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BHLB Berkshire Hills Bancorp

Filed: 9 Nov 20, 4:29pm
0001108134us-gaap:DebtSecuritiesMemberus-gaap:FairValueMeasurementsRecurringMemberus-gaap:CorporateBondSecuritiesMemberus-gaap:FairValueInputsLevel1Member2019-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                  
 
Commission File Number: 001-15781
bhlb-20200930_g1.jpg  
BERKSHIRE HILLS BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware04-3510455
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
   
60 State StreetBostonMassachusetts02109
(Address of principal executive offices)(Zip Code)
 
Registrant’s telephone number, including area code: (800) 773-5601, ext. 133773

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

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


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


BERKSHIRE HILLS BANCORP, INC.
FORM 10-Q
 
INDEX 
  Page
   
 
 
 Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019
 Consolidated Statements of Comprehensive Income/(Loss) for the Three and Nine Months Ended September 30, 2020 and 2019
 Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019
 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019
 Notes to Consolidated Financial Statements (Unaudited) 
  
  
  
  
  
  
  
  
  
  
Item 2.
 
 
 
2


3

PART I
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
 September 30,
2020
December 31,
2019
(In thousands, except share data)
Assets  
Cash and due from banks$90,537 $105,447 
Short-term investments844,755 474,382 
Total cash and cash equivalents935,292 579,829 
Trading security, at fair value9,525 10,769 
Marketable equity securities, at fair value31,993 41,556 
Securities available for sale, at fair value1,575,289 1,311,555 
Securities held to maturity (fair values of $356,035 and $373,277)330,197 357,979 
Federal Home Loan Bank stock and other restricted securities40,520 48,019 
Total securities1,987,524 1,769,878 
Less: Allowance for credit losses on held to maturity securities(96)
Net securities1,987,428 1,769,878 
Loans held for sale15,854 36,664 
Total loans8,982,336 9,502,428 
Less: Allowance for credit losses on loans(134,414)(63,575)
Net loans8,847,922 9,438,853 
Premises and equipment, net117,116 120,398 
Other real estate owned40 
Goodwill553,762 
Other intangible assets40,947 45,615 
Cash surrender value of bank-owned life insurance policies231,217 227,894 
Other assets425,675 288,945 
Assets from discontinued operations12,966 154,132 
Total assets$12,614,457 $13,215,970 
Liabilities  
Demand deposits$2,585,173 $1,884,100 
NOW and other deposits1,522,289 1,492,569 
Money market deposits2,516,168 2,528,656 
Savings deposits952,836 841,283 
Time deposits2,890,093 3,589,369 
Total deposits10,466,559 10,335,977 
Short-term debt110,000 125,000 
Long-term Federal Home Loan Bank advances and other495,483 605,501 
Subordinated borrowings97,223 97,049 
Total borrowings702,706 827,550 
Other liabilities251,220 267,398 
Liabilities from discontinued operations14,947 26,481 
Total liabilities$11,435,432 $11,457,406 
(continued)
September 30,
2020
December 31,
2019
Shareholders’ equity  
Preferred Stock (Series B non-voting convertible preferred stock - $0.01 par value; 2,000,000 shares authorized, 260,907 shares issued and outstanding in 2020; 2,000,000 shares authorized, 521,607 shares issued and outstanding in 2019)20,325 40,633 
Common stock ($0.01 par value; 100,000,000 shares authorized and 51,903,190 shares issued and 50,305,952 shares outstanding in 2020; 51,903,190 shares issued and 49,585,143 shares outstanding in 2019523 517 
Additional paid-in capital - common stock1,422,300 1,422,441 
Unearned compensation(7,526)(8,465)
Retained earnings (deficit)(242,175)361,082 
Accumulated other comprehensive income32,426 11,993 
Treasury stock, at cost (1,597,238 shares in 2020 and 2,318,047 shares in 2019)(46,848)(69,637)
Total shareholders’ equity1,179,025 1,758,564 
Total liabilities and shareholders’ equity$12,614,457 $13,215,970 
The accompanying notes are an integral part of these consolidated financial statements.
4

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands, except per share data)2020201920202019
Interest and dividend income from continuing operations  
Loans$85,688 $118,371 $278,259 $338,012 
Securities and other12,080 15,354 39,392 46,060 
Total interest and dividend income97,768 133,725 317,651 384,072 
Interest expense from continuing operations  
Deposits16,070 31,501 60,460 86,396 
Borrowings4,643 5,353 16,118 23,751 
Total interest expense20,713 36,854 76,578 110,147 
Net interest income from continuing operations77,055 96,871 241,073 273,925 
Non-interest income from continuing operations  
Mortgage banking originations2,044 292 4,647 616 
Loan related income4,988 6,493 12,007 17,318 
Deposit related fees7,062 8,705 20,382 23,088 
Insurance commissions and fees2,660 2,895 8,451 8,486 
Wealth management fees2,299 2,325 6,926 7,114 
Total fee income19,053 20,710 52,413 56,622 
Other, net1,927 609 492 1,363 
(Loss)/gain on securities, net(1,017)87 (9,925)2,655 
Total non-interest income19,963 21,406 42,980 60,640 
Total net revenue from continuing operations97,018 118,277 284,053 334,565 
Provision for credit losses1,200 22,600 65,878 30,068 
Non-interest expense from continuing operations  
Compensation and benefits34,809 37,272 111,121 105,551 
Occupancy and equipment11,084 9,893 32,411 28,788 
Technology and communications8,540 6,849 24,376 19,821 
Marketing and promotion1,002 1,006 3,069 3,428 
Professional services2,567 2,282 7,852 8,510 
FDIC premiums and assessments1,518 4,658 3,390 
Other real estate owned and foreclosures40 150 81 150 
Amortization of intangible assets1,530 1,526 4,668 4,201 
Goodwill impairment553,762 
Acquisition, restructuring, and other expenses5,316 4,163 5,316 22,333 
Other6,437 7,870 21,129 23,398 
Total non-interest expense72,843 71,011 768,443 219,570 
Income/(loss) from continuing operations before income taxes$22,975 $24,666 $(550,268)$84,927 
Income tax (benefit)/expense(68)4,007 (18,194)16,042 
Net income/(loss) from continuing operations$23,043 $20,659 $(532,074)$68,885 
(Loss)/income from discontinued operations before income taxes$(2,477)$2,747 $(21,741)$3,975 
Income tax (benefit)/expense(659)790 (5,789)1,161 
Net (loss)/income from discontinued operations$(1,818)$1,957 $(15,952)$2,814 
Net income/(loss)$21,225 $22,616 $(548,026)$71,699 
Preferred stock dividend58 240 313 720 
Income/(loss) available to common shareholders$21,167 $22,376 $(548,339)$70,979 
(continued)
5

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONCLUDED)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Basic earnings/(loss) per common share:  
Continuing operations$0.46 $0.40 $(10.58)$1.41 
Discontinued operations(0.04)0.04 (0.32)0.06 
Total$0.42 $0.44 $(10.90)$1.47 
Diluted earnings/(loss) per common share:
Continuing operations$0.46 $0.40 $(10.58)$1.40 
Discontinued operations(0.04)0.04 (0.32)0.06 
Total$0.42 $0.44 $(10.90)$1.46 
Weighted average shares outstanding:  
Basic50,329 51,422 50,256 48,846 
Diluted50,329 51,545 50,256 48,987 
The accompanying notes are an integral part of these consolidated financial statements.
6

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Three Months Ended
September 30,
Nine Months Ended
September 30,
(In thousands)2020201920202019
Net income/(loss)$21,225 $22,616 $(548,026)$71,699 
Other comprehensive income, before tax:    
Changes in unrealized gain on debt securities available-for-sale(1,085)6,154 27,529 39,477 
Income taxes related to other comprehensive income:   
Changes in unrealized gain on debt securities available-for-sale272 (1,575)(7,096)(10,127)
Total other comprehensive income(813)4,579 20,433 29,350 
Total comprehensive income/(loss)$20,412 $27,195 $(527,593)$101,049 
The accompanying notes are an integral part of these consolidated financial statements.

7

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 Preferred stockCommon stockAdditional
paid-in capital
Unearned compensationRetained earnings (deficit)Accumulated
other
comprehensive income/(loss)
Treasury stock
(In thousands)SharesAmountSharesAmountTotal
Balance at June 30, 2019522 $40,633 51,045 $517 $1,421,461 $(6,555)$336,542 $11,301 $(24,062)$1,779,837 
Comprehensive income:       
Net income— — — — — — 22,616 — — 22,616 
Other comprehensive income— — — — — — — 4,579 — 4,579 
Total comprehensive income— — — — — — 22,616 4,579 — 27,195 
Cash dividends declared on common shares ($0.23 per share)— — — — — — (11,812)— — (11,812)
Cash dividends declared on preferred shares ($0.46 per share)— — — — — — (240)— — (240)
Treasury shares repurchased— — (800)— — — — — (24,325)(24,325)
Forfeited shares— — (8)— (25)252 — — (227)— 
Exercise of stock options— — — — — (74)— 129 55 
Restricted stock grants— — 152 — 867 (4,709)— — 3,842 — 
Stock-based compensation— — — — — 1,543 — — — 1,543 
Other, net— — — 50 — (61)— (18)(29)
Balance at September 30, 2019522 $40,633 50,394 $517 $1,422,353 $(9,469)$346,971 $15,880 $(44,661)$1,772,224 
Balance at June 30, 2020261 $20,325 50,192 $523 $1,427,728 $(8,298)$(257,352)$33,239 $(52,025)$1,164,140 
Comprehensive income:       
Net income— — — — — — 21,225 — — 21,225 
Other comprehensive (loss)— — — — — — — (813)— (813)
Total comprehensive income— — — — — — 21,225 (813)— 20,412 
Cash dividends declared on common shares ($0.12 per share)— — — — — — (5,993)— — (5,993)
Cash dividends declared on preferred shares ($0.24 per share)— — — — — — (58)— — (58)
Forfeited shares— — (74)— (1,395)2,163 — — (768)— 
Exercise of stock options— — — — — — 
Restricted stock grants— — 198 — (4,033)(2,026)— — 6,059 — 
Stock-based compensation— — — — — 635 — — — 635 
Other, net— — (10)— — — — (114)(111)
Balance at September 30, 2020261 $20,325 50,306 $523 $1,422,300 $(7,526)$(242,175)$32,426 $(46,848)$1,179,025 
8

 Preferred stockCommon stockAdditional
paid-in capital
Unearned compensationRetained earnings (deficit)Accumulated
other
comprehensive income/(loss)
Treasury stock
(In thousands)SharesAmountSharesAmountTotal
Balance at December 31, 2018522 $40,633 45,417 $460 $1,245,013 $(6,594)$308,839 $(13,470)$(21,963)$1,552,918 
Comprehensive income:       
Net income— — — — — — 71,699 — — 71,699 
Other comprehensive income— — — — — — — 29,350 — 29,350 
Total comprehensive income— — — — — — 71,699 29,350 — 101,049 
Acquisition of SI Financial Group, Inc.— — 5,691 57 176,654 — — — — 176,711 
Cash dividends declared on common shares ($0.69 per share)— — — — — — (32,756)— — (32,756)
Cash dividends declared on preferred shares ($1.38 per share)— — — — — — (720)— — (720)
Treasury shares repurchased— — (910)— — — — — (27,651)(27,651)
Forfeited shares— — (59)— (234)1,951 — — (1,717)— 
Exercise of stock options— — — — — (89)— 158 69 
Restricted stock grants— — 284 — 869 (8,372)— — 7,503 — 
Stock-based compensation— — — — — 3,546 — — — 3,546 
Other, net— — (35)— 51 — (2)— (991)(942)
Balance at September 30, 2019522 $40,633 50,394 $517 $1,422,353 $(9,469)$346,971 $15,880 $(44,661)$1,772,224 
Balance at December 31, 2019522 $40,633 49,585 $517 $1,422,441 $(8,465)$361,082 $11,993 $(69,637)$1,758,564 
Comprehensive (loss):       
Net (loss)— — — — — — (548,026)— — (548,026)
Other comprehensive income— — — — — — — 20,433 — 20,433 
Total comprehensive (loss)— — — — — — (548,026)20,433 — (527,593)
Impact of ASC 326 Adoption— — — — — — (24,380)— — (24,380)
Conversion of preferred stock to common stock(261)(20,308)522 5,391 — — — 14,911 
Cash dividends declared on common shares ($0.60 per share)— — — — — — (30,143)— — (30,143)
Cash dividends declared on preferred shares ($1.20 per share)— — — — — — (313)— — (313)
Treasury shares repurchased— — (14)— — — — — (473)(473)
Forfeited shares— — (87)— (1,551)2,648 — — (1,097)— 
Exercise of stock options— — 33 — — — (395)— 1,002 607 
Restricted stock grants— — 306 — (3,981)(5,159)— — 9,140 — 
Stock-based compensation— — — — — 3,450 — — — 3,450 
Other, net— — (39)— — — (694)(694)
Balance at September 30, 2020261 $20,325 50,306 $523 $1,422,300 $(7,526)$(242,175)$32,426 $(46,848)$1,179,025 
The accompanying notes are an integral part of these consolidated financial statements.
9

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months Ended
September 30,
(In thousands)20202019
Cash flows from operating activities:  
Net (loss)/income from continuing operations$(532,074)$68,885 
Net (loss)/income from discontinued operations(15,952)2,814 
Net (loss)/income$(548,026)$71,699 
Adjustments to reconcile net (loss)/income to net cash provided by operating activities:  
Provision for credit losses65,878 30,068 
Net amortization of securities2,035 1,811 
Change in unamortized net loan costs and premiums20,565 8,964 
Premises and equipment depreciation and amortization expense8,944 7,844 
Stock-based compensation expense3,450 3,546 
Accretion of purchase accounting entries, net(8,146)(9,589)
Amortization of other intangibles4,668 4,201 
Income from cash surrender value of bank-owned life insurance policies(3,876)(3,546)
Securities losses (gains), net9,925 (2,655)
Net change in loans held-for-sale(7,130)(2,920)
Decrease in right-of-use lease assets1,809 10,025 
Decrease in lease liabilities(1,746)(10,189)
Loss on disposition of assets327 1,615 
Loss on sale of real estate13 
Amortization of interest in tax-advantaged projects2,621 4,459 
Goodwill impairment553,762 
Net change in other(36,152)(4,803)
Net cash provided by operating activities of continuing operations84,873 107,721 
Net cash provided (used) by operating activities of discontinued operations109,897 (104,001)
Net cash provided by operating activities194,770 3,720 
Cash flows from investing activities:  
Net decrease in trading security546 522 
Purchases of marketable equity securities(17,631)(18,150)
Proceeds from sales of marketable equity securities18,458 17,728 
Purchases of securities available for sale(635,194)(30,032)
Proceeds from sales of securities available for sale71,844 82,978 
Proceeds from maturities, calls, and prepayments of securities available for sale320,010 151,155 
Purchases of securities held to maturity(3,200)(5,692)
Proceeds from maturities, calls, and prepayments of securities held to maturity29,237 13,822 
Net change in loans474,707 395,643 
Proceeds from surrender of bank-owned life insurance553 1,457 
Purchase of Federal Home Loan Bank stock(6,741)(112,208)
Proceeds from redemption of Federal Home Loan Bank stock14,240 141,424 
Net investment in limited partnership tax credits(6,499)(3,997)
Purchase of premises and equipment, net(6,190)(8,518)
Acquisitions, net of cash acquired110,774 
Proceeds from sales of seasoned commercial loan portfolios37,988 
Proceeds from sale of other real estate171 150 
(continued)
10

BERKSHIRE HILLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
 Nine Months Ended
September 30,
(In thousands)20202019
Net investing cash flows from discontinued operations(2)
Net cash provided by investing activities292,299 737,054 
Cash flows from financing activities:  
Net increase in deposits133,031 109,238 
Proceeds from Federal Home Loan Bank advances and other borrowings326,277 5,267,520 
Repayments of Federal Home Loan Bank advances and other borrowings(451,493)(5,937,568)
Purchase of treasury stock(473)(27,651)
Exercise of stock options607 69 
Common and preferred stock cash dividends paid(30,456)(33,476)
Settlement of derivative contracts with financial institution counterparties(109,099)
Net cash used by financing activities(131,606)(621,868)
Net change in cash and cash equivalents355,463 118,906 
Cash and cash equivalents at beginning of period579,829 183,189 
Cash and cash equivalents at end of period$935,292 $302,095 
Supplemental cash flow information:  
Interest paid on deposits$67,119 $87,499 
Interest paid on borrowed funds16,961 27,499 
Income taxes paid, net345 8,368 
Acquisition of non-cash assets and liabilities:  
Assets acquired$$1,595,054 
Liabilities assumed(1,530,010)
Other non-cash changes:  
Other net comprehensive income$20,433 $29,350 
Impact to retained earnings from adoption of ASC 326, net of tax24,380 — 
Reclass of seasoned loan portfolios to held-for-sale, net10,048 
Real estate owned acquired in settlement of loans224 
The accompanying notes are an integral part of these consolidated financial statements.
11


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.           BASIS OF PRESENTATION

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

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

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

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

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

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

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

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


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

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

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

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

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

13


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

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

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

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


14


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

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

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


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

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

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

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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2.           DISCONTINUED OPERATIONS

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

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

The following is a summary of the assets and liabilities of the discontinued operations of FCLS at September     30, 2020 and December 31, 2019:
(In thousands)September 30, 2020December 31, 2019
Assets
Loans held for sale, at fair value$1,742 $132,655 
Premises and equipment, net1,073 
Other real estate owned361 
Mortgage servicing rights, at fair value3,855 12,299 
Mortgage banking derivatives2,329 
Right-of-use asset1,773 3,462 
Other assets5,235 2,314 
Total assets$12,966 $154,132 
Liabilities
Customer payments in process$11,698 $15,372 
Lease liability1,773 3,494 
Other liabilities1,476 7,615 
Total liabilities$14,947 $26,481 

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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents operating results of the discontinued operations of FCLS for the three and nine months ended September 30, 2020 and September 30, 2019:
Three Months Ended September 30,Nine Months Ended September 30,
(In thousands)2020201920202019
Interest income$23 $1,765 $1,516 $4,627 
Interest expense1,030 390 2,676 
Net interest income20 735 1,126 1,951 
Non-interest income(286)15,055 (4,175)37,114 
Total net revenue(266)15,790 (3,049)39,065 
Non-interest expense2,211 13,043 18,692 35,090 
(Loss)/income from discontinued operations before income taxes(2,477)2,747 (21,741)3,975 
Income tax (benefit)/expense(659)790 (5,789)1,161 
Net (loss)/income from discontinued operations$(1,818)$1,957 $(15,952)$2,814 
18


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3.           TRADING SECURITY

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


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

The following is a summary of securities available for sale, held to maturity, and marketable equity securities:
(In thousands)Amortized  CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Fair ValueAllowance
September 30, 2020    
Securities available for sale    
Municipal bonds and obligations$97,463 $7,057 $(13)$104,507 $
Agency collateralized mortgage obligations722,124 19,469 (124)741,469 
Agency mortgage-backed securities322,252 4,202 (437)326,017 
Agency commercial mortgage-backed securities263,406 10,304 (102)273,608 
Corporate bonds74,357 842 (222)74,977 
Other bonds and obligations52,958 1,762 (9)54,711 
Total securities available for sale1,532,560 43,636 (907)1,575,289 
Securities held to maturity    
Municipal bonds and obligations242,666 18,401 261,067 67 
Agency collateralized mortgage obligations68,124 6,535 74,659 
Agency mortgage-backed securities5,280 208 5,488 
Agency commercial mortgage-backed securities10,305 671 10,976 
Tax advantaged economic development bonds3,527 32 (9)3,550 29 
Other bonds and obligations295 295 
Total securities held to maturity330,197 25,847 (9)356,035 96 
Marketable equity securities34,179 1,480 (3,666)31,993 — 
Total$1,896,936 $70,963 $(4,582)$1,963,317 $96 
(In thousands)Amortized  CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Fair ValueAllowance
December 31, 2019    
Securities available for sale    
Municipal bonds and obligations$104,325 $5,813 $$110,138 $
Agency collateralized mortgage obligations742,550 6,431 (169)748,812 
Agency mortgage-backed securities146,589 1,515 (360)147,744 
Agency commercial mortgage-backed securities148,066 176 (1,146)147,096 
Corporate bonds115,395 1,788 (607)116,576 
Other bonds and obligations40,414 780 (5)41,189 
Total securities available for sale1,297,339 16,503 (2,287)1,311,555 
Securities held to maturity    
Municipal bonds and obligations252,936 13,095 (5)266,026 
Agency collateralized mortgage obligations69,667 2,870 (50)72,487 
Agency mortgage-backed securities6,271 29 6,300 
Agency commercial mortgage-backed securities10,353 51 10,404 
Tax advantaged economic development bonds18,456 218 (910)17,764 
Other bonds and obligations296 296 
Total securities held to maturity357,979 16,263 (965)373,277 
Marketable equity securities37,138 5,147 (729)41,556 — 
Total$1,692,456 $37,913 $(3,981)$1,726,388 $

20


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

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

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

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

During the three months ended September 30, 2020, purchases of AFS securities totaled $319.2 million and the proceeds from the sale of AFS securities totaled $64.2 million. During the nine months ended September 30, 2020, purchases of AFS securities totaled $635.2 million and the proceeds from the sale of AFS securities totaled $71.8 million. During the three months ended September 30, 2019, purchases of AFS securities totaled $14.9 million. During the three months ended September 30, 2019, there were 0 securities sold. During the nine months ended September 30, 2019, purchases of AFS securities totaled $30.0 million and the proceeds from the sale of AFS securities totaled $83.0 million. During the three months ended September 30, 2020, gross gains on AFS securities totaled $704.6 thousand and there were $698.6 thousand gross losses. During the nine months ended September 30, 2020, gross gains on AFS securities totaled $705.4 thousand and gross losses totaled $699.9 thousand. During the
21


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

Securities available for sale and held to maturity with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:
 Less Than Twelve MonthsOver Twelve MonthsTotal
 Gross Gross Gross 
 UnrealizedFairUnrealizedFairUnrealizedFair
(In thousands)LossesValueLossesValueLossesValue
September 30, 2020      
Securities available for sale      
Municipal bonds and obligations$13 $3,451 $$$13 $3,451 
Agency collateralized mortgage obligations124 44,785 124 44,785 
Agency mortgage-backed securities434 133,536 257 437 133,793 
Agency commercial mortgage-backed securities102 22,336 102 22,336 
Corporate bonds222 10,663 222 10,663 
Other bonds and obligations1,064 1,064 
Total securities available for sale895 214,771 12 1,321 907 216,092 
Securities held to maturity      
Tax advantaged economic development bonds1,430 1,430 
Total securities held to maturity1,430 1,430 
Total$904 $216,201 $12 $1,321 $916 $217,522 
December 31, 2019      
Securities available for sale      
Agency collateralized mortgage obligations127 52,623 42 6,267 169 58,890 
Agency mortgage-backed securities59 10,640 301 23,404 360 34,044 
Agency commercial mortgage-backed securities1,097 116,324 49 11,250 1,146 127,574 
Corporate bonds607 42,823 607 42,823 
Other bonds and obligations1,239 29 1,268 
Total securities available for sale1,287 180,826 1,000 83,773 2,287 264,599 
Securities held to maturity      
Municipal bonds and obligations800 800 
Agency collateralized mortgage obligations50 9,778 50 9,778 
Tax advantaged economic development bonds910 6,925 910 6,925 
Total securities held to maturity55 10,578 910 6,925 965 17,503 
Total$1,342 $191,404 $1,910 $90,698 $3,252 $282,102 

22


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

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

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

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

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

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

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


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

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


24


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

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

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

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

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

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

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

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


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

26


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

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

27


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


28


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

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

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

The following table presents the Company’s loans by risk category:
Term Loans Amortized Cost Basis by Origination Year
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
As of September 30, 2020
Construction
Risk rating
Pass$35,430 $241,497 $155,695 $29,807 $17,600 $3,115 $933 $$484,077 
Special Mention
Substandard2,034 4,000 6,034 
Total$35,430 $241,497 $157,729 $33,807 $17,600 $3,115 $933 $$490,111 
Commercial multifamily:
Risk rating
Pass$28,876 $56,630 $79,397 $72,790 $89,041 $185,276 $29 $$512,039 
Special Mention13,595 13,595 
Substandard47 10,108 147 10,302 
Total$28,876 $56,630 $79,397 $86,385 $89,088 $195,384 $176 $$535,936 
Commercial real estate owner occupied:
Risk rating
Pass$44,304 $90,869 $112,768 $71,574 $38,231 $205,814 $3,461 $$567,021 
Special Mention2,123 1,815 2,001 5,939 
Substandard5,638 1,622 1,704 13,867 22,831 
Total$44,304 $92,992 $120,221 $73,196 $39,935 $221,682 $3,461 $$595,791 
29


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Term Loans Amortized Cost Basis by Origination Year
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
Commercial real estate non-owner occupied:
Risk rating
Pass$133,231 $291,079 $469,033 $250,093 $314,902 $583,861 $16,967 $$2,059,166 
Special Mention295 3,094 17,254 12,901 68,838 495 102,877 
Substandard7,804 6,844 3,817 11,368 2,950 63,914 195 96,892 
Total$141,035 $298,218 $475,944 $278,715 $330,753 $716,613 $17,657 $$2,258,935 
Commercial and industrial:
Risk rating
Pass$755,987 $96,675 $189,565 $121,633 $47,911 $150,299 $401,356 $$1,763,426 
Special Mention1,507 5,950 693 604 20,614 29,368 
Substandard1,354 275 6,354 1,661 1,965 5,848 8,522 25,979 
Doubtful402 402 
Total$757,341 $98,457 $201,869 $123,987 $50,480 $156,147 $430,894 $$1,819,175 
Commercial and industrial - other:
Risk rating
Pass$34,814 $78,318 $78,149 $33,573 $7,717 $14,585 $4,614 $$251,770 
Special Mention933 1,100 1,944 741 497 64 5,279 
Substandard2,543 29,372 12,006 4,542 3,286 307 2,400 54,456 
Doubtful
Total$38,290 $108,790 $92,099 $38,856 $11,500 $14,956 $7,014 $$311,505 
Residential real estate
Risk rating
Pass$133,186 $163,232 $373,222 $399,237 $391,953 $794,072 $3,260 $$2,258,162 
Special Mention39 468 38 545 
Substandard97 539 1,162 429 9,515 11,751 
Total$133,225 $163,329 $373,761 $400,399 $392,382 $804,055 $3,307 $$2,270,458 


30


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For home equity and consumer other loan portfolio segments, Berkshire evaluates credit quality based on the aging status of the loan and by payment activity. The performing or nonperforming status is updated on an ongoing basis dependent upon improvement and deterioration in credit quality. The following table presents the amortized cost based on payment activity:
Term Loans Amortized Cost Basis by Origination Year
(In thousands)20202019201820172016PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
As of September 30, 2020
Home equity:
Payment performance
Performing$2,191 $1,995 $432 $1,990 $515 $1,954 $336,569 $$345,646 
Nonperforming3,626 3,628 
Total$2,191 $1,995 $434 $1,990 $515 $1,954 $340,195 $$349,274 
Consumer other:
Payment performance
Performing$11,381 $39,877 $121,304 $80,701 $43,513 $37,256 $11,464 $$345,496 
Nonperforming34 404 1,563 1,480 1,698 447 29 5,655 
Total$11,415 $40,281 $122,867 $82,181 $45,211 $37,703 $11,493 $$351,151 

31


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


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

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

A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of individually analyzed collateral-dependent loans by loan portfolio segment:
Type of Collateral
(In thousands)Real EstateInvestment Securities/CashOther
September 30, 2020
Construction$2,389 $$
Commercial multifamily598 
Commercial real estate owner occupied8,956 
Commercial real estate non-owner occupied3,819 
Commercial and industrial2,506 59 245 
Commercial and industrial - other2,958 
Residential real estate5,290 
Home equity272 
Consumer other26 
Total loans$23,856 $59 $3,203 

33


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

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


34


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

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

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

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

35


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

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

36


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

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality:
(In thousands)Three Months Ended September 30, 2019Nine Months Ended September 30, 2019
Balance at beginning of period$5,420 $2,840 
Acquisitions4,200 
Accretion(2,872)(6,470)
Net reclassification from nonaccretable difference2,066 4,195 
Payments received, net(196)(356)
Reclassification to TDR
Balance at end of period$4,418 $4,418 

The following is a summary of past due loans at December 31, 2019:
Business Activities Loans
(in thousands)30-59 Days
Past Due
60-89 Days
Past Due
>90 Days Past DueTotal Past
Due
CurrentTotal LoansPast Due >
90 days and
Accruing
December 31, 2019       
Commercial real estate:       
Construction$$$$$382,014 $382,014 $
Commercial real estate423 89 15,623 16,135 2,398,807 2,414,942 
Total423 89 15,623 16,135 2,780,821 2,796,956 
Commercial and industrial loans       
Total2,841 2,033 10,662 15,536 1,427,081 1,442,617 122 
Residential mortgages:       
1-4 family1,669 714 3,350 5,733 2,138,084 2,143,817 800 
Construction4,641 4,641 
Total1,669 714 3,350 5,733 2,142,725 2,148,458 800 
Consumer loans:       
Home equity149 1,147 1,296 272,571 273,867 52 
Auto and other4,709 990 2,729 8,428 496,171 504,599 
Total4,858 990 3,876 9,724 768,742 778,466 53 
Total$9,791 $3,826 $33,511 $47,128 $7,119,369 $7,166,497 $975 

37


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans
(in thousands)30-59 Days
Past Due
60-89 Days
Past Due
>90 Days Past DueTotal Past
Due
Acquired
Credit
Impaired
Total LoansPast Due >
90 days and
Accruing
December 31, 2019       
Commercial real estate:       
Construction$$$$$1,396 $47,792 $
Commercial real estate3,907 245 10,247 14,399 21,639 1,189,521 5,751 
Total3,907 245 10,247 14,399 23,035 1,237,313 5,751 
Commercial and industrial loans       
Total888 299 1,275 2,462 26,718 397,891 442 
Residential mortgages:       
1-4 family745 491 932 2,168 10,840 533,536 139 
Construction3,478 
Total745 491 932 2,168 10,840 537,014 139 
Consumer loans:       
Home equity346 222 789 1,357 540 106,724 72 
Auto and other120 22 265 407 286 56,989 
Total466 244 1,054 1,764 826 163,713 72 
Total$6,006 $1,279 $13,508 $20,793 $61,419 $2,335,931 $6,404 


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


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

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

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

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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans
 December 31, 2019
(In thousands)Recorded Investment (1)Unpaid Principal
Balance (2)
Related Allowance
With no related allowance:   
Other commercial real estate loans$3,200 $6,021 $— 
Other commercial and industrial loans437 532 — 
Residential mortgages - 1-4 family292 293 — 
Consumer - home equity416 844 — 
Consumer - other— 
With an allowance recorded:   
Other commercial real estate loans$1,033 $1,050 $97 
Commercial and industrial loans28 30 
Residential mortgages - 1-4 family84 110 
Consumer - home equity121 123 
  Consumer - other39 37 
Total   
Commercial real estate$4,233 $7,071 $97 
Commercial and industrial loans465 562 
Residential mortgages376 403 
Consumer576 1,004 12 
Total impaired loans$5,650 $9,040 $118 
(1) The Recorded Investment represents the face amount of the loan increased or decreased by applicable accrued interest, net deferred loan fees and costs, and unamortized premium or discount, and reflects direct charge-offs. This amount is a component of total loans on the Consolidated Balance Sheet.
(2) The Unpaid Principal Balance represents the customer's legal obligation to the Company.
40


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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans
 December 31, 2019
(in thousands)Average  Recorded
Investment
Cash Basis  Interest
Income  Recognized
With no related allowance:  
Other commercial real estate$1,603 $117 
Other commercial and industrial441 51 
Residential mortgages - 1-4 family241 11 
Consumer - home equity475 23 
Consumer - other
With an allowance recorded:  
Other commercial real estate$1,005 $59 
Other commercial and industrial29 
Residential mortgages - 1-4 family88 
Consumer - home equity68 
Consumer - other41 
Total  
Commercial real estate$2,608 $176 
Commercial and industrial470 53 
Residential mortgages329 18 
Consumer loans584 31 
Total impaired loans$3,991 $278 

NaN additional funds are committed to be advanced in connection with impaired loans.

The modifications for the three and nine months ended September 30, 2019 were attributable to interest rate concessions, maturity date extensions, modified payment terms, reamortization, and accelerated maturity.
Modifications by Class
For the three months ending September 30, 2019
 Number of
Modifications
Pre-Modification
Outstanding Recorded
Investment (In thousands)
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings   
Commercial real estate$$
Commercial and industrial loans
Residential mortgages - 1-4 family65 65 
 $65 $65 
Modifications by Class
For the nine months ending September 30, 2019
 Number of
Modifications
Pre-Modification
Outstanding Recorded
Investment (In thousands)
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings   
Commercial real estate$145 $145 
Commercial and industrial loans475 472 
Residential mortgages - 1-4 family65 65 
 $685 $682 
42


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

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

43


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

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

44


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

Business Activities Loans

Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
December 31, 2019
(In thousands)ConstructionReal EstateTotal Commercial Real Estate
Grade:   
Pass$382,014 $2,354,375 $2,736,389 
Special mention12,167 12,167 
Substandard48,400 48,400 
Total$382,014 $2,414,942 $2,796,956 
Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
December 31, 2019
(In thousands)Total Commercial and Industrial Loans
Grade: 
Pass$1,366,342 
Special mention50,072 
Substandard24,112 
Doubtful2,091 
Total$1,442,617 
Residential Mortgages
Credit Risk Profile by Internally Assigned Grade
December 31, 2019
(In thousands)1-4 FamilyConstructionTotal Residential Mortgages
Grade:   
Pass$2,139,753 $4,641 $2,144,394 
Special mention714 714 
Substandard3,350 3,350 
Total$2,143,817 $4,641 $2,148,458 
Consumer Loans
Credit Risk Profile Based on Payment Activity
December 31, 2019
(In thousands)Home EquityAuto and OtherTotal Consumer Loans
Performing$272,772 $501,871 $774,643 
Nonperforming1,095 2,728 3,823 
Total$273,867 $504,599 $778,466 
45


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquired Loans

Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
December 31, 2019
(In thousands)ConstructionReal EstateTotal Commercial Real Estate
Grade:   
Pass$46,396 $1,130,333 $1,176,729 
Special mention5,993 5,993 
Substandard1,396 53,195 54,591 
Total$47,792 $1,189,521 $1,237,313 
Commercial and Industrial Loans
Credit Risk Profile by Creditworthiness Category
December 31, 2019
(In thousands)Total Commercial and Industrial Loans
Grade: 
Pass$373,744 
Special mention4,404 
Substandard19,743 
Total$397,891 

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

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

46


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

NOTE 6. GOODWILL

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

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

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


NOTE 7.               DEPOSITS

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

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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8.               BORROWED FUNDS

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

Short-term debt includes Federal Home Loan Bank (“FHLB”) advances with an original maturity of less than one year and a short-term line-of-credit drawdown through a correspondent bank. The Bank also maintains a $3.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was 0 outstanding balance on the FHLB line of credit for the periods ended September 30, 2020 and December 31, 2019. The Bank's available borrowing capacity with the FHLB was $1.6 billion for both the periods ended September 30, 2020 and December 31, 2019.

The Bank is approved to borrow on a short-term basis from the Federal Reserve Bank of Boston as a non-member bank. The Bank has pledged certain loans and securities to the Federal Reserve Bank to support this arrangement. NaN borrowings with the Federal Reserve Bank under this arrangement took place for the periods ended September 30, 2020 and December 31, 2019. As a participant in the SBA Paycheck Protection Program ("PPP"), the Bank may pledge originated loans as collateral at face value to the Federal Reserve Bank of Boston for term financings. As of September 30, 2020, the Bank had pledged PPP loans of $624 thousand, which is equal to the amount borrowed. The Bank's available borrowing capacity with the Federal Reserve Bank was $870.2 million and $201.3 million for the periods ended September 30, 2020 and December 31, 2019, respectively.

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


48


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

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

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

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

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

49


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

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

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

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

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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information about derivative assets and liabilities at December 31, 2019, follows:
  WeightedWeighted Average RateEstimated
 NotionalAverage ContractFair Value
 AmountMaturityReceivedpay rateAsset (Liability)
 (In thousands)(In years)  (In thousands)
Economic hedges:     
Interest rate swap on tax advantaged economic development bond$9,390 9.92.08 %5.09 %$(1,488)
Interest rate swaps on loans with commercial loan customers1,669,895 6.44.38 %3.28 %75,326 
Offsetting interest rate swaps on loans with commercial loan customers1,669,895 6.43.28 %4.38 %(77,051)
Risk participation agreements with dealer banks315,140 7.5  320 
Forward sale commitments (1)
237,412 0.2  (227)
Total economic hedges3,901,732    (3,120)
Non-hedging derivatives:     
Commitments to lend (1)
168,997 0.2  2,628 
Total non-hedging derivatives168,997    2,628 
Total$4,070,729    $(492)
(1) Includes the impact of discontinued operations.
51


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

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

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

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

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

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

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

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


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

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


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

The Company had net asset positions with its financial institution counterparties totaling $1.1 million and $0.6 million as of September 30, 2020 and December 31, 2019, respectively. The Company had net asset positions with its commercial banking counterparties totaling $177.7 million and $76.4 million as of September 30, 2020 and December 31, 2019, respectively. The Company had net liability positions with its financial institution counterparties totaling $74.8 million and $78.8 million as of September 30, 2020 and December 31, 2019, respectively. The Company had 0 net liability positions with its commercial banking counterparties as of September 30, 2020. The Company had net liability positions with its commercial banking counterparties totaling $1.1 million as of December 31, 2019. The Company has collateral pledged to cover this liability.

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

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

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


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

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


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. LEASES

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

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

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

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

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

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

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


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

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

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


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

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

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

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

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


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

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

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

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

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


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

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

60


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

61


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

62


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

Earnings/(loss) per share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):
 Three Months Ended September 30,Nine Months Ended September 30,
(In thousands, except per share data)2020201920202019
Income/(loss) from continuing operations$23,043 $20,659 $(532,074)$68,885 
(Loss)/income from discontinued operations(1,818)1,957 (15,952)2,814 
Net income/(loss)$21,225 $22,616 $(548,026)$71,699 
Average number of common shares issued51,903 51,903 51,903 49,068 
Less: average number of treasury shares1,560 1,089 1,674 855 
Less: average number of unvested stock award shares536 435 499 410 
Plus: average participating preferred shares522 1,043 526 1,043 
Average number of basic shares outstanding50,329 51,422 50,256 48,846 
Plus: dilutive effect of unvested stock award shares87 109 
Plus: dilutive effect of stock options outstanding36 32 
Average number of diluted shares outstanding50,329 51,545 50,256 48,987 
Basic earnings/(loss) per common share:  
Continuing operations$0.46 $0.40 $(10.58)$1.41 
Discontinued operations(0.04)0.04 (0.32)0.06 
Total$0.42 $0.44 $(10.90)$1.47 
Diluted earnings/(loss) per common share:
Continuing operations$0.46 $0.40 $(10.58)$1.40 
Discontinued operations(0.04)0.04 (0.32)0.06 
Total$0.42 $0.44 $(10.90)$1.46 

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


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

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

During the three ended September 30, 2020 there were 0 options exercised. During the nine months ended September 30, 2020, proceeds from stock option exercises totaled $607 thousand. During the three and nine months ended September 30, 2019, proceeds from stock option exercises totaled $55 thousand and $69 thousand. During the three and nine months ended September 30, 2020, there were 37 thousand and 133 thousand shares vested in connection with stock awards, respectively. During the three and nine months ended September 30, 2019, there were 3 thousand and 130 thousand shares issued in connection with vested stock awards, respectively. All of these shares were issued from available treasury stock. Stock-based compensation expense totaled $0.6 million and $1.5 million during the three months ended September 30, 2020 and 2019, respectively. Stock-based compensation expense totaled $3.5 million and $3.5 million during the nine months ended September 30, 2020 and 2019, respectively. Stock-based compensation expense is recognized over the requisite service period for all awards.
64


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. FAIR VALUE MEASUREMENTS

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

Recurring Fair Value Measurements
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.
 September 30, 2020
 Level 1Level 2Level 3Total
(In thousands)InputsInputsInputsFair Value
Trading security$$$9,525 $9,525 
Securities available for sale: 
Municipal bonds and obligations104,507 104,507 
Agency collateralized mortgage obligations741,469 741,469 
Agency residential mortgage-backed securities326,017 326,017 
Agency commercial mortgage-backed securities273,608 273,608 
Corporate bonds49,152 25,825 74,977 
Other bonds and obligations54,711 54,711 
Marketable equity securities31,321 672 31,993 
Loans held for investment at fair value2,774 2,774 
Loans held for sale (1)
17,596 17,596 
Derivative assets (1)
177,731 1,895 179,626 
Capitalized servicing rights (1)
3,855 3,855 
Derivative liabilities (1)
73,659 73,659 
(1) Includes assets and liabilities classified as discontinued operations.
<
 December 31, 2019
 Level 1Level 2Level 3Total
(In thousands)InputsInputsInputsFair Value
Trading security$$$10,769 $10,769 
Securities available for sale:
Municipal bonds and obligations110,138 110,138 
Agency collateralized mortgage obligations748,812 748,812 
Agency residential mortgage-backed securities147,744 147,744 
Agency commercial mortgage-backed securities