0001108134 bhlb:LoansAcquiredFromBusinessCombinationsMember us-gaap:MortgagesMember us-gaap:ResidentialPortfolioSegmentMember us-gaap:ConstructionLoansMember us-gaap:PassMember 2018-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended: December 31, ~~2018~~2019

o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-15781

BERKSHIRE HILLS BANCORP, INC.

(Exact name of registrant as specified in its charter)



Delaware		04-3510455
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



60 State Street	Boston	Massachusetts	02109
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: ~~(800)~~ (800) 773-5601, ext. 133773

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý

No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

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 and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. 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 definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one)



Large Accelerated Filer	x	Accelerated Filer	o

Non-Accelerated Filer	o	Smaller Reporting Companyo	☐

		Emerging Growth Companyo	☐

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 Act). Yes o☐ No ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates was approximately ~~$1.8~~$1.4 billion, based upon the closing price of ~~$40.60~~$31.39 as quoted on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares outstanding of the registrant’s common stock as of February 25, ~~2019~~2020 was ~~45,532,727.~~50,200,155.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statement for the ~~2019~~2020 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.

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INDEX



PART I		4

ITEM 1.	BUSINESS	4

ITEM 1A.	RISK FACTORS	2827

ITEM 1B.	UNRESOLVED STAFF COMMENTS	37

ITEM 2.	PROPERTIES	37

ITEM 3.	LEGAL PROCEEDINGS	38

ITEM 4.	MINE SAFETY DISCLOSURES	38

PART II		39

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	39

ITEM 6.	SELECTED FINANCIAL DATA	4142

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	4648

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	6564

ITEM 8.	CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	66

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	66

ITEM 9A.	CONTROLS AND PROCEDURES	66

ITEM 9B.	OTHER INFORMATION	66

PART III		67

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	67

ITEM 9.11.	~~CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~	68

~~ITEM 9A.~~	~~CONTROLS AND PROCEDURES~~EXECUTIVE COMPENSATION	69

ITEM ~~9B.~~12.	~~OTHER INFORMATION~~SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS	69

~~PART III~~ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	70

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ITEM ~~10.~~14.	~~DIRECTORS, EXECUTIVE OFFICERS,~~PRINCIPAL ACCOUNTING FEES AND ~~CORPORATE GOVERNANCE~~SERVICES	70

~~ITEM 11.~~PART IV	~~EXECUTIVE COMPENSATION~~	7271

ITEM ~~12.~~15.	~~SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS~~EXHIBITS AND ~~MANAGEMENT AND RELATED SHAREHOLDER MATTERS~~FINANCIAL STATEMENT SCHEDULES	73

~~ITEM 13.~~	~~CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE~~	73

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~~ITEM 14.~~		~~PRINCIPAL ACCOUNTING FEES AND SERVICES~~	7371

~~PART IV~~ITEM 16.			74

~~ITEM 15.~~FORM 10-K SUMMARY		~~EXHIBITS AND FINANCIAL STATEMENT SCHEDULES~~	74

~~ITEM 16~~.		~~FORM 10-K SUMMARY~~	7673

SIGNATURES			7774


TABLE INDEX

PART I			4

ITEM 1.			4

	ITEM 1 TABLE 1 — LOAN PORTFOLIO ANALYSIS		86

	ITEM 1 TABLE 2 — MATURITY AND SENSITIVITY OF LOAN PORTFOLIO		9

	ITEM 1 TABLE 3 — PROBLEM ASSETS		11

	ITEM 1 TABLE 34 — ~~PROBLEM ASSETS AND ACCRUING TDR~~ALLOWANCE FOR LOAN LOSS		12

	ITEM 1 TABLE 5 — ALLOCATION OF ALLOWANCE BY LOAN CATEGORY		13

	~~ITEM 1 TABLE 4 — ALLOWANCE FOR LOAN LOSS~~		14

	~~ITEM 1 TABLE 5 — ALLOCATION OF ALLOWANCE BY LOAN CATEGORY~~		15

	ITEM 1 TABLE 6 — AMORTIZED COST AND FAIR VALUE OF SECURITIES		14

	ITEM 1 TABLE 7 — WEIGHTED AVERAGE YIELD ON SECURITIES		15

	ITEM 1 TABLE 8 — AVERAGE BALANCE AND WEIGHTED AVERAGE RATES FOR DEPOSITS		15

	ITEM 1 TABLE 9 — MATURITY OF DEPOSITS > $100,000		16

		~~ITEM 1 TABLE 7 — WEIGHTED AVERAGE YIELD ON SECURITIES~~		17

	~~ITEM 1 TABLE 8 — AVERAGE BALANCE AND WEIGHTED AVERAGE RATES FOR DEPOSITS~~		17

	~~ITEM 1 TABLE 9 — MATURITY OF DEPOSITS > $100,000~~		18

PART II			39

ITEM 6			4142

	ITEM 6 TABLE 3 — AVERAGE BALANCES, INTEREST AND AVERAGE YIELD COSTS		43

	~~ITEM 6 TABLE 4 — RATE VOLUME ANALYSIS~~		45

	~~ITEMS 7~~ITEM 6 TABLE 4 — RATE VOLUME ANALYSIS-7A.		4647

ITEMS 7-7A.			48

	ITEM 7 — 7A TABLE 1 — CONTRACTUAL OBLIGATIONS		62

	ITEM 7 — 7A TABLE 2 — QUALITATIVE ASPECTS OF MARKET RISK		6665

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PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that Berkshire Hills Bancorp files with the Securities and Exchange Commission. You should not place undue reliance on forward-looking statements, which reflect our expectations only as of the date of this report. We do not assume any obligation to revise forward-looking statements except as may be required by law.

GENERAL

Berkshire Hills Bancorp, Inc. (“Berkshire” or “the Company”) is headquartered in Boston, Massachusetts. Berkshire is a Delaware corporation and the holding company for Berkshire Bank (“the Bank”) and Berkshire Insurance Group, Inc.

~~The Bank profiles itself as follows:~~

~~Table of Contents~~

Berkshire’s common shares are listed on the New York Stock Exchange under the trading symbol “BHLB.” At year-end 2018, Berkshire’s closing stock price was $26.97 and there were 45.417 million shares outstanding. Berkshire is a regional bank and financial services company providing the service capabilities of a larger institution and the focus and responsiveness of a local partner to its communities. The Company seeks to distinguish itself based on the following attributes:

•~~Strong momentum and improving profitability~~

•~~Diversified revenue drivers and controlled expenses~~

•~~Well positioned footprint in attractive markets~~

•~~Entrepreneurial culture - results driven~~

•~~Focused on long-term profitability goals and shareholder value~~

•~~Acquisition disciplines a strength in a consolidating market~~

The Bank has ~~115~~130 full-service banking offices in its New England, New York, and Mid-Atlantic footprint. ~~The Bank also owns mortgage banking and specialty equipment finance subsidiaries which serve markets nationwide. Additionally, it is a leading provider of SBA loan solutions in targeted markets.~~ The Company offers a wide range of deposit, lending, insurance, and wealth management products to retail and commercial customers in its market areas. ~~Its business goal is to expand and deepen market share and wallet share through organic growth and acquisition strategies.~~

~~The Bank serves the following regions shown below:~~

~~Greater Boston,~~ where the Company has relocated its headquarters in a prominent downtown Boston financial district location. This region includes 19 branch offices and several lending offices. The Company expanded in this region with its acquisition of Commerce Bancshares Corp. (“Commerce”) in October 2017. Berkshire’s asset based lending operations and the headquarters of its Firestone Financial subsidiary are located in this region. Greater Boston is the largest economic area in New England. The Greater Boston combined statistical area, including Worcester, is the sixth largest in the country. Boston is viewed as a leading commercial real estate market nationally, including foreign demand for investment real estate. Major local industries include biotechnology, technology, education, healthcare, trade, and financial service. The Boston MSA 2017 GDP was $439 billion and the Worcester 2017 MSA GDP was $44 billion.

~~Western New England~~, with 23 branches, includes the Company’s traditional Berkshire County market, where it has a leading market share in many of its product lines. This region also includes Southern Vermont, and many of the region’s branches are in communities close to Route 7, which runs north/south through the valleys to the west of the Berkshire Hills and Green Mountains. This region is within commuting range of both Albany, N.Y., and Springfield, Mass., and is known throughout the world as a tourist and recreational destination area, with vacation and second home traffic from Boston and New York City. The Pittsfield 2017 MSA GDP totaled $7 billion.

~~New York,~~ with 40 branches serving the Albany Capital District and Central New York. Albany is the state capital and is part of New York’s Tech Valley which is gaining prominence as a world technology hub including leading edge nanotechnology initiatives representing a blend of private enterprise and public investment. The Company’s Central New York area includes operations in the Rome/Utica MSA and in the Syracuse MSA. These are markets along Interstate 90 with longstanding local industries and expansion influences from the Albany Capital District. The Albany/Schenectady 2017 MSA GDP was $54 billion, and the Rome/Utica/Syracuse total 2017 MSA GDP was $45 billion.

~~Hartford/Springfield,~~ with 25 branches serving the market along the Connecticut River in this region, which is the second largest economic area in New England. This region is centrally located between Boston and New York City at the crossroads of Interstate 91, which traverses the length of New England, and Interstate 90, which traverses the width of Massachusetts. This region also has easy access to Bradley International Airport, which is a major airport serving central New England. Major local industries include insurance, defense manufacturing, education, and assembly/distribution. The Springfield area is receiving major commercial

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~~investment including the first Massachusetts casino/entertainment complex. The Hartford/Springfield combined 2017 MSA GDP was $118 billion.~~

~~Mid-Atlantic~~, with 8 branches and mortgage banking and SBA lending operations. Berkshire established its presence in this region in 2016 with its acquisition of First Choice Bank (“First Choice”) located in the Princeton, New Jersey area and its acquisition of the business assets and operations of 44 Business Capital, LLC ("44 Business Capital"), located in the greater Philadelphia area. Major local industries include bio-science, financial services, trade, iron, steel, and rubber. The Philadelphia MSA 2017 GDP was $445 billion, while the Trenton 2017 MSA GDP was $30 billion.

~~Shown below is information about total loans and deposits within the Company’s banking footprint, by region, as of year-end 2018 (wholesale deposit and loan balances are excluded).~~

These regions are viewed as having favorable economic and demographic characteristics and provide an attractive regional niche for the Bank to distinguish itself from larger national and super-regional banks, as well as from smaller community banks, while serving its market area. The Company’s regions have competitive economic strengths in precision manufacturing, distribution, technology, health care, and education which are expected to continue to support above average personal incomes and wealth. These regions include two major U.S. metropolitan areas and port cities - Boston and the Philadelphia area. As a result of its growth, the Company has increased and diversified its revenues both geographically and by product type and this has improved its flexibility in pursuing growth opportunities as they arise. The Company believes it has attractive long-term growth prospects because of the Bank’s positioning as a leading regional bank in its markets with the ability to serve retail and commercial customers with a strong product set and responsive local management. The Company has acquired and is developing targeted national lending operations to support its strategic growth and profitability. The Company also pursues organic growth through ongoing business development, de novo branching, product development, and delivery channel diversification and enhancement.

The Company has a pending agreement to acquire SI Financial Group, which owns Savings Institute Bank & Trust, a $1.6 billion bank headquartered in Willimantic, Conn., with 23 branches serving Eastern Connecticut and Southern Rhode Island. This is viewed by Berkshire as a complementary market extension business combination.

~~Table of Contents~~

FILINGS

Information regarding the Company is available through the Investor Relations tab at berkshirebank.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge at sec.gov and at berkshirebank.com under the Investor Relations tab. Information on the website is not incorporated by reference and is not a part of this annual report on Form 10-K.

COMPETITION

The Company is subject to strong competition from banks and other financial institutions and financial service providers. Its competition includes national and super-regional banks. Non-bank competitors include credit unions, brokerage firms, insurance providers, financial planners, and the mutual fund industry. New technology is reshaping customer interaction with financial service providers and the increase of internet-accessible financial institutions increases competition for the Company’s customers. The Company generally competes on the basis of customer service, relationship management, and the fair pricing of loan and deposit products and wealth management and insurance services. The location and convenience of branch offices is also a significant competitive factor, particularly regarding new offices. The Company does not rely on any individual, group, or entity for a material portion of its deposits.

LENDING ACTIVITIES

General. The Bank originates loans in the four basic portfolio categories discussed below. Lending activities are limited by federal and state laws and regulations. Loan interest rates and other key loan terms are affected principally by the Bank’s credit policy, asset/liability strategy, loan demand, competition, and the supply of money available for lending purposes. These factors, in turn, are affected by general and economic conditions, monetary policies of the federal government, including the Federal Reserve, legislative tax policies, and governmental budgetary matters. Most of the Bank’s loans held for investment are made in its market areas and are secured by real estate located in its market areas. Lending is therefore affected by activity in these real estate markets. The Bank does not engage in subprime lending activities. The Bank monitors and manages the amount of long-term fixed-rate lending volume. Adjustable-rate loan products generally reduce interest rate risk but may produce higher loan losses in the event of sustained rate increases. The Bank generally originates loans for investment except for residential mortgages, which are generally originated for sale on a servicing released basis. Additionally, the Bank also originates ~~SBA~~Small Business Administration ("SBA") 7A loans for sale to investors. The Bank also conducts wholesale purchases and sales of loans and loan participations generally with other banks doing business in its markets, including selected national banks.

The Bank changed its charter several years ago from a savings bank to a trust company, which is the common charter for Massachusetts chartered commercial banks. The majority of the Bank’s held for investment loans are commercial loans. The Company’s strategy is to be a leading regional bank in its markets, and to develop commercial market share and wallet share across its commercial banking product areas. The Company’s recent expansion into more urban markets is targeted to facilitate further development of this strategy. The Company also is building its specialized commercial business lines which have higher margins and provide for revenue diversification and geographic expansion into other national markets. The Bank has focused on team recruitments to establish its market prominence and deliver revenue synergies in new markets entered by acquisition.

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Loan Portfolio Analysis. The following table sets forth the year-end composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated. Further information about the composition of the loan portfolio is contained in Note 67 - Loans of the Consolidated Financial Statements. In the fourth quarter of 2019, the Commercial Banking division reorganized itself into four vertical product categories delivered through a regional relationship management structure.

Item 1 - Table 1 - Loan Portfolio Analysis


	2018					2017					2016					2015					2014					2019					2018					2017					2016					2015
				Percent					Percent					Percent					Percent					Percent					Percent					Percent					Percent					Percent					Percent
				of					of					of					of					of					of					of					of					of					of
(In millions)	Amount			Total		Amount			Total		Amount			Total		Amount			Total		Amount			Total		Amount			Total		Amount			Total		Amount			Total		Amount			Total		Amount			Total
Commercial real estate	$	3,400		38	%	$	3,264		39	%	$	2,617		40	%	$	2,060		36	%	$	1,612		35	%	$	4,034		43	%	$	3,400		38	%	$	3,264		39	%	$	2,617		40	%	$	2,060		36	%
Commercial and industrial loans	1,980			22		1,804			22		1,062			16		1,048			18		804			17		1,841			19		1,980			22		1,804			22		1,062			16		1,048			18
Total commercial loans	5,380			60		5,068			61		3,679			56		3,108			54		2,416			52		5,875			62		5,380			60		5,068			61		3,679			56		3,108			54
Residential mortgages	2,566			28		2,103			25		1,893			29		1,815			32		1,496			32		2,685			28		2,566			28		2,103			25		1,893			29		1,815			32
Consumer	1,097			12		1,128			14		978			15		802			14		768			16		943			10		1,097			12		1,128			14		978			15		802			14
Total loans	$	9,043		100	%	$	8,299		100	%	$	6,550		100	%	$	5,725		100	%	$	4,680		100	%	$	9,503		100	%	$	9,043		100	%	$	8,299		100	%	$	6,550		100	%	$	5,725		100	%

Allowance for loan losses	(61		)			(52		)			(44		)			(39		)			(35		)			(64		)			(61		)			(52		)			(44		)			(39		)
Net loans	$	8,982				$	8,247				$	6,506				$	5,686				$	4,645				$	9,439				$	8,982				$	8,247				$	6,506				$	5,686

Commercial Real Estate. The Bank originates commercial real estate loans on properties used for business purposes such as small office buildings, industrial, healthcare, lodging, recreation, or retail facilities. Commercial real estate loans are provided on owner-occupied properties and on investor-owned properties. The portfolio includes commercial 1-4 family and multifamily properties. ~~The Bank’s expansion in Greater Boston may involve increased lending to finance new types of properties and reliance on more expensive property values compared to its traditional markets.~~ Loans may generally be made with amortizations of up to 25 years and with interest rates that adjust periodically (primarily from short-term to five years). Most commercial real estate loans are originated with final maturities of 10 years or less. As part of its business activities, the Bank also enters into commercial loan participations with regional and national banks and purchases and sells commercial loans.

Commercial real estate loans are among the largest of the Bank’s loans, and may have higher credit risk and lending spreads. Because repayment is often dependent on the successful operation or management of the properties, repayment of commercial real estate loans may be affected by adverse conditions in the real estate market or the economy. The Bank seeks to manage these risks through its underwriting disciplines and portfolio management processes. The Bank generally requires that borrowers have debt service coverage ratios (the ratio of available cash flows before debt service to debt service) of at least 1.25 times based on stabilized cash flows of leases in place, with some exceptions for national credit tenants. For variable rate loans, the Bank underwrites debt service coverage to interest rate shocks of 300 basis points or higher based on a minimum of 1.0 times coverage and it uses loan maturities to manage risk based on the lease base and interest sensitivity. Loans at origination may be made up to 80% of appraised value based on property type and risk, with sublimits of 75% or less for designated specialty property types. Generally, commercial real estate loans are supported by full or partial personal guarantees by the principals. Credit enhancements in the form of additional collateral or guarantees are normally considered for start-up businesses without a qualifying cash flow history.

The Bank offers interest rate swaps to certain larger commercial mortgage borrowers. These swaps allow the Bank to originate a mortgage based on short-term LIBOR rates and allow the borrower to swap into a longer-term fixed rate. The Bank simultaneously sells an offsetting back-to-back swap to an investment grade national bank so that it does not retain this fixed-rate risk. The Bank also records fee income on these interest rate swaps based on the terms of the offsetting swaps with the bank counterparties.

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The Bank originates construction loans to developers and commercial borrowers in and around its markets. The maximum loan to value limits for construction loans follow ~~FDIC~~Federal Deposit Insurance Corporation ("FDIC") supervisory limits, up to a maximum of 85 percent. The Bank commits to provide the permanent mortgage financing on most of its construction loans on income-producing property. Advances on construction loans are made in accordance with a schedule reflecting the cost of the improvements. Construction loans include land acquisition loans up to a maximum 50 percent loan to value on raw land. Construction loans may have greater credit risk due to the dependence on completion of construction and other real estate improvements, as well as the sale or rental of the improved property. The Bank generally mitigates these risks with presale or preleasing requirements and phasing of construction.

Commercial and Industrial ~~Loans.~~Loans ("C&I"). C&I loans are managed through the Bank’s commercial middle market banking organization. The Bank offers secured commercial term loans with repayment terms which are normally limited to the expected useful life of the asset being financed, and generally not exceeding ten years. The Bank also offers revolving loans, lines of credit, letters of credit, time notes and Small Business Administration guaranteed loans. Business lines of credit have adjustable rates of interest and can be committed or are payable on demand, subject to annual review and renewal. Commercial and industrial loans are generally secured by a variety of collateral such as accounts receivable, inventory and equipment, and are generally supported by personal guarantees. Loan-to-value ratios depend on the collateral type and generally do not exceed 80 percent of orderly liquidation value. Some commercial loans may also be secured by liens on real estate. The Bank generally does not make unsecured commercial loans. Commercial loans are of higher risk and are made primarily on the basis of the borrower’s ability to make repayment from the cash flows of its business. Further, any collateral securing such loans may depreciate over time, may be difficult to monitor and appraise and may fluctuate in value. The Bank gives additional consideration to the borrower’s credit history and the guarantor’s capacity to help mitigate these risks. Additionally, the Bank uses loan structures including shorter terms, amortizations, and advance rate limitations to additionally mitigate credit risk. The Company considers these loans, together with its owner-occupied commercial real estate loans, as constituting the primary relationship based component of its commercial lending activities.

Asset Based Lending.The Asset Based Lending Group serves the commercial middle market in New England, as well as the Bank’s market in northeastern New York. In 2017, this group expanded into the Mid-Atlantic. The group expands the Bank’s business lending offerings to include revolving lines of credit and term loans secured by accounts receivable, inventory, and other assets to manufacturers, distributors and select service companies experiencing seasonal working capital needs, rapid sales growth, a turnaround, buyout or recapitalization with credit needs ranging from $2 to $25 million. Asset based lending involves monitoring loan collateral so that outstanding balances are always properly secured by business assets, which reduces the risks associated with these loans. ~~At year-end 2018, asset based loans outstanding totaled $452 million.~~

~~In 2016,~~Small Business Banking. This group is also referred to as Business Banking, and handles most business relationships which are smaller than the ~~Bank created the Specialty Lending Group to oversee its equipment lending, SBA lending, and small~~middle market category. Additionally, some smaller business lending activities. The specialty equipment lending operation is conducted by Firestone Financial Corp. ("Firestone"), which was acquired in 2015. Firestone originates loans secured by business-essential equipmentneeds are handled through over 160 equipment distributors and manufacturers and directly via the end borrower in all 50 states. Key customer segments include the fitness, carnival, gaming, and entertainment industries. These loans function similarly to the Bank’s commercial and industrial portfolio. However, some credits have payment schedules tailored to the meet the needs of the seasonality of these borrowers’ businesses. These loans generally have higher interest rates than the Bank's other commercial loans, reflecting the niche expertise required in servicing these industries. Firestone’s loans outstanding totaled $265 million at year-end 2018.

~~In 2016,~~retail branch system. Berkshire ~~acquired~~Bank also owns 44 Business Capital, a dedicated SBA ~~7(a)~~7A program lending team based in the Philadelphia area. This team originates loans primarily in the Mid-Atlantic area. This team sells the guaranteed portions of these loans with servicing retained and the Bank retains the unguaranteed portions of the ~~loans, which are pari-passu with the SBA for loan repayment. Some of the SBA’s underwriting parameters are outside of the Bank’s normal commercial lending standards.~~loans. The Bank is a preferred SBA lender and closely manages the servicing portfolio pursuant to SBA requirements. This team is the Bank’s largest source of commercial lending fee revenue, and it is targeting to further expand these operations to other ~~markets, as well as increasing SBA product penetration to~~markets. Berkshire Bank also owns Firestone Financial Corp. ("Firestone"), which is located in Needham, MA. Firestone originates loans secured by business-essential equipment through over 160 equipment distributors and manufacturers and directly via the ~~market served by Firestone. Berkshire also originates SBA loans~~end borrower in ~~its regional markets. The SBA’s annual report of SBA originators for~~all 50 states. Key customer segments include the ~~year-ended September 30, 2018 ranked Berkshire among the top 30~~^thfitness, carnival, gaming, and entertainment industries.

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~~in the nation by both number of loans and dollar amount of loans. Berkshire has the top SBA ranking in several of its regional markets.~~

Residential Mortgages. Through its mortgage banking operations, the Bank offers fixed-rate and adjustable-rate residential mortgage loans to individuals with maturities of up to 30 years that are fully amortizing with monthly loan payments. The majority of loans are originated for sale with rate lock commitments which are recorded as derivative financial instruments. Mortgages are generally underwritten according to U.S. government sponsored enterprise guidelines designated as “A” or “A-” and referred to as “conforming loans”. The Bank also originates jumbo loans above conforming loan amounts which generally are consistent with secondary market guidelines for

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these loans and are often held in portfolio. The Bank does not offer subprime mortgage lending programs. The Bank buys and sells seasoned mortgages primarily with smaller financial institutions operating in its markets.

The majority of the Bank’s secondary marketing is to U.S. secondary market investors on a servicing-released basis. The Bank also sells directly to government sponsored enterprises with servicing retained. Mortgage sales generally involve customary representations and warranties and are nonrecourse in the event of borrower default. The Bank is also an approved originator of loans for sale to the Federal Housing Administration (“FHA”), U.S. Department of Veteran Affairs (“VA”), state housing agency programs, and other government sponsored mortgage programs.

The Bank does not offer interest-only or negative amortization mortgage loans. Adjustable rate mortgage loan interest rates may rise as interest rates rise, thereby increasing the potential for default. The Bank also originates construction loans which generally provide 15-month construction periods followed by a permanent mortgage loan, and follow the Bank’s normal mortgage underwriting guidelines. Mortgage banking also requires flexible and scalable operations due to the volatility of mortgage demand over time. Investor management is integral to maintaining the secondary market support that is required for these operations.

Most of the Bank’s mortgages are originated by commissioned mortgage lenders. With the First Choice Bank acquisition in December 2016, the Company acquired First Choice Loan Services Inc. ("First Choice Loan Services"), which ~~now~~ operates its national mortgage banking business as a subsidiary of Berkshire Bank. This operation has a team of ~~more than 400~~several hundred members originating mortgages in targeted markets in nine states, with headquarters in East Brunswick, N.J. First Choice Loan Services originates directly through its originators as well as online including a mortgage marketing partnership with Costco.

~~Berkshire’s~~ In 2019, the Company decided to attempt to sell these national mortgage banking operations, ~~are its largest source of non-interest revenue. The portfolio of mortgages~~which have been designated as held for sale ~~is a high yielding short term asset. The Bank’s portfolio of mortgages held~~and discontinued for ~~investment is a significant source of interest income to~~financial statement presentation purposes. This decision reflects the ~~bank. Mortgage operations require significant interest rate risk management both for the interest rate lock derivative financial instruments and for the long term assets held~~Company’s heightened emphasis on community banking in portfolio. Mortgage banking also requires flexible and scalable operations due to the volatility of mortgage demand over time. Investor management is integral to maintaining the secondary market support that is required for these operations. The management of commissioned originations staff across national markets in this highly regulated business line requires strong controls and compliance management.its local markets.

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Consumer Loans. The Bank’s consumer loans are centrally underwritten and processed by its experienced consumer lending team based in Syracuse, New York. The Bank’s primary consumer lending activity isin recent year has been indirect auto lending. In 2019, the ~~second half~~Company decided to end the origination of ~~2015,~~indirect auto loans. This decision reflects the ~~Bank recruited new leadership to expand this activity from~~Company’s heightened emphasis on community banking in its Central New York base to other parts of Berkshire’s footprint. The Bank provides prime auto loans to finance new and used autos and is evaluating secondary marketing to further support this activity. At year-end 2018, outstanding auto and other loans totaled $720 million.local markets. The Bank’s other major consumer lending activity is prime home equity lending, following its conforming mortgage underwriting guidelines with more streamlined verifications and documentation. Most of these outstanding loans are prime based home equity lines with a maximum combined loan-to-value of 85 percent. Home equity line credit risks include the risk that higher interest rates will affect repayment and possible compression of collateral coverage on second lien home equity lines. ~~At year-end 2018, home equity loans totaled $377 million.~~

Maturity and Sensitivity of Loan Portfolio. The following table shows contractual final maturities of selected loan categories at year-end ~~2018.~~2019. The contractual maturities do not reflect premiums, discounts, deferred costs, or prepayments.

Item 1 - Table 2 - Loan Contractual Maturity - Scheduled Loan Amortizations are not included in the maturities presented.


Contractual Maturity	One Year		One to		More Than				One Year		One to		More Than
(In thousands)	or Less		Five Years		Five Years		Total		or Less		Five Years		Five Years		Total
Construction real estate loans:
Commercial	$	196,394	$	156,618	$	—	$	353,012	$	71,959	$	178,578	$	179,269	$	429,806
Residential	8,070		341		1,345		9,756		2,415		321		5,383		8,119
Commercial and industrial loans	355,477		1,025,178		599,391		1,980,046		381,322		1,020,178		439,008		1,840,508
Total	$	559,941	$	1,182,137	$	600,736	$	2,342,814	$	455,696	$	1,199,077	$	623,660	$	2,278,433

For the $1.8 billion of loans above which mature in more than one year, $0.5 billion of these loans are fixed-rate and $1.3 billion are variable rate.

Loan Administration.Lending activities are governed by a loan policy approved by the Board’s Risk Management and Capital Committee. Internal staff perform and monitor post-closing loan documentation review, quality control, and commercial loan administration. The lending staff assigns a risk rating to all commercial loans, excluding point scored small business loans. Management primarily relies on internal risk management staff to review the risk ratings of the majority of commercial loan balances.

The Bank’s lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Risk Management and Capital Committee and Management, under the leadership of the Chief Risk Officer. The Bank’s loan underwriting is based on a review of certain factors including risk ratings, recourse, loan-to-value ratios, and material policy exceptions. The Risk Management and Capital Committee has established individual and combined loan limits and lending approval authorities. Management’s Executive Loan Committee is responsible for commercial loan approvals in accordance with these standards and procedures. Generally, pass rated secured commercial loans can be approved jointly up to $7 million by the regional lending manager and regional credit officer. Loans up to $15 million can be approved with the additional signature of the Chief Credit Officer. Loans in excess of this amount, and designated lower rated loans are approved by the Executive Loan Committee. These limits were expanded in 2016. The Bank tracks loan underwriting exceptions and exception reports are actively monitored by executive lending management.

The Bank’s lending activities are conducted by its salaried and commissioned loan personnel. Designated salaried branch staff originate conforming residential mortgages and receive bonuses based on overall performance. Additionally, the Bank employs commissioned residential mortgage originators. Commercial lenders receive salaries and are eligible for bonuses based on individual and overall performance. The Bank purchases whole loans and participations in loans from banks headquartered in its market and from outside of its market. These loans are underwritten according to the Bank’s underwriting criteria and procedures and are generally serviced by the

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originating lender under terms of the applicable agreement. The Bank routinely sells newly originated, fixed-rate residential mortgages in the secondary market. Customer rate locks are offered without charge and rate locked

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applications are generally committed for forward sale or hedged with derivative financial instruments to minimize interest rate risk pending delivery of the loans to the investors. The Bank also sells residential mortgages and commercial loan participations on a non-recourse basis. The Bank issues loan commitments to its prospective borrowers conditioned on the occurrence of certain events. Loan origination commitments are made in writing on specified terms and conditions and are generally honored for up to 60 days from approval; some commercial commitments are made for longer terms. The Company also monitors pipelines of loan applications and has processes for issuing letters of interest for commercial loans and pre-approvals for residential mortgages, all of which are generally conditional on completion of underwriting prior to the issuance of formal commitments.

The loan policy sets certain limits on concentrations of credit and requires periodic reporting of concentrations to the Risk Management and Capital Committee. The Bank also actively monitors its 25 largest borrower relationships. Commercial real estate is generally managed within federal regulatory monitoring guidelines of 300% of risk based capital for non-owner occupied commercial real estate and 100% for construction loans. ~~At year-end 2018, non-owner occupied commercial real estate totaled 238% of Bank risk based capital and outstanding construction loans were 34% of Bank risk based capital.~~ The Bank has hold limits for several categories of commercial specialty lending including healthcare, hospitality, designated franchises, and leasing, as well as hold limits for designated commercial loan participations purchased. In most cases, these limits are below 100% of risk based capital for all outstandings in each monitored category.

Problem Assets. The Bank prefers to work with borrowers to resolve problems rather than proceeding to foreclosure. For commercial loans, this may result in a period of forbearance or restructuring of the loan, which is normally done at current market terms and does not result in a “troubled” loan designation. For residential mortgage loans, the Bank generally follows FDIC guidelines to attempt a restructuring that will enable owner-occupants to remain in their home. However, if these processes fail to result in a performing loan, then the Bank generally will initiate foreclosure or other proceedings no later than the 90th day of a delinquency, as necessary, to minimize any potential loss. Management reports delinquent loans and non-performing assets to the Board quarterly. Loans are generally removed from accruing status when they reach 90 days delinquent, except for certain loans which are well secured and in the process of collection. Loan collections are managed by a combination of the related business units and the Bank’s special assets group, which focuses on larger, riskier collections and the recovery of purchased credit impaired loans.

Real estate obtained by the Bank as a result of loan collections, including foreclosures, is classified as real estate owned until sold. When property is acquired it is recorded at fair market value less estimated selling costs at the date of foreclosure, establishing a new cost basis. Holding costs and decreases in fair value after acquisition are expensed. Interest income that would have been recorded for ~~2018,~~2019, if non-accruing loans had been current according to their original terms, amounted to ~~$4.2~~$3.3 million. Included in the amount is ~~$948 thousand~~$1.0 million related to troubled debt restructurings. The amount of interest income on those loans that was recognized in net income in ~~2018~~2019 was ~~$1.7~~$1.6 million. Included in this amount is ~~$318~~$157 thousand related to troubled debt restructurings. Interest income on accruing troubled debt restructurings totaled ~~$652~~$817 thousand for ~~2018.~~2019. The total carrying value of troubled debt restructurings was ~~$27.4~~$19.3 million at year-end.

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The following table sets forth additional information on year-end problem ~~assets and accruing troubled debt restructurings (“TDR”).~~assets. Due to accounting standards for business combinations, non-accrual loans of acquired banks are recorded as accruing on the acquisition date. Therefore, measures related to accruing and non-accruing loans reflect these standards and may not be comparable to prior periods.

Item 1 - Table 3 - Problem Assets ~~and Accruing TDR~~


(In thousands)	2018			2017			2016			2015			2014			2019			2018			2017			2016			2015
Non-accruing loans:
Commercial real estate	$	20,371		$	7,267		$	5,883		$	4,882		$	12,878		$	20,119		$	20,371		$	7,267		$	5,883		$	4,882
Commercial and industrial loans	6,003			7,311			7,523			8,259			1,705			11,373			6,003			7,311			7,523			8,259
Residential mortgages	2,217			2,883			3,795			3,966			3,908			3,343			2,217			2,883			3,795			3,966
Consumer	3,834			5,438			5,039			3,768			3,214			4,805			3,834			5,438			5,039			3,768
Total non-performing loans	32,425			22,899			22,240			20,875			21,705			39,640			32,425			22,899			22,240			20,875
Real estate owned	—			—			151			1,725			2,049			—			—			—			151			1,725
Repossessed assets	1,209			1,147			—			—			—			858			1,209			1,147			—			—
Total non-performing assets	$	33,634		$	24,046		$	22,391		$	22,600		$	23,754		$	40,498		$	33,634		$	24,046		$	22,391		$	22,600

Troubled debt restructurings (accruing)	$	11,871		$	36,172		$	28,241		$	12,497		$	12,612
Accruing loans 90+ days past due	$	19,690		$	16,480		$	9,863		$	5,229		$	4,568

Total non-performing loans/total loans	0.36		%	0.28		%	0.34		%	0.36		%	0.46		%	0.42		%	0.36		%	0.28		%	0.34		%	0.36		%
Total non-performing assets/total assets	0.28		%	0.21		%	0.24		%	0.29		%	0.37		%	0.31		%	0.28		%	0.21		%	0.24		%	0.29		%

Asset Classification and Delinquencies. The Bank performs an internal analysis of its commercial loan portfolio and assets to classify such loans and assets in a manner similar to that employed by federal banking regulators. There are four classifications for loans with higher than normal risk: Loss, Doubtful, Substandard, and Special Mention. Usually an asset classified as Loss is fully charged-off. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses, are designated Special Mention. Please see the additional discussion of non-accruing and potential problem loans in Item 7 and additional information in Note 78 - Loan Loss Allowance of the Consolidated Financial Statements. Impaired loans acquired in business combinations are normally rated Substandard or lower and the fair value assigned to such loans at acquisition includes a component for the possibility of loss if deficiencies are not corrected.

Allowance for Loan Losses. The Bank’s loan portfolio is regularly reviewed by management to evaluate the adequacy of the allowance for loan losses. The allowance represents management’s estimate of inherent incurred losses that are probable and estimable as of the date of the financial statements. The allowance includes a specific component for impaired loans (a “specific loan loss reserve”) and a general component for portfolios of all outstanding loans (a “general loan loss reserve”). At the time of acquisition, no allowance for loan losses is assigned to loans acquired in business combinations. These loans are initially recorded at fair value, including the impact of expected losses, as of the acquisition date. An allowance on such loans is established subsequent to the acquisition date through the provision for loan losses based on an analysis of factors including environmental factors. The loan loss allowance is discussed further in Note 1 - Summary of Significant Accounting Policies of the Consolidated Financial Statements.

Management believes that it uses the best information available to establish the allowance for loan losses. However, future adjustments to the allowance for loan losses may be necessary, and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making its determinations. Because the estimation of inherent losses cannot be made with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loan or loan portfolio

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category deteriorate as a result of the factors discussed above. Additionally, the regulatory agencies, as an integral part of their examination process, also periodically review the Bank’s allowance for loan losses. Such agencies may

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require the Bank to make additional provisions for estimated losses based upon judgments different from those of management. Any material increase in the allowance for loan losses may adversely affect the Bank’s financial condition and results of operations.

The following table presents an analysis of the allowance for loan losses for the five years indicated:

Item 1 - Table 4 - Allowance for Loan Loss


(In thousands)	2018			2017			2016			2015			2014			2019			2018			2017			2016			2015
Balance at beginning of year	$	51,834		$	43,998		$	39,308		$	35,662		$	33,323		$	61,469		$	51,834		$	43,998		$	39,308		$	35,662
Charged-off loans:
Commercial real estate	7,671			4,646			3,104			7,546			5,684			7,407			7,671			4,646			3,104			7,546
Commercial and industrial loans	4,799			4,217			5,715			3,110			3,010			24,370			4,799			4,217			5,715			3,110
Residential mortgages	1,248			1,603			2,865			1,857			2,596			898			1,248			1,603			2,865			1,857
Consumer	4,293			4,118			2,342			2,175			2,563			3,879			4,293			4,118			2,342			2,175
Total charged-off loans	18,011			14,584			14,026			14,688			13,853			36,554			18,011			14,584			14,026			14,688
Recoveries on charged-off loans:
Commercial real estate	344			235			303			582			270			1,242			344			235			303			582
Commercial and industrial loans	906			424			389			458			228			1,450			906			424			389			458
Residential mortgages	165			313			304			205			365			173			165			313			304			205
Consumer	780			423			358			363			361			376			780			423			358			363
Total recoveries	2,195			1,395			1,354			1,608			1,224			3,241			2,195			1,395			1,354			1,608
Net loans charged-off	15,816			13,189			12,672			13,080			12,629			33,313			15,816			13,189			12,672			13,080
Provision for loan losses	25,451			21,025			17,362			16,726			14,968			35,419			25,451			21,025			17,362			16,726
Balance at end of year	$	61,469		$	51,834		$	43,998		$	39,308		$	35,662		$	63,575		$	61,469		$	51,834		$	43,998		$	39,308

Ratios:
Net charge-offs/average loans	0.18		%	0.19		%	0.21		%	0.25		%	0.29		%	0.35		%	0.18		%	0.19		%	0.21		%	0.25		%
Recoveries/charged-off loans	12.19			9.57			9.65			10.95			8.84			8.87			12.19			9.57			9.65			10.95
Net loans charged-off/allowance for loan losses	25.73			25.44			28.80			33.28			35.41			52.40			25.73			25.44			28.80			33.28
Allowance for loan losses/total loans	0.68			0.62			0.67			0.69			0.76			0.67			0.68			0.62			0.67			0.69
Allowance for loan losses/non-accruing loans	189.57			226.36			197.83			188.30			164.30			160.38			189.57			226.36			197.83			188.30

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The following tables present year-end data for the approximate allocation of the allowance for loan losses by loan categories at the dates indicated (including an apportionment of any unallocated amount). The first table shows for each category the amount of the allowance allocated to that category as a percentage of the outstanding loans in that category. The second table shows the allocated allowance together with the percentage of loans in each category to total loans. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not indicative of future losses and does not restrict the use of any of the allowance to absorb losses in any category. Due to the impact of accounting standards for acquired loans, data in the accompanying tables may not be comparable between accounting periods.

Item 1 - Table 5A - Allocation of Allowance for Loan Loss by Category (as of year-end)


	2018				2017				2016				2015				2014				2019				2018				2017				2016				2015
(Dollars in thousands)	Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category		Amount Allocated		Percent Allocated to Total Loans in Each Category
Commercial real estate	$	24,885	0.73	%	$	20,699	0.63	%	$	18,801	0.72	%	$	16,494	0.80	%	$	15,539	0.96	%	$	28,864	0.72	%	$	24,885	0.73	%	$	20,699	0.63	%	$	18,801	0.72	%	$	16,494	0.80	%
Commercial and industrial loans	17,568		0.88	%	14,975		0.83	%	10,611		1.00	%	8,715		0.83	%	6,322		0.79	%	20,178		1.09	%	17,568		0.88	%	14,975		0.83	%	10,611		1.00	%	8,715		0.83	%
Residential mortgages	11,165		0.44	%	10,018		0.48	%	8,571		0.45	%	8,589		0.47	%	7,480		0.50	%	9,388		0.35	%	11,165		0.44	%	10,018		0.48	%	8,571		0.45	%	8,589		0.47	%
Consumer	7,851		0.72	%	6,142		0.54	%	6,015		0.61	%	5,510		0.69	%	6,321		0.82	%	5,145		0.55	%	7,851		0.72	%	6,142		0.54	%	6,015		0.61	%	5,510		0.69	%
Total	$	61,469	0.68	%	$	51,834	0.62	%	$	43,998	0.67	%	$	39,308	0.69	%	$	35,662	0.76	%	$	63,575	0.67	%	$	61,469	0.68	%	$	51,834	0.62	%	$	43,998	0.67	%	$	39,308	0.69	%

Item 1 - Table 5B - Allocation of Allowance for Loan Loss (as of year-end)


	2018				2017				2016				2015				2014				2019				2018				2017				2016				2015
(Dollars in thousands)	Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans		Amount Allocated		Percent of Loans in Each Category to Total Loans
Commercial real estate	$	24,885	37.60	%	$	20,699	39.33	%	$	18,801	39.95	%	$	16,494	41.96	%	$	15,539	34.43	%	$	28,864	42.45	%	$	24,885	37.60	%	$	20,699	39.33	%	$	18,801	39.95	%	$	16,494	41.96	%
Commercial and industrial loans	17,568		21.90	%	14,975		21.74	%	10,611		16.22	%	8,715		22.10	%	6,322		17.19	%	20,178		19.37	%	17,568		21.90	%	14,975		21.74	%	10,611		16.22	%	8,715		22.10	%
Residential mortgages	11,165		28.37	%	10,018		25.34	%	8,571		28.90	%	8,589		21.91	%	7,480		31.97	%	9,388		28.26	%	11,165		28.37	%	10,018		25.34	%	8,571		28.90	%	8,589		21.91	%
Consumer	7,851		12.13	%	6,142		13.59	%	6,015		14.93	%	5,510		14.03	%	6,321		16.41	%	5,145		9.92	%	7,851		12.13	%	6,142		13.59	%	6,015		14.93	%	5,510		14.03	%
Total	$	61,469	100.00	%	$	51,834	100.00	%	$	43,998	100.00	%	$	39,308	100.00	%	$	35,662	100.00	%	$	63,575	100.00	%	$	61,469	100.00	%	$	51,834	100.00	%	$	43,998	100.00	%	$	39,308	100.00	%

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INVESTMENT SECURITIES ACTIVITIES

The securities portfolio provides cash flow to protect the safety of customer deposits and as a potential source of liquidity. The portfolio is also used to manage interest rate risk and to earn a reasonable return on investment. Decisions are made in accordance with the Company’s investment policy and include consideration of risk, return, duration, and portfolio concentrations. Day-to-day oversight of the portfolio rests with the Chief Financial Officer and the Treasurer. The Enterprise Risk Management/Asset-Liability Committee meets multiple times each quarter and reviews investment strategies. The Risk Management and Capital Committee of the Board of Directors provides general oversight of the investment function.

The Company has historically maintained a high-quality portfolio of managed duration mortgage-backed securities, together with a portfolio of municipal bonds including national and local issuers and local economic development bonds issued to non-profit organizations. Nearly all of the mortgage-backed securities are issued by Ginnie Mae, Fannie Mae, or Freddie Mac, consisting principally of collateralized mortgage obligations (generally consisting of planned amortization class bonds). Other than securities issued by the above agencies, no other issuer concentrations exceeding 10% of stockholders’ equity existed at year-end ~~2018.~~2019. The municipal portfolio provides tax-advantaged yield, and the local economic development bonds were originated by the Company to area borrowers. The Company invests in investment grade corporate bonds and commercial mortgage-backed securities. Purchases of non-investment grade fixed-income securities have consisted primarily of capital instruments issued by local and regional financial institutions and a mutual fund investing in non-investment grade bonds of national corporate issuers and in community reinvestment projects. The Company also invests in equity securities of local financial institutions, including those that might be future potential partners, as well as dividend yielding equity securities of national corporate exchange traded issuers. Historically, the Company acquired equity securities in the Bank, which was allowed under its savings bank charter. As a result of the Bank's charter change in 2014, equity security purchases after that date have been conducted at the holding company level. The Bank owns restricted equity in the Federal Home Loan Bank of Boston (“FHLBB”) based on its operating relationship with the FHLBB. The Company owns an interest rate swap against a tax advantaged economic development bond issued to a local not-for-profit organization, and as a result this security is carried as a trading account security. The Company generally designates debt securities as available for sale, but sometimes designates longer-duration municipal securities as held to maturity based on its intent. This also allows the Company to more effectively manage the potential impact of longer-duration, fixed-rate securities on stockholders' equity in the event of rising interest rates. Based on a new accounting pronouncement effective in 2018, changes in fair value on equity securities are recorded to current period income, rather than to equity.

The following tables present the year-end amortized cost and fair value of the Company’s securities, by type of security, for the three years indicated.

Item 1 - Table 6A - Amortized Cost and Fair Value of Securities


	2018				2017				2016				2019				2018				2017
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available for sale
Municipal bonds and obligations	$	109,648	$	111,207	$	113,427	$	118,233	$	117,910	$	119,816	$	104,325	$	110,138	$	109,648	$	111,207	$	113,427	$	118,233
Mortgage-backed securities	1,182,552		1,160,130		1,142,656		1,130,403		948,661		945,129		1,037,205		1,043,652		1,182,552		1,160,130		1,142,656		1,130,403
Other bonds and obligations	129,073		128,310		131,167		132,278		78,877		79,051		155,809		157,765		129,073		128,310		131,167		132,278
Total securities available for sale	$	1,421,273	$	1,399,647	$	1,387,250	$	1,380,914	$	1,145,448	$	1,143,996	$	1,297,339	$	1,311,555	$	1,421,273	$	1,399,647	$	1,387,250	$	1,380,914

Securities held to maturity
Municipal bonds and obligations	$	264,524	$	264,492	$	270,310	$	278,895	$	203,463	$	204,986	$	252,936	$	266,026	$	264,524	$	264,492	$	270,310	$	278,895
Mortgage-backed securities	89,273		88,442		92,115		92,242		95,302		95,495		86,291		89,191		89,273		88,442		92,115		92,242
Tax advantaged economic development bonds	19,718		18,042		34,357		33,818		35,278		36,874		18,456		17,764		19,718		18,042		34,357		33,818
Other bonds and obligations	248		248		321		321		325		325		296		296		248		248		321		321
Total securities held to maturity	$	373,763	$	371,224	$	397,103	$	405,276	$	334,368	$	337,680	$	357,979	$	373,277	$	373,763	$	371,224	$	397,103	$	405,276

Trading account security	$	10,090	$	11,212	$	10,755	$	12,277	$	11,387	$	13,229	$	9,390	$	10,769	$	10,090	$	11,212	$	10,755	$	12,277
Marketable equity securities	$	55,471	$	56,638	$	36,483	$	45,185	$	47,858	$	65,541	$	37,138	$	41,556	$	55,471	$	56,638	$	36,483	$	45,185
Restricted equity securities	$	77,344	$	77,344	$	63,085	$	63,085	$	71,112	$	71,112	$	48,019	$	48,019	$	77,344	$	77,344	$	63,085	$	63,085

Item 1 - Table 6B - Amortized Cost and Fair Value of Securities


	2018				2017				2016				2019				2018				2017
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Treasuries, other Government agencies and corporations	$	1,327,296	$	1,305,210	$	1,271,254	$	1,267,830	$	1,091,821	$	1,106,165	$	1,160,634	$	1,174,399	$	1,327,296	$	1,305,210	$	1,271,254	$	1,267,830
Municipal bonds and obligations and tax advantaged securities	403,980		404,953		428,849		443,223		368,038		374,905		385,107		404,697		403,980		404,953		428,849		443,223
Other	206,665		205,902		194,573		195,684		150,314		150,488		204,124		206,080		206,665		205,902		194,573		195,684
Total Securities	$	1,937,941	$	1,916,065	$	1,894,676	$	1,906,737	$	1,610,173	$	1,631,558	$	1,749,865	$	1,785,176	$	1,937,941	$	1,916,065	$	1,894,676	$	1,906,737

The schedule includes available-for-sale and held-to-maturity securities, as well as the trading security, marketable equity securities, and restricted equity securities.

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The following table summarizes year-end ~~2018~~2019 amortized cost, weighted average yields, and contractual maturities of debt securities. Yields are shown on a fully taxable equivalent basis. A significant portion of the mortgage-based securities are planned amortization class bonds. Their expected durations are 3-5 years at current interest rates, but the contractual maturities shown reflect the underlying maturities of the collateral mortgages. Additionally, the mortgage-based securities maturities shown below are based on final maturities and do not include scheduled amortization. Yields include amortization and accretion of premiums and discounts.

Item 1 - Table 7 - Weighted Average Yield


	One Year or Less				More than One Year to Five Years				More than Five Years to Ten Years				More than Ten Years				Total				One Year or Less				More than One Year to Five Years				More than Five Years to Ten Years				More than Ten Years				Total
(In millions)	Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield		Amortized Cost		Weighted Average Yield
Municipal bonds and obligations	$	5.4	2.0	%	$	28.8	3.0	%	$	24.3	3.0	%	$	309.3	3.0	%	$	367.8	3.0	%	$	16.8	3.0	%	$	14.8	4.0	%	$	29.0	4.0	%	$	296.7	5.0	%	$	357.3	4.0	%
Mortgage-backed securities	—		—	%	5.4		2.0	%	43.4		2.0	%	1,223.2		3.0	%	1,272.0		3.0	%	0.1		3.0	%	3.4		2.0	%	103.6		2.0	%	1,016.4		3.0	%	1,123.5		3.0	%
Other bonds and obligations	2.0		1.0	%	15.6		0.3	%	63.8		5.0	%	73.9		5.0	%	155.3		5.0	%	20.0		1.0	%	19.8		5.0	%	51.6		5.0	%	83.1		4.0	%	174.5		4.0	%
Total	$	7.4	2.1	%	$	49.8	2.7	%	$	131.5	3.7	%	$	1,606.4	2.9	%	$	1,795.1	3.0	%	$	36.9	1.9	%	$	38.0	4.3	%	$	184.2	3.2	%	$	1,396.2	3.5	%	$	1,655.3	3.3	%

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

Deposits are the major source of funds for the Bank’s lending and investment activities. Deposit accounts are the primary product and service interaction with the Bank’s customers. The Bank serves personal, commercial, non-profit, and municipal deposit customers. Most of the Bank’s deposits are generated from the areas surrounding its branch offices. The Bank offers a wide variety of deposit accounts with a range of interest rates and terms. The Bank also periodically offers promotional interest rates and terms for limited periods of time. The Bank’s deposit accounts consist of demand deposits (non-interest-bearing checking), NOW (interest-bearing checking), regular savings, money market savings, and time certificates of deposit. The Bank emphasizes its transaction deposits --– checking and NOW accounts --– for personal accounts and checking accounts promoted to businesses. These accounts have the lowest marginal cost to the Bank and are also often a core account for a customer relationship. The Bank offers a courtesy overdraft program to improve customer service, and also provides debit cards and other electronic fee producing payment services to transaction account customers. The Bank offers targeted online deposit account opening capabilities for personal accounts. The Bank promotes remote deposit capture devices so that commercial accounts can make deposits from their place of business. Additionally, the Bank offers a variety of retirement deposit accounts to personal and business customers. Deposit related fees are a significant source of fee income to the Bank, including overdraft and interchange fees related to debit card usage. Deposit service fee income also includes other miscellaneous transactions and convenience services sold to customers through the branch system as part of an overall service relationship. The Bank offers compensating balance arrangements for larger business customers as an alternative to fees charged for checking account services. Berkshire’s Business Connection is a personal financial services benefit package designed for the employees of its business customers. In addition to providing service through its branches, Berkshire provides services to deposit customers through its private bankers, MyBankers, commercial/small business relationship managers, and call center representatives. Commercial cash management services are an important commercial service offered to commercial depositors and a fee income source to the bank. ~~With the Commerce acquisition, the~~The Bank ~~acquired~~also operates a commercial payment processing business that serves regional and national payroll service bureau customers. Online banking and mobile banking functionality is increasingly important as a component of deposit account access and service delivery. The Bank is also gradually deploying its MyTeller video tellers to complement and extend its service capabilities in its branches.

The Company also is monitoring the development of payment services which are growing in their importance in the personal and commercial deposit markets. ~~Near the end of 2017, the~~The Company has recruited experienced senior officers to enhance its offerings and market development for government banking and international services ~~which are expected~~ to support further development of commercial deposit sources.

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The Bank’s deposits are insured by the FDIC. The Bank utilizes brokered time deposits to broaden its funding base, augment its interest rate risk management vehicles, and to support loan growth. The Bank also offers brokered reciprocal money market arrangements to provide additional deposit protection to certain large commercial and institutional accounts. These balances are viewed as part of overall relationship balances with regional customers. Brokered deposits are sourced through selected Board approved brokers; these deposits are viewed as potentially more volatile than other deposits and are managed as a component of the Bank's liquidity policies.

The following table presents information concerning average balances and weighted average interest rates on the Bank’s interest-bearing deposit accounts for the years indicated.

Item 1 - Table 8 - Average Balance and Weighted Average Rates for Deposits


	2018						2017						2016						2019						2018						2017
(In millions)	Average Balance		Percent of Total Average Deposits		Weighted Average Rate		Average Balance		Percent of Total Average Deposits		Weighted Average Rate		Average Balance		Percent of Total Average Deposits		Weighted Average Rate		Average Balance		Percent of Total Average Deposits		Weighted Average Rate		Average Balance		Percent of Total Average Deposits		Weighted Average Rate		Average Balance		Percent of Total Average Deposits		Weighted Average Rate
Demand	$	1,622.4	19	%	—	%	$	1,296.4	18	%	—	%	$	1,081.0	19	%	—	%	$	1,745.2	18	%	—	%	$	1,622.4	19	%	—	%	$	1,296.4	18	%	—	%
NOW and other	824.7		9		0.5		591.0		8		0.3		487.8		8		0.1		1,053.9		11		0.6		824.7		9		0.5		591.0		8		0.3
Money market	2,432.2		28		0.9		1,935.8		27		0.6		1,470.3		26		0.5		2,542.6		26		1.2		2,432.2		28		0.9		1,935.8		27		0.6
Savings	740.8		9		0.2		680.1		10		0.1		610.8		11		0.1		798.2		8		0.2		740.8		9		0.2		680.1		10		0.1
Time	3,075.5		35		1.7		2,581.1		37		1.2		2,094.8		36		1.1		3,754.2		37		2.0		3,075.5		35		1.7		2,581.1		37		1.2
Total	$	8,695.6	100	%	0.9	%	$	7,084.4	100	%	0.6	%	$	5,744.7	100	%	0.5	%	$	9,894.1	100	%	1.2	%	$	8,695.6	100	%	0.9	%	$	7,084.4	100	%	0.6	%

At year-end ~~2018,~~2019, the Bank had time deposit accounts in amounts of $100 thousand or more maturing as follows:

Item 1 - Table 9 - Maturity of Deposits > $100,000


Maturity Period	Amount		Weighted Average Rate		Amount		Weighted Average Rate
(In thousands)
Three months or less	$	767,372	1.88	%	$	567,919	2.08	%
Over 3 months through 6 months	428,802		1.85		619,804		2.26
Over 6 months through 12 months	558,411		2.10		914,560		2.19
Over 12 months	813,443		2.27		581,896		2.17
Total	$	2,568,028	2.05	%	$	2,684,179	2.18	%

The Company also uses borrowings from the FHLBB as an additional source of funding, particularly for daily cash management and for funding longer duration assets. FHLBB advances also provide more pricing and option alternatives for particular asset/liability needs. The FHLBB functions as a central reserve bank providing credit for member institutions. As an FHLBB member, the Company is required to own capital stock of the organization. Borrowings from this institution are secured by a blanket lien on most of the Bank’s mortgage loans and mortgage-related securities, as well as certain other assets. Advances are made under several different credit programs with different lending standards, interest rates, and range of maturities.

The Company has a $15 million trust preferred obligation and a $7 million trust preferred obligation outstanding, as well as $74 million in senior subordinated notes. The Company’s common stock is listed on the New York Stock Exchange. Subject to certain limitations, the Company can also choose to issue common stock, preferred stock, subordinated debt, or senior debt in public stock offerings or private placements. ~~The Company maintains a universal shelf registration with the SEC to facilitate future potential capital issuances.~~

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DERIVATIVE FINANCIAL INSTRUMENTS

The Company offers interest rate swaps to commercial loan customers who wish to fix the interest rates on their loans, and the Company backs these swaps with offsetting swaps with national bank counterparties. With other lending institutions, the Company engages in risk participation agreements. These arrangements are structured similarly to its swaps with commercial borrowers, but a different bank is the lead underwriter. The Company gets paid a fee to take on the risk associated with having to make the lead bank whole on Berkshire’s portion of the pro-rated swap should the borrower default. These swaps are designated as economic hedges. ~~Based on changes in federal regulation, interest~~Interest rate swaps that meet certain criteria to be viewed as conforming are required to be cleared through ~~exchanges beginning when the $10 billion threshold is crossed.~~exchanges. The Bank has designated a national financial institution as its clearing agent.

The Company’s mortgage banking activities result in derivatives. Commitments to lend are provided on applications for residential mortgages intended for resale and are accounted for as non-hedging derivatives. The Company arranges offsetting forward sales commitments for most of these rate-locks with national bank counterparties, which are designated as economic hedges. Commitments on applications intended to be held for investment are not accounted for as derivative financial instruments. The Company has a policy for managing its derivative financial instruments, and the policy and program activity are overseen by the Risk Management and Capital Committee. Derivative financial instruments with counterparties which are not customers are limited to a select number of national financial institutions. Collateral may be required based on financial condition tests. The Company works with third-party firms which assist in marketing derivative transactions, executing transactions, and providing information for bookkeeping and accounting purposes.

The Company sometimes uses interest rate swap instruments for its own account to fix the interest rate on some of its borrowings, all of which have been designated as cash flow hedges. The Company ~~terminated its outstanding cash flow hedges in the first quarter of 2017. The Company evaluates these hedges as part of its overall interest rate risk management. The Company~~ also ~~expects to begin~~has begun offering forward foreign exchange derivatives to its commercial markets as part of its expanded international banking services. The Company expects to back these forwards with offsetting forwards with national bank counterparties. This activity would be targeted to support routine commercial needs of customers engaged in international trading activities and would only be offered for bank approved currencies and durations.

LIBOR BASED INSTRUMENTS

The Company has approximately 1,050 commercial loans with a total balance of $2.8 billion with the contract interest rate tied to LIBOR. Additionally, the Company has approximately 500 interest rate swap contracts with a notional value of approximately $3.6 billion, including customer, dealer, and risk participation agreements. Many of these interest rate swap contracts are associated with the LIBOR based commercial loans.

The Company established an enterprise-wide LIBOR transition committee in 2019. The committee has assessed the on and off-balance sheet products that will be impacted with the LIBOR transition. The areas with the most impact are LIBOR based interest rate swaps and commercial loans that utilize LIBOR as the indexed rate. During 2019 revised LIBOR fallback language was added to all new Commercial loan contracts that contemplated the use of LIBOR as an index rate. An impact assessment is underway to identify further exposures, such as systems, processes, and models affected by the discontinuation of LIBOR. The Company continues to develop and execute plans to transition products associated with LIBOR to alternative reference rates.

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WEALTH MANAGEMENT SERVICES

The Company’s Wealth Management Group provides consultative investment management, trust administration, and financial planning to individuals, businesses, and institutions, with an emphasis on personal investment management. The Wealth Management Group has built a track record over more than a decade with its dedicated in-house investment management team. The Bank also provides a full line of investment products, financial planning, and brokerage services through BerkshireBanc Investment Services utilizing Commonwealth Financial Network as the broker/dealer. The Group’s principal operations are in Western New England and it is expanding services in the Company’s other regions. ~~In 2016, the Bank purchased the business assets and operations of Ronald N. Lazzaro, P.C., a provider of financial advisory services in Rutland, Vermont.~~ At year-end ~~2018,~~2019, assets under management totaled ~~$1.4~~$1.5 billion, primarily held in the Bank’s traditional wealth/trust platform and the remainder is managed through its investment services and financial advisory teams. The Bank is integrating with its growing private banking and MyBanker teams to further develop wealth management account generation.

INSURANCE

As an independent insurance agent, the Berkshire Insurance Group represents a carefully selected group of financially sound, reputable insurance companies offering attractive coverage at competitive prices. The Insurance Group offers a full line of personal and commercial property and casualty insurance. It also offers employee benefits insurance and a full line of personal life, health, and financial services insurance products. Berkshire Insurance Group operates a focused cross-sell program of insurance and banking products through all offices and branches of the Bank with some of the Group’s offices located within the Bank’s branches. The Group’s principal operations are in Western New England, and it is expanding its services in the Company’s other regions. The Group focuses on the Bank’s distribution channels in order to broaden its retail and commercial customer base. The Company may consider acquisitions of insurance agencies in support of its growth strategy.

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PERSONNEL

~~At year-end 2018, the Company had 1,917 full time~~Full-time equivalent ~~employee~~staff in continuing operations totaled 1,550 positions at period-end, compared to ~~1,992~~1,485 at ~~the end of 2017. This included 432 positions and 513 positions in the~~year-end 2018. National mortgage banking ~~business line at these respective dates.~~ operations designated as discontinued operations totaled 323 positions.

The Company’s employees are not represented by a collective bargaining unit. In 2018, the Bank’s president initiated a diversity and inclusion initiative as part of Berkshire’s expanded social responsibility focus. In 2018, the Company increased its hourly minimum wage to $15.00 and implemented the new Massachusetts equal pay law.

SUBSIDIARY ACTIVITIES

The Company wholly-owns two active consolidated subsidiaries: the Bank and Berkshire Insurance Group, Inc. The Bank operates as a commercial bank under a Massachusetts trust company charter. Berkshire Insurance Group is incorporated in Massachusetts. Berkshire Bank owns Firestone Financial, LLC which is a Massachusetts limited liability company, First Choice Loan Services Inc. which is a New Jersey corporation, as well as consolidated subsidiaries operated as Massachusetts securities ~~corporations.~~corporations and other subsidiary entities. The Company designated the operations of First Choice Loan Services as held for sale in 2019. The Company also owns all of the common stock of a Delaware statutory business ~~trust,~~trusts, Berkshire Hills Capital Trust I.I and SI Capital Trust II. The capital ~~trust is~~trusts are unconsolidated and ~~its~~their only material ~~asset is a $15 million~~assets are trust preferred ~~security~~securities related to the junior subordinated debentures reported in the Company’s Consolidated Financial Statements. Additional information about the subsidiaries is contained in Exhibit 21 to this report.

REGULATION AND SUPERVISION

The Company is a Delaware corporation and a bank holding company that has elected financial holding company status within the meaning of the Bank Holding Company Act of 1956, as amended. As such, it is registered with, supervised by and required to comply with the rules and regulations of the Federal Reserve Board. The Federal Reserve Board requires the Company to file various reports and also conducts examinations of the Company. The Company must receive the approval of the Federal Reserve Board to engage in certain transactions, such as acquisitions of additional banks and savings associations.

The Bank is a Massachusetts-chartered trust company and its deposits are insured up to applicable limits by the FDIC. The Bank was previously a Massachusetts-chartered savings bank and converted to a Massachusetts-chartered trust company in July 2014. The Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks (the “Commissioner”), as its chartering agency, and by the FDIC, as its deposit insurer. The

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Bank is required to file reports with the Commissioner and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other depository institutions or branches of other institutions. The Commissioner and the FDIC conduct periodic examinations to test the Bank’s safety and soundness and compliance with various regulatory requirements. The regulatory structure gives the regulatory authorities extensive discretion in connection with supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Commissioner, the Massachusetts legislature, the FDIC, the Federal Reserve Board, or Congress, could have a material adverse impact on the Company, the Bank, and their operations.

Federal Legislation

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted in 2010. The Dodd-Frank Act has significantly changed the bank regulatory structure and is affecting the lending, investment, trading and operating activities of depository institutions and their holding companies.

Many of the provisions of the Dodd-Frank Act were subject to delayed effective dates and/or the issuance of implementing regulations. The regulatory process is ongoing and the impact on operations cannot yet be fully assessed. However, the Dodd-Frank Act has, and is expected to continue to, at a minimum, result in increased regulatory burden, compliance costs and interest expense for the Company and the Bank.

Certain regulatory requirements applicable to the Company are referred to below. The description of statutory provisions and regulations applicable to financial institutions and their holding companies set forth in this Form ~~10-~~

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K10-K does not purport to be a complete description of such statutes and regulations and their effects on the Company and is qualified in its entirety by reference to the actual laws and regulations.

Massachusetts Banking Laws and Supervision

General. As a Massachusetts-chartered depository institution, the Bank is subject to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, the Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The approval of the Commissioner is required for a Massachusetts-chartered institution to establish or close branches, merge with other financial institutions, issue stock, and undertake certain other activities.

Massachusetts law and regulations generally allow Massachusetts institutions to engage in activities permissible for federally chartered banks or banks chartered by another state. There is a 30-day notice procedure to the Commissioner in order to engage in such activities. Massachusetts law also authorized Massachusetts institutions to engage in activities determined to be “financial in nature,” or incidental or complementary to such a financial activity, subject to a 30-day notice to the Commissioner.

Dividends. Under Massachusetts law, the Bank may declare cash dividends from net profits not more frequently than quarterly and non-cash dividends at any time. No dividends may be declared, credited, or paid if the institution’s capital stock is impaired. An institution with outstanding preferred stock may not, without the prior approval of the Commissioner, declare dividends to the common stock without also declaring dividends to the preferred stock. The approval of the Commissioner is generally required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained “net profits,” as defined, of the preceding two years.

Loans to One Borrower Limitations. Massachusetts banking law grants broad lending authority. However, with certain limited exceptions, total obligations of one borrower to an institution may not exceed 20.0% of the total of the institution’s capital, which is defined under Massachusetts law as the sum of the institution’s capital stock, surplus account and undivided profits.

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Investment Activities. In general, Massachusetts-chartered institutions may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4.0% of the bank’s deposits. Massachusetts-chartered institutions may also invest an amount equal to 1.0% of their deposits in stocks of Massachusetts corporations or companies with substantial employment in Massachusetts which have pledged to the Commissioner that such monies will be used for further development within the Commonwealth. However, these powers are constrained by federal law, which generally limit the activities and equity investments of state banks to those permitted for national banks.

Regulatory Enforcement Authority. Any Massachusetts-chartered institution that does not operate in accordance with the regulations, policies, and directives of the Commissioner may be sanctioned for non-compliance, including seizure of the property and business of the institution and suspension or revocation of its charter. The Commissioner may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the institution’s business in a manner which is unsafe, unsound or contrary to the depositors interests, or been negligent in the performance of their duties. In addition, upon finding that an institution has engaged in an unfair or deceptive act or practice, the Commissioner may issue an order to cease and desist and impose a fine on the institution concerned. Finally, Massachusetts consumer protection and civil rights statutes applicable to the Bank permit private individual and class action lawsuits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.

Massachusetts has other statutes or regulations that are similar to the federal provisions discussed below.

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Federal Regulations

Capital Requirements. Federal regulations require FDIC insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier ~~1capital)~~1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The Bank chose the opt-out election. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the ~~regulations.~~regulations, including adjustments for goodwill and other intangible assets.

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% and 600% is assigned to permissible equity interests, depending on certain specified factors.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer ~~requirement~~ was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019.

In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary. As a bank holding company, the Company is also subject to regulatory capital requirements, as described in a subsequent section.

Interstate Banking and Branching. Federal law permits an institution, such as the Bank, to acquire another institution by merger in a state other than Massachusetts unless the other state has opted out. Federal law, as amended by the Dodd-Frank Act, authorizes de novo branching into another state to the extent that the target state allows its ~~state chartered~~state-chartered banks to establish branches within its borders. The Bank currently operates branches in New York, Vermont, Connecticut, New Jersey, and Pennsylvania as well as Massachusetts. At its interstate branches, the Bank may conduct any activity authorized under Massachusetts law that is permissible either for an institution chartered in that state (subject to applicable federal restrictions) or a branch in that state of an out-of-state national bank. The New York State Superintendent of Banks, the Vermont Commissioner of Banking and Insurance, the Connecticut Commissioner of Banking, the New Jersey Commissioner of Banking and Insurance, ~~and~~ the Pennsylvania Secretary of Banking and Securities, and the Director of the Rhode Island Department of Business Regulation may exercise certain regulatory authority over the Bank’s branches in their respective states.

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Prompt Corrective Regulatory Action. Federal law requires that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For this purpose, the law establishes three categories of capital deficient institutions: undercapitalized, significantly undercapitalized, and critically undercapitalized. The FDIC regulations implementing the prompt corrective action law were amended to incorporate the previously discussed increased regulatory capital standards that were effective January 1, 2015. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater, and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater, and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0%, or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0%, or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend), and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such plans must be guaranteed by its holding company in an amount equal to the lesser of 5% of the institution’s total assets when deemed “undercapitalized” or the amount needed to comply with regulatory capital requirements. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce assets and cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers, and capital distributions by the holding company. “Critically undercapitalized” institutions must comply with additional sanctions including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

At December 31, ~~2018,~~2019, the Bank met the criteria for being considered “well capitalized” as defined in the prompt corrective action regulations.

Transactions with Affiliates and Loans to Insiders. Transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. In a holding company context, at a minimum, the parent holding company of an institution and any companies which are controlled by the holding company are affiliates of the institution. Generally, Section 23A limits the extent to which the institution or its subsidiaries may engage in “covered transactions,” such as loans, with any one affiliate to 10% of such institution’s capital stock and surplus. There is also an aggregate limit on all such transactions with all affiliates to 20% of capital stock and surplus. Loans to affiliates and certain other specified transactions must comply with specified collateralization requirements. Section 23B requires that transactions with affiliates be on terms that are no less favorable to the institution or its subsidiary as similar transactions with non-affiliates.

Federal law also restricts an institution with respect to loans to directors, executive officers, and principal stockholders (“insiders”). Loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the Board of Directors. Further, loans to insiders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the institution’s employees and does not give preference to the insider over the employees. Federal law places additional limitations on loans to executive officers. Massachusetts law previously had a separate law regarding insider transactions but that law was amended in 2015 to generally incorporate the federal restrictions.

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Insurance of Deposit Accounts. The Bank’s deposit accounts are insured by the Deposit Insurance Fund of the FDIC up to applicable limits. The FDIC insures deposits up to the standard maximum deposit insurance amount (“SMDIA”) of $250,000.

The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. The Dodd-Frank Act required the FDIC to revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits.

Under the FDIC’s risk-based assessment system, insured institutions are assessed based on perceived risk to the Deposit Insurance Fund with institutions deemed less risky pay lower FDIC assessments. Assessments for institutions with $10 billion or more of assets are primarily based on a scorecard ~~approached~~approach by the FDIC, including factors such as examination ratings and modeling measuring the institution’s ability to withstand asset-related and funding-related stress and potential loss to the Deposit Insurance Fund should the bank fail. The assessment range (inclusive of possible adjustments specified by the regulations) for institutions with greater than $10 billion of total assets is 1.5 to 40 basis points. The Dodd-Frank Act required that banks of greater than $10 billion of assets bear the burden of raising the Deposit Insurance Fund reserve ratio from 1.15% to 1.35%. Such institutions were subject to an annual surcharge of 4.5 basis points of total assets exceeding $10 billion, effective July 1, 2016. The FDIC announced in November 2018 that the 1.35% reserve ratio had been reached so that the surcharges would cease.

In 2019, the FDIC ~~insured institutions are also required to pay assessments~~distributed premium rebates to the ~~FDIC to fund interest payments on bonds issued by the Financing Corporation, an agency~~Company and other bank peers as a result of ~~the federal government established to recapitalize a predecessor deposit insurance fund. These assessments continue until the Financing Corporation bonds mature~~having collected excess premiums in September 2019. The assessment rate is adjusted quarterly to reflect changes in the assessment base of the fund. For the quarter ended December 31, 2018, the Financing Corporation assessment amounted to 0.32 basis points of total assets less Tier 1 capital.earlier periods.

Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a regulator. Management does not know of any practice, condition or violation that might lead to termination of FDIC deposit insurance.

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank system, which consists of 12 regional Federal Home Loan Banks that provide a central credit facility primarily for member institutions. The Bank, as a member, is required to acquire and hold shares of capital stock in the FHLBB.

The Federal Home Loan Banks are required to provide funds for certain purposes including contributing funds for affordable housing programs. These requirements, and general financial results, could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. Historically, the FHLBB has paid dividends to member banks based on money market rates.

Enforcement

The FDIC has primary federal enforcement responsibility over state chartered banks that are not members of Federal Reserve System, which includes the Bank. The FDIC has authority to bring enforcement actions against such institutions and their “institution-related parties,” including officers, directors, certain shareholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution or receivership or conservatorship in certain circumstances. Potential civil money penalties cover a wide range of violations and actions, and range up to $25 thousand per day or, in extreme cases, as high as $1.0 million per day.

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Holding Company Regulation

General. The Company is subject to examination, regulation, and periodic reporting as a bank holding company under the Bank Holding Company Act of 1956, as amended. The Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any other bank or bank holding company. Prior Federal Reserve Board approval would be required for the Company to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after such acquisition, it would, directly or indirectly, own or control more than five percent of any class of voting shares of the bank or bank holding company.

A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than five percent of the voting securities of any company engaged in non-banking activities. The Federal Reserve Board has allowed by regulation some exceptions based on activities closely related to banking including: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment or financial advisor; and (v) acquiring a savings and loan association whose direct and indirect activities are limited to those permitted for bank holding companies.

The Gramm-Leach-Bliley Act of 1999 authorized a bank holding company that meets specified conditions, including being “well capitalized” and “well managed” as defined in the regulations, to opt to become a “financial holding company” and thereby engage in a broader array of financial activities. Such activities can include insurance and investment banking. The Company has elected to become a financial holding company.

The Company is subject to the Federal Reserve Board’s capital adequacy requirements for bank holding companies. The Dodd-Frank Act required the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. The previously discussed final rule regarding regulatory capital requirements implemented the Dodd-Frank Act as to bank holding company capital standards. Consolidated regulatory capital requirements identical to those applicable to the Bank applied to the Company, effective January 1, 2015. As is the case with institutions themselves, the capital conservation buffer was phased in beginning in 2016 and was fully effective on January 1, 2019.

Federal Reserve Board policy requires that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength doctrine.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to dividends in certain circumstances such as where the company’s net income for the past four quarters, net of dividends’ previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.

Federal regulations require a bank holding company to give the Federal Reserve Board prior written notice of any repurchase or redemption of then outstanding equity securities if the gross consideration for the repurchase or redemption, when combined with the net consideration paid for all such repurchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption under certain circumstances. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions. Federal Reserve policy provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital

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instruments under specified circumstances regardless of the applicability of the previously referenced notification requirement.

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requirement. Most recently, the Federal Reserve Board’s staff has been interpreting its regulatory capital regulation as requiring a bank holding company to apply and receive its approval before repurchasing or redeeming shares that are included by the holding company for regulatory capital purposes.

These regulatory policies could affect the ability of the Company to pay dividends, repurchase shares of its stock, or otherwise engage in capital distributions.

The status of the Company as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

Acquisition of the Company. Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as the Company unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined ~~under federal law,~~for this purpose, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’s directors, or a determination by the regulator that the acquirer has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable presumption of control under the regulations under certain circumstances including where, is the case with the Company, the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

Massachusetts Holding Company Regulation. In addition to the federal holding company regulations, a bank holding company organized or doing business in Massachusetts must comply with requirements under Massachusetts law. Approval of the Massachusetts regulatory authorities is generally be required for the Company to acquire 25 percent or more of the voting stock of another depository institution. Similarly, prior regulatory approval would be necessary for any person or company to acquire 25 percent or more of the voting stock of the Company.

Mergers and Acquisitions

The Company and the Bank have authority to engage, and have engaged, in acquisitions of other depository institutions. Such transactions are subject to a variety of conditions including, but not limited to, required stockholder approvals and the receipt of all necessary regulatory approvals. Necessary regulatory approvals include those required by the federal Bank Holding Company Act and/or Bank Merger Act, Massachusetts law and, if the target institution is located in a state other than Massachusetts, the law of that state. When considering merger applications, the federal regulators must evaluate such factors as the financial and managerial resources and future prospects of the parties, the convenience and needs of the communities to be served (including performance of the parties under the Community Reinvestment Act), competitive factors, any risk to the stability of the United States banking or financial system and the effectiveness of the institutions involved in combating money laundering activities. Both the Bank Holding Company Act and the Bank Merger Act provide for a waiting period of 15 to 30 days following approval by the federal banking regulator within which the United States Department of Justice may file objections to the merger under the federal antitrust laws. Massachusetts law requires the Commissioner (or Board of Bank Incorporation in certain cases) to consider such factors as whether competition among banking institutions will be unreasonably affected and whether public convenience and advantage will be promoted (including whether the merger will result in net new benefits).

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Other Regulations

Consumer Protection Laws. The Bank is subject to federal and state consumer protection statutes and regulations applicable to depository institutions. These include the Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; Home Mortgage Disclosure Act, requiring financial institutions to provide certain information about home mortgage and refinance loans; the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act, governing the provision of consumer information to credit reporting agencies and the use of consumer information; the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and the Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. Since the Bank has exceeded $10 billion of consolidated assets, compliance with such federal consumer protection statutes and regulations is examined for and enforced by the Consumer Finance Protection Bureau rather than the FDIC.

The Bank also is subject to Massachusetts and federal laws protecting the confidentiality of consumer financial records, and limiting the ability of the institution to share non-public personal information with third parties.

The Community Reinvestment Act (“CRA”) establishes a requirement for federal banking agencies that, in connection with examinations of depository institutions within their jurisdiction, the agencies evaluate the record of the depository institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial non-compliance.” A less than “satisfactory” rating would result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of the most recent CRA examination by the FDIC, the Bank’s CRA rating was “satisfactory.”

Anti-Money Laundering Laws. The Bank is subject to extensive anti-money laundering provisions and requirements, which require the institution to have in place a comprehensive customer identification program and an anti-money laundering program and procedures. These laws and regulations also prohibit depository institutions from engaging in business with foreign shell banks; require depository institutions to have due diligence procedures and, in some cases, enhanced due diligence procedures for foreign correspondent and private banking accounts; and improve information sharing between depository institutions and the U.S. government. The Bank has established policies and procedures intended to comply with these provisions.

Taxation

The Company reports its income on a calendar year basis using the accrual method of accounting. This discussion of tax matters is only a summary and is not a comprehensive description of the tax rules applicable to the Company and its subsidiaries. Further discussion of income taxation is contained in Note 1416 - Income Taxes of the Consolidated Financial Statements. The federal income tax laws apply to the Company in the same manner as to other corporations with some exceptions. The Company may exclude from income 100 percent of dividends received from the Bank and from Berkshire Insurance Group as members of the same affiliated group of corporations. The Company reports income on a calendar year basis to the Commonwealth of Massachusetts. Massachusetts tax law generally permits special tax treatment for a qualifying limited purpose “securities corporation.” The Bank’s securities corporations all qualify for this treatment, and are taxed at a 1.3% rate on their gross income.

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ITEM 1A. RISK FACTORS

The risks set forth below, in addition to the other risks described in this Annual Report on Form 10-K, may adversely affect the Company's business, financial condition, and operating results. In addition to the risks set forth below and the other risks described in this annual report, there may be additional risks and uncertainties that are not currently known to the Company or that the Company currently deems to be immaterial that could materially and adversely affect the Company's business, financial condition or operating results. As a result, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

Lending

Deterioration in the Housing Sector, Commercial Real Estate, and Related Markets May Adversely Affect Business and Financial Results.

Real estate lending is a major business activity for the Company. Real estate market conditions affect the value and marketability of real estate collateral, and they also affect the cash flows, liquidity, and net worth of many borrowers whose operations and finances depend on real estate market conditions. Adverse conditions in the Company's market areas could reduce growth rates, affect the ability of our customers to repay their loans, and generally affect the Company's financial condition and results of operations. Potential increases in interest rates could increase capitalization rates which could adversely affect commercial property appraisals and collateral value.

The Company’s Emphasis on Commercial Lending May Expose the Company to Increased Lending Risks, Which Could Hurt Profits.

The Company emphasizes commercial lending, which generally exposes the Company to a greater risk of nonpayment and loss because repayment of such loans often depends on the successful operations and income stream of the borrowers. Commercial loans are historically more susceptible to delinquency, default, and loss during economic downturns. Commercial lending involves larger loan sizes and larger relationship exposures, with greater potential impact on profits in the event of adverse loan performance. The majority of the Company’s commercial loans are secured by real estate and subject to the previously discussed real estate risk ~~factors.~~factors, as well as risks specific to individual properties and property types. Geographic expansion may result in new risks not identified by the Company or which it is unfamiliar with monitoring or resolving. Recent expansion has been focused on the Greater Boston market, where the Bank may be financing projects with larger loan amounts and where the Bank has less experience than in its traditional market areas and where competition may result in different lending structures.

In 2019, the Company wrote-off the $16 million balance of a secured commercial loan in circumstances involving alleged borrower fraud. Commercial lending activities pose higher risk of fraud, as in this situation. This asset was a participating interest in a commercial loan managed by another financial institution. Such participating interests involve risks related to counterparty performance, as further described in a later risk factor. In the case of this loan, the Company has filed legal claims against the lead lender in pursuit of the recovery of some of the loss recorded by the Company. The outcome of such legal proceedings is subject to uncertainty and the Company has not recognized any such potential recoveries in its financial records.

The Company is ~~subject~~Subject to a ~~variety~~Variety of ~~risks~~Risks in ~~connection with any sale~~Connection With Any Sale of ~~loans~~Loans it ~~may conduct.~~May Conduct.

In connection with the Company’s sale of one or more loan portfolios, it may make certain representations and warranties to the purchaser concerning the loans sold and the procedures under which those loans have been originated and serviced. If any of these representations and warranties are invalid, the Company may be required to indemnify the purchaser for any related losses, or it may be required to repurchase part or all of the affected loans, which may be impaired. The Company may also be required to repurchase loans as a result of borrower fraud or in the event of early payment default by the borrower on a loan it has sold. The ~~Company’s~~Company��s ability to maintain seller/servicer relationships with government agencies and government backed entities may be jeopardized in the event of the emergence of one or more of the above risks. Demand for the Company’s loans in the secondary markets could also be affected by these risks, which could lead to a reduction in related business activities.

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The Company may be required to reduce the value of any loans it marks as held for sale, which could adversely affect its results of operations. As a result of the Company’s strategic initiatives in 2019, the Company sold certain loan pools which were previously held for investment and conducted sales with buyers who it had not previously transacted with.

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The Company is ~~exposed~~Exposed to ~~risk~~Risk of ~~environmental liability when it takes title~~Environmental Liability When It Takes Title to ~~property.~~Property.

In the course of its business, the Company may foreclose on and take title to real estate. As a result, the Company could be subject to environmental liabilities with respect to these properties for property damage, personal injury, investigation and clean-up costs. The costs associated with investigation or remediation activities could be substantial. The Company may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.

Operating

The Company’s Initiatives Resulting From Its Strategic Review May Not Be Successful.

In 2019, the Company initiated actions as a result of is strategic review of lines of business, balance sheet structure, efficiency, and stock repurchases. These actions are intended to produce more profitable and sustainable operations. These initiatives depend on conditions in the Company’s operating environment and involve significant changes in resource allocation and staffing. If operating conditions change or unanticipated consequences are experienced, the Company’s market position and operating results could be negatively impacted.

Discontinuing National Mortgage Banking Operations Exposes the Company to Additional Costs.

The FCLS national mortgage banking operations have been designated as discontinued and are held for sale. These operations involve a significant number of personnel and generate large volumes of loans and secondary market transactions and are the Company’s largest source of fee income. Prospects for the sale of these operations depend on market conditions and expectations of potential buyers. The structuring of a sale or other arrangements to complete the discontinuation of these operations may require additional expenses or have the impact of impairing the operations or revenue generating potential of the business. The Company could incur losses from discontinuing the operations or based on pricing available from buyers in this market. Such impacts may not be fully recognized until a sale or other disposition is completed.

Expansion, Growth, and Acquisitions Could Negatively Impact Earnings If Not Successful.

~~The Company plans to grow organically, by geographic expansion, through business line expansion, and through acquisitions.~~ Successful expansion depends on the maintenance and development of an adequate infrastructure. Success also depends on customer acceptance and the long-term recruitment and retention of key personnel and acquired customer relationships. Profitability depends on whether the income generated will offset the increased operating expenses. The Company implemented certain expense restructuring activities, related in part to the rationalization of acquired operations. Changes in operations may result in inefficiencies or control deficiencies.

Merger and acquisition activities are subject to a number of risks, including lending, operating, and integration risks. Such growth requires careful due diligence, evaluation of risks, and projections of future operations and financial conditions. Adverse developments could have a material adverse effect on the Company's financial condition and results of operations. Acquisitions often involve extensive merger agreements, which may lead to litigation risks or operating constraints.

The Company has recruited executive and business line management to support its growth and expansion, and it has absorbed management of acquired operations. This involves retention risks, operating risks, and financial risks. Such recruitment can affect the retention of new and old business, and can also be affected by competitive reactions and other relationship risks in retaining accounts. ~~The relocation of the Company’s headquarters may affect operational functioning.~~

Regulatory examinations may identify matters requiring attention. Deficiencies related to regulatory compliance may result in changes that affect operating revenues and costs, including the scope or scale of business activities and/or potential future expansion initiatives. The Company has crossed the $10 billion threshold for additional Dodd Frank regulatory requirements. These regulations affect revenues and operating costs, and introduce additional compliance requirements. If targeted earnings accretion is not achieved, some profitability metrics may be reduced. The Company may also face additional acquisition approval requirements, and growth plans could be slowed if expected approvals are not obtained.

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Competition From Financial Institutions and Other Financial Service Providers May Adversely Affect the Company’s Growth and Profitability.

Competition in the banking and financial services industry is intense. Larger banking institutions have substantially greater resources and lending limits and may offer certain services not offered by the Company. Local competitors with excess capital may accept lower returns on new business. There is increased competition by out-of-market competitors through the internet and mobile technology. Federal regulations and financial support programs may in some cases favor competitors. Competition includes competition for banking teams and talent. Competition creates risk that revenues, earnings, or market share could be adversely affected by the loss of talent.

Market Changes May Adversely Affect Demand For The Company’s Services and Impact Revenue, Costs, and Earnings.

Channels for servicing the Company’s customers are evolving rapidly, with less reliance on traditional branch facilities, more use of online and mobile banking, and demand for universal bankers and other relationship managers who can service multiple product lines. The Company has an ongoing process for evaluating the profitability of its branch system and other office and operational facilities. The identification of unprofitable operations and facilities can lead to restructuring charges and introduce the risk of disruptions to revenues and customer relationships. The Company competes with larger providers who are rapidly evolving their service channels and escalating the costs of evolving the service process.

The Company anticipates accelerating changes in market behaviors such that there is increased preference for providers with social purpose missions and community service initiatives, particularly to the underbanked. The Company’s strategic vision of building a 21^st century community bank with a goal of purpose driven performance for all stakeholders is intended to future-proof the Company accelerated changes in market behaviors. The Company faces risk that these behaviors may change in a manner different from its expectations, which could affect future revenue, earnings, and recovery of investments in its strategic model.

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The Company is Subject to Security and Operational Risks Relating to the Use of Technology that Could Damage the Company's Reputation and Business.

Security breaches of confidential information in our technology platforms could expose the Company to possible liability and damage its reputation. Any compromise of data security could also deter customers from using the Company's services. The Company relies on industry standard internet security and authentication systems to effect secure transmission of data. These precautions may not protect the Company's security systems from compromises or breaches and could result in damage to its reputation and business. The Company utilizes third party core banking software, in addition to other outsourced data processing. If third party providers encounter difficulties or if the Company has difficulty in communicating and/or transmitting with such third parties, it could significantly affect its ability to adequately process and account for customer transactions, which could significantly affect its business operations. The Company interfaces with electronic payments systems which are subject to security and operational risks. The Company utilizes file encryption in designated internal systems and networks and is subject to certain state and federal regulations regarding how the Company manages data security. The Company's enterprise governance risk and compliance function includes a framework of controls, policies and technologies to monitor and protect information from cyberattacks, mishandling, and loss, together with safeguards related to the confidentiality, integrity, and availability of information. Natural disasters and disaster recovery risks could affect its operating systems, which could affect its reputation. The Company's business continuity program addresses crisis management, business impact, and data and systems recovery. Potential problems with the management of technology security and operational risks may affect regulatory compliance, which could affect operating costs and expansion plans.

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The Company Faces Cybersecurity Risks, Including Denial of Service Attacks, Hacking and Identity Theft that Could Result in the Disclosure of Confidential Information or the Creation of Unauthorized Transactions, Which Could Adversely Affect the Company’s Business or Reputation and Create Significant Legal and Financial Exposure.

The Company’s computer systems and network infrastructure are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, steal financial assets, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions. As a growing regional bank, the Company may be subject to similar attacks in the future. Hacking and identity theft risks could cause serious reputational harm and possible financial loss to the Company. Cyber threats are rapidly evolving and the Company may not be able to anticipate or prevent all such attacks.

The Company may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss. Despite efforts to ensure the integrity of its systems, the Company will not be able to anticipate all security breaches of these types, and the Company may not be able to implement effective preventive measures against such security breaches. The techniques used by cyber criminals change frequently and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers or other users of the Company’s systems to disclose sensitive information in order to gain access to its data or that of its clients or to conduct unauthorized financial transactions.

These risks may increase in the future as the Company continues to increase its mobile-payment and other internet-based product offerings and expands its internal usage of web-based products and applications. A successful penetration or circumvention of system security could cause serious negative consequences to the Company, including significant disruption of operations, misappropriation of confidential information of the Company or that of its customers, or damage to computers or systems of the Company or those of its customers and counterparties. A security breach could result in violations of applicable privacy and other laws, financial loss to the Company or to its customers, loss of confidence in the Company’s security measures, significant litigation exposure, and harm to the Company’s reputation, all of which could have a material adverse effect on the Company.

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The Company is ~~subject~~Subject to ~~regulatory environment changes regarding privacy~~Regulatory Environment Changes Regarding Privacy and ~~data protection~~Data Protection and ~~could~~Could have a ~~material impact~~Material Impact on our ~~results~~Results of ~~operations.~~Operations.

The growth and expansion of the company into a variety of new fields may potentially involve new regulatory issues/requirements such as the EU General Data Protection Regulation (GDPR) or the ~~New York Department of Financial Services (NYDFS) Cybersecurity Regulation.~~California Consumer Privacy Act (CCPA). The potential costs of compliance with or imposed by new/existing regulations and policies that are applicable to us may affect the use of our products and services and could have a material adverse impact on our results of operations.

Financial and Operating Counterparties Expose the Company to Risks.

The Company's use of derivative financial instruments exposes us to financial and contractual risks with counterparties. The Company maintains correspondent bank relationships, manage certain loan participations, engage in securities and funding transactions, and undergo other activities with financial counterparties that are customary to its industry. The Company also utilizes services from major vendors of technology, telecommunications, and other essential operating services. There is financial and operating risk in these relationships, which the Company seeks to manage through internal controls and procedures, but there are no assurances that the Company will not experience loss or interruption of its business as a result of unforeseen events with these providers. The Company's ~~expanded~~ mortgage banking operations have also exposed us to more counterparty transactions including the use of third parties to participate in the management of interest rate risk and mortgage sales and hedging. Financial and operational risks are inherent in these counterparty relationships. The Company could experience losses if there are failures in the controls or accounting, including those related to derivatives activities or if there are performance failures by any counterparties. The risk of loss is increased when interest rates

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change suddenly and if the intended hedging objectives are not achieved as a result of market or counterparty behaviors.

Changes in Executive Management Could Affect Operations.

Changes in executive and senior management could introduce control risks in the oversight of operating activities and in the planning and execution of strategic objectives, which could adversely affect the operations of the Bank.

The Company May Not Be Able to Attract and Retain Skilled People.

The Company's success depends, in large part, on its ability to attract new employees, retain and motivate its existing employees, and continue to compensate employees competitively. Competition for the best people can be intense and the Company may not be able to hire or retain appropriately qualified individuals. As a result of restructuring activities, the Company could experience challenges in the retention of existing employees.

Controls and Procedures May Fail or Be Circumvented.

Management regularly reviews and updates the Company’s internal controls, disclosure requirements and practices, and corporate governance policies and procedures. Any system of controls, however well designed and operated, can only provide reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations, and financial condition.

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The Company’s Business Isis Reliant on Outside Vendors.

The Company’s business is highly dependent on the use of certain outside vendors for its day-to-day operations. The Company’s operations are exposed to risk that a vendor may not perform in accordance with established performance standards required in its agreements for any number of reasons including a change in their senior management, their financial condition, their product line or mix and how they support existing customers, or a simple change in their strategic focus. While the Company has comprehensive policies and procedures in place to mitigate risk at all phases of vendor management from selection, to performance monitoring and renewals, the failure of a vendor to perform in accordance with contractual agreements could be disruptive to its business, which could have a material adverse effect on its financial condition and results of operations.

Development of New Products and Services May Impose Additional Costs on the Company and May Expose It to Increased Operational Risk.

The Company’s financial performance depends, in part, on its ability to develop and market new and innovative services and to adopt or develop new technologies that differentiate its products or provide cost efficiencies, while avoiding increased related expenses. This dependency is exacerbated in the current “FinTech” environment, where financial institutions are investing significantly in evaluating new technologies, such as “Blockchain,” and developing potentially industry-changing new products, services and industry standards. The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, the Company’s ability to access technical and other information from its clients, the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the preparation of marketing, sales and other materials that fully and accurately describe the product or service and its underlying risks. The Company’s failure to manage these risks and uncertainties also exposes it to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to the Company’s clients. Products and services relying on internet and mobile technologies may expose the Company to fraud and cybersecurity risks. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on the Company’s business and reputation, as well as on its consolidated results of operations and financial condition.

~~Our Strategic Review May Expose~~

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The forecasted discontinuation of LIBOR and the emergence of one or more alternative benchmark indices to replace LIBOR could adversely impact the Company’s business and results of operations.

The Company’s floating-rate funding, certain hedging transactions and certain of the Company’s products, such as floating-rate loans and mortgages, determine the applicable interest rate or payment amount by reference to a benchmark rate, such as the London Interbank Offered Rate (“LIBOR”), or to an index, currency, basket or other financial metric. LIBOR and certain other benchmark rates are the subject of recent national, international, and other regulatory guidance and proposals for reform. In July 2017, the Chief Executive of the Financial Conduct Authority (“FCA”) announced that the FCA intends to stop persuading or compelling its panel banks to submit rates for the calculation of LIBOR after 2021. Consequently, at this time, it is not possible to predict whether and to what extent panel banks will continue to provide submissions for the calculation of LIBOR, such that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Similarly, it is not possible to predict whether and for how long LIBOR will continue to be viewed as an acceptable market benchmark, what new or existing benchmark rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in industry views or alternatives may be on the markets for LIBOR-linked financial instruments.

Regulators and various financial industry groups have sponsored or formed committees (e.g., the Federal Reserve-sponsored Alternative Reference Rates Committee) to, among other things, facilitate the identification of an alternative benchmark index to replace LIBOR, and publish consultations on recommended practices for transitioning away from LIBOR, including (i) the utilization of recommended fallback language for LIBOR-linked financial instruments, and (ii) development of alternative pricing methodologies for recommended alternative benchmarks such as the Secured Overnight Financing Rate (“SOFR”). SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-based repurchase transactions. At this time, it is still not possible to predict whether these recommendations and proposals will be broadly accepted in the market, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments.

The discontinuation of LIBOR or changes in market perceptions of the acceptability of LIBOR as a benchmark could result in changes to the Company’s risk exposures (for example, if the anticipated discontinuation of LIBOR adversely affects the availability or cost of floating-rate funding and, therefore, the Company’s exposure to fluctuations in interest rates) or otherwise result in losses on a product or having to pay more or receive less on securities that the Company has issued or owns. A substantial portion of the Company’s on- and off-balance sheet financial instruments (many of which have terms that extend beyond 2021) are indexed to ~~Operating Risks.~~LIBOR, including interest rate swap agreements and other contracts used for hedging and trading account purposes, loans to commercial customers and consumers (including mortgage loans and other loans), and long-term borrowings. In addition, such uncertainty could result in pricing volatility and increased capital requirements, loss of market share in certain products, adverse tax or accounting impacts, and compliance, legal and operational costs and risks.

The Company established a LIBOR transition task force committee in 2018, which reports to the Enterprise Risk Management and Asset/Liability Committee. The task force has ~~announced a strategic review~~assessed the on- and off-balance sheet products that will be impacted with the LIBOR transition. The areas with the most impact are LIBOR based interest rate swaps and commercial loans that utilize LIBOR as the indexed rate. During 2019, revised LIBOR fallback language was added to ~~support earnings which will include its balance sheet structure, line~~all new Commercial loan contracts that contemplated the transition of LIBOR as an index rate. An impact assessment is underway to identify further exposures, such as systems, processes, and models affected by the discontinuation of LIBOR. The Company continues to develop and execute plans to transition products associated with LIBOR to alternative reference rates.

Acts of terrorism, severe weather, natural disasters, pandemics, public health issues and other external events could impact our ability to conduct business.

Our business ~~profitability, expense levels, and capital management. This review may expose~~is subject to risk from external events that could affect the ~~Company~~stability of our deposit base, impair the ability of borrowers to ~~unanticipated operating risks if large scale changes are made~~repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in ~~a condensed timeframe. Such risks could include an unexpected~~ loss of revenue, ~~elevated one time~~and/or cause us to incur additional expenses. For example, financial institutions have been, and continue to be, targets of terrorist threats aimed at compromising their operating and communication systems. The metropolitan Boston area remains a central target for potential acts of terrorism, including cyber terrorism, which could affect not only our operations but those of our customers. Additionally, there

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could be sudden increases in electrical, telecommunications or other major physical infrastructure outages, natural disasters, the emergence of widespread health emergencies or pandemics, events arising from local or larger scale political or social matters, including terrorist acts, and cyber attacks. Events such as these may become more common in the future and could cause significant damage, such as disrupt power and communication services, impact the stability of our facilities and result in additional expenses, ~~or disruptions~~impair the ability of ~~controls or customer service.~~our borrowers to repay their loans, reduce the value of collateral securing the repayment of our loans, which could result in the loss of revenue. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.

Liquidity

The Company's Wholesale Funding Sources May Prove Insufficient to Replace Deposits at Maturity and Support Operations and Future Growth.

The Company must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of its liquidity management, the Company uses a number of funding sources in addition to deposit growth and cash flows from loans and investments. These sources include Federal Home Loan Bank advances, proceeds from the sale of loans, and liquidity resources at the holding company. The Company uses brokered deposits both to support ongoing growth and to provide enhanced deposit insurance to support large dollar commercial relationships. The Company's financial flexibility will be severely constrained if the Company is unable to maintain access to wholesale funding or if adequate financing is not available to accommodate future growth at acceptable costs. Turbulence in the capital and credit markets may adversely affect liquidity and financial condition and the willingness of certain counterparties and customers to do business with the Company.

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The Company's Ability to Service Our Debt, Pay Dividends, and Otherwise Pay Obligations as They Come Due Is Substantially Dependent on Capital Distributions from the Bank, and These Distributions Are Subject to Regulatory Limits and Other Restrictions. The Company’s Stock Repurchase Program is also Dependent on These Distributions.

A substantial source of holding company income is the receipt of dividends from the Bank, from which the Company services debt, pay obligations, and pay shareholder dividends. The availability of dividends from the Bank is limited by various statutes and regulations. It is possible, depending upon the financial condition of the Bank and other factors, that the applicable regulatory authorities could assert that payment of dividends or other types of payments are an unsafe or unsound practice. If the Bank is unable to pay dividends, the Company may not be able to service debt, pay debt obligations, or pay dividends on its common stock.

The Company’s strategic initiative to liquidate less strategic assets and to use proceeds to repurchase excess capital also depend on dividend distributions from the Bank which are Subject to Regulatory Limits and Other Restrictions. The Company’s ability to achieve targeted strategic benefits from this initiative may be compromised if Capital Distributions from the Bank are restricted or prohibited.

Secondary ~~mortgage market conditions could have~~Mortgage Market Conditions Could Have a ~~material impact~~Material Impact on the Company’s ~~financial condition~~Financial Condition and ~~results~~Results of ~~operations.~~Operations.

In addition to being affected by interest rates, the secondary mortgage markets are also subject to investor demand for residential mortgage loans and increased investor yield requirements for these loans. These conditions may fluctuate or worsen in the future. As a result, a prolonged period of secondary market illiquidity may reduce the Company’s loan production volumes and operating results.

Secondary markets are significantly affected by Fannie Mae, Freddie Mac and Ginnie Mae (collectively, the “Agencies”) for loan purchases that meet their conforming loan requirements. These agencies could limit purchases of conforming loans due to capital constraints, a change in the criteria for conforming loans or other factors. Proposals to reform mortgage finance could affect the role of the Agencies and the market for conforming loans which comprise the majority of the Company’s mortgage lending and related originations income.

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Interest Rates

Market Interest Rate Conditions Could Adversely Affect Results of Operations and Financial Condition.

Net interest income is the Company's largest source of income. Changes in interest rates can affect the level of net interest income and other elements of net income. The Company’s interest rate sensitivity is discussed in more detail in Item 7A of this report and is the primary market risk to its condition and operations. Changes in interest rates can also affect the demand for the Company’s products and services, and the supply conditions in the U.S. financial and capital markets. Changes in the level of interest rates may negatively affect the Company’s ability to originate real estate loans, the value of its assets and its ability to realize gains from the sale of assets, all of which ultimately affect earnings.

Securities Market Values

Declines in the Value of Certain Investment Securities Could Require Write-Downs, Which Would Reduce Earnings.

Declines in the value of investment securities due to market conditions and/or issuer impairment could result in losses that can reduce capital and earnings. The Company’s investment in equity securities and non-investment grade debt securities present heightened credit and price risks. Under new accounting standards, equity gains and losses are recorded to current period operating results. The Company has an investment in the stock of the Federal Home Loan Bank of Boston ("FHLBB") which could result in write-down in the event of impairment.

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Taxation

Changes in Tax Preference Items May Affect Results of Operations.

Higher tax expense due to planned or unplanned changes in tax preference items may result in lower profitability. Quarterly results may vary significantly from annual results.

~~The Company May Be Adversely Affected by Recent Changes in U.S. Tax Laws.~~

Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for single-family residential real estate. Changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes. The recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for such loans in the future, and could make it harder for borrowers to make their loan payments. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in the Company’s loan portfolio may be adversely impacted as a result of the changing economics of home ownership, which could require an increase in its provision for loan losses, which would reduce its profitability and could materially adversely affect its business, financial condition and results of operations.

Regulatory

Legislative and Regulatory Initiatives May Affect Business Activities and Increase Operating Costs.

New federal or state laws and regulations could affect lending, funding practices, capital, and liquidity standards. New laws, regulations, and other regulatory changes may also increase compliance costs and affect business and operations. Moreover, the FDIC sets the cost of FDIC insurance premiums, which can affect profitability.

Regulatory capital requirements and their impact on the Company may change. ItThe Company may need to raise additional capital in the future to support operations and continued growth. The Company's ability to raise capital, if needed, will depend on its condition and performance, and on market conditions. If additional capital is not available when needed, it could affect operations and the execution of the strategic plan, which includes further expanding operations through internal growth and acquisitions.

New laws, regulations, and other regulatory changes, along with negative developments in the financial industry and the domestic and international credit markets, may significantly affect the markets in which the Company does business, the markets for and value of its loans and investments, and ongoing operations, costs and profitability. For more information, see “Regulation and Supervision” in Item 1 of this report.

In 2017, the Company crossed the $10 billion asset threshold established by the Dodd-Frank ~~act.~~Act. The Company and the Bank are now subject to closer supervision by their primary regulators and, as to compliance with consumer protection laws and regulations, the Consumer Financial Protection Bureau. The Company and the Bank are subject to capital stress testing expectations which require significant resources and infrastructure. If the Company’s compliance with the enhanced supervision and requirements is insufficient, there can be significant negative consequences for its operations, profitability, and ability to further pursue its strategic growth plan.

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Provisions of the Company's Certificate of Incorporation, Bylaws, and Delaware Law, as Well as State and Federal Banking Regulations, Could Delay or Prevent a Takeover of Us by a Third Party.

Provisions in the Company's certificate of incorporation and bylaws, the corporate law of the State of Delaware, and state and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit stockholders, or otherwise adversely affect the price of its common stock. These provisions include: limitations on voting rights of beneficial owners of more than 10 percent of common stock; supermajority voting requirements for certain business combinations; the election of directors to terms of one year; and advance notice requirements for nominations for election to the Company's Board of Directors and for proposing matters that

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stockholders may act on at stockholder meetings. In addition, the Company is subject to Delaware laws, including one that prohibits engaging in a business combination with any interested stockholder for a period of three years from the date the person became an interested stockholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discourage bids for the Company's common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, its common stock. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors other than the candidates nominated by the Board.

Significant Accounting Estimates May Not Be Realized in Accordance with Recorded Estimates.

Unexpected Changes May Adversely Affect Condition or Performance.

The Company’s significant accounting policies are described in Note 1 - Summary of Significant Accounting Policies of the Consolidated Financial Statements in Item 8 of this report. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company’s critical accounting policies are further discussed in Item 7 of this report. If actual events and results do not conform to critical estimates, there could be a material impact on financial condition, operating performance, and execution of the strategic plan.

If the Company ~~determines goodwill~~Determines Goodwill or ~~other intangible assets~~Other Intangible Assets to be ~~impaired,~~Impaired, the Company’s ~~financial condition~~Financial Condition and ~~results would be negatively affected.~~Results Would Be Negatively Affected.

When the Company completes a business combination, a portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is determined by the excess of the purchase price over the net identifiable assets acquired. At least annually (or more frequently if indicators arise), the Company evaluates goodwill for impairment by comparing the fair value of its reporting entities against the carrying value. If the Company determines goodwill or other intangible assets are impaired, the Company will be required to write down these assets. Any write-down would have a negative effect on the Consolidated Financial Statements.

A New Accounting Standard ~~May~~Will Require the Company to Increase Its Allowance For Loan Losses and May Have a Material Adverse Effect on Its Financial Condition and Results of Operations.

The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Company for its 2020 fiscal ~~year ended.~~year. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This standard is also applicable to other financial assets carried at amortized cost. This will change the current method of providing allowances for loan losses that are probable, which may require the Company to increase its allowance for loan losses, and to greatly increase the types of data it would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in the Company’s allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on its financial condition and operating results.

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Mergers and Acquisitions

Acquisitions ~~may disrupt~~May Disrupt the Company’s ~~business~~Business and ~~dilute stockholder value.~~Dilute Stockholder Value.

The Company has a pending merger agreement with SI Financial Group, which is targeted for completion in the second quarter of 2019 and for completion of integration of operations by year-end 2019. The Company regularly evaluates merger and acquisition opportunities with other financial institutions and financial services companies. Future mergers or acquisitions involving cash, debt, or equity securities may occur from time to time. The Company seeks acquisition partners that offer either significant market presence or the potential to expand its market footprint and improve profitability through economies of scale or expanded services.

Acquiring other banks, businesses, or branches may have an adverse effect on the Company’s financial results and may involve various other risks commonly associated with acquisitions, including, among other things:

difficulty in estimating the value of the target company

payment of a premium over book and market values that may dilute the Company’s tangible book value and earnings per share in the short and long term;

exposure to unknown or contingent liabilities, or asset quality problems, of the target company;

unexpected regulatory responses to merger related applications

larger than anticipated merger-related expenses;

difficulty and expense of integrating the operations and personnel of the target company, and retaining key employees and customers;

inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits; and

potential diversion of Company management’s time and attention.

potential litigation could lead to additional expenses or prevent the completion of a merger agreement, which could result in the loss of the benefits which are targeted to offset merger costs.

If the Company is unable to successfully integrate an acquired company, the anticipated benefits may not be realized fully or may take longer to realize than expected. A significant decline in asset valuations or cash flows may also prevent the attainment of targeted results. Additional discussion about the risk of acquisitions is included above in the discussion of Operating Risk.

Trading of the Company's Common Stock

The Trading History of ~~The~~the Company’s Common Stock Isis Characterized By Low Trading Volume. The Value of Shareholder Investments May be Subject Toto Sudden Decreases Due Toto the Volatility of the Price of the Common Stock.

The level of interest and trading in the Company’s stock depends on many factors beyond the Company's control. The market price of the Company's common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following: actual or anticipated fluctuations in operating results; changes in interest rates; changes in the legal or regulatory environment; press releases, announcements or publicity relating to the Company or its competitors or relating to trends in its industry; changes in expectations as to future financial performance, including financial estimates or recommendations by securities analysts and investors; future sales of its common stock; changes in economic conditions in the marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and other developments. These factors may adversely affect the trading price of the Company's common stock, regardless of actual operating performance, and could prevent stockholders from selling their common stock at a desirable price.

In the past, stockholders have brought securities class action litigation against a company following periods of volatility in the market price of their securities. The Company could be the target of similar litigation in the future, which could result in substantial costs and divert management’s attention and resources.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company's headquarters are located at 60 State Street in leased property in Boston, ~~Mass.~~MA. The Bank's headquarters are located in owned and leased facilities located in Pittsfield, ~~Mass.~~MA. The Company also owns or leases other facilities within its primary market areas: Greater Boston (including Worcester, MA); Berkshire County, Massachusetts; Pioneer Valley (Springfield area), Massachusetts; Southern Vermont; the Capital Region (Albany area), New York; Central New York; ~~Northern~~Central and Eastern Connecticut; Southern Rhode Island; and Princeton area, New Jersey.

As of December 31, ~~2018,~~2019, the Company had ~~115~~130 full-service branches in Massachusetts, New York, Connecticut, Vermont, Central New Jersey, and Eastern Pennsylvania. Early in 2018, the Company opened two branch offices -- one in Simsbury, Conn., and one in Malta, N.Y. Subsequent to year-end 2018, the Company closed two branches as a part of its ongoing strategy to identify opportunities for consolidation.

The Company also has regional locations which are full-service commercial offices located in Boston, MA.; Pittsfield, MA.; Springfield, MA.; Albany, N.Y.; East Syracuse, N.Y.; Hartford, ~~Conn.~~CT.; Willimantic, CT. Worcester, MA.; Burlington, MA.; and Lawrenceville, N.J. In addition, the Company has eight lending locations in Central/Eastern, Massachusetts. The Bank's wholly-owned subsidiary, Firestone Financial, LLC, is headquartered in the Boston metro area. First Choice Loan Services Inc., is headquartered in East Brunswick, N.J. and is a wholly-owned subsidiary of the Bank. As a national mortgage lender, the Company operates mortgage lending offices in targeted U.S. markets. These national mortgage banking operations were designated as held for sale in 2019 and are classified as discontinued operations in the financial statements.

Berkshire Insurance Group Inc. operates from 12 locations in Western Massachusetts and East Syracuse, N.Y. in both stand-alone premises as well as in rented space located in the Bank’s premises.

The Company acquired Commerce Bancshares in October of 2017, obtaining 13 branches in and around the Worcester, MA area. The Company also assumed three branches and three lending offices in the Boston metro area in the transaction.

The Company acquired First Choice Bank in December of 2016, assuming eight full-service branches in the Princeton, N.J. and greater Philadelphia areas. As a part of the acquisition, First Choice Loan Services Inc., headquartered in East Brunswick, N.J., became a wholly-owned subsidiary of the Bank. As a national mortgage lender, the Company acquired its 12 loan production offices across six states. In 2016, the Company sold two existing branches that management determined to have redundancy with its current footprint.

Berkshire continues to enhance its new retail branch design which eliminates traditional teller counters and provides an interactive customer service environment through “pod” stations which include automated cash handling technology. In many cases, this branch design also includes a multimedia community room which is offered for use by nonprofit community groups. The Company has begun introducing MyTeller automated remote teller stations at new offices and targeted existing offices.

The Bank has made its workplace more flexible as certain designated functions are approved for telecommuting arrangements. As a result of its merger and efficiency initiatives, the Bank has excess facilities space in various locations which in some cases is owned or subject to lease. The Bank is considering alternative uses of excess office space in support of its strategies to provide community benefit. The Bank has also introduced Reevx Labs community workspaces targeted to increase the Bank’s presence and service to underbanked urban communities. The first such workspace was opened shortly after year-end, and the Company has plans to open other such workspaces in targeted areas in the future.

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ITEM 3. LEGAL PROCEEDINGS

As of December 31, ~~2018,~~2019, neither the Company nor the Bank was involved in any pending adverse 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 April 28, 2016, the Company and the Bank were served with a complaint filed in the United States District Court, District of Massachusetts, Springfield Division. The complaint was filed by an individual Berkshire Bank depositor, who claims to have filed the complaint on behalf of a purported class of Berkshire Bank depositors, and alleges violations of the Electronic Funds Transfer Act and certain regulations thereunder, among other matters. On July 15, 2016, the complaint was amended to add purported claims under the Massachusetts Consumer Protection Act. On January 4, 2019, the Parties reached an agreement in principle to settle the matter on a class-wide basis. Among other terms, the agreement in principle provides that the ~~Defendants~~Company will pay a total of ~~Three Million Dollars ($3.0 million)~~$3.0 million in exchange for the dismissal with prejudice and release of all claims that have been or could have been asserted in the lawsuit on behalf of the Plaintiff and the Settlement Class Members. ~~The Parties are in~~On April 11, 2019, the ~~process of negotiating~~Plaintiff filed the ~~final terms of a written Settlement Agreement. Once the Parties execute the~~Parties’ fully-executed Settlement Agreement ~~it will be presented to~~and Release (the “Settlement”) with the Court together with her unopposed motion for preliminary approval of class action settlement. On July 24, 2019, the Court granted preliminary approval of the Settlement, and issued an Order that notice ~~a period for members~~of the Settlement be given to ~~opt out or object, and a final approval hearing.~~all Settlement Class Members. The Company ~~accrued $3.0~~paid $1.0 million on July 26, 2019, as required under the Settlement to offset certain anticipated administrative costs and expenses. The Company had an accrual of $2.0 million as of December 31, ~~2018,~~2019, in anticipation of the completion of the Settlement. On February 14, 2020, the Court issued an order granting final approval of the Settlement and entered a ~~settlement.~~final judgment dismissing the case with prejudice. The Company anticipates that the Settlement will be completed sometime during the first six months of 2020.

On January 29, 2018, the Bank was served with an amended complaint filed nominally against ~~Berkshire Hills~~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 in the course of performing its duties as trustee. The complaint seeks compensatory, statutory, and punitive damages. ~~Berkshire Hills~~The Company and ~~Berkshire~~the Bank deny the 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. It is expected that this motion will be heard by the court during the first quarter of 2020.

On February 9, 2019, the Company received notice of a lawsuit filed in the United States District Court for the District of Connecticut by a purported SI Financial Group, Inc. (“SI Financial”) shareholder. On June 26, 2019, the Company received notice of a verified consolidated amended complaint in this action, which was filed after consolidation and elimination of two additional suits filed in the same Court by other former shareholders of SI Financial. The lawsuit purports to be filed as a putative class action lawsuit against SI Financial, the individual former members of the SI Financial board of directors, and the Company, in connection with the Company’s announced intention to acquire and merge with SI Financial. The Plaintiff, on behalf of himself and ~~similarly-situated~~similarly situated SI Financial shareholders, generally alleges that the registration statement filed with the SEC on February 4, 2019 contains materially misleading omissions or misrepresentations in violation of Section 14(a) and Section 20(a) of the Exchange Act, and Rule 14a-9 promulgated ~~thereunder.~~thereunder, and that the individual Defendants breached their fiduciary duty to SI Financial shareholders and were unjustly enriched by the subject merger transaction. The Plaintiff seeks injunctive relief, unspecified damages, and an award of attorneys’ fees and expenses. Of note, ~~although~~SI Financial merged with and into the Company ~~is named in the caption~~on May 17, 2019, and ceased to ~~atop this complaint, neither the Company, nor Berkshire Bank, nor~~have any ~~of their affiliates are identified as defendants in this action.~~further independent legal existence at that time. The Company ~~SI Financial~~ and the individual Defendants deny the allegations contained in the verified consolidated amended complaint and intend to vigorously defend this lawsuit.

On ~~February 15,~~July 26, 2019, the Company received notice of another lawsuit filed in the United States District Court for the District of Connecticut by a purported SI Financial shareholder against SI Financial and the individual members of the SI Financial board of directors in connection with the Company’s announced intention to acquire and merge with SI Financial. The plaintiff, solely on behalf of himself, generally alleges that the registration statement filed with the SEC on February 4, 2019 contains materially misleading omissions or misrepresentations in violation of Section 14(a) and Section 20(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder. The plaintiff seeks injunctive relief, unspecified damages, and an award of attorneys’ fees and expenses. Of note, although the Company is named as an interested non-party in this complaint, neither the Company, nor Berkshire Bank, nor any of their affiliates are identified as defendants in this action. SI Financial and the individual Defendants ~~deny~~jointly filed a motion to dismiss all claims in this litigation, which is still pending before the ~~allegations contained in the complaint and intend to vigorously defend this lawsuit.~~

~~On February 21, 2019,~~court. There are no other active cases proceeding against the Company received notice of a lawsuit filed in the Maryland Circuit Court for Baltimore County by a purported SI Financial shareholder. The lawsuit purports to be filed as a putative class action lawsuit and as a derivative action on behalf of SI Financial againstor the individual ~~members of~~Defendants in regard to the SI Financial ~~board~~merger.

On February 4, 2020, the Bank filed a complaint in the New York State Supreme Court for the County of ~~directors and the Company, in connection with the Company’s announced intention to acquire and merge with SI Financial.~~Albany against Pioneer Bank (“Pioneer”) seeking damages of approximately $16.0 million. The ~~Plaintiff, on behalf of himself and both similarly-situated SI Financial shareholders and SI Financial itself, generally~~complaint alleges that ~~the individual Defendants breached their fiduciary duties as directors of SI Financial by causing SI Financial to agree~~Pioneer is liable to the ~~merger transaction with~~Bank for acredit loss of approximately $16.0 million suffered by the ~~Company. The Plaintiff seeks injunctive and other equitable relief, unspecified damages, and an award~~Bank in the third quarter of ~~attorneys’ fees and expenses. Of note, although the Company is named~~2019 as a ~~defendant~~result of Pioneer’s breach of loan participation agreements in ~~this complaint, there are no direct allegations~~ which it served as the lead bank, as well as constructive fraud, fraudulent concealment and/or ~~causes of action stated~~negligent misrepresentation. Pioneer has not yet responded to the Bank’s complaint. The Company wrote down the underlying credit loss in its entirety in the ~~complaint against Company, or Berkshire Bank, or~~third quarter of 2019 and has not accrued for any ~~of their affiliates. The Company, SI Financial and the individual Defendants deny the allegations contained in the complaint and intend to vigorously defend~~anticipated recovery at this ~~lawsuit.~~time.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The common shares of the Company trade on the New York Stock Exchange under the symbol “BHLB”. The following table sets forth the quarterly high and low sales price information and dividends declared per share of common stock in ~~2018~~2019 and ~~2017.~~2018.


2018	High		Low		Dividends Declared
2019							High		Low		Dividends Declared
First quarter	$	40.10	$	35.80	$	0.22	$	31.81	$	26.02	$	0.23
Second quarter	44.10		37.05		0.22		31.60		27.35		0.23
Third quarter	44.25		40.00		0.22		33.33		28.20		0.23
Fourth quarter	41.49		25.77		0.22		33.72		27.99		0.23


2017
2018
First quarter	$	37.45	$	32.90	$	0.21	$	40.10	$	35.80	$	0.22
Second quarter	38.65		33.55		0.21		44.10		37.05		0.22
Third quarter	39.00		32.85		0.21		44.25		40.00		0.22
Fourth quarter	40.00		35.10		0.21		41.49		25.77		0.22

The Company had approximately ~~3,517~~4,205 holders of record of common stock at February 25, ~~2018.~~2020.

Dividends

The Company intends to pay regular cash dividends to common and preferred shareholders; however, there is no assurance as to future dividends because they are dependent on the Company’s future earnings, capital requirements, financial condition, and regulatory environment. Dividends from the Bank have been a source of cash used by the Company to pay its dividends, and these dividends from the Bank are dependent on the Bank’s future earnings, capital requirements, and financial condition. Further information about dividend restrictions is disclosed in Note 1720 - Shareholders’ Equity and Earnings per Common Share of the Consolidated Financial Statements.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

The Company occasionally issues unregistered shares of common stock to vendors or as consideration in contracts for the purchase of assets, services, or operations. The Company issued 1,936 shares in 2019 and 23,877 shares in ~~2018 and 30,478~~2018. Subsequent to December 31, 2019, 260,700 preferred shares ~~in 2017.~~were converted to 521,400 unregistered shares of common stock from treasury shares.

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Purchases of Equity Securities by the Issuer and Affiliated Purchases

~~On December 2, 2015,~~In April 2019, the Company announced that its Board of Directors authorized a new stock repurchase program,

pursuant to which the Company may repurchase up to ~~500 thousand~~2.4 million shares of the Company's common ~~stock, representing approximately 1.6% of~~stock. The new

repurchase program replaced the ~~Company’s then outstanding shares.~~Company's unused 500 thousand share repurchase authorization. The timing of the purchases ~~will depend~~depends on certain factors, including but not limited to, market conditions and prices, available funds, and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions, or pursuant to a trading plan adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. ~~Any repurchased~~Repurchased shares ~~will be~~are recorded as treasury shares. ~~The repurchase plan will continue until it is completed or terminated by the Board of Directors.~~ As of ~~year-end 2018, no~~December 31, 2019, 1.7 million shares had been purchased under this ~~program.~~program, which terminates on March 31, 2020.

~~Table of Contents~~

~~Period~~

~~Total number of~~
~~shares purchased~~

~~Average price~~
~~paid per share~~

~~Total number of shares~~
~~purchased as part of~~
~~publicly announced~~
~~plans or programs~~

~~Maximum number of~~
~~shares that may yet~~
~~be purchased under~~
~~the plans or programs~~

~~October 1-31, 2018~~

—

~~500,000~~

~~November 1-30, 2018~~

—

~~500,000~~

~~December 1-31, 2018~~

—

~~500,000~~

~~Total~~

—

~~500,000~~



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
October 1-31, 2019	408,600	$	29.59	408,600	1,081,400
November 1-30, 2019	210,000	$	31.96	210,000	871,400
December 1-31, 2019	197,028	$	32.46	197,028	674,372
Total	815,628	$	31.26	815,628	674,372

Common Stock Performance Graph

The performance graph compares the Company’s cumulative shareholder return on its common stock over the last five years to the cumulative return of the NYSE Composite Index and the PHLX KBW Regional Bank Index. Total shareholder return is measured by dividing total dividends (assuming dividend reinvestment) for the measurement period plus share price change for a period by the share price at the beginning of the measurement period. The Company’s cumulative shareholder return over a five-year period is based on an initial investment of $100 on December 31, ~~2013.~~2014.

Information used on the graph and table was obtained from a third party provider, a source believed to be reliable, but the Company is not responsible for any errors or omissions in such information.

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	Period Ending						Period Ending
Index	12/31/13	12/31/14	12/31/15	12/31/16	12/31/17	12/31/18	12/31/14	12/31/15	12/31/16	12/31/17	12/31/18	12/31/19
Berkshire Hills Bancorp, Inc.	100.00	100.70	112.96	147.28	149.70	112.90	100.00	112.18	146.26	148.66	112.12	140.93
NYSE Composite Index	100.00	106.87	102.63	115.02	136.76	124.73	100.00	96.03	107.62	127.96	116.72	146.76
PHLX KBW Regional Banking Index	100.00	102.43	108.57	151.04	153.77	126.88	100.00	105.99	147.46	150.13	123.87	153.43

In accordance with the rules of the SEC, this section captioned “Common Stock Performance Graph,” shall not be incorporated by reference into any of our future filings made under the Securities Exchange Act of 1934 or the Securities Act of 1933. The Common Stock Performance Graph, including its accompanying table and footnotes, is not deemed to be soliciting material or to be filed under the Exchange Act or the Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA

The following summary data is based in part on the Consolidated Financial Statements and accompanying notes, and other schedules appearing elsewhere in this Form 10-K. Historical data is also based in part on, and should be read in conjunction with, prior filings with the SEC.


	At or For the Years Ended December 31,															At or For the Years Ended December 31,
(In thousands, except per share data)	2018			2017			2016			2015			2014			2019			2018			2017			2016			2015
Per Common Share Data:
Net earnings, diluted - continuing operations																$	2.05		$	2.36		$	1.24		$	1.88		$	1.73
Net (loss)/earnings, diluted - discontinued operations																(0.08		)	(0.07		)	0.15			—			—
Net earnings, diluted	$	2.29		$	1.39		$	1.88		$	1.74		$	1.36		$	1.97		$	2.29		$	1.39		$	1.88		$	1.73
Total book value per common share	33.30			32.14			30.65			28.64			28.17			34.65			33.30			32.14			30.65			28.64
Dividends	0.88			0.84			0.80			0.76			0.72			0.92			0.88			0.84			0.80			0.76
Common stock price:
High	44.25			40.00			37.35			30.40			27.28			33.72			44.25			40.00			37.35			30.40
Low	25.77			32.85			24.71			24.32			22.06			26.02			25.77			32.85			24.71			24.32
Close	26.97			36.60			36.85			29.11			26.66			32.88			26.97			36.60			36.85			29.11
Performance Ratios: (1)
Return on assets	0.90		%	0.56		%	0.74		%	0.68		%	0.55		%	0.75		%	0.90		%	0.56		%	0.74		%	0.68		%
Return on equity	6.84			4.45			6.44			6.14			4.87			5.75			6.84			4.45			6.44			6.14
Net interest margin, fully taxable equivalent (FTE) (2)	3.40			3.40			3.31			3.34			3.30			3.17			3.40			3.40			3.31			3.34
Fee income/Net interest and fee income	23.36			29.41			22.80			21.18			23.02			23.86			23.36			29.41			22.80			21.18
Growth Ratios:
Total commercial loans	6.17		%	37.79		%	18.39		%	28.65		%	14.80		%	9.19		%	6.17		%	37.79		%	18.39		%	28.65		%
Total loans	8.96			26.71			14.41			22.32			11.96			5.08			8.96			26.71			14.41			22.32
Total deposits	2.66			32.13			18.48			20.08			20.95			15.07			2.66			32.13			18.48			20.08
Total net revenues, (compared to prior year)	11.59			41.05			11.18			18.40			(0.23		)	4.53			11.59			41.05			11.18			18.40
Earnings per share, (compared to prior year)	64.75			(26.06		)	8.62			27.21			(17.58		)	(13.97		)	64.75			(26.06		)	8.62			27.21
Selected Financial Data:
Total assets	$	12,212,231		$	11,570,751		$	9,162,542		$	7,831,086		$	6,501,079		$	13,215,970		$	12,212,231		$	11,570,751		$	9,162,542		$	7,831,086
Total earning assets	11,140,307			10,509,163			8,340,287			7,140,387			5,923,462			11,916,007			11,140,307			10,509,163			8,340,287			7,140,387
Securities	1,918,604			1,898,564			1,628,246			1,371,316			1,205,794			1,769,878			1,918,604			1,898,564			1,628,246			1,371,316
Total loans	9,043,253			8,299,338			6,549,787			5,725,236			4,680,600			9,502,428			9,043,253			8,299,338			6,549,787			5,725,236
Allowance for loan losses	(61,469		)	(51,834		)	(43,998		)	(39,308		)	(35,662		)	(63,575		)	(61,469		)	(51,834		)	(43,998		)	(39,308		)
Total intangible assets	551,743			557,583			422,551			334,607			276,270			599,377			551,743			557,583			422,551			334,607
Total deposits	8,982,381			8,749,530			6,622,092			5,589,135			4,654,679			10,335,977			8,982,381			8,749,530			6,622,092			5,589,135
Total borrowings	1,517,816			1,137,075			1,313,997			1,263,318			1,051,371			827,550			1,517,816			1,137,075			1,313,997			1,263,318
Total shareholders’ equity	1,552,918			1,496,264			1,093,298			887,189			709,287			1,758,564			1,552,918			1,496,264			1,093,298			887,189

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	At or For the Years Ended December 31,															At or For the Years Ended December 31,
	2018			2017			2016			2015			2014			2019			2018			2017			2016			2015
Selected Operating Data:
Total interest and dividend income	$	471,161		$	360,258		$	280,439		$	247,030		$	207,042		$	509,513		$	465,894		$	355,076		$	280,439		$	247,030
Total interest expense	111,825			65,463			48,172			33,181			28,351			144,255			109,694			64,113			48,172			33,181
Net interest income ~~(3)~~	359,336			294,795			232,267			213,849			178,691			365,258			356,200			290,963			232,267			213,849
Fee income	109,601			122,801			68,606			57,480			53,434			76,824			74,026			71,356			68,606			57,480
All other non-interest income (loss)	298			2,888			(2,755		)	(3,192		)	(5,664		)	7,178			298			2,888			(2,755		)	(3,192		)
Total net revenue	469,235			420,484			298,118			268,137			226,461			449,260			430,524			365,207			298,118			268,137
Provision for loan losses	25,451			21,025			17,362			16,726			14,968			35,419			25,451			21,025			17,362			16,726
Total non-interest expense	310,371			299,710			203,302			196,829			165,986			289,857			266,893			252,978			203,302			196,829
Income tax expense - continuing operations	27,648			44,502			18,784			5,064			11,763
Income from continuing operations before income taxes																123,984			138,180			91,204			77,454			54,582
Income tax expense from continuing operations																22,463			28,961			42,088			18,784			5,064
Net income from continuing operations																101,521			109,219			49,116			58,670			49,518

(Loss)/income from discontinued operations before income taxes																(5,539		)	(4,767		)	8,545			—			—
Income tax (benefit)/expense from discontinued operations																(1,468		)	(1,313		)	2,414			—			—
Net (loss) from discontinued operations																(4,071		)	(3,454		)	6,131			—			—
Net income	$	105,765		$	55,247		$	58,670		$	49,518		$	33,744		$	97,450		$	105,765		$	55,247		$	58,670		$	49,518

Dividends per preferred share	$	1.76		$	0.42		$	—		$	—		$	—
Dividends per common share	0.88			0.84			0.80			0.76			0.72
Basic earnings per common share	2.30			1.40			1.89			1.74			1.36
Diluted earnings per common share	2.29			1.39			1.88			1.73			1.36
Basic earnings/(loss) per common share:
Continuing operations																$	2.06		$	2.38		$	1.24		$	1.89		$	1.74
Discontinued operations																(0.08		)	(0.08		)	0.16			—			—
Total basic earnings per share																$	1.98		$	2.30		$	1.40		$	1.89		$	1.74
Diluted earnings/(loss) per common share:
Continuing operations																$	2.05		$	2.36		$	1.24		$	1.88		$	1.73
Discontinued operations																(0.08		)	(0.07		)	0.15			—			—
Total diluted earnings per share																$	1.97		$	2.29		$	1.39		$	1.88		$	1.73

Weighted average common shares outstanding - basic	46,024			39,456			30,988			28,393			24,730			49,263			46,024			39,456			30,988			28,393
Weighted average common shares outstanding - diluted	46,231			39,695			31,167			28,564			24,854			49,421			46,231			39,695			31,167			28,564

Asset Quality and Condition Ratios: (4)
Dividends per preferred share																$	1.84		$	1.76		$	0.42		$	—		$	—
Dividends per common share																$	0.92		$	0.88		$	0.84		$	0.80		$	0.76

Asset Quality and Condition Ratios: (3)
Net loans charged-off/average loans	0.18		%	0.19		%	0.21		%	0.25		%	0.29		%	0.35		%	0.18		%	0.19		%	0.21		%	0.25		%
Allowance for loan losses/total loans	0.68			0.62			0.67			0.69			0.76			0.67			0.68			0.62			0.67			0.69
Loans/deposits	101			95			99			102			101			92			101			95			99			102

Capital Ratios:
Tier 1 capital to average assets - Company (5)	9.04		%	9.01		%	7.88		%	7.71		%	7.01		%
Total capital to risk-weighted assets - Company (5)	12.99			12.43			11.87			11.91			11.38
Tier 1 capital to risk-weighted assets - Company (5)	11.57			11.15			10.07			9.94			9.03
Tier 1 capital to average assets - Company																9.33		%	9.04		%	9.01		%	7.88		%	7.71		%
Total capital to risk-weighted assets - Company																13.73			12.99			12.43			11.87			11.91
Tier 1 capital to risk-weighted assets - Company																12.30			11.57			11.15			10.07			9.94
Shareholders’ equity/total assets	12.73			12.93			11.93			11.33			10.91			13.31			12.73			12.93			11.93			11.33

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(1) All performance ratios are annualized and are based on average balance sheet amounts, where applicable.

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

(3) ~~For the year 2014 the above schedule includes an immaterial adjustment of prior period interest income earned on loans acquired in bank acquisition.~~

~~(4)~~ 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.

(5) In July 2014, the Company changed its status from a savings and loan holding company to a bank holding company through the Bank's conversion from a Massachusetts-chartered savings bank to a Massachusetts-chartered trust company. As a result of this change, the Company became subject to bank holding company capital requirements including the requirement to report Tier 1 capital to average assets, Tier 1 capital to risk-weighted assets, and total capital to risk-weighted assets.

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Average Balances, Interest and Average Yields/Cost

The following table presents an analysis of average rates and yields on a fully taxable equivalent basis for the years presented. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison.

Item 6 - Table 3 - Average Balance, Interest and Average Yields / Costs


	2018						2017						2016						2019						2018						2017
(Dollars in millions)	Average Balance		Interest		Average Yield/ Rate		Average Balance		Interest		Average Yield/ Rate		Average Balance		Interest		Average Yield/ Rate		Average Balance		Interest		Average Yield/ Rate		Average Balance		Interest		Average Yield/ Rate		Average Balance		Interest		Average Yield/ Rate
Assets
Loans: (1)
Commercial real estate	$	3,283.6	$	167.7	5.11	%	$	2,789.8	$	130.0	4.66	%	$	2,239.6	$	95.8	4.28	%	$	3,789.5	$	188.6	4.98	%	$	3,283.6	$	167.7	5.11	%	$	2,789.8	$	130.0	4.66	%
Commercial and industrial loans	1,867.9		107.6		5.76		1,259.9		65.7		5.21		1,019.7		51.2		5.02		1,983.9		111.2		5.60		1,867.9		107.6		5.76		1,259.9		65.7		5.21
Residential loans	2,353.1		86.3		3.67		1,962.4		71.5		3.64		1,808.8		66.1		3.66		2,719.8		100.7		3.70		2,353.1		86.3		3.67		1,962.4		71.5		3.64
Consumer loans	1,115.3		47.2		4.23		1,032.6		39.4		3.82		873.3		29.9		3.42		1,038.4		46.5		4.48		1,115.3		47.2		4.23		1,032.6		39.4		3.82
Total loans	8,619.9		408.8		4.74		7,044.7		306.6		4.35		5,941.4		243.0		4.09		9,531.6		447.0		4.69		8,619.9		408.8		4.74		7,044.7		306.6		4.35
Investment securities (2)	1,931.7		64.4		3.33		1,757.3		60.3		3.43		1,260.5		41.4		3.28		1,846.9		62.6		3.39		1,931.7		64.4		3.33		1,757.3		60.3		3.43
Short-term investments and loans held for sale(3)	146.3		5.4		3.72		134.5		4.6		3.38		51.6		0.9		1.70		335.3		13.4		4.01		146.3		5.4		3.72		134.5		4.6		3.38
Total interest-earning assets	10,697.9		478.6		4.47		8,936.5		371.5		4.16		7,253.5		285.3		3.93		11,713.8		523.0		4.47		10,697.9		478.6		4.47		8,936.5		371.5		4.16
Intangible assets	554.6		0				449.7						347.7						578.1		0				554.6						449.7
Other non-interest earning assets(3)	516.9		0				428.4						357.9						669.1		0				516.9						428.4
Total assets	$	11,769.4					$	9,814.6					$	7,959.1					$	12,961.0					$	11,769.4					$	9,814.6

Liabilities and shareholders' equity
Deposits:
NOW and other	$	824.7	$	4.0	0.49	%	$	591.0	$	1.5	0.25	%	$	487.8	$	0.7	0.14	%	$	1,053.9	$	6.5	0.62	%	$	824.7	$	4.0	0.49	%	$	591.0	$	1.5	0.25	%
Money market	2,432.2		21.9		0.90		1,935.8		11.2		0.58		1,470.3		7.0		0.48		2,542.6		31.4		1.23		2,432.2		21.9		0.90		1,935.8		11.2		0.58
Savings	740.8		1.1		0.15		680.1		0.9		0.14		610.8		0.7		0.12		798.2		1.2		0.15		740.8		1.1		0.15		680.1		0.9		0.14
Certificates of deposit	3,075.5		51.3		1.67		2,581.1		30.3		1.17		2,094.8		22.5		1.07		3,754.2		76.1		2.03		3,075.5		51.3		1.67		2,581.1		30.3		1.17
Total interest-bearing deposits	7,073.2		78.4		1.11		5,788.0		43.9		0.76		4,663.7		30.9		0.66		8,148.9		115.2		1.41		7,073.2		78.4		1.11		5,788.0		43.9		0.76
Borrowings and notes ~~(3)~~(4)	1,409.0		33.4		2.37		1,373.8		21.6		1.57		1,218.2		17.3		1.42		1,115.5		32.4		2.91		1,409.0		33.4		2.37		1,373.8		21.6		1.57
Total interest-bearing liabilities	8,482.2		111.8		1.32		7,161.8		65.5		0.91		5,881.9		48.2		0.82		9,264.4		147.6		1.59		8,482.2		111.8		1.32		7,161.8		65.5		0.91
Non-interest-bearing demand deposits	1,622.4						1,296.4						1,081.0						1,745.2						1,622.4						1,296.4
Other non-interest-bearing liabilities(3)	119.3						112.6						85.2						257.1						119.3						112.6
Total liabilities	10,223.9						8,570.8						7,048.1						11,266.7						10,223.9						8,570.8
Total shareholders' equity	1,545.5						1,243.8						911.0						1,694.3						1,545.5						1,243.8
Total liabilities and equity	$	11,769.4					$	9,814.6					$	7,959.1					$	12,961.0					$	11,769.4					$	9,814.6
Net interest-earning assets	$	2,215.7					$	1,774.7					$	1,371.6
Net interest income			$	366.8					$	306.0					$	237.1					$	375.4					$	366.8					$	306.0

Table of Contents


	2018					2017					2016					2019					2018					2017
(Dollars in millions)	Average Balance		Interest	Average Yield/ Rate		Average Balance		Interest	Average Yield/ Rate		Average Balance		Interest	Average Yield/ Rate		Average Balance		Interest	Average Yield/ Rate		Average Balance		Interest	Average Yield/ Rate		Average Balance		Interest	Average Yield/ Rate
Net interest spread				3.16	%				3.25	%				3.11	%				2.88	%				3.16	%				3.25	%
Net interest margin ~~(4)~~(5)				3.40					3.40					3.31					3.17					3.40					3.40
Cost of funds				1.11					0.77					0.69					1.34					1.11					0.77
Cost of deposits				0.90					0.62					0.54					1.16					0.90					0.62
Interest-earning assets/interest-bearing liabilities				126.12					124.78					123.32					126.44					126.12					124.78

Supplementary data
Total non-maturity deposits	$	5,620.1				$	4,503.3				$	3,649.9				$	6,139.9				$	5,620.1				$	4,503.3
Total deposits	8,695.6					7,084.4					5,744.7					9,894.1					8,695.6					7,084.4
Fully taxable equivalent adjustment	7.4					11.2					8.1					7.5					7.4					11.2

Notes:

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

(2) The average balance of investment securities is based on amortized cost.

(3) Includes discontinued operations.

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

~~(4) Purchased loan~~(5) Purchase accounting accretion totaled $14.5 million, $23.1 million, ~~$14.8 million,~~ and ~~$8.1~~$14.8 million for the years-ended December 31, 2019, 2018, ~~2017,~~ and ~~2016,~~2017, respectively. The effect of ~~purchased loan~~purchase accounting accretion on the net interest margin was an increase in all years, which is shown sequentially as follows beginning with the most recent year and ending with the earliest year: ~~0.22%~~0.12%, ~~0.17%~~0.22%, and ~~0.11%~~0.17%.

Table of Contents

Rate/Volume Analysis

The following table presents the effects of rate and volume changes on the fully taxable equivalent net interest income. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate), and (3) changes in volume/rate (change in rate multiplied by change in volume) have been allocated proportionately based on the absolute value of the change due to the rate and the change due to volume.

Item 6 - Table 4 - Rate Volume Analysis


	2018 Compared with 2017							2017 Compared with 2016							2019 Compared with 2018									2018 Compared with 2017
	(Decrease) Increase Due to							(Decrease) Increase Due to							(Decrease) Increase Due to									(Decrease) Increase Due to
(In thousands)	Rate			Volume		Net		Rate			Volume		Net		Rate			Volume			Net			Rate			Volume		Net
Interest income:
Commercial real estate	$	13,206		$	24,444	$	37,650	$	9,145		$	25,080	$	34,225	$	(4,367	)	$	25,271		$	20,904		$	13,206		$	24,444	$	37,650
Commercial and industrial loans	7,492			34,426		41,918		1,999			12,457		14,456		(2,978		)	6,558			3,580			7,492			34,426		41,918
Residential loans	467			14,318		14,785		(259		)	5,595		5,336		901			13,571			14,472			467			14,318		14,785
Consumer loans	4,487			3,304		7,791		3,698			5,839		9,537		2,630			(3,357		)	(727		)	4,487			3,304		7,791
Total loans	25,652			76,492		102,144		14,583			48,971		63,554		(3,814		)	42,043			38,229			25,652			76,492		102,144
Investment securities	(1,784		)	5,853		4,069		1,985			16,978		18,963		1,098			(2,863		)	(1,765		)	(1,784		)	5,853		4,069
Short-term investments and loans held for sale(1)	470			418		888		1,405			2,271		3,676		455			7,544			7,999			470			418		888
Total interest income	$	24,338		$	82,763	$	107,101	$	17,973		$	68,220	$	86,193	$	(2,261	)	$	46,724		$	44,463		$	24,338		$	82,763	$	107,101

Interest expense:
NOW accounts	$	1,809		$	739	$	2,548	$	627		$	165	$	792	$	1,217		$	1,265		$	2,482		$	1,809		$	739	$	2,548
Money market accounts	7,332			3,382		10,714		1,698			2,506		4,204		8,411			1,036			9,447			7,332			3,382		10,714
Savings accounts	77			87		164		122			88		210		5			86			91			77			87		164
Certificates of deposit	14,526			6,557		21,083		2,205			5,561		7,766		12,250			12,562			24,812			14,526			6,557		21,083
Total deposits	23,744			10,765		34,509		4,652			8,320		12,972		21,883			14,949			36,832			23,744			10,765		34,509
Borrowings	11,286			567		11,853		1,981			2,338		4,319		6,695			(7,722		)	(1,027		)	11,286			567		11,853
Total interest expense	$	35,030		$	11,332	$	46,362	$	6,633		$	10,658	$	17,291	$	28,578		$	7,227		$	35,805		$	35,030		$	11,332	$	46,362
Change in net interest income	$	(10,692	)	$	71,431	$	60,739	$	11,340		$	57,562	$	68,902	$	(30,839	)	$	39,497		$	8,658		$	(10,692	)	$	71,431	$	60,739

(1) Includes discontinued operations.

NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP adjusted earnings information set forth is not necessarily comparable to non-GAAP information which may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company’s GAAP financial information.

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and expense. These measures exclude amounts which the Company views as unrelated to its normalized operations, including securities gains/losses, gains on the sale of business operations, losses recorded for hedge terminations, merger costs, restructuring costs, systems conversion costs, and certain dispute settlement costs. Additionally, the results of national mortgage banking operations which have been designated as discontinued have been excluded from adjusted earnings for all three years summarized below.

Non-GAAP adjustments are presented net of an adjustment for income tax expense. In 2017, there was a large adjustment for the write-down of the deferred tax asset at year-end due to the passage of federal tax reform. There was also an adjustment for investments in employees and communities which were made by the Company in recognition of the future benefits of federal tax reform. The Company also measures adjusted revenues and adjusted expenses which result from the above adjustments.

The Company calculates certain profitability measures based on its adjusted revenue, expenses, and earnings. The Company also calculates adjusted earnings per share based on its measure of adjusted earnings. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to merger and acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company’s performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry.

Charges related to merger and acquisition activity consist primarily of severance/benefit related expenses, contract termination costs, and professional fees. Systems conversion costs relate primarily to the Company’s core systems conversion and related systems conversions costs. Restructuring costs primarily consist of the Company's continued effort to create efficiencies in operations through calculated adjustments to the branch banking footprint. Expense adjustments include variable rate compensation related to non-operating items. An adjustment was recorded in 2018 for an $8 million core systems contract restructuring charge, and an adjustment of $1.5 million was recorded for charges related to the CEO transition.

The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.

The following table summarizes the reconciliation of non-GAAP items recorded for the time periods indicated:


	At or For the Years Ended									At or For the Years Ended
(Dollars in thousands)	December 31, 2018			December 31, 2017			December 31, 2016			December 31, 2019			December 31, 2018			December 31, 2017
GAAP Net income	$	105,765		$	55,247		$	58,670		$	97,450		$	105,765		$	55,247
Non-GAAP measures
Adj: Loss/(gain) on securities, net	3,719			(12,598		)	551			(4,389		)	3,719			(12,598		)
Adj: Net gains on sale of business operations	(460		)	(296		)	(1,085		)	—			(460		)	(296		)
Adj: Loss on termination of hedges	—			6,629			—			—			—			6,629
Adj: Acquisition, restructuring, conversion, and other related expenses (1)	10,752			31,558			15,761			28,046			10,752			31,558
Adj: Employee and community investment	—			3,400			—			—			—			3,400
Adj: Legal settlements	3,000			—			—			—			3,000			—
Adj: Systems vendor restructuring costs	8,379			—			—			—			8,379			—
Adj: Deferred tax asset impairment	—			18,145			—			—			—			18,145
Adj: Loss from discontinued operations before income taxes										5,539			4,767			(8,545		)
Adj: Income taxes	(5,788		)	(11,277		)	(5,455		)	(7,799		)	(7,102		)	(8,863		)
Net non-operating charges	19,602			35,561			9,772			21,397			23,055			29,430
Total adjusted net income (non-GAAP)	$	125,367		$	90,808		$	68,442		$	118,847		$	128,820		$	84,677

GAAP Total revenue	$	469,235		$	420,484		$	298,118
GAAP Total revenue from continuing operations										$	449,260		$	430,524		$	365,207
Adj: Loss/(gain) on securities, net	3,719			(12,598		)	551			(4,389		)	3,719			(12,598		)
Adj: Net gains on sale of business operations	(460		)	(296		)	(1,085		)	—			(460		)	(296		)
Adj: Loss on termination of hedges	—			6,629			—			—			—			6,629
Total adjusted operating revenue (non-GAAP)	$	472,494		$	414,219		$	297,584		$	444,871		$	433,783		$	358,942

GAAP Total non-interest expense	$	310,371		$	299,710		$	203,302
GAAP Total non-interest expense from continuing operations										$	289,857		$	266,893		$	252,978
Less: Total non-operating expense (see above)	(10,752		)	(31,558		)	(15,761		)	(28,046		)	(10,752		)	(31,558		)
Less: Employee and community reinvestment	—			(3,400		)	—			—			—			(3,400		)
Less: Legal settlements	(3,000		)	—			—			—			(3,000		)	—
Less: Systems vendor restructuring costs	(8,379		)	—			—			—			(8,379		)	—
Adjusted operating non-interest expense (non-GAAP)	$	288,240		$	264,752		$	187,541		$	261,811		$	244,762		$	218,020
(in millions, except per share data)
Total average assets	$	11,769		$	9,815		$	7,958		$	12,961		$	11,769		$	9,815
Total average shareholders' equity	1,546			1,244			911			1,694			1,546			1,244
Total average tangible shareholders equity	991			793			563			1,116			991			793
Total average tangible common shareholders equity	950			784			563			1,076			950			784
Total tangible shareholders’ equity, period-end	1,001			939			671			1,159			1,001			939
Total tangible common shareholders’ equity, period-end	961			898			671			1,119			961			898
Total tangible assets, period-end	11,660			11,013			8,740			12,613			11,660			11,013
Total common shares outstanding, period-end (thousands)	45,417			45,290			35,673			49,585			45,417			45,290
Average diluted shares outstanding (thousands)	46,231			39,695			31,167			49,421			46,231			39,695
Earnings per share, diluted	$	2.29		$	1.39		$	1.88		$	1.97		$	2.29		$	1.39
Plus: Net adjustments per share, diluted	0.42			0.90			0.32			0.43			0.50			0.74
Adjusted earnings per share, diluted	2.71			2.29			2.20			2.40			2.79			2.13
Book value per common share, period-end	33.30			32.14			30.65			34.65			33.30			32.14
Tangible book value per common share, period-end	21.15			19.83			18.81			22.56			21.15			19.83
Total shareholders' equity/total assets	12.72			12.93			11.93			13.31			12.72			12.93
Total tangible shareholders' equity/total tangible assets	8.59			8.52			7.68			9.19			8.59			8.52
										At or For the Years Ended
(Dollars in thousands)										December 31, 2019			December 31, 2018			December 31, 2017
Performance Ratios
GAAP return on assets	0.90			0.56			0.74			0.75			0.90			0.56
Adjusted return on assets	1.07			0.93			0.86			0.93			1.12			0.86
GAAP return on equity	6.84			4.45			6.44			5.75			6.84			4.45
Adjusted return on equity	8.11			7.31			7.51			7.01			8.33			6.81
Adjusted return on tangible common equity	13.48			11.82			12.47			11.35			13.48			11.04
Efficiency ratio (2)	58.32			59.97			58.27			55.63			53.64			56.40

Supplementary Data (in thousands)
Tax benefit on tax-credit investments	5,876			10,182			11,134			7,950			5,876			10,182
Non-interest income charge on tax-credit investments	(4,822		)	(8,693		)	(8,993		)	(6,455		)	(4,822		)	(8,693		)
Net income on tax-credit investments	1,054			1,489			2,143			1,495			1,054			1,489

Intangible amortization	4,934			3,493			2,927			5,783			4,934			3,493
Fully taxable equivalent income adjustment	7,423			11,227			8,098			7,451			7,423			11,227

(1)

Acquisition, restructuring, conversion, and other related expenses included $18.7 million of merger and acquisition expenses and $9.3 million of restructuring expenses for the year-ended December 31, 2019. For the year-ended 2018, these expenses included $8.9 million ofin merger and acquisition expenses and $1.8 million of restructuring ~~expenses for the year-ended December 31, 2018.~~expenses. For the year-ended 2017, these expenses included $24.9 million in merger and acquisition expenses and $6.7 ~~million of restructuring expenses. For the year-ended 2016, these expenses included $13.5 million in merger and acquisition expenses and $2.3~~ million of restructuring, conversion, and other expenses.


(2)	Efficiency ratio is computed by dividing total core tangible non-interest expense by the sum of total net interest income on a fully taxable equivalent basis and total core non-interest income adjusted to include tax credit benefit of tax shelter investments. The Company uses this non-GAAP measure to provide important information regarding its operational efficiency.

Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

This discussion is intended to assist in understanding the financial condition and results of operations of the Company. This discussion should be read in conjunction with the Consolidated Financial Statements ("financial statements") and accompanying notes contained in this report.

SUMMARY

Berkshire’s net income decreased by $8 million, or 8%, to $97 million in 2019 from $106 million in 2018. This was primarily due to the $12 million after-tax charge recorded in the third quarter related to one commercial loan write-off as a result of alleged borrower fraud. The income benefit from the acquisition of SI Financial Group, Inc (“SI Financial”). on May 17, 2019 was partially offset by charges related to the consummation of this merger. The Company uses the non-GAAP measure of operating earnings to measure profits before merger and other net charges deemed to be non-operating. This measure decreased by $10 million, or 8%, to $119 million from $129 million. Taking into account the shares issued as merger consideration, the non-GAAP measure of operating earnings per share decreased by 14% to $2.40 from $2.79. Adjusted for the $0.23 per share impact of the above loan write-off, 2019 operating EPS was $2.63, which was 6% lower than the 2018 result. This was primarily due to a lower net interest margin as a result of lower purchase accounting accretion as well as the impact of lower market interest rates in relation to the Company’s asset sensitive balance sheet. GAAP earnings per share decreased by 14% to $1.97 from $2.29. Most measures of financial condition and book value improved during the year, including liquidity and capital metrics.

In 2019, the Company adopted a goal of building a 21^st century community bank. Its focus had previously been on expanding through acquisition as a regional bank. The Company is targeting to position the Company in coming decades to meet demand for values based, community focused financial providers. The Company adopted a Be First values statement and is pursuing a goal to expand through non-traditional product and service offerings in underbanked urban communities. The Company received numerous recognitions in 2019 for its social responsibility initiatives.

The acquisition of SI Financial Group, which was announced in December 2018, provided a market extension opportunity for the Company, with the acquisition of a 23 branch operation in Eastern Connecticut and Rhode Island, with $1.7 billion in assets. Recognizing the impact of decreasing purchased loan accretion due to the seasoning of purchased loan portfolios from past bank acquisitions and based on its strategic vision. In April 2019, the Company announced a strategic review which resulted in four main initiatives as follows:

•

Line of Business Review. The Company completed a line of business review and discontinued the origination of indirect auto loans and aircraft loans. The Company decided to attempt to sell its national mortgage banking operations, which continue to operate but which have been reclassified as discontinued operations in the financial statements and which remained held for sale at year-end amid ongoing discussions with potential purchasers.

•

Balance Sheet Restructuring. The Company initiated a plan to liquidate up to $1.1 billion in non-strategic assets over the medium term through sales and run-off, and to use proceeds to pay down more expensive wholesale funds (borrowings and brokered deposits) and improve liquidity. In 2019, the Company reduced total assets by approximately $700 million under this plan and paid down wholesale funds by approximately $900 million. The Company set a goal to limit future growth in earning assets to the rate of organic core deposit growth.


•	Efficiency Initiative. The Company worked with a third-party consultant to review its operations to improve efficiency. The Company consolidated eight existing branches (7%), continuing the branch consolidation program it has conducted in recent years.


•	Stock Repurchases. The Board approved a one year 2.4 million share buyback program expiring March 31, 2020. The Company’s goal is to return to shareholders the excess capital freed up due to the balance sheet restructuring. At year-end, the Company had repurchased 1.7 million shares under its buyback program.

Table of Contents

The year 2019 was the first year of operations under the leadership of CEO Richard Marotta, who was appointed to the position in November 2018. In December 2019, William Ryan resigned from his position as Board Chair, while remaining active as a Director. Existing Director J. Williar (“Bill”) Dunlaevy was elected to replace Mr. Ryan as Chair. During the year, the Company appointed three new directors, broadening the experience, diversity, and geographic representation on its Board. After year-end, experience and diversity were expanded with the appointment of an additional two directors. Also, after year-end, the Company promoted eight existing leaders to the new position of Regional President in each of the Company’s eight markets, leading its priority efforts around its Be FIRST values and commitment to being a 21^st century community bank. The Regional Presidents are proven Berkshire leaders in a variety of disciplines, including commercial, retail and executive management. In this role, they report to Sean Gray, Berkshire Bank President, with a goal to drive Berkshire’s market positioning, enhance its performance, and maintain active community leadership roles.

The Company increased its dividend on common shares by a penny to $0.23 in January 2019, and an additional penny increase was announced in January 2020. Shortly after year-end, approximately half of the outstanding preferred shares were converted to common shares pursuant to the contracted conversion terms. This change has no impact on earnings per share and is slightly accretive to book value per share metrics.

The Company owns a $16 million participating interest in a secured commercial loan in its market area. In September 2019, this loan defaulted under circumstances involving alleged borrower fraud. In that same month, the Company determined that this loan was uncollectable and charged-off the full balance.

The Company maintains an asset sensitive profile in its interest rate risk management. The Federal Reserve Bank unexpectedly reduced the Fed Funds rate in three 25 basis point cuts in 2019. These changes resulted in compression of the Company’s net interest margin. The yield curve also flattened during the year, which is generally adverse to the net interest margin. The Company’s balance sheet restructuring is intended, in part, to support its margins by reducing dependence on high cost wholesale funding.

Our strategic vision is summarized below:

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Recent developments in the Company’s progress towards its strategic vision are shown below. 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. Recent developments in the Company’s progress towards its strategic vision include the following:

Responsible & Sustainable Business Policy. As part of Berkshire Bank’s efforts to build a more socially responsible and values driven company, the Bank implemented a new Responsible & Sustainable Business Policy. The policy enhances the Company’s risk management and social responsibility practices with a focus on long-term sustainable performance.

U.S. Chamber of Commerce Foundation Citizens Award. The U.S. Chamber of Commerce Foundation honored Berkshire Bank with the 2019 Citizens Award, in the category of Top Corporate Steward- Small - Middle Market Business, for its Be FIRST Commitment, the company’s comprehensive corporate responsibility, culture, social impact and sustainability strategy. The Citizens Awards honor businesses for their significant positive impact in communities around the world, making them one of the most prestigious honors in corporate citizenship.

Bloomberg Gender Equality Index. Berkshire Bank’s focus on diversity, ensuring gender equality and pay equity was highlighted as Bloomberg announced the company would be included in the 2020 Bloomberg Gender-Equality Index (GEI). The GEI tracks the financial performance of public companies committed to supporting gender equality. Through disclosure of gender-related metrics, Berkshire Bank provided a comprehensive look at its investment in workplace gender equality reflecting a high level of overall performance in terms of gender equality.

Fostering Sustainable Communities & Reducing the Wealth Gap. The Company continued its commitment to closing the wealth gap so that all citizens, regardless of ethnicity, have equal opportunity for upward economic mobility, improving the business climate in communities where the bank operates. Berkshire Bank Foundation provided $2.9 million in grant funding to support 612 organizations in 2019 and the company’s XTEAM® employee volunteer program achieved ~~record~~a 100% participation rate for the fourth consecutive year impacting more than one million people with their volunteer efforts.

Reevx Labs. The Bank recently opened its first Reevx Labs in Boston’s Roxbury neighborhood. Reevx Labs is part of the Bank’s continued commitment to bettering the community and revolutionizing the banking experience. Reevx Labs feature a series of free co-working spaces for the community with the goal of creating spaces where entrepreneurs and non-profits can connect with their peers and access the Bank’s MyBankers for support of their financial needs, as they pursue their missions. Each Reevx Labs will take on a unique approach informed by the needs of the community, providing opportunities to build solutions together.

ACQUISITION OF SI FINANCIAL GROUP, INC.

On May 17, 2019, Berkshire completed the acquisition of SI Financial Group, Inc. (“SI Financial”), which added the Savings Institute operations consisting of 23 branches and $1.7 billion in total assets in eastern Connecticut and Rhode Island. The acquisition included $1.3 billion in loans and $1.3 billion in deposits. The SI Financial franchise is a mostly rural and suburban franchise viewed as economically stable and with an historically attractive loan and deposit structure. The merger was completed on time and on plan. Berkshire views the business retention as good based on experience through December 31, 2019. The systems conversion was completed early in the fourth quarter of 2019. At the acquisition date, SI Financial had assets with a gross fair value totaling $1.7 billion and a net fair value of $141 million net of liabilities. Berkshire recorded $177 million in total merger consideration, consisting primarily of the issuance of 5.7 million Berkshire common shares. Goodwill was recorded in the amount of $35 million, and the core deposit intangibles were recorded at $18 million. Most Berkshire consolidated balance sheet and income statement categories increased as a result of the merger.

Berkshire targets to achieve cost savings related efficiencies totaling approximately $12 million, or 30% of SI Financial annualized non-interest expense, which was reported by SI Financial as $41 million in 2018. The Company estimates that it remained within its target of approximately $29 million in total pre-tax transaction costs, or $23 million after-tax. Including all purchase accounting and targeted transaction costs the Company estimates that the transaction will be approximately $0.45 dilutive to the non-GAAP financial measure of tangible book value

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per common share used by the investment community. Projected dilution per share is less than originally anticipated primarily due to lower loan discount reflecting lower market interest rates at merger date.

Note 2 - Acquisitions in the Consolidated Financial Statements illustrates the pro forma impact on operations of the combination of Berkshire and SI Financial, assuming that the merger was completed on January 1, 2018 and excluding merger costs and planned efficiencies, and based on other assumptions set forth in the statements. This pro forma also excludes the impact of the Durbin Amendment on SI Financial revenue and ~~earnings~~any impacts on the loan loss provision for SI Financial loans. Based on the pro forma information, and taking into account the shares issued as merger consideration and the impact of purchase accounting adjustments, the Company's EPS would have been accreted by approximately $0.11 in 2018 ~~together with record return~~and $0.17 in 2019 based on ~~assets. This was achieved with a full year~~the pro forma assumptions. The 2019 impact includes the reversal of ~~results from acquired operations~~merger charges based on required assumptions. The total cost savings targeted by the Company are expected to produce overall positive EPS accretion of ~~Worcester-based Commerce Bank, which was acquired on October 13, 2017. Merger related cost saving efficiencies were achieved on schedule and on target following~~the merger after the completion of ~~Commerce systems and operations~~ integration. ~~This acquisition, together with~~These costs savings are not included within the ~~expansion of Berkshire’s regional banking teams at its new Boston corporate headquarters, solidified Berkshire’s emerging Eastern Massachusetts market presence.~~

Organic loan growth further contributed to the year’s results. Berkshire’s SBA lending business achieved record business volume and profitability; this group broke into the top 30 producers nationally based on both the number and dollar volume of loans originated. These results partially offset a contraction in residential mortgage banking revenues, resulting from lower demand in the industry due to higher interest rates and heightened fintech competition. Berkshire managed operating expenses closely to offset these revenue pressures as well as margin pressure from higher funding costs. Expense discipline also cushioned the additional cost and revenue impacts from the expanded regulatory burden tied to crossing the $10 billion asset threshold. Berkshire initiated the consolidation of six branch offices which is targeted for completion in the first quarter of 2019. Additionally, the Company engaged in a core systems strategic analysis and vendor review, concluding in the restructuring of its core systems contract to improve its future competitive profile and technology cost.

Federal income tax reform was enacted at the end of 2017, effective beginning in 2018. This reform reduced the statutory federal income tax rate from 35% to 21%, and adjustments were made to various elements of income tax computation. Due to this reform, the Company recorded a one-time charge in December 2017 to reduce the carrying value of its net deferred tax asset. The Company’s 2018 effective income tax rate was reduced by an estimated 11% to 21% due to the net impact of the federal tax reform. In response to this reform, Berkshire announced one time employee bonuses and community support contributions which were recorded in 2017. The Company also increased its hourly minimum wage to $15.00 per hour at the beginning of 2018.

Purchased loan accretion accounted for 17% of pretax earnings in 2018 and 15% of pretax earnings in 2017. The Company anticipates this revenue source will decrease significantly in 2019. In order to support future earnings, the Company has initiated a strategic review targeted for the first half of 2019. This review is expected to include: (1) balance sheet composition; (2) line of business profitability; (3) expense structure; and (4) capital management.

Berkshire’s longtime CEO and President, Michael Daly, resigned from the Company on November 26, 2018 pursuant to a Resignation and Separation Agreement. Richard Marotta, the Bank’s President, was promoted to the positions that Mr. Daly had held. Sean Gray, the Bank’s Chief Operating Officer, was promoted to President of the Bank. During 2018, Mr. Marotta initiated a diversity and inclusion initiative, and the Company also appointed a Corporate Social Responsibility (“CSR”) Officer. In 2018, the Company implemented the Massachusetts equal pay law. In the third quarter, the Company received an Impact2030 award from the United Nations, citing its support of volunteerism.

On December 11, 2018, the Company entered into an agreement to acquire SI Financial Group (“SI Financial”), the parent of Savings Institute Bank & Trust, a $1.6 billion bank headquartered in Willimantic, Connecticut with 23 branch offices serving Eastern Connecticut and Southern Rhode Island. Under this agreement, each outstanding SI Financial common share will be exchanged for 0.48 Berkshire common shares. This business combination is targeted to be completed in the second quarter of 2019, subject to shareholder and regulatory approval. This is

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viewed as a complementary market extension business combination that expands Berkshire’s presence in Southeastern New England, adding a stable deposit franchise and targeting attractive earnings accretion.

Berkshire increased its quarterly common stock cash dividend by 5% to $0.22 per share in January 2018, and the common stock dividend was further increased by 5% to $0.23 per share in January 2019. In June, Berkshire’s stock was added to the S&P 600 SmallCap^R ~~index; this index tracks U.S. small cap companies and is included in the S&P Composite 1500~~^R ~~index. This event widened the visibility of Berkshire’s stock. During 2018, the Company obtained an investment grade senior debt rating from a recognized credit rating agency.~~

U.S and regional economic growth were elevated in 2018 compared to prior years. U.S. unemployment fell to the lowest rate in nearly 50 years. The Company’s asset quality and credit performance remained favorable throughout the year. The Federal Reserve Board increased its target Federal Funds interest rate by 0.25% in each quarter, with the target standing at 2.5% at year-end. The yield curve flattened, with the ten year treasury rate increasing to 2.63% from 1.76% over the course of the year. Deposit competition intensified and lending spreads remained pressured in this environment. Residential mortgage volumes declined and gain on sale margins remained under pressure. While the Company’s interest rate risk position was generally neutral in its static models, the growth of its business and focus on the competitive Eastern Massachusetts markets resulted in margin pressures as it utilized wholesale funding to build scale, market share, and overall efficiencies across its business lines.pro forma assumptions.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, ~~2018~~2019 AND ~~2017~~2018

Summary: Berkshire ~~offers a competitive mix of loan~~reduced its leverage, increased its core funding, and ~~deposit products to serve the retail and commercial markets in~~focused its regions, and in certain national specialty lending markets. Net interest income from these products is its primary revenue source; the related staff, facilities, and systems are its primary operating expenses. The Company emphasizes services and fee revenue business to deepen market and wallet share, diversify revenues, and lessen the requirement for balance sheet ~~liquidity~~more in support of its community banking franchise in 2019. Asset management disciplines reflected an emphasis on return, risk management, and ~~capital resources. The Company has expanded~~relationship development. Berkshire’s total assets increased in 2019 due to the SI Financial acquisition, which was partially offset by the reduction of assets tied to its ~~wholesale lending and deposit practices to provide more product and~~ balance sheet flexibility. The Company’s current strategic review includes an assessment of the balance sheet structure and capital management to support earnings and profitability metrics while also supporting liquidity, capital, and interest rate sensitivity objectives.

restructuring. Total assets increased by ~~$641 million,~~$1 billion, or 6%8%, to ~~$12.2~~$13.2 billion, including $1.7 billion acquired from SI Financial and net of a $700 million decrease in ~~2018. This was driven~~targeted investments and loans due to the balance sheet restructuring. Deposits increased by ~~a 9% increase in total loans~~$1.4 billion including $1.3 billion acquired from SI financial. Borrowings decreased by $0.7 billion and ~~was funded primarily by borrowings, together with a 3% increase in deposits. Shareholders’~~ equity increased by ~~4%,~~$0.2 billion due to stock consideration issued for the merger.

Many of Berkshire’s financial condition metrics improved during the year as a result of its operating strategies. Equity/assets improved to 13.3% from 12.7% and ~~measured $33.30~~the non-GAAP financial measure of tangible equity/tangible assets improved to 9.2% from 8.6%. The liquidity measure of loans/deposits improved to 92% from 101%. Nonperforming assets remained unchanged at 0.3% of total assets. Book value per common share ~~at year-end. The~~increased by 4% to $34.65 and the non-GAAP financial measure of tangible ~~equity~~book value per common share increased by 7% to ~~$21.15, with tangible equity growth outpacing the rate of growth in total assets.~~$22.56.

Investment Securities.Berkshire’s goal is to maintain a high quality portfolio consisting primarily of liquid investment securities with managed durations. The portfolio generates interest income and provides additional liquidity and interest rate risk management flexibility. The portfolio is managed to contribute to earnings per share and return on equity, taking into account regulatory risk classifications.

The Company continuously evaluates the portfolio’s size, yield, diversification, risk, and duration. The newly initiated strategic review in 2019 will include a reassessment of the contribution of this portfolio towards the Company’s portfolio objectives.

The securities portfolio was ~~unchanged~~reduced in 2019 to decrease the use of leveraged investments and return the related capital to shareholders so that the balance sheet is more focused on and funded by its community banking franchise. The investment portfolio decreased by $149 million in 2019. The SI Financial merger added $143 million in securities, and all other investments were reduced by a net amount of $292 million, which was a 15% reduction from the starting balance.

The portfolio balance stood at ~~$1.9~~$1.7 billion ~~in 2018,~~at year-end 2019. The Company generally maintained the distribution of the portfolio, with ~~no significant changes in its composition. Some~~a continuing emphasis on agency ~~mortgage~~ backed pass through securities ~~were shifted from pass throughs to~~and collateralized mortgage ~~backed~~ obligations which are targeted to manage prepayment risk. Portfolio credit risk was reduced with the sale of lower rated corporate obligations. Although new corporate and ~~tax advantaged securities declined modestly.~~other bonds were added through the merger. The fully taxable equivalent yield of municipal securities decreased due to federal tax reform, but the portfolio generally continued to meet the Company’s earnings and liquidity objectives. Marketable equity securities increased modestly. Based on the adoption of ASU 2016-01 in 2018, unrealized equity gains/losses are reported in current period earnings, and are excluded from the Company’s non-GAAP measure of adjusted earnings. A stock market decline resulted in a $4 million unrealized loss on equity securities recorded to 2018 income. The total net unrealized loss on the investment portfolio was 1.2% of cost at year-end 2018, compared to a 0.6% net unrealized gain at year-end 2017. This reflected generally lower bond prices due to the higher interest rates prevailing at the end of 2018.

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The fourth quarter portfolio yield decreased year-to-year to 3.38% from 3.55%, while the full year yield decreased to 3.33% from 3.43%. Due to the federal tax reform, the Company had estimated that the fully taxable equivalent yield of the securities portfolio would decrease by approximately 0.15%. This is primarily due to the municipal bond portfolio, which continues to meet the Company’s profitability objectives despite the lower taxable equivalent yield. The year-end weighted average life of the bond portfolio ~~increased slightly~~was 4.2 years at period-end, compared to 5.8 years ~~from 5.5 years. The Company estimates that~~at the ~~average life~~start of the ~~portfolio would increase~~year, reflecting higher prepayment speeds related to ~~7.9 years~~lower interest rates that developed during the year. The fair value of investment securities was a 2.0% premium to book value at period-end, compared to a 1.2% discount at the start of the period due primarily to higher bond prices resulting from lower long-term rates. At period-end, all debt securities which were rated by public rating agencies had an investment grade rating. A total of $89 million in debt securities was not rated by rating agencies. All of these securities were either pre-funded with U.S./Agency collateral or rated “pass” or higher in the ~~event of a 300 basis point increase~~Company’s internal ratings system except for $4 million in ~~interest rates.~~unrated performing local municipal obligations and one substandard $8 million economic development bond which was performing in accordance with its terms. During the year, there were no impairments recorded and all securities were performing. The fourth quarter 2019 securities yield was 3.31% compared to 3.34% in the same quarter of 2018.

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Loans.~~Berkshire~~ The loan portfolio increased by $459 million, or 5%, in 2019 due to the SI Financial acquisition, which was substantially offset by the release of balances across most loan categories based on the Company’s strategic review to deleverage and focus on its community banking mission. A summary of changes in the loan portfolio is as follows:



(In millions)	December 31, 2018 Balance		Acquired SI Financial Balances		All Other Net Change			December 31, 2019 Balance
Total commercial real estate	$	3,400	$	624	$	10		$	4,034
Commercial and industrial loans	1,980		244		(383		)	1,841
Total commercial loans	5,380		868		(373		)	5,875

Total residential mortgages	2,566		375		(256		)	2,685

Home equity	377		58		(54		)	381
Auto and other	720		2		(161		)	561
Total consumer loans	1,097		60		(215		)	942
Total loans	$	9,043	$	1,303	$	(844	)	$	9,502

The Company views SI Financial’s historic loan origination and management practices as generally conforming with the Company’s practices and industry norms and the acquired loans are not viewed as significantly changing the Company’s overall credit risk profile. The SI Financial loans were recorded at a $45 million (or 3.3%) discount to gross carrying value.

Excluding acquired SI Financial loans, most major loan categories decreased in 2019. The decrease in commercial and industrial loans included reductions in national syndicated and participated loans. The Company also discontinued originating commercial aircraft loans and sold a portion of the portfolio balance. Residential mortgages declined due primarily to accelerated prepayments when interest rates unexpectedly declined. Additionally there were lower net purchases of mortgage pools from community banks in the region. The Company discontinued the origination of indirect auto loans in the first quarter of 2019, which was the primary cause for the decrease in consumer loans.

This reflected the Company’s decision to exit certain assets with lower profitability and lower relationship potential. The Company’s lending teams remain active serving qualifying credit demand in its markets, and following selective criteria with an emphasis on credit quality and overall relationship potential and profitability. The Company is expanding ~~and deepening retail and commercial~~its SBA lending ~~activities through organic growth and acquisitions, including a focus on specialized lending. The Company uses secondary markets and a growing network~~operations, selling the guaranteed portion of ~~financial institution partners in managing and diversifying~~ its ~~portfolio, as well as supporting its fee income objectives and managing its capital and liquidity.~~

Total loan growth of 9% in 2018 resulted from 6% commercial loan growth and 22% residential mortgage growth. Berkshire recruited commercial banking leadership for its expanding Eastern Massachusetts region and in its new Mid-Atlantic markets. The Company’s goal is to gain market share based on its expansion into these large and growing markets, including its positioning as the largest regional bank with corporate headquarters in Boston. Residential mortgage growth was primarily related to Eastern Massachusetts relationship oriented mortgages. The Company continues to sell its national mortgage originations into the secondary market onas a ~~servicing released basis. Consumer loans decreased by 3% in 2018 due to price competition from national and nonbanking sources in the ongoing economic expansion.~~fee-oriented business activity.

For the longer term, the Company’s primary lending focus is on its commercial banking business across its franchise footprint. Commercial lending is organized around four major lending activities: commercial real estate, middle market banking, asset-based lending, and business banking. Commercial loans constituted ~~59%~~62% of total loans at year-end ~~2018.~~2019. Berkshire’s total non-owner occupied commercial real estate exposure measured 238% of regulatory capital at period-end, compared to ~~270%~~250% at the start of the year and compared to the 300% regulatory monitoring guidelines (based on regulatory definitions). Construction loan exposure was ~~34%~~37% of bank regulatory capital at year-end ~~2018,~~2019, compared to ~~40%~~34% at year-end ~~2017,~~2018, and compared to the 100% regulatory guideline. Berkshire monitors its commercial real estate lending risk using the enhanced processes required for banks exceeding the monitoring thresholds even though it is well margined below those thresholds.

Berkshire’s commercial specialty lending includes asset based lending ("ABL"), business equipment lending, and SBA lending. ABL outstandings totaled $452 million at year-end 2018. Business equipment loans, through Berkshire’s Firestone division, totaled $265 million at year-end 2018. The Bank originates SBA 7(a) loans for sale through its 44 Business Capital division (primarily in the mid-Atlantic area), as well as direct loans by its business banking teams throughout its regions. Based on the annual SBA national originations rankings as of September 30, ~~2018,~~2019, Berkshire was among the top 30 originators both in loan count and dollars loaned. Most earnings related to SBA lending are included in loan fee income arising from the sale of guaranteed portions of SBA loans.

~~The full year loan yield increased by 0.39% to 4.74% in 2018, reflecting the benefit~~

Table of higher interest rates as well as the contributions from the fair value marked Commerce loans. Purchased loan accretion contributed 0.27% to the 2018 loan yield, compared to 0.21% in the prior year. Most of the portfolio growth in 2018 was in lower yielding residential mortgages, which declined slightly in yield from the fourth quarter of 2017. Contents

The fourth quarter loan yield ~~was~~decreased to 4.52% in 2019 from 4.94% in ~~2018, compared~~2018. The contribution from purchased loan accretion decreased to ~~4.47%~~0.13% from 0.37% for these periods. The reduction in ~~2017.~~market interest rates also contributed to the decrease in portfolio yield.

The repricing terms of the total loan portfolio shortened slightly in 2018, with 43% repricing in one year, 22% in one to five years, and 35% over five years. Growth in variable rate commercial loans generally offset growth in long maturity residential mortgages.

Asset Quality. Berkshire’s Chief Risk Officer and the Risk Management and Capital Committee of the Board oversee risk management and asset quality. This includes setting loan portfolio objectives, maintaining sound underwriting, close portfolio oversight, and careful management of problem assets and potential problem assets. Additionally, merger due diligence is an integral component of maintaining asset quality. Acquired loans are recorded at fair value and are deemed performing regardless of their payment status. Therefore, some overall

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portfolio measures of asset quality are not comparable between years or among institutions as a result of recent business combinations. A general goal is to achieve significant resolutions of impaired loans acquired in bank mergers primarily in the first two years following the acquisition date. Berkshire’s asset quality has reflected its strong credit disciplines together with the generally favorable economic environment in the extended U.S. recovery and asset values supported by the low inflation environment.

~~Asset quality metrics remained favorable during the year.~~ At period-end, non-performing assets were ~~0.28%~~0.31% of total assets. Net loan charge-offs were ~~0.18%~~0.35% of average loans in ~~2018.~~2019, of which 0.17% was related to the previously discussed large commercial loan charge-off. The balance of troubled debt restructurings decreased to ~~$27~~$19 million at year-end from ~~$42~~$27 million at the start of the year.At year-end, the total contractual balance of purchased credit impaired loans was ~~$124~~$147 million, with a ~~$47~~$61 million carrying value. This balance includes taxi medallion loans acquired at a significant discount from Commerce Bank, with a net carrying value ~~less than $30~~of $23 million at year-end 2018. Due to successful asset recoveries during 2018, the total balance of purchased credit impaired loans declined from a $209 million contractual amount and a $97 million carrying value at the start of the year.2019.

Loan Loss ~~Allowance~~.Allowance. The determination of the allowance for loan losses is a critical accounting estimate. The Company’s methodologies for determining the loan loss allowance are discussed in Item 1 of this report, and Item 8 includes further information about the accounting policy for the loan loss allowance and the Company’s accounting for the allowance in the Consolidated Financial Statements.

~~The Company considers~~As of December 31, 2019 and 2018, the allowance for loan losses ~~appropriate~~totaled $63.6 million and $61.5 million, respectively. The allowance for loan losses is broken down between a general component reserve (ASC 450) and specific reserve components (ASC 310). Specific reserves on individually evaluated loans amounted to ~~cover probable incurred losses which can be reasonably estimated~~$0.4 million and ~~which are inherent in the loan portfolio~~$0.3 million as of December 31, 2019 and 2018, respectively, with the ~~balance sheet date. Under accounting standards for business combinations, acquired loans are recorded at fair value with no loan loss~~remaining allowance onbeing the ~~date of acquisition. The fair value of acquired loans includes the impact of estimated loan losses for the life~~general component of the portfolio, including subjective assessments of risk. A loan loss allowance is recorded by the Company for the emergence of new probable and estimable losses relating to acquired loans which were not impaired as of the acquisition date. In the first period of combined operations, the Company may also establish an environmentalcalculation in accordance with ASC 450. The general component of the allowance ~~related~~for loan losses totaled approximately $63 million which consisted of $44 million attributable to ~~newly acquired loans.~~ observable historical data, adjusted for a temporal estimate of the incurred loss emergence and confirmation period and approximately $19 million attributable to qualitative adjustments. The breakdown between historical data and qualitative adjustments were consistent in the prior periods.

Because of the accounting for acquired loans, some measures of the loan loss allowance are not comparable to periods prior to the acquisition date or to other financial institutions. Loans acquired in business combinations totaled $2.3 billion, or 25% of total loans at year-end 2019, compared to $1.7 billion, or 19% of total loans at year-end ~~2018, compared to $2.2 billion, or 26% of total loans at year-end 2017.~~2018.

The loan loss allowance increased by ~~$10 million, or 19%,~~3% to ~~$61~~$64 million in ~~2018.~~2019. The allowance ~~increased~~decreased to ~~0.68% percent~~0.67% of loans at year-end ~~2018,~~2019 compared to ~~0.62%~~0.68% at year-end ~~2017, due to a decline in the percentage of acquired loans noted above.~~2018. For business activities loans, the ratio of the allowance to loans increased ~~slightly~~ to ~~0.76%~~0.80% from ~~0.75%~~0.76% of related loans. For acquired loans, this ratio ~~increased~~decreased to ~~0.32%~~0.27% from ~~0.27%. The year-end allowance coverage~~0.35% due to the addition of ~~net charge-offs remained unchanged~~the SI Financial loans at ~~3.9X.~~fair value. The allowance provided ~~1.9X~~1.6X coverage of year-end non-accrual loans in ~~2018~~2019 compared to ~~2.3X~~1.9X in ~~2017.~~2018.

The credit risk profile of the Company’s loan portfolio is described in Note 68 - Loan Loss Allowance of the Consolidated Financial Statements. The Company’s risk management process focuses primary attention on loans with higher than normal risk, which includes loans rated special mention and classified (substandard and lower). These loans are referred to as criticized loans. Including acquired loans, they totaled $237 million, or 1.8% of total assets at year-end 2019, compared to $189 million, or 1.5% of total assets at year-end ~~2018, compared~~2018. Criticized loans from business activities increased to ~~1.6% at year-end 2017. An~~$146 million from $114 million. Criticized acquired loans increased to $92 million from $76 million, including acquired SI Financial loans. The increase in criticized loans from business activities was ~~offset by a decrease in criticized acquired loans. The~~due to an increase in ~~non-accruing~~ loans ~~was offset by a decrease in~~rated special ~~mention loans. Approximately 45% of the $32 million balance of non-accrual~~mention. Substandard business activities loans ~~was related to one commercial real estate relationship in the Company’s footprint which became delinquent~~decreased during the ~~year and is viewed as adequately secured by real estate and which does not require a specific impaired loan reserve.~~year.

The Company views its potential problem loans as those loans from business activities which are rated as classified and continue to accrue interest. These loans have a possibility of loss if weaknesses are not corrected. Classified loans acquired in business combinations are recorded at fair value and are classified as performing at the time of acquisition and therefore are not generally viewed as potential problem loans. In ~~2018,~~2019, potential problem loans ~~increased~~decreased to ~~$61~~$49 million from ~~$37 million at the start of the year. This was primarily due to several existing~~$61 million.

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commercial relationships in the $2-5 million range with no geographic or borrower type concentrations. Criticized commercial loans from business activities measured $107 million, or 2.6% of related loans, at year-end 2018.

As discussed in Note 1 - Summary of Significant Accounting Policies of the Consolidated Financial Statements, in June 2016, the FASB issued ASU No. 2016-13, ~~“Measurement~~“Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU requires companies to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Forward-looking information will now be used in credit loss estimates. ASU No. 2016-13 is effective for interim and annual periods beginning after December 15, 2019. AtThe Company is in the ~~date~~process of ~~adoption,~~finalizing the required changes to loan loss estimation methodologies and processes as a result of the new accounting guidance. The Company ~~expects~~is finalizing its control environment regarding the new processes, data validations, and model validation. CECL is expected to increase the allowance for credit losses, ~~with~~including the impact of reclassifying non-accretable credit discounts on existing purchased credit-impaired loans to the reserve. This increase to the allowance for credit losses does not include our medallion portfolio. Loans will have a resulting increase for the non-accretable credit discount and a negative adjustment to retained ~~earnings.~~earnings for the remaining credit losses for financial assets.

Other Assets. ~~Short term~~At year-end 2019, the balance of payroll deposits totaled $744 million, an increase of $277 million over the prior year-end. The overnight funds were held in overnight investments, ~~decreased~~which increased by $388 million. The Company has also increased its use of short-term investments during 2019 to ~~$82 million from $158 million in 2018~~better match its liquidity related to payroll deposit balances which fluctuate daily. Several other asset accounts increased due to ~~lower overnight liquidity needed for~~ the ~~acquired Commerce payroll processing business as of that date. Residential mortgages~~SI Financial acquisition, including goodwill. Assets from discontinued operations primarily reflect mortgage loans held for sale ~~decreased due to lower originations volumes. Due to the fourth quarter 2018 decline in~~by the Company’s ~~stock price and~~national mortgage banking operation. The $114 million increase in ~~bank stocks overall,~~Other Assets included impacts from the ~~Company performed tests for impairment~~SI Financial acquisition as well as $84 million in right of ~~goodwill at year-end, and the book balance was not deemed impaired as a result of this analysis. Beginning in 2019 pursuant~~use assets related to the adoption of ~~ASU 2016-02, qualifying operating leases will be recorded to~~a new lease accounting standard.

Deposits: Total deposits increased by $1.4 billion, or 15%, in 2019 including the ~~balance sheet.~~acquired SI Financial deposits. A summary of changes in deposits is below:

~~Deposits.~~



(In millions)	December 31, 2018 Balance		Acquired SI Financial Balances		All Other Net Changes			December 31, 2019 Balance
Demand	$	1,603	$	258	$	23		$	1,884
NOW and other	1,122		138		233			1,493
Money market	2,245		190		94			2,529
Savings	724		164		(47		)	841
Time deposits	3,288		585		(284		)	3,589
Total deposits	$	8,982	$	1,335	$	19		$	10,336

Note:
Total payroll deposits	$	467	$	—	$	277		$	744
Total brokered deposits	$	1,419	$	19	$	(225	)	$	1,213

The acquired deposits represented a market extension for Berkshire ~~views its deposit programs~~and are viewed as ~~central~~an attractive and stable core funding source. Due to its funding and market management goals. Retail and commercial strategies focus on transaction accounts as being key to customer relationships. Interest bearing deposit products are positioned to be competitive while offering local convenience and the safety of FDIC insurance. Due to the impacts of technology on mobile and electronic banking, preferred customer channels are shifting andstrategic asset reductions, the Company ~~seeks to maximize the benefits it offers as a local provider with the scale to compete with the delivery channels~~reduced its use of ~~national bank~~more expensive wholesale funding, including reduced brokered deposits. The Company’s payroll deposits were mostly in NOW and ~~nonbank competitors.~~money market balances at year-end 2019. The Company consolidated eight branch offices in 2019. Deposit retention for these offices and for acquired balances was viewed by management as good and within the expected range through year-end. Deposit retention related to branch consolidations has been active in shifting the number, location, and configuration of its offices and customer facing staff in order to move with its markets and to reduce overhead related to older channels that are now less favored. Current initiatives include the expansion of virtual tellers and MyBankers. The Company has also utilized brokered time deposits as an additional funds source to complement its other strategies, manage its funding costs, and to support interest rate risk management goals. With the Commerce acquisition, the Company added a specialty payroll processing business line that processes payments for payroll service bureau customers. In 2017, Berkshire added a senior government banking professional to provide more outreach to municipal accounts inaided by the Company’s ~~regions. The Company has also added a senior international banking professional who is augmenting the Company’s payments related business.~~MyBanker program.

Berkshire’s deposits increased in 2018 by 0.2 billion, or 3%, to $9.0 billion. This increase was due to a $0.3 billion increase in brokered time deposits to support loan growth. The level and mix of deposits changes daily depending on the timing of payroll cycles. Payroll related deposits were $0.5 billion both at the start and at the end of 2018.

Berkshire uses brokered deposits flexibly in combination with short term borrowings in managing its liquidity position and earnings objectives. Brokered deposits are sometimes the most efficient funding in terms of rate and maturity based on asset liability objectives. Brokered time deposits totaled $1.4 billion at year-end 2018, compared to $1.1 billion at the start of the year, and measured 16% of total deposits at year-end. At year-end, estimated uninsured deposits totaled $2.8 billion. The average fourth quarter cost of deposits increased slightly to 1.11% in 2019 from 1.07% in 2018. Deposit costs have benefited from ~~0.66% in 2018 compared~~the accretion of a fair value mark on the acquired SI Financial deposits, which is producing a $2 million per quarter benefit as part of the purchase accounting accretion from this transaction. This reduced quarterly overall deposit costs by around 7 basis points; this accretion is scheduled to ~~2017. This increase was in line with the Company’s modeling for interest rate increase scenarios. The interest sensitivity of deposits~~be completed in the ~~current environment~~second quarter of expected future rate increases is a significant uncertainty in the banking industry, following the years of unusually low interest rates. The Company believes that it can benefit from the diverse regional conditions in which it operates, and also continues to emphasize relationship and transactions accounts to manage potential future deposit cost increases.2020.

Early in 2018, Berkshire opened two branch offices - one in Simsbury, Conn., and one in Malta, N.Y. The Company has identified six branch offices for consolidation early in 2019. The Bank is deploying its virtual teller technology in new offices and targeted existing offices. Berkshire continues to diversify its distribution network, including expanding its MyBanker and private banking teams and integrating more closely with its wealth management, investment services, small business, insurance, and other business lines. At year-end, the Bank had four offices

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~~operating in metro Boston, which serve the expanding regional team located at the new corporate headquarters on State Street.~~

Borrowings and Other ~~Liabilities~~. ~~Nearly all~~Liabilities:Total borrowings decreased by $690 million, or 45%, in 2019. This was due to a reduction in short term FHLBB advances, partially offset by an increase in longer term FHLBB advances. The reduction in borrowings was part of ~~Berkshire’s senior~~the Company’s reduction in higher cost wholesale funds as a result of its asset deleveraging strategy, and was net of $153 million in borrowings ~~at year-end were provided by the Federal Home Loan Bank of Boston under established relationship programs.~~acquired with SI Financial. The ~~FHLBB~~Company is ~~secured by a general pledge of assets primarily consisting of mortgage backed securities and residential mortgages. The Bank uses FHLBB borrowings and~~also using some overnight payroll funds to invest in short term investments rather than to manage overnight liquidity and generally to provide funding for its growth. Other components of the Bank’s wholesale funding program include correspondent banks and brokerages, and brokered deposits. For contingency liquidity purposes, the Bank hasreduce short term ~~credit arrangements with~~funding. Borrowings activity also reflected the Company’s liquidity management strategies after the Federal Reserve Bank initiated unusual interventions in short term funding markets in the third quarter of 2019. As a result, the Company lengthened its funding structure to reduce risk from unexpected short term market fluctuations.

Wholesale funds consist of brokered deposits and ~~with certain national banks and brokerages, and~~borrowings. Wholesale funds decreased by $896 million, or 44%, to $2.0 billion due to the ~~holding company maintains a line of credit. There has been no regular ongoing use of these arrangements.~~Company’s strategic asset reduction strategy. The Company ~~evaluates~~measures the ratio of its ~~use~~wholesale funds to total assets as a measure of liquidity. This ratio improved, decreasing to 15% at period-end from 24% at the start of the year. The fourth quarter cost of borrowings ~~and of wholesale funds~~increased to 2.77% in ~~general in managing its liquidity and strategic growth plans. This is further discussed in the following section on Liquidity.~~

~~Total borrowings increased by $0.4 billion, or 33%,~~2019 from 2.67% in 2018 due to ~~help fund loan portfolio growth. Most~~the higher proportionate amount of more costly subordinated debt. Because borrowings ~~are short term. The weighted average interest rate on borrowings was 2.67% in~~decreased as a funding source, the fourth quarter of 2018, compared to 1.81% in the fourth quarter of 2017. This increase was due to the increase in short term market interest rates during the year. Due to the increased use of borrowings in 2018, and to higher interest rates, the overall cost of funds ~~increased~~decreased to 1.23% in 2019 from 1.31% in 2018. This was an important objective of the ~~fourth quarter~~Company’s strategy to help mitigate the loss of ~~2018 compared~~asset yield due to ~~0.81%~~less benefit from purchase accounting accretion.

The category of Other Liabilities increased by $112 million in 2019, including the ~~fourth quarter~~impact of ~~2017.~~the SI Financial acquisition. Additionally, with the adoption of the new lease accounting standard, the Company recorded in Other Liabilities a total lease liability of $81 million, in addition to the $84 million lease right of use asset previously discussed. Other Liabilities also were impacted by a $47 million increase in derivative liabilities accompanied by a $45 million increase in derivative assets in Other Assets, related to hedge fair values at period-end.

Derivative Financial ~~Instruments and Hedging Activities.~~ Berkshire utilizes derivative financial instruments to manage the interest rate risk of its borrowings, to offer these instruments to commercial loan customers for similar purposes, and as part of its residential mortgage banking activities. The instruments sold to commercial and residential mortgage customers are an important source of fee income and generally represent fixed rate contracts purchased by customers which are sold or offset by the Company with national counterparties.

Instruments:The notional balance of derivative financial instruments increased to $4.1 billion from $3.3 billion ~~at year-end 2018, compared to $2.5 billion at year-end 2017.~~during 2019. This ~~increase~~ was primarily due to a ~~$908 million~~$0.6 billion, or 24% increase in ~~economic hedges~~derivatives related to ~~commercial loan~~ interest rate ~~swaps. The~~swaps on commercial ~~loan interest rate swap derivatives include back to back~~loans, including customer swaps and back-to-back hedges with national ~~bank counterparties, along~~counterparties. This growth included swaps acquired with ~~risk participation agreements with dealer banks. This represents a 43% increase related~~SI Financial.

Shareholders’ Equity:Shareholders’ equity increased by $206 million, or 13%, in 2019 due primarily to ~~strong customer demand during~~ the ~~year. Derivatives related to mortgage banking decreased~~issuance of $176 million in common stock as SI Financial merger consideration. Retained earnings contributed $52 million, which was offset by ~~$115~~$53 million ~~during the year~~in stock repurchases. Other comprehensive income contributed $25 million, which was primarily due to aunrealized gains on investment securities reflecting the price impact of lower ~~volume of mortgage originations. The net fair value of derivatives decreased to $2 million from $3 million during the year due to the lower mortgage pipeline volume~~interest rates at year-end ~~2018.~~2019.

~~Stockholders’ Equity.Berkshire pursues~~The Company’s Board approved a ~~balance of~~2.4 million share one year stock buyback program in March 2020. Repurchases are subject to market conditions and the Company’s financial condition, among other factors. Repurchases are targeted in part as a means to return excess capital to maintain financial soundness while using common equity efficiently with the goal to produce a strong return on equity and a strong return on tangible equity to support opportunities for franchise growth. Long run growth in dividends and in both book value and tangible book value per share are also viewed as elements for shareholder value creation. A sound capital structure reduces risk and enhances shareholder return and access to capital markets to support the Company’s banking activities and the markets that it serves. In its payment of dividends, management of treasury shares, issuance of equity compensation, and balancing of capital sources, the Company strives to achieve a capital structure that is attractive to the investment community and which satisfies the policy and supervision purposes of the Company’s regulators. When Berkshire negotiates business combinations, it generally targets to use its common shares as a significant component of merger consideration and to balance the mix of cash and stock to arrive at targeted capital metricsshareholders based on the characteristics of the combined banks. The Company’s common stock is listed on the New York Stock Exchange. Its preferred shares are non-voting conditionally convertible stock owned by one holder which is also the Company’s largest non-institutional holder of common stockcapital freed-up as a result of the ~~Commerce acquisition. These holdings are restricted pursuant~~asset reductions being undertaken as a result of its strategic review. Repurchases were begun in June. As of year-end 2019, the Company had repurchased 1.726 million shares at an average price of $30.56 per share.

The Company’s goal is to ~~an agreement filed with~~maintain or improve capital metrics while returning excess capital to shareholders. For the ~~SEC.~~

~~Total shareholders’ equity increased by $57 million (or 4%)~~year 2019, the ratio of equity/assets improved to ~~$1.6 billion in 2018 primarily due to the benefit of retained earnings.~~13.3% from 12.7%. The non-GAAP measure of tangible equity increased by 7% based on internal capital generation, and slightly exceeded the 6% increase in total assets. The Company focuses on its internal generation of tangible equity to support growth and dividends, as well as to support merger and other non-operating charges. The ratio of

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~~equity to assets decreased to 12.7% from 12.9%, and the~~ non-GAAP ratio of tangible equity to tangible assets improved to 9.2% from 8.6%. The Company has a capital planning policy, including a framework conforming to regulatory expectations for annual stress testing and reporting. Capital stress testing generally follows the mandatory process required for larger banks. The Company’s policy is to maintain sufficient capital such that the modeled ratios remain above the well capitalized benchmarks in the severely adverse maximum stress scenario. The capital policy targets a capital plan that provides adequate capital to support the Company’s three year strategic plan. The policy, plan, and stress test results are annually reviewed by management and Board committees responsible for risk oversight.

Subsequent to year-end, 521,400 unregistered common shares were issued from treasury for the conversion of approximately half of the outstanding participating preferred shares in accordance with the contracted conversion terms. The common equivalent impact of these shares has previously been included in operating results per share.

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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

Summary:Revenue and expense in 2019 included the SI Financial operations acquired on May 17, 2019. As a result, many categories of revenue and expense increased in 2019 over the same period of 2018. Additionally, operations in 2019 included the benefit of restructuring actions in both years, and the benefit of the acquired Commerce Bank operations which were being fully integrated in the first half of 2018. Earnings per share reflected the shares issued as merger consideration for the SI Financial acquisition. References to revenue and expense in this discussion are generally related to continuing operations unless otherwise noted. In 2019, The Company designated its FCLS national mortgage banking operations as discontinued and the financial statements in all periods reflect this designation.

The comparison of operating results was previously discussed in the introductory summary of Management’s Discussion and Analysis. Year-over-year profitability declined primarily due to the $16 million charge related to the write-off of one commercial loan due to alleged fraud. Profitability was also adversely impacted by a lower net interest margin due to the decline in purchased loan accretion, which had been anticipated, as well as the impact of lower interest rates on the Company’s asset sensitive balance sheet. Total purchase accounting accretion decreased to $14 million in 2019 from $23 million in 2018. The Company undertook various initiatives following its strategic review, which has previously been described, to help mitigate these margin impacts. Operating results were also lower due to higher merger charges related to the completion and integration of the SI Financial acquisition.

The Company measures the non-GAAP financial measure of adjusted earnings to focus on earnings related to ongoing operations and excluding items described in the reconciliation of non-GAAP financial measures which was set forth in an earlier section of this report. Adjusted earnings per share declined by 14% for the year, and were down 6% excluding the impact of the above-noted loan write-off.

The Company’s return on equity was 5.7% in 2019, compared to 6.8% in the prior year. Its non-GAAP measure of adjusted return on tangible common equity was 11.3% compared to 13.5% for these respective periods. The Company focuses on this measure as important to its shareholder value, as well as measuring its internal capital generation to support operations, dividend growth, and its capital metrics supporting the balance sheet.

Revenue:Net revenue from continuing operations increased in 2019 by $19 million, or 4%, to $449 million in 2019 compared to the prior year, including acquired SI Financial operations. This increase was divided between net interest income and non-interest income. The SI Financial operations reported 2018 net revenue of $56 million in 2018; these operations were acquired on May 17, 2019. The first year pro forma revenue benefit of the SI Financial combination as set forth in the notes to the financial statements indicates a proforma full year revenue benefit of $67 million, including an estimated $11 million benefit from purchase accounting accretion. On a per share basis, net revenue decreased by 2% to $9.09 in 2019 from $9.31 in 2018, primarily reflecting the decrease in the net interest margin. Annualized revenue per share measured $9.05 in the final quarter of 2019.

Net Interest Income: Net interest income from continuing operations increased by $9 million, or 3%, in 2019 compared to 2018. This growth was due to a 9% increase in average earning assets, which was partially offset by a decrease in the net interest margin. The increase in average earning assets included the impact of approximately $1.48 billion in earning assets acquired from SI Financial on May 17. This was offset by a net decline in other average earning assets due to the Company’s strategic initiative to reduce less strategically important loans and investments in order to decrease expensive wholesale funding sources and related leverage.

The net interest margin decreased year-over-year to 3.17% from 3.40%, and the contribution from purchase accounting accretion decreased to 0.12% from 0.22%. The margin decreased further to 3.11% in the final quarter of the year, including a 0.17% contribution from purchase accounting accretion. The benefit of purchase accounting accretion decreased primarily due to the seasoning of purchased credit impaired loans from prior bank acquisitions. Purchase accounting accretion also benefited from accretion related to acquired SI Financial time deposits, which are contributing approximately 7 basis points per quarter accretion benefit which is scheduled to mature in the second quarter of 2020. Recoveries of purchased credit impaired loans have been a primary source of purchased loan accretion in recent years. Under the new CECL accounting standard, future purchased loan recoveries will be posted to the loan loss allowance rather than to interest income.

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The yield on earning assets measured 4.47% in both 2019 and 2018, despite the decrease in purchased loan accretion. The cost of funds increased to ~~8.6%~~1.31% from ~~8.5%~~1.11%. These results included the impacts of interest rates that were rising in much of 2018 and then falling for the much of 2019, as well as the impact of the SI Financial acquisition. The fourth quarter yield on earning assets decreased to 4.27% from 4.64%, while the fourth quarter cost of funds decreased to 1.23% from 1.31%. These results included the benefit of the Company’s strategies to reduce the reliance on higher cost wholesale funding. The quarterly net interest margin decreased from 3.41% in the fourth quarter of 2018 to 3.17% in the first quarter of 2019 due to a decline in purchased loan accretion from a relatively high level in the fourth quarter of 2018. The quarterly margin decreased further to 3.11% in the fourth quarter of 2019, primarily due to the impact of unexpected market interest rate cuts on the Bank’s asset sensitive balance sheet profile and the continued flattening of the yield curve throughout 2019.

Non-Interest Income. Non-interest income from continuing operations increased by $10 million, or 13%, in 2019 compared to 2018 due primarily to an $8 million swing in unrealized securities gains/losses which the Company views as non-operating in nature. Fee income increased by $3 million, or 4%, including the benefit of acquired operations. One major component of this income is SBA loan sale gains. Berkshire’s 44 Business Capital business generated record revenue in 2019. For the SBA fiscal year ended September 30, 2019, Berkshire’s team ranked as the 18^th largest lender in the country for SBA 7A loan originations, advancing from 28^th position in the prior SBA fiscal year. The category of Other Non-Interest Income includes income accrued on bank owned life insurance as well as any death benefits paid. This category also includes the amortization of tax credit investments related to tax credit benefits recorded to income tax expense.

Provision for Loan Losses. The provision increased year-over-year by $10 million, or 39%. As previously discussed, the Company is planning to adopt the new CECL accounting standard at the beginning of 2020. The posting of purchased credit impaired loan recoveries to the loan loss allowance under CECL may have the impact of reducing the provision for loan losses in this regard, compared to current accounting principles.

Non-Interest Expense.Non-interest expense from continuing operations increased year-over-year by $23 million, or 9%, including acquired operations. Merger related expense included the completion of the SI Financial merger. The Company focuses on its non-GAAP financial measure of adjusted expense which excludes merger charges and other items set forth in the reconciliation of non-GAAP measures. Adjusted expense increased by $17 million, or 7%.

Expenses in 2019 benefited from $3 million in FDIC premium rebates as a result of a return of FDIC reserves to smaller U.S. banks. Professional services expense increased due to legal cost and settlements. The category of other expense increased due to uninsured losses on check items as well higher loan workout expense. The full year efficiency ratio moved unfavorably to 55.6% in 2019 from 53.6% in 2018. The full efficiencies from the merger were not achieved until the fourth quarter of 2019.

Full-time equivalent staff in continuing operations totaled 1,550 positions at period-end, compared to 1,485 at year-end 2018; SI Financial reported approximately 284 full time equivalent positions at that date. At year-end 2019, full-time equivalent staff in the national mortgage banking operations designated as discontinued total 323 positions, compared to 432 positions at the start of the year.

Merger expenses recorded in 2019 related to the SI Financial acquisition, included severance expense, legal and professional transaction costs, and contract termination costs. Restructuring costs included employee severance, lease terminations, and contract termination costs related to the Company’s efficiency projects and branch consolidations. The loss from discontinued operations related to the Company’s national mortgage banking operations held for sale, including the write-down of related mortgage servicing right assets.

Income Tax Expense. Income taxes are discussed in a note to the Consolidated Financial Statements; this note is important to an understanding of the results of operations. The effective tax rate measured 18% in 2019, compared to 21% in 2018. As set forth in the tax note, this reflected the proportionate benefit of tax advantaged income on lower pretax earnings, along with structural changes in the Company’s tax position, including the impacts of the SI Financial acquisition.

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Discontinued Operations. As part of its strategic review, the Company ~~had~~decided at the beginning of 2019 to attempt to sell its national mortgage banking operations. These operations are not viewed as central to the Company’s current community banking focus. These operations have been reclassified as discontinued operations for financial statement presentation purposes for all periods shown in the financial statements. These operations became unprofitable in 2018 as a ~~pending agreement~~result of depressed industry conditions due to ~~acquire SI~~lower market demand for mortgages as interest rates rose in that period. While industry conditions improved in 2019 as interest rates moved downwards during the year, these operations continued to operate at a loss. The net loss was equivalent to $0.08 per share in 2019, compared to $0.07 per share in 2018. Total revenue improved to $41 million in 2019 from $39 million in 2018, but remained below the $55 million recorded during the profitable year of 2017. Most of the $5.5 million pretax loss in 2019 was due to a $4.5 million charge to write-down mortgage servicing rights based on market indications at year-end.

Total Comprehensive Income. Total comprehensive income includes net income together with other comprehensive income. Other comprehensive income is principally driven by unrealized gains/losses in the investment portfolio, which primarily reflect the impact of point-in-time interest rates on capital market prices. Falling interest rates at year-end resulted in $25 million in other comprehensive income for 2019, while rising year-end interest rates resulted in a $12 million other comprehensive loss in 2018. When combined with net income reported in those years, total comprehensive income was $123 million in 2019, compared to $93 million in 2018.

Quarterly Results. Quarterly results for 2019 and 2018 are presented in a note to the Consolidated Financial ~~Group. If~~Statements. Results for all of these periods have been discussed in previous SEC Forms 10-Q and 10-K, except for operations in the fourth quarter of 2019. Prior SEC filings for 2018 presented results including national mortgage banking operations in continuing operations, rather than as discontinued operations as shown in the quarterly results footnote in the 2019 financial statements. The second and third quarters of each year are often the strongest quarters due to generally higher business activity during the spring and summer. Quarterly results also vary depending on the timing of expenses that are excluded from the measure of adjusted earnings, including merger ~~is completed, each outstanding share~~related expenses. Quarterly results are also affected by the timing of recoveries of purchased credit impaired loans as well as changes in the loan loss provision. The third quarter of 2019 was the first full quarter to include the operations of SI Financial, ~~common stock will be converted into the right to receive 0.48 shares of the Company's common stock. The Company expects to issue approximately 5.7 million shares as merger consideration.~~

which was acquired on May 17, 2019.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Summary: Berkshire achieved record revenue, earnings, and return on assets in 2018. GAAP results included significant charges viewed as non-operating. Based on its non-GAAP adjusted measures, ~~discussed below,~~ Berkshire produced improvement in its earnings per share and ROA ~~measures, which are its primary strategic focus.~~

measures. Berkshire’s national mortgage banking operations have been retroactively classified as discontinued for these periods. Net income increased in 2018 by $51 million, or 91%, to $106 million. Adjusted net income increased ~~by $35~~to $129 million ~~or 38%, to $125~~from $91 million. On a per share basis, net income increased by 65% to $2.29 and adjusted net income per share increased by ~~$0.42, or 18%,~~22% to ~~$2.71. This adjusted earnings per share result was consistent with the Company’s plan at the start of the year.~~$2.79.

Operations in 2018 benefited from the lower federal tax rate, which reduced the Company’s effective tax rate by an estimated 10.8%. ~~This benefited~~Results of discontinued operations have been excluded from adjusted net income by approximately $17 million, or $0.37 per share, and contributed significantly to the year-over-year targeted increase in per share results. This target took into account an estimated $0.03 per share cost of an increase in the minimum wage to $15/hour which was adopted by the Company when the federal tax reform was announced. It also considered the impact of the tax reform on market pricing margins and on the supply and demand for tax advantaged revenue sources, both of which were expected to be adversely affected by tax reform.income.

The operating results of the Company further benefited from a full year of fully integrated First Choice operations in the Mid Atlantic and a partial year of the fully integrated Commerce operations in Eastern Massachusetts. The successful integrations of these business combinations were a critical focus for the Company. Operating results also benefited from organic loan growth and improved efficiency resulting from increased business scale. Additionally, most restructuring actions were expected to benefit subsequent earnings, including restructuring actions in 2017 and 2018.

Operating results ~~were negatively impacted by the $19 million decrease in mortgage banking revenue due to lower demand and heightened competition. This negative impact was significantly offset by~~benefited from higher purchased loan accretion resulting from unanticipated high levels of recoveries of purchased credit impaired loans. Total purchased loan accretion measured $23 million in 2018, compared to $15 million in the prior year. The Company expects that the contribution from purchased loan accretion will decrease significantly in 2019 and later years. A strategic review has been initiated to identify opportunities to offset the negative impact of this reduction and lower mortgage banking revenue on earnings in 2019 and beyond.

~~The~~ GAAP return on assets improved to 0.90% in 2018, while the non-GAAP adjusted return on assets measured ~~1.07%~~1.12%. The return on equity improved to 6.8%, while the non-GAAP measure of adjusted return on tangible common equity improved to 13.5%. ~~This latter ratio is an important measure of the generation of internal capital to support organic growth and dividends.~~ The efficiency ratio improved to ~~58.3%~~53.6% from ~~60%~~60.0%.

~~As noted previously, Berkshire uses a non-GAAP measure~~

Table of ~~adjusted net income to supplement its evaluation of its operating results.~~ Contents

Adjusted net income excludes certain amounts not viewed as related to normalized operations. These items are primarily related to acquisition expenses. Berkshire views its net acquisition related costs as part of the economic investment for its acquisitions. These investments are intended to contribute to long term earnings growth and franchise value. Other significant charges excluded in 2018 were related to the core systems contract restructuring, a legal settlement, and the CEO transition. Charges excluded from the 2017 adjusted earnings measure included contract termination costs for premises restructuring and the termination of hedges. These were mostly offset by the realization of gains on the sale of equity securities. The Company also recorded an $18 million charge in 2017 for the provisional write-down of its net deferred tax asset following the enactment of federal tax reform near year-end. ~~This reform was viewed as positive for shareholder value due to the reduction in the federal statutory~~

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tax rate beginning in 2018. Berkshire also makes references to adjusted revenues and adjusted expenses in its discussion of operating results. Please see the Non-GAAP reconciliation section of this report for more discussion and information about adjusted net income and other non-GAAP financial measures discussed in this report.

Operations in 2018 included purchased loan accretion totaling $23 million, which accounted for approximately 17% of pre-tax earnings. The contribution in 2017 was $15 million. The Company expects that the contribution from purchased loan accretion will decrease significantly in 2019 and later years. A strategic review has been initiated to identify opportunities to offset the negative impact of this reduction on earnings in 2019 and beyond.

Berkshire’s 2018 results included the Commerce operations acquired in October 2017, and systems conversion and merger integration activities were completed by midyear 2018. Due to the Commerce acquisition, most measures of revenue, expense, income, and average balances increased in 2018 compared to 2017. The year 2018 was also the first full year of the fully integrated First Choice operations, which were acquired in December 2016 and fully integrated by midyear 2017. Per share measures were affected by the issuance of shares as merger consideration. Both of these acquisitions were targeted to be accretive to earnings and earnings per share when fully integrated, and to provide a long term double digit return on equity.

Total Net Revenue. Berkshire evaluates its top line with the measure of net revenue, which is the sum of net interest income and non-interest income. The Company also measures adjusted net revenue and adjusted net revenue per share in evaluating its growth strategies, operations, and strategies for generating improved profitability.

Total net revenue increased in 2018 ~~by $49~~to $431 million ~~or 12%, to $469 million. On a pro-forma basis, as set forth~~from $365 million in ~~the~~ 2017, ~~Consolidated Financial Statements, total 2017 revenue~~ including the Commerce operations measured $480 million. Operations in 2018 resulted in a revenue decline from this pro forma 2017 amount, with a positive net interest income variance which was more than offset by a decline in mortgage banking revenue. Organic loan growth produced a $13 million increase in net interest income to $359 million in 2018 compared to the $345 million pro forma 2017 amount. Non-interest income in 2018 totaled $110 million, compared to $135 million in the 2017 pro forma statement. This decrease was primarily due to a $19 million year-over-year decrease in mortgage banking revenue. Total revenue per share increased by 4% to $9.85 in 2018 compared to $9.44 in 2017.

~~Net Interest Income.~~ Net interest income is the primary contributor to revenue. Berkshire targets growth in net interest income based on increased business volumes related to market share gains in its markets. Pricing disciplines for loans and deposits target a balance of market share and profitability objectives, while taking into account credit, liquidity, and interest rate sensitivity objectives. The Company also borrows to fund an investment portfolio to contribute to income and profitability, together with other balance sheet objectives. Assets and liabilities acquired in business combinations are marked to market for carrying value and yield, and balance sheet adjustments are often made at or following the acquisition date to integrate the acquired balance sheet with the Company’s balance sheet. Net interest income includes significant components related to the amortization of purchase accounting adjustments and deferred items. The most significant component is purchased loan accretion related to recoveries on the resolutionbenefit of acquired impaired assets, where Berkshire has regularly posted significant gains that are included in net interest income. These gains are difficult to forecast and are highly variable from quarter to quarter, and generally reflect the Company’s strong asset management capabilities and strong focus on resolving purchased credit impaired loans. The chief focus of the Company’s market risk assessment in the sensitivity of net interest income to changes in interest rates.

Commerce operations. Net interest income increased ~~by $65~~to $431 million ~~or 22%, to $359 million in 2018 compared to $295 million in 2017 and to $345 million in the pro forma 2017 statement. This~~from $365 million. Net interest income growth was due to the ~~20%~~ increase in average earning assets, including the benefit of the Commerce assets, together with organic loan growth in 2018. The net interest margin was unchanged at 3.40% in both 2018 and 2017. Measured before accretion, the net interest margin decreased in the second half of the year as higher cost borrowings were used to fund loan growth. The contribution from purchased loan accretion measured 0.22% in 2018 and 0.17% in 2017. This contribution is expected to decrease significantly beginning in 2019. The $23 million in total purchased loan accretion in 2018 included approximately $18 million related to Commerce loans and $4 million related to First Choice loans. The $23 million in 2018 accretion included approximately $12 million of recoveries, $7 million of scheduled purchased impaired

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loan accretion, and $4 million in accretion related to the interest rate mark on non-impaired loans. The balance of accretable yield on purchased credit impaired loans totaled $3 million at year-end 2018 compared to $12 million at the start of the year.

The margin before accretion in the final quarter of the year measured 3.11%. Due to higher market interest rates, most categories of loans and deposits had higher interest rates in the fourth quarter of 2018 compared to the same quarter of 2017. The fourth quarter yield on earning assets before loan accretion increased year-over-year by 0.30% to 4.35%. Higher growth in lower yielding residential mortgages partially offset the gain in yield from higher interest rates. The fourth quarter cost of funds increased over this interval by 0.50% to 1.31% from 0.81%. The cost of deposits increased by 0.41% to 1.07%. This deposit cost increase was within the range of the Company’s estimates of interest rate sensitivity.

Berkshire’s sensitivity to interest rates is discussed in Item 7A. Generally, its loan assets tied to LIBOR and prime adjust quickly to interest rate increases, as do short term borrowings, while deposit rates move in line with market forces which have been slower to react. The competitive environment in the northeast pressured spreads on both loans and deposits during the year.

~~Non-Interest Income~~. Most of Berkshire’s non-interest income is fee income, including various revenue sources related to its operations. Berkshire focuses on fee income to build more enduring customer relationships, to diversify away from potential volatility in net interest income, and to increase return on assets and on equity. Fee income is the primary revenue source for two of the Company’s national lending businesses - mortgage banking and SBA lending. Both of these business lines originate loans primarily for sale into the secondary market, and their sales gains are included as a component of fee income.

Fee income decreased by $13 million, or 11%, in 2018 due to a $19 million, or 35%, decrease in mortgage banking revenue. This reflected a downturn in industry demand and increased competition as the industry goes through consolidation due to widespread operating losses. Additionally, fintech providers have gained more market share with their digital offerings. The 35% decrease in mortgage banking revenue was partially offset by expense reduction, including a reduction in the range of 20-25% in mortgage banking FTE staff over the last year. Berkshire’s total loans originated for sale decreased by 15% to $2.0 billion.

Loan related fee income increased by 13% and deposit related fee income increased by 10% in 2018. The $24 million in loan related fees included a record $9 million in SBA loan sale gains as Berkshire’s team further improved its position among the top 30 SBA 7(a) loan producers in the U.S. Due to the federal government partial shutdown at the end of 2018, some SBA loan originations could not be certificated for sale in the fourth quarter.Commercial loan interest rate swap fees also increased to a record $9 million as demand for fixed rate swaps increased in the environment of rising interest rates. Deposit related fees increased to $30 million including the acquired Commerce operations. In crossing the $10 billion asset regulatory threshold, the Bank lost card related fee income as a result of price restraints mandated by the Durbin Amendment to the Dodd-Frank Act. The Company estimates that this reduces card fee income by $5 million per year, and it became effective on July 1, 2018.

Other non-interest income in 2017 included $13 million in gains realized on the sale of equity securities and a $7 million loss on the termination of interest rate hedges. Berkshire recorded $4 million in unrealized equity securities losses in 2018 based on new accounting rules effective in 2018 requiring that current period unrealized equity security gains and losses be recorded to current period income. The 2018 losses were a result of a market reduction in bank equities' prices in the second half of the year. Securities gains/losses and hedge termination costs are excluded from the Company’s non-GAAP adjusted earnings measure. The category of Other Non-Interest Income includes income accrued on bank owned life insurance as well as any death benefits paid. This category also includes the amortization of tax credit investments related to tax credit benefits recorded to income tax expense. The category of Other Non-Interest Income category swung from a $3 million net charge in 2017 to a $4 million credit toNon-interest income in 2018 ~~due primarily to lower tax credit investment activity~~remained flat at $74 million. An increase in fee income was offset by a change in gains/losses from securities and ~~higher insurance death benefit income.~~from hedge terminations.

Provision for Loan Losses. The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company. The level of the allowance is a critical

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~~accounting estimate, which is subject to uncertainty. The level of the allowance was included in the discussion of financial condition.~~ The provision for loan losses increased by $4 million, or 21%, to $25 million in 2018. The provision for loan losses exceeded net loan charge-offs and resulted in an increase in the loan loss allowance to 0.68% of total loans at year-end, compared to 0.62% at the start of the year.

Non-Interest Expense. ~~Berkshire’s goal~~Including the acquired Commerce operations, total non-interest expense increased to $267 million in 2018 from $253 million in 2017. Full time equivalent staff at year-end 2018 totaled 1,917 positions including 432 national mortgage banking positions. This is down from 1,992 positions including 513 national mortgage banking positions at year-end 2017. Excluding mortgage banking, all other FTE staff was essentially flat, with Commerce related reductions offset by staff recruitment to ~~generate positive operating leverage, growing revenues through business~~support Eastern Massachusetts expansion and ~~maintaining expense management disciplines. Non-interest expense increases have generally been related~~infrastructure to the Company’s growth, including the impact of acquisitions. The Company also invests in building its infrastructure and adding to its market teams, with a focus on fee generating business lines, as part of its long term strategy to occupy a leading position as a regional provider in its footprint. Additionally, the Company has invested in the increased compliance and risk management resources required for banks atsupport operations above the $10 billion ~~threshold established in the Dodd Frank Act.~~

asset size. Non-interest expense includes amounts viewed by the Company as not related to ongoing operations. These expenses are excluded from the Company’s non-GAAP measure of adjusted expense. The primary component of these expenses is merger related expense, which totaled $9 million in 2018 and $25 million in 2017. Merger expenses were primarily related to the Commerce acquisition in 2018 and the First Choice combination in 2017. For both of these business combinations, the Company estimates that merger costs were within its original projections. In 2018, other expenses excluded from adjusted expenses included $8 million for core systems contract restructuring costs, $3 million for a legal settlement, and $1.5 million for the CEO transition. The core systems restructuring included a full core systems technology assessment and a competitive vendor selection process. The restructured contract is targeted to provide more flexibility in developing technology and integrating third party solutions, together with improved efficiency and lower costs related to growth. The Company recorded restructuring and other expense totaling $7 million in 2017, which was primarily related to premises lease terminations as the Company has reduced its rented space. In 2017, the Company recorded $3 million in employee and community investment expense for initiatives undertaken due to the federal tax reform. Total expenses excluded from the measure of adjusted expenses totaled $22 million in 2018 and $35 million in 2017.

Including the acquired Commerce operations, total non-interest expense increased by $11 million, or 4% in 2018. Adjusted expense, excluding the items discussed above, increased by $23 million, or 9%. Expenses in 2018 benefited from a full year of First Choice cost saves, which were targeted at $15 million annualized and a partial year of Commerce cost saves, which were targeted at $8 million. For both mergers, the Company estimated that it met or exceeded its targets for merger related cost saves. Expenses in 2018 also benefited from the restructuring projects in both 2017 and 2018. The efficiency ratio improved to 58.3% in 2018 from 60.0% in 2017. The Company’s current strategic review includes a focus on line of business profitability and expense structure with an objective to achieve the targeted efficiency ratio of 60% or better despite revenue pressures previously noted. Full time equivalent staff at year-end 2018 totaled 1,917 positions including 432 mortgage banking positions. This is down from 1,992 positions including 513 mortgage banking positions at year-end 2017. Excluding mortgage banking, all other FTE staff was essentially flat, with Commerce related reductions offset by staff recruitment to support Eastern Massachusetts expansion and infrastructure to support operations above the $10 billion asset size.

Income Tax Expense. ~~Income taxes are discussed in a note to the Consolidated Financial Statements; this note is important to an understanding of the results of operations.~~ The effective tax rate measured 21% in ~~2018 for both GAAP income and adjusted income.~~2018. The GAAP tax rate of 45% in 2017 included the $18 million charge to write-down the net deferred tax assets as a result of the federal income tax reform near year-end. Before this charge, the effective tax rate in 2017 was 26%. As previously noted, federal income tax reform reduced the Company’s effective tax rate in 2018 by an estimated 11% compared to what it would have been without tax reform.Without this tax reform, the Company’s effective tax rate would have increased in 2018 due to

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its larger size and higher pretax income in relation to the tax advantaged income sources consisting primarily of tax exempt investment income, life insurance income, and investment tax credits.

~~Total Comprehensive Income.~~ ~~Total comprehensive income includes net income together with other comprehensive income. Other comprehensive income was a loss due mainly to unrealized losses on bonds in the investment~~

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~~portfolio as interest rates have increased over the last two years. Net of this unrealized loss, total comprehensive income was $93 million in 2018 and $50 million in the prior year.~~

~~Quarterly Results.~~ Quarterly results for 2018 and 2017 are presented in a note to the Consolidated Financial Statements. Results for all of these periods have been discussed in previous SEC Forms 10-Q and 10-K, except for operations in the fourth quarter of 2018. The second and third quarters of each year are often the strongest quarters due to seasonal mortgage banking volume and higher general business activity during the spring and summer. Quarterly results also vary depending on the timing of expenses that are excluded from the measure of adjusted earnings, including especially merger related expenses. Quarterly results are also affected by the timing of recoveries of purchased credit impaired loans. The first quarter of 2017 was the first full quarter including the First Choice operations acquired in December 2016. The first quarter of 2018 was the first full quarter including the Commerce operations acquired in October 2017. The Company’s non-GAAP measure of adjusted earnings per share showed results generally improving sequentially due to positive contributions from acquisitions, organic growth, and tax reform. Quarterly EPS peaked in the second quarter of 2018 and subsequently declined due to growing weakness in mortgage banking and rising funding costs. The Company initiated a strategic review at the beginning of 2019 as a result of potential further pressure on operating results due mainly to an expected decrease in purchased loan accretion.

~~COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016~~

~~Summary:~~ Berkshire’s results in 2017 included growth from acquisitions and a significant amount of charges, viewed as non-operating, which depressed GAAP results. Based on its adjusted measures, discussed further below, Berkshire produced improvement in its earnings per share and ROA measures, which are its primary strategic focus.

Berkshire’s 2017 results included the First Choice operations acquired in December 2016, including the targeted efficiencies which resulted from the integration of these operations in 2017. Results also included the Commerce operations acquired in October 2017, and the Company is targeted efficiencies in 2018 from integration of those operations. Due to these business combinations, most measures of revenue, expense, income, and average balances increased in 2017 compared to 2016. Additionally, per share measures were affected by the issuance of shares as merger consideration, together with the stock offering in May 2017 which was simultaneous with the Commerce announcement. All acquisitions were targeted to be accretive to earnings and earnings per share when fully integrated, and to provide a long term double digit return on equity.

Net income decreased in 2017 by 6% to $55 million, while adjusted net income increased by 33% to $91 million. On a per share basis, net income decreased by 26% to $1.39, while adjusted net income increased by 4% to $2.29. The Company targets ongoing improvement in this measure to benefit from its investments in organic growth and acquisitions, and to improve profitability. Return on assets decreased by 24% to 0.56%, while adjusted return on assets increased by 8% to 0.93% as the Company moved closer to its target of 1.00% or higher. The federal tax reform and efficiencies from the Commerce integration were targeted to support further improvement in this measure in 2018.

The return on equity decreased by 31% to 4.5% while the adjusted return on equity decreased by 3% to 7.3% due to the excess equity on hand in 2017 while the Commerce merger was pending. The return on tangible common equity decreased by 5% to 11.8% due to the excess equity but continued to be important as a source of internal capital generation to support organic growth and dividends. The efficiency ratio increased by 3% to 60.0% due to the first full year including the acquired First Choice mortgage banking operations, which operate with narrower margins common to this business. Berkshire estimated that the efficiency of operations excluding mortgage banking improved to approximately 56%. This reflected the benefit of ongoing scale efficiencies and was achieved despite the higher regulatory cost burden as the Company crossed the $10 billion regulatory asset threshold.

~~Total Net Revenue.~~ Total net revenue increased in 2017 by $122 million, or 41% to $420 million. On a pro-forma basis, as set forth in the Consolidated Financial Statements, total 2017 revenue including the Commerce operations reached $480 million, with non-interest income providing 28% of total revenue. Revenue growth in 2017 included a 27% increase in net interest income and a 79% increase in fee income. Total revenue per share increased by 11% to

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$10.59, and on a pro forma basis with Commerce this measure increased to $10.81. These changes indicated the combined impact of the Commerce and First Choice acquisitions on Berkshire’s scale and business mix.

~~Net Interest Income.~~ Annual net interest income increased by $63 million, or 27%, in 2017. As noted in the pro-forma statements in the Company’s SEC filings, the business combinations in 2016 were estimated to add $36 million in net interest income in the first year of combined operations based on the assumptions set forth therein. The Commerce pro forma estimated that it would add up to $20 million per quarter in revenue in the first year; the Company owned Commerce operations for most of the fourth quarter of 2017. Interest income also increased as a result of 8% organic increase in loans, funded primarily by the 6% organic increase in deposits. The 27% increase in net interest income was attributable to the 23% increase in average earning assets and the 3% increase in the net interest margin.

The net interest margin increased throughout 2017 from 3.21% in the fourth quarter of 2016 to 3.50% in the fourth quarter of 2017. The margin for the year improved to 3.40% in 2017 from 3.31% in 2016. Factors that contributed to the improvement in the margin included the mix shift towards higher yielding commercial loans, the increase in interest rates, the termination of the fixed payment cash flow hedges, generally low deposit betas (indicating low sensitivity to interest rate changes), and the benefit of purchase accounting initially related to First Choice and then to Commerce. The yield on earning assets increased for the year to 4.16% from 3.93%, while there was a smaller increase in the cost of funds to 0.77% from 0.69%.

The Company measures the impact of purchased loan accretion on the net interest margin. This accretion totaled $15 million and contributed 0.17% to the margin in 2017, compared to $8 million and 0.11% in 2016. The recognition of accretion depends on strategies for managing purchased credit impaired loans which have significantly benefited net interest income but which are uncertain and may vary from quarter to quarter. The Company has also benefited from the amortization of discount on purchased time deposits, which is mostly recognized in the first year or two following a merger.

~~Non-Interest Income~~. Fee income increased by $54 million, or 79% in 2017, and totaled $123 million for the year. Mortgage banking fees increased by $47 million to $54 million, representing the first full year of the acquired First Choice national mortgage banking operations. Berkshire originated $2.4 billion in total held for sale mortgages in 2017.

Loan fees increased by $5 million to $21 million. Loan fees in 2017 included $9 million in SBA loan sale gains, $5 million in commercial loan interest rate swap fees, $3 million in gains on the sale of seasoned mortgages, and $2 million in asset based lending fees. The increase was primarily due to higher SBA loan volumes, and included increased cross-sale activities among the lending groups. Deposit related fees increased by $2 million, or 9%, to $27 million including the First Choice and Commerce contributions.

Non-interest income in 2017 included $13 million in securities gains, a $7 million charge for the loss on the termination of hedges, and $3 million in other net charges. The securities gains were due to the equity securities sales described previously in the investment securities section. The loss on the termination of hedges was described previously in the derivative securities section. The $3 million in other net charges was due to a $9 million charge for the amortization of tax credit investments, which was more than offset by benefits to income tax expense as further discussed below. This charge was partially offset by $4 million in accrued income on bank owned life insurance contracts.

~~Provision for Loan Losses.~~ The provision for loan losses increased by $4 million, or 21%, to $21 million in 2017. The provision for loan losses exceeded net loan charge-offs and resulted in an increase in the loan loss allowance due to portfolio growth.

~~Non-Interest Expense.~~ Non-interest expense includes amounts viewed by the Company as not related to recurring operations. These expenses are excluded from the Company’s non-GAAP measure of adjusted expense. The primary component of these expenses is merger related expense, which totaled $25 million in 2017 and $14 million in 2016. These expenses related mostly to the Commerce and First Choice acquisitions. The Company had targeted $32

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million in Commerce merger related expenses, of which $21 million was recorded in 2017. The Company recorded restructuring and other expense totaling $7 million in 2017 and $2 million in 2016, which was primarily related to premises lease terminations as the Company has right sized its facilities. In 2017, the Company recorded $3 million in employee and community investment expense for initiatives undertaken due to the federal tax reform. Total expenses excluded from the measure of adjusted expenses totaled $35 million in 2017 compared to $16 million in 2016.

Total non-interest expense increased by $96 million, or 47%, to $300 million in 2017. Adjusted expense, excluding items discussed above, increased by $77 million, or 41%, to $265 million. The largest expense growth was in compensation (46%), premises and technology (30%), and marketing (276%). The compensation and marketing expense changes were affected by the mortgage banking expense structure, which has higher variable compensation expense and marketing payments related to designated business channels. Expenses benefited from the First Choice integration, which was targeted to result in $15 million in annualized cost savings on completion of integration. The Commerce integration in 2018 was targeted to result in $8 million in such annualized savings. Expenses in 2017 also benefited from the restructuring initiatives early in the year which reduced ongoing overhead costs.

The efficiency ratio increased to 59.97% in 2017 from 58.27% in 2016. The acquired mortgage banking business operates with lower margins and therefore a higher efficiency ratio. The Company estimates that it operated with an efficiency ratio of approximately 56% in 2017 excluding mortgage banking. This demonstrated the ongoing benefit of the Company’s growth strategies. Berkshire had full time equivalent staff totaling 1,992 at year-end 2017, including the Commerce positions which were reported at 226 as of September 30, 2017. Berkshire reported 1,788 full time equivalent staff as of that date. Full time equivalent staff totaled 1,731 positions as of year-end 2016.

~~Income Tax Expense.~~ The effective tax rate increased to 45% in 2017 from 24% in 2016. This included the $18 million charge to write-down the net deferred tax assets as a result of the federal income tax reform near year-end. Before this charge, the effective tax rate in 2017 was 26%.

The Company also measures its effective tax rate on adjusted income as a non-GAAP measure. The Company excluded the $18 million deferred tax provisional write-down from its tax expense in this analysis. The adjusted effective tax rate on adjusted pre-tax income measured 29% in 2017. This adjusted rate exceeded the 26% GAAP rate before the deferred tax charge due to the total net adjustments to GAAP income, primarily from merger charges. These charges resulted in lower GAAP pre-tax income, compared to adjusted pre-tax income. As a result, the GAAP tax rate (before the deferred tax charge) had a higher proportionate benefit from tax advantaged revenues, and therefore was lower than the adjusted rate. This is a normal occurrence for the Company due to its record of acquisitions which result in merger costs that reduce GAAP earnings.

The 29% adjusted income tax rate on adjusted income in 2017 increased from 26% in 2016. This increase primarily reflected the increase in pre-tax adjusted income and the proportionately lower benefit of slower growing tax advantaged sources and a decrease in the benefit from investment tax credit programs. As the Company has grown, ongoing earnings growth has been a normal contributor to changes in the tax rate.

The 29% adjusted effective tax rate on adjusted income in 2017 was 6% lower than the 35% federal statutory rate due to the benefit of items listed in the effective tax rate table in the Consolidated Financial Statements. Federal tax reform reduced the future federal statutory tax rate to 21%, and also adjusted certain other deductions and benefits that impact the overall effective tax rate.

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LIQUIDITY AND CASH FLOWS

Liquidity is the ability to meet cash needs at all times with available cash and established external liquidity sources or by conversion of other assets to cash at a reasonable price and in a timely manner. Berkshire evaluates liquidity at the holding company and on a consolidated basis, which is primarily a function of the Bank’s liquidity.

The Company’s liquidity management focuses on the liquidity of the Bank, primarily to serve the deposit and loan needs of its customers. The Company undertook a focused program in 2019 to improve the liquidity of the Bank. Elements of this program included:

Completing the acquisition of SI Financial, which added a significant source of core deposits viewed as relatively stable.

Reducing less strategically important assets in order to generate funds to pay down potentially more volatile wholesale funding sources which had been used to fund leveraged balance sheet expansion in recent years.

Shifting borrowings to de-emphasize overnight FHLBB advances, using advances with due dates laddered into the future, to minimize the impacts of any potential disruptions in financial market liquidity.

Maintaining more liquid assets on balance sheet, including overnight funds from payroll deposits which had been used to paydown overnight advances.

One general measure of the Bank’s liquidity is the ratio of loans/deposits. This ratio improved to 92% from 101% during 2019. The measure of wholesale funding (borrowings and brokered deposits) decreased to 18% of funding liabilities (deposits and borrowings) from 28%. The ratio of brokered deposits decreased to 11% of funding liabilities from 14%. Unencumbered high quality liquid assets measured 8% of funding liabilities at year-end 2019. Actions taken to improve the liquidity of the balance sheet included runoff of illiquid loan portfolios, extension of wholesale funding maturities, and setting an objective to limit loan growth to the growth rate of core deposits. As part of a comprehensive review and update of funds management and liquidity policies, the Company expanded its liquidity stress management testing and contingency funding plans. The Company also uses national secondary markets to support its lending programs and facilitate the targeted sale of portfolio loans. The Federal Home Loan Bank of Boston ("FHLBB") is the Bank’s primary source of borrowings. The Bank’s total FHLBB unused borrowing availability was $1.6 billion at year-end 2019, compared to $1.2 billion at the start of the year. In recent periods, the Bank has expanded borrowings base of collateral assets to improve eligibility for FHLBB borrowings. The Bank is also expanding its list of approved correspondent banks and the availability of federal funds lines to the Company. The Company maintains cash flow projections over a series of monthly and quarterly time horizons and monitors projected liquidity indicators against established policy objectives. The Bank’s payroll deposit service generates deposits which fluctuate daily based on customer payroll cycles. During 2019, the Bank shifted its liquidity management to maintain more overnight funds on balance sheet rather than reducing borrowings.

The primary liquidity need at the holding company is to support its capital structure, including shareholder dividends and debt service. Additionally, the holding company uses cash to support certain organizational expenses, stock purchases and buybacks, merger related costs, and limited business functions that cannot be performed at the Bank or the insurance subsidiary. The holding company primarily relies on dividends from the Bank to meet its ongoing cash needs. The holding company generally expects to maintain cash on hand equivalent to normal cash uses, including common stock dividends, for at least a one year period. ~~Sources and uses of cash at the parent are reported in the condensed statements of the parent company included in the notes to the Consolidated Financial Statements.~~ There are certain restrictions on the payment of dividends by the Bank ~~as discussed in Note 1 - Shareholders' Equity and Earnings Per Common Share of the Consolidated Financial Statements. This amount is~~ based on retained earnings of the ~~Bank and is expected to be supplemented by future bank earnings in accordance with the statutory formula.~~Bank. Dividends by the holding company require notice and non-objection from the Federal Reserve Bank in the event that earnings are not sufficient to cover the dividend. ~~There~~

In 2019, the Company initiated a stock repurchase program which was ~~no objection to~~funded by additional cash dividends from the ~~dividend declared on fourth quarter operations which resulted in a loss due to~~Bank utilizing the ~~charge recorded due to federal tax reform.~~

proceeds from strategic asset reductions. At year-end ~~2018,~~2019, the holding company had ~~$69~~$74 million in cash and equivalents, compared to ~~$83~~$69 million at the start of the year. The Parent’s cash is held on deposit in the Bank. ~~The Bank paid $46 million in dividends to~~In 2019, the holding company ~~in 2018, which was an increase from $39 million in 2016 due to the increase in common shareholders. The holding company has~~eliminated a ~~$5 million~~small unsecured line of credit which ~~was unused at year-end 2018.~~had been minimally used in recent years. The holding company manages a portfolio of liquid equity securities in support of the consolidated strategy for investments and asset liability management.

The Bank’s primary ongoing source of liquidity is customer deposits and wholesale funding, and the main use of liquidity is the funding of loans and lending commitments. Additional routine sources are repayments of loans and investment securities, and the sale of investment securities. The Bank targets to grow customer deposits by increasing its market share among its regions in order to sustain loan growth as a primary component of its strategy. Deposit strategies also consider relative deposit costs as well as relationship and market share objectives. The Bank’s acquisition strategy is also targeted to supplement business activities including bank acquisitions and acquisitions of branches. Additionally, the Bank utilizes wholesale funding sources, including borrowings and brokered time deposits. Around year-end 2017, the Bank recruited government banking and international banking professionals who are developing municipal, institutional, and commercial deposit sources in the future.

The Company monitors the loans/deposits ratio in assessing directional changes in its liquidity. Deposit concentrations are monitored as well. The Company also monitors the levels of its wholesale funding in relationship to total assets. Brokered deposits can be more volatile than customer deposits depending on Company and economic events. FHLBB borrowings are in the context of standard, long-term FHLB programs but overall availability is constrained by collateral tests.

The Company also monitors the liquidity of investment securities. The Bank relies on its borrowings availability with the FHLBB for routine operating liquidity, and has other overnight borrowing relationships for contingency liquidity purposes. The Bank has improved its collateral management to improve its credit availability with the FHLBB and the Federal Reserve Bank of Boston. The Bank has also expanded its interest rate swaps with national counterparties to provide fixed interest instruments to large commercial borrowers. The Company has strengthened its liquidity planning and management processes in conjunction with its overall growth and regulatory expectations.

In 2018, the Bank’s primary use of funds was loan growth and the primary source of funds was brokered deposits and short term FHLBB borrowings. The Bank’s total FHLBB unused borrowing availability was $1.1 billion at year-end 2018, which was unchanged from the prior year. The Bank scrubbed additional collateral assets for FHLBB eligibility during the year, which offset its higher usage of borrowings. The Bank is also expanding its list of approved correspondent banks and the availability of federal funds lines to the Company. While most investment

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~~securities are pledged as collateral, at year-end 2018, the Bank had $251 million in segregated and unencumbered securities available to provide additional liquidity if needed.~~

Berkshire operates a payroll deposit and transfer service, which works with payroll service bureau clients to accept their deposits and process ACH payments to their commercial customer employee accounts. The balances in this business fluctuate daily based on payroll cycles. As a result, the Bank’s daily cash management has expanded and it maintains additional focus on overnight liquidity and the management of daily cash clearing activity. During 2018, the average balance of these deposits was $324 million, with a high balance of $631 million and a low balance of $154 million.

The Bank utilizes the mortgage secondary market as a source of funds for residential mortgages which are sold into that market. Secondary market counterparties include federal mortgage agencies and selected U.S. financial institutions. The Bank works with third parties in hedging interest rate locks with to-be-announced mortgage backed securities and arranging commitments for the sale of individual loans to approved secondary market investors. Most sales are on a servicing released basis. Mortgage loans originated for sale in 2018 totaled $2.0 billion.

Berkshire has additionally developed financial institution banking relationships in and around its regions for the wholesale purchase and sale of seasoned loans. Berkshire’s financial institution banking has also expanded wholesale transactions of commercial loans, including purchases and sales of whole loans and participations in syndicated loan transactions.

The greatest sources of uncertainty affecting liquidity are deposit withdrawals and usage of loan commitments, which are influenced by interest rates, economic conditions, and competition. Due to the unusual and prolonged low interest rate environment prior to 2018, there is uncertainty about the behavior of deposits if interest rates increase at some future time as is anticipated. The Company believes that its market positioning and relationship focus will generally enhance the stability of its deposits, and it also models various scenarios for the purpose of contingency liquidity planning. The Bank manages the concentration of deposits from customers and in various regions and product types. The Bank relies on competitive rates, customer service, and long-standing relationships with customers to manage deposit and loan liquidity. Based on its historical experience, management believes that it has adequately provided for deposit and loan liquidity needs. Both liquidity and capital resources are managed according to policies approved by the Board of Directors and executive management and the Board reviews liquidity metrics and contingency plans on a regular basis. The Bank actively manages all aspects of its balance sheet to achieve its objectives for earnings, liquidity, asset quality, interest rate risk, and capital.

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CAPITAL RESOURCES

The Company and the Bank target to maintain sufficient capital to qualify for the “Well Capitalized” designation by federal regulators. Berkshire’s long term goal is to use capital efficiently to achieve its objective to become a higher performance ~~company with a~~company. The Company’s strategic initiatives in 2019 were targeted to reduce balance sheet leverage, release lower returning assets, and return ~~on equity exceeding 10%. A double digit return on equity is used~~excess capital to ~~benchmark all lending and investment programs, together with all acquisition analyses. The Company seeks to maintain a competitive cost of~~shareholders through stock buybacks, while maintaining or improving capital and capital structure. The Company monitors its ratio of tangible equity/tangible assets. This ratio increased slightly to 8.6% in 2018 due to strong internal capital generation which supported asset growth, a higher dividend, and improvement in this ratio.metrics.

Berkshire views its adjusted internal return on tangible capital as the primary capital resource of the Company. ~~The return~~This non-GAAP financial measure is based on ~~tangible equity averaged over 12% for~~ the ~~four years 2015-2018.~~Company’s measure of adjusted earnings, which excludes net charges viewed as not related to ongoing operations. The Company focuses on internal capital generation to support shareholder dividends and ~~targeted~~ organic growth and also to support non-operating charges and/or improvement in its capital ratios. The Company has in the past maintained a universal shelf registration of capital securities with the SEC. ~~The Company sometimes uses issuances of unregistered stock for targeted small contractual payments. The Company has an approved stock repurchase program for 500,000 shares.~~ The Company normally uses common stock as a significant component of consideration for business combinations. The resulting stock issuances have meaningfully increased the float and market capitalization of the Company.

~~Due~~ In 2019, the merger consideration for the SI Financial acquisition was 100% comprised of Company common stock, with the result that the acquisition’s dilution of tangible book value per share was primarily limited to the ~~stock issuances in 2017, the Company had utilized most~~impact of its authorized common and preferred shares. In 2018, the Company obtained shareholder approval to amend the Certificate of Incorporation to increase authorized shares. As previously noted, the Company has a pending agreement to acquire SI Financial Group and to issue common stock as merger consideration. The Company has also announced that it has initiated a strategic review, which will include its capital structure and evaluate possible changes in its balance sheet and capital needed to support its operations.

The Company regularly evaluates the markets for capital instruments and views itself as well positioned to access additional capital in various ways if appropriate based on future changes in conditions. In 2018, the Company obtained an investment grade senior debt rating from a recognized credit rating agency.transaction costs. Additional discussion of the Company’s capital management is contained in the Shareholders’ Equity section of the discussion of Changes in Financial Condition in this report.

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CONTRACTUAL OBLIGATIONS

The year-end ~~2018~~2019 contractual obligations were as follows:

Item 7-7A - Table 1 - Contractual Obligations


(In thousands)	Total		Less than One Year		One to Three Years		Three to Five Years		After Five Years		Total		Less than One Year		One to Three Years		Three to Five Years		After Five Years
FHLBB borrowings (1)	$	1,428,298	$	1,268,882	$	152,840	$	5,165	$	1,411	$	730,501	$	419,996	$	290,825	$	11,993	$	7,687
Subordinated notes	89,518		—		—		—		89,518		97,049		—		—		—		97,049
Operating lease obligations (2)	99,146		13,554		24,021		18,722		42,849
Purchase obligations (3)	93,173		13,523		25,083		22,081		32,486
Lease liabilities (2)											80,734		11,287		19,721		14,283		35,443
Total Contractual Obligations	$	1,710,135	$	1,295,959	$	201,944	$	45,968	$	166,264	$	908,284	$	431,283	$	310,546	$	26,276	$	140,179

Acquisition related obligations are not included.

(1) Consists of borrowings from the Federal Home Loan Bank. The maturities extend through 2038 and the rates vary by borrowing.

(2) Consists of leases, bank branches, and ATMs through 2039.

~~(3) Consists of obligations with multiple vendors to purchase a broad range of services.~~

Further information about borrowings and lease obligations is disclosed in Note 1113 - Borrowed Funds and Note 1618 - ~~Other Commitments, Contingencies, and Off-Balance Sheet Activities~~Leases of the Consolidated Financial Statements. ~~Note 24 - Subsequent Events describes the Company’s contractual obligation under an agreement to acquire SI Financial Group which was pending as of year-end 2018.~~

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, Berkshire engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the Company’s financial statements. As previously reported in the discussion of changes in financial condition, Berkshire has outstanding derivative financial instruments and engages in hedging activities, and the fair value of these contracts is recorded on the balance sheet. The previously mentioned pending agreement to acquire SI Financial Group is expected to be recorded in the Company’s financial statements on completion of the merger agreement, which is expected to occur in the second quarter of 2019.

FAIR VALUE MEASUREMENTS

The most significant fair value measurements recorded by the Company are those related to assets and liabilities acquired in business combinations. These measurements are discussed further in the mergers and acquisitions note to the financial statements. The premium or discount value of acquired loans has historically been the most significant element of this presentation.

The Company makes further measurements of fair value of certain assets and liabilities, as described in the related note in the financial statements. The most significant measurements of recurring fair values of financial instruments primarily relate to securities available for sale, marketable equity securities, and derivative instruments. These measurements were included in the previous discussion of changes in financial condition, and were generally based on Level 2 market based inputs. Non-recurring fair value measurements primarily relate to certain corporate bonds, impaired loans, capitalized mortgage servicing rights, and other real estate owned. When measurement is required, these measures are generally based on Level 3 inputs. Acquired corporate bonds and industrial development bonds are valued based on Level 3 inputs.

Berkshire provides a summary of estimated fair values of financial instruments at each period-end. The premium or discount value of loans has historically been the most significant element of this presentation. This amount is a Level 3 estimate and reflects management’s subjective judgments. At year-end ~~2018,~~2019, the premium value of the loan portfolio was $215 million, or 2.3% of carrying value, compared to $45 million, or 0.5% of carrying value ~~compared to $175 million, or 2.1% of carrying value~~ at year-end ~~2017.~~2018. This ~~decrease~~increase reflected the ~~higher~~lower prevailing market interest rates at year-end ~~2018,~~2019, resulting in a ~~lower~~higher present value of the fixed rate instruments in the portfolio.

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IMPACT OF INFLATION AND CHANGING PRICES

The financial statements and related financial data presented in this Form 10-K have been prepared in conformity with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank’s performance than the general level of inflation. Interest rates may be affected by inflation, but the direction and magnitude of the impact may vary. A sudden change in inflation (or expectations about inflation), with a related change in interest rates, would have a significant impact on our operations.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

Please refer to the notes on Recently Adopted Accounting Principles and Future Application of Accounting Pronouncements in Note 1 - Summary of Significant Accounting Policies of the Consolidated Financial Statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES ~~AND ACCOUNTING ESTIMATES~~

The Company’s significant accounting policies are described in Note 1 ~~- Summary of Significant Accounting Policies~~to the financial statements. The preparation of the ~~Consolidated Financial Statements. Please see those policies~~consolidated financial statements in ~~conjunction~~accordance with ~~this discussion. The accounting~~GAAP and ~~reporting policies followed by the Company conform, in all material respects,~~practices generally applicable to ~~accounting principles generally accepted in the United States and to general practices within~~ the financial services ~~industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States~~industry requires management to make estimates and assumptions that affect the reported amounts ~~reported in the financial statements~~of assets, liabilities, revenues, and ~~accompanying notes. While the Company bases estimates on historical experience, current information~~expenses, and ~~other factors deemed~~ to ~~be relevant, actual~~disclose contingent assets and liabilities. Actual results could differ from those estimates.

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

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

Acquired Loans

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

~~Income Taxes.~~ Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The realization of the net deferred tax asset generally

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depends upon future levels of taxable ordinary income, taxable capital gain income, and the existence of prior years' taxable income, to which "carry back" refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. In determining the valuation allowance, the Company uses historical and forecasted future operating results, including a review of the eligible carry-forward periods, tax planning opportunities and other relevant considerations. In particular, income tax benefits and deferred tax assets generated from tax-advantaged commercial development projects are based on management's assessment and interpretation of applicable tax law as it currently stands. These underlying assumptions can change from period to period. For example, tax law changes or variances in projected taxable ordinary income or taxable capital gain income could result in a change in the deferred tax asset or the valuation allowance. Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset in excess of the valuation allowance would be charged to income tax expense in the period such determination is made.

~~Goodwill and Identifiable Intangible Assets.~~ Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and analysis of market pricing multiples. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

~~Determination of Other-Than-Temporary Impairment of Securities.~~ The Company evaluates debt securities within the Company's available for sale and held to maturity portfolios for other-than-temporary impairment ("OTTI"), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is "more likely than not" that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the loss is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Noncredit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

Fair Value of Financial ~~Instruments.~~ The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. For financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.Instruments

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MANAGEMENT OF INTEREST RATE RISK AND MARKET RISK ANALYSIS

Qualitative Aspects of Market Risk. The Company’s most significant form of market risk is interest rate risk. The Company seeks to avoid fluctuations in its net interest income and to maximize net interest income within acceptable levels of risk through periods of changing interest rates. The Company also seeks to manage the risk of interest rate changes to its net income and the economic value of equity. Further, where prudent, the Company seeks to be positioned to benefit from expected interest rate changes, within its risk parameters. The Company manages interest rate risk within policy limits approved by the Board.

The Company maintains an Enterprise Risk Management/Asset-Liability Committee (ERM/ALCO) that is responsible for reviewing its asset-liability policies and interest rate risk position. This Committee meets regularly, and the Chief Financial Officer and Treasurer report trends and interest rate risk position to the Risk Management and Capital Committee of the Board of Directors on a quarterly basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the Company’s net interest income and earnings.

The Company manages its interest rate risk by analyzing the sensitivities and adjusting the mix of its assets and liabilities, including derivative financial instruments. The Company also uses secondary markets, brokerages, and counterparties to accommodate customer demand for long term fixed rate loans and to provide it with flexibility in managing its balance sheet positions. When the Company enters into business combinations, it considers interest rate risk as part of its merger analysis and it integrates existing and acquired operations as appropriate to achieve its objectives for the combined businesses.

Quantitative Aspects of Market Risk. ~~Berkshire has recently maintained 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 measures ~~this~~its interest rate sensitivity primarily by evaluating models of net interest income over one year, two years, and three year time horizons. The Company models a base case assuming no changes in interest rates or balance sheet composition and then assuming various scenarios of ramped interest rate changes, shocked interest rate changes, changes predicted by the forward yield curve, and changes involving twists in the yield curve. The focus is on a two-year scenario where interest rates ramp up by 200 basis points in the first year compared to a base case of flat interest rates. The Bank also evaluates its equity at risk from interest rate changes through discounted cash flow analysis. This measure assesses the present value of changes to equity based on long term impacts of rate changes beyond the time horizons evaluated for net interest income at risk.

The Company uses a simulation model to measure the changes in net interest income. The chart below shows the analysis of the ramped change described above, assuming a parallel shift in the yield curve. Loans, deposits, and borrowings were expected to reprice at the repricing or maturity date. Pricing caps and floors are included in the simulation model. The Company uses prepayment guidelines set forth by market sources as well as Company generated data where applicable. Cash flows from loans and securities are assumed to be reinvested to maintain a static balance sheet. Other assumptions about balance sheet mix are generally held constant. The input for loan prepayment speeds was updated, reducing the modeled prepayment speeds in downward rate environments and thereby reducing the related income sensitivity. This change in inputs was not viewed as material in the overall scope of interest rate risk analysis. There were no material changes to the way that the Company measures market risk in ~~2018.~~2019.

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Item 7-7A - Table 2 - Qualitative Aspects of Market Risk


Change in Interest Rates-Basis Points (Rate Ramp)
	1- 12 Months					13- 24 Months					1- 12 Months					13- 24 Months
	$ Change			% Change		$ Change			% Change		$ Change			% Change		$ Change			% Change
(In thousands)
At December 31, 2019
+300											$	17,080		4.70	%	$	28,003		7.60	%
+200											11,070			3.00		19,589			5.30
+100											5,107			1.40		10,289			2.80
-100											(6,559		)	(1.80	)	(13,611		)	(3.70	)
At December 31, 2018
+300	$	8,200		2.20	%	$	4,400		1.20	%	$	8,200		2.20	%	$	4,400		1.20	%
+200	6,700			1.80		3,500			0.90		6,700			1.80		3,500			0.90
+100	4,600			1.20		2,100			0.60		4,600			1.20		2,100			0.60
-100	(5,900		)	(1.60	)	(9,500		)	(2.50	)	(5,900		)	(1.60	)	(9,500		)	(2.50	)

At December 31, 2017
+300	$	9,806		2.95	%	$	11,193		3.40	%
+200	7,940			2.39		9,374			2.85
+100	4,683			1.41		5,890			1.79
-100	(6,424		)	(1.93	)	(12,532		)	(3.81	)

~~During 2018, the Company moved from being modestly~~The Company’s interest rate sensitivity became more asset sensitive in 2019. This reflected the impact of the SI Financial acquisition along with the impact of the Company’s strategic deleveraging and reduction of wholesale funding. It also reflected the shorter projected lives of assets with prepayment activity, due to ~~generally neutral~~the lower long term interest rates at period-end. At period-end, in ~~the modeled scenario of a static balance sheet and focusing on~~ the second year of a 200 basis point parallel upward ~~move in~~ramp of interest rates, net interest income was projected to increase by 5% compared to a baseline scenario of unchanged interest rates. This ~~has been primarily due~~was modeled as 1% at the beginning of the year. With this added interest rate sensitivity, the Company is also more sensitive to declining net interest income in falling interest rate scenarios. In the ~~use~~second year of ~~short term wholesale funding to fund loan growth. The Company has modeled~~ a 100 basis point ~~decrease in~~downward parallel interest ~~income in recent years due to low interest rates. As market rates have moved upward, the Company will expand its modeling of downward~~ rate ~~scenarios, which are expected to indicate more sensitivity to a decrease in net interest income than the 100 basis point scenario shown above.~~

In a flat rate scenario, the Company anticipates that there would be modest margin pressure on the year-end balance sheet. This is due to some asset repricings and the lagged nature of deposit repricings, along with anticipated decreases in the accretive benefits of purchase accounting. The interest sensitivity analyses are in comparison to this flat rate base case. The Company also analyzes its interest sensitivity based on the forward yield curve, which indicates thatramp, net interest income is ~~generally neutral~~modeled to decrease by 4%, compared to a decrease of 2% at the ~~flat rate base case.~~

The Company also evaluates net income at risk, taking into account primarily changes in fee income that may result from interest rate changes. Generally, fee income is viewed as negatively correlated with changes in interest rates. Higher rates can depress demand for fixed rate products that arestart of the chief source of loan sale gains in mortgage banking and SBA lending, as well as interest rate swap income. Higher rates also are related to higher earnings credit rates on commercial transactions accounts, which reduces deposit service charges. The Company estimates that its net income is generally neutral in the modeled scenario ofyear. In a 200 basis point ~~upward interest~~downward ramp, the modeled downward impact is 6%. The Company’s model assumes that it will not reduce the rate ~~ramp~~ on its financial instruments below zero, and there are no significant contracted indexed instruments which would reset below zero in a down 200 basis point scenario at December 31, 2019. The above sensitivities are compared to the baseline static ~~balance sheet.~~model and based on current interest rates and modeling assumptions. The yield curve at period-end, if unchanged, could additionally pressure the net interest margin in the future compared to recent results due to ongoing asset yield compression in a static environment before the targeted benefit of further potential asset reductions. Further flattening of the yield curve also presents the possibility of compressing the margin, including the impact of tighter market spreads due to competitive factors in such environments.

The Company’s equity at risk is normally liability sensitive due to the overall shorter duration of its funds sources compared to its ~~loans~~loan and investments. ~~The Company estimated that~~Due to the changes described above, this sensitivity has declined. At year-end 2019, the economic value of ~~its~~ equity at risk was ~~6% negatively impacted~~modeled to decrease by only 1% in the scenario of a modeled 200 basis point parallel upward rate shock. This sensitivity has declined from 6% at year-end 2018. At year-end, the economic value of equity was negatively at risk for most modeled scenarios of interest rate changes. A 2% downward interest rate shock was modeled to result in an 11% decrease in the economic value of equity due to assumed market floors in the cost of deposits.

In addition to modeling net interest income, the Company also estimates the sensitivity of net income to interest rate changes. This sensitivity is generally larger on a percentage basis, since net income is lower than net interest income. The national mortgage banking operations had been a partial hedge to the asset sensitivity of net interest income, with mortgage banking fee income increasing in downward rate scenarios. The removal of these operations has removed this hedging influence related to net income. At year-end 2019, net income at ~~year-end 2018, which~~risk in year two in the event of a 200 basis point ramp was ~~not significantly different from the 5% risk estimated~~an increase of 11% in an upward ramp and a decrease of 13% in a downward ramp. Sensitivity had been modeled as generally neutral at the ~~start~~end of 2018. A critical component of the ~~year.~~

~~The Company estimates that its~~Company’s modeling is the assumption of deposit interest rate sensitivity, ~~in 2018 has approximated~~which the Company continues to model at a 40% beta ~~level~~

~~utilized in the Company’s modeling. The Company’s modeling assumes no shift in the deposit mix in rate change~~

~~scenarios.~~level. The Company ~~has a pending agreement to acquire~~does not believe that the addition of the SI Financial ~~Group.~~deposits materially impacted this estimate. The behavior of markets under the historically unusual conditions currently prevailing may be different from modeling assumptions, and the Company ~~anticipates that this acquisition will be neutral or slightly positive~~continues to monitor the markets and the assumptions in its interest rate sensitivity when the merger is complete and integrated. The Company will also be assessing its interest rate sensitivity as it considers balance sheet scenarios in the strategic review that it is conducting.model.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and supplementary data required by this item are presented elsewhere in this report beginning on page F-1, in the order shown below:

Management’s Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, ~~2018~~2019 and ~~2017~~2018

Consolidated Statements of Income for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017

Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017

Notes to Consolidated Financial Statements

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On August 3, 2017, the Audit Committee (the "Committee") of the Board of Directors of Berkshire Hills Bancorp, Inc. (the "Company") notified PricewaterhouseCoopers, LLP ("PwC") of its dismissal as the Company's independent registered public accounting firm. The dismissal was effective on August 9, 2017, with PwC having served as the Company's principal accountants for the first two quarters of the fiscal year ended December 31, 2017. The Committee participated in, and approved the decision to change its independent registered public accounting firm.None.

PwC's audit reports on the Company's Consolidated Financial Statements as of and for the year ended December 31, 2016 and did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal year ended December 31, 2016 and the subsequent interim period through August 9, 2017, there were (i) no disagreements between the Company and PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which, if not resolved to the satisfaction of PwC, would have caused PwC to make reference thereto in their reports on the consolidated financial statements for such years, and (ii) no "reportable events" as that term is defined in Item 304(a)(1)(v) of Regulation S-K.

Also on August 3, 2017, the Committee completed a competitive selection process and selected Crowe LLP ("Crowe") as the Company's independent registered public accounting firm, effective August 10, 2017. During the fiscal year ended December 31, 2016 and the subsequent interim period preceding the selection of Crowe, the Company did not consult with Crowe regarding: (i) the application of accounting principles to a specified transaction, either completed or proposed; (ii) the type of audit opinion that might be rendered on the Company's financial statements, and Crowe did not provide any written report or oral advice that Crowe concluded was an important factor considered by the Company in reaching a decision as to any such accounting, auditing or financial reporting issue; or (iii) any matter that was either the subject of a disagreement with PwC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure or the subject of a reportable event.

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ITEM 9A. CONTROLS AND PROCEDURES

The Company’s management, including the Company’s Principal Executive Officer and Principal Financial Officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a and 15(d) -15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of December 31, ~~2018.~~2019. Based upon their evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of that date, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”): (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company evaluated changes in its internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the last fiscal quarter. The Company determined that there were no changes that materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s report on internal control over financial reporting and the independent registered public accounting firm’s report on the Company’s internal control over financial reporting are contained in “Item 8 — Consolidated Financial Statements and Supplementary Data.”

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

For information concerning the directors of the Company, the information contained under the sections captioned ~~“Proposals to be Voted on by Stockholders - Proposal~~“Proposal 1 - Election of ~~Directors”~~Directors for a One-Year Term” in Berkshire’s Proxy Statement for the 2019 Annual Meeting of Stockholders (“Proxy Statement”) is incorporated by reference. The following table sets forth certain information regarding the executive officers of the Company.



Name	Age	Position
Richard M. Marotta	6061	President and Chief Executive Officer of the Company; Chief Executive Officer - Berkshire Bank; Director of Berkshire Hills Bancorp and Berkshire Bank
Sean A. Gray	4344	Senior Executive Vice President of the Company; President - Berkshire Bank
James M. Moses	4243	Senior Executive Vice President, Chief Financial Officer of the Company; Senior Executive Vice President, Chief Financial Officer - Berkshire Bank
George F. Bacigalupo	6465	Senior Executive Vice President, Commercial Banking - Berkshire Bank
~~Michael D. Carroll~~	57	~~Executive Vice President, Commercial Banking and Specialty Lending - Berkshire Bank~~
Tami F. Gunsch	5657	Senior Executive Vice President & Director of Relationship Banking - Berkshire Bank
~~Linda A. Johnston~~Malia C. Lazu	6642	~~Senior~~ Executive Vice President, ~~of Human Resources~~Chief Experience & Culture Officer - Berkshire Bank
Gregory D. Lindenmuth	5152	Senior Executive Vice President, Chief Risk Officer - Berkshire Bank
~~Allison P. O'Rourke~~	43	~~Senior Executive Vice President, Chief Administrative Officer - Berkshire Bank~~
Wm. Gordon Prescott	5758	~~Senior~~ Executive Vice President, General Counsel and Corporate Secretary - Berkshire Bank

The executive officers are elected annually and hold office until their successors have been elected and qualified or until they are removed or replaced.

BIOGRAPHICAL INFORMATION



	Richard M. Marotta. Age ~~60.~~ 61. Mr. Marotta was appointed to the role of President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank in November 2018. He was also appointed as a Director of the Company and the Bank. Prior to these appointments, Mr. Marotta served as Senior Executive Vice President of the Company and President of the Bank from 2015. Mr. Marotta joined the Company in 2010 as Executive Vice President, Chief Risk Officer and has held additional positions including Chief Credit Officer and Chief Administrative Officer. Mr. Marotta has all functions reporting to him except for those reporting to Mr. ~~Gray.~~Gray and Mr. Moses. Mr. Marotta was previously Executive Vice President and Group Head, Asset Recovery at KeyBank.



	Sean A. Gray. Age ~~43.~~44. Mr. Gray was appointed to the role of Senior Executive Vice President and Chief Operating Officer of the Company and President of the Bank in November 2018. Prior to this appointment, Mr. Gray was Senior Executive Vice President of the Company and Chief Operating Officer of the Bank from 2015. Mr. Gray joined the Company in 2007 as First ~~Vice President,~~VP, Retail Banking and has held various position including, Executive Vice President, Retail Banking and Senior ~~Vice President.~~VP. Mr. Gray has Ms. Gunsch and ~~Ms. Johnston~~Mr. Bacigalupo reporting to him, together with the wealth management, insurance, government banking, cash management, information technology, business line analytics, and ~~home lending business lines,~~corporate development functions. The newly appointed Regional Presidents report to Mr. Gray in their capacity as ~~well as marketing~~market leaders. Prior to joining the Bank, Mr. Gray was Vice President and Consumer Market Manager at Bank of America, in Waltham, Massachusetts.

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	James M. Moses. Age ~~42.~~43. Mr. Moses is Senior Executive Vice President, Chief Financial Officer of the Company and the Bank, since joining the Bank in July 2016. ~~He is responsible for~~Mr. Moses has Mr. Prescott reporting to him, together with the accounting, treasury, tax, investor relations, and capital markets ~~functions, and facilities management.~~functions. Mr. Moses previously served at Webster Bank as Senior Vice President and Asset/Liability Manager. Mr. Moses joined Webster Bank in 2011 from M&T Bank where he spent four years in various roles including head mortgage trader, deposit products pricing manager, and consumer credit card product manager.

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	George F. Bacigalupo. Age ~~64.~~ 65. Mr. Bacigalupo was promoted to Senior Executive Vice President, Commercial Banking in September 2015, having previously served as an Executive Vice President since October 2013 and Senior Vice President, Chief Credit Officer since 2011. Mr. Bacigalupo is responsible for commercial banking, including the commercial real estate, middle-market (commercial and industrial), asset-based lending, and small business ~~banking and asset based lending teams in Eastern and Central Massachusetts and Connecticut.~~banking. Previously, Mr. Bacigalupo was EVP of Specialty Lending at TD Banknorth, where he established the ABL and other middle-market lending groups. Subsequently, at TD Bank, he was the Senior Lender for New England.



	~~Michael D. Carroll. Age 57.~~ Mr. Carroll is Senior Executive Vice President, Commercial Banking and Specialty Lending of Berkshire Bank, a position he was promoted to 2018. Mr. Carroll has previously held the positions of EVP, Commercial Banking and Specialty Lending, EVP, Chief Risk Officer and SVP, Chief Credit Officer managing the risk and credit departments of the Bank. In his role as SEVP, Commercial Banking and Specialty Lending, he is responsible for Firestone Financial (equipment leasing) and 44 Business Capital (SBA lending) and is the executive leader of the regional commercial teams in Berkshire County, Vermont, Albany, Syracuse, and the Mid-Atlantic region. He joined the company in 2009 as SVP, New York Regional Commercial Leader. Previously, Mr. Carroll was Senior Vice President, Middle Market banking at KeyBank.



	Tami F. Gunsch. Age ~~56.~~ 57. Ms. Gunsch is Senior Executive Vice President & Director of Relationship Banking, she also serves as President of First Choice Loan Services, a subsidiary of Berkshire Bank. ~~In this role,~~ Ms. Gunsch is responsible for all aspects of the retail banking consumer experience, including branches, branch operations, consumer lending, home lending, private banking, investment services, call center, electronic/mobile banking, operations, loan servicing, and the MyBanker team, as well as the deployment of the Bank's relationship banking strategy across all lines of business. Ms. Gunsch has previously held the positions of EVP, Retail Banking and Senior Vice President. Ms. Gunsch joined Berkshire from Citizens Bank in 2009 as First VP of Retail Banking.

~~Linda A. Johnston. Age 66~~. Ms. Johnston is Senior Executive Vice President of Human Resources for Berkshire Bank. Ms. Johnston is responsible for overseeing and directing the Company’s human resources functions including compensation and benefits, performance and talent management, training, recruitment, development, executive compensation, and initiatives and practices that support the Company’s strategic direction. Ms. Johnston also serves as a key advisor to the Compensation Committee of the Company’s Board of Directors and has been part of the Company for more than 30 years.

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	Malia C. Lazu. Age 42. Ms. Lazu is Executive Vice President, Chief Experience and Culture Officer for Berkshire Bank. She oversees and directs internal and external experience and culture management, and is a key advisor to the Corporate Responsibility and Culture Committee of the Company's Board of Directors. Ms. Lazu is also the Regional President for the Company's Boston region. She manages corporate communications, marketing, corporate social responsibility, and facilities. She also coordinates with the Executive Director of the Berkshire Bank Foundation. Ms. Lazu joined in July 2019, having served the Company as an independent consultant for more than a year. Ms. Lazu has more than 20 years experience as a culture creator and strategist for cities, institutions, and organizations throughout the U.S.



	Gregory D. Lindenmuth. Age ~~51.~~52. Mr. Lindenmuth is Senior Executive Vice President, Chief Risk Officer of the Bank, a position he was promoted to in October 2018. Mr. Lindenmuth is responsible for enterprise risk management as well as compliance, loan review, information security, and strategic services. Mr. Lindenmuth joined Berkshire in 2016 from the FDIC where he was employed for 24 years and held multiple positions including Senior Risk Examiner for the Division of Risk Management Supervision and Acting Regional Manager for the Division of Insurance and Research. With the FDIC, Mr. Lindenmuth was also a Capital Markets, Mortgage Banking, and Fraud Specialist.



	~~Allison P. O’Rourke. Age 43.~~ Ms. O'Rourke is Senior Executive Vice President, Chief Administrative Officer of the Bank, a position she was promoted to in October 2018. In this role, Ms. O'Rourke is responsible for information technology and project management as well as leading corporate strategy and innovation. Ms. O'Rourke previously held the positions of EVP, Corporate Sales Director and EVP, Finance and Investor Relations. She joined the Bank as Vice President, Investor Relations Officer in 2013 from NYSE Euronext and previously worked in securities brokerage with Goldman Sachs.

Wm. Gordon Prescott, Age ~~57.~~58. Mr. Prescott is ~~Senior~~ Executive Vice President, General Counsel and Corporate Secretary of the Bank, a position he was promoted to in October 2018. Mr. Prescott joined Berkshire in 2008 as VP, General Counsel and Corporate Secretary. Mr. Prescott has 30 plus years of experience in the legal profession, including extensive experience as in-house corporate counsel, and holds a law degree from Boston University School of Law.

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Reference is made to the cover page of this report and to the section captioned ~~“Other~~“Additional Information - Other Information Relating to Directors and Executive Officers - Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for information regarding compliance with Section 16(a) of the Exchange Act. For information concerning the audit committee and the audit committee financial expert, reference is made to the section captioned “Proposal 1 - Election of Directors for a One-Year Term”, “Corporate Governance - Committees of the Board of Directors”, and “Corporate Governance - Audit Committee” in the Proxy Statement.

For information concerning the Company’s code of ethics, the information contained under the section captioned “Corporate Governance - Code of Business Conduct” in the Proxy Statement is incorporated herein by reference.

A copy of the Company’s code of ethics is available to stockholders on the Company’s website at at:

http://ir.berkshirebank.com.

ITEM 11. EXECUTIVE COMPENSATION

For information regarding executive compensation, the sections captioned ~~“Director Compensation”~~“Proposal 1 - Election of Directors for a One-Year Term”, ~~“Compensation Discussion~~“Corporate Governance - Committees of the Board of Directors”, and ~~Analysis,” and “Executive Compensation”~~“Corporate Governance - Audit Committee” in the Proxy Statement are incorporated herein by reference.

For information regarding the Compensation Committee Report, the section captioned “Compensation ~~Committee Report”~~Discussion and Analysis” in the Proxy Statement is incorporated herein by reference.

~~Table of Contents~~

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

(a)Security Ownership of Certain Beneficial Owners

Information required by this item is incorporated herein by reference to the section captioned ~~“Stock~~“Additional Information - Stock Ownership” in the Proxy Statement.

(b)Security Ownership of Management

Information required by this item is incorporated herein by reference to the section captioned ~~“Stock~~“Additional Information - Stock Ownership” in the Proxy Statement.

(c)Changes in Control

Management of Berkshire knows of no arrangements, including any pledge by any person of securities of Berkshire, the operation of which may at a subsequent date result in a change in control of the registrant.

(d)Equity Compensation Plan Information

The following table sets forth information, as of December 31, ~~2018,~~2019, about Company common stock that may be issued upon exercise of options under stock-based benefit plans maintained by the Company, as well as the number of securities available for issuance under equity compensation plans:


Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Equity compensation plans approved by security holders	31,422	$	10.82	1,357,545	153,272	$	22.00	1,123,411
Equity compensation plans not approved by security holders	—	—		—	—	—		—
Total	31,422	$	10.82	1,357,545	153,272	$	22.00	1,123,411

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference to the sections captioned ~~“Other~~“Additional Information - Other Information Relating to Directors and Executive Officers —- Transactions with Related ~~Persons”~~Persons and ~~“Procedures~~- Procedures Governing Related Persons Transactions” in the Proxy Statement. Information regarding director independence is incorporated herein by reference to the section ~~“Proposals to be Voted on by Shareholders — Proposal~~“Proposal 1 —- Election of ~~Directors”~~Directors for a One Year Term” in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section captioned ~~“Proposals to be Voted on by Shareholders — Proposal~~“Proposal 3 — Ratification of the Appointment of the Independent Registered Public Accounting Firm” in the Proxy Statement.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a)	[1] Consolidated Financial Statements


•	Report of Independent Registered Public Accounting Firm


•	Consolidated Balance Sheets as of December 31, ~~2018~~2019 and ~~2017~~2018


•	Consolidated Statements of Income for the Years Ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017


•	Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017


•	Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017


•	Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017


•	Notes to Consolidated Financial Statements

The Consolidated Financial Statements required to be filed in our Annual Report on Form 10-K are included in Part II, Item 8 hereof.


[2]	Financial Statement Schedules

All financial statement schedules are omitted because the required information is either included or is not applicable.

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[3]	Exhibits



3.1			Certificate of Incorporation of Berkshire Hills Bancorp, Inc. (1)
3.2			Amended and Restated Bylaws of Berkshire Hills Bancorp, Inc. (2)
3.3			Certificate of Amendment to the Certificate of Incorporation of Berkshire Hills Bancorp, Inc. (3)
3.4			Certificate of Designations of the Series B Non-Voting Preferred Stock (4)
4.1			Form of Common Stock Certificate of Berkshire Hills Bancorp, Inc. (1)
4.2			Note Subscription Agreement by and among Berkshire Hills Bancorp, Inc. and certain subscribers dated September 20, 2012 (5)
4.3			Description of Berkshire Hills Bancorp, Inc. Securities
10.1			Three-Year Employment Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Richard M. Marotta (6)
10.2			Amended and Restated Supplemental Executive Retirement Agreement between Berkshire Bank and Richard M. Marotta (6)
10.3			Supplemental Executive Retirement Agreement between Berkshire Bank and Sean A. Gray (6)
10.4			Three Year Executive Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc., and George F. Bacigalupo (7)
10.5			Three-Year Executive Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc., and James M. Moses (8)
10.6			Amended and Restated Three Year Change in Control Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc., and Sean A. Gray (9)
10.7			~~Amended and Restated Three-Year~~Berkshire Bank Enhanced Change in Control ~~Agreement by and among Berkshire Bank, Berkshire Hills Bancorp, Inc. and Linda A. Johnston (9)~~Severance Plan (Gregory Lindenmuth)
10.8			Form of Split Dollar Agreement entered into with Sean A. Gray and Richard M. Marotta (10)
10.10			Berkshire Hills Bancorp, Inc. 2011 Equity Incentive Plan (11)
10.11			Berkshire Hills Bancorp, Inc. 2013 Equity Incentive Plan (12)
10.12			Berkshire Bank Executive Long-Term Care Insurance Plan (13)
10.13			Berkshire Hills Bancorp, Inc. 2018 Equity Incentive Plan (14)
10.14			Senior Executive Short Term Incentive Plan (15)
21.0			Subsidiary Information
23.1			Consent of Crowe LLP
~~23.2~~			~~Consent of PricewaterhouseCoopers LLP~~
31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2			Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101			Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail

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(1)		Incorporated herein by reference from the Exhibits to Form S-1, Registration Statement and amendments thereto, initially filed on March 10, 2000, Registration No. 333-32146.
(2)		Incorporated herein by reference from the Exhibits to the Form 8-K as filed on June 26, 2017.
(3)		Incorporated herein by reference from the Exhibits to the Form 10-Q as filed on November 9, 2017.
(4)		Incorporated herein by reference from the Exhibits to the Form 8-K as filed on October 16, 2017.
(5)		Incorporated herein by reference from the Exhibits to the Form 8-K as filed on September 26, 2012.
(6)		Incorporated herein by reference from the Exhibits to the Form 8-K as filed on February 22, 2019.
(7)		Incorporated herein by reference from the Exhibit to the Form 10-K as filed on March 17, 2014.
(8)		Incorporated herein by reference from the Exhibits to the Form 8-K as filed on September 23, 2016.
(9)		Incorporated herein by reference from the Exhibits to the Form 10-K as filed on March 16, 2011.
(10)		Incorporated herein by reference from the Exhibit to the Form 8-K as filed on January 19, 2011.
(11)		Incorporated herein by reference from the Appendix to the Proxy Statement as filed on March 24, 2011.
(12)		Incorporated herein by reference from the Appendix to the Proxy Statement as filed on April 2, 2013.
(13)		Incorporated herein by reference from the Exhibits to the Form 8-K as filed on January 23, 2015.
(14)		Incorporated herein by reference from the Appendix to the Proxy Statement as filed on April 6, 2018.
(15)		Incorporated herein by reference from the Exhibits to the Form ~~10-K~~10-Q as filed on ~~March 1, 2018.~~May 10, 2019.

ITEM 16. FORM 10-K SUMMARY

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Date: ~~March 1, 2019~~February 28, 2020	By:	/s/ Richard M. Marotta
		Richard M. Marotta
		President & Chief Executive Officer

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

~~Table of Contents~~



/s/ Richard M. Marotta	Director, President, & Chief Executive Officer	~~March 1, 2019~~February 28, 2020
Richard M. Marotta	(principal executive officer)

/s/ James M. Moses	Senior Executive Vice President, Chief Financial Officer	~~March 1, 2019~~February 28, 2020
James M. Moses	(principal financial and accounting officer)

/s/ ~~William~~ J. ~~Ryan~~Williar Dunlaevy	~~Non-Executive~~ Chairman	~~March 1, 2019~~February 28, 2020
~~William~~ J. ~~Ryan~~Williar Dunlaevy

/s/ ~~Paul T. Bossidy~~Baye Adofo-Wilson	Director	~~March 1, 2019~~February 28, 2020
~~Paul T. Bossidy~~Baye Adofo-Wilson

/s/ Rheo A. Brouillard	Director	February 28, 2020
Rheo A. Brouillard

/s/ David M. Brunelle	Director	~~March 1, 2019~~February 28, 2020
David M. Brunelle

/s/ Robert M. Curley	Director	~~March 1, 2019~~February 28, 2020
Robert M. Curley

/s/ John B. Davies	Director	~~March 1, 2019~~February 28, 2020
John B. Davies

/s/ ~~J. Williar Dunlaevy~~William H. Hughes, III	Director	~~March 1, 2019~~February 28, 2020
~~J. Williar Dunlaevy~~William H. Hughes, III

/s/ Cornelius D. Mahoney	Director	~~March 1, 2019~~February 28, 2020
Cornelius D. Mahoney

/s/ Pamela A. Massad	Director	~~March 1, 2019~~February 28, 2020
Pamela A. Massad

	Director	February 28, 2020
Sylvia Maxfield

/s/ Laurie Norton Moffatt	Director	~~March 1, 2019~~February 28, 2020
Laurie Norton Moffatt

/s/ ~~Richard~~William J. ~~Murphy~~Ryan	Director	~~March 1, 2019~~February 28, 2020
~~Richard~~William J. ~~Murphy~~Ryan

/s/ ~~Patrick J. Sheehan~~Jonathan I. Shulman	Director	~~March 1, 2019~~February 28, 2020
~~Patrick J. Sheehan~~Jonathan I. Shulman

/s/ D. Jeffrey Templeton	Director	~~March 1, 2019~~February 28, 2020
D. Jeffrey Templeton

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s Consolidated Financial Statements for external reporting purposes in accordance with generally accepted accounting principles.

As of December 31, ~~2018,~~2019, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control—Integrated Framework issued in 2013, by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, ~~2018~~2019 was effective.

The Company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

The effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2018~~2019 has been audited by Crowe LLP, an independent registered public accounting firm, as stated in their report, which follows. This report expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2018.~~2019.



/s/ Richard M. Marotta		/s/ James M. Moses
Richard M. Marotta		James M. Moses
President & Chief Executive Officer		Senior Executive Vice President & Chief Financial Officer
~~March 1, 2019~~February 28, 2020		~~March 1, 2019~~February 28, 2020

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of

of Berkshire Hills Bancorp, Inc.

Boston, Massachusetts

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Berkshire Hills Bancorp, Inc. (the "Company") as of December 31, ~~2018~~2019 and ~~2017,~~2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the ~~two-year~~three-year period ended December 31, ~~2018,~~2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, ~~2018,~~2019, based on criteria established in Internal Control - Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, ~~2018~~2019 and ~~2017,~~2018, and the results of its operations and its cash flows for each of the years in the ~~two-year~~three-year period ended December 31, ~~2018~~2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2018,~~2019, based on criteria established in Internal Control - Integrated Framework issued in 2013 by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and the significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses - General Component

The allowance for loan losses is a significant estimate that is a determination of estimated probable incurred credit losses in the Company’s loan portfolio. Refer to Note 1 - Summary of Significant Accounting Policies for the Company’s accounting policy related to the allowance for loan losses and Note 8 - Loan Loss Allowance for the Company’s disclosures related to loans and the associated allowance for loan losses. The Company has deemed its policy for determining the allowance for loan losses to be a critical accounting estimate.

The allowance for loan losses includes allowance allocations calculated in accordance with ASC 310, “Receivables,” and allowance allocations calculated in accordance with ASC 450, “Contingencies.” The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans (“general component”) and an analysis of certain individual loans for impairment (“specific component”).

As of December 31, 2019, the allowance for loan losses totaled approximately $63.6 million. The general component of the allowance totaled approximately $63 million which consisted of approximately $44 million attributable to observable historical data and approximately $19 million attributable to qualitative adjustments. The formula-based approach emphasizes loss factors derived from actual historical and industry portfolio loss rates, which are combined with an assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan categories. Allowance amounts are based on an estimate of historical average annual percentage rate of loan loss for each group of loan, a temporal estimate of the incurred loss emergence and confirmation period for each group of loan, and certain qualitative risk factors considered in the computation of the allowance for loan losses.

We considered auditing the general component of the allowance for loan losses to be a critical audit matter due to complex nature of the calculation resulting from the high volume of the data inputs. The high degree of manual intervention for the data to be appropriately evaluated in the calculation makes auditing the general component of the allowance for loan loss calculation especially challenging. The calculation utilizes numerous external and internal data sources as well as a high volume of reports. The dependability of the calculation relies heavily on the

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completeness, accuracy and validity of the data sources and appropriate application of these data points within the calculation.

The primary procedures we performed to address this critical audit matter included:

Testing the design and operating effectiveness of controls pertaining to the significant data inputs related to the completeness and accuracy of the data inputs as well as the accuracy of the allowance calculation itself. These specific procedures included:


◦	Management’s control over the completeness and accuracy of reports utilized to prepare the allowance for loan loss calculation


◦	Management’s control over the completeness and accuracy of historical loss calculations over the groups of loans included in the general component of the allowance calculation


◦	Management’s control over the completeness and accuracy of the loss emergence period calculation


◦	Management’s review of the mathematical accuracy of the allowance for loan loss calculation

Substantively testing the completeness and accuracy over management’s allowance calculation including the various significant data inputs. These specific procedures included:


◦	Testing of the completeness and accuracy of reports utilized in the calculation of the allowance for loan losses.


◦	Testing the completeness and accuracy of the historical loss calculation


◦	Testing the accuracy and completeness of loss emergence period calculation


◦	Testing the mathematical accuracy of management’s allowance calculation

/s/ Crowe LLP

We have served as the Company's auditor since ~~2017~~2017.

New York, New York

~~March 1, 2019~~February 28, 2020

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~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the Board of Directors and Shareholders of~~

~~Berkshire Hills Bancorp, Inc.~~

In our opinion, the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the year ended December 31, 2016 present fairly, in all material respects, the results of operations and cash flows of Berkshire Hills Bancorp, Inc. and its subsidiaries for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

~~/s/ PricewaterhouseCoopers LLP~~

~~Boston, Massachusetts~~

~~March 1, 2017~~

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BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED BALANCE SHEETS


	December 31,						December 31,
(In thousands, except share data)	2018			2017			2019			2018
Assets
Cash and due from banks	$	100,972		$	91,122		$	105,447		$	100,972
Short-term investments	82,217			157,641			474,382			82,217
Total cash and cash equivalents	183,189			248,763			579,829			183,189

Trading security	11,212			12,277			10,769			11,212
Marketable equity securities, at fair value	56,638			45,185			41,556			56,638
Securities available for sale, at fair value	1,399,647			1,380,914			1,311,555			1,399,647
Securities held to maturity (fair values of $371,224 in 2018 and $405,276 in 2017)	373,763			397,103
Securities held to maturity (fair values of $373,277 in 2019 and $371,224 in 2018)							357,979			373,763
Federal Home Loan Bank stock and other restricted securities	77,344			63,085			48,019			77,344
Total securities	1,918,604			1,898,564			1,769,878			1,918,604

Loans held for sale, at fair value	96,233			153,620
Loans held for sale							36,664			2,183

Commercial real estate loans	3,400,221			3,264,742			4,034,269			3,400,221
Commercial and industrial loans	1,980,046			1,803,939			1,840,508			1,980,046
Residential mortgages	2,566,424			2,102,807			2,685,472			2,566,424
Consumer loans	1,096,562			1,127,850			942,179			1,096,562
Total loans	9,043,253			8,299,338			9,502,428			9,043,253
Less: Allowance for loan losses	(61,469		)	(51,834		)	(63,575		)	(61,469		)
Net loans	8,981,784			8,247,504			9,438,853			8,981,784

Premises and equipment, net	108,367			109,352			120,398			106,500
Other real estate owned	—			—
Goodwill	518,325			519,287			553,762			518,325
Other intangible assets	33,418			38,296			45,615			33,418
Cash surrender value of bank-owned life insurance	190,609			191,221			227,894			190,609
Deferred tax assets, net	39,164			47,061			51,165			42,434
Other assets	142,538			117,083			237,780			120,926
Assets from discontinued operations							154,132			114,259
Total assets	$	12,212,231		$	11,570,751		$	13,215,970		$	12,212,231

Liabilities
Demand deposits	$	1,603,019		$	1,606,656		$	1,884,100		$	1,603,019
NOW and other deposits	1,122,321			734,558			1,492,569			1,122,321
Money market deposits	2,245,195			2,776,157			2,528,656			2,245,195
Savings deposits	724,129			741,954			841,283			724,129
Time deposits	3,287,717			2,890,205			3,589,369			3,287,717
Total deposits	8,982,381			8,749,530			10,335,977			8,982,381
Short-term debt	1,118,832			667,300			125,000			1,118,832
Long-term Federal Home Loan Bank advances	309,466			380,436			605,501			309,466
Subordinated notes	89,518			89,339			97,049			89,518
Total borrowings	1,517,816			1,137,075			827,550			1,517,816
Other liabilities	159,116			187,882			267,398			149,519
Liabilities from discontinued operations							26,481			9,597
Total liabilities	10,659,313			10,074,487			11,457,406			10,659,313

(continued)


							December 31,
(In thousands, except share data)							2019			2018
Shareholders’ equity
Preferred Stock (Series B non-voting convertible preferred stock - $0.01 par value; 2,000,000 shares authorized, 521,607 shares issued and outstanding in 2018; 1,000,000 shares authorized, 521,607 shares issued and outstanding in 2017)	40,633			40,633
Common stock ($.01 par value; 100,000,000 shares authorized, 46,211,894 shares issued, and 45,416,855 shares outstanding in 2018; 50,000,000 shares authorized, 46,211,894 shares issued, and 45,290,433 shares outstanding in 2017)	460			460
Preferred Stock (Series B non-voting convertible preferred stock - $0.01 par value; 2,000,000 shares authorized, 521,607 shares issued and outstanding in 2019; 2,000,000 shares authorized, 521,607 shares issued and outstanding in 2018)							40,633			40,633
Common stock ($.01 par value; 100,000,000 shares authorized and 51,903,190 shares issued and 49,585,143 shares outstanding in 2019; 100,000,000 shares authorized; 46,211,894 shares issued, and 45,416,855 shares outstanding in 2018)							517			460
Additional paid-in capital - common stock	1,245,013			1,242,487			1,422,441			1,245,013
Unearned compensation	(6,594		)	(6,531		)	(8,465		)	(6,594		)
Retained earnings	308,839			239,179			361,082			308,839
Accumulated other comprehensive (loss)/income	(13,470		)	4,161
Treasury stock, at cost (795,039 shares in 2018 and 921,461 shares in 2017)	(21,963		)	(24,125		)
Accumulated other comprehensive income/(loss)							11,993			(13,470		)
Treasury stock, at cost (2,318,047 shares in 2019 and 795,039 shares in 2018)							(69,637		)	(21,963		)
Total shareholders’ equity	1,552,918			1,496,264			1,758,564			1,552,918
Total liabilities and shareholders’ equity	$	12,212,231		$	11,570,751		$	13,215,970		$	12,212,231

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

F-5

Table of Contents

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME


	Years Ended December 31,									Years Ended December 31,
(In thousands)	2018			2017			2016			2019			2018			2017
Interest and dividend income
Loans	$	411,489		$	308,099		$	242,600		$	448,927		$	406,222		$	302,917
Securities and other	59,672			52,159			37,839			60,586			59,672			52,159
Total interest and dividend income	471,161			360,258			280,439			509,513			465,894			355,076
Interest expense
Deposits	78,364			43,855			30,883			115,193			78,364			43,855
Borrowings and subordinated notes	33,461			21,608			17,289			29,062			31,330			20,258
Total interest expense	111,825			65,463			48,172			144,255			109,694			64,113
Net interest income	359,336			294,795			232,267			365,258			356,200			290,963
Non-interest income
Mortgage banking income	35,197			54,251			7,555			788			635			2,786
Loan related income	24,168			21,401			16,694			24,374			23,155			21,421
Deposit related fees	29,806			27,165			24,963			31,352			29,806			27,165
Insurance commissions and fees	10,983			10,589			10,477			10,957			10,983			10,589
Wealth management fees	9,447			9,395			8,917			9,353			9,447			9,395
Total fee income	109,601			122,801			68,606			76,824			74,026			71,356
Other	3,557			(3,377		)	(3,289		)	1,438			3,557			(3,377		)
(Loss)/Gain on securities, net	(3,719		)	12,598			(551		)
Gain on sale of business operations, net	460			296			1,085
Gain/(loss) on securities, net										4,389			(3,719		)	12,598
Gain on sale of business operations and assets, net										1,351			460			296
Loss on termination of hedges	—			(6,629		)	—			—			—			(6,629		)
Total non-interest income	109,899			125,689			65,851			84,002			74,324			74,244
Total net revenue	469,235			420,484			298,118			449,260			430,524			365,207
Provision for loan losses	25,451			21,025			17,362			35,419			25,451			21,025
Non-interest expense
Compensation and benefits	165,185			152,979			104,600			140,906			134,019			120,015
Occupancy and equipment	40,841			35,422			27,220			39,586			36,927			31,730
Technology and communications	28,600			25,900			19,883			26,523			27,147			24,450
Marketing and promotion	7,980			11,877			3,161			4,474			4,697			6,528
Professional services	8,693			9,165			6,199			10,798			7,343			7,507
FDIC premiums and assessments	5,734			6,457			5,066			3,861			5,734			6,457
Other real estate owned and foreclosures	68			44			691			154			68			44
Amortization of intangible assets	4,934			3,493			2,927			5,783			4,934			3,493
Merger, restructuring and conversion related expenses	22,144			31,558			15,461			28,046			22,144			31,558
Other	26,192			22,815			18,094			29,726			23,880			21,196
Total non-interest expense	310,371			299,710			203,302			289,857			266,893			252,978
Income from continuing operations before income taxes	133,413			99,749			77,454			123,984			138,180			91,204
Income tax expense	27,648			44,502			18,784
Income tax expense from continuing operations										22,463			28,961			42,088
Net income from continuing operations										101,521			109,219			49,116

(Loss)/income from discontinued operations before income taxes										(5,539		)	(4,767		)	8,545
Income tax (benefit)/expense from discontinued operations										(1,468		)	(1,313		)	2,414
Net (loss)/income from discontinued operations										(4,071		)	(3,454		)	6,131

Net income	$	105,765		$	55,247		$	58,670		$	97,450		$	105,765		$	55,247
Preferred stock dividend	918			219			—			960			918			219
Income available to common shareholders	$	104,847		$	55,028		$	58,670		$	96,490		$	104,847		$	55,028
										Years Ended December 31,
Earnings per common share:
Basic	$	2.30		$	1.40		$	1.89
Diluted	$	2.29		$	1.39		$	1.88
(in thousands, except per share data)										2019			2018			2017
Basic earnings/(loss) per share:
Continuing Operations										$	2.06		$	2.38		$	1.24
Discontinued operations										(0.08		)	(0.08		)	0.16
Total basic earning per share										$	1.98		$	2.30		$	1.40

Diluted earnings/(loss) per share:
Continuing Operations										$	2.05		$	2.36		$	1.24
Discontinued operations										(0.08		)	(0.07		)	0.15
Total diluted earnings per share										$	1.97		$	2.29		$	1.39

Weighted average common shares outstanding:
Basic	46,024			39,456			30,988			49,263			46,024			39,456
Diluted	46,231			39,695			31,167			49,421			46,231			39,695

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

F-6

Table of Contenets

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Years Ended December 31,									Years Ended December 31,
(In thousands)	2018			2017			2016			2019			2018			2017
Net income	$	105,765		$	55,247		$	58,670		$	97,450		$	105,765		$	55,247
Other comprehensive income (loss), before tax:
Changes in unrealized gains and losses on securities available-for-sale	(16,923		)	(15,142		)	18,859			34,530			(16,923		)	(15,142		)
Changes in unrealized gains and losses on derivative hedges	—			6,573			1,959			—			—			6,573
Changes in unrealized gains and losses on pension	336			(94		)	515			(270		)	336			(94		)
Total other comprehensive (loss)/income, before tax	(16,587		)	(8,663		)	21,333
Total other comprehensive income/(loss), before tax										34,260			(16,587		)	(8,663		)
Income taxes related to other comprehensive income (loss):
Changes in unrealized gains and losses on securities available-for-sale	4,421			5,610			(7,199		)	(8,873		)	4,421			5,610
Changes in unrealized gains and losses on derivative hedges	—			(2,589		)	(835		)	—			—			(2,589		)
Changes in unrealized gains and losses on pension	(108		)	37			(228		)	76			(108		)	37
Total income tax (expense) benefit related to other comprehensive income (loss)	4,313			3,058			(8,262		)	(8,797		)	4,313			3,058
Total other comprehensive (loss)/income	(12,274		)	(5,605		)	13,071
Total other comprehensive income/(loss)										25,463			(12,274		)	(5,605		)
Total comprehensive income	$	93,491		$	49,642		$	71,741		$	122,913		$	93,491		$	49,642

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

F-7

Table of Contents

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY



	Preferred Stock			Common Stock				Additional paid-in			Unearned			Retained			Accumulated other comprehensive			Treasury
(In thousands, except per share data)	Shares	Amount		Shares		Amount		capital			compensation			earnings			(loss) income			stock			Total
Balance at January 1, 2017	—	—		35,673		$	366	$	898,989		$	(6,374	)	$	217,494		$	9,766		$	(26,943	)	$	1,093,298
Comprehensive income:
Net income	—	—		—		—		—			—			55,247			—			—			55,247
Other net comprehensive (loss)	—	—		—		—		—			—			—			(5,605		)	—			(5,605		)
Total comprehensive income	=sum(J5:J6)	=sum(J5:J6)		=sum(J5:J6)		=sum(J5:J6)		=sum(J5:J6)			=sum(J5:J6)			55,247			(5,605		)	—			49,642
Acquisition of Commerce Bank	522	40,633		4,842		48		188,552			—			—			—			—			229,233
Common stock issued, net of $7.1 million offering costs	—	—		4,638		46		152,938			—			—			—			—			152,984
Cash dividends declared on common shares ($0.84 per share)	—	—		—		—		—			—			(33,022		)	—			—			(33,022		)
Cash dividends declared on preferred shares ($0.42 per share)	—	—		—		—		—			—			(219		)	—			—			(219		)
Forfeited shares	—	—		(17	)	—		102			516			—			—			(618		)	—
Exercise of stock options	—	—		19		—		—			—			(158		)	—			487			329
Restricted stock grants	—	—		161		—		1,650			(5,775		)	—			—			4,125			—
Stock-based compensation	—	—		—		—		—			5,102			—			—			—			5,102
Other, net	—	—		(26	)	—		256			—			(163		)	—			(1,176		)	(1,083		)
Balance at December 31, 2017	522	40,633		45,290		$	460	$	1,242,487		$	(6,531	)	$	239,179		$	4,161		$	(24,125	)	$	1,496,264
Comprehensive income:		0
Net income	—	—		—		—		—			—			105,765			—			—			105,765
Other net comprehensive (loss)	—	—		—		—		—			—			—			(12,274		)	—			(12,274		)
Total comprehensive income	—	—		—		—		—			—			105,765			(12,274		)	—			93,491
Adoption of ASU No 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Liabilities	—	—		—		—		—			—			6,253			(6,253		)	—			—
Adoption of ASU No 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income	—	—		—		—		—			—			(896		)	896			—			—
Cash dividends declared on common shares ($0.88 per share)	—	—		—		—		—			—			(39,966		)	—			—			(39,966		)
Cash dividends declared on preferred shares ($1.76 per share)	—	—		—		—		—			—			(918		)	—			—			(918		)
Forfeited shares	—	—		(65	)	—		90			2,189			—			—			(2,279		)	—
Exercise of stock options	—	—		33		—		—			—			(578		)	—			904			326
Restricted stock grants	—	—		185		—		2,157			(7,011		)	—			—			4,854			—
Stock-based compensation	—	—		—		—		—			4,759			—			—			—			4,759
Other, net	—	—		(26	)	—		279			—			—			—			(1,317		)	(1,038		)
Balance at December 31, 2018	522	40,633		45,417		$	460	$	1,245,013		$	(6,594	)	$	308,839		$	(13,470	)	$	(21,963	)	$	1,552,918
Comprehensive income:
Net income	—	—		—		—		—			—			97,450			—			—			97,450
Other net comprehensive income	—	—		—		—		—			—			—			25,463			—			25,463
Total comprehensive income	—	—		—		—		—			—			97,450			25,463			—			122,913
Acquisition of SI Financial Group, Inc.	—	—		5,691		57		176,655			—			—			—			—			176,712
Cash dividends declared on common shares ($0.92 per share)	—	—		—		—		—			—			(44,147		)	—			—			(44,147		)
Cash dividends declared on preferred shares ($1.84 per share)	—	—		—		—		—			—			(960		)	—			—			(960		)
Treasury stock purchased	—	—		(1,726	)	—		—			—			—			—			(52,746		)	(52,746		)
Forfeited shares	—	—		(65	)	—		(251		)	2,160			—			—			(1,909		)	—
Exercise of stock options	—	—		11		—		—			—			(100		)	—			288			188
Restricted stock grants	—	—		299		—		932			(8,843		)	—			—			7,911			—
Stock-based compensation	—	—		—		—		—			4,812			—			—			—			4,812
Other, net	—	—		(42	)	—		92			—			—			—			(1,218		)	(1,126		)
Balance at December 31, 2019	522	$	40,633	49,585		$	517	$	1,422,441		$	(8,465	)	$	361,082		$	11,993		$	(69,637	)	$	1,758,564

Preferred Stock Common Stock Additional paid-in Unearned Retained Accumulated other comprehensive Treasury
(In thousands, except per share data) Shares Amount Shares Amount capital compensation earnings (loss) income stock Total
Balance at January 1, 2016 —
—
30,974
$ 322
$ 742,619
$ (6,997 ) $ 183,885
$ (3,305 ) $ (29,335 ) $ 887,189
Comprehensive income:

Net income —
—
—
—
—
—
58,670
—
—
58,670
Other net comprehensive (loss) —
—
—
—
—
—
—
13,071
—
13,071
Total comprehensive income =sum(J5:J6)
=sum(J5:J6)
=sum(J5:J6)
=sum(J5:J6)
=sum(J5:J6)
=sum(J5:J6)
58,670
13,071
—
71,741
Acquisition of 44 Business Capital —
—
45
—
—
—
—
—
1,217
1,217
Acquisition of First Choice Bank —
—
4,410
44
151,004
—
—
—
—
151,048
Cash dividends declared on common shares ($0.80 per share) —
—
—
—
—
—
(24,916 ) —
—
(24,916 )
Treasury stock adjustment (1) —
—
—
—
4,632
—
—
—
(4,632 ) —
Forfeited shares —
—
(70 ) —
148
1,789
—
—
(1,937 ) —
Exercise of stock options —
—
151
—
—
—
(145 ) —
3,857
3,712
Restricted stock grants —
—
211
—
575
(5,787 ) —
—
5,212
—
Stock-based compensation —
—
—
—
—
4,621
—
—
—
4,621
Net tax benefit related to stock-based compensation —
—
—
—
(1 ) —
—
—
—
(1 )
Other, net —
—
(48 ) —
12
—
—
—
(1,325 ) (1,313 )
Balance at December 31, 2016 —
—
35,673
$ 366
$ 898,989
$ (6,374 ) $ 217,494
$ 9,766
$ (26,943 ) $ 1,093,298
Comprehensive income: 0

Net income —
—
—
—
—
—
55,247
—
—
55,247
Other net comprehensive (loss) —
—
—
—
—
—
—
(5,605 ) —
(5,605 )
Total comprehensive income —
—
—
—
—
—
55,247
(5,605 ) —
49,642
Acquisition of Commerce Bank 522
40,633
4,842
48
188,552
—
—
—
—
229,233
Common stock issued, net of $7.1 million offering costs —
—
4,638
46
152,938
—
—
—
—
152,984
Cash dividends declared on common shares ($0.84 per share) —
—
—
—
—
—
(33,022 ) —
—
(33,022 )
Cash dividends declared on preferred shares ($0.42 per share) —
—
—
—
—
—
(219 ) —
—
(219 )
Forfeited shares —
—
(17 ) —
102
516
—
—
(618 ) —
Exercise of stock options —
—
19
—
—
—
(158 ) —
487
329
Restricted stock grants —
—
161
—
1,650
(5,775 ) —
—
4,125
—
Stock-based compensation —
—
—
—
—
5,102
—
—
—
5,102
Other, net —
—
(26 ) —
256
—
(163 ) —
(1,176 ) (1,083 )
Balance at December 31, 2017 522
40,633
45,290
$ 460
$ 1,242,487
$ (6,531 ) $ 239,179
$ 4,161
$ (24,125 ) $ 1,496,264
Comprehensive income:

Net income —
—
—
—
—
—
105,765
—
—
105,765
Other net comprehensive (loss) —
—
—
—
—
—
—
(12,274 ) —
(12,274 )
Total comprehensive income —
—
—
—
—
—
105,765
(12,274 ) —
93,491
Adoption of ASU No 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Liabilities —
—
—
—
—
—
6,253
(6,253 ) —
—
Adoption of ASU No 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income —
—
—
—
—
—
(896 ) 896
—
—
Cash dividends declared on common shares ($0.88 per share) —
—
—
—
—
—
(39,966 ) —
—
(39,966 )
Cash dividends declared on preferred shares ($1.76 per share) —
—
—
—
—
—
(918 ) —
—
(918 )
Forfeited shares —
—
(65 ) —
90
2,189
—
—
(2,279 ) —
Exercise of stock options —
—
33
—
—
—
(578 ) —
904
326
Restricted stock grants —
—
185
—
2,157
(7,011 ) —
—
4,854
—
Stock-based compensation —
—
—
—
—
4,759
—
—
—
4,759
Other, net —
—
(26 ) —
279
—
—
—
(1,317 ) (1,038 )
Balance at December 31, 2018 522
$ 40,633
45,417
$ 460
$ 1,245,013
$ (6,594 ) $ 308,839
$ (13,470 ) $ (21,963 ) $ 1,552,918

~~(1)Treasury stock adjustment represents the extinguishment of 168,931 shares of Berkshire Hills Bancorp stock held by the Company's subsidiary.~~

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

F-8

Table of Contents

BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,										Years Ended December 31,
(In thousands)	2018			2017			2016				2019			2018			2017
Cash flows from operating activities:
Net income from continuing operations											101,521			109,219			49,116
Net income from discontinued operations											(4,071		)	(3,454		)	6,131
Net income	$	105,765		$	55,247		$	58,670			$	97,450		$	105,765		$	55,247
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	25,451			21,025			17,362				35,419			25,451			21,025
Net amortization of securities	2,837			1,678			4,052				2,407			2,837			1,678
Change in unamortized net loan origination costs and premiums	(1,004		)	2,232			(4,138		)		12,759			(1,004		)	2,232
Premises and equipment depreciation and amortization expense	10,795			9,916			8,393				10,921			10,442			9,499
Stock-based compensation expense	4,759			5,102			4,621				4,812			4,759			5,102
Accretion of purchase accounting entries, net	(24,000		)	(18,189		)	(9,407		)		(14,813		)	(24,000		)	(18,189		)
Amortization of other intangibles	4,934			3,493			2,927				5,783			4,934			3,493
Write down of other real estate owned	—			10			395				—			—			10
Excess tax loss from stock-based payment arrangements	—			—			(105		)
Income from cash surrender value of bank-owned life insurance policies	(6,232		)	(3,615		)	(3,913		)		(5,349		)	(6,232		)	(3,615		)
Securities losses (gains), net	3,719			(12,598		)	551
Net decrease (increase) in loans held-for-sale	57,387			(32,947		)	5,185
Securities (gains) losses, net											(4,389		)	3,719			(12,598		)
Net change in loans held-for-sale											(5,137		)	1,460			10,511
Change in right-of-use lease assets											12,031			—			—
Change in lease liabilities											(12,217		)	—			—
Loss on disposition of assets	152			912			1,318				3,443			152			686
(Gain) loss on sale of real estate	—			(51		)	40
Loss (gain) on sale of real estate											5			—			(51		)
Amortization of interest in tax-advantaged projects	4,618			8,477			8,882				6,455			4,618			8,477
Remeasurement of deferred tax asset	—			18,145			—				—			—			18,145
Net change in other	33,073			19,254			3,309				(23,232		)	30,601			13,842
Net cash provided by operating activities of continuing operations											130,419			166,956			109,363
Net cash (used) provided by operating activities of discontinued operations											(18,894		)	55,298			(31,272		)
Net cash provided by operating activities	222,254			78,091			98,142				111,525			222,254			78,091

Cash flows from investing activities:
Net decrease in trading security	665			632			599				701			665			632
Proceeds from sales of marketable equity securities and securities available for sale	38,603			188,921			421,843
Purchases of marketable equity securities and securities available for sale	(282,085		)	(498,646		)	(400,053		)
Purchases of marketable equity securities											(23,841		)	(24,538		)	(27,435		)
Proceeds from sales of marketable equity securities											43,075			38,104			51,382
Purchases of securities available for sale											(119,671		)	(257,547		)	(471,211		)
Proceeds from sales of securities available for sale											136,229			499			137,539
Proceeds from maturities, calls, and prepayments of securities available for sale	188,076			206,648			166,736				240,586			188,076			206,648
Purchases of securities held to maturity											(7,260		)	(15,391		)	(77,208		)
Proceeds from maturities, calls, and prepayments of securities held to maturity	36,746			12,600			7,734				21,602			36,746			12,600
Purchases of securities held to maturity	(15,391		)	(77,208		)	(7,115		)
Net change in loans	(801,876		)	(468,331		)	(334,347		)		694,657			(801,876		)	(468,331		)
Acquisitions, net of cash paid	—			374,611			(48,180		)		110,774			—			374,611
Proceeds from surrender of bank-owned life insurance	854			310			258				2,451			854			310
Purchase of bank-owned life insurance	—			(20,000		)	—				—			—			(20,000		)
Proceeds from sale of Federal Home Loan Bank stock	61,831			96,378			19,461
Purchase of Federal Home Loan Bank stock	(76,090		)	(88,351		)	(19,555		)		(112,208		)	(76,090		)	(88,351		)
Proceeds from sales of Federal Home Loan Bank stock											149,455			61,831			96,378
Net investment in limited partnership tax credits	(4,724		)	(5,102		)	(7,616		)		(4,387		)	(4,724		)	(5,102		)
Proceeds from sale of premises and equipment	—			—			226
Purchase of premises and equipment, net	(9,726		)	(12,528		)	(9,101		)		(10,565		)	(9,349		)	(11,256		)
Payment to terminate cash flow hedges	—			6,573			—
Proceeds from sale of other real estate owned	1,600			590			1,515
Net cash used in investing activities	(861,517		)	(282,903		)	(207,595		)
(Continued)										(Continued)

~~(continued)~~

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BERKSHIRE HILLS BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)


	Years ended December 31,									Years ended December 31,
(In thousands)	2018			2017			2016			2019			2018			2017
Proceeds from sales of seasoned commercial loan portfolios										81,147			—			—
Payment to terminate cash flow hedges										—			—			6,573
Proceeds from sales of other real estate owned										150			1,600			590
Net investing cash flows (used) by discontinued operations										(313		)	(377		)	(1,272		)
Net cash provided (used) by investing activities										1,202,582			(861,517		)	(282,903		)

Cash flows from financing activities:
Net increase in deposits	$	233,704		$	418,550		$	140,730		$	23,996		$	233,704		$	418,550
Proceeds from Federal Home Loan Bank advances and other borrowings	4,767,766			5,978,358			9,364,599			5,384,982			4,767,766			5,978,358
Repayments of Federal Home Loan Bank advances and other borrowings	(4,387,223		)	(6,174,781		)	(9,365,159		)	(6,228,780		)	(4,387,223		)	(6,174,781		)
Issuance of common stock, net	—			152,985			—			—			—			152,985
Purchase of treasury stock										(52,746		)	—			—
Exercise of stock options	326			329			3,712			188			326			329
Common and preferred stock cash dividends paid	(40,884		)	(33,241		)	(24,916		)	(45,107		)	(40,884		)	(33,241		)
Acquisition contingent consideration paid	—			(1,700		)	—			—			—			(1,700		)
Net cash provided by financing activities	573,689			340,500			118,966
Net cash (used) provided by financing activities										(917,467		)	573,689			340,500

Net change in cash and cash equivalents	(65,574		)	135,688			9,513			396,640			(65,574		)	135,688

Cash and cash equivalents at beginning of year	248,763			113,075			103,562			183,189			248,763			113,075

Cash and cash equivalents at end of year	$	183,189		$	248,763		$	113,075		$	579,829		$	183,189		$	248,763

Supplemental cash flow information:
Interest paid on deposits	$	74,565		$	43,133		$	28,777		$	119,695		$	74,565		$	43,133
Interest paid on borrowed funds	32,274			21,336			16,674			33,406			32,274			21,336
Income taxes paid, net	3,029			18,323			16,229			19,818			3,029			18,323

Acquisition of non-cash assets and liabilities:
Assets acquired	—			1,584,786			1,169,086			1,595,054			—			1,584,786
Liabilities assumed	—			(1,959,489		)	(965,529		)	(1,530,010		)	—			(1,959,489		)

Other non-cash changes:
Other net comprehensive (loss) income	(12,274		)	(5,605		)	13,071
Other net comprehensive income/(loss)										25,463			(12,274		)	(5,605		)
Real estate owned acquired in settlement of loans	1,600			490			340			—			1,600			490
Reclass of aircraft, HOA, and SBA loan portfolios to HFS, net										120,307			—			—
Goodwill measurement period adjustment										942			—			—

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

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, ~~Mass.,~~Massachusetts, and the holding company for Berkshire Bank (the “Bank”), a Massachusetts-chartered trust company headquartered in Pittsfield, ~~Mass.,~~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.

Reclassifications

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

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements. Actual results could differ from those estimates.

Business Combinations

Business combinations are accounted for using the acquisition method of accounting. Under this method, the accounts of an acquired entity are included with the acquirer’s accounts as of the date of acquisition with any excess of purchase price over the fair value of the net assets acquired (including identifiable intangibles) capitalized as goodwill.

To consummate an acquisition, the Company will typically issue common stock and/or pay cash, depending on the terms of the acquisition agreement. The value of common shares issued is determined based upon the market price of the stock as of the closing of the acquisition.

~~F-11~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~Prior Period Acquisition~~

The Company completed the acquisition of Commerce Bancshares Corp. (“Commerce”), the parent company of Commerce Bank & Trust Company (“Commerce Bank”), at the close of business on October 13, 2017. With this acquisition, the Company established a market position in Worcester, New England’s second largest city. Additionally, this acquisition was a catalyst for the Company’s decision to relocate its corporate headquarters to Boston and to expand its Greater Boston market initiatives. This acquisition also increased the Company’s total assets over the $10 billion Dodd Frank Act threshold for additional regulatory requirements.

During the nine months ended September 30, 2018, immaterial adjustments were made to the preliminary valuation of the assets acquired and liabilities assumed. These adjustments affect goodwill, other assets, and deferred tax assets. As of September 30, 2018, the Company finalized its valuation of all assets acquired and liabilities assumed, resulting in no material change to acquisition accounting adjustments. A summary of the fair values of the acquired assets, liabilities assumed, and resulting goodwill follows:

Fair Value As Recorded by
(In thousands) As Acquired Adjustments the Company
Consideration Paid:
Company common stock issued to Commerce common shareholders $ 188,599
Company preferred stock issued to certain Commerce shareholders 40,633
Cash in lieu paid to Commerce shareholders 1
Total consideration paid 229,233
Recognized amounts of identifiable assets acquired and (liabilities) assumed, at fair value:
Cash and short-term investments $ 374,611
—
$ 374,611
Investment securities 115,274
(1,427 ) 113,847
Loans, net 1,327,256
(86,505 ) 1,240,751
Premises and equipment 8,931
5,346
14,277
Core deposit intangibles —
22,400
22,400
Deferred tax assets, net 7,956
27,060
35,016
Goodwill and other intangibles 11,233
(11,233 ) —
Other assets 52,709
(3,182 ) 49,527
Deposits (1,710,872 ) (1,180 ) (1,712,052 )
Borrowings (19,542 ) —
(19,542 )
Other liabilities (5,086 ) 265
(4,821 )
Total identifiable net assets $ 162,470
(48,456 ) 114,014

Goodwill 115,219

Cash and Cash equivalents

Cash and cash equivalents include cash, balances due from banks, and short-term investments, all of which had an original maturity within 90 days. Due to the nature of cash and cash equivalents and the near term maturity, the Company estimated that the carrying amount of such instruments approximated fair value. The nature of the Bank’s business requires that it maintain amounts due from banks which at times, may exceed federally insured limits. The Bank has not experienced any losses on such amounts and all amounts are maintained with well-capitalized institutions.

Trading Security

The Company accounts for a tax advantaged economic development bond originated in 2008 at fair value, in accordance with Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 320. The bond has been designated as a trading account security and is recorded at fair value, with changes in unrealized gains and losses recorded through earnings each period as part of non-interest income.

~~F-12~~F-11

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Securities

Debt securities that management has the intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. All other debt securities are classified as available for sale and carried at fair value, with unrealized gains and losses reported as a component of other net comprehensive income. Equity securities are carried at fair value, with changes in fair value reported in net income. Management determines the appropriate classification of securities at the time of purchase. Restricted equity securities, such as stock in the Federal Home Loan Bank of Boston (“FHLBB”) are carried at cost. There are no quoted market prices for the Company’s restricted equity securities. The Bank is a member of the FHLBB, which requires that members maintain an investment in FHLBB stock, which may be redeemed based on certain conditions. The Bank reviews for impairment based on the ultimate recoverability of the cost bases in the FHLBB stock.

Purchase premiums and discounts are recognized in interest income using the interest method, without anticipating prepayments, except mortgage-backed securities where prepayments are anticipated, over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

The Company evaluates debt securities within the Company’s available for sale and held to maturity portfolios for other-than-temporary impairment (“OTTI”), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes.

Loans Held for Sale

Loans originated with the intent to be sold in the secondary market are accounted for under the fair value option. Non-refundable fees and direct loan origination costs related to residential mortgage loans held for sale are recognized in non-interest income or non-interest expense as earned or incurred. Fair value is primarily determined based on quoted prices for similar loans in active markets. Gains and losses on sales of residential mortgage loans (sales proceeds minus carrying value) are recorded in non-interest income.

Loans that were previously held for investment that the Company has an active plan to sell are transferred to loans held for sale at the lower of cost or market (fair value). The market price is primarily determined based on quoted prices for similar loans in active markets or agreed upon sales prices. Gains are recorded in non-interest income at sale to the extent that the sale price of the loan exceeds carrying value. Any reduction in the loan’s value, prior to being transferred to loans held for sale, is reflected as a charge-off of the recorded investment in the loan resulting in a new cost basis, with a corresponding reduction in the allowance for loan losses. Further ~~changes~~decreases in the fair value of the loan are recognized in non-interest ~~income or expense, accordingly.~~expense.

~~F-13~~F-12

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans

Loans are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, the unamortized balance of any deferred fees or costs on originated loans and the unamortized balance of any premiums or discounts on loans purchased or acquired through mergers. Interest income is accrued on the unpaid principal balance. Interest income includes net accretion or amortization of deferred fees or costs and of premiums or discounts. Direct loan origination costs, net of any origination fees, in addition to premiums and discounts on loans, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest on loans, excluding automobile loans, is generally not accrued on loans which are ninety days or more past due unless the loan is well-secured and in the process of collection. Past due status is based on contractual terms of the loan. Automobile loans generally continue accruing until one hundred and twenty days delinquent, at which time they are charged off. All interest accrued but not collected for loans that are placed on non-accrual or charged-off is reversed against interest income, except for certain loans designated as well-secured. The interest on non-accrual loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Acquired Loans

Loans that the Company acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.

For loans that meet the criteria stipulated in ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” the Company recognizes the accretable yield, which is defined as the excess of all cash flows expected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss accrual, or a valuation allowance.

For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan by loan or pool basis according to the anticipated collection plan of these loans. The expected prepayments used to determine the accretable yield are consistent between the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference. For ASC 310-30 loans, prepayments result in the recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may change the amount of interest income and principal expected to be collected. Interest income is also net of recoveries recorded on acquired impaired loans. ASC310-30 loans that have similar risk characteristics, primarily credit risk, collateral type and interest rate risk, and are homogenous in size, are pooled and accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. ASC 310-30 loans that cannot be aggregated into a pool are accounted for individually.

After we acquire loans determined to be accounted for under ASC 310-30, actual cash collections are monitored to determine if they conform to management’s expectations. Revised cash flow expectations are prepared each quarter. A decrease in expected cash flows in subsequent periods may indicate impairment and would require us to establish an allowance for loan and lease losses (“ALLL”) by recording a charge to the provision for loan and lease losses. An increase in expected cash flows in subsequent periods initially reduces any previously established ALLL by the increase in the present value of cash flows expected to be collected, and requires us to recalculate the amount of accretable yield for the ASC 310-30 loan or pool. The adjustment of accretable yield due to an increase in expected cash flows is accounted for as a change in estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is adjusted accordingly over the remaining life of the ASC 310-30 loan or pool.

An ASC 310-30 loan may be derecognized either through receipt of payment (in full or in part) from the borrower, the sale of the loan to a third party, foreclosure of the collateral, or charge-off. If one of these events occurs, the loan

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is removed from the loan pool, or derecognized if it is accounted for as an individual loan. ASC 310-30 loans

~~F-14~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

subject to modification are not removed from an ASC 310-30 pool even if those loans would otherwise be deemed troubled debt restructurings (“TDRs”) since the pool, and not the individual loan, represents the unit of account. Individually accounted for ASC 310-30 loans that are modified in a TDR are no longer classified as ASC 310-30 loans and are subject to TDR recognition.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield. The Company has determined that the Company can reasonably estimate future cash flows on the Company’s current portfolio of acquired loans that are past due 90 days or more and on which the Company is accruing interest and the Company expects to fully collect the carrying value of the loans.

For loans that do not meet the ASC 310-30 criteria, the Company accretes interest income based on the contractually required cash flows. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans.

Allowance for Loan Losses

The allowance for loan losses is established based upon the level of estimated probable incurred losses in the current loan portfolio. Loan losses are charged against the allowance when management believes the collectability of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses includes allowance allocations calculated in accordance with ASC 310, “Receivables,” and allowance allocations calculated in accordance with ASC 450, “Contingencies.” The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans and an analysis of certain individual loans for impairment. The formula-based approach emphasizes loss factors derived from actual historical and industry portfolio loss rates, which are combined with an assessment of certain qualitative factors to determine the allowance amounts allocated to the various loan categories. Allowance amounts are based on an estimate of historical average annual percentage rate of loan loss for each loan segment, a temporal estimate of the incurred loss emergence and confirmation period for each loan category, and certain qualitative risk factors considered in the computation of the allowance for loan losses.

Qualitative risk factors impacting the inherent risk of loss within the portfolio include the following:

National and local economic conditions, regulatory/legislative changes, or other competitive factors affecting the collectability of the portfolio

Trends in underwriting characteristics, composition of the portfolio, and/or asset quality

Changes in underwriting standards and/or collection, charge off, recovery, and account management practice

The existence and effect of any concentrations of credit

Risk characteristics relevant to each portfolio segment are as follows:

Commercial real estate - Loans in this segment 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. In addition, 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 and industrial loans - Loans in this segment are made to businesses and are generally secured by assets of the business. 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

F-14

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

~~F-15~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Residential mortgage - 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.

Consumer loans - Loans in this segment are primarily home equity lines of credit and second mortgages, together with 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.

The Company utilizes a blend of historical and industry portfolio loss rates for commercial real estate and commercial and industrial loans that are assessed by internal risk rating. Historical loss rates for residential mortgages, home equity and other consumer loans are not risk graded but are assessed based on the total of each loan segment. This approach incorporates qualitative adjustments based upon management’s assessment of various market and portfolio specific risk factors into its formula-based estimate. Due to the subjective nature of the loan loss estimation process and ever changing conditions, the qualitative risk attributes may not adequately capture amounts of incurred loss in the formula-based loan loss components used to determine allocations in the Company’s analysis of the adequacy of the allowance for loan losses.

The Company evaluates certain loans individually for specific impairment. Large groups of small balance homogeneous loans such as the residential mortgage, home equity, and other consumer portfolios are collectively evaluated for impairment. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification, or non-accrual status. The evaluation of certain loans individually for specific impairment includes non-accrual loans over a threshold and loans that were determined to be Troubled Debt Restructurings (“TDRs”). A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of the probable loss is able to be estimated. Estimates of loss may be determined by the present value of anticipated future cash flows or the loan’s observable fair market value, or the fair value of the collateral less costs to sell, if the loan is collateral dependent. However, for collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible.

Regarding acquired loans, the Company subjects loans that do not meet the ASC 310-30 criteria to ASC 450-20 by collectively evaluating these loans for an allowance for loan loss. The Company applies a methodology similar to the methodology prescribed for business activities loans, which includes the application of environmental factors to each category of loans. The methodology to collectively evaluate the acquired loans outside the scope of ASC 310-30 includes the application of a number of environmental factors that reflect management’s best estimate of the level of incremental credit losses that might be recognized given current conditions. This is reviewed as part of the allowance for loan loss adequacy analysis. As the loan portfolio matures and environmental factors change, the loan portfolio will be reassessed each quarter to determine an appropriate reserve allowance.

Additionally, the Company considers the need for an additional reserve for acquired loans accounted for outside of the scope of ASC 310-30 under ASC 310-20. At acquisition date, the Bank determined a fair value mark with credit and interest rate components. Under the Company’s model, the impairment evaluation process involves comparing the carrying value of acquired loans, including the unamortized premium or discount, to the calculated reserve

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

allowance. If necessary, the Company books an additional reserve to account for shortfalls identified through this calculation. A decrease in the expected cash flows in subsequent periods requires the establishment of an allowance for loan losses at that time for ASC 310-30 loans.

~~F-16~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Bank-Owned Life Insurance

Bank-owned life insurance policies are reflected on the Consolidated Balance Sheets at the amount that can be realized under the insurance contract at the balance sheet date which is the cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the Consolidated Statements of Income and are not subject to income taxes.

Foreclosed and Repossessed Assets

Other real estate owned is comprised of real estate acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Repossessed collateral is primarily comprised of taxi medallions. Both other real estate owned and repossessed collateral are held for sale and are initially recorded at the fair value less estimated costs to sell at the date of foreclosure or repossession, establishing a new cost basis. The shortfall, if any, of the loan balance over the fair value of the property or collateral, less cost to sell, at the time of transfer from loans to other real estate owned or repossessed collateral is charged to the allowance for loan losses. Subsequent to transfer, the asset is carried at lower of cost or fair value less cost to sell and periodically evaluated for impairment. Subsequent impairments in the fair value of other real estate owned and repossessed collateral are charged to expense in the period incurred. Net operating income or expense related to other real estate owned and repossessed collateral is included in operating expenses in the accompanying Consolidated Statements of Income. Because of changing market conditions, there are inherent uncertainties in the assumptions with respect to the estimated fair value of other real estate owned and repossessed collateral. Because of these inherent uncertainties, the amount ultimately realized on other real estate owned and repossessed collateral may differ from the amounts reflected in the financial statements.

Capitalized Servicing Rights

Capitalized servicing rights are included in “other assets” in the Consolidated Balance Sheets. Servicing assets are initially recognized as separate assets at fair value when rights are acquired through purchase or through sale of financial assets with servicing retained.

The Company's servicing rights accounted for under the fair value method are carried on the Consolidated Balance Sheets at fair value with changes in fair value recorded in income in the period in which the change occurs. Changes in the fair value of servicing rights are primarily due to changes in valuation ~~inputs,~~ assumptions, such as discount rates and prepayment speeds, and the collection and realization of expected cash flows.

The Company’s servicing rights accounted for under the amortization method are initially recorded at fair value. Under that method, capitalized servicing rights are charged to expense in proportion to and over the period of estimated net servicing income. Fair value of the servicing rights is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, prepayment speeds and default rates and losses. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranches. If the Company later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.

Premises and Equipment

Land is carried at cost. Buildings, improvements, and equipment are carried at cost less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term, plus optional terms if certain conditions are met, or the estimated useful life of the asset.

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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. Adverse changes in the economic environment, declining operations, unanticipated competition, loss of key personnel, or other factors could result in a decline in the implied

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fair value of goodwill. If the implied fair value of goodwill is less than the carrying amount, a loss would be recognized in other non-interest expense to reduce the carrying amount to the implied fair value of goodwill.

The Company performs an annual qualitative assessment of whether it is more likely than not that the reporting unit's fair value is less than its carrying amount. If the results of the qualitative assessment suggest goodwill impairment, the Company would perform a two-step impairment test through the application of various quantitative valuation methodologies. Step 1, used to identify instances of potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount, including goodwill, exceeds its fair value, the second step of the goodwill impairment analysis is performed to measure the amount of impairment loss, if any. Step 2 of the goodwill impairment analysis compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for the reporting unit exceeds the implied fair value of the reporting unit’s goodwill, an impairment loss is recognized in an amount equal to that excess. Subsequent reversals of goodwill impairment are prohibited. The Company may elect to bypass the qualitative assessment and begin with Step 1.

Other Intangibles

Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.

The fair values of these assets are generally determined based on appraisals and are subsequently amortized on a straight-line basis or an accelerated basis over their estimated lives. Management assesses the recoverability of these intangible assets at least annually or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the carrying amount exceeds fair value, an impairment charge is recorded to income.

Transfers of Financial Assets

Transfers of an entire financial asset, group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.

Income Taxes

Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable for future years to differences between financial statement and tax bases of existing assets and liabilities. The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized. In the event it becomes more likely than not that some or all of the deferred tax asset allowances will not be needed, the valuation allowance will be adjusted.

In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax

positions. Income tax positions and recorded tax benefits are based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have determined the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is more-likely-than-not that a tax benefit will not be sustained, no tax benefit has been recognized

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in the financial statements. Where applicable, associated interest and penalties have also been recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

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Insurance Commissions

Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later, net of return commissions related to policy cancellations. Policy cancellation is a variable consideration that is not deemed significant and thus, does not impact the amount of revenue recognized.

In addition, the Company may receive additional performance commissions based on achieving certain sales and loss experience measures. Such commissions are recognized when determinable, which is generally when such commissions are received or when the Company receives data from the insurance companies that allows the reasonable estimation of these amounts.

~~Advertising Costs~~

~~Advertising costs are expensed as incurred.~~

Stock-Based Compensation

The Company measures and recognizes compensation cost relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued. The fair value of restricted stock is recorded as unearned compensation. The deferred expense is amortized to compensation expense based on one of several permitted attribution methods over the longer of the required service period or performance period. For performance-based restricted stock awards, the Company estimates the degree to which performance conditions will be met to determine the number of shares that will vest and the related compensation expense. Compensation expense is adjusted in the period such estimates change.

Income tax benefits and/or tax deficiencies related to stock compensation determined as the difference between compensation cost recognized for financial reporting purposes and the deduction for tax, are recognized in the income statement as income tax expense or benefit in the period in which they occur.

Wealth Management

Wealth management assets held in a fiduciary or agent capacity are not included in the accompanying Consolidated

Balance Sheets because they are not assets of the Company.

Wealth management fees is primarily comprised of fees earned from consultative investment management, trust administration, tax return preparation, and financial planning. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based on the daily accrual of the market value of the investment accounts and the applicable fee rate.

Derivative Instruments and Hedging Activities

The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy for certain assets and liabilities and not for speculative purposes. Based on the Company’s intended use for the interest rate swap at inception, the Company designates the derivative as either an economic hedge of an asset or liability or a hedging instrument subject to the hedge accounting provisions of ASC 815, “Derivatives and Hedging.~~��~~”

Interest rate swaps designated as economic hedges are recorded at fair value within other assets or liabilities. Changes in the fair value of these derivatives are recorded directly through earnings.

For interest rate swaps that management intends to apply the hedge accounting provisions of ASC 815, the Company formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the various hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception and for each reporting period thereafter, to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value of the derivative in earnings after termination of the hedge relationship.

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The Company has characterized its interest rate swaps that qualify under ASC 815 hedge accounting as cash flow hedges. Cash flow hedges are used to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by interest rate fluctuations, and are recorded at fair value in other assets or liabilities within the Company’s balance sheets. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any hedge ineffectiveness assessed as part of the Company’s quarterly analysis is recorded directly to earnings.

The Company enters into commitments to lend with borrowers, and forward commitments to sell loans or to-be-announced mortgage-backed bonds to investors to hedge against the inherent interest rate and pricing risk associated with selling loans. The commitments to lend generally terminate once the loan is funded, the lock period expires or the borrower decides not to contract for the loan. The forward commitments generally terminate once the loan is sold, the commitment period expires or the borrower decides not to contract for the loan. These commitments are considered derivatives which are accounted for by recognizing their estimated fair value on the Consolidated Balance Sheets as either a freestanding asset or liability. See Note 1517 to the financial statements for more information on commitments to lend and forward commitments.

Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Company enters into off-balance sheet financial instruments, consisting primarily of credit related financial instruments. These financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

Fair Value Hierarchy

The Company groups assets and liabilities that are measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Employee Benefits

The Company maintains an employer sponsored 401(k) plan to which participants may make contributions in the form of salary deferrals and the Company provides matching contributions in accordance with the terms of the plan. Contributions due under the terms of the defined contribution plans are accrued as earned by employees.

Due to the Rome Bancorp acquisition in 2011, the Company inherited a noncontributory, qualified, defined benefit pension plan for certain employees who met age and service requirements; as well as other post-retirement benefits, principally health care and group life insurance. The Rome pension plan and postretirement benefits that were acquired in connection with the whole-bank acquisition ~~in the second quarter of 2011~~ were frozen prior to the close of the transaction. The pension benefit in the form of a life annuity is based on the employee’s combined years of service, age, and compensation. The Company also has a long-term care post-retirement benefit plan for certain executives where upon disability, associated benefits are funded by insurance policies or paid directly by the Company.

In order to measure the expense associated with the Plans, various assumptions are made including the discount rate, expected return on plan assets, anticipated mortality rates, and expected future healthcare costs. The

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assumptions are based on historical experience as well as current facts and circumstances. The Company uses a

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December 31 measurement date for its Plans. As of the measurement date, plan assets are determined based on fair value, generally representing observable market prices. The projected benefit obligation is primarily determined based on the present value of projected benefit distributions at an assumed discount rate.

Net periodic pension benefit costs include interest costs based on an assumed discount rate, the expected return on plan assets based on actuarially derived market-related values, and the amortization of net actuarial losses. Net periodic postretirement benefit costs include service costs, interest costs based on an assumed discount rate, and the amortization of prior service credits and net actuarial gains. Differences between expected and actual results in each year are included in the net actuarial gain or loss amount, which is recognized in other comprehensive income. The net actuarial gain or loss in excess of a 10% corridor is amortized in net periodic benefit cost over the average remaining service period of active participants in the Plans. The prior service credit is amortized over the average remaining service period to full eligibility for participating employees expected to receive benefits.

The Company recognizes in its statement of condition an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. The Company also measures the Plans’ assets and obligations that determine its funded status as of the end of the fiscal year and recognizes those changes in other comprehensive income, net of tax.

Due to the SI Financial acquisition in 2019, the Company inherited a tax-qualified defined benefit pension plan. The plan was frozen effective September 6, 2013 and SI Financial recorded a contingent obligation to settle the plan at a future date, which was assumed by the Company. The plan is a single plan under the Internal Revenue Code and, as a result, all of the assets stand behind all of liabilities. Accordingly, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.

Operating Segments

The Company operates as ~~one~~1 consolidated reportable segment. The chief operating decision-maker evaluates consolidated results and makes decisions for resource allocation on this same data. Management periodically reviews and redefines its segment reporting as internal reporting practices evolve and components of the business change. The financial statements reflect the financial results of the Company's ~~one~~1 reportable operating segment.

Recently Adopted Accounting Principles

Effective January 1, ~~2018,~~2019, the following new accounting guidance was adopted by the Company:

ASU No. ~~2014-09, Revenue from Contracts with Customers~~2017-12, Derivatives and Hedging (Topic ~~606) (additional~~815): Targeted Improvements to Accounting for Hedging Activities;

ASU No. 2016-02, Leases (Topic 842)(additional information is disclosed in Note 2318 - ~~Revenue~~Leases of the Consolidated Financial Statements);

~~ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~

~~The adoption of these accounting standards did not have a material impact on the Company's Consolidated Financial Statements.~~

In ~~February 2018,~~August 2017, the FASB issued ASU No. ~~2018-02, “Income statement - Reporting Comprehensive Income~~2017-12, “Derivatives and Hedging (Topic ~~220)~~815): ~~Reclassification~~Targeted Improvements to Accounting for Hedging Activities.” The purpose of ~~Certain Tax Effects from Accumulated Other Comprehensive Income” which will allow~~this updated guidance is to better align a ~~reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings~~company’s financial reporting for ~~stranded tax effects resulting from~~hedging activities with the ~~Tax Cuts and Jobs Act~~economic objectives of ~~2017. These amendments are~~those activities. ASU No. 2017-12 is effective for ~~all~~public business entities for fiscal years beginning after December 15, ~~2018. For interim periods within those fiscal years,~~2018, with early adoption, including adoption in an interim period, permitted. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the ~~amendment is permitted including public business entities for reporting periods for which financial statements have not yet been issued. The Company elected to early adopt ASU 2018-02 during~~change on the ~~first quarter~~opening balance of ~~2018, and elected to reclassify~~each affected component of equity in the ~~income tax effects~~Consolidated Balance Sheets as of the ~~Tax Cuts~~date of adoption. In April 2019, the FASB issued ASU No. 2019-04 to clarify certain aspects of accounting for hedging activities addressed by ASU No. 2017-12, among other things (ASU No. 2019-04 amendments and ~~Jobs Act of 2017 from AOCI~~pending adoption to ~~retained earnings.~~FASB ASC Topics 326 and 825 are described in the section below). ASU No. 2017-12 became effective for the Company on January 1, 2019. The ~~immaterial reclassification increased AOCI and decreased retained earnings by $896 thousand, with no net effect on total shareholders’ equity.~~adoption was not material to the financial statements.

~~Future Application of Accounting Pronouncements~~

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. The new pronouncement improves the transparency and comparability of financial reporting around leasing transactions and more closely aligns accounting for leases with the recently issued International Financial Reporting Standard. The pronouncement affects all entities that are participants to leasing agreements. From a lessee accounting perspective, the ASU requires a lessee to recognize assets and liabilities on the balance sheet for operating leases and changes many key definitions, including the definition of a lease. The ASU includes a short-term lease exception for leases with a

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term of twelve months or less, in which a lessee can make an accounting policy election not to recognize lease assets and lease liabilities. Lessees will continue to differentiate between finance leases (previously referred to as capital leases) and operating leases, using classification criteria that are substantially similar to the previous guidance. For

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lessees, the recognition, measurement, and presentation of expenses and cash flows arising from a lease have not significantly changed from previous GAAP. From a lessor accounting perspective, the guidance is largely unchanged, except for targeted improvements to align with new terminology under lessee accounting and with the updated revenue recognition guidance in Topic 606. For sale-leaseback transactions, for a sale to occur the transfer must meet the sale criteria under the new revenue standard, Topic 606. Entities will not be required to reassess transactions previously accounted under then existing guidance.

The ASU includes additional quantitative and qualitative disclosures required by lessees and lessors to help users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years beginning after December 31, 2018, and interim periods within those fiscal years. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU No. 2018-11 entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. As the Company elected the transition option provided in ASU No. 2018-11, the modified retrospective approach ~~will be~~was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain practical expedients provided under ASU No. 2016-02 whereby we will not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for any existing leases. In December 2018, the FASB issued ASU No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” which provides targeted improvements and clarification to guidance with FASB ASC Topic 842 specific to lessors. The amendments of ASU No. 2018-20 have the same effective date as ASU 2016-02 and may be applied either retrospectively or prospectively to all new and existing leases. The Company obtained a third-party software application which ~~will provide~~provides lease accounting under the guidelines of FASB ASC Topic 842. The amendments of ASU No. 2016-02 and subsequently issued ASUs, which provided additional guidance and clarifications to various aspects of FASB ASC Topic 842, became effective for the Company on January 1, 2019. ~~Management is currently finalizing the evaluation of the Company’s lease obligations as potential~~The Company recognized right-of-use lease assets and related lease liabilities totaling $79.6 million and $82.8 million respectively as ~~defined by ASU No. 2016-02. Based on management’s preliminary analysis~~ of ~~the Company’s existing~~January 1, 2019. The right-of-use lease ~~contracts, it is estimated that the adoption of ASU 2016-02 will result in approximately $70 million to $90 million increase in~~ assets and related lease liabilities ~~on the Company’s consolidated balance sheets. Disclosures required by the amendments~~recognized at January 1, 2019 include right-of-use lease assets and lease liabilities classified as discontinued operations. See Note 18 - Leases for more information.

Future Application of ~~ASU No. 2016-02 will be presented beginning with the Quarterly Report on Form 10-Q for the period ending March 31, 2019.~~

Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU improves financial reporting by requiring timelier recording of credit losses on loans and other financial instruments. The ASU requires companies to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Forward-looking information will now be used in credit loss estimates. The ASU requires enhanced disclosures to provide better understanding surrounding significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit ~~deterioration.~~deterioration (“PCD assets”). Most debt instruments will require a cumulative-effect adjustment to retained earnings on the statement of financial position as of the beginning of the first reporting period in which the guidance is adopted (modified retrospective approach). However, there is instrument-specific (such as PCD assets) transition ~~guidance.~~guidance requiring a prospective transition approach. For existing purchased credit-impaired assets, upon adoption, the amortized cost basis will be adjusted to reflect the addition of the allowance for credit losses. This transition relief avoids the need to reassess purchased financial assets that exist as of the date of adoption in order to determine whether they would have met, at acquisition, the

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new criteria of ‘more than insignificant’ credit deterioration since origination. The transition relief also allows the remaining accretable discount (based on the revised amortized cost basis) to accrete into interest income over the life of the related asset using the interest method. ASU No. 2016-13 is effective for interim and annual periods beginning after December 15, 2019. ~~Early application will be permitted for interim and annual periods beginning after December 15, 2018.~~

The Company is evaluating the provisions of ASU No. 2016-13, and will closely monitor developments and additional guidance to determine the potential impact on the Company's Consolidated Financial Statements. A cross-functional working group has been formed and is comprised of individuals from various functional areas including credit, risk management, finance and information technology, among others. Management is working

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through its implementation plan which includes assessment and documentation of processes and internal controls; model development and documentation; and system configuration. Management is also in the process of implementing a third-party vendor solution to assist us in the application of ASU No. 2016-13. The Company expects the primary changes to be the application of the new expected credit loss model from the incurred model. In addition, the Company expects the guidance to change the presentation of credit losses within the available-for-sale fixed maturities portfolio through an allowance method rather than as a direct write-down. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The allowance method for available-for-sale debt securities will allow the Company to record reversals of credit losses if the estimate of credit losses declines. Management is finalizing the execution of operating and financial processes, controls, and disclosures. The Company ishas not completed finalizing the results of the CECL estimate as of year-end as we are in ~~the~~ process of ~~identifying~~data and ~~implementing required changes to loan loss estimation models~~model validation, as well as finalizing qualitative factors and processes and evaluating the impact of this new accounting guidance, which at the date of adoption is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.forecast measurement.

In January 2017, the FASB issued ASU No. 2017-04, ~~“Intangibles -~~“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. ~~Early adoption is permitted.~~ The Company will adopt the guidance when it performs the annual impairment test and does not expect adoption to have a material effect on its Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU No. 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. ASU No. 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the Consolidated Balance Sheets as of the date of adoption. ASU No. 2017-12 became effective for the Company on January 1, 2019. The adoption was not material to the 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. ~~Early adoption is permitted.~~ 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 will not have a material impact on its Consolidated Financial Statements.

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.

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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 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

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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. ~~Early adoption is permitted.~~ The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. ~~While the~~The Company ~~continues to assess all potential impacts of the standard, we currently do~~does not expect adoption to have a material impact on ~~its~~the Company's Consolidated Financial Statements.

As mentioned in the previous section in April 2019 the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” With respect to FASB ASC Topic 326, Financial Instruments - Credit Losses, ASU No. 2019-04 clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to FASB ASC Topic 825, Financial Instruments, on recognizing and measuring financial instruments, ASU No. 2019-04 addresses the scope of the guidance, the requirement for remeasurement under FASB ASC Topic 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. The amendments to FASB ASC Topic 326 have the same effective dates as ASU 2016-13 (i.e., the first quarter of 2020). The Company is currently evaluating the impact of FASB ASC Topic 326 amendments on the Company’s Consolidated Financial Statements. The amendments to FASB ASC Topic 825 are effective for interim and annual reporting periods beginning after December 15, 2019 and are not expected to have a material impact on the Company’s Consolidated Financial Statements.

In May 2019, the FASB issued ASU No. 2019-05, “Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief.” ASU No. 2019-05 allows entities to irrevocably elect, upon adoption of ASU No. 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU No. 2019-05 has the same effective date as ASU No. 2016-13 (i.e., the first quarter of 2020). The Company has determined to apply this transition relief to one of the PCI loan asset classes that is currently accounted for under the pooled method under ASC 310-30. Similar to disclosure of the potential impact of ASU No. 2016-13, the Company is in process of finalizing the operational and financial processes and internal controls.

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.

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NOTE 2. ACQUISITION

SI Financial Group, Inc.

At the close of business on May 17, 2019, the Company completed the acquisition of SI Financial Group, Inc. (“SIFI”), the parent company of Savings Institute Bank and Trust Company (“Savings Institute”). Savings Institute also merged with and into Berkshire Bank. With this acquisition, the Company increased its market presence with

18 branches in Eastern Connecticut and 5 branches in Rhode Island, adding to the Company's existing 9 Connecticut branches.

As established by the merger agreement, each of the 11.858 million outstanding shares of SIFI common stock was converted into the right to receive 0.48 shares of the Company's common stock, plus cash in lieu of fractional shares. As of close of business on May 17, 2019, the Company issued 5.691 million common shares as merger consideration, pursuant to the merger agreement. The value of this consideration was measured at $175.8 million for the common stock based on the $30.89 closing price of the Company’s common stock on the issuance date. SIFI had a stock option plan, and as part of the acquisition agreement, Berkshire agreed to continue the vesting schedules of option holders of SIFI stock with corresponding Berkshire stock with a share conversion ratio of 48%. The fair value of the vested portion of the options was $0.9 million, and was included as part of consideration paid for SIFI.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Accordingly, the Company recognizes amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair value, with any excess of purchase consideration over the net assets being reported as goodwill. During the year ended December 31, 2019, immaterial adjustments were made to the preliminary valuation of the assets acquired and liabilities assumed. These adjustments affect goodwill, other assets, other liabilities, and deferred tax assets. As of December 31, 2019, the Company finalized its valuation of all assets acquired and liabilities assumed, resulting in no material change to acquisition accounting adjustments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides a summary of the assets acquired and liabilities assumed and the associated fair value adjustments as recorded by the Company at acquisition:



(in thousands)	As Acquired			Fair Value Adjustments				As Recorded by the Company
Consideration Paid:
Company common stock issued to SIFI common shareholders								$	175,804
Fair value of SIFI stock options converted to Berkshire options								907
Cash in lieu paid to SIFI shareholders								14
Total consideration paid								$	176,725
Recognized amounts of identifiable assets acquired and (liabilities) assumed, at fair value:
Cash and short-term investments	$	110,774		$	—			$	110,774
Investment securities	144,629			(1,261		)	(a)	143,368
Loans held for sale	1,005			—				1,005
Loans, net	1,332,127			(29,388		)	(b)	1,302,739
Premises and equipment	19,039			(2,092		)	(c)	16,947
Core deposit intangibles	—			17,980			(d)	17,980
Deferred tax assets, net	6,629			11,315			(e)	17,944
Goodwill and other intangibles	16,063			(16,063		)	(f)	—
Other assets	60,648			(984		)		59,664
Deposits	(1,327,115		)	(7,733		)	(g)	(1,334,848		)
Borrowings	(154,726		)	1,717			(h)	(153,009		)
Other liabilities	(33,987		)	(7,289		)	(i)	(41,276		)
Total identifiable net assets	$	175,086		$	(33,798	)		$	141,288

Goodwill								$	35,437

Explanation of Certain Fair Value Adjustments:


(a)	The adjustment represents the write down of the book value of securities to their estimated fair value at the date of acquisition.

(b)

The adjustment represents the write-off of $15.6 million in allowance for loan and lease losses and the write down of the book value of loans to their estimated fair value based on interest rates and expected cash flows as of the acquisition date, which includes an estimate of expected loan loss inherent in the portfolio. Loans with evidence of credit deterioration at acquisition are accounted for under ASC 310-30 and had a book value of $55.8 million and had a fair value of $32.1 million, including a $4.2 million fair value adjustment that is accretable in earnings. Non-impaired loans accounted for under ASC 310-20 had a book value of $1.29 billion and have a fair value of $1.27 billion, including a $6.7 million fair value adjustment discount that is amortized over the remaining term of the loans using the effective interest method, or a straight-line method if the loan is a revolving credit facility.

(c)

The adjustment represents a decreased fair value based on the appraised value of Savings Institute's owned branches comprised of $1.1 million for land. This is in addition to a $1.0 million reduction of the book value of furniture, fixtures, and equipment, to their estimated fair value and the immediate expensing of equipment not meeting the thresholds for capitalization in accordance with Company policy. The adjustments will be depreciated over the remaining estimated economic lives of the assets.


(d)	The adjustment represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized over the estimated useful life of the deposit base (10 years).


(e)	Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments.


(f)	Represents the write-off of goodwill and intangible assets from a prior SIFI acquisition.


(g)	The adjustment is necessary because the weighted average interest rate of time deposits exceeded the cost of similar funding at the time of acquisition. The amount will be amortized over the estimated useful life of eleven months.


(h)	Adjusts borrowings by a reduction of $0.8 million to their estimated fair value, which is calculated based on current market rates. This is in addition to a $0.9 million reduction to the estimated fair value for the SI Capital Trust II, which is calculated based on the amount an institution would be willing to purchase the instrument at in the open market.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(i)	Adjusts the book value of other liabilities to their estimated fair value at the acquisition date. The adjustment consists of a $6.7 million increase to post-retirement liabilities due to change-in-control provisions, a $0.9 million increase in bank-owned life insurance liabilities, offset by a decrease of $0.4 million to the unfunded commitment reserve.

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, the Company estimated fair value by analyzing the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of the seller’s allowance for credit losses associated with the loans acquired, as the loans were initially recorded at fair value. Information about the Savings Institute acquired loan portfolio subject to ASC 310-30 as of May 17, 2019 is as follows (in thousands):



	ASC 310-30 Loans
Gross contractual receivable amounts at acquisition	$	55,754
Contractual cash flows not expected to be collected (nonaccretable discount)	(19,427		)
Expected cash flows at acquisition	36,327
Interest component of expected cash flows (accretable discount)	(4,200		)
Fair value of acquired loans	$	32,127

Capitalized goodwill, which is not amortized for book purposes, is not deductible for tax purposes.

Direct acquisition and integration costs of the Savings Institute acquisition were expensed as incurred, and totaled $18.7 million during the year ending December 31, 2019 and $2.8 million for the same period of 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Pro Forma Information (unaudited)

The following table presents selected unaudited pro forma financial information reflecting the acquisition of SIFI assuming the acquisition was completed as of January 1, 2018. The valuation of the assets and

liabilities acquired has been used to prepare pro forma adjustments. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments. These adjustments would have been different if they had been recorded on January 1, 2018, and they do not include the impact of prepayments. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and the acquisition had the transaction actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. The unaudited pro forma information is based on the actual financial statements of Berkshire and the acquired business for the periods shown until the dates of acquisition, at which time the acquired business operations became included in Berkshire’s financial statements.

For whole-bank acquisitions, the Company has determined it is impractical to report the amounts of revenue and earnings of each entity since acquisition date. Due to the integration of their operations with those of the organization, the Company does not record revenue and earnings separately. The revenue and earnings of SIFI’s operations are included in the Consolidated Statement of Income.

The unaudited pro forma information, for the years ended December 31, 2019 and 2018, set forth below reflects adjustments related to (a) amortization and accretion of purchase accounting fair value adjustments; (b) amortization of core deposit and customer relationship intangibles; and (c) an estimated tax rate of 27.04 percent. Direct acquisition expenses incurred by the Company during 2019, as noted above, are reversed for the purposes of this unaudited pro forma information. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the

Information in the following table is shown in thousands:



	Pro Forma (unaudited) Years Ended December 31,
	2019		2018
Net interest income	$	383,828	$	412,164
Non-interest income	88,500		85,563
Income available to common shareholders	118,552		127,693

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. 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 continues to operate and serve its customers as the Company initiates the process of identifying a buyer. The potential transaction is expected to close within 12 months. 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.

The following is a summary of the assets and liabilities of the discontinued operations of FCLS at December 31, 2019 and December 31, 2018:



(in thousands)	December 31, 2019			December 31, 2018
Assets
Loans held for sale, at fair value	$	132,655		$	94,050
Premises and equipment, net	1,073			1,867
Mortgage servicing rights, at fair value	12,299			11,500
Mortgage banking derivatives	2,329			3,254
Right-of-use asset	3,462			—
Deferred tax	(3,418		)	(3,270		)
Other assets	5,732			6,858
Total assets	$	154,132		$	114,259
Liabilities
Customer payments in process	$	15,372		$	6,584
Lease liability	3,494			—
Other liabilities	7,615			3,013
Total liabilities	$	26,481		$	9,597

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. When the transaction closes, the Company will reallocate these funds to various purposes, including but not limited to, pay-down of short-term debt with the Federal Home Loan Bank.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following presents operating results of the discontinued operations of FCLS for the years ended December 31, 2019, 2018, and 2017:



	Years Ended December 31,
(in thousands)	2019			2018			2017
Interest income	$	6,085		$	5,267		$	5,182
Interest expense	3,372			2,131			1,350
Net interest income	2,713			3,136			3,832
Non-interest income	38,517			35,574			51,445
Total net revenue	41,230			38,710			55,277
Non-interest expense	46,769			43,477			46,732
(Loss)/income from discontinued operations before income taxes	(5,539		)	(4,767		)	8,545
Income tax expense	(1,468		)	(1,313		)	2,414
Net income from discontinued operations	$	(4,071	)	$	(3,454	)	$	6,131

FCLS also originates mortgages designated as held-for-investment. This component of FCLS’s operations was not considered discontinued, since the Company expects to continue to originate mortgages designated as held-for-investment in its footprint on a small scale through processes considered as continuing operations.

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NOTE 2.4. CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, amounts due from banks, and short-term investments with original maturities of 90 days or less. Short-term investments included ~~$25.4~~$96.3 million and ~~$2.1~~$25.4 million pledged as collateral support for derivative financial contracts at year-end ~~2018~~2019 and ~~2017,~~2018, respectively. The Federal Reserve Bank requires the Bank to maintain certain reserve requirements of vault cash and/or deposits. The reserve requirement, included in cash and equivalents, was ~~$18.0~~$18.3 million and ~~$20.4~~$18.0 million at year-end ~~2018~~2019 and ~~2017,~~2018, respectively.

NOTE 3.5. TRADING SECURITY

The Company holds a tax advantaged economic development bond that is being accounted for at fair value. The security had an amortized cost of ~~$10.1~~$9.4 million and ~~$10.8~~$10.1 million and a fair value of ~~$11.2~~$10.8 million and ~~$12.3~~$11.2 million at year-end ~~2018~~2019 and ~~2017,~~2018, respectively. Unrealized losses recorded through income on this security totaled $0.3 million, $0.4 million, and $0.3 million for 2019, 2018, and ~~$0.4 million for 2018,~~ 2017, ~~and 2016,~~ respectively. As discussed further in Note 1517 - Derivative Instruments and Hedging Activities, the Company has 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 are no other debt securities in the trading portfolio at year-end ~~2018~~2019 and ~~2017.~~2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4.6. SECURITIES

The Company adopted ASU-2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" in the first quarter of 2018. Beginning in 2018, all changes in the fair value of marketable equity securities, including other-than-temporary impairment, are immediately recognized in earnings.

The following is a summary of securities available for sale (“AFS”) , held to maturity (“HTM”), and marketable equity securities:



(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2019
Securities available for sale
Debt securities:
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 sale	1,297,339		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 maturity	357,979		16,263		(965		)	373,277

Marketable equity securities	37,138		5,147		(729		)	41,556
Total	$	1,692,456	$	37,913	$	(3,981	)	$	1,726,388

December 31, 2018
Securities available for sale
Debt securities:
Municipal bonds and obligations	$	109,648	$	2,272	$	(713	)	$	111,207
Agency collateralized mortgage obligations	944,946		1,130		(15,192		)	930,884
Agency mortgage-backed securities	175,406		36		(5,121		)	170,321
Agency commercial mortgage-backed securities	62,200		—		(3,275		)	58,925
Corporate bonds	120,718		593		(1,355		)	119,956
Other bonds and obligations	8,355		34		(35		)	8,354
Total securities available for sale	1,421,273		4,065		(25,691		)	1,399,647
Securities held to maturity
Municipal bonds and obligations	264,524		3,569		(3,601		)	264,492
Agency collateralized mortgage-backed securities	71,637		533		(778		)	71,392
Agency mortgage-backed securities	7,219		—		(297		)	6,922
Agency commercial mortgage-backed securities	10,417		—		(289		)	10,128
Tax advantaged economic development bonds	19,718		22		(1,698		)	18,042
Other bonds and obligations	248		—		—			248
Total securities held to maturity	373,763		4,124		(6,663		)	371,224

Marketable equity securities	55,471		4,370		(3,203		)	56,638
Total	$	1,850,507	$	12,559	$	(35,557	)	$	1,827,509

(In thousands) Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
December 31, 2018

Securities available for sale

Debt securities:

Municipal bonds and obligations $ 109,648
$ 2,272
$ (713 ) $ 111,207
Agency collateralized mortgage obligations 944,946
1,130
(15,192 ) 930,884
Agency mortgage-backed securities 175,406
36
(5,121 ) 170,321
Agency commercial mortgage-backed securities 62,200
—
(3,275 ) 58,925
Corporate bonds 112,404
342
(1,256 ) 111,490
Trust preferred securities 8,314
251
(99 ) 8,466
Other bonds and obligations 8,355
34
(35 ) 8,354
Total securities available for sale 1,421,273
4,065
(25,691 ) 1,399,647
Securities held to maturity

Municipal bonds and obligations 264,524
3,569
(3,601 ) 264,492
Agency collateralized mortgage obligations 71,637
533
(778 ) 71,392
Agency mortgage-backed securities 7,219
—
(297 ) 6,922
Agency commercial mortgage-backed securities 10,417
—
(289 ) 10,128
Tax advantaged economic development bonds 19,718
22
(1,698 ) 18,042
Other bonds and obligations 248
—
—
248
Total securities held to maturity 373,763
4,124
(6,663 ) 371,224

Marketable equity securities 55,471
4,370
(3,203 ) 56,638
Total $ 1,850,507
$ 12,559
$ (35,557 ) $ 1,827,509

December 31, 2017

Securities available for sale

Debt securities:

Municipal bonds and obligations $ 113,427
$ 5,012
$ (206 ) $ 118,233
Agency collateralized mortgage obligations 859,705
397
(8,944 ) 851,158
Agency mortgage-backed securities 218,926
279
(2,265 ) 216,940
Agency commercial mortgage-backed securities 64,025
41
(1,761 ) 62,305
Corporate bonds 110,076
882
(237 ) 110,721
Trust preferred securities 11,334
343
—
11,677
Other bonds and obligations 9,757
154
(31 ) 9,880
Total securities available for sale 1,387,250
7,108
(13,444 ) 1,380,914
Securities held to maturity

Municipal bonds and obligations 270,310
8,675
(90 ) 278,895
Agency collateralized mortgage-backed securities 73,742
1,045
(486 ) 74,301
Agency mortgage-backed securities 7,892
—
(164 ) 7,728
Agency commercial mortgage-backed securities 10,481
—
(268 ) 10,213
Tax advantaged economic development bonds 34,357
596
(1,135 ) 33,818
Other bonds and obligations 321
—
—
321
Total securities held to maturity 397,103
10,316
(2,143 ) 405,276

Marketable equity securities 36,483
9,211
(509 ) 45,185
Total $ 1,820,836
$ 26,635
$ (16,096 ) $ 1,831,375

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At year-end ~~2018~~2019 and ~~2017,~~2018, accumulated net unrealized gains/(losses)~~/gains~~ on AFS securities included in accumulated other comprehensive income/(loss)~~/income~~ were ~~$(21.6)~~$14.2 million and ~~$2.3~~$(21.6) million, respectively. At year-end ~~2018~~2019 and ~~2017,~~2018, accumulated net unrealized gains on HTM securities included in accumulated other comprehensive income/(loss)~~/income~~ were ~~$6.4~~$5.0 million and ~~$7.7~~$6.4 million respectively. The year-end ~~2018~~2019 and ~~2017~~2018 related income tax ~~benefit/~~(liability)/benefit of ~~$3.8~~$(5.1) million and ~~$(4.0)~~$3.8 million, respectively, was also included in accumulated other comprehensive income/(loss)~~/income.~~.

The amortized cost and estimated fair value of AFS and HTM securities, segregated by contractual maturity at year-end ~~2018~~2019 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities and collateralized mortgage obligations are shown in total, as their maturities are highly variable.



	Available for sale				Held to maturity
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within 1 year	$	34,900	$	34,996	$	1,849	$	1,849
Over 1 year to 5 years	20,372		20,292		14,269		14,403
Over 5 years to 10 years	68,139		69,673		12,541		12,711
Over 10 years	136,723		142,942		243,029		255,123
Total bonds and obligations	260,134		267,903		271,688		284,086
Mortgage-backed securities	1,037,205		1,043,652		86,291		89,191
Total	$	1,297,339	$	1,311,555	$	357,979	$	373,277

Available for sale Held to maturity
(In thousands) Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Within 1 year $ 4,277
$ 4,264
$ 3,151
$ 3,151
Over 1 year to 5 years 30,065
30,123
14,286
14,256
Over 5 years to 10 years 75,361
75,614
12,766
12,826
Over 10 years 129,018
129,516
254,287
252,549
Total bonds and obligations 238,721
239,517
284,490
282,782
Mortgage-backed securities 1,182,552
1,160,130
89,273
88,442
Total $ 1,421,273
$ 1,399,647
$ 373,763
$ 371,224

At year-end ~~2018~~2019 and ~~2017,~~2018, the Company had pledged securities as collateral for certain municipal deposits and for interest rate swaps with certain counterparties. The total amortized cost and fair values of these pledged securities follows. Additionally, there is a blanket lien on certain securities to collateralize borrowings from the FHLBB, as discussed further in Note 1113 - Borrowed Funds.



	2019				2018
(In thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities pledged to swap counterparties	$	25,728	$	25,828	$	13,093	$	12,819
Securities pledged for municipal deposits	168,740		175,719		187,636		188,423
Total	$	194,468	$	201,547	$	200,729	$	201,242

2018 2017
(In thousands) Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Securities pledged to swap counterparties $ 13,093
$ 12,819
$ 24,410
$ 24,240
Securities pledged for municipal deposits 187,636
188,423
210,382
214,513
Total $ 200,729
$ 201,242
$ 234,792
$ 238,753

Purchases of AFS securities totaled $120 million in 2019 and $258 million in ~~2018 and $499 million in 2017.~~2018. Proceeds from the sale of AFS securities totaled $136 million in 2019 and $0.5 million in ~~2018 and $189 million in 2017.~~2018. The amounts for the sale of AFS securities were reclassified out of accumulated other comprehensive income and into earnings. The components of net recognized gains and losses on the sale of AFS securities and the fair value change of marketable equities are as follows:



(In thousands)	2019			2018			2017
Gross recognized gains	$	7,492		$	3,256		$	13,877
Gross recognized losses	(3,103		)	(6,975		)	(1,279		)
Net recognized gains/(losses)	$	4,389		$	(3,719	)	$	12,598

(In thousands) 2018 2017 2016
Gross recognized gains $ 3,256
$ 13,877
$ 2,762
Gross recognized losses (6,975 ) (1,279 ) (3,313 )
Net recognized (losses)/gains $ (3,719 ) $ 12,598
$ (551 )

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



	Less Than Twelve Months				Over Twelve Months				Total
(In thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
December 31, 2019
Securities available for sale
Debt securities:
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-back securities	1,097		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 sale	$	1,287	$	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 maturity	55		10,578		910		6,925		965		17,503
Total	$	1,342	$	191,404	$	1,910	$	90,698	$	3,252	$	282,102

December 31, 2018
Securities available for sale
Debt securities:
Municipal bonds and obligations	$	55	$	3,186	$	658	$	11,787	$	713	$	14,973
Agency collateralized mortgage obligations	76		39,114		15,116		755,528		15,192		794,642
Agency mortgage-backed securities	53		5,500		5,068		162,439		5,121		167,939
Agency commercial mortgage-backed securities	44		1,503		3,231		57,422		3,275		58,925
Corporate bonds	1,348		81,502		7		2,561		1,355		84,063
Other bonds and obligations	—		—		35		3,030		35		3,030
Total securities available for sale	$	1,576	$	130,805	$	24,115	$	992,767	$	25,691	$	1,123,572
Securities held to maturity
Municipal bonds and obligations	127		17,596		3,474		103,759		3,601		121,355
Agency collateralized mortgage obligations	—		—		778		43,138		778		43,138
Agency mortgage-backed securities	—		—		297		6,922		297		6,922
Agency commercial mortgage-back securities	—		—		289		10,128		289		10,128
Tax advantaged economic development bonds	65		8,078		1,633		6,512		1,698		14,590
Total securities held to maturity	192		25,674		6,471		170,459		6,663		196,133
Total	$	1,768	$	156,479	$	30,586	$	1,163,226	$	32,354	$	1,319,705

Less Than Twelve Months Over Twelve Months Total
(In thousands) Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value Gross
Unrealized
Losses Fair
Value
December 31, 2018

Securities available for sale

Debt securities:

Municipal bonds and obligations $ 55
$ 3,186
$ 658
$ 11,787
$ 713
$ 14,973
Agency collateralized mortgage obligations 76
39,114
15,116
755,528
15,192
794,642
Agency mortgage-backed securities 53
5,500
5,068
162,439
5,121
167,939
Agency commercial mortgage-back securities 44
1,503
3,231
57,422
3,275
58,925
Corporate bonds 1,249
74,434
7
2,561
1,256
76,995
Trust preferred securities 99
7,068
—
—
99
7,068
Other bonds and obligations —
—
35
3,030
35
3,030
Total securities available for sale $ 1,576
$ 130,805
$ 24,115
$ 992,767
$ 25,691
$ 1,123,572
Securities held to maturity

Municipal bonds and obligations 127
17,596
3,474
103,759
3,601
121,355
Agency collateralized mortgage obligations —
—
778
43,138
778
43,138
Agency mortgage-backed securities —
—
297
6,922
297
6,922
Agency commercial mortgage-back securities —
—
289
10,128
289
10,128
Tax advantaged economic development bonds 65
8,078
1,633
6,512
1,698
14,590
Total securities held to maturity 192
25,674
6,471
170,459
6,663
196,133
Total $ 1,768
$ 156,479
$ 30,586
$ 1,163,226
$ 32,354
$ 1,319,705

December 31, 2017

Securities available for sale

Debt securities:

Municipal bonds and obligations $ —
$ —
$ 206
$ 8,985
$ 206
$ 8,985
Agency collateralized mortgage obligations 6,849
655,479
2,095
80,401
8,944
735,880
Agency mortgage-backed securities 765
95,800
1,500
65,323
2,265
161,123
Agency commercial mortgage-backed securities 334
17,379
1,427
39,268
1,761
56,647
Corporate bonds 1
328
236
15,769
237
16,097
Trust preferred securities —
—
—
—
—
—
Other bonds and obligations 11
1,096
20
2,004
31
3,100
Total securities available for sale $ 7,960
$ 770,082
$ 5,484
$ 211,750
$ 13,444
$ 981,832
Securities held to maturity

Municipal bonds and obligations 35
10,213
55
2,059
90
12,272
Agency collateralized mortgage obligations —
—
486
12,946
486
12,946
Agency mortgage-backed securities —
—
164
7,728
164
7,728
Agency commercial mortgage-back securities —
—
268
10,213
268
10,213
Tax advantaged economic development bonds 1,135
7,305
—
—
1,135
7,305
Total securities held to maturity 1,170
17,518
973
32,946
2,143
50,464
Total $ 9,130
$ 787,600
$ 6,457
$ 244,696
$ 15,587
$ 1,032,296

~~F-28~~F-33

Table of Contents

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 December 31, ~~2018,~~2019, 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 historical low portfolio turnover.~~positions.

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 did not maintain other-than-temporary impairment ("OTTI") at year-end ~~2018:~~

~~AFS municipal bonds and obligations~~

At year-end 2018, 20 out of the total 316 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 4.6% 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 that the bonds in this portfolio carry minimal risk of default and that the Company is appropriately compensated for that risk. There were no material underlying credit downgrades during 2018. All securities are performing.2019:

AFS collateralized mortgage obligations

At year-end ~~2018, 259~~2019, 28 out of the total ~~290~~245 securities in the Company’s portfolio of AFS collateralized mortgage obligations were in unrealized loss positions. Aggregate unrealized losses represented ~~1.9%~~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 residential mortgage obligations. The securities are investment grade rated and there were no material underlying credit downgrades during ~~2018.~~2019. All securities are performing.

AFS commercial and residential mortgage-backed securities

At year-end ~~2018, 121~~2019, 39 out of the total ~~143~~107 securities in the Company’s portfolio of AFS mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented ~~3.6%~~0.9% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows of the Company’s mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during ~~2018.~~2019. All securities are performing.

AFS corporate bonds

At year-end ~~2018, 14~~2019, 6 out of the total 2523 securities in the Company’s portfolio of AFS corporate bonds were in unrealized loss positions. The aggregate unrealized loss represents ~~1.6%~~1.4% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.

~~AFS trust preferred securities~~

At year-end 2018, 1 out of the total 2 securities in the Company’s portfolio of AFS trust preferred securities was in an unrealized loss position. Aggregate unrealized losses represented 1.4% of the amortized cost of the security in an unrealized loss position. The Company’s evaluation of the present value of expected cash flows on this security supports its conclusions about the recoverability of the securities’ amortized cost basis. This security is investment grade rated. The Company reviews the financial strength of all of the single issue trust issuers and has concluded that the amortized cost remains supported by the market value of these securities and they are performing.

~~F-29~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

AFS other bonds and obligations

At year-end ~~2018, 6~~2019, 3 out of the total 128 securities in the Company’s portfolio of other bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented ~~1.2%~~0.4% 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 ~~2018.~~2019. All securities are performing.

HTM Municipal bonds and obligations

At year-end ~~2018, 98~~2019, 1 out of the total ~~274~~210 securities in the Company’s portfolio of HTM municipal bonds and obligations were in an unrealized loss ~~positions.~~position. Aggregate unrealized losses represented ~~2.9%~~0.6% of the amortized cost of ~~securities~~the security in an unrealized loss ~~positions.~~position. 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 that the bonds in this portfolio carry minimal risk of default and that the Company is appropriately compensated for that risk. There were no material underlying credit downgrades during ~~2018.~~2019. All securities are performing.

HTM collateralized mortgage obligations

At year-end ~~2018, 4~~2019, 1 out of the total 9 securities in the Company’s portfolio of HTM collateralized mortgage obligations ~~was~~were in an unrealized loss ~~positions.~~position. Aggregate unrealized losses represented ~~1.8%~~0.5% of the amortized cost of ~~securities~~the security in an unrealized loss ~~positions.~~position. The FNMA, FHLMC, and GNMA guarantee the contractual cash flows of all of the Company's collateralized residential mortgage obligations. The securities are investment grade rated, and there were no material underlying credit downgrades during ~~2018.~~2019. All securities are performing.

~~HTM commercial and residential mortgage-backed securities~~

F-34

Table of Contents

At year-end 2018, 3 out of the total 3 securities in the Company’s portfolio of HTM mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 3.3% of the amortized cost of securities in unrealized loss positions. The FNMA, FHLMC, and GNMA guarantees the contractual cash flows of the Company’s mortgage-backed securities. The securities are investment grade rated and there were no material underlying credit downgrades during 2018. All securities are performing.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

HTM tax-advantaged economic development bonds

At year-end ~~2018, 3~~2019, 1 out of the total 95 securities in the Company’s portfolio of tax advantaged economic development bonds were in an unrealized loss position. Aggregate unrealized losses represented ~~10.4%~~11.6% of the amortized cost of the security in an unrealized loss position. ~~One of the~~The above mentioned ~~tax advantaged~~tax-advantaged economic ~~bonds was downgraded to~~bond is a Substandard ~~during 2018.~~rated asset. The Company believes ~~it is~~that more likely than not ~~that~~ all the principal outstanding will be collected. All securities are performing.

~~F-30~~F-35

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.7. LOANS

The Company’s loan portfolio is segregated into the following segments: commercial real estate, commercial and industrial, residential mortgage, and consumer. Commercial real estate loans include construction, single and multi-family, and other commercial real estate classes. Residential mortgage loans include classes for 1-4 family owner occupied and construction loans. Consumer loans include home equity, direct and indirect auto, and other consumer loan classes. These portfolio segments each have unique risk characteristics that are considered when determining the appropriate level for the allowance for loan losses.

A substantial portion of the loan portfolio is secured by real estate in Massachusetts, southern Vermont, northeastern New York, New Jersey, and in the Bank’s other New England lending areas. The ability of many of the Bank’s borrowers to honor their contracts is dependent, among other things, on the specific economy and real estate markets of these areas.

Total loans include business activity loans and acquired loans. Acquired loans are those loans acquired from previous mergers and acquisitions. Once the full integration of the acquired entity is complete, acquired and business activity loans are serviced, managed, and accounted for under the Company's same control environment. During 2019, the Company reclassified $50 million of aircraft loans, $29 million of homeowners association loans, and $29 million of SBA loans from commercial and industrial to held-for-sale. The aircraft loans and homeowners association loans were sold prior to year-end. The SBA loans reclassified to held-for-sale are not contained in the balances below and are accounted for at the lower of carrying value or fair market value.

The following is a summary of total loans:



	December 31, 2019						December 31, 2018
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Commercial real estate:
Construction	$	382,014	$	47,792	$	429,806	$	327,792	$	25,220	$	353,012
Other commercial real estate	2,414,942		1,189,521		3,604,463		2,260,919		786,290		3,047,209
Total commercial real estate	2,796,956		1,237,313		4,034,269		2,588,711		811,510		3,400,221

Commercial and industrial loans	1,442,617		397,891		1,840,508		1,513,538		466,508		1,980,046

Total commercial loans	4,239,573		1,635,204		5,874,777		4,102,249		1,278,018		5,380,267

Residential mortgages:
1-4 family	2,143,817		533,536		2,677,353		2,317,716		238,952		2,556,668
Construction	4,641		3,478		8,119		9,582		174		9,756
Total residential mortgages	2,148,458		537,014		2,685,472		2,327,298		239,126		2,566,424

Consumer loans:
Home equity	273,867		106,724		380,591		289,961		86,719		376,680
Auto and other	504,599		56,989		561,588		647,236		72,646		719,882
Total consumer loans	778,466		163,713		942,179		937,197		159,365		1,096,562

Total loans	$	7,166,497	$	2,335,931	$	9,502,428	$	7,366,744	$	1,676,509	$	9,043,253

December 31, 2018 December 31, 2017
(In thousands) Business Activities Loans Acquired Loans Total Business Activities Loans Acquired Loans Total
Commercial real estate:

Construction $ 327,792
$ 25,220
$ 353,012
$ 181,371
$ 84,965
$ 266,336
Other commercial real estate 2,260,919
786,290
3,047,209
2,036,336
962,070
2,998,406
Total commercial real estate 2,588,711
811,510
3,400,221
2,217,707
1,047,035
3,264,742

Commercial and industrial loans 1,513,538
466,508
1,980,046
1,182,569
621,370
1,803,939

Total commercial loans 4,102,249
1,278,018
5,380,267
3,400,276
1,668,405
5,068,681

Residential mortgages:

1-4 family 2,317,716
238,952
2,556,668
1,808,024
289,373
2,097,397
Construction 9,582
174
9,756
5,177
233
5,410
Total residential mortgages 2,327,298
239,126
2,566,424
1,813,201
289,606
2,102,807

Consumer loans:

Home equity 289,961
86,719
376,680
294,954
115,227
410,181
Auto and other 647,236
72,646
719,882
603,767
113,902
717,669
Total consumer loans 937,197
159,365
1,096,562
898,721
229,129
1,127,850

Total loans $ 7,366,744
$ 1,676,509
$ 9,043,253
$ 6,112,198
$ 2,187,140
$ 8,299,338

~~F-31~~F-36

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total unamortized net costs and premiums included in the year-end total loans for business activity loans were the following:



(In thousands)	December 31, 2019		December 31, 2018
Unamortized net loan origination costs	$	13,259	$	25,761
Unamortized net premium on purchased loans	2,643		2,792
Total unamortized net costs and premiums	$	15,902	$	28,553

(In thousands) December 31, 2018 December 31, 2017
Unamortized net loan origination costs $ 25,761
$ 24,669
Unamortized net premium on purchased loans 2,792
4,311
Total unamortized net costs and premiums $ 28,553
$ 28,980

In 2019, the Company purchased loans aggregating $432 million and sold loans aggregating $310 million. In 2018, the Company purchased loans aggregating $567 million and sold loans aggregating $388 million. ~~In 2017, the Company purchased loans aggregating $501 million and sold loans aggregating $515 million.~~ Net gains on sales of loans were $12.0 million, $9.3 million, ~~$11.7 million,~~ and ~~$8.0~~$11.7 million for the years 2019, 2018, ~~2017,~~ and ~~2016,~~2017, respectively. These amounts are included in Loan Related Income on the Consolidated Statements of Income.

Most of the Company’s lending activity occurs within its primary markets in Massachusetts, Southern Vermont, and Northeastern New York. Most of the loan portfolio is secured by real estate, including residential mortgages, commercial mortgages, and home equity loans. Year-end loans to operators of non-residential buildings totaled $1.7 billion, or 18.1%, and $1.4 billion, or 15.6%~~, and $1.3 billion, or 15.8%~~ of total loans in ~~2018~~2019 and ~~2017,~~2018, respectively. There were no other concentrations of loans related to any single industry in excess of 10% of total loans at year-end ~~2018~~2019 or ~~2017.~~2018.

At year-end ~~2018,~~2019, the Company had pledged loans totaling ~~$371~~$285 million to the Federal Reserve Bank of Boston as collateral for certain borrowing arrangements. Also, residential first mortgage loans are subject to a blanket lien for FHLBB advances. See Note 1113 - Borrowed Funds.

At year-end ~~2018~~2019 and ~~2017,~~2018, the Company’s commitments outstanding to related parties totaled ~~$52.9~~$1.8 million and ~~$50.8~~$52.9 million, respectively, and the loans outstanding against these commitments totaled ~~$47.8~~$1.0 million and ~~$44.1~~$47.8 million, respectively. Related parties include directors and executive officers of the Company and its subsidiaries, as well as their respective affiliates in which they have a controlling interest and immediate family members. For the years ~~2018~~2019 and ~~2017,~~2018, all related party loans were performing.

The carrying amount of the acquired loans at December 31, 2019 totaled $2.3 billion. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $61.4 million and a note balance of $147 million. These loans are evaluated for impairment through the quarterly reforecasting of expected cash flows. Of the $61.4 million, $23.1 million are commercial real estate, $26.7 million are commercial and industrial loans, $10.8 million are residential mortgages, and $0.8 million are consumer loans.

The carrying amount of the acquired loans at December 31, 2018 totaled $1.7 billion. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans ~~presently maintain~~maintained a carrying value of $47.3 million and a note balance of $124 million. ~~These loans are evaluated for impairment through the quarterly reforecasting of expected cash flows.~~ Of the $47.3 million, $12.0 million ~~are Commercial Real Estate,~~were commercial real estate, $29.5 million ~~are Commercial~~were commercial and ~~Industrial~~industrial loans, $4.9 million ~~are Residential Mortgages,~~were residential mortgages, and $0.9 million ~~are Consumer~~were consumer loans.

The carrying amount of the acquired loans at December 31, 2017 totaled $2.2 billion. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans maintained a carrying value of $97.3 million and a note balance of $209 million. Of the $97.3 million, $53.3 million were Commercial Real Estate, $34.6 million were Commercial and Industrial loans, $7.0 million were Residential Mortgages, and $2.4 million were Consumer loans.

~~F-32~~F-37

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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)	2019			2018			2017
Balance at beginning of period	$	2,840		$	11,561		$	8,738
Accretion	(9,619		)	(23,109		)	(14,810		)
Additions	4,200			—			10,815
Net reclassification from nonaccretable difference	7,430			17,347			9,198
Payments received, net	(837		)	(2,878		)	(2,380		)
Reclassification to TDR	9			—			—
Disposals	—			(81		)	—
Balance at end of period	$	4,023		$	2,840		$	11,561

(In thousands) 2018 2017 2016
Balance at beginning of period $ 11,561
$ 8,738
$ 6,925
Accretion (23,109 ) (14,810 ) (8,149 )
Additions —
10,815
6,125
Net reclassification from/(to) nonaccretable difference 17,347
9,198
7,040
Payments received, net (2,878 ) (2,380 ) (3,018 )
Reclassification to TDR —
—
(185 )
Disposals (81 ) —
—
Balance at end of period $ 2,840
$ 11,561
$ 8,738

The following is a summary of past due loans at December 31, ~~2018~~2019 and ~~2017:~~2018:

Business Activities Loans


(in thousands)	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing		30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing
December 31, 2018
December 31, 2019
Commercial real estate:
Construction	$	—	$	—	$	—	$	—	$	327,792	$	327,792	$	—	$	—	$	—	$	—	$	—	$	382,014	$	382,014	$	—
Commercial real estate	913		276		18,833		20,022		2,240,897		2,260,919		993		423		89		15,623		16,135		2,398,807		2,414,942		—
Total	913		276		18,833		20,022		2,568,689		2,588,711		993		423		89		15,623		16,135		2,780,821		2,796,956		—
Commercial and industrial loans
Total	4,694		975		4,636		10,305		1,503,233		1,513,538		4		2,841		2,033		10,662		15,536		1,427,081		1,442,617		122
Residential mortgages:
1-4 family	1,631		1,619		1,440		4,690		2,313,026		2,317,716		66		1,669		714		3,350		5,733		2,138,084		2,143,817		800
Construction	—		—		—		—		9,582		9,582		—		—		—		—		—		4,641		4,641		—
Total	1,631		1,619		1,440		4,690		2,322,608		2,327,298		66		1,669		714		3,350		5,733		2,142,725		2,148,458		800
Consumer loans:
Home equity	618		15		933		1,566		288,395		289,961		—		149		—		1,147		1,296		272,571		273,867		52
Auto and other	3,543		615		1,699		5,857		641,379		647,236		—		4,709		990		2,729		8,428		496,171		504,599		1
Total	4,161		630		2,632		7,423		929,774		937,197		—		4,858		990		3,876		9,724		768,742		778,466		53
Total	$	11,399	$	3,500	$	27,541	$	42,440	$	7,324,304	$	7,366,744	$	1,063	$	9,791	$	3,826	$	33,511	$	47,128	$	7,119,369	$	7,166,497	$	975

~~F-33~~F-38

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Activities Loans


(in thousands)	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing		30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing
December 31, 2017
December 31, 2018
Commercial real estate:
Construction	$	—	$	—	$	—	$	—	$	181,371	$	181,371	$	—	$	—	$	—	$	—	$	—	$	327,792	$	327,792	$	—
Commercial real estate	1,925		48		5,474		7,447		2,028,889		2,036,336		457		913		276		18,833		20,022		2,240,897		2,260,919		993
Total	1,925		48		5,474		7,447		2,210,260		2,217,707		457		913		276		18,833		20,022		2,568,689		2,588,711		993
Commercial and industrial loans
Total	4,031		1,912		6,023		11,966		1,170,603		1,182,569		128		4,694		975		4,363		10,305		1,503,233		1,513,538		4
Residential mortgages:
1-4 family	2,412		242		2,186		4,840		1,803,184		1,808,024		520		1,631		1,619		1,440		4,690		2,313,026		2,317,716		66
Construction	—		—		—		—		5,177		5,177		—		—		—		—		—		9,582		9,582		—
Total	2,412		242		2,186		4,840		1,808,361		1,813,201		520		1,631		1,619		1,440		4,690		2,322,608		2,327,298		66
Consumer loans:
Home equity	444		1,235		1,747		3,426		291,528		294,954		120		618		15		933		1,566		288,395		289,961		—
Auto and other	3,389		599		1,597		5,585		598,182		603,767		143		3,543		615		1,699		5,857		641,379		647,236		—
Total	3,833		1,834		3,344		9,011		889,710		898,721		263		4,161		630		2,632		7,423		929,774		937,197		—
Total	$	12,201	$	4,036	$	17,027	$	33,264	$	6,078,934	$	6,112,198	$	1,368	$	11,399	$	3,500	$	27,541	$	42,440	$	7,324,304	$	7,366,744	$	1,063

Acquired Loans


(in thousands)	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Acquired Credit Impaired		Total Loans		Past Due > 90 days and Accruing		30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Acquired Credit Impaired		Total Loans		Past Due > 90 days and Accruing
December 31, 2018
December 31, 2019
Commercial real estate:
Construction	$	—	$	—	$	—	$	—	$	—	$	25,220	$	—	$	—	$	—	$	—	$	—	$	1,396	$	47,792	$	—
Commercial real estate	2,603		1,127		4,183		7,913		11,994		786,290		1,652		3,907		245		10,247		14,399		21,639		1,189,521		5,751
Total	2,603		1,127		4,183		7,913		11,994		811,510		1,652		3,907		245		10,247		14,399		23,035		1,237,313		5,751
Commercial and industrial loans
Total	217		147		1,515		1,879		29,539		466,508		144		888		299		1,275		2,462		26,718		397,891		442
Residential mortgages:
1-4 family	1,382		144		918		2,444		4,888		238,952		75		745		491		932		2,168		10,840		533,536		139
Construction	—		—		—		—		—		174		—		—		—		—		—		—		3,478		—
Total	1,382		144		918		2,444		4,888		239,126		75		745		491		932		2,168		10,840		537,014		139
Consumer loans:
Home equity	290		148		751		1,189		553		86,719		—		346		222		789		1,357		540		106,724		72
Auto and other	193		62		547		802		314		72,646		96		120		22		265		407		286		56,989		—
Total	483		210		1,298		1,991		867		159,365		96		466		244		1,054		1,764		826		163,713		72
Total	$	4,685	$	1,628	$	7,914	$	14,227	$	47,288	$	1,676,509	$	1,967	$	6,006	$	1,279	$	13,508	$	20,793	$	61,419	$	2,335,931	$	6,404

~~F-34~~F-39

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans


(in thousands)	30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Acquired Credit Impaired		Total Loans		Past Due > 90 days and Accruing		30-59 Days Past Due		60-89 Days Past Due		>90 Days Past Due		Total Past Due		Acquired Credit Impaired		Total Loans		Past Due > 90 days and Accruing
December 31, 2017
December 31, 2018
Commercial real estate:
Construction	$	—	$	—	$	—	$	—	$	7,655	$	84,965	$	—	$	—	$	—	$	—	$	—	$	—	$	25,220	$	—
Commercial real estate	1,487		1,875		2,359		5,721		45,647		962,070		109		2,603		1,127		4,183		7,913		11,994		786,290		1,652
Total	1,487		1,875		2,359		5,721		53,302		1,047,035		109		2,603		1,127		4,183		7,913		11,994		811,510		1,652
Commercial and industrial loans:
Total	1,252		268		1,439		2,959		34,629		621,370		23		217		147		1,515		1,879		29,539		466,508		144
Residential mortgages:
1-4 family	957		2,581		1,247		4,785		6,974		289,373		30		1,382		144		918		2,444		4,888		238,952		75
Construction	—		—		—		—		—		233		—		—		—		—		—		—		174		—
Total	957		2,581		1,247		4,785		6,974		289,606		30		1,382		144		918		2,444		4,888		239,126		75
Consumer loans:
Home equity	286		40		1,965		2,291		1,956		115,227		—		290		148		751		1,189		553		86,719		—
Auto and other	346		135		430		911		483		113,902		38		193		62		547		802		314		72,646		96
Total	632		175		2,395		3,202		2,439		229,129		38		483		210		1,298		1,991		867		159,365		96
Total	$	4,328	$	4,899	$	7,440	$	16,667	$	97,344	$	2,187,140	$	200	$	4,685	$	1,628	$	7,914	$	14,227	$	47,288	$	1,676,509	$	1,967

The following is summary information pertaining to non-accrual loans at year-end ~~2018~~2019 and ~~2017:~~2018:



	December 31, 2019						December 31, 2018
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Commercial real estate:
Construction	$	—	$	—	$	—	$	—	$	—	$	—
Other commercial real estate	15,623		4,496		20,119		17,840		2,531		20,371
Total	15,623		4,496		20,119		17,840		2,531		20,371
Commercial and industrial loans:
Total	10,540		833		11,373		4,632		1,371		6,003

Residential mortgages:
1-4 family	2,550		793		3,343		1,374		843		2,217
Construction	—		—		—		—		—		—
Total	2,550		793		3,343		1,374		843		2,217
Consumer loans:
Home equity	1,095		717		1,812		933		751		1,684
Auto and other	2,728		265		2,993		1,699		451		2,150
Total	3,823		982		4,805		2,632		1,202		3,834
Total non-accrual loans	$	32,536	$	7,104	$	39,640	$	26,478	$	5,947	$	32,425

December 31, 2018 December 31, 2017
(In thousands) Business Activities
Loans Acquired Loans Total Business Activities
Loans Acquired Loans Total
Commercial real estate:

Construction $ —
$ —
$ —
$ —
$ —
$ —
Other commercial real estate 17,840
2,531
20,371
5,017
2,250
7,267
Total 17,840
2,531
20,371
5,017
2,250
7,267
Commercial and industrial loans:

Total 4,632
1,371
6,003
5,895
1,333
7,228

Residential mortgages:

1-4 family 1,374
843
2,217
1,666
1,217
2,883
Construction —
—
—
—
—
—
Total 1,374
843
2,217
1,666
1,217
2,883
Consumer loans:

Home equity 933
751
1,684
1,627
1,965
3,592
Auto and other 1,699
451
2,150
1,454
392
1,846
Total 2,632
1,202
3,834
3,081
2,357
5,438
Total non-accrual loans $ 26,478
$ 5,947
$ 32,425
$ 15,659
$ 7,157
$ 22,816

~~F-35~~F-40

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Loans evaluated for impairment as of December 31, ~~2018~~2019 and ~~2017~~2018 were as follows:

Business Activities Loans



(In thousands) 2019	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Loans receivable:
Balance at end of year
Individually evaluated for impairment	$	19,192	$	9,167	$	3,019	$	630	$	32,008
Collectively evaluated	2,777,764		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

Business Activities Loans



(In thousands) 2018	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Loans receivable:
Balance at end of year
Individually evaluated for impairment	$	23,345	$	2,825	$	2,089	$	342	$	28,601
Collectively evaluated	2,565,366		1,510,713		2,325,209		936,855		7,338,143
Total	$	2,588,711	$	1,513,538	$	2,327,298	$	937,197	$	7,366,744

~~Business Activities Loans~~

(In thousands)
2017 Commercial
real estate Commercial
and industrial Residential
mortgages Consumer Total
Loans receivable:

Balance at end of year

Individually evaluated for impairment $ 33,732
$ 5,761
$ 3,872
$ —
$ 43,365
Collectively evaluated 2,183,975
1,176,808
1,809,329
898,721
6,068,833
Total $ 2,217,707
$ 1,182,569
$ 1,813,201
$ 898,721
$ 6,112,198

Acquired Loans


(In thousands) 2018	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
(In thousands) 2019											Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Loans receivable:
Balance at end of year
Individually evaluated for impairment	$	3,980	$	763	$	362	$	646	$	5,751	$	4,241	$	464	$	372	$	575	$	5,652
Purchased credit-impaired loans	11,994		29,539		4,888		867		47,288		23,035		26,718		10,840		826		61,419
Collectively evaluated	795,536		436,206		233,876		157,852		1,623,470		1,210,037		370,709		525,802		162,312		2,268,860
Total	$	811,510	$	466,508	$	239,126	$	159,365	$	1,676,509	$	1,237,313	$	397,891	$	537,014	$	163,713	$	2,335,931

Acquired Loans



(In thousands) 2018	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Loans receivable:
Balance at end of year
Individually evaluated for impairment	$	3,980	$	763	$	362	$	646	$	5,751
Purchased credit-impaired loans	11,994		29,539		4,888		867		47,288
Collectively evaluated	795,536		436,206		233,876		157,852		1,623,470
Total	$	811,510	$	466,508	$	239,126	$	159,365	$	1,676,509

(In thousands)
2017 Commercial
real estate Commercial
and industrial Residential
mortgages Consumer Total
Loans receivable:

Balance at end of year

Individually evaluated for impairment $ 4,244
$ 421
$ 2,617
$ 27
$ 7,309
Purchased credit-impaired loans 53,302
34,629
6,974
2,439
97,344
Collectively evaluated 989,489
586,320
280,015
226,663
2,082,487
Total $ 1,047,035
$ 621,370
$ 289,606
$ 229,129
$ 2,187,140

~~F-36~~F-41

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following is a summary of impaired loans at year-end ~~2018~~2019 and ~~2017~~2018 and for the years then ended:

Business Activities Loans


	At December 31, 2018						At December 31, 2019
(In thousands)	Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance		Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
With no related allowance:
Commercial real estate - construction	$	—	$	—	$	—
Other commercial real estate	22,606		31,038		—		$	18,676	$	37,493	$	—
Other commercial and industrial loans	1,584		2,566		—		4,805		10,104		—
Residential mortgages - 1-4 family	443		441		—		433		699		—
Consumer - home equity	230		242		—		32		238		—
With an allowance recorded:
Commercial real estate - construction	$	—	$	—	$	—
Other commercial real estate	666		670		9		$	550	$	1,411	$	20
Other commercial and industrial loans	1,251		1,235		49		4,166		12,136		122
Residential mortgages - 1-4 family	1,663		1,779		128		2,615		2,924		109
Consumer - home equity	100		106		10		594		614		42
Consumer - other	13		13		1		8		8		1

Total
Commercial real estate	$	23,272	$	31,708	$	9	$	19,226	$	38,904	$	20
Commercial and industrial	2,835		3,801		49		8,971		22,240		122
Residential mortgages	2,106		2,220		128		3,048		3,623		109
Consumer	343		361		11		634		860		43
Total impaired loans	$	28,556	$	38,090	$	197	$	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. These amounts are components of total loans and other assets on the Consolidated Balance Sheets.

(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.

~~F-37~~F-42

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Business Activities Loans


	At December 31, 2017						At December 31, 2018
(In thousands)	Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance		Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
With no related allowance:
Commercial real estate - construction	$	—	$	—	$	—
Other commercial real estate	19,362		22,218		—		$	22,606	$	31,038	$	—
Other commercial and industrial loans	2,060		2,629		—		1,584		2,566		—
Residential mortgages - 1-4 family	660		1,075		—		443		441		—
Consumer - home equity	867		1,504		—		230		242		—
With an allowance recorded:
Commercial real estate - construction	$	159	$	159	$	1
Other commercial real estate	14,480		15,406		228		$	666	$	670	$	9
Other commercial and industrial loans	3,716		4,249		66		1,251		1,235		49
Residential mortgages - 1-4 family	1,344		1,446		130		1,663		1,779		128
Consumer - home equity	1,014		999		34		100		106		10
Consumer - other	17		17		1		13		13		1

Total
Commercial real estate	$	34,001	$	37,783	$	229	$	23,272	$	31,708	$	9
Commercial and industrial	5,776		6,878		66		2,835		3,801		49
Residential mortgages	2,004		2,521		130		2,106		2,220		128
Consumer	1,898		2,520		35		343		361		11
Total impaired loans	$	43,679	$	49,702	$	460	$	28,556	$	38,090	$	197

(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.

~~F-38~~F-43

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans


	At December 31, 2018						At December 31, 2019
(In thousands)	Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance		Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
With no related allowance:
Other commercial real estate loans	$	3,055	$	5,959	$	—	$	3,200	$	6,021	$	—
Other commercial and industrial loans	538		644		—		437		532		—
Residential mortgages - 1-4 family	271		324		—		292		293		—
Consumer - home equity	399		1,053		—		416		844		—
Consumer - other	—		11		—		—		—		—

With an allowance recorded:
Other commercial real estate loans	$	925	$	947	$	9	$	1,033	$	1,050	$	97
Other commercial and industrial loans	228		232		4		28		30		1
Residential mortgages - 1-4 family	94		117		36		84		110		8
Consumer - home equity	205		196		41		121		123		6
Consumer - other	43		40		7		39		37		6

Total
Commercial real estate	$	3,980	$	6,906	$	9	$	4,233	$	7,071	$	97
Commercial and industrial	766		876		4		465		562		1
Residential mortgages	365		441		36		376		403		8
Consumer	647		1,300		48		576		1,004		12
Total impaired loans	$	5,758	$	9,523	$	97	$	5,650	$	9,040	$	118

(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.

~~F-39~~F-44

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans



	December 31, 2018
(In thousands)	Recorded Investment (1)		Unpaid Principal Balance (2)		Related Allowance
With no related allowance:
Other commercial real estate loans	$	3,055	$	5,959	$	—
Other commercial and industrial loans	538		644		—
Residential mortgages - 1-4 family	271		324		—
Consumer - home equity	399		1,053		—
Consumer - other	—		11		—

With an allowance recorded:
Other commercial real estate loans	$	925	$	947	$	9
Other commercial and industrial loans	228		232		4
Residential mortgages - 1-4 family	94		117		36
Consumer - home equity	205		196		41
Consumer - other	43		40		7

Total
Commercial real estate	$	3,980	$	6,906	$	9
Commercial and industrial	766		876		4
Residential mortgages	365		441		36
Consumer	647		1,300		48
Total impaired loans	$	5,758	$	9,523	$	97

December 31, 2017
(In thousands) Recorded Investment (1) Unpaid Principal
Balance (2) Related Allowance
With no related allowance:

Other commercial real estate loans $ 1,327
$ 3,084
$ —
Other commercial and industrial loans 255
310
—
Residential mortgages - 1-4 family 658
671
—
Consumer - home equity 1,374
1,654
—
Consumer - other 27
27
—

With an allowance recorded:

Other commercial real estate loans $ 2,930
$ 2,541
$ 56
Other commercial and industrial loans 165
166
1
Residential mortgages - 1-4 family 166
185
9
Consumer - home equity 433
540
45

Total

Commercial real estate $ 4,257
$ 5,625
$ 56
Commercial and industrial 420
476
1
Residential mortgages 824
856
9
Consumer 1,834
2,221
45
Total impaired loans $ 7,335
$ 9,178
$ 111

(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.

~~F-40~~F-45

Table of Contents

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, 2018, ~~2017~~ and ~~2016:~~2017:

Business Activities Loans


	December 31, 2018				December 31, 2017				December 31, 2016				December 31, 2019				December 31, 2018				December 31, 2017
(in thousands)	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized
With no related allowance:
Commercial real estate - construction	$	—	$	—	$	—	$	—	$	—	$	—
Other commercial real estate	24,078		373		21,208		1,337		6,499		1,156		$	19,805	$	586	$	24,078	$	373	$	21,208	$	1,337
Other commercial and industrial	914		245		4,437		265		3,349		131		3,165		523		914		245		4,437		265
Residential mortgages - 1-4 family	428		20		1,128		31		2,403		91		185		17		428		20		1,128		31
Consumer-home equity	107		10		1,291		30		612		5		148		3		107		10		1,291		30
Consumer-other	—		—		72		3		2		—		—		—		—		—		72		3

With an allowance recorded:
Commercial mortgages - construction	$	—	$	—	$	41	$	3	$	—	$	—
Other commercial real estate	555		30		11,541		532		7,591		355		$	374	$	107	$	555	$	30	$	11,541	$	532
Other commercial and industrial	1,259		139		3,251		267		2,002		225		2,533		793		1,259		139		3,251		267
Residential mortgages - 1-4 family	1,407		75		1,289		59		682		26		2,427		150		1,407		75		1,289		59
Consumer-home equity	98		6		1,007		29		999		35		349		32		98		6		1,007		29
Consumer - other	15		1		4		1		103		4		11		1		15		1		4		1

Total
Commercial real estate	$	24,633	$	403	$	32,790	$	1,872	$	14,090	$	1,511	$	20,179	$	693	$	24,633	$	403	$	32,790	$	1,872
Commercial and industrial	2,173		384		7,688		532		5,351		356		5,698		1,316		2,173		384		7,688		532
Residential mortgages	1,835		95		2,417		90		3,085		117		2,612		167		1,835		95		2,417		90
Consumer loans	220		17		2,374		63		1,716		44		508		36		220		17		2,374		63
Total impaired loans	$	28,861	$	899	$	45,269	$	2,557	$	24,242	$	2,028	$	28,997	$	2,212	$	28,861	$	899	$	45,269	$	2,557

~~F-41~~F-46

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans



	December 31, 2019				December 31, 2018				December 31, 2017
(in thousands)	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized
With no related allowance:
Other commercial real estate	$	1,603	$	117	$	3,280	$	263	$	829	$	321
Other commercial and industrial	441		51		428		68		581		43
Residential mortgages - 1-4 family	241		11		290		9		390		28
Consumer - home equity	475		23		635		4		773		22
Consumer - other	—		—		13		1		7		1

With an allowance recorded:
Other commercial real estate	$	1,005	$	59	$	950	$	53	$	2,622	$	138
Other commercial and industrial	29		2		197		41		47		13
Residential mortgages - 1-4 family	88		7		26		9		173		9
Consumer - home equity	68		6		89		12		400		21
Consumer - other	41		2		11		3		—		—

Total
Commercial real estate	$	2,608	$	176	$	4,230	$	316	$	3,451	$	459
Commercial and industrial	470		53		625		109		628		56
Residential mortgages	329		18		316		18		563		37
Consumer loans	584		31		748		20		1,180		44
Total impaired loans	$	3,991	$	278	$	5,919	$	463	$	5,822	$	596

December 31, 2018 December 31, 2017 December 31, 2016
(in thousands) Average Recorded
Investment Cash Basis Interest
Income Recognized Average Recorded
Investment Cash Basis Interest
Income Recognized Average Recorded
Investment Cash Basis Interest
Income Recognized
With no related allowance:

Commercial real estate - construction $ —
$ —
$ —
$ —
$ —
$ —
Other commercial real estate 3,280
263
829
321
521
20
Other commercial and industrial 428
68
581
43
492
9
Residential mortgages - 1-4 family 290
9
390
28
293
12
Consumer - home equity 635
4
773
22
—
—
Consumer - other 13
1
7
1
105
1

With an allowance recorded:

Commercial real estate - construction $ —
$ —
$ —
$ —
$ —
$ —
Other commercial real estate 950
53
2,622
138
3,682
280
Other commercial and industrial 197
41
47
13
369
17
Residential mortgages - 1-4 family 26
9
173
9
214
25
Consumer - home equity 89
12
400
21
—
—
Consumer - other 11
3
—
—
—
—

Total

Commercial real estate $ 4,230
$ 316
$ 3,451
$ 459
$ 4,203
$ 300
Commercial and industrial 625
109
628
56
861
26
Residential mortgages 316
18
563
37
507
37
Consumer loans 748
20
1,180
44
105
1
Total impaired loans $ 5,919
$ 463
$ 5,822
$ 596
$ 5,676
$ 364

NoNaN additional funds are committed to be advanced in connection with impaired loans.

~~F-42~~F-47

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Troubled Debt Restructuring Loans

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

The following tables include the recorded investment and number of modifications for modified loans identified during the years-ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017 respectively. The tables include the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. The modifications for the ~~year-ended~~years-ended December 31, 2019, 2018, ~~were attributable to interest rate concessions, maturity date extensions, modified payment terms, reamortization,~~ and ~~accelerated maturity. The modifications for the year-ended December 31,~~ 2017 were attributable to interest rate concessions, maturity date extensions, modified payment terms, reamortization, and accelerated maturity.


	Modifications by Class For the twelve months ending December 31, 2018					Modifications by Class For the twelve months ending December 31, 2019
	Number of Modifications	Pre-Modification Outstanding Recorded Investment (In thousands)		Post-Modification Outstanding Recorded Investment		Number of Modifications	Pre-Modification Outstanding Recorded Investment (In thousands)		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Other commercial real estate	5	$	2,061	$	2,061	3	$	420	$	420
Other commercial and industrial loans	1	43		43		6	1,434		1,434
Residential mortgages - 1-4 family	4	581		581		2	98		98
Consumer - home equity	—	—		—		2	111		111
	10	$	2,685	$	2,685	13	$	2,063	$	2,063


	Modifications by Class For the twelve months ending December 31, 2017					Modifications by Class For the twelve months ending December 31, 2018
	Number of Modifications	Pre-Modification Outstanding Recorded Investment (In thousands)		Post-Modification Outstanding Recorded Investment		Number of Modifications	Pre-Modification Outstanding Recorded Investment (In thousands)		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Other commercial real estate	16	$	13,680	$	11,953	5	$	2,061	$	2,061
Other commercial and industrial loans	12	3,507		3,507		1	43		43
Residential mortgages - 1-4 family	4	331		314		4	581		581
Consumer - home equity	3	122		122		—	—		—
	35	$	17,640	$	15,896	10	$	2,685	$	2,685



	Modifications by Class For the twelve months ending December 31, 2017
	Number of Modifications	Pre-Modification Outstanding Recorded Investment (In thousands)		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Other commercial real estate	16	$	13,680	$	11,953
Other commercial and industrial loans	12	3,507		3,507
Residential mortgages - 1-4 family	4	331		314
Consumer - home equity	3	122		122
	35	$	17,640	$	15,896

Modifications by Class
For the twelve months ending December 31, 2016
Number of
Modifications Pre-Modification
Outstanding Recorded
Investment (In thousands) Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings

Other commercial real estate 10
$ 17,088
$ 17,088
Other commercial and industrial loans 4
555
555
Residential mortgages - 1-4 family 2
5
5
Consumer - home equity 1
117
117
17
$ 17,765
$ 17,765

~~F-43~~F-48

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table discloses the recorded investments and numbers of modifications for TDRs where a concession has been made within the previous 12 months, that then defaulted in the respective reporting period. For the year ended ~~2018,~~2019, there ~~were no loans~~was 1 loan that ~~were~~was restructured that had subsequently defaulted during the period. For the period ended ~~2017,~~2018, there were ~~three~~0 loans that were restructured that had subsequently defaulted during the period. For the year ended ~~2016,~~2017, there were no3 loans that were restructured that had subsequently defaulted during the period.



	Modifications that subsequently defaulted for the twelve months ending December 31, 2019
	Number of Contracts	Recorded Investment
Troubled Debt Restructurings
Other commercial and industrial loans	1	$	195
	1	$	195



	Modifications that subsequently defaulted for the twelve months ending December 31, 2017
	Number of Contracts	Recorded Investment
Troubled Debt Restructurings
Other commercial real estate	1	$	113
Other commercial and industrial loans	2	492
Residential mortgages - 1-4 family	—	—
	3	$	605

The following table presents the Company’s TDR activity in ~~2018~~2019 and ~~2017:~~2018:


(In thousands)	2018			2017			2016			2019			2018			2017
Balance at beginning of year	$	41,990		$	33,829		$	22,048		$	27,415		$	41,990		$	33,829
Principal payments	(8,547		)	(3,213		)	(5,870		)	(6,086		)	(8,547		)	(3,213		)
TDR status change (1)	—			—			2,235			—			—			—
Other reductions (2)	(8,713		)	(4,522		)	(2,349		)	(4,076		)	(8,713		)	(4,522		)
Newly identified TDRs	2,685			15,896			17,765			2,063			2,685			15,896
Balance at end of year	$	27,415		$	41,990		$	33,829		$	19,316		$	27,415		$	41,990

________________________________

(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.

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

As of December 31, ~~2018~~2019 and ~~2017,~~2018, the Company maintained no0 foreclosed residential real estate property. Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of December 31, ~~2018~~2019 and December 31, ~~2017~~2018 totaled $6.5 million and $3.2 million, ~~and $4.9 million, respectively.~~respectively, including sold loans serviced by the Company.

~~F-44~~F-49

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.8. LOAN LOSS ALLOWANCE

Activity in the allowance for loan losses for 2019, 2018, ~~2017,~~ and ~~2016~~2017 was as follows:

Business Activities Loans


(In thousands) 2018	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
(In thousands) 2019											Commercial real estate		Commercial and industrial		Residential mortgages			Consumer		Total
Balance at beginning of year	$	16,843	$	13,850	$	9,420	$	5,807	$	45,920	$	21,732	$	16,504	$	10,535		$	7,368	$	56,139
Charged-off loans	5,859		4,275		157		3,187		13,478		6,577		23,799		635			3,322		34,333
Recoveries on charged-off loans	50		620		114		363		1,147		570		1,012		57			253		1,892
Provision for loan losses	10,698		6,309		1,158		4,385		22,550		9,033		25,404		(1,417		)	458		33,478
Balance at end of year	$	21,732	$	16,504	$	10,535	$	7,368	$	56,139	$	24,758	$	19,121	$	8,540		$	4,757	$	57,176
Individually evaluated for impairment	9		49		128		11		197		20		122		109			43		294
Collectively evaluated	21,723		16,455		10,407		7,357		55,942		24,738		18,999		8,431			4,714		56,882
Total	$	21,732	$	16,504	$	10,535	$	7,368	$	56,139	$	24,758	$	19,121	$	8,540		$	4,757	$	57,176

Business Activities Loans


(In thousands) 2017	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
(In thousands) 2018											Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Balance at beginning of year	$	16,498	$	9,447	$	7,805	$	5,479	$	39,229	$	16,843	$	13,850	$	9,420	$	5,807	$	45,920
Charged-off loans	3,875		3,373		806		3,470		11,524		5,859		4,275		157		3,187		13,478
Recoveries on charged-off loans	170		179		270		270		889		50		620		114		363		1,147
Provision for loan losses	4,050		7,597		2,151		3,528		17,326		10,698		6,309		1,158		4,385		22,550
Balance at end of year	$	16,843	$	13,850	$	9,420	$	5,807	$	45,920	$	21,732	$	16,504	$	10,535	$	7,368	$	56,139
Individually evaluated for impairment	229		66		130		35		460		9		49		128		11		197
Collectively evaluated	16,614		13,784		9,290		5,772		45,460		21,723		16,455		10,407		7,357		55,942
Total	$	16,843	$	13,850	$	9,420	$	5,807	$	45,920	$	21,732	$	16,504	$	10,535	$	7,368	$	56,139

Business Activities Loans


(In thousands) 2016	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
(In thousands) 2017											Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Balance at beginning of year	$	14,591	$	7,385	$	7,613	$	4,985	$	34,574	$	16,498	$	9,447	$	7,805	$	5,479	$	39,229
Charged-off loans	2,127		4,620		2,036		1,722		10,505		3,875		3,373		806		3,470		11,524
Recoveries on charged-off loans	243		123		159		267		792		170		179		270		270		889
Provision for loan losses	3,791		6,559		2,069		1,949		14,368		4,050		7,597		2,151		3,528		17,326
Balance at end of year	$	16,498	$	9,447	$	7,805	$	5,479	$	39,229	$	16,843	$	13,850	$	9,420	$	5,807	$	45,920
Individually evaluated for impairment	158		264		136		156		714		229		66		130		35		460
Collectively evaluated	16,340		9,183		7,669		5,323		38,515		16,614		13,784		9,290		5,772		45,460
Total	$	16,498	$	9,447	$	7,805	$	5,479	$	39,229	$	16,843	$	13,850	$	9,420	$	5,807	$	45,920

~~F-45~~F-50

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans



(In thousands) 2019	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Balance at beginning of year	$	3,153	$	1,064	$	630	$	483	$	5,330
Charged-off loans	830		571		263		557		2,221
Recoveries on charged-off loans	672		438		116		123		1,349
Provision for loan losses	1,111		126		365		339		1,941
Balance at end of year	$	4,106	$	1,057	$	848	$	388	$	6,399
Individually evaluated for impairment	97		1		8		12		118
Collectively evaluated	4,009		1,056		840		376		6,281
Total	$	4,106	$	1,057	$	848	$	388	$	6,399

Acquired Loans



(In thousands) 2018	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Balance at beginning of year	$	3,856	$	1,125	$	598	$	335	$	5,914
Charged-off loans	1,812		524		1,091		1,106		4,533
Recoveries on charged-off loans	294		286		51		417		1,048
Provision for loan losses	815		177		1,072		837		2,901
Balance at end of year	$	3,153	$	1,064	$	630	$	483	$	5,330
Individually evaluated for impairment	9		4		36		48		97
Collectively evaluated	3,144		1,060		594		435		5,233
Total	$	3,153	$	1,064	$	630	$	483	$	5,330

Acquired Loans



(In thousands) 2017	Commercial real estate		Commercial and industrial		Residential mortgages		Consumer		Total
Balance at beginning of year	$	2,303	$	1,164	$	766	$	536	$	4,769
Charged-off loans	771		844		797		648		3,060
Recoveries on charged-off loans	65		245		43		153		506
Provision for loan losses	2,259		560		586		294		3,699
Balance at end of year	$	3,856	$	1,125	$	598	$	335	$	5,914
Individually evaluated for impairment	56		1		9		45		111
Collectively evaluated	3,800		1,124		589		290		5,803
Total	$	3,856	$	1,125	$	598	$	335	$	5,914

(In thousands)
2017 Commercial
real estate Commercial
and industrial Residential
mortgages Consumer Total
Balance at beginning of year $ 2,303
$ 1,164
$ 766
$ 536
$ 4,769
Charged-off loans 771
844
797
648
3,060
Recoveries on charged-off loans 65
245
43
153
506
Provision for loan losses 2,259
560
586
294
3,699
Balance at end of year $ 3,856
$ 1,125
$ 598
$ 335
$ 5,914
Individually evaluated for impairment 56
1
9
45
111
Collectively evaluated 3,800
1,124
589
290
5,803
Total $ 3,856
$ 1,125
$ 598
$ 335
$ 5,914

~~Acquired Loans~~

(In thousands)
2016 Commercial
real estate Commercial
and industrial Residential
mortgages Consumer Total
Balance at beginning of year $ 1,903
$ 1,330
$ 976
$ 525
$ 4,734
Charged-off loans 977
1,095
829
620
3,521
Recoveries on charged-off loans 61
266
144
91
562
Provision for loan losses 1,316
663
475
540
2,994
Balance at end of year $ 2,303
$ 1,164
$ 766
$ 536
$ 4,769
Individually evaluated for impairment 250
59
11
114
434
Collectively evaluated 2,053
1,105
755
422
4,335
Total $ 2,303
$ 1,164
$ 766
$ 536
$ 4,769

~~F-46~~F-51

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Credit Quality Information

Business Activities Loans Credit Quality Analysis

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

For commercial credits, the Company assigns an internal risk rating at origination and reviews the rating 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~~3 rating system: Pass, Special Mention, and Substandard. Loans that are current within 59 days are rated Pass. Residential mortgages that are 60-89 days delinquent are rated Special Mention. Loans delinquent for 90 days or greater are rated Substandard and generally placed on non-accrual status. Home equity loans are risk rated based on the same rating system as the Company’s residential mortgages.

Ratings for other consumer loans, including auto loans, are based on a ~~two~~2 rating system. Loans that are current within 119 days are rated Performing while loans delinquent for 120 days or more are rated Non-performing. Other consumer loans are placed on non-accrual at such time as they become Non-performing.

Acquired Loans Credit Quality Analysis

Upon acquiring a loan portfolio, our internal loan review function assigns risk ratings to the acquired loans, utilizing the same methodology as it does with business activities loans. This may differ from the risk rating policy of the predecessor bank. Loans which are rated Substandard or worse according to the rating process outlined below are generally deemed to be credit impaired loans accounted for under ASC 310-30, regardless of whether they are classified as performing or non-performing.

The Bank utilizes a loan risk rating system for acquired loans consistent with loans originated from business activities, as outlined in the Credit Quality Information section of this Note. The ratings system is similar to loans originated through business activities. The Company presented several tables within this footnote separately for business activity loans and acquired loans in order to distinguish the credit performance of the acquired loans from the business activity loans.

~~F-47~~F-52

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables present the Company’s loans by risk rating at year-end ~~2018~~2019 and ~~2017:~~2018:

Business Activities Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category


	Construction				Real Estate				Total commercial real estate				Construction				Real Estate				Total commercial real estate
(In thousands)	2018		2017		2018		2017		2018		2017		2019		2018		2019		2018		2019		2018
Grade:
Pass	$	327,792	$	181,371	$	2,198,129	$	1,989,380	$	2,525,921	$	2,170,751	$	382,014	$	327,792	$	2,354,375	$	2,198,129	$	2,736,389	$	2,525,921
Special mention	—		—		9,805		13,503		9,805		13,503		—		—		12,167		9,805		12,167		9,805
Substandard	—		—		52,985		33,453		52,985		33,453		—		—		48,400		52,985		48,400		52,985
Doubtful	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	327,792	$	181,371	$	2,260,919	$	2,036,336	$	2,588,711	$	2,217,707	$	382,014	$	327,792	$	2,414,942	$	2,260,919	$	2,796,956	$	2,588,711

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category


	Total comm. and industrial				Total comm. and industrial
(In thousands)	2018		2017		2019		2018
Grade:
Pass	$	1,469,139	$	1,156,240	$	1,366,342	$	1,469,139
Special mention	14,279		12,806		50,072		14,279
Substandard	29,176		11,123		24,112		29,176
Doubtful	944		2,400		2,091		944
Total	$	1,513,538	$	1,182,569	$	1,442,617	$	1,513,538

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade


	1-4 family				Construction				Total residential mortgages				1-4 family				Construction				Total residential mortgages
(In thousands)	2018		2017		2018		2017		2018		2017		2019		2018		2019		2018		2019		2018
Grade:
Pass	$	2,314,657	$	1,805,596	$	9,582	$	5,177	$	2,324,239	$	1,810,773	$	2,139,753	$	2,314,657	$	4,641	$	9,582	$	2,144,394	$	2,324,239
Special mention	1,619		242		—		—		1,619		242		714		1,619		—		—		714		1,619
Substandard	1,440		2,186		—		—		1,440		2,186		3,350		1,440		—		—		3,350		1,440
Total	$	2,317,716	$	1,808,024	$	9,582	$	5,177	$	2,327,298	$	1,813,201	$	2,143,817	$	2,317,716	$	4,641	$	9,582	$	2,148,458	$	2,327,298

Consumer Loans

Credit Risk Profile Based on Payment Activity


	Home equity				Auto and other				Total consumer				Home equity				Auto and other				Total consumer
(In thousands)	2018		2017		2018		2017		2018		2017		2019		2018		2019		2018		2019		2018
Performing	$	289,028	$	293,327	$	645,537	$	602,313	$	934,565	$	895,640	$	272,772	$	289,028	$	501,871	$	645,537	$	774,643	$	934,565
Nonperforming	933		1,627		1,699		1,454		2,632		3,081		1,095		933		2,728		1,699		3,823		2,632
Total	$	289,961	$	294,954	$	647,236	$	603,767	$	937,197	$	898,721	$	273,867	$	289,961	$	504,599	$	647,236	$	778,466	$	937,197

~~F-48~~F-53

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Acquired Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category


	Construction				Real Estate				Total commercial real estate				Construction				Real Estate				Total commercial real estate
(In thousands)	2018		2017		2018		2017		2018		2017		2019		2018		2019		2018		2019		2018
Grade:
Pass	$	24,519	$	76,611	$	743,684	$	888,470	$	768,203	$	965,081	$	46,396	$	24,519	$	1,130,333	$	743,684	$	1,176,729	$	768,203
Special mention	—		—		9,086		22,673		9,086		22,673		—		—		5,993		9,086		5,993		9,086
Substandard	701		8,354		33,520		50,927		34,221		59,281		1,396		701		53,195		33,520		54,591		34,221
Total	$	25,220	$	84,965	$	786,290	$	962,070	$	811,510	$	1,047,035	$	47,792	$	25,220	$	1,189,521	$	786,290	$	1,237,313	$	811,510

Commercial and Industrial Loans

Credit Risk Profile by Creditworthiness Category



	Total comm. and industrial
(In thousands)	2019		2018
Grade:
Pass	$	373,744	$	439,603
Special mention	4,404		11,374
Substandard	19,743		15,532
Total	$	397,891	$	466,509

Total comm. and industrial
(In thousands) 2018 2017
Grade:

Pass $ 439,603
$ 606,922
Special mention 11,374
1,241
Substandard 15,532
13,207
Total $ 466,509
$ 621,370

Residential Mortgages

Credit Risk Profile by Internally Assigned Grade


	1-4 family				Construction				Total residential mortgages				1-4 family				Construction				Total residential mortgages
(In thousands)	2018		2017		2018		2017		2018		2017		2019		2018		2019		2018		2019		2018
Grade:
Pass	$	235,172	$	281,160	$	174	$	233	$	235,346	$	281,393	$	528,282	$	235,173	$	3,478	$	174	$	531,760	$	235,347
Special mention	144		2,704		—		—		144		2,704		592		144		—		—		592		144
Substandard	3,635		5,509		—		—		3,635		5,509		4,662		3,635		—		—		4,662		3,635
Total	$	238,951	$	289,373	$	174	$	233	$	239,125	$	289,606	$	533,536	$	238,952	$	3,478	$	174	$	537,014	$	239,126

Consumer Loans

Credit Risk Profile Based on Payment Activity



	Home equity				Auto and other				Total consumer
(In thousands)	2019		2018		2019		2018		2019		2018
Performing	$	106,007	$	85,968	$	56,724	$	72,195	$	162,731	$	158,163
Nonperforming	717		751		265		451		982		1,202
Total	$	106,724	$	86,719	$	56,989	$	72,646	$	163,713	$	159,365

Home equity Auto and other Total consumer
(In thousands) 2018 2017 2018 2017 2018 2017
Performing $ 85,968
$ 113,262
$ 72,195
$ 113,510
$ 158,163
$ 226,772
Nonperforming 751
1,965
451
392
1,202
2,357
Total $ 86,719
$ 115,227
$ 72,646
$ 113,902
$ 159,365
$ 229,129

~~F-49~~F-54

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes information about total loans rated Special Mention or lower. 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.



	2019						2018
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-Accrual	$	32,536	$	7,104	$	39,640	$	26,478	$	5,947	$	32,425
Substandard Accruing	49,293		73,131		122,424		60,698		48,792		109,490
Total Classified	81,829		80,235		162,064		87,176		54,739		141,915
Special Mention	63,943		11,341		75,284		26,333		20,833		47,166
Total Criticized	$	145,772	$	91,576	$	237,348	$	113,509	$	75,572	$	189,081

December 31, 2018 December 31, 2017
(In thousands) Business
Activities Loans Acquired Loans Total Business
Activities Loans Acquired Loans Total
Non-Accrual $ 26,478
$ 5,947
$ 32,425
$ 15,659
$ 7,240
$ 22,899
Substandard Accruing 60,698
48,792
109,490
36,846
73,412
110,258
Total Classified 87,176
54,739
141,915
52,505
80,652
133,157
Special Mention 26,333
20,833
47,166
28,387
26,802
55,189
Total Criticized $ 113,509
$ 75,572
$ 189,081
$ 80,892
$ 107,454
$ 188,346

NOTE 7.9. PREMISES AND EQUIPMENT

Year-end premises and equipment are summarized as follows:



(In thousands)	2019			2018			Estimated Useful Life
Land	$	17,816		$	14,096		N/A
Buildings and improvements	116,997			105,190			5 - 39 years
Furniture and equipment (1)	64,044			56,207			3 - 7 years
Construction in process (1)	1,580			1,314
Premises and equipment, gross	200,437			176,807
Accumulated depreciation and amortization (1)	(78,966		)	(68,440		)
Premises and equipment, net	$	121,471		$	108,367
Premises and equipment, net from discontinued operations	1,073			1,867
Premises and equipment, net from continuing operations	$	120,398		$	106,500

(In thousands) 2018 2017 Estimated Useful
Life
Land $ 14,096
$ 14,177
N/A
Buildings and improvements 105,190
99,821
5 - 39 years
Furniture and equipment 56,207
49,600
3 - 7 years
Construction in process 1,314
5,177

Premises and equipment, gross 176,807
168,775

Accumulated depreciation and amortization (68,440 ) (59,423 )
Premises and equipment, net $ 108,367
$ 109,352


(1)	Includes premises and equipment classified as discontinued operations. See Note 3 - Discontinued Operations for more information.

Depreciation and amortization expense including discontinued operations for the years 2019, 2018, ~~2017,~~ and ~~2016~~2017 amounted to $11.8 million, $10.8 million, ~~$9.9 million,~~ and ~~$8.4~~$9.9 million, respectively.

~~F-50~~F-55

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.10. GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangible assets are presented in the tables below. The Company ~~did not have an~~had 1 acquisition during ~~2018.~~2019. There was ~~one~~0 acquisition during ~~2017.~~2018. In accordance with applicable accounting guidance, the Company allocated the amount paid to the fair value of the net assets acquired, with any excess amounts recorded as goodwill. The goodwill balance is allocated to the consolidated Company. The activity impacting goodwill in ~~2018~~2019 and ~~2017~~2018 is as follows:


(In thousands)	2018			2017		2019			2018
Balance, beginning of the period	$	519,287		$	403,106	$	518,325		$	519,287
Goodwill acquired and adjusted:
Commerce Bank	—			116,181
SI Financial Group, Inc.						36,379			—
Adjustments (1)	(962		)	—		(942		)	(962		)
Balance, end of the period	$	518,325		$	519,287	$	553,762		$	518,325

______________________________________________________________________________________________________


(1)	In 2019, goodwill related to the SI Financial Group acquisition was adjusted to reflect new information available during the one-year measurement period. In 2018, goodwill related to the Commerce acquisition was adjusted to reflect new information available during the one-year measurement period.

The Company tests goodwill impairment annually as of June 30 ~~2018~~ using second quarter data. The results of the quantitative assessment indicated it is more likely than not that the reporting unit's fair value exceeds its carrying amount, and accordingly, the two-step impairment test was not performed. When events or changes in circumstances indicate that impairment is possible, the Company performs additional reviews. NoNaN impairment was recorded on goodwill for 2019, 2018, ~~2017,~~ and ~~2016.~~2017.

The components of other intangible assets are as follows:



(In thousands)	Gross Intangible Assets		Accumulated Amortization			Net Intangible Assets
December 31, 2019
Non-maturity deposits (core deposit intangible)	$	84,903	$	(42,663	)	$	42,240
Insurance contracts	7,558		(7,553		)	5
All other intangible assets	7,866		(4,496		)	3,370
Total	$	100,327	$	(54,712	)	$	45,615
December 31, 2018
Non-maturity deposits (core deposit intangible)	$	66,923	$	(37,410	)	$	29,513
Insurance contracts	7,558		(7,542		)	16
All other intangible assets	7,866		(3,977		)	3,889
Total	$	82,347	$	(48,929	)	$	33,418

(In thousands)
Gross Intangible
Assets

Accumulated
Amortization

Net Intangible
Assets
December 31, 2018

Non-maturity deposits (core deposit intangible) $ 66,923
$ (37,410 ) $ 29,513
Insurance contracts 7,558
(7,542 ) 16
All other intangible assets 7,866
(3,977 ) 3,889
Total $ 82,347
$ (48,929 ) $ 33,418
December 31, 2017

Non-maturity deposits (core deposit intangible) $ 66,923
$ (33,024 ) $ 33,899
Insurance contracts 7,558
(7,526 ) 32
All other intangible assets 7,810
(3,445 ) 4,365
Total $ 82,291
$ (43,995 ) $ 38,296

Other intangible assets are amortized on a straight-line or accelerated basis over their estimated lives, which range from four to fifteen ~~years.~~ years. Amortization expense related to intangibles totaled $5.8 million in 2019, $4.9 million in 2018, and $3.5 million in ~~2017, and $2.9 million in 2016.~~2017.

The estimated aggregate future amortization expense for intangible assets remaining at year-end ~~2018~~2019 is as follows: ~~2019- $4.7 million;~~ 2020- ~~$4.4~~$6.2 million; 2021- ~~$4.2~~$6.0 million; 2022- ~~$4.1~~$5.9 million; 2023- ~~$3.8~~$5.6 million; 2024- $5.4 million; and thereafter- ~~$12.2~~$16.6 million. For the years 2019, 2018, and 2017, ~~and 2016, no~~0 impairment charges were identified for the Company’s intangible assets.

~~F-51~~F-56

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.11. OTHER ASSETS

Year-end other assets are summarized as follows:



(In thousands)	2019		2018
Capitalized servicing rights (1)	$	26,451	$	23,376
Accrued interest receivable	36,462		36,879
Accrued federal and state tax receivable	23,786		23,923
Right-of-use assets (1)	76,332		—
Derivative assets (1)	80,190		35,654
Assets held for sale	1,734		1,541
Other (1)	16,647		21,165
Total other assets	$	261,602	$	142,538
Total other assets from discontinued operations	23,822		21,612
Total other assets from continuing operations	$	237,780	$	120,926


(1)	Includes other assets classified as discontinued operations. See Note 3 - Discontinued Operations for more information.

(In thousands) 2018 2017
Capitalized servicing rights $ 23,376
$ 16,361
Accrued interest receivable 36,879
33,739
Accrued federal and state tax receivable 23,923
33,101
Derivative assets 35,654
19,308
Assets held for sale 1,541
1,392
Other 21,165
13,182
Total other assets $ 142,538
$ 117,083

The Bank sells loans in the secondary market and retains the ability to service many of these loans. The Bank earns fees for the servicing provided. Loans sold and serviced for others from continuing operations amounted to ~~$2.3~~$1.7 billion, ~~$1.8~~$1.4 billion, and ~~$1.3~~$1.4 billion at year-end 2019, 2018, and 2017, respectively. Loans sold and ~~2016, respectively.~~serviced for others from discontinued operations amounted to $1.4 billion, $0.8 billion, and $0.3 billion at year-end 2019, 2018, and 2017. Loans serviced for others are not included in the accompanying Consolidated Balance Sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates. Contractually specified servicing fees from continuing operations were $5.6 million, $4.6 million, and ~~$3.2~~$4.4 million for the years 2019, 2018, ~~2017,~~ and ~~2016,~~2017, respectively, and included as a component of loan related fees within non-interest income. ~~The~~Contractually specified servicing fees from discontinued operations were $1.9 million, $1.0 million, and $0.2 million for the years 2019, 2018, and 2017, respectively, and included as a component of other income in Note 3 - Discontinued Operations. Refer to Note 22 - Fair Value Measurements for significant assumptions and inputs used in the valuation at year-end ~~2018 included a weighted average discount rate of 11.99% and pre-payment speed assumptions ranging from 7.74% to 11.29%.~~2019.

Servicing rights activity was as follows:



(In thousands)	2019			2018
Balance at beginning of year	$	23,376		$	16,361
Additions	16,837			10,660
Amortization	(3,240		)	(3,124		)
Change in fair value	(5,822		)	29
Allowance adjustment	(4,700		)	(550		)
Balance at end of year (1)	$	26,451		$	23,376

(In thousands) 2018 2017
Balance at beginning of year $ 16,361
$ 11,524
Additions 10,660
7,604
Amortization (3,124 ) (2,446 )
Change in fair value 29
(221 )
Allowance adjustment (550 ) (100 )
Balance at end of year (1)
$ 23,376
$ 16,361


(1)	The balances of servicing rights accounted for at fair value as of December 31, ~~2018~~2019 and December 31, ~~2017~~2018 were ~~$11.5~~$12.3 million and ~~$3.8~~$11.5 million, respectively.

Servicing rights activity from discontinued operations during 2019 included $11.1 million of additions, $5.8 million decrease in fair value, and $4.5 million valuation allowance. During 2018, servicing rights activity from discontinued operations included $7.6 million of additions.

~~F-52~~F-57

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~10.~~12. DEPOSITS

A summary of year-end time deposits is as follows:



(In thousands)	2019		2018
Maturity date:
Within 1 year	$	2,734,870	$	2,142,943
Over 1 year to 2 years	582,622		717,706
Over 2 years to 3 years	145,976		217,840
Over 3 years to 4 years	90,731		109,891
Over 4 years to 5 years	33,754		96,479
Over 5 years	1,416		2,858
Total	$	3,589,369	$	3,287,717
Account balances:
Less than $100,000	$	905,190	$	719,689
$100,000 through $250,000	2,027,717		2,060,500
$250,000 or more	656,462		507,528
Total	$	3,589,369	$	3,287,717

(In thousands) 2018 2017
Maturity date:

Within 1 year $ 2,142,943
$ 1,790,056
Over 1 year to 2 years 717,706
546,381
Over 2 years to 3 years 217,840
268,897
Over 3 years to 4 years 109,891
161,314
Over 4 years to 5 years 96,479
121,400
Over 5 years 2,858
2,157
Total $ 3,287,717
$ 2,890,205
Account balances:

Less than $100,000 $ 719,689
$ 733,785
$100,000 through $250,000 2,060,500
1,717,050
$250,000 or more 507,528
439,370
Total $ 3,287,717
$ 2,890,205

Included in total deposits on the Consolidated Balance Sheets are brokered deposits of ~~$1.4~~$1.2 billion and ~~$1.1~~$1.4 billion at December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Also included in total deposits are reciprocal deposits of ~~$84.4~~$91.7 million and ~~$97.4~~$84.4 million at December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, as well as related party deposits of ~~$123.9~~$63.9 million and ~~$36.0~~$123.9 million at December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

~~F-53~~F-58

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~11.~~13. BORROWED FUNDS

Borrowed funds at December 31, ~~2018~~2019 and ~~2017~~2018 are summarized, as follows:



	2019				2018
(in thousands, except rates)	Principal		Weighted Average Rate		Principal		Weighted Average Rate
Short-term borrowings:
Advances from the FHLBB	$	125,000	2.06	%	$	1,118,832	2.58	%
Total short-term borrowings:	125,000		2.06		1,118,832		2.58
Long-term borrowings:
Advances from the FHLBB	605,501		2.16		309,466		2.17
Subordinated notes	74,232		7.00		74,054		7.00
Junior subordinated borrowing - Trust I	15,464		3.76		15,464		4.50
Junior subordinated borrowing - Trust II	7,353		3.59		—		—
Total long-term borrowings:	702,550		2.72		398,984		3.16
Total	$	827,550	2.62	%	$	1,517,816	2.73	%

2018 2017
(in thousands, except rates) Principal Weighted
Average
Rate Principal Weighted
Average
Rate
Short-term borrowings:

Advances from the FHLBB $ 1,118,832
2.58 % $ 667,300
1.48 %
Total short-term borrowings: 1,118,832
2.58
667,300
1.48
Long-term borrowings:

Advances from the FHLBB 309,466
2.17
380,436
1.54
Subordinated notes 74,054
7.00
73,875
7.00
Junior subordinated notes 15,464
4.50
15,464
3.30
Total long-term borrowings: 398,984
3.16
469,775
2.46
Total $ 1,517,816
2.73 % $ 1,137,075
1.88 %

Short-term debt includes Federal Home Loan Bank of Boston (“FHLBB”) advances with an original maturity of less than one year. At year-end ~~2018,~~2019, the Company maintained a short-term line-of-credit through a correspondent bank with no0 balance outstanding. The Bank also maintains a $3.0 million secured line of credit with the FHLBB that bears a daily adjustable rate calculated by the FHLBB. There was no0 outstanding balance on the FHLBB line of credit for the periods ended December 31, ~~2018~~2019 and December 31, ~~2017.~~2018. The Company is in compliance with all debt covenants as of December 31, ~~2018.~~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. NoNaN borrowings with the Federal Reserve Bank of Boston took place for the periods ended December 31, ~~2018~~2019 and December 31, ~~2017.~~2018.

Long-term FHLBB advances consist of advances with an original maturity of more than one ~~year.~~year and are subject to

prepayment penalties. The advances outstanding at December 31, 2019 include callable advances totaling $10 million and amortizing advances totaling $4.4 million. The advances outstanding at December 31, 2018 include no callable advances and amortizing advances totaling $1.7 ~~million. The advances outstanding at December 31, 2017 include no callable advances and amortizing advances totaling $1.4~~ million. All FHLBB 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.

A summary of maturities of FHLBB advances at year-end ~~2018~~2019 is as follows:



	2019
(In thousands)	Amount		Weighted Average Rate
Fixed rate advances maturing:
2020	$	419,996	2.25	%
2021	231,476		2.00
2022	59,349		1.92
2023	11,924		2.23
2024 and beyond	7,756		1.82
Total FHLBB advances	$	730,501	2.14	%

2018
(In thousands) Amount Weighted
Average Rate
Fixed rate advances maturing:

2019 $ 1,268,880
2.47 %
2020 152,634
2.69
2021 206
2.50
2022 35
2.00
2023 and beyond 6,543
2.52
Total FHLBB advances $ 1,428,298
2.49 %

~~F-54~~F-59

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company did ~~not~~0t have variable-rate FHLB advances for the period ended December 31, ~~2018~~2019 and December 31, ~~2017.~~2018.

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 plus 5.113%. The subordinated note includes reduction to the note principal balance of ~~$461~~$338 thousand and ~~$583~~$461 thousand for unamortized debt issuance costs as of December 31, ~~2018~~2019 and December 31 ~~2017,~~2018, 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 ~~4.50%~~3.76% and ~~3.30%~~4.50% at December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 on each quarterly payment date. 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 3.59% at December 31, 2019. 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.

NOTE ~~12.~~14. OTHER LIABILITIES

Year-end other liabilities are summarized as follows:



(In thousands)	2019		2018
Derivative liabilities	$	80,681	$	33,973
Capital and financing lease obligations	10,883		10,986
Asset purchase settlement payable (1)	189		5,727
Employee benefits liability	44,781		27,229
Operating lease liabilities (1)	80,734		5,674
Accrued interest payable	11,625		11,808
Customer transaction clearing accounts	4,310		17,574
Other (1)	60,676		46,145
Total other liabilities	$	293,879	$	159,116
Total other liabilities from discontinued operations	26,481		9,597
Total other liabilities from continuing operations	$	267,398	$	149,519


(1)	Includes other liabilities classified as discontinued operations. See Note 3 - Discontinued Operations for more information.

(In thousands) 2018 2017
Derivative liabilities $ 33,973
$ 15,838
Capital and financing lease obligations 10,986
11,323
Asset purchase settlement payable 5,727
70,637
Employee benefits liability 27,229
27,093
Level lease liability 5,674
5,766
Accrued interest payable 11,808
6,813
Customer transaction clearing accounts 17,574
9,118
Other 46,145
41,294
Total other liabilities $ 159,116
$ 187,882

~~F-55~~F-60

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~13.~~15. EMPLOYEE BENEFIT PLANS

Pension Plan

The Company maintains a legacy, employer-sponsored defined benefit pension plan (the “Plan”) for which participation and benefit accruals were frozen on January 1, 2003. The Plan was assumed in connection with the Rome Bancorp acquisition in 2011. Accordingly, no0 employees are permitted to commence participation in the Plan and future salary increases and years of credited service are not considered when computing an employee’s benefits under the Plan. As of December 31, ~~2018,~~2019, all minimum Employee Retirement Income Security Act (“ERISA”) funding requirements have been met.

Information regarding the pension plan is as follows:



	December 31,
(In thousands)	2019			2018
Change in projected benefit obligation:
Projected benefit obligation at beginning of year	$	5,669		$	6,353
Service Cost	72			74
Interest cost	228			217
Actuarial loss (gain)	542			(503		)
Benefits paid	(333		)	(323		)
Settlements	(330		)	(149		)
Projected benefit obligation at end of year	5,848			5,669
Accumulated benefit obligation	5,848			5,669

Change in fair value of plan assets:
Fair value of plan assets at plan beginning of year	5,522			5,446
Actual return on plan assets	940			(359		)
Contributions by employer	—			907
Benefits paid	(333		)	(323		)
Settlements	(330		)	(149		)
Fair value of plan assets at end of year	5,799			5,522

Underfunded status	$	49		$	147

December 31,
(In thousands) 2018 2017
Change in projected benefit obligation:

Projected benefit obligation at beginning of year $ 6,353
$ 6,126
Service Cost 74
66
Interest cost 217
237
Actuarial gain (503 ) 309
Benefits paid (323 ) (324 )
Settlements (149 ) (61 )
Projected benefit obligation at end of year 5,669
6,353
Accumulated benefit obligation 5,669
6,353

Change in fair value of plan assets:

Fair value of plan assets at plan beginning of year 5,446
5,121
Actual return on plan assets (359 ) 710
Contributions by employer 907
—
Benefits paid (323 ) (324 )
Settlements (149 ) (61 )
Fair value of plan assets at end of year 5,522
5,446

Underfunded status $ 147
$ 907



Amounts Recognized on Consolidated Balance Sheets
Other Liabilities	$	49	$	147

Amounts Recognized on Consolidated Balance Sheets
Other Liabilities $ 147
$ 907

~~F-56~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Net periodic pension cost is comprised of the following:



	December 31,
(In thousands)	2019			2018
Service Cost	$	72		$	74
Interest Cost	228			217
Expected return on plan assets	(373		)	(369		)
Amortization of unrecognized actuarial loss	117			84
Net periodic pension costs	$	44		$	6

F-61

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,
(In thousands) 2018 2017
Service Cost $ 74
$ 66
Interest Cost 217
237
Expected return on plan assets (369 ) (346 )
Amortization of unrecognized actuarial loss 84
100
Net periodic pension costs $ 6
$ 57

Changes in plan assets and benefit obligations recognized in accumulated other comprehensive income are as follows:



	December 31,
(In thousands)	2019			2018
Amortization of actuarial (loss)	$	(117	)	$	(84	)
Actuarial (gain) loss	(25		)	225
Settlement charge	(70		)	—
Total recognized in accumulated other comprehensive income	(212		)	141
Total recognized in net periodic pension cost recognized and other comprehensive income	$	(168	)	$	147

December 31,
(In thousands) 2018 2017
Amortization of actuarial (loss) $ (84 ) $ (100 )
Actuarial loss (gain) 225
(54 )
Total recognized in accumulated other comprehensive income 141
(154 )
Total recognized in net periodic pension cost recognized and other comprehensive income $ 147
$ (97 )

The amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost are a net loss of $1.2 million and $1.5 million in 2019 and ~~$1.3 million in~~ 2018, ~~and 2017,~~ respectively.

The Company did not make any cash contributions to the pension trust during 2019. The Company made cash contributions of $907 thousand ~~to the pension trust~~ during 2018, which was equal to the underfunded status of the trust as of December 31, 2017. The Company does ~~not~~0t expect to make any cash contributions in ~~2019.~~2020. The amount expected to be amortized from other comprehensive income into net periodic pension cost over the next fiscal year is ~~$117~~$93 thousand.

The principal actuarial assumptions used are as follows:



	December 31,
	2019		2018
Projected benefit obligation
Discount rate	3.15	%	4.16	%
Net periodic pension cost
Discount rate	4.16	%	3.51	%
Long term rate of return on plan assets	7.00	%	7.00	%

December 31,
2018 2017
Projected benefit obligation

Discount rate 4.160 % 3.510 %
Net periodic pension cost

Discount rate 3.510 % 3.980 %
Long term rate of return on plan assets 7.000 % 7.000 %

The discount rate that is used in the measurement of the pension obligation is determined by comparing the expected future retirement payment cash flows of the pension plan to the Above Median FTSE Pension Discount Curve as of the measurement date. The expected long-term rate of return on Plan assets reflects long-term earnings expectations on existing Plan assets and those contributions expected to be received during the current plan year. In estimating that rate, appropriate consideration was given to historical returns earned by Plan assets in the fund and the rates of return expected to be available for reinvestment. The rates of return were adjusted to reflect current capital market assumptions and changes in investment allocations.

The Company’s overall investment strategy with respect to the Plan’s assets is primarily for preservation of capital and to provide regular dividend and interest payments. The Plan’s targeted asset allocation is 65% equity securities via investment in the Long-Term Growth - Equity Portfolio ~~(‘LTGE’~~("LTGE"), 34% intermediate-term investment grade bonds via investment in the Long-Term Growth - Fixed-Income Portfolio ~~(‘LTGFI’~~("LTGFI"), and 1% in cash equivalents portfolio (for liquidity). Equity securities include investments in a diverse mix of equity funds to gain exposure in the US and international markets. The fixed income portion of the Plan assets is a diversified portfolio that primarily

~~F-57~~

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~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

invests in intermediate-term bond funds. The overall rate of return is based on the historical performance of the assets applied against the Plan’s target allocation, and is adjusted for the long-term inflation rate.

The fair values for investment securities are determined by quoted prices in active markets, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

F-62

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The fair ~~values~~value of the Plan’s assets by category ~~and level~~ within the fair value hierarchy are as follows at December 31, ~~2018~~2019 and December 31, ~~2017:~~

December 31, 2018
Asset Category (In thousands) Total Level 1 Level 2
Equity Mutual Funds:

Large-Cap $ 1,659
$ —
$ 1,659
Mid-Cap 407
—
407
Small-Cap 418
—
418
International 751
—
751
Fixed Income Funds
Fixed Income - US Core 1,628
—
1,628
Intermediate Duration 545
—
545
Cash Equivalents - money market 114
52
62
Total $ 5,522
$ 52
$ 5,470

December 31, 2017
Asset Category (In thousands) Total Level 1 Level 2
Equity Mutual Funds:

Large-Cap $ 1,820
$ —
$ 1,820
Mid-Cap 439
—
439
Small-Cap 438
—
438
International 893
—
893
Fixed Income Funds

Fixed Income - US Core 1,308
—
1,308
Intermediate Duration 437
—
437
Cash Equivalents - money market 111
29
82
Total $ 5,446
$ 29
$ 5,417

2018. The Plan did not hold any assets classified as Level 3, ~~and~~nor were there ~~were no transfers between levels during 2018 or 2017.~~any transfers.



	December 31, 2019
Asset Category (In thousands)	Total		Level 1		Level 2
Equity Mutual Funds:
Large-Cap	$	1,900	$	—	$	1,900
Mid-Cap	453		—		453
Small-Cap	429		—		429
International	828		—		828
Fixed Income - US Core	1,535		—		1,535
Intermediate Duration	517		—		517
Cash Equivalents - money market	137		60		77
Total	$	5,799	$	60	$	5,739



	December 31, 2018
Asset Category (In thousands)	Total		Level 1		Level 2
Equity Mutual Funds:
Large-Cap	$	1,659	$	—	$	1,659
Mid-Cap	407		—		407
Small-Cap	418		—		418
International	751		—		751
Fixed Income - US Core	1,628		—		1,628
Intermediate Duration	545		—		545
Cash Equivalents - money market	114		52		62
Total	$	5,522	$	52	$	5,470

Estimated benefit payments under the pension plans over the next 10 years at December 31, ~~2018~~2019 are as follows:



Year		Payments (In thousands)
2020		370
2021		358
2022		371
2023		357
2024 - 2029		1,924

Year Payments (In thousands)
2019 380
2020 372
2021 362
2022 387
2023 375
2024 - 2028 1,729

Multi-Employer Pension Plan

As a result of the Company's acquisition of SI Financial Group, Inc. (“SIFI”), the Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “Plan”), a tax-qualified defined benefit pension plan. The Plan operates as a multiple-employer plan under ERISA and the Internal Revenue Code, and as as a multi-employer plan for accounting purposes. The Plan was frozen effective September 6, 2013 and SIFI recorded a contingent obligation to settle the plan at a future date, which was assumed by the Company via acquisition. As of December 31, 2019, the Company's liability related to the Plan totaled $4.8 million. The Company made contributions of $290 thousand in 2019. As of July 1, 2019, the Plan held assets with a market value of $4.3 million and liabilities with a market value of $7.2 million. The funded status (market value of plan assets divided by funding target) of the Plan, was greater than 80% as of July 1, 2019, as required by federal and state regulations. Market value of the Plan's assets reflects contributions received through June 30, 2019. There are no collective bargaining agreements in place that require contributions to the Plan by the Company. The Plan is a single plan under the Internal Revenue Code and, as a result, all of the assets stand behind all of the liabilities. Accordingly, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.

~~F-58~~F-63

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Postretirement Benefits

The Company ~~has~~maintains an unfunded postretirement medical plan ~~which was~~ assumed in connection with the Rome Bancorp acquisition in 2011. The postretirement plan has been modified so that participation is closed to those employees who did not meet the retirement eligibility requirements by March 31, 2011. The Company contributes partially to medical benefits and life insurance coverage for retirees. Such retirees and their surviving spouses are responsible for the remainder of the medical benefits, including increases in premiums levels, between the total premium and the Company’s contribution.

The Company also has an executive long-term care (“LTC”) postretirement benefit plan which started August 1, 2014. The LTC plan reimburses executives for certain costs in the event of a future chronic illness. Funding of the plan comes from Company paid insurance policies or direct payments. At plan’s inception, a $558 thousand benefit obligation was recorded against equity representing the prior service cost of plan participants.

Information regarding the postretirement plans is as follows:



	December 31,
(In thousands)	2019			2018
Change in accumulated postretirement benefit obligation:
Accumulated post-retirement benefit obligation at beginning of year	$	3,422		$	3,693
Service Cost	38			40
Interest cost	142			130
Participant contributions	—			46
Actuarial loss (gain)	565			(391		)
Benefits paid	(128		)	(96		)
Accumulated post-retirement benefit obligation at end of year	$	4,039		$	3,422

Change in plan assets:
Fair value of plan assets at beginning of year	$	—		$	—
Contributions by employer	128			50
Contributions by participant	—			46
Benefits paid	(128		)	(96		)
Fair value of plan assets at end of year	$	—		$	—

December 31,
(In thousands) 2018 2017
Change in accumulated postretirement benefit obligation:

Accumulated post-retirement benefit obligation at beginning of year $ 3,693
$ 3,249
Service Cost 40
35
Interest cost 130
131
Participant contributions 46
46
Actuarial loss (gain) (391 ) 326
Benefits paid (96 ) (94 )
Accumulated post-retirement benefit obligation at end of year $ 3,422
$ 3,693

Change in plan assets:

Fair value of plan assets at beginning of year $ —
$ —
Contributions by employer 50
48
Contributions by participant 46
46
Benefits paid (96 ) (94 )
Fair value of plan assets at end of year $ —
$ —



Amounts Recognized on Consolidated Balance Sheets
Other Liabilities	$	4,039	$	3,422

Amounts Recognized on Consolidated Balance Sheets

Other Liabilities $ 3,422
$ 3,693

Net periodic post-retirement cost is comprised of the following:



	December 31,
(In thousands)	2019		2018
Service cost	$	38	$	40
Interest costs	142		130
Amortization of net prior service credit	83		83
Amortization of net actuarial loss	—		—
Net periodic post-retirement costs	$	263	$	253

December 31,
(In thousands) 2018 2017
Service cost $ 40
$ 35
Interest costs 130
131
Amortization of net prior service credit 83
83
Amortization of net actuarial loss —
—
Net periodic post-retirement costs $ 253
$ 249

~~F-59~~F-64

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in benefit obligations recognized in accumulated other comprehensive income are as follows:



	December 31,
(In thousands)	2019			2018
Amortization of prior service credit	$	(83	)	$	(83	)
Net actuarial loss (gain)	374			(191		)
Total recognized in accumulated other comprehensive income	291			(274		)
Accrued post-retirement liability recognized	$	4,039		$	3,422

December 31,
(In thousands) 2018 2017
Amortization of actuarial loss $ —
$ —
Amortization of prior service credit (83 ) (83 )
Net actuarial (gain) loss (191 ) 199
Total recognized in accumulated other comprehensive income (274 ) 116
Accrued post-retirement liability recognized $ 3,422
$ 1,918

The amounts in accumulated other comprehensive income that have not yet been recognized as components of net periodic benefit cost are as follows:



	December 31,
(In thousands)	2019		2018
Net prior service cost (credit)	$	1,409	$	1,492
Net actuarial loss (gain)	374		(191		)
Total recognized in accumulated other comprehensive income	$	1,783	$	1,301

December 31,
(In thousands) 2018 2017
Net prior service cost (credit) $ 1,492
$ 1,576
Net actuarial (gain) loss (191 ) 199
Total recognized in accumulated other comprehensive income $ 1,301
$ 1,775

The amount expected to be amortized from other comprehensive income into net periodic postretirement cost over the next fiscal year is $83 thousand.

The discount rates used in the measurement of the postretirement plan obligations are determined by comparing the expected future retirement payment cash flows of the plans to the Above Median FTSE Pension Discount Curve as of the measurement date.

The assumed discount rates on a weighted-average basis were ~~4.11%~~3.06% and ~~3.44%~~4.11% as of December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit medical obligation is expected to be 7.25% for ~~2019,~~2020, and is gradually expected to decrease to 3.84% by 2075. This assumption may have a significant effect on the amounts reported. However, as noted above, increases in premium levels are the financial responsibility of the plan beneficiary. Thus an increase or decrease in 1% of the health care cost trend rates utilized would have had an immaterial effect on the service and interest cost as well as the accumulated post-retirement benefit obligation for the postretirement plan as of December 31, ~~2018.~~2019.

For participants in the LTC plan covered by insurance policies, no increase in annual premiums is assumed based on the history of the corresponding insurance provider.

Estimated benefit payments under the post-retirement benefit plan over the next ten years at December 31, ~~2018~~2019 are as follows:



Year		Payments (In thousands)
2020		98
2021		103
2022		76
2023		103
2024 - 2029		658

Year Payments (In thousands)
2019 106
2020 105
2021 110
2022 110
2023 109
2024 - 2028 573

~~F-60~~F-65

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

401(k) Plan

The Company provides a 401(k) Plan in which most eligible employees participate. Expense related to the plan was $4.1 million in 2019, $3.9 million in 2018, and $3.4 million in ~~2017, and $3.9 million in 2016.~~2017.

Employee Stock Ownership Plan (“ESOP”)

As part of ~~acquisitions~~the Savings Institute acquisition in ~~2015, 2012, and 2011,~~2019, the Company acquired an ESOP ~~plans~~plan that ~~were~~was frozen and terminated prior to the completion of ~~those transactions.~~the transaction. On ~~the~~ acquisition ~~dates,~~date, all amounts in the ~~plans~~plan were vested and the ~~loans~~loan under the plans ~~were~~was repaid from the sale proceeds of unallocated shares.

Other Plans

The Company maintains supplemental executive retirement plans (“SERPs”) for select current and former executives. Benefits generally commence no earlier than age sixty-two and are payable either as an annuity or as a lump sum at the executive’s option. ~~Some~~Most of these SERPs were assumed in connection with ~~prior~~ acquisitions. At year-end ~~2018~~2019 and ~~2017,~~2018, the accrued liability for these SERPs was ~~$3.4~~$20.3 million and ~~$8.3~~$3.4 million, respectively. SERP expense was $928 thousand in 2019, $638 thousand in 2018, and $968 thousand in 2017, ~~and $917 thousand in 2016,~~ and is recognized over the required service period.

During 2018, the Company released $5.4 million of accrued SERP liability, following a transition in the Company's Chief Executive Officer position. The separation agreement did not entitle the former executive to any future benefits, including the associated SERP, other than those described in the agreement.

The Company has endorsement split-dollar arrangements pertaining to certain current and former executives and directors. Under these arrangements, the Company purchased policies insuring the lives of the executives and directors, and separately entered into agreements to split the policy benefits with the individuals. There are no post-retirement benefits associated with these policies. The Company also assumed split-dollar life insurance agreements from multiple prior acquisitions. The accrued liability for these split-dollar arrangements was $7.1 million as of year-end 2019 and $4.6 million as of year-end ~~2018 and $4.5 million as of year-end 2017.~~2018.

~~F-61~~F-66

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~14.~~16. INCOME TAXES

Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017 were, as follows:



(In thousands)	2019			2018			2017
Current:
Federal tax expense	$	16,576		$	12,634		$	10,092
State tax expense	5,323			4,114			292
Total current tax expense	21,899			16,748			10,384
Deferred:
Federal tax expense	908			8,443			29,824
State tax (benefit)/expense	(344		)	3,770			1,805
Total deferred tax expense (1)	564			12,213			31,629
Change in valuation allowance	—			—			75
Income tax expense from continuing operations	$	22,463		$	28,961		$	42,088
Income tax (benefit)/expense from discontinued operations	(1,468		)	(1,313		)	2,414
Total	$	20,995		$	27,648		$	44,502

(In thousands) 2018 2017 2016
Current:

Federal tax expense $ 11,726
$ 11,686
$ 6,758
State tax expense 3,708
1,112
1,101
Total current expense 15,434
12,798
7,859
Deferred:

Federal tax expense 8,443
29,824
9,438
State tax expense 3,771
1,805
1,591
Total deferred tax expense (1)
12,214
31,629
11,029
Change in valuation allowance —
75
(104 )
Total income tax expense $ 27,648
$ 44,502
$ 18,784


(1)	2017 deferred tax expense of $31.6 million includes an $18.1 million charge to re-measure the net deferred tax asset at December 31, 2017 pursuant to the reduction in the corporate income tax rate from 35% to 21%, effective January 1, 2018, per the Tax Cuts and Jobs Act enacted on December 22, 2017.

Effective Tax Rate

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended ~~December��~~December 31, 2019, 2018, ~~2017,~~ and ~~2016:~~2017:



	2019					2018					2017
(In thousands, except rates)	Amount			Rate		Amount			Rate		Amount			Rate
Statutory tax rate	$	26,037		21.0	%	$	29,018		21.0	%	$	31,921		35.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit	3,641			2.9		7,081			5.1		1,699			1.9
Tax exempt income - investments, net	(3,527		)	(2.8	)	(3,620		)	(2.6	)	(5,395		)	(5.9	)
Bank-owned life insurance	(1,305		)	(1.1	)	(1,337		)	(1.0	)	(1,556		)	(1.7	)
Non-deductible merger costs	122			0.1		181			0.1		368			0.4
Tax credits, net of basis reduction	(3,531		)	(2.8	)	(3,574		)	(2.6	)	(4,656		)	(5.1	)
Change in valuation allowance	—			—		—			—		75			0.1
Impact of federal tax reform enactment	—			—		—			—		18,721			20.5
Other, net	1,026			0.8		1,212			0.9		911			1.0
Effective tax rate	$	22,463		18.1	%	$	28,961		20.9	%	$	42,088		46.2	%

2018 2017 2016
(In thousands, except rates) Amount Rate Amount Rate Amount Rate
Statutory tax rate $ 28,017
21.0 % $ 34,912
35.0 % $ 27,108
35.0 %
Increase (decrease) resulting from:

State taxes, net of federal tax benefit 6,761
5.1
2,232
2.2
1,675
2.2
Tax exempt income - investments, net (3,620 ) (2.7 ) (5,395 ) (5.4 ) (3,849 ) (5.0 )
Bank-owned life insurance (1,337 ) (1.0 ) (1,556 ) (1.6 ) (1,364 ) (1.8 )
Non-deductible merger costs 181
0.1
368
0.4
542
0.7
Tax credits, net of basis reduction (3,574 ) (2.7 ) (4,656 ) (4.7 ) (6,225 ) (8.0 )
Change in valuation allowance —
—
75
0.1
125
0.2
Impact of federal tax reform enactment (1)
—
—
18,145
18.2
—
—
Other, net 1,220
0.9
377
0.4
772
1.0
Effective tax rate $ 27,648
20.7 % $ 44,502
44.6 % $ 18,784
24.3 %

~~(1) Refer to SAB 118 disclosure below.~~

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address the application of US GAAP in situations when a registrant does not have the necessary information available to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (the "2017 Act"). SAB 118 allowed for adjustments to the tax provision for up to one year from the enactment date (the measurement period). Any provisional amounts or adjustments to provisional amounts included in the Company’s financial statements during the measurement period were included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined.

As of December 31, 2017, the Company recorded provisional amounts of deferred income taxes using reasonable estimates in five areas where the information necessary to determine the final deferred tax asset or liability was either not available, not prepared, or not sufficiently analyzed as of the report filing date: 1) The deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets was awaiting

~~F-62~~F-67

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

completion and implementation of software updates to process the calculations associated with the Act's provisions allowing for direct expensing of qualified assets. 2) The net deferred tax asset for temporary differences associated with Commerce acquired tax attributes was awaiting final determinations of those amounts, some of which remained provisional. 3) The net deferred tax liability for loan servicing rights was awaiting formal approval from the Internal Revenue Service of a requested tax accounting method change with respect to these rights. 4) The net deferred tax asset for temporary differences associated with equity investments in partnerships was awaiting the receipt of Schedules K-1 from outside preparers, which was necessary to determine the 2017 tax impact from these investments.

In a fifth area, the Company made no adjustments to deferred tax assets representing future deductions for accrued compensation that may be subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limits the annual deduction for certain compensation paid to certain employees to $1 million. All of these matters were finalized in 2018 with no material impact to the Company's federal income tax expense.

Deferred Tax ~~Liabilities~~Assets and ~~Assets~~Liabilities

As of December 31, ~~2018~~2019 and ~~2017,~~2018, significant components of the Company’s deferred tax assets and liabilities were, as follows:



(In thousands)	2019			2018
Deferred tax assets:
Allowance for loan losses	$	17,446		$	16,754
Unrealized capital loss on tax credit investments	6,195			6,045
Net unrealized loss on securities available for sale and pension in OCI	—			4,554
Employee benefit plans	10,565			5,161
Purchase accounting adjustments	39,359			27,249
Net operating loss carryforwards	951			1,162
Lease liability	22,497			—
Premises and equipment	739			—
Other	1,088			2,457
Deferred tax assets, net before valuation allowances	98,840			63,382
Valuation allowance	(200		)	(200		)
Deferred tax assets, net of valuation allowances	$	98,640		$	63,182

Deferred tax liabilities:
Net unrealized gain on securities available for sale and pension in OCI	$	(4,244	)	$	—
Premises and equipment	—			(1,654		)
Loan servicing rights	(4,669		)	(3,944		)
Deferred loan fees	(1,667		)	(3,310		)
Intangible amortization	(18,557		)	(13,940		)
Unamortized tax credit reserve	(1,142		)	(1,170		)
Right-of-use asset	(20,614		)	—
Deferred tax liabilities	$	(50,893	)	$	(24,018	)
Deferred tax assets, net	$	47,747		$	39,164

Deferred tax liabilities from discontinued operations	$	(3,418	)	$	(3,270	)
Deferred tax assets, net from continuing operations	$	51,165		$	42,434

(In thousands) 2018 2017
Deferred tax assets:

Allowance for loan losses $ 16,754
$ 14,578
Tax credit carryforwards —
4,100
Unrealized capital loss on tax credit investments 6,045
6,502
Net unrealized loss on securities available for sale and pension in OCI 4,554
—
Employee benefit plans 5,161
4,983
Purchase accounting adjustments 27,249
37,843
Net operating loss carryforwards 1,162
1,374
Other 2,457
3,549
Deferred tax assets, net before valuation allowances 63,382
72,929
Valuation allowance (200 ) (200 )
Deferred tax assets, net of valuation allowances $ 63,182
$ 72,729

Deferred tax liabilities:

Net unrealized gain on securities available for sale and pension in OCI $ —
$ (1,888 )
Premises and equipment (1,654 ) (1,126 )
Loan servicing rights (3,944 ) (2,174 )
Deferred loan fees (3,310 ) (3,900 )
Intangible amortization (13,940 ) (15,001 )
Unamortized tax credit reserve (1,170 ) (1,579 )
Deferred tax liabilities $ (24,018 ) $ (25,668 )
Deferred tax assets, net $ 39,164
$ 47,061

The Company’s net deferred tax asset ~~decreased~~increased by ~~$7.9~~$8.6 million during ~~2018,~~2019, including ~~$10.6~~$17.9 million ~~related to~~from the ~~accretion~~acquisition of purchase accounting adjustments from acquisitions, $3.9 million related to the utilization of the alternative minimum tax credit carryforward offset by $4.3 million deferred tax benefit recognized as an increase in shareholder's equity.SIFI.

Deferred tax assets, net of valuation allowances, are expected to be realized through the reversal of existing taxable temporary differences and future taxable income.

~~F-63~~F-68

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Valuation Allowances

The components of the Company’s valuation allowance on its deferred tax asset, net as of December 31, ~~2018~~2019 and ~~2017~~2018 were, as follows:



(in thousands)	2019			2018
State tax basis difference, net of Federal tax benefit	$	(200	)	$	(200	)
Valuation allowances	$	(200	)	$	(200	)

(in thousands) 2018 2017
State tax basis difference, net of Federal tax benefit $ (200 ) $ (200 )
Valuation allowances $ (200 ) $ (200 )

The state tax basis difference, net of Federal tax benefit was originally recorded in 2012, due to management’s assessment that it is more likely than not that certain deferred tax assets recorded for the difference between the book basis and the state tax basis in certain tax credit limited partnership investments (LPs) will not be realized. Management anticipates that the remaining excess state tax basis will be realized as a capital loss upon disposition, and that it is unlikely that the Company will have capital gains against which to offset such capital losses.

There was no0 change in the valuation allowance during ~~2018.~~2019. The valuation allowance as of December 31, ~~2018~~2019 is subject to change in the future as the Company continues to periodically assess the likelihood of realizing its deferred tax assets.

Tax Attributes

At December 31, ~~2018,~~2019, the Company has ~~$5.5~~$4.5 million of federal net operating loss carryforwards, ~~and $13.9 million of Connecticut net operating loss carryforwards available that were obtained through acquisition,~~ the utilization of which are limited under Internal Revenue Code Section 382. ~~No deferred tax asset has been recorded for the Connecticut net operating loss carryforward since the state of Connecticut does not currently allow a deduction for net operating losses.~~ These net operating losses begin to expire in 2024. The related deferred tax asset is ~~$1.2~~$1.0 million.

Unrecognized Tax Benefits

On a periodic basis, the Company evaluates its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This evaluation takes into consideration the status of taxing authorities’ current examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment in relation to uncertain tax positions.

The following table presents changes in unrecognized tax benefits for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016:~~2017:



(In thousands)	2019			2018			2017
Unrecognized tax benefits at January 1	$	467		$	304		$	460
Increase in gross amounts of tax positions related to prior years	26			533			—
Decrease in gross amounts of tax positions related to prior years	—			(370		)	(156		)
Decrease due to settlement with taxing authority	(185		)	—			—
Increase in gross amounts of tax positions related to current year	—			—			—
Decrease due to lapse in statute of limitations	(70		)	—			—
Unrecognized tax benefits at December 31	$	238		$	467		$	304

(In thousands) 2018 2017 2016
Unrecognized tax benefits at January 1 $ 304
$ 460
$ 307
Increase in gross amounts of tax positions related to prior years 533
—
270
Decrease in gross amounts of tax positions related to prior years (370 ) (156 ) —
Decrease due to settlement with taxing authority —
—
—
Increase in gross amounts of tax positions related to current year —
—
—
Decrease due to lapse in statute of limitations —
—
(117 )
Unrecognized tax benefits at December 31 $ 467
$ 304
$ 460

It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes. The Company does not expect any significant changes in unrecognized tax benefits during the next twelve months.

~~F-64~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

All of the Company’s unrecognized tax benefits, if recognized, would be recorded as a component of income tax expense, therefore, affecting the effective tax rate. The Company recognizes interest and penalties, if any, related to the liability for uncertain tax positions as a component of income tax expense. The accrual for interest and penalties was not material for all years presented.

F-69

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as well as in various states. In the normal course of business, the Company is subject to U.S. federal, state, and local income tax examinations by tax authorities. The Company is no longer subject to examination for tax years prior to ~~2015~~2016including any related income tax filings from its recent acquisitions. The Company has been selected for audit in the state of New York for tax years 2015-2017.

~~F-65~~F-70

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~15.~~17. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

At year-end ~~2018,~~2019, the Company held derivatives with a total notional amount of ~~$3.3~~$4.1 billion. The Company had economic hedges and non-hedging derivatives totaling ~~$3.1~~$3.9 billion and ~~$165~~$169 million, respectively, which are not designated as hedges for accounting purposes and are therefore recorded at fair value with changes in fair value recorded directly through earnings. Economic hedges included interest rate swaps totaling ~~$2.7~~$3.3 billion, risk participation agreements with dealer banks of ~~$244~~$315 million, and ~~$191~~$237 million in forward commitment contracts. Forward sale commitments and commitments to lend are included in discontinued operations. See Note 3 - 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 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 December 31, ~~2018.~~2019.

The Company pledged collateral to derivative counterparties in the form of cash totaling $96.3 million and securities with an amortized cost of $25.7 million and a fair value of $25.8 million at year-end 2019. At December 31, 2018, the Company pledged cash collateral of $25.4 million and securities with an amortized cost of $13.1 million and a fair value of $12.8 ~~million at year-end 2018. At December 31, 2017, the Company pledged cash collateral of $2.1 million and securities with an amortized cost of $24.4 million and a fair value of $24.4~~ million. 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 interest rate swap agreements and non-hedging derivative assets and liabilities at December 31, ~~2018~~2019 follows:


	Notional Amount				Weighted Average Maturity	Weighted Average Rate				Estimated Fair Value Asset (Liability)			Notional Amount			Weighted Average Maturity	Weighted Average Rate						Estimated Fair Value Asset (Liability)
December 31, 2018				Received		Contract pay rate										Weighted Average Maturity							Estimated Fair Value Asset (Liability)
December 31, 2019													Notional Amount		Notional Amount		Weighted Average Maturity		Received			Contract pay rate			Estimated Fair Value Asset (Liability)
	Notional Amount		(In thousands)			(In years)							(In thousands)												Estimated Fair Value Asset (Liability)
Economic hedges:					Weighted Average Maturity					Estimated Fair Value Asset (Liability)					Notional Amount		Weighted Average Maturity
Interest rate swap on tax advantaged economic development bond	10,090				10.9	2.72	%	5.09	%	(1,240		)	$	9,390		9.9	2.08	%		5.09	%		$	(1,488	)
Interest rate swaps on loans with commercial loan customers	1,346,894				6.7	4.04	%	4.53	%	(11,953		)	1,669,895			6.4	4.38	%		3.28	%		75,326
Reverse interest rate swaps on loans with commercial loan customers	1,346,894				6.7	4.53	%	4.04	%	11,443			1,669,895			6.4	3.28	%		4.38	%		(77,051		)
Risk participation agreements with dealer banks	243,806				5.7					237			315,140			7.5							320
Forward sale commitments(1)	190,807				0.2					(734		)	237,412			0.2							(227		)
Total economic hedges	3,138,491									(2,247		)	3,901,732										(3,120		)

Non-hedging derivatives:
Commitments to lend(1)	165,079				0.2					3,927			168,997			0.2							2,628
Total non-hedging derivatives	165,079									3,927			168,997										2,628
Total	$	3,303,570								$	1,680		$	4,070,729									$	(492	)

(1) Includes the impact of discontinued operations.

~~F-66~~F-71

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information about interest rate swap agreements and non-hedging derivative asset and liabilities at December 31, ~~2017~~2018 follows:



	Notional Amount		Weighted Average Maturity	Weighted Average Rate				Estimated Fair Value Asset (Liability)
December 31, 2018	Notional Amount		Weighted Average Maturity	Received		Contract pay rate		Estimated Fair Value Asset (Liability)
	(In thousands)		(In years)					(In thousands)
Economic hedges:
Interest rate swap on tax advantaged economic development bond	$	10,090	10.9	2.72	%	5.09	%	$	(1,240	)
Interest rate swaps on loans with commercial loan customers	1,346,894		6.7	4.53	%	4.04	%	11,443
Reverse interest rate swaps on loans with commercial loan customers	1,346,894		6.7	4.04	%	4.53	%	(11,953		)
Risk participation agreements with dealer banks	243,806		5.7					237
Forward sale commitments (1)	190,807		0.2					(734		)
Total economic hedges	3,138,491							(2,247		)

Non-hedging derivatives:
Commitments to lend (1)	165,079		0.2					3,927
Total non-hedging derivatives	165,079							3,927
Total	$	3,303,570						$	1,680

Notional
Amount

Weighted
Average
Maturity
Weighted Average Rate
Estimated
Fair Value
Asset (Liability)
December 31, 2017 Received Contract pay rate
(In thousands) (In years) (In thousands)
Economic hedges:

Interest rate swap on tax advantaged economic development bond 10,755
11.9 1.73 % 5.09 % (1,649 )
Interest rate swaps on loans with commercial loan customers 943,795
5.9 3.26 % 4.25 % (3,195 )
Reverse interest rate swaps on loans with commercial loan customers 943,795
5.9 4.25 % 3.26 % 3,204
Risk participation agreements with dealer banks 142,054
8.4

(26 )
Forward sale commitments 276,572
0.2

(123 )
Total economic hedges 2,316,971

(1,789 )

Non-hedging derivatives:

Commitments to lend 193,966
0.2

5,259
Total non-hedging derivatives 193,966

5,259
Total $ 2,510,937

$ 3,470
(1) Includes the impact of discontinued operations.

~~F-67~~F-72

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cash Flow Hedges

In the first quarter of 2017, the Company maintained ~~six~~6 interest rate swap contracts with an aggregate notional value of $300 million with original durations of three years. This hedge strategy converted one month rolling FHLB borrowings based on the FHLB’s one month fixed interest rate to fixed interest rates, thereby protecting the Company from floating interest rate variability.

On February 7, 2017, the Company terminated all of its interest rate swaps associated with FHLB borrowings with 1-month LIBOR based floating interest rates of an aggregate notional amount of $300 million. As of March 31, 2017, the Company no longer held the FHLB borrowings associated with the interest rate swaps. As a result, the Company reclassified $6.6 million of losses from the effective portion of the unrealized changes in the fair value of the terminated derivatives from other comprehensive income to non-interest income as the forecasted transactions to the related FHLB advances will not occur.c

Prior to the termination, the effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges was reported in other comprehensive income. Each quarter, the Company assessed the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. For the years ended December 31, ~~2018~~2019 and ~~2017,~~2018, there was no hedge ineffectiveness on interest rate swaps designated as cash flow hedges.

Amounts included in the Consolidated Statements of Income and in the other comprehensive income section of the Consolidated Statements of Comprehensive Income (related to interest rate derivatives designated as hedges of cash flows), were as follows:



	Years Ended December 31,
(In thousands)	2019		2018		2017
Interest rate swaps on FHLB borrowings:
Unrealized (loss) recognized in accumulated other comprehensive loss	$	—	$	—	$	(449	)
Less: Reclassification of unrealized (loss) from accumulated other comprehensive loss to interest expense	—		—		(393		)
Less: reclassification of unrealized (loss) from accumulated other comprehensive income to other non-interest expense	—		—		(6,629		)
Net tax effect on items recognized in accumulated other comprehensive income	—		—		(2,589		)
Other comprehensive income recorded in accumulated other comprehensive income, net of reclassification adjustments and tax effects	$	—	$	—	$	3,984

Years Ended December 31,
(In thousands) 2018 2017 2016
Interest rate swaps on FHLB borrowings:

Unrealized (loss) recognized in accumulated other comprehensive loss $ —
$ (449 ) $ (2,023 )
Less: Reclassification of unrealized (loss) from accumulated other comprehensive loss to interest expense —
(393 ) (3,981 )
Less: reclassification of unrealized (loss) from accumulated other
comprehensive income to other non-interest expense —
(6,629 ) —
Net tax effect on items recognized in accumulated other comprehensive income —
(2,589 ) (835 )
Other comprehensive income recorded in accumulated other comprehensive income, net of reclassification adjustments and tax effects $ —
$ 3,984
$ 1,123

~~F-68~~F-73

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Economic hedges

As of December 31, ~~2018~~2019 the Company has an interest rate swap with a ~~$10.1~~$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 ~~$(519) thousand~~$1.2 million at year-end ~~2018.~~2019. 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 earns 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.

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 held 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 3 - 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 sales 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 sales 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 to-be-announced 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.

~~F-69~~F-74

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-hedging derivatives

The Company enters into 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. Commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding commitments 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 commitments are free-standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Income. Changes in the fair value of commitments 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 3 - 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:



	Years Ended December 31,
(In thousands)	2019			2018			2017
Economic hedges
Interest rate swap on industrial revenue bond:
Unrealized (loss)/gain recognized in other non-interest income	$	(248	)	$	409		$	371
Interest rate swaps on loans with commercial loan customers:
Unrealized gain/(loss) recognized in other non-interest income	65,098			8,758			(3,557		)
(Unfavorable)/Favorable change in credit valuation adjustment recognized in other non-interest income	(1,214		)	(519		)	(316		)
Reverse interest rate swaps on loans with commercial loan customers:
Unrealized (loss)/gain recognized in other non-interest income	(65,098		)	(8,758		)	3,557
Risk Participation Agreements:
Unrealized gain/(loss) recognized in other non-interest income	83			263			(31		)
Forward Commitments:
Unrealized gain/(loss) recognized in discontinued operations	507			(611		)	(123		)
Realized (loss) in discontinued operations	(9,195		)	(1,532		)	(1,764		)

Non-hedging derivatives
Commitments to lend:
Unrealized (loss)/gain recognized in discontinued operations	$	(1,299	)	$	3,358		$	5,259
Realized gain in discontinued operations	57,699			33,982			50,879

Years Ended December 31,
(In thousands) 2018 2017 2016
Economic hedges

Interest rate swap on industrial revenue bond:

Unrealized gain (loss) recognized in other non-interest income $ 409
$ 371
$ (75 )
Interest rate swaps on loans with commercial loan customers:

Unrealized (loss)/gain recognized in other non-interest income (8,758 ) 3,557
1,312
Reverse interest rate swaps on loans with commercial loan customers:

Unrealized gain/(loss) recognized in other non-interest income 8,758
(3,557 ) (1,312 )
(Unfavorable) Favorable change in credit valuation adjustment recognized in other non-interest income (519 ) (316 ) 338
Risk Participation Agreements:

Unrealized gain/(loss) recognized in other non-interest income 263
(31 ) (61 )
Forward Commitments:

Unrealized (loss) recognized in non-interest income (611 ) (123 ) (1,176 )
Realized gain/(loss) in non-interest income (1,532 ) (1,764 ) (3,705 )

Non-hedging derivatives

Commitments to lend:

Unrealized gain recognized in non-interest income $ 3,358
$ 5,259
$ 8,373
Realized gain in non-interest income 33,982
50,879
3,650

~~F-70~~F-75

Table of Contents

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 Balance Sheets. 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 ~~$5.9~~$0.6 million and ~~$1.1~~$5.9 million as of December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The Company had net asset positions with its commercial banking counterparties totaling ~~$21.2~~$76.4 million and ~~$8.6~~$21.2 million as of December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The Company had net liability positions with its financial institution counterparties totaling ~~$18.8~~$78.8 million and ~~$5.9~~$18.8 million as of December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. At December 31, ~~2018,~~2019, the Company had net liability positions with its commercial banking counterparties totaling ~~$9.7~~$1.1 million and ~~$5.4~~$9.7 million as of December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The collateral posted by the Company that covered liability positions was ~~$25.4~~$122.1 million and ~~$5.9~~$38.2 million as of December 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of December 31, ~~2018~~2019 and December 31, ~~2017~~2018 :

Offsetting of Financial Assets and Derivative Assets



	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statements of Condition			Net Amounts of Assets Presented in the Statements of Condition		Gross Amounts Not Offset in the Statements of Condition
								Financial Instruments		Cash Collateral Received
(in thousands)								Financial Instruments		Cash Collateral Received		Net Amount
As of December 31, 2019
Interest Rate Swap Agreements:
Institutional counterparties	$	640	$	(54	)	$	586	$	—	$	—	$	586
Commercial counterparties	76,428		(22		)	76,406		—		—		76,406
Total	$	77,068	$	(76	)	$	76,992	$	—	$	—	$	76,992

Gross
Amounts of
Recognized
Assets Gross Amounts
Offset in the
Statements of
Condition Net Amounts of Assets
Presented in the Statements of
Condition Gross Amounts Not Offset in the Statements
of Condition
Financial
Instruments Cash
Collateral Received
(in thousands) Net Amount
As of December 31, 2018

Interest Rate Swap Agreements:
Institutional counterparties $ 9,485
$ (3,592 ) $ 5,893
$ —
$ —
$ 5,893
Commercial counterparties 21,345
(157 ) 21,188
—
—
21,188
Total $ 30,830
$ (3,749 ) $ 27,081
$ —
$ —
$ 27,081

Offsetting of Financial Liabilities and Derivative Liabilities



	Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Statements of Condition		Net Amounts of Liabilities Presented in the Statement of Condition			Gross Amounts Not Offset in the Statements of Condition
									Financial Instruments		Cash Collateral Received
(in thousands)									Financial Instruments		Cash Collateral Received		Net Amount
As of 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

Gross
Amounts of
Recognized
Liabilities Gross Amounts
Offset in the
Statements of
Condition Net Amounts of Liabilities
Presented in the Statement of
Condition Gross Amounts Not Offset in the Statements
of Condition
Financial
Instruments Cash
Collateral Received
(in thousands) Net Amount
As of December 31, 2018

Interest Rate Swap Agreements:
Institutional counterparties $ (19,949 ) $ 1,101
$ (18,848 ) $ —
$ 25,412
$ 6,564
Commercial counterparties (9,932 ) 187
(9,745 ) —
—
(9,745 )
Total $ (29,881 ) $ 1,288
$ (28,593 ) $ —
$ 25,412
$ (3,181 )

~~F-71~~F-76

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Offsetting of Financial Assets and Derivative Assets



	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statements of Condition			Net Amounts of Assets Presented in the Statements of Condition		Gross Amounts Not Offset in the Statements of Condition
								Financial Instruments		Cash Collateral Received
(in thousands)								Financial Instruments		Cash Collateral Received		Net Amount
As of December 31, 2018
Interest Rate Swap Agreements:
Institutional counterparties	$	9,485	$	(3,592	)	$	5,893	$	—	$	—	$	5,893
Commercial counterparties	21,345		(157		)	21,188		—		—		21,188
Total	$	30,830	$	(3,749	)	$	27,081	$	—	$	—	$	27,081

Gross
Amounts of
Recognized
Assets Gross Amounts
Offset in the
Statements of
Condition Net Amounts of Assets
Presented in the Statements of
Condition Gross Amounts Not Offset in the Statements
of Condition
Financial
Instruments Cash
Collateral Received
(in thousands) Net Amount
As of December 31, 2017

Interest Rate Swap Agreements:
Institutional counterparties $ 2,692
$ (1,622 ) $ 1,070
$ —
$ —
$ 1,070
Commercial counterparties 8,577
—
8,577
—
—
8,577
Total $ 11,269
$ (1,622 ) $ 9,647
$ —
$ —
$ 9,647

Offsetting of Financial Liabilities and Derivative Liabilities



	Gross Amounts of Recognized Liabilities			Gross Amounts Offset in the Statements of Condition		Net Amounts of Liabilities Presented in the Statement of Condition			Gross Amounts Not Offset in the Statements of Condition
									Financial Instruments		Cash Collateral Received
(in thousands)									Financial Instruments		Cash Collateral Received		Net Amount
As of December 31, 2018
Interest Rate Swap Agreements:
Institutional counterparties	$	(19,949	)	$	1,101	$	(18,848	)	$	12,793	$	25,412	$	19,357
Commercial counterparties	(9,932		)	187		(9,745		)	—		—		(9,745		)
Total	$	(29,881	)	$	1,288	$	(28,593	)	$	12,793	$	25,412	$	9,612

Gross
Amounts of
Recognized
Liabilities Gross Amounts
Offset in the
Statements of
Condition Net Amounts of Liabilities
Presented in the Statement of
Condition Gross Amounts Not Offset in the Statements
of Condition
Financial
Instruments Cash
Collateral Received
(in thousands) Net Amount
As of December 31, 2017

Interest Rate Swap Agreements:
Institutional counterparties $ (8,777 ) $ 2,835
$ (5,942 ) $ 3,982
$ 1,960
$ —
Commercial counterparties (5,375 ) 2
(5,373 ) —
—
(5,373 )
Total $ (14,152 ) $ 2,837
$ (11,315 ) $ 3,982
$ 1,960
$ (5,373 )

~~F-72~~F-77

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 18.LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee. See Note 1 - Summary of Significant Accounting Policies to the Consolidated Financial Statements regarding transition guidance related to the new standard.

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, and therefore, were previously not recognized on the Company’s Consolidated Balance Sheets. With the adoption of Topic 842, operating lease agreements are required to be recognized on the Consolidated Balance Sheets as a right-of-use (“ROU”) asset and a corresponding lease liability. The Company’s finance leases (previously referred to as a capital lease) was previously required to be recorded on the Company’s Consolidated Balance Sheets. As these leases were previously required to be recorded on the Company’s Consolidated Balance Sheets, Topic 842 did not materially impact the accounting for the leases.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, the Company utilized the implicit lease rate when readily determinable. As most of the Company’s leases do not provide an implicit rate, the Company used our incremental borrowing rate based on the information available at commencement date. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate used to discount operating lease liabilities and finance lease liabilities at December 31, 2019 was 3.36% and 5.00%, respectively.

The Company made a policy election to exclude the recognition requirements of Topic 842 to all classes of leases with original terms of 12 months or less. Instead, the short-term lease payments are recognized in profit or loss on a straight-line basis over the lease term. At December 31, 2019 lease expiration dates ranged from 1 month to 21 years. The weighted average remaining lease term for operating and finance leases at December 31, 2019 was 10.3 years and 14.8 years, respectively.

The following table represents the Consolidated Balance Sheets classification of the Company’s ROU assets and lease liabilities:



(In thousands)		December 31, 2019
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets (1)	Other assets	$	76,332
Finance lease right-of-use assets	Premises and equipment, net	7,720
Total Lease Right-of-Use Assets		$	84,052

Lease Liabilities
Operating lease liabilities (1)	Other liabilities	$	80,734
Finance lease liabilities	Other liabilities	10,883
Total Lease Liabilities		$	91,617

(1) Includes $3.5 million of operating lease right-of-use assets and $3.5 million of operating lease liabilities classified as discontinued operations.

F-78

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 year ended December 31, 2019 was $14.4 million, of which $2.8 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.

Supplemental cash flow information related to leases was as follows:



	Year Ended
(In thousands)	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1)	$	14,731
Operating cash flows from finance leases	553
Financing cash flows from finance leases	435

Right-of-use assets obtained in exchange for lease obligations:
Operating leases (1)	88,079
Finance leases	—

(1) Includes operating cash flows from operating leases of $2.8 million related to discontinued operations.

The following table presents a maturity analysis of the Company’s lease liability by lease classification at December 31, 2019:



(In thousands)	Operating Leases			Finance Leases
2020	$	13,763		$	1,031
2021	12,515			1,031
2022	11,295			1,031
2023	9,331			1,037
2024	7,873			1,037
Thereafter	40,924			10,260
Total undiscounted lease payments (1)	95,701			15,427
Less amounts representing interest (1)	(14,967		)	(4,544		)
Lease liability (1)	$	80,734		$	10,883

(1) Includes $3.5 million of discontinued operations.

F-79

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~16.~~19. OTHER COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ACTIVITIES

Credit Related Financial Instruments. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit, and interest rate risk in excess of the amount recognized in the accompanying Consolidated Balance Sheets.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. A summary of financial instruments outstanding whose contract amounts represent credit risk is as follows at year-end:



(In thousands)	2019		2018
Commitments to originate new loans (1)	$	143,812	$	202,789
Unused funds on commercial and other lines of credit	850,761		831,853
Unadvanced funds on home equity lines of credit	384,723		332,359
Unadvanced funds on construction and real estate loans	440,599		424,347
Standby letters of credit	15,527		17,295
Total	$	1,835,422	$	1,808,643

(In thousands) 2018 2017
Commitments to originate new loans $ 202,789
$ 244,252
Unused funds on commercial and other lines of credit 831,853
678,567
Unadvanced funds on home equity lines of credit 332,359
297,367
Unadvanced funds on construction and real estate loans 424,347
360,472
Standby letters of credit 17,295
13,613
Lease obligation 10,986
11,323
Total $ 1,819,629
$ 1,605,594
(1) Includes discontinued operations of $132.7 million and $134.5 million for 2019 and 2018, respectively.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company considers standby letters of credit to be guarantees and the amount of the recorded liability related to such guarantees was not material at year-end ~~2018~~2019 and ~~2017.~~2018.

~~Operating Lease Commitments.~~ Future minimum rental payments required under operating leases at year-end 2018 are as follows: 2019 — $13.6 million; 2020 — $12.6 million; 2021 — $11.4 million; 2022 — $10.3 million; 2023 — $8.4 million; and all years thereafter — $42.8 million. The leases contain options to extend for periods up to twenty years. The cost of such rental options is not included above. Total rent expense for the years 2018, 2017, and 2016 amounted to $13.7 million, $12.0 million, and $8.3 million, respectively.

~~Lease Obligations.~~ Future obligations required under the capital and financing lease at year-end 2018 are $732 thousand in 2019; $730 thousand in 2020; $698 thousand in 2021; $669 thousand in 2022; $647 thousand in 2023 and $5.8 million all years thereafter. Amortization under the capital and financing lease is included with premises and equipment depreciation and amortization expense.

Employment and Change in Control Agreements. The Company and the Bank have change in control agreements with several officers which provide a severance payment in the event employment is terminated in conjunction with a defined change in control.

Legal Claims. Various legal claims arise from time to time in the normal course of business. As of December 31, ~~2018,~~2019, neither the Company nor the Bank was involved in any pending legal proceedings believed by management to be material, that are not accrued for, to the Company’s financial condition or results of operations. As of December 31, 2019, the Company had litigation accrual of $2.0 million. As of December 31, 2018, the Company had litigation accrual of $3.0 million. ~~There was no accrual as of December 31, 2017.~~

~~F-73~~F-80

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~17.~~20. SHAREHOLDERS’ EQUITY AND EARNINGS PER COMMON SHARE

Minimum Regulatory Capital Requirements

The Company and Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if imposed, could have a direct material impact on the Company’s Consolidated Financial Statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as defined). As of year-end ~~2018~~2019 and ~~2017,~~2018, the Bank and the Company met the capital adequacy requirements. Regulators may set higher expected capital requirements in some cases based on their examinations.

Effective January 1, 2015, the Company and the Bank became subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to risk weighted assets and the Company and the Bank each exceed the minimum to be well capitalized. In addition, the final capital rules added mechanism for the maintenance of a ~~requirement to maintain a minimum~~ conservation buffer, composed of Common equity tier 1 capital, of 2.5% of risk-weighted assets, to be phased in over three years and applied to the Common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Accordingly, banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5%, and a minimum Total risk-based capital ratio of 10.5%. The required minimum conservation buffer began to be phased in incrementally, starting at 0.625% on January 1, 2016, increased to 1.25% on January 1, 2017, increased to 1.875% on January 1, 2018 and increased to 2.5% on January 1, 2019. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.

At December 31, ~~2018,~~2019, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels. The capital levels of both the Company and the Bank at December 31, 2018 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 1.875%.

As of year-end ~~2018~~2019 and ~~2017,~~2018, 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 following tables.

~~F-74~~F-81

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company and Bank’s actual and required capital amounts were as follows:



					Minimum Capital Requirement				Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
	Actual				Minimum Capital Requirement
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2019
Company (Consolidated)
Total capital to risk-weighted assets	$	1,321,910	13.73	%	$	770,294	8.00	%	N/A		N/A
Common Equity Tier 1 Capital to risk weighted assets	1,161,800		12.07		433,290		4.50		N/A		N/A
Tier 1 capital to risk-weighted assets	1,183,932		12.30		577,720		6.00		N/A		N/A
Tier 1 capital to average assets	1,183,932		9.33		385,147		4.00		N/A		N/A
Bank
Total capital to risk-weighted assets	$	1,233,278	12.82	%	$	769,327	8.00	%	$	961,659	10.00	%
Common Equity Tier 1 Capital to risk weighted assets	1,169,535		12.16		432,747		4.50		625,079		6.50
Tier 1 capital to risk-weighted assets	1,169,535		12.16		576,996		6.00		769,327		8.00
Tier 1 capital to average assets	1,169,535		9.14		384,664		4.00		480,830		5.00
December 31, 2018
Company (Consolidated)
Total capital to risk-weighted assets	$	1,172,120	12.99	%	$	721,605	8.00	%	N/A		N/A
Common Equity Tier 1 Capital to risk weighted assets	1,029,724		11.42		405,903		4.50		N/A		N/A
Tier 1 capital to risk-weighted assets	1,043,898		11.57		541,203		6.00		N/A		N/A
Tier 1 capital to average assets	1,043,898		9.04		360,802		4.00		N/A		N/A
Bank
Total capital to risk-weighted assets	$	1,100,783	12.21	%	$	721,185	8.00	%	$	901,481	10.00	%
Common Equity Tier 1 Capital to risk weighted assets	1,043,401		11.57		405,667		4.50		585,963		6.50
Tier 1 capital to risk-weighted assets	1,043,401		11.57		540,889		6.00		721,185		8.00
Tier 1 capital to average assets	1,043,401		9.04		360,593		4.00		450,741		5.00

Minimum
Capital
Requirement

Minimum to be Well
Capitalized Under
Prompt Corrective
Action Provisions
Actual
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
December 31, 2018

Company (Consolidated)

Total capital to risk-weighted assets $ 1,172,120
12.99 % $ 721,605
8.00 % N/A
N/A
Common Equity Tier 1 Capital to risk weighted assets 1,029,724
11.42
405,903
4.50
N/A
N/A
Tier 1 capital to risk-weighted assets 1,043,898
11.57
541,203
6.00
N/A
N/A
Tier 1 capital to average assets 1,043,898
9.04
360,802
4.00
N/A
N/A
Bank

Total capital to risk-weighted assets $ 1,100,783
12.21 % $ 721,185
8.00 % $ 901,481
10.00 %
Common Equity Tier 1 Capital to risk weighted assets 1,043,401
11.57
405,667
4.50
585,963
6.50
Tier 1 capital to risk-weighted assets 1,043,401
11.57
540,889
6.00
721,185
8.00
Tier 1 capital to average assets 1,043,401
9.04
360,593
4.00
450,741
5.00
December 31, 2017

Company (Consolidated)

Total capital to risk-weighted assets $ 1,063,843
12.43 % $ 684,692
8.00 % N/A
N/A
Common Equity Tier 1 Capital to risk weighted assets 942,389
11.01
385,139
4.50
N/A
N/A
Tier 1 capital to risk-weighted assets 954,103
11.15
513,519
6.00
N/A
N/A
Tier 1 capital to average assets 954,103
9.01
342,346
4.00
N/A
N/A
Bank

Total capital to risk-weighted assets $ 954,172
11.17 % $ 683,103
8.00 % $ 853,879
10.00 %
Common Equity Tier 1 Capital to risk weighted assets 881,324
10.32
384,245
4.50
555,021
6.50
Tier 1 capital to risk-weighted assets 881,324
10.32
512,327
6.00
683,103
8.00
Tier 1 capital to average assets 881,324
8.32
341,552
4.00
426,939
5.00

~~F-75~~F-82

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Common stock

The Bank is subject to dividend restrictions imposed by various regulators, including a limitation on the total of all dividends that the Bank may pay to the Company in any calendar year. The total of all dividends shall not exceed the Bank’s net income for the current year (as defined by statute), plus the Bank’s net income retained for the two previous years, without regulatory approval. Dividends from the Bank are an important source of funds to the Company to make dividend payments on its common and preferred stock, to make payments on its borrowings, and for its other cash needs. The ability of the Company and the Bank to pay dividends is dependent on regulatory policies and regulatory capital requirements. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies relating to capital, safety and soundness, and other regulatory concerns.

The payment of dividends by the Company is subject to Delaware law, which generally limits dividends to an amount equal to an excess of the net assets of a company (the amount by which total assets exceed total liabilities) over statutory capital, or if there is no excess, to the Company’s net profits for the current and/or immediately preceding fiscal year.

Preferred stock

~~As a provision of the merger agreement with Commerce, certain Commerce common stock was converted into the right to receive 0.465 shares of~~The Company previously issued Series B Non-Voting Preferred ~~Stock issued by the Company.~~Stock. Each preferred share is convertible into ~~two~~2 shares of the Company's common stock under specified conditions. The shares are considered participating, but do not maintain preferential treatment over common shares. Proportional dividends on the preferred shares are not payable unless also declared for common shares. As of year-end ~~2018,~~2019, 522 thousand preferred shares were issued and outstanding.

Accumulated other comprehensive income

Year-end components of accumulated other comprehensive (loss)/income are as follows:



(In thousands)	2019			2018
Other accumulated comprehensive income/(loss), before tax:
Net unrealized holding gain/(loss) on AFS securities	$	19,263		$	(15,267	)
Net unrealized holding (loss) on pension plans	(3,023		)	(2,753		)

Income taxes related to items of accumulated other comprehensive (loss)/income:
Net unrealized holding (gain)/loss on AFS securities	(5,059		)	3,814
Net unrealized holding loss on pension plans	812			736
Accumulated other comprehensive income/(loss)	$	11,993		$	(13,470	)

(In thousands) 2018 2017
Other accumulated comprehensive (loss)/income, before tax:

Net unrealized holding (loss)/gain on AFS securities $ (15,267 ) $ 10,034
Net (loss) on effective cash flow hedging derivatives —
—
Net unrealized holding (loss) on pension plans (2,753 ) (3,048 )

Income taxes related to items of accumulated other comprehensive (loss)/income:

Net unrealized holding loss/(gain) on AFS securities 3,814
(4,026 )
Net loss on effective cash flow hedging derivatives —
—
Net unrealized holding loss on pension plans 736
1,201
Accumulated other comprehensive (loss)/income $ (13,470 ) $ 4,161

~~F-76~~F-83

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the components of other comprehensive (loss)/income for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016:~~2017:

(In thousands) Before Tax Tax Effect Net of Tax
Year Ended December 31, 2018

Net unrealized holding (loss) on AFS securities:

Net unrealized (loss) arising during the period $ (16,917 ) $ 4,419
$ (12,498 )
Less: reclassification adjustment for gains realized in net income 6
(2 ) 4
Net unrealized holding (loss) on AFS securities (16,923 ) 4,421
(12,502 )

Net unrealized holding (loss) on pension plans

Net unrealized gain arising during the period 135
(54 ) 81
Less: reclassification adjustment for losses realized in net income (201 ) 54
(147 )
Net unrealized holding gain on pension plans 336
(108 ) 228
Other comprehensive (loss) $ (16,587 ) $ 4,313
$ (12,274 )
Less: reclassification related to adoption of ASU 2016-01 8,379
(2,126 ) 6,253
Less: reclassification related to adoption of ASU 2018-02 —
(896 ) (896 )
Total change to accumulated other comprehensive (loss) $ (24,966 ) $ 7,335
$ (17,631 )



(In thousands)	Before Tax			Tax Effect			Net of Tax
Year Ended December 31, 2019
Net unrealized holding gain on AFS securities:
Net unrealized gain arising during the period	$	34,591		$	(8,890	)	$	25,701
Less: reclassification adjustment for gains realized in net income	61			(17		)	44
Net unrealized holding gain on AFS securities	34,530			(8,873		)	25,657

Net unrealized holding (loss) on pension plans
Net unrealized (loss) arising during the period	(270		)	76			(194		)
Less: reclassification adjustment for (losses) realized in net income	—			—			—
Net unrealized holding (loss) on pension plans	(270		)	76			(194		)
Other comprehensive gain	$	34,260		$	(8,797	)	$	25,463


(In thousands)	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
Year Ended December 31, 2017
Net unrealized holding gain on AFS securities:
Year Ended December 31, 2018
Net unrealized holding (loss) on AFS securities:
Net unrealized (loss) arising during the period	$	(2,544	)	$	1,075		$	(1,469	)	$	(16,917	)	$	4,419		$	(12,498	)
Less: reclassification adjustment for gains realized in net income	12,598			(4,535		)	8,063			6			(2		)	4
Net unrealized holding (loss) on AFS securities	(15,142		)	5,610			(9,532		)	(16,923		)	4,421			(12,502		)

Net (loss) on cash flow hedging derivatives:
Net unrealized (loss) arising during the period	(449		)	180			(269		)
Net unrealized holding (loss) on pension plans
Net unrealized gain arising during the period										135			(54		)	81
Less: reclassification adjustment for (losses) realized in net income	(7,022		)	2,769			(4,253		)	(201		)	54			(147		)
Net gain on cash flow hedging derivatives	6,573			(2,589		)	3,984

Net unrealized holding (loss) on pension plans
Net unrealized (loss) arising during the period	(311		)	124			(187		)
Less: reclassification adjustment for (losses) realized in net income	(217		)	87			(130		)
Net unrealized holding (loss) on pension plans	(94		)	37			(57		)
Net unrealized holding gain on pension plans										336			(108		)	228
Other comprehensive (loss)	$	(8,663	)	$	3,058		$	(5,605	)	$	(16,587	)	$	4,313		$	(12,274	)
Less: reclassification related to adoption of ASU 2016-01										8,379			(2,126		)	6,253
Less: reclassification related to adoption of ASU 2018-02										—			(896		)	(896		)
Total change to accumulated other comprehensive (loss)										$	(24,966	)	$	7,335		$	(17,631	)

~~F-77~~



(In thousands)	Before Tax			Tax Effect			Net of Tax
Year Ended December 31, 2017
Net unrealized holding gain on AFS securities:
Net unrealized (loss) arising during the period	$	(2,544	)	$	1,075		$	(1,469	)
Less: reclassification adjustment for gains realized in net income	12,598			(4,535		)	8,063
Net unrealized holding gain on AFS securities	(15,142		)	5,610			(9,532		)

Net (loss) on cash flow hedging derivatives:
Net unrealized (loss) arising during the period	(449		)	180			(269		)
Less: reclassification adjustment for (losses) realized in net income	(7,022		)	2,769			(4,253		)
Net gain on cash flow hedging derivatives	6,573			(2,589		)	3,984

Net unrealized holding (loss) on pension plans
Net unrealized (loss) arising during the period	(311		)	124			(187		)
Less: reclassification adjustment for (losses) realized in net income	(217		)	87			(130		)
Net unrealized holding (losses) on pension plans	(94		)	37			(57		)
Other comprehensive (loss)	$	(8,663	)	$	3,058		$	(5,605	)

F-84

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands) Before Tax Tax Effect Net of Tax
Year Ended December 31, 2016

Net unrealized holding gain on AFS securities:

Net unrealized gain arising during the period $ 18,308
$ (6,979 ) $ 11,329
Less: reclassification adjustment for (losses) realized in net income (551 ) 220
(331 )
Net unrealized holding gain on AFS securities 18,859
(7,199 ) 11,660

Net (loss) on cash flow hedging derivatives:

Net unrealized (loss) arising during the period (2,022 ) 754
(1,268 )
Less: reclassification adjustment for (losses) realized in net income (3,981 ) 1,589
(2,392 )
Net gain on cash flow hedging derivatives 1,959
(835 ) 1,124

Net unrealized holding (loss) on pension plans

Net unrealized gain arising during the period 351
(155 ) 196
Less: reclassification adjustment for (losses) realized in net income (164 ) 73
(91 )
Net unrealized holding gain on pension plans 515
(228 ) 287
Other comprehensive income $ 21,333
$ (8,262 ) $ 13,071

~~F-78~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

The following table presents the changes in each component of accumulated other comprehensive (loss)/income, for the years ended December 31, 2019, 2018, ~~, 2017,~~ and ~~2016:~~2017:



(in thousands)	Net unrealized holding gain (loss) on AFS Securities			Net loss on effective cash flow hedging derivatives			Net unrealized holding gain (loss) on pension plans			Total
Year Ended December 31, 2019
Balance at Beginning of Year	$	(11,453	)	$	—		$	(2,017	)	$	(13,470	)
Other comprehensive gain/(loss) before reclassifications	25,701			—			(194		)	25,507
Amounts reclassified from accumulated other comprehensive income	44			—			—			44
Total other comprehensive (loss)/income	25,657			—			(194		)	25,463
Balance at End of Period	$	14,204		$	—		$	(2,211	)	$	11,993

Year Ended December 31, 2018
Balance at Beginning of Year	$	6,008		$	—		$	(1,847	)	$	4,161
Other comprehensive gain/(loss) before reclassifications	(12,498		)	—			81			(12,417		)
Amounts reclassified from accumulated other comprehensive income	4			—			(147		)	(143		)
Total other comprehensive (loss)/income	(12,502		)	—			228			(12,274		)
Less: amounts reclassified from accumulated other comprehensive income (loss) related to adoption of ASU 2016-01 and ASU 2018-02	4,959			—			398			5,357
Balance at End of Period	$	(11,453	)	$	—		$	(2,017	)	$	(13,470	)

Year Ended December 31, 2017
Balance at Beginning of Year	$	15,540		$	(3,984	)	$	(1,790	)	$	9,766
Other comprehensive gain/(loss) Before reclassifications	(1,469		)	(269		)	(187		)	(1,925		)
Amounts reclassified from accumulated other comprehensive income	8,063			(4,253		)	(130		)	3,680
Total other comprehensive income	(9,532		)	3,984			(57		)	(5,605		)
Balance at End of Period	$	6,008		$	—		$	(1,847	)	$	4,161

(in thousands) Net unrealized holding gain (loss) on AFS Securities Net loss on effective cash flow hedging derivatives Net unrealized holding gain (loss) on pension plans Total
Year Ended December 31, 2018

Balance at Beginning of Year $ 6,008
$ —
$ (1,847 ) $ 4,161
Other comprehensive gain/(loss) before reclassifications (12,498 ) —
81
(12,417 )
Amounts reclassified from accumulated other comprehensive income 4
—
(147 ) (143 )
Total other comprehensive (loss)/income (12,502 ) —
228
(12,274 )
Less: amounts reclassified from accumulated other
comprehensive income (loss) related to adoption of ASU 2016-01 and ASU 2018-02
4,959
—
398
5,357
Balance at End of Period $ (11,453 ) $ —
$ (2,017 ) $ (13,470 )

Year Ended December 31, 2017

Balance at Beginning of Year $ 15,540
$ (3,984 ) $ (1,790 ) $ 9,766
Other comprehensive gain/(loss) before reclassifications (1,469 ) (269 ) (187 ) (1,925 )
Amounts reclassified from accumulated other comprehensive income 8,063
(4,253 ) (130 ) 3,680
Total other comprehensive (loss)/income (9,532 ) 3,984
(57 ) (5,605 )
Balance at End of Period $ 6,008
$ —
$ (1,847 ) $ 4,161

Year Ended December 31, 2016

Balance at Beginning of Year $ 3,880
$ (5,108 ) $ (2,077 ) $ (3,305 )
Other comprehensive gain/(loss) Before reclassifications 11,329
(1,268 ) 196
10,257
Amounts reclassified from accumulated other comprehensive income (331 ) (2,392 ) (91 ) (2,814 )
Total other comprehensive income 11,660
1,124
287
13,071
Balance at End of Period $ 15,540
$ (3,984 ) $ (1,790 ) $ 9,766

~~F-79~~F-85

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss)/income for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016:~~2017:



										Affected Line Item in the Statement Where Net Income Is Presented
	Years Ended December 31,
(in thousands)	2019			2018			2017
Realized gains/(losses) on AFS securities:
	$	61		$	6		$	12,598		Non-interest income
	(17		)	(2		)	(4,535		)	Tax expense
	44			4			8,063
Realized (losses) on cash flow hedging derivatives:
	—			—			(393		)	Interest expense
	—			—			(6,629		)	Non-interest income
	—			—			—			Non-interest expense
	—			—			2,769			Tax benefit
	—			—			(4,253		)
Realized (losses) on pension plans
	—			(201		)	(217		)	Non-interest expense
	—			54			87			Tax expense
	—			(147		)	(130		)
Total reclassifications for the period	$	44		$	(143	)	$	3,680

Affected Line Item in the
Statement Where Net Income
Is Presented
Years Ended December 31,
(in thousands) 2018 2017 2016
Realized gains/(losses) on AFS securities:
$ 6
$ 12,598
$ (551 ) Non-interest income
(2 ) (4,535 ) 220
Tax expense
4
8,063
(331 )
Realized (losses) on cash flow hedging derivatives:
—
(393 ) —
Interest expense
—
(6,629 ) —
Non-interest income
—
—
(3,981 ) Non-interest expense
—
2,769
1,589
Tax benefit
—
(4,253 ) (2,392 )
Realized (losses) on pension plans
(201 ) (217 ) (164 ) Non-interest expense
54
87
73
Tax expense
(147 ) (130 ) (91 )
Total reclassifications for the period $ (143 ) $ 3,680
$ (2,814 )

~~F-80~~F-86

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Common Share

Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the entity. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method.

Earnings per common share has been computed based on the following (average diluted shares outstanding is calculated using the treasury stock method):



	Years Ended December 31,
(In thousands, except per share data)	2019			2018			2017
Net income from continuing operations	$	101,521		$	109,219		$	49,116
Net (loss)/income from discontinued operations	(4,071		)	(3,454		)	6,131
Net income	$	97,450		$	105,765		$	55,247

Average number of common shares issued	49,782			46,212			40,627
Less: average number of treasury shares	1,142			810			963
Less: average number of unvested stock award shares	420			421			437
Plus: average participating preferred shares	1,043			1,043			229
Average number of basic common shares outstanding	49,263			46,024			39,456
Plus: dilutive effect of unvested stock award shares	122			180			202
Plus: dilutive effect of stock options outstanding	36			27			37
Average number of diluted common shares outstanding	49,421			46,231			39,695

Basic earnings per share:
Continuing Operations	$	2.06		$	2.38		$	1.24
Discontinued operations	(0.08		)	(0.08		)	0.16
Basic earning per common share	$	1.98		$	2.30		$	1.40

Diluted earnings per share:
Continuing Operations	$	2.05		$	2.36		$	1.24
Discontinued operations	(0.08		)	(0.07		)	0.15
Diluted earnings per common share	$	1.97		$	2.29		$	1.39

Years Ended December 31,
(In thousands, except per share data) 2018 2017 2016
Net income $ 105,765
$ 55,247
$ 58,670

Average number of common shares issued 46,212
40,627
32,604
Less: average number of treasury shares 810
963
1,116
Less: average number of unvested stock award shares 421
437
500
Plus: average participating preferred shares 1,043
229
—
Average number of basic common shares outstanding 46,024
39,456
30,988
Plus: dilutive effect of unvested stock award shares 180
202
122
Plus: dilutive effect of stock options outstanding 27
37
57
Average number of diluted common shares outstanding 46,231
39,695
31,167

Basic earning per common share $ 2.30
$ 1.40
$ 1.89

Diluted earnings per common share $ 2.29
$ 1.39
$ 1.88

For the year ended 2019, 61 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations. For the year ended 2018, 38 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations. For the year ended 2017, 55 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations. ~~For the year ended 2016, 52 thousand options were anti-dilutive and therefore excluded from the earnings per share calculations.~~

~~F-81~~F-87

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~18.~~21. STOCK-BASED COMPENSATION PLANS

The 2018 Equity Incentive Plan (the “2018 Plan”) permits the granting of a combination of Restricted Stock awards and incentive and non-qualified stock options (“Stock Options”) to employees and directors. A total of 1.0 million shares was authorized under the Plan. Awards may be granted as either Restricted Stock or Stock Options provided that any shares that are granted as Restricted Stock are counted against the share limit set forth as (1) ~~three~~3 for every one share of Restricted Stock granted and (2) ~~one~~1 for every one share of Stock Option granted. As of the 2018 Plan's effective date, all expired, canceled, and forfeited shares under the 2013 Plan are included in the 2018 Plan's available shares. As of year-end ~~2018,~~2019, the Company had the ability to grant approximately ~~1.0~~1.1 million shares under this plan.

The 2013 Equity Incentive Plan (the “2013 Plan”) permits the granting of a combination of Restricted Stock awards and incentive and non-qualified stock options (“Stock Options”) to employees and directors. A total of 1.0 million shares was authorized under the Plan. Awards may be granted as either Restricted Stock or Stock Options provided that any shares that are granted as Restricted Stock are counted against the share limit set forth as (1) three for every one share of Restricted Stock granted and (2) one for every one share of Stock Option granted. As of year-end 2018, the Company had the ability to grant approximately 347 thousand shares under this plan.

The 2011 Equity Incentive Plan (the “2011 Plan”) permits the granting of a combination of Restricted Stock awards and incentive and non-qualified stock options to employees and directors. A total of 1.4 million shares was authorized under the Plan. Awards may be granted as either Restricted Stock or Stock Options provided that any shares that are granted as Restricted Stock are counted against the share limit set forth as (1) three for every one share of Restricted Stock granted and (2) one for every one share of Stock Option granted. As of year-end 2018, the Company had the ability to grant approximately 10 thousand shares under this plan.

A summary of activity in the Company’s stock compensation plans is shown below:



	Non-vested Stock Awards Outstanding				Stock Options Outstanding
(Shares in thousands)	Number of Shares		Weighted- Average Grant Date Fair Value		Number of Shares		Weighted- Average Exercise Price
Balance, December 31, 2018	371		$	33.63	31		$	10.82
Granted	299		29.47		—		—
Acquired	—		—		133		23.99
Stock options exercised	—		—		(11	)	17.29
Stock awards vested	(155	)	31.13		—		—
Forfeited	(65	)	33.34		—		—
Expired	—		—		—		—
Balance, December 31, 2019	450		$	32.47	153		$	22.00

Non-vested Stock
Awards Outstanding Stock Options Outstanding
(Shares in thousands) Number of Shares Weighted- Average
Grant Date
Fair Value Number of Shares Weighted- Average Exercise Price
Balance, December 31, 2017 418
$ 29.68
76
$ 13.59
Granted 185
37.87
—
—
Stock options exercised —
—
(33 ) 9.81
Stock awards vested (167 ) 28.60
—
—
Forfeited (65 ) 33.78
—
—
Expired —
—
(12 ) 22.61
Balance, December 31, 2018 371
$ 33.63
31
$ 10.82

Stock Awards

The total compensation cost for stock awards recognized as expense was $4.8 million, ~~$5.3~~$4.8 million, and ~~$4.6~~$5.3 million, in the years 2019, 2018, ~~2017,~~ and ~~2016,~~2017, respectively. The total recognized tax benefit associated with this compensation cost was $1.3 million, ~~$2.0~~$1.3 million, and ~~$1.8~~$2.0 million, respectively.

The weighted average fair value of stock awards granted was $29.47, $37.87, and $35.84 in 2019, 2018, and ~~$26.81 in 2018,~~ 2017, ~~and 2016,~~ respectively. Stock awards vest over periods up to five years and are valued at the closing price of the stock on the grant date. Certain awards vest based on the Company's performance over established measurement periods. The total fair value of stock awards vested during 2019, 2018, ~~2017,~~ and ~~2016~~2017 was $4.8 million, ~~$4.4~~$4.8 million, and $4.4 million respectively. The unrecognized stock-based compensation expense related to unvested stock awards was ~~$6.6~~$8.5 million as of year-end ~~2018.~~2019. This amount is expected to be recognized over a weighted average period of two years.

~~F-82~~F-88

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Option Awards

Option awards are granted with an exercise price equal to the market price of the Company’s stock at the date of grant, and vest over periods up to five years. The options grant the holder the right to acquire a share of the Company’s common stock for each option held, and have a contractual life of ten years. As of year-end ~~2018,~~2019, the weighted average remaining contractual term for options outstanding is two years.

The Company generally issues shares from treasury stock as options are exercised. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The expected dividend yield and expected term are based on management estimates. The expected volatility is based on historical volatility. The risk-free interest rates for the expected term are based on the U.S. Treasury yield curve in effect at the time of the grant. The Company acquired options in the ~~Beacon~~SI Financial Group transaction in ~~2012,~~2019, but did not grant additional options induring the year. The Company did not grant options during 2018 ~~2017,~~ or ~~2016.~~2017.

The total intrinsic value of options exercised was $149 thousand, $855 thousand, ~~$363 thousand,~~ and ~~$880~~$363 thousand for the years 2019, 2018, and 2017, ~~and 2016,~~ respectively. During 2019, the expense pertaining to options vesting was $93 thousand. There was no0 expense pertaining to options vesting in 2018 ~~2017~~ or ~~2016.~~2017. The tax benefit associated with stock option expense in 2019 was $25 thousand. There was no0 tax benefit associated with stock option expense in 2018 ~~2017~~ or ~~2016.~~2017. The unrecognized stock-based compensation expense related to unvested stock options as of year-end 2019 was $124 thousand. There was no0 unrecognized stock-based compensation expense related to unvested stock options as of year-ends 2018 ~~2017,~~ and ~~2016.~~2017.

~~F-83~~F-89

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~19.~~22. FAIR VALUE MEASUREMENTS

A description of the valuation methodologies used for instruments 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.~~value, including assets classified as discontinued operations on the consolidated balance sheets. See Note 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

Recurring Fair Value Measurements of Financial Instruments

The following table summarizes assets and liabilities measured at fair value on a recurring basis as of year-end ~~2018~~2019 and ~~2017~~2018 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	December 31, 2018								December 31, 2019
(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Trading security	$	—	$	—	$	11,212	$	11,212	$	—	$	—	$	10,769	$	10,769
Available-for-sale securities:
Municipal bonds and obligations	—		111,207		—		111,207		—		110,138		—		110,138
Agency collateralized mortgage obligations	—		930,884		—		930,884		—		748,812		—		748,812
Agency residential mortgage-backed securities	—		170,321		—		170,321		—		147,744		—		147,744
Agency commercial mortgage-backed securities	—		58,925		—		58,925		—		147,096		—		147,096
Corporate bonds	—		111,490		—		111,490		—		73,610		42,966		116,576
Trust preferred securities	—		8,466		—		8,466
Other bonds and obligations	—		8,354		—		8,354		—		41,189		—		41,189
Marketable equity securities	56,074		564		—		56,638		40,499		1,057		—		41,556
Loans held for sale	—		96,233		—		96,233
Derivative assets	—		31,727		3,927		35,654
Capitalized servicing rights	—		—		11,485		11,485
Derivative liabilities	734		33,239		—		33,973
Loans held for sale (1)									—		140,280		—		140,280
Derivative assets (1)									—		77,562		2,628		80,190
Capitalized servicing rights (1)									—		—		12,299		12,299
Derivative liabilities (1)									227		80,454		—		80,681

(1) Includes assets and liabilities classified as discontinued operations.



	December 31, 2018
(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Trading security	$	—	$	—	$	11,212	$	11,212
Available-for-sale securities:
Municipal bonds and obligations	—		111,207		—		111,207
Agency collateralized mortgage obligations	—		930,884		—		930,884
Agency residential mortgage-backed securities	—		170,321		—		170,321
Agency commercial mortgage-backed securities	—		58,925		—		58,925
Corporate bonds	—		119,956		—		119,956
Other bonds and obligations	—		8,354		—		8,354
Marketable equity securities	56,074		564		—		56,638
Loans held for sale (1)	—		96,233		—		96,233
Derivative assets (1)	—		31,727		3,927		35,654
Capitalized servicing rights (1)	—		—		11,485		11,485
Derivative liabilities (1)	734		33,239		—		33,973

December 31, 2017
(In thousands) Level 1
Inputs Level 2
Inputs Level 3
Inputs Total
Fair Value
Trading security $ —
$ —
$ 12,277
$ 12,277
Available-for-sale securities:

Municipal bonds and obligations —
118,233
—
118,233
Agency collateralized mortgage obligations —
851,158
—
851,158
Agency residential mortgage-backed securities —
216,940
—
216,940
Agency commercial mortgage-backed securities —
62,305
—
62,305
Corporate bonds —
110,721
—
110,721
Trust preferred securities —
11,677
—
11,677
Other bonds and obligations —
9,880
—
9,880
Marketable equity securities 44,851
334
—
45,185
Loans held for sale —
153,620
—
153,620
Derivative assets —
14,049
5,259
19,308
Capitalized servicing rights —
—
3,834
3,834
Derivative liabilities 104
15,715
19
15,838
(1) Includes assets and liabilities classified as discontinued operations.

~~F-84~~F-90

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During the year ended December 31, 2019, the Company had 4 transfers totaling $44.0 million in corporate bonds from Level 2 to Level 3 based on recent inactivity in the market related to pricing information for similar bonds. There were no0 transfers between Level 1, 2, and 3 during the years ended December 31, 2018 and 2017. During the year ended December 31, 2016, the Company had one transfer of $708 thousand in marketable equity securities from Level 3 to Level 2 based on a change in valuation technique driven by the availability of market data.

Trading Security at Fair Value. The Company holds ~~one~~1 security designated as a trading security. It is a tax advantaged economic development bond issued to the Company by a local nonprofit which provides wellness and health programs. The determination of the fair value for this security is determined based on a discounted cash flow methodology. Certain inputs to the fair value calculation are unobservable and there is little to no market activity in the security; therefore, the security meets the definition of a Level 3 security. The discount rate used in the valuation of the security is sensitive to movements in the 3-month LIBOR rate.

Securities Available for Sale 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. ~~AFS~~Marketable equity securities classified as Level 2 consist of securities with infrequent trades in active exchange markets, and ~~marketable equity~~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 sale. The Company elected the fair value option for all mortgage loans originated for sale (HFS) that were 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			Aggregate Unpaid Principal	Aggregate Fair Value Less Aggregate Unpaid Principal		Aggregate Fair Value			Aggregate Unpaid Principal			Aggregate Fair Value Less Aggregate Unpaid Principal
December 31, 2018 (In thousands)
December 31, 2019 (In thousands)							Aggregate Fair Value			Aggregate Unpaid Principal			Aggregate Fair Value Less Aggregate Unpaid Principal
Loans held for sale - continuing operations
Loans held for sale - discontinued operations									132,655			129,622			3,033
Loans Held for Sale		$	96,233		$	93,019	$	3,214		$	140,280		$	137,107		$	3,173



	Aggregate Fair Value		Aggregate Unpaid Principal		Aggregate Fair Value Less Aggregate Unpaid Principal
December 31, 2018 (In thousands)	Aggregate Fair Value		Aggregate Unpaid Principal		Aggregate Fair Value Less Aggregate Unpaid Principal
Loans held for sale - continuing operations	$	2,184	$	2,141	$	43
Loans held for sale - discontinued operations	94,049		90,878		3,171
Loans Held for Sale	$	96,233	$	93,019	$	3,214

Aggregate
Fair Value Aggregate
Unpaid Principal Aggregate Fair Value
Less Aggregate
Unpaid Principal
December 31, 2017 (In thousands)
Loans Held for Sale $ 153,620
$ 149,022
$ 4,598

The changes in fair value of loans held for sale for years ended December 31, ~~2018~~2019, were gains of $97 thousand from continuing operations and ~~2017 were~~ losses of ~~$1.4 million and gains of $2.1 million, respectively.~~$138 thousand from discontinued operations. The changes in fair value ~~are included in mortgage banking income in the Consolidated Statements~~ of ~~Income. In~~loans held for sale for years ended December 31, 2018, were losses of $61 thousand from continuing operations and $1.3 million from discontinued operations. During 2019, originations of loans held for sale from continuing operations totaled $67 million and sales of loans originated for sale from continuing operations totaled $62 million. During 2019, originations of loans held for sale from discontinued operations totaled $2.9 billion and sales of loans originated for sale from discontinued operations totaled $2.8 billion. During 2018, originations of loans held for sale from continuing operations totaled ~~$2.0~~$55 million and sales of loans originated for sale from continuing operations totaled $55 million. During 2018, originations of loans held for sale from discontinued operations totaled $1.9 billion and sales of loans originated ~~as held~~ for sale from discontinued operations totaled ~~$2.1 billion. In 2017, originations of loans held for sale totaled $2.4 billion and sales of loans originated as held for sale totaled $2.4~~$2.0 billion.

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.

F-91

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 year-end ~~2018,~~2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

~~F-85~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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 certain 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 commitment 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 to lend are classified as Level 3 measurements. Commitments to lend are included in discontinued operations. See Note 3 - 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 hedging instruments, 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 sale commitments are classified as Level 3 measurements. Forward sale commitments are included in discontinued operations. See Note 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

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 3 -

Discontinued Operations for more information on assets and liabilities classified as discontinued operations.

~~F-86~~F-92

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The table below presents the changes in Level 3 assets that were measured at fair value on a recurring basis at year-end ~~2018~~2019 and ~~2017:~~2018:



	Assets (Liabilities)
(In thousands)	Trading Security			Securities Available for Sale			Commitments to Lend (1)			Forward Commitments (1)			Capitalized Servicing Rights (1)
Balance as of December 31, 2017	$	12,277		$	—		$	5,259		$	19		$	3,834
Unrealized (loss), net recognized in other non-interest income	(400		)	—			—			—			—
Unrealized gain/(loss), net recognized in discontinued operations	—			—			46,014			(19		)	29
Paydown of trading security	(665		)	—			—			—			—
Transfers to loans held for sale	—			—			(47,346		)	—			—
Additions to servicing rights	—			—			—			—			7,622
Balance as of December 31, 2018	$	11,212		$	—		$	3,927		$	—		$	11,485
Unrealized (loss) gain, net recognized in other non-interest income	258			—			—			—			—
Unrealized gain/(loss), net recognized in discontinued operations	—			—			55,771			—			(10,322		)
Unrealized (loss) included in accumulated other comprehensive loss	—			(162		)	—			—			—
Transfers to Level 3	—			43,128			—			—			—
Paydown of trading security	(701		)	—			—			—			—
Transfers to loans held for sale	—			—			(57,070		)	—			—
Additions to servicing rights	—			—			—			—			11,136
Balance as of December 31, 2019	$	10,769		$	42,966		$	2,628		$	—		$	12,299

Unrealized gains/(losses) relating to instruments still held at December 31, 2019	$	1,379		$	(162	)	$	2,628		$	—		$	—
Unrealized gains/(losses) relating to instruments still held at December 31, 2018	$	1,122		$	—		$	3,927		$	—		$	—

Assets (Liabilities)
(In thousands) Trading
Security Commitments to Lend Forward
Commitments Capitalized Servicing Rights
Balance as of December 31, 2016 $ 13,229
$ 4,738
$ 100
$ 798
Unrealized (loss) gain, net recognized in other non-interest income (320 ) 63,894
(81 ) (221 )
Unrealized gain included in accumulated other comprehensive loss —
—
—
—
Transfers to Level 2 —
—
—
—
Paydown of trading security (632 ) —
—
—
Transfers to loans held for sale —
(63,373 ) —
—
Additions to servicing rights —
—
—
3,257
Balance as of December 31, 2017 $ 12,277
$ 5,259
$ 19
$ 3,834
Unrealized (loss) gain, net recognized in other non-interest income (400 ) 46,014
(19 ) 29
Unrealized gain included in accumulated other comprehensive loss —
—
—
—
Transfers to Level 2 —
—
—
—
Paydown of trading security (665 ) —
—
—
Transfers to loans held for sale —
(47,346 ) —
—
Additions to servicing rights —
—
—
7,622
Balance as of December 31, 2018 $ 11,212
$ 3,927
$ —
$ 11,485

Unrealized gains/(losses) relating to instruments still held at December 31, 2018 $ 1,122
$ 3,927
$ —
$ 29
Unrealized gains/(losses) relating to instruments still held at December 31, 2017 $ 1,522
$ 5,259
$ 19
$ (221 )
(1) Classified as assets from discontinued operations on the consolidated balance sheets.

~~F-87~~F-93

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Quantitative information about the significant unobservable inputs within Level 3 recurring assets/(liabilities) as of December 31, ~~2018~~2019 and ~~2017~~2018 are as follows:


	Fair Value				Significant Unobservable Input Value			Fair Value				Significant Unobservable Input Value
(In thousands)	December 31, 2018		Valuation Techniques	Unobservable Inputs	Significant Unobservable Input Value			December 31, 2019		Valuation Techniques	Unobservable Inputs	Significant Unobservable Input Value
Assets
Trading Security	$	11,212	Discounted Cash Flow	Discount Rate	3.07		%	$	10,769	Discounted Cash Flow	Discount Rate	2.21		%
Forward Commitments	—		Historical Trend	Closing Ratio	82.36		%
Securities Available for Sale								42,966		Indication from Market Maker	Price	97.00 - 100.00
Commitments to Lend (1)								2,628		Historical Trend	Closing Ratio	77.81		%
			Pricing Model	Origination Costs, per loan	$	3,063				Pricing Model	Origination Costs, per loan	$	3,137
Commitments to Lend	3,927		Historical Trend	Closing Ratio	82.36		%
			Pricing Model	Origination Costs, per loan	$	3,063
Capitalized Servicing Rights	11,485		Discounted cash flow	Constant prepayment rate (CPR)	9.30		%
Capitalized Servicing Rights (1)								12,299		Discounted cash flow	Constant prepayment rate (CPR)	11.50		%
				Discount rate	10.00		%				Discount rate	10.00		%
Total	$	26,624						$	68,662

(1) Classified as assets from discontinued operations on the consolidated balance sheets.



	Fair Value				Significant Unobservable Input Value
(In thousands)	December 31, 2018		Valuation Techniques	Unobservable Inputs	Significant Unobservable Input Value
Assets
Trading Security	$	11,212	Discounted Cash Flow	Discount Rate	3.07		%
Commitments to Lend (1)	3,927		Historical Trend	Closing Ratio	82.36		%
			Pricing Model	Origination Costs, per loan	$	3,063
Capitalized Servicing Rights (1)	11,485		Discounted cash flow	Constant prepayment rate (CPR)	9.30		%
				Discount rate	10.00		%
Total	$	26,624

Fair Value Significant
Unobservable Input
Value
(In thousands) December 31, 2017 Valuation Techniques Unobservable Inputs
Assets

Trading Security $ 12,277
Discounted Cash Flow Discount Rate 2.74 %
Forward Commitments 19
Historical Trend Closing Ratio 81.53 %
Pricing Model Origination Costs, per loan $ 3,692
Commitments to Lend 5,259
Historical Trend Closing Ratio 81.53 %
Pricing Model Origination Costs, per loan $ 3,692
Capitalized Servicing Rights 3,834
Discounted cash flow Constant prepayment rate (CPR) 10.00 %
Discount rate 10.95 %
Total $ 21,389

(1) Classified as assets from discontinued operations on the consolidated balance sheets.

~~F-88~~F-94

Table of Contents

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 on a non-recurring basis.

December 31, 2018

Fair Value Measurements as of December 31, 2018

December 31, 2019

Fair Value Measurements as of December 31, 2018

(In thousands)

Level 3
Inputs

Level 3

Inputs

Level 3
Inputs

Level 3

Inputs

Assets

Impaired loans

4,892

December 2018

8,831

December 2019

Capitalized servicing rights

11,891

December 2018

14,152

December 2019

Total

16,783

22,983



	December 31, 2018		Fair Value Measurements as of December 31, 2017
(In thousands)	Level 3 Inputs		Level 3 Inputs
Assets
Impaired loans	$	4,892	December 2018
Capitalized servicing rights	11,891		December 2018
Total	$	16,783

December 31, 2017 Fair Value Measurements as of December 31, 2017
(In thousands) Level 3
Inputs Level 3
Inputs
Assets

Impaired loans $ 23,853
December 2017
Capitalized servicing rights 12,527
December 2017
Total $ 36,380

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets as of December 31, ~~2018~~2019 and ~~2017~~2018 are as follows:

(in thousands)

December 31, 2018

Valuation Techniques

Unobservable Inputs

Range (Weighted Average) (a)

December 31, 2019

Valuation Techniques

Unobservable Inputs

Range (Weighted Average) (a)

Assets

Impaired loans

4,892

Fair value of collateral

Loss severity

51.16% to 0.00% (6.75%)

8,831

Fair value of collateral

Loss severity

15.72% to 0.12% (4.50%)

Appraised value

$0.3 to $877 ($363)

Appraised value

$8.2 to $1,548 ($736.1)

Capitalized servicing rights

11,891

Discounted cash flow

Constant prepayment rate (CPR)

7.74% to 11.29% (9.74%)

14,152

Discounted cash flow

Constant prepayment rate (CPR)

9.44% to 14.12% (12.25%)

Discount rate

10.00% to 14.13% (11.99%)

Discount rate

10.00% to 13.50% (11.78%)

Total Assets

16,783

22,983

(a) Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individuals properties.

~~F-89~~F-95

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(in thousands)	December 31, 2018		Valuation Techniques	Unobservable Inputs	Range (Weighted Average) (a)
Assets
Impaired loans	$	4,892	Fair value of collateral	Loss severity	51.16% to 0.00% (6.75%)
				Appraised value	$0.3 to $877 ($363)
Capitalized servicing rights	11,891		Discounted cash flow	Constant prepayment rate (CPR)	7.74% to 11.29% (9.74%)
				Discount rate	10.00% to 14.13% (11.99%)
Total Assets	$	16,783

(in thousands) December 31, 2017 Valuation Techniques Unobservable Inputs Range (Weighted Average) (a)
Assets

Impaired loans $ 23,853
Fair value of collateral Loss severity 38.72% to 0.21% (3.40%)

Appraised value $10.9 to $5967 ($2,197)
Capitalized servicing rights 12,527
Discounted cash flow Constant prepayment rate (CPR) 7.78% to 12.78% (10.38%)

Discount rate 10.00% to 13.28% (11.72%)
Total Assets $ 36,380

There were no Level 1 or Level 2 nonrecurring fair value measurements for year-end ~~2018~~2019 and ~~2017.~~2018.

Impaired Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation 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, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

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

~~Other real estate owned (“OREO”).~~ OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

~~F-90~~F-96

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Estimated Fair Values of Financial Instruments

The following tables summarize the estimated fair values, which represent exit price, ~~for 2018,~~ and related carrying amounts, of the Company’s financial ~~instruments follow.~~instruments. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein 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 3 - Discontinued Operations for more information on assets and liabilities classified as discontinued operations.


	December 31, 2018												December 31, 2019
	Carrying Amount			Fair Value									Carrying Amount		Fair Value
(In thousands)			Level 1			Level 2		Level 3				Level 1					Level 2			Level 3
Financial Assets
Cash and cash equivalents	$	183,189		$	183,189	$	183,189	$	—	$	—		$	579,829	$	579,829		$	579,829		$	—	$	—
Trading security	11,212			11,212		—		—		11,212			10,769		10,769			—			—		10,769
Marketable equity securities	56,638			$	56,638	56,074		564		—			41,556		41,555			40,499			1,056		—
Securities available for sale	1,399,647			1,399,647		—		1,399,647		—			1,311,555		1,311,555			—			1,267,573		43,982
Securities held to maturity	373,763			371,224		—		353,182		18,042			357,979		373,277			—			355,513		17,764
FHLB stock and restricted equity securities	77,344			N/A		N/A		NA		N/A			48,019		N/A			N/A			N/A		N/A
Net loans	8,981,784			9,026,442		—		—		9,026,442			9,438,853		9,653,550			—			—		9,653,550
Loans held for sale(1)	96,233			96,233		—		96,233		—			169,319		169,319			—			140,280		29,039
Accrued interest receivable	36,879			36,879		—		36,879		—			36,462		36,462			—			36,462		—
Derivative assets(1)	35,654			35,654		—		31,727		3,927			80,190		80,190			—			77,562		2,628

Financial Liabilities
Total deposits	8,982,381			8,970,321		—		8,970,321		—			10,335,977		10,338,993			—			10,338,993		—
Short-term debt	1,118,832			1,118,820		—		1,118,820		—			125,000		125,081			—			125,081		—
Long-term FHLB advances	309,466			308,336		—		308,336		—			605,501		606,381			—			606,381		—
Subordinated notes	89,518			97,376		—		97,376		—			97,049		101,055			—			101,055		—
Derivative liabilities	33,973			33,973		734		33,239		—
Derivative liabilities (1)													80,681		80,681			227			80,454		—

(1) Includes assets and liabilities classified as discontinued operations.



	December 31, 2018
	Carrying Amount		Fair Value
(In thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	183,189	$	183,189	$	183,189	$	—	$	—
Trading security	11,212		11,212		—		—		11,212
Marketable equity securities	56,638		56,638		56,074		564		—
Securities available for sale	1,399,647		1,399,647		—		1,399,647		—
Securities held to maturity	373,763		371,224		—		353,182		18,042
FHLB stock and restricted equity securities	77,344		N/A		N/A		N/A		N/A
Net loans	8,981,784		9,026,442		—		—		9,026,442
Loans held for sale (1)	96,233		96,233		—		96,233		—
Accrued interest receivable	36,879		36,879		—		36,879		—
Derivative assets (1)	35,654		35,654		—		31,727		3,927
Financial Liabilities
Total deposits	8,982,381		8,970,321		—		8,970,321		—
Short-term debt	1,118,832		1,118,820		—		1,118,820		—
Long-term FHLB advances	309,466		308,336		—		308,336		—
Subordinated notes	89,518		97,376		—		97,376		—
Derivative liabilities (1)	33,973		33,973		734		33,239		—

December 31, 2017
Carrying
Amount Fair
Value
(In thousands) Level 1 Level 2 Level 3
Financial Assets

Cash and cash equivalents $ 248,763
$ 248,763
$ 248,763
$ —
$ —
Trading security 12,277
12,277
—
—
12,277
Marketable equity securities 45,185
45,185
44,851
334
—
Securities available for sale 1,380,914
1,380,914
—
1,380,914
—
Securities held to maturity 397,103
405,276
—
371,458
33,818
FHLB stock and restricted equity securities 63,085
N/A
N/A
N/A
N/A
Net loans 8,247,504
8,422,034
—
—
8,422,034
Loans held for sale 153,620
153,620
—
153,620
—
Accrued interest receivable 33,739
33,739
—
33,739
—
Derivative assets 19,308
19,308
—
14,049
5,259

Financial Liabilities

Total deposits 8,749,530
8,731,527
—
8,731,527
—
Short-term debt 667,300
667,246
—
667,246
—
Long-term FHLB advances 380,436
378,766
—
378,766
—
Subordinated notes 89,339
97,414
—
97,414
—
Derivative liabilities 15,838
15,838
104
15,715
19
(1) Includes assets and liabilities classified as discontinued operations.

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.

~~F-91~~F-97

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~Cash and cash equivalents.~~ ~~Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ninety days or less.~~

~~FHLB stock and restricted equity securities.~~ ~~It is not practical to determine fair value due to the restricted nature of the security.~~

~~Cash surrender value of life insurance policies.~~ ~~Carrying value approximates fair value.~~

~~Loans, net.~~ In accordance with recent accounting guidance, the fair value of loans as of December 31, 2018 was measured using the exit price valuation method, determined primarily by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or cash flows, while incorporating liquidity and credit assumptions. Therefore, prior period is not directly comparable.

~~Accrued interest receivable.~~ ~~Carrying value approximates fair value.~~

~~Deposits.~~ The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.

~~Borrowed funds.~~ The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above.

~~Subordinated borrowings.~~ ~~The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.~~

~~Off-balance-sheet financial instruments.~~ ~~Off-balance-sheet financial instruments include standby letters of credit and other financial guarantees and commitments considered immaterial to the Company’s financial statements.~~

~~F-92~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE ~~20.~~23. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Condensed financial information pertaining only to the Parent, Berkshire Hills Bancorp, is as follows. During 2018, the Company converted a $35 million intercompany subordinated note from the Bank into equity at the Bank. ~~At December 31, 2017, investment in subsidiaries includes $35 million of intercompany subordinated notes.~~

CONDENSED BALANCE SHEETS



	December 31,
(In thousands)	2019		2018
Assets
Cash due from Berkshire Bank	$	74,153	$	69,320
Investment in subsidiaries	1,777,717		1,571,018
Marketable equity securities, at fair value	4,840		3,914
Other assets	438		398
Total assets	$	1,857,148	$	1,644,650

Liabilities and Shareholders’ Equity
Subordinated notes	$	97,049	$	89,518
Accrued expenses	1,535		2,214
Shareholders’ equity	1,758,564		1,552,918
Total liabilities and shareholders’ equity	$	1,857,148	$	1,644,650

December 31,
(In thousands) 2018 2017
Assets

Cash due from Berkshire Bank $ 69,320
$ 83,380
Investment in subsidiaries 1,571,018
1,470,859
Securities available for sale, at fair value 3,914
21,827
Other assets 398
12,138
Total assets $ 1,644,650
$ 1,588,204

Liabilities and Shareholders’ Equity

Subordinated notes $ 89,518
$ 89,339
Accrued expenses 2,214
2,601
Shareholders’ equity 1,552,918
1,496,264
Total liabilities and shareholders’ equity $ 1,644,650
$ 1,588,204

CONDENSED STATEMENTS OF INCOME


	Years Ended December 31,									Years Ended December 31,
(In thousands)	2018			2017			2016			2019			2018			2017
Income:
Dividends from subsidiaries	$	48,500		$	39,000		$	33,000		$	104,700		$	48,500		$	39,000
Other	506			5,864			4,072			1,258			506			5,864
Total income	49,006			44,864			37,072			105,958			49,006			44,864
Interest expense	5,335			5,338			5,743			5,335			5,335			5,338
Non-interest expenses	3,034			6,042			3,740			4,129			3,034			6,042
Total expense	8,369			11,380			9,483			9,464			8,369			11,380
Income before income taxes and equity in undistributed income of subsidiaries	40,637			33,484			27,589			96,494			40,637			33,484
Income tax benefit	(1,068		)	(1,783		)	(2,123		)	(2,054		)	(1,068		)	(1,783		)
Income before equity in undistributed income of subsidiaries	41,705			35,267			29,712			98,548			41,705			35,267
Equity in undistributed income of subsidiaries	64,060			19,980			28,958
Equity in undistributed results of operations of subsidiaries										(1,098		)	64,060			19,980
Net income	105,765			55,247			58,670			97,450			105,765			55,247
Preferred stock dividend	918			219			—			960			918			219
Income available to common shareholders	$	104,847		$	55,028		$	58,670		$	96,490		$	104,847		$	55,028

Comprehensive income	$	88,133		$	49,643		$	68,435		$	122,912		$	88,133		$	49,643

~~F-93~~F-98

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONDENSED STATEMENTS OF CASH FLOWS



	Years Ended December 31,
(In thousands)	2019			2018			2017
Cash flows from operating activities:
Net income	$	97,450		$	105,765		$	55,247
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Equity in undistributed results of operations of subsidiaries	1,098			(64,060		)	(19,980		)
Other, net	(4,457		)	20,916			(7,964		)
Net cash provided by operating activities	94,091			62,621			27,303

Cash flows from investing activities:
Advances to subsidiaries	—			(85,000		)	(100,000		)
Purchase of securities	—			(128		)	(1,057		)
Sale of securities	6,989			13,550			2,101
Other, net	987			—			1,508
Net cash (used) in investing activities	7,976			(71,578		)	(97,448		)

Cash flows from financing activities:
Proceed from issuance of short term debt	431			178			—
Proceed from repayment of long term debt	—			35,000			—
Repayment of short term debt	—			—			(9,822		)
Net proceeds from common stock	—			325			153,313
Payment to repurchase common stock	(52,746		)	—			—
Common stock cash dividends paid	(44,147		)	(39,966		)	(33,022		)
Preferred stock cash dividends paid	(960		)	(918		)	(219		)
Other, net	188			278			257
Net cash provided provided/(used) by financing activities	(97,234		)	(5,103		)	110,507

Net change in cash and cash equivalents	4,833			(14,060		)	40,362

Cash and cash equivalents at beginning of year	69,320			83,380			43,018

Cash and cash equivalents at end of year	$	74,153		$	69,320		$	83,380

Years Ended December 31,
(In thousands) 2018 2017 2016
Cash flows from operating activities:

Net income $ 105,765
$ 55,247
$ 58,670
Adjustments to reconcile net income to net cash (used) provided by operating activities:

Equity in undistributed income of subsidiaries (64,060 ) (19,980 ) (28,958 )
Other, net 20,916
(7,964 ) 1,988
Net cash provided by operating activities 62,621
27,303
31,700

Cash flows from investing activities:

Advances to subsidiaries (85,000 ) (100,000 ) —
Purchase of securities (128 ) (1,057 ) (18,016 )
Sale of securities 13,550
2,101
—
Other, net —
1,508
9,728
Net cash (used) in investing activities (71,578 ) (97,448 ) (8,288 )

Cash flows from financing activities:

Proceed from issuance of short term debt 178
—
9,349
Proceed from repayment of long term debt 35,000
—
—
Repayment of short term debt —
(9,822 ) —
Net proceeds from common stock 325
153,313
3,712
Payment to repurchase common stock —
—
(4,632 )
Common stock cash dividends paid (39,966 ) (33,022 ) (24,916 )
Preferred stock cash dividends paid (918 ) (219 ) —
Other, net 278
257
11
Net cash provided provided/(used) by financing activities (5,103 ) 110,507
(16,476 )

Net change in cash and cash equivalents (14,060 ) 40,362
6,936

Cash and cash equivalents at beginning of year 83,380
43,018
36,082

Cash and cash equivalents at end of year $ 69,320
$ 83,380
$ 43,018

~~F-94~~F-99

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~21.~~24. QUARTERLY DATA (UNAUDITED)

Quarterly results of operations were as follows:



	2019										2018
(In thousands, except per share data)	Fourth Quarter			Third Quarter		Second Quarter		First Quarter			Fourth Quarter			Third Quarter			Second Quarter		First Quarter
Interest and dividend income	$	125,441		$	133,725	$	129,238	$	121,109		$	126,695		$	117,569		$	115,484	$	106,146
Interest expense	34,108			36,854		37,643		35,650			33,929			29,184			25,192		21,389
Net interest income	91,333			96,871		91,595		85,459			92,766			88,385			90,292		84,757
Non-interest income	23,362			21,406		17,512		21,722			15,775			20,034			19,623		18,892
Total revenue	114,695			118,277		109,107		107,181			108,541			108,419			109,915		103,649
Provision for loan losses	5,351			22,600		3,467		4,001			6,716			6,628			6,532		5,575
Non-interest expense	70,287			71,011		76,568		71,991			80,373			59,627			61,527		65,366
Income from continuing operations before income taxes	39,057			24,666		29,072		31,189			21,452			42,164			41,856		32,708
Income tax expense	6,421			4,007		5,118		6,917			4,384			9,095			8,145		7,337
Net income from continuing operations	32,636			20,659		23,954		24,272			17,068			33,069			33,711		25,371
(Loss)/income from discontinued operations, net of tax	(6,885		)	1,957		1,494		(637		)	(2,809		)	(842		)	320		(123		)
Net income	$	25,751		$	22,616	$	25,448	$	23,635		$	14,259		$	32,227		$	34,031	$	25,248

Basic earnings/(loss) per share:
Continuing operations	$	0.65		$	0.40	$	0.49	$	0.52		$	0.37		$	0.72		$	0.73	$	0.55
Discontinued operations	(0.14		)	0.04		0.03		(0.01		)	(0.06		)	(0.02		)	0.01		—
Basic earnings per common share	$	0.51		$	0.44	$	0.52	$	0.51		$	0.31		$	0.70		$	0.74	$	0.55

Diluted earnings/(loss) per share:
Continuing operations	$	0.65		$	0.40	$	0.49	$	0.52		$	0.37		$	0.72		$	0.73	$	0.55
Discontinued operations	(0.14		)	0.04		0.03		(0.01		)	(0.06		)	(0.02		)	0.01		—
Diluted earnings per share	$	0.51		$	0.44	$	0.52	$	0.51		$	0.31		$	0.70		$	0.74	$	0.55

Weighted average common shares outstanding:
Basic	50,494			51,422		48,961		46,113			46,061			46,030			46,032		45,966
Diluted	50,702			51,545		49,114		46,261			46,240			46,263			46,215		46,200

F-100

2018 2017
(In thousands, except per share data) Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter
Interest and dividend income $ 127,851
$ 119,191
$ 116,879
$ 107,240
$ 105,823
$ 89,060
$ 84,666
$ 80,709
Interest expense 34,447
29,850
25,758
21,770
19,457
17,062
15,121
13,823
Net interest income 93,404
89,341
91,121
85,470
86,366
71,998
69,545
66,886
Non-interest income 21,068
29,281
30,030
29,520
29,298
28,836
32,798
34,757
Total revenue 114,472
118,622
121,151
114,990
115,664
100,834
102,343
101,643
Provision for loan losses 6,716
6,628
6,532
5,575
6,141
4,900
4,889
5,095
Non-interest expense 90,188
70,977
72,337
76,869
90,041
65,820
69,523
74,326
Income before income taxes 17,568
41,017
42,282
32,546
19,482
30,114
27,931
22,222
Income tax expense (1) 3,309
8,790
8,251
7,298
22,292
7,211
8,237
6,762
Net income/(loss) $ 14,259
$ 32,227
$ 34,031
$ 25,248
$ (2,810 ) $ 22,903
$ 19,694
$ 15,460

Basic earnings/(loss) per common share $ 0.31
$ 0.70
$ 0.74
$ 0.55
$ (0.06 ) $ 0.57
$ 0.53
$ 0.44

Diluted earnings/(loss) per share $ 0.31
$ 0.70
$ 0.74
$ 0.55
$ (0.06 ) $ 0.57
$ 0.53
$ 0.44

Weighted average common shares outstanding:
Basic 46,061
46,030
46,032
45,966
45,122
39,984
37,324
35,280
Diluted 46,240
46,263
46,215
46,200
45,122
40,145
37,474
35,452


~~(1)~~	2017 income tax expense includes $18.1 million charge to re-measure the net deferred tax asset at December 31, 2017 pursuant to the reduction in the corporate income tax rate from 35% to 21%, effective January 1, 2018, per the Tax Cuts and Jobs Act enacted on December 22, 2017.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~22.~~25. NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

Presented below is net interest income after provision for loan losses for the three years ended 2019, 2018, ~~2017,~~ and ~~2016,~~2017, respectively:



	Years Ended December 31,
(In thousands)	2019			2018			2017
Net interest income	$	365,258		$	356,200		$	290,963
Provision for loan losses	35,419			25,451			21,025
Net interest income after provision for loan losses	329,839			330,749			269,938
Total non-interest income	84,002			74,324			74,244
Total non-interest expense	289,857			266,893			252,978
Income from continuing operations before income taxes	123,984			138,180			91,204
Income tax expense	22,463			28,961			42,088
Net income from continuing operations	101,521			109,219			49,116
(Loss) income from discontinued operations before income taxes	(5,539		)	(4,767		)	8,545
Income tax (benefit)/expense	(1,468		)	(1,313		)	2,414
Net (loss) income from discontinued operations	(4,071		)	(3,454		)	6,131
Net income	$	97,450		$	105,765		$	55,247

Years Ended December 31,
(In thousands) 2018 2017 2016
Net interest income $ 359,336
$ 294,795
$ 232,267
Provision for loan losses 25,451
21,025
17,362
Net interest income after provision for loan losses 333,885
273,770
214,905
Total non-interest income 109,899
125,689
65,851
Total non-interest expense 310,371
299,710
203,302
Income from continuing operations before income taxes 133,413
99,749
77,454
Income tax expense 27,648
44,502
18,784
Net income $ 105,765
$ 55,247
$ 58,670

~~F-95~~F-101

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ~~23.~~26. REVENUE

~~The Company adopted ASU No. 2014-09, “Revenue~~Revenue from ~~Contracts~~contracts with ~~Customers (Topic 606),” and all subsequent ASU’s that modified~~customers in the scope of Topic 606 on January 1, 2018. A cumulative effect adjustment to opening retained earnings was not deemed necessary as the implementation of the new standard did not have a material impact on the measurement or recognition of revenue.

Topic 606 requires the Company to follow a five step process: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Revenue recognition under Topic 606 depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.is recognized within noninterest income. The Company does not have any material significant payment terms as payment is received at or shortly after the satisfaction of the performance obligation. The value of unsatisfied performance obligations for contracts with an original expected length of one year or less are not disclosed. The Company recognizes incremental costs of obtaining contracts as an expense when incurred for contracts with a term of one year or less.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain non-interest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of ~~the new standard.~~Topic 606. Topic 606 is applicable to non-interest revenue streams such as wealth management fees, insurance commissions and fees, administrative services for customer deposit accounts, interchange fees, and sale of owned real estate properties.

The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended 2019, 2018, and 2017, respectively.



	Years Ended December 31,
(In thousands)	2019		2018		2017
Non-interest income
In-scope of Topic 606:
Service charges on deposit accounts	$	23,122	$	21,046	$	17,591
Insurance commissions and fees	10,957		10,983		10,589
Wealth management fees	9,353		9,447		9,395
Interchange income	6,266		7,177		7,379
Non-interest income (in-scope of Topic 606)	$	49,698	$	48,653	$	44,954
Non-interest income (out-of-scope of Topic 606)	34,304		25,671		29,290
Total non-interest income from continuing operations	$	84,002	$	74,324	$	74,244

Non-interest income streams in-scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts.Service charges on deposit accounts consist of monthly service fees (i.e. business analysis fees and consumer service charges) and other deposit account related fees. The Company's performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company's performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. The Company may, from time to time, waive certain fees (e.g., NSF fee) for customers but generally do not reduce the transaction price to reflect variability for future reversals due to the insignificance of the amounts. Waiver of fees reduces the revenue in the period the waiver is granted to the customer.

Insurance Commissions and Fees. Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later, net of return commissions related to policy cancellations. Policy cancellation is a variable consideration that is not deemed significant and thus, does not impact the amount of revenue recognized.

F-102

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Wealth Management Fees.Wealth management fees is primarily comprised of fees earned from consultative investment management, trust administration, tax return preparation, and financial planning. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based on the daily accrual of the market value of the investment accounts and the applicable fee rate.

Interchange Fees.Interchange fees are transaction fees paid to the card-issuing bank to cover handling costs, fraud and bad debt costs, and the risk involved in approving the payment. Due to the day-to-day nature of these fees they are settled on a daily basis and are accounted for as they are received.

~~F-96~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

Gains/Losses on Sales of OREO. The sale of OREO and other nonfinancial assets are accounted for with the derecognition of the asset in question once a contract exists and control of the asset has been transferred to the buyer. The gain or loss on the sale is calculated as the difference between the carrying value of the asset and the transaction price.

~~The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2018, 2017, and 2016, respectively.~~

F-103

Years Ended December 31,
(In thousands) 2018 2017 2016
Non-interest income
In-scope of Topic 606:
Service charges on deposit accounts $ 21,046
$ 17,591
$ 16,711
Insurance commissions and fees 10,983
10,589
10,477
Wealth management fees 9,447
9,395
8,917
Interchange income 7,177
7,379
7,652
Non-interest income (in-scope of Topic 606) $ 48,653
$ 44,954
$ 43,757
Non-interest income (out-of-scope of Topic 606) 61,246
80,735
22,094
Total non-interest income $ 109,899
$ 125,689
$ 65,851

~~F-97~~

~~Table of Contents~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 24. SUBSEQUENT EVENTS~~

On December 11, 2018, the Company entered into an agreement and plan of merger with SI Financial Group, Inc. ("SI Financial"). Under the agreement, SI Financial will merge with and into the Company in a transaction to be accounted for a business combination. Immediately following the merger, SI Financial's wholly-owned subsidiary, Savings Institute Bank and Trust Company, will merge with and into Berkshire Bank.

~~Headquartered in Willimantic, Conn., SI Financial had $1.6 billion in assets as of December 31, 2018 and operates 23~~ ~~banking offices providing a range of banking services in Eastern Connecticut and Rhode Island.~~

~~If the merger is completed, each outstanding share of SI Financial common stock will be converted into the~~

~~right to receive 0.48~~ shares of the Company's common stock. The transaction is subject to closing conditions, including the receipt of regulatory approvals and approval by the shareholders of SI Financial. The merger is currently expected to be completed in the second quarter of 2019. If the merger is not consummated under specified circumstances, SI Financial has agreed to pay the Company a termination fee of $7.4 million.

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

presented. Expenses related to the proposed merger are included in the financial statement line item Merger, Restructuring, and Conversion Related Expenses of the Consolidated Statements of Income for the 12 months ended

~~December 31, 2018.~~

~~F-98~~



				Fair Value		As Recorded by
(In thousands)	As Acquired			Adjustments		the Company
Consideration Paid:
Company common stock issued to Commerce common shareholders						$	188,599
Company preferred stock issued to certain Commerce shareholders						40,633
Cash in lieu paid to Commerce shareholders						1
Total consideration paid						229,233
Recognized amounts of identifiable assets acquired and (liabilities) assumed, at fair value:
Cash and short-term investments	$	374,611		—		$	374,611
Investment securities	115,274			(1,427	)	113,847
Loans, net	1,327,256			(86,505	)	1,240,751
Premises and equipment	8,931			5,346		14,277
Core deposit intangibles	—			22,400		22,400
Deferred tax assets, net	7,956			27,060		35,016
Goodwill and other intangibles	11,233			(11,233	)	—
Other assets	52,709			(3,182	)	49,527
Deposits	(1,710,872		)	(1,180	)	(1,712,052		)
Borrowings	(19,542		)	—		(19,542		)
Other liabilities	(5,086		)	265		(4,821		)
Total identifiable net assets	$	162,470		(48,456	)	114,014

Goodwill						115,219

Title of each class

Trading Symbol(s)

Name of Exchange on which registered

Common stock, par value $0.01 per share

New York Stock Exchange