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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$22.6 billion and$23.5 billion atDecember 31, 2022 and 2021, 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 revenue of$645.4 million , or 86.7% of our total revenue for the year endedDecember 31, 2022 , and our insurance agency business, which contributed revenue of$98.8 million , or 13.3% of our total revenue for the year endedDecember 31, 2022 . 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. Refer to the section of this Annual Report on Form 10-K titled "Business" within Item 1 for further discussion of our banking business and insurance agency business. Net income for the year endedDecember 31, 2022 , computed in accordance with GAAP, was$199.8 million , as compared to$154.7 million for the year endedDecember 31, 2021 , representing an increase of 29.2%. This increase was primarily due to an increase in net interest income. Our net interest income increased primarily due to an increase in our average interest-earning assets, which was primarily the result of our 2021 acquisition of Century. Refer to the "Results of Operations" section below for further discussion. Net income for the year endedDecember 31, 2022 and 2021 included items that our management considers non-core, which management excludes for purposes of assessing our operating net income, a non-GAAP financial measure. Operating net income for the year endedDecember 31, 2022 was$213.3 million compared to$165.9 million for the year endedDecember 31, 2021 . This increase was largely driven by the aforementioned change in average interest-earning assets. Refer to the "Outlook and Trends" section below for further discussion. Refer to the "Non-GAAP Financial Measures" below for a reconciliation of net operating earnings to GAAP net income. 56 -------------------------------------------------------------------------------- The following chart shows our basic earnings per share on a GAAP and operating (non-GAAP) basis over the past three years (refer to the "Non-GAAP Financial Measures" section below for a reconciliation of GAAP earnings to operating earnings): [[Image Removed: ebc-20221231_g2.jpg]] Earnings per share, on a GAAP basis, increased from$0.90 for the year endedDecember 31, 2021 to$1.21 for the year endedDecember 31, 2022 a 34.4% increase. The increase was primarily due to an increase in net interest income and a decrease in the average number of common shares outstanding. The decrease in the average number of common shares outstanding was attributable to share repurchases in connection with our previously announced share repurchase programs. 57 --------------------------------------------------------------------------------
The following chart shows our efficiency ratio on a GAAP and operating
(non-GAAP) basis over the past five years (refer to the "Non-GAAP Financial
Measures" section below for additional information on the determination of each
measure):
[[Image Removed: ebc-20221231_g3.jpg]]
The GAAP efficiency ratio and non-GAAP operating efficiency ratio for the year
ended December 31, 2022 decreased compared to the ratios for the year ended
December 31, 2021 . The decreases were primarily attributable to increased net
interest income, which resulted in a margin of increase in total revenue that
exceeded the rates at which noninterest expense increased and noninterest income
decreased for the same periods. Refer to the"Results of Operations" section
below for additional discussion of the changes in net interest income,
noninterest income and noninterest expense.
Outlook and Trends
Interest Rates
We believe that increases in the federal funds rate we expect to occur in the first half of 2023 will reduce our net interest income in 2023 as the increases in interest-bearing liability costs are anticipated to exceed the increase in yield on interest-earning assets. Beginning inMarch 2022 , theFOMC voted to increase the federal funds rate multiple times from a range of 0.00% to 0.25% to a range of 4.50% to 4.75% onFebruary 1, 2023 , when theFOMC stated that it "anticipates that ongoing increases in the target range [for the federal funds rate] will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time." Inevitably, not all of our interest rate-sensitive assets and liabilities will re-price simultaneously and in equal volume in response to changes in the federal funds rate, and therefore the potential for interest rate exposure exists. Management believes that several factors will affect the actual impact of interest rate changes on our balance sheet and operating results, including, but not limited to, actual changes in interest rates or expectations of future changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. We attempt to manage interest rate risk by identifying, quantifying, and, where appropriate, hedging our exposure. Approximately 34% of the outstanding principal balance of our loans as ofDecember 31, 2022 was indexed to a market rate that is expected to reprice along with the federal funds rate. As rates have risen and the shape of the yield curve changed during the year endedDecember 31, 2022 , a portion of these loans have been hedged using interest rate swaps to convert the floating rate interest receipts to a fixed rate. The notional amount of floating rate loans swapped totaled$2.4 billion as ofDecember 31, 2022 , representing approximately 18% of the outstanding principal balance of our loans at that date. For more detail regarding such hedging financial instruments, refer to Note 19, "Derivative Financial Instruments" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. We anticipate that an increase in market interest rates, whether due to an increase in the federal funds rate or otherwise, will decrease the fair value of those interest rate swaps 58 -------------------------------------------------------------------------------- and consequently reduce the positive impact on our net interest income that an interest rate increase would otherwise have. Refer to the section titled "Management of Market Risk" within this Item 7 for additional discussion including the estimated change to our net interest income under interest rate risk measurement methodologies that use a variety of hypothetical scenarios assuming immediate and parallel changes in interest rates that may not reflect the manner in which actual yields and costs respond to changes in market interest rates.
Paycheck Protection Program Loans
We are a participating lender in the SBA's Paycheck Protection Program, or PPP. 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 . As ofDecember 31, 2022 and 2021, the remaining balance of our PPP loans was$9.8 million and$331.4 million , respectively. Net PPP loan fee accretion (fee accretion less cost amortization) for all PPP loans decreased by$25.3 million , or 73.8%, to$9.0 million for the year endedDecember 31, 2022 from$34.3 million for the year endedDecember 31, 2021 . Our net interest margin was adversely affected as a result of the decline in net fee accretion, which is associated with the decreased volume of PPP loan payoffs. The impact to our net interest margin resulting from the decline in net PPP loan fee accretion during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was 0.25% (change computed based upon average total loans for the year endedDecember 31, 2021 ).
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,
operating net income to average tangible shareholders' equity, tangible book
value 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 (the "Foundation") in connection with our mutual-to-stock conversion
and IPO, (x) settlement of putative consumer class action litigation matters
related to overdraft and non-sufficient fund fees, and associated settlement
expenses, and (xi) the non-cash pension settlement charge recognized related to
our Defined Benefit Plan.
We also present tangible shareholders' equity, tangible assets, the ratio of
tangible shareholders' equity to tangible assets, average tangible shareholders'
equity, the ratios of net income and operating net income to average tangible
shareholders' equity 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
2022 2021 2020
(Dollars in thousands, except per share data)
Net income (GAAP) $ 199,759 $ 154,665 $ 22,738
Non-GAAP adjustments:
Add:
Noninterest income components:
Losses (income) from investments held in rabbi trusts 10,762 (10,217) (10,337)
Losses (gains) on sales of securities available for
sale, net
3,157 (1,166) (288) (Gains) losses on sales of other assets (1,492) (571) 20 Noninterest expense components: Rabbi trust employee benefit (income) expense (5,161) 5,515 4,789 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 305 35,460 90
Settlement and expenses for putative consumer class
action matters
- 3,325 - Defined Benefit Plan settlement loss (2) 12,045 - - Stock donation to the Eastern Bank Foundation - - 91,287 Total impact of non-GAAP adjustments 19,616 32,089 96,933 Less net tax benefit associated with non-GAAP adjustment (3) 6,096 20,869 17,537 Non-GAAP adjustments, net of tax $ 13,520$ 11,220 $ 79,396 Operating net income (non-GAAP) $ 213,279$ 165,885 $ 102,134 Weighted average common shares outstanding during the period: Basic 165,510,357 172,192,336 171,812,535 Diluted 165,648,571 172,252,057 171,812,535
Earnings per share, basic $ 1.21$ 0.90 $ 0.13 Earnings per share, diluted $ 1.21$ 0.90 $ 0.13 Operating earnings per share, basic (non-GAAP) $ 1.29$ 0.96 $ 0.59 Operating earnings per share, diluted (non-GAAP) $ 1.29$ 0.96 $ 0.59
(1)Reflects costs associated with the IPO that are indirectly related to the IPO
and were not recorded as a reduction of capital.
(2)Represents a non-cash settlement charge related to the Defined Benefit Plan. For additional information regarding this charge, refer to Note 17, "Employee Benefits" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. (3)The net tax benefit 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 net tax benefit amount for the years endedDecember 31, 2022 and 2021 reflects the impact of the reversal of a$12.0 million valuation allowance associated with the stock donation to theEastern Bank Foundation in the amounts of$0.7 million and$11.3 million , respectively. The reversal of the valuation allowance in each period was considered appropriate based upon our determination of the realizability of such deductions for tax purposes at that time. 60 -------------------------------------------------------------------------------- The following table summarizes the impact of non-core items with respect to our total revenue, noninterest income, noninterest expense and the efficiency ratio, which reconciles to the most directly comparable respective GAAP financial measure, for the periods indicated: For the Year Ended December 31, 2022 2021 2020 2019 2018 (Dollars in thousands) Net interest income (GAAP)$ 568,054 $ 429,827 $ 401,251 $ 411,264 $ 390,044 Add: Tax-equivalent adjustment (non-GAAP)(2) 12,736 6,093 5,472 5,254 5,696 Fully-taxable equivalent net interest income (non-GAAP) 580,790 435,920 406,723 416,518 395,740 Noninterest income (GAAP) 176,161 193,155 178,373 182,299 180,595 Less: (Losses) income from investments held in rabbi trusts (10,762) 10,217 10,337 9,866 (1,542) (Losses) gains on sales of securities available for sale, net (3,157) 1,166 288 2,016 50 Gains (losses) on sales of other assets 1,492 571 (20) (15) 1,989 Noninterest income on an operating basis (non-GAAP) 188,588 181,201 167,768 170,432 180,098 Noninterest expense (GAAP)$ 469,602 $ 443,956 $ 504,923 $ 412,684 $ 397,928 Less: Rabbi trust employee benefit (income) expense (5,161) 5,515 4,789 4,604 (847) Impairment (reversal) charge on tax credit investments - (170) 10,779 - - Indirect IPO costs (1) - - 1,199 - - Merger and acquisition expenses 305 35,460 90 - 244 Settlement and expenses for putative consumer class action matters - 3,325 - - - Defined Benefit Plan settlement loss 12,045 - - - - 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)$ 462,413 $ 399,913 $ 397,385 $ 408,080 $ 398,531 Total revenue (GAAP)$ 744,215 $ 622,982 $ 579,624 $ 593,563 $ 570,639 Total operating revenue (non-GAAP)$ 769,378 $ 617,121 $ 574,491 $ 586,950 $ 575,838 Ratios Efficiency ratio (GAAP) 63.10 % 71.26 % 87.11 % 69.53 % 69.73 % Operating efficiency ratio (non-GAAP) 60.10 % 64.80 % 69.17 % 69.53 % 69.21 %
(1)Reflects costs associated with the IPO that are indirectly related to the IPO
and were not recorded as a reduction of capital.
(2)Interest income on tax-exempt loans and investment securities has been adjusted to an FTE basis using a marginal tax rate of 21.6% for the year endedDecember 31, 2022 , 21.0% for the year endedDecember 31, 2021 , 21.8% for the year endedDecember 31, 2020 , 21.8% for the year endedDecember 31, 2019 , and 21.7% for the year endedDecember 31, 2018 . 61 -------------------------------------------------------------------------------- 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, 2022 2021 2020 2019 2018 (Dollars in thousands, except per share data) Tangible shareholders' equity: Total shareholders' equity (GAAP)$ 2,471,790 $ 3,406,352
Less:
649,703 376,534 377,734 381,276 Tangible shareholders' equity (non-GAAP) 1,810,664 2,756,649 3,051,518 1,222,419 1,051,865 Tangible assets: Total assets (GAAP) 22,646,858 23,512,128 15,964,190 11,628,775 11,372,287 Less: Goodwill and other intangibles 661,126 649,703 376,534 377,734 381,276 Tangible assets (non-GAAP)$ 21,985,732 $ 22,862,425
Shareholders' equity to assets ratio
(GAAP)
10.9 % 14.5 % 21.5 % 13.8 % 12.6 % Tangible shareholders' equity to tangible assets ratio (non-GAAP) 8.2 % 12.1 % 19.6 % 10.9 % 9.6 % Book value per share: Common shares issued and outstanding 176,172,073 186,305,332 186,758,154 - -
Book value per share (GAAP)
Tangible book value per share
(non-GAAP)
$ 10.28 $ 14.80
The following table summarizes the calculation of our average tangible
shareholders' equity and ratio of net income and operating net income to average
tangible shareholders' equity ("operating return on average tangible
shareholders' equity"), which reconciles to the most directly comparable GAAP
measure, for the periods indicated:
As of December 31,
2022 2021 2020 2019 2018
(Dollars in thousands)
Net income (GAAP) $ 199,759 $ 154,665
Operating net income (non-GAAP) (1) 213,279
165,885 102,134 129,696 121,796 Average tangible shareholders' equity: Average total shareholders' equity (GAAP)$ 2,831,533 $ 3,424,570
Less: Average goodwill and other
intangibles
655,653 414,441 376,706 379,615 380,304 Average tangible shareholders' equity (non-GAAP)$ 2,175,880 $ 3,010,129 $ 1,663,450 $ 1,163,576 $ 980,258 Ratios: Return on average total shareholders' equity (GAAP) 7.05 % 4.52 % 1.11 % 8.75 % 9.02 % Return on average tangible shareholders' equity (non-GAAP) 9.18 % 5.14 % 1.37 % 11.61 % 12.52 % Operating return on average tangible shareholders' equity (non-GAAP) 9.80 % 5.51 % 6.14 % 11.15 % 12.42 %
(1)Refer to the table above within this "Non-GAAP Financial Measures" section
for a reconciliation of operating net income to net income.
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Financial Position
Summary of Financial Position
As of December 31, Change
2022 2021 Amount ($) Percentage (%)
(Dollars in thousands)
Cash and cash equivalents $ 169,505 $ 1,231,792 $ (1,062,287) (86.2) %
Securities available for sale 6,690,778 8,511,224 (1,820,446) (21.4) %
Securities held to maturity 476,647 - 476,647 100.0 %
Loans, net of allowance for loan
losses 13,420,317 12,157,281 1,263,036 10.4 %
Federal Home Loan Bank stock 41,363 10,904 30,459 279.3 %
Goodwill and other intangible
assets 661,126 649,703 11,423 1.8 %
Deposits 18,974,359 19,628,311 (653,952) (3.3) %
Borrowed funds 740,828 34,278 706,550 2,061.2 %
Cash and cash equivalents
Total cash and cash equivalents decreased by $1.1 billion , or 86.2%, to
$169.5 million at December 31, 2022 from $1.2 billion at December 31, 2021 . This
decrease was primarily due to an increase in gross loans of $1.3 billion , a
decrease in total customer deposits of $654.0 million , net of purchases of
brokered certificates of deposit, and share repurchases of $201.6 million . These
items were partially offset by net cash inflows related to increased borrowed
funds of $706.6 million and net cash inflows related to AFS and HTM securities
of $263.7 million during the year ended December 31, 2022 . For further
discussion of the change in deposits, refer to the later "Deposits" section in
this Item 7. For further discussion of the change in loans, refer to the later
"Loans" section in this Item 7. For more information regarding our share
repurchase programs, refer to Note 15, "Shareholders' Equity" within the Notes
to the Consolidated Financial Statements included in Part II, Item 8 in this
Annual Report on Form 10-K. For further discussion of the change in securities,
refer to the later "Securities" section in this Item 7. For further discussion
of the change in borrowed funds, refer to the later "Borrowed Funds" section in
this Item 7.
Securities
Our current investment policy authorizes us to invest in various types of
investment securities and liquid assets, including U.S. Treasury obligations,
securities of government-sponsored enterprises, mortgage-backed securities,
collateralized mortgage obligations, corporate notes, asset-backed securities
and municipal securities. 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. 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: At December 31, 2022 our U.S. government securities
consisted of U.S. Agency bonds and U.S. Treasury securities. At December 31,
2021 , our U.S. government securities consisted of U.S. Agency bonds, U.S.
Treasury securities and Small 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, the FHLB, and the Federal 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, Ginnie Mae 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
accretion 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
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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 within Massachusetts
and by the Commonwealth of Massachusetts . The market value of these securities
may be affected by call options, long dated maturities, general market liquidity
and credit factors.
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,
2022 2021
(In thousands)
Available for sale securities, at fair value:
Government-sponsored residential mortgage-backed securities $ 4,111,908 $ 5,524,708
Government-sponsored commercial mortgage-backed securities 1,348,954 1,408,868
U.S. Agency bonds 952,482 1,175,014
U.S. Treasury securities 93,057 88,605
State and municipal bonds and obligations 183,092 280,329
Small business administration pooled securities - 32,103
Other debt securities 1,285 1,597
Total available for sale securities, at fair value 6,690,778 8,511,224
Held to maturity securities, at amortized cost:
Government-sponsored residential mortgage-backed securities 276,493
-
Government-sponsored commercial mortgage-backed securities 200,154
- Total held to maturity securities, at amortized cost 476,647 - Total$ 7,167,425 $ 8,511,224 Our securities portfolio has decreased$1.3 billion , or 15.8%, to$7.2 billion atDecember 31, 2022 from$8.5 billion atDecember 31, 2021 . This decrease was primarily due to a decrease in the fair value of AFS securities, sales of AFS securities, and maturities and principal paydowns of our AFS and held to maturity ("HTM") securities. Partially offsetting this activity were AFS and HTM security purchases during the year endedDecember 31, 2022 : •AtDecember 31, 2022 , the unrealized loss on AFS securities was$1.1 billion compared to an unrealized loss of$0.1 billion atDecember 31, 2021 , representing a$1.1 billion decrease in the fair value of such securities. The change fromDecember 31, 2021 toDecember 31, 2022 is primarily driven by rising market rates of interest.
•AFS securities sales totaled
2022
billion
2022
•Partially offsetting the decrease in the securities portfolio fromDecember 31, 2021 toDecember 31, 2022 were purchases of AFS and HTM securities of$740.8 million and$493.7 million , respectively, during the year endedDecember 31, 2022 .
We did not have trading investments at
A portion of our securities portfolio continues to be tax-exempt. Investments in
federally tax-exempt securities totaled
compared to
Our AFS 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, 2022 and 2021, we had no securities categorized as Level 3 within the fair value hierarchy. 64 --------------------------------------------------------------------------------
Maturities of our securities portfolio are based on the final contractual
payment dates, and do not reflect the effect of scheduled principal repayments,
prepayments, or early redemptions that may occur.
The following tables show contractual maturities of our AFS and HTM securities and weighted average yields at and for the period endedDecember 31, 2022 and contractual maturities of our AFS securities and weighted average yields at and for the period endedDecember 31, 2021 . Weighted average yields in the tables below have been calculated based on the amortized cost of the security: Securities Portfolio, Weighted-Average Yield
Securities Maturing as of
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 - % 2.27 % 1.00 % 1.53 % 1.45 %
Government-sponsored commercial
mortgage-backed securities - 1.29 1.51 1.94 1.68
U.S. Agency bonds - 0.79 0.97 - 0.82
U.S. Treasury securities - 1.97 - - 1.97
State and municipal bonds and obligations 1.22 2.26 3.17 4.05 3.66
Other debt securities 0.84 - - - 0.84
Total available for sale securities 0.89 1.02 1.25 1.66
1.47
Held to maturity securities: Government-sponsored residential mortgage-backed securities - - - 2.86
2.86
Government-sponsored commercial mortgage-backed securities - - 2.23 -
2.23
Total held to maturity securities - - 2.23 2.86 2.59
Total 0.89 % 1.02 % 1.36 % 1.72 % 1.54 %
Securities Maturing as of December 31, 2021 (1)
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 FTE basis 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 and net PPP loan activity for the year endedDecember 31, 2022 : As of December 31, Change (excluding net PPP loan activity) PPP Loan 2022 2021 Change ($) Activity, net Change ($) Percentage (%) (Dollars in thousands)
Commercial and industrial
$ 190,419 $ (109,213) $ 299,632 10.1 % Commercial real estate 5,155,323 4,522,513 632,810 - 632,810 14.0 % Commercial construction 336,276 222,328 113,948 - 113,948 51.3 % Business banking 1,090,492 1,334,694 (244,202) (212,331) (31,871) (2.4) % Residential real estate 2,460,849 1,926,810 534,039 - 534,039 27.7 % Consumer home equity 1,187,547 1,100,153 87,394 - 87,394 7.9 % Other consumer 194,098 214,485 (20,387) - (20,387) (9.5) % Total gross loans (1)$ 13,575,531 $ 12,281,510 $ 1,294,021 $ (321,544) $ 1,615,565 13.2 %
(1)Amounts presented exclude unamortized premiums, unearned discounts and
deferred fees and costs.
We consider our loan portfolio to be relatively diversified by borrower and industry. Our loans increased$1.3 billion , or 10.5%, to$13.6 billion atDecember 31, 2022 from$12.3 billion atDecember 31, 2021 . The increase as ofDecember 31, 2022 was primarily due to increases in our commercial real estate, residential real estate, and commercial and industrial portfolio balances, partially offset by a decrease in our business banking portfolio, as further noted below: •Our commercial real estate portfolio increased by$632.8 million fromDecember 31, 2021 toDecember 31, 2022 which was primarily attributable to an increase of$622.0 million in commercial real estate investment loan balances. Such loans represent loans secured by commercial real estate that are non-owner-occupied. The increase in such loan balances was primarily due to management's active focus on originating loans collateralized by industrial/warehouse and multi-family property types, which are included in the commercial real estate investment loan category, due to management's stable outlook as it relates to the credit performance of such loans. •Our residential real estate portfolio increased by 534.0 million fromDecember 31, 2021 toDecember 31, 2022 primarily due to the purchase of$380.2 million residential real estate loans from a third party during the year endedDecember 31, 2022 . Also contributing to the overall increase in the balance of our residential real estate loans was a reduction in the volume of loan sales, which was precipitated by rising market rates of interest, and led to us retaining more of our residential real estate mortgage loan originations. •Our commercial and industrial portfolio, excluding PPP loan balances, increased by$299.6 million , which was primarily attributable to an increase of$291.7 million in commercial and industrial participation loans during the year endedDecember 31, 2022 . The majority of the increase in participation loans was in our SNC portfolio, which increased$205.0 million during the year endedDecember 31, 2022 . The increase in such loan balances was primarily due to management's active focus in increasing our exposures related to such arrangements due to strong historical credit performance and management's stable outlook as it relates to the future credit performance of such loans. Partially offsetting this increase was a$109.2 million decrease in commercial and industrial PPP loan balances during the year endedDecember 31, 2022 as such loans were paid off or forgiven by the SBA resulting in a net portfolio increase of$190.4 million . •Our business banking portfolio decreased by$244.2 million primarily as a result of a$212.4 million decrease in business banking PPP loan balances during the year endedDecember 31, 2022 as such loans were paid off or forgiven by the SBA.
We believe that our commercial loan portfolio composition is relatively
diversified in terms of industry sectors, property types and various lending
specialties. As of
concentrations in our commercial loan portfolios were as follows:
66 --------------------------------------------------------------------------------
Commercial and Industrial
Balance Percentage (%)
(Dollars in thousands)
Educational services $ 773,680 24.7 %
Professional, scientific, and technical services 324,681 10.4 %
Finance and insurance 303,024 9.7 %
Wholesale trade 278,944 8.9 %
Accomodation 199,353 6.4 %
Healthcare 197,684 6.3 %
Transportation 185,925 5.9 %
Manufacturing 176,993 5.7 %
Admin support 159,967 5.1 %
Real estate 113,947 3.6 %
Other industries 418,330 13.3 %
Total portfolio $ 3,132,528 100.0 %
Commercial Real Estate
Balance Percentage (%)
(Dollars in thousands)
Multi-family $ 1,212,944 23.5 %
Industrial/warehouse 546,660 10.6 %
Retail 509,651 9.9 %
Office 441,910 8.6 %
Mixed use - retail/office 428,650 8.3 %
Mixed use - retail/multi-family 357,127 6.9 %
School 351,581 6.8 %
Affordable housing 319,681 6.2 %
Self storage 186,253 3.6 %
Other property types 796,906 15.6 %
Total portfolio $ 5,151,363 100.0 %
Commercial Construction
Balance Percentage (%)
(Dollars in thousands)
Affordable housing $ 85,802 25.7 %
Multi-family 82,875 24.8 %
Industrial/warehouse 54,772 16.4 %
Mixed use - retail/multi-family 26,150 7.8 %
For sale housing 20,646 6.2 %
Assisted living 14,767 4.4 %
Office 10,255 3.1 %
Retail 9,082 2.7 %
1-4 family 7,575 2.3 %
Service station 6,375 1.9 %
Other property types 15,960 4.7 %
Total portfolio $ 334,259 100.0 %
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, on an amortized cost
basis, by LTV
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and year of origination for each of our portfolios of loans, including those
acquired from Century, secured by real estate as of
Balance of Commercial Real
Estate Loans Originated During the Year Ended
2022 2021 2020 2019 2018 2017 and Prior
Total
Current LTV (1) (Dollars in thousands) Not available (2) $ 26,231$ 34,682 $ 3,594 $ 33,701 $ 16,111 $ 83,179 $ 197,498 50.00% or lower 528,843 208,311 259,368 166,600 162,811 517,976 1,843,909 50.01% - 69.99% 646,235 417,407 226,378 349,793 283,041 372,933 2,295,787 70.00% - 79.99% 230,141 162,053 89,088 58,293 39,787 41,458 620,820 80.00% - 89.99% (3) 52,027 13,068 - 2,426 1,424 1,157 70,102 90.00% or higher 61,449 6,370 14,327 - - 41,101 123,247 Total$ 1,544,926 $ 841,891 $ 592,755 $ 610,813 $ 503,174 $ 1,057,804 $ 5,151,363 Average LTV 58.74 % 57.08 % 51.72 % 52.68 % 53.91 % 45.03 % 53.79 % Balance of Residential Real
Estate Loans Originated During the Year Ended
2022 2021 2020 2019 2018 2017 and Prior
Total
Current LTV (1) (Dollars in thousands) Not available (2)$ 2,926 $ 118 $ 893 $ - $ -$ 13,638 $ 17,575 50.00% or lower 65,099 172,890 81,685 26,678 21,196 159,541 527,089 50.01% - 69.99% 110,503 259,847 148,747 30,546 21,890 164,443 735,976 70.00% - 79.99% 271,503 169,608 100,406 29,310 13,531 75,190 659,548 80.00% - 89.99% 233,927 59,104 33,932 9,832 12,917 37,755 387,467 90.00% or higher 82,136 40,862 17,988 7,381 1,134 2,899 152,400 Total$ 766,094 $ 702,429 $ 383,651 $ 103,747 $ 70,668 $ 453,466 $ 2,480,055 Average LTV 76.11 % 62.43 % 63.02 % 63.03 % 60.32 % 55.58 % 65.46 % Balance of Consumer Home Equity
Loans Originated During the Year Ended
2022 2021 2020 2019 2018 2017 and Prior
Total
Current LTV (1) (Dollars in thousands) Not available (2)$ 275,299 $ 208,698 $ 25,507 $ 37,073 $ 30,187 $ 211,075 $ 787,839 50.00% or lower 4,395 569 29,419 24,721 26,031 34,509 119,644 50.01% - 69.99% 6,905 797 35,253 23,826 20,586 37,167 124,534 70.00% - 79.99% 5,133 587 14,580 27,194 20,771 36,918 105,183 80.00% - 89.99% 2,909 762 6,204 12,594 8,490 22,628 53,587 90.00% or higher - - - - - 520 520 Total$ 294,641 $ 211,413 $ 110,963 $ 125,408 $ 106,065 $ 342,817 $ 1,191,307 Average LTV 61.32 % 63.28 % 55.56 % 60.65 % 57.99 % 61.96 % 59.55 %
(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.
68 -------------------------------------------------------------------------------- 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, on a gross basis, as ofDecember 31, 2022 : 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$ 324,458 $ 1,195,402 $ 672,359 $ 958,727 $ 3,150,946 Commercial real estate 227,408 1,299,723 3,215,683 412,509 5,155,323 Commercial construction 44,985 161,635 119,570 10,086 336,276 Business banking 124,912 268,262 659,813 37,505 1,090,492 Residential real estate 671 12,731 295,898 2,151,549 2,460,849 Consumer home equity 1,657 17,943 216,407 951,540 1,187,547 Other consumer 26,987 83,395 79,606 4,110 194,098 Total loans$ 751,078 $ 3,039,091 $ 5,259,336 $ 4,526,026 $ 13,575,531
(1)Includes demand loans, or loans without a stated maturity.
The interest rate risk of 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, 2022 : Loan Interest Rate Risk Due after December 31, 2023 Fixed Adjustable Total (In thousands)
Commercial and industrial
Commercial real estate 2,188,212 2,739,703 4,927,915
Commercial construction 220,927 70,364 291,291
Business banking 263,466 702,114 965,580
Residential real estate 2,000,810 459,368 2,460,178
Consumer home equity 202,215 983,675 1,185,890
Other consumer 164,260 2,851 167,111
Total loans $ 5,870,814 $ 6,953,639 $ 12,824,453
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 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 15 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.
Special mention, substandard and doubtful loans totaled 2.2% and 5.8% of total
commercial loans outstanding at December 31, 2022 and 2021, respectively. This
decrease was driven by risk rating upgrades in the construction and commercial
and industrial portfolios.
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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, 2022 , 72.3% of retail borrowers, based
on loan balance, have a FICO score of 740 or greater. The following table shows
the balances by borrowers' current FICO scores as of the dates indicated:
As of December 31, 2022 As of December 31, 2021
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) $ 5,195 $ 15,284 $ 27,400 $ 3,954 $ 1,122 $ 27,448
640 or lower 54,268 37,538 4,406 49,112 39,446 7,680
641 - 699 193,215 114,751 13,026 184,740 106,621 18,078
700 - 739 381,018 200,397 21,139 307,162 173,617 27,739
740 or higher 1,846,359 823,337 111,807 1,381,842 779,347 133,539
Total $ 2,480,055 $ 1,191,307 $ 177,778 $ 1,926,810 $ 1,100,153 $ 214,485
Average FICO 767.3 763.3 772.2 764.7 764.5 765.7
(1)Borrower FICO scores are updated on a semi-annual basis, and the most recent
update occurred in
(2)Insufficient data available to report.
The delinquency rate of our total loan portfolio decreased to 0.50% 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) (2)
2022 2021
Commercial and industrial 0.12 % 0.06 %
Commercial real estate - % 0.60 %
Commercial construction - % - %
Business banking 1.00 % 0.86 %
Residential real estate 1.46 % 1.38 %
Consumer home equity 1.33 % 0.90 %
Other consumer 0.63 % 1.23 %
Total 0.50 % 0.65 %
(1)In the calculation of the delinquency rate as of December 31, 2022 and 2021,
the total amount of loans outstanding includes $9.8 million and $331.4 million ,
respectively, of PPP loans.
(2)Delinquency rates as of December 31, 2022 were computed based upon amortized
cost balances while delinquency rates as of December 31, 2021 were computed
based upon recorded investment balances. The effect on the above delinquency
rates of the difference in methodology is not significant.
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.
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
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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 increased $3.6 million , or 10%, to $38.6 million at December 31, 2022 from
$35.0 million at December 31, 2021 . NPLs as a percentage of total loans
decreased to 0.28% at December 31, 2022 from 0.29% at December 31, 2021 . Refer
to the later "Allowance for Credit Losses" section in this Item 7 for a
discussion of the change in non-accrual loans which comprise our NPLs as of
December 31, 2022 . As of December 31, 2021 , NPLs included loans that were past
due 90 days or more and still accruing which were comprised solely of purchased
credit impaired ("PCI") loans. PCI loans were not subject to classification as
non-accrual in the same manner as originated loans as their interest income
related to the accretable yield recognized and not to contractual interest
payments at the loan level. In connection with our adoption of ASU 2016-13 on
January 1, 2022 , all PCI loans are now considered purchased credit deteriorated
("PCD") loans. Interest income recognition for PCD loans is consistent with
originated loans and, therefore, PCD loans cease accruing interest at 90 days
past due unless management believes that the applicable collateral held by the
Company is clearly sufficient and in full satisfaction of both principal and
interest. There were no PCD or originated loans at December 31, 2022 that were
past due 90 days or more and still accruing.
The total amount of interest recorded on NPLs was not significant for both the
years ended December 31, 2022 and 2021. The gross interest income that would
have been recorded under the original terms of those loans if they had been
performing amounted to $3.9 million and $3.2 million for the years ended
December 31, 2022 and 2021, respectively.
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 each loan
that is 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 noted within Note 5, "Loans and Allowance for Credit Losses" within
the Notes to the Consolidated Financial Statements included in Part II, Item 8
in this Annual Report on Form 10-K, loan modifications made in response to the
COVID-19 pandemic that 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) are
not deemed TDRs. This election afforded by the CARES Act and Interagency
guidance expired on January 1, 2022 .
In cases where a borrower experiences financial difficulties and we make certain
concessionary modifications to contractual terms, the loan is classified as a
TDR. Loans modified during the year ended December 31, 2022 and 2021 which were
determined to be TDRs were $12.6 million (post modification balance) and $0.8
million (post modification balance), respectively. The Company executed 51 and 5
TDRs during the years ended December 31, 2022 and 2021, respectively. As
discussed further in the "COVID-19 Modifications" section below, we elected to
apply the treatment of modifications to borrowers impacted by the COVID-19
pandemic afforded by the CARES Act and the Interagency Statement on Loan
Modifications and Reporting for Financial Institutions Working with Customers
Affected by the Coronavirus (Revised) which resulted in such loans not being
deemed TDRs. This election, which expired on January 1, 2022 , contributed to a
significant decline in new TDRs during the years ended December 31, 2021 and
2020. Consequently, modifications designated as TDRs increased during the year
ended December 31, 2022 as we are no longer executing COVID-19 modifications.
The overall increase in TDR loans modified during the aforementioned periods
consisted of an increase of $8.2 million and $3.6 million in commercial and
consumer loan TDR modifications, respectively. One loan totaling $1.0 million
that was modified during the preceding 12 months subsequently defaulted during
the year ended December 31, 2022 . 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.
PCD loans are loans that 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. As of December 31, 2022 , the carrying amount of PCD loans was
$56.6 million . As discussed further below, we adopted ASU 2016-13, commonly
referred to as CECL, on January 1, 2022 . Prior to such adoption, our acquired
loans that exhibited evidence of deterioration of credit quality since
origination were designated as PCI loans. As of December 31, 2021 , the carrying
amount of PCI loans was $69.6 million .
COVID-19 Modifications. In light of the COVID-19 pandemic, we implemented loan
modification programs for our borrowers 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
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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 provided additional emergency relief to individuals and businesses. Included
within the provisions of the Appropriations Act is the extension of Section 4013
of the CARES Act to January 1, 2022 . As such, we applied CARES Act TDR relief to
any 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, 2022 (1) as of December 31, 2021 (1)
Balance % of Total Portfolio Balance % of Total Portfolio
(Dollars in thousands)
Commercial and industrial $ - 0.0 % $ 4,548 0.2 %
Commercial real estate 12,826 0.3 % 93,519 2.1 %
Commercial construction - - % - - %
Business banking - 0.0 % 649 0.1 %
Residential real estate 262 0.0 % 5,870 0.3 %
Consumer home equity - - % 1,365 0.1 %
Other consumer - 0.0 % 706 0.3 %
Total (2) $ 13,088 0.1 % $ 106,657 0.9 %
(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.
(2)As of
hotel industry.
As ofDecember 31, 2022 and 2021, the aggregate amount of loans that received a COVID-19 modification and have become a non-performing loan after the respective deferral period was$4.4 million and$4.7 million , respectively. Potential Problem Loans. 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. These loans were neither delinquent nor on non-accrual status. AtDecember 31, 2022 and 2021, our potential problem 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$187.0 million and$470.9 million , respectively. Allowance for credit losses. Because we continued to qualify for emerging growth company ("EGC") status under the Jumpstart Our Business ("JOBS") Act untilDecember 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 that we ceased to be an EGC. Included in the Appropriations Act was an extension of the adoption date to the earlier ofJanuary 1, 2022 or 60 days after the date on which the COVID-19 national emergency terminated. We elected this extension and, accordingly, adopted the CECL standard onJanuary 1, 2022 . As ofDecember 31, 2021 , we followed the incurred loss allowance GAAP accounting model. For the purpose of estimating our allowance for loan losses, we segregate the loan portfolio into loan categories, for loans that share similar risk characteristics, 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. Loans that do not share similar risk characteristics with other loans are evaluated individually. 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. 72 -------------------------------------------------------------------------------- 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:
•known increases 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;
•lending policies and procedures, including underwriting standards and
collection, charge-off and recovery practices; and
•current and forecasted banking industry conditions, as well as the regulatory
and competitive environment.
Loans are evaluated on a regular basis by management. Expected lifetime losses are estimated on a collective basis for loans sharing similar risk characteristics and are determined using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. For commercial and industrial, commercial real estate, commercial construction and business banking portfolios, the quantitative model uses a loan rating system which is comprised of management's determination of probability of default, or "PD," loss given default, or "LGD" and exposure at default, or "EAD," which are derived from historical loss experience and other factors. For residential real estate, consumer home equity and other consumer portfolios, our quantitative model uses 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 expected credit loss in the loan portfolio. Under our current methodology, the allowance for loan losses contains reserves related to loans for which the related allowance for loan losses is determined on individual loan basis and on a collective basis, and other qualitative components. In the ordinary course of business, we enter into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the reserving method for loans receivable previously described. The reserve for unfunded lending commitments is included in other liabilities in the Consolidated Balance Sheets. The allowance for loan losses increased by$44.4 million , or 45.4%, to$142.2 million , or 1.05% of total loans, atDecember 31, 2022 from$97.8 million , or 0.80% of total loans atDecember 31, 2021 . The increase in the allowance for loan losses was primarily a result of our adoption of CECL, as previously described above, and increased loan balances, as previously described above. The additional reserves required as a result of our adoption of CECL were primarily attributable to the loans we acquired in connection with our acquisition of Century which were recorded at fair value at the time of acquisition. Under ASU 2016-13, the credit mark that is a component of the day-one fair value adjustment on acquired loans cannot be considered in the allowance computation, whereas under the incurred loss model, the credit mark could be considered for reserve determination purposes. In connection with our adoption of this standard, we recorded an increase to the allowance for loan losses of$27.1 million which represented the one-time cumulative-effect adjustment. For additional discussion of our allowance for credit losses measurement methodology, see Note 2, "Summary of Significant Accounting Policies" and Note 5, "Loans and Allowance for Loan Losses" within the Notes to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. For additional discussion of the change in allowance for loan losses, refer to the later "Provision for Loan Losses," included in the "Results of Operations" section within this Item 7. For discussion of our previous methodology for estimating the allowance for loan losses, refer to Note 6, "Loans and Allowance for Loan Losses" within the Notes to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K and Note 2, "Summary of Significant Accounting Policies" included in Part II, Item 8 of the 2021 Form 10-K. 73 --------------------------------------------------------------------------------
The following table summarizes credit ratios for the periods presented:
Credit Ratios
For the Year Ended
2022 2021 2020 2019 2018
(Dollars in thousands)
Net loan charge-offs (recoveries):
Commercial and industrial $ (1,053) $ 623 $ 992 $ (2,625) $ 893
Commercial real estate (91) 243 (206) (12) (83)
Commercial construction - - - - -
Business banking 223 3,567 4,855 5,370 5,970
Residential real estate (94) (87) (125) (39) (125)
Consumer home equity (23) (161) 421 153 225
Other consumer 1,625 1,373 2,129 1,811 1,676
Total net loan charge-offs (recoveries) $ 587 $
5,558
Average loans:
Commercial and industrial
$ 2,944,064 $
2,015,665
Commercial real estate
4,886,951 3,960,818 3,654,887 3,667,147 3,402,560 Commercial construction 294,805 191,771 226,286 263,736 327,781 Business banking 1,021,720 1,241,770 1,079,779 738,652 738,122 Residential real estate 2,063,193 1,508,796 1,398,337 1,438,775 1,357,116 Consumer home equity 1,129,757 869,110 902,634 948,089 934,681 Other consumer 197,659 233,932 334,257 471,602 619,406 Average total loans (1)$ 12,538,149 $ 10,021,862 $ 9,649,273 $ 8,947,876 $ 8,564,890 Total net charge-offs (recoveries) to average total loans outstanding during the period Commercial and industrial (0.04) % 0.03 % 0.05 % (0.18) % 0.08 % Commercial real estate 0.00 0.01 (0.01) 0.00 0.00 Commercial construction - - - - - Business banking 0.02 0.29 0.45 0.73 0.81 Residential real estate 0.00 (0.01) (0.01) 0.00 (0.01) Consumer home equity 0.00 (0.02) 0.05 0.02 0.02 Other consumer 0.82 0.59 0.64 0.38 0.27 Total net charge-offs (recoveries) to average total loans outstanding during the period 0.00 % 0.06 % 0.08 % 0.05 % 0.10 % Total loans$ 13,575,531 $
12,281,510
Total non-accrual loans
$ 38,604 $
32,993
Allowance for loan losses
$ 142,211 $
97,787
Allowance for loan losses as a percent of
total loans
1.05 % 0.80 % 1.16 % 0.92 % 0.91 % Non-accrual loans as a percent of total loans 0.28 % 0.27 % 0.42 % 0.47 % 0.30 % Allowance for loan losses as a percent of non-accrual loans 368.38 % 296.39 % 275.65 % 193.86 % 308.17 %
(1)Average loan balances exclude loans held for sale.
Non-accrual loans increased$5.6 million , or 17%, to$38.6 million atDecember 31, 2022 from$33.0 million atDecember 31, 2021 , primarily due to increases in non-accrual loans in our residential real estate and consumer home equity portfolios of$3.1 million and$2.3 million , respectively. Non-accrual residential real estate and consumer home equity loans increased primarily due to several loans moving to non-accrual status which had been acquired in connection with our acquisition of Century. 74 -------------------------------------------------------------------------------- The following tables sets forth the allocation of the allowance for loan losses by loan categories listed in loan portfolio composition and the related loan balances as a percentage of total loans as of the dates indicated: Summary of Allocation of Allowance for Loan Losses As of December 31, 2022 2021 Percent of Allowance in Percent of Percent of Category Loans in Allowance Percent of to Total Category Allowance in Category Loans in Category Allowance for Allocated to Total for Loan to Total Allocated to Total Loan Losses Allowance Loans Losses Allowance Loans (Dollars in thousands) Commercial and industrial (1)$ 26,859 18.89 % 23.21 %$ 18,018 18.43 % 24.10 % Commercial real estate 54,730 38.49 % 37.97 % 52,373 53.56 % 36.82 % Commercial construction 7,085 4.98 % 2.48 % 2,585 2.64 % 1.81 % Business banking (1) 16,189 11.38 % 8.03 % 10,983 11.23 % 10.87 % Residential real estate 28,129 19.78 % 18.13 % 6,556 6.70 % 15.69 % Consumer home equity 6,454 4.54 % 8.75 % 3,722 3.81 % 8.96 % Other consumer 2,765 1.94 % 1.43 % 3,308 3.38 % 1.75 % Other - - % - % 242 0.25 % - % Total$ 142,211 100.00 % 100.00 %$ 97,787 100.00 % 100.00 % As of December 31, 2020 2019 2018 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 (1)$ 26,617 23.54 % 20.51 %$ 20,919 25.42 % 18.27 %$ 19,321 23.96 % 18.73 % Commercial real estate 54,569 48.28 % 36.73 % 34,730 42.20 % 39.34 % 32,400 40.17 % 36.26 % Commercial construction 4,553 4.03 % 3.14 % 3,424 4.16 % 3.05 % 4,606 5.71 % 3.53
%
Business banking (1) 13,152 11.64 % 13.76 % 8,260 10.04 % 8.58 % 8,167 10.13 % 8.37
%
Residential real estate 6,435 5.69 % 14.09 % 6,380 7.75 % 15.90 % 7,059 8.75 % 16.16 % Consumer home equity 3,744 3.31 % 8.92 % 4,027 4.89 % 10.38 % 4,113 5.10 % 10.72 % Other consumer 3,467 3.07 % 2.85 % 4,173 5.07 % 4.48 % 4,600 5.70 % 6.23 % Other 494 0.44 % - % 384 0.47 % - % 389 0.48 % - % Total$ 113,031 100.00 % 100.00 %$ 82,297 100.00 % 100.00 %$ 80,655 100.00 % 100.00 %
(1)PPP loans are included within these portfolios as of
allowance for loan losses was recorded on these loans due to the SBA guarantee
of 100% of the loans.
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.
75
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For additional information regarding our allowance for loan losses, see Note 5,
"Loans and Allowance for Credit Losses" within the Notes to the Consolidated
Financial Statements included in Item 8 in 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$41.4 million and$10.9 million atDecember 31, 2022 and 2021, respectively. The amount of stock we are required to purchase is in proportional to our FHLB borrowings and level of total assets. Accordingly, the increase in the FHLB stock is due to increased borrowing.
Goodwill and other intangible assets were$661.1 million and$649.7 million atDecember 31, 2022 and 2021, respectively. The increase in goodwill and other intangibles assets was due to the purchase of two insurance agencies during the year endedDecember 31, 2022 . The aggregate amount of goodwill that was added as a result of these acquisitions was$8.7 million . For more information regarding our insurance agency acquisitions, refer to Note 3,"Mergers and Acquisitions" and Note 9,"Goodwill and Other Intangibles" within the Notes to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K. We did not record any impairment to our goodwill or other intangible assets during the years endedDecember 31, 2022 and 2021. We will continue to assess our goodwill and other intangible assets to determine if impairments are necessary.
Deposits and other interest-bearing liabilities
Deposits originating within the markets we serve continue to be our primary source of funding our earning assets. We have been able to compete effectively for deposits in our primary market areas. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in our assessment of the stability of our fund sources and our access to additional funds. Furthermore, we shift the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize net interest margin. In addition, we may occasionally raise funds through the use of brokered deposits.
The following table presents our deposits as of the dates presented:
Components of Deposits
As of December 31, Change Change
2022 2021 Amount ($) Amount (%)
(Dollars in thousands)
Demand $ 6,240,637 $ 7,020,864 $ (780,227) (11.1) %
Interest checking 4,568,122 4,478,566 89,556 2.0 %
Savings 1,831,123 2,077,495 (246,372) (11.9) %
Money market investments 4,710,095 5,525,005 (814,910) (14.7) %
Certificates of deposit (2) 1,624,382 526,381 1,098,001 208.6 %
Total deposits $ 18,974,359 $ 19,628,311 $ (653,952) (3.3) %
(1)The Bank's estimate of total uninsured deposits was
billion
(2)Brokered deposits are included in certificates of deposits and amounted to$928.6 million atDecember 31, 2022 . As ofDecember 31, 2021 , we had purchased no brokered certificates of deposit. 76 -------------------------------------------------------------------------------- Deposits decreased by$0.7 billion , or 3.3%, to$19.0 billion atDecember 31, 2022 from$19.6 billion atDecember 31, 2021 . This decrease was primarily the result of a decrease in money market investments of$0.8 billion , a decrease in demand deposits of$0.8 billion , and a decrease in savings deposits of$0.2 billion . These decreases were partially offset by an increase of$1.1 billion in certificates of deposit. The overall decrease is primarily due to a runoff of higher cost deposits acquired in connection with our acquisition of Century, the runoff of government stimulus funds which had been deposited by our customers, higher market rates resulting in greater industry-wide competition for deposits, and a transfer of deposits during the second quarter of 2022. OnJanuary 14, 2022 , we announced we had entered into an asset purchase agreement for the transfer of our cannabis-related and money service business deposits relationships, which we acquired from Century, toNeedham Bank . OnApril 1, 2022 , we completed the transfer of such deposits, which was subject to a post-transfer settlement period of 60 days. The total amount transferred, which includes amounts transferred during the post-transfer settlement period, was$278.0 million . Partially offsetting these decreases was an increase of$1.1 billion in certificates of deposit which was primarily attributable to the purchase of$928.6 million of brokered certificates of deposit during the year endedDecember 31, 2022 .
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,
2022 2021 2020
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
Demand $ 6,647,518 - % $ 5,547,615 - % $ 4,535,066 - %
Interest checking 4,890,709 0.24 % 2,866,091 0.07 % 2,227,185 0.09 %
Savings 2,015,651 0.01 % 1,483,271 0.02 % 1,123,584 0.02 %
Money market investments 5,057,445 0.27 % 3,870,712 0.06 % 3,212,752 0.23 %
Certificates of deposit 463,261 0.70 % 280,141 0.21 % 300,381 0.52 %
Total deposits $ 19,074,584 0.15 % $ 14,047,830 0.04 % $ 11,398,968 0.10 %
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,
2022 2021
Maturing in (In thousands)
Three months or less $ 39,322 $ 113,019
Over three months through six months 45,053 53,899
Over six months through twelve months 149,107 33,295
Over twelve months
5,569 23,827 Total$ 239,051 $ 224,040 Borrowings
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$706.6 million to$740.8 million atDecember 31, 2022 compared to$34.3 million atDecember 31, 2021 . The increase was primarily due to an increase in FHLB advances, which we borrowed primarily to fund loan originations. The increase was also due, in part, to an increase in interest rate swap collateral funds, which represents collateral posted to us by our financial institution counterparties for over-the-counter interest rate swaps. AtDecember 31, 2021 , our financial institution counterparties were not required to post collateral to us due to the low level of market interest rates. Conversely, atDecember 31, 2022 , following increases in market interest rates during the year endedDecember 31, 2022 , our financial institution counterparties were required to post collateral to us of$14.4 million . 77 -------------------------------------------------------------------------------- The following table sets forth information concerning balances on our borrowings as of the dates indicated: Borrowings by Category As of December 31, Change 2022 2021 Amount ($) (In thousands)
Escrow deposits of borrowers
22,314 20,258
2,056
Interest rate swap collateral funds 14,430 -
14,430
(1,216) Total$ 740,828 $ 34,278 $ 706,550 Results of Operations Summary of Results of Operations For the Year Ended December 31, Change 2022 2021 Amount ($) Percentage (%) (Dollars in thousands) Interest and dividend income$ 605,181 $ 435,159 $ 170,022 39.1 % Interest expense 37,127 5,332 31,795 596.3 % Net interest income 568,054 429,827 138,227 32.2 % Provision for (release of) allowance for loan losses 17,925 (9,686) 27,611 (285.1) % Noninterest income 176,161 193,155 (16,994) (8.8) % Noninterest expense 469,602 443,956 25,646 5.8 % Income tax expense 56,929 34,047 22,882 67.2 % Net income$ 199,759 $ 154,665 $ 45,094 29.2 %
Comparison of the Years Ended
Interest and Dividend Income
Interest and dividend income increased by$170.0 million , or 39.1%, to$605.2 million during the year endedDecember 31, 2022 from$435.2 million during the year endedDecember 31, 2021 . 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$4.9 billion , or 29.6%, to$21.6 billion as ofDecember 31, 2022 compared to$16.7 billion as ofDecember 31, 2021 , reflecting the addition of Century assets. Also contributing to the increase in interest and dividend income was an increase in the yield on average interest-earning assets which increased by 22 basis points to 2.86% during the year endedDecember 31, 2022 . 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 other short-term investments increased$61.6 million , or 91.1%, to$129.1 million for the year endedDecember 31, 2022 compared to$67.6 million for the year endedDecember 31, 2021 . The increase in interest income on securities was primarily due to an increase in the average balance and yield of such securities. The average balance of our securities increased$2.4 billion , or 36.3%, to$9.1 billion as ofDecember 31, 2022 compared to$6.7 billion as ofDecember 31, 2021 , which was primarily due to securities acquired in connection with our acquisition of Century of$3.1 billion partially offset by a net reduction in the balance of securities as a result of security sales, maturities and principal paydowns in excess of security purchases during the year endedDecember 31, 2022 . The yield on our securities increased 40 basis points during the year endedDecember 31, 2022 in comparison to the year endedDecember 31, 2021 . This increase is due primarily to HTM securities purchased at higher interest rates as well as an increase in yields on other short-term investments, the latter of which is due to increases in the rate received on reserve balances held at theFederal Reserve Bank of Boston , commensurate with increases in the federal funds rate. •Interest income on loans increased by$108.5 million , or 29.5%, to$476.0 million during the year endedDecember 31, 2022 from$367.6 million during the year endedDecember 31, 2021 . The increase in interest 78 -------------------------------------------------------------------------------- income on our loans was primarily due to an increase in the average balance of loans and an increase in the yield on loans partially offset by a decrease in net accretion of PPP loan deferred fees and costs. The average balance of our loans increased$2.5 billion , or 25.1%, to$12.5 billion during the year endedDecember 31, 2022 from$10.0 billion during the year endedDecember 31, 2021 , which was primarily due to loans acquired in connection with our acquisition of Century of$2.9 billion . The FTE yield on average loans increased 17 basis points to 3.88% during the year endedDecember 31, 2022 . The slight increase in loan yields was primarily due to increases in market rates of interest and was partially offset by a decrease in net accretion of PPP loan deferred fees and costs which decreased$25.3 million to$9.0 million during year endedDecember 31, 2022 from$34.3 million during the year endedDecember 31, 2021 .
Interest Expense
Interest expense increased$31.8 million , or 596.3%, to$37.1 million during the year endedDecember 31, 2022 from$5.3 million during the year endedDecember 31, 2021 . The increase was attributable to increases in both deposit interest expense and borrowings interest expense. •Interest expense on our interest-bearing deposits increased by$23.5 million , or 453.9%, to$28.6 million during the year endedDecember 31, 2022 from$5.2 million during the year endedDecember 31, 2021 . This increase was due to an increase in rates paid on deposits and due to an increase in average interest-bearing deposits. Rates paid on interest-bearing deposits increased by 17 basis points to 0.23% during the year endedDecember 31, 2022 from 0.06% during the year endedDecember 31, 2021 , which were increased in response to an increase in market rates of interest. Average interest-bearing deposits increased$3.9 billion , or 46.2%, to$12.4 billion for the year endedDecember 31, 2022 from$8.5 billion for the year endedDecember 31, 2021 which was primarily due to our acquisition of Century which added approximately$4.4 billion in interest-bearing deposits. •Interest expense on borrowed funds increased by$8.3 million to$8.5 million during the year endedDecember 31, 2022 from$0.2 million during the year endedDecember 31, 2021 which was primarily attributable to an increase in the average balance. Average borrowed funds increased by$230.1 million , or 868.6%, to$256.6 million for the year endedDecember 31, 2022 from$26.5 million for the year endedDecember 31, 2021 , due to an increase in FHLB advances, which we borrowed to fund loan originations.
Net Interest Income
Net interest income increased by$138.2 million , or 32.2%, to$568.1 million during the year endedDecember 31, 2022 , from$429.8 million during the year endedDecember 31, 2021 . Net interest income increased due to an increase in yields on interest-earning assets which exceeded the increase in the costs of interest-bearing liabilities. Also contributing to the increase in net interest income was an increase in net interest-earning assets of$0.8 billion , or 9.6%, to$8.9 billion during the year endedDecember 31, 2022 from$8.2 billion during the year endedDecember 31, 2021 . 79 --------------------------------------------------------------------------------
The following chart shows our net interest margin over the past five annual
periods including and excluding net PPP loan fee accretion:
[[Image Removed: ebc-20221231_g4.jpg]] 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 21.6% for the year endedDecember 31, 2022 , 21.0% for the year endedDecember 31, 2021 and 21.8% for the year endedDecember 31, 2020 . Net interest margin, including PPP loan interest income, increased 8 basis points to 2.69% during the year endedDecember 31, 2022 , from 2.61% during the year endedDecember 31, 2021 . The increase in net interest margin for the year endedDecember 31, 2022 was primarily due to an increase in market rates of interest and was partially offset by a decline in PPP net fee accretion of$25.3 million in comparison to the year endedDecember 31, 2021 . For additional discussion of the decline in the PPP loan net fee accretion and increased interest rates, refer to the earlier "Outlook and Trends" section within this Item 7. The following tables set forth average balance sheet items, average yields and costs, and certain other information for the periods indicated. All average balances in the table reflect daily average balances. Non-accrual loans were included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. 80 -------------------------------------------------------------------------------- Average Balances, Interest Earned/Paid, & Average Yields/Costs As of and for the Year Ended December 31, 2022 2021 2020 Average Average Average Outstanding Average Outstanding Average Outstanding Average Balance Interest Yield /Cost Balance Interest Yield /Cost Balance Interest Yield /Cost (Dollars in thousands) Interest-earning assets: Loans (1): Residential$ 2,064,609 $ 63,803 3.09 %$ 1,510,703 $ 47,143 3.12 %$ 1,400,907 $ 49,767 3.55 % Commercial 9,147,540 366,097 4.00 % 7,410,024 288,557 3.89 % 7,014,044 281,816 4.02 % Consumer 1,327,417 56,965 4.29 % 1,103,042 36,019 3.27 % 1,236,893 43,729 3.54 % Total loans 12,539,566 486,865 3.88 % 10,023,769 371,719 3.71 % 9,651,844 375,312 3.89 % Non-taxable investment securities 253,651 9,091 3.58 % 260,399 9,335 3.58 % 265,511 9,899 3.73 % Taxable investment securities 8,413,217 118,690 1.41 % 4,890,737 58,312 1.19 % 1,560,610 31,831 2.04 % Other short-term investments 420,834 3,271 0.78 % 1,514,351 1,886 0.12 % 1,288,714 1,758 0.14 % Total interest-earning assets 21,627,268 617,917 2.86 % 16,689,256 441,252 2.64 % 12,766,679 418,800 3.28 % Non-interest-earning assets 986,865 1,173,830 1,097,064 Total assets$ 22,614,133 $ 17,863,086 $ 13,863,743 Interest-bearing liabilities: Deposits: Savings accounts$ 2,015,651 $ 209 0.01 %$ 1,483,271 $ 230 0.02 %$ 1,123,584 $ 242 0.02 % Interest checking accounts 4,890,709 11,675 0.24 % 2,866,091 1,997 0.07 % 2,227,185 2,033 0.09 % Money market investments 5,057,445 13,479 0.27 % 3,870,712 2,342 0.06 % 3,212,752 7,492 0.23 % Time accounts 463,261 3,258 0.70 % 280,141 598 0.21 % 300,381 1,548 0.52 % Total interest-bearing deposits 12,427,066 28,621 0.23 % 8,500,215 5,167 0.06 % 6,863,902 11,315 0.16 % Federal funds purchased (7) 964 24 2.49 % - - - % 45,204 570 1.26 % Other borrowings 255,668 8,482 3.32 % 26,495 165 0.62 % 26,897 192 0.71 % Total interest-bearing liabilities 12,683,698 37,127 0.29 % 8,526,710 5,332 0.06 % 6,936,003 12,077 0.17 % Demand accounts 6,647,518 5,547,615 4,535,066 Other noninterest-bearing liabilities 451,384 364,191 352,518 Total liabilities 19,782,600 14,438,516 11,823,587 Shareholders' equity 2,831,533 3,424,570 2,040,156 Total liabilities and shareholders' equity$ 22,614,133 $ 17,863,086 $ 13,863,743 Net interest income - FTE$ 580,790 $ 435,920 $ 406,723 Net interest rate spread (2) 2.57 % 2.58 % 3.11 % Net interest-earning assets (3)$ 8,943,570 $ 8,162,546 $ 5,830,676 Net interest margin - FTE (4) 2.69 % 2.61 % 3.19 % Average interest-earning assets to interest-bearing liabilities 170.51 % 195.73 % 184.06 % Return on average assets (5) 0.88 % 0.87 % 0.16 % Return on average equity (6) 7.05 % 4.52 % 1.11 % Noninterest expenses to average assets 2.08 % 2.49 % 3.64 % (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 - FTE represents fully-taxable equivalent net interest income divided by average total interest-earning assets. Refer to the earlier "Non-GAAP Financial Measures" section within this Item 7 for additional information. (5)Represents net income divided by average total assets. (6)Represents net income divided by average equity. 81 --------------------------------------------------------------------------------
(7)Federal funds purchased and the related interest expense for the 2020 period
primarily related to federal funds purchased for correspondent bank customers.
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, 2022 vs. 2021 For the Year Ended December 31, 2021 vs. 2020
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 $ (462) $ 17,122 $ 16,660 $ (6,339) $ 3,715 $ (2,624)
Commercial 8,201 69,339 77,540 (8,852) 15,593 6,741
Consumer 12,715 8,231 20,946 (3,190) (4,520) (7,710)
Total loans 20,454 94,692 115,146 (18,381) 14,788 (3,593)
Non-taxable investment securities (2) (242) (244) (376) (188) (564)
Taxable investment securities 12,245 48,133 60,378 (17,822) 44,303 26,481
Other short-term investments 3,611 (2,226) 1,385 (162) 290 128
Total interest-earning assets
$ 176,665 $ (36,741) $ 59,193 $ 22,452 Interest-bearing liabilities: Deposits: Savings accounts$ (89) $ 68 $ (21) $ (78) $ 66 $ (12) Interest checking accounts 7,496 2,182 9,678 (544) 508 (36) Money market investments 10,217 920 11,137 (6,438) 1,288 (5,150) Time accounts 2,070 590 2,660 (852) (98) (950) Total interest-bearing deposits 19,694 3,760 23,454 (7,912) 1,764 (6,148) Federal funds purchased - 24 24 - (570) (570) Other borrowings 2,773 5,544 8,317 (24) (3) (27) Total interest-bearing liabilities 22,467 9,328 31,795 (7,936) 1,191 (6,745)
Change in net interest income
The following chart shows the composition of our quarterly average
interest-earning assets for the past five quarters:
82
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[[Image Removed: ebc-20221231_g5.jpg]]
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. During the year endedDecember 31, 2021 , management determined the allowance for loan losses in accordance with ASC 450, "Contingencies" and ASC 310, "Receivables" (i.e., prior to our adoption of ASU 2016-13). We recorded a provision for loan losses of$17.9 million for the year endedDecember 31, 2022 , compared to a release of$9.7 million for the year endedDecember 31, 2021 . Management determined a provision to be necessary primarily due to increased loan balances. Also contributing to the provision for the year endedDecember 31, 2022 was an increase in the overall reserve rate. The reserve rate increased by 25 basis points to 1.05% atDecember 31, 2022 from 0.80% atDecember 31, 2021 . We recorded a transition adjustment in connection with our adoption of ASU 2016-13 onJanuary 1, 2022 of$27.1 million which resulted in an increase in the reserve rate to 1.02% at that time based upon loan balances as ofDecember 31, 2021 . Subsequently, the reserve rate further increased by 3 basis points to 1.05% as ofDecember 31, 2022 which was the result of changes in macroeconomic conditions. To determine our allowance for loan losses as ofDecember 31, 2022 and the provision for loan losses for the year endedDecember 31, 2022 , we used the Oxford EconomicsDecember 31, 2022 Baseline forecast ("the forecast") to generate our modeled expected losses by loan portfolio in order to reflect management's reasonable expectations of current and future economic conditions. The forecast assumed theU.S. economy will enter a recession in the second quarter of 2023, reflecting the combination of persistently high inflation, aggressiveFederal Reserve monetary policy tightening, slower global gross domestic product ("GDP") activity, and weaker corporate earnings, all of which are expected to adversely impact consumers' and businesses' willingness to spend. Primary macroeconomic assumptions included in management's evaluation of the adequacy of the allowance for loan losses included continued low, but rising, unemployment rates which are expected to continue to rise until their peak in early 2024, and a peak-to-trough decline in GDP of 1.2%. Further, the forecast assumed that theFOMC will continue to raise interest rates into early 2023 following its most recentDecember 2022 increase but then remain flat into early 2024. For additional discussion of our allowance for credit losses measurement methodology, see Note 2, "Summary of Significant Accounting Policies" and 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. For discussion of our previous methodology for estimating the allowance for loan losses, refer to Note 6, "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 and Note 2, "Summary of Significant Accounting Policies" within the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 ("2021 Form 10-K"). 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. 83 --------------------------------------------------------------------------------
Noninterest Income
The following table sets forth information regarding noninterest income for the
periods shown:
Noninterest Income
For the Year Ended December 31, Change
2022 2021 Amount %
(Dollars in thousands)
Insurance commissions $ 99,232 $ 94,704 $ 4,528 4.8 %
Service charges on deposit accounts 30,392 24,271 6,121 25.2 %
Trust and investment advisory fees 23,593 24,588 (995) (4.0) %
Debit card processing fees 12,644 12,118 526 4.3 %
Interest rate swap income 6,009 5,634 375 6.7 %
(Losses) income from investments held in
rabbi trusts (10,762) 10,217 (20,979) (205.3) %
Gains on sales of mortgage loans held for
sale, net 248 3,605 (3,357) (93.1) %
(Losses) gains on sales of securities
available for sale, net (3,157) 1,166 (4,323) (370.8) %
Other 17,962 16,852 1,110 6.6 %
Total noninterest income $ 176,161 $ 193,155 $ (16,994) (8.8) %
Noninterest income decreased by $17.0 million , or 8.8%, to $176.2 million for
the year ended December 31, 2022 from $193.2 million for the year ended December
31, 2021 . The decrease was primarily due to a $21.0 million decrease in income
from investments held in rabbi trusts which resulted from a current period net
loss from such investments, a $4.3 million decrease in gains on sales of
securities available for sale which resulted from a current period net loss from
such sales compared to a net gain in the comparative prior period, and a $3.4
million decrease in net gains on sales of mortgage loans. These decreases were
partially offset by a $6.1 million increase in service charges on deposit
accounts and an $4.5 million increase in insurance commissions.
•Income from investments held in rabbi trusts decreased to a net loss primarily
as a result of an unfavorable mark-to-market adjustment on equity securities
held in these accounts resulting from a decline in the market value of equity
securities held in rabbi trusts.
•Gains on sales of securities available for sale, net, decreased to a net loss
due to the decision by management to sell certain available for sale securities
during the year ended December 31, 2022 , a portion of which were acquired in
connection with our acquisition of Century and were in a net unrealized loss
position at the time of sale.
•Net gains resulting from the sale of mortgage loans held for sale decreased due
to a reduction in the volume of our mortgage loan sales on the secondary market
which was primarily due to rising market rates of interest.
•Service charges on deposit accounts increased primarily as a result of
increased corporate account analysis charges as a result of greater commercial
deposit customer activity. The increased customer deposit activity is primarily
attributable to our acquisition of Century.
•Insurance commissions increased due to an increase in recurring commission
income which was attributable to recent insurance agency acquisitions. 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 for
additional discussion of such agency acquisitions.
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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 Century Merger & Change Excluding
Acquisition Merger & Acquisition
2022 2021 Amount % Expenses (1) Expenses (1)
(Dollars in thousands)
Salaries and employee
benefits $ 298,186 $ 295,916 $ 2,270 0.8 % $ 15,947 $ 18,217
Office occupancy and
equipment 40,764 40,465 299 0.7 % 7,198 7,497
Data processing 57,273 50,839 6,434 12.7 % 1,286 7,720
Professional services 16,814 21,879 (5,065) (23.2) % 9,223 4,158
Marketing 9,540 8,741 799 9.1 % - 799
Loan expenses 6,384 9,114 (2,730) (30.0) % - (2,730)
FDIC insurance 6,250 4,226 2,024 47.9 % - 2,024
Amortization of
intangible assets 3,864 2,512 1,352 53.8 % - 1,352
Other 30,527 10,264 20,263 197.4 % 1,802 22,065
Total noninterest
expense $ 469,602 $ 443,956 $ 25,646 5.8 % $ 35,456 $ 61,102
(1)We recorded merger and acquisition expenses of $35.5 million during the year
ended December 31, 2021 related to our acquisition of Century. These merger and
acquisition expenses were deducted from the corresponding financial statement
line items in the above table to compute the related change excluding such
expenses for purposes of the below discussion.
Noninterest expense increased by $25.6 million , or 5.8%, to $469.6 million
during the year ended December 31, 2022 from $444.0 million during the year
ended December 31, 2021 . The increase was primarily due to the following
financial statement line items (changes excluding merger and acquisition
expenses included in such financial statement line items): an $18.2 million
increase in salaries and employee benefits, a $22.1 million increase in other
noninterest expenses, a $7.7 million increase in data processing, and a $7.5
million increase in office occupancy and equipment. Partially offsetting these
increases was a decrease in merger and acquisition expenses of $35.2 million to
$0.3 million during the year ended December 31, 2022 from $35.5 million during
the year ended December 31, 2021 .
•Salaries and employee benefits, excluding merger and acquisition expenses,
increased primarily due to salaries and wages for newly hired employees and
former employees of Century who were retained following the acquisition. In
addition, share-based compensation, which is related to restricted stock awards
("RSAs") granted in the fourth quarter of 2021 and second quarter of 2022 and
awards of restricted stock units ("RSUs") and performance stock units ("PSUs")
granted in the first quarter of 2022, increased $10.3 million . The increase is
due to a full year of expense recognized during the year ended December 31, 2022
related to RSAs granted in 2021 and a partial year of expense during the year
ended December 31, 2022 related to RSAs, RSUs and PSUs granted in 2022. During
the year ended December 31, 2021 , we recognized expense related to RSAs for
approximately one month as such awards were granted on November 30, 2021 . As of
December 31, 2021 , we had not granted any awards of RSUs or PSUs. Lastly, our
deferrals of loan origination-related costs decreased by $9.9 million , resulting
in a corresponding increase in salaries and employee benefits expenses. These
increases were partially offset by a decrease of $10.7 million in benefit
expense related to our defined contribution supplemental executive retirement
plan ("DC SERP"). Participant benefits are adjusted based upon deemed investment
performance. Accordingly, such investments experienced a decline in value during
the year ended December 31, 2022 resulting in a corresponding decrease in the
related benefit expense.
•Other noninterest expenses, excluding merger and acquisition expenses,
increased primarily due to a pension settlement-related expense recorded during
the year ended December 31, 2022 of $12.0 million related to the Defined Benefit
Plan. For additional information regarding this charge, refer to Note 17,
"Employee Benefits" within the Notes to the Consolidated Financial Statements
included in Item 8 in this Annual Report on Form 10-K. Also contributing to the
overall increase was an $2.2 million increase in liability insurance expense,
which was primarily due to regular insurance rate premium increases and our
acquisition of Century, which increased the number of our properties and,
therefore, the scope of our required insurance coverage, a $1.9 million increase
in customer bad check losses during the year ended December 31, 2022 compared to
the year ended December 31 ,
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2021, consistent with a nationwide increase in mail-based check fraud, and a
$1.5 million increase in our provision for off-balance sheet credit exposures
which was primarily due to an increase in unfunded loan commitments. Partially
offsetting these items was a decrease of $3.3 million in legal expenses
associated with the settlement of two putative consumer class action litigation
matters related to overdraft and non-sufficient funds fees. The accrual for such
expenses was initially recorded during the second quarter of 2021 and final
settlement of the legal matters occurred during the first quarter of 2022. For
additional information, refer to Note 18, "Commitments and Contingencies" within
the Notes to the Consolidated Financial Statements included in Item 8 in this
Annual Report on Form 10-K.
•Data processing expenses, excluding merger and acquisition expenses, are
primarily comprised of costs associated with the processing of customer
transactions including loans and deposits and are partially impacted by
fluctuations in related transaction volume. Such expenses increased during the
year ended December 31, 2022 from the year ended December 31, 2021 primarily due
to our acquisition of Century in the fourth quarter of 2021 which resulted in
the acquisition of additional loan and deposit customers.
•Office occupancy and equipment, excluding merger and acquisition expenses,
increased during the year ended December 31, 2022 as compared to the year ended
December 31, 2021 primarily due to the addition of properties resulting from our
acquisition of Century and which included a $2.1 million increase in
depreciation expense, and lease impairment charges of $0.6 million , which were
due to an early termination of a lease acquired from Century.
•Merger and acquisition expenses decreased $35.2 million to $0.3 million during
the year ended December 31, 2022 from $35.5 million during the year ended
December 31, 2021 . In connection with our acquisition of Century, which we
completed on November 12, 2021 , we incurred merger and acquisition costs of
$35.5 million during the year ended December 31, 2021 . 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.
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,
2022 2021
(Dollars in thousands)
Combined federal and state income tax provisions $ 56,929 $ 34,047
Effective income tax rates 22.2 % 18.0 %
Blended statutory tax rate 28.1 % 28.1 %
Income tax expense increased by $22.9 million to $56.9 million in the year ended
December 31, 2022 from $34.0 million in the year ended December 31, 2021 . The
increase in income tax expense was due primarily to higher pre-tax income during
the year ended December 31, 2022 compared to the year ended December 31, 2021
and an increase in our effective income tax rate. The increase in our effective
income tax rate was due primarily to a partial release of $11.3 million during
the year ended December 31, 2021 related to a valuation allowance established as
of December 31, 2020 against our charitable contribution carryover deferred tax
asset in connection with our 2020 charitable contribution to the Eastern Bank
Foundation compared to a release of $0.7 million during the year ended December
31, 2022 . For additional information related to our income taxes see Note 12,
"Income Taxes" and Note 14, "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,
2022 2021
Insurance Insurance
Banking Agency Other/ Banking Agency Other/
Business Business Eliminations Total Business Business Eliminations Total
(Dollars in thousands)
Net interest income $ 568,054 $ - $ - $ 568,054 $ 429,827 $ - $ - $ 429,827
Provision for (release of)
allowance for loan losses 17,925 - - 17,925 (9,686) - - (9,686)
Net interest income after
provision for loan losses 550,129 - - 550,129 439,513 - - 439,513
Noninterest income 78,002 98,814 (655) 176,161 96,376 97,168 (389) 193,155
Noninterest expense 390,880 83,208 (4,486) 469,602 365,410 82,780 (4,234) 443,956
Income before income tax
expense 237,251 15,606 3,831 256,688 170,479 14,388 3,845 188,712
Income tax expense 52,521 4,408 - 56,929 29,994 4,053 - 34,047
Net income $ 184,730 $ 11,198 $
3,831
$ 3,845 $ 154,665 Total assets$ 22,498,175 $ 215,190 $
(66,507)
$ (69,161) $ 23,512,128 Total liabilities$ 20,192,632 $ 48,943 $
(66,507)
$ (69,161) $ 20,105,776 Banking Segment •Interest and dividend income increased by$170.0 million , or 39.1%, to$605.2 million during the year endedDecember 31, 2022 from$435.2 million during the year endedDecember 31, 2021 which was primarily due to an increase in average interest-earning assets. Average interest-earning assets increased$4.9 billion , or 29.6%, to$21.6 billion for the year endedDecember 31, 2022 from$16.7 billion for the year endedDecember 31, 2021 . The increase was primarily due to the acquisition of Century, which closed onNovember 12, 2021 and added approximately$6.6 billion in interest-earning assets. For additional discussion, refer to the earlier "Interest and Dividends" section. •Interest expense increased$31.8 million , or 596.3%, to$37.1 million during the year endedDecember 31, 2022 from$5.3 million during the year endedDecember 31, 2021 which was primarily due to increased rates paid on deposits which increased 17 basis points during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The overall change in average interest-bearing liabilities also contributed to the increase in interest expense and increased$4.2 billion , or 48.8%, to$12.7 billion for the year endedDecember 31, 2022 from$8.5 billion for the year endedDecember 31, 2021 , with average total interest-bearing deposits, our largest category of average interest-bearing liabilities, growing$3.9 billion , or 46.2%, to$12.4 billion as ofDecember 31, 2022 compared to$8.5 billion as ofDecember 31, 2021 . Average interest-bearing deposits increased primarily due to our acquisition of Century, which added$4.4 billion in interest-bearing deposits. Also contributing to the increase in average interest-bearing liabilities was average borrowings which increased$230.1 million to$256.6 million for the year endedDecember 31, 2022 from$26.5 million for the year endedDecember 31, 2021 . The increase in borrowings was primarily to provide additional liquidity for the funding of loan growth. For additional discussion, refer to the earlier "Interest and Dividends" section. •We recorded a provision for allowance for loan losses of$17.9 million for the year endedDecember 31, 2022 , compared to a release of allowance for loan losses of$9.7 million for the year endedDecember 31, 2021 . We determined a provision to be appropriate primarily due to overall increased loan balances during the year endedDecember 31, 2022 . Comparatively, during the year endedDecember 31, 2021 , following continued improvement in economic and credit conditions, we had determined that a release of the provision was necessary. For additional discussion, refer to the earlier "Provision for Loan Losses" section. •Losses from investments held in rabbi trust accounts were$9.5 million for the year endedDecember 31, 2022 which represents a decrease of$18.7 million , or 201.9%, from income of$9.3 million for the year endedDecember 31, 2021 . The decrease was primarily the result of an unfavorable mark-to-market adjustment on equity securities held in these accounts during the year endedDecember 31, 2022 . •Losses on sales of securities available for sale, net, were$3.2 million during the year endedDecember 31, 2022 which represents a decrease of$4.3 million from the year endedDecember 31, 2021 , a period during which we recognized a net gain of$1.2 million . The net loss on sale was due to the decision by management to sell certain 87 -------------------------------------------------------------------------------- AFS securities during the year endedDecember 31, 2022 , the majority of which were acquired in connection with our acquisition of Century and were in a net unrealized loss position at the time of sale. •Gains on sales of mortgage loans held for sale, net, were$0.2 million during the year endedDecember 31, 2022 which represents a decrease of$3.4 million from gains of$3.6 million during the year endedDecember 31, 2021 . The decrease was primarily due to a reduction in the volume of our mortgage loan sales on the secondary market which was primarily due to rising market rates of interest. •Partially offsetting the losses from investments held in rabbi trust accounts and losses on sales of securities available for sale during the year endedDecember 31, 2022 were service charges on deposit accounts which increased$6.1 million during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , primarily as a result of increased corporate account analysis charges as a result of greater commercial deposit customer activity during the year endedDecember 31, 2022 . •Noninterest expense increased$25.5 million , or 7.0%, to$390.9 million during the year endedDecember 31, 2022 from$365.4 million during the year endedDecember 31, 2021 . This increase was primarily due to an increase of$22.1 million in salaries and wages expense, a$10.4 million pension settlement-related expense during the year endedDecember 31, 2022 (representing the banking segment-only portion of the total settlement-related expense recognized), an increase of$10.3 million in share-based compensation, and an increase of$6.4 million in data processing expenses. Partially offsetting these increases was a decrease of$19.0 million in other compensation which was primarily attributable to decreased merger and acquisition-related expenses. For additional discussion, refer to the earlier "Noninterest Expense" section.
Insurance Agency Segment
•Noninterest income related to our insurance agency business increased by$1.6 million , or 1.7%, to$98.8 million during the year endedDecember 31, 2022 from$97.2 million during the year endedDecember 31, 2021 primarily due to increased commission income. For additional discussion, refer to the earlier "Noninterest Income" section. •Noninterest expense related to our insurance agency business remained relatively consistent during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2021 with a slight increase of$0.4 million , or 0.5%, to$83.2 million during the year endedDecember 31, 2022 from$82.8 million during the year endedDecember 31, 2021 . The slight increase is primarily due to the previously mentioned pension settlement-related expense, of which$1.6 million related to the insurance agency segment.
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. ThroughDecember 31, 2021 , the allowance for loan losses represented management's best estimate of incurred probable losses in our loan portfolios based upon management's assessment of various factors, including the risk characteristics of our loan portfolio, current economic conditions, and trends in loan delinquencies and charge-offs. Our methodology for determining the qualitative component throughDecember 31, 2021 included an assessment of factors affecting the determination of incurred losses in the loan portfolio. Such factors included trends in economic conditions, loan growth, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons, among others. Upon adoption of ASU 2016-13, effectiveJanuary 1, 2022 , we changed our reserve methodology to estimate expected credit losses over the contractual life of loans and leases. The allowance for credit losses, or ACL, is established to provide for our current estimate of expected lifetime credit losses on loans measured at amortized cost and unfunded lending commitments at the balance sheet date and is established through a provision for credit losses charged to net income. Management uses a methodology to systematically estimate the amount of expected lifetime losses in the portfolio. Expected lifetime losses are estimated on a collective basis for loans sharing similar risk characteristics and are determined using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast 88 -------------------------------------------------------------------------------- risk and model risk inherent in the quantitative model output. For commercial and industrial, commercial real estate, commercial construction and business banking portfolios, the quantitative model uses a loan rating system which is comprised of management's determination of a financial asset's probability of default ("PD"), loss given default ("LGD") and exposure at default ("EAD"), which are derived from historical loss experience and other factors. For residential real estate, consumer home equity and other consumer portfolios, our quantitative model uses historical loss experience. The quantitative model estimates expected credit losses using loan level data over the estimated life of the exposure, considering the effect of prepayments. Economic forecasts, one of the most significant judgments influencing the ACL, are incorporated into the estimate over a reasonable and supportable forecast period of eight quarters, beyond which is a reversion to our historical loss average which occurs over a period of four quarters. Management's estimate of the ACL as ofDecember 31, 2022 was supported, in part, by Oxford Economic's,December 2022 Baseline forecast ("the forecast"). The forecast assumed theU.S. economy will enter a recession in the second quarter of 2023, reflecting the combination of persistently high inflation, aggressiveFederal Reserve monetary policy tightening, slower GDP activity, and weaker corporate earnings, all of which are expected to adversely impact consumers' and businesses' willingness to spend. Primary macroeconomic assumptions included in management's evaluation of the adequacy of the allowance for loan losses included continued low, but rising, unemployment rates which are expected to continue to rise until their peak in early 2024, and a peak-to-trough decline in GDP of 1.2%. Further, the forecast assumed that theFOMC will continue to raise interest rates into early 2023 following itsDecember 2022 increase but then remain flat into early 2024. Changes in the economic forecast could significantly affect the estimated credit losses which could potentially lead to materially different reserve amounts from one reporting period to the next. To illustrate the sensitivity of the modeled result to the impact of a hypothetical change in the economic forecast, management calculated the allowance for loan losses assuming the downside economic forecast scenario and, separately, the upside economic forecast scenario were used. The downside scenario assumed the US economy will enter a recession in the first quarter of 2023 and experience a decline in GDP of 3.2% peak-to-trough. Use of the downside scenario would have resulted in an incremental increase in the allowance for loan losses of approximately$10.4 million as ofDecember 31, 2022 . The upside scenario assumed GDP growth of 1.4% in 2023, 1.9% in 2024 and sustained recovery. Use of the upside scenario would have resulted in an incremental decrease in the allowance for loan losses of approximately$3.1 million as ofDecember 31, 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.
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.
Pension and other Post Retirement Benefit Plans. For information regarding our
pension and other postretirement benefit plans including our pension
contributions, investment strategies, assumptions, the change in benefit
obligation and related plan assets, pension funding requirements and future net
benefit payments, refer to Note 2, "Summary of Significant Accounting Policies"
and Note 17, "Employee Benefits" within the Notes to the Consolidated Financial
Statements included in Item 8 in this Annual Report on Form 10-K.
Our defined benefit pension plans are accounted for on an actuarial basis, which
requires the selection of various assumptions, including an expected long-term
rate of return on plan assets for our Qualified Defined Benefit Pension Plan
("Defined Benefit Plan"), a discount rate, lump sum conversion rates,
compensation and benefit limitation increase assumptions, mortality rates of
participants and expectation of mortality improvement. The expected long-term
rate of return on plan assets that is utilized in determining Defined Benefit
Plan pension expense is derived from periodic studies, which include a review of
asset allocation strategies, investment policy, amount and types of expenses
that will be paid from the Defined Benefit Plan, and the expected long-term
return for the Defined Benefit Plan using recent forward looking capital market
assumptions published by leading financial organizations. While the studies give
appropriate consideration to recent plan performance and historical returns, the
assumptions are primarily long-term, prospective rates of return.
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An investment policy study was completed for the Defined Benefit Pension Plan as
of December 31, 2022 . As a result of the study, it was determined that the
weighted-average long-term rate of return on assets in effect at December 31,
2021 of 7.00%, should be increased to 7.50% at December 31, 2022 .
Another key assumption in determining net pension expense is the assumed
discount rate used to discount plan obligations. We estimate the assumed
discount rate for all pension plans using a cash flow matching approach, which
uses projected cash flows matched to spot rates along the Financial Times Stock
Exchange ("FTSE") above-median yield curve to determine the weighted-average
discount rate for the calculation of the present value of cash flows. We apply
the individual annual yield curve rates instead of the assumed discount rate to
determine the service cost and interest cost, which more specifically links the
cash flows related to service cost and interest cost to bonds maturing in their
year of payment.
For our Defined Benefit Plan and the Non-Qualified Benefit Equalization Plan,
the interest rates used to convert annuities to the actuarial equivalent lump
sum amounts were selected based on the applicable segment rates under Internal
Revenue Code Section 417(e) for the plan year beginning on November 1, 2022 .
The Society of Actuaries ("SOA") most recently issued mortality improvement
tables during the year ended December 31, 2021 . We reviewed our recent mortality
experience and we determined our current mortality assumptions were appropriate
to measure our pension plan obligations as of December 31, 2022 .
Significant differences in actual experience or significant changes in
assumptions may materially affect the pension obligations. The effects of actual
results differing from assumptions and the changing of assumptions are included
in unamortized net actuarial gains and losses that are subject to amortization
to pension expense over future periods. The unamortized pre-tax actuarial loss
on all of our pension plans was $99.0 million and $128.4 million at December 31,
2022 and December 31, 2021 , respectively. The year-over-year change was
primarily due to an increase in discount rate assumptions used for determining
the benefit obligation and lump sum conversion rates.
The overfunded status of all of our pension plans improved during the year ended
December 31, 2022 to $56.8 million from $44.5 million primarily due to: (i) the
favorable effect of an increase in discount rates of $97.6 million ; (ii) the
favorable effect of an increase in lump sum conversion rates of $39.3 million ;
and (iii) changes in other actuarial assumptions and demographic data updates;
partially offset by (iv) the unfavorable effect of increased service and
interest costs of $4.6 million ; and (v) actual pension plan investment returns
less than expected of $127.0 million .
The following table illustrates the sensitivity to a change in certain
assumptions for the pension plans, holding all other assumptions constant:
Effect on December 31,
Effect on 2023 Pension 2022 Pension Benefit
Expense Obligation
(in thousands)
25 basis point decrease in discount rate $ 539 $ 7,786
25 basis point increase in discount rate (519) (7,472)
25 basis point decrease in expected rate of
return on plan assets 1,005 N/A
25 basis point increase in expected rate of
return on plan assets (1,005) N/A
25 basis point decrease in lump sum conversion
rates 494 3,558
25 basis point increase in lump sum conversion
rates (472) (3,404)
Recent Accounting Pronouncements
InOctober 2021 , the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ("ASU 2021-08"). This update modifies how an acquiring entity measures contract assets and contract liabilities of an acquiree in a business combination in accordance with Topic 606. The amendments in this update require the acquiring entity in a business combination to account for revenue contracts as if they had originated the contract and assess how the acquiree accounted for the contract under Topic 606. ASU 2021-08 improves comparability of recognition and measurement of revenue contracts with customers both before and after a business combination. For public business entities, the amendments in this update are effective for fiscal years beginning afterDecember 15, 2022 . For all other entities, the amendments are effective for fiscal years beginning afterDecember 15, 2023 . The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date of the amendments with early adoption permitted. We expect the adoption of this standard will not have a material impact on our Consolidated Financial Statements.
In
(Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU
2022-02"). The amendments in this update eliminate the accounting guidance
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on troubled debt restructurings ("TDRs") for creditors in ASC 310-40 and amends
the guidance on vintage disclosures, referenced in ASC 326-20-50, to require
disclosure of current-period gross write-offs by year of origination. This
update supersedes the existing accounting guidance for TDRs in ASC 310-40 in its
entirety and requires entities to evaluate all receivable modifications under
existing accounting guidance in ASC 310-20 to determine whether a modification
made to a borrower results in a new loan or a continuation of an existing loan.
In addition to the elimination of TDR accounting guidance, entities that adopt
this update will no longer consider renewals, modifications and extensions that
result from reasonably expected TDRs in their calculation of the allowance for
credit losses. Further, if an entity employs a discounted cash flow method to
calculate the allowance for credit losses, it will be required to use a
post-modification-derived effective interest rate as part of its calculation.
The update also requires new disclosures for receivables for which there has
been a modification in their contractual cash flows resulting from borrowers
experiencing financial difficulties. For public business entities, the
amendments in this update are effective for fiscal years beginning after
December 15, 2022 , including interim periods within those fiscal years. Entities
may elect to apply the updated guidance on TDR recognition and measurement by
using a modified retrospective transition method. The amendments on TDR
disclosures and vintage disclosures should be adopted prospectively. On January
1, 2023 , we adopted this standard using the modified retrospective method with
respect to the updated guidance on TDR recognition and measurement and the
prospective approach with regard to the TDR and vintage disclosures. The
adoption of this standard did not have a material impact on our Consolidated
Financial Statements.
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 the net present value of assets and liabilities and/or 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 the net present value of assets and liabilities and/or 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 our 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 including, but not limited to, 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 estimate what the net interest income would be for the same period under the assumption that market rates increase or decrease instantaneously by +200, +300, +400, -100 and -200 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 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 market interest rates prevalent atDecember 31, 2021 precluded the modeling of certain falling rate scenarios. We do not model negative interest rate scenarios. 91 --------------------------------------------------------------------------------
The tables below set forth, as of
the estimated changes in our net interest income on an FTE basis that would
result from the designated immediate changes in market interest rates:
Interest Rate Sensitivity
As of December 31, 2022
Change in Net Interest Year 1
Interest Rates Income Year 1 Change from
(basis points) Forecast Level
(Dollars in thousands)
400 $ 528,247 (8.4)%
300 539,739 (6.4)%
200 552,231 (4.2)%
Flat 576,477 -%
(100) 585,728 1.6%
(200) 586,771 1.8%
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)%
(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.
As ofDecember 31, 2022 , our models, as indicated above, show a decline in our net interest income in rising rate scenarios and an increase in our net interest income in falling rate scenarios. In the rising rate scenarios, interest expense is expected to rise at a faster rate than interest income due, in part, to the extension of asset duration from our interest rate swap portfolio designated as cash flow hedges and the reduction of liability duration due to the increase in short term certificates of deposit and borrowings. Conversely, in the declining rate scenarios, the reduction in interest expense exceeds the reduction in interest income. The tables above indicate that atDecember 31, 2022 andDecember 31, 2021 , in the event of an instantaneous parallel 200 basis points increase in rates, we would have experienced a 4.2% decrease and a 15.1% 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 1.6% increase and a 5.9% decrease atDecember 31, 2022 andDecember 31, 2021 , respectively, in net interest income, on an FTE basis. We also modeled an instantaneous 200 basis point decrease in interest rates atDecember 31, 2022 , the results of which showed we would have experienced a 1.8% increase in net interest income, on an FTE basis. We did not model an instantaneous 200 basis points decrease in interest rates atDecember 31, 2021 given the relatively low level of interest rates. Management may use investment strategy, loan and deposit pricing, non-core funding strategies, and 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. For additional information related to our interest rate derivative financial instruments, see Note 19, "Derivative Financial Instruments" within the Notes to the Consolidated Financial Statements included in Part II, Item 8 in this Annual Report on Form 10-K 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 as measured by the estimated changes in our EVE, resulting from an instantaneous and sustained parallel shift in the yield curve (+200, +300, +400 basis points and -100, -200 basis points) atDecember 31, 2022 and (+200, +300, +400 basis points and -100 basis points)December 31, 2021 . The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the 92 --------------------------------------------------------------------------------
modeling of certain falling rate scenarios during periods of lower market
interest rates. The relatively low level of interest rates prevalent at
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 and by affecting the amount of unrealized
gains and losses from securities held in rabbi trusts which are partially offset
by a corresponding but opposite impact to the amount of employee benefit expense
associated with the change in value of plan assets.
EVE Interest Rate Sensitivity
As of December 31, 2022 EVE as a
Change in Interest Estimated Increase (Decrease) in EVE from Level Percentage of
Rates (basis points) Estimated EVE (2) Amount Percent Total Assets (3)
(Dollars in thousands)
400 $ 3,691,963 $ (691,696) (15.8) % 18.48 %
300 3,834,512 (549,147) (12.5) % 18.72 %
200 4,007,265 (376,394) (8.6) % 19.04 %
Flat 4,383,659 - - 19.66 %
(100) 4,527,743 144,084 3.3 % 19.74 %
(200) 4,620,994 237,335 5.4 % 19.61 %
As of December 31, 2021 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 $ 4,573,359 $ 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 %
(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.
Certain shortcomings are inherent in the interest rate risk measurement
methodologies underlying the data presented in the tables in this section.
Modeling changes require making certain assumptions that may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. For example, the models assume that the composition of our
interest-sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and assume that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration or repricing of specific assets and liabilities.
Accordingly, although the tables provide an indication of our interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates, and actual results may differ.
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.
Our primary sources of funds are deposits, principal and interest payments on
loans and securities, and proceeds from calls, maturities and sales of
securities, subject to market conditions. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and loan and securities prepayments are greatly influenced by general
interest rates, economic conditions, and competition. Our most liquid assets are
unencumbered cash and due from banks and securities classified as available for
sale, which could be liquidated, subject to market conditions. In the future,
our liquidity position will be affected by the level of customer deposits and
payments, as well as acquisitions, dividends, and share
93
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repurchases in which we may engage. For the next twelve months, we believe that
our existing resources, including our capacity to use brokered deposits and
wholesale borrowings, will be sufficient to meet the liquidity and capital
requirements of our operations. We may elect to raise additional capital through
the sale of additional equity or debt financing to fund business activities such
as strategic acquisitions, share repurchases, or other purposes beyond the next
twelve months.
At December 31, 2022 , we had $169.5 million of cash and cash equivalents, a
decrease of $1.1 billion from $1.2 billion at December 31, 2021 . The reduction
in cash levels was due primarily to a $1.3 billion increase in total loans, on a
gross basis, and a $654.0 million decrease in total deposits. Advances from the
FHLBB were used to support ongoing operations and totaled $704.1 million at
December 31, 2022 .
We participate in the IntraFi Network, which allows us to provide access to
multi-million dollar FDIC 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. At December 31, 2022 , we had no IntraFi Network one-way
sell deposits. At December 31, 2021 , we had $520.5 million of IntraFi Network
one-way sell deposits. At December 31, 2022 , we had repurchased $665.0 million
of previously sold reciprocal deposits. At December 31, 2021 , no amounts were
repurchased of previously sold reciprocal deposits. The additional capacity of
$520.5 million at December 31, 2021 was considered a source of liquidity.
Although customer deposits remain our preferred source of funds, maintaining
additional sources of liquidity is part of our prudent liquidity risk management
practices. We have the ability to borrow from the FHLBB. At December 31, 2022 ,
we had $704.1 million in outstanding advances and the ability to borrow up to an
additional $2.0 billion . We also have the ability to borrow from the Federal
Reserve Bank of Boston . At December 31, 2022 , we had a $538.9 million
collateralized line of credit from the Federal Reserve Bank of Boston with no
outstanding balance. In addition, we are able to acquire brokered deposits at
our discretion to raise additional funds. At December 31, 2022 , we had $928.6
million in brokered certificates of deposit of which $40.5 million were IntraFi
Network deposits and which are excluded from the Intrafi Network reciprocal
deposits shown in the table below.
Sources of Liquidity
As of December 31,
2022 2021
Additional Additional
Outstanding Capacity Outstanding Capacity
(In thousands)
IntraFi Network reciprocal deposits $ 664,971 $ - $ - $ 520,461
Brokered certificates of deposit (1) 928,648 - - -
Federal Home Loan Bank (2) 704,084 1,976,166 14,020 1,839,540
Federal Reserve Bank of Boston (3) - 538,894 - 456,148
Total $ 2,297,703 $ 2,515,060 $ 14,020 $ 2,816,149
(1)The additional borrowing capacity has not been assessed for this category.
(2)As ofDecember 31, 2022 andDecember 31, 2021 , loans have been pledged to the FHLBB with a carrying value of$3.9 billion and$2.6 billion , respectively, to secure our total borrowing capacity. (3)Loans with a carrying value of$1.1 billion and$0.8 billion atDecember 31, 2022 and 2021, 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, 2022 and 2021, 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 16, "Minimum Regulatory Capital Requirements" within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K. 94 -------------------------------------------------------------------------------- Contractual Obligations, Commitments and Contingencies. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include 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
One Year or Less After One Year
Total
(In thousands)
Commitments to extend credit (1) $ 977,827
$ 5,680,438 Standby letters of credit 59,126 6,028 65,154 Operating lease obligations 14,858 28,212 43,070 FHLB advances 691,297 12,787 704,084 Forward commitments to sell loans 10,008 - 10,008 Total$ 1,753,116 $ 4,749,638 $ 6,502,754 (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$3.4 billion of commitments under commercial loans and lines of credit (including$713.3 million of unadvanced portions of construction loans),$2.0 billion of commitments under home equity loans and lines of credit,$198.6 million in overdraft coverage commitments,$24.9 million of unfunded commitments related to residential real estate loans and$56.1 million in other consumer loans and lines of credit as ofDecember 31, 2022 .
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."
95
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