# Eastern Bankshares, Inc.: Form 10-Q for the period ended Jun 30, 2022

- Company: [Eastern Bankshares, Inc.](/companies/ebc.md) (CIK 1810546)
- Form: 10-Q
- Filed: 2022-08-05
- Accepted by EDGAR: Aug 5, 2022, 10:13 ET
- Period: 2022-06-30
- Accession: 0001628280-22-021267
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1810546/000162828022021267/ebc-20220630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1810546/000162828022021267/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-04-01 to 2022-06-30 | $45.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2022-01-01 to 2022-06-30 | $93.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2022-04-01 to 2022-06-30 | $3.1m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2022-01-01 to 2022-06-30 | $6.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-04-01 to 2022-06-30 | $16.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2022-01-01 to 2022-06-30 | $30.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-04-01 to 2022-06-30 | $51.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2022-01-01 to 2022-06-30 | $102.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.31 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.61 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.31 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2022-01-01 to 2022-06-30 | $0.61 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-04-01 to 2022-06-30 | 166,573,627 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2022-01-01 to 2022-06-30 | 168,248,246 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2022-01-01 to 2022-06-30 | $165.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2022-04-01 to 2022-06-30 | $16.5m | us-gaap:PaymentsOfDividends |
| Dividends paid | 6 months, 2022-01-01 to 2022-06-30 | $33.4m | us-gaap:PaymentsOfDividends |
| Share repurchases | 6 months, 2022-01-01 to 2022-06-30 | $141.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2022-06-30 | $22.35bn | us-gaap:Assets |
| Total liabilities | at 2022-06-30 | $19.63bn | us-gaap:Liabilities |
| Shareholders' equity | at 2022-06-30 | $2.72bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 150,409 characters.

*This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at June 30, 2022, and our results of operations for the three and six months ended June 30, 2022 and 2021. This section should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto of the Company appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Company’s 2021 Form 10-K.*

### Forward-Looking Statements

When we use the terms “we,” “us,” “our,” and the “Company,” we mean Eastern Bankshares, Inc., a Massachusetts corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.

Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors:

- the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations;
- the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in employment levels and other general business and economic conditions on a national basis and in the local markets in which the Company operates;
- changes in customer behavior;
- changes in regional, national or international macroeconomic conditions, including especially changes in inflation or interest rates in the United States;
- the possibility that future credit losses, loan defaults and charge-off rates are higher than expected due to changes in economic assumptions or adverse economic developments;
- turbulence in the capital and debt markets;
- decreases in the value of securities and other assets;
- decreases in deposit levels necessitating increased borrowing to fund loans and investments;
- competitive pressures from other financial institutions;
- operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics;
- changes in regulation and associated increases in compliance costs, as well as enforcement and litigation risk;
- reputational risks relating to the Company’s participation in the PPP and other pandemic-related legislative and regulatory initiatives and programs;
- changes in accounting standards and practices;
- the risk that goodwill and intangibles recorded in our financial statements will become impaired;
- risks related to the implementation of acquisitions, dispositions, and restructurings, including the risk that acquisitions may not produce results at levels or within time frames originally anticipated;
- the risk that we may not be successful in the implementation of our business strategy;
- changes in assumptions used in making such forward-looking statements; and
- other risks and uncertainties detailed in Part I, Item 1A of our 2021 Form 10-K, as updated by Part II, Item 1A “Risk Factors” of the Quarterly Report on Form 10-Q for the three months ended March 31, 2022 (“Q1 Form 10-Q”), as updated by Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q, and as may be further updated in our filings with the SEC from time to time.

Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

### Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed 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. Our significant accounting policies are discussed in detail in our 2021 Form 10-K, as updated by the notes to our unaudited interim condensed consolidated financial statements accompanying this Quarterly Report on Form 10-Q. Effective January 1, 2022, we adopted ASU 2016-13, or CECL, the accounting policy for which is described in *Note 2, “Summary of Significant Accounting Policies,” Note 3, “Securities,”* and *Note 4, “Loans and Allowance for Credit Losses”* within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. There have been no other material changes in critical accounting policies during the three and six months ended June 30, 2022.

### Overview

We are a bank holding company, and our principal subsidiary, Eastern Bank, is a Massachusetts-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 $22.4 billion and $23.5 billion at June 30, 2022 and December 31, 2021, respectively. We are subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board and the Consumer Financial Protection Bureau.

We manage our business under two business segments: our banking business, which contributed $155.8 million, or 86.7%, of our total income (pre-provision net interest and dividend income and noninterest income) for the three months ended June 30, 2022 and $302.0 million, or 85.2%, of our total income for the six months ended June 30, 2022, and our insurance agency business, which contributed $23.9 million, or 13.3%, of our total income for the three months ended June 30, 2022 and $52.3 million, or 14.8%, of our total income for the six months ended June 30, 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.

Net income for the three and six months ended June 30, 2022 computed in accordance with GAAP was $51.2 million and $102.7 million, respectively, as compared to $34.8 million and $82.5 million for the three and six months ended June 30, 2021, respectively, representing increases of 47.0% and 24.5%, respectively. These increases were primarily due to an increase in average interest earning assets, which was primarily the result of our 2021 acquisition of Century. Refer to the “*Results of Operations”* section below for additional discussion. Net income for the three and six months ended June 30, 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 three and six months ended June 30, 2022 was $52.5 million and $107.6 million, respectively, compared to operating net income for the three and six months ended June 30, 2021 of $37.1 million and $83.6 million, respectively, representing increases of 41.6% and 28.7%, respectively. These increasess were largely driven by the aforementioned change in average interest-earning assets. See “*Non-GAAP Financial Measures”* below for a reconciliation of operating net income to GAAP net income.

The following chart shows our basic earnings per share on a GAAP and operating basis over the past five quarters (refer to the “*Non-GAAP Financial Measures”* section below for a reconciliation of GAAP earnings to operating earnings):

Earnings per share increased from $0.20 for the three months ended June 30, 2021 to $0.31 for the three months ended June 30, 2022, a 52.0% increase. Earnings per share increased from $0.48 for the six months ended June 30, 2021 to $0.61 for the six months ended June 30, 2022, a 27.4% increase. These increases were due to increases in net income and decreases in the average number of common shares outstanding during each such period. The decreases in the average number of common shares outstanding are attributable to share repurchases in connection with our previously announced share repurchase program.

The following chart shows our efficiency ratio on a GAAP and operating basis over the past five quarters (refer to the “*Non-GAAP Financial Measures”* section below for additional information on the determination of each measure):

The GAAP efficiency and non-GAAP operating efficiency ratios for both the three and six months ended June 30, 2022 decreased compared to the ratios for the three and six months ended June 30, 2021. The decrease in the efficiency ratios for such periods was primarily attributable to increased net interest income, which resulted in a margin of increase in total revenue that exceeded the rate at which interest expense increased 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.

### Banking Business

Our banking business offers a range of commercial, retail, wealth management and banking services, and consists primarily of attracting deposits from the general public, including municipalities, and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. The financial condition and results of operations of our banking business depend primarily on (i) attracting and retaining low cost, stable deposits, (ii) using those deposits to originate and acquire loans and earn net interest income and (iii) operating expenses incurred.

### Lending Activities

We use funds obtained from deposits, as well as funds obtained from the FHLBB advances and federal funds, primarily to originate loans and to invest in securities. Our lending focuses on the following categories of loans:

### Commercial Lending

- Commercial and industrial: Loans in this category consist of revolving and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As of June 30, 2022 and December 31, 2021, we had total commercial and industrial loans of $2.8 billion and $3.0 billion, representing 23.0% and 24.2%, respectively, of our total loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Our primary focus for commercial and industrial loans is middle-market companies located in the markets we serve. In addition, we participate in the syndicated loan market and the SNC Program. As of June 30, 2022 and December 31, 2021, our SNC Program portfolio

totaled $447.0 million and $480.9 million, or 15.7% and 16.2%, respectively, of our commercial and industrial portfolio, and 33.8% and 40.3%, respectively, of our SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial and industrial portfolio also includes our Asset Based Lending Portfolio (“ABL Portfolio”), a portion of our PPP loans, and industrial revenue bonds (“IRBs”), the balances of which are detailed below:

- As of June 30, 2022 and December 31, 2021, our ABL Portfolio totaled $244.5 million and $224.8 million, or 8.6% and 7.6%, respectively, of our commercial and industrial portfolio.
- As of June 30, 2022 and December 31, 2021, the amount of PPP loans included in our commercial and industrial portfolio was $7.5 million and $112.8 million, respectively.
- As of both June 30, 2022 and December 31, 2021, our commercial and industrial IRB portfolio, which is comprised of municipal bonds issued to finance major capital projects, totaled $1.0 billion.
- Commercial real estate: Loans in this category include mortgage loans on commercial real estate, both investment and owner occupied. As of June 30, 2022 and December 31, 2021, we had total commercial real estate loans of $4.8 billion and $4.5 billion, representing 38.7% and 36.9%, respectively, of our total loans. As of June 30, 2022, and December 31, 2021, owner occupied loans totaled $984.1 million and $958.5 million, representing 20.5% and 21.2%, respectively, of our commercial real estate loans. In connection with our adoption of ASU 2016-13, we revised our methodology for determining owner occupied commercial real estate loans in order to conform with our corresponding pools for CECL reserve modeling purposes, and our totals as of June 30, 2022 reflect such revision. Accordingly, the amount of our owner occupied commercial real estate loans as of December 31, 2021 was also revised from the amount disclosed in our 2021 Form 10-K to accommodate comparability. Collateral values are established by independent third-party appraisals and evaluations. The primary repayment sources include operating income generated by the real estate, permanent debt refinancing and/or the sale of the real estate. Our commercial real estate loan portfolio also includes IRB loans of $588.1 million and $629.6 million as of June 30, 2022 and December 31, 2021, respectively.
- Commercial construction: Loans in this category include construction project financing and are comprised of commercial real estate, business banking and residential loans for the purpose of constructing and developing real estate. As of June 30, 2022 and December 31, 2021, we had total commercial construction loans of $303.5 million and $222.3 million, representing 2.5% and 1.8%, respectively, of our total loans.
- Business banking: Loans in this category are comprised of loans to small businesses with exposures of under $1 million and small investment real estate projects with exposures of under $3 million. These loans are separate and distinct from our commercial and industrial and commercial real estate portfolios described above due to the size of the loans. As of June 30, 2022 and December 31, 2021, we had total business banking loans of $1.1 billion and $1.3 billion, respectively, representing 9.1% and 10.9% of our total loans for each period end, respectively. In this category, commercial and industrial loans and commercial real estate loans totaled $244.0 million and $882.8 million, respectively, as of June 30, 2022, and $440.6 million and $894.1 million, respectively, as of December 31, 2021.

Business banking originations include traditionally underwritten loans as well as partially automated scored loans. Our proprietary decision matrix, which includes a number of quantitative factors including, but not limited to, a guarantor’s credit score, industry risk, and time in business, is used to determine whether to make business banking loans. We also engage in SBA lending. SBA guarantees reduce our risk of loss when default occurs and are considered a credit enhancement to the loan structure.

Our business banking portfolio also includes a portion of our PPP loans which are included in the aforementioned commercial and industrial business banking total. As of June 30, 2022 and December 31, 2021, the amount of PPP loans included in our business banking portfolio was $35.0 million and $218.6 million, respectively.

### Residential Lending

- Residential real estate: Loans in this category consist of mortgage loans on residential real estate. As of June 30, 2022 and December 31, 2021, we had total residential loans of $2.0 billion and $1.9 billion, respectively, representing 16.1% and 15.7%, respectively, of our total loans. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit

repayment history, financial resources including cash reserves and the value of the collateral. We maintain policy standards for minimum credit scores and cash reserves and maximum loan to value consistent with a “prime” portfolio. Collateral consists of mortgage liens on residential dwellings. We do not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or to retain in our loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and our capital needs. During the three and six months ended June 30, 2022, residential real estate mortgage originations were $159.4 million and $277.7 million, respectively, of which $15.8 million and $45.1 million, respectively, were sold on the secondary markets. Comparatively, during the three and six months ended June 30, 2021, residential real estate mortgage originations were $236.5 million and $496.6 million, respectively, of which $46.1 million and $103.3 million, respectively, were sold on the secondary markets. We generally do not continue to service residential loans that we sell in the secondary market.

### Consumer Lending

- Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of both June 30, 2022 and December 31, 2021, we had total consumer home equity loans of $1.1 billion, representing 9.3% and 9.0%, respectively, of our total loans. Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Full principal repayment is required at the end of the ten-year draw period. Home equity lines of credit can be converted to term loans that are fully amortized. Underwriting considerations are materially consistent with those utilized in the residential real estate category. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
- Other consumer: Loans in this category consist of unsecured personal lines of credit, overdraft protection, automobile and aircraft loans, home improvement loans and other personal loans. As of June 30, 2022 and December 31, 2021, we had total other consumer loans of $198.3 million and $214.5 million, representing 1.6% and 1.8%, respectively, of our total loans. Our policy and underwriting in this category include the following factors, among others: income sources and reliability, credit histories, term of repayment and collateral value, as applicable.

### Other Banking Products and Services

In addition to our lending activities, which are the core part of our banking business, we offer other banking products and services primarily related to (i) other commercial banking products, (ii) other consumer deposit products and (iii) wealth management services.

### Other Commercial Banking Products

- We offer a variety of deposit, treasury management, electronic banking, interest rate protection and foreign exchange products to our customers. In addition, we offer cash management services to our corporate and municipal clients. Deposit products include checking products, both interest-bearing and noninterest-bearing, as well as money market deposits, savings deposits and certificates of deposits. Our treasury management products include a variety of cash management and payment products. Our interest rate protection and foreign exchange products include interest rate swaps and currency related transactions. As of June 30, 2022 and December 31, 2021, our total commercial deposits were $7.6 billion and $8.1 billion, respectively. During the three and six months ended June 30, 2022 our commercial noninterest income was $5.8 million and $11.6 million, respectively, compared to $4.1 million and $8.3 million for the three and six months ended June 30, 2021, respectively.

### Other Consumer Deposit Products

- We offer a wide variety of deposit products and services to our consumer customers. We service these customers through our 98 branches located in eastern Massachusetts and New Hampshire, through our call center in our facility in Lynn, MA and through our online and mobile banking applications.

### Wealth Management Services

- Through our Eastern Wealth Management division, we provide a wide range of trust services, including (i) managing customer investments, (ii) serving as custodian for customer assets, and (iii) providing other fiduciary services, including serving as the trustee and personal representative of estates. As of June 30, 2022 and December 31, 2021, we held $2.8 billion and $3.4 billion, respectively, of assets in a fiduciary, custodial or agency capacity for customers, which are not our assets and therefore not included on the consolidated balance sheets included in this Quarterly Report on Form 10-Q. For the three and six months ended June 30, 2022, we had noninterest income of $6.0 million and $12.1 million, respectively, from providing these services compared to $6.1 million and $11.7 million for the three and six months ended June 30, 2021, respectively.

### Insurance Agency Business

Our insurance agency business consists of insurance-related activities such as acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients through our wholly-owned agency, Eastern Insurance Group. Our insurance products include commercial property and liability, workers compensation, life, accident and health and automobile insurance. We also offer a wide range of employee benefits products and services, including professional advice related to health care cost management, employee engagement and executive services. As an agency business, we do not assume any underwriting or insurance risk. The commissions we earn on the sale of these insurance products and services is the most significant portion of our noninterest income, representing $24.7 million and $53.4 million, respectively, or 58.9% and 60.5%, respectively of our noninterest income during the three and six months ended June 30, 2022. Comparatively, during the three and six months ended June 30, 2021, such income represented $23.7 million and $51.8 million, respectively, or 51.7% and 51.3%, respectively, of our noninterest income. Our insurance business operates through 22 non-branch offices located primarily in eastern Massachusetts and had 401 full-time equivalent employees as of June 30, 2022.

### Acquisitions

During the six months ended June 30, 2022, Eastern Insurance Group completed one insurance agency acquisition. The purchase price and goodwill recorded as a result of the acquisition were not material. There were no acquisitions during the three months ended June 30, 2022.

### Outlook and Trends

### Interest Rates

We expect additional increases in the federal funds rate in 2022 which is anticipated to be beneficial to our net interest income and net interest margin. The Federal Open Market Committee (the “FOMC”) voted to increase rates multiple times thus far in 2022, which is detailed as follows:

- On March 16, 2022, the FOMC voted to increase interest rates by 25 basis points to a range of 0.25% to 0.50%.
- On May 4, 2022, the FOMC voted to increase interest rates by 50 basis points to a range of 0.75% to 1.00%.
- On June 15, 2022, the FOMC voted to increase interest rates by 75 basis points to a range of 1.50% to 1.75%.
- On July 27, 2022, the FOMC voted to increase interest rates by 75 basis points to a range of 2.25% to 2.50% and stated that it anticipates that ongoing rate increases will be appropriate.

Approximately 40% of our loans are 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 has changed during the first and second quarters of 2022, a portion of these loans have been hedged using interest rate swaps to convert the floating rate interest receipts to a fixed rate. For more detail regarding such hedging financial instruments, refer to *Note 13, “Derivative Financial Instruments”* within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. Management expects to continue to evaluate the scope of our hedging program in order to manage interest rate risk exposure to lower rate scenarios. Refer to the section titled “*Management of Market Risk”* within this Item 2 for additional discussion including the estimated change to our net interest income which assumes a variety of immediate and parallel changes in 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 in May 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 and Eastern Insurance Group. As of June 30, 2022 and December 31, 2021, the remaining balance of our PPP loans was $42.5 million and $331.4 million, respectively. Net PPP loan fee accretion (fee accretion less cost amortization) for all PPP loans for the three and six months ended June 30, 2022 was $2.5 million and $8.3 million, respectively. Net PPP loan fee accretion (fee accretion less cost amortization) for all PPP loans for the three and six months ended June 30, 2021 was $9.3 million and $17.6 million, respectively. We expect to recognize the remaining net unearned fees of $0.9 million as of June 30, 2022 during the remainder of the year ended December 31, 2022 resulting in total recognized net fee accretion of $9.2 million for the year ended December 31, 2022 compared to $34.3 million recognized during the year ended December 31, 2021. Our net interest margin is expected to be 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 is estimated to be 0.25% (change computed based upon average total loans for the year ended December 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’s 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 initial public offering (“IPO”), (vii) OREO gains and losses, (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, and (x) settlement of putative consumer class action litigation matters related to overdraft and non-sufficient funds fees, and associated settlement expenses. There were no expenses indirectly associated with our IPO, OREO gains or stock donations to the Foundation during the periods presented in this Quarterly Report on Form 10-Q.

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.

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:

*(Dollars in thousands, except per share data)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| **Net income (GAAP)** | $51,172 | $34,809 | $102,688 | $82,472 |
| Non-GAAP adjustments: |  |  |  |  |
| Add: |  |  |  |  |
| Noninterest income components: |  |  |  |  |
| Loss (income) from investments held in rabbi trusts | 7,316 | (4,216) | 11,749 | (6,062) |
| Losses (gains) on sales of securities available for sale, net | 104 | (1) | 2,276 | (1,165) |
| Gains on sales of other assets | (1,251) | (29) | (977) | (47) |
| Noninterest expense components: |  |  |  |  |
| Rabbi trust employee benefit (income) expense | (3,310) | 2,063 | (5,397) | 3,049 |
| Impairment reversal on tax credit investments | — | (1,419) | — | (1,419) |
| Merger and acquisition expenses | — | 3,479 | 34 | 4,068 |
| Settlement and expenses for putative consumer class action matters | — | 3,325 | — | 3,325 |
| Total impact of non-GAAP adjustments | 2,859 | 3,202 | 7,685 | 1,749 |
| Less net tax benefit associated with non-GAAP adjustment (1) | 1,513 | 914 | 2,748 | 587 |
| Non-GAAP adjustments, net of tax | $1,346 | $2,288 | $4,937 | $1,162 |
| **Operating net income (non-GAAP)** | $52,518 | $37,097 | $107,625 | $83,634 |
| Weighted average common shares outstanding during the period: |  |  |  |  |
| Basic | 166,533,920 | 172,173,707 | 168,184,528 | 172,111,372 |
| Diluted | 166,573,627 | 172,173,707 | 168,248,246 | 172,111,372 |
| Earnings per share, basic | $0.31 | $0.20 | $0.61 | $0.48 |
| Earnings per share, diluted | $0.31 | $0.20 | $0.61 | $0.48 |
| Operating earnings per share, basic (non-GAAP) | $0.32 | $0.22 | $0.64 | $0.49 |
| Operating earnings per share, diluted (non-GAAP) | $0.32 | $0.22 | $0.64 | $0.49 |

(1) 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 2022 periods reflects the impact of the reversal of the remaining $0.7 million of a $12.0 million valuation allowance (“EBF Valuation Allowance”) established in 2020 associated with the 2020 stock donation to the Foundation. The reversal of the valuation allowance during the three months ended June 30, 2022 was considered appropriate based upon our determination of the realizability of such deductions for tax purposes as of June 30, 2022. The initial $11.3 million reversal of the EBF Valuation Allowance occurred in 2021.

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:

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| **Net interest income (GAAP)** | $137,757 | $104,608 | $265,881 | $204,699 |
| Add: |  |  |  |  |
| Tax-equivalent adjustment (non-GAAP) | 3,023 | 1,269 | 5,284 | 2,566 |
| Fully-taxable equivalent net interest income (non-GAAP) | 140,780 | 105,877 | 271,165 | 207,265 |
| Noninterest income (GAAP) | 41,877 | 45,733 | 88,292 | 100,945 |
| Less: |  |  |  |  |
| (Loss) income from investments held in rabbi trusts | (7,316) | 4,216 | (11,749) | 6,062 |
| (Losses) gains on sales of securities available for sale, net | (104) | 1 | (2,276) | 1,165 |
| Gains on sales of other assets | 1,251 | 29 | 977 | 47 |
| Noninterest income on an operating basis (non-GAAP) | 48,046 | 41,487 | 101,340 | 93,671 |
| **Noninterest expense (GAAP)** | $111,139 | $107,335 | $220,005 | $201,384 |
| Less: |  |  |  |  |
| Rabbi trust (income) benefit expense | (3,310) | 2,063 | (5,397) | 3,049 |
| Impairment reversal on tax credit investments | — | (1,419) | — | (1,419) |
| Merger and acquisition expenses | — | 3,479 | 34 | 4,068 |
| Settlement and expenses for putative consumer class action matters | — | 3,325 | — | 3,325 |
| Noninterest expense on an operating basis (non- GAAP) | $114,449 | $99,887 | $225,368 | $192,361 |
| Total revenue (GAAP) | $179,634 | $150,341 | $354,173 | $305,644 |
| Total operating revenue (non-GAAP) | $188,826 | $147,364 | $372,505 | $300,936 |
| **Ratios:** |  |  |  |  |
| Efficiency ratio (GAAP) | 61.87% | 71.39% | 62.12% | 65.89% |
| Operating efficiency ratio (non-GAAP) | 60.61% | 67.78% | 60.50% | 63.92% |

73

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:

*(Dollars in thousands, except per share data)*

| Tangible shareholders’ equity: | As of June 30, 2022 | As of December 31, 2021 |
| --- | ---: | ---: |
| Total shareholders’ equity (GAAP) | $2,718,396 | $3,406,352 |
| Less: Goodwill and other intangibles | 653,853 | 649,703 |
| Tangible shareholders’ equity (non-GAAP) | 2,064,543 | 2,756,649 |
| **Tangible assets:** |  |  |
| Total assets (GAAP) | 22,350,848 | 23,512,128 |
| Less: Goodwill and other intangibles | 653,853 | 649,703 |
| Tangible assets (non-GAAP) | $21,696,995 | $22,862,425 |
| Shareholders’ equity to assets ratio (GAAP) | 12.2% | 14.5% |
| Tangible shareholders’ equity to tangible assets ratio (non-GAAP) | 9.5% | 12.1% |
| **Book value per share:** |  |  |
| Common shares issued and outstanding | 179,253,801 | 186,305,332 |
| Book value per share (GAAP) | $15.17 | $18.28 |
| Tangible book value per share (non-GAAP) | $11.52 | $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:

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net income (GAAP) | $51,172 | $34,809 | $102,688 | $82,472 |
| Operating net income (non-GAAP) (1) | 52,518 | 37,097 | 107,625 | 83,634 |
| **Average tangible shareholders’ equity:** |  |  |  |  |
| Average total shareholders’ equity (GAAP) | $2,865,799 | $3,406,497 | $3,068,497 | $3,411,982 |
| Less: Average goodwill and other intangibles | 654,444 | 379,044 | 651,984 | 377,699 |
| Average tangible shareholders’ equity (non-GAAP) | 2,211,355 | 3,027,453 | 2,416,513 | 3,034,283 |
| **Ratios:** |  |  |  |  |
| Return on average total shareholders’ equity (GAAP) (2) | 7.16% | 4.10% | 6.75% | 4.87% |
| Return on average tangible shareholders’ equity (non-GAAP) (2) | 9.28% | 4.61% | 8.57% | 5.48% |
| Operating return on average tangible shareholders’ equity (non-GAAP) (2) | 9.53% | 4.91% | 8.98% | 5.56% |

(1) Refer to the table above within this “Non-GAAP Financial Measures” section for a reconciliation of operating net income to net income.

(2) Presented on an annualized basis.

### Financial Position

### Summary of Financial Position

*(Dollars in thousands)*

|  | As of June 30, 2022 Amount ($) | As of December 31, 2021 Percentage (%) | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $368,914 | $1,231,792 | $(862,878) | (70.1)% |
| Securities available for sale | 7,536,921 | 8,511,224 | (974,303) | (11.4)% |
| Securities held to maturity | 488,581 | — | 488,581 | 100.0% |
| Loans, net of allowance for loan losses | 12,252,175 | 12,157,281 | 94,894 | 0.8% |
| Federal Home Loan Bank Stock | 5,714 | 10,904 | (5,190) | (47.6)% |
| Goodwill and other intangible assets | 653,853 | 649,703 | 4,150 | 0.6% |
| Deposits | 19,163,801 | 19,628,311 | (464,510) | (2.4)% |
| Borrowed funds | 43,116 | 34,278 | 8,838 | 25.8% |

### Cash and cash equivalents

Total cash and cash equivalents decreased by $0.9 billion, or 70.1%, to $0.4 billion at June 30, 2022 from $1.2 billion at December 31, 2021. This decrease was primarily due to a decrease in total customer deposits of $464.5 million, net cash outflows related to AFS and HTM securities of $296.6 million, which included security purchases partially offset by proceeds from sales of securities available for sale, maturities and principal paydowns, and $141.8 million in share repurchases during the six months ended June 30, 2022, respectively. The decrease in customer deposits is primarily due to the transfer of our cannabis-related and money service business deposits relationships, which we acquired from Century, to Needham Bank in the second quarter of 2022. For further discussion of the deposit transfer, refer to the later “*Components of Deposits”* section in this Item 2. For further discussion of the change in securities, refer to the later “*Security Portfolio Composition”* section in this Item 2.

### 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 June 30, 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 acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.

**State and municipal securities:** We invest in fixed rate investment grade bonds issued primarily by municipalities in our local communities 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

*(In thousands)*

| Available for sale securities, at fair value: | As of June 30, 2022 | As of December 31, 2021 |
| --- | ---: | ---: |
| Government-sponsored residential mortgage-backed securities | $4,610,409 | $5,524,708 |
| Government-sponsored commercial mortgage-backed securities | 1,587,959 | 1,408,868 |
| U.S. Agency bonds | 988,944 | 1,175,014 |
| U.S. Treasury securities | 85,366 | 88,605 |
| State and municipal bonds and obligations | 262,670 | 280,329 |
| Small Business Administration pooled securities | — | 32,103 |
| Other debt securities | 1,573 | 1,597 |
| Total available for sale securities, at fair value | 7,536,921 | 8,511,224 |
| Held to maturity securities, at amortized cost: |  |  |
| Government-sponsored residential mortgage-backed securities | 286,472 | — |
| Government-sponsored commercial mortgage-backed securities | 202,109 | — |
| Total held to maturity securities, at amortized cost | 488,581 | — |
| Total | $8,025,502 | $8,511,224 |

Our securities portfolio has decreased $0.5 billion, or 5.7%, to $8.0 billion at June 30, 2022 from $8.5 billion at December 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 six months ended June 30, 2022.

- At June 30, 2022, the unrealized loss on AFS securities was $847.1 million compared to an unrealized loss of $76.0 million at December 31, 2021, representing a $771.1 million decrease in the fair value of such securities. The change from December 31, 2021 to June 30, 2022 is primarily driven by rising market rates of interest.
- AFS securities sales totaled $238.2 million during the six months ended June 30, 2022. AFS and HTM security maturities and principal paydowns totaled $624.4 million and $5.2 million, respectively, during the six months ended June 30, 2022.
- Partially offsetting the decrease in the securities portfolio from December 31, 2021 to June 30, 2022 were purchases of AFS and HTM securities of $670.7 million and $493.7 million, respectively, during the six months ended June 30, 2022.

We did not have trading investments at June 30, 2022 or December 31, 2021.

A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled $262.4 million at June 30, 2022 compared to $279.8 million at December 31, 2021.

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 both June 30, 2022 and December 31, 2021, we had no securities categorized as Level 3 within the fair value hierarchy.

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 ended June 30, 2022 and contractual maturities of our AFS securities and weighted average yields at and for the period ended December 31, 2021. Weighted average yields in the tables below have been calculated based on the amortized cost of the security:

### Securities Portfolio, Amounts Maturing

| Available for sale securities: | Securities Maturing as of June 30, 2022 (1) Within One Year | After One Year But Within Five Years | After Five Years But Within Ten Years | After Ten Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Government-sponsored residential mortgage-backed securities | —% | 2.67% | 0.96% | 1.52% | 1.44% |
| Government-sponsored commercial mortgage-backed securities | 1.58 | 1.30 | 1.66 | 1.94 | 1.74 |
| U.S. Agency bonds | — | 0.76 | 0.91 | — | 0.82 |
| U.S. Treasury securities | 0.13 | 1.57 | — | — | 1.41 |
| State and municipal bonds and obligations | 2.56 | 2.61 | 3.28 | 4.05 | 3.58 |
| Other debt securities | 0.87 | 0.87 | — | — | 0.87 |
| Total available for sale securities | 0.97 | 1.06 | 1.28 | 1.65 | 1.49 |
| **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 | 2.60 |
| Total | 0.97% | 1.06% | 1.36% | 1.71% | 1.55% |

| Within One Year Available for sale securities: | Securities Maturing as of December 31, 2021 (1) After One Year But Within Five Years | After Five Years But Within Ten Years | After Ten Years | Total |  |
| --- | ---: | ---: | ---: | ---: | ---: |
| 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 available for sale securities | 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.

We consider our loan portfolio to be relatively diversified by borrower and industry. Our loans increased $117.2 million, or 1.0%, to $12.4 billion at June 30, 2022 from $12.3 billion at December 31, 2021. The increase as of June 30, 2022 was primarily due to an increase in our commercial real estate, retail, and commercial construction portfolio balances, partially offset by decreases in our business banking and commercial and industrial portfolios, as further noted below.

- Our commercial real estate portfolio increased by $269.8 million from December 31, 2021 to June 30, 2022 which was primarily attributable to an increase of $283.0 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 retail portfolio increased by $93.9 million, which was primarily attributable to increases of $62.8 million and $47.3 million in residential and consumer home equity loan balances, respectively, during the six months ended June 30, 2022. The increase in residential real estate loan balances was primarily due to reduced volume of loan sales, which was precipitated by rising market rates of interest, and led to us retaining a larger number of residential real estate mortgage loan originations. Consumer home equity loan balances increased primarily due to additional customer draws on home equity lines of credit during the period attributable to normal customer activity.
- Our commercial construction portfolio increased by $81.1 million which was primarily attributable to increases of $22.6 million and $22.1 million in our industrial/warehouse and multi-family collateral type loan balances, respectively, during the six months ended June 30, 2022. The increase in the balance of loans collateralized by industrial/warehouse and multi-family property types is due to management’s active focus on originating these types of loans as mentioned above.
- Our business banking portfolio decreased by $207.8 million primarily as a result of a $183.6 million decrease in business banking PPP loan balances during the six months ended June 30, 2022 as such loans were paid off or forgiven by the SBA.
- Similarly, our commercial and industrial portfolio decreased by $119.8 million primarily as a result of a decrease of $105.3 million in commercial and industrial PPP loan balances during the six months ended June 30, 2022.

The following table shows the composition of our loan portfolio, by category, as of the dates indicated:

### Loan Portfolio Composition

*(In thousands)*

|  | As of June 30, 2022 | As of December 31, 2021 |
| --- | ---: | ---: |
| Commercial and industrial | $2,840,734 | $2,960,527 |
| Commercial real estate | 4,792,345 | 4,522,513 |
| Commercial construction | 303,463 | 222,328 |
| Business banking | 1,126,853 | 1,334,694 |
| Residential real estate | 1,989,621 | 1,926,810 |
| Consumer home equity | 1,147,425 | 1,100,153 |
| Other consumer | 198,253 | 214,485 |
| Total loans | 12,398,694 | 12,281,510 |
| Allowance for loan losses | (125,531) | (97,787) |
| Unamortized premiums, net of unearned discounts and deferred fees | (20,988) | (26,442) |
| Total loans receivable, net | $12,252,175 | $12,157,281 |

We believe that our commercial loan portfolio composition is relatively diversified in terms of industry sectors, property types and various lending specialties, and is concentrated in the New England geographical area, with 83.5% of our commercial loans in Massachusetts and New Hampshire as of June 30, 2022.

***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 14 separate scorecards developed for distinctive portfolio segments based on common attributes. Key factors include: industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral and other considerations.

Special mention, substandard and doubtful loans totaled 3.4% and 5.8% of total commercial loans outstanding at June 30, 2022 and December 31, 2021, respectively. This decrease was driven by risk rating upgrades in the commercial real estate and commercial and industrial portfolios.

Our philosophy toward managing our loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. We seek to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.

The delinquency rate of our total loan portfolio remained consistent at 0.65% at June 30, 2022, compared to 0.65% at December 31, 2021.

The following table provides details regarding our delinquency rates as of the dates indicated:

### Loan Delinquency Rates

| Portfolio | Delinquency Rate as of (1)(2) June 30, 2022 | December 31, 2021 |
| --- | ---: | ---: |
| Commercial and industrial | 0.07% | 0.06% |
| Commercial real estate | 0.52% | 0.60% |
| Commercial construction | —% | —% |
| Business banking | 1.03% | 0.86% |
| Residential real estate | 1.52% | 1.38% |
| Consumer home equity | 0.82% | 0.90% |
| Other consumer | 0.83% | 1.23% |
| Total | 0.65% | 0.65% |

(1) In the calculation of the delinquency rate as of June 30, 2022 and December 31, 2021, the total amount of loans outstanding includes $42.5 million and $331.4 million, respectively, of PPP loans.

(2) Delinquency rates as of June 30, 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 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 $24.9 million, or 71.2%, to $59.9 million at June 30, 2022 from $35.0 million at December 31, 2021. NPLs as a percentage of total loans increased to 0.48% at June 30, 2022 from 0.29% at December 31, 2021. Refer to the later “*Allowance for Loan Losses”* section in this Item 2 for a discussion of the change in non-accrual loans which comprise our NPLs as of June 30, 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 June 30, 2022 that were past due 90 days or more and still accruing.

The total amount of interest recorded on NPLs during both the six months ended June 30, 2022 and 2021 was not significant. The gross interest income that would have been recorded under the original terms of those loans if they had been performing amounted to $2.7 million and $1.5 million for the six months ended June 30, 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 4, “Loans and Allowance for Credit Losses”* within the Notes to the Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q, 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 six months ended June 30, 2022 and 2021 which were determined to be TDRs were $4.0 million (post modification balance) and $0.8 million (post modification balance), respectively. The overall increase in TDR loans modified during the aforementioned periods consisted of an increase of $2.5 million and $0.7 million in commercial and consumer loan TDR modifications, respectively. There were no loans that had been modified during the preceding 12 months and which subsequently defaulted during the six months ended June 30, 2022. Two loans totaling $0.5 million were modified during the preceding 12 months, which subsequently defaulted during the six months ended June 30, 2021.

It is our policy to have any restructured loan, which is 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 June 30, 2022, the carrying amount of PCD loans was $58.1 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 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 June 30, 2022 and December 31, 2021:

*(Dollars in thousands)*

| Portfolio | Remaining COVID-19 Modifications as of June 30, 2022 (1) Balance | % of Total Portfolio | Remaining COVID-19 Modifications as of December 31, 2021 (1) Balance | % of Total Portfolio |
| --- | ---: | ---: | ---: | ---: |
| Commercial and industrial | $— | —% | $4,548 | 0.2% |
| Commercial real estate | 12,825 | 0.3% | 93,519 | 2.1% |
| Commercial construction | — | —% | — | —% |
| Business banking | 611 | 0.1% | 649 | 0.1% |
| Residential real estate | 5,290 | 0.3% | 5,870 | 0.3% |
| Consumer home equity | 772 | 0.1% | 1,365 | 0.1% |
| Other consumer | 416 | 0.2% | 706 | 0.3% |
| Total (2) | $19,914 | 0.2% | $106,657 | 0.9% |

(1) Remaining COVID-19 modifications reflect only those loans which underwent a modification and have not yet resumed repayment. 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 June 30, 2022 and December 31, 2021, remaining COVID-19 modifications included $12.8 million and $71.0 million, respectively, of loans to borrowers in the hotel industry.

As of June 30, 2022 and December 31, 2021, the aggregate amount of loans that received a COVID-19 modification and have become a non-performing loan after the respective deferral period is $4.8 million and $4.7 million, respectively.

***COVID-19 Pandemic-Impacted Industries.*** As of June 30, 2022, we believe loans to our borrowers in the categories of office, retail, restaurant, and hotel industry to represent those which have experienced and will likely continue to experience the most adverse effects of the COVID-19 pandemic. As of June 30, 2022, the aggregate outstanding loan balance of loans to our borrowers in the office, retail, restaurant, and hotel industry categories was $1.1 billion, $591.3 million, $187.7 million, and $156.8 million respectively, representing 9.3%, 4.8%, 1.5%, and 1.3% of total loans, respectively. As of December 31, 2021, the aggregate outstanding loan balance of loans to our borrowers in the office, retail, restaurant, and hotel industry categories was $1.1 billion, $549.0 million, $188.9 million and $189.0 million, respectively, representing 8.8%, 4.5%, 1.5% and 1.5% of total loans, respectively.

***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 are neither delinquent nor on non-accrual status. At June 30, 2022 and December 31, 2021, our potential problem loans (including COVID-19-related 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 $262.8 million and $470.9 million, respectively. Of these potential problem loans, $171.8 million and $335.9 million at June 30, 2022 and December 31, 2021, respectively, are loans in COVID-19 pandemic-impacted industries.

***Allowance for credit losses.*** Because we continued to qualify for emerging growth company (“EGC”) status under the Jumpstart Our Business (“JOBS”) Act until December 31, 2021, we were permitted to delay adoption of the CECL standard until the earlier of the date at which non-public business entities are required to adopt the standard and the date that we ceased to be an EGC. Included in the Appropriations Act was an extension of the adoption date to the earlier of January 1, 2022 or 60 days after the date on which the COVID-19 national emergency terminates. We elected this extension and, accordingly, adopted the CECL standard on January 1, 2022. As of December 31, 2021, we followed the incurred loss allowance GAAP accounting model.

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.

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 possesses unique risk characteristics that are considered when determining the appropriate level of allowance for loan losses, including:

- known increases in concentrations within each category;
- certain higher risk classes of loans, or pledged collateral;
- historical loan loss experience within each category;
- results of any independent review and evaluation of the category’s credit quality;
- trends in volume, maturity and composition of each category;
- volume and trends in delinquencies and non-accruals;
- national and local economic conditions and downturns in specific local industries;
- corporate goals and objectives;
- 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, the Company enters 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 balance sheet.

The allowance for loan losses increased by $27.7 million, or 28.4%, to $125.5 million, or 1.01% of total loans, at June 30, 2022 from $97.8 million, or 0.80% of total loans at December 31, 2021. The increase in the allowance for loan losses was primarily a result of our adoption of CECL, 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 4, “Loans and Allowance for Loan Losses”* within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. 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 2. For discussion of our previous methodology for estimating the allowance for loan losses, refer to *Note 5,*

*“Loans and Allowance for Loan Losses”* within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q and *Note 2, “Summary of Significant Accounting Policies”* included in Part II, Item 8 of the 2021 Form 10-K.

The following table summarizes credit ratios for the periods presented:

### Summary of Changes in the Allowance for Loan Losses

*(Dollars in thousands)*

| Net loan charge-offs (recoveries): | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Commercial and industrial | $(697) | $537 | $(946) | $528 |
| Commercial real estate | (36) | (4) | (50) | 230 |
| Commercial construction | — | — | — | — |
| Business banking | 144 | 1,547 | 161 | 2,566 |
| Residential real estate | (14) | (17) | (24) | (27) |
| Consumer home equity | (6) | (3) | (10) | (74) |
| Other consumer | 294 | 83 | 776 | 291 |
| Total net loan (recoveries) charge-offs | (315) | 2,143 | (93) | 3,514 |
| Average loans: |  |  |  |  |
| Commercial and industrial | 2,866,551 | 1,954,733 | 2,913,763 | 1,987,974 |
| Commercial real estate | 4,781,439 | 3,759,236 | 4,723,630 | 3,726,316 |
| Commercial construction | 278,125 | 264,600 | 258,996 | 269,818 |
| Business banking | 1,018,537 | 1,323,175 | 1,062,406 | 1,325,695 |
| Residential real estate | 1,959,190 | 1,430,400 | 1,947,971 | 1,411,274 |
| Consumer home equity | 1,113,142 | 823,737 | 1,100,882 | 833,377 |
| Other consumer | 196,722 | 238,163 | 200,839 | 250,300 |
| Average total loans (1) | $12,213,706 | $9,794,045 | $12,208,487 | $9,804,754 |
| Net charge-offs (recoveries) to average loans outstanding during the period: |  |  |  |  |
| Commercial and industrial | (0.02)% | 0.03% | (0.03)% | 0.03% |
| Commercial real estate | 0.00 | 0.00 | 0.00 | 0.01 |
| Commercial construction | — | — | — | — |
| Business banking | 0.01 | 0.12 | 0.02 | 0.19 |
| Residential real estate | 0.00 | 0.00 | 0.00 | 0.00 |
| Consumer home equity | 0.00 | 0.00 | 0.00 | (0.01) |
| Other consumer | 0.15 | 0.03 | 0.39 | 0.12 |
| Total net (recoveries) charge-offs to average loans outstanding during the period: | (0.01)% | 0.02% | (0.01)% | 0.04% |
| Total loans | $12,377,706 | $9,591,336 | $12,377,706 | $9,591,336 |
| Total non-accrual loans | 59,880 | 39,907 | 59,880 | 39,907 |
| Allowance for loan losses | $125,531 | $105,637 | $125,531 | $105,637 |
| Allowance for loan losses as a percent of total loans | 1.01% | 1.10% | 1.01% | 1.10% |
| Non-accrual loans as a percent of total loans | 0.48% | 0.42% | 0.48% | 0.42% |
| Allowance for loan losses as a percent of non-accrual loans | 209.64% | 264.71% | 209.64% | 264.71% |

(1) Average loan balances exclude loans held for sale

Non-accrual loans increased $20.0 million, or 50.0%, to $59.9 million at June 30, 2022 from $39.9 million at June 30, 2021, primarily due to increases in non-accrual loans in our commercial real estate, residential real estate, and consumer home equity portfolios. Partially offsetting this increase was a $8.2 million decrease in business banking loans. Non-accrual commercial real estate loans increased $24.5 million to $25.0 million at June 30, 2022 from $0.5 million at June 30, 2021 primarily due to the migration of one syndicated commercial real estate loan to non-accrual status during the six months ended June 30, 2022. As of the date of this filing, this loan is in an active workout process. Non-accrual residential real estate loans increased $3.0 million, or 47.2%, to $9.5 million at June 30, 2022 from $6.4 million at June 30, 2021, primarily due to several loans moving to non-accrual status which had been acquired in connection with our acquisition of Century. Similarly, non-accrual consumer home equity loans increased $2.8 million, or 77.4%, to $6.4 million at June 30, 2022 from $3.6 million at June 30, 2021, primarily due to several loans moving to non-accrual status which had been acquired in connection with our acquisition of Century. Non-accrual business banking loans decreased $8.2 million, or 57.9%, to $6.0 million at June 30, 2022, from $14.2 million at June 30, 2021 primarily due to payoffs and curing of delinquency of such loans.

The following table sets forth the allocation of the allowance for loan losses by loan categories listed in loan portfolio composition as of the dates indicated:

### Summary of Allocation of Allowance for Loan Losses

*(Dollars in thousands)*

|  | As of June 30, 2022 Allowance for Loan Losses | Percent of Allowance in Category to Total Allocated Allowance | Percent of Loans in Category to Total Loans | As of December 31, 2021 Allowance for Loan Losses | Percent of Allowance in Category to Total Allocated Allowance | Percent of Loans in Category to Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial (1) | $25,852 | 20.59% | 22.91% | $18,018 | 18.43% | 24.10% |
| Commercial real estate | 47,555 | 37.89% | 38.65% | 52,373 | 53.56% | 36.82% |
| Commercial construction | 5,474 | 4.36% | 2.45% | 2,585 | 2.64% | 1.81% |
| Business banking (1) | 16,699 | 13.30% | 9.09% | 10,983 | 11.23% | 10.87% |
| Residential real estate | 21,663 | 17.26% | 16.05% | 6,556 | 6.70% | 15.69% |
| Consumer home equity | 5,662 | 4.51% | 9.25% | 3,722 | 3.81% | 8.96% |
| Other consumer | 2,626 | 2.09% | 1.60% | 3,308 | 3.38% | 1.75% |
| Other | — | —% | —% | 242 | 0.25% | —% |
| Total | $125,531 | 100.00% | 100.00% | $97,787 | 100.00% | 100.00% |

(1) PPP loans are included within these portfolios as of June 30, 2022 and December 31, 2021; however, as of June 30, 2022 and December 31, 2021 no 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.

For additional information regarding our allowance for loan losses, see *Note 4, “Loans and Allowance for Credit Losses”* within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

### Federal Home Loan Bank stock

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 $5.7 million and $10.9 million at June 30, 2022 and December 31, 2021, respectively.

### Goodwill and other intangible assets

Goodwill and other intangible assets were $653.9 million and $649.7 million at June 30, 2022 and December 31, 2021, respectively. The increase in goodwill and other intangibles assets was due to the purchase of one insurance agency during the six months ended June 30, 2022. We did not record any impairment to our goodwill or other intangible assets during the six months ended June 30, 2022. 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. We do not rely upon, and in recent years have not obtained, deposit funding through brokered deposits.

The following table presents our deposits as of the dates presented:

### Components of Deposits

*(Dollars in thousands)*

|  | As of June 30, 2022 Amount ($) | As of December 31, 2021 Percentage (%) | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Demand | $6,604,154 | $7,020,864 | $(416,710) | (5.9)% |
| Interest checking | 5,348,181 | 4,478,566 | 869,615 | 19.4% |
| Savings | 2,015,865 | 2,077,495 | (61,630) | (3.0)% |
| Money market investments | 4,787,603 | 5,525,005 | (737,402) | (13.3)% |
| Certificate of deposits | 407,998 | 526,381 | (118,383) | (22.5)% |
| Total deposits | $19,163,801 | $19,628,311 | $(464,510) | (2.4)% |

(1) The Bank’s estimate of total uninsured deposits was $10.1 billion and $11.0 billion at June 30, 2022 and December 31, 2021, respectively.

Deposits decreased by $0.5 billion, or 2.4%, to $19.2 billion at June 30, 2022 from $19.6 billion at December 31, 2021. This decrease was primarily the result of a decrease in money market investments of $0.7 billion, a decrease in demand deposits of $0.4 billion, and a decrease in certificate of deposits of $0.1 billion. These decreases were partially offset by an increase of $0.9 billion in interest checking deposits. The overall decrease is due to normal deposit activity and a transfer of deposits during the second quarter of 2022. On January 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, to Needham Bank. On April 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.

The following table presents the classification of deposits on an average basis for the periods below:

### Classification of Deposits on an Average Basis

*(Dollars in thousands)*

|  | For the Six Months Ended June 30, 2022 Average Amount | Average Rate | For the Year Ended December 31, 2021 Average Amount | Average Rate |
| --- | ---: | ---: | ---: | ---: |
| Demand | $6,741,424 | —% | $5,547,615 | —% |
| Interest checking | 4,737,418 | 0.17% | 2,866,091 | 0.07% |
| Savings | 2,059,027 | 0.01% | 1,483,271 | 0.02% |
| Money market investments | 5,317,559 | 0.06% | 3,870,712 | 0.06% |
| Certificate of deposits | 454,226 | 0.23% | 280,141 | 0.21% |
| Total deposits | $19,309,654 | 0.06% | $14,047,830 | 0.04% |

Other time deposits in excess of the FDIC insurance limit of $250,000, including certificates of deposits as of the dates indicated, had maturities as follows:

*(In thousands)*

| Maturing in | As of June 30, 2022 | As of December 31, 2021 |
| --- | ---: | ---: |
| Three months or less | $67,194 | $113,019 |
| Over three months through six months | 25,749 | 53,899 |
| Over six months through 12 months | 34,987 | 33,295 |
| Over 12 months | 13,109 | 23,827 |
| Total | $141,039 | $224,040 |

### Borrowings

Our borrowings 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 $8.8 million, or 25.8%, to $43.1 million at June 30, 2022 compared to $34.3 million at December 31, 2021. The increase was primarily due 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. At December 31, 2021, our financial institution counterparties were not required to post collateral to us due to the low level of market interest rates. Conversely, at June 30, 2022, following increases in market interest rates during the second quarter of 2022, our financial institutions counterparties were required to post collateral to us of $10.1 million.

The following table sets forth information concerning balances on our borrowings as of the dates and for the periods indicated:

### Borrowings by Category

*(In thousands)*

|  | As of June 30, 2022 | As of December 31, 2021 | Change Amount ($) | Percentage (%) |
| --- | ---: | ---: | ---: | ---: |
| FHLB advances | $13,560 | $14,020 | $(460) | (3.3)% |
| Escrow deposits of borrowers | 19,456 | 20,258 | (802) | (4.0)% |
| Interest rate swap collateral funds | 10,100 | — | 10,100 | 100.0% |
| Total | $43,116 | $34,278 | $8,838 | 25.8% |

### Results of Operations

### Summary of Results of Operations

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Change Amount ($) | Percentage | Six Months Ended June 30, 2022 | 2021 | Change Amount ($) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest and dividend income | $140,871 | $105,681 | $35,190 | 33.3% | $272,356 | $206,814 | $65,542 | 31.7% |
| Interest expense | 3,114 | 1,073 | 2,041 | 190.2% | 6,475 | 2,115 | 4,360 | 206.1% |
| Net interest income | 137,757 | 104,608 | 33,149 | 31.7% | 265,881 | 204,699 | 61,182 | 29.9% |
| Provision for (release of) allowance for loan losses | 1,050 | (3,300) | 4,350 | (131.8)% | 565 | (3,880) | 4,445 | (114.6)% |
| Noninterest income | 41,877 | 45,733 | (3,856) | (8.4)% | 88,292 | 100,945 | (12,653) | (12.5)% |
| Noninterest expense | 111,139 | 107,335 | 3,804 | 3.5% | 220,005 | 201,384 | 18,621 | 9.2% |
| Income tax expense | 16,273 | 11,497 | 4,776 | 41.5% | 30,915 | 25,668 | 5,247 | 20.4% |
| Net income | 51,172 | 34,809 | 16,363 | 47.0% | 102,688 | 82,472 | 20,216 | 24.5% |

### Comparison of the three and six months ended June 30, 2022 and 2021

### Interest and Dividend Income

Interest and dividend income increased by $35.2 million, or 33.3%, to $140.9 million during the three months ended June 30, 2022 from $105.7 million during the three months ended June 30, 2021. The increase was primarily a result of our acquisition of Century on November 12, 2021, which added approximately $6.6 billion in interest-earning assets. Overall, the average balance of our interest-earning assets increased $5.7 billion, or 36.1%, to $21.4 billion during the three months ended June 30, 2022 compared to $15.8 billion during the three months ended June 30, 2021, reflecting the addition of Century assets. Partially offsetting this increase was a decrease in the yield on average interest-earning assets which decreased by 3 basis points compared with the three months ended June 30, 2021. Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans or securities are calculated and added to the yield. Management believes that this presentation allows for better comparability between institutions with different tax structures.

- Interest income on securities and federal funds sold and other short-term investments increased $18.9 million, or 128.1%, to $33.6 million during the three months ended June 30, 2022 from $14.7 million during the three months ended June 30, 2021. The increase in interest income on our securities was due to an increase in the average balance and yield of such securities. The average balance of our securities increased $3.3 billion, or 54.8%, to $9.2 billion for the three months ended June 30, 2022 from $6.0 billion for the three months ended June 30, 2021 which was primarily due to securities acquired in connection with our acquisition of Century of $3.1 billion combined with security purchases. The yield on our securities increased 46 basis points during the three months ended June 30, 2022 in comparison to the three months ended June 30, 2021 due to increases in market rates of interest.
- Interest income on loans increased $16.3 million, or 17.9%, to $107.2 million during the three months ended June 30, 2022 from $90.9 million during the three months ended June 30, 2021. The increase in interest income on our loans was primarily due to an increase in the average balance of loans and was partially offset by a decrease in net accretion of PPP loan deferred fees and costs. The average balance of our loans increased $2.4 billion, or 24.7%, to $12.2 billion during the three months ended June 30, 2022 from $9.8 billion during the three months ended June 30, 2021 which was primarily due to loans acquired in connection with our acquisition of Century of $2.9 billion. The increase in interest income attributable to the increase in average total loans was partially offset by a decrease in net accretion of PPP loan deferred fees and costs of $6.8 million, or 73.1%, to $2.5 million during the three months ended June 30, 2022 from $9.3 million during three months ended June 30, 2021.

Interest and dividend income increased by $65.5 million, or 31.7%, to $272.4 million during the six months ended June 30, 2022 from $206.8 million during the six months ended June 30, 2021. This increase was primarily a result of our acquisition of Century on November 12, 2021, which added approximately $6.6 billion in interest-earning assets. Overall, the average balance of our interest-earning assets increased $6.2 billion, or 40%, to $21.6 billion during the six months ended June 30, 2022 compared to $15.5 billion during the six months ended June 30, 2021, reflecting the addition of Century assets. Partially offsetting this increase was a decrease in the yield on average interest-earning assets which decreased by 14 basis points compared with the six months ended June 30, 2021.

- Interest income on securities and federal funds sold and other short-term investments increased $36.5 million, or 134.1%, to $63.8 million for the six months ended June 30, 2022 compared to $27.2 million for the six months ended June 30, 2021. The increase in interest income on securities was due to an increase in the average balance and yield of such securities. The balance of our securities increased $3.8 billion, or 66.5%, to $9.4 billion during the six months ended June 30, 2022 compared to $5.7 billion during the six months ended June 30, 2021, which was primarily due to securities acquired in connection with our acquisition of Century of $3.1 billion combined with security purchases. The yield on our securities increased 38 basis points during the six months ended June 30, 2022 in comparison to the six months ended June 30, 2021 due to increases in market rates of interest.
- Interest income on loans increased by $29.0 million, or 16.2%, to $208.6 million during the six months ended June 30, 2022 from $179.6 million during the six months ended June 30, 2021. The increase in interest income on our loans was primarily due to an increase in the average balance of loans and was partially offset by a decrease in net accretion of PPP loan deferred fees and costs. The average balance of our loans increased $2.4 billion, or 24.5%, increase in average total loans. Average loans increased to $12.2 billion during the six months ended June 30, 2022 from $9.8 billion during the six months ended June 30, 2021 which was primarily due to loans acquired in connection with our acquisition of Century of $2.9 billion. The increase in interest income attributable to the increase in average total loans was partially offset by a decrease in net accretion of PPP loan deferred fees and costs of $9.3 million, or 52.8%, to $8.3 million during the six months ended June 30, 2022 from $17.6 million during the six months ended June 30, 2021.

### Interest Expense

During the three and six months ended June 30, 2022, interest expense increased $2.0 million and $4.4 million, respectively, or 190.2% and 206.1%, respectively, to $3.1 million and $6.5 million, respectively, from $1.1 million and $2.1 million during the three and six months ended June 30, 2021. The increase was attributable to an increase in deposit interest expense.

During the three months ended June 30, 2022, interest expense on our interest-bearing deposits increased by $2.0 million, or 196.9%, to $3.1 million from $1.0 million during the three months ended June 30, 2021. This increase was primarily due to an increase in average interest-bearing deposits which increased $4.7 billion, or 61.3%, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to the Century acquisition. An increase in rates paid on deposits also contributed to the overall increase in deposit interest expense. Rates paid on deposits increased by 5 basis points to 0.10% during the three months ended June 30, 2022 from 0.05% during the three months ended June 30, 2021.

During the six months ended June 30, 2022, interest expense on our interest-bearing deposits increased by $4.4 million, or 214.0%, to $6.4 million from $2.0 million during the six months ended June 30, 2021. This increase was primarily due to an increase in average interest-bearing deposits which increased $5.0 billion, or 66.7%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to the Century acquisition. An increase in rates paid on deposits also contributed to the overall increase in deposit interest expense. Rates paid on deposits increased by 5 basis points to 0.10% during the six months ended June 30, 2022 from 0.05% during the six months ended June 30, 2021.

### Net Interest Income

Net interest income increased by $33.1 million, or 31.7%, to $137.8 million during the three months ended June 30, 2022 from $104.6 million for the three months ended June 30, 2021. Net interest income increased primarily due to an increase in net interest-earning assets of $1.0 billion, or 12%, to $9.0 billion during the three months ended June 30, 2022 from $8.0 billion during the three months ended June 30, 2021.

Net interest income increased by $61.2 million, or 29.9%, to $265.9 million during the six months ended June 30, 2022 from $204.7 million for the six months ended June 30, 2021. Net interest income increased primarily due to an increase in net interest-earning assets of $1.1 billion, or 14%, to $9.0 billion during the six months ended June 30, 2022 from $7.9 billion during the six months ended June 30, 2021.

The following chart shows our net interest margin over the past five quarters including and excluding net PPP loan fee accretion:

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 21.5% for the three and six months ended June 30, 2022 and 20.9% for the three and six months ended June 30, 2021. Net interest margin, including PPP loan interest income, decreased 6 basis points to 2.63% during the three months ended June 30, 2022, from 2.69% during the three months ended June 30, 2021. Net interest margin, including PPP loan interest income, decreased 17 basis points to 2.53% during the six months ended June 30, 2022, from 2.70% during the six months ended June 30, 2021. The overall decline in net interest margin for both the three and six months ended June 30, 2022 from the three and six months ended June 30, 2021 was primarily due to a decrease in the amount of PPP loan net fee accretion as such balances pay down. The increase in net interest margin excluding PPP net fee accretion during the three months ended June 30, 2022 from the three months ended June 30, 2021 and the prior quarter was primarily due to increases in market rates of interest. 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.

The following tables set forth average balance sheet items, annualized 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 and costs, discounts and premiums that are amortized or accreted to interest income or expense.

### Average Balances, Interest Earned/Paid, & Average Yields

*(Dollars in thousands)*

| Interest-earning assets: Loans (1) | As of and for the three months ended June 30, 2022 Average Outstanding Balance | Interest | Average Yield/Cost (5) | 2021 Average Outstanding Balance | Interest | Average Yield /Cost (5) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $1,960,014 | $14,683 | 3.00% | $1,433,056 | $11,397 | 3.19% |
| Commercial | 8,944,652 | 83,586 | 3.75% | 7,301,745 | 71,747 | 3.94% |
| Consumer | 1,309,864 | 11,494 | 3.52% | 1,061,900 | 8,597 | 3.25% |
| Total loans | 12,214,530 | 109,763 | 3.60% | 9,796,701 | 91,741 | 3.76% |
| Non-taxable investment securities | 264,232 | 2,358 | 3.58% | 260,418 | 2,321 | 3.57% |
| Taxable investment securities | 8,619,478 | 31,121 | 1.45% | 4,084,272 | 12,457 | 1.22% |
| Federal funds sold and other short-term investments | 345,731 | 652 | 0.76% | 1,617,741 | 431 | 0.11% |
| Total interest-earning assets | 21,443,971 | 143,894 | 2.69% | 15,759,132 | 106,950 | 2.72% |
| Non-interest-earning assets | 962,734 |  |  | 1,061,121 |  |  |
| Total assets | $22,406,705 |  |  | $16,820,253 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| Savings account | $2,041,495 | $51 | 0.01% | $1,385,735 | $69 | 0.02% |
| Interest checking account | 4,877,256 | 2,061 | 0.17% | 2,541,862 | 253 | 0.04% |
| Money market investment | 5,069,609 | 745 | 0.06% | 3,523,330 | 605 | 0.07% |
| Time account | 426,923 | 204 | 0.19% | 246,801 | 104 | 0.17% |
| Total interest-bearing deposits | 12,415,283 | 3,061 | 0.10% | 7,697,728 | 1,031 | 0.05% |
| Borrowings | 35,330 | 53 | 0.60% | 25,042 | 42 | 0.67% |
| Total interest-bearing liabilities | 12,450,613 | 3,114 | 0.10% | 7,722,770 | 1,073 | 0.06% |
| Demand accounts | 6,661,920 |  |  | 5,355,170 |  |  |
| Other noninterest-bearing liabilities | 428,373 |  |  | 335,816 |  |  |
| Total liabilities | 19,540,906 |  |  | 13,413,756 |  |  |
| Shareholders’ equity | 2,865,799 |  |  | 3,406,497 |  |  |
| Total liabilities and shareholders’ equity | $22,406,705 |  |  | $16,820,253 |  |  |
| Net interest income – FTE |  | $140,780 |  |  | $105,877 |  |
| Net interest rate spread (2) |  |  | 2.59% |  |  | 2.66% |
| Net interest-earning assets (3) | $8,993,358 |  |  | $8,036,362 |  |  |
| Net interest margin – FTE (4) |  |  | 2.63% |  |  | 2.69% |
| Average interest-earning assets to interest-bearing liabilities | 172.23% |  |  | 204.06% |  |  |
| Return on average assets (5)(6) | 0.92% |  |  | 0.83% |  |  |
| Return on average equity (5)(7) | 7.16% |  |  | 4.10% |  |  |
| Noninterest expense to average assets | 1.99% |  |  | 2.56% |  |  |

(1) Non-accrual loans are included in loans.

(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

(5) Presented on an annualized basis.

(6) Represents net income divided by average total assets.

(7) Represents net income divided by average equity.

*(Dollars in thousands)*

| Interest-earning assets: Loans (1) | As of and for the six months ended June 30, 2022 Average Outstanding Balance | Interest | Average Yield /Cost (5) | 2021 Average Outstanding Balance | Interest | Average Yield/Cost (5) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $1,948,816 | $29,155 | 3.02% | $1,413,208 | $22,671 | 3.24% |
| Commercial | 8,958,795 | 161,811 | 3.64% | 7,309,803 | 140,952 | 3.89% |
| Consumer | 1,301,721 | 21,944 | 3.40% | 1,083,677 | 17,534 | 3.26% |
| Total loans | 12,209,332 | 212,910 | 3.52% | 9,806,688 | 181,157 | 3.73% |
| Non-taxable investment securities | 262,082 | 4,645 | 3.57% | 260,643 | 4,697 | 3.63% |
| Taxable investment securities | 8,504,026 | 58,997 | 1.40% | 3,729,437 | 22,663 | 1.23% |
| Federal funds sold and other short-term investments | 672,757 | 1,088 | 0.33% | 1,678,812 | 863 | 0.10% |
| Total interest-earning assets | 21,648,197 | 277,640 | 2.59% | 15,475,580 | 209,380 | 2.73% |
| Non-interest-earning assets | 1,198,409 |  |  | 1,089,585 |  |  |
| Total assets | $22,846,606 |  |  | $16,565,165 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| Savings account | $2,059,027 | $102 | 0.01% | $1,343,133 | $133 | 0.02% |
| Interest checking account | 4,737,418 | 4,093 | 0.17% | 2,466,860 | 487 | 0.04% |
| Money market investment | 5,317,559 | 1,665 | 0.06% | 3,482,002 | 1,193 | 0.07% |
| Time account | 454,226 | 523 | 0.23% | 248,946 | 220 | 0.18% |
| Total interest-bearing deposits | 12,568,230 | 6,383 | 0.10% | 7,540,941 | 2,033 | 0.05% |
| Borrowings | 33,012 | 92 | 0.56% | 25,332 | 82 | 0.65% |
| Total interest-bearing liabilities | 12,601,242 | 6,475 | 0.10% | 7,566,273 | 2,115 | 0.06% |
| Demand accounts | 6,741,424 |  |  | 5,241,134 |  |  |
| Other noninterest-bearing liabilities | 435,443 |  |  | 345,776 |  |  |
| Total liabilities | 19,778,109 |  |  | 13,153,183 |  |  |
| Shareholders’ equity | 3,068,497 |  |  | 3,411,982 |  |  |
| Total liabilities and shareholders’ equity | $22,846,606 |  |  | $16,565,165 |  |  |
| Net interest income – FTE |  | $271,165 |  |  | $207,265 |  |
| Net interest rate spread (2) |  |  | 2.49% |  |  | 2.67% |
| Net interest-earning assets (3) | $9,046,955 |  |  | $7,909,307 |  |  |
| Net interest margin – FTE (4) |  |  | 2.53% |  |  | 2.70% |
| Average interest-earning assets to interest-bearing liabilities | 171.79% |  |  | 204.53% |  |  |
| Return on average assets (5)(6) | 0.91% |  |  | 1.00% |  |  |
| Return on average equity (5)(7) | 6.75% |  |  | 4.87% |  |  |
| Noninterest expense to average assets | 1.94% |  |  | 2.45% |  |  |

(1) Non-accrual loans are included in loans.

(2) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest income divided by average total interest-earning assets.

(5) Presented on an annualized basis.

(6) Represents net income divided by average total assets.

(7) Represents net income divided by average equity.

The following chart shows the composition of our quarterly average interest-earning assets for the past five quarters:

### Provision for Loan Losses

The provision for loan losses represents the charge to expense that is required to maintain an appropriate level of allowance for loan losses.

We recorded a provision for loan losses of $1.1 million for the three months ended June 30, 2022, compared to a release of $3.3 million for the three months ended June 30, 2021. Management determined a provision to be necessary due to increased loan balances, which were partially offset by continued low historical losses during the three months ended June 30, 2022, compared with average historical losses for periods preceding the three months ended June 30, 2022. With respect to the three months ended June 30, 2021, management had determined that a release was necessary given the continued improved economic and credit conditions experienced at that time. Overall, we recorded a net provision for allowance for loan losses of $0.6 million for the six months ended June 30, 2022 compared to a release of $3.9 million for the six months ended June 30, 2021 during which period management determined the Company’s allowance for loan losses in accordance with ASC 450, “*Contingencies”* and ASC 310, “*Receivables”* (i.e., prior to our adoption of ASU 2016-13).

To determine our allowance for loan losses as of June 30, 2022 and the provision for loan losses for the three and six months ended June 30, 2022, we used Oxford Economics June 2022 Baseline forecast (“the forecast”) to generate our modelled expected losses by loan portfolio in order to reflect management’s reasonable expectations of current and future economic conditions, which remained relatively stable in comparison to the first quarter of 2022. The forecast assumed overall positive but slower economic growth supported by strong employment and consumer spending. Primary macroeconomic assumptions included in management’s evaluation of the adequacy of the allowance for loan losses included continued decline of unemployment rates partially offset by slowing gross domestic product growth. Further, the forecast assumed that COVID-19 pandemic-related impacts, such as lockdowns in China, and the impact of the Russian invasion of Ukraine, will continue to place inflationary pressures on the U.S. economy and result in a more gradual descent in the pace of inflation than otherwise could reasonably be expected given the increase in the FOMC’s target interest rate. The forecast also assumed a decrease in core consumer price index inflation but which is expected to remain above the Federal Open Market Committee’s 2% target until mid-2023. Refer to the section titled “*Outlook and Trends”* within this Item 2 for additional discussion. For additional discussion of our allowance for credit losses measurement methodology, see *Note 2, “Summary of Significant Accounting Policies”* and *Note 4, “Loans and Allowance for Loan Losses”* within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. For discussion of our previous methodology for estimating the allowance for loan losses, refer to *Note 5, “Loans and Allowance for Loan Losses”* within the Notes to the

Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q and *Note 2, “Summary of Significant Accounting Policies”* included in Part II, Item 8 of the 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.

### Noninterest Income

The following table sets forth information regarding noninterest income for the periods shown:

### Noninterest Income

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Change Amount% |  | Six Months Ended June 30, 2022 | 2021 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Insurance commissions | $24,682 | $23,664 | $1,018 | 4.3% | $53,395 | $51,811 | $1,584 | 3.1% |
| Service charges on deposit accounts | 8,313 | 5,708 | 2,605 | 45.6% | 16,850 | 11,075 | 5,775 | 52.1% |
| Trust and investment advisory fees | 5,994 | 6,074 | (80) | (1.3)% | 12,135 | 11,737 | 398 | 3.4% |
| Debit card processing fees | 3,223 | 3,170 | 53 | 1.7% | 6,168 | 5,919 | 249 | 4.2% |
| Interest rate swap income (losses) | 1,593 | (1,164) | 2,757 | (236.9)% | 4,525 | 4,241 | 284 | 6.7% |
| (Losses) income from investments held in rabbi trusts | (7,316) | 4,216 | (11,532) | (273.5)% | (11,749) | 6,062 | (17,811) | (293.8)% |
| Gains on sales of mortgage loans held for sale, net | 49 | 848 | (799) | (94.2)% | 218 | 2,327 | (2,109) | (90.6)% |
| (Losses) gains on sales of securities available for sale, net | (104) | 1 | (105) | (10,500.0)% | (2,276) | 1,165 | (3,441) | (295.4)% |
| Other | 5,443 | 3,216 | 2,227 | 69.2% | 9,026 | 6,608 | 2,418 | 36.6% |
| Total noninterest income | $41,877 | $45,733 | $(3,856) | (8.4)% | $88,292 | $100,945 | $(12,653) | (12.5)% |

Noninterest income decreased by $3.9 million, or 8.4%, to $41.9 million for the three months ended June 30, 2022 from $45.7 million for the three months ended June 30, 2021. This decrease was primarily due to an $11.5 million decrease in income from investments held in rabbi trusts which resulted from a current period net loss from such investments. This decrease was partially offset by a $2.8 million increase in interest rate swap income and a $2.6 million increase in service charges on deposit accounts.

- 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 the rabbi trusts.
- Interest rate swap income increased primarily as a result of a favorable mark-to-market adjustment during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.
- 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 and increased overdraft fees as a result of greater customer deposit activity. The increased customer deposit activity is primarily attributable to our acquisition of Century.

Noninterest income decreased by $12.7 million, or 12.5%, to $88.3 million for the six months ended June 30, 2022 from $100.9 million for the six months ended June 30, 2021. The decrease was primarily due to a $17.8 million decrease in income from investments held in rabbi trusts which resulted from a current period net loss from such investments and a $3.4 million decrease in gains on sales of securities available for sale which resulted from a current period net loss from such sales. These decreases were partially offset by a $5.8 million increase in service charges on deposit accounts.

- 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 the 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 six months ended June 30, 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.

- 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 and increased overdraft fees as a result of greater customer deposit activity. The increased customer deposit activity is primarily attributable to our acquisition of Century.

### Noninterest Expense

The following table sets forth information regarding noninterest expense for the periods shown:

### Noninterest Expense

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Change Amount% |  | Six Months Ended June 30, 2022 | 2021 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $72,996 | $69,276 | $3,720 | 5.4% | $142,522 | $133,316 | $9,206 | 6.9% |
| Office occupancy and equipment | 9,888 | 8,094 | 1,794 | 22.2% | 21,502 | 16,311 | 5,191 | 31.8% |
| Data processing | 14,345 | 13,572 | 773 | 5.7% | 29,665 | 25,701 | 3,964 | 15.4% |
| Professional services | 4,034 | 6,439 | (2,405) | (37.4)% | 8,735 | 10,587 | (1,852) | (17.5)% |
| Marketing | 2,651 | 3,497 | (846) | (24.2)% | 4,225 | 5,188 | (963) | (18.6)% |
| Loan expenses | 1,124 | 1,854 | (730) | (39.4)% | 2,292 | 3,701 | (1,409) | (38.1)% |
| FDIC insurance | 1,720 | 985 | 735 | 74.6% | 3,132 | 1,933 | 1,199 | 62.0% |
| Amortization of intangible assets | 907 | 625 | 282 | 45.1% | 1,734 | 1,157 | 577 | 49.9% |
| Other | 3,474 | 2,993 | 481 | 16.1% | 6,198 | 3,490 | 2,708 | 77.6% |
| Total noninterest expense | $111,139 | $107,335 | $3,804 | 3.5% | $220,005 | $201,384 | $18,621 | 9.2% |

Noninterest expense increased by $3.8 million, or 3.5%, to $111.1 million during the three months ended June 30, 2022 from $107.3 million during the three months ended June 30, 2021. This increase was primarily due to a $3.7 million increase in salaries and employee benefits. This increase was partially offset by a $2.4 million decrease in professional services.

- Salaries and employee benefits increased primarily due to salaries and wages for newly hired employees and former employees of Century who were retained subsequent to the acquisition. In addition, we incurred $2.9 million in share-based compensation expense related to restricted stock awards granted in the fourth quarter of 2021 and awards of RSUs and performance stock units granted in the first quarter of 2022 and restricted stock awards granted in the second quarter of 2022. No related expenses were incurred during the three months ended June 30, 2021 as no such awards had been granted.
- Professional services decreased primarily as a result of costs associated with our acquisition of Century which were incurred during the three months ended June 30, 2021 and did not recur in the three months ended June 30, 2022.
- Other noninterest expense increased $0.5 million during the three months ended June 30, 2022 compared with the three months ended June 30, 2021 which included a one-time accrual for legal expenses associated with the settlement of two putative class action litigation matters related to overdraft and non-sufficient funds fees of $3.3 million recognized during such period, as further described below. Partially offsetting the legal accrual during such period was a $1.4 million reversal of impairment related to a tax credit investment. No such reversal or impairment charges were recorded during the three months ended June 30, 2022. Offsetting the net impact of the one-time accrual for legal expenses and the tax credit investment impairment reversal were a $0.7 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 $0.5 million increase in customer bad check losses, consistent with a nationwide increase in mail-based check fraud, a $0.5 million increase in charitable contributions, and additional increases in other noninterest expense items that were not significant either individually or collectively.

Noninterest expense increased by $18.6 million, or 9.2%, to $220.0 million during the six months ended June 30, 2022 from $201.4 million during the six months ended June 30, 2021. The increase was primarily due to a $9.2 million increase in salaries and employee benefits, a $5.2 million increase in office occupancy and equipment expenses, a $4.0 million increase in data processing expenses and a $2.7 million increase in other noninterest expenses.

- Salaries and employee benefits increased primarily due to salaries and wages for newly hired employees and former employees of Century who were retained subsequent to the acquisition. In addition, we incurred $4.5 million in share-based compensation expense related to restricted stock awards granted in the fourth quarter of 2021 and awards of RSUs and performance stock units granted in the first quarter of 2022 and restricted stock awards granted in the second quarter of 2022. No comparable expenses were incurred during the six months ended June 30, 2021, during which period the Company did not have an equity incentive plan and no such awards were granted.
- Office occupancy and equipment increased during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021 primarily due to the addition of properties resulting from our acquisition of Century which includes a $1.4 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.
- Data processing 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 six months ended June 30, 2022 from the six months ended June 30, 2021 primarily due to our acquisition of Century in the fourth quarter of 2022 which resulted in the acquisition of additional loan and deposit customers.
- Other noninterest expenses increased primarily due to a $1.7 million increase in customer bad check losses during the six months ended June 30, 2022 compared to during six months ended June 30, 2021, consistent with a nationwide increase in mail-based check fraud, and a $1.4 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. In addition, as described above, there was a $1.4 million reversal of impairment related to a tax credit investment during the six months ended June 30, 2021. No such reversal of impairment charges were recorded during the six months ended June 30, 2022. Partially offsetting the effect of these items, was a decrease of $3.3 million in legal expenses associated with the settlement of two putative class action litigation matters related to overdraft and non-sufficient funds fees. The accrual for such expenses was initially recorded during the three months ended June 30, 2021 and final settlement of the legal matters occurred during the first quarter of 2022. For additional information, refer to *Note 12, “Commitments and Contingencies”* within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

### 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

*(Dollars in thousands)*

|  | Three Months Ended June 30, 2022 | 2021 | Six Months Ended June 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Combined federal and state income tax provisions | $16,273 | $11,497 | $30,915 | $25,668 |
| Effective income tax rates | 24.1% | 24.8% | 23.1% | 23.7% |
| Blended statutory tax rate | 28.1% | 28.1% | 28.1% | 28.1% |

Income tax expense increased by $4.8 million, or 41.5%, to $16.3 million in the three months ended June 30, 2022 from $11.5 million in the three months ended June 30, 2021 and increased by $5.2 million, or 20.4%, to $30.9 million in the six months ended June 30, 2022 from $25.7 million in the six months ended June 30, 2021. The increase in income tax expense was due primarily to higher pre-tax income during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. Partially offsetting the increase attributable to higher pre-tax income, was a decrease in our effective tax rate which was primarily the result of increases in favorable permanent differences, including investment tax credits and tax exempt income, for both the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021. For additional information related to the Company’s income taxes see *Note 12, “Income Taxes”* within the Notes to the Consolidated Financial Statements included in Part II, Item 8 in our 2021 Form 10-K.

### Financial Position and Results of Operations of our Business Segments

### Comparison of the three and six months ended June 30, 2022 and 2021

*(In thousands)*

|  | As of and for the three months ended June 30, 2022 Banking Business Insurance Agency Business Other/ Eliminations Total | 2021 Banking Business Insurance Agency Business Other/ Eliminations Total |
| --- | ---: | ---: |
| Net interest income | $137,757 $— $— $137,757 | $104,608 $— $— $104,608 |
| Provision for (release of) allowance for loan losses | 1,050 — — 1,050 | (3,300) — — (3,300) |
| Net interest income after provision for loan losses | 136,707 — — 136,707 | 107,908 — — 107,908 |
| Noninterest income | 18,005 23,891 (19) 41,877 | 21,567 24,166 — 45,733 |
| Noninterest expense | 92,628 19,516 (1,005) 111,139 | 87,799 20,496 (960) 107,335 |
| Income before income tax expense | 62,084 4,375 986 67,445 | 41,676 3,670 960 46,306 |
| Income tax expense | 15,045 1,228 — 16,273 | 10,464 1,033 — 11,497 |
| Net income | $47,039 $3,147 $986 $51,172 | $31,212 $2,637 $960 $34,809 |
| Total assets | $22,210,434 $217,669 $(77,255) $22,350,848 | $16,905,267 $209,416 $(67,230) $17,047,453 |
| Total liabilities | $19,656,675 $53,032 $(77,255) $19,632,452 | $13,628,092 $55,969 $(67,230) $13,616,831 |
|  | **For the six months ended June 30,** |  |
|  | **2022** | **2021** |
|  | **Banking Business** **Insurance Agency Business** **Other/ Eliminations** **Total** | **Banking Business** **Insurance Agency Business** **Other/ Eliminations** **Total** |
|  | (In thousands) |  |
| Net interest income | $265,881 $— $— $265,881 | $204,699 $— $— $204,699 |
| Provision for (release of) allowance for loan losses | 565 — — 565 | (3,880) — — (3,880) |
| Net interest income after provision for loan losses | 265,316 — — 265,316 | 208,579 — — 208,579 |
| Noninterest income | 36,142 52,340 (190) 88,292 | 48,527 52,450 (32) 100,945 |
| Noninterest expense | 183,074 38,989 (2,058) 220,005 | 163,074 40,307 (1,997) 201,384 |
| Income before income tax expense | 118,384 13,351 1,868 133,603 | 94,032 12,143 1,965 108,140 |
| Income tax expense | 27,153 3,762 — 30,915 | 22,257 3,411 — 25,668 |
| Net income | $91,231 $9,589 $1,868 $102,688 | $71,775 $8,732 $1,965 $82,472 |

### Banking Segment

- Average interest-earning assets grew $5.7 billion, or 36.1%, to $21.4 billion for the three months ended June 30, 2022 from $15.8 billion for the three months ended June 30, 2021. The increase is primarily due to the acquisition of Century, which closed on November 12, 2021 and added $6.6 billion in interest-earning assets. The increase in average interest-earning assets resulted in an increase in interest income which was partially offset by a decline of 3 basis points in yields on interest-earning assets. For additional discussion, refer to the earlier “*Interest and Dividends”* section.
- Average interest-bearing liabilities grew $4.7 billion, or 61.2%, to $12.5 billion for the three months ended June 30, 2022 from $7.7 billion for the three months ended June 30, 2021, with average total interest-bearing deposits, our largest category of average interest-bearing liabilities, growing $4.7 billion, or 61.3%, to $12.4 billion for the three months ended June 30, 2022 compared to $7.7 billion for the three months ended June 30, 2021. Average deposits increased due to our acquisition of Century, which added $4.4 billion in interest-bearing deposits. Also contributing to the increase in interest expenses was an increase of 5 basis points in rates paid on deposits. For additional discussion, refer to the earlier “*Interest and Dividends”* section.
- Average interest-earning assets grew $6.2 billion, or 39.9%, to $21.6 billion for the six months ended June 30, 2022 from $15.5 billion for the six months ended June 30, 2021. The increase is primarily due to the acquisition of Century, which closed on November 12, 2021 and added $6.6 billion in interest-earning assets.

The increase in average interest-earning assets resulted in an increase in interest income which was partially offset by a decline in yields on interest-earning assets. For additional discussion, refer to the earlier “*Interest and Dividends”* section.

- Average interest-bearing liabilities grew $5.0 billion, or 66.5%, to $12.6 billion for the six months ended June 30, 2022 from $7.6 billion for the six months ended June 30, 2021, with average total interest-bearing deposits, our largest category of average interest-bearing liabilities, growing $5.0 billion, or 66.7%, to $12.6 billion for the six months ended June 30, 2022 compared to $7.5 billion for the six months ended June 30, 2021. Average deposits increased due to our acquisition of Century, which added $4.4 billion in interest-bearing deposits. Also contributing to the increase in interest expenses was an increase of 5 basis points in rates paid on deposits. For additional discussion, refer to the earlier “*Interest and Dividends”* section.
- We recorded a provision for loan losses of $1.1 million for the three months ended June 30, 2022, compared to a release of $3.3 million for the three months ended June 30, 2021. We determined a provision to be appropriate due to overall increased loan balances during the three months ended June 30, 2022 in comparison to the first quarter of 2022. Comparatively, in March 2020, in response to the COVID-19 pandemic, we downgraded the risk ratings for all commercial loans we expected to be significantly impacted by the COVID-19 pandemic, including our hotel and restaurant loan portfolios. During the three months ended June 30, 2021 and following continued improved economic and credit conditions, we 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 $6.4 million for the three months ended June 30, 2022 which represents a decrease of $10.2 million, or 270.8%, from income of $3.8 million in income recorded for the three months ended June 30, 2021. The decrease was primarily a result of an unfavorable mark-to-market adjustment on equity securities held in these accounts during the three months ended June 30, 2022.
- Losses from investments held in rabbi trust accounts were $10.4 million for the six months ended June 30, 2022 which represents a decrease of $15.9 million, or 286.6%, from income of $5.6 million for the six months ended June 30, 2021. The decrease was primarily as a result of an unfavorable mark-to-market adjustment on equity securities held in these accounts during the six months ended June 30, 2022.
- Losses on sales of securities available for sale, net, were $2.3 million during the six months ended June 30, 2022 which represents a decrease of $3.4 million from the six months ended June 30, 2021, a period during which we recognized a gain of $1.2 million. The net loss on sale was due to the decision by management to sell certain AFS securities during the six months ended June 30, 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.
- Partially offsetting the losses from investments held in rabbi trust accounts during the three months ended June 30, 2022 was interest rate swap income which increased $2.8 million primarily as a result of a favorable mark-to-market adjustment during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.
- Partially offsetting the losses from investments held in rabbi trust accounts during the three and six months ended June 30, 2022 and losses on sales of securities available for sale during the six months ended June 30, 2022 were service charges on deposit accounts which increased $2.6 million and $5.8 million during the three and six months ended June 30, 2022, respectively, compared to the three and six months ended June 30, 2021, primarily as a result of increased corporate account analysis charges as a result of greater commercial deposit customer activity and increased overdraft fees as a result of greater customer deposit activity.
- Noninterest expense increased $4.8 million, or 5.5%, to $92.6 million during the three months ended June 30, 2022 from $87.8 million during the three months ended June 30, 2021. This increase was driven primarily by a $5.5 million increase in salaries and wages expense and a $1.8 million increase in office occupancy and equipment expenses. Refer to the earlier “*Noninterest Expense”* section for additional discussion of this items.
- Noninterest expense increased $20.0 million, or 12.3%, to $183.1 million during the six months ended June 30, 2022 from $163.1 million during the six months ended June 30, 2021. This increase was driven primarily

by a $10.0 million increase in salaries and wages expense, a $5.2 million increase in office occupancy and equipment expenses, and a $4.2 million increase in data processing expenses. Partially offsetting these increases, was a decrease of $3.3 million in legal expenses associated with the settlement of two putative class action litigation matters related to overdraft and non-sufficient funds fees. The accrual for such expenses was initially recorded during the three months ended June 30, 2021 and final settlement of the legal matters occurred during the first quarter of 2022. Refer to the earlier “*Noninterest Expense”* section for additional discussion of this items.

### Insurance Agency Segment

- Noninterest income related to our insurance agency business remained relatively consistent with a slight decrease of $0.3 million, or 1.1%, to $23.9 million during the three months ended June 30, 2022 from $24.2 million during the three months ended June 30, 2021. Similarly, noninterest income related to our insurance agency business remained relatively consistent with a slight decrease of $0.1 million, or 0.2%, to $52.3 million during the six months ended June 30, 2022 from $52.5 million during the six months ended June 30, 2021.
- Noninterest expense related to our insurance agency business remained relatively consistent with a slight increase of $1.0 million, or 4.8%, to $19.5 million during three months ended June 30, 2022 from $20.5 million during three months ended June 30, 2021. Similarly, noninterest expense related to our insurance agency business remained relatively consistent with a slight increase of $1.3 million, or 3.3%, to $39.0 million during the six months ended June 30, 2022 from $40.3 million during the six months ended June 30, 2021. The increase in noninterest expense for both the three and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021 was primarily due to an increase in executive retirement benefit costs.

### Management of Market Risk

***General.*** Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. Interest rate sensitivity is the most significant market risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, our primary source of income. Interest rate risk arises directly from our core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of securities and derivatives, as well as other effects. The primary goal of interest rate risk management is to control this risk within limits approved by the Risk Management Committee of our Board of Directors.

These limits reflect our tolerance for interest rate risk over both short-term and long-term horizons. We attempt to manage interest rate risk by identifying, quantifying, and where appropriate, hedging its exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. Our objective is to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary and within limits that management determines to be prudent, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors and caps.

***Net Interest Income.*** We analyze our sensitivity to changes in interest rates through a net interest income model. We estimate what our net interest income would be for a 12-month period assuming no changes in interest rates. We then calculate what the net interest income would be for the same period under the assumption that the U.S. Treasury yield curve increases or decreases instantaneously by +200, +300, +400 and -100 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Changes in Interest Rates” column below. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent at June 30, 2022 and December 31, 2021 precluded the modeling of certain falling rate scenarios. We do not model negative interest rate scenarios.

The tables below set forth, as of June 30, 2022 and December 31, 2021, the calculation of the estimated changes in our net interest income on an FTE basis that would result from the designated immediate changes in the U.S. Treasury yield curve:

### Interest Rate Sensitivity

*(Dollars in thousands)*

| Change in Interest Rates (basis points) (1) | As of June 30, 2022 Net Interest Income Year 1 Forecast | Year 1 Change from Level |
| ---: | ---: | ---: |
| 400 | $687,413 | 9.4% |
| 300 | 672,384 | 7.0% |
| 200 | 658,025 | 4.7% |
| Flat | 628,539 | —% |
| (100) | 578,846 | (7.9)% |
|  | **As of December 31, 2021** |  |
| **Change in Interest Rates (basis points) (1)** | **Net Interest Income Year 1 Forecast** | **Year 1 Change from 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.

The tables above indicate that at June 30, 2022 and December 31, 2021, in the event of an instantaneous parallel 200 basis points increase in rates, we would have experienced an 4.7% and 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 7.9% and a 5.9% decrease at June 30, 2022 and December 31, 2021, respectively, in net interest income, on an FTE basis. 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 13, “Derivative Financial Instruments”* within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

**Economic Value of Equity Analysis.** We also analyze the sensitivity of our financial condition in interest rates through our economic value of equity (“EVE”) model. This analysis calculates the difference between the present value of expected cash flows from assets and liabilities assuming various changes in current interest rates.

The table below represents an analysis of our interest rate risk (excluding the effect of our pension plans) as measured by the estimated changes in our EVE, resulting from an instantaneous and sustained parallel shift in the yield curve (+200, +300, +400 basis points and -100 basis points) at June 30, 2022 and 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 modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent at June 30, 2022 and December 31, 2021 precluded the modeling of certain falling rate scenarios, including negative interest rates.

Our earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines.

### EVE Interest Rate Sensitivity

*(Dollars in thousands)*

| Change in Interest Rate (basis points) (1) Estimated EVE (2) | Estimated Increase (Decrease) in EVE from Level Amount | As of June 30, 2022 Percent | EVE as a Percentage of Total Assets (3) |  |
| ---: | ---: | ---: | ---: | ---: |
| 400 | $4,222,640 | $(403,369) | (8.7)% | 21.24% |
| 300 | 4,303,486 | (322,523) | (7.0)% | 21.12% |
| 200 | 4,404,762 | (221,248) | (4.8)% | 21.04% |
| Flat | 4,626,010 | — | — | 20.87% |
| (100) | 4,652,136 | 26,126 | 0.6% | 20.40% |

*(Dollars in thousands)*

| Change in Interest Rate (basis points) (1) Estimated EVE (2) | Estimated Increase (Decrease) in EVE from Level Amount | As of December 31, 2021 Percent | EVE as a Percentage of Total Assets (3) |  |
| ---: | ---: | ---: | ---: | ---: |
| 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.

### Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies

***Liquidity.*** Liquidity describes our ability to meet the financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet deposit withdrawals and anticipated loan fundings, as well as current and planned expenditures. We seek to maintain sources of liquidity that are deep and diversified and that may be used during the normal course of business as well as on a contingency basis.

The net proceeds from our IPO significantly increased our liquidity and capital resources at both Eastern Bankshares, Inc. and Eastern Bank. Over time, the initial level of liquidity has been and will continue to be reduced as net proceeds from the IPO are used for general corporate purposes. Our financial condition and results of operations were enhanced by the net proceeds from the stock offering and resulted in increased net interest-earning assets and net interest and dividend income. On November 12, 2021, we completed our merger with Century for $641.9 million in cash. Although the transaction reduced the net proceeds from the IPO, we continue to expect that, due to the increase in equity resulting from the net proceeds raised in our IPO, our return on equity has been and will continue to be adversely affected until we can effectively deploy the remaining proceeds of the IPO.

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities, subject to market conditions. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are unencumbered cash and cash equivalents and securities classified as available for sale. In the future, our liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and stock repurchases in which we may engage. We believe that our existing resources will be sufficient to meet the liquidity and capital requirements of our operations for the foreseeable future.

We participate in the IntraFi Network, 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 June 30, 2022 and December 31, 2021, we had a total of $110.7 million and $520.5 million of IntraFi Network one-way sell deposits, respectively. At June 30, 2022, we had repurchased $594.2 million of previously sold reciprocal deposits. At December 31, 2021, no amounts were repurchased of previously sold reciprocal deposits. The additional capacity of $110.7 million and $520.5 million at June 30, 2022 and December 31, 2021, respectively, should be considered a source of liquidity.

Although customer deposits remain our preferred source of funds, maintaining additional back up sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. At June 30, 2022, we had $13.6 million in outstanding advances and the ability to borrow up to an additional $2.1 billion. At June 30, 2022, we had a $537.5 million collateralized line of credit from the FRBB with no outstanding balance. We had a total of $790.0 million of discretionary lines of credit at June 30, 2022.

### Sources of Liquidity

*(In thousands)*

|  | As of June 30, 2022 Outstanding | Additional Capacity | As of December 31, 2021 Outstanding | Additional Capacity |
| --- | ---: | ---: | ---: | ---: |
| IntraFi Network deposits | $594,240 | $110,685 | $— | $520,461 |
| Federal Home Loan Bank (1) | 13,560 | 2,108,018 | 14,020 | 1,839,540 |
| Federal Reserve Bank of Boston (2) | — | 537,514 | — | 456,148 |
| Unsecured lines of credit | — | 790,000 | — | 790,000 |
| Total deposits | $607,800 | $3,546,217 | $14,020 | $3,606,149 |

(1) As of June 30, 2022 and December 31, 2021, loans have been pledged to the FHLBB with a carrying value of $2.9 billion and $2.6 billion to secure additional borrowing capacity.

(2) Loans with a carrying value of $1.0 billion and $784.0 million at June 30, 2022 and December 31, 2021, respectively, have been pledged to the FRBB 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 its need for liquid assets as well as backup sources of liquidity.

***Capital Resources.*** We are subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks, the FDIC and the Federal Reserve (with respect to our consolidated capital requirements). At June 30, 2022 and December 31, 2021, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines. To be categorized as well-capitalized, the Company must maintain (1) a minimum of total risk-based capital ratio of 10%; (2) a minimum of Tier 1 risk-based capital ratio of 8%; (3) a minimum of common equity Tier 1 capital ratio of 6.5%; and (4) a minimum of Tier 1 leverage ratio of 5%. Management believes that the Company met all capital adequacy requirements to which it is subject as of June 30, 2022 and December 31, 2021. There have been no conditions or events that management believes would cause a change in the Company’s categorization.

The Company’s actual capital ratios are presented in the following table:

| Capital Ratios: | As of June 30, 2022 | As of December 31, 2021 |
| --- | ---: | ---: |
| Average equity to average assets (1) | 13.43% | 19.17% |
| Total regulatory capital (to risk-weighted assets) | 18.76% | 19.77% |
| Common equity Tier 1 capital (to risk-weighted assets) | 17.88% | 19.04% |
| Tier 1 capital (to risk-weighted assets) | 17.88% | 19.04% |
| Tier 1 capital (to average assets) leverage | 12.21% | 13.96% |

(1) The ratio presented as of June 30, 2022 represents quarter-to-date average equity as a percentage of quarter-to-date average total assets.

***Contractual Obligations, Commitments and Contingencies.*** In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. At June 30, 2022, there were no material changes in our contractual obligations, other commitments and contingencies from those disclosed in our 2021 Form 10-K.

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit, unadvanced portions of construction loans and standby letters of credit, all of which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.

At June 30, 2022, we had $5.5 billion of commitments to originate loans, comprised of $3.1 billion of commitments under commercial loans and lines of credit (including $563.1 million of unadvanced portions of construction loans), $2.1 billion of commitments under home equity loans and lines of credit, $198.3 million in standard overdraft coverage commitments, $48.2 million of unfunded commitments related to residential real estate loans and $55.0 million in other consumer loans and lines of credit. In addition, at June 30, 2022, we had $64.8 million in standby letters of credit outstanding. We also had $6.8 million in forward commitments to sell loans.

Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements.

## Market risk

As filed, 152 characters.

The information required by this Item is included in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Management of Market Risk.”

## Controls and procedures

As filed, 1,529 characters.

### Effectiveness of Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(c) promulgated under the Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q.

### Changes to Internal Controls over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2022 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting. The Company has not experienced any material impact to the Company’s internal controls over financial reporting due to the fact that most of the Company’s employees responsible for financial reporting are working remotely during the COVID-19 pandemic. The Company is continually monitoring and assessing the impact of the COVID-19 pandemic on the Company’s internal controls to minimize the impact to their design and operating effectiveness.

## Risk factors

As filed, 9,290 characters.

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in our 2021 Form 10-K, as updated by Part II, Item 1A “Risk Factors” in our Q1 Form 10-Q. Except for the revised risk factors below regarding “Changes in interest rates have impacted and may continue to impact our profitability” and “The fair value of Eastern Bank’s investments has and could in the future decline,” as of the date of this Quarterly Report on Form 10-Q, the risk factors of the Company have not changed materially from those disclosed in our 2021 Form 10-K, as updated by the Q1 Form 10-Q. The COVID-19 pandemic has led to general uncertainty and adverse changes in economic conditions and has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in our 2021 Form 10-K and updated in the Q1 Form 10-Q. The risk factors disclosure in our 2021 Form 10-K and our Q1 Form 10-Q is therefore qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q.

***Changes in interest rates have impacted and may continue to impact our profitability.***

Net interest income historically has been, and we anticipate that it will remain, a significant component of our total revenue. This is due to the fact that a high percentage of our assets and liabilities have been and will continue to be in the form of interest-bearing or interest-related instruments. Changes in interest rates can have a material effect on many areas of our business, including net interest income, deposit costs, and loan volume and delinquency. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Open Market Committee. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits and the fair value of our financial assets and liabilities. If the interest rates on our interest-bearing liabilities increase at a faster pace than the interest rates on our interest earning assets, our net interest income may decline and, with it, a decline in our earnings may occur. Our net interest income and our earnings would be similarly affected if the interest rates on our interest earning assets declined at a faster pace than the interest rates on our interest-bearing liabilities.

The Federal Open Market Committee raised the target range for the federal funds rate in March, May, June and July of 2022, and, with particular attention given to ongoing supply chain disruptions, rising energy and commodity prices and the global economic impact of the Russia-Ukraine conflict, has signaled that additional rate increases may be appropriate if inflation pressures remain elevated or intensify. Aggressive increases to the target range for the federal funds rate, combined with ongoing geopolitical instability, could raise the risk of an economic recession. Any such downturn, especially domestically and in the markets in which we operate, may adversely affect our asset quality, deposit levels, loan demand and results of operations.

Higher interest rates generally are associated with a lower volume of loan originations and refinancings, while lower interest rates are usually associated with higher loan originations and refinancings. Our ability to generate gains on sales of mortgage loans is significantly dependent on the level of originations. Cash flows are affected by changes in market interest rates. Generally, in rising interest rate environments, loan prepayment rates are likely to decline, and in falling interest rate environments, loan prepayment rates are likely to increase. A significant amount of our commercial, commercial real estate and multi-family residential real estate loans are adjustable-rate loans and an increase in the general level of interest rates may adversely affect the ability of some borrowers to pay the interest on and principal of their obligations, especially borrowers with loans that have adjustable rates of interest. Changes in interest rates, prepayment speeds and other factors may also cause the value of our loans held for sale to change.

However, any decision by the Federal Open Market Committee to increase interest rates could subsequently be modified or reversed depending on future changes in the U.S. economy. Should interest rates move lower, we would expect our net interest income to decline, as our interest earning assets are expected to decline at a faster pace than the interest rates on our interest-bearing liabilities.

Interest rate changes may impact our ability to attract deposits and to generate attractive earnings through our loan and investment portfolio. We are unable to control or predict with certainty changes in market interest rates. Global, national, regional and local economic conditions, the effects of a widespread outbreak of disease pandemics such as COVID-19, competitive pressures and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. Although we have strategies, such as hedging certain loans indexed to a market rate that are expected to reprice with the federal funds rate by using interest rate swaps, as well as policies and procedures designed to manage the risks associated with changes in market interest rates, changes in interest rates still may have an adverse effect on our profitability.

If our ongoing assumptions regarding borrower or depositor behavior or overall economic conditions are significantly different than we anticipate, then our risk mitigation may be insufficient to protect against interest rate risk and our net income would be adversely affected.

***The fair value of Eastern Bank’s investments has and could in the future decline.***

Most of Eastern Bank’s investment securities portfolio is designated as available-for-sale. Accordingly, unrealized gains and losses, net of tax, in the estimated fair value of the available-for-sale portfolio is recorded as other comprehensive income, a separate component of shareholders’ equity. Due to the recent increases in interest rates, the fair value of Eastern Bank’s investment portfolio has declined, causing a corresponding decline in shareholders’ equity. If interest rates rise further, the fair value of our investment portfolio may further decline and contribute to a further corresponding decline in shareholders’ equity. Management believes that several factors will affect the fair values of the investment portfolio, including, but not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation and the slope of the interest rate yield curve. These and other factors may impact specific categories of the portfolio differently and the effect any of these factors may have on any specific category of the portfolio cannot be predicted.

In addition, unrealized losses on investment securities may result from changes in credit spreads and liquidity issues in the marketplace, along with changes in the credit profile of individual securities issuers. Under accounting principles generally accepted in the United States (“GAAP”), we are required to review our investment portfolio periodically for the presence of credit-related impairment of our investment securities, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts’ evaluations, and our ability and intent to hold investments until a recovery in fair value, as well as other factors. Adverse developments with respect to one or more of the foregoing factors may require us to measure and recognize an allowance for credit losses in a future period, with the resulting provision for credit losses recognized as a charge to our earnings. Subsequent valuations, in light of management’s evaluation of the factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require us to recognize an impairment in the value of our investment securities portfolio, which could have an adverse effect on our results of operations in future periods.

Further, our investment securities are a source of liquidity that we may elect to access in the event of an unforeseen liquidity crisis. In such event, we may elect to sell securities in our investment portfolio in order to meet the funding needs mandated by our regulator. To the extent that the investment securities that we sell to meet our liquidity needs have declined in value since their initial purchase, we would recognize a loss in connection with such sales and take a charge to our earnings in the quarter in which such securities were sold, which in turn would have a negative impact on our financial results.

Filed Aug 5, 2022.
Source: SEC EDGAR, the filing index for accession 0001628280-22-021267. Last ingested by Listed: Nov 6, 2026, 12:48 ET. No prices; not investment advice.