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EASTERN BANKSHARES, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including, but not limited to, those discussed under Part I, Item 1A, "Risk Factors" appearing elsewhere in this Annual Report on Form 10-K.
Overview
We are a bank holding company, and our principal subsidiary, Eastern Bank, is aMassachusetts -chartered bank that has served the banking needs of our customers since 1818. Our business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services primarily to retail, commercial and small business customers. We had total assets of$23.5 billion and$16.0 billion atDecember 31, 2021 and 2020, respectively. We are subject to comprehensive regulation and examination by theMassachusetts Commissioner of Banks, theFederal Deposit Insurance Corporation ("FDIC"), theFederal Reserve Board and theConsumer Financial Protection Bureau . We manage our business under two business segments: our banking business, which contributed$531.1 million , which is 84.5%, of our total income for the year endedDecember 31, 2021 , and our insurance agency business, which contributed$97.2 million , which is 15.5%, of our total income for the year endedDecember 31, 2021 . Our banking business consists of a full range of banking, lending (commercial, residential and consumer), savings and small business offerings, including our wealth management and trust operations that we conduct through our Eastern Wealth Management division. Our insurance agency business consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients. See the section of this Annual Report on Form 10-K titled "Business" for further discussion of our banking business and insurance agency business. Net income for the year endedDecember 31, 2021 computed in accordance with GAAP was$154.7 million , as compared to$22.7 million for the year endedDecember 31, 2020 . Net income for years endedDecember 31, 2021 and 2020 included items that our management considers noncore, which are excluded for purposes of assessing operating earnings. Operating net income, a non-GAAP financial measure, for year endedDecember 31, 2021 was$165.9 million compared to operating net income of$102.1 million for year endedDecember 31, 2020 , representing a 62.4% increase. This increase was largely driven by a decrease in the provision for allowance for loan losses which is attributable to greater prior period provisions that resulted from the impact of the COVID-19 pandemic on the Bank's borrowers during such periods, and current period releases of allowance for loan losses totaling$9.7 million . See "Non-GAAP Financial Measures" below for a reconciliation of net operating earnings to GAAP net income. OnNovember 12, 2021 , we acquired Century, which operated 29 banking offices in 21 cities and towns inMassachusetts and southernNew Hampshire for$641.9 million in cash. Century had total assets of approximately$6.8 billion at the time of our acquisition, at fair value and excluding goodwill and intangible assets. Outlook and Trends Interest Rates We expect increases in the federal funds rate in 2022 which is anticipated to be beneficial to our net interest income and net interest margin. In its statement released onJanuary 26, 2022 , theFederal Open Market Committee stated that it would soon be appropriate to raise the target range for the federal funds rate above the current range of 0.0% to 0.25% in response to inflation that is above their 2.0% target and a strong labor market. Approximately 40% of our loans are indexed to a market rate that is expected to reprice along with the federal funds rate. Refer to the section titled "Management of Market Risk" within this Item 7 for additional discussion including the estimated change to net interest income which assumes a variety of immediate and parallel changes in theU.S. Treasury yield curve. CECL Adoption We adopted the current expected credit losses accounting methodology (ASU 2016-13), commonly referred to as the "CECL standard" onJanuary 1, 2022 . The cumulative day one impact is estimated to be an increase of between$25.0 million and$30.0 million to the allowance which is attributable to the change in accounting methodology for estimating the allowance for credit losses from our adoption of ASU 2016-13 and includes the impact of loans acquired from Century. The portion of the total estimated impact that is attributable to loans acquired from Century is estimated to be between$25.0 million and$28.0 million . The anticipated increase in the allowance is expected to be a result of a) the change in accounting treatment 61 -------------------------------------------------------------------------------- for loans acquired from Century; and b) transitioning from an "incurred loss" model, which estimates the allowance for loan losses based upon current known and inherent losses within our portfolio, to an "expected loss" model, which estimates the allowance for credit losses based upon losses expected to be incurred over the life of loans in our portfolio. For further information, refer to Note 2, "Summary of Significant Accounting Policies" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.
Paycheck Protection Program Loans
We are a participating lender in the SBA's Paycheck Protection Program. We concluded PPP loan originations in the second quarter of 2021 as the SBA announced inMay 2021 that PPP funds were exhausted. The majority of our PPP borrowers are existing commercial and small business borrowers, non-profit customers, retail banking customers and clients of our Eastern Wealth Management division andEastern Insurance Group . •During the year endedDecember 31, 2021 , we originated approximately 6,600 PPP loans totaling$543.2 million . These loans have a maturity of five years. Fees received from the SBA and direct loan origination costs are being deferred over the five-year loan term. ThroughDecember 31, 2021 , we had received$28.7 million in fees from the SBA and had deferred$4.0 million in direct loan origination costs related to 2021 originations. •During the year ended year endedDecember 31, 2020 , we originated approximately 8,900 PPP loans totaling$1.2 billion . The majority of these loans have a maturity of two years. Fees received from the SBA and direct loan origination costs are being deferred over the loan term, which is generally two years. During the year endedDecember 31, 2020 , we received$37.1 million in fees from the SBA and deferred$4.6 million in direct loan origination costs. During the year endedDecember 31, 2021 , certain 2020 originations were modified and we received a nominal amount of additional fees from the SBA.
•Net PPP fee accretion (fee accretion less cost amortization) for all PPP loans
for the year ended
In connection with the Century acquisition, we acquired Century's PPP loans with a remaining unpaid principal balance of$73.7 million at the time of our acquisition. In accordance with ASC 805, Business Combinations (commonly referred to as "purchase accounting"), remaining unearned fees received from the SBA and unamortized direct loan origination costs associated with these loans were written off with a corresponding adjustment to goodwill. The net purchase discount associated with these loans was$1.1 million , of which$0.1 million was accreted into income during the year endedDecember 31, 2021 . 62 -------------------------------------------------------------------------------- The following table shows certain data related to PPP originations by period. This table is specific to Eastern PPP loan originations and does not include data related to PPP loans that we acquired from Century: PPP Loans Originated During the Year Ended December 31, 2021 2020 Total (Dollars in thousands) Number of loans originated 6,628 8,902 15,530 Original balance of loans originated$ 543,212 $ 1,167,137 $ 1,710,349 Current balance of loans originated in respective periods 254,725 12,746 267,471 Total SBA fees received(1) 28,699 37,249 65,948 SBA fees recognized in interest income related to loans originated in respective periods(2) 18,227 37,166 55,393
Unaccreted SBA fees related to loans originated in
respective periods
10,472 84 10,556
(1)Total SBA fees received on 2020 originations includes additional fees
received from the SBA in 2021 for originations that were modified in 2021.
(2)Reflects life-to-date accretion.
The following table shows certain data related to the remaining balance of our aggregate PPP loans (Eastern originations and Century originations) as ofDecember 31, 2021 : Number Loan Size Loan Balance of Loans (Dollars in thousands)$0 to$50 thousand $ 37,513 2,234$50 thousand to$150 thousand 45,097 512$150 thousand to$1 million 165,346 500$1 million to$2 million 45,851 32$2 million to$5 million 37,578 15 Over$5 million - - Total$ 331,385 3,293
The following table shows the balance of our PPP loans (Eastern originations and
Century originations) by industry as of
Industry Loan Balance Number of Loans
(Dollars in thousands)
Accommodation & food services $ 84,739 469
Construction 44,021 449
Health care & social assistance 34,735
251
Professional, scientific & technical services 28,368 426 Other services 35,964 480 Manufacturing 17,659 117 Retail trade 13,191 291 Administrative & support 17,368 180 Wholesale trade 9,626 74 Transportation & warehousing 12,912 169 Arts, entertainment & recreation 9,912 104 All other 22,890 283 Total$ 331,385 3,293 63
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Non-GAAP Financial Measures
We present certain non-GAAP financial measures, which management uses to
evaluate our performance, and which exclude the effects of certain transactions,
non-cash items and GAAP adjustments that we believe are unrelated to our core
business and are therefore not necessarily indicative of our current performance
or financial position. Management believes excluding these items facilitates
greater visibility for investors into our core businesses as well as underlying
trends that may, to some extent, be obscured by inclusion of such items in the
corresponding GAAP financial measures.
There are items in our financial statements that impact our results but which we
believe are unrelated to our core business. Accordingly, we present operating
net income, noninterest income on an operating basis, noninterest expense on an
operating basis, total operating revenue, operating earnings per share, and the
operating efficiency ratio, each of which excludes the impact of such items
because we believe such exclusion can provide greater visibility into our core
business and underlying trends. Such items that we do not consider to be core to
our business include (i) income and expenses from investments held in rabbi
trusts, (ii) gains and losses on sales of securities available for sale, net,
(iii) gains and losses on the sale of other assets, (iv) rabbi trust employee
benefits, (v) impairment charges on tax credit investments and associated tax
credit benefits, (vi) expenses indirectly associated with our IPO, (vii) other
real estate owned ("OREO") gains, (viii) merger and acquisition expenses, (ix)
the stock donation to the Eastern Bank Foundation (formerly known as the Eastern
Bank Charitable Foundation , or the "Foundation") in connection with our
mutual-to-stock conversion and IPO, and (x) settlement of putative consumer
class action litigation matters related to overdraft and non-sufficient fund
fees, and associated settlement expenses.
We also present tangible shareholders' equity, tangible assets, the ratio of
tangible shareholders' equity to tangible assets, and tangible book value per
share, each of which excludes the impact of goodwill and other intangible
assets, as we believe these financial measures provide investors with the
ability to further assess our performance, identify trends in our core business
and provide a comparison of our capital adequacy to other companies. We have
included the tangible ratios because management believes that investors may find
it useful to have access to the same analytical tools used by management to
assess performance and identify trends.
Our non-GAAP financial measures should not be considered as an alternative or
substitute to GAAP net income, or as an indication of our cash flows from
operating activities, a measure of our liquidity or an indication of funds
available for our cash needs. An item which we consider to be non-core and
exclude when computing these non-GAAP financial measures can be of substantial
importance to our results for any particular period. In addition, our
methodology for calculating non-GAAP financial measures may differ from the
methodologies employed by other companies to calculate the same or similar
performance measures and, accordingly, our reported non-GAAP financial measures
may not be comparable to the same or similar performance measures reported by
other companies.
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The following table summarizes the impact of non-core items recorded for the
time periods indicated below and reconciles them to the most directly comparable
GAAP financial measure.
For the Year Ended
2021 2020 2019
(Dollars in thousands, except per share data)
Net income (GAAP) $ 154,665 $ 22,738 $ 135,098
Non-GAAP adjustments:
Add:
Noninterest income components:
Income from investments held in rabbi trusts (10,217) (10,337) (9,866)
Gains on sales of securities available for sale, net (1,166) (288) (2,016)
(Gains) losses on sales of other assets (571) 20 15
Noninterest expense components:
Rabbi trust employee benefit expense 5,515 4,789 4,604
Impairment (reversal) charge on tax credit investments (170) 10,779 -
Indirect IPO costs (1) - 1,199 -
Gain on sale of other real estate owned (87) (606) -
Merger and acquisition expenses 35,460 90 -
Settlement and expenses for putative consumer class
action matters
3,325 - - Stock donation to the Eastern Bank Foundation - 91,287 - Total impact of non-GAAP adjustments 32,089 96,933 (7,263)
Less net tax benefit (expense) associated with non-GAAP
adjustment (2)
20,869 17,537 (1,861) Non-GAAP adjustments, net of tax $ 11,220$ 79,396 $ (5,402) Operating net income (non-GAAP) $ 165,885$ 102,134 $ 129,696 Weighted average common shares outstanding during the period: Basic 172,192,336 171,812,535 - Diluted 172,252,057 171,812,535 -
Earnings per share, basic $ 0.90$ 0.13 n.a. Earnings per share, diluted $ 0.90 0.13 n.a. Operating earnings per share, basic (non-GAAP) $ 0.96$ 0.59 n.a. Operating earnings per share, diluted (non-GAAP) $ 0.96 0.59 n.a.
(1)Reflects costs associated with the IPO that are indirectly related to the IPO
and were not recorded as a reduction of capital.
(2)The net tax benefit (expense) associated with these items is determined by assessing whether each item is included or excluded from net taxable income and applying our combined statutory tax rate only to those items included in net taxable income. The 2020 net tax benefit amount reflects the impact of the$12.0 million valuation allowance associated with the stock donation to theEastern Bank Foundation . The 2021 net tax benefit amount reflects the impact of the reversal of$11.3 million of the$12.0 million valuation allowance associated with the stock donation to theEastern Bank Foundation . 65 -------------------------------------------------------------------------------- The following table summarizes the impact of non-core items with respect to our total revenue, noninterest income, noninterest expense and the efficiency ratio, which reconciles to the most directly comparable respective GAAP financial measure, for the periods indicated: For the Year Ended December 31, 2021 2020 2019 2018 2017 Net interest income (GAAP)$ 429,827 $ 401,251 $ 411,264 $ 390,044 $ 338,514 Add: Tax-equivalent adjustment (non-GAAP) 6,093 5,472 5,254 5,696 10,607 Fully-taxable equivalent net interest income (non-GAAP) 435,920 406,723 416,518 395,740 349,121 Noninterest income (GAAP) 193,155 178,373 182,299 180,595 197,727
Less:
Income (loss) from investments held in rabbi trusts 10,217 10,337 9,866 (1,542) 6,587 Gains on sales of securities available for sale, net 1,166 288 2,016 50 11,356 Gains (losses) on sales of other assets 571 (20) (15) 1,989 6,075 Noninterest income on an operating basis (non-GAAP) 181,201 167,768 170,432 180,098 173,709 Noninterest expense (GAAP)$ 443,956 $ 504,923 $ 412,684 $ 397,928 $ 389,413 Less: Rabbi trust employee benefit expense (income) 5,515 4,789 4,604 (847) 2,888 Impairment (reversal) charge on tax credit investments (170) 10,779 - - - Indirect IPO costs (1) - 1,199 - - - Merger and acquisition expenses 35,460 90 - 244 149 Settlement and expenses for putative consumer class action matters 3,325 - - - - Stock donation to the Eastern Bank Foundation - 91,287 - - -
Plus:
Gain on sale of other real estate owned 87 606 - - - Noninterest expense on an operating basis (non-GAAP)$ 399,913 $ 397,385 $ 408,080 $ 398,531 $ 386,376 Total revenue (GAAP)$ 622,982 $ 579,624 $ 593,563 $ 570,639 $ 536,241 Total operating revenue (non-GAAP)$ 617,121 $ 574,491 $ 586,950 $ 575,838 $ 522,830 Ratios Efficiency ratio (GAAP) 71.26 % 87.11 % 69.53 % 69.73 % 72.62 % Operating efficiency ratio (non-GAAP) 64.80 % 69.17 % 69.53 % 69.21 % 73.90 %
(1)Reflects costs associated with the IPO that are indirectly related to the IPO
and were not recorded as a reduction of capital.
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The following table summarizes the calculation of our tangible shareholders'
equity, tangible assets, the ratio of tangible shareholders' equity to tangible
assets, and tangible book value per share, which reconciles to the most directly
comparable respective GAAP measure, as of the dates indicated:
As of December 31,
2021 2020 2019 2018 2017
(In thousands, except per share data)
Tangible shareholders' equity:
Total shareholders' equity (GAAP) $ 3,406,352 $ 3,428,052
Less: Goodwill and other intangibles 649,703
376,534 377,734 381,276 373,042 Tangible shareholders' equity (non-GAAP) 2,756,649 3,051,518 1,222,419 1,051,865 957,472 Tangible assets: Total assets (GAAP) 23,512,128 15,964,190 11,628,775 11,372,287 10,873,073 Less: Goodwill and other intangibles 649,703 376,534 377,734 381,276 373,042 Tangible assets (non-GAAP)$ 22,862,425 $ 15,587,656
Shareholders' equity to assets ratio
(GAAP)
14.5 % 21.5 % 13.8 % 12.6 % 12.2 % Tangible shareholders' equity to tangible assets ratio (non-GAAP) 12.1 % 19.6 % 10.9 % 9.6 % 9.1 % Book value per share: Common shares issued and outstanding 186,305,332 186,758,154 - - - Book value per share (GAAP)$ 18.28 $ 18.36 $ - $ - $ - Tangible book value per share (non-GAAP)$ 14.80 $ 16.34 $ - $ - $ - Financial Position Summary of Financial Position As of December 31, Change 2021 2020 Amount ($) Percentage (%) (Dollars in thousands) Cash and cash equivalents$ 1,231,792 $ 2,054,070 $ (822,278) (40.0) % Securities available for sale 8,511,224 3,183,861 5,327,363 167.3 % Loans, net of allowance for loan losses 12,157,281 9,593,958 2,563,323 26.7 % Federal Home Loan Bank stock 10,904 8,805 2,099 23.8 % Goodwill and other intangible assets 649,703 376,534 273,169 72.5 % Deposits 19,628,311 12,155,784 7,472,527 61.5 % Borrowed funds 34,278 28,049 6,229 22.2 % Cash and cash equivalents Total cash and cash equivalents decreased by$0.8 billion , or 40.0%, to$1.2 billion atDecember 31, 2021 from$2.1 billion atDecember 31, 2020 . This decrease was primarily due to available for sale security purchases partially offset by deposit growth. 67 --------------------------------------------------------------------------------
Securities
Our current investment policy authorizes us to invest in various types of investment securities and liquid assets, includingU.S. Treasury obligations, securities of government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate notes, asset-backed securities and municipal securities. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk investment products. We typically invest in the following types of securities:U.S. government securities: AtDecember 31, 2021 and 2020 ourU.S. government securities consisted ofU.S. Agency bonds,U.S. Treasury securities andSmall Business Administration pooled securities. We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes, and as collateral for interest rate derivative positions.U.S. Agency bonds include securities issued by Fannie Mae, Freddie Mac, theFederal Home Loan Bank , and theFederal Farm Credit Bureau . Mortgage-backed securities: We invest in residential and commercial mortgage-backed securities insured or guaranteed by Freddie Mac,Ginnie Mae or Fannie Mae, including collateralized mortgage obligations. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac or Fannie Mae. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. State and municipal securities: We invest in fixed rate investment grade bonds issued primarily by municipalities in our local communities withinMassachusetts and by theCommonwealth of Massachusetts . The market value of these securities may be affected by call options, long dated maturities, general market liquidity and credit factors. The Risk Management Committee of our Board of Directors is responsible for approving and overseeing our investment policy, which it reviews at least annually. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns and market risk considerations. 68 --------------------------------------------------------------------------------
The following table shows the fair value of our securities by investment
category as of the dates indicated:
Securities Portfolio Composition
As of December 31,
2021 2020
(In thousands)
Available for sale securities:
Government-sponsored residential mortgage-backed securities $ 5,524,708 $ 2,148,800
Government-sponsored commercial mortgage-backed securities 1,408,868 17,081
U.S. Agency bonds 1,175,014 666,709
U.S. Treasury securities 88,605 70,369
State and municipal bonds and obligations 280,329 280,902
Small Business Administration pooled securities 32,103 -
Other debt securities 1,597 -
Total $ 8,511,224 $ 3,183,861
The following table presents the composition of securities acquired in
connection with our acquisition of Century at fair value as of the
2021
Acquired Securities at Fair Value
As of November 12, 2021
(Dollars in thousands)
Available for sale securities:
Government-sponsored residential mortgage-backed securities $ 1,675,002
Government-sponsored commercial mortgage-backed securities 1,055,228
U.S. Agency bonds 346,538
State and municipal bonds and obligations 6,532
Small Business Administration pooled securities 31,827
Other debt securities 1,895
Total $ 3,117,022
Our securities portfolio has increased year-to-date. Available for sale
securities increased $5.3 billion , or 167.3%, to $8.5 billion at December 31,
2021 from $3.2 billion at December 31, 2020 . This increase is due to investment
purchases during the year ended December 31, 2021 and securities acquired in the
Century acquisition as shown in the table above. Partially offsetting the
increase in the securities portfolio from December 31, 2020 to December 31,
2021 , was the reduction in the unrealized gain on the securities. At
December 31, 2021 the unrealized loss was $76.0 million compared to an
unrealized gain of $58.7 million at December 31, 2020 , representing a $134.6
million decrease. This change is primarily driven by a steepening yield curve.
We did not have trading or held-to-maturity investments at
2020.
A portion of our securities portfolio continues to be tax-exempt. Investments in
federally tax-exempt securities totaled
compared to
Our available for sale securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as level 3 within the fair value hierarchy. As of bothDecember 31, 2021 and 2020, we had no securities categorized as level 3 within the fair value hierarchy. 69 --------------------------------------------------------------------------------
The following table shows investment security weighted-average yields by
category of security and contractual maturity at
Weighted-average yields in the table below have been calculated based upon the
amortized cost of the security:
Securities Portfolio, Weighted-Average Yield
Securities Maturing as of December 31, 2021
After Five
Within One After One Year But Years But After Ten
Year Within Five Years Within Ten Years Years Total
Available for sale securities:
Government-sponsored residential
mortgage-backed securities - % 2.64 % 1.01 % 1.44 % 1.38 %
Government-sponsored commercial
mortgage-backed securities - 1.14 1.20 1.95 1.67
U.S. Agency bonds 1.11 0.73 1.00 - 0.88
U.S. Treasury securities 0.15 0.78 - - 0.50
State and municipal bonds and obligations
(2) (1.24) 2.46 3.17 4.04
3.48
Small business administration pooled securities - 1.72 - 1.93 1.90 Other debt securities 1.01 0.84 - - 0.87 Total 0.10 % 0.95 % 1.12 % 1.60 % 1.42 % (1)Investment security weighted-average yields were calculated on a level-yield basis by weighting the tax equivalent yield for each security type by the book value of each maturity.
(2)The negative yield indicated in the "Within One Year" category is the result
of premium amortization that is in excess of earned income.
The yield on tax-exempt obligations of states and political subdivisions has
been adjusted to a fully taxable equivalent basis ("FTE") by adjusting
tax-exempt income upward by an amount equivalent to the prevailing federal
income taxes that would have been paid if the income had been fully taxable.
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Loans
The following table shows the composition of our loan portfolio, by category, as of the dates indicated, the loans, by category, that were acquired from Century, and their balances as of the acquisition date ofNovember 12, 2021 and net PPP loan activity for the year endedDecember 31, 2021 :
Organic Change (excluding net PPP loan
As of December 31, activity)
PPP Loan
Century Acquired Activity, net
2021 2020 Change ($) Balance (1) (3) Amount ($) Percentage (%)
(In thousands)
Commercial and industrial
$ 965,511 $ 1,405,127 $ (475,561) $ 35,945 1.8 % Commercial real estate 4,522,513 3,573,630 948,883 606,139 - 342,744 9.6 % Commercial construction 222,328 305,708 (83,380) 2,647 - (86,027) (28.1) % Business banking 1,334,694 1,339,164 (4,470) 240,703 (292,905) 47,732 3.6 % Residential real estate 1,926,810 1,370,957 555,853 418,119 - 137,734 10.0 % Consumer home equity 1,100,153 868,270 231,883 237,522 - (5,639) (0.6) % Other consumer 214,485 277,780 (63,295) 9,429 - (72,724) (26.2) % Total gross loans (2)$ 12,281,510 $ 9,730,525 $ 2,550,985 $ 2,919,685 $ (768,466) $ 399,766 4.1 % (1)Balances of loans acquired through our acquisition of Century represent unpaid principal balances and do not include the fair value adjustment recorded upon acquisition. Refer to Note 3, "Mergers and Acquisitions" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.
(2)Amounts presented exclude unamortized premiums, unearned discounts and
deferred fees and costs.
(3)Amounts exclude change attributable to acquired PPP loans.
We consider our loan portfolio to be relatively diversified by borrower and industry. Our loans increased$2.6 billion , or 26.2%, to$12.3 billion atDecember 31, 2021 from$9.7 billion atDecember 31, 2020 . The increase as ofDecember 31, 2021 was primarily due to loans acquired from Century of$2.9 billion partially offset by a decrease in our PPP loan balances within our commercial and industrial balances and business banking portfolios. The changes to our loan portfolio, excluding the impact of the Century acquisition and PPP loan activity, are further detailed below: •The$342.7 million increase in our commercial real estate loans fromDecember 31, 2020 toDecember 31, 2021 was primarily a result of an increase of$296.3 million in our investment commercial real estate loan balances, which represents loans secured by commercial real estate that are non-owner-occupied, during the year endedDecember 31, 2021 . •The$59.4 million increase in our retail portfolio was primarily a result of an increase of$137.7 million in residential real estate loans during the year endedDecember 31, 2021 which was partially offset by a decrease in our other consumer and consumer home equity portfolios of$72.7 million and$5.6 million , respectively. The increase in residential real estate loans is due to the Company retaining more residential real estate loans as held for investment rather than selling such loans on the secondary market. The decrease in other consumer is primarily the result of the continued run-off of our indirect auto loan portfolio.
We believe that our commercial loan portfolio composition is relatively
diversified in terms of industry sectors, property types and various lending
specialties. As of
portfolios were as follows and includes loans acquired from Century:
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Commercial and Industrial
Balance Percentage (%)
(Dollars in thousands)
Educational services $ 821,187 27.7 %
Professional, scientific, and technical services 288,532 9.7 %
Wholesale trade 264,988 9.0 %
Finance and insurance 180,398 6.1 %
Transportation and warehousing 171,976 5.8 %
Healthcare and social assistance 171,316 5.8 %
Manufacturing 170,490 5.8 %
Accommodation and food services 153,683 5.2 %
Administrative and support 148,979 5.0 %
Real estate, rental and leasing 124,239 4.2 %
Other industries 464,739 15.7 %
Total portfolio $ 2,960,527 100.0 %
Commercial Real Estate
Balance Percentage (%)
(Dollars in thousands)
Multi-family $ 807,437 17.9 %
Office 492,669 10.9 %
Industrial/warehouse 486,344 10.8 %
Retail 471,147 10.4 %
School 365,706 8.1 %
Mixed use - retail/office 330,017 7.3 %
Mixed use - retail/multi-family 268,017 5.9 %
Affordable housing 259,467 5.7 %
Hotel/motel/hospitality 178,561 3.9 %
Other property types 863,148 19.1 %
Total portfolio $ 4,522,513 100.0 %
Commercial Construction
Balance Percentage (%)
(Dollars in thousands)
Affordable housing $ 82,739 37.2 %
For sale housing 39,852 17.9 %
Multi-family 35,195 15.8 %
Industrial/warehouse 14,584 6.6 %
Assisted living 13,364 6.0 %
Mixed use - retail/multi-family 10,904 4.9 %
1-4 Family 5,705 2.6 %
Self storage 1,832 0.8 %
Other property types 18,153 8.2 %
Total portfolio $ 222,328 100.0 %
We believe that the loan to value ratio ("LTV") is an important factor in
monitoring the risk characteristics of our loans secured by real estate. The
following tables show the distribution of loan balances by LTV and year of
origination for each of our portfolios of loans, including those acquired from
Century, secured by real estate as of December 31, 2021 :
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Balance of Commercial Real Estate Loans
Originated During the Year Ended
2021 2020 2019 2018 2017 and Prior Total Current LTV (1) (Dollars in thousands) Not available (2)$ 61,950 $ 22,373 $ 6,732 $ 20,132 $ 261,885 $ 373,073 50.00% or lower 185,482 190,888 103,556 134,336 815,035 1,429,296 50.01% - 69.99% 288,153 161,905 385,692 251,312 884,864 1,971,926 70.00% - 79.99% 123,506 84,920 108,505 62,527 83,969 463,427 80.00% - 89.99% (3) 32,503 17,520 6,026 12,471 33,790 102,310 90.00% or higher 23,480 70,561 21,121 6,968 60,351 182,481 Total$ 715,073 $ 548,167 $ 631,632 $ 487,747 $ 2,139,894 $ 4,522,513 Average LTV 53.62 % 58.94 % 57.70 % 54.58 % 45.50 % 50.38 % Balance of Residential Real Estate Loans
Originated During the Year Ended
2021 2020 2019 2018 2017 and Prior Total Current LTV (1) (Dollars in thousands) Not available (2)$ 1,625 $ 912 $ -$ 353 $ 16,781 $ 19,671 50.00% or lower 168,814 80,959 29,190 25,491 179,865 484,318 50.01% - 69.99% 269,429 151,061 35,746 27,426 182,219 665,880 70.00% - 79.99% 194,495 123,898 34,120 16,938 114,558 484,009 80.00% - 89.99% 67,897 38,350 12,595 11,838 51,790 182,470 90.00% or higher 44,916 22,738 11,332 6,335 5,141 90,462 Total$ 747,175 $ 417,918 $ 122,982 $ 88,380 $ 550,354 $ 1,926,810 Average LTV 60.44 % 62.13 % 61.42 % 58.04 % 49.98 % 55.58 % Balance of Consumer Home Equity Loans
Originated During the Year Ended
2021 2020 2019 2018 2017 and Prior Total Current LTV (1) (Dollars in thousands) Not available (2)$ 151,593 $ 32,587 $
46,792
50.00% or lower
35,473 35,608 29,780 31,195 43,929 175,986 50.01% - 69.99% 17,384 46,029 29,276 30,422 46,852 169,962 70.00% - 79.99% 9,246 23,367 31,219 29,311 46,508 139,652 80.00% - 89.99% 4,393 7,460 17,156 10,691 26,891 66,591 90.00% or higher - - - - 221 221 Total$ 218,089 $ 145,050 $ 154,223 $ 137,001 $ 445,790 $ 1,100,153 Average LTV 38.32 % 52.01 % 56.09 % 55.48 % 55.61 % 53.47 %
(1)Current LTV is calculated based upon exposure amount and the most recently
available appraisal value as of the reporting period.
(2)Insufficient data available to calculate LTV.
(3)We generally require an LTV of 80% or less on new CRE loan originations.
Certain CRE loans with LTVs greater than 80% may have additional collateral
pledged which is not included in the computation of the amounts stated.
73 -------------------------------------------------------------------------------- The maturity distribution of our loan portfolio is one factor used by management to evaluate the risk characteristics of our loan portfolio. The following table shows the maturity distribution of our loans, including those acquired from Century, as ofDecember 31, 2021 : Scheduled Contractual Loan Maturity One Year or Less One to Five Five to Fifteen After Fifteen (1) Years Years Years Total (In thousands) Commercial and industrial$ 287,526 $ 1,070,642 $ 605,759 $ 996,600 $ 2,960,527 Commercial real estate 383,101 1,199,267 2,504,355 435,790 4,522,513 Commercial construction 47,057 95,735 58,079 21,457 222,328 Business banking 140,904 496,620 663,716 33,454 1,334,694 Residential real estate 398 5,024 302,715 1,618,673 1,926,810 Consumer home equity 2,260 19,989 183,738 894,166 1,100,153 Other consumer 25,660 115,894 66,449 6,482 214,485 Total loans$ 886,906 $ 3,003,171 $ 4,384,811 $ 4,006,622 $ 12,281,510
(1)Includes demand loans, or loans without a stated maturity.
The interest rate risk to our loan portfolio is an important element in the management of net interest margin. We attempt to manage the relationship between the interest rate sensitivity of our assets and liabilities to produce an effective interest differential that is not significantly impacted by changes in the level of interest rates. The following table shows the interest rate risk of our loans, on a gross basis, due one year afterDecember 31, 2021 : Loan Interest Rate Risk Due after December 31, 2022 Fixed Adjustable Total (In thousands)
Commercial and industrial
Commercial real estate 1,368,467 2,770,945 4,139,412
Commercial construction 116,240 59,031
175,271
Business banking 492,037 701,753
1,193,790
Residential real estate 1,502,419 423,993 1,926,412
Consumer home equity 141,295 956,598 1,097,893
Other consumer 185,028 3,797 188,825
Total loans $ 4,651,159 $ 6,743,445 $ 11,394,604
Asset quality. We continually monitor the asset quality of our loan portfolio
utilizing portfolio scorecards and various credit quality indicators. Based on
this process, loans meeting certain criteria are categorized as delinquent,
impaired, or non-performing and further assessed to determine if non-accrual
status is appropriate.
For the commercial portfolio, which includes our commercial and industrial,
commercial real estate, commercial construction and business banking loans, we
monitor credit quality using a risk rating scale, which assigns a risk-grade to
each borrower based on a number of quantitative and qualitative factors
associated with a commercial loan transaction. Management utilizes a loan risk
rating methodology based on a 15-point scale with the assistance of risk rating
scorecard tools. Pass grades are 0-10 and non-pass categories, which align with
regulatory guidelines, are: special mention (11), substandard (12), doubtful
(13) and loss (14).
Risk rating assignment is determined using one of 14 separate scorecards
developed for distinctive portfolio segments based on common attributes. Key
factors include: industry and market conditions, position within the industry,
earnings trends, operating cash flow, asset/liability values, debt capacity,
guarantor strength, management and controls, financial reporting, collateral and
other considerations. The new risk rating methodology, inclusive of the expanded
grade levels and the scorecard tools, has increased, and is expected to continue
to increase granularity and distribution of risk rating assignment with more
precision and effectiveness; provide customized and enhanced templates to
incorporate more risk factors and attributes applicable to loan and collateral
types; increase precision and effectiveness of credit risk identification; and
provide a foundation for enhanced reporting, including migration of risk rating
analysis.
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Special mention, substandard and doubtful loans totaled 5.8% and 7.7% of total
commercial loans outstanding at December 31, 2021 and 2020, respectively. This
decrease was driven by risk rating upgrades in the construction and commercial
and industrial portfolios.
Our philosophy toward managing our loan portfolios is predicated upon careful
monitoring, which stresses early detection and response to delinquent and
default situations. We seek to make arrangements to resolve any delinquent or
default situation over the shortest possible time frame.
For the retail portfolio, which includes residential real estate, consumer home
equity, and other consumer portfolios, we monitor credit quality using the
borrower's FICO score. As of December 31, 2021 , 70.8% of retail borrowers, based
on loan balance, have a FICO score of 740 or greater. The following table shows
the balances by borrower's current FICO score as of the dates indicated:
As of December 31, 2021 As of December 31, 2020
Residential Consumer Other Residential Consumer Other
Real Estate Home Equity Consumer Real Estate Home Equity Consumer
Current FICO (1) (Dollars in thousands) (Dollars in thousands)
Not available (2) $ 3,954 $ 1,122 $ 27,448 $ 15,762 $ 224 $ 35,097
640 or lower 49,112 39,446 7,680 50,705 36,699 15,762
641 - 699 184,740 106,621 18,078 137,028 93,647 28,357
700 - 739 307,162 173,617 27,739 223,544 144,304 38,203
740 or higher 1,381,842 779,347 133,539 943,918 593,396 160,361
Total $ 1,926,810 $ 1,100,153 $ 214,485 $ 1,370,957 $ 868,270 $ 277,780
Average FICO 764.7 764.5 765.7 762.9 763.3 757.5
(1)Borrower FICO scores are updated on a semi-annual basis, and the most recent
update occurred in August 2021 . With respect to loans acquired in connection
with our acquisition of Century, borrower FICO scores were updated in December
2021 .
(2)Insufficient data available to report.
The delinquency rate of our total loan portfolio increased to 0.65% at
The following table provides details regarding our delinquency rates as of the
dates indicated:
Loan Delinquency Rates
Delinquency Rate as of December 31, (1)
2021 2020
Commercial and industrial 0.06 % 0.11 %
Commercial real estate 0.60 % 0.06 %
Commercial construction - % - %
Business banking 0.86 % 1.40 %
Residential real estate 1.38 % 1.21 %
Consumer home equity 0.90 % 0.60 %
Other consumer 1.23 % 0.98 %
Total 0.65 % 0.49 %
(1)In the calculation of the delinquency rate as of December 31, 2021 and 2020,
the total amount of loans outstanding includes $0.3 billion and $1.0 billion ,
respectively, of PPP loans.
As a general rule, loans more than 90 days past due with respect to principal or
interest are classified as non-accrual loans. However, based on our assessment
of collateral and/or payment prospects, certain loans that are more than 90 days
past due may be kept on an accruing status. Income accruals are suspended on all
non-accrual loans and all previously accrued and uncollected interest is
reversed against current income. A loan is expected to remain on non-accrual
status until it becomes current with respect to principal and interest, the loan
is liquidated, or the loan is determined to be uncollectible and is charged-off
against the allowance for loan losses.
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Non-performing assets ("NPAs") are comprised of non-performing loans ("NPLs"),
OREO and non-performing securities. NPLs consist of non-accrual loans and loans
that are more than 90 days past due but still accruing interest. OREO consists
of real estate properties, which primarily serve as collateral to secure our
loans, that we control due to foreclosure. These properties are recorded at the
fair value less estimated costs to sell on the date we obtain control. Any
write-downs to the cost of the related asset upon transfer to OREO to reflect
the asset at fair value less estimated costs to sell is recorded through the
allowance for loan losses.
NPLs decreased $8.3 million , or 20%, to $35.0 million at December 31, 2021 from
$43.3 million at December 31, 2020 . NPLs as a percentage of total loans
decreased to 0.29% at December 31, 2021 from 0.45% at December 31, 2020
primarily due to a decrease in residential non-accrual loans, commercial real
estate non-accrual loans, and commercial and industrial loans greater than 90
days past due and still accruing. The decreases in these categories was
partially offset by an increase in consumer loans greater than 90 days and still
accruing. For additional discussion of non-accrual loans, refer to the later
"Credit Ratios" section.
The total amount of interest recorded on NPLs was $0.5 million for the year
ended December 31, 2021 . The gross interest income that would have been recorded
under the original terms of those loans if they had been performing amounted to
$3.2 million for the year ended December 31, 2021 . The total amount of interest
recorded on NPLs was $1.0 million for the year ended December 31, 2020 . The
gross interest income that would have been recorded under the original terms of
those loans if they had been performing amounted to $3.4 million for the year
ended December 31, 2020 .
In the course of resolving NPLs, we may choose to restructure the contractual
terms of certain loans. We attempt to work-out alternative payment schedules
with the borrowers in order to avoid foreclosure actions. We review any loans
that are modified to identify whether a TDR has occurred. TDRs involve
situations in which, for economic or legal reasons related to the borrower's
financial difficulties, we grant a concession to the borrower that we would not
otherwise consider. As described further below, loan modifications made in
response to the COVID-19 pandemic met the criteria of either Section 4013 of the
CARES Act or the Interagency Statement on Loan Modifications and Reporting for
Financial Institutions Working with Customers Affected by the Coronavirus
(Revised) and therefore are not deemed TDRs.
All TDR loans are considered impaired and therefore are subject to a specific
review for impairment loss. The impairment analysis discounts the present value
of the anticipated cash flows by the loan's contractual rate of interest in
effect prior to the loan's modification or the fair value of collateral if the
loan is collateral dependent. The amount of impairment loss, if any, is recorded
as a specific reserve to each individual loan in the allowance for loan losses.
Commercial loans (commercial and industrial, commercial real estate, commercial
construction, and business banking) and residential loans that have been
classified as TDRs and which subsequently default are reviewed to determine if
the loan should be deemed collateral dependent.
TDR loans modified during the years ended December 31, 2021 and 2020 were $0.8
million and $4.2 million , respectively (post modification balance). The overall
decrease in TDR loans consisted of a decrease of $2.3 million in commercial loan
TDRs and a decrease of $1.2 million in consumer loan TDRs. No loans were
modified during the preceding 12 months which subsequently defaulted during the
year ended December 31, 2021 .
It is our policy to have any restructured loans that are on non-accrual status
prior to being modified remain on non-accrual status for approximately six
months subsequent to being modified before we consider its return to accrual
status. If the restructured loan is on accrual status prior to being modified,
we review it to determine if the modified loan should remain on accrual status.
PCI loans are loans we acquired that have shown evidence of deterioration of
credit quality since origination and, therefore, it was deemed unlikely that all
contractually required payments would be collected upon the acquisition date. We
consider factors such as payment history, collateral values and accrual status
when determining whether there was evidence of deterioration at the acquisition
date. The carrying value and prospective income recognition of PCI loans are
predicated on future cash flows expected to be collected. As of December 31,
2021 and 2020 the carrying amount of PCI loans was $69.6 million and $9.3
million , respectively. The increase of $60.3 million was primarily attributable
to PCI loans acquired from Century of $67.3 million , partially offset by
borrower principal payments during the year ended December 31, 2021 .
COVID-19 Modifications In light of the COVID-19 pandemic, we implemented loan
modification programs for our borrowers in 2020 that allowed for either full
payment deferrals (both interest and principal) or deferral of principal only.
These modifications met the criteria of either Section 4013 of the CARES Act or
the Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus (Revised) and
therefore are not deemed TDRs. We have deemed these modified loans "COVID-19
modifications."
The Appropriations Act, which was enacted on December 27, 2020 , extended certain
expiring tax provisions related to the COVID-19 pandemic in the United States
and provides additional emergency relief to individuals and businesses. Included
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within the provisions of the Appropriations Act was the extension of Section
4013 of the CARES Act to
relief to qualifying loan modifications executed during the allowable time
period.
The following table presents the balance of loans that received a COVID-19
modification and have not yet resumed repayment as of
and excludes loans acquired from Century:
Remaining COVID-19 Modifications Remaining COVID-19 Modifications
as of December 31, 2021 (1) as of December 31, 2020 (1)
Balance % of Total Portfolio Balance % of Total Portfolio
(In thousands)
Commercial and industrial $ 4,548 0.2 % $ 34,076 1.7 %
Commercial real estate 93,519 2.1 % 231,794 6.5 %
Commercial construction - - % 10,987 3.6 %
Business banking 649 0.1 % 23,434 1.7 %
Residential real estate 5,870 0.3 % 26,772 2.0 %
Consumer home equity 1,365 0.1 % 3,432 0.4 %
Other consumer 706 0.3 % 2,187 0.8 %
Total $ 106,657 0.9 % $ 332,682 3.4 %
(1)Remaining COVID-19 modifications reflect only those loans which underwent a
modification and have not yet resumed payment. We define a modified loan to have
resumed payment if it is one month past the modification end date and not more
than 30 days past due.
As of December 31, 2021 , the aggregate amount of loans that received a COVID-19
modification and have become a non-performing loan after the respective deferral
period is $4.7 million and are included in the total remaining COVID-19
modifications shown in the table above.
COVID-19 Pandemic-Impacted Industries . Management evaluated the risk present in
our commercial loan portfolios with respect to COVID-19 pandemic-impacted
industries as of December 31, 2021 and, in connection with that evaluation,
identified commercial real estate loans collateralized by properties with office
space as a high risk industry sector primarily resulting from the delay in many
companies' return to office plans. As of December 31, 2021 , we believe loans to
our borrowers in office, retail, restaurant, and hotel industry categories
represent those which have experienced and will likely continue to experience
the most adverse effects of the COVID-19 pandemic. As of December 31, 2021 , the
aggregate outstanding balance of loans to our borrowers in office, retail,
restaurant, and hotel industry categories was $1.1 billion , $549.0 million ,
$188.9 million , and $189.0 million respectively, representing 8.8%, 4.5%, 1.5%
and 1.5% of total loans, respectively. As of December 31, 2020 , the aggregate
outstanding loan balance of loans to our borrowers in office, retail,
restaurant, and hotel industry categories was $1.0 billion , $496.4 million ,
$197.4 million , and $178.7 million , respectively, representing 10.6%, 5.1%,
2.0%, and 1.8% of total loans, respectively.
As of December 31, 2021 , the current balance of loans modified which we
considered to be COVID-19 modifications was $987.0 million , of which 40% were
for full payment deferrals, while 60% were for full deferral of principal only.
This includes $631.7 million in commercial real estate (including commercial
construction loans), $105.7 million in commercial and industrial loans, $133.5
million in business banking loans, $88.5 million in residential real estate
loans, and $27.5 million in consumer loans. The balance of COVID-19
modifications that have not resumed scheduled repayment or have become
delinquent as of December 31, 2021 was $106.7 million compared to $332.7 million
as of December 31, 2020 . As of December 31, 2021 , the percentage of loans to our
borrowers in retail, restaurant and hotel industries that were modified
primarily due to the effects on borrowers of the COVID-19 pandemic and related
economic slowdown beginning in late March 2020 which have not yet resumed
payment were less than 0.1%, 2.9%, and 37.6%, respectively. As of December 31,
2021 , there were no loans to our borrowers in office industries that were
modified primarily due to the effects on borrowers of the COVID-19 pandemic and
related economic slowdown beginning in late March 2020 and which have not yet
resumed payment. As of December 31, 2020 , the percentage of loans to our
borrowers in office, retail, restaurant, and hotel industries that were modified
primarily due to the effects on borrowers of the COVID-19 pandemic and related
economic slowdown beginning in late March 2020 which have not yet resumed
payment were 7.7%, 2.1%, 12.7%, and 39.4%, respectively.
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In the normal course of business, we become aware of possible credit problems in
which borrowers exhibit potential for the inability to comply with the
contractual terms of their loans, but which currently do not yet meet the
criteria for classification as NPLs. In response to the COVID-19 pandemic, we
reviewed all of our credit exposures in industries that were expected to
experience significant problems due to the pandemic and resulting economic
contraction. As part of that review, we downgraded our hotel loans, restaurant
loans and other loans that we expected to have associated challenges as a result
of the economic impact of the COVID-19 pandemic. These loans were neither
delinquent nor on non-accrual status. Management evaluated loans to borrowers in
our office segment as of December 31, 2021 and observed increases in vacancy
rates in properties collateralized by such properties. Due to the long-term
nature of leases at such properties, the full impact of the COVID-19 pandemic on
borrowers' ability to repay is not currently reasonably estimable. However,
based upon management's regular evaluation of such loans, downgrades to the
respective risk ratings have occurred and may occur again at such time
heightened risk is identified. At December 31, 2021 and 2020, our potential
problem loans (including these COVID-19 pandemic-impacted loans), or loans with
potential weaknesses that were not included in the non-accrual loans or in the
loans 90 days or more past due categories, totaled $470.9 million and $563.3
million , respectively. Included in these potential problem loans was $335.9
million and $319.5 million at December 31, 2021 and 2020, respectively, of loans
in COVID-19 impacted industries, which includes borrowers in office industries
as previously described at both December 31, 2021 and 2020.
Allowance for loan losses. Because we continued to qualify for emerging growth
company status under the Jumpstart Our Business ("JOBS") Act until December 31,
2021 , we were permitted to delay adoption of the CECL standard until the earlier
of the date at which non-public business entities are required to adopt the
standard and the date we ceased to be an EGC. Included in the Appropriations Act
was an extension of the adoption date to the earlier of January 1, 2022 or 60
days after the date on which the COVID-19 national emergency terminates. We
elected this extension and, accordingly, adopted the CECL standard on January 1,
2022 . As of December 31, 2021 , we followed the incurred loss allowance GAAP
accounting model. See "Risk Factors-Our loan loss allowance at December 31, 2021
may be difficult to evaluate in comparison to our peers" in Part I, Item 1A of
this Annual Report on Form 10-K.
For the purpose of estimating our allowance for loan losses, we segregate the
loan portfolio into homogenous loan pools that possess unique risk
characteristics such as loan purpose, repayment source, and collateral that are
considered when determining the appropriate level of the allowance for loan
losses for each category.
While we use available information to recognize losses on loans, future
additions or subtractions to/from the allowance for loan losses may be necessary
based on changes in NPLs, changes in economic conditions, or other reasons.
Additionally, various regulatory agencies, as an integral part of our
examination process, periodically assess the adequacy of the allowance for loan
losses to assess whether the allowance for loan losses was determined in
accordance with GAAP and applicable guidance.
We perform an evaluation of our allowance for loan losses on a regular basis (at
least quarterly), and establish the allowance for loan losses based upon an
evaluation of our loan categories, as each possess unique risk characteristics
that are considered when determining the appropriate level of allowance for loan
losses, including:
•estimated future loss in all impaired loans in each category;
•known increases in concentrations within each category;
•certain higher risk classes of loans, or pledged collateral;
•historical loan loss experience within each category;
•results of any independent review and evaluation of the category's credit
quality;
•trends in volume, maturity and composition of each category;
•volume and trends in delinquencies and non-accruals;
•national and local economic conditions and downturns in specific local
industries;
•corporate goals and objectives;
•expertise of our lending staff;
•lending policy and practices; and
•current and forecasted banking industry conditions, as well as regulatory
environment.
Loans are periodically evaluated using changes in asset quality, historical
losses, and other loss allocation factors, which form our basis for estimating
incurred losses. For risk rated loans, our risk-rating system takes into
consideration a number of quantitative and qualitative factors, such as the
borrower's financial capacity, cash flow, liquidity, leverage, adequacy of
collateral, tangible net worth, management team, industry, sales and supplier
concentration, credit history,
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additional support and the impact of outside factors on repayment ability.
Homogenous populations of loans that are not risk rated loans, are analyzed by
loan category, taking into account delinquency ratios and historical loss
experience.
The allowance for loan losses is allocated to loan categories using both a
formula-based approach and an analysis of certain individual loans for
impairment. We use a methodology to systematically estimate the amount of credit
loss incurred in the loan portfolio. Under our current methodology, the
allowance for loan losses contains specific, general and other components.
The specific component consists of reserves for impaired loans (defined as those where we determine it is probable we will not collect all payments when due, typically classified as either doubtful or substandard). All commercial, residential and consumer loan portfolios are periodically reviewed to identify the loans with deteriorating performance. The reports used to identify those loans include, but are not limited to, delinquency reports, risk rating migration (for risk rated loans), asset quality reports, watch loan list and other credit risk management reports. When a loan is determined to be impaired, the measurement will be based on the present value of expected future cash flows, except for collateral-dependent loans, where the impairment is based on the fair value of the collateral. The general loss reserves methodology, which is applied to categories of loans with similar characteristics, covers all non-impaired loans and is based on our portfolio's segment historical loss experience adjusted for qualitative factors. The general loss reserve methodology considers multiple qualitative factors that may impact the loss experience during the incurred loss horizon period, including internal infrastructure factors, external macroeconomic factors, internal credit quality factors and external industry data, tailored to the specific loan category.
For additional discussion of our risk rating methodology, see Note 5, "Loans and
Allowance for Loan Losses" within the Notes to the Consolidated Financial
Statements included in Item 8 in this Annual Report on Form 10-K.
79 --------------------------------------------------------------------------------
The following table summarizes credit ratios for the periods presented:
Credit Ratios
For the Year Ended
2021 2020 2019 2018 2017
(Dollars in thousands)
Net loan charge-offs (recoveries):
Commercial and industrial $ 623 $ 992 $ (2,625) $ 893 $ (4,489)
Commercial real estate 243 (206) (12) (83) (147)
Commercial construction - - - - (21)
Business banking 3,567 4,855 5,370 5,970 4,800
Residential real estate (87) (125) (39) (125) 43
Consumer home equity (161) 421 153 225 (16)
Other consumer 1,373 2,129 1,811 1,676 1,707
Total net loan charge-offs (recoveries)
Average loans:
Commercial and industrial
$ 2,015,665 $ 2,053,093 $ 1,419,875 $ 1,185,224 $ 1,074,875 Commercial real estate 3,960,818 3,654,887 3,667,147 3,402,560 3,131,900 Commercial construction 191,771 226,286 263,736 327,781 253,244 Business banking 1,241,770 1,079,779 738,652 738,122 701,704 Residential real estate 1,508,796 1,398,337 1,438,775 1,357,116 1,220,600 Consumer home equity 869,110 902,634 948,089 934,681 913,830 Other consumer 233,932 334,257 471,602 619,406 670,881 Average total loans (1)$ 10,021,862 $ 9,649,273 $ 8,947,876 $ 8,564,890 $ 7,967,034 Net charge-offs (recoveries) to average loans outstanding during the period: Commercial and industrial 0.03 % 0.05 % (0.18) % 0.08 % (0.42) % Commercial real estate 0.01 (0.01) 0.00 0.00 0.00 Commercial construction - - - - (0.01) Business banking 0.29 0.45 0.73 0.81 0.68 Residential real estate (0.01) (0.01) 0.00 (0.01) 0.00 Consumer home equity (0.02) 0.05 0.02 0.02 0.00 Other consumer 0.59 0.64 0.38 0.27 0.25 Total net charge-offs (recoveries) to average total loans outstanding during the period 0.06 % 0.08 % 0.05 % 0.10 % 0.02 % Total loans$ 12,281,510 $ 9,730,525 $ 8,987,046 $ 8,856,003 $ 8,227,041 Total non-accrual loans 32,993 41,005 42,451 26,172 18,165 Allowance for loan losses$ 97,787 $ 113,031
Allowance for loan losses as a percent of
total loans
0.80 % 1.16 % 0.92 % 0.91 % 0.90 % Non-accrual loans as a percent of total loans 0.27 % 0.42 % 0.47 % 0.30 % 0.22 % Allowance for loan losses as a percent of non-accrual loans 296.39 % 275.65 % 193.86 % 308.17 % 407.99 %
(1)Average loan balances exclude loans held for sale.
Non-accrual loans decreased$8.0 million , or 20%, to$33.0 million atDecember 31, 2021 from$41.0 million atDecember 31, 2020 , primarily due to a decrease in non-accrual loans in our business banking portfolio and commercial real estate portfolio, partially offset by an increase in non-accrual loans in our commercial and industrial portfolio. 80 -------------------------------------------------------------------------------- The allowance for loan losses decreased by$15.2 million , or 13.5%, to$97.8 million , or 0.80% of total loans (including PPP loans), atDecember 31, 2021 from$113.0 million , or 1.16% of total loans atDecember 31, 2020 . The decrease in the allowance for loan losses was primarily a result of improved macroeconomic conditions, risk rating upgrades in the commercial portfolios during the period and loans acquired from Century for which the estimated incurred losses were substantively included in the initial fair value determination as of the acquisition date ofNovember 12, 2021 . The economic environment during the year endedDecember 31, 2021 was assisted by government stimulus, the impacts of loan deferral programs, reductions in unemployment and reductions in COVID-19 related restrictions. These, along with other factors, resulted in a release of allowance for loan losses of$9.7 million for the year endedDecember 31, 2021 , as compared to a provision for allowance for loan losses of$38.8 million for the year endedDecember 31, 2020 . 81 -------------------------------------------------------------------------------- The following table sets forth the allocation of the allowance for loan losses by loan categories listed in loan portfolio composition as of the dates indicated: Summary of Allocation of Allowance for Loan Losses As of December 31, 2021 2020 Percent of Allowance in Percent of Percent of Category Loans in Allowance Percent of to Total Category Allowance in Category Loans in Category Allowance for Allocated to Total for Loan to Total Allocated to Total Loan Losses Allowance Loans Losses Allowance Loans (Dollars in thousands) Commercial and industrial (1)$ 18,018 18.43 % 24.10 %$ 26,617 23.54 % 20.51 % Commercial real estate 52,373 53.56 % 36.82 % 54,569 48.28 % 36.73 % Commercial construction 2,585 2.64 % 1.81 % 4,553 4.03 % 3.14 % Business banking (1) 10,983 11.23 % 10.87 % 13,152 11.64 % 13.76 % Residential real estate 6,556 6.70 % 15.69 % 6,435 5.69 % 14.09 % Consumer home equity 3,722 3.81 % 8.96 % 3,744 3.31 % 8.92 % Other consumer 3,308 3.38 % 1.75 % 3,467 3.07 % 2.85 % Other 242 0.25 % - % 494 0.44 % - % Total$ 97,787 100.00 % 100.00 %$ 113,031 100.00 % 100.00 % (1)PPP loans are included within these portfolios as ofDecember 31, 2021 andDecember 31, 2020 ; however, as ofDecember 31, 2021 andDecember 31, 2020 , no allowance for loan losses have been recorded on these loans due to the SBA guarantee of 100% of the loans. As of December 31, 2019 2018 2017 Percent of Percent of Percent of Allowance in Percent of Allowance Percent of Allowance Percent of Category to Total Loans in Category Allowance in Category Loans in Category Allowance in Category Loans in Category Allowance for Allocated to Total for Loan to Total Allocated to Total for Loan to Total Allocated to Total Loan Losses Allowance Loans Losses Allowance Loans Losses Allowance Loans (Dollars in thousands) Commercial and industrial$ 20,919 25.42 % 18.27 %$ 19,321 23.96 % 18.73 %$ 14,892 20.09 % 16.97 % Commercial real estate 34,730 42.20 % 39.34 % 32,400 40.17 % 36.26 % 30,807 41.57 % 34.40 % Commercial construction 3,424 4.16 % 3.05 % 4,606 5.71 % 3.53 % 5,588 7.54 % 4.87 % Business banking 8,260 10.04 % 8.58 % 8,167 10.13 % 8.37 % 6,497 8.77 % 9.25 % Residential real estate 6,380 7.75 % 15.90 % 7,059 8.75 % 16.16 % 6,954 9.38 % 15.69 % Consumer home equity 4,027 4.89 % 10.38 % 4,113 5.10 % 10.72 % 4,040 5.45 % 11.32 % Other consumer 4,173 5.07 % 4.48 % 4,600 5.70 % 6.23 % 4,751 6.41 % 7.50 % Other 384 0.47 % - % 389 0.48 % - % 582 0.79 % - % Total$ 82,297 100.00 % 100.00 %$ 80,655 100.00 % 100.00 %$ 74,111 100.00 % 100.00 % To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, liquidation of the collateral and the strength of co-makers or guarantors. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for loan losses and any recoveries of such previously charged-off amounts are credited to the allowance for loan losses. Regardless of whether a loan is unsecured or collateralized, we charge off the amount of any confirmed loan loss in the period when the loans, or portions of loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss confirming events may include an appraisal or other valuation that reflects a shortfall between the value of the collateral and the carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral. 82 --------------------------------------------------------------------------------
For additional information regarding our allowance for loan losses, see Note 5,
"Loans and Allowance for Loan Losses" within the Notes to the Consolidated
Financial Statements included in Item 8 in this Annual Report on Form 10-K.
We adopted the CECL standard onJanuary 1, 2022 and will use the CECL methodology to determine our allowance for loan loss in future periods. For information about risks associated with our adoption of the CECL standard, see "Risk Factors-"We increased our allowance for loan losses as a result of our adoption as ofJanuary 1, 2022 of the new accounting standard for determining the amount of the allowance for loan losses and may be required to do so again in the future." in Part I, Item 1A of this Annual Report on Form 10-K.
The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for our membership in the FHLBB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. We purchase and/or are subject to redemption of FHLBB stock proportional to the volume of funding received and view the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.
We held an investment in the FHLBB of
Goodwill and other intangible assets
Goodwill and other intangible assets were$649.7 million and$376.5 million atDecember 31, 2021 and 2020, respectively. The increase in goodwill and other intangibles assets was due to our acquisition of Century which resulted in the addition of goodwill and intangible assets of$259.0 million and$11.6 million , respectively, as well as two insurance agency acquisitions which resulted in additional goodwill and intangible assets that are not considered to be material. This was partially offset by amortization of definite-lived intangibles during the year endedDecember 31, 2021 . We did not record any impairment to our goodwill or other intangible assets during the years endedDecember 31, 2021 and 2020. We routinely assess our goodwill and other intangible assets to determine if impairments are necessary.
Deposits and other interest-bearing liabilities
Deposits originating within the markets we serve continue to be our primary source of funding our earning assets. We have been able to compete effectively for deposits in our primary market areas. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in our assessment of the stability of our fund sources and our access to additional funds. Furthermore, we shift the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize net interest margin.
The following table presents our deposits, including those acquired from Century
in 2021, as of the dates presented:
Components of Deposits
As of December 31, Change
2021 2020 Amount ($) Percentage (%)
(Dollars in thousands)
Demand $ 7,020,864 $ 4,910,794 $ 2,110,070 43.0 %
Interest checking 4,478,566 2,380,497 2,098,069 88.1 %
Savings 2,077,495 1,256,736 820,759 65.3 %
Money market investments 5,525,005 3,348,898 2,176,107 65.0 %
Certificates of deposit 526,381 258,859 267,522 103.3 %
Total deposits $ 19,628,311 $ 12,155,784 $ 7,472,527 61.5 %
83
-------------------------------------------------------------------------------- (1)The Bank's estimate of total uninsured deposits was$11.0 billion and$5.5 billion atDecember 31, 2021 andDecember 31, 2020 , respectively. The increase in estimated uninsured deposits betweenDecember 31, 2020 andDecember 31, 2021 was primarily due to our acquisition of Century. The following table presents the composition of deposits acquired in connection with our acquisition of Century at fair value as of theNovember 12, 2021 acquisition date: Acquired Deposits at Fair Value As of November 12, 2021 (Dollars in thousands) Demand $ 1,744,600 Interest checking 1,406,039 Savings 1,011,569 Money market investments 1,611,947 Certificates of deposit 325,666 Total deposits $ 6,099,821 Deposits increased by$7.5 billion , or 61.5%, to$19.6 billion atDecember 31, 2021 from$12.2 billion atDecember 31, 2020 . This increase was primarily a result of our acquisition of Century through which we acquired$6.1 billion total deposits. For more information regarding deposits acquired as a result of the Century acquisition, see Note 26, "Subsequent Events" within the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on form 10-K. Excluding deposits acquired from Century, interest checking deposits, money market deposits and demand deposits, the deposit types primarily contributed to the increase in legacy deposits (e.g., deposits not acquired from Century) and increased$0.7 billion ,$0.6 billion and$0.4 billion , respectively. The increases in these deposit categories reflect strong deposit flows, in part due to government stimulus.
The following table presents the classification of deposits on an average basis
for the years indicated:
Classification of Deposits on an Average Basis
For the Year Ended December 31,
2021 2020 2019
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Demand $ 5,547,615 - % $ 4,535,066 - % $ 3,369,375 - %
Interest checking 2,866,091 0.07 % 2,227,185 0.09 % 1,842,993 0.21 %
Savings 1,483,271 0.02 % 1,123,584 0.02 % 991,244 0.02 %
Money market investments 3,870,712 0.06 % 3,212,752 0.23 % 2,769,934 0.69 %
Time accounts 280,141 0.21 % 300,381 0.52 % 392,035 1.02 %
Total deposits $ 14,047,830 0.04 % $ 11,398,968 0.10 % $ 9,365,581 0.29 %
Other time deposits in excess of the
certificates of deposits as of the dates indicated had maturities as follows:
Maturities of Time Certificates of Deposit
As of December 31,
2021 2020
Maturing in (In thousands)
Three months or less $ 113,019 $ 29,224
Over three months through six months 53,899 12,264
Over six months through twelve months 33,295 13,187
Over twelve months 23,827 4,402
Total $ 224,040 $ 59,077
Borrowings
84
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Our borrowings may consist of both short-term and long-term borrowings and
provide us with sources of funding. Maintaining available borrowing capacity
provides us with a contingent source of liquidity.
Our total borrowings increased by
The following table sets forth information concerning balances on our borrowings
as of the dates indicated:
Borrowings by Category
As of December 31, Change
2021 2020 Amount ($) Percentage (%)
(Dollars in thousands)
Federal Home Loan Bank advances $ 14,020 $ 14,624 $ (604) (4.1) %
Escrow deposits of borrowers 20,258 13,425 6,833 50.9 %
Total $ 34,278 $ 28,049 $ 6,229 22.2 %
Results of Operations
Summary of Results of Operations
For the Year Ended December 31, Change
2021 2020 Amount ($) Percentage (%)
(Dollars in thousands)
Interest and dividend income $ 435,159 $ 413,328 $ 21,831 5.3 %
Interest expense 5,332 12,077 (6,745) (55.8) %
Net interest income 429,827 401,251 28,576 7.1 %
Provision for loan losses (9,686) 38,800 (48,486) (125.0) %
Noninterest income 193,155 178,373 14,782 8.3 %
Noninterest expense 443,956 504,923 (60,967) (12.1) %
Income taxes 34,047 13,163 20,884 158.7 %
Net income $ 154,665 $ 22,738 $ 131,927 580.2 %
Comparison of the Years Ended
Interest and Dividend Income
Interest and dividend income increased by$21.8 million , or 5.3%, to$435.2 million during the year endedDecember 31, 2021 from$413.3 million during the year endedDecember 31, 2020 . This increase was primarily a result of our acquisition of Century onNovember 12, 2021 which added approximately$6.6 billion in interest-earning assets. Overall, the average balance of our interest-earning assets increased$3.9 billion , or 30.7%, to$16.7 billion as ofDecember 31, 2021 compared to$12.8 billion as ofDecember 31, 2020 , reflecting the addition of Century assets and the purchase of investment securities resulting from the investment of the proceeds from ourOctober 2020 IPO. Partially offsetting this increase was a decrease in the yield on average interest-earning assets which decreased by 64 basis points to 2.64% during the year endedDecember 31, 2021 . Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans or securities are calculated and added to the yield. Management believes that this presentation allows for better comparability between institutions with different tax structures. •Interest income on securities and federal funds sold and other short-term investments increased$26.4 million , or 64.1%, to$67.6 million for the year endedDecember 31, 2021 compared to$41.2 million for the year endedDecember 31, 2020 . The increase in interest income on securities was primarily due to an increase in the average balance of such securities of$3.6 billion , or 114.0%, to$6.7 billion as ofDecember 31, 2021 compared to$3.1 billion as ofDecember 31, 2020 , which was partially offset by a decrease in the yield on such securities. The increase in the average balance of securities was attributable to security purchases of$3.3 billion during the year endedDecember 31, 2021 , reflecting the investment of the proceeds from ourOctober 2020 IPO, and investment securities acquired of$3.1 billion as a result of our acquisition of Century.
•Interest income on loans decreased by
during the year ended
ended
85 -------------------------------------------------------------------------------- loans was primarily due to the decrease in yield on average loans which was driven by the downward adjustment of the interest rates on our existing adjustable-rate loans as a result of lower interest rates. The FTE yield on average loans decreased 18 basis points to 3.71% during the year endedDecember 31, 2021 . The decrease in loan yields was partially offset by an increase in net accretion of PPP loan deferred fees and costs of$20.4 million to$34.3 million during year endedDecember 31, 2021 from$13.9 million during the year endedDecember 31, 2020 . Also partially offsetting the decline in average yield was a slight increase in the average balance of loans of$371.9 million , or 3.9%, from$9.7 billion to$10.0 billion which was primarily the result of our acquisition of Century which added$2.9 billion in loans as ofNovember 12, 2021 , partially offset by a decline in PPP loan balances of$0.7 billion reflecting pay-offs of such balances. Interest Expense Interest expense decreased$6.7 million , or 55.8%, to$5.3 million during the year endedDecember 31, 2021 from$12.1 million during the year endedDecember 31, 2020 . The decrease was a result of lower funding costs associated with the decline in the market interest rates.
•Interest expense on our interest-bearing deposits decreased by
54.3%, to
million
•Interest expense on borrowed funds decreased by$0.6 million , or 78.3%, to$0.2 million during the year endedDecember 31, 2021 from$0.8 million during the year endedDecember 31, 2020 . Average interest-bearing deposits increased$1.6 billion , or 23.8%, for year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to the Century acquisition. The increase in deposit costs associated with the increase in average deposits was more than offset by the reduction in rates paid on deposits during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Net Interest Income Net interest income increased by$28.6 million , or 7.1%, to$429.8 million during the year endedDecember 31, 2021 , from$401.3 million during the year endedDecember 31, 2020 . Net interest income increased slightly as the reduction in interest income associated with the lower interest rate environment was more than offset by a related reduction in interest expense. In addition, the average balances of interest-earning assets substantially increased during the year endedDecember 31, 2021 compared to year endedDecember 31, 2020 which reflects assets acquired in connection with our acquisition of Century and the investment of the proceeds from ourOctober 2020 IPO in investment securities. Net interest margin is determined by dividing FTE net interest income by average-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using a marginal tax rate of 21.0% for the year endedDecember 31, 2021 , and 21.8% for the years endedDecember 31, 2020 and 2019. Net interest margin decreased 57 basis points to 2.61% during the year endedDecember 31, 2021 , from 3.19% during the year endedDecember 31, 2020 . The following tables set forth average balance sheet items, average yields and costs, and certain other information for the periods indicated. All average balances in the table reflect daily average balances. Non-accrual loans were included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. 86 -------------------------------------------------------------------------------- Average Balances, Interest Earned/Paid, & Average Yields As of and for the Year Ended December 31, 2021 2020 2019 Average Average Average Outstanding Average Outstanding Average Outstanding Average Balance Interest Yield /Cost Balance Interest Yield /Cost Balance Interest Yield /Cost (Dollars in thousands) Interest-earning assets: Loans (1): Residential$ 1,510,703 $ 47,143 3.12 %$ 1,400,907 $ 49,767 3.55 %$ 1,439,845 $ 53,736 3.73 % Commercial 7,410,024 288,557 3.89 % 7,014,044 281,816 4.02 % 6,089,410 291,055 4.78 % Consumer 1,103,042 36,019 3.27 % 1,236,893 43,729 3.54 % 1,419,692 60,009 4.23 % Total loans 10,023,769 371,719 3.71 % 9,651,844 375,312 3.89 % 8,948,947 404,800 4.52 % Non-taxable investment securities 260,399 9,335 3.58 % 265,511 9,899 3.73 % 287,128 10,852 3.78 % Taxable investment securities 4,890,737 58,312 1.19 % 1,560,610 31,831 2.04 % 1,148,591 31,642 2.75 % Federal funds sold and other short-term investments 1,514,351 1,886 0.12 % 1,288,714 1,758 0.14 % 144,856 2,977 2.06 % Total interest-earning assets 16,689,256 441,252 2.64 % 12,766,679 418,800 3.28 % 10,529,522 450,271 4.28 % Non-interest-earning assets 1,173,830 1,097,064 874,588 Total assets$ 17,863,086 $ 13,863,743 $ 11,404,110 Interest-bearing liabilities: Deposits: Savings accounts$ 1,483,271 $ 230 0.02 %$ 1,123,584 $ 242 0.02 %$ 991,244 $ 210 0.02 % Interest checking accounts 2,866,091 1,997 0.07 % 2,227,185 2,033 0.09 % 1,842,993 3,947 0.21 % Money market investments 3,870,712 2,342 0.06 % 3,212,752 7,492 0.23 % 2,769,934 19,150 0.69 % Time accounts 280,141 598 0.21 % 300,381 1,548 0.52 % 392,035 3,994 1.02 % Total interest-bearing deposits 8,500,215 5,167 0.06 % 6,863,902 11,315 0.16 % 5,996,206 27,301 0.46 % Borrowings 26,495 165 0.62 % 72,101 762 1.06 % 291,413 6,452 2.21 % Total interest-bearing liabilities 8,526,710 5,332 0.06 % 6,936,003 12,077 0.17 % 6,287,619 33,753 0.54 % Demand accounts 5,547,615 4,535,066 3,369,375 Other noninterest-bearing liabilities 364,191 352,518 203,925 Total liabilities 14,438,516 11,823,587 9,860,919 Total net worth 3,424,570 2,040,156 1,543,191 Total liabilities and retained earnings$ 17,863,086 $ 13,863,743 $ 11,404,110 Net interest income - FTE$ 435,920 $ 406,723 $ 416,518 Net interest rate spread (2) 2.58 % 3.11 % 3.74 % Net interest-earning assets (3)$ 8,162,546 $ 5,830,676 $ 4,241,903 Net interest margin - FTE (4) 2.61 % 3.19 % 3.96 % Average interest-earning assets to interest-bearing liabilities 195.73 % 184.06 % 167.46 % Return on average assets (5) 0.87 % 0.16 % 1.18 % Return on average equity (6) 4.52 % 1.11 % 8.75 % Noninterest expenses to average assets 2.49 % 3.64 % 3.62 % (1)Non-accrual loans are included in Loans. (2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. (4)Net interest margin represents net interest income divided by average total interest-earning assets. (5)Represents net income divided by average total assets. (6)Represents net income divided by average equity. 87 -------------------------------------------------------------------------------- The following table presents, on a tax equivalent basis, the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. Rate and Volume Analysis For the Year Ended December 31, 2021 vs. 2020 For the Year Ended December 31, 2020 vs. 2019 Increase (Decrease) Due to Total Increase (Decrease) Due to Total Increase Increase Rate Volume (Decrease) Rate Volume (Decrease) (In thousands) Interest-earning assets: Loans Residential$ (6,339) $ 3,715 $ (2,624) $ (2,541) $ (1,428) $ (3,969) Commercial (8,852) 15,593 6,741 (49,997) 40,758 (9,239) Consumer (3,190) (4,520) (7,710) (9,110) (7,170) (16,280) Total loans (18,381) 14,788 (3,593) (61,648) 32,160 (29,488) Non-taxable investment securities (376) (188) (564) (145) (808) (953) Taxable investment securities (17,822) 44,303 26,481 (9,452) 9,641 189 Federal funds sold and other short-term investments (162) 290 128 (5,100) 3,881 (1,219) Total interest-earning assets$ (36,741) $ 59,193 $ 22,452 $ (76,345) $ 44,874 $ (31,471) Interest-bearing liabilities: Deposits: Savings accounts$ (78) $ 66 $ (12) $ 4 $ 28 $ 32 Interest checking accounts (544) 508 (36) (2,611) 697 (1,914) Money market investments (6,438) 1,288 (5,150) (14,325) 2,667 (11,658) Time accounts (852) (98) (950) (1,660) (786) (2,446) Total interest-bearing deposits (7,912) 1,764 (6,148) (18,592) 2,606 (15,986) Borrowings (235) (362) (597) (2,332) (3,358) (5,690) Total interest-bearing liabilities (8,147) 1,402 (6,745) (20,924) (752) (21,676)
Change in net interest income
29,197
Provision for Loan Losses
The provision for loan losses represents the charge to expense that is required to maintain an appropriate level of allowance for loan losses. We currently follow the incurred loss model for determining the provision for loan losses and adopted what is commonly referred to as the "CECL standard" onJanuary 1, 2022 . We recorded a release of the allowance for loan losses of$9.7 million for the year endedDecember 31, 2021 , compared to a provision of$38.8 million for the year endedDecember 31, 2020 . Given the continued improved economic and credit conditions during year endedDecember 31, 2021 , we determined that a release of the allowance was necessary. InMarch 2020 , in response to the COVID-19 pandemic, we downgraded the risk ratings for all commercial loans we expected at the time to be significantly impacted by the pandemic, including our hotel and restaurant loan portfolios, which resulted in a total provision of$28.6 million recorded in the first quarter of 2020. Our periodic evaluation of the appropriate allowance for loan losses considers the risk characteristics of the loan portfolio, current economic conditions, and trends in loan delinquencies and charge-offs. 88 --------------------------------------------------------------------------------
Noninterest Income
The following table sets forth information regarding noninterest income for the
periods shown:
Noninterest Income
For the Year Ended December 31, Change
2021 2020 Amount %
(Dollars in thousands)
Insurance commissions $ 94,704 $ 94,495 $ 209 0.2 %
Service charges on deposit accounts 24,271 21,560 2,711 12.6 %
Trust and investment advisory fees 24,588 21,102 3,486 16.5 %
Debit card processing fees 12,118 10,277 1,841 17.9 %
Interest swap income (losses) 5,634 (1,381) 7,015 508.0 %
Income from investments held in rabbi
trusts 10,217 10,337 (120) (1.2) %
Losses trading securities gains, net - (4) 4 (100.0) %
Gains on sales of mortgage loans held for
sale, net 3,605 7,066 (3,461) (49.0) %
Gains on sales of securities available
for sale, net 1,166 288 878 304.9 %
Other 16,852 14,633 2,219 15.2 %
Total noninterest income $ 193,155 $ 178,373 $ 14,782 8.3 %
Noninterest income increased by $14.8 million , or 8.3%, to $193.2 million for
the year ended December 31, 2021 from $178.4 million for the year ended December
31, 2020 . The increase was primarily due to a $7.0 million increase in interest
rate swap income, and a $3.5 million increase in trust and investment advisory
fees, which were partially offset by a $3.5 million decrease in net gains
resulting from the sale of mortgage loans held for sale.
•Interest rate swap income increased primarily as a result of a favorable
mark-to-market adjustment due to the current interest rate and economic
environment.
•Trust and investment advisory fees increased primarily as a result of higher
asset values associated with the principal assets in customers' accounts.
•Net gains resulting from the sale of mortgage loans held for sale decreased
primarily due to a combination of fewer residential real estate loans originated
as held for sale as we designate more residential mortgage loans originated as
held for investment and increases in market rates of interest.
89
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Noninterest Expense
The following table sets forth information regarding noninterest expense for the
periods shown:
Noninterest Expense
For the Year Ended December 31, Change
2021 2020 Amount %
(Dollars in thousands)
Salaries and employee benefits $ 295,916 $ 261,827 $ 34,089 13.0 %
Office occupancy and equipment 40,465 33,796 6,669 19.7 %
Data processing 50,839 45,259 5,580 12.3 %
Professional services 24,477 18,902 5,575 29.5 %
Charitable contributions - 95,272 (95,272) (100.0) %
Marketing 8,741 8,879 (138) (1.6) %
Operational losses 7,786 2,493 5,293 212.3 %
Loan expenses 6,516 6,727 (211) (3.1) %
FDIC insurance 4,226 3,734 492 13.2 %
Amortization of intangible assets 2,512 2,857 (345) (12.1) %
Other 2,478 25,177 (22,699) (90.2) %
Total noninterest expense $ 443,956 $ 504,923 $ (60,967) (12.1) %
The Company recorded merger and acquisition expenses of $35.5 million during the
year ended December 31, 2021 related to the Century acquisition. These merger
and acquisition expenses were included in the following line items of the
consolidated statements of income:
Century Merger & Acquisition Expenses
For the Year Ended December 31, 2021
(In thousands)
Salaries and employee benefits $
15,947
Office occupancy and equipment 7,198 Data processing 1,286 Professional services 9,223 Other 1,802 Total merger and acquisition expenses $
35,456
Noninterest expense decreased by$61.0 million , or 12.1%, to$444.0 million during the year endedDecember 31, 2021 from$504.9 million during the year endedDecember 31, 2020 . The decrease was primarily due to a$95.3 million decrease in charitable contributions and a$24.5 million decrease in other noninterest expenses, excluding merger and acquisition expenses. Partially offsetting these decreases were$35.5 million in merger and acquisition expenses, for which there were none during the year endedDecember 31, 2020 , an increase in salaries and employee benefits of$18.1 million , excluding merger and acquisition expenses, and an increase in operational losses of$5.3 million . •Charitable contributions decreased as the Company made no contributions during the year endedDecember 31, 2021 following the Company's$91.3 million stock contribution to theEastern Bank Foundation made in connection with the Company's IPO during the year endedDecember 31, 2020 . •Other noninterest expenses, excluding merger and acquisition expenses, decreased primarily due to reduced costs associated with the conversion of each of our noncontributory, defined benefit plan ("Defined Benefit Plan") and Benefit Equalization Plan ("BEP") from a traditional final average earnings plan design to a cash balance plan design, which occurred in the fourth quarter of 2020 and was effective as ofNovember 1, 2020 . In addition, other noninterest expenses, excluding merger and acquisition expenses, decreased due to a reduction in impairment charges taken on certain tax credit investments. Non-service cost expenses for the Defined Benefit Plan and the BEP decreased by$13.0 million and$2.1 million , respectively, for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 . Impairment charges taken on certain tax credit investments decreased primarily due to write-downs taken of$10.8 million on certain tax credit investments accounted for under the equity method of accounting during the year endedDecember 31, 2020 , which was primarily composed of a$7.6 90 -------------------------------------------------------------------------------- million impairment charge reflecting management's estimate of the future benefit of the investments. During the year endedDecember 31, 2021 we recorded a net recovery of impairment charges of$0.2 million . For additional information on this impairment charge see Note 13, "Low Income Housing Tax Credits and Other Tax Credit Investments" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. •Merger and acquisition expenses were$35.5 million and resulted from our acquisition of Century which we completed onNovember 12, 2021 . No such expenses were incurred during the year endedDecember 31, 2020 as there were no acquisitions. For additional information on our acquisition of Century, see Note 3, "Mergers and Acquisitions" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. •Salaries and employee benefits increased primarily as a result of an increase of$7.1 million in ESOP expense, for which fewer expenses were incurred during the year endedDecember 31, 2020 , in which the ESOP was established in October of such year. Also contributing to the increase were pension service costs which increased$6.9 million from the year endedDecember 31, 2020 which resulted from an increase in the projected retirement benefits earned by plan participants during the year endedDecember 31, 2021 . The higher pension service costs were more than offset by a decrease in the non-service cost components of net periodic pension expense for the Defined Benefit Plan and the BEP, as discussed further above. •Operational losses increased primarily as a result of an accrual of$3.3 million during the year endedDecember 31, 2021 for legal expenses associated with the preliminary settlement of the putative consumer class action litigation matters related to overdraft and non-sufficient funds fees.
Income Taxes
We recognize the tax effect of all income and expense transactions in each
year's consolidated statements of income, regardless of the year in which the
transactions are reported for income tax purposes. The following table sets
forth information regarding our tax provision and applicable tax rates for the
periods indicated:
Tax Provision and Applicable Tax Rates
For the Year Ended December 31,
2021 2020
(Dollars in thousands)
Combined federal and state income tax provisions $ 34,047 $ 13,163
Effective income tax rates 18.0 % 36.7 %
Blended statutory tax rate 28.1 % 28.1 %
Income tax expense increased by $20.9 million to $34.0 million in the year ended
December 31, 2021 from $13.2 million in the year ended December 31, 2020 . The
increase in income tax expense was due primarily to higher pre-tax income during
the year ended December 31, 2021 compared to the year ended December 31, 2020 ,
which lessened the impact on the effective rate related to favorable permanent
differences, including investment tax credits and tax exempt income. Partially
offsetting this increase was a release of $11.3 million related to a valuation
allowance of $12.0 million , established as of December 31, 2020 against our
charitable contribution carryover deferred tax asset in connection with our 2020
charitable contribution to the Foundation. For additional information related to
the Company's income taxes see Note 12, "Income Taxes" and Note 13, "Low Income
Housing Tax Credits and Other Tax Credit Investments" within the Notes to the
Consolidated Financial Statements included in Item 8 in this Annual Report on
Form 10-K.
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Financial Position and Results of Operations of our Business Segments
As of and for the Year Ended December 31,
2021 2020
Insurance Insurance
Banking Agency Other/ Banking Agency Other/
Business Business Eliminations Total Business Business Eliminations Total
(Dollars in thousands)
Net interest income $ 429,827 $ - $ - $ 429,827 $ 401,251 $ - $ - $ 401,251
(Release of) provision for
allowance for loan losses (9,686) - - (9,686) 38,800 - - 38,800
Net interest income after
provision for loan losses 439,513 - - 439,513 362,451 - - 362,451
Noninterest income 96,376 97,168 (389) 193,155 82,334 96,739 (700) 178,373
Noninterest expense 365,410 82,780 (4,234) 443,956 431,705 77,806 (4,588) 504,923
Income before provision for
income taxes 170,479 14,388 3,845 188,712 13,080 18,933 3,888 35,901
Income tax provision 29,994 4,053 - 34,047 7,870 5,293 - 13,163
Net income $ 140,485 $ 10,335 $
3,845
$ 3,888 $ 22,738 Total assets$ 23,376,521 $ 204,768 $
(69,161)
$ (67,201) $ 15,964,190 Total liabilities$ 20,125,218 $ 49,719 $
(69,161)
$ (67,201) $ 12,536,138 Banking Segment •Average interest-earning assets increased$3.9 billion , or 30.7%, to$16.7 billion for the year endedDecember 31, 2021 from$12.8 billion for the year endedDecember 31, 2020 , reflecting the addition of Century assets and the purchase of investment securities representing the investment of the proceeds from ourOctober 2020 IPO. Our acquisition of Century closed onNovember 12, 2021 and added approximately$6.6 billion in interest-earning assets. The increase in average interest-earning assets resulted in an increase in interest income and was partially offset by a decline in market rates of interest. For additional discussion, refer to the earlier "Interest and Dividends" section. •Average interest-bearing liabilities increased$1.6 billion , or 22.9%, to$8.5 billion for the year endedDecember 31, 2021 from$6.9 billion for the year endedDecember 31, 2020 , with average total interest-bearing deposits, our largest category of average interest-bearing liabilities, growing$1.6 billion , or 23.8%, to$8.5 billion as ofDecember 31, 2021 compared to$6.9 billion as ofDecember 31, 2020 . The increase in average interest-bearing liabilities was more than offset by a reduction in rates paid on deposits resulting in an overall decrease in interest expense. For additional discussion, refer to the earlier "Interest and Dividends" section. •We recorded a release of allowance for loan losses of$9.7 million for the year endedDecember 31, 2021 , compared to a provision of$38.8 million for the year endedDecember 31, 2020 . Given continued improved economic and credit conditions during the year endedDecember 31, 2021 , we determined that a release of the provision was necessary. For additional discussion, refer to the earlier "Provision for Loan Losses" section. •Gains related to interest rate swaps were$5.6 million for the year endedDecember 31, 2021 compared to losses of$1.4 million for the year endedDecember 31, 2020 , representing an increase of 508.0%. This change was due primarily to a favorable mark-to-market adjustment which resulted in an increase in income of$9.8 million which was partially offset by a decrease of$2.7 million attributable to a decline in transactional volume. •Trust and investment advisory fees increased$3.5 million from$21.1 million for the year endedDecember 31, 2020 to$24.6 million for the year endedDecember 31, 2021 primarily as a result of higher asset values associated with the principal assets in customers' accounts. Assets under management as ofDecember 31, 2021 were$3.4 billion compared to$2.9 billion as ofDecember 31, 2020 . •Noninterest expense decreased during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily due to charitable contributions which decreased as no contributions were made during the year endedDecember 31, 2021 following the our$91.3 million stock contribution to theEastern Bank Foundation made in connection with our IPO during the year endedDecember 31, 2020 . This decrease was partially offset by costs associated with our acquisition of Century of$35.5 million . For additional discussion, refer to the earlier "Noninterest Expense" section. 92 --------------------------------------------------------------------------------
Insurance Agency Segment
•Noninterest income related to our insurance agency business remained relatively consistent with a slight increase of$0.4 million , or 0.4%, to$97.2 million during the year endedDecember 31, 2021 from$96.7 million during the year endedDecember 31, 2020 . •Noninterest expense related to our insurance agency business increased$5.0 million , or 6.4%, to$82.8 million during the year endedDecember 31, 2021 from$77.8 million during the year endedDecember 31, 2020 , due to increases in salaries, wages and benefits to employees in this business unit.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could differ from these estimates. While our significant accounting policies are discussed in detail in Note 2, "Summary of Significant Accounting Policies" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements. Allowance for Loan Losses. The allowance for loan losses is the amount estimated by us as necessary to absorb loan losses incurred in the loan portfolio that are probable and reasonably estimable at the balance sheet date. The amount of the allowance is based on significant judgments and estimates, and the ultimate losses may vary from such estimates as more information becomes available or conditions change. The methodology for determining the allowance for loan losses is considered a critical accounting policy due to the high degree of judgement involved in determining the risk characteristics of the loan portfolio, subjectivity of assumptions used and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses. Additionally, various regulatory agencies, as an integral part of the regulatory examination process, periodically assess the appropriateness of the allowance for loan losses and may require us to increase the provision for loan losses or recognize further loan charge-offs, in accordance with GAAP. The allowance for loan losses is evaluated at least quarterly. While we use current information in establishing the allowance for losses, future adjustments to the allowance may be necessary if economic conditions or conditions relative to borrowers differ substantially from the assumptions used in making the evaluation. We use a methodology to systematically estimate the amount of credit loss incurred in the portfolio. Commercial real estate, commercial construction, commercial and industrial, and business banking loans are evaluated using a loan rating system, historical losses and other factors which form the basis for estimating incurred losses. Portfolios of more homogeneous populations of loans, including residential mortgages and consumer loans, are analyzed as groups using delinquency ratios, historical loss experience and charge-offs. The allowance consists of specific and general components. The specific component relates to loans that are deemed to be impaired. For impaired loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the loan is lower than the carrying value of the loan. The general component covers non-impaired, non-classified loans and is based on historical loss experience adjusted for qualitative factors. ThroughDecember 31, 2021 , we followed the incurred loss methodology for determining our allowance for loan loss. We adopted the CECL standard effectiveJanuary 1, 2022 .
For additional information on our allowance for loan losses, refer to Note 5,
"Loans and Allowance for Loan Losses" within the Notes to the Consolidated
Financial Statements included in Item 8 in this Annual Report on Form 10-K.
Income Taxes. We account for income taxes by establishing deferred tax assets
and liabilities for the temporary differences between the accounting basis and
the tax basis of our assets and liabilities at enacted tax rates. We make
significant judgments regarding the amount and timing of recognition of deferred
tax assets and liabilities. This requires subjective projections of future
taxable income resulting from interest on loans and securities, as well as
noninterest income. A valuation allowance is established if it is considered
more likely than not that all or a portion of the deferred tax assets will not
be realized. Interest and penalties paid on the underpayment of income taxes are
classified as income tax expense.
We periodically evaluate the potential uncertainty of our tax positions as to
whether it is more likely than not its position would be upheld upon examination
by the appropriate taxing authority. The tax position is measured at the largest
amount of benefit that we believe is greater than 50% likely of being realized
upon settlement.
93
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For additional information on our income taxes, refer to Note 12, "Income Taxes"
within the Notes to the Consolidated Financial Statements included in Item 8 in
this Annual Report on Form 10-K.
Goodwill and Other Intangibles. We evaluate goodwill for impairment at least
annually, or more often if warranted, using a quantitative impairment approach.
The quantitative impairment testing compares book value to fair value of the
reporting unit. If book value exceeds fair value, an impairment is charged to
earnings and allocated to the appropriate reporting unit.
We evaluate other intangible assets, all of which are definite-lived, for
impairment whenever there is an indication of impairment, and we evaluate
annually the remaining useful lives of those intangible assets. We amortize
other intangible assets over their respective estimated useful lives.
For additional information on our goodwill and other intangibles, refer to Note
8, "Goodwill and Other Intangibles" within the Notes to the Consolidated
Financial Statements included in Item 8 in this Annual Report on Form 10-K.
Securities. Debt securities are classified at the time of purchase as either
"trading," "available for sale," or "held to maturity." Equity securities are
measured at fair value with changes in the fair value recognized through net
income.
We evaluate impaired securities for other-than-temporary impairment ("OTTI") at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to the length of time and the
extent to which the fair value has been less than cost, current market
conditions, the financial condition and near-term prospects of the issuer,
performance of collateral underlying the securities, the ratings of the
individual securities, the interest rate environment, our intent to sell the
security or whether it is more likely than not that we will be required to sell
the debt security before its anticipated recovery, as well as other qualitative
factors. The term other-than-temporary impairment is not intended to indicate
that the decline is permanent. It indicates that the prospects for near-term
recovery are not necessarily favorable or that there is a lack of evidence to
support fair values greater than or equal to the carrying value of the
investment.
If a decline in fair value below the amortized cost basis of an investment is
judged to be other than temporary, the investment is written down to fair value.
The portion of the impairment related to credit losses is included in net
income, and the portion of the impairment related to other factors is included
in other comprehensive income. Gains and losses on sales of securities are
recognized at the time of sale on the specific-identification basis.
For additional information on our investment securities, refer to Note 3,
"Securities" and Note 20, "Fair Value of Assets and Liabilities" within the
Notes to the Consolidated Financial Statements included in Item 8 in this Annual
Report on Form 10-K.
Pension and other Post Retirement Benefit Plans. We provide pension benefits for employees using a noncontributory, defined benefit plan, through membership in the SBERA. EffectiveNovember 1, 2020 , the Defined Benefit Plan was amended to convert the plan from a traditional final average earnings plan design to a cash balance plan design. Benefits earned under the final average earnings plan design were frozen atOctober 31, 2020 . StartingNovember 1, 2020 , future benefits are earned under the cash balance plan design. Our employees become eligible after attaining age 21 and one year of service. Under the final average earnings plan design, benefits became fully vested after three years of eligible service for individuals employed on or beforeOctober 31, 1989 . For individuals employed subsequent toOctober 31, 1989 and who were already in the Defined Benefit Plan as ofNovember 1, 2020 , benefits became fully vested after five years of eligible service. Under the cash balance plan design, benefits become fully vested after three years of eligible service. Our annual contribution to the plan is based upon standards established by the Pension Protection Act. The contribution is based on an actuarial method intended to provide not only for benefits attributable to service to date, but also for those expected to be earned in the future. Plan assets are invested in various investment funds and held at fair value which generally represents observable market prices. Pension liability is determined based on the actuarial cost method factoring in assumptions such as salary increases, expected retirement date, mortality rate, and employee turnover. The actuarial cost method used to compute the pension liabilities and related expense is the projected unit credit method. The projected benefit obligation is principally determined based on the present value of the projected benefit distributions at an assumed discount rate (which is the rate at which the projected benefit obligation could be effectively settled as of the measurement date). The discount rate which is utilized is determined using the spot rate approach whereby the individual spot rates on theFinancial Times andStock Exchange ("FTSE") above-median yield curve are applied to each corresponding year's projected cash flow used to measure the respective plan's service cost and interest cost. Periodic pension expense (or income) includes service costs, interest costs based on the assumed discount rate, the expected return on plan assets, if applicable, based on the market value of assets and amortization of actuarial gains and losses. Net period benefit cost excluding service cost is included within other noninterest expense in the consolidated statements of income. Service cost is included in salaries and employee benefits in the consolidated statements of income. The amortization of actuarial gains and losses for the Defined Benefit Supplemental Executive Retirement Plan ("DB SERP") and Outside Directors' Retainer Continuance Plan ("ODRCP") is determined using the 10% 94 -------------------------------------------------------------------------------- corridor minimum amortization approach and is taken over the average remaining future service of the plan participants for the ODRCP, and over the average remaining future life expectancy of plan participants for the DB SERP. The amortization of actuarial gains and losses for the Defined Benefit Plan and BEP are determined without using the 10% corridor minimum amortization approach and is taken over the average remaining future service of the plan participants. The overfunded or underfunded status of the plans is recorded as an asset or liability on the consolidated balance sheets, with changes in that status recognized through other comprehensive income, net of related taxes. Funded status represents the difference between the projected benefit obligation of the plan and the market value of the plan's assets.
For additional information on our employee benefit plans, refer to Note 16,
"Employee Benefits" within the Notes to the Consolidated Financial Statements
included in Item 8 in this Annual Report on Form 10-K.
Derivative Financial Instruments. Derivative instruments are carried at fair value in our financial statements. The accounting for a derivative instrument is determined by whether it has been designated and qualifies as part of a hedging relationship, and further, by the type of hedging relationship. Our derivative instruments that qualify for hedge accounting are classified as cash flow hedges (i.e., hedging the exposure to variability in expected future cash flows associated with a recognized asset or liability, or a forecasted transaction). Our derivative instruments not designated as hedging instruments include interest rate swaps, foreign exchange contracts offered to commercial customers to assist them in meeting their financing and investing objectives for their risk management purposes, and risk participation agreements entered into as financial guarantees of performance on customer-related interest rate swap derivatives. The interest rate and foreign exchange risks associated with customer interest rate swaps and foreign exchange contracts are mitigated by entering into similar derivatives having offsetting terms with correspondent bank counterparties. For additional information on our derivatives, refer to Note 18, "Derivative Financial Instruments" and Note 19, "Balance Sheet Offsetting" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. Fair Value Measurements. "Fair value" is defined as 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. We estimate the fair value in recording acquisition transactions and for financial instruments and any related asset impairment using a variety of valuation methods. For acquisition transactions, the Company uses quotable market prices or observable data when possible in valuing acquired assets and liabilities. Where financial instruments are actively traded and have quoted market prices, quoted market prices as of the measurement date are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data, may be used, if available, to determine fair value. When observable market prices do not exist, we estimate fair value. These estimates are subjective in nature and imprecision in estimating these factors can impact the amount of revenue or loss recorded. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment we exercise in determining fair value is greatest for instruments categorized in Level 3.
For additional information on our fair value measurements, refer to Note 20,
"Fair Value of Assets and Liabilities" within the Notes to the Consolidated
Financial Statements included in Item 8 in this Annual Report on Form 10-K.
Recent Accounting Pronouncements
InJune 2016 , the FASB issued ASU 2016-13, Financial Instruments-Credit Losses on Financial Instruments and relevant amendments (Topic 326) ("ASU 2016-13"). This update was created to replace the current GAAP method of calculating credit losses. Specifically, the standard replaces the existing incurred loss impairment guidance by requiring immediate recognition of expected credit losses. For financial assets carried at amortized cost that are held at the reporting date (including trade and other receivables, loans and commitments, held-to-maturity debt securities and other financial assets), credit losses are measured based on historical experience, current conditions and reasonable supportable forecasts. The standard also amends existing impairment guidance for available for sale securities, in which credit losses will be recorded as an allowance versus a write-down of the amortized cost basis of the security. It will also allow for a reversal of impairment loss when the credit of the issuer improves. The guidance requires a cumulative effect of the initial application to be recognized in retained earnings at the date of initial application. InNovember 2018 , the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses ("ASU 2018-19"). The amendments in ASU 2018-19 were intended to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. InNovember 2019 , the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. This update requires entities to include expected recoveries of the amortized cost basis previously written off or expected to be written off in the valuation 95 -------------------------------------------------------------------------------- account for purchased financial assets with credit deterioration. In addition, the amendments in this update clarify and improve various aspects of the guidance for ASU 2016-13. For public entities that meet the definition of anSEC filer (excluding smaller reporting entities) the guidance is effective for annual reporting periods beginning afterDecember 15, 2019 . Early adoption is permitted for all entities as of the fiscal years beginning afterDecember 15, 2018 . For all other entities, the guidance is effective for annual reporting periods beginning afterDecember 15, 2022 , including interim periods within those fiscal years. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was enacted in response to the COVID-19 pandemic inthe United States . to provide economic relief measures including the option to defer adoption of ASU 2016-13 to the earlier of the ending of the national emergency declaration related to the COVID-19 crisis orDecember 31, 2020 . OnDecember 27, 2020 , the Consolidated Appropriations Act (the "Appropriations Act") was enacted to fund the federal government through their fiscal year, extend certain expiring tax provisions and provide additional emergency relief to individuals and businesses related to the COVID-19 pandemic inthe United States . Included within the provisions of the Appropriations Act is an extension of the adoption date for ASU 2016-13 fromDecember 31, 2020 to the earlier ofJanuary 1, 2022 or 60 days after the date on which the COVID-19 national emergency terminates.
Effective
For a description of recent accounting pronouncements that may affect our
financial position or results of operations, refer to Note 2, "Summary of
Significant Accounting Policies" within the Notes to the Consolidated Financial
Statements included in Item 8 in this Annual Report on Form 10-K.
Management of Market Risk
General. Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. Interest rate sensitivity is the most significant market risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, our primary source of income. Interest rate risk arises directly from our core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of securities and derivatives, as well as other effects. The primary goal of interest rate risk management is to control this risk within limits approved by the Risk Management Committee of our Board of Directors. These limits reflect our tolerance for interest rate risk over both short-term and long-term horizons. We attempt to manage interest rate risk by identifying, quantifying, and where appropriate, hedging its exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. Our objective is to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary and within limits that management determines to be prudent, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors and caps. Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. We estimate what our net interest income would be for a 12-month period assuming no changes in interest rates. We then calculate what the net interest income would be for the same period under the assumption that theU.S. Treasury yield curve increases or decreases instantaneously by +200, +300, +400 and -100 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the "Changes in Interest Rates" column in the table below. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent atDecember 31, 2021 and 2020 precluded the modeling of certain falling rate scenarios. We do not model negative interest rate scenarios. 96 -------------------------------------------------------------------------------- The tables below set forth, as ofDecember 31, 2021 and 2020, the calculation of the estimated changes in our net interest income on an FTE basis that would result from the designated immediate changes in theU.S. Treasury yield curve. Interest Rate Sensitivity As of December 31, 2021 Change in Net Interest Year 1 Interest Rates Income Year 1 Change from (basis points) (1) Forecast Level (Dollars in thousands) 400 $ 663,207 30.2% 300 624,384 22.6% 200 586,319 15.1% Flat 509,379 -% (100) 479,489 (5.9)% As of December 31, 2020 Change in Net Interest Year 1 Interest Rates Income Year 1 Change from (basis points) (1) Forecast Level (Dollars in thousands) 400 $ 571,842 50.0% 300 524,847 37.7% 200 478,307 25.5% Flat 381,259 -% (100) 362,186 (5.0)%
(1)Assumes an immediate uniform change in interest rates at all maturities,
except in the down 100 basis points scenario, where rates are floored at zero at
all maturities.
The tables above indicate that atDecember 31, 2021 and 2020, in the event of an instantaneous parallel 200 basis points increase in rates, we would have experienced a 15.1% and 25.5% increase, respectively, in net interest income on an FTE basis, and in the event of an instantaneous 100 basis points decrease in interest rates, we would have experienced a 5.9% and a 5.0% decrease atDecember 31, 2021 and 2020, respectively, in net interest income, on an FTE basis. Management may use interest rate derivative financial instruments, within internal policy guidelines, to manage interest rate risk as part of our asset/liability strategy. These derivatives provide significant protection against falling interest rates. Economic Value of Equity Analysis. We also analyze the sensitivity of our financial condition in interest rates through our economic value of equity ("EVE") model. This analysis calculates the difference between the present value of expected cash flows from assets and liabilities assuming various changes in current interest rates. The table below represents an analysis of our interest rate risk (excluding the effect of our pension plans) as measured by the estimated changes in our EVE model, resulting from an instantaneous and sustained parallel shift in the yield curve (+200, +300, +400 basis points and -100 basis points) atDecember 31, 2021 and 2020. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent atDecember 31, 2021 and 2020 precluded the modeling of certain falling rate scenarios, including negative interest rates. Our earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines. 97 -------------------------------------------------------------------------------- EVE Interest Rate Sensitivity As ofDecember 31, 2021 EVE as a Change in Interest Estimated Increase (Decrease) in EVE from Level Percentage of Rates (basis points) (1) Estimated EVE (2) Amount Percent Total Assets (3) (Dollars in thousands) 400 $ 4,573,359 $ 27,408 0.6 % 21.30 % 300 4,565,019 19,068 0.4 % 20.80 % 200 4,589,035 43,084 0.9 % 20.39 % Flat 4,545,951 - - 17.06 % (100) 4,270,433 (275,518) (6.1) % 17.75 % As ofDecember 31, 2020 EVE as a Change in Interest Estimated Increase (Decrease) in EVE from Level Percentage of Rate (basis points) (1) Estimated EVE (2) Amount ($) Percent (%) Total Assets (3) (Dollars in thousands) 400 $ 4,385,795 $ 452,022 11.5 % 29.09 % 300 4,297,682 363,909 9.3 % 28.06 % 200 4,205,867 272,094 6.9 % 27.00 % Flat 3,933,773 - - 24.38 % (100) 3,663,432 (270,341) (6.9) % 22.65 % (1)Assumes an immediate uniform change in interest rates at all maturities, except in the down 100 basis points scenario, where rates are floored at zero at all maturities. (2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts. (3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
Liquidity, Capital Resources, Contractual Obligations, Commitments and
Contingencies
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet deposit withdrawals and anticipated loan fundings, as well as current and planned expenditures. We seek to maintain sources of liquidity that are deep and diversified and that may be used during the normal course of business as well as on a contingency basis. The net proceeds from our IPO significantly increased our liquidity and capital resources at bothEastern Bankshares, Inc. and Eastern Bank. Over time, the initial level of liquidity will be reduced as net proceeds from the IPO are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations were enhanced by the net proceeds from the stock offering and resulted in increased net interest-earning assets and net interest and dividend income. As previously discussed in "Overview" within this section, onNovember 12, 2021 , we completed our previously announced merger with Century for$641.9 million in cash. Although, the transaction reduced the net proceeds from the IPO, we continue to expect that, due to the increase in equity resulting from the net proceeds raised in our IPO, our return on equity has been and will continue to be adversely affected until we can effectively deploy the remaining proceeds of the IPO. Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and due from banks and securities classified as available for sale. In the future, our liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and stock repurchases in which we may engage. We believe that our existing resources will be sufficient to meet the liquidity and capital requirements of our operations for the foreseeable future. We participate in the IntraFi Network (formerly "Promontory"), which allows us to provide access to multi-million dollarFDIC deposit insurance protection on customer deposits for consumers, businesses and public entities. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. AtDecember 31, 2021 and 2020, we had a total of$520.5 million and$364.8 million of IntraFi Network one-way sell deposits, respectively. AtDecember 31, 2021 andDecember 31, 2020 , no amounts were repurchased of previously sold reciprocal deposits. The additional capacity of$520.5 million and$364.8 million atDecember 31, 2021 and 2020, respectively, should be considered a source of liquidity. 98 -------------------------------------------------------------------------------- Although customer deposits remain our preferred source of funds, maintaining additional back up sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. AtDecember 31, 2021 , we had$14.0 million in outstanding advances and the ability to borrow up to an additional$1.8 billion . We also have the ability to borrow from theFederal Reserve Bank of Boston . AtDecember 31, 2021 , we had a$456.1 million collateralized line of credit from theFederal Reserve Bank of Boston with no outstanding balance. Additionally, atDecember 31, 2020 we had the ability to borrow from the Federal Reserve Paycheck Protection Program Liquidity Facility ("PPPLF"). TheFederal Reserve ended the PPPLF as ofJuly 30, 2021 . Accordingly, atDecember 31, 2021 , we no longer had additional capacity under the PPPLF. We had a total of$790.0 million of discretionary lines of credit atDecember 31, 2021 . Sources of Liquidity As of December 31, 2021 2020 Additional Additional Outstanding Capacity Outstanding Capacity (In thousands) IntraFi Network deposits $ -$ 520,461 $ -$ 364,794 Federal Home Loan Bank (1) 14,020 1,839,540 14,624 1,581,016 Federal Reserve Bank of Boston (2) - 456,148 - 503,512 Federal Reserve Paycheck Protection Program Liquidity Facility - - - 1,026,117 Unsecured lines of credit - 790,000 - 620,000 Total deposits$ 14,020 $ 3,606,149 $ 14,624 $ 4,095,439 (1)As ofDecember 31, 2021 andDecember 31, 2020 , loans have been pledged to the FHLBB with a carrying value of$2.6 billion and$2.4 billion , respectively, to secure our total borrowing capacity. (2)Loans with a carrying value of$0.8 billion and$0.9 billion atDecember 31, 2021 and 2020, respectively, have been pledged to theFederal Reserve Bank of Boston resulting in this additional unused borrowing capacity. We believe that advanced preparation, early detection, and prompt responses can avoid, minimize, or shorten potential liquidity crises. Our Board of Directors and our management's Asset Liability Committee have put a liquidity contingency plan in place to establish methods for assessing and monitoring risk levels, as well as potential responses during unanticipated stress events. As part of our risk management framework, we perform periodic liquidity stress testing to assess our need for liquid assets as well as backup sources of liquidity. Capital Resources. We are subject to various regulatory capital requirements administered by theMassachusetts Commissioner of Banks, theFDIC and theFederal Reserve (with respect to our consolidated capital requirements). AtDecember 31, 2021 and 2020, we exceeded all applicable regulatory capital requirements, and were considered "well capitalized" under regulatory guidelines. For additional information regarding our regulatory capital requirements, refer to Note 15, "Minimum Regulatory Capital Requirements" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. Contractual Obligations, Commitments and Contingencies. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. The amounts below assume the contractual obligations and commitments will run through the end of the applicable term and, as such, do not include early termination fees or penalties where applicable.
The following table summarizes our short-term (e.g. maturity of one year or
less) and long-term (e.g. maturity of greater than one year) contractual
obligations, other commitments and contingencies at
99
--------------------------------------------------------------------------------
One Year or Less After One Year
Total
(In thousands)
Commitments to extend credit (1)
$ 5,175,521 Standby letters of credit 55,424 10,178 65,602 Operating lease obligations 15,731 38,991 54,722 FHLB advances 17 14,003 14,020 Forward commitments to sell loans 24,440 - 24,440 Total$ 1,178,810 $ 4,155,495 $ 5,334,305 (1)Unused commitments that are deemed to be unconditionally cancellable are included in the less than one year category in the above table. Commitments to extend credit was comprised of$3.0 billion of commitments under commercial loans and lines of credit (including$423.2 million of unadvanced portions of construction loans),$1.9 billion of commitments under home equity loans and lines of credit,$197.2 million in overdraft coverage commitments,$38.6 million of unfunded commitments related to residential real estate loans and$59.9 million in other consumer loans and lines of credit as ofDecember 31, 2021 .
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is included in Part II, Item 7 of this
Annual Report on Form 10-K under the heading "Management of Market Risk."
100
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NATIONAL STORAGE AFFILIATES TRUST – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
OSCAR HEALTH, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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