Eastern Bankshares, Inc.: Form 10-Q for the period ended Mar 31, 2024

This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at March 31, 2024, and our results of operations for the three months ended March 31, 2024 and 2023. 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;
• risks related to the implementation of acquisitions, dispositions, and restructurings, including the pending merger with Cambridge Bancorp and Cambridge Trust Company, such as 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 related to the potential integration of Cambridge Bancorp and Cambridge Trust Company, including that revenue and expense synergies or other expected benefits may not materialize or in the time frame originally anticipated or may be more costly to achieve than anticipated and that the combined businesses may not perform as expected;
• 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;
• 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, legislation, accounting standards and practices, and monetary policy;
• 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;
• 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 2023 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 2023 Form 10-K, as updated by the notes to our Unaudited Interim Condensed Consolidated Financial Statements accompanying 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. Accordingly, the Consolidated Statements of Income and Consolidated Statements of Cash flows present discontinued operations as of March 31, 2023 and for the period then ended. For further discussion, refer to Note 15, “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 months ended March 31, 2024.

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 $21.2 billion and $21.1 billion at March 31, 2024 and December 31, 2023, 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 October 31, 2023, we sold substantially all of the assets and transferred certain liabilities of our insurance agency business. In the third quarter of 2023, following management’s decision to sell our insurance agency business, we reclassified the related assets and liabilities to assets and liabilities of discontinued operations, respectively, on our Consolidated Balance Sheets. Accordingly, the results of discontinued operations were reclassified to “net income from discontinued operations” on our Consolidated Statements of Income. For additional discussion of discontinued operations, refer to Note 15, “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 from continuing operations for the three months ended March 31, 2024 computed in accordance with GAAP was $38.6 million as compared to a net loss from continuing operations of $202.1 million for the three months ended March 31, 2023. The increase to net income from continuing operations for the three months ended March 31, 2024 compared to a net loss from continuing operations for the three months ended March 31, 2023 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 which did not recur during the three months ended March 31, 2024. Refer to the later sections titled “Results of Operations” within this Item 2 for additional discussion.

Net income from continuing operations for the three months ended March 31, 2024 and net loss from continuing operations for the three months ended March 31, 2023 included items that our management considers non-core, which management excludes for purposes of assessing our operating net income, a non-GAAP financial measure. Operating net income for the three months ended March 31, 2024 was $38.1 million compared to operating net income for the three months ended March 31, 2023 of $53.1 million representing a decrease of 28.3%. This decrease was primarily due to decreased net interest income and an increase in the provision for allowance for loan losses for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. See “Non-GAAP Financial Measures” and “Results of Operations” within this Item 2 for a reconciliation of operating net income to net income from continuing operations on a GAAP basis and further discussion of net interest income and the provision for allowance for loan losses.

Banking Business

Our banking business offers a range of commercial, retail, wealth management and banking services, and consists primarily of attracting deposits from the general public, including municipalities, and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. 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 March 31, 2024 and December 31, 2023, we had total commercial and industrial loans of $3.1 billion and $3.0 billion, respectively, representing 21.9% and 21.8%, 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 March 31, 2024 and December 31, 2023, commercial and industrial loans in our SNC Program portfolio totaled $623.1 million and $606.2 million, respectively, or 20.2% and 20.1%, respectively, of our commercial and industrial portfolio, and 51.0% and 45.1%, respectively, of our commercial and industrial SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial and industrial portfolio also includes our Asset Based Lending Portfolio (“ABL Portfolio”) and industrial revenue bonds (“IRBs”), the balances of which are detailed below:
• As of March 31, 2024 and December 31, 2023, our ABL Portfolio totaled $187.2 million and $203.1 million, respectively, or 6.1% and 6.7%, respectively, of our commercial and industrial portfolio.
• As of both March 31, 2024 and December 31, 2023, our commercial and industrial IRB portfolio, which is comprised of municipal bonds issued to finance major capital projects, totaled $0.9 billion, or 30.2% and 30.8%, respectively, of our commercial and industrial portfolio at each period end.
• Commercial real estate: Loans in this category include mortgage loans and lines of credit on commercial real estate, both investment and owner occupied. Property types financed include office, industrial, multi-family, affordable housing, retail, hotel, and other type properties. As of both March 31, 2024 and December 31, 2023, we had total commercial real estate loans of $5.5 billion, representing 39.3% and 39.1%, respectively, of our total loans as of each period end. As of both March 31, 2024, and December 31, 2023, owner occupied commercial real estate loans totaled $1.0 billion, representing 17.6% and 18.2%, 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 includes loans included in our SNC Program portfolio described above. As of March 31, 2024 and December 31, 2023, commercial real estate loans in our SNC Program portfolio totaled $86.2 million and $86.3 million, respectively, or 1.6% of our commercial real estate loan portfolio, as of both March 31, 2024 and December 31, 2023, and 100.0% of our commercial real estate SNC Program portfolio were loans to borrowers headquartered in our primary lending market, as of both March 31, 2024 and December 31, 2023. Our commercial real estate loan portfolio also included IRB loans of $587.5 million and $591.0 million as of March 31, 2024 and December 31, 2023, respectively, representing 10.6% and 10.8%, 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 March 31, 2024 and December 31, 2023, we had total commercial construction loans of $388.0 million and $387.0 million, respectively, representing 2.8% and 2.8%, respectively, of our total loans. Our commercial construction loan portfolio also includes loans included in our SNC Program portfolio described above. As of March 31, 2024 and December 31, 2023, commercial construction loans in our SNC Program portfolio totaled $14.7 million and $10.2 million, respectively, or 3.8% and 2.6%, respectively, of our commercial construction loan portfolio, and 100.0% of our commercial construction SNC Program portfolio were loans to borrowers headquartered in our primary lending market as of both March 31, 2024 and December 31, 2023. Our commercial construction loan portfolio also included IRB loans as of $81.2 million and $63.8 million as of March 31, 2024 and December 31, 2023, respectively, representing 20.9% and 16.5% 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 March 31, 2024 and December 31, 2023, we had total business banking loans of $1.1 billion, representing 7.8% of our total loans as of both March 31, 2024 and December 31, 2023. In this category, commercial and industrial loans and commercial real estate loans totaled $196.8 million and $903.8 million, respectively, as of March 31, 2024, and $186.9 million and $898.9 million, respectively, as of December 31, 2023.

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 March 31, 2024 and December 31, 2023, we had total residential real estate loans of $2.5 billion and $2.6 billion, respectively, representing 18.1% and 18.4%, 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 months ended March 31, 2024, residential real estate mortgage loan originations were $38.3 million, of which $19.9 million were sold on the secondary markets. Comparatively, during the three months ended March 31, 2023, residential real estate mortgage loan originations were $57.2 million, of which $9.1 million were sold on the secondary markets.

Consumer Lending

• Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of both March 31, 2024 and December 31, 2023, we had total consumer home equity loans of $1.2 billion, representing 8.7% of our total loans as of both March 31, 2024 and December 31, 2023. Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Full principal repayment is required at the end of the ten-year draw period. Home equity lines of credit can be converted to term loans that are fully amortized. Underwriting considerations are materially consistent with those utilized in the residential real estate category. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
• Other consumer: Loans in this category consist of unsecured personal lines of credit, overdraft protection, automobile and aircraft loans, home improvement loans and other personal loans. As of March 31, 2024 and December 31, 2023, we had total other consumer loans of $234.4 million and $235.5 million, respectively, representing 1.7% of our total loans as of both March 31, 2024 and December 31, 2023. 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 March 31, 2024 and December 31, 2023, we held $3.5 billion and $3.3 billion, respectively, of assets in a fiduciary, custodial or agency capacity for customers, which are not our assets and therefore not included on the Consolidated Balance Sheets included in this Quarterly Report on Form 10-Q. For the three months ended March 31, 2024, we had noninterest income of $6.5 million from providing these services compared to $5.8 million for the three months ended March 31, 2023.

Outlook and Trends

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 remains subject to required regulatory approvals and satisfaction of other customary closing conditions set forth in the Merger Agreement. On February 28, 2024, our shareholders authorized the issuance of shares of our common stock to Cambridge shareholders in connection with the merger. There can be no assurances as to whether, or when, we and Cambridge will obtain the remaining required approvals or complete the merger. However, we anticipate the merger will close early in the third quarter of 2024.

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 $5.4 billion in total assets and $4.2 billion in deposits as of March 31, 2024. Cambridge’s core services also include wealth management. Through its wealth management group, which has 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 $4.8 billion as of March 31, 2024.

During the three months ended March 31, 2024, we incurred and recorded merger and acquisition costs related to our proposed acquisition of Cambridge of $1.8 million. The following table presents Cambridge-related merger and acquisition costs by financial statement line item on the Consolidated Statements of Income for the three months ended March 31, 2024:

(In thousands)

No merger and acquisition costs were incurred related to our proposed acquisition of Cambridge during the three months ended March 31, 2023.

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 May 1, 2024, the FOMC decided to maintain the target range for the federal funds rate at the range set at its July 26, 2023 meeting. The FOMC indicated, in consideration of adjustments to the target range for the federal funds rate, it will carefully assess incoming data, the evolving outlook, and the balance of risks. Further, it indicated that it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward its long-term target of 2%.

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 35% of the outstanding principal balance of our loans, gross of outstanding interest rate swaps as described further below, as of March 31, 2024 was indexed to a market rate that is expected to reprice with similar magnitude and direction as the federal funds rate. A portion of these loans have been hedged using interest rate swaps to convert the floating rate interest receipts to a fixed rate. The notional amount of floating rate loans swapped totaled $2.4 billion on March 31, 2024, representing approximately 17.0% of the outstanding principal balance of our loans at that date. For more detail regarding such hedging financial instruments, refer to Note 10, “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.

Non-GAAP Financial Measures

We present certain non-GAAP financial measures, which management uses to evaluate our performance, and which exclude the effects of certain transactions, non-cash items and GAAP adjustments that we believe are unrelated to our core business and are therefore not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility for investors into our core businesses as well as underlying trends that may, to some extent, be obscured by inclusion of such items in the corresponding GAAP financial measures. Except as otherwise indicated, the information presented for the three months ended March 31, 2023 within this section excludes discontinued operations. Refer to Note 15, “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, and (viii) certain discrete tax items. There were no gains or losses on sales of other assets, expenses indirectly associated with OREO gains or losses, or impairment charges on tax credit investments and associated tax credit benefits during the periods presented in this Quarterly Report on Form 10-Q.

We also present tangible shareholders’ equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, average tangible shareholders’ equity, the ratios of net 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), 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) The net tax (expense) 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 three months ended March 31, 2023 primarily resulted from the sale of securities classified as available for sale in the first quarter of 2023 and a $23.7 million tax benefit resulting from the transfer of certain securities from Market Street Securities Corp (“MSSC”), a wholly owned subsidiary which was liquidated during the first quarter of 2023, to Eastern Bank. In addition, 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.

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, as of the dates indicated:

(Dollars in thousands, except per share data)

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 for the three months ended March 31, 2023.

(3) Presented on an annualized basis.

Financial Position

Summary of Financial Position

(Dollars in thousands)

Cash and cash equivalents

Total cash and cash equivalents increased by $45.9 million, or 6.6%, to $739.0 million at March 31, 2024 from $693.1 million at December 31, 2023. This increase was primarily due to proceeds from maturities and principal paydowns of AFS and HTM securities of $87.6 million and an increase in deposits of $70.5 million. Partially offsetting this increase was an increase in gross loans of $115.3 million during the three months ended March 31, 2024. For further discussion of the change in securities, deposits, and loans, refer to the later “Securities,” ”Deposits,” and ”Loans,” 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: 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 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 approximately $125.8 million, or 2.6%, to $4.7 billion at March 31, 2024 from $4.9 billion at December 31, 2023. This decrease was primarily due to maturities and principal paydowns of AFS and HTM securities of $87.6 million.

We did not have trading investments at March 31, 2024 or December 31, 2023.

A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled $186.6 million at March 31, 2024 compared to $191.1 million at December 31, 2023.

Our AFS securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as Level 3 within the fair value hierarchy. As of both March 31, 2024 and December 31, 2023, we had no securities categorized as Level 3 within the fair value hierarchy.

The following tables show contractual maturities of our AFS and HTM securities and weighted average yields at and for the periods ended March 31, 2024 and December 31, 2023. 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. Weighted average yields in the tables below have been calculated based on the amortized cost of the security:

Securities Portfolio, Weighted Average Yield

(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

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

Loan Portfolio Composition

(In thousands)

We consider our loan portfolio to be relatively diversified by borrower and industry. Our gross loans increased $115.3 million, or 0.8%, to $14.1 billion at March 31, 2024 from $14.0 billion at December 31, 2023. The increase was primarily due to increases in our commercial real estate and commercial and industrial portfolio balances.

• Our commercial real estate portfolio increased by $62.2 million from December 31, 2023 to March 31, 2024 which was primarily attributable to an increase of $89.1 million in commercial real estate investment loan balances. Such loans represent loans secured by commercial real estate that are non-owner-occupied. The increase in such loan balances was primarily due to management’s active focus on originating loans collateralized by industrial/warehouse and multi-family property types, which are included in the commercial real estate investment loan category, due to management’s belief that the credit performance of such loans has a stable outlook. The increase in commercial real estate investment loan balances was partially offset by a decrease in commercial real estate owner-occupied loans of $18.8 million which was due to net paydowns of such loans during the three months ended March 31, 2024.
• Our commercial and industrial portfolio increased by $50.5 million from December 31, 2023 to March 31, 2024 which was primarily due to new loan originations within the commercial and industrial portfolio during the three months ended March 31, 2024.

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 83.3% of our commercial loans in Massachusetts and New Hampshire as of March 31, 2024.

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 5.4% and 4.1% of total commercial loans outstanding at March 31, 2024 and December 31, 2023, respectively. This increase was driven by several risk rating downgrades of loans in the commercial real estate and commercial and industrial portfolio.

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 decreased to 0.32% at March 31, 2024, compared to 0.41% at December 31, 2023.

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 $4.6 million, or 8.8%, to $57.2 million at March 31, 2024 from $52.6 million at December 31, 2023. NPLs as a percentage of total loans increased to 0.41% at March 31, 2024 from 0.38% at December 31, 2023. Refer to the later “Allowance for Loan Losses” section in this Item 2 for a discussion of the change in non-accrual loans which comprise our NPLs as of March 31, 2024 and December 31, 2023.

The total amount of interest recorded on NPLs during both the three months ended March 31, 2024 and 2023 was not significant. The gross interest income that would have been recorded under the original terms of those loans if they had been performing amounted to $1.5 million and $1.1 million for the three months ended March 31, 2024 and 2023, 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. The aggregate amortized cost balance as of March 31, 2024 and 2023 of loans modified during the three months ended March 31, 2024 and 2023, respectively, which were determined to be modifications to borrowers experiencing financial difficulty was $1.1 million and $2.3 million, respectively. As of March 31, 2024, there were no loans that had been modified to borrowers experiencing financial difficulty during the during the twelve-month period then ended which had subsequently defaulted during the three months ended March 31, 2024. As of March 31, 2023, there were no loans that had been modified to borrowers experiencing financial difficulty during the during the three-month period then ended which had subsequently defaulted during the during the three months ended March 31, 2023.

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 March 31, 2024 and December 31, 2023, the carrying amount of PCD loans was $48.4 million and $49.1 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 $132.6 million, or 35.5%, to $506.3 million at March 31, 2024 from $373.7 million at December 31, 2023. These loans as a percentage of total loans increased to 3.6% at March 31, 2024 from 2.7% at December 31, 2023. The increase in potential problem loans from December 31, 2023 to March 31, 2024 was primarily due to the downgrade of certain commercial real estate and commercial and industrial loans during the three months ended March 31, 2024, 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 $802.0 million and $818.9 million as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, our office-related CRE loans are primarily concentrated in Massachusetts, where approximately 83.7% of the total recorded investment balance of office-related CRE loans are located, and approximately 19.1% of the total recorded investment balance of office-related CRE loans are located in the City of Boston.

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. Such monitoring includes incremental risk management strategies undertaken by management including monthly internal CRE office exposure portfolio reporting, more frequent portfolio reviews, ongoing monitoring of market conditions, and additional portfolio analysis such as maturity risk analysis and rent rollover risk analysis. As of March 31, 2024, two of these loans, which had a total recorded investment balance of $21.6 million, were on non-accrual status, one of which transitioned to non-accrual status during the three months ended March 31, 2024. We recorded a partial charge-off of $7.3 million of the commercial real estate loan which transitioned to non-accrual during the three months ended March 31, 2024. As of December 31, 2023, two of these loans were on non-accrual status and had a total recorded investment balance of $14.0 million.

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 an individual loan basis and on a collective basis, and other qualitative components.

The allowance for loan losses increased by $0.2 million, or 0.1%, to $149.2 million, or 1.06% of total loans, at March 31, 2024 from $149.0 million, or 1.07% of total loans at December 31, 2023. The increase in the allowance for loan losses was primarily the result of additional reserves required due to an increase in loan balances during the three months ended March 31, 2024. In addition, we recorded a $7.3 million charge-off related to one commercial real estate loan collateralized by a property in the office risk segment. The loan transitioned to non-accrual during the three months ended March 31, 2024 and had not been specifically reserved for as of December 31, 2023. Consequently, we recorded a corresponding and partially-offsetting provision for allowance for loan losses within our CRE portfolio of $6.3 million during the three months ended March 31, 2024.

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. Our reserve for unfunded lending commitments decreased by $2.0 million, or 14%, to $12.1 million at March 31, 2024 from $14.1 million at December 31, 2023. The decrease was primarily due to a combination of decreased total exposure on unfunded lending commitments and lower reserve rates within the commercial construction portfolio, which was attributable to an improved economic forecast. The decrease in our reserve for unfunded lending commitments contributed to a decrease in our other non-interest expense during the three months ended March 31, 2024.

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 $22.6 million, or 65.4%, to $57.2 million at March 31, 2024 from $34.6 million at March 31, 2023, primarily due to an increase in commercial real estate non-accrual loans of $37.3 million and was partially offset by a decrease in commercial and industrial non-accrual loans of $10.3 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 subsequent to March 31, 2023, one of which transitioned to non-accrual status during the three months ended March 31, 2024 and is collateralized by real estate in the office risk segment. 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)

To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, liquidation of the collateral and the strength of co-makers or guarantors. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for loan losses and any recoveries of such previously charged-off amounts are credited to the allowance for loan losses.

Regardless of whether a loan is unsecured or collateralized, we charge off the amount of any confirmed loan loss in the period when the loans, or portions of loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss confirming events may include an appraisal or other valuation that reflects a shortfall between the value of the collateral and the carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral.

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

Federal Home Loan Bank stock

The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for our membership in the FHLBB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. We purchase and/or are subject to redemption of FHLBB stock proportional to the volume of funding received and view the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.

We held an investment in the FHLBB of $5.9 million at both March 31, 2024 and December 31, 2023. The amount of stock we are required to purchase is proportional to our FHLB borrowings and level of total assets.

Goodwill and other intangible assets

The table below sets forth the carrying amount of goodwill and other intangible assets, net of accumulated amortization, as of the dates indicated below:

(In thousands)

The balance of our goodwill and core deposit intangible asset was $565.7 million and $566.2 million at March 31, 2024 and December 31, 2023, respectively. We did not record any impairment to our goodwill or core deposit intangible asset during the three months ended March 31, 2024.

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)

Deposits remained relatively consistent, increasingly by $70.5 million, or 0.4%, to $17.7 billion at March 31, 2024 from $17.6 billion at December 31, 2023. This increase was primarily driven by increased money market investment deposits and certificates of deposit partially offset by a decrease in demand deposits reflecting a continued shift in deposit mix from non-interest-bearing deposit accounts to interest-bearing deposit accounts. This shift in deposit mix during the three months ended March 31, 2024 was due primarily to increases in rates paid on money market investment deposits and certificates of deposit, which attracted depositors to such products.

The Bank’s estimate of total uninsured deposits was $7.7 billion and $8.0 billion at March 31, 2024 and December 31, 2023, 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 $5.4 billion and $5.5 billion at March 31, 2024 and December 31, 2023, 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 increased by $4.5 million to $52.8 million at March 31, 2024 compared to $48.2 million at December 31, 2023. The increase was primarily due to increased balances of escrow deposits from borrowers and interest rate swap collateral funds. 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 with respect to information related to the three months ended March 31, 2023. Refer to Note 15, “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 months ended March 31, 2024 and 2023

Interest and Dividend Income

Interest and dividend income increased by $13.7 million, or 7.3%, to $202.6 million during the three months ended March 31, 2024 from $188.9 million during the three months ended March 31, 2023. The increase was the result of an increase in the yield on average interest-earning assets which increased by 53 basis points compared to the three months ended March 31, 2023. 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 $1.6 billion, or 7.4%, to $20.2 billion during the three months ended March 31, 2024 compared to $21.8 billion during the three months ended March 31, 2023, which was primarily attributable to a decrease in the average balance of securities.

• Interest income on loans increased $16.4 million, or 10.7%, to $170.0 million during the three months ended March 31, 2024 from $153.5 million during the three months ended March 31, 2023. The increase in interest income on our loans was due to an increase in our yields and an increase in our average loan balance. The overall yield on our loans increased 31 basis points during the three months ended March 31, 2024 in comparison to the three months ended March 31, 2023. 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 $0.4 billion, or 2.8%, to $14.0 billion during the three months ended March 31, 2024 from $13.6 billion during the three months ended March 31, 2023.
• Interest income on securities and other short-term investments decreased slightly by $2.7 million, or 7.7%, to $32.6 million during the three months ended March 31, 2024 from $35.3 million during the three months ended March 31, 2023. The decrease was primarily driven by a decrease in our average securities and other short-term investments balance, which decreased $2.0 billion, or 24.4%, to $6.2 billion for the three months ended March 31, 2024 from $8.1 billion for the three months ended March 31, 2023, which was primarily due to our sales of AFS securities in March 2023. Also contributing to the decrease in the average balance of securities and other short-term investments was maturities and principal paydowns on AFS and HTM securities. Partially offsetting the decrease in our average securities and other short-term investments balance was an increase in our yield on our securities and other short-term investments which increased 38 basis points during the three months ended March 31, 2024 in comparison to the three months ended March 31, 2023 primarily due to an increase in the rate paid on our cash held at the Federal Reserve Bank of Boston from an average of 4.59% during the three months ended March 31, 2023 to an average of 5.40% during the three months ended March 31, 2024.

Interest Expense

During the three months ended March 31, 2024, interest expense increased $22.1 million, to $72.7 million, from $50.6 million during the three months ended March 31, 2023. The increase was due to an increase in deposit interest expense partially offset by a decrease in borrowings interest expense.

During the three months ended March 31, 2024, interest expense on our interest-bearing deposits increased by $29.5 million to $72.5 million from $42.9 million during the three months ended March 31, 2023. This increase was due to an increase in the rates paid on deposits. Rates paid on deposits increased by 99 basis points to 2.32% during the three months ended March 31, 2024 from 1.33% during the three months ended March 31, 2023. This was 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. Partially offsetting the impact of the increase in rates paid on deposits was a decrease in the average balance of interest-bearing deposits for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. During the three months ended March 31, 2024, the average interest-bearing deposits balance decreased by $0.5 billion to $12.6 billion from $13.1 billion during the three months ended March 31, 2023 primarily as a result of a decrease in the average balance of brokered deposits. The average balance of brokered certificates of deposit decreased to $8.2 million during the three months ended March 31, 2024 from $784.4 million during the three months ended March 31, 2023.

Interest expense related to our borrowings decreased by $7.4 million to $0.3 million during three months ended March 31, 2024 from $7.6 million during the three months ended March 31, 2023. The decrease in borrowings interest expense during the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was due to a decrease in our utilization of our FHLB borrowing capacity. Our utilization of FHLBB borrowings was greater during the three months ended March 31, 2023 compared to the three months ended March 31, 2024 as we bolstered on-balance sheet liquidity in response to the bank failures in the first quarter of 2023. In addition, during the four quarter of 2023, we paid down our FHLB advances primarily with the proceeds from the sale of our insurance agency business, which occurred in the fourth quarter of 2023. Both of these factors resulted in a reduced average balance of borrowings during the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Net Interest Income

Net interest income decreased by $8.4 million, or 6.1%, to $129.9 million during the three months ended March 31, 2024 from $138.3 million for the three months ended March 31, 2023. Net interest income decreased due to a decrease in the average balance of net interest-earning assets of $0.5 billion, or 6.1%, to $7.5 billion during the three months ended March 31, 2024 from $8.0 billion during the three months ended March 31, 2023.

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 total interest-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using marginal tax rates of 21.7% for both the three months ended March 31, 2024 and 2023, respectively. Net interest margin remained relatively consistent during the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Refer to the above “Interest and Dividend Income” and “Interest Expense” sections for further discussion.

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

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

(8) Includes noninterest expenses included in results of discontinued operations. Refer to Note 15, “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 provisions for allowance for loan losses of $7.5 million and less than $0.1 million for the three months ended March 31, 2024 and 2023, respectively. Management determined a provision to be necessary for the three months ended March 31, 2024 primarily due to a $7.3 million partial charge-off of a commercial real estate investment loan which transitioned to non-accrual status during the three months ended March 31, 2024 and had not been previously reserved for on a specific reserve basis.

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.

Management’s estimate of our allowance for loan losses as of March 31, 2024 and the provision for allowance for loan losses for the three months ended March 31, 2024, was supported, in part, by Oxford Economics’ March 2024 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 slightly grow in the second quarter of 2024. This forecast reflects the impact of consumer spending rebounding after a slow end to 2023 and start of 2024. Primary macroeconomic assumptions included in management’s evaluation of the adequacy of the allowance for loan losses included a slight increase in unemployment rate and a gross domestic product (“GDP”) that is projected to rise modestly in the second quarter of 2024. Further, the forecast assumed that the FOMC will decrease federal rates during May 2024, although the probability of such a rate decrease occurring was reduced from prior forecasts. Although the core consumer price index declined slightly in March 2024 from the prior month, inflation is expected to remain above the FOMC’s 2% target through 2024 and therefore, no material reduction in federal rates was forecast. 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 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 experience growth of GDP in 2024 of 1.1%. Use of the downside scenario would have resulted in an incremental increase in the allowance for loan losses of approximately $12.4 million as of March 31, 2024. The upside scenario assumed GDP growth of 3.3% in 2024, along with sustained recovery. Use of the upside scenario would have resulted in an incremental decrease in the allowance for loan losses of approximately $4.9 million as of March 31, 2024.

Noninterest Income

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

Noninterest Income

(Dollars in thousands)

Noninterest income increased $337.5 million, or 108.9%, to $27.7 million for the three months ended March 31, 2024 from a net loss of $309.9 million for the three months ended March 31, 2023. This increase was primarily due to a $333.2 million decrease in losses on sales of securities available for sale, a $1.5 million increase in income from investments held in rabbi trusts, a $1.1 million increase in interest rate swap income, and a $1.0 million increase in service charges on deposit accounts.

• We recorded losses of $333.2 million on sales of securities available for sale, net, for the three months ended March 31, 2023. Management made the decision to sell certain available for sale securities in connection with a balance sheet repositioning in March 2023. There were no sales of securities available for sale during the three months ended March 31, 2024.
• Income from investments held in rabbi trusts increased primarily as a result of a favorable mark-to-market adjustment on equity securities held in those accounts for the three months ended March 31, 2024 resulting from an increase in the market value of equity securities held in the rabbi trusts.
• Interest rate swap income increased primarily as a favorable mark-to-market adjustment during the three months ended March 31, 2024 compared to an unfavorable mark-to-market adjustment during the three months ended March 31, 2023.
• Service charges on deposit accounts increased primarily as a result of increased corporate account analysis charges which was primarily due to higher customer deposit activity. Also contributing to the increase was an increase in overdraft charges, which increased primarily due to a larger volume of overdrafts for the three months ended March 31, 2024 compared to during the three months ended March 31, 2023.

Noninterest Expense

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

Noninterest Expense

(Dollars in thousands)

Noninterest expense increased by $5.3 million, or 5.5%, to $101.2 million during the three months ended March 31, 2024 from $95.9 million during the three months ended March 31, 2023. This increase was primarily due to a a $4.2 million increase in data processing expense and a $2.3 million increase in salary and employee benefits expenses. These increases were partially offset by a $2.2 million decrease in other noninterest expenses.

• Data processing expenses increased during the three months ended March 31, 2024 compared to during the three months ended March 31, 2023, primarily due to an increase in software expenses, which were primarily driven by increases in customer relationship management and cybersecurity software expenses. The increase in these expenses was driven by efforts to improve our customer relationship management with current and potential customers, as well as improve our cybersecurity technology to better protect against cybersecurity threats. Also contributing to the increase in data processing expenses was an increase in engineering and consulting expense, which was primarily driven by onboarding costs related to our pending Cambridge acquisition.
• Salaries and employee benefits expenses increased primarily due to an $1.1 million increase 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 the legacy long-term cash-based incentive plan compensation expense, which was a net credit (reduction of expense) during the three months ended March 31, 2023, as a result of a decline in certain metrics to which the awards were tied during such period. The final performance cycle under the legacy long-term cash-based incentive compensation plan ended on December 31, 2023. As such, we have ceased accruing expense relative to this plan. In addition, restricted stock award expense and benefit expense related to our defined contribution supplemental executive retirement plan (“DC SERP”) each increased $0.5 million during the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Restricted stock award expense increased due to incremental expense recognized in relation to restricted stock units granted. For our DC SERP, participant benefits are adjusted based upon deemed investment performance. Accordingly, such investments experienced an increase in value during the three months ended March 31, 2024, resulting in a corresponding increase in the related benefit expense. Partially offsetting these increases was an increase in loan origination fee expense reductions, which were primarily due to increases in commercial loan volume.
• Other noninterest expenses decreased primarily due to a $2.7 million decrease in the provision for credit losses on off-balance sheet exposures, which was caused by decreases in unfunded reserve rates and balances in commercial construction and commercial and industrial unfunded commitments. For further discussion of the change in the provision for credit losses on off-balance sheet exposures, refer to the earlier discussion under “Allowance for Credit Losses,” included in the “Financial Position” section within this Item 2. Partially offsetting this decrease was a $0.7 million increase in post retirement bank owned life insurance expense which was primarily caused by a decrease in the discount rate used to determine the liability related to our split-dollar life insurance policies. This decrease in the discount rate resulted in an increase in the expense associated with such liabilities.

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 increased by $75.7 million to $10.3 million for the three months ended March 31, 2024 from a benefit of $65.4 million for the three months ended March 31, 2023. The increase in income tax expense was primarily due to higher income before income tax expense, which increased from a net loss for the three months ended March 31, 2023 to net income for the three months ended March 31, 2024. The tax benefit for the three months ended March 31, 2023 was primarily due to a net loss during three months ended March 31, 2023, which primarily resulted from losses realized on sales of available for sale securities during the three months ended March 31, 2023.

In addition, during the first quarter of 2023, the Company liquidated MSSC, a wholly owned subsidiary, and transferred all of MSSC’s assets to Eastern Bank. In connection with the liquidation and subsequent transfer of securities previously held by MSSC to Eastern Bank, the Company recognized an additional deferred income tax benefit of $23.7 million during the first quarter of 2023. This deferred income tax benefit resulted from a state tax rate change applied to the deferred tax asset related to the securities transferred to Eastern Bank.

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 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 aspects of our business.

Governance. The primary goal of interest rate risk management is to attempt to control this risk within policy limits approved by the Risk Management Committee of our Board of Directors (“RMC”), and within the Risk Appetite Statement formally adopted by the Board of Directors and described further below.

These limits reflect our tolerance for interest rate risk over both short-term and long-term horizons, are designed to encompass market rate shocks that would take place with both gradual and immediate effect and cover a range of scenarios from mild to extreme market shocks. More specifically, and as further described below, our policy limits govern:

• The maximum amount of acceptable earnings loss due to market risk in year one of a two-year earnings simulation, determined by net interest income analysis;
• The maximum amount of acceptable earnings loss due to market risk in year two of a two-year earnings simulation, determined by net interest income analysis;
• The maximum amount of acceptable decline in the present value of equity due to market risk, determined by economic value of equity analysis;
• The maximum acceptable size of the investment portfolio relative to total assets;
• Concentration limits on investment asset types to ensure appropriate portfolio diversification;
• Maximum maturity and weighted average life per security at time of purchase in both a base case and a shocked rate scenario to measure extension risk;
• The maximum acceptable duration of the investment and hedging derivatives portfolio; and
• Guidelines on accounting classification of securities including held for trading, available for sale and held to maturity.

Policy limits are tested quarterly, and the results are reported to the Asset and Liability Management Committee (“ALCO”) and to the RMC. The RMC advises the Board of Directors with respect to the adequacy of capital allocated based on the level of risk as well as risk issues that could impact liquidity and/or capital adequacy. From time to time, we expect we will exceed policy limits, in which case we may seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. A remediation plan will be presented to the ALCO, the Enterprise Risk Management Committee (“ERMC”) and the RMC that carefully outlines the proposed corrective action.

We attempt to manage interest rate risk by identifying, quantifying, and where appropriate, hedging our exposure to market risk. 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 ALCO, a subcommittee of the ERMC, in accordance with policies approved by the RMC. ALCO operates under a charter developed and approved by the ERMC. ALCO meets at least monthly, or more frequently as needed, to review, among other things, our sensitivity to interest rate changes, loan pricing and activity, investment activity and strategy, hedging strategies, deposit pricing and funding strategies with respect to overall balance sheet composition, as well as earnings simulations over multiple years. ALCO may meet more frequently if there are changes in the economic environment, such as rapid increases or decreases in interest rates due to or as a result of exogenous or unknown factors so that ALCO can make any necessary strategic adjustments to ensure risk is well-managed. ALCO’s membership is comprised of executive management of the Company, and representatives from various lines of business are in regular attendance, including representation from Enterprise Risk Management (“ERM”). ALCO reports regularly to the RMC on these risks and objectives with independent oversight and reporting from our Financial and Model Risk Management group within ERM.

As a company offering banking and other financial services, certain elements of risk are inherent in our transactions and operations and are present in the business decisions we make. We, therefore, encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks. In its oversight of our risk management framework, the Board of Directors has adopted a formal Risk Appetite Statement (“RAS”) which defines the aggregate level of risk and the types of risk the Company is willing to assume to achieve its corporate strategy and objectives. The Board of Directors ensures that approved policy limits, as described further above, conform to stated risk appetite. The Board of Directors monitors, on at least a quarterly basis, a set of key risk metrics, including those, but not limited to those, pertaining to market risk. Monitoring these metrics ensures that management is operating within the Board of Directors’ stated risk appetite, can help to identify trends in risk profile or emerging risks over time, and where applicable, determine where adjustments may be required to business strategy or tactics. Within our risk management framework, the functional responsibilities of risk management are divided into a tiered model, involving three lines of defense:

1. The Finance Department to which primary market risk ownership belongs including monitoring and tracking of risk, model development and maintenance, and execution of strategy and tactics to mitigate market risk;

2. The ERM Department which conducts independent risk and controls assessments to ensure appropriate risk identification, management, and reporting. The Model Risk Management group (“MRM”) within ERM is responsible for independent oversight of models used to measure market risk, including model and assumption implementation, development, and conceptual soundness; and

3. The Internal Audit Department which independently assesses the operating effectiveness of the first- and second-line processes and controls.

Comments on Recent Developments. As noted in the earlier section titled “Outlook and Trends” within this Item 7, 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. Our market risk management framework is designed for the potential for such rapid changes in interest rates, by establishing policy limits on such rapid shocks and periodically back-testing modeled to actual results. Back-testing of top-line results as well as key assumptions is performed against established thresholds as part of our ongoing monitoring governance of our models, and results are reported to the ALCO and the MRM. Should back-testing results exceed established performance thresholds, the model and underlying assumptions will be reviewed for recalibration.

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. The impact of our interest rate derivatives designated as hedging instruments are included in the model results. 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, permanent, and 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 March 31, 2024 and December 31, 2023, 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 March 31, 2024, 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, which are more sensitive to changes in interest rates. As shown in the table above, the model generated similar results as of December 31, 2023. 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 simulation results are within policy limits and management therefore does not expect a material change to our current strategy over the near term. 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.

Management may use techniques such as 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. Hedging strategies such as, for example, receive-fixed and pay-fixed swaps, interest rate caps, floors, or collars, may be used to protect against benchmark interest rates either rising or falling. The type of derivatives we primarily use to hedge market risk are interest rate swap agreements designated as cash flow hedging instruments. When the Federal Reserve began raising interest rates in March of 2022 from very low levels, management began evaluating a derivative strategy designed to limit our exposure to downward rate scenarios. In 2022, management executed a total of $2.4 billion in notional value of receive-fixed interest rate swap agreements on floating-rate loans. These swaps are designated as cash flow hedges and management believes these derivatives provide significant protection against falling interest rates, as they have the effect of converting floating rate loan exposure to fixed rates. These receive-fixed swaps constitute the entirety of our current hedge portfolio. Management may, from time to time, due to actual or projected changes in market rates or our risk exposure, evaluate other hedging strategies, although we believe our current Net Interest Income and Economic Value of Equity simulation analyses support maintaining the current derivatives strategy. For additional information related to our interest rate derivative financial instruments, see Note 10, “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 both March 31, 2024 and December 31, 2023. 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, the latter of 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 cash equivalents 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, loan originations and repayments, 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.

We participate in the IntraFi Network, which allows us to provide access to FDIC deposit insurance protection on customer deposits for consumers, businesses and public entities that exceed same-bank FDIC insurance thresholds. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. At both March 31, 2024 and December 31, 2023 we had no IntraFi Network one-way sell deposits. At March 31, 2024 and December 31, 2023, we had repurchased $1.5 billion and $1.3 billion, respectively, of previously sold reciprocal deposits.

Although customer deposits remain our preferred source of funds, maintaining additional sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. At March 31, 2024, we had $17.6 million in outstanding advances and the ability to borrow up to an additional $2.7 billion. We also have the ability to borrow from the Federal Reserve Bank of Boston. At March 31, 2024, we had the ability to borrow up to $2.8 billion from the Federal Reserve Bank of Boston Discount Window. At March 31, 2024, cash and cash equivalents were $739.0 million and secured borrowing capacity at the Federal Reserve Bank and Federal Home Loan Bank totaled $5.5 billion, providing total liquidity sources of $6.2 billion. These liquidity sources provided 116% coverage of all customer uninsured and uncollateralized deposits, which totaled $5.4 billion, or 31% of total deposits, as of March 31, 2024. For further discussion of uninsured deposits, refer to the “Deposits” discussion within the “Financial Position” within this Item 2.

Sources of Liquidity

(In thousands)

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

(2) As of March 31, 2024 and December 31, 2023, loans have been pledged to the FHLBB with a carrying value of $4.4 billion and $4.6 billion, respectively, resulting in this additional unused borrowing capacity.

(3) Securities with a carrying value of $2.4 billion at December 31, 2023 were pledged to the Federal Reserve Bank of Boston under the Bank Term Funding Program, resulting in this additional unused borrowing capacity. The Bank Term Funding Program ceased extending new loans March 11, 2024. Accordingly, we had no additional capacity nor any securities pledged to the Federal Reserve Bank of Boston under Bank Term Funding Program as of March 31, 2024.

(4) Loans with a carrying value of $1.1 billion at both March 31, 2024 and December 31, 2023, and securities with a carrying value of $2.6 billion and $168.8 million at March 31, 2024 and December 31, 2023, respectively, were pledged to the Discount Window, resulting in this additional borrowing capacity. The increase in the amount of securities pledged to the Discount Window at March 31, 2024 from December 31, 2023 is due to additional securities pledged which were previously pledged as collateral to the Bank Term Funding Program.

We believe that advanced preparation, early detection, and prompt responses can avoid, minimize, or shorten potential liquidity constraints. Our Board of Directors and our management’s Asset and Liability Management Committee oversee the assessment and monitoring of risk levels, as well as potential responses during unanticipated stress events. As part of our risk management framework, we perform periodic liquidity stress testing to assess our need for liquid assets as well as backup sources of liquidity.

Capital Resources. We are subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks, the FDIC and the Federal Reserve (with respect to our consolidated capital requirements). At March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023. There have been no conditions or events that management believes would cause a change in the Company’s categorization.

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

Contractual Obligations, Commitments and Contingencies. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. At March 31, 2024, there were no material changes in our contractual obligations, other commitments and contingencies from those disclosed in our 2023 Form 10-K.

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

At March 31, 2024, we had $6.1 billion of commitments to originate loans, comprised of $3.7 billion of commitments under commercial loans and lines of credit (including $823.2 million of unadvanced portions of construction loans), $2.1 billion of commitments under home equity loans and lines of credit, $202.0 million in standard overdraft coverage commitments, $18.9 million of unfunded commitments related to residential real estate loans and $59.1 million in other consumer loans and lines of credit. In addition, at March 31, 2024, we had $50.0 million in standby letters of credit outstanding. We also had $8.0 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 March 31, 2024, the end of the period covered by this Quarterly Report on Form 10-Q.

Changes to Internal Controls over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2024 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in our 2023 Form 10-K. As of the date of this Quarterly Report on Form 10-Q, the risk factors of the Company have not changed materially from those disclosed in our 2023 Form 10-K.