# Eastern Bankshares, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Eastern Bankshares, Inc.](/companies/ebc.md) (CIK 1810546)
- Form: 10-Q
- Filed: 2023-05-08
- Accepted by EDGAR: May 8, 2023, 09:55 ET
- Period: 2023-03-31
- Accession: 0001628280-23-016268
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1810546/000162828023016268/ebc-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1810546/000162828023016268/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $49.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $50.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | −$62.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$194.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | −$1.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$1.20 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 162,059,431 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $100.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $16.2m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-03-31 | $22.72bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $20.14bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $2.58bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 133,663 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 March 31, 2023, and our results of operations for the three months ended March 31, 2023 and 2022. 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 2022 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, the following factors:

- the ongoing negative impacts and disruptions of the COVID-19 pandemic on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations;
- general business and economic conditions on a national basis and in the local markets in which we operate, including potential impacts resulting from delays in raising or a failure to raise the national debt ceiling;
- changes in customer behavior and perceptions;
- changes in regional, national or international macroeconomic conditions, including especially changes in inflation, recessionary pressures 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 and within the banking industry;
- decreases in the value of securities and other assets;
- decreases in deposit levels necessitating increased borrowing to fund loans, investments and other needs;
- competitive pressures from other financial institutions;
- operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics;
- changes in regulation;
- changes in accounting standards and practices;
- the risk that goodwill and intangibles recorded in our financial statements will become impaired;
- the risk that deferred tax assets will not be realized in full;
- 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 2022 Form 10-K 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 2022 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, 2023, we adopted ASU 2022-02, the accounting policy for which is described in *Note 2, “Summary of Significant Accounting Policies,”* and *Note 4, “Loans and Allowance for Credit Losses”* within the Notes to the Unaudited 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 months ended March 31, 2023.

### 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 $22.7 billion and $22.6 billion at March 31, 2023 and December 31, 2022, 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 $171.9 million, or 122.9%, of our total loss (pre-provision net interest and dividend income and noninterest loss/income) for the three months ended March 31, 2023, and our insurance agency business, which partially offset the banking business loss by $32.0 million, or 22.9%, of our total loss for the three months ended March 31, 2023. 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 loss for the three months ended March 31, 2023 computed in accordance with GAAP was $194.1 million as compared to net income of $51.5 million for the three months ended March 31, 2022. This decrease was primarily due to the sale of available for sale securities at a loss in connection with our balance sheet repositioning completed in March 2023. Refer to the later sections titled “*Outlook and Trends”* and “*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* within this Item 2 for additional discussion. Net loss for the three months ended March 31, 2023 and net income for the three months ended March 31, 2022 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 months ended March 31, 2023 was $61.1 million compared to operating net income for the three months ended March 31, 2022 of $55.1 million representing an increase of 10.9%. This increase was primarily due to an increase in net interest income. 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 decreased from $0.30 for the three months ended March 31, 2022 to a loss per share of $1.20 for the three months ended March 31, 2023. This decrease was due to our balance sheet repositioning which included a sale of AFS securities at a loss and which was completed in March 2023 as described above.

Our GAAP efficiency ratio is our noninterest expenses divided by the sum of our net interest income and noninterest income. 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 ratio for the three months ended March 31, 2023 decreased compared to the three months ended March 31, 2022. The decrease in the GAAP efficiency ratio during the three months ended March 31, 2023 was attributable to a net loss for the period, while in all other periods shown we had net income. The net loss for the three months ended March 31, 2023 was due to the balance sheet repositioning completed in March 2023 described above. The non-GAAP operating efficiency ratio during the three months ended March 31, 2023 remained relatively consistent compared to the three months ended March 31, 2022. 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 relatively 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 lines of credit and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As of both March 31, 2023 and December 31, 2022, we had total commercial and industrial loans of $3.2 billion, representing 23.2% of our total loans as of each period end. 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 March 31, 2023 and December 31, 2022, our SNC Program portfolio totaled $790.5 million and $685.8 million, or 24.9% and 21.9%, respectively, of our commercial and industrial portfolio, and 37.3% for both periods, 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”), and industrial revenue bonds (“IRBs”), the balances of which are detailed below:

- As of March 31, 2023 and December 31, 2022, our ABL Portfolio totaled $211.5 million and $208.8 million, or 6.7% and 6.6%, respectively, of our commercial and industrial portfolio.
- As of March 31, 2023 and December 31, 2022, our commercial and industrial IRB portfolio, which is comprised of municipal bonds issued to finance major capital projects, totaled $0.9 billion and $1.0 billion, or 29.6% and 31.7%, respectively, of our commercial real estate portfolio.
- Commercial real estate: Loans in this category include mortgage loans and lines of credit on commercial real estate, both investment and owner occupied. Property types financed include office, industrial, multi-family, affordable housing, retail, hotel, and other type properties. As of both March 31, 2023 and December 31, 2022, we had total commercial real estate loans of $5.2 billion, representing 38.1% and 38.0%, respectively, of our total loans as of each period end. As of March 31, 2023, and December 31, 2022, owner occupied loans totaled $0.9 billion and $1.0 billion, representing 17.2% and 17.8%, respectively, of our commercial real estate loans. 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 included IRB loans of $587.0 million and $608.0 million as of March 31, 2023 and December 31, 2022, 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 March 31, 2023 and December 31, 2022, we had total commercial construction loans of $357.1 million and $336.3 million, representing 2.6% and 2.5%, respectively, of our total loans. Our commercial construction loan portfolio also included IRB loans as of $43.1 million and $36.9 million as of March 31, 2023 and December 31, 2022, respectively
- Business banking: Loans in this category are comprised of loans to small businesses with exposures of under $1.0 million and small investment real estate projects with exposures of under $3.0 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 both March 31, 2023 and December 31, 2022, we had total business banking loans of $1.1 billion, representing 7.9% and 8.0%, respectively, of our total loans as of each period end. In this category, commercial and industrial loans and commercial real estate loans totaled $200.3 million and $878.3 million, respectively, as of March 31, 2023, and $208.4 million and $882.1 million, respectively, as of December 31, 2022.

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.

### Residential Lending

- Residential real estate: Loans in this category consist of mortgage loans on residential real estate. As of both March 31, 2023 and December 31, 2022, we had total residential loans of $2.5 billion, representing 18.3% and 18.1%, respectively, of our total loans as of each period end. 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 months ended March 31, 2023, residential real estate mortgage originations were $57.2 million, of which $9.1 million were sold on the secondary markets. Comparatively, during the three months ended March 31, 2022, residential real estate mortgage originations were $118.3 million, of which $29.2 million were sold on the secondary markets. We began purchasing residential real estate mortgage loans

during the third quarter of 2022. Loans purchased were subject to the same underwriting criteria as those loans originated directly by us. During the three months ended March 31, 2023, we purchased $32.0 million of residential real estate mortgage loans. No residential real estate mortgage loans were purchased during the three months ended March 31, 2022.

### Consumer Lending

- Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of both March 31, 2023 and December 31, 2022, we had total consumer home equity loans of $1.2 billion, representing 8.6% and 8.8%, respectively, of our total loans as of each period end. 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 March 31, 2023 and December 31, 2022, we had total other consumer loans of $190.5 million and $194.1 million, representing 1.4% of our total loans as of each period end. 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.

### Other Consumer Deposit Products

- We offer a wide variety of deposit products and services to our consumer customers. We service these customers through our 97 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 March 31, 2023 and December 31, 2022, we held $3.1 billion and $2.9 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 months ended March 31, 2023, we had noninterest income of $5.8 million from providing these services compared to $6.1 million for the three months ended March 31, 2022, 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 $31.5 million or 11.3% of our noninterest loss on a GAAP basis and 60.6%% of our noninterest income on an operating basis during the three months ended March 31, 2023. Comparatively, during the three months ended March 31, 2022, such income represented $28.7 million, or 61.9%, of our noninterest income on a GAAP basis and 53.9% of our noninterest income on an operating basis. Refer to the “*Non-GAAP Financial Measures”* section below for additional information on the determination of noninterest income on an operating basis. Our insurance business operates through 22 non-branch offices located primarily in eastern Massachusetts and had 408 full-time equivalent employees as of March 31, 2023.

### Outlook and Trends

### Interest Rates

Beginning in March 2022, the Federal Open Market Committee (“FOMC”) voted to increase the federal funds rate multiple times from a range of 0.00% to 0.25% to a range of 5.00% to 5.25% on May 3, 2023, when the FOMC stated that it will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

Inevitably, not all of our interest rate-sensitive assets and liabilities will re-price simultaneously and in equal volume in response to changes in the federal funds rate, and therefore the potential for interest rate exposure exists. Management believes that several factors will affect the actual impact of interest rate changes on our balance sheet and operating results, including, but not limited to, actual changes in interest rates or expectations of future changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. We attempt to manage interest rate risk by identifying, quantifying, and, where appropriate, hedging our exposure. Approximately 34% of the outstanding principal balance of our loans as of March 31, 2023 was indexed to a market rate that is expected to reprice along with the federal funds rate. A portion of these loans have been hedged using interest rate swaps to convert the floating rate interest receipts to a fixed rate. The notional amount of floating rate loans swapped totaled $2.4 billion on March 31, 2023, representing approximately 17.5% of the outstanding principal balance of our loans at that date. For more detail regarding such hedging financial instruments, refer to *Note 14, “Derivative Financial Instruments”* within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. We anticipate that an increase in market interest rates, whether due to an increase in the federal funds rate or otherwise, will decrease the fair value of those interest rate swaps and consequently reduce the positive impact on our net interest income that an interest rate increase would otherwise have. Refer to the section titled “*Management of Market Risk”* within this Item 2 for additional discussion including the estimated change to our net interest income under interest rate risk measurement methodologies that use a variety of hypothetical scenarios assuming immediate and parallel changes in interest rates that may not reflect the manner in which actual yields and costs respond to changes in market interest rates.

Increases in the federal funds rate over the last twelve months and greater industry-wide competition for deposits have had a significant impact on our cost of interest-bearing liabilities and funding betas. Beginning in the third quarter of 2022 and to assist in meeting our loan-growth needs, we placed additional reliance on wholesale funding in the form of borrowings and then, in the fourth quarter of 2022, we started to purchase brokered certificates of deposit. These funding sources generally have a higher cost than deposits originating within the markets we serve and are not our preferred sources of funding. We expect both our cost of interest bearing liabilities and funding betas to improve in 2023, as during the three months ended March 31, 2023, we completed a balance sheet repositioning by selling a portion of our AFS securities portfolio for total proceeds of $1.9 billion. The proceeds from the sale of such securities have been used to increase cash levels and may be used to reduce wholesale funds over time and, in turn, improve our net interest margin.

The following chart depicts our funding betas and cost of interest bearing liabilities for the previous twelve months as of March 31, 2023:

(1) The total cost of interest bearing liabilities is charted on the left-hand y-axis and cycle beta data is charted on the right-hand y-axis.

(2) Cycle beta calculated as the change in monthly average total interest-bearing liabilities cost in each respective month from the beginning of the cycle, defined as February, 2022, divided by the respective change in the average monthly upper bound of the Federal Funds target range during the same period.

### Liquidity and Uninsured Deposits

As noted previously, we completed a balance sheet repositioning during the three months ended March 31, 2023 by selling a portion of our AFS investment securities portfolio for total proceeds of $1.9 billion. Such securities were lower-yielding U.S. Agency bonds and government-sponsored residential and commercial mortgage-backed securities which were purchased when interest rates were historically low. The record rise in interest rates over the last twelve months caused the fair value of such securities to decline and, after careful consideration, management made the decision in early March and prior to the failures of Silicon Valley Bank and Signature Bank to sell these securities to improve liquidity and future earnings.

We also took steps to strengthen our backup sources of liquidity during the three months ended March 31, 2023 by pledging securities to the Federal Reserve’s Bank Term Funding Program. As of March 31, 2023, cash and cash equivalents were $2.1 billion and secured borrowing capacity at the Federal Reserve Bank and Federal Home Loan Bank totaled $5.0 billion, providing total liquidity sources of $7.1 billion. These liquidity sources provide 107% coverage of all customer uninsured and uncollateralized deposits, which totaled $6.7 billion, or 36% of total deposits, on March 31, 2023. For further discussion of liquidity, refer to “*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* within this Item 2 and for further discussion of uninsured deposits, refer to the “*Deposits”* discussion within “*Financial Position”* within this Item 2.

### Commercial Real Estate Office Exposure

Our total office-related CRE loans (which is comprised of loans secured by office space, medical office space, and mixed-use retail/office space in our commercial real estate, business banking, and construction portfolios) totaled $1.2 billion as of both March 31, 2023 and December 31, 2022. Given prevailing market conditions such as rising interest rates, reduced occupancy as a result of the increase in hybrid work arrangements post-COVID, and lower commercial real estate valuations, we are carefully monitoring these loans for signs of deterioration in credit quality. As of March 31, 2023, three of these loans, totaling $0.8 million and within our business banking portfolio, were on non-accrual status. As of December 31, 2022, five of these loans, totaling $0.6 million and within our business banking portfolio, were on non-accrual status.

### Non-GAAP Financial Measures

We present certain non-GAAP financial measures, which management uses to evaluate our performance and which exclude the effects of certain transactions, non-cash items and GAAP adjustments that we believe are unrelated to our core business and are therefore not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility for investors into our core businesses as well as underlying trends that may, to some extent, be obscured by inclusion of such items in the corresponding GAAP financial measures.

There are items in our financial statements that impact our results but which we believe are unrelated to our core business. Accordingly, we present operating net income, noninterest income on an operating basis, noninterest expense on an operating basis, total operating revenue, operating earnings per share, operating net income to average tangible shareholders’ equity, tangible book value per share, and the operating efficiency ratio, each of which excludes the impact of such items because we believe such exclusion can provide greater visibility into our core business and underlying trends. Such items that we do not consider to be core to our business include (i) income and expenses from investments held in rabbi trusts, (ii) gains and losses on sales of securities available for sale, net, (iii) gains and losses on the sale of other assets, (iv) rabbi trust employee benefits, (v) impairment charges on tax credit investments and associated tax credit benefits, (vi) OREO gains and losses, (vii) merger and acquisition expenses, (viii) the non-cash pension settlement charge recognized related to our Defined Benefit Plan, and (ix) certain discrete tax items. There were no expenses indirectly associated with OREO gains or losses, or impairment charges on tax credit investments and associated tax credit benefits 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 (loss) 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 (loss) 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 March 31, 2023 | 2022 |
| --- | ---: | ---: |
| **Net (loss) income (GAAP)** | $(194,096) | $51,516 |
| Non-GAAP adjustments: |  |  |
| Add: |  |  |
| Noninterest income components: |  |  |
| (Income) losses from investments held in rabbi trusts | (2,857) | 4,433 |
| Losses on sales of securities available for sale, net | 333,170 | 2,172 |
| (Gains) losses on sales of other assets | (1) | 274 |
| Noninterest expense components: |  |  |
| Rabbi trust employee benefit expense (income) | 1,274 | (2,087) |
| Merger and acquisition expenses | — | 34 |
| Total impact of non-GAAP adjustments | 331,586 | 4,826 |
| Less net tax benefit associated with non-GAAP adjustment (1) | 76,377 | 1,235 |
| Non-GAAP adjustments, net of tax | $255,209 | $3,591 |
| **Operating net income (non-GAAP)** | $61,113 | $55,107 |
| Weighted average common shares outstanding during the period: |  |  |
| Basic | 161,991,373 | 169,857,950 |
| Diluted | 162,059,431 | 169,968,156 |
| (Losses) earnings per share, basic | $(1.20) | $0.30 |
| (Losses) earnings per share, diluted | $(1.20) | $0.30 |
| Operating earnings per share, basic (non-GAAP) | $0.38 | $0.32 |
| Operating earnings per share, diluted (non-GAAP) | $0.38 | $0.32 |

(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. For the three months ended March 31, 2023, this amount is primarily comprised of a $53.2 million tax benefit, net of a valuation allowance, resulting from the sale of securities classified as available for sale and a $23.7 million tax benefit resulting from the transfer of certain securities from Market Street Securities Corp., a wholly owned subsidiary which was liquidated during the three months ended March 31, 2023, to Eastern Bank. Upon the sale of securities, we established a valuation allowance of $17.4 million as it was determined at that time it was not more likely than not that the entirety of the deferred tax asset related to the loss on such securities would be realized.

The following table summarizes the impact of non-core items with respect to our total (loss) revenue, noninterest (loss) 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 March 31, 2023 | 2022 |
| --- | ---: | ---: |
| **Net interest income (GAAP)** | $138,309 | $128,124 |
| Add: |  |  |
| Tax-equivalent adjustment (non-GAAP) | 4,445 | 2,261 |
| Fully-taxable equivalent net interest income (non-GAAP) | 142,754 | 130,385 |
| Noninterest (loss) income (GAAP) | (278,330) | 46,415 |
| Less: |  |  |
| Income (losses) from investments held in rabbi trusts | 2,857 | (4,433) |
| Losses on sales of securities available for sale, net | (333,170) | (2,172) |
| Gains (losses) on sales of other assets | 1 | (274) |
| Noninterest income on an operating basis (non-GAAP) | 51,982 | 53,294 |
| **Noninterest expense (GAAP)** | $116,294 | $108,866 |
| Less: |  |  |
| Rabbi trust employee benefit expense (income) | 1,274 | (2,087) |
| Merger and acquisition expenses | — | 34 |
| Noninterest expense on an operating basis (non- GAAP) | $115,020 | $110,919 |
| Total (loss) revenue (GAAP) | $(140,021) | $174,539 |
| Total operating revenue (non-GAAP) | $194,736 | $183,679 |
| **Ratios:** |  |  |
| Efficiency ratio (GAAP) | (83.05)% | 62.37% |
| Operating efficiency ratio (non-GAAP) | 59.06% | 60.39% |

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 March 31, 2023 | As of December 31, 2022 |
| --- | ---: | ---: |
| Total shareholders’ equity (GAAP) | $2,579,123 | $2,471,790 |
| Less: Goodwill and other intangibles | 660,165 | 661,126 |
| Tangible shareholders’ equity (non-GAAP) | 1,918,958 | 1,810,664 |
| **Tangible assets:** |  |  |
| Total assets (GAAP) | 22,720,530 | 22,646,858 |
| Less: Goodwill and other intangibles | 660,165 | 661,126 |
| Tangible assets (non-GAAP) | $22,060,365 | $21,985,732 |
| Shareholders’ equity to assets ratio (GAAP) | 11.4% | 10.9% |
| Tangible shareholders’ equity to tangible assets ratio (non-GAAP) | 8.7% | 8.2% |
| **Book value per share:** |  |  |
| Common shares issued and outstanding | 176,328,426 | 176,172,073 |
| Book value per share (GAAP) | $14.63 | $14.03 |
| Tangible book value per share (non-GAAP) | $10.88 | $10.28 |

64

The following table summarizes the calculation of our average tangible shareholders’ equity and ratio of net (loss) 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 March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net (loss) income (GAAP) | $(194,096) | $51,516 |
| Operating net income (non-GAAP) (1) | 61,113 | 55,107 |
| **Average tangible shareholders’ equity:** |  |  |
| Average total shareholders’ equity (GAAP) | $2,460,170 | $3,273,447 |
| Less: Average goodwill and other intangibles | 660,795 | 649,497 |
| Average tangible shareholders’ equity (non-GAAP) | $1,799,375 | $2,623,950 |
| **Ratios:** |  |  |
| (Loss) return on average total shareholders’ equity (GAAP) (2) | (32.00)% | 6.38% |
| (Loss) return on average tangible shareholders’ equity (non-GAAP) (2) | (43.75)% | 7.96% |
| Operating return on average tangible shareholders’ equity (non-GAAP) (2) | 13.78% | 8.52% |

(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 March 31, 2023 Amount ($) | As of December 31, 2022 Percentage (%) | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Cash and cash equivalents | $2,137,816 | $169,505 | $1,968,311 | 1,161.2% |
| Securities available for sale | 4,700,134 | 6,690,778 | (1,990,644) | (29.8)% |
| Securities held to maturity | 471,185 | 476,647 | (5,462) | (1.1)% |
| Loans, net of allowance for loan losses | 13,520,715 | 13,420,317 | 100,398 | 0.7% |
| Federal Home Loan Bank Stock | 45,168 | 41,363 | 3,805 | 9.2% |
| Goodwill and other intangible assets | 660,165 | 661,126 | (961) | (0.1)% |
| Deposits | 18,541,580 | 18,974,359 | (432,779) | (2.3)% |
| Borrowed funds | 1,138,403 | 740,828 | 397,575 | 53.7% |

### Cash and cash equivalents

Total cash and cash equivalents increased by $2.0 billion to $2.1 billion at March 31, 2023 from $169.5 million at December 31, 2022. This increase was primarily due to proceeds from sales of AFS securities of $1.9 billion during the three months ended March 31, 2023. For further discussion of the change in securities, refer to the later “*Securities”* 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 March 31, 2023 and December 31, 2022, our U.S. government securities consisted of U.S. Agency bonds and U.S. Treasury securities. We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes, and as collateral for interest rate derivative positions. U.S. Agency bonds include securities issued by Fannie Mae, Freddie Mac, the FHLB, and the Federal Farm Credit Bureau.

**Mortgage-backed securities:** We invest in residential and commercial mortgage-backed securities insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae, including collateralized mortgage obligations. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Ginnie Mae or Fannie Mae.

Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or 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 March 31, 2023 | As of December 31, 2022 |
| --- | ---: | ---: |
| Government-sponsored residential mortgage-backed securities | $3,024,560 | $4,111,908 |
| Government-sponsored commercial mortgage-backed securities | 1,180,040 | 1,348,954 |
| U.S. Agency bonds | 211,807 | 952,482 |
| U.S. Treasury securities | 94,283 | 93,057 |
| State and municipal bonds and obligations | 188,149 | 183,092 |
| Other debt securities | 1,295 | 1,285 |
| Total available for sale securities, at fair value | 4,700,134 | 6,690,778 |
| Held to maturity securities, at amortized cost: |  |  |
| Government-sponsored residential mortgage-backed securities | 271,655 | 276,493 |
| Government-sponsored commercial mortgage-backed securities | 199,530 | 200,154 |
| Total held to maturity securities, at amortized cost | 471,185 | 476,647 |
| Total | $5,171,319 | $7,167,425 |

Our securities portfolio has decreased $2.0 billion, or 27.8%, to $5.2 billion at March 31, 2023 from $7.2 billion at December 31, 2022. This decrease was primarily due to the completion of balance sheet repositioning in March 2023 through the sale of AFS securities for total proceeds of $1.9 billion. Refer to the sections titled “*Outlook and Trends”* and “*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* within this Item 2 for additional discussion of such sales.

We did not have trading investments at March 31, 2023 or December 31, 2022.

A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled $187.9 million at March 31, 2023 compared to $182.9 million at December 31, 2022.

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 March 31, 2023 and December 31, 2022, 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 periods ended March 31, 2023 and December 31, 2022. Weighted average yields in the tables below have been calculated based on the amortized cost of the security:

### Securities Portfolio, Weighted Average Yield

| Available for sale securities: | Securities Maturing as of March 31, 2023 (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 | —% | 2.30% | 2.10% | 1.59% | 1.60% |
| Government-sponsored commercial mortgage-backed securities | — | 1.76 | 1.57 | 1.94 | 1.78 |
| U.S. Agency bonds | — | 1.30 | 1.62 | — | 1.35 |
| U.S. Treasury securities | — | 1.97 | — | — | 1.97 |
| State and municipal bonds and obligations | 1.22 | 2.29 | 3.22 | 4.06 | 3.66 |
| Other debt securities | 0.84 | — | — | — | 0.84 |
| Total available for sale securities | 0.89 | 1.65 | 1.71 | 1.73 | 1.72 |
| **Held to maturity securities:** |  |  |  |  |  |
| Government-sponsored residential mortgage-backed securities | — | — | — | 2.86 | 2.86 |
| Government-sponsored commercial mortgage-backed securities | — | — | 2.22 | — | 2.22 |
| Total held to maturity securities | — | — | 2.22 | 2.86 | 2.59 |
| Total | 0.89% | 1.65% | 1.83% | 1.79% | 1.79% |

| Within One Year Available for sale securities: | Securities Maturing as of December 31, 2022 (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 | —% | 2.27% | 1.00% | 1.53% | 1.45% |
| Government-sponsored commercial mortgage-backed securities | — | 1.29 | 1.51 | 1.94 | 1.68 |
| U.S. Agency bonds | — | 0.79 | 0.97 | — | 0.82 |
| U.S. Treasury securities | — | 1.97 | — | — | 1.97 |
| State and municipal bonds and obligations | 1.22 | 2.26 | 3.17 | 4.05 | 3.66 |
| Other debt securities | 0.84 | — | — | — | 0.84 |
| Total available for sale securities | 0.89% | 1.02% | 1.25% | 1.66% | 1.47% |
| **Held to maturity securities:** |  |  |  |  |  |
| Government-sponsored residential mortgage-backed securities | — | — | — | 2.86 | 2.86 |
| Government-sponsored commercial mortgage-backed securities | — | — | 2.23 | — | 2.23 |
| Total held to maturity securities | — | — | 2.23 | 2.86 | 2.59 |
| Total | 0.89% | 1.02% | 1.36% | 1.72% | 1.54% |

67

(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.

The yield on tax-exempt obligations of states and political subdivisions has been adjusted to an 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.

### Loans

We consider our loan portfolio to be relatively diversified by borrower and industry. Our gross loans increased $99.7 million, or 0.7%, to $13.7 billion at March 31, 2023 from $13.6 billion at December 31, 2022. The increase as of March 31, 2023 was primarily due to increases in our commercial real estate and residential real estate portfolio balances.

- Our commercial real estate portfolio increased by $45.9 million from December 31, 2022 to March 31, 2023 which was primarily attributable to an increase of $70.1 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 belief that the credit performance of such loans has a stable outlook. The increase in commercial real estate investment loan balances was partially offset by a decrease in commercial real estate owner-occupied loans of $24.0 million which was due to net paydowns of such loans during the three months ended March 31, 2023.
- Our residential real estate portfolio increased by $36.6 million during the three months ended March 31, 2023. The increase in residential real estate loan balances was primarily due to purchases of such loans which totaled $32.0 million during the three months ended March 31, 2023.

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

### Loan Portfolio Composition

*(In thousands)*

|  | As of March 31, 2023 | As of December 31, 2022 |
| --- | ---: | ---: |
| Commercial and industrial | $3,169,438 | $3,150,946 |
| Commercial real estate | 5,201,196 | 5,155,323 |
| Commercial construction | 357,117 | 336,276 |
| Business banking | 1,078,678 | 1,090,492 |
| Residential real estate | 2,497,491 | 2,460,849 |
| Consumer home equity | 1,180,824 | 1,187,547 |
| Other consumer | 190,506 | 194,098 |
| Total loans | 13,675,250 | 13,575,531 |
| Allowance for loan losses | (140,938) | (142,211) |
| Unamortized premiums, net of unearned discounts and deferred fees | (13,597) | (13,003) |
| Total loans receivable, net | $13,520,715 | $13,420,317 |

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 81.5% of our commercial loans in Massachusetts and New Hampshire as of March 31, 2023.

***Asset quality.*** We continually monitor the asset quality of our loan portfolio utilizing portfolio scorecards and various credit quality indicators. Based on this process, loans meeting certain criteria are categorized as delinquent or non-performing and further assessed to determine if non-accrual status is appropriate.

For the commercial portfolio, which includes our commercial and industrial, commercial real estate, commercial construction and business banking loans, we monitor credit quality using a risk rating scale, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Management utilizes a loan risk rating methodology based on a 15-point scale with the assistance of risk rating scorecard tools. Pass grades are 0-10 and non-pass categories, which align with regulatory guidelines, are: special mention (11), substandard (12), doubtful (13) and loss (14).

Risk rating assignment is determined using one of 15 separate scorecards developed for distinctive portfolio segments based on common attributes. Key factors include: industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral and other considerations.

Special mention, substandard and doubtful loans totaled 3.0% and 2.2% of total commercial loans outstanding at March 31, 2023 and December 31, 2022, respectively. This increase was driven by risk rating downgrades of several credits in the commercial and industrial and commercial real estate portfolios. Management is not aware of any pervasive credit trends leading to this increase and the the percentage of such loans to total commercial loans as of March 31, 2023 remains consistent with our long-term average.

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 improved to 0.37% at March 31, 2023, compared to 0.50% at December 31, 2022.

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

### Loan Delinquency Rates

| Portfolio | Delinquency Rate as of March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Commercial and industrial | 0.02% | 0.12% |
| Commercial real estate | —% | —% |
| Commercial construction | —% | —% |
| Business banking | 0.84% | 1.00% |
| Residential real estate | 0.99% | 1.46% |
| Consumer home equity | 1.32% | 1.33% |
| Other consumer | 0.49% | 0.63% |
| Total | 0.37% | 0.50% |

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 decreased $4.0 million, or 10.4%, to $34.6 million at March 31, 2023 from $38.6 million at December 31, 2022. NPLs as a percentage of total loans decreased to 0.25% at March 31, 2023 from 0.28% at December 31, 2022. 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 March 31, 2023.

The total amount of interest recorded on NPLs during both the three months ended March 31, 2023 and 2022 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 $1.1 million and $0.5 million for the three months ended March 31, 2023 and 2022, 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. As noted within *Note 2, “Summary of Significant Accounting Policies”* within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q, we adopted ASU 2022-02 on January 1, 2023 which eliminated TDR accounting. Prior to the adoption of this standard, we reviewed each loan that was modified to identify whether a TDR had occurred. TDRs involved situations in which, for economic or legal reasons related to the borrower’s financial difficulties, we granted a concession to the borrower that we would not otherwise have considered. Subsequent to our adoption of this standard, we apply the loan refinancing and restructuring guidance codified in paragraphs 310-20-35-9 through 35-11 of the Accounting Standards Codification to determine whether a modification results in a new loan or a continuation of an existing loan.

ASU 2022-02 requires disclosure of loan modifications to borrowers experiencing financial difficulty. The aggregate amortized cost balance as of March 31, 2023 of loans modified during the three months ended March 31, 2023, determined in accordance with ASU 2022-02, which were determined to be modifications to borrowers experiencing financial difficulty was $2.3 million. As of March 31, 2023, there were no loans that had been modified to borrowers experiencing financial difficulty during the three months ended March 31, 2023 and which subsequently defaulted during the period.

Under previous accounting guidance, in cases where a borrower experienced financial difficulties and we made certain concessionary modifications to contractual terms, the loan was classified as a TDR. Loans modified during the three months ended March 31, 2022 which were determined to be TDRs, determined in accordance with previous accounting guidance in effect through December 31, 2022, totaled $0.8 million. As of March 31, 2022, there were no loans that had been modified during the preceding 12 months, which were party to a TDR and which subsequently defaulted during the three months ended March 31, 2022.

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.

Purchased credit deteriorated (“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 March 31, 2023 and December 31, 2022, the carrying amount of PCD loans was $56.0 million and $56.6 million, respectively.

***Potential Problem Loans.*** In the normal course of business, we become aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which currently do not yet meet the criteria for classification as NPLs. These loans are neither delinquent nor on non-accrual status. Our potential problem loans, or loans with potential weaknesses that were not included in the non-accrual loans or in the loans 90 or more past due categories, increased by $70.2 million, or 37.5%, to $257.2 million at March 31, 2023 from $187.0 million at December 31, 2022. These loans as a percentage of total loans increased to 1.9% at March 31, 2023 from 1.4% at December 31, 2022. The increase in potential problem loans from December 31, 2022 to March 31, 2023 was primarily due to the downgrade of several commercial and industrial and commercial real estate loans during the three months ended March 31, 2023.

***Allowance for credit losses.*** 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, we enter into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the reserving method for loans receivable previously described. The reserve for unfunded lending commitments is included in other liabilities in the Consolidated Balance Sheet.

The allowance for loan losses decreased by $1.3 million, or 0.9%, to $140.9 million, or 1.03% of total loans, at March 31, 2023 from $142.2 million, or 1.05% of total loans at December 31, 2022. The decrease in the allowance for loan losses was primarily the result of our adoption of ASU 2022-02, as previously described above, which resulted in a change in reserving method for loans previously classified as TDRs. Upon adoption of ASU 2022-02, TDR loans for which the allowance for loan losses was determined by a discounted cash flow analysis, transitioned to their respective pools of loans sharing similar risk characteristics for which the allowance for loan losses is determined on a collective basis. As a result, the allowance for loan losses for such loans was reduced by $1.1 million.

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 Unaudited 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.

The following table summarizes credit ratios for the periods presented:

### Credit Ratios

*(Dollars in thousands)*

| Net loan charge-offs (recoveries): | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Commercial and industrial | $(139) | $(249) |
| Commercial real estate | (4) | (14) |
| Commercial construction | — | — |
| Business banking | (138) | 17 |
| Residential real estate | (15) | (10) |
| Consumer home equity | 6 | (4) |
| Other consumer | 445 | 482 |
| Total net loan charge-offs | 155 | 222 |
| Average loans: |  |  |
| Commercial and industrial | 3,187,533 | 2,963,414 |
| Commercial real estate | 5,270,526 | 4,735,257 |
| Commercial construction | 334,979 | 169,608 |
| Business banking | 972,198 | 1,104,815 |
| Residential real estate | 2,509,313 | 1,936,629 |
| Consumer home equity | 1,169,727 | 1,088,487 |
| Other consumer | 188,889 | 205,002 |
| Average total loans (1) | $13,633,165 | $12,203,212 |
| Net charge-offs (recoveries) to average loans outstanding during the period: |  |  |
| Commercial and industrial | 0.00% | (0.01)% |
| Commercial real estate | 0.00 | 0.00 |
| Commercial construction | — | — |
| Business banking | (0.01) | 0.00 |
| Residential real estate | 0.00 | 0.00 |
| Consumer home equity | 0.00 | 0.00 |
| Other consumer | 0.24 | 0.24 |
| Total net charge-offs to average loans outstanding during the period: | 0.00% | 0.00% |
| Total loans | $13,661,653 | $12,157,769 |
| Total non-accrual loans | $34,573 | $33,821 |
| Allowance for loan losses | $140,938 | $124,166 |
| Allowance for loan losses as a percent of total loans | 1.03% | 1.02% |
| Non-accrual loans as a percent of total loans | 0.25% | 0.28% |
| Allowance for loan losses as a percent of non-accrual loans | 407.65% | 367.13% |

(1) Average loan balances exclude loans held for sale

Non-accrual loans increased $0.8 million, or 2.2%, to $34.6 million at March 31, 2023 from $33.8 million at March 31, 2022, primarily due to an increase in residential real estate non-accrual loans of $1.3 million which was partially offset by a decrease in commercial real estate and business banking non-accrual loans of $0.5 million and $0.4 million, respectively. The increase in non-accrual residential real estate loans is primarily due to an overall increase in the residential real estate loan portfolio which increased 29.0% from March 31, 2022 to March 31, 2023. Non-accrual residential real estate loans as a percentage of total gross residential loans decreased from 0.43% at March 31, 2022 to 0.38% at March 31, 2023. Non-accrual commercial real estate loans and business banking loans decreased 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 March 31, 2023 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, 2022 Allowance for Loan Losses | Percent of Allowance in Category to Total Allocated Allowance | Percent of Loans in Category to Total Loans (1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $26,929 | 19.11% | 23.07% | $26,859 | 18.89% | 23.10% |
| Commercial real estate | 55,193 | 39.15% | 38.04% | 54,730 | 38.49% | 37.98% |
| Commercial construction | 7,578 | 5.38% | 2.60% | 7,085 | 4.98% | 2.46% |
| Business banking | 15,085 | 10.70% | 7.93% | 16,189 | 11.38% | 8.08% |
| Residential real estate | 27,130 | 19.25% | 18.42% | 28,129 | 19.78% | 18.29% |
| Consumer home equity | 6,182 | 4.39% | 8.67% | 6,454 | 4.54% | 8.78% |
| Other consumer | 2,841 | 2.02% | 1.26% | 2,765 | 1.94% | 1.31% |
| Total | $140,938 | 100.00% | 100.00% | $142,211 | 100.00% | 100.00% |

(1) Percentages were revised from the percentages presented in our 2022 10-K. The revised figures were computed based upon loan amortized cost balances whereas the percentages presented in the 2022 10-K were computed based upon recorded investment balances.

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 Unaudited 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 $45.2 million and $41.4 million at March 31, 2023 and December 31, 2022, respectively. The amount of stock we are required to purchase is proportional to our FHLB borrowings and level of total assets. Accordingly, the increase in FHLB stock is due to increased borrowings.

### Goodwill and other intangible assets

Goodwill and other intangible assets were $660.2 million and $661.1 million at March 31, 2023 and December 31, 2022, respectively. We did not record any impairment to our goodwill or other intangible assets during the three months ended March 31, 2023. We will continue to assess our goodwill and other intangible assets to determine if impairments are necessary.

### Deposits

Deposits originating within the markets we serve continue to be our primary source of funding our earning assets. Historically, we have been able to compete effectively for deposits in our primary market areas. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in our assessment of the stability of our fund sources and our access to additional funds. Furthermore, we shift the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize net interest margin.

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

### Components of Deposits

*(Dollars in thousands)*

|  | As of March 31, 2023 Amount ($) | As of December 31, 2022 Percentage (%) | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Demand | $5,564,016 | $6,240,637 | $(676,621) | (10.8)% |
| Interest checking | 4,240,780 | 4,568,122 | (327,342) | (7.2)% |
| Savings | 1,633,790 | 1,831,123 | (197,333) | (10.8)% |
| Money market investments | 5,135,590 | 4,710,095 | 425,495 | 9.0% |
| Certificates of deposit (1) | 1,967,404 | 1,624,382 | 343,022 | 21.1% |
| Total deposits | $18,541,580 | $18,974,359 | $(432,779) | (2.3)% |

(1) Brokered certificates of deposit are included in total certificates of deposit and amounted to $609.7 million and $928.6 million at March 31, 2023 and December 31, 2022, respectively.

Deposits decreased by $0.4 billion, or 2.3%, to $18.5 billion at March 31, 2023 from $19.0 billion at December 31, 2022. This decrease was primarily the result of a decrease in brokered certificates of deposit of $318.9 million. Brokered certificates of deposit decreased as such accounts matured and were not renewed in full as we emphasized other means for increasing our overall liquidity as of March 31, 2023. The decrease in brokered certificates of deposit was more than offset by a shift in deposit mix of certain core deposits from demand and interest checking deposits, which decreased by $0.7 billion and $0.3 billion, respectively, to certificates of deposit resulting in a net increase in certificates of deposit. This shift in deposit mix during the three months ended March 31, 2023 was due primarily to increases in rates paid on certificates of deposit, which attracted depositors to such products. Money market investments increased $0.4 billion primarily due to increased IntraFi Network deposits. Refer to the later “*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* section in this Item 2 for additional discussion of such deposits.

The Bank’s estimate of total uninsured deposits was $8.4 billion and $9.0 billion at March 31, 2023 and December 31, 2022, respectively. In accordance with the FDIC’s Call Report instructions, these estimates include accounts of wholly-owned subsidiaries, the holding company, and internal operating deposit accounts (together referred to as “internal deposit accounts”). In addition, these estimates include municipal deposit accounts for which securities were pledged by us to secure such deposits (“collateralized deposits”). For liquidity monitoring purposes, we exclude internal deposit accounts and collateralized deposits from our estimate of uninsured deposits. Our estimate of uninsured deposits, excluding internal deposit accounts and collateralized deposits, was $6.7 billion and $7.3 billion at March 31, 2023 and December 31, 2022, respectively.

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 Three Months Ended March 31, 2023 Average Amount | Average Rate | For the Year Ended December 31, 2022 Average Amount | Average Rate |
| --- | ---: | ---: | ---: | ---: |
| Demand | $5,825,269 | —% | $6,647,518 | —% |
| Interest checking | 4,363,528 | 0.44% | 4,890,709 | 0.24% |
| Savings | 1,721,143 | 0.02% | 2,015,651 | 0.01% |
| Money market investments | 5,040,330 | 1.63% | 5,057,445 | 0.27% |
| Certificate of deposits | 1,931,860 | 3.74% | 463,261 | 0.70% |
| Total deposits | $18,882,130 | 0.92% | $19,074,584 | 0.15% |

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 March 31, 2023 | As of December 31, 2022 |
| --- | ---: | ---: |
| Three months or less | $50,023 | $39,322 |
| Over three months through six months | 93,093 | 45,053 |
| Over six months through 12 months | 352,145 | 149,107 |
| Over 12 months | 4,566 | 5,569 |
| Total | $499,827 | $239,051 |

### 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 $397.6 million to $1.1 billion at March 31, 2023 compared to $740.8 million at December 31, 2022. The increase was primarily due to an increase in FHLB short-term advances, which we borrowed to increase our liquidity. Refer to the later “*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* section in this Item 2 for additional discussion of our liquidity position.

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

### Borrowings by Category

*(Dollars in thousands)*

|  | As of March 31, 2023 | As of December 31, 2022 | Change Amount ($) | Percentage (%) |
| --- | ---: | ---: | ---: | ---: |
| FHLB short-term advances | $1,088,296 | $691,297 | $396,999 | 57.4% |
| Escrow deposits of borrowers | 25,671 | 22,314 | 3,357 | 15.0% |
| Interest rate swap collateral funds | 11,780 | 14,430 | (2,650) | (18.4)% |
| FHLB long-term advances | 12,656 | 12,787 | (131) | (1.0)% |
| Total | $1,138,403 | $740,828 | $397,575 | 53.7% |

### Results of Operations

### Summary of Results of Operations

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 | Change Amount ($) | Percentage |
| --- | ---: | ---: | ---: | ---: |
| Interest and dividend income | $188,880 | $131,485 | $57,395 | 43.7% |
| Interest expense | 50,571 | 3,361 | 47,210 | 1,404.6% |
| Net interest income | 138,309 | 128,124 | 10,185 | 7.9% |
| Provision for (release of) allowance for loan losses | 25 | (485) | 510 | (105.2)% |
| Noninterest income | (278,330) | 46,415 | (324,745) | (699.7)% |
| Noninterest expense | 116,294 | 108,866 | 7,428 | 6.8% |
| Income tax (benefit) expense | (62,244) | 14,642 | (76,886) | (525.1)% |
| Net (loss) income | (194,096) | 51,516 | (245,612) | (476.8)% |

### Comparison of the three months ended March 31, 2023 and 2022

### Interest and Dividend Income

Interest and dividend income increased by $57.4 million, or 43.7%, to $188.9 million during the three months ended March 31, 2023 from $131.5 million during the three months ended March 31, 2022. The increase was primarily a result of an increase in the yield on average interest-earning assets which increased by 112 basis points compared with the three months ended March 31, 2022. Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans and securities are calculated and added to the yield. Management believes that this presentation allows for better comparability between institutions with different tax structures. Partially offsetting the impact of increased yields was a decrease in the average balance of our interest-earning assets which decreased slightly by $83.2 million, or 0.4%, to $21.8 billion during the three months ended March 31, 2023 compared to $21.9 billion during the three months ended March 31, 2022, which was primarily attributable to a decrease in the average balance of securities.

- Interest income on loans increased $52.2 million, or 51.5%, to $153.5 million during the three months ended March 31, 2023 from $101.4 million during the three months ended March 31, 2022. The increase in interest income on our loans was due to an increase in our yields on loans and an increase in the average balance of loans. The overall yield on our loans increased 126 basis points during the three months ended March 31, 2023 in comparison to the three months ended March 31, 2022. The increase in yield was primarily due to increases in market rates of interest which resulted in increased yields on variable rate loans which repriced and new loans originated at higher rates of interest. The average balance of our loans increased $1.4 billion, or 11.7%, to $13.6 billion during the three months ended March 31, 2023 from $12.2 billion during the three months ended March 31, 2022. Refer to the earlier “*Loans”* discussion within the “*Financial Position”* section within this Item 2 for additional discussion of changes in our loans balances.
- Interest income on securities and other short-term investments increased $5.2 million, or 17.3%, to $35.3 million during the three months ended March 31, 2023 from $30.1 million during the three months ended March 31, 2022. The increase in interest income on our securities was due to an increase in the average yield of such securities. The yield on our securities and short-term investments increased 50 basis points during the three months ended March 31, 2023 in comparison to the three months ended March 31, 2022 primarily due to an increase in the rate paid on our cash held at the Federal Reserve Bank of Boston from an average of 0.19% during the three months ended March 31, 2022 to an average of 4.59% during the three months ended March 31, 2023. In addition, our cash deposited at the Federal Reserve Bank of Boston increased during the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due primarily to the deposit of proceeds from the sale of AFS securities (discussed earlier) in March 2023. Partially offsetting this increase was a corresponding decrease in our average securities balance, which decreased $1.5 billion, or 15.7%, to $8.1 billion for the three months ended March 31, 2023 from $9.7 billion for the three months ended March 31, 2022 primarily due to the sales of AFS securities in March 2023. For additional discussion of the sales, refer to the section titled “*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* within this Item 2.

### Interest Expense

During the three months ended March 31, 2023, interest expense increased $47.2 million to $50.6 million from $3.4 million during the three months ended March 31, 2022. The increase was primarily attributable to an increase in deposit interest expense, which was primarily attributable to an increase in the deposit rates we offered.

During the three months ended March 31, 2023, interest expense on our interest-bearing deposits increased by $39.6 million to $42.9 million from $3.3 million during the three months ended March 31, 2022. This increase was due to an increase in the rates paid on deposits and an increase in average interest-bearing deposits. Rates paid on deposits increased by 122 basis points to 1.33% during the three months ended March 31, 2023 from 0.11% during the three months ended March 31, 2022, which we increased in response to an increase in market rates of interest and heightened industry-wide competition for deposits. In addition, beginning in the fourth quarter of 2022, we began purchasing brokered certificates of deposit. Such deposits bear higher rates of interest in comparison to our core deposits. Consequently, the purchases of brokered certificates of deposit contributed to the increase in rates paid on deposits.

Interest expense related to our borrowings increased by $7.6 million to $7.6 million during the three months ended March 31, 2023 from less than $0.1 million during the three months ended March 31, 2022. The increase in borrowings interest expense is attributable to an increase in our utilization of our FHLB borrowing capacity. For additional discussion of the increase in borrowings, refer to the section titled “*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* within this Item 2.

### Net Interest Income

Net interest income increased by $10.2 million, or 7.9%, to $138.3 million during the three months ended March 31, 2023 from $128.1 million for the three months ended March 31, 2022. Net interest income increased due to an increase in yield on interest-earning assets which exceeded the increase in the cost of interest-bearing liabilities. Partially offsetting the increase in yields on our interest-earning assets was the decrease in the balance of average net interest-earning assets of $1.1 billion, or 11.7%, to $8.0 billion during the three months ended March 31, 2023 from $9.1 billion during the three months ended March 31, 2022.

The following chart shows our net interest margin over the past five quarters:

Net interest margin is determined by dividing FTE net interest income by average interest-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 21.7% for the three months ended March 31, 2023 and 21.5% for the three months ended March 31, 2022. Net interest margin increased 24 basis points to 2.66% during the three months ended March 31, 2023, from 2.42% during the three months ended March 31, 2022. The increase in net interest margin for the three months ended March 31,

2023 from the three months ended March 31, 2022 was primarily due to an increase in market rates of interest which resulted in an increase in our yield on interest-earning assets.

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 March 31, 2023 Average Outstanding Balance | Interest | Average Yield/Cost (5) | 2022 Average Outstanding Balance | Interest | Average Yield /Cost (5) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $2,513,413 | $21,614 | 3.49% | $1,937,494 | $14,471 | 3.03% |
| Commercial | 9,765,236 | 115,929 | 4.81% | 8,973,094 | 78,226 | 3.54% |
| Consumer | 1,358,616 | 20,059 | 5.99% | 1,293,489 | 10,450 | 3.28% |
| Total loans | 13,637,265 | 157,602 | 4.69% | 12,204,077 | 103,147 | 3.43% |
| Non-taxable investment securities | 197,766 | 1,817 | 3.73% | 259,908 | 2,287 | 3.57% |
| Taxable investment securities | 7,486,899 | 28,642 | 1.55% | 8,387,292 | 27,876 | 1.35% |
| Other short-term investments | 449,543 | 5,264 | 4.75% | 1,003,416 | 436 | 0.18% |
| Total interest-earning assets | $21,771,473 | $193,325 | 3.60% | $21,854,693 | $133,746 | 2.48% |
| Non-interest-earning assets | 739,270 |  |  | 1,436,702 |  |  |
| Total assets | $22,510,743 |  |  | $23,291,395 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| Savings account | $1,721,143 | $81 | 0.02% | $2,076,754 | $51 | 0.01% |
| Interest checking account | 4,363,528 | 4,711 | 0.44% | 4,596,026 | 2,032 | 0.18% |
| Money market investment | 5,040,330 | 20,305 | 1.63% | 5,568,264 | 920 | 0.07% |
| Time account | 1,931,860 | 17,836 | 3.74% | 481,833 | 319 | 0.27% |
| Total interest-bearing deposits | 13,056,861 | 42,933 | 1.33% | 12,722,877 | 3,322 | 0.11% |
| Borrowings | 675,056 | 7,638 | 4.59% | 30,669 | 39 | 0.52% |
| Total interest-bearing liabilities | $13,731,917 | $50,571 | 1.49% | $12,753,546 | $3,361 | 0.11% |
| Demand accounts | 5,825,269 |  |  | 6,821,811 |  |  |
| Other noninterest-bearing liabilities | 493,387 |  |  | 442,591 |  |  |
| Total liabilities | 20,050,573 |  |  | 20,017,948 |  |  |
| Shareholders’ equity | 2,460,170 |  |  | 3,273,447 |  |  |
| Total liabilities and shareholders’ equity | $22,510,743 |  |  | $23,291,395 |  |  |
| Net interest income – FTE |  | $142,754 |  |  | $130,385 |  |
| Net interest rate spread (2) |  |  | 2.11% |  |  | 2.37% |
| Net interest-earning assets (3) | $8,039,556 |  |  | $9,101,147 |  |  |
| Net interest margin – FTE (4) |  |  | 2.66% |  |  | 2.42% |
| Average interest-earning assets to interest-bearing liabilities | 158.55% |  |  | 171.36% |  |  |
| (Loss) return on average assets (5)(6) | (3.50)% |  |  | 0.90% |  |  |
| (Loss) return on average equity (5)(7) | (32.00)% |  |  | 6.38% |  |  |
| Noninterest expense to average assets | 2.10% |  |  | 1.90% |  |  |

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

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

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

(4) Net interest margin - FTE represents fully-taxable equivalent net interest income divided by average total interest-earning assets. Refer to the earlier “*Non-GAAP Financial Measures”* section within this Item 2 for additional information.

(5) Presented on an annualized basis.

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

(7) Represents net (loss) 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 less than $0.1 million for the three months ended March 31, 2023, compared to a release of $0.5 million for the three months ended March 31, 2022. Management determined a provision to be necessary due primarily to increased loan balances.

Management’s estimate of our allowance for loan losses as of March 31, 2023 and the provision for loan losses for the three months ended March 31, 2023, was supported, in part, by Oxford Economics’ March 2023 Baseline forecast (“the forecast”) which was used to develop management’s estimate of the effect of expected future economic conditions on the allowance for loan losses. The forecast assumed the U.S. economy will enter a recession in the third quarter of 2023 compared to the assumption used as of December 31, 2022 which had assumed the U.S. economy would enter a recession in the second quarter of 2023. This forecast reflects the combination of continued strong consumer product demand, consistent labor market metrics, and stronger economic growth rates than anticipated following the recent increases to the federal funds rate by the FOMC. Primary macroeconomic assumptions included in management’s evaluation of the adequacy of the allowance for loan losses included continued low unemployment rates and a steady gross domestic product (“GDP”). Further, the forecast assumed that the FOMC will continue to raise interest rates into mid-2023 following its most recent March 2023 increase. The core consumer price index remained steady, and is expected to remain well above the FOMC’s 2% target through 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 Credit Losses”* within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

To illustrate the sensitivity of the modeled result to the impact of a hypothetical change in the economic forecast, management calculated the allowance for loan losses assuming the downside economic forecast scenario and, separately, the upside economic forecast scenario. The downside scenario assumed the U.S. economy will enter a more severe recession in the third quarter of 2023 and experience a decline in GDP of 3.0% peak-to-trough. Use of the downside scenario would have resulted in an incremental increase in the allowance for loan losses of approximately $9.0 million as of March 31, 2023. The upside scenario assumed GDP growth of 1.8% in 2023, 2.0% in 2024 and sustained recovery. Use of the upside scenario would have resulted in an incremental decrease in the allowance for loan losses of approximately $4.9 million as of March 31, 2023.

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 March 31, 2023 | 2022 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Insurance commissions | $31,503 | $28,713 | $2,790 | 9.7% |
| Service charges on deposit accounts | 6,472 | 8,537 | (2,065) | (24.2)% |
| Trust and investment advisory fees | 5,770 | 6,141 | (371) | (6.0)% |
| Debit card processing fees | 3,170 | 2,945 | 225 | 7.6% |
| Interest rate swap (losses) income | (408) | 2,932 | (3,340) | (113.9)% |
| Income (losses) from investments held in rabbi trusts | 2,857 | (4,433) | 7,290 | (164.4)% |
| (Losses) gains on sales of mortgage loans held for sale, net | (74) | 169 | (243) | (143.8)% |
| (Losses) on sales of securities available for sale, net | (333,170) | (2,172) | (330,998) | 15,239.3% |
| Other | 5,550 | 3,583 | 1,967 | 54.9% |
| Total noninterest (loss) income | $(278,330) | $46,415 | $(324,745) | (699.7)% |

Noninterest income decreased $324.7 million, to a net loss of $278.3 million for the three months ended March 31, 2023 from income of $46.4 million for the three months ended March 31, 2022. This decrease was primarily due to a $331.0 million increase in losses on sales of securities available for sale, a $3.3 million decrease in interest rate swap income which resulted from a current period net loss from such swaps compared to net income in the comparative prior period, and a $2.1 million decrease in service charges on deposit accounts. These unfavorable items were partially offset by a $7.3 million increase in income from investments held in rabbi trusts and a $2.8 million increase in insurance commissions.

- Losses on sales of securities available for sale, net, increased by $331.0 million to $333.2 million for the three months ended March 31, 2023 from $2.2 million for the three months ended March 31, 2022 due to balance sheet repositioning which was completed in March 2023 and included the decision by management to sell certain available for sale securities. Refer to the section titled“*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* within this Item 2 for additional discussion of such sales.
- Interest rate swap income decreased to a loss primarily as a result of an unfavorable mark-to-market adjustment for the three months ended March 31, 2023 compared a favorable mark-to-market adjustment for the three months ended March 31, 2022.
- Service charges on deposit accounts decreased primarily as a result of decreased corporate account analysis charges which was due primarily to lower commercial deposit account customer activity because of heightened industry-wide competition for deposits. Also contributing to the decrease was a decrease in customer overdraft charges which decreased primarily as a result of our decision to reduce the amount of the overdraft fees charged to our customers beginning in the third quarter of 2022.
- Income from investments held in rabbi trusts increased primarily as a result of a favorable mark-to-market adjustment on equity securities held in these accounts for the three months ended March 31, 2023 resulting from an increase in the market value of equity securities held in the rabbi trusts as compared to an unfavorable mark-to-market adjustment for the three months ended March 31, 2022.
- Insurance commissions increased primarily as a result of an increase in recurring commission income which was attributable to recent agency acquisitions consummated during the year ended December 31, 2022.

### Noninterest Expense

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

### Noninterest Expense

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $78,478 | $69,526 | $8,952 | 12.9% |
| Office occupancy and equipment | 9,878 | 11,614 | (1,736) | (14.9)% |
| Data processing | 13,441 | 15,320 | (1,879) | (12.3)% |
| Professional services | 3,420 | 3,950 | (530) | (13.4)% |
| Marketing | 1,097 | 1,574 | (477) | (30.3)% |
| Loan expenses | 1,095 | 1,919 | (824) | (42.9)% |
| FDIC insurance | 2,546 | 1,412 | 1,134 | 80.3% |
| Amortization of intangible assets | 960 | 827 | 133 | 16.1% |
| Other | 5,379 | 2,724 | 2,655 | 97.5% |
| Total noninterest expense | $116,294 | $108,866 | $7,428 | 6.8% |

Noninterest expense increased by $7.4 million, or 6.8%, to $116.3 million during the three months ended March 31, 2023 from $108.9 million during the three months ended March 31, 2022. This increase was primarily due to a $9.0 million increase in salaries and employee benefits and a $2.7 million increase in other noninterest expenses. Partially offsetting these increases were a $1.9 million decrease in data processing expenses and a $1.7 million decrease in office occupancy and equipment expenses.

- Salaries and employee benefits increased primarily due to an increase of $3.7 million in regular salaries and wages expense, which was primarily due to costs of living salary and wage increases and the addition of new employees. Also contributing to the increase was a $3.4 million increase in benefit expense related to our defined contribution supplemental executive retirement plan (“DC SERP”). Participant benefits are adjusted based upon deemed investment performance. Accordingly, such investments experienced an increase in value during the three months ended March 31, 2023 resulting in a corresponding increase in the related benefit expense. Also contributing to the increase in salaries and employee benefits was an increase in the legacy long-term cash-based incentive plan compensation expense as well as an increase in the restricted stock award expense. Expense related to the long-term cash-based incentive plan was a net credit (reduction of expense) during the three months ended March 31, 2023 and 2022, which resulted from a decline in certain metrics to which the awards are tied during such periods. The decline in expense during the three months ended March 31, 2023 was less than the decline during the three months ended March 31, 2022. Also contributing to the increase was a $1.4 million increase in restricted stock award expense, which increased due to the restricted stock awards granted during the second quarter of 2022. Partially offsetting this increase was a decrease of $1.5 million in the pension service cost, which was primarily driven by a decrease in the assumed rate of compensation increase.
- Other noninterest expenses increased primarily due to a $3.1 million increase in other pension expense. This is primarily due to a decrease in expected return on plan assets in our Defined Benefit Plan. For further discussion on the Company’s Defined Benefit Plan refer to see *Note 10, “Employee Benefits”* within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. Also contributing to this increase was a $1.4 million increase in the provision for credit losses on off balance sheet exposures, which is primarily due to an increase in unfunded commercial loan commitments. Partially offsetting these items was a $1.0 million decrease in bad check losses, which is primarily due to recuperated losses from the year ended December 31, 2022. Also partially offsetting these increases was a $0.7 million decrease in other professional fees, which was driven by a decrease in printed check costs, which was higher than usual during the three months ended March 31, 2022 in order to accommodate new customers from our acquisition of 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, including core data processing expenses, decreased during the three months ended March 31, 2023 from the three months ended March 31, 2022, primarily due to decreased customer deposit activity.

- Office occupancy and equipment expenses decreased primarily due to a decrease in depreciation expense during the three months ended March 31, 2023 compared to during the three months ended March 31, 2022.

### 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 March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Combined federal and state income tax (benefit) provision | $(62,244) | $14,642 |
| Effective income tax rate | 24.3% | 22.1% |
| Blended statutory tax rate | 28.2% | 28.1% |

Income tax expense decreased by $76.9 million to a $62.2 million benefit in the three months ended March 31, 2023 from a $14.6 million expense in the three months ended March 31, 2022. The decrease in income tax expense, which resulted in a tax benefit for the three months ended March 31, 2023, was primarily due to lower income before income tax expense, which decreased to a loss as a consequence of losses realized on sales of available for sale securities. For additional information related to the Company’s income taxes see *Note 12, “Income Taxes”* within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

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

### Comparison of the three months ended March 31, 2023 and 2022

*(In thousands)*

|  | As of and for the three months ended March 31, 2023 Banking Business | Insurance Agency Business | Other/ Eliminations | Total | 2022 Banking Business | Insurance Agency Business | Other/ Eliminations | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net interest income | $138,309 | $— | $— | $138,309 | $128,124 | $— | $— | $128,124 |
| Provision for (release of) allowance for loan losses | 25 | — | — | 25 | (485) | — | — | (485) |
| Net interest income after provision for loan losses | 138,284 | — | — | 138,284 | 128,609 | — | — | 128,609 |
| Noninterest (loss) income | (310,206) | 32,044 | (168) | (278,330) | 18,137 | 28,449 | (171) | 46,415 |
| Noninterest expense | 95,946 | 21,588 | (1,240) | 116,294 | 90,446 | 19,473 | (1,053) | 108,866 |
| (Loss) income before income tax expense | (267,868) | 10,456 | 1,072 | (256,340) | 56,300 | 8,976 | 882 | 66,158 |
| Income tax (benefit) expense | (65,193) | 2,949 | — | (62,244) | 12,108 | 2,534 | — | 14,642 |
| Net (loss) income | $(202,675) | $7,507 | $1,072 | $(194,096) | $44,192 | $6,442 | $882 | $51,516 |
| Total assets | $22,579,422 | $218,582 | $(77,474) | $22,720,530 | $22,695,895 | $211,401 | $(71,224) | $22,836,072 |
| Total liabilities | $20,174,053 | $44,828 | $(77,474) | $20,141,407 | $19,848,995 | $49,909 | $(71,224) | $19,827,680 |

### Banking Segment

- Interest and dividend income increased by $57.4 million, or 43.7%, to $188.9 million for the three months ended March 31, 2023 from $131.5 million for the three months ended March 31, 2022 which was primarily driven by an increase in the yields on interest-earning assets. The overall increase in our yield on interest-earning assets, which increased 112 basis points from 2.48% during the three months ended March 31, 2022 to 3.60% during the three months ended March 31, 2023, was partially offset by a decrease in average interest-earning assets, which resulted in an increase in interest income. For additional discussion, refer to the earlier “*Interest and Dividends”* section.
- Interest expense increased by $47.2 million to $50.6 million during the three months ended March 31, 2023 from $3.4 million during the three months ended March 31, 2022, which was driven by an increase in the rates paid on deposits. There was an increase of 122 basis points in rates paid on deposits, which increased from 0.11% during the three months ended March 31, 2022 to 1.33% during the three months ended March 31, 2023. For additional discussion, refer to the earlier “*Interest and Dividends”* section.
- We recorded a provision for loan losses of less than $0.1 million for the three months ended March 31, 2023, compared to a release of $0.5 million for the three months ended March 31, 2022. We determined a provision to be appropriate due to overall increased loan balances during the three months ended March 31, 2023 in comparison to the first quarter of 2022. During the three months ended March 31, 2022 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 on sales of securities available for sale, net, were $333.2 million during the three months ended March 31, 2023 which represents an increase of $331.0 million compared to a loss of $2.2 million during the three months ended March 31, 2022. The loss on sale was due to the decision by management to sell certain available for sale securities in March 2023, the majority of which were in a net unrealized loss position at the time of sale.
- Also contributing to the decrease in noninterest income during the three months ended March 31, 2023 was a $3.3 million decrease in our interest rate swap income resulting in a loss position, primarily as a result of an unfavorable mark-to-market adjustment during the three months ended March 31, 2023 compared to a favorable mark-to-market adjustment during the three months ended March 31, 2022.
- Partially offsetting the decrease in noninterest income was income from investments held in rabbi trust accounts, which were $2.5 million for the three months ended March 31, 2023 which represents an increase of $6.5 million from a $3.9 million loss recorded for the three months ended March 31, 2022. The increase was primarily a result of a favorable mark-to-market adjustment on equity securities held in these accounts during the three months ended March 31, 2023.
- Noninterest expense increased $5.5 million, or 6.1%, to $95.9 million during the three months ended March 31, 2023 from $90.4 million during the three months ended March 31, 2022. This increase was driven primarily by a $3.0 million increase in regular salaries and wages expenses, a $2.8 million increase in other pension expenses, a $1.6 million increase in the legacy long-term cash-based incentive plan compensation expense, and a $1.4 million increase in the provision for credit losses on off balance sheet exposures. Partially offsetting these increases were a $1.9 million decrease in data processing expenses, a $1.8 million decrease in office occupancy and equipment expenses, and a $1.0 million decrease in bad check losses. Refer to the earlier “*Noninterest Expense”* section for additional discussion of these items.

### Insurance Agency Segment

- Noninterest income related to our insurance agency business increased by $3.6 million, or 12.6%, to $32.0 million during the three months ended March 31, 2023 from $28.4 million during the three months ended March 31, 2022. This increase is primarily attributable to increased commission income. Refer to the earlier “*Noninterest Income”*section for additional discussion of this items.
- Noninterest expense related to our insurance agency business increased by $2.1 million, or 10.9%, to $21.6 million during three months ended March 31, 2023 from $19.5 million during three months ended March 31, 2022. The increase in noninterest expense for the three months ended March 31, 2023, compared to the three months ended March 31, 2022 was primarily due to an increase in benefit expense related to our DC SERP and increases in salaries and wages expenses. Refer to the earlier “*Noninterest Expense”*section for additional discussion of this items

### Management of Market Risk

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

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

As noted in the earlier section titled “*Outlook and Trends”* and the later section titled “*Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”* in this Item 2, we completed a balance sheet repositioning during the three months ended March 31, 2023 by selling a portion of our AFS investment securities portfolio for total proceeds of $1.9 billion. Such securities were lower-yielding U.S. Agency bonds and government-sponsored residential and commercial mortgage-backed securities which were purchased when interest rates were historically low. As a result of such sales, we expect our net interest margin to be less susceptible to decline as a result of future increases to the federal funds rate which may occur. Prior to the sale, we placed reliance on wholesale funding, including brokered deposits, to meet our loan-growth needs which have a higher cost than deposits originating within the markets we serve and are not our preferred sources of funding. Subsequent to the sale, our reliance on such funding sources is lessened as we believe we have a stronger liquidity position.

***Net Interest Income.*** We analyze our sensitivity to changes in interest rates through a net interest income model. We estimate what our net interest income would be for a 12-month period assuming no changes in interest rates. We then estimate what the net interest income would be for the same period under the assumption that market rates increase or decrease instantaneously by +100, +200, +400, -100, -200, and -400 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. We do not model negative interest rate scenarios.

The tables below set forth, as of March 31, 2023 and December 31, 2022, the calculation of the estimated changes in our net interest income on an FTE basis that would result from the designated immediate changes in market interest rates:

### Interest Rate Sensitivity

*(Dollars in thousands)*

| Change in Interest Rates (basis points) (1) | As of March 31, 2023 Net Interest Income Year 1 Forecast | Year 1 Change from Level |
| ---: | ---: | ---: |
| 400 | $610,178 | (1.8)% |
| 200 | 615,483 | (0.9)% |
| 100 | 617,211 | (0.7)% |
| Flat | 621,337 | —% |
| (100) | 621,173 | —% |
| (200) | 610,142 | (1.8)% |
| (400) | 563,371 | (9.3)% |
|  | **As of December 31, 2022** |  |
| **Change in Interest Rates (basis points) (1)** | **Net Interest Income Year 1 Forecast** | **Year 1 Change from Level** |
|  | (Dollars in thousands) |  |
| 400 | $528,247 | (8.4)% |
| 300 | 539,739 | (6.4)% |
| 200 | 552,231 | (4.2)% |
| Flat | 576,477 | —% |
| (100) | 585,728 | 1.6% |
| (200) | 586,771 | 1.8% |

(1) Assumes an immediate uniform change in market interest rates at all maturities, except in the down 400 basis point scenario as it relates to information as of March 31, 2023 and the down 200 basis point scenario as it relates to information as of December 31, 2022, where rates are floored at zero at all maturities.

As of March 31, 2023, our models, as indicated above, show a decline in our net interest income in rising rate and falling rate scenarios. In the rising rate scenarios, funding costs are modeled to rise faster than the yield on earning assets, due, in part, to the mix of funding which has shifted towards higher rate paying deposits and wholesale funding in recent quarters. In the falling rate scenarios, particularly the 400 basis point decrease scenario, faster prepayment speeds on certain loan and investment types are modeled to reduce earning asset yields at a faster rate than the rate of decline in funding costs. The tables above indicate that at March 31, 2023 and December 31, 2022, in the event of an instantaneous parallel 200 basis points increase in rates, we would have experienced a 0.9% decrease and a 4.2% decrease, respectively, in net interest income on an FTE basis, and in the event of an instantaneous 200 basis points decrease in interest rates, we would have experienced a 1.8% decrease and a 1.8% increase at March 31, 2023 and December 31, 2022, respectively, in net interest income, on an FTE basis. We also modeled an instantaneous 400 basis point decrease in interest rates at March 31, 2023, the results of which showed we would have experienced a 9.3% decrease in net interest income on an FTE basis. We did not model an instantaneous 400 basis point decrease in interest rates at December 31, 2022 given the lower level of interest rates compared to March 31, 2023. 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 14, “Derivative Financial Instruments”* within the Notes to the Unaudited 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 tables below represent an analysis of our interest rate risk as measured by the estimated changes in our EVE, resulting from an instantaneous and sustained parallel shift in the yield curve (+100, +200, +400 basis points and -100, -200, and -400 basis points) at March 31, 2023 and (+200, +300, +400 basis points and -100, -200 basis points) at December 31,

2022\. 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.

Our earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines and by affecting the amount of unrealized gains and losses from securities held in rabbi trusts which are partially offset by a corresponding but opposite impact to the amount of employee benefit expense associated with the change in value of plan assets.

### EVE Interest Rate Sensitivity

*(Dollars in thousands)*

| Change in Interest Rates (basis points) (1) Estimated EVE (2) | Estimated Increase (Decrease) in EVE from Level Amount | As of March 31, 2023 Percent | EVE as a Percentage of Total Assets (3) |  |
| ---: | ---: | ---: | ---: | ---: |
| 400 | $3,676,017 | $(595,597) | (13.9)% | 18.00% |
| 200 | 3,950,478 | (321,136) | (7.5)% | 18.47% |
| 100 | 4,085,847 | (185,767) | (4.3)% | 18.64% |
| Flat | 4,271,614 | — | — | 18.97% |
| (100) | 4,379,782 | 108,168 | 2.5% | 18.97% |
| (200) | 4,435,168 | 163,554 | 3.8% | 18.76% |
| (400) | 4,464,245 | 192,631 | 4.5% | 18.16% |

*(Dollars in thousands)*

| Change in Interest Rates (basis points) Estimated EVE (2) | Estimated Increase (Decrease) in EVE from Level Amount | As of December 31, 2022 Percent | EVE as a Percentage of Total Assets (3) |  |
| ---: | ---: | ---: | ---: | ---: |
| 400 | $3,691,963 | $(691,696) | (15.8)% | 18.48% |
| 300 | 3,834,512 | (549,147) | (12.5)% | 18.72% |
| 200 | 4,007,265 | (376,394) | (8.6)% | 19.04% |
| Flat | 4,383,659 | — | — | 19.66% |
| (100) | 4,527,743 | 144,084 | 3.3% | 19.74% |
| (200) | 4,620,994 | 237,335 | 5.4% | 19.61% |

(1) Assumes an immediate uniform change in market interest rates at all maturities, except in the down 400 basis point scenario as it relates to information as of March 31, 2023 and the down 200 basis point scenario as it relates to information as of December 31, 2022, 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) Total assets is the net present value of expected cash flows.

Certain shortcomings are inherent in the interest rate risk measurement methodologies underlying the data presented in the tables in this section. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For example, the models assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.

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

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

Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities, subject to market conditions. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan and securities prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are unencumbered cash and due from banks and securities classified as available for sale, which could be liquidated, subject to market conditions. In the future, our liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and share repurchases in which we may engage. For the next twelve months, we believe that our existing resources, including our capacity to use brokered deposits and wholesale borrowings, will be sufficient to meet the liquidity and capital requirements of our operations. We may elect to raise additional capital through the sale of additional equity or debt financing to fund business activities such as strategic acquisitions, share repurchases, or other purposes beyond the next twelve months.

At March 31, 2023, we had $2.1 billion of cash and cash equivalents, an increase of $2.0 billion from $169.5 million at December 31, 2022. The increase in cash levels was due primarily to a decrease of $2.0 billion in AFS securities from $6.7 billion at December 31, 2022 to $4.7 billion at March 31, 2023. In March 2023, we completed a balance sheet repositioning by selling lower yielding AFS securities. The sale allowed us to redeploy the proceeds in the current higher interest rate environment either through increased cash levels or the reduction of wholesale funds over time. The increased cash levels at March 31, 2023 provided strong balance sheet liquidity to support the needs of our depositors as part of our liquidity contingency planning during the uncertain environment created by the bank failures in the month of March 2023. Advances from the FHLBB were used to support ongoing operations and bolster on-balance sheet liquidity and totaled $1.1 billion and $0.7 billion at March 31, 2023 and December 31, 2022, respectively.

We participate in the IntraFi Network, which allows us to provide access to FDIC deposit insurance protection on customer deposits for consumers, businesses and public entities that exceed same-bank FDIC insurance thresholds. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. At both March 31, 2023 and December 31, 2022 we had no IntraFi Network one-way sell deposits. At March 31, 2023 and December 31, 2022, we had repurchased $863.4 million and $665.0 million, respectively, of previously sold reciprocal deposits.

Although customer deposits remain our preferred source of funds, maintaining additional sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. At March 31, 2023, we had $1.1 billion in outstanding advances and the ability to borrow up to an additional $1.5 billion. We also have the ability to borrow from the Federal Reserve Bank of Boston. At March 31, 2023, we had a $2.6 billion collateralized line of credit from the Federal Reserve Bank of Boston through the Bank Term Funding Program. The Bank Term Funding Program was created by the Federal Reserve in March 2023. At March 31, 2023 we had the ability to borrow up to $879.1 million from the Federal Reserve Bank of Boston Discount Window In addition, we were able to acquire brokered deposits at our discretion to raise additional funds. At March 31, 2023, we had $609.7 million in brokered certificates of deposit. At March 31, 2023, cash and cash equivalents were $2.1 billion and secured borrowing capacity at the Federal Reserve Bank and Federal Home Loan Bank totaled $5.0 billion, providing total liquidity sources of $7.1 billion. These liquidity sources provided 107% coverage of all customer uninsured and uncollateralized deposits, which totaled $6.7 billion, or 36% of total deposits, as of March 31, 2023.

### Sources of Liquidity

*(In thousands)*

|  | As of March 31, 2023 Outstanding | Additional Capacity | As of December 31, 2022 Outstanding | Additional Capacity |
| --- | ---: | ---: | ---: | ---: |
| IntraFi Network deposits | $863,368 | $— | $664,971 | $— |
| Brokered certificates of deposit (1) | 609,663 | — | 928,648 | — |
| Federal Home Loan Bank (2) | 1,100,952 | 1,522,215 | 704,084 | 1,976,166 |
| Federal Reserve Bank of Boston- Bank Term Funding Program (3) | — | 2,597,181 | — | — |
| Federal Reserve Bank of Boston- Discount Window (4) | — | 879,136 |  | 538,894 |
| Total | $2,573,983 | $4,998,532 | $2,297,703 | $2,515,060 |

88

(1) The additional borrowing capacity has not been assessed for this category.

(2) As of March 31, 2023 and December 31, 2022, loans have been pledged to the FHLBB with a carrying value of $4.1 billion and $3.9 billion resulting in this additional unused borrowing capacity.

(3) Securities with a carrying value of $2.6 billion at March 31, 2023 have been pledged to the Federal Reserve Bank of Boston under the Bank Term Funding Program, resulting in this additional unused borrowing capacity.

(4) Loans with a carrying value of $1.1 billion at both March 31, 2023 and December 31, 2022, and securities with a carrying value of $376.8 million at March 31, 2023 were pledged to the Discount Window, resulting in this additional borrowing capacity. No securities were pledged to the Discount Window at December 31, 2022.

We believe that advanced preparation, early detection, and prompt responses can avoid, minimize, or shorten potential liquidity crises. Our Board of Directors and our management’s Asset Liability Committee have put a liquidity contingency plan in place to establish methods for assessing and monitoring risk levels, as well as potential responses during unanticipated stress events. As part of our risk management framework, we perform periodic liquidity stress testing to assess our need for liquid assets as well as backup sources of liquidity.

***Capital Resources.*** We are subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks, the FDIC and the Federal Reserve (with respect to our consolidated capital requirements). At March 31, 2023 and December 31, 2022, 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 regulatory capital ratio of 10.0%; (2) a minimum common equity Tier 1 capital ratio of 6.5%; (3) a minimum Tier 1 capital ratio of 8.0%; and (4) a minimum of Tier 1 leverage ratio of 5.0%. Management believes that the Company met all capital adequacy requirements to which it is subject as of March 31, 2023 and December 31, 2022. There have been no conditions or events that management believes would cause a change in the Company’s categorization.

In March 2015, the FDIC issued a Financial Institution Letter (FIL-12-2015) indicating that non-advanced approaches institutions may make a one-time, permanent election to opt out of the requirement to include most components of accumulated other comprehensive income (“AOCI”) in regulatory capital. At that time, we opted to make such an election. Accordingly, unrealized gains and losses on our AFS securities portfolio are not included in regulatory capital. Consequently, the balance sheet repositioning we completed in March 2023 with the sale of AFS securities reduced our regulatory capital and related capital ratios, as the unrealized loss on such securities (which was included in AOCI and excluded from regulatory capital) was effectively reclassified to retained earnings (which is included in regulatory capital).

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

| Capital Ratios: | As of March 31, 2023 | As of December 31, 2022 |
| --- | ---: | ---: |
| Average equity to average assets (1) | 10.93% | 12.52% |
| Total regulatory capital (to risk-weighted assets) | 16.76% | 17.89% |
| Common equity Tier 1 capital (to risk-weighted assets) | 15.80% | 16.94% |
| Tier 1 capital (to risk-weighted assets) | 15.80% | 16.94% |
| Tier 1 capital (to average assets) leverage | 11.09% | 12.03% |

(1) The ratio presented as of March 31, 2023 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 March 31, 2023, there were no material changes in our contractual obligations, other commitments and contingencies from those disclosed in our 2022 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 March 31, 2023, we had $5.7 billion of commitments to originate loans, comprised of $3.3 billion of commitments under commercial loans and lines of credit (including $702.1 million of unadvanced portions of construction loans), $2.1 billion of commitments under home equity loans and lines of credit, $199.5 million in standard overdraft coverage commitments, $20.9 million of unfunded commitments related to residential real estate loans and $60.5 million in other consumer loans and lines of credit. In addition, at March 31, 2023, we had $62.8 million in standby letters of credit outstanding. We also had $10.5 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, 1,525 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 March 31, 2023, 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 March 31, 2023 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 and/or hybrid. The Company is continually monitoring and assessing the impact of working remotely and/or hybrid on the Company’s internal controls to minimize the impact to their design and operating effectiveness.

## Risk factors

As filed, 271 characters.

For information regarding the Company’s risk factors, see Part I, Item 1A “*Risk Factors”* in our 2022 Form 10-K. 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 2022 Form 10-K.

Filed May 8, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-016268. Last ingested by Listed: Nov 6, 2026, 12:48 ET. No prices; not investment advice.