Beacon Financial Corp (BBT) FY 2024 MD&A

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

SELECTED FINANCIAL DATA

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

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

(2) Non-GAAP financial measure. Refer to "Reconciliation of Non-GAAP Financial Measures" for additional information.

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

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Average Balances, Interest and Average Yields/Cost

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

Item 7 - Table 1 - Average Balance, Interest and Average Yields / Costs

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_________________________________

Notes:

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

(2) The yield on tax-exempt loans and securities is computed on a fully tax-equivalent basis using a tax rate of 27%.

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

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

(5) Purchase accounting accretion totaled $1.3 million, $0.7 million, and $2.0 million for the years-ended December 31, 2024, 2023, and 2022, respectively. The effect of purchase accounting accretion on the net interest margin was an increase in all years, which is shown sequentially as follows beginning with the most recent year and ending with the earliest year: 0.01%, 0.01%, and 0.02%.

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Rate/Volume Analysis

The following table presents the effects of rate and volume changes on the fully taxable equivalent net interest income. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate), and (3) changes in volume/rate (change in rate multiplied by change in volume) have been allocated proportionately based on the absolute value of the change due to the rate and the change due to volume. There are no out-of-period adjustments included in the rate/volume analysis in the following table.

Item 7 - Table 2 - Rate Volume Analysis

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NON-GAAP FINANCIAL MEASURES

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

In 2024, adjustments were primarily related to the pending merger, branch sales and consolidations, and loss on sale of AFS securities.

In 2023, adjustments were primarily related to branch consolidations, severance charges related to a workforce reduction, and loss on sale of AFS securities. Starting in 2023, fair value adjustments on securities are included in operating income.

In 2022, the restructuring expense adjustment primarily related to the termination of leasehold interests and the write-down of related right of use assets and leasehold improvements in conjunction with branch consolidations and real estate reductions.

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

Due to the anticipated earnings volatility resulting from loan loss provisions reflecting changes in estimates of uncertain future economic conditions under the CECL accounting standard, many users of bank financial statements are focusing on Pre-Provision Net Revenue (“PPNR”). This is a measure of revenue less expenses, and is calculated before the loan loss provision and income tax expense. This measure gives clearer visibility of the operations of the company during the periods presented in the income statements, without the impact of period-end estimates of future uncertain events. This measure also enhances comparisons of operations across different banks, which might have significantly different period-end estimates of uncertain future economic conditions that affect the loan loss provision. Consistent with its previous practices measuring results on an adjusted basis before the impacts of acquisitions, divestitures, and other designated items, the Company has introduced the measure of Operating Pre-Provision Net Revenue (“Operating PPNR”) which measures PPNR excluding adjustments for items not viewed as related to ongoing operations. This measure is now integral to the Company’s analysis of its operations, and is not viewed as a substitute for GAAP measures of net income. Analysts also use this measure in assessing the Company’s operations and in making comparisons across banks. The Company and analysts also measure Operating PPNR/Assets in order to utilize the PPNR measure in assessing its comparative operating profitability. This measure primarily relies on the measures of operating revenue and operating expense already used in the Company’s calculation of its efficiency ratio.

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

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

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(1)Starting in 2023, fair value adjustments on securities are included in operating income.

(2)Merger, restructuring, conversion, and other related expenses included $6.6 million of merger expenses for the year ended December 31, 2024. Merger, restructuring, conversion, and other related expenses included no merger and acquisition expenses for the years ended December 31, 2023 and 2022.

(3)Amortization of intangible assets is adjusted assuming a 27% marginal tax rate.

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

(5)Return on tangible common equity excluding AFS unrealized losses was 5.45%, 6.07%, and 8.26% for the years ended December 31, 2024, 2023, and 2022, respectively. Operating return on tangible common equity excluding AFS unrealized losses was 8.32%, 8.03%, and 8.94% for the years ended December 31, 2024, 2023, and 2022, respectively.

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GENERAL

This discussion is intended to assist readers in understanding the financial condition and results of operations of the Company, the changes in key items in the Company’s Consolidated Financial Statements (“financial statements”) from year to year, and the primary reasons for those changes.

The objectives of this section are:

•To provide a narrative explanation of the Company’s financial statements that enables investors to see the company through the eyes of management;

•To enhance the financial disclosure and provide the context within which financial information should be analyzed; and

•To provide information about the quality of, and potential future variability of, the Company’s earnings and cash flow.

This discussion includes the following sections:

•Summary

•Comparison of Operating Results for the Years Ended December 31, 2024 and 2023

•Comparison of Financial Condition at December 31, 2024 and 2023

•Liquidity and Cash Flows

•Capital Resources

•Application of Critical Accounting Policies

•Enterprise Risk Management

•Corporate Responsibility and Sustainability

The following discussion and analysis should be read in conjunction with the Company’s financial statements and the notes thereto appearing in Item 8 of this document. In the following discussion, income statement comparisons are against the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the year 2025 or any future period. In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable. Tax-equivalent adjustments are the result of increasing income from tax-advantaged loans and securities by an amount equal to the taxes that would be paid if the income were fully taxable based on a 27% marginal rate (including state income taxes net of federal benefit). In the discussion, unless otherwise specified, references to earnings per share and "EPS" refer to diluted earnings per common share.

Berkshire is a Delaware corporation headquartered in Boston and the holding company for the Bank. Established in 1846, the Bank operates as a commercial bank under a Massachusetts trust company charter. On December 16, 2024, the Company entered into a definitive agreement for a merger of equals with Brookline Bancorp, Inc., a Boston-based multi-bank holding company with $11.9 billion in assets and branches in Massachusetts, Rhode Island, and New York. This merger is targeted to be completed in the second half of 2025, subject to customary shareholder and regulatory approvals, and closing conditions.

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SUMMARY

Berkshire reported 2024 net income of $61 million, or $1.43 per share, compared to $70 million, or $1.60 per share, in 2023. The decrease in 2024 was due primarily to higher non-operating losses on the sale of securities.

The Company’s non-GAAP measure of operating income totaled $95 million, or $2.22 per share in 2024, compared to $93 million, or $2.14 per share in 2023. The 4% increase in operating EPS included the benefit of lower credit loss provision expense and lower non-interest expense, together with a 2% reduction in average diluted shares due to ongoing share repurchases.

Berkshire’s 2024 return on assets was 0.52%; the operating return on assets was 0.81%. The return on tangible common equity was 6.3%; the operating return on tangible common equity was 9.6%. The efficiency ratio measured 63.9%. The 2024 shareholder dividend was $0.72 per share in 2024. Period-end book value per share increased 8% to $25.15 and the non-GAAP measure of tangible equity to tangible assets increased 9% to $24.82 for the year.

Operating income and profitability improved sequentially in every quarter of the year, reflecting the cumulative benefit of the Company’s ongoing growth initiatives together with strategic optimization programs. Results also benefited from strong credit discipline, rigorous expense management, investments in new client-facing bankers and enhancements to the digital platform and consumer product offerings. Strategic initiatives included:

•Network Optimization: The Company consolidated four branches in 2023 and three branches in 2024, and additionally exited surplus back-office premises. Staff count was reduced through a workforce realignment in the first half of 2024. The sale of ten New York branches was completed in the third quarter of 2024. The sale concentrated the Bank’s overall geographic footprint and reduced certain expenses. With the branch sale and consolidations, Berkshire’s total branch count was reduced to 83 offices in New England and New York, including 16 offices in its Albany and Rome/Utica markets.

•Sales of Securities: Investment securities were sold in the fourth quarter of 2023 and first quarter of 2024. This allowed the Company to reposition its balance sheet to improve net interest income and to fund the branch sale. The securities were carried at fair value on the Company’s balance sheet and the non-operating losses on sale therefore had no effect on shareholders’ equity.

•Sales of Targeted Loan Portfolios: The Company sold most of its remaining Upstart consumer loan portfolio, which was in run-off mode. In addition to this, the Company also sold a package of $47 million of seasoned residential mortgages.

•Growth Initiatives: During 2024, the Company announced the recruitment of commercial deposit relationship managers and private bankers. Additionally, it announced the planned move and expansion of a Boston branch to bolster its commercial and private banking teams serving the Greater Boston market.

•Digital Enhancements: In the third quarter, the Bank launched Berkshire One, its innovative suite of digital-first banking solutions to complement its branch and concierge banking channels.

Including the impact of branch and loan sales, in 2024 the Company recorded 4% loan growth and a 2% deposit decrease. Excluding the impact of these sales, Berkshire produced 5% loan growth and 1% deposit growth in 2024.

Measures of asset quality remained favorable in 2024. Delinquent and non-performing loans were 0.52% of total period-end loans; this was the lowest quarterly level in nearly two decades. Net loan charge-offs measured 0.16% of average total loans in 2024, compared to 0.26% in the prior year.

Liquidity remained satisfactory in 2024, with the year-end loans to deposits ratio measuring 90% in 2024 compared to 85% in 2023. Total shareholders’ equity increased by $155 million, or 15%, to $1.2 billion during the year, including the proceeds of a $100 million common stock placement in December in conjunction with the merger agreement. The common equity Tier 1 capital ratio stood at 13.0% at year-end 2024.

In response to persistent high inflation, the Federal Reserve Board increased the maximum target federal funds rate beginning in the first quarter of 2022. The rate increased from 0.25% in the first quarter of 2022 to 5.50% in the third quarter of 2023, increasing in each sequential quarter. The target rate remained unchanged until September

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2024 and then was reduced by 1.00% in three steps to 4.50% at year-end. Some of the Bank’s loans are indexed to market rates and are the most immediately sensitive to rate changes. The upward move in federal funds in 2022 and 2023 contributed to inversion of the yield curve, which can negatively impact the net interest margin. This inversion began to correct in the second half of 2024, bringing more positive slope to portions of the yield curve.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2024 AND 2023

GAAP net income decreased $9 million, or 12%, year-over-year to $61 million in 2024 from $70 million in 2023. This was primarily due to a $25 million increase in non-operating securities losses offset in part by $16 million in non-operating gains on branch sales.

Berkshire improved operating profitability in 2024, with consecutive quarter-over-quarter improvement in operating results throughout the year. The non-GAAP measure of operating income increased $2 million, or 2%, to $95 million in 2024 from $93 million in 2023. A $17 million decrease in net interest income was mostly offset by an $8 million decrease in credit loss provision expense and an $8 million decrease in operating non-interest expense. The additional benefit of a $3 million increase in loan and SBA related revenue contributed to the $2 million increase in total operating income.

Effective January 1, 2024, the Company elected the proportional amortization method for its tax credit equity investments in public welfare investment projects which consist of Affordable Housing and New Market tax credit investments. This election had no material impact on net income. As a result of this election, certain noncash charges which had been posted to non-interest income are now posted to income tax expense. Therefore, non-interest income, total revenue, and tax expense are not comparable on a year-over-year basis. The amount charged against non-interest income in 2023 was $8.0 million compared to $2.5 million credited to non-interest income in 2024.

Year-to-year comparisons of revenue and expense were also impacted by the sale of ten branches toward the end of the third quarter and the sale of investment securities and reinvestment of proceeds into short-term investments in the first quarter to help fund the branch sale. The fourth quarter of 2024 was the first full quarter subsequent to completion of the branch sale.

Due to the change in tax accounting, the efficiency ratio was unchanged at 63.9% in both years. Excluding the impact of tax credits in 2023, the adjusted efficiency ratio was 65.3% in 2023. The improvement in 2024 compared to this adjusted ratio included the benefit of reinvestments of proceeds from securities sales and the reduction in operating expenses in 2024.

Net Interest Income

Net interest income and net interest margin may be affected by many factors, including: changes in average balances; interest rate fluctuations and the slope of the yield curve; sales of loans and securities; residential mortgage loan and mortgage-backed security prepayment rates; product pricing; competitive forces; the relative mix, repricing characteristics and maturity of interest-earning assets and interest-bearing liabilities; non-interest-bearing sources of funds; hedging activities; and asset quality.

Net interest income decreased in 2024 by $17 million, or 5%, to $352 million. The net interest margin decreased by 11 basis points, or 3%, to 316 basis points in 2024 from 327 basis points in 2023. Average earning assets decreased by $0.2 billion, or 2%, to $11.2 billion. The decrease in average earning assets was primarily due to the sale of lower yielding investment securities to fund the branch sales and to pay down higher cost borrowings.

The 11 basis point decrease in the net interest margin was primarily due to the 57 basis point increase in the cost of funds, partially offset by the 37 basis point increase in the yield on earning assets. These changes resulted from the ongoing impact of repricings following federal funds rate increases in the period from January 2022 to July 2024.

The increase in the cost of funds was driven by the 75 basis point increase in the cost of deposits. This reflected ongoing repricings in the higher rate and competitive market conditions, and mix shifts from lower cost transaction accounts into higher cost money market and time deposit accounts.

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The increase in the yield on earning assets was primarily due to a mix shift from lower yield investment securities to higher yielding loans and short term investments. The loan yield increased 18 basis points as a result of upward repricings of loans.

The net interest margin decreased sequentially on a quarterly basis in 2023, from 3.84% in the fourth quarter of 2022 to 3.11% in the fourth quarter of 2023. This primarily reflected deposit repricings catching up with loan repricings in 2022. It improved to 3.20% in the second quarter of 2024, including the benefit of securities sales and related balance sheet changes. The margin declined to 3.14% in the fourth quarter of 2024 as loan repricings adjusted quickly to the 100 basis reduction in the federal funds rate beginning in September. The margin measured 3.18% in December 2024, as deposit repricings began to accelerate. For the full year 2024, the net interest margin averaged 3.16%, down from 3.27% in 2023 due primarily to deposit repricings in the higher rate and competitive marketplace.

Non-Interest Income

Non-interest income was $48 million in 2024 and $43 million in 2023. As previously noted, due to the tax accounting methodology change, total non-interest income is not comparable between these years. This change is included in the category of other non-interest income, which increased by $12 million. Operating results benefited from a $3 million increase in revenues from loan related fees and gains on SBA loans. Non-interest income in 2024 included the $16 million gain on the branch sale and the $50 million loss on the first quarter sale of securities. In 2023, non-interest income included the $25 million loss on the fourth quarter sale of securities. The securities losses had no impact on total shareholders’ equity. These gains and losses are viewed by the Company as non-operating.

Provision for Credit Losses

Provision expense decreased year-over-year by $8 million, or 25%, to $24 million from $32 million. In part, this reflected a decrease in loan growth to 4% in 2024 from 8% in 2023. Additionally, it reflected an increase in the coverage ratio of the allowance for credit losses on loans to 1.22% at year-end 2024 compared to 1.17% at the prior year-end. Net loan charge-offs totaled $15 million in 2024 compared to $23 million in the prior year.

Non-Interest Expense

Non-interest expense decreased year-over year by $5 million, or 2%, to $296 million. The non-GAAP measure of operating non-interest expense decreased by $8 million, or 3%, to $287 million. This primarily reflected lower operating expenses due to branch sales and consolidations. Non-operating expenses of $9 million in 2024 and $6 million in 2023 included branch and facilities consolidations in both years, and 2024 expenses related to the pending merger.

The largest decrease in operating expense was occupancy and equipment expense, which decreased $4 million or 12%. This included the impact of four branch consolidations in 2023, three branch consolidations in 2024, and ten branches sold in 2024, together with dispositions of other excess properties. Of note, the sales of eight of the branches sold were completed near the end of the third quarter of 2024. All major categories of operating expenses declined year-over-year except for regulatory expense and compensation expense. The Company is focused on efficiencies to reduce overhead and to deepen its investment in frontline staff and customer engagement technology. Full year compensation expense increased 1% year-over-year. Fourth quarter compensation expense decreased 3% year-over-year. Year-end full time equivalent staff totaled 1,216 positions in 2024, a decrease of 124 positions, or 9%, from 1,340 positions at year-end 2023. This decrease included 40 positions which were transferred in the branch sale. All staff related to the ten branches sold were offered employment by the branch buyers. FTE staff was also reduced based on a workforce realignment in the first quarter of the year.

Income Tax Expense

As previously noted, income tax expense in 2024 is not comparable to 2023 and prior years due to the change in the accounting method for certain equity tax credit investments. In 2024, the effective income tax rate was 23%. Differences arising between Berkshire’s effective income tax rate and the U.S. federal statutory rate of 21% are primarily attributable to: (i) tax-exempt interest earned on certain investments; (ii) tax-exempt income from BOLI; (iii) non-deductible merger costs; and (iv) state income taxes.

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COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2024 AND DECEMBER 31, 2023

General

Total assets decreased $0.2 billion, or 1%, to $12.3 billion in 2024. A $0.4 billion decrease in investment securities primarily funded the $0.4 billion sale of deposits. Loan growth of $0.2 billion from business activities was primarily funded by deposit growth from business activities. A $100 million common stock issuance offset a decrease in borrowings. With the stock offering and reduction in assets, the ratio of equity to assets increased to 9.5% from 8.1%. Primarily as a result of the deposit sale, the ratio of loans/deposits increased to 90% from 85%

Investment Securities

Investment securities decreased $419 million, or 26%, to $1.2 billion during 2024. This was primarily due to the sale of lower yielding securities near the end of the first quarter. This improved the Company’s liquidity in advance of the branch sale and benefited earnings as the sale proceeds were used to pay down higher cost funds. The yield on the securities portfolio was 2.66% in the fourth quarter of 2024 compared to 2.40% in the fourth quarter of 2023, reflecting the sale of lower coupon securities and the benefit of higher interest rates in the second half of 2024. The unrealized loss on available for sale securities decreased by $47 million in 2024 to $142 million at year-end 2024 due to the $50 million loss realized on the sale of securities in the first quarter.

Loans

Total loans increased $345 million, or 4%, to $9.4 billion in 2024, including commercial loan growth totaling $433 million, or 7%, which was partially offset by a $99 million, or 22%, reduction in consumer loans. During the year, the Company sold $47 million in seasoned residential mortgages and $47 million in consumer loans. Additionally, the Company sold $50 million in residential mortgage and consumer loans as part of the branch sale. Adjusted for these loans sold, total loans increased 5% for the year 2024. The yield on total loans was 5.88% in the most recent quarter, compared to 5.97% in the final quarter of 2023. At year-end 2024, loans repricing within three months were 43% of total loans.

Year-end commercial loans were 67% of total loans at year-end 2024 compared to 65% in 2023. Commercial loan growth was recorded in all major categories of commercial loans, including a 13% increase in construction loans and an 11% increase in owner-occupied commercial real estate loans. Based on the supervisory definition of commercial real estate loans which excludes owner-occupied properties, the supervisory measure of commercial real estate loans to total bank regulatory capital measured 292% at period-end, compared to 286% at year-end 2023. The supervisory measure of construction loans to bank regulatory capital measured 54% and 51% at the above respective dates.

The Company has a diversified commercial real estate portfolio primarily located in suburban markets in its footprint. The commercial real estate loan portfolio increased $353 million, or 8%, to $4.8 million in 2024, and constituted 51% of the total loan portfolio at period-end. There were $1.2 million in net charge-offs of commercial real estate loans in 2024, compared to net recoveries of $0.8 million in 2023. Non-accruing loans were 0.22% of total commercial real estate loans at period-end compared to 0.10% at year-end 2023. For commercial real estate loans, year-end loans rated as criticized increased to 2.93% from 2.44% while loans rated as classified decreased to 1.19% from 1.94% of total loans.

At period-end, the largest property type concentrations (over 5% of the portfolio and excluding construction loans) were retail trade (21%), multifamily (13%), office (10%), healthcare (9%), and hospitality (7%). The largest category, retail trade, was primarily comprised of properties anchored by strong grocery and big box tenants in suburban areas – with no significant tenant concentrations, and negligible indoor mall exposure. The $507 million office portfolio was approximately 71% composed of Class A properties and approximately 79% of the office portfolio was maturing after 2025. Boston properties were approximately 16% of the office portfolio, with no high-rise office buildings. Construction loans consisted primarily of multifamily (approximately 49%) and health care (approximately 13%) at period-end.

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Residential mortgage loans comprised 30% of year-end 2024 loans and were up $11 million to $2.8 billion during the year. Consumer loans comprised 4% of loans and decreased 22% to $0.3 billion during the year. This was largely due to targeted run-off and sales of unsecured consumer installment loans.

Allowance for Credit Losses on Loans

Loan performance indicators remained at historically favorable levels in 2024. Total delinquent and non-performing loans measured 0.52% of loans at period-end, the lowest level in nearly two decades. It included non-performing loans measuring 0.26% of total loans at that date.

Net loan charge-offs totaled $15 million, measuring 0.16% of average loans in 2024 and totaled $23 million, measuring 0.26% of average loans in 2023. Consumer loan net charge-offs totaled $9 million in 2024 and $8 million in 2023. Excluding consumer loans, charge-offs of all other loans totaled $5 million and $14 million, measuring 0.06% and 0.17% of all other average loans in those respective years.

Year-end criticized loans/total loans decreased to 2.62% of total loans from in 2024 from 2.71% in 2023, including a reduction in classified loans to 1.20% of loans from 1.69%. Potential problems loans, which are defined as accruing classified loans, decreased to $88 million from $132 million. Improvements in borrower risk ratings have generally reflected borrowers adjusting operations to mitigate the impact of higher interest rates on variable rate loans and to the impact of changing supply/demand conditions.

The allowance for credit losses on loans increased by $9 million, or 9%, to $115 million during 2024. In addition to reflecting the 4% loan growth, this also reflected an increase in the ratio of the allowance to total loans to 1.22% from 1.17%. The increase in reserve coverage reflected increases in all major loan categories except non-owner occupied commercial real estate and other consumer loans. Regarding the former, coverage decreased to 1.39% from 1.47%. Regarding other consumer loans, coverage decreased to 5.11% from 5.46% and the total other consumer allowance decreased by $6 million to $3 million primarily as a result of the sale of Upstart loans. The remaining Upstart loan balance was $7.5 million at year-end 2024. The major contributor to the increase in the total allowance was the commercial and industrial loan portfolio, which accounted for $13 million, or 53%, of the total $24 million credit loss provision expense in 2024. Reflecting higher net loan losses of $6 million in this portfolio, the year-end allowance coverage of these loans was 1.78% at year-end 2024 compared to 1.37% at year-end 2023. Factors contributing to higher coverage in most portfolios included longer expected loan lives and increased qualitative reserves related to macroeconomic and federal policy uncertainties.

Deposits and Borrowings

For the year 2024, total deposits decreased by $258 million, or 2%, to $10.4 billion. This included the sale of $383 million in deposits due to the sale of ten branches in the third quarter. Average deposits in the fourth quarter of 2024 were $9.7 billion, decreasing $277 million, or 3%, from the same quarter of 2023 due to lower average transaction account balances. Excluding the deposits sold, average fourth quarter deposits increased $106 million, or 1%, year-over-year. In recent years, year-end balances included higher overnight balances related to the Company’s payroll deposit service.

The branch sale included $383 million in deposits, consisting of $77 million of non-interest bearing deposits, $25 million of NOW deposits, $77 million of money market deposits, $45 million of savings deposits, and $159 million of time deposits.

Fourth quarter average non-interest bearing deposits were 24% of average deposits in 2024 compared to 25% in 2023. All major categories of average deposits decreased between these two periods, primarily in transaction deposits. The fourth quarter cost of deposits was 2.30% in 2024 compared to 2.11% in 2023. The fourth quarter of 2024 marked the first decline in the cost of deposits since the first quarter of 2022, reflecting market changes following the reduction in the federal funds rate and other market interest rates beginning in the third quarter of 2024.

Total borrowings decreased year-over year by $68 million, or 14%, to $438 million at year-end 2024. The fourth quarter cost of borrowings was 5.20% in 2024 compared to 5.45% in 2023.

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Derivative Financial Instruments

The notional amount of derivative financial instruments totaled $4.9 billion at period-end, compared to $4.8 billion at year-end 2023. The net fair value of these instruments at period-end was a liability of $31 million, compared to $30 million at year-end 2023. Included in derivative financial instruments are $800 million in cash flow hedges on commercial loans, of which $275 million mature in 2025, $425 million mature in 2026, and $100 million mature in 2027. The Company recorded a $632 thousand charge to interest expense for the realized loss on cash flow hedging instruments in both 2024 and 2023.

Shareholders’ Equity and Dividends

Total shareholders' equity increased $155 million, or 15%, to $1.2 billion in 2024. This included the benefit of the $100 million common stock placement in December 2024. Equity also benefited from operating income of $95 million and was reduced by $31 million in dividends declared and $18 million in stock repurchases. The $50 million loss on securities recorded in the first quarter of 2024 had no impact on shareholders’ equity, as the after-tax impact on retained earnings was offset by a reduction in the accumulated other comprehensive loss component of equity.

Book value per share increased in 2024 by $1.88, or 8%, to $25.15 at year-end 2024 compared to $23.27 at year-end 2023. The non-GAAP measure of tangible book value per share increased by $2.00, or 9%, to $24.82 from $22.82. Share repurchases in 2024 were accretive to book value measures, based on the average repurchase price of approximately $21.94. The share issuance in December was priced at $29.00 per share.

Reflecting primarily the increase in equity, the year-end ratio of equity to assets increased to 9.5% from 8.1% and the non-GAAP measure of tangible common equity to tangible assets increased to 9.4% from 8.0%. The common equity Tier 1 capital ratio increased to 13.0% from 12.0%.

LIQUIDITY AND CASH FLOWS

Liquidity is defined as the ability to generate sufficient cash flows to meet all present and future funding requirements at reasonable costs for the Company, including the Bank. Liquidity management addresses both the Company’s ability to fund new loans and investments pursuant to commitments and as opportunities arise, to meet customer deposit withdrawals and to repay borrowings and subordinated notes as they mature. The Company views its liquidity as satisfactory for current conditions as well as for stressed scenarios in its liquidity testing models.

At year-end 2024, liquid assets totaling $1.8 billion included cash and equivalents totaling $1.1 billion and securities available for sale totaling $0.7 billion. At year-end 2023 liquid assets were $2.2 billion, including $1.2 billion in cash and equivalents and $1.0 billion in securities available for sale. Year-end liquidity is elevated due to overnight payroll related deposit balances. Securities include assets pledged to support borrowings.

At year-end 2024 wholesale funds, consisting of borrowings and brokered deposits, totaled $0.9 billion, compared to $1.0 billion at year-end 2023.

Unused borrowing availability at period-end from the Federal Home Loan Bank of Boston “FHLBB” and the Federal Reserve Bank of Boston (“FRB”) totaled $4.1 billion at year-end 2024, compared to $4.0 billion at year-end 2023. Borrowings from these sources are supported by collateral, to the extent utilized. Cash balances at the holding company totaled $164 million at period-end.

During 2024, total cash and equivalents decreased to $1.1 billion from $1.2 billion. The primary sources of funds were securities sales, together with operating activities and the stock issuance. The primary uses of funds were the branch sale and loan growth.

CAPITAL RESOURCES

Please see the Note 17 - Shareholders’ Equity and Earnings per Common Share of the Comparison of Financial Condition for a discussion of shareholders’ equity together with the note on Shareholders' Equity in the consolidated financial statements.

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Additional information about capital resources and regulatory capital is contained in the notes to the consolidated financial statements and in Item 1 of this report.

The Company’s goal is to maintain sound capitalization and use capital generation to support organic growth and shareholder distributions in the form of dividends and stock repurchases. The Company’s goal is to maintain a “well-capitalized” regulatory designation under projected and stressed financial projections.

As a result of rising interest rates, available for sale bond portfolios in banks are generally subject to unrealized losses which result in charges against accumulated other comprehensive income (“AOCI”) and reduce the book value of shareholders’ equity. Like many of its peers, the Company utilizes an option in reporting its regulatory equity which excludes changes in AOCI in the calculation of regulatory capital. Reductions in bond valuations due to changes in market interest rates are reversed as bonds approach maturity. These reversals are accreted to AOCI over time, restoring the book value of equity. The balance of AOCI was a loss of $106 million at period-end, compared to a loss of $143 million at year-end 2023. This reduction was primarily due to the after-tax realization of $50 million in losses with the securities sale in the first quarter of 2024.

While the Company monitors the book value of equity and related metrics, it primarily manages capital based on regulatory capital measures, with a focus on the common equity Tier 1 capital ratio. This ratio measured 13.0% at year-end 2024 compared to 12.0% at year-end 2023. This improvement included the benefit of the $100 million capital placement in December 2024.

In acting as a source of strength for the Bank, the Company relies in the long term on capital distributions from the Bank in order to provide operating and capital service for the Company, which in turn can access national financial markets to provide financial support to the Bank. Capital distributions from the Bank to the parent company presently require approval by the FDIC.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies and modifications to significant accounting policies made during the year are described in Note 1 to the financial statements. The preparation of the financial statements is in accordance with GAAP and general practices applicable to the financial services industry. This preparation requires management to make estimates, assumptions, and judgements that affect the amounts reported in the financial statements and accompanying notes. The judgment and assumptions made are based upon historical experience, future forecasts, or other factors that management believes to be reasonable under the circumstances. Actual results could differ from those estimates, assumptions, and judgements.

Not all significant accounting policies require management to make difficult, subjective or complex judgments. Certain estimates inherently have a greater reliance on the use of assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. The following significant accounting policies are considered most critical in that they are important to the Company’s financial condition and results, and they require management’s subjective and complex judgment as a result of the need to make estimates about the effects of matters that are inherently uncertain. Both of these most critical accounting policies were significant in determining income and financial condition based on events in 2024.

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Allowance for Credit Losses on Loans

The allowance for credit losses on loans (“ACLL”) represents management’s estimate of expected credit losses over the expected contractual life of our loan portfolio. Determining the appropriateness of the ACLL is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the ACLL in those future periods.

The estimate of expected credit losses is based on relevant information about current conditions, past events, and reasonable and supportable forward-looking forecasts regarding collectability of the reported amounts. In order to estimate the expected credit losses for loans evaluated on a pooled basis, the Company utilizes a static pool migration methodology which calculates a historical loss rate for each of the identified loan segments. The historical loss rates are then adjusted for current and asset specific characteristics (also referred to as qualitative adjustments) and for expected changes to current conditions over the reasonable and supportable forecast period (also referred to as forecast). The appropriateness of the ACLL could change significantly because current economic conditions and forecasts can change and future events are inherently difficult to predict. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs considered may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. One of the most significant judgments used in determining the allowance for credit losses is the macroeconomic forecast provided by a third party. Changes in the macroeconomic forecast, especially for the national unemployment rate, could significantly impact the calculated estimated credit losses.

While management utilizes its best judgment and information available, the ultimate adequacy of our ACLL is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, and changes in interest rates. For detailed information on the ACLL see Note 1- Summary of Significant Accounting Policies and Note 5 – Loans and Related Allowance for Credit Losses.

Fair Value Measurements

The Company uses fair value measurements to determine fair value disclosures and to record fair value adjustments to certain assets and liabilities, such as interest rate swaps, individually evaluated loans, securities available for sale, and derivatives. Our fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, from time to time, the Company may be required to record certain assets at fair value on a non-recurring basis, such as certain individually evaluated loans held for investment and capitalized servicing rights. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower-of-cost or market accounting or other accounting standards.

Management has established and documented a process for determining fair value. The use of observable inputs is maximized and the use of unobservable inputs is minimized when developing fair value measurements. Whenever there is no readily available market data, management uses its best estimate and assumptions in determining fair value, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if other assumptions had been used, our recorded earnings or disclosures could have been materially different from those reflected in these financial statements. For detailed information on our use of fair value measurements and our related valuation methodologies, see Note 1 – Summary of Significant Accounting Policies and Note 19 – Fair Value Measurements for more information.

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ENTERPRISE RISK MANAGEMENT

Other sections of this report on Form 10-K include discussion of market risk and risk factors. Risk management is overseen by the Company’s Chief Risk Officer, who reports directly to the CEO. This position oversees risk management, credit, loan review, compliance, data governance, 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 & Compliance Committee.

The Company includes recessionary/inflationary risk overlays on all of the material business risks to capture the uncertainties of the economic environment. The Company has also developed recession toolkits and playbooks that outline mitigating factors and actions that strive to minimize losses under such scenarios. Both of these items are addressed throughout the assessments and dashboards provided to the above Committees.

The high level corporate risk assessment focuses on the following material business risks: credit risk, interest rate risk, price risk, liquidity risk, operational risk, compliance risk, strategic risk, and reputation risk, with the credit risk category having the highest weighting. For all material business risks, residual risk was viewed as medium/low to medium due to mitigating controls functioning in the Company. In 2024, price risk remained elevated in relation to the corporate appetite due to the impact of higher interest rates on the behavior and value of various interest sensitive instruments. Residual price risk was viewed as medium including the impact of mitigating factors and management actions in the risk management environment. Emerging risks affecting business risks included merger execution risk, fraud risk due to rising thefts targeting electronic platforms, and IT and cyber risks due to rising external threats and the emergence of artificial intelligence technology.

CORPORATE RESPONSIBILITY & SUSTAINABILITY

The Company’s longstanding commitment to operating responsibly and sustainably is interwoven into the company’s vision, mission, business practices, and strategic goals. Berkshire’s integrated approach to strong governance and managing environmental and social externalities helps reduce risk and unlock new business opportunities to create an ecosystem of positive impact and value, which in turn supports Berkshire’s commercial performance, creating capacity to invest more in its business, employees, customers, shareholders and communities.

The Company maintains a comprehensive governance system to oversee sustainability matters including a dedicated committee of its Board of Directors and a dedicated management committee, along with a network of policies including its Responsible & Sustainable Business Policy and Climate Risk Management Program. Berkshire was one of the first banks in the country to establish a dedicated committee of its Board of Directors to oversee these matters and became the first public U.S. community bank holding company with under $150 billion in assets to issue and successfully allocate a Sustainability Bond with a $100 million issuance.

Berkshire remains a leader among community banks in sustainability performance and regularly engages directly with its stakeholders to share information about its progress. The Company’s annual Sustainability Report, which is aligned with disclosure standards from Sustainability Accounting Standards Board (“SASB”) and Task Force on Climate-Related Financial Disclosure ("TCFD"), detail the Company's programs and performance.

Climate Impact

Climate change manifesting in the form of both physical or transition risks along with the Company’s mitigating practices could adversely, either directly or indirectly, affect Berkshire’s operations, businesses, customers, communities, and its stakeholders. As the transition to a low-carbon economy continues, new policy emerges, and market dynamics shift, Berkshire expects that its efforts to manage its environmental footprint, mitigate the risks associated with climate change, and support the transition will allow it to strengthen its long-term positioning. The Company’s Board of Directors Corporate Responsibility & Culture Committee provides oversight of sustainability and climate matters. Management and the board evaluate climate related risks and opportunities and incorporate the results of risk assessments and discussions into strategic planning, product development, programming and relevant risk mitigating measures. The Company expects to evolve its practices to align with risks, current and expected regulations as well as the size, scope, and complexity of its operations. Further details on Berkshire’s practices can be found in its most recent Sustainability Report.

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Opportunity for All

Maintaining an inclusive workplace is essential to business success and an important enabler to advancing the Company’s strategic goals. By embracing and leveraging diverse backgrounds, cultures, skills, ideas and experiences, Berkshire is driving innovation, better decision-making and enhancing the bank’s ability to serve the evolving needs of its customers and communities. Berkshire remains committed to creating a culture of inclusivity in its workplace where every employee feels respected, valued and empowered to contribute their unique talents to the Company’s success.

Berkshire seeks to attract, engage and retain individuals, businesses and suppliers from a wide range of backgrounds, and experiences so that the workforce, clients and supplier base reflect the communities in which it operates. The Company approaches its efforts with strong governance practices, provides professional development for its employees, engages with its communities and offers employee resource groups, all aimed at ensuring accessibility and opportunity for all.

Awards & Recognition

Berkshire is proud to be recognized for its performance with local, regional, national, and international awards including:

•American Bankers Association Community Commitment Award

•America’s Most Trustworthy Companies – Newsweek

•America’s Best Regional Banks – Newsweek

•America’s Greatest Workplaces – Newsweek

•America’s Best Mid-Size Companies – TIME

•Communitas Award for Leadership in Corporate Social Responsibility

•Boston Business Journal Top Charitable Contributor

•Human Rights Campaign Equality 100

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