Eastern Bankshares, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 September 30, 2023, and our results of operations for the three and nine months ended September 30, 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:

• changes in regional, national or international macroeconomic conditions, including changes in inflation, recessionary pressures or interest rates in the United States, including potential impacts resulting from delays in raising or a failure to raise the national debt ceiling;
• 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;
• general business and economic conditions on a national basis and in the local markets in which we operate, including those impacting credit quality;
• changes in customer behavior and perceptions;
• 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, including COVID-19;
• 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 be timely completed or at all and may not produce results at levels or within time frames originally anticipated, including due to delays in obtaining regulatory approvals or to the conditions associated with such approvals;
• risks arising from unexpected expenses or challenges related to the Cambridge acquisition and integration;
• 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 this Quarterly Report on Form 10-Q and 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.

In September 2023, following the approval of the sale of our insurance agency business by our board of directors, we reclassified our insurance agency business as held for sale in connection with a planned disposition of the business. A business is classified as held for sale when management, having the authority to approve the action, commits to a plan to sell the business, the sale is probable to occur during the next 12 months at a price that is reasonable in relation to its current fair value and certain other criteria are met. In accordance with ASC 205, Presentation of Financial Statements, we classify operations as discontinued when they meet all the criteria to be classified as held for sale and when the sale represents a strategic shift that will have a major impact on our financial condition and results of operations. Accordingly, the Consolidated

Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash flows present discontinued operations for the current period and were adjusted on a retrospective basis for prior periods and assets of discontinued operations were measured at their lower of cost or fair value. For further discussion, refer to Note 19, “Discontinued Operations” 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 and nine months ended September 30, 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 $21.1 billion and $22.6 billion at September 30, 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. Our 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.

In recent years, we managed our business under two business segments: our banking business and our insurance agency business. On September 19, 2023, we entered into an agreement to sell our insurance agency business and, consequently, reclassified substantially all of the related assets and certain liabilities to “assets and liabilities of discontinued operations,” respectively, on our Consolidated Balance Sheets and the results of discontinued operations were reclassified to “net (loss) income from discontinued operations” on our Consolidated Statements of Income. For additional discussion of discontinued operations, refer to Note 19, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. The following discussion excludes amounts reported as discontinued operations.

Net income and net loss from continuing operations for the three and nine months ended September 30, 2023 computed in accordance with GAAP were $63.5 million and $94.2 million, respectively, as compared to net income of $52.8 million and $145.6 million for the three and nine months ended September 30, 2022, respectively, representing an increase of 20.2% and a decrease of 164.7%, respectively. The increase in net income for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to a net income tax benefit recognized for the three months ended September 30, 2023 compared to income tax expense recognized for the three months ended September 30, 2022, which more than offset the combined effect of a decline in net interest income and an increase in noninterest expenses during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Refer to the later sections titled “Results of Operations” within this Item 2 for additional discussion. The net loss for the nine months ended September 30, 2023 and resulting decline from net income during the nine months ended September 30, 2022 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 income from continuing operations and net loss continuing operations for the three and nine months ended September 30, 2023, respectively, and net income from continuing operations for the three and nine months ended September 30, 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 and nine months ended September 30, 2023 was $52.1 million and $146.3 million, respectively, compared to operating net income for the three and nine months ended September 30, 2022 of $53.6 million and $151.3 million, respectively, representing decreases of 2.8% and 3.3%, respectively. These decreases were primarily due to decreased noninterest income on an operating basis along with increased noninterest expense on an operating basis for both the three and nine months ended compared to the three and nine months ended September 30, 2022. See “Non-GAAP Financial Measures” and “Results of Operations” within this Item 2 for a reconciliation of operating net income to net income on a GAAP basis and further discussion of noninterest income and noninterest expense.

Banking Business

Our banking business offers a range of commercial, retail, wealth management and banking service, 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. Our financial condition and results of operations 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, primarily to originate loans and to invest in securities. Our lending focuses on the following categories of loans:

Commercial Lending

• Commercial and industrial: Loans in this category consist of revolving and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As of September 30, 2023 and December 31, 2022, we had total commercial and industrial loans of $3.1 billion and $3.2 billion, respectively, representing 22.2% and 23.2%, respectively, of our total loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Our primary focus for commercial and industrial loans is middle-market companies located in the markets we serve. In addition, we participate in the syndicated loan market and the SNC Program. As of September 30, 2023 and December 31, 2022, our SNC Program portfolio totaled $666.9 million and $685.8 million, respectively, or 21.6% and 21.9%, respectively, of our commercial and industrial portfolio, and 46.7% and 37.3%, respectively, of our SNC Program portfolio were loans to borrowers headquartered in our primary lending market. During the three and nine months ended September 30, 2023 we sold $191.8 million of SNC loans in our commercial and industrial portfolio. We did not sell any SNC loans during the three and nine months ended September 30, 2022. 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 September 30, 2023 and December 31, 2022, our ABL Portfolio totaled $225.9 million and $208.8 million, respectively, or 7.3% and 6.6%, respectively, of our commercial and industrial portfolio.
• As of September 30, 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, respectively, or 29.1% and 31.7%, respectively, of our commercial and industrial 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 September 30, 2023 and December 31, 2022, we had total commercial real estate loans of $5.4 billion and $5.2 billion, representing 38.8% and 38.0%, respectively, of our total loans as of each period end. As of both September 30, 2023, and December 31, 2022, owner occupied loans totaled $0.9 billion, representing 16.8% 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 $590.7 million and $608.0 million as of September 30, 2023 and December 31, 2022, respectively, representing 10.9% and 11.8%, respectively, of our commercial real estate portfolio.
• 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 September 30, 2023 and December 31, 2022, we had total commercial construction loans of $382.6 million and $336.3 million, respectively, representing 2.8% and 2.5%, respectively, of our total loans. Our commercial construction loan portfolio also included IRB loans as of $47.5 million and $36.9 million as of September 30, 2023 and December 31, 2022, respectively, representing 12.4% and 11.0% respectively, of our commercial construction portfolio.
• 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 September 30, 2023 and December 31, 2022, we had total business banking loans of $1.1 billion, representing 7.8% and 8.0% of our total loans for each period end, respectively. In this category, commercial and industrial loans and commercial real estate loans totaled $187.0 million and $900.8 million, respectively, as of September 30, 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 September 30, 2023 and December 31, 2022, we had total residential real estate loans of $2.6 billion and $2.5 billion, respectively, representing 18.4% and 18.1%, respectively, of our total loans. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit repayment history, financial resources including cash reserves and the value of the collateral. We maintain policy standards for minimum credit scores and cash reserves and maximum loan-to-value consistent with a “prime” portfolio. Collateral consists of mortgage liens on residential dwellings. We do not originate or purchase sub-prime or other high-risk loans. Residential real estate loans are originated either for sale to investors or to retain in our loan portfolio. Decisions about whether to sell or retain residential real estate loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and our capital needs. During the three and nine months ended September 30, 2023, residential real estate mortgage loan originations were $115.3 million and $253.0 million, respectively, of which $14.7 million and $36.6 million, respectively, were sold on the secondary markets. Comparatively, during the three and nine months ended September 30, 2022, residential real estate mortgage loan originations were $119.8 million and $397.5 million, respectively, of which $8.1 million and $53.2 million, respectively, 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 nine months ended September 30, 2023, we purchased $32.0 million of residential real estate mortgage loans. We did not purchase any residential real estate mortgage loans during the three months ended September 30, 2023. During the three and nine months ended September 30, 2022, we purchased $79.9 million of residential real estate loans.

Consumer Lending

• Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of both September 30, 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 September 30, 2023 and December 31, 2022, we had total other consumer loans of $219.7 million and $194.1 million, respectively, representing 1.6% and 1.4%, respectively, of our total loans. Our policy and underwriting in this category include the following factors, among others: income sources and reliability, credit histories, term of repayment and collateral value, as applicable.

Other 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 September 30, 2023 and December 31, 2022, we held $3.2 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 and nine months ended September 30, 2023, we had noninterest income of $6.2 million and $18.1 million, respectively, from providing these services compared to $5.8 million and $18.0 million for the three and nine months ended September 30, 2022, respectively.

Acquisitions

Proposed Acquisition

On September 19, 2023, we entered into a definitive merger agreement with Cambridge Bancorp (“Cambridge”) and Cambridge Trust Company (“Cambridge Trust”) pursuant to which we have agreed to acquire Cambridge through a merger, with the Company as the surviving entity (the “Merger Agreement”). Under the Merger Agreement, each share of Cambridge common stock will be exchanged for 4.956 shares of our common stock. The transaction is intended to qualify as a tax-free reorganization for federal income tax purposes and will provide Cambridge shareholders with a tax-free exchange of their shares of Cambridge common stock in exchange for our common stock as the consideration they will receive in the merger. We anticipate issuing approximately 39.4 million shares of our common stock in the merger. Based upon the closing price of our common stock on September 18, 2023 of $13.41 per share, the transaction is valued at approximately $528.1 million. The closing of the Cambridge acquisition, which is expected to occur in the first quarter of 2024, remains subject to required Company shareholder approval, Cambridge shareholder approval, regulatory approvals and satisfaction of other customary closing conditions set forth in the Merger Agreement.

Cambridge, a Massachusetts corporation, is a federally registered bank holding company headquartered in Cambridge, Massachusetts. Cambridge Trust, a Massachusetts-chartered trust company formed in 1890, is a wholly-owned subsidiary of Cambridge that operates through a network of 22 full-service banking offices in eastern Massachusetts and New Hampshire with $5.5 billion in total assets and $4.6 billion in deposits as of September 30, 2023. Cambridge’s core services also include wealth management. Through its wealth management group, which has five offices in Massachusetts and New Hampshire, it offers comprehensive investment management, as well as trust administration, estate settlement, and financial planning services. Cambridge had assets under management and administration of approximately $4.3 billion as of September 30, 2023.

Outlook and Trends

Sale of Insurance Operations

On September 19, 2023, we announced that we had entered into an agreement with a third-party insurance company to sell substantially all of the assets and transfer certain liabilities of our insurance agency business for a gross purchase price of $515.0 million, subject to customary post-closing working capital adjustments. Management made the decision to sell the insurance agency business to recognize the valuation premium of the business, while allowing us to focus on growth and strategic initiatives of our core banking business. The sale closed on October 31, 2023. The proceeds from the sale will primarily be used to pay down our short-term FHLB borrowings. Refer to Note 19, “Discontinued Operations” and Note 20, “Subsequent Events” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q for additional discussion.

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 5.25% to 5.50% on July 26, 2023, when the FOMC stated that it will continue to assess additional information and its implications for monetary policy. At its most recent meeting on November 1, 2023, the FOMC decided to maintain the target range for the federal funds rate at the range set following its July 26, 2023 meeting. The FOMC indicated that 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 33% of the outstanding principal balance of our loans as of September 30, 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 September 30, 2023, representing approximately 17.2% 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. 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, which began in March 2022, 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. During the first quarter of 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 reduce wholesale funds and, in turn, improve our funding betas.

The following chart depicts our funding betas and cost of interest bearing liabilities for the previous twelve months as of September 30, 2023:

(1) 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.

(2) 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.

The above chart demonstrates a flattening of our liabilities costs immediately following the sale of AFS securities in March 2023 as the cash generated from the sale was used to reduce wholesale funding.

Bank Closures and Related FDIC Matters

On March 12 and 13, 2023, following the closures of Silicon Valley Bank (“SVB”) and Signature Bank and the appointment of the FDIC as the receiver for those banks, the FDIC announced that, under the systemic risk exception set forth in the Federal Deposit Insurance Act (“FDIA”), all insured and uninsured deposits of those banks were transferred to the respective bridge banks for SVB and Signature Bank.

The FDIC also announced that, as required by the FDIA, any losses to the Deposit Insurance Fund (“DIF”) to support uninsured depositors would be recovered by a special assessment. On May 22, 2023, the FDIC published in the Federal Register a proposed rule that would impose special assessments to recover the loss to the DIF arising from the protection of uninsured depositors in connection with the systemic risk determination announced on March 12, 2023, following the closures of SVB and Signature Bank, as required by the FDIA. The assessment base for the special assessments would be equal to an insured depository institution’s (“IDI”) estimated uninsured deposits, reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits from the IDI, or for IDIs that are part of a holding company with one or more subsidiary IDIs, at the banking organization level. The FDIC has proposed to collect special assessments at an annual rate of approximately 12.5 basis points, over eight quarterly assessment periods, which it estimates will result in total revenue of $15.8 billion. Because the estimated loss pursuant to the systemic risk determination will be periodically adjusted, the FDIC would retain the ability to cease collection early, extend the special assessment collection period one or more quarters beyond the initial eight-quarter collection period to collect the difference between actual or estimated losses and the amounts collected, and impose a final shortfall special assessment on a one-time basis after the receiverships for SVB and Signature Bank terminate. The FDIC is proposing an effective date of January 1, 2024, with special assessments collected beginning with the first quarterly assessment period of 2024 (i.e., January 1 through March 31, 2024, with an invoice payment date of June 28, 2024).

We estimate, based on the FDIC’s May 2023 proposed rule, that the total pre-tax amount of the Bank’s special assessment will be approximately $10.0 million, although the timing, amount and allocation of that special assessment remains subject to the provisions of the FDIC’s final rule, when effective, as well as any actions by the FDIC, as described above, to cease collection early, extend the collection period, and impose a final shortfall special assessment. The special assessment is expected to be recognized, in full, in the reporting period in which the final rule is published.

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 are non-recurring or infrequent and/or 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. Except as otherwise indicated, the information presented within this section excludes discontinued operations. Refer to Note 19, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for further discussion regarding discontinued operations.

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, (ix) certain discrete tax items, and (x) net income from discontinued operations. There were no expenses indirectly associated with OREO gains or losses, impairment charges on tax credit investments and associated tax credit benefits, or non-cash pension settlement charges during the periods presented in this Quarterly Report on Form 10-Q.

We also present tangible shareholders’ equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, average tangible shareholders’ equity, the ratios of net income (loss) from continuing operations and operating net income to average tangible shareholders’ equity and tangible book value per share, each of which excludes the impact of goodwill and other intangible assets, as we believe these financial measures provide investors with the ability to further assess our performance, identify trends in our core business and provide a comparison of our capital adequacy to other companies. We have included the tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends.

Our non-GAAP financial measures should not be considered as an alternative or substitute to GAAP net income (loss) from continuing operations, 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)

(1) Comprised of merger and acquisition expenses incurred related to our acquisition of Cambridge. Merger and acquisition expenses previously reported for the three and nine months ended September 30, 2022 related to acquisitions by Eastern Insurance Group were excluded from the above table as they were reclassified to discontinued operations. Refer to Note 19, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q for additional discussion.

(2) The net tax benefit associated with these items is generally determined by assessing whether each item is included or excluded from net taxable income and applying our combined statutory tax rate only to those items included in net taxable income. The net tax benefit amount for the nine months ended September 30, 2023 primarily resulted from the sale of securities classified as available for sale in the first quarter of 2023, 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 first quarter of 2023, to Eastern Bank, and the net effect of establishing a valuation allowance and the subsequent reversal of the federal portion of such valuation allowance. Upon the sale of securities in the first quarter of 2023, we established a valuation allowance of $17.4 million, which is included in the net tax benefit amount, as it was determined at that time that 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. Following the execution of the agreement to sell our insurance agency business in September 2023 and our estimate of the resulting capital gain, which is described in the earlier “Outlook and Trends” section in this Item 2 and is estimated to be sufficient to realize federal capital losses related to the securities sale, we reversed the associated federal valuation allowance previously established as we had determined it was more-likely-than-not that the entirety of the federal deferred tax asset related to the loss on such securities would be realized. The tax expense resulting from the sale of the insurance agency business is expected to be recognized in the fourth quarter following the closing of the sale. The net tax benefit for the three months ended September 30, 2023 was primarily due to the reversal of the remainder of the federal portion of the valuation allowance described above and a net tax benefit associated with a change in management’s estimate of annual pre-tax loss for purposes of determining our quarterly income tax provision.

The following table summarizes the impact of non-core items with respect to our total revenue (loss), noninterest income (loss), noninterest expense, and the efficiency ratio, which reconciles to the most directly comparable respective GAAP financial measure, for the periods indicated:

(Dollars in thousands)

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 and includes discontinued operations, as of the dates indicated:

(Dollars in thousands, except per share data)

74

(1) Includes goodwill and other intangibles included in assets of discontinued operations within the Company’s Consolidated Balance Sheets.

The following table summarizes the calculation of our average tangible shareholders’ equity and ratio of net income (loss) from continuing operations 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)

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

(2) Includes goodwill and other intangibles included in assets of discontinued operations within the Company’s Consolidated Balance Sheets.

(3) Presented on an annualized basis.

Financial Position

The information presented within this section excludes discontinued operations. Refer to Note 19, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q for further discussion regarding discontinued operations.

Summary of Financial Position

(Dollars in thousands)

Cash and cash equivalents

Total cash and cash equivalents increased by $439.3 million, or 259.2%, to $608.8 million at September 30, 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 first quarter of 2023, proceeds from maturities and principal paydowns of AFS and HTM securities of $350.9 million and proceeds from the sale of commercial and industrial loans during the three months ended September 30, 2023 of

$189.3 million. Partially offsetting this increase was a decrease in deposits of $1.6 billion and an increase in gross loans of $343.7 million for the nine months ended September 30, 2023. For further discussion of the change in securities, loans, and deposits, refer to the later “Securities,” ”Loans,” and ”Deposits,” sections 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 September 30, 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)

Our securities portfolio has decreased $2.5 billion, or 34.2%, to $4.7 billion at September 30, 2023 from $7.2 billion at December 31, 2022. This decrease was primarily due to the completion of a 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 September 30, 2023 or December 31, 2022.

A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled $170.4 million at September 30, 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 September 30, 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 September 30, 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

77

(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 category.

The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a fully-taxable equivalent (“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 $343.7 million, or 2.5%, to $13.9 billion at September 30, 2023 from $13.6 billion at December 31, 2022. The increase was primarily due to increases in our commercial real estate and residential real estate portfolio balances and was partially offset by a decrease in our commercial and industrial portfolio.

• Our commercial real estate portfolio increased by $241.6 million from December 31, 2022 to September 30, 2023 which was primarily attributable to an increase of $251.9 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 $14.2 million which was due to net paydowns of such loans during the nine months ended September 30, 2023.
• Our residential real estate portfolio increased by $90.0 million during the nine months ended September 30, 2023. The increase in residential real estate loan balances was primarily due to fewer sales of originated loans resulting in more loans being held for investment, and purchases of loans which totaled $32.0 million during the nine months ended September 30, 2023.
• Our commercial and industrial portfolio decreased by $63.4 million from December 31, 2022 to September 30, 2023 which was primarily due to sales of commercial and industrial participation loans of $191.8 million during the nine months ended September 30, 2023. This decrease was partially offset by new loan originations within the commercial and industrial portfolio which were primarily funded with the proceeds from the sales of loans.

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

Loan Portfolio Composition

(In thousands)

We believe that our commercial loan portfolio composition is relatively diversified in terms of industry sectors, property types and various lending specialties, and it is concentrated in the New England geographical area, with 83.6% of our commercial loans in Massachusetts and New Hampshire as of September 30, 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 3.5% and 2.2% of total commercial loans outstanding at September 30, 2023 and December 31, 2022, respectively. This increase was driven by several risk rating downgrades of loans in the commercial and industrial and commercial real estate portfolios.

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

The delinquency rate of our total loan portfolio improved to 0.38% at September 30, 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

As a general rule, loans more than 90 days past due with respect to principal or interest are classified as non-accrual loans. However, based on our assessment of collateral and/or payment prospects, certain loans that are more than 90 days past due may be kept on an accruing status. Income accruals are suspended on all non-accrual loans and all previously accrued and uncollected interest is reversed against current income. A loan is expected to remain on non-accrual status until it becomes current with respect to principal and interest, the loan is liquidated, or the loan is determined to be uncollectible and is charged-off against the allowance for loan losses.

Non-performing assets (“NPAs”) are comprised of non-performing loans (“NPLs”), OREO and non-performing securities. NPLs consist of non-accrual loans and loans that are more than 90 days past due but still accruing interest. OREO consists of real estate properties, which primarily serve as collateral to secure our loans, that we control due to foreclosure. These properties are recorded at the fair value less estimated costs to sell on the date we obtain control. Any write-downs to the cost of the related asset upon transfer to OREO to reflect the asset at fair value less estimated costs to sell is recorded through the allowance for loan losses.

NPLs increased $8.9 million, or 23.0%, to $47.5 million at September 30, 2023 from $38.6 million at December 31, 2022. NPLs as a percentage of total loans increased to 0.34% at September 30, 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 September 30, 2023 and December 31, 2022.

The total amount of interest recorded on NPLs during both the nine months ended September 30, 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 $3.8 million and $2.7 million for the nine months ended September 30, 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 September 30, 2023 of loans modified during the three and nine months ended September 30, 2023, determined in accordance with ASU 2022-02, which were determined to be modifications to borrowers experiencing financial difficulty was $2.9 million and $7.0 million, respectively. As of September 30, 2023, there were no loans that had been modified to borrowers experiencing financial difficulty during the nine months ended September 30, 2023 and which had 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 and nine months ended September 30, 2022 which were determined to be TDRs, determined in accordance with previous accounting guidance in effect through December 31, 2022, totaled $5.7 million and $9.6 million, respectively. As of

September 30, 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 nine months ended September 30, 2022.

Our policy is that 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 September 30, 2023 and December 31, 2022, the carrying amount of PCD loans was $50.4 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 $123.1 million, or 65.8%, to $310.1 million at September 30, 2023 from $187.0 million at December 31, 2022. These loans as a percentage of total loans increased to 2.2% at September 30, 2023 from 1.4% at December 31, 2022. The increase in potential problem loans from December 31, 2022 to September 30, 2023 was primarily due to the downgrade of certain commercial and industrial and commercial real estate loans during the nine months ended September 30, 2023, including certain commercial real estate loans collateralized by properties in the office risk segment. Refer to the below “Commercial Real Estate Office Exposure” section of this Item 2 for additional information.

Commercial Real Estate Office Exposure. Our total office-related commercial real estate (“CRE”) loans (which is comprised of loans within our commercial real estate and construction portfolios that are secured by office space, medical office space, and mixed-use properties where rental income is primarily from office space) totaled $832.3 million and $819.3 million as of September 30, 2023 and December 31, 2022, respectively.

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 September 30, 2023, three of these loans, which had a total recorded investment balance of $25.8 million, were on non-accrual status and had transitioned to non-accrual status during the three months ended September 30, 2023. As of December 31, 2022, none of these loans were on non-accrual status.

The following table sets forth the unpaid principal balance of office-related CRE loans by loan segment and credit quality indicator as of the dates indicated:

(In thousands)

The following table sets forth the unpaid principal balance of office-related CRE loans by loan segment and collateral use type as of the dates indicated:

(In thousands)

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 Sheets.

The allowance for loan losses increased by $12.9 million, or 9.1%, to $155.1 million, or 1.12% of total loans, at September 30, 2023 from $142.2 million, or 1.05% of total loans at December 31, 2022. The increase in the allowance for loan losses was primarily the result of additional reserves required due to increased loan balances, an increase in reserve rates for commercial real estate loans collateralized by properties in the office risk segment, and increased specific reserve balances, particularly as they relate to several commercial real estate loans collateralized by properties in the office risk segment which transitioned to non-accrual status during the three months ended September 30, 2023. Partially offsetting these increases in the allowance for loan losses, was 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 and 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)

(1) Average loan balances exclude loans held for sale

Non-accrual loans increased $13.5 million, or 39.8%, to $47.5 million at September 30, 2023 from $34.0 million at September 30, 2022, primarily due to an increase in commercial real estate non-accrual loans of $25.8 million and was partially offset by a decrease in commercial and industrial non-accrual loans of $11.8 million. Non-accrual commercial real estate loans increased due to several loans, which are collateralized by properties in the office risk segment, transitioning to non-accrual status during the three months ended September 30, 2023. Two such loans were delinquent less than 30 days as of September 30, 2023. Non-accrual commercial and industrial loans decreased primarily due to payoffs and curing of delinquency of such loans, which included the payoff during the nine months ended September 30, 2023 of one commercial and industrial loan which was on non-accrual and had a balance of $7.2 million as of September 30, 2022. For additional information regarding the credit quality of our loans, 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.

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)

(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.

Separately, during the nine months ended September 30, 2023, we increased by $1.7 million our reserve on unfunded lending commitments, which was primarily due to an increase in the total exposure on unfunded lending commitments. This increase contributed to an increase in our non-interest expense during the nine months ended September 30, 2023.

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 $37.1 million and $41.4 million at September 30, 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 decrease in FHLB stock is due to decreased borrowings.

Goodwill and other intangible assets

The balance of our goodwill and core deposit intangible asset was $566.7 million and $568.0 million at September 30, 2023 and December 31, 2022, respectively, which excludes goodwill and other intangible assets included in discontinued operations. We did not record any impairment to our goodwill or core deposit intangible asset during the nine months ended September 30, 2023. For discussion of the impairment testing performed as of September 30, 2023, see Note 6, “Goodwill and Other Intangibles” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.

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 funding 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)

(1) Brokered certificates of deposit are included in total certificates of deposit and amounted to $394.1 million and $928.6 million at September 30, 2023 and December 31, 2022, respectively.

Deposits decreased by $1.6 billion, or 8.2%, to $17.4 billion at September 30, 2023 from $19.0 billion at December 31, 2022. This decrease was primarily the result of an overall decline in deposits following the failure of several banks in early 2023, as discussed in the earlier “Outlook and Trends” section in this Item 2, as well as industry-wide competition for deposits and a decrease in brokered certificates of deposit of $534.5 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 September 30, 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 $1.1 billion and $0.9 billion, respectively, to certificates of deposit resulting in a net increase in certificates of deposit. This shift in deposit mix during the nine months ended September 30, 2023 was due primarily to increases in rates paid on certificates of deposit, which attracted depositors to such products.

The Bank’s estimate of total uninsured deposits was $7.4 billion and $9.0 billion at September 30, 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 $5.7 billion and $7.3 billion at September 30, 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)

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)

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 decreased by $25.5 million to $715.4 million at September 30, 2023 compared to $740.8 million at December 31, 2022. The decrease was primarily due to a decrease in FHLB short-term advances. 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

(In thousands)

Results of Operations

The information presented within this section excludes discontinued operations. Refer to Note 19, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q for further discussion regarding discontinued operations.

Summary of Results of Operations

(Dollars in thousands)

Comparison of the three and nine months ended September 30, 2023 and 2022

Interest and Dividend Income

Interest and dividend income increased by $44.3 million, or 28.1%, to $202.2 million during the three months ended September 30, 2023 from $157.8 million during the three months ended September 30, 2022. The increase was primarily a result of an increase in the yield on average interest-earning assets which increased by 107 basis points compared with the three months ended September 30, 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 by $1.3 billion, or 5.9%, to $20.2 billion during the three months ended September 30, 2023 compared to $21.5 billion during the three months ended September 30, 2022, which was primarily attributable to a decrease in the average balance of securities.

• Interest income on loans increased $44.3 million, or 35.4%, to $169.3 million during the three months ended September 30, 2023 from $125.0 million during the three months ended September 30, 2022. The increase in interest income on our loans was due to an increase in our yields and an increase in the average balance. The overall yield on our loans increased 88 basis points during the three months ended September 30, 2023 in comparison to the three months ended September 30, 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 11.2%, to $13.9 billion during the three months ended September 30, 2023 from $12.5 billion during the three months ended September 30, 2022.
• Interest income on securities and other short-term investments increased slightly by $0.1 million, or 0.2%, to $32.9 million during the three months ended September 30, 2023 from $32.8 million during the three months ended September 30, 2022. The relative consistency in interest income on our securities and other short-term investments was due to the offsetting effect of an increase in our yield and a decrease in the overall average balance. The yield on our securities and short-term investments increased 62 basis points during the three months ended September 30, 2023 in comparison to the three months ended September 30, 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 2.25% during the three months ended September 30, 2022 to an average of 5.33% during the three months ended September 30, 2023. In addition, our cash deposited at the Federal Reserve Bank of Boston increased during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 due primarily to the deposit of proceeds from the sale of AFS securities (discussed earlier) in March 2023. Substantially offsetting this increase was a decrease in our average securities balance, which decreased $2.7 billion, or 29.8%, to $6.3 billion for the three months ended September 30, 2023 from $9.0 billion for the three months ended September 30, 2022 which was 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 and dividend income increased by $162.6 million, or 37.8%, to $592.8 million during the nine months ended September 30, 2023 from $430.2 million during the nine months ended September 30, 2022. The increase was primarily a result of an increase in the yield on average interest-earning assets which increased by 114 basis points compared with the nine months ended September 30, 2022. Partially offsetting the impact of increased yields was a decrease in the average balance of our interest-earning assets which decreased by $0.7 billion, or 3.0%, to $21.0 billion during the nine months ended September 30, 2023 compared to $21.6 billion during the nine months ended September 30, 2022, which was primarily attributable to a decrease in the average balance of securities.

• Interest income on loans increased $150.1 million, or 45.0%, to $483.7 million during the nine months ended September 30, 2023 from $333.6 million during the nine months ended September 30, 2022. The increase in interest income on our loans was due to an increase in our yields and an increase in the average balance. The overall yield on our loans increased 110 basis points during the nine months ended September 30, 2023 in comparison to the nine months ended September 30, 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 $1.5 billion, or 12.0%, to $13.8 billion during the nine months ended September 30, 2023 from $12.3 billion during the nine months ended September 30, 2022.
• Interest income on securities and other short-term investments increased $12.5 million, or 13.0%, to $109.1 million during the nine months ended September 30, 2023 from $96.6 million during the nine months ended September 30, 2022. The increase in interest income on our securities and other short-term investments was due to an increase in our yield on such investments. The yield on our securities and short-term investments increased 65 basis points during the nine months ended September 30, 2023 in comparison to the nine months ended September 30, 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 1.10% during the nine months ended September 30, 2022 to an average of 4.99% during the nine months ended September 30, 2023. In addition, our cash deposited at the Federal Reserve Bank of Boston increased during the nine months ended September 30, 2023 compared to the nine months ended September 30, 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 decrease in our average securities balance, which decreased $2.1 billion, or 22.9%, to $7.2 billion for the nine months ended September 30, 2023 from $9.3 billion for the nine months ended September 30, 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 and nine months ended September 30, 2023, interest expense increased $59.3 million and $163.6 million, respectively, to $65.0 million and $175.7 million, respectively, from $5.6 million and $12.1 million during the three and nine months ended September 30, 2022, respectively. The increases were primarily attributable to an increase in both deposit and borrowings interest expense.

During the three months ended September 30, 2023, interest expense on our interest-bearing deposits increased by $54.8 million to $59.6 million from $4.8 million during the three months ended September 30, 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 174 basis points to 1.89% during the three months ended September 30, 2023 from 0.15% during the three months ended September 30, 2022. This is primarily due to our increasing overall deposit rates paid in response to an increase in market rates of interest and heightened industry-wide competition for deposits, and an increase in brokered certificates of deposit which generally bear a higher rate of interest compared to other interest-bearing deposits. During the three months ended September 30, 2023, the average interest-bearing deposits balance increased by $0.1 billion to $12.5 billion from $12.4 billion during the three months ended September 30, 2022 as a result of our increasing of rates paid on such deposits as well as purchases of brokered certificates of deposit. We did not purchase any brokered certificates of deposit during the three months ended September 30, 2022.

Interest expense related to our borrowings increased by $4.5 million to $5.4 million during three months ended September 30, 2023 from $0.9 million during the three months ended September 30, 2022. The increase in borrowings interest expense during the three months ended September 30, 2023 compared to the three months ended September 30, 2022 is attributable to an increase in our utilization of our FHLB borrowing capacity and an increase in rates paid on such borrowings. We increased utilization of our FHLB borrowing capacity in order to support ongoing operations.

During the nine months ended September 30, 2023, interest expense on our interest-bearing deposits increased by $147.5 million to $158.7 million from $11.2 million during the nine months ended September 30, 2022. This increase was due to an increase in the rates paid on deposits and an increase in the balance of average interest-bearing deposits. Rates paid on deposits increased by 152 basis points to 1.64% during the nine months ended September 30, 2023 from 0.12% during the nine months ended September 30, 2022. This is primarily due to our increasing overall deposit rates paid in response to an increase in market rates of interest and heightened industry-wide competition for deposits and an increase in brokered certificates of deposit which generally bear a higher rate of interest compared to other interest-bearing deposits. During the nine months ended September 30, 2023, the average interest-bearing deposits balance increased by $0.4 billion to $12.9 billion from $12.5 billion during the nine months ended September 30, 2022. Average interest-bearing deposits increased during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 as a result of our increasing of rates paid on such deposits as well as purchases of brokered certificates of deposit. We did not purchase any brokered certificates of deposit during the nine months ended September 30, 2022.

Interest expense related to our borrowings increased by $16.0 million to $17.0 million during the nine months ended September 30, 2023 from $1.0 million during the nine months ended September 30, 2022. The increase in borrowings interest expense during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is attributable to an increase in our utilization of our FHLB borrowing capacity and an increase in rates paid on such borrowings. We increased utilization of our FHLB borrowing capacity in order to support ongoing operations.

Net Interest Income

Net interest income decreased by $15.0 million, or 9.8%, to $137.2 million during the three months ended September 30, 2023 from $152.2 million for the three months ended September 30, 2022. Net interest income decreased due to the decrease in the average balance of net interest-earning assets of $1.6 billion, or 18.2%, to $7.3 billion during the three months ended September 30, 2023 from $8.9 billion during the three months ended September 30, 2022. Partially offsetting this decrease was an increase in yields on interest-earning assets.

Net interest income decreased by $1.0 million, or 0.2%, to $417.1 million during the nine months ended September 30, 2023 from $418.1 million for the nine months ended September 30, 2022. Net interest income decreased due to the decrease in the balance of average net interest-earning assets of $1.4 billion, or 16.0%, to $7.6 billion during the nine months ended September 30, 2023 from $9.0 billion during the nine months ended September 30, 2022. Partially offsetting this decrease was an increase in yields on interest-earning assets.

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-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using marginal tax rates of 21.7% for both the three and nine months ended September 30, 2023 and 21.5% for both the three and nine months ended September 30, 2022. Net interest margin decreased 10 basis points to 2.77% during the three months ended September 30, 2023, from 2.87% during the three months ended September 30, 2022. The decrease in the net interest margin for the three months ended September 30, 2023 from the three months ended September 30, 2022 was due to a decrease in the average balance of our net-interest earning assets and increases in both the average balance and cost of interest bearing liabilities.

Net interest margin increased 10 basis points to 2.74% during the nine months ended September 30, 2023 from 2.64% during the nine months ended September 30, 2022. The increase in net interest margin for the nine months ended September 30, 2023 from the nine months ended September 30, 2022 was primarily due to an increase in market rates of interest which resulted in an increase in our yield on interest-earning assets that exceeded the increase in costs of interest-bearing liabilities.

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 asset and liability balances included in discontinued operations are included in non-interest-earnings assets and liabilities, respectively.

Average Balances, Interest Earned/Paid, & Average Yields

(Dollars in thousands)

(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 income, including net (loss) income from discontinued operations, divided by average total assets.

(7) Represents net income, including net (loss) income from discontinued operations, divided by average equity.

(8) Includes noninterest expenses included in results of discontinued operations. Refer to Note 19, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for such amounts.

(Dollars in thousands)

(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, including net income from discontinued operations, divided by average total assets.

(7) Represents net (loss) income, including net income from discontinued operations, divided by average equity.

(8) Includes noninterest expenses included in results of discontinued operations. Refer to Note 19, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for such amounts.

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 allowance for loan losses of $7.3 million for the three months ended September 30, 2023, compared to a provision of $6.5 million for the three months ended September 30, 2022 and a provision for allowance for loan losses of $14.9 million for the nine months ended September 30, 2023 compared to a provision of $7.0 million for the nine months ended September 30, 2022. Management determined a provision to be necessary for the three and nine months ended September 30, 2023 primarily due to increased loan balances and an increase in non-performing commercial real estate loans, which are reserved for on a specific reserve basis. The increase in our non-performing commercial real estate loans was primarily attributable to several commercial real estate loans, which are collateralized by properties in the investor office risk segment, transitioning to non-accrual during the three months ended September 30, 2023.

Management’s estimate of our allowance for loan losses as of September 30, 2023 and the provision for allowance for loan losses for the three and nine months ended September 30, 2023, was supported, in part, by Oxford Economics’ September 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 mildly contract in the fourth 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 impact of cumulative rate increases by the FOMC, with the most recent occurring in July 2023, tighter lending conditions, and continued inflation pressure leading to reduced consumer spending. Primary macroeconomic assumptions included in management’s evaluation of the adequacy of the allowance for loan losses included an increased unemployment rate and a steady gross domestic product (“GDP”). Further, the forecast assumed that the FOMC will not raise federal rates further during the current economic cycle. Although the core consumer price index declined slightly in August 2023 from the prior month, inflation is expected to remain above the FOMC’s 2% target through 2024. 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 at the end of 2023 and experience a fourth quarter decline in GDP of 2.6% on an annualized basis. Use of the downside scenario would have resulted in an incremental increase in the allowance for loan losses of approximately $11.5 million as of September 30, 2023. The upside scenario assumed GDP growth of 2.1% and 0.8% in the fourth quarter of 2023 and the first quarter of 2024, respectively, along with sustained recovery. Use of the upside scenario would have resulted in an incremental decrease in the allowance for loan losses of approximately $7.2 million as of September 30, 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)

Noninterest income decreased $0.4 million, or 1.9%, to $19.2 million for the three months ended September 30, 2023 from $19.5 million for the three months ended September 30, 2022. This decrease was primarily due to losses on sales of commercial and industrial loans of $2.7 million. Partially offsetting the loss was a $0.7 million increase in income from investments held in rabbi trusts and a $0.7 million increase in service charges on deposit accounts.

• We realized a loss on sale of commercial and industrial loans of $2.7 million during the three months ended September 30, 2023. Management made the decision to sell certain loans included in the SNC Program in order to fund new loan originations and to provide additional liquidity to support ongoing operations. No commercial loans were sold during the three months ended September 30, 2022. For additional discussion, refer to 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.
• Losses from investments held in rabbi trusts were $1.5 million for the three months ended September 30, 2023 compared to losses of $2.2 million for the three months ended September 30, 2022. For both periods, the losses were primarily due to an unfavorable mark-to-market adjustment on equity securities held in these accounts. The unfavorable mark-to-market adjustment for the three months ended September 30, 2022 was greater than the unfavorable mark-to-market adjustment for the three months ended September 30, 2023.
• Service charges on deposit accounts increased primarily as a result of an increase in customer overdraft charges primarily due to a larger volume of overdrafts for the three months ended September 30, 2023 compared to during the three months ended September 30, 2022.

Noninterest income decreased $318.8 million, to a net loss of $264.5 million for the nine months ended September 30, 2023 from income of $54.3 million for the nine months ended September 30, 2022. This decrease was primarily due to a $330.7 million increase in losses on sales in the first quarter of 2023 of securities available for sale, a $4.0 million decrease in interest rate swap income, losses on sales of commercial and industrial loans of $2.7 million, and a $2.4 million decrease in service charges on deposit accounts. These items were partially offset by an $18.3 million increase in income from investments held in rabbi trusts.

• Losses on sales of securities available for sale, net, increased by $330.7 million to $333.2 million for the nine months ended September 30, 2023 from $2.5 million for the nine months ended September 30, 2022 due to balance sheet repositioning which was completed in March 2023 and included the sale of 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 primarily as a result of a less favorable mark-to-market adjustment during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
• We realized a loss on sale of commercial and industrial loans of $2.7 million during the nine months ended September 30, 2023. Management made the decision to sell certain loans included in the SNC Program in order to fund new loan originations and to provide additional liquidity to support ongoing operations. No commercial loans were sold during the nine months ended September 30, 2022. For additional discussion, refer to 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.
• Service charges on deposit accounts for the nine months ended September 30, 2023 decreased primarily as a result of decreased corporate account analysis charges which was due primarily to lower commercial deposit account customer activity attributable to heightened industry-wide competition for deposits. Also contributing to the decrease was a decrease in customer overdraft charges for the period, 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 nine months ended September 30, 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 nine months ended September 30, 2022.

Noninterest Expense

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

Noninterest Expense

(Dollars in thousands)

Noninterest expense increased by $6.0 million, or 6.2%, to $101.7 million during the three months ended September 30, 2023 from $95.8 million during the three months ended September 30, 2022. This increase was primarily due to a $2.9 million increase in professional services, a $2.6 million increase in other noninterest expenses, a $1.2 million increase in

FDIC insurance, and a $1.2 million increase in data processing expense. These increases were partially offset by a $1.1 million decrease in loan expenses.

• Professional services increased primarily due to merger and acquisitions expenses incurred during the three months ended September 30, 2023, which totaled $3.6 million and were related to our proposed acquisition of Cambridge. No merger and acquisition expenses were incurred by the Bank during the three months ended September 30, 2022.
• 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.
• FDIC insurance expenses increased primarily due to an increase in the assessment rate charged by the FDIC during the three months ended September 30, 2023 compared to during the three months ended September 30, 2022.
• 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, such as core data processing expenses, increased during the three months ended September 30, 2023 compared to during the three months ended September 30, 2022, primarily due to an increase in customer loan activity.
• Loan expenses decreased primarily due to a decrease in the volume of property titling expenses associated with consumer home equity line of credit (“HELOC”) applications received during the three months ended September 30, 2023 compared to during the three months ended September 30, 2022. We had marketed our HELOC products during the three months ended September 30, 2022 which had led to increased volume during that period. The marketing effort ceased in the fourth quarter of 2022 which led to a subsequent decline in the volume of HELOC applications received.

Noninterest expense increased by $21.5 million, or 7.8%, to $297.6 million during the nine months ended September 30, 2023 from $276.1 million during the nine months ended September 30, 2022. This increase was primarily due to a $13.7 million increase in salaries and employee benefits, a $8.9 million increase in other noninterest expenses, and a $3.7 million increase in FDIC insurance expenses. Partially offsetting these increases were a $2.5 million decrease in loan expenses and a $2.0 million decrease in office occupancy and equipment expenses.

• Salaries and employee benefits increased primarily due to an $8.3 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 nine months ended September 30, 2023 resulting in a corresponding increase in the related benefit expense. Also contributing to the increase was an increase of $5.4 million in 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 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 increased to a net expense during the nine months ended September 30, 2023 compared to a net credit (reduction of expense) during the nine months ended September 30, 2022, resulting from an increase in certain metrics to which the awards are tied during such periods. Restricted stock award expense increased $3.3 million due to the restricted stock units and restricted stock awards granted in December 2022 and during the first and second quarters of 2023. Partially offsetting this increase was a decrease of $3.3 million in the pension service cost, which was primarily driven by a change in the mix of employees which reduced the present value of benefits based upon salary growth levels in comparison to the nine months ended September 30, 2022.
• Other noninterest expenses increased primarily due to a $9.4 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 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 $1.5 million increase in the provision for credit losses on off balance sheet exposures, which was primarily due to increases in exposure on unfunded commercial and industrial loan commitments and unfunded construction loan commitments. Partially offsetting these items was a $2.1 million decrease in post-retirement bank-owned life insurance expense which was primarily

caused by an increase in the discount rate used to determine the liability related to our split-dollar life insurance policies. This increase in the discount rate resulted in a decrease in the expense associated with such liabilities.

• FDIC insurance expenses increased $3.7 million primarily due to an increase in the assessment rates charged by the FDIC during the nine months ended September 30, 2023 compared to during the nine months ended September 30, 2022.
• Loan expenses decreased primarily due to a decrease in volume of HELOC applications received during the nine months ended September 30, 2023 compared to during the nine months ended September 30, 2022. The Bank stopped offering HELOC promotions at the end of 2022.
• Office occupancy and equipment expenses decreased primarily due to a decrease in operating lease expense, which was primarily due to a decrease in the number of occupancy leases during the nine months ended September 30, 2023 compared to during the nine months ended September 30, 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 and excludes income tax expense related to discontinued operations:

Tax Provision and Applicable Tax Rates

(Dollars in thousands)

Income tax expense decreased by $32.8 million to a benefit of $16.2 million for the three months ended September 30, 2023 from an expense $16.7 million for the three months ended September 30, 2022. The decrease was primarily the result of our reversal of a federal valuation allowance established in the first quarter of 2023 related to our sale of securities at a loss and a revision in management’s estimate of annual pre-tax loss for purposes of determining our quarterly income tax provision. For additional information related to 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.

Income tax expense decreased by $109.3 million to a benefit of $65.6 million in the nine months ended September 30, 2023 from a provision of $43.7 million in the nine months ended September 30, 2022. The decrease in income tax expense, which resulted in a tax benefit for the nine months ended September 30, 2023, was primarily due to lower income before income tax expense, which was a net loss and net benefit during the nine months ended September 30, 2023, respectively, as a consequence of losses realized on sales of available for sale securities in the first quarter of 2023. 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.

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.

Our asset-liability management strategy is devised and monitored by our Asset/Liability Management Committee (“ALCO”), a subcommittee of the Enterprise Risk Management Committee (“ERMC”), in accordance with policies approved by our Board of Directors. ALCO meets regularly to review, among other things, our sensitivity to interest rate changes, loan pricing and activity, investment activity and strategy, hedging strategies, and deposit pricing and funding strategies with respect to overall balance sheet composition. Management reports regularly to the Risk Management Committee of the Board of Directors on these risks and objectives with independent oversight and reporting from our Financial and Model Risk Management group.

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 first quarter of 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. 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 (“NII”) model. We model our NII over a 12-month and 24-month period assuming no changes in interest rates and a static balance sheet, where cash flows from financial assets and liabilities are replaced with new business of similar terms at current rates. We then model NII for the same period under the assumption that market rates increase and decrease instantaneously by certain basis point increments, which vary by period depending upon market conditions, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Changes in Interest Rates” column in the table below.

Many assumptions are made in the modeling process for both NII and economic value of equity (“EVE”, discussed further below), including but not limited to the repricing and maturity characteristics of existing and new business, loan and security prepayments, administered deposit rate betas, duration of deposits without stated maturity dates, and other option risks. Management believes these assumptions to be reasonable for the various interest rate environments modeled, however, differences in actual results from these assumptions could change our exposure to interest rate risk. 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. Additionally, 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.

Because of the limitations inherent in any modeling approach used to measure market risk, including NII and EVE sensitivity analysis, and because, in the event of changes in interest rates, management would take active steps to manage interest rate risk exposure among its financial assets and liabilities, modeling results, including those discussed in “Interest Rate Sensitivity” and “EVE Interest Rate Sensitivity” below, should not be relied upon as a forecast of actual NII or EVE, nor should they be interpreted as management’s expectations of actual results in the event of such interest rate fluctuations. The tables provide an indication of our interest rate risk exposure at a particular point in time, and actual results may differ.

The tables below set forth, as of September 30, 2023 and December 31, 2022, the modeled 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)

(1) Assumes an immediate uniform change in market interest rates at all maturities.

As of September 30, 2023, our model, as indicated above, shows a decline in our net interest income in rising rate scenarios. In the rising rate scenarios, funding costs are modeled to rise faster than income 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. As shown in the table above, the model generated similar results as of December 31, 2022. That is, the model showed a decline in our net interest income in the rising rate scenarios as funding costs were modeled to rise faster than income on earning assets, due, in part, to the shift in our mix of funding. The rate scenarios that we model at each period end are dependent upon market conditions, which is why the rate scenarios that we model may differ from period-to-period. As such, we did not previously model an instantaneous 400 basis point decrease in interest rates at December 31, 2022 given the lower level of interest rates compared to September 30, 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. Management believes 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 to changes in interest rates through our 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 September 30, 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)

(Dollars in thousands)

(1) Assumes an immediate uniform change in market interest rates 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.

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 reliable 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 continue to be affected by the level of customer deposits and payments, as well as any 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 September 30, 2023, we had $608.8 million of cash and cash equivalents, an increase of $439.3 million from $169.5 million at December 31, 2022. The increase in cash levels was due primarily to a decrease of $2.4 billion in AFS securities from $6.7 billion at December 31, 2022 to $4.3 billion at September 30, 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 through increased cash levels and loan fundings, and the reduction of wholesale borrowings.

The increased cash levels following our balance sheet repositioning 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 months of March and May 2023. Advances from the FHLBB were also used to support ongoing operations and totaled $673.5 million and $704.1 million at September 30, 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 September 30, 2023 and December 31, 2022 we had no IntraFi Network one-way sell deposits. At September 30, 2023 and December 31, 2022, we had repurchased $1.2 billion 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 September 30, 2023, we had $673.5 million in outstanding advances and the ability to borrow up to an additional $2.0 billion. We also have the ability to borrow from the Federal Reserve Bank of Boston. At September 30, 2023, we had a $2.5 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 September 30, 2023, we had the ability to borrow up to $879.4 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 September 30, 2023, we had $394.1 million in brokered certificates of deposit. At September 30, 2023, cash and cash equivalents were $608.8 million and secured borrowing capacity at the Federal Reserve Bank and Federal Home Loan Bank totaled $5.3 billion, providing total liquidity sources of $5.9 billion. These liquidity sources provided 105% coverage of all customer uninsured and uncollateralized deposits, which totaled $5.7 billion, or 32% of total deposits, as of September 30, 2023. For further discussion of uninsured deposits, refer to the “Deposits” discussion within the “Financial Position” within this Item 2.

Anticipating the completion of the sale of Eastern Insurance Group’s business during the quarter ending December 31, 2023, our funding mix during the three months ended September 30, 2023 relied more heavily on short-term FHLB borrowings. As disclosed elsewhere in this Quarterly Report on Form 10-Q, we completed the sale of Eastern Insurance Group’s business on October 31, 2023 for a gross purchase price of $515.0 million, subject to customary post-closing working capital adjustments. We plan to use the proceeds from the sale to pay down our short-term FHLB borrowings. For further discussion refer to “Outlook and Trends” within this Item 2.

Sources of Liquidity

(In thousands)

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

(2) As of September 30, 2023 and December 31, 2022, loans have been pledged to the FHLBB with a carrying value of $4.2 billion and $3.9 billion, respectively, resulting in this additional unused borrowing capacity.

(3) Securities with a carrying value of $2.5 billion at September 30, 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 September 30, 2023 and December 31, 2022, and securities with a carrying value of $370.3 million at September 30, 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 September 30, 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 risk-based capital ratio of 10.0%; (2) a minimum of common equity Tier 1 capital ratio of 6.5%; (3) a minimum of 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 September 30, 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:

(1) The ratio presented as of September 30, 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 September 30, 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 September 30, 2023, we had $5.9 billion of commitments to originate loans, comprised of $3.6 billion of commitments under commercial loans and lines of credit (including $888.6 million of unadvanced portions of construction loans), $2.1 billion of commitments under home equity loans and lines of credit, $201.9 million in standard overdraft coverage commitments, $17.1 million of unfunded commitments related to residential real estate loans and $62.9 million in other consumer loans and lines of credit. In addition, at September 30, 2023, we had $54.5 million in standby letters of credit outstanding. We also had $8.5 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.

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.”

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 September 30, 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 September 30, 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.

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in our 2022 Form 10-K and the risk factors set forth below. Except for the revised risk factors below, 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.

The market price of the Company’s common stock after the merger may be affected by factors different from those currently affecting shares of Company common stock.

Subject to the receipt of regulatory and shareholder approvals, and the satisfaction of other closing conditions, upon the completion of the merger with Cambridge, the Company will be incorporating Cambridge’s business into its own to create a combined enterprise. While we believe there are significant similarities and expected synergies in core business activities and geographical locations of our businesses and services, the Company’s business differs from that of Cambridge. Accordingly, the results of operations of the Company and the market price of the Company’s common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of the Company and Cambridge.

The Company may fail to realize all of the anticipated benefits of the merger, particularly if the integration of the Company’s and Cambridge’s businesses is more difficult than expected.

The success of the merger will depend, in part, on our ability to successfully combine the businesses of Company and Cambridge. the Company may fail to realize some or all of the anticipated benefits of the transaction if the integration process takes longer or is more costly than expected. Furthermore, any number of unanticipated adverse occurrences for either the business of Cambridge or the Company may cause us to fail to realize some or all of the expected benefits. The integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. Each of these issues might adversely affect the Company, Cambridge or both during the transition period, resulting in adverse effects on the Company following the merger. As a result, revenues may be lower than expected or costs may be higher than expected and the overall benefits of the merger may not be as great as anticipated.

The Company may be unable to retain Company and/or Cambridge personnel successfully while the merger is pending or after the merger is completed.

The success of the merger will depend in part on the Company’s ability to retain the talents and dedication of key employees currently employed by the Company and Cambridge. It is possible that these employees may decide not to remain with the Company or Cambridge, as applicable, while the merger is pending or with the Company after the merger is completed. If the Company and Cambridge are unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, the Company and Cambridge could face disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition, following the merger, if key employees terminate their employment, the Company’s business activities may be adversely affected, and management’s attention may be diverted from successfully integrating the Company and Cambridge to hiring suitable replacements, all of which may cause the Company’s business to suffer. In addition, the Company and Cambridge may not be able to locate or retain suitable replacements for any key employees who leave either company.

The Company and Cambridge have incurred and expect to continue to incur significant costs related to the merger and integration.

The Company and Cambridge have incurred and expect to incur significant, non-recurring costs in connection with negotiating the merger agreement and closing the merger. In addition, the Company will incur integration costs following the completion of the merger as the Company integrates the Cambridge business, including facilities and systems consolidation costs and employment-related costs. The Company and Cambridge will also incur significant legal, financial advisory, accounting, banking and consulting fees, fees relating to regulatory filings and notices, SEC filing fees, printing and mailing fees and other costs associated with the merger. Some of these costs incurred by the Company are payable regardless of whether the merger is completed.

The Company and Cambridge may also incur additional costs to maintain employee morale and to retain key employees. There can be no assurances that the expected benefits and efficiencies related to the integration of the businesses will be realized to offset these transaction and integration costs over time.

Regulatory approvals related to the merger may not be received, may take longer to receive than expected or may impose burdensome conditions that are not presently anticipated, which could impose additional costs and could delay or prevent completion of the merger.

Before the merger may be completed, certain approvals or consents must be obtained from the various bank regulatory and other authorities of the United States, the Commonwealth of Massachusetts and the State of New Hampshire. These governmental entities, including the Federal Reserve Board, the FDIC, the Massachusetts Division of Banks and the New Hampshire Banking Department, may impose conditions on the completion of the merger or require changes to the terms of the merger. While the Company does not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of the Company following the merger, any of which might have a material adverse effect on the Company following the merger. The Company is not obligated to complete the merger if the regulatory approvals received in connection with the completion of the merger include any conditions or restrictions that would constitute a “Burdensome Condition” as defined in the merger agreement.

There can be no assurance as to whether the regulatory approvals will be received or the timing of the approvals.

If the merger is not consummated by September 19, 2024, either the Company or Cambridge may choose not to proceed with the merger.

Either the Company or Cambridge may terminate the merger agreement if the merger has not been completed by September 19, 2024, unless the failure of the merger to be completed has resulted from the failure of the party seeking to terminate the merger agreement to perform its obligations.

Shareholder litigation could prevent or delay the completion of the merger or otherwise negatively impact the business and operations of the Company and Cambridge.

Shareholders of the Company and/or Cambridge may file lawsuits against the Company, Cambridge and/or the directors and officers of either company in connection with the merger. One of the conditions to the closing is that no order, injunction or decree issued by any court or governmental entity of competent jurisdiction or other legal restraint preventing the consummation of the merger or any of the other transactions contemplated by the merger agreement be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the Company or Cambridge defendants from completing the merger or any of the other transactions contemplated by the merger agreement, then such injunction may delay or prevent the effectiveness of the merger and could result in significant costs to the Company and/or Cambridge, including any cost associated with the indemnification of directors and officers of each company. The Company and Cambridge may incur costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the merger. Such litigation could have an adverse effect on the financial condition and results of operations of the Company and Cambridge and could prevent or delay the completion of the merger.