BERKSHIRE HILLS BANCORP INC MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)
SELECTED FINANCIAL DATA The following summary data is based in part on the consolidated financial statements and accompanying notes and other information appearing elsewhere in this or prior Forms 10-Q. At or for the At or for the Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 NOMINAL AND PER SHARE DATA Net earnings per common share, diluted $ 0.42
$ 1.31$ 1.34 $ 1.97Adjusted earnings per common share, diluted (1)(2) 0.62 0.53 1.56 1.28 Net income, (thousands) 18,717 63,749 62,028 98,416 Adjusted net income, (thousands) (1)(2) 27,928 25,695 72,279 63,814 Total common shares outstanding, (thousands) 45,040 48,657 45,040 48,657 Average diluted shares, (thousands) 45,034 48,744 46,396 49,963 Total book value per common share 20.93 24.21 20.93 24.21 Tangible book value per common share (2) 20.36 23.58 20.36 23.58 Dividends per common share 0.12 0.12 0.36 0.36 Full-time equivalent staff, continuing operations 1,300 1,333 1,300 1,333 PERFORMANCE RATIOS (3) Return on equity 6.30 % 22.18 % 6.97 % 11.30 % Adjusted return on equity (1)(2) 9.40 8.94 8.12 7.33 Return on tangible common equity (1)(2) 6.76 23.14 7.46 11.97 Adjusted return on tangible common equity (1)(2) 9.92 9.53 8.64 7.88 Return on assets 0.66 2.14 0.73 1.07 Adjusted return on assets (1)(2) 0.99 0.86 0.85 0.69 Net interest margin, fully taxable equivalent (FTE) 3.48 2.56 3.05 2.60 (4)(5) Efficiency ratio (1)(2) 62.01 68.76 66.75 69.32 FINANCIAL DATA (in millions, end of period) Total assets $ 11,317 $ 11,846 $ 11,317 $ 11,846Total earning assets 10,604 11,145 10,604 11,145 Total loans 7,943 6,836 7,943 6,836 Total deposits 9,988 10,365 9,988 10,365 Loans/deposits (%) 80 % 66 % 80 % 66 % ASSET QUALITY Allowance for credit losses, (millions) $ 96 $ 113$ 96 $ 113Net charge-offs, (millions) (6) (2) (9) (17) Net charge-offs (QTD annualized)/average loans 0.30 % 0.12 % 0.16 % 0.30 % Provision expense/(benefit), (millions) $ 3 $ (4)$ (1) $ 3Non-accruing loans/total loans 0.48 % 0.54 % 0.48 % 0.54 % Allowance for credit losses/non-accruing loans 254 304 254 304 Allowance for credit losses/total loans 1.21 1.65 1.21 1.65 CAPITAL RATIOS Common equity tier 1 capital to risk-weighted assets 12.7 % 15.3 % 12.7 % 15.3 % Tier 1 capital leverage ratio 10.1 9.9 10.1 9.9 Tangible common shareholders' equity/tangible assets 8.1 9.7 8.1 9.7 (2) 61
At or for the At or for the Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 FOR THE PERIOD: (In thousands) Net interest income
$ 92,084 $ 71,368 $ 242,505 $ 221,854Non-interest income 16,251 73,635 53,283 121,839 Net revenue 108,335 145,003 295,788 343,693 Provision/(benefit) for credit losses 3,000 (4,000) (1,000) 2,500 Non-interest expense 81,677 69,460 218,702 216,486 Net income 18,717 63,749 62,028 98,416 Adjusted income (1)(2) 27,928 25,695 72,279 63,814
(1) Adjusted measurements are non-GAAP financial measures that are adjusted to exclude net non-operating charges primarily related to acquisitions and restructuring activities. Refer to "Reconciliation of Non-GAAP Financial Measures" for additional information. (2) Non-GAAP financial measure. Refer to "Reconciliation of Non-GAAP Financial Measures" for additional information. (3) All performance ratios are annualized and are based on average balance sheet amounts, where applicable. (4) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans. (5) The effect of purchase accounting accretion for loans, time deposits, and borrowings on the net interest margin was an increase in all periods presented. The increase for the three months ended
September 30, 2022and 2021 was 0.01% and 0.06%, respectively. The increase for the nine months ended September 30, 2022and 2021 was 0.01% and 0.06%, respectively.
Table of Contents AVERAGE BALANCES AND AVERAGE YIELDS/RATES The following table presents average balances and an analysis of average rates and yields on an annualized fully taxable equivalent basis for the periods included: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Average Yield/Rate Average Yield/Rate Average Yield/Rate Average Yield/Rate Balance (FTE basis) Balance (FTE basis) Balance (FTE basis) Balance (FTE basis) Assets Loans: Commercial real estate
$ 3,9264.53 % $ 3,5773.40 % $ 3,8023.89 % $ 3,6113.38 % Commercial and industrial loans 1,449 5.21 1,370 4.78 1,423 4.60 1,612 4.71 Residential mortgages 1,926 3.53 1,499 3.65 1,671 3.55 1,613 3.72 Consumer loans 587 6.24 545 3.95 554 5.30 587 3.85 Total loans (1) 7,888 4.54 6,991 3.77 7,450 4.05 7,423 3.78 Investment securities (2) 2,400 2.13 2,312 2.09 2,557 2.02 2,255 2.21 Short-term investments & loans held for sale 342 1.96 1,762 0.17 673 0.90 1,623 0.13
Mid-Atlantic region loans held for sale (4) - - 155 3.82 - - 239 3.96 Total interest-earning assets 10,630 3.91 11,220 2.86 10,680 3.36 11,540 2.96 Intangible assets 26 x 31 27 33 Other non-interest earning assets 659 x 674 648 696 Total assets
$ 11,315 $ 11,925 $ 11,355 $ 12,269Liabilities and shareholders' equity Deposits: NOW and other $ 1,3620.48 % $ 1,3160.05 % $ 1,4240.22 % $ 1,3430.09 % Money market 2,737 0.46 2,716 0.16 2,806 0.27 2,756 0.20 Savings 1,129 0.03 1,112 0.04 1,124 0.03 1,056 0.06 Time 1,528 0.85 1,893 0.86 1,537 0.73 2,056 0.97 Total interest-bearing deposits 6,756 0.48 7,037 0.35 6,891 0.32 7,211 0.38 Borrowings and notes (5) 251 5.46 253 3.89 178 5.09 377 3.26 Mid-Atlantic region interest-bearing deposits - - 306 0.51 - - 447 0.54
Total interest-bearing liabilities 7,007 0.66 7,596 0.43 7,069 0.44 8,035 0.52 Non-interest-bearing demand deposits 2,913 x 2,901 2,928
Other non-interest earning liabilities 206 279 171
Liabilities from discontinued operations - - - - Total liabilities 10,126 10,776 10,168 11,108 Total common shareholders' equity 1,189 1,149 1,187
Total shareholders' equity (2) 1,189 1,149 1,187
Total liabilities and stockholders' equity
$ 11,315 $ 11,925 $ 11,355 $ 12,26963
Table of Contents Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Average Yield/Rate Average Yield/Rate Average Yield/Rate (FTE Average Yield/Rate (FTE Balance (FTE basis) Balance (FTE basis) Balance basis) Balance basis) Net interest spread 3.25 % 2.43 % 2.92 % 2.44 % Net interest margin (6) 3.48 2.56 3.05 2.60 Cost of funds 0.46 0.31 0.31 0.38 Cost of deposits 0.33 0.22 0.22 0.28 Supplementary data Total deposits (In millions)
$ 9,669 $ 9,938 $ 9,819 $ 9,953Fully taxable equivalent 1,715 1,586 4,799 4,739
adj. income (In thousands) (7)
(1) The average balances of loans include nonaccrual loans and deferred fees and costs. As of
September 30, 2022, deferred fees related to PPP loans was not considered material. As of September 30, 2021, deferred fees related to PPP loans totaled $0.2 million. (2) The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment. (3) Interest income on loans held for sale is included in loan interest income on the income statement. (4) The Bank sold its Mid-Atlantic branch operations and insurance operations in the third quarter of 2021. The Mid-Atlantic region loans are not included in the loan yields; however they are included in the total earning assets yield and the net interest margin. The Mid-Atlantic region deposits are not included in the deposit costs; however, they are included in the total interest-bearing liabilities cost and the net interest margin. (5) The average balances of borrowings include the capital lease obligation presented under other liabilities on the consolidated balance sheet. (6) Purchase accounting accretion totaled $0.3 millionand $1.7 millionfor the three months ended September 30, 2022and 2021, respectively. Purchase accounting accretion totaled $1.5 millionand $5.0 millionfor the nine months ended September 30, 2022and 2021, respectively. (7) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans. The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 27%.
Table of Contents NON-GAAP FINANCIAL MEASURES This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles ("GAAP"). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company's GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company's results for any particular quarter or year. The Company's non-GAAP adjusted earnings information set forth is not necessarily comparable to non- GAAP information which may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company's GAAP financial information. The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for operating revenue and expense. These measures exclude amounts which the Company views as unrelated to its normalized operations. These items primarily include securities gains/losses, merger costs, restructuring costs, goodwill impairment, and discontinued operations. Merger costs consist primarily of severance/benefit related expenses, contract termination costs, systems conversion costs, variable compensation expenses, and professional fees. Restructuring costs generally consist of costs and losses associated with the disposition of assets and liabilities and lease terminations, including costs related to branch sales. Restructuring costs also include severance and consulting expenses related to the Company's strategic review. The Company also calculates adjusted earnings per share based on its measure of adjusted earnings and diluted common shares. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to merger and acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company's performance. Expense adjustments in 2022 and 2021 were primarily related to branch consolidations. Net losses on securities in 2022 were primarily due to unrealized equity securities losses due to changes in market conditions.
Management believes that the calculation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the Company’s comparison with other companies in the financial services industry. The Company also adjusts certain equity-related measures to exclude intangible assets due to the importance of these measures to the investment community.
In 2021, the Company recorded a third quarter net gain of
$52 millionon the sale of the operations of the insurance subsidiary and the Mid-Atlantic branch operations. Expense adjustments in the first quarter 2021 were primarily related to branch consolidations. Third quarter 2021 adjustments included Federal Home Loan Bankborrowings prepayment costs. They also included other restructuring charges for efficiency initiatives in operations areas including write-downs on real estate moved to held for sale and severance related to staff reductions. The fourth quarter 2021 revenue adjustment was primarily related to trailing revenue on a previously reported sale, and the expense adjustment was due primarily to branch restructuring costs. Net losses on securities in both years were primarily due to unrealized equity securities losses due to changes in market conditions. The adjustment to expense in 2022 is primarily related to the consolidation of branches in 2022, along with the disposition of other unused premises and costs related to the change in business operations in the Firestone business line.
Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES The following table summarizes the reconciliation of non-GAAP items recorded for the periods indicated: At or for the Three Months At or for the Nine Months Ended Ended September 30, September 30, (In thousands) 2022 2021 2022 2021 GAAP Net income $
Adjusted: Net losses on securities (1)
476 166 2,194 681 Adj: Net (gains) on sale of business - (51,885) - (51,885)
operations and assets
Adj: Restructuring and other expense 11,473 1,425 11,526 4,917 Adj: Income taxes
(2,738) 12,240 (3,469) 11,685 Total adjusted income (non-GAAP) (2)
GAAP Total revenue $
Adj: Losses on securities, net (1)
476 166 2,194 681 Adj: Net (gains) on sale of business - (51,885) - (51,885) operations and assets Total operating revenue (non-GAAP) (2) (B) $
GAAP Total non-interest expense $
Minus: total non-operating expenses (see above)
(11,473) (1,425) (11,526) (4,917) Less:
- - - - Operating non-interest expense (non-GAAP) (2) (C) $
(In millions, except per share data) Total average assets (D) $
Total average equity
(E) 1,189 1,150 1,187 1,161 Total average tangible shareholders' equity (F) 1,164 1,118 1,159 1,128
Total average tangible common shareholders' (G) 1,164 1,118 1,159 1,128 equity (2) Total tangible shareholders' equity, (H) 917 1,147 917 1,147 period-end (2)(3) Total tangible common shareholders' equity, (I) 917 1,147 917 1,147 period-end (2)(3) Total tangible assets, period-end (2)(3) (J) 11,291 11,815 11,291 11,815 Total common shares outstanding, period-end (K) 45,040 48,657 45,040 48,657
Average diluted shares outstanding (thousands) (L) 45,034 48,744 46,396 49,963 Earnings per common share, diluted $
Adjusted earnings per common share, diluted
(A/L) 0.62 0.53 1.56 1.28
Book value per common share, period-end 20.93 24.21 20.93 24.21 Tangible book value per common share, (I/K) 20.36 23.58 20.36 23.58 period-end (2) Total shareholders' equity/total assets 8.33 9.95 8.33 9.95 Total tangible shareholder's equity/total (H/J) 8.12 9.71 8.12 9.71 tangible assets (2) x Performance ratios (4) x GAAP return on equity 6.30 % 22.18 % 6.97 % 11.30 % Adjusted return on equity (2) (A/E) 9.40 8.94 8.12 7.33 Return on tangible common equity (2)(5) 6.76 23.14 7.46 11.97 Adjusted return on tangible common equity (A+O)/(G) 9.92 9.53 8.64 7.88 (2)(5) GAAP return on assets 0.66 2.14 0.73 1.07 66
Table of Contents Adjusted return on assets (2) (A/D) 0.99 0.86 0.85 69.00 Efficiency ratio (2) (C-O)/(B+M+P) 62.01 68.76 66.75 69.32 (in thousands) Supplementary data (In thousands)
Tax benefit on tax-credit investments (M)
$ 620 $ 2,195 $ 1,811 $ 2,315(6) Non-interest income charge on tax-credit (N) (445) (1,789) (1,153) (1,996) investments (7) Net income on tax-credit investments (M+N) 175
406 658 319
Intangible amortization (O) 1,285 1,296 3,857 3,912 Fully taxable equivalent income (P) 1,715 1,586 4,799 4,739 adjustment
(1) Net securities losses for the periods ending
September 30, 2022and 2021 include the change in fair value of the Company's equity securities in compliance with the Company's adoption of ASU 2016-01. (2) Non-GAAP financial measure. (3) Total tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Total tangible assets is computed by taking total assets less the intangible assets at period-end. (4) Ratios are annualized and based on average balance sheet amounts, where applicable. (5) Adjusted return on tangible common equity is computed by dividing the total adjusted income adjusted for the tax-affected amortization of intangible assets, assuming a 27% marginal rate, by tangible equity. (6) The tax benefit is the direct reduction to the income tax provision due to tax credits and deductions generated from investments in historic rehabilitation and low-income housing. (7) The non-interest income charge is the reduction to the tax-advantaged commercial project investments, which are incurred as the tax credits are generated.
Table of Contents GENERAL Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company's consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2021 Annual Report on Form 10-K. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the year 2022 or any future period. In management's discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable. References to loan categories in the financial statements are based on collateralization. Tax-equivalent adjustments are the result of increasing income from tax-advantaged loans and securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 27% marginal rate (including state income taxes net of federal benefit). In the discussion, unless otherwise specified, references to earnings per share and "EPS" refer to diluted earnings per common share.
Berkshire Hills Bancorp, Inc.("Berkshire" or "the Company") is a Delawarecorporation headquartered in Bostonand the holding company for Berkshire Bank("the Bank"). Established in 1846, the Bank operates as a commercial bank under a Massachusettstrust company charter. The Bank seeks to transform what it means to bank its neighbors socially, humanly, and digitally to empower the financial potential of people, families, and businesses in its communities as it pursues its vision of being a leading socially responsible omni-channel community bank in New Englandand beyond. Berkshire Bankprovides business and consumer banking, mortgage, wealth management, and investment services. Headquartered in Boston, Berkshirehas approximately $11.3 billionin assets and operates 100 branch offices in New Englandand New York.
Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our outlook for earnings, net interest margin, fees, expenses, tax rates, capital and liquidity levels and other matters regarding or affecting
Berkshireand its future business or operations. You can identify these statements from the use of the words "may," "will," "should," "could," "would," "outlook," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions. Such statements further include statements about expectations regarding inflation and interest rates, economic activity, supply chains, the Russian invasion of Ukraine, market conditions, and stock repurchases. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or reduce our volume of loan originations, or increase the level of defaults, losses and prepayments on loans we have made and make whether held in portfolio or sold in the secondary market, legislative and regulatory change, changes in the financial markets, the effects of the COVID-19 pandemic, including impacts on the Company, its customers, and the communities where it operates, international conflict in Europeand elsewhere, and other risks and uncertainties disclosed from time to time in documents that Berkshire Hills Bancorpfiles with the Securities and Exchange Commission, including the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as updated by subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. In addition, Berkshire'spast results of operations do not necessarily indicate Berkshire'scombined future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. Berkshireis not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. Berkshirequalifies all of its forward-looking statements by these cautionary statements.
Berkshire'squarterly revenue and operating earnings advanced in 2022 compared to the fourth quarter of 2021, reflecting growth and profitability under its BEST strategic plan which was initiated near midyear 2021. Results have also benefited from a strong credit environment and from market interest rate increases which began after the start of 2022. The Company's interest rate risk profile is positioned to benefit earnings from further interest rate increases expected by the markets through the rest of the year. The BEST plan targeted getting better before getting bigger, and this was a primary focus in the second half of 2021 as various expense and profitability initiatives were undertaken and less strategic operations were ended, including the sale of Mid-Atlantic branch operations and insurance operations in the third quarter of 2021. The refocus on core markets and operations and the reinvestment of resources into frontline bankers and technology contributed to the resumption of loan growth in 2022. Share repurchases over the last year to return excess capital to shareholders produced a 7% decrease in outstanding shares over the last twelve months, which has further supported growth in per share earnings and return on equity. The sale of operations in the third quarter of 2021 inflated revenue and earnings in the third quarter and first nine months of 2021. As a result, GAAP revenue and earnings declined in 2022 compared to these periods. Adjusted measures of revenue and earnings, which do not include these sale gains, advanced in 2022 compared to 2021 in both the third quarter and first nine months of the year. Third quarter earnings per share decreased year-over-year by 68% to $0.42, while adjusted earnings per share increased by 18% to $0.62. Total third quarter net revenue decreased by 25%, while adjusted revenue increased by 17%. The Company's BEST plan sets goals for certain non-GAAP adjusted profitability measures. The Company advanced strongly in 2022 towards the target ranges for adjusted return on assets, adjusted return on tangible equity, and adjusted pre-tax pre-provision net revenue. Third quarter 2022 financial highlights are shown below. Comparisons are year-over-year unless otherwise noted: •6.8% return on tangible common equity and 9.9% adjusted return on tangible common equity •11% increase quarter-over-quarter in total net revenue; 10% increase in adjusted net revenue •3.48% net interest margin, increased from 3.11% in 2Q22 and 2.56% in 3Q21 •62% efficiency ratio, improved from 67% in 2Q22 and 69% in 3Q21 •2% end-of-period loan growth quarter-over-quarter; 16% growth year-over-year •0.74% delinquent and non-accrual loans/loans •7% reduction in period-end shares outstanding year-over-year reflecting stock buybacks •Prepayment of $75 millionin subordinated debt in September 2022
Credit metrics remained strong in 2022 and earnings benefited from a year-to-date credit loss provision release. The allowance continues to provide relatively strong coverage of the loan portfolio. The positioning of the Company’s balance sheet includes:
•Significant liquidity available through short and long term investments and off-balance sheet sources. Loans/deposits measured 80% at period-end •Positive asset sensitivity to rising interest rates, with a 2.4% modeled benefit to first year net interest income compared to a static scenario in the event of a 100 basis point upward interest rate shock •Stock repurchase plan approved for up to
$140 millionin repurchases, with $105 millioncompleted in the first nine months of 2022 •Strong regulatory capital metrics, with a 12.7% period-end common equity tier 1 capital ratio During the second quarter of 2022, Moody's Investors Service assigned first time issuer ratings with an investment grade rating of Baa3 to Berkshire Hills Bancorpand Berkshire Bank, with a positive outlook. Moody's assigned an A3 long-term deposit rating to the Bank. Also, in the second quarter, KBRA ( Kroll Bond Rating Agency) affirmed senior unsecured investment grade ratings of BBB for Berkshire Hills Bancorpand BBB+ for Berkshire Bank, with a stable outlook. KBRA affirmed a BBB+ deposit rating for the Bank. In conjunction with the issuance of $100 millionin subordinated notes, an amount equal to the net proceeds of which will be used to finance or refinance new
Table of Contents or existing social and environmental projects (a "Sustainability Bond"),, the Company implemented its Sustainable Financing Framework, which received a favorable rating from Sustainalytics, a leading ESG ratings firm. This was the first Sustainability Bond issued by a
U.S.community bank with assets under $150 billion. In accordance with its BEST plan, Berkshirecontinued recruiting front line bankers and developing technology initiatives in the first nine months of 2022. The Company continues to promote employees from within the organization and to bring on board knowledgeable bankers to deepen long-term relationships with its customers. Berkshire Bankrecently announced an expanded partnership with fintech Narmi to create a best-in-class digital banking experience for consumers and small businesses, which is targeted for implementation in 2023. For more information about the BEST plan, please see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's most recent report on Form 10-K. Since year-end 2021, inflation has accelerated, with the consumer price index increasing 8.2% year-over-year in September 2022. In response, the Federal Reserve Bankhas embarked on monetary tightening policies, resulting in increased interest rates. The Federal Reservehas indicated that further tightening is anticipated. The average federal funds target rate increased from 0.25% in the third quarter of 2021 to 2.37% in the third quarter of 2022, reaching 4.00% as of November 7, 2022. The average ten year treasury increased from 1.53% to 3.10% for these periods, reaching 4.21% as of November 7, 2022. The possibility of a recession induced by monetary policy is an increasing market concern for 2023, although business conditions remained solid in the Company's markets through period-end. The Company is pursuing its plans for growth under its BEST plan based on its favorable niche in a consolidating regional market and its distinctive strategy based on its DigitouchSM approach to customer engagement and its community service message that where you bank matters. On October 13, 2022the Company and the Bank announced that Subhadeep Basu, Chief Financial Officer of the Company and the Bank, resigned effective October 7, 2022, for personal reasons and to subsequently pursue other career interests. Mr. Basuagreed to be available as an advisor to the Company to assist with transition matters through December 31, 2022. The Company and Berkshire Bankappointed Senior Vice President and Chief Accounting Officer Brett Brbovic, age 42, as Interim Chief Financial Officer, effective October 7, 2022, and is in the process of searching for a new Chief Financial Officer through an executive search process. Mr. Brbovicfirst joined the Company and Berkshire Bankfrom KPMG LLPin 2012 as Vice President and Controller and has served as Senior Vice President and Chief Accounting Officer since 2015. On November 4, 2022, the Company announced that it had increased its quarterly dividend to shareholder by 50% to $0.18per share. This reflected growth in earnings since the announcement of the BEST strategic transformation plan in May 2021. The $0.18dividend represents a yield of approximately 2.6% based on Berkshire'sclosing share price of $27.44on November 3, 2022and is equivalent to a 29% payout compared to third quarter 2022 adjusted earnings.
Table of contents COMPARISON OF THE FINANCIAL SITUATION AT
Summary: Total assets decreased by
$0.3 billionto $11.3 billiondue primarily to lower values of available for sale securities. A $0.9 billionreduction in excess cash was the primary funding source for loan growth totaling $1.1 billion. Cash and equivalents decreased to 6% of total assets from 14%. Most asset quality metrics remained at relatively favorable levels. Total deposits decreased by 1%, and the ratio of loans/deposits increased to 80% from 68%. The book value of equity decreased primarily due to the unrealized bond losses, which are not applied against regulatory capital. The regulatory measure of common equity tier one capital decreased to 12.7% from 15.0% due primarily to the loan portfolio growth. The Company views its liquidity and capital, including the contribution of retained earnings, as well positioned to support ongoing organic growth and shareholder distributions. Investments: The portfolio of investment securities decreased by $458 million, or 18%, to $2.09 billionduring the first nine months of 2022. This decrease was primarily due to the unrealized loss on securities available for sale, which resulted from interest rate increases in the first nine months of 2022. The unrealized loss on securities available for sale increased from $4 million, or 0.2% of book value, at year-end 2021 to $248 million, or 14.4% of book value, at period-end. Additionally, proceeds from securities maturities and amortization contributed funding for the growth of the loan portfolio. Proceeds from maturities, calls, and prepayments of investments securities totaled $483 millionfor the first nine months of 2022. The average life of the bond portfolio increased to 6.9 years from 4.6 years due primarily to slower prepayments of mortgage related securities in the rising rate environment. The investment portfolio is viewed as a significant source of liquidity for the Bank, as 93% of the $1.5 billionavailable for sale portfolio consists of Agency mortgage related products and Treasurynotes. The investment portfolio yield was 2.13% in the third quarter of 2022, compared to 2.04% in the fourth quarter of 2021. Loans: Total loans increased by $1.12 billion, or 16%, to $7.94 billionin the first nine months of 2022. Loan growth of 14% in the first half was followed by 2% growth in the third quarter. Growth was concentrated in a $641 million, or 46%, increase in residential mortgages and a $409 million, or 8%, increase in commercial loans. Loans increased in all major categories as a result of the Company's BEST initiatives which included stronger production from frontline bankers, talent recruitment, and channel expansion. Prepayments slowed in the rising rate environment. Loan demand moderated in the third quarter reflecting the impact of higher interest rates and potential prospects for a future recession. Overall loan yields increased from the fourth quarter of 2021 due mainly to increases in market interest rates, primarily in relation to loans repricing within three months. These loans totaled $2.96 billion, or 38% of total loans and loan yields were expected to benefit further in the fourth quarter based on market expectations for additional interest rate increases. The Company measures its loan beta, which is the ratio of the change in loan yields to a market index. Compared to the average federal funds target rate, the beta for the total loan portfolio measured 36% comparing the third quarter of 2022 to the fourth quarter of 2021. Comparing the most recent quarter to the linked quarter, the loan beta was 38%. The magnitude and consistency of these betas primarily reflects the large volume of loans contractually repricing based on Prime. LIBOR, or SOFR based indices. As part of its BEST program, Berkshirehas invested in expanding its retail originations team and its correspondent platform. The Company also purchased residential mortgages from area lenders. Most mortgage bookings were jumbo mortgages held for investment. New loan volumes were predominantly fixed rate early in the year and gradually transitioned to primarily 7/1 hybrid adjustable-rate mortgages in the third quarter. The mortgage portfolio expanded from 20% of total loans at the start of the year to 26% at period-end. The portfolio yield decreased from 3.82% in the fourth quarter of 2021 to 3.53% in the most recent quarter, including the impact of the shorter duration adjustable rate mortgages added in 2022. Portfolio growth was substantially funded through the reinvestment of excess short-term investments accumulated from loan run-off in 2021. Commercial real estate and commercial and industrial loans increased by 8% and 9% respectively in the first nine months of the year. Total commercial loans decreased by 1% in the third quarter, including outplacements of targeted credits, as well as seasonal impacts on loan closings in the third quarter. The Company's commercial loan pipeline at period-end increased compared to the midyear pipeline. The $295 millionnine month increase in commercial real estate loans was concentrated in a $97 million, or 19%, increase in multifamily loans and a $129
Table of Contents million, or 6%, increase in loans to commercial real estate non-owner occupied properties. The
$111 millionincrease in commercial and industrial loans was driven by growth in asset-based lending related loans due to both customer growth and increased line utilization. The average yield on commercial real estate loans increased by 1.04% to 4.53% in the most recent quarter compared to the fourth quarter of 2021. For these periods, the average yield on commercial and industrial loans increased by 0.83% to 5.21%. Many of the commercial loans are indexed to prime, LIBOR, or SOFR which have responded quickly to changes in market interest rates. The impact of these increases on borrowers has been more muted due to the benefit of interest rate swaps with fix customer payments. The notional amount of borrower interest rate swaps totaled approximately $1.7 billionat period-end, measuring approximately 32% of the commercial portfolio. The Company continues to maintain its commercial underwriting standards and growth is managed within a detailed system of hold limits based on industry and loan type. Variable rate loan underwriting includes a test of debt service coverage for up to a 300 basis point upward interest rate shock. After midyear, the Company announced that it would cease originating new loans in its Firestone Financial specialty lending operation and allow the portfolio to run-off. This was a strategic decision in the context of Berkshire'sBEST plan to focus on core markets and products. The Firestone portfolio stood at $153 millionat period-end and continues to have strong credit performance in line with its long history. Consumer loans increased by $67 million, or 13%, in the first nine months of the year. Growth was driven by consumer unsecured loans originated through the Company's partnership with the fintech Upstart. This portfolio totaled $152 millionat period-end, and most of these loans were originated during the first half of the year and were generally subject to the Company's prime underwriting standards. In July 2022the Company announced that, due to the prevailing economic uncertainty, it was ceasing new originations through this partnership. Credit performance of this portfolio has exceeded the Company's expectations. The yield on the consumer portfolio increased by 2.28% to 6.24% in the first nine months of 2022, reflecting the higher coupon consumer unsecured loans added in the first half of the year, along with the benefit of higher interest rates on prime-indexed home equity loans. Asset Quality and Credit Loss Allowance: Major asset quality metrics remained solid as of third quarter-end, with many metrics at better levels than pre-pandemic. Non-accruing loans measured 0.48% of total loans, compared to 0.52% at year-end 2021. Annualized net loan charge-offs measured 0.16% of average loans for the first nine months of the 2022, compared to 0.29% in fiscal year 2021. Accruing delinquent loans measured a relatively low 0.26% of total loans, compared to 0.63% at year-end 2021. This included loans 30-89 days past due measuring 0.18% of loans. Period-end non-accruing loans totaling $38 millionincluded $21 millionin commercial and industrial loans which was concentrated in one manufacturing credit with operational challenges which were episodic rather than systemic in nature. This credit accounted for $4 millionof the $6 millionin net charge-offs in the quarter. Non-accruing commercial real estate loans decreased to a low $3 millionfrom $8 million, including the benefit of the $11 millionsale of certain problem and potential problem loans to proactively take advantage of attractive market conditions during the period. At period-end, accruing troubled debt restructurings totaled $7 millionand accruing loans over 90 days delinquent totaled $6 million. Total criticized loans decreased to 2.5% of loans from 3.5% of loans, including classified loans which decreased to 1.6% of loans from 2.1% of loans. Classified loans include accruing substandard loans, which are regarded as potential problem loans and which declined to 1.1% of loans from 1.6% over the nine month period. The allowance for credit losses on loans decreased in the first nine months of 2022 to $96 millionfrom $106 million. The ratio of the allowance to total loans decreased to 1.21% from 1.55%. This decline was primarily due to improved asset quality metrics and a reduction in the potential losses from economic and social disruptions related to COVID-19 conditions, while including a qualitative assessment of risks related to market and inflation conditions and future possible recession conditions. The allowance covers all current expected credit losses for all loans. In relation to outstanding loans, the allowance for most of the loan categories decreased.
Table of Contents Deposits and Borrowings: Total deposits decreased by
$81 million, or 1%, to $9.99 billionduring the first nine months of 2022. This decrease included a $73 millionreduction in brokered deposits, and total other total deposits were essentially unchanged for the period. Non-interest-bearing demand deposit accounts decreased by $112 millionor 4%. This decrease was more than offset by NOW deposit growth of $70 million, or 7%, and money market deposit growth of $95 million, or 3%. Payroll deposits, which fluctuate daily, totaled $1.05 billionat period-end. Deposit activity included the impact of increased customer spending rates as well as market competition from higher yielding investment instruments in the rising interest rate environment. The cost of deposits increased to 0.33% in the third quarter of 2022, compared to 0.19% in the fourth quarter of 2021. Increases were concentrated in a 0.44% increase to 0.48% in the cost of NOW and related deposits and a 0.30% increase to 0.46% in the cost of money market deposit accounts. Deposit costs increased in most major account categories due to the impact of sharply rising market interest rates during the period. The Company measures its deposit beta, which is the ratio of the change in deposit costs to a market index. Compared to the average federal funds target rate, the deposit beta measured 6% for the above periods, rising to 12% for the change in costs in the most recent quarter compared to the linked quarter. Deposit rates were relatively unchanged through the first half of the year, and began increasing in the most recent quarter. The Company anticipates that further increases in market interest rates will lead to higher deposit costs in future periods, including higher rates paid as well as shifts in balances from lower cost accounts to higher cost accounts.
The Company’s wholesale funds consist of deposits and traded loans. Wholesale funds decreased by
June 30, 2022, Berkshirecompleted the sale at par of $100 millionin subordinated notes bearing interest at a fixed rate of 5.5% for the first five years. The notes will then reset quarterly to a floating rate per annum equal to a benchmark rate which is expected to be the Three-Month Term SOFR, plus 249 basis points. The notes have a ten year final maturity and generally may be called at par after five years. Berkshireis the first public U.S.community bank holding company with under $150 billionin total assets to issue a Sustainability Bond. The Company intends to use an amount equal to the net proceeds of its Sustainability Bond issuance to finance or refinance new or existing social and environmental projects consistent with its Sustainable Financing Framework. Sustainalytics, a Morningstar Company, and the global leader in high-quality ESG research, ratings, and data, has independently verified that Berkshire'sSustainable Financing Framework "is credible and impactful and in alignment with" International Capital Market Association(ICMA) guidelines and principles. On September 28, 2022, the Company prepaid the balance of its existing $75 millionin subordinated debt bearing interest at 6.875% which became callable for the first time on that date since the original issuance ten years ago. Third quarter 2022 interest expense included the additional cost of carrying these two subordinated debt obligations for one quarter. Derivative Financial Instruments: During September 2022, the Company added $400 millionof receive fix/pay SOFR interest rate swaps through a combination of immediate and forward-settling cash flow hedges which were intended to reduce the earnings exposure to downward rate movements. This was in response to the increased sensitivity to a downward interest rate shock following the rapid rise in market interest rates during the year. Except for these swaps, there were no material changes during the first nine months in the portfolio of outstanding derivative financial instruments. The estimated fair value of these instruments was a liability of $49 millionat period-end, which decreased from an asset of $43 millionat year-end 2021 due to the impact of changes in interest rates on the value of outstanding commercial loan interest rate swaps. Shareholders' Equity: Total shareholders' equity decreased by $240 million, or 20% to $943 millionin the first nine months of 2022. This decrease was primarily due to a $185 millionnet other comprehensive loss resulting mostly from the previously discussed $245 millionunrealized loss on debt securities available for sale as a result of the increase in market interest rates. Additionally, the Company repurchased $105 millionin common shares during this period, representing approximately 8% of shares outstanding at year-end 2021.
Table of Contents The unrealized securities losses are not counted against regulatory equity. As a result, the decrease in regulatory capital was more modest. Including the impact of the loan growth, the common equity tier one capital remained relatively strong, decreasing from 15.0% to 12.7% in the first nine months of 2022. Similarly, the relatively strong risk based capital ratio decreased to 15.0% from 17.3%. Across the banking industry, the unrealized losses on available for sale investment securities have led to significant compression of book value and the non-GAAP financial measure of tangible book value. The Company's book value per share decreased by 14% to
$20.93and period-end equity/assets decreased from 10.2% to 8.3%. Tangible book value per share decreased by 14% to $20.36, and the period-end ratio of tangible common equity/tangible assets decreased from 10.0% to 8.1%. During the first nine months of 2022, the Company continued the quarterly shareholder dividend at $0.12per share level it was reduced to as a result of the pandemic beginning in the third quarter of 2020. On November 4, 2022, the Company announced that it had increased its quarterly dividend to shareholders by 50% to $0.18per share. This reflected growth in earnings since the announcement of the BEST strategic transformation plan in May 2021. The $0.18dividend represents a yield of approximately 2.6% based on Berkshire'sclosing share price of $27.44on November 3, 2022and is equivalent to a 29% payout compared to third quarter 2022 adjusted earnings.
Table of Contents COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2022AND SEPTEMBER 30, 2021Summary: Berkshire'sthird quarter net income decreased by 71% to $19 million. Results in 2021 included $52 millionin gains on the sale of insurance and branch operations. The non-GAAP measure of adjusted income, which excludes non-operating items and sale gains, increased by 9% to $28 million. The benefit of a 29% increase in net interest income was partially offset by lower non-interest income and higher credit loss provision expense. Third quarter 2022 GAAP earnings per share totaled $0.42and adjusted earnings per share totaled $0.62, which was the highest quarterly adjusted EPS since 2019. This included the benefit of share repurchases, which reduced outstanding shares by 7% year-over-year. GAAP EPS decreased by 68%, while adjusted EPS increased by 18%. Berkshire'snine month net income decreased by 37% to $62 million. Adjusted net income improved by 13% to $72 million. In addition to adjusting for sale gains, the major adjustments to adjusted earnings related to restructuring expenses primarily consisting of branch consolidations. Nine month 2022 earnings per share totaled $1.34and adjusted earnings per share totaled $1.56. In the most recent quarter, the return on assets measured 0.66% and the adjusted return on assets measured 0.99%. The return on tangible equity measured 6.76% and the adjusted return on tangible equity measured 9.92%. By growing operating revenue and maintaining disciplined operating expenses, Berkshirehas been achieving positive operating leverage. The third quarter efficiency ratio improved to 62% in 2022 compared to 69% in 2021. Net Interest Income: Third quarter net interest income increased by 29% to $92 million. Nine month net interest income increased by 9% to $243 million. These increases were driven by increases of 36% and 17%, respectively, in the net interest margin. This reflected the benefit of rising interest rates in 2022 as well as the use of excess cash accumulated in 2021 and used reinvesting primarily in residential mortgage growth in 2022. The third quarter net interest margin increased year-over-year by 91 basis points to 3.48% from 2.56%. This was the highest quarterly net interest margin reported by the Company in four years. This primarily reflects the benefit of the 36% loan beta compared to the 6% deposit beta in the environment of rapidly rising market interest rates since the fourth quarter of 2021. Most loans repricing within three months are indexed to Prime, LIBOR, or SOFR which change rapidly as market interest rates change. Deposit cost changes depend on market factors and typically operate with a lag, which has been pronounced in the current environment of rapid market rate increases. At period-end, the Company remained asset sensitive and was positioned to benefit from further increases in market interest rates in 2022 based on market forecasts. This is discussed below in Item 3 "Quantitative and Qualitative Disclosures About Market Risk". Expected market interest rate increases in the fourth quarter may provide further benefit to the net interest income. Based on the Company's interest rate risk modeling, the deposit beta increase over time, and the cost of wholesale funds may also affect the cost of interest bearing liabilities, depending on market and competitive conditions and the Company's asset and liability management strategies. The structure of deposits, including the percentage of non-interest-bearing deposits (which was 29% of total deposits at period-end) may also affect the margin depending on future economic and monetary conditions. Non-Interest Income: Total fee income decreased year-over-year by 29% to $15 million, and for nine months year-to-date fee income decreased by 26% to $48 million. Excluding insurance commissions and fees from insurance operations sold at the end of September 2021, the decreases in this income measured 24% and 17% for the above respective periods. This was mostly due to decreases in loan fees totaling $5 millionand $9 millionfor the above periods. This was primarily due to decreases of $3 millionand $6 million, for the above respective periods, in SBA originations related income reflecting lower market volumes and premiums as a result of the increase in market interest rates. Berkshirecontinued to rank high in national SBA loan originations, placing in the 22nd position nationally based on SBA 7(a) loan approval data for the SBA fiscal year ending September 30, 2022. Income from commercial loan swap fees and fair value changes also decreased for the three and nine month periods. Deposit related fees increased by 9% and 6% respectively for these periods despite the sale of branch operations in 2021, reflecting increased consumer transaction activity year-over-year.
Provision for Credit Losses on Loans: The third quarter provision was a
$3 millionexpense in 2022 compared to a $4 millionbenefit in 2021. For the first nine months, the provision was a $1 millionbenefit in 2022 compared to a $2 millionexpense in 2021. The Company has steadily reduced the coverage of its allowance for credit losses on loans based on improvements in asset quality and forecast conditions. Charge-offs have remained at relatively favorable levels. These improvements have generally offset the impact of loan portfolio growth and increased consumer lending which would otherwise require additional provision expense. The most recent quarter was the first quarter with a provision expense since the first quarter of 2021. Non-Interest Expense and Tax Expense: Total non-interest expense increased year-over-year by 18% for the third quarter and by 1% for the first nine months. The non-GAAP financial measure of adjusted non-interest expense increased by 3% for the third quarter and decreased by 2% for the first nine months. Expense in 2022 benefited from the sale of operations and restructuring actions in 2021. Cost saves from these initiatives were targeted towards increased spending for bankers and technology. The Company generally targets operating expenses in the range of $68- $70 millionon a quarterly basis. Adjustments to nine month expense totaled $5 millionin 2021 and $12 millionin 2022 and were primarily related to branch consolidations and the sale of operations in 2021 and branch consolidations in 2022. The total branch count decreased from 130 branches at the start of 2021 to 106 branches at year-end 2021 and 100 branches at third quarter-end in 2022. Full time equivalent staff decreased from 1,505 positions at the start of 2021 to 1,319 positions at year-end 2021 and 1,300 positions at September 30, 2022. The effective income tax rate was 21% for the first nine months of 2021 and 22. The tax rate benefit from lower pre-tax income in 2022 was offset in part by lower benefits on investment tax credit investments due to slower construction activity in 2022 and longer schedules for recognizing the benefits in income. Total Comprehensive Income: Total comprehensive income includes net income together with other comprehensive income, which primarily consists of unrealized gains/losses on debt securities available for sale, after tax. Total comprehensive income for the first nine months of the year was a loss of $123 millionin 2022, compared to income of $75 millionin 2021, reflecting the impact in both periods of rising medium term interest rates on the bond portfolio. Liquidity and Cash Flows: Please see ""Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Cash Flows" in the most recent report on Form10-K for a more expansive discussion of these topics. For the first nine months of 2022, loan growth was the primary use of cash, which was mainly sourced from short-term investments and investment securities. The ratio of cash and cash equivalents to total assets decreased to 6% from 14% over this period. Investment securities and wholesale funding are sources of cash to support future loan growth. Unused FHLBB borrowing availability stood at $1.2 billionat period-end. Cash at the parent company stood at $119 millionat period-end The Company continues to view itself as having sufficient liquidity with a high quality and liquid securities portfolio and well-positioned wholesale funding sources. The new Moody's ratings introduced in 2022, including the A3 long-term bank deposit rating, support Berkshire'sliquidity profile. The relative stability of deposit costs during 2022 has also been positive as an indicator of core funding stability in the Company's markets. The ratio of loans to deposits measured 80% at period-end, compared to 68% at the start of the year. A number of metrics are utilized in establishing optimal and minimal liquidity targets and the Company is generally well positioned across these metrics. The rising rate environment potentially constrains industry deposit demand growth. Additionally, the rising rates have contributed to the extension of the investment portfolio average life and the unrealized bond losses are a potential constraint on some options for the use of investments to support overall liquidity. The unrealized losses would affect capital if they were realized through the sale of the related securities, which could then impact the
Table of Contents management of capital. The excess liquidity which has been widespread throughout the financial system during the pandemic may constrain funding sources if systemwide liquidity is reduced. The Company is monitoring various scenarios as it continues to pursue organic growth and market share gains in the context of its BEST strategic plan. The parent relies over the long term on dividends from the Bank to fund its debt obligations and capital returns to shareholders. The Bank requires regulatory approval from the
FDICand the Massachusetts Division of Banksto provide dividends to the parent Capital Resources: Please see the "Shareholders' Equity" section of the Comparison of Financial Condition for a discussion of shareholders' equity together with Note 10 - Capital Ratios and Shareholders' Equity in the notes to the consolidated financial statements. Additional information about capital resources and regulatory capital is contained in the notes to the consolidated financial statements and in the Company's most recent Form 10-K. The Company monitors the impacts of rising rates, credit stress scenarios, and organic growth in assessing its capital adequacy and plans. The Company's BEST plan includes the optimization of capital, including reducing excess capital through organic growth and capital returns to shareholders. The operation of this plan was evidenced in the first nine months of the year through the 16% loan growth and $105 millionin share repurchases. Additionally, shareholder dividends paid totaled $16 millionfor this period. Capital optimization was also supported through the subordinated debt issuance, reducing the coupon compared to the existing debt which was later prepaid. The Company primarily focuses on regulatory capital measures in assessing capital, including the common equity Tier 1 capital ratio. This ratio stood at 12.7% at period-end. This also includes ongoing assessment of the shareholder cash dividend in relationship to earnings and to competitive practices. The Company announced a 50% increase in the quarterly shareholder dividend from $0.12per share to $0.18per share on November 4, 2022. The unrealized available sale securities losses reduce the book value of equity. These losses are expected to accrete back into equity as the securities season to maturity. These losses are not deducted from regulatory capital which is the primary focus of the Company's capital management. The measure of tangible book value is a focus of bank investors, together with the ratio of tangible equity to tangible assets and the measure of tangible book value per share. The tangible equity to tangible assets ratio decreased to 8.1% from 10.0% during the first nine months of the year, and tangible book value per share decreased by 14% to $20.36from $23.69. The Company is monitoring its tangible book value related metrics and it believes that its condition at period-end was within a general range for peers at that date. Further decreases in these metrics were anticipated for the remainder of 2022 based on market expectations for further rate increases. In acting as a source of strength for the Bank, the Company relies in the long term on capital distributions from the Bank in order to provide operating and capital service for the Company, which in turn can access national financial markets to provide financial support to the Bank. Capital distributions from the Bank to the parent company presently require approval by the FDICand the Massachusetts Division of Banking. Increased distributions from the Company to shareholders require notice to and nonobjection from the Federal Reserve Bank. For the first nine months of 2022, the Bank paid $108 millionin dividends to the parent company. LIBOR Transition: Please see the Company's most recent Annual Report on Form 10-K for additional information regarding the LIBOR transition. In addition to the commercial loan interest rate swaps and back-to-back counterparty offsetting swaps, the Company's primary exposure in managing the transition relates to LIBOR based commercial and mortgage loans. The Company introduced new loan documentation switching from LIBOR to one month term SOFR for new commercial loans originated beginning in 2022. As of September 30, 2022, the Company had approximately $2.0 billionin LIBOR based commercial loans, including $1.8 billionmaturing after the LIBOR cessation date at midyear 2023. The Company is focused on converting the majority of these loans to one month term SOFR in the next six months, working with customers, counsel, and its core loan servicing provider. The Company had converted $258 millionin outstanding loans through period-end.
CORPORATE RESPONSIBILITY UPDATE
Our Commitment to Environmental, Social, Governance (ESG) and Corporate Responsibility
Berkshireis committed to purpose-driven, community-centered banking that enhances value for all stakeholders as it pursues its vision of being a high-performing, leading socially responsible community bank in New Englandand beyond. Berkshireprovides an ecosystem of socially responsible financial solutions, actively engages with its communities, and harnesses the power of its business to support the economy, empower financial access and success, and invest in a low-carbon future. ESG factors are integral to our vision, mission, risk management practices, sustainable finance activities and Berkshire'sExciting Strategic Transformation (BEST). Berkshirefocuses its strategy on material topics impacting its business and stakeholders including leadership & governance, human capital management, equity & inclusion, responsible banking & cybersecurity, financial access & affordability, environmental sustainability & climate change and community investment. Because our vision is to be a high-performing, leading socially responsible community bank in New Englandand beyond, we were one of the first banks in the country to establish a dedicated committee of our Board of Directors to oversee ESG matters, were the first U.S.community bank holding company with under $150 billionin assets to issue a Sustainability Bond and are a leader among community banks in integrating ESG standards into our business strategy and operations. We continue to engage directly with our stakeholders to share information about the progress in our ESG performance, including through our Corporate Responsibility website, corporate annual report, and proxy statement. Additionally, our annual Corporate Responsibility Report, which is aligned with Sustainability Accounting Standards Board("SASB") commercial bank disclosure topics along with the Task Force for Climate Related Financial Disclosures(TCFD), details the Company's ESG efforts and programs.
Climate change and sustainability
Climate Change poses unprecedented risks and opportunities to the world.
Berkshireexpects that its efforts to manage its environmental footprint, mitigate the risks and impacts associated with climate change, and finance the transition to a low-carbon future will allow it to strengthen its positioning as a high-performing, leading socially responsible community bank. The Company continues to evolve its practices to reflect its community bank mission, expected regulatory requirements, sustainable finance opportunities as well as the size, scope, and complexity of its operations.
Table of Contents Key ESG & Corporate Responsibility Quarterly Developments •BEST Community Comeback: As a result of the collective efforts of its employees,
Berkshireis making steady progress towards the achievement of its "BEST Community Comeback" goals. The multi-year plan focuses on four key areas: fueling small businesses, community financing and philanthropy, financial access and empowerment, and funding environmental sustainability. •Current ESG Performance: The Company remained within its BEST ESG goal with a top 23% composite performance in leading ESG indexes in the U.S.for its Environmental, Social and Governance (ESG) ratings. As of September 30, 2022the Company has ratings of: MSCI ESG- BBB; ISS ESG Quality Score - Environment: 2, Social: 1, Governance: 2; and Bloomberg ESG Disclosure- 62.81. The Company also receives a rating by Sustainalytics. Berkshirecontinues to rank among the top 1% of all U.S.Banks for ESG in Bloomberg this year. •Recognition & Continued Community Impact: The Boston Business Journalnamed Berkshireone of Massachusetts'Top Corporate Charitable Contributors for the tenth consecutive year. The honor further demonstrates Berkshire'sdeep commitment to lifting-up its communities which includes recent announcements of $100,000in scholarships to forty (40) students continuing in their pursuit of an undergraduate degree from an accredited non-profit college or technical school and more than $600,000in third quarter philanthropic contributions through Berkshire'sFoundation to support projects enhancing the quality of life and economic vibrancy in communities where the bank operates.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 to the consolidated financial statements included in its most recent Annual Report on Form 10-K. Modifications to significant accounting policies made during the year are described in Note 1 to the consolidated financial statements included in Item 1 of this report. The preparation of the consolidated financial statements in accordance with GAAP and practices generally applicable to the financial services industry requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and to disclose contingent assets and liabilities. Actual results could differ from those estimates.
Management has identified the Company’s most critical accounting policies with respect to:
• Allowance for credit losses on loans
• Fair value measurements
These policies are considered most critical in that they are important to the Company's financial condition and results, and they require management's subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. Both of these policies were significant in determining income and financial condition in the financial statements. There is further discussion of the application of these policies in the Form 10-K. ENTERPRISE RISK MANAGEMENT Following sections of this report on Form 10-Q include discussion of market risk and risk factors. Risk management is overseen by the Company's
Chief Risk Officer, who reports directly to the CEO. This position oversees risk management policy, credit, loan review, compliance and information security. Enterprise risk assessments are brought to the Company's Enterprise Risk Management Committee, and then are reported to the Board's Risk Management, Capital, and Compliance Committee. The high level corporate risk assessment includes the following material business risks: credit risk, interest rate risk, price risk, liquidity risk, operational risk, compliance risk, strategic risk, and reputation risk, with the credit risk category having the highest weighting.
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