Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 5.14M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 36K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 36K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 34K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 34K
11: R1 Cover Page HTML 84K
12: R2 Unaudited Consolidated Balance Sheets HTML 181K
13: R3 Unaudited Consolidated Balance Sheets HTML 47K
(Parenthetical)
14: R4 Unaudited Consolidated Statements of Income HTML 137K
15: R5 Unaudited Consolidated Statements of Comprehensive HTML 61K
Income
16: R6 Unaudited Consolidated Statements of Changes in HTML 117K
Shareholders Equity
17: R7 Unaudited Consolidated Statements of Changes in HTML 39K
Shareholders Equity (Parenthetical)
18: R8 Unaudited Consolidated Statements of Cash Flows HTML 161K
19: R9 Corporate Structure and Nature of Operations; HTML 39K
Basis of Presentation
20: R10 Summary of Significant Accounting Policies HTML 52K
21: R11 Securities HTML 299K
22: R12 Loans and Allowance for Credit Losses HTML 724K
23: R13 Leases HTML 65K
24: R14 Goodwill and Other Intangibles HTML 60K
25: R15 (Loss) Earnings Per Share ("Eps") HTML 46K
26: R16 Low Income Housing Tax Credits and Other Tax HTML 44K
Credit Investments
27: R17 Shareholders' Equity HTML 46K
28: R18 Employee Benefits HTML 69K
29: R19 Share-Based Compensation HTML 77K
30: R20 Income Taxes HTML 42K
31: R21 Commitments and Contingencies HTML 42K
32: R22 Derivative Financial Instruments HTML 130K
33: R23 Balance Sheet Offsetting HTML 123K
34: R24 Fair Value of Assets and Liabilities HTML 224K
35: R25 Revenue from Contracts with Customers HTML 60K
36: R26 Other Comprehensive Income HTML 100K
37: R27 Segment Reporting HTML 87K
38: R28 Summary of Significant Accounting Policies HTML 64K
(Policies)
39: R29 Securities (Tables) HTML 303K
40: R30 Loans and Allowance for Credit Losses (Tables) HTML 704K
41: R31 Leases (Tables) HTML 48K
42: R32 Goodwill and Other Intangibles (Tables) HTML 57K
43: R33 (Loss) Earnings Per Share ("Eps") (Tables) HTML 45K
44: R34 Low Income Housing Tax Credits and Other Tax HTML 42K
Credit Investments (Tables)
45: R35 Shareholders' Equity (Tables) HTML 38K
46: R36 Employee Benefits (Tables) HTML 63K
47: R37 Share-Based Compensation (Tables) HTML 73K
48: R38 Income Taxes (Tables) HTML 39K
49: R39 Commitments and Contingencies (Tables) HTML 38K
50: R40 Derivative Financial Instruments (Tables) HTML 124K
51: R41 Balance Sheet Offsetting (Tables) HTML 122K
52: R42 Fair Value of Assets and Liabilities (Tables) HTML 201K
53: R43 Revenue from Contracts with Customers (Tables) HTML 44K
54: R44 Other Comprehensive Income (Tables) HTML 102K
55: R45 Segment Reporting (Tables) HTML 82K
56: R46 Securities - Summary Of Debt Securities (Detail) HTML 71K
57: R47 Securities - Additional Information (Detail) HTML 60K
58: R48 Securities - Schedule of Realized Gain (Loss) HTML 38K
(Details)
59: R49 Securities - Summary Of Government-Sponsored HTML 87K
Residential Mortgage-Backed Securities With Gross
Unrealized Losses (Detail)
60: R50 Securities - Debt Securities, Held-to-maturity HTML 58K
(Details)
61: R51 Securities - Summary Of Fair Value Of Available HTML 156K
For Sale Securities By Contractual Maturities
(Detail)
62: R52 Loans and Allowance for Credit Losses - Summary of HTML 82K
Company's Loan Portfolio as of the Dates Indicated
(Detail)
63: R53 Loans and Allowance for Credit Losses - Additional HTML 99K
Information (Detail)
64: R54 Loans and Allowance for Credit Losses - Summary of HTML 132K
Changes in Allowance for Loan Losses by Loan
Category (Detail)
65: R55 Loans and Allowance for Credit Losses - Summary of HTML 315K
Internal Risk-rating Categories (Detail)
66: R56 Loans and Allowance for Credit Losses - Summary of HTML 113K
Shows the Age Analysis of Past Due Loans (Detail)
67: R57 Loans and Allowance for Credit Losses - Schedule HTML 63K
of Non-Accrual Loans (Details)
68: R58 Loans and Allowance for Credit Losses - Loan HTML 130K
Modifications to Borrowers Experiencing Financial
Difficulty (Details)
69: R59 Loans and Allowance for Credit Losses - Summary of HTML 78K
TDR Loans on Accrual and Nonaccrual (Detail)
70: R60 Loans and Allowance for Credit Losses - Summary of HTML 56K
the Modifications Which Occurred During the
Periods and the Change in the Recorded Investment
Subsequent to the Modifications Occurring (Detail)
71: R61 Loans and Allowance for Credit Losses - Summary of HTML 40K
Post-modification Balance of TDRs listed by Type
of Modification (Detail)
72: R62 Loans and Allowance for Credit Losses - Summary of HTML 55K
the Company's Loan participations (Detail)
73: R63 Leases - Additional Information (Detail) HTML 39K
74: R64 Leases - Summary of Information Relating to HTML 35K
Operating Leases (Detail)
75: R65 Leases - Summary of Net Lease Cost (Detail) HTML 40K
76: R66 Leases - Supplemental Balance Sheet Information HTML 36K
Related to Operating Leases (Detail)
77: R67 Goodwill and Other Intangibles - Summary of HTML 58K
Goodwill and Other Intangible Assets (Detail)
78: R68 Goodwill and Other Intangibles - Additional HTML 33K
Information (Details)
79: R69 (Loss) Earnings Per Share ("Eps") (Details) HTML 64K
80: R70 Low Income Housing Tax Credits and Other Tax HTML 47K
Credit Investments - Additional Information
(Detail)
81: R71 Low Income Housing Tax Credits and Other Tax HTML 41K
Credit Investments - Summary of the Company's
Investments in Low Income Housing Projects
Accounted for Using the Proportional Amortization
Method (Detail)
82: R72 Shareholders' Equity - Narrative (Details) HTML 49K
83: R73 Shareholders' Equity - Schedule of Dividends HTML 38K
Declared and Paid (Details)
84: R74 Employee Benefits - Summary of Components of Net HTML 50K
Pension Expense (Details)
85: R75 Employee Benefits - Narrative (Details) HTML 36K
86: R76 Employee Benefits - Asset Held in Rabbi Trust by HTML 47K
Plan Type (Details)
87: R77 Share-Based Compensation - Narrative (Details) HTML 101K
88: R78 Share-Based Compensation - Share-based Payment HTML 72K
Arrangement, Restricted Stock, Restricted Stock
Unit, and Performance Stock Unit, Activity
(Details)
89: R79 Income Taxes - Summary of Company's Tax Provision HTML 38K
and Applicable Tax Rates (Detail)
90: R80 Income Taxes - Narrative (Details) HTML 40K
91: R81 Commitments and Contingencies - Summary of HTML 40K
Financial Instruments as of the Dates Indicated
(Detail)
92: R82 Derivative Financial Instruments - Schedule of HTML 48K
Interest Rate Derivatives (Details)
93: R83 Derivative Financial Instruments - Pre-tax Impact HTML 45K
of Terminated Cash Flow Hedges on AOCI (Details)
94: R84 Derivative Financial Instruments - Additional HTML 81K
information (Detail)
95: R85 Derivative Financial Instruments - HTML 48K
Customer-related derivative positions (Detail)
96: R86 Derivative Financial Instruments - Classification HTML 77K
on the balance sheet for the periods indicated
(Detail)
97: R87 Derivative Financial Instruments - Company's HTML 61K
derivative financial instruments included in OCI
as follows (Detail)
98: R88 Balance Sheet Offsetting - Disclosure Detail Of HTML 105K
Balance Sheet Offsetting Of Financial Assets And
Liabilities (Detail)
99: R89 Fair Value of Assets and Liabilities - Additional HTML 42K
information (Detail)
100: R90 Fair Value of Assets and Liabilities - Summary Of HTML 138K
The Balances Of Assets And Liabilities Measured At
Fair Value On A Recurring Basis (Detail)
101: R91 Fair Value of Assets and Liabilities - Summary Of HTML 43K
The Fair Value Of Assets And Liabilities Measured
At Fair Value On A Nonrecurring Basis (Detail)
102: R92 Fair Value of Assets and Liabilities - Schedule of HTML 87K
Fair Value of Financial Instruments (Details)
103: R93 Revenue from Contracts with Customers - Revenue HTML 52K
from External Customers by Products and Services
(Detail)
104: R94 Revenue from Contracts with Customers - Additional HTML 42K
information (Detail)
105: R95 Other Comprehensive Income - Comprehensive Income HTML 89K
(Loss) (Detail)
106: R96 Other Comprehensive Income - Schedule of HTML 61K
Accumulated Other Comprehensive Income (Loss)
(Detail)
107: R97 Segment Reporting - Schedule Of Segment Reporting HTML 99K
Information, By Segment (Detail)
108: R9999 Uncategorized Items - ebc-20230331.htm HTML 52K
111: XML IDEA XML File -- Filing Summary XML 219K
109: XML XBRL Instance -- ebc-20230331_htm XML 7.68M
110: EXCEL IDEA Workbook of Financial Reports XLSX 280K
7: EX-101.CAL XBRL Calculations -- ebc-20230331_cal XML 369K
8: EX-101.DEF XBRL Definitions -- ebc-20230331_def XML 1.25M
9: EX-101.LAB XBRL Labels -- ebc-20230331_lab XML 2.42M
10: EX-101.PRE XBRL Presentations -- ebc-20230331_pre XML 1.65M
6: EX-101.SCH XBRL Schema -- ebc-20230331 XSD 241K
112: JSON XBRL Instance as JSON Data -- MetaLinks 712± 1.12M
113: ZIP XBRL Zipped Folder -- 0001628280-23-016268-xbrl Zip 1.24M
(Exact
name of the registrant as specified in its charter)
___________________________
iMassachusetts
i84-4199750
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification Number)
i265 Franklin Street, iBoston,
iMassachusetts
i02110
(Address of principal executive offices)
(Zip
Code)
(i800) i327-8376
(Registrant’s telephone number, including area code)
__________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol
Name of exchange on which registered
iCommon Stock
iEBC
iNasdaq
Global Select Market
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. ☒iYes☐ No
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒iYes☐ No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
(Do
not check if a smaller reporting company)
Emerging Growth Company
i☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Yes ☐ No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). i☐ Yes ☒ No
i176,328,426
shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of May 4, 2023.
Available
for sale (amortized cost $i5,459,320 and $i7,825,435,
respectively)
i4,700,134
i6,690,778
Held
to maturity (fair value $i425,427 and $i423,226, respectively)
i471,185
i476,647
Total
securities
i5,171,319
i7,167,425
Loans
held for sale
i3,068
i4,543
Loans:
Commercial
and industrial
i3,169,438
i3,150,946
Commercial
real estate
i5,201,196
i5,155,323
Commercial
construction
i357,117
i336,276
Business
banking
i1,078,678
i1,090,492
Residential
real estate
i2,497,491
i2,460,849
Consumer
home equity
i1,180,824
i1,187,547
Other
consumer
i190,506
i194,098
Total
loans
i13,675,250
i13,575,531
Allowance
for loan losses
(i140,938)
(i142,211)
Unamortized
premiums, net of unearned discounts and deferred fees
(i13,597)
(i13,003)
Net
loans
i13,520,715
i13,420,317
Federal
Home Loan Bank stock, at cost
i45,168
i41,363
Premises
and equipment
i61,110
i62,656
Bank-owned
life insurance
i161,755
i160,790
Goodwill
and other intangibles, net
i660,165
i661,126
Deferred
income taxes, net
i314,139
i331,648
Prepaid
expenses
i163,018
i165,900
Other
assets
i482,257
i461,585
Total
assets
$
i22,720,530
$
i22,646,858
LIABILITIES
AND EQUITY
Deposits:
Demand
$
i5,564,016
$
i6,240,637
Interest
checking accounts
i4,240,780
i4,568,122
Savings
accounts
i1,633,790
i1,831,123
Money
market investment
i5,135,590
i4,710,095
Certificates
of deposit
i1,967,404
i1,624,382
Total
deposits
i18,541,580
i18,974,359
Borrowed
funds:
Short-term Federal Home Loan Bank advances
i1,088,296
i691,297
Escrow
deposits of borrowers
i25,671
i22,314
Interest
rate swap collateral funds
i11,780
i14,430
Long-term
Federal Home Loan Bank advances
i12,656
i12,787
Total
borrowed funds
i1,138,403
i740,828
Other
liabilities
i461,424
i459,881
Total
liabilities
i20,141,407
i20,175,068
Commitments
and contingencies (see footnote 13)
i
i
Shareholders’ equity
Common
shares, $ii0.01/ par value, ii1,000,000,000/
shares authorized, ii176,328,426/ and ii176,172,073/
shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively
i1,764
i1,762
Additional
paid in capital
i1,651,524
i1,649,141
Unallocated
common shares held by the Employee Stock Ownership Plan
(i136,470)
(i137,696)
Retained
earnings
i1,672,169
i1,881,775
Accumulated
other comprehensive income, net of tax
(i609,864)
(i923,192)
Total
shareholders’ equity
i2,579,123
i2,471,790
Total
liabilities and shareholders’ equity
$
i22,720,530
$
i22,646,858
The
accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
(1)Represents
gross transition adjustment amount of $i28.0 million, net of taxes of $i7.9 million, to reflect the cumulative impact on retained
earnings pursuant to the Company’s adoption of Accounting Standards Update 2016-13. Refer to Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for additional discussion.
(2)Represents gross transition adjustment amount of $i1.1
million, net of taxes of $i0.3 million, to reflect the cumulative impact on retained earnings pursuant to the Company’s adoption of Accounting Standards Update 2022-02. Refer to Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for additional discussion.
(3)Represents
shares issued, net of employee tax withheld, during the three months ended March 31, 2023 upon the vesting of restricted stock units. Refer to Note 11, “Share-Based Compensation” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for additional discussion.
The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. iCorporate
Structure and Nature of Operations; Basis of Presentation
Corporate Structure and Nature of Operations
Eastern Bankshares, Inc., a Massachusetts corporation (the “Company”), is a bank holding company. Through its wholly-owned subsidiaries, Eastern Bank (the “Bank”) and Eastern Insurance Group LLC (“Eastern Insurance Group”), the Company provides a variety of banking services, trust and investment services, and insurance services, through its full-service bank branches and insurance offices, located primarily in eastern Massachusetts, southern and coastal New Hampshire and Rhode Island. Eastern Insurance Group LLC is a wholly-owned subsidiary of the Bank.
The
activities of the Company are subject to the regulatory supervision of the Board of Governors of the Federal Reserve System (“Federal Reserve”). The activities of the Bank are subject to the regulatory supervision of the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation (“FDIC”) and the Consumer Financial Protection Bureau. The Company and the activities of the Bank and its subsidiaries are also subject to various Massachusetts, New Hampshire and Rhode Island business, banking and insurance regulations.
i
Basis
of Presentation
The Company’s Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) as set forth by the Financial Accounting Standards Board (“FASB”) and its Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) as well as the rules and interpretive releases of the U.S. Securities and Exchange Commission (“SEC”) under the authority of federal securities laws.
The Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries and entities
in which it holds a controlling financial interest through being the primary beneficiary or through holding a majority of the voting interest. All intercompany accounts and transactions have been eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform to the current period’s presentation which included certain loan servicing-related costs which have been reclassified from professional services to loan expense.
The accompanying Consolidated Balance Sheet as of March 31, 2023, the Consolidated Statements of Income and Comprehensive Income and of Changes in Shareholders’ Equity for the three months ended March 31, 2023 and 2022 and Statements of Cash Flows for the three months ended March
31, 2023 and 2022 are unaudited. The Consolidated Balance Sheet as of December 31, 2022 was derived from the Audited Consolidated Financial Statements as of that date. The interim Consolidated Financial Statements and the accompanying notes should be read in conjunction with the annual Consolidated Financial Statements and the accompanying notes contained within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Form 10-K”), as filed with the SEC. In the opinion of management, the Company’s Consolidated Financial Statements reflect all adjustments, which include only normal recurring adjustments, necessary
for a fair statement of the results of operations for the periods presented. The results for the three months ended March 31, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods, or any future year or period.
2. iSummary of Significant
Accounting Policies
The following describes the Company’s use of estimates as well as relevant accounting pronouncements that were recently issued but not yet adopted as of March 31, 2023 and those that were adopted during the three months ended March 31, 2023. For a full discussion of significant accounting policies, refer to the Notes to the Consolidated Financial Statements included within the Company’s 2022 Form 10-K.
i
Use
of Estimates
In preparing the Consolidated Financial Statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and income and expenses for the periods reported. Actual results could differ from those estimates based on changing conditions, including economic conditions and future events. Material estimates that are particularly susceptible to change relate to the determination of the allowance for credit losses, valuation and fair value measurements, the liabilities for benefit obligations (particularly pensions), the provision for income taxes and impairment of goodwill and other intangibles.
Relevant standards that were recently issued but not yet adopted as ofMarch 31, 2023:
In March 2023, the FASB issued ASU 2023-02, Investments–Equity Method and Joint Ventures (Topic 323): Accounting for
Investments in Tax Credit Structures Using the Proportional Amortization Method (“ASU 2023-02”). This update permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if the following conditions are met:
1.It is probable that the income tax credits allocable to the tax equity investor will be available.
2.The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project.
3.Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits include income
tax credits, other income tax benefits, and other non-income-tax-related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project.
4.The tax equity investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive.
5.The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor’s liability is limited to its capital investment.
Under existing accounting standards, the proportional amortization method is allowable only for equity investments in low-income-housing tax credit structures.
Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). Updates made by ASU 2023-02 allow a reporting entity to make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis. The Company had previously made an accounting policy election to account for its investments in low-income-housing tax credit investments using the proportional amortization method. This election was made upon the Company’s adoption of ASU 2014-01, Investments–Equity
Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, which introduced the option to apply proportional amortization to low-income-housing tax credit investments. For public business entities, the amendments in ASU 2023-02 are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in an interim period. The Company is currently assessing the impact of the new standard on its Consolidated Financial Statements.
Relevant standards that were adopted during the three months ended March 31, 2023:
In
October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). This update modifies how an acquiring entity measures contract assets and contract liabilities of an acquiree in a business combination in accordance with Topic 606. The amendments in this update require the acquiring entity in a business combination to account for revenue contracts
as if they had originated the contract and assess how the acquiree accounted for the contract under Topic 606. ASU 2021-08 improves comparability of recognition and measurement of revenue contracts with customers both before and after a business combination. For public business entities, the amendments in this update were effective for fiscal years beginning after December 15, 2022. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective
date of the amendments with early adoption permitted. The adoption of this standard on January 1, 2023 did not have a material impact on the Company’s Consolidated Financial Statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments–Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). The amendments in this update eliminate the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310-40 and amends the guidance on vintage disclosures, referenced in ASC 326-20-50, to require disclosure of current-period gross write-offs by year of origination. This update supersedes the existing accounting guidance for TDRs in ASC 310-40 in its entirety and
requires entities to evaluate all receivable modifications under existing accounting guidance in ASC 310-20 to determine whether a modification made to a borrower results in a new loan or a continuation of an existing loan. In addition to the elimination of TDR accounting guidance, entities that adopt this update will no longer consider renewals, modifications and extensions that result from reasonably expected TDRs in their calculation of the allowance for credit losses. Further, if an entity employs a discounted cash flow method to calculate the allowance for credit losses, it will be required to use a post-modification-derived effective interest rate as part of its calculation. The update also requires new disclosures for receivables for which there has been a modification in their contractual cash flows resulting from borrowers experiencing financial difficulties. For public business entities, the
amendments in this update were effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method. The amendments on TDR disclosures and vintage disclosures should be adopted prospectively. On January 1, 2023, the Company adopted this standard by using the modified retrospective transition method, except with regard to amendments on TDR and vintage disclosures which were adopted prospectively. Accordingly, the Company
recorded a cumulative-effect adjustment to retained earnings as of January 1, 2023. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
Significant Accounting Policies
The adoption of ASU 2022-02 resulted in changes in the Company’s accounting policies and estimates as it relates to loans receivable and the allowance for loan losses. The following describes the changes to the Company’s significant accounting policies from December 31, 2022, that resulted from the adoption
of ASU 2022-02:
i
Allowance for Loan Losses - Loans Held for Investment
Troubled Debt Restructured Loans
The amendments in ASU 2022-02 eliminated the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Thus, as a result of
adoption of this standard on January 1, 2023, rather than applying the recognition and measurement guidance for TDRs, the Company now applies the loan refinancing and restructuring guidance codified in paragraphs 310-20-35-9 through 35-11 of the Accounting Standards Codification to determine whether a modification results in a new loan or a continuation of an existing loan. As previously indicated, the Company adopted ASU 2022-02 using the modified retrospective transition method. Accordingly, upon adoption, commercial loan TDRs existing at that time which were measured using a discounted cash flow methodology and all residential real estate and consumer home equity loan TDRs were transitioned to the applicable segment of loans collectively evaluated
for impairment based upon their risk characteristics. Commercial loan TDRs determined to be collateral dependent continue to be assessed for impairment on an individual basis.
Prior to the Company’s adoption of ASU 2022-02, in cases where a borrower was experiencing financial difficulties and the Company made certain concessionary modifications to contractual terms, the loan was classified as a TDR. Modifications included adjustments to interest rates, extensions of maturity, consumer loans where the borrower’s obligations had been effectively discharged through Chapter 7 bankruptcy and the borrower had not reaffirmed the debt to the Company, and other actions intended
to minimize economic loss and avoid foreclosure or repossession of collateral. Management identified loans as TDR loans when it had a reasonable expectation that it would execute a TDR modification with a borrower. In addition, management estimated expected credit losses on a collective basis if a group of TDR loans shared similar risk characteristics. If a TDR loan’s risk characteristics were not similar to those of any of the Company’s other TDR loans, expected credit losses on the TDR loan were measured individually. The impairment analysis discounted the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification or the fair value of collateral if the loan was collateral dependent. The amount of credit loss, if any, was recorded as a specific loss allocation to each individual loan or as a loss allocation to
the pool of loans, for those loans for which credit loss was measured on a collective basis, in the allowance for credit losses. Any commercial (commercial and industrial, commercial real estate, commercial construction, and business banking loans) or residential loan that had been classified as a TDR and which subsequently defaulted was reviewed to determine if the loan should be deemed collateral-dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan was determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell.
Refer to Note 4, “Loans and Allowance for Credit Losses” for additional information regarding the Company’s measurement of the allowance for loan losses
as of March 31, 2023 and information regarding the Company’s TDR loans as of December 31, 2022 and for the three months ended March 31, 2022.
The amortized cost, gross unrealized gains and losses, allowance for credit losses (“ACL”) and fair value of AFS securities as of March 31, 2023 and December 31,
2022, respectively, were as follows:
The
Company did iino/t
record a provision for credit losses on any AFS securities for either the three months ended March 31, 2023 or 2022. Accrued interest receivable on AFS securities totaled $i12.3 million and $i12.9
million as of March 31, 2023 and December 31, 2022, respectively, and is included within other assets on the Consolidated Balance Sheets. The Company did iino/t
record any write-offs of accrued interest income on AFS securities during either the three months ended March 31, 2023 or 2022. No securities held by the Company were delinquent on contractual payments as of March 31, 2023 and December 31, 2022, nor were any securities placed on non-accrual status for the three and twelve month periods then ended, respectively.
i
The
following table summarizes gross realized gains and losses from sales of AFS securities for the periods indicated:
Gross
realized losses from sales of AFS securities
(i333,170)
(i3,217)
Losses
from sales of AFS securities, net
$
(i333,170)
$
(i2,172)
/
iInformation
pertaining to AFS securities with gross unrealized losses as of March 31, 2023 and December 31, 2022, for which the Company did not recognize a provision for credit losses under the current expected credit loss methodology (“CECL”), aggregated by investment category and length of time that individual securities had been in a continuous loss position, is as follows:
The
Company does not intend to sell these investments and has determined based upon available evidence that it is more likely than not that the Company will not be required to sell each security before the expected recovery of its amortized cost basis. As a result, the Company did not recognize an ACL on these investments as of both March 31, 2023 and December 31, 2022.
The causes of the impairments listed in the tables above by category are as follows as of March 31, 2023 and December 31, 2022:
•Government-sponsored
residential mortgage-backed securities – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•Government-sponsored commercial mortgage-backed securities – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these
securities are implicitly guaranteed by the U.S. government or one of its agencies.
•U.S. Agency bonds – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•U.S.
Treasury securities – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•State and municipal bonds and obligations – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality.
•Other
debt securities – This securities portfolio consists of two foreign debt securities which are performing in accordance with the terms of the respective contractual agreements. The decline in market value of these securities is attributable to changes in interest rates and not credit quality.
Held to Maturity Securities
i
The amortized cost, gross unrealized gains and losses, and fair value of HTM securities as of the dates indicated were as follows:
The
Company did iino/t
record a provision for estimated credit losses on any HTM securities for either the three months ended March 31, 2023 or 2022. The accrued interest receivable on HTM securities totaled $ii1.0/
million as of both March 31, 2023 and December 31, 2022 and is included within other assets on the Consolidated Balance Sheets. The Company did iino/t
record any write-offs of accrued interest receivable on HTM securities during either the three months ended March 31, 2023 or 2022. No securities held by the Company were delinquent on contractual payments as of March 31, 2023 and December 31, 2022 nor were any securities placed on non-accrual status for the periods then ended.
Available for Sale and Held to Maturity Securities Contractual Maturity
The amortized cost and estimated fair value of AFS and HTM securities by contractual maturities as of March 31, 2023 and December 31, 2022 are shown below.
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
As of both March 31, 2023 and December 31, 2022, securities with a carrying value of $i440.3 million and $i437.9
million, respectively, were pledged to secure public deposits and for other purposes required by law. As of March 31, 2023 and December 31, 2022, deposits with associated pledged collateral included cash accounts from the Company’s wealth management division (“Eastern Wealth Management”) and municipal deposit accounts.
In March 2023 the Federal Reserve created the Bank Term Funding Program (the “Program”) in order to support American businesses and households. The Program helps make available additional funding to eligible depository institutions in order to help assure banks have the ability to meet the needs of their depositors. The Program offers loans up to one year in length to banks in return for any collateral eligible
for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. As of March 31, 2023, securities with a carrying value of $i2.6 billion were pledged as collateral through the Program. In addition, the Company pledged securities with a carrying value of $i376.8
million to the Federal Reserve Discount Window (the “Discount Window”) as of March 31, 2023. iiNo/
securities were pledged to the Program or the Discount Window as of December 31, 2022.
Gross
loans before unamortized premiums, unearned discounts and deferred fees
i13,675,250
i13,575,531
Allowance
for loan losses (1)
(i140,938)
(i142,211)
Unamortized
premiums, net of unearned discounts and deferred fees
(i13,597)
(i13,003)
Loans
after the allowance for loan losses, unamortized premiums, unearned discounts and deferred fees
$
i13,520,715
$
i13,420,317
(1)The
balance of accrued interest receivable excluded from amortized cost and the calculation of the allowance for loan losses amounted to $i46.2 million and $i45.2
million as of March 31, 2023 and December 31, 2022, respectively, and is included within other assets on the Consolidated Balance Sheets.
(2)Automobile loans are included in the other consumer portfolio and amounted to $i13.3 million and $i18.1
million at March 31, 2023 and December 31, 2022, respectively.
/
There are no other loan categories that exceed 10% of total loans not already reflected in the preceding table.
The Company’s lending activities are conducted principally in the New England area with the exception of its Shared National Credit Program (“SNC Program”) portfolio. The Company participates in the SNC Program in an effort to improve its industry and geographical diversification.
The SNC Program portfolio is included in the Company’s commercial and industrial portfolio. The SNC Program portfolio is defined as loan syndications with exposure over $i100 million and with three or more lenders participating.
Most loans originated by the Company are either collateralized by real estate or other assets or guaranteed
by federal and local governmental authorities. The ability and willingness of the single-family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers’ geographic areas and real estate values. The ability and willingness of commercial real estate, commercial and industrial, and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate economy in the borrowers’ geographic areas and the general economy.
Loans Pledged as Collateral
The carrying value of loans pledged to secure advances from the Federal Home Loan Bank (“FHLB”) of Boston (“FHLBB”) were $i4.1
billion and $i3.9 billion at March 31, 2023 and December 31, 2022, respectively. The balance of funds borrowed from the FHLBB were $i1.1
billion and $i704.1 million at March 31, 2023 and December 31, 2022, respectively.
The carrying value of loans pledged to secure advances from the Federal Reserve Bank (“FRB”) were $ii1.1/
billion at both March 31, 2023 and December 31, 2022. There were iino/
funds borrowed from the FRB outstanding at March 31, 2023 and December 31, 2022.
Serviced Loans
At March 31, 2023 and December 31, 2022, mortgage loans partially or wholly-owned by others and serviced by the Company amounted to approximately $i82.5
million and $i84.0 million, respectively.
Purchased Loans
The Company began purchasing residential real estate mortgage loans during the third quarter of 2022. Loans purchased were subject to the same underwriting criteria as those loans originated directly by the Company.
During the three months ended March 31, 2023, the Company purchased $i32.0 million of residential real estate mortgage loans. iNo
residential
real estate mortgage loans were purchased during the three months ended March 31, 2022. As of March 31, 2023 and December 31, 2022, the amortized cost balance of loans purchased was $i399.9
million and $i376.1 million, respectively. As of March 31, 2023, the Company had ceased purchases of residential real estate mortgage loans.
Allowance for Loan Losses
The allowance for loan losses is established to provide for management’s estimate
of expected lifetime credit losses on loans measured at amortized cost at the balance sheet date and is established through a provision for loan losses charged to net income. Charge-offs, net of recoveries, are charged directly to the allowance for loan losses. Commercial and residential loans are charged-off in the period in which they are deemed uncollectible. Delinquent loans in these product types are subject to ongoing review and analysis to determine if a charge-off in the current period is appropriate. For consumer loans, policies and procedures exist that require charge-off consideration upon a certain triggering event depending on the product type.
i
The
following tables summarize the changes in the allowance for loan losses by loan category for the periods indicated:
Cumulative
effect of change in accounting principle (2)
i11,533
(i6,655)
i1,485
i6,160
i13,489
i1,857
(i541)
(i242)
i27,086
Charge-offs
(i1)
i—
i—
(i945)
i—
i—
(i661)
i—
(i1,607)
Recoveries
i250
i14
i—
i928
i10
i4
i179
i—
i1,385
Provision
(release)
(i2,959)
(i1,120)
i344
i143
i2,188
i435
i484
i—
(i485)
Ending
balance
$
i26,841
$
i44,612
$
i4,414
$
i17,269
$
i22,243
$
i6,018
$
i2,769
$
i—
$
i124,166
(1)Represents
the adjustment needed to reflect the cumulative day one impact pursuant to the Company’s adoption of ASU 2022-02 (i.e., cumulative effect adjustment related to the adoption of ASU 2022-02 as of January 1, 2023). The adjustment represents a $i1.1 million decrease to the allowance attributable to the change in accounting methodology for
estimating the allowance for loan losses resulting from the Company’s adoption of the standard.
(2)Represents the adjustment needed to reflect the cumulative day one impact pursuant to the Company’s adoption of ASU 2016-13 (i.e., cumulative effect adjustment related to the adoption of ASU 2016-13 as of January 1, 2022). The adjustment represents a $i27.1
million increase to the allowance attributable to the change in accounting methodology for estimating the allowance for loan losses resulting from the Company’s adoption of the standard. The adjustment also includes the adjustment needed to reflect the day one reclassification of the Company’s PCI loan balances to PCD and the associated gross-up of $i0.1
million, pursuant to the Company’s adoption of ASU 2016-13.
Management evaluates the need for a reserve on unfunded lending commitments in a manner consistent with loans held for investment. The Company’s
adoption of ASU 2022-02 on January 1, 2023 did not impact the reserve for unfunded lending commitments. Upon adoption of ASU 2016-13 on January 1, 2022, the Company recorded a transition adjustment related to the reserve for unfunded lending commitments of $i1.0 million, resulting in a total reserve for unfunded
lending commitments of $i11.1 million as of January 1, 2022. As of March 31, 2023 and December 31, 2022, the Company’s reserve for unfunded lending commitments was $i13.9
million and $i13.2 million, respectively, which is recorded within other liabilities in the Company's Consolidated Balance Sheets.
Portfolio Segmentation
Management uses a methodology to systematically estimate the amount of expected losses in each segment of loans in the
Company’s portfolio. Commercial and industrial business banking, investment commercial real estate, and commercial and industrial loans are evaluated based upon loan-level risk characteristics, historical losses and other factors which form the basis for estimating expected losses. Other portfolios, including owner occupied commercial real estate (which includes business banking owner occupied commercial real estate), commercial construction, residential mortgages, home equity and consumer loans, are analyzed as groups taking into account delinquency ratios, and the Company’s and peer banks’ historical loss experience. For the purposes of estimating the allowance for loan losses, management segregates the loan portfolio into loan categories that share similar risk characteristics such as the purpose of the loan, repayment source, and collateral. These characteristics are considered
when determining the appropriate level of the allowance for each category. Some examples of these risk characteristics unique to each loan category include:
Commercial Lending
Commercial and industrial: The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Collateral frequently consists of a first lien position on business assets including, but not limited to, accounts receivable, inventory, aircraft and equipment. The primary repayment source is operating cash flow and, secondarily, the liquidation of assets. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals that hold material ownership in the borrowing
entity when the loan-to-value of a commercial and industrial loan is in excess of a specified threshold.
Commercial real estate: Collateral values are established by independent third-party appraisals and evaluations. Primary repayment sources include operating income generated by the real estate, permanent debt refinancing, sale of the real estate and, secondarily, liquidation of the collateral. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals that hold material ownership in the borrowing entity when the loan-to-value of a commercial real estate loan is in excess of a specified threshold.
Commercial construction: These loans are generally considered to present a higher degree of risk than
other real estate loans and may be affected by a variety of factors, such as adverse changes in interest rates and the borrower’s ability to control costs and adhere to time schedules. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. Construction loan repayment is substantially dependent on the ability of the borrower to complete the project and obtain permanent financing.
Business banking: These loans are typically secured by all business assets or commercial real estate. Business banking originations include traditionally underwritten loans as well as partially automated scored loans. Business banking scored loans are determined
by utilizing the Company’s proprietary decision matrix that has a number of quantitative factors including, but not limited to, a guarantor’s credit score, industry risk, and time in business. The Company also engages in Small Business Association (“SBA”) lending. The SBA guarantees reduce the Company’s loss due to default and are considered a credit enhancement to the loan structure.
Residential Lending
These loans are made to borrowers who demonstrate the ability to repay principal and interest on a monthly basis. 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. The Company maintains policy standards for minimum credit score and cash reserves and maximum loan-to-value consistent with a “prime” portfolio. Collateral consists of mortgage liens on 1-4 family residential dwellings. The policy standards applied to loans originated by the Company are the same as those applied to purchased loans. The Company does not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or retained in the Company’s
loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and the Company’s capital needs.
Consumer home equity: 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 loans
are term loans that require the monthly payment of principal and interest such that the loan will be fully amortized at maturity. Underwriting considerations are materially consistent with those utilized in residential real estate. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
Other consumer: The Company’s policy and underwriting in this category, which is comprised primarily of home improvement, automobile and aircraft loans, include the following factors, among others: income sources and reliability, credit histories, term of repayment, and collateral value, as applicable. These are typically granted on an unsecured basis, with the exception of aircraft and automobile loans.
Credit Quality
Commercial
Lending Credit Quality
The credit quality of the Company’s commercial loan portfolio is actively monitored and supported by a comprehensive credit approval process and all large dollar transactions are sent for approval to a committee of seasoned business line and credit professionals. The Company maintains an independent credit risk review function that reports directly to the Risk Management Committee of the Board of Directors. Credits that demonstrate significant deterioration in credit quality are transferred to a specialized group of experienced officers for individual attention.
The Company monitors credit quality indicators
and utilizes portfolio scorecards to assess the risk of its commercial portfolio. Specifically, the Company utilizes a 15-point credit risk-rating system to manage risk and identify potential problem loans. Under this point system, risk-rating assignments are based upon a number of quantitative and qualitative factors that are under continual review. Factors include cash flow, collateral coverage, liquidity, leverage, position within the industry, internal controls and management, financial reporting, and other considerations. Commercial loan risk ratings are (re)evaluated for each loan at least once-per-year. The risk-rating categories under the credit risk-rating system are defined as follows:
0 Risk Rating - Unrated
Certain segments of the portfolios are not rated. These segments include aircraft
loans, business banking scored loan products, and other commercial loans managed by exception. Loans within this unrated loan segment are monitored by delinquency status; and for lines of credit greater than $i100,000 in exposure, an annual review is conducted which includes the review of the business score and loan and deposit account performance. The Company supplements performance data with current business credit scores for the business banking
portfolio on a quarterly basis. Unrated commercial and business banking loans are generally restricted to commercial exposure of less than $i1.5 million. Loans included in this category generally are not required to provide regular financial reporting or regular covenant monitoring.
For purposes of estimating the allowance for loan losses, unrated loans are considered in the same manner as “Pass” rated loans. Unrated loans are included with “Pass” rated loans for disclosure
purposes.
1-10 Risk Rating – Pass
Loans with a risk rating of 1-10 are classified as “Pass” and are comprised of loans that range from “substantially risk free” which indicates borrowers of unquestioned credit standing, well-established national companies with a very strong financial condition, and loans fully secured by policy conforming cash levels, through “low pass” which indicates acceptable rated loans that may be experiencing weak cash flow, impending lease rollover or minor liquidity concerns.
11 Risk Rating – Special Mention (Potential Weakness)
Loans to borrowers in this category exhibit potential weaknesses or downward trends deserving management’s close attention. While potentially weak, no loss of principal or interest is envisioned. Included in this category
are borrowers who are performing as agreed, are weak when compared to industry standards, may be experiencing an interim loss and may be in declining industries. An element of asset quality, financial flexibility or management is below average. The Company does not consider borrowers within this category as new business prospects. Borrowers rated special mention may find it difficult to obtain alternative financing from traditional bank sources.
Loans with a risk-rating of 12 exhibit well-defined weaknesses that, if not corrected, may jeopardize the orderly liquidation of the debt. A loan is classified as substandard if it is inadequately protected by the repayment capacity of the
obligor or by the collateral pledged. Specifically, repayment under market rates and terms, or by the requirements under the existing loan documents, is in jeopardy, but no loss of principal or interest is envisioned. There is a possibility that a partial loss of principal and/or interest will occur in the future if the deficiencies are not corrected. Loss potential, while existing in the aggregate portfolio of substandard assets, does not have to exist in individual assets classified as substandard. Non-accrual is possible, but not mandatory, in this class.
13 Risk Rating – Doubtful (Loss Probable)
Loans classified as doubtful have comparable weaknesses as found in the loans classified as substandard, with the added provision that such weaknesses make collection of the debt
in full (based on currently existing facts, conditions and values) highly questionable and improbable. Serious problems exist such that a partial loss of principal is likely. The probability of loss exists, but because of reasonably specific pending factors that may work to strengthen the credit, estimated losses are deferred until a more exact status can be determined. Specific reserves will be the amount identified after specific review. Non-accrual is mandatory in this class.
14 Risk Rating – Loss
Loans to borrowers in this category are deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the Company is not warranted. This classification does not mean that the loans have no recovery or salvage value,
but rather, it is not practical or desirable to defer writing off these assets even though partial recovery may occur in the future. Loans in this category have a recorded investment of $0 at the time of the downgrade.
Residential and Consumer Lending Credit Quality
For the Company’s residential and consumer portfolios, the quality of the loan is best indicated by the repayment performance of an individual borrower. Updated appraisals, broker opinions of value and other collateral valuation methods are employed in the residential and consumer portfolios, typically for credits that are deteriorating. Delinquency status is determined using payment performance, while accrual status may be determined using a combination of payment performance, expected borrower viability and collateral value. Delinquent
consumer loans are handled by a team of seasoned collection specialists.
i
The following table details the amortized cost balances of the Company’s loan portfolios, presented by credit quality indicator and origination year as of March 31, 2023, and gross charge-offs for the three month period then ended:
(1)The
amounts presented represent the amortized cost as of March 31, 2023 of revolving loans that were converted to term loans during the three months ended March 31, 2023.
The following table details the amortized cost balances of the Company’s loan portfolios, presented by credit quality indicator and origination year as of December 31, 2022:
(1)The
amounts presented represent the amortized cost as of December 31, 2022 of revolving loans that were converted to term loans during the year ended December 31, 2022.
Asset Quality
The Company manages its loan portfolio with careful monitoring. As a general rule, loans more than 90 days past due with respect to principal and interest are classified as non-accrual loans. Exceptions may be made if management believes that collateral held by the Company is clearly sufficient and in full satisfaction of both principal and interest. The
Company may also use discretion regarding other loans over i90 days delinquent if the loan is well secured and in the process of collection. Non-accrual loans and loans that are more than i90
days past due but still accruing interest are considered non-performing loans.
Non-accrual loans may be returned to an accrual status when principal and interest payments are no longer delinquent, and the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectability of principal and interest. Loans are considered past due based upon the number of days delinquent according to their contractual terms.
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.
i
The
following tables show the age analysis of past due loans as of the dates indicated:
(1)The
loans on non-accrual status and without an ACL as of both March 31, 2023 and December 31, 2022, were primarily comprised of collateral dependent loans for which the fair value of the underlying loan collateral exceeded the loan carrying value.
/
The amount of interest income recognized on non-accrual loans during the three months ended March 31, 2023 and 2022 was not significant. As of both March 31, 2023 and December 31, 2022, there were no loans greater than 90 days
past due and still accruing.
It is the Company’s policy to reverse any accrued interest when a loan is put on non-accrual status and, generally, to record any payments received from a borrower related to a loan on non-accrual status as a reduction of the amortized cost basis of the loan. Accrued interest reversed against interest income for the three months ended March 31, 2023 and 2022 was insignificant.
For collateral values for residential mortgage and home equity loans, the Company relies primarily upon third-party valuation information from certified appraisers and values are generally based upon recent appraisals
of the underlying collateral, brokers’ opinions based upon recent sales of comparable properties, or estimated auction or liquidation values less estimated costs to sell. As of March 31, 2023 and December 31, 2022, the Company had collateral-dependent residential mortgage and home equity loans totaling $i0.5 million and $i0.6
million, respectively.
For collateral-dependent commercial loans, the amount of the allowance for loan losses is individually assessed based upon the fair value of the collateral. Various types of collateral are used, including real estate, inventory, equipment, accounts receivable, securities and cash, among others. For commercial real estate loans, the Company relies primarily upon third-party valuation information from certified appraisers and values are generally based upon recent appraisals of the underlying collateral, brokers’ opinions based upon recent sales of comparable properties, estimated equipment auction or liquidation values, income capitalization, or a combination of income capitalization and comparable sales. As of March 31, 2023 and December 31,
2022, the Company had collateral-dependent commercial loans totaling $i12.3 million and $i16.2
million, respectively.
Appraisals for all loan types are obtained at the time of loan origination as part of the loan approval process and are updated at the time of a loan modification and/or refinance and as considered necessary by management for impairment review purposes. In addition, appraisals are updated as required by regulatory pronouncements.
As of both March 31, 2023 and December 31, 2022, the Company had no residential real estate held in other real estate owned (“OREO”). As of both March 31, 2023 and December 31, 2022, there were no mortgage loans collateralized by residential real
estate property for which formal foreclosure proceedings were in-process.
Loan Modifications to Borrowers Experiencing Financial Difficulty
i
The
following tables show the amortized cost balance as of March 31, 2023 of loans modified during the three months ended March 31, 2023 to borrowers experiencing financial difficulty by the type of concession granted:
Interest
Rate Reduction
Other-than-Insignificant Delay in Repayment
Combination—Interest Rate Reduction & Other-than-Insignificant Delay in Repayment
Amortized Cost Balance
% of Total Portfolio
Amortized Cost Balance
% of Total Portfolio
Amortized Cost Balance
% of Total Portfolio
(Dollars
in thousands)
Business banking
$
i47
i0.00
%
$
i—
i—
%
$
i64
i0.01
%
Residential
real estate
i—
i—
i327
i0.01
i—
i—
Consumer
home equity
i813
i0.07
i23
i0.00
i175
i0.01
Total
$
i860
i0.01
%
$
i350
i0.00
%
$
i239
i0.00
%
Combination—Interest
Rate Reduction & Term Extension
Combination—Term Extension & Other-than-Insignificant Delay in Repayment
Combination—Interest Rate Reduction, Term Extension & Other-than-Insignificant Delay in Repayment
The following table describes the financial effect of the modifications made during the three months ended March 31, 2023 to borrowers experiencing financial difficulty:
Loan
Type
Financial Effect (1)
Interest Rate Reduction
Business banking
Reduced weighted-average contractual interest rate from i9.5% to i6.9%.
Consumer
home equity
Reduced weighted-average contractual interest rate from i7.0% to i4.4%.
Other-than-Insignificant
Delay in Repayment
Business banking
Deferred a weighted average of itwelve payments. For principal and interest deferrals, the loans were re-amortized over an extended payment period resulting in reduced monthly payment amounts for the borrowers. For interest-only deferrals, interest accrued at the time of the modification was added to the end of the loan life.
Residential
real estate
Deferred a weighted average of inine principal and interest payments which were added to the end of the loan life.
Consumer home equity
Deferred a weighted average of isix
principal and interest payments which were added to the end of the loan life.
Term Extension
Business banking
Added a weighted-average i4.2 years to the life of loans, which reduced monthly payment amounts for the borrowers.
Consumer home equity
Added
a weighted-average i0.6 years to the life of loans, which reduced monthly payment amounts for the borrowers.
(1)Loans that were modified in more than one manner are included in each modification type corresponding to the type of modifications performed.
As of March 31, 2023, no loans to borrowers experiencing financial difficulty modified during the three months
ended March 31, 2023 had a payment default during the three months ended March 31, 2023.
Management closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. iThe following table shows the age analysis of past due loans to borrowers experiencing financial difficulty as of March 31,
2023 that were modified during the three months ended March 31, 2023:
As
of March 31, 2023, there were no additional commitments to lend to borrowers experiencing financial difficulty and which were modified during the three months ended March 31, 2023 in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant delay in repayment, or a term extension.
Troubled Debt Restructurings (“TDR”)
As described previously in Note 2, “Summary of Significant Accounting Policies,”the Company adopted ASU 2022-02 on January 1, 2023 which eliminated TDR accounting. Previously, in cases where a borrower experienced financial difficulty and the
Company made certain concessionary modifications to contractual terms, the loan was classified as a TDR. The process through which management identified loans as TDR loans, the methodology employed to record any loan losses, and the calculation of any shortfall on collateral dependent loans is described within Note 2, “Summary of Significant Accounting Policies”within the Notes to the Consolidated Financial Statements included within the Company’s 2022 Form 10-K. The below disclosures regarding TDRs relate to prior periods and were included for comparative purposes.
The Company’s policy was to have any TDR loan which was on non-accrual status prior to being modified remain on non-accrual status
for approximately six months subsequent to being modified before management considered its return to accrual status. If the TDR loan was on accrual status prior to being modified, it was reviewed to determine if the modified loan should remain on accrual status.
The following table shows the TDR loans on accrual and non-accrual status as of December 31, 2022:
TDRs
on Accrual Status
TDRs on Non-Accrual Status
Total TDRs
Number of Loans
Balance of Loans
Number of Loans
Balance of Loans
Number of Loans
Balance of Loans
(Dollars in thousands)
Commercial
and industrial
i2
$
i4,449
i9
$
i11,317
i11
$
i15,766
Business
banking
i11
i4,124
i22
i2,101
i33
i6,225
Residential
real estate
i114
i17,618
i28
i4,016
i142
i21,634
Consumer
home equity
i51
i2,632
i19
i1,917
i70
i4,549
Other
consumer
i1
i11
i—
i—
i1
i11
Total
i179
$
i28,834
i78
$
i19,351
i257
$
i48,185
At
December 31, 2022, the outstanding recorded investment of loans that were new TDR loans during the year ended December 31, 2022 was $i11.0 million. The amount of allowance for loan losses associated with the TDR loans was $i1.8
million at December 31, 2022. There were no additional commitments to lend to borrowers who have been party to a TDR as of December 31, 2022.
The following table shows the modifications which occurred during the three months ended March 31, 2022 and the change in the recorded investment subsequent to the modifications occurring:
Post-Modification Outstanding Recorded Investment (1)
(Dollars
in thousands)
Business banking
i5
$
i440
$
i448
Residential
real estate
i1
i134
i134
Consumer
home equity
i1
i210
i210
Total
i7
$
i784
$
i792
(1)The
post-modification balances represent the balance of the loan on the date of modification. These amounts may show an increase when modification includes capitalization of interest.
The following table shows the Company’s post-modification balance of TDRs listed by type of modification during the three months ended March 31, 2022:
During
the three months ended March 31, 2022, there were no loans that had been modified during the prior 12 months which had subsequently defaulted. The Company considers a loan to have defaulted when it reaches 90 days past due or is transferred to non-accrual. During the three months ended March 31, 2022, no amounts were charged-off on TDRs modified in the prior 12 months.
Loan Participations
The Company occasionally purchases commercial loan participations, or participates in syndications through the SNC Program. These participations meet the same underwriting, credit and portfolio management standards as the
Company’s other loans and are applied against the same criteria to determine the allowance for loan losses as other loans.
iThe following table summarizes the Company’s loan participations:
The
Company leases certain office space and equipment under various non-cancelable operating leases. These leases have original terms ranging from i1 year to i25 years. Operating lease liabilities and right-of-use (“ROU”) assets are recognized at the lease commencement date based
upon the present value of the future minimum lease payments over the lease term. Operating lease liabilities are recorded within other liabilities and ROU assets are recorded within other assets in the Company’s Consolidated Balance Sheets.
i
As of the dates indicated, the Company had the following related to operating leases:
Finance
leases are not material. Finance lease liabilities are recorded within other liabilities and finance ROU assets are recorded within other assets in the Company’s Consolidated Balance Sheets.
The following table is a summary of the Company’s components of net lease cost for the periods indicated:
During
the three months ended March 31, 2023 and 2022the Company made $i3.7 million and $i4.7
million, respectively, in cash payments for operating and finance lease payments.
i
Supplemental balance sheet information related to operating leases are as follows:
The
following tables set forth the carrying amount of goodwill and other intangible assets, net of accumulated amortization, by reporting unit as of the dates indicated below:
(1)Insurance
agency intangible assets include customer list and non-compete agreement intangible assets.
/
The Company quantitatively assesses goodwill for impairment at the reporting unit level on an annual basis or sooner if an event occurs or circumstances change which might indicate that the fair value of a reporting unit is below its carrying amount. The Company has identified and assigned goodwill to itwo
reporting units - the banking business and insurance agency business. The quantitative assessments for both the banking business and insurance agency business were most recently performed as of September 30, 2022. The assessment for the banking business included a market capitalization analysis, as well as a comparison of the banking business’ book value to the implied fair value using a pricing multiple of the Company’s tangible book value. The assessment for the insurance agency business included a price-to-earnings analysis, as well as an earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiplier valuation based upon recent and observed insurance agency mergers and acquisitions.
In accordance with the accounting guidance codified in ASC 350-20, the
Company performs a test of goodwill for impairment at least on an annual basis. An assessment is also required to be performed to the extent relevant events and/or circumstances occur which may indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The recent events regarding the failure of several banks has led to economic uncertainty and an increase in volatility in the capital markets, particularly in the banking industry. Accordingly, the Company performed a qualitative assessment as of March 31, 2023 which included an assessment of current industry conditions and the impacts of those conditions on the Company's financial position and results of operations. As a result of that assessment,
the Company determined it was not more-likely-than-not that the carrying value was greater than the fair value of either reporting unit subject to our analysis as of March 31, 2023. Therefore, a quantitative goodwill impairment test was not considered necessary.
Similarly, other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Management performed a review of the Company’s intangible assets as of March 31, 2023 in response to the circumstances indicated above. Based upon that review, the
Company
concluded that it was not more-likely-than-not that the carrying amount of the core deposit intangible and other intangible assets may not be recoverable. Management performed an assessment as of December 31, 2022 and determined there was no indication of impairment related to intangible assets.
7. (Loss) Eiarnings
Per Share (“EPS”)
Basic EPS represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the Company. Diluted EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period, plus the effect of potential dilutive common share equivalents computed using the treasury stock method. Shares held by the Employee Stock Ownership Plan (“ESOP”)
that have not been allocated to employees in accordance with the terms of the ESOP, referred to as “unallocated ESOP shares,” are not deemed outstanding for earnings per share calculations.i
Average
number of common shares outstanding used to calculate basic (loss) earnings per common share
i161,991,373
i169,857,950
Common
stock equivalents
i68,058
i110,206
Average
number of common shares outstanding used to calculate diluted (loss) earnings per common share
i162,059,431
i169,968,156
(Loss)
earnings per common share
Basic
$
(i1.20)
$
i0.30
Diluted
$
(i1.20)
$
i0.30
/
8.
iLow Income Housing Tax Credits and Other Tax Credit Investments
The Community Reinvestment Act (“CRA”) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate income. The Company has primarily invested in separate Low Income Housing Tax Credits (“LIHTC”) projects, also referred to as
qualified affordable housing projects, which provide the Company with tax credits and operating loss tax benefits over a period of ii15/
years. The return on these investments is generally generated through tax credits and tax losses. In addition to LIHTC projects, the Company invests in new market tax credit projects that qualify for CRA credits and eligible projects that qualify for renewable energy and historic tax credits.
As of March 31, 2023 and December 31, 2022, the Company had $i180.0
million and $i131.3 million, respectively, in tax credit investments that were included in other assets in the Consolidated Balance Sheets.
When permissible, the Company accounts for its investments in LIHTC projects using the proportional amortization method, under which it amortizes the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognizes that amortization as
a component of income tax expense. The net investment in the housing projects is included in other assets in the Consolidated Balance Sheets. The Company will continue to use the proportional amortization method on any new qualifying LIHTC investments.
iThe following
table presents the Company’s investments in low income housing projects accounted for using the proportional amortization method as of the dates indicated:
Amortization expense
included in income tax expense
i2,766
i1,843
The
Company accounts for certain other investments in renewable energy projects using the equity method of accounting. These investments in renewable energy projects are included in other assets on the Consolidated Balance Sheets and totaled $i2.5 million and $i2.6
million as of March 31, 2023 and December 31, 2022, respectively. There were iino/
outstanding commitments related to these investments as of both March 31, 2023 and December 31, 2022.
9. iShareholders’ Equity
Share Repurchases
On November 12, 2021,
the Company announced receipt of a notice of non-objection from the Board of Governors of the Federal Reserve System to its previously announced share repurchase program which was approved by the Company’s Board of Directors on October 1, 2021. The program authorized the purchase of up to i9,337,900
shares, or ii5/%
of the Company’s then-outstanding shares of common stock over a i12-month period. The program was limited to $i225.0
million through November 30, 2022. The Company completed the repurchase of the total number of shares authorized through this program during the third quarter of 2022.
On September 7, 2022, the Company announced receipt of a notice of non-objection from the Board of Governors of the Federal Reserve System for a new share repurchase program. The program, which authorizes the purchase of up to i8,900,000
shares, or ii5/%
of the Company’s then-outstanding shares of common stock over a i12-month period, is limited to $i200.0
million through August 31, 2023.
Repurchases are made at management’s discretion from time to time at prices management considers to be attractive and in the best interests of both the Company and its shareholders, subject to the availability of shares, general market conditions, the trading price of the shares, alternative uses for capital, and the Company’s financial performance. Repurchases may be suspended, terminated or modified by the Company at any time for any reason. During the three months ended March 31, 2023, there were ino
share repurchases. During the three months ended March 31, 2022, the Company repurchased i2,866,621 shares at a weighted average price per share of $i21.12.
As of March 31, 2023, the Company had purchased a total of i1,910,250 shares under the September 7, 2022 repurchase program. There were i6,989,750
shares that may yet be repurchased under such plan as of March 31, 2023.
Dividends
i
Information regarding dividends declared and paid is presented in the following table:
The Company provides pension benefits for its employees through membership in the Savings Banks Employees’ Retirement Association. The plan through which benefits are provided is a noncontributory, qualified defined benefit plan and is referred to as the Defined Benefit Plan. The
Company’s annual contribution to the Defined Benefit Plan is based upon standards established by the Pension Protection Act. The contribution is based on an actuarial method intended to provide not only for benefits attributable to service to date, but also for those expected to be earned in the future. The Defined Benefit Plan has a plan year end of October 31.
The Company has an unfunded Defined Benefit Supplemental Executive Retirement Plan (“DB SERP”) that provides certain Company officers upon their retirement with
defined pension benefits in excess of qualified plan limits imposed by U.S. federal tax law. The DB SERP has a plan year end of December 31.
In addition, the Company has an unfunded Benefit Equalization Plan (“BEP”) to provide retirement benefits to certain employees whose retirement benefits under the qualified pension plan are limited per the Internal Revenue Code. The BEP has a plan year end of October 31.
The Company also has an unfunded Outside Directors’ Retainer Continuance Plan (“ODRCP”) that provides pension benefits to outside directors who retire from service. The ODRCP has a plan year end of December 31. Effective December 31, 2020,
the Company closed the ODRCP to new participants and froze benefit accruals for active participants.
Components of Net Periodic Benefit Cost
i
The components of net pension expense for the plans for the periods indicated are as follows:
Service
costs for the Defined Benefit Plan and the BEP are recognized within salaries and employee benefits in the Consolidated Statements of Income. There were no service costs associated with the DB SERP or ODRCP during the three months ended March 31, 2023 and March 31, 2022. The remaining components of net periodic benefit cost are recognized in other noninterest expense in the Consolidated Statements of Income.
In accordance with the Pension Protection Act, the Company was not required to make any contributions to the Defined Benefit Plan for the plan years beginning November 1, 2022 and 2021. Accordingly, during the three months ended March
31, 2023 there were ino contributions to the Defined Benefit Plan. The Company made discretionary contributions to the Defined Benefit Plan of $i7.2
million during the three months ended March 31, 2022.
Rabbi Trust Variable Interest Entities
The Company established rabbi trusts to meet its obligations under certain executive non-qualified retirement benefits and deferred compensation plans and to mitigate the expense volatility of the aforementioned retirement plans. The rabbi trusts are considered variable interest entities (“VIE”) as the equity investment at risk is insufficient to permit the trusts to finance their activities without additional subordinated financial support from the Company. The Company is considered
the primary beneficiary of the rabbi trusts as it has the power to direct the activities of the rabbi trusts that significantly affect the rabbi trusts’ economic performance and it has the obligation to absorb losses of the rabbi trusts that could potentially be significant to the rabbi trusts by virtue of its contingent call options on the rabbi trusts’ assets in the event of the Company’s bankruptcy. As the primary beneficiary of these VIEs, the Company consolidates the rabbi trust investments. In general, the rabbi trust investments and any earnings received thereon are accumulated, reinvested and used exclusively for trust purposes. These rabbi trust investments consist primarily of cash and cash equivalents, U.S. government agency obligations, equity securities, mutual funds and other exchange-traded
funds, and are recorded at fair value in other assets in the Company’s Consolidated Balance Sheets. Changes in fair value are recorded in noninterest income in the Company’s Consolidated Statements of Income.
The
following table presents the book value, mark-to-market, and fair value of assets held in rabbi trust accounts by asset type as of the dates indicated:
(1)Equities
include mutual funds and other exchange-traded funds.
/
11. iShare-Based Compensation
Share-Based Compensation Plan
On
November 29, 2021, the shareholders of the Company approved the Eastern Bankshares, Inc. 2021 Equity Incentive Plan (the “2021 Plan”). The 2021 Plan provides for the issuance of up to i26,146,141 shares of common stock pursuant to grants of restricted stock, restricted stock units (“RSUs”), non-qualified
stock options and incentive stock options, any or all of which can be granted with performance-based vesting conditions. Under the 2021 Plan, i7,470,326 shares may be issued as restricted stock or RSUs, including those issued as performance shares and performance share units (“PSUs”), and i18,675,815
shares may be issued upon the exercise of stock options. These shares may be awarded from the Company’s authorized but unissued shares. However, the 2021 Plan permits the grant of additional awards of restricted stock or RSUs above the aforementioned limit, provided that, for each additional share of restricted stock or RSU awarded in excess of such limit, the pool of shares available to be issued upon the exercise of stock options will be reduced by ithree
shares. Pursuant to the terms of the 2021 Plan, each of the Company’s non-employee directors were automatically granted awards of restricted stock on November 30, 2021. Such restricted stock awards vest pro-rata on an annual basis over a ifive-year period. The maximum term for stock options is iten
years.
During the three months ended March 31, 2023, the Company granted to all of the Company’s executive officers and certain other employees a total of i318,577
RSUs, which vest pro-rata on an annual basis over a period of ithree years from the date of the grant, and a total of i108,984
PSUs for which vesting is contingent upon the Compensation Committee of the Board of Director’s certification, after the conclusion of a ithree-year period from the date of the grant, that the Company has attained a threshold level of certain performance criteria over such period. During the three months ended March 31, 2022, the
Company granted to all of the Company’s executive officers and certain other employees a total of i978,364 RSUs, which vest pro-rata on an annual basis over a period of three or ifive
years from the date of the grant, and a total of i533,676 PSUs for which vesting is contingent upon the Compensation Committee of the Board of Director’s certification, after the conclusion of a ithree-year
period from the date of the grant, that the Company has attained a threshold level of certain performance criteria over such period. As of March 31, 2023 and December 31, 2022, there were i4,874,695 shares and i5,302,256
shares that remained available for issuance as restricted stock or RSU awards (including those that may be issued as performance shares and PSUs), respectively, and ii18,675,815/
shares that remained available for issuance upon the exercise of stock options at both dates. As of both March 31, 2023 and December 31, 2022, iino/
stock options had been awarded under the 2021 Plan.
i
The following table summarizes the Company’s restricted stock award activity for the periods indicated:
Non-vested performance stock units as of the beginning of the respective period
i533,676
$
i21.12
i—
$
i—
Granted
i108,984
i10.16
i533,676
i21.12
Vested
i—
i—
i—
i—
Forfeited
i—
i—
i—
i—
Non-vested
performance stock units as of the end of the respective period
i642,660
$
i19.26
i533,676
$
i21.12
/
As
of March 31, 2023, ino PSU awards had vested. As of December 31, 2022, iino/
RSU or PSU awards had vested. During the three months ended March 31, 2023, i230,768 RSU awards vested. Such awards had a grant date fair value of $i4.9
million. During the three months ended March 31, 2022, ino awards had vested.
For the three months ended March 31, 2023, share-based compensation expense under the 2021 Plan and the related tax benefit totaled $i3.0
million and $i0.8 million, respectively. For the three months ended March 31, 2022, share-based compensation expense under the 2021 Plan and the related tax benefit totaled $i1.6
million and $i0.4 million, respectively.
As of March 31, 2023 and December 31, 2022, there was $i37.6
million and $i44.0 million, respectively, of total unrecognized compensation expense related to unvested restricted stock awards, restricted stock units and performance stock units granted and issued under the 2021 Plan, as applicable. As of March 31, 2023, this cost is expected to be recognized over a weighted
average remaining period of approximately i3.0 years. As of December 31, 2022, this cost was expected to be recognized over a weighted average remaining period of approximately i4.1
years.
12. iIncome Taxes
i
The
following table sets forth information regarding the Company’s tax provision and applicable tax rates for the periods indicated:
The
Company recorded a net income tax benefit of $i62.2 million for the three months ended March 31, 2023 compared to a provision of $i14.6
million for the three months ended March 31, 2022. The income tax benefit for the three months ended March 31, 2023 was primarily due to pretax losses which largely resulted from losses on sales of available for
sale securities. The Company established a $i17.4
million valuation allowance against the capital loss carryforward deferred tax asset which resulted from the sale of securities for the amount of deferred tax asset management believes is not more-likely-than-not to be realized.
In addition, during the three months ended March 31, 2023, the Company liquidated Market Street Securities Corporation (“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 $i23.7
million during the three months ended March 31, 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.
13. iCommitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
In
order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates, the Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit, standby letters of credit, and forward commitments to sell loans, all of which involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in each particular class of financial instruments.
Substantially
all of the Company’s commitments to extend credit, which normally have fixed expiration dates or termination clauses, are contingent upon customers maintaining specific credit standards at the time of loan funding. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual
amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. For forward loan sale commitments, the contract or notional amount does not represent exposure to credit loss. The Company does not sell loans with recourse.
i
The following table summarizes the above financial instruments
as of the dates indicated:
The Company has been named a defendant in various legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company’s Consolidated Financial Statements.
14. iDerivative
Financial Instruments
The Company uses derivative financial instruments to manage its interest rate risk resulting from the differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments. Additionally, the Company enters into interest rate derivatives and foreign exchange contracts to accommodate the business requirements of its customers (“customer-related positions”) and risk participation agreements entered into as financial guarantees of performance on customer-related interest rate swap derivatives. The Company
also enters into residential mortgage loan commitments to fund mortgage loans at specified rates and times in the future and enters into forward sale commitments to sell such residential mortgage loans at specified prices and times in the future, both of which are considered derivative instruments. Derivative instruments are carried at fair value in the Company’s Consolidated Financial Statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not the instrument qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.
By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts
do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the
Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty plus any initial margin collateral posted. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where
appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with those counterparties is remote. The Company’s discounting methodology and interest calculation of cash margin uses the Secured Overnight Financing Rate, or SOFR, for U.S. dollar cleared interest rate swaps.
Interest Rate Positions
An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The
Company has entered into interest rate swaps in which it pays floating and receives fixed interest in order to manage its interest rate risk exposure to the variability in interest cash flows on certain floating-rate loans. Such interest rate swaps include those which effectively convert the floating rate one-month LIBOR, SOFR or overnight indexed swap rate, or prime rate interest payments received on the loans to a fixed rate and consequently reduce the Company’s exposure to variability in short-term interest rates. For interest rate swaps that are accounted for as cash flow hedges, changes in fair value are included in other comprehensive income and reclassified into net income in the same period or periods during which the hedged forecasted transaction affects net income. iThe
following table reflects the Company’s derivative positions for interest rate swaps which qualify as cash flow hedges for accounting purposes as of the dates indicated:
(1)The
fair value included a net accrued interest payable balance of $i1.9 million as of March 31, 2023. In addition, the fair value includes netting adjustments which represent the amounts recorded to convert derivative assets and liabilities cleared through the CME from a gross basis to a net basis in accordance with applicable accounting guidance.
(1)The
fair value included a net accrued interest payable balance of $i1.5 million as of December 31, 2022. In addition, the fair value includes netting adjustments which represent the amounts recorded to convert derivative assets and liabilities cleared through the CME from a gross basis to a net basis in accordance with applicable accounting guidance.
The maximum amount of time over which the
Company is currently hedging its exposure to the variability in future cash flows of forecasted transactions related to the receipt of variable interest on existing financial instruments is i4.5 years.
The Company expects approximately $i37.5
million will be reclassified into interest income, as a reduction of such income, from other comprehensive income related to the Company’s active cash flow hedges in the next 12 months as of March 31, 2023. The reclassification is due to anticipated net payments on the swaps based upon the forward curve as of March 31, 2023.
The Company discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in accumulated other comprehensive income (“AOCI”) are reclassified immediately into earnings and any subsequent
changes in the fair value of such derivatives are recognized directly in earnings.
Unrealized gains on terminated hedges included in AOCI – beginning of respective period
$
i46
$
i10,239
Unrealized
gains on terminated hedges arising during the period
i—
i—
Reclassification
adjustments for amortization of unrealized gains into net income
(i46)
(i5,298)
Unrealized
gains on terminated hedges included in AOCI – end of respective period
$
i—
$
i4,941
/
Customer-Related
Positions
Interest rate swaps offered to commercial customers do not qualify as hedges for accounting purposes. These swaps allow the Company to retain variable rate commercial loans while allowing the commercial customer to synthetically fix the loan rate by entering into a variable-to-fixed rate interest rate swap. The Company believes that its exposure to commercial customer derivatives is limited to non-performance by either the customer or the dealer because these contracts are simultaneously matched at inception with an offsetting transaction.
Risk participation agreements are entered into as financial guarantees
of performance on interest rate swap derivatives. The purchased (asset) or sold (liability) guarantee allow the Company to participate-out (fee paid) or participate-in (fee received) the risk associated with certain derivative positions executed with the borrower by the lead bank in a customer-related interest rate swap derivative.
Foreign exchange contracts consist of those offered to commercial customers and those entered into to hedge the Company’s foreign currency risk associated with a foreign-currency loan. Neither qualifies as a hedge for accounting purposes. These commercial customer derivatives are offset with matching derivatives with correspondent-bank
counterparties in order to minimize foreign exchange rate risk to the Company. Exposure with respect to these derivatives is largely limited to non-performance by either the customer or the other counterparty. Neither the Company nor the correspondent-bank counterparty are required to post collateral but each has established foreign-currency transaction limits to manage the exposure risk. The Company requires its customers to post collateral to minimize risk exposure.
i
The
following tables present the Company’s customer-related derivative positions as of the dates indicated below for those derivatives not designated as hedging.
The
level of interest rate swaps, risk participation agreements and foreign currency exchange contracts at the end of each period noted above was commensurate with the activity throughout those periods.
The
table below presents the fair value of the Company’s derivative financial instruments, as well as their classification on the Consolidated Balance Sheets for the periods indicated.
The
table below presents the net effect of the Company’s derivative financial instruments on the Consolidated Income Statements as well as the effect of the Company’s derivative financial instruments included in other comprehensive income (“OCI”) as follows:
(Loss)
gain reclassified from OCI into interest income (effective portion)
$
(i8,905)
$
i5,298
Gain
recognized in income on derivatives (ineffective portion and amount excluded from effectiveness test)
Interest income
i—
i—
Other
income
i—
i—
Total
$
i—
$
i—
Derivatives
not designated as hedges:
Customer-related positions:
(Loss) gain recognized in interest rate swap income
$
(i530)
$
i2,298
Gain
recognized in interest rate swap income for risk participation agreements
i21
i60
Gain
(loss) recognized in other income for foreign currency exchange contracts:
Matched commercial customer book
i14
(i2)
Foreign
currency loan
i136
i78
Total
(loss) gain for derivatives not designated as hedges
$
(i359)
$
i2,434
/
The
Company has agreements with its customer-related interest rate swap derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its customer-related interest rate swap derivative correspondent-bank counterparties that contain a provision whereby if the Company fails to maintain its status as a well-capitalized
institution,
then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
The Company’s exposure related to its customer-related interest rate swap derivatives consists of exposure on cleared derivative transactions and exposure on non-cleared derivative transactions.
Cleared
derivative transactions are with the Chicago Mercantile Exchange, or CME, and exposure is settled to market daily, with additional credit exposure related to initial-margin collateral pledged to CME at trade execution. At March 31, 2023, the Company had exposure to CME for settled variation margin in excess of the customer-related and non-customer-related interest rate swap termination values of $i1.7 million.
At December 31, 2022, the Company had ino exposure to CME for settled variation margin in excess of the customer-related and non-customer-related interest rate swap termination values. In addition, at March 31, 2023 and December 31, 2022, the
Company had posted initial-margin collateral in the form of U.S. Treasury notes amounting to $i85.2 million and $i84.1 million,
respectively, to CME for these derivatives. The U.S. Treasury notes were considered restricted assets and were included in available for sale securities within the Company’s Consolidated Balance Sheets.
At both March 31, 2023 and December 31, 2022, there were iino/
customer-related interest rate swap derivatives with credit-risk contingent features in a net liability position. The Company has minimum collateral posting thresholds with its customer-related interest rate swap derivative correspondent-bank counterparties to the extent that the Company has a liability position with the correspondent-bank counterparties. At both March 31, 2023 and December 31, 2022, the Company had posted collateral in the form of cash amounting to $ii1.0/
million, which was considered to be a restricted asset and was included in other short-term investments within the Company’s Consolidated Balance Sheets. If the Company had breached any of these provisions at March 31, 2023 or December 31, 2022, it would have been required to settle its obligations under the agreements at the termination value. In addition, the Company had cross-default provisions with its commercial customer loan agreements which provide cross-collateralization with the customer loan collateral.
Mortgage Banking Derivatives
The
Company enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to fund mortgage loans at specified rates and times in the future. In addition, the Company enters into forward sale commitments to sell such residential mortgage loans at specified prices and times in the future. These commitments are short-term in nature and generally expire in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale and the related forward sale commitments are considered derivative instruments under ASC Topic 815,“Derivatives and Hedging” and are reported at fair value. Changes in fair value are reported in earnings and included in other non-interest income on the Consolidated Statements of Income. As of March 31,
2023 and December 31, 2022, the Company had an outstanding notional balance of residential mortgage loan origination commitments of $i14.7 million and $i8.3
million, respectively and forward sale commitments of $i10.5 million and $i10.0 million, respectively. During the three months ended March 31, 2023
and 2022, the Company recorded net losses related to the change in fair value of commitments to originate and sell mortgage loans of less than $i0.1 million and $i0.2
million, respectively. The aggregate fair value of the Company’s mortgage banking derivative asset and liability as of March 31, 2023 was $i0.1 million and less than $i0.1
million, respectively. The aggregate fair value of the Company’s mortgage banking derivative asset and liability as of December 31, 2022 was $i0.1 million and $i0.1
million, respectively. Mortgage banking derivative assets and liabilities are included in other assets and other liabilities, respectively, on the Consolidated Balance Sheets. Residential mortgages sold are generally sold with servicing rights released. Mortgage banking derivatives do not qualify as hedges for accounting purposes.
15. iBalance Sheet Offsetting
Certain
financial instruments, including derivatives, may be eligible for offset in the Consolidated Balance Sheets and/or subject to master netting arrangements or similar agreements. The Company’s derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts. However, the Company does not offset fair value amounts recognized for derivative instruments. The Company nets the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral
arising from derivative instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be maintained at dealer banks by the Company is monitored and adjusted as necessary. As of March 31, 2023 and December 31, 2022, it was determined that no additional collateral would have to be posted to immediately settle these instruments.
The
following tables present the Company’s asset and liability positions that were eligible for offset and the potential effect of netting arrangements on its Consolidated Balance Sheet, as of the dates indicated:
ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous
market. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able and willing to transact. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements), and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Valuations based on quoted prices
in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 – Prices or valuations that require unobservable inputs that reflect the Company’s own assumptions that are significant to the fair value measurement.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in
determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The Company uses fair value measurements to record adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are
current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgements regarding
future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Cash and Cash Equivalents
For these financial instruments, which have original maturities of i90
days or less, their carrying amounts reported in the Consolidated Balance Sheets approximate fair value.
Securities
Securities consisted of U.S. Treasury securities, U.S. Agency bonds, U.S. government-sponsored residential and commercial mortgage-backed securities, state and municipal bonds, and other debt securities. AFS securities are recorded at fair value.
The Company’s U.S. Treasury securities are traded on active markets and therefore these securities were classified as Level 1.
The fair value of U.S. Agency bonds, were evaluated using relevant trade data, benchmark quotes and spreads obtained from publicly available trade data, and generated on a price, yield or spread basis as determined by the observed
market data. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
The fair value of U.S. government-sponsored residential and commercial mortgage-backed securities were estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
The fair value of state and municipal bonds were estimated using a valuation matrix with inputs including observable bond interest rate tables, recent transactions, and yield relationships. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
The fair value of other debt securities were estimated using a valuation matrix with inputs including observable bond interest
rate tables, recent transactions, and yield relationships. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
Fair value was based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. The estimated fair value of the Company’s securities, by type, is disclosed in Note 3, “Securities.”
The
fair value of loans held for sale, whose carrying amounts approximate fair value, was estimated using the anticipated market price based upon pricing indications provided by investor banks. These assets were classified as Level 2 given the use of observable inputs.
Loans
The fair value of commercial construction, commercial and industrial lines of credit, and certain other consumer loans was estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
For commercial, commercial real estate, residential real estate, automobile, and consumer home equity loans, fair value was estimated by discounting contractual cash flows adjusted for prepayment estimates using interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
The fair value of PPP loans, which are fully guaranteed by the SBA, approximates the carrying amount.
Loans are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. Loans that are deemed to be collateral-dependent, as described in Note 2, “Summary of Significant Accounting Policies” within the Notes to the Consolidated Financial Statements included within the Company’s 2022 Form 10-K, were recorded at the fair value of the underlying collateral.
FHLB Stock
The fair value of FHLB stock approximates the carrying amount based on the redemption provisions of the FHLB. These assets were classified
as Level 2.
Rabbi Trust Investments
Rabbi trust investments consisted primarily of cash and cash equivalents, U.S. government agency obligations, equity securities, mutual funds and other exchange-traded funds, and were recorded at fair value and included in other assets. The purpose of these rabbi trust investments is to fund certain executive non-qualified retirement benefits and deferred compensation.
The fair value of other U.S. government agency obligations were estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities were categorized as Level 2 given the use of observable inputs. The equity securities, mutual funds and other exchange-traded funds were valued based on quoted prices from the market. The equities, mutual funds
and exchange-traded funds traded in an active market were categorized as Level 1 as they were valued based upon quoted prices from the market. Mutual funds at net asset value amounted to $i41.0 million at March 31, 2023 and $i38.9
million at December 31, 2022. There were no redemption restrictions on these mutual funds at the end of any period presented.
Bank-Owned Life Insurance
The fair value of bank-owned life insurance was based upon quotations received from bank-owned life insurance dealers. These assets were classified as Level 2 given the use of observable inputs.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and interest checking accounts, and money market accounts, was equal to their carrying amount. The fair value of time deposits was based on the discounted value of contractual cash flows using current market interest rates. Deposits were classified as Level 2 given the use of observable market
inputs.
The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the wholesale market (core deposit intangibles).
FHLB Advances
The fair value of FHLB advances was based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on instruments with similar remaining maturities. FHLB advances were classified as Level 2.
The fair value of escrow deposits of borrowers, which have no stated maturity, approximates the carrying amount. Escrow deposits of borrowers were classified as Level 2.
Interest Rate Swap Collateral Funds
The fair value of interest rate swap collateral funds approximates the carrying amount. Interest rate swap collateral funds were classified as Level 2.
Interest Rate Swaps
The fair value of interest rate swaps was determined using discounted cash flow analysis on the expected cash flows of the interest rate swaps. This analysis reflects the contractual terms of the interest rate swaps, including the period of maturity, and uses observable market-based inputs, including interest rate curves
and implied volatility. In addition, for customer-related interest rate swaps, the analysis reflects a credit valuation adjustment to reflect the Company’s own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. The majority of inputs used to value the Company’s interest rate swaps fall within Level 2 of the fair value hierarchy, but the credit valuation adjustments associated with the interest rate swaps utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, at March 31, 2023 and December 31,
2022, the impact of the Level 3 inputs on the overall valuation of the interest rate swaps was deemed insignificant to the overall valuation. As a result, the interest rate swaps were categorized as Level 2 within the fair value hierarchy.
Risk Participations
The fair value of risk participations was determined based upon the total expected exposure of the derivative which considers the present value of cash flows discounted using market-based inputs and were therefore categorized as Level 2 within the fair value hierarchy. The fair value also included a credit valuation adjustment which evaluates the credit risk of its counterparties by considering factors such as the likelihood of default by the counterparties, its net exposures, the remaining contractual life, as well as the amount of collateral securing the position. The change in value of derivative assets and liabilities
attributable to credit risk was not significant during the reported periods.
The fair values of foreign currency forward contracts were based upon the remaining expiration period of the contracts and bid quotations received from foreign exchange contract dealers and were categorized as Level 2 within the fair value hierarchy.
Mortgage Derivatives
The fair value of mortgage derivatives is determined
based upon current market prices for similar assets in the secondary market and, therefore are classified as Level 2 within the fair value hierarchy.
Fair Value of Assets and Liabilities Measured on a Recurring Basis
i
The
following tables present the balances of assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:
There
were no transfers to or from Level 1, 2 and 3 during the three months ended March 31, 2023 and twelve months ended December 31, 2022.
The Company held no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2023 or December 31, 2022.
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis
The Company may also be required, from time to time, to measure certain other assets on a nonrecurring
basis in accordance with generally accepted accounting principles. iThe following tables summarize the fair value of assets and liabilities measured at fair value on a nonrecurring basis, as of March 31, 2023 and December 31, 2022.
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
(In thousands)
Assets
Individually assessed collateral-dependent
loans whose fair value is based upon appraisals
$
i16,432
$
i—
$
i—
$
i16,432
For
the valuation of the collateral-dependent loans, the Company relies primarily on third-party valuation information from certified appraisers and values are generally based upon recent appraisals of the underlying collateral, brokers’ opinions based upon recent sales of comparable properties, estimated equipment auction or liquidation values, income capitalization, or a combination of income capitalization and comparable sales. Depending on the type of underlying collateral, valuations may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.
Disclosures about Fair Value of Financial Instruments
The estimated fair values and related carrying amounts for assets and liabilities for which fair
value is only disclosed are shown below as of the dates indicated:
This
summary excludes certain financial assets and liabilities for which the carrying value approximates fair value. For financial assets, these may include cash and due from banks, federal funds sold and short-term investments. For financial liabilities, these may include federal funds purchased. These instruments would all be considered to be classified as Level 1 within the fair value hierarchy. Also excluded from the summary are financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.
Revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) is recognized when control of goods or services is transferred to the customer, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The Company considers the terms of the contract and
all relevant facts and circumstances when applying this guidance. The Company measures revenue and timing of recognition by applying the following five steps:
4.Allocate the transaction price to the performance obligations.
5.Recognize revenue when (or as) the entity satisfies a performance obligation.
The
Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Performance obligations
The Company’s performance obligations are generally satisfied either at a point in time or over time, as services are rendered. Unsatisfied performance obligations at the report date are not material to the Company’s Consolidated Financial Statements.
A portion of the Company’s noninterest (loss) income is derived from contracts with customers within the scope of ASC 606. The Company has disaggregated such revenues by type of service, as presented in the table below. These categories reflect how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Additional
information related to each of the revenue streams is further noted below.
Insurance Commissions
The Company acts as an agent in offering property, casualty, and life and health insurance to both commercial and consumer customers though Eastern Insurance Group. The Company earns a fixed commission rate on the sales of these products and services. The Company may also earn additional commissions from the insurers based upon meeting certain criteria, such as premium levels, growth rates, new business volume and loss experience. The Company
recognizes commission revenues when earned based upon the effective date of the policy or when services are rendered. Certain revenues are deferred to reflect delivery of services over the contract period.
Commissions are earned on the contract effective date and generally are based upon a percentage of premiums for insurance coverage. Commission rates depend upon a large number of factors, including the type of risk being placed, the particular underwriting enterprise’s demand, the expected loss experience of the particular risk coverage, and historical benchmarks surrounding the level of effort necessary for the Company to place and service the insurance contract.
The vast majority of the Company’s services and revenues are associated with the placement of an insurance contract. Insurance commissions earned but not yet received amounted to $i13.2 million and $i15.1
million as of March 31, 2023, and December 31, 2022, respectively, and were included in other assets on the Consolidated Balance Sheets.
The Company also earns profit-sharing revenues, also referred to as contingency revenue, from the insurers with whom the Company places business. These profit-sharing revenues are performance bonuses from the insurers based upon certain performance metrics such as floors on written premiums, loss rates, and growth rates. These amounts are in excess of the commission revenues discussed above, and not all business placed with underwriting enterprises is eligible for contingent revenues. Contingent revenues are variable and
generally based upon the Company’s expectation of the ultimate profit-sharing revenue amounts to be earned and can vary from period to period. The Company’s contracts are generally calendar year contracts whereby revenues from underwriting enterprises are received in the calendar year following placement, generally the first and second quarters, after verification of the performance indicators outlined in the contracts. Accordingly, during each reporting period, management must make its best estimate of the amounts that have
been earned using historical averages and other factors to project revenues. The Company bases its estimates each period on a contract-by-contract basis. As estimates may change significantly from period to period, the Company does not recognize this revenue until it has concluded that, based on all the facts and information available, it is probable that a significant revenue reversal will not occur in future periods.
Deposit Service Charges
The
Company offers various deposit account products to its customers governed by specific deposit agreements applicable to either personal customers or business customers. These agreements identify the general conditions and obligations of both parties and include standard information regarding deposit account-related fees.
Deposit account services include providing access to deposit accounts as well as access to the various deposit transactional services of the Company. These transactional services are primarily those that are identified in the standard fee schedule, and include, but are not limited to, services such as overdraft protection, wire transfer, and check collection. The Company may charge monthly fixed service fees associated with the customer
having access to the deposit account as well as separate fixed fees associated with and at the time specific transactions are entered into by the customer. As such, the Company
considers that its performance obligations are fulfilled when customers are provided deposit account access or when the requested deposit transaction is completed.
Cash management services are a subset of the deposit service charges revenue stream. These services include automated clearing house, or ACH, transaction
processing, positive pay, lockbox, and remote deposit services. These services are also governed by separate agreements entered into by the customer. The fee arrangement for these services is structured as a fixed fee per transaction which may be offset by earnings credits. An earnings credit is a discount that a customer receives based upon the investable balance in the applicable covered deposit account(s) for a given month. Earnings credits are only good for the given month. That is, if cash management fees for a given month are less than the month’s earnings credit, the remainder of the credit does not carry over to the following month. Cash management fees are recognized as revenue in the month that the services are provided. Cash management fees earned but not yet received amounted to $i1.7
million and $i2.1 million as of March 31, 2023 and December 31, 2022 and were included in other assets.
Trust and Investment Advisory Fees
The Company offers investment management and trust services to individuals, institutions, small businesses and charitable institutions. Each investment management product is governed by
its own contract along with a separate identifiable fee schedule unique to that product. The Company also offers additional services, such as estate settlement, financial planning, tax services, and other special services quoted at the customer’s request.
The asset management and/or custody fees are primarily based upon a percentage of the monthly valuation of the principal assets in the customer’s account. Customers are also charged a base fee which is prorated over a twelve-month period. Fees for additional or special services are generally fixed in nature and are charged as services are rendered. All revenue is recognized in correlation to the monthly management fee determinations or as transactional services are provided.
Debit
Card Processing Fees
The Company provides debit cards to its customers which are authorized and settled through various card payment networks, and in exchange, the Company earns revenue as determined by each payment network’s interchange program. Regardless of the network that is utilized to authorize and settle the payment, the merchant that provides the product or service to the debit card holder is ultimately responsible for the interchange payment to the Company. Debit card processing fees are recognized as card transactions are settled within each network. Debit card processing fees earned but not yet received amounted to $ii0.3/
million as of both March 31, 2023 and December 31, 2022 and were included in other assets.
Other Noninterest Income
The Company earns various types of other noninterest income that have been aggregated into one general revenue stream in the table noted above. Noninterest income includes, but is not limited to, the following types of revenue with customers: safe deposit rent, ATM surcharge fees and customer checkbook fees. Individually, these sources of noninterest income are not material.
The following tables present a reconciliation
of the changes in the components of other comprehensive (loss) income for the dates indicated including the amount of income tax (expense) benefit allocated to each component of other comprehensive (loss) income:
Unrealized losses on securities available for sale:
Change in fair value of securities available for sale
$
i42,301
$
(i8,810)
$
i33,491
$
(i465,532)
$
i112,008
$
(i353,524)
Less:
reclassification adjustment for losses included in net income
(i333,170)
i74,630
(i258,540)
(i2,172)
i673
(i1,499)
Net
change in fair value of securities available for sale
i375,471
(i83,440)
i292,031
(i463,360)
i111,335
(i352,025)
Unrealized
gains (losses) on cash flow hedges:
Change in fair value of cash flow hedges
i19,746
(i4,458)
i15,288
i—
i—
i—
Less:
net cash flow hedge gains reclassified into interest income(1)
(i8,905)
i2,515
(i6,390)
i5,298
(i1,489)
i3,809
Net
change in fair value of cash flow hedges
i28,651
(i6,973)
i21,678
(i5,298)
i1,489
(i3,809)
Defined
benefit pension plans:
Change in actuarial net loss
i—
i—
i—
i—
i—
i—
Less:
amortization of actuarial net loss
(i2,468)
i697
(i1,771)
(i2,798)
i787
(i2,011)
Less:
accretion of prior service credit
i2,970
(i818)
i2,152
i2,970
(i835)
i2,135
Net
change in other comprehensive income for defined benefit pension plans
(i502)
i121
(i381)
(i172)
i48
(i124)
Total
other comprehensive income (loss)
$
i403,620
$
(i90,292)
$
i313,328
$
(i468,830)
$
i112,872
$
(i355,958)
(1)Includes
amortization of realized gains on terminated cash flow hedges for the three months ended March 31, 2023 and 2022. The total realized gain of $i41.2 million, net of tax, was fully recognized in earnings as of March 31, 2023. The balance of this unamortized gain was $i3.6
million, net of tax, as of March 31, 2022.
/i
The following table illustrates the changes in the balances of each component of accumulated other comprehensive loss, net of tax:
Unrealized Gains
and (Losses) on Available for Sale Securities
The Company’s primary reportable segment is its banking business, which offers a range of commercial, retail, wealth management and banking services, and consists primarily of attracting deposits from the general public 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. Revenue from the banking business reportable segment consists primarily of interest earned on loans and investment securities. In addition to its banking business reportable segment, the Company has an insurance agency business reportable segment, which consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients. Revenue from the insurance agency business consists primarily of commissions on sales of insurance products and services.
Results of operations and selected financial information by segment and reconciliation to the Consolidated Financial Statements as of and for the three months ended iMarch 31,
2023 and 2022 was as follows:
Provision
for (release of) allowance for loan losses
i25
i—
i—
i25
(i485)
i—
i—
(i485)
Net
interest income after provision for (release of) allowance for loan losses
i138,284
i—
i—
i138,284
i128,609
i—
i—
i128,609
Noninterest
(loss) income
(i310,206)
i32,044
(i168)
(i278,330)
i18,137
i28,449
(i171)
i46,415
Noninterest
expense
i95,946
i21,588
(i1,240)
i116,294
i90,446
i19,473
(i1,053)
i108,866
(Loss)
income before income tax (benefit) expense
(i267,868)
i10,456
i1,072
(i256,340)
i56,300
i8,976
i882
i66,158
Income
tax (benefit) expense
(i65,193)
i2,949
i—
(i62,244)
i12,108
i2,534
i—
i14,642
Net
(loss) income
$
(i202,675)
$
i7,507
$
i1,072
$
(i194,096)
$
i44,192
$
i6,442
$
i882
$
i51,516
Total
assets
$
i22,579,422
$
i218,582
$
(i77,474)
$
i22,720,530
$
i22,695,895
$
i211,401
$
(i71,224)
$
i22,836,072
Total
liabilities
$
i20,174,053
$
i44,828
$
(i77,474)
$
i20,141,407
$
i19,848,995
$
i49,909
$
(i71,224)
$
i19,827,680
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at March 31, 2023, and our results of operations for the three months ended March 31, 2023 and 2022. This section should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto of the Company appearing in Part
I, Item 1 of this Quarterly Report on Form 10-Q and the Company’s 2022 Form 10-K.
Forward-Looking Statements
When we use the terms “we,”“us,”“our,” and the “Company,” we mean Eastern Bankshares, Inc., a Massachusetts corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,”“will,”“should,”“could,”“would,”“plan,”“potential,”“estimate,”“project,”“believe,”“intend,”“anticipate,”“expect,”“target” and similar expressions.
Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ
materially from those projected in the forward-looking statements as a result of, among others, the following factors:
•the ongoing negative impacts and disruptions of the COVID-19 pandemic on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations;
•general business and economic conditions on a national basis and in the local markets in which we operate, including potential impacts resulting from delays in raising or a failure to raise the national debt ceiling;
•changes in customer behavior and perceptions;
•changes in regional, national or international macroeconomic conditions, including especially changes in inflation, recessionary pressures or interest rates in the United States;
•the possibility that future credit losses, loan defaults and charge-off rates are higher than expected due to changes in economic assumptions or adverse economic developments;
•turbulence in the capital and debt markets and within the banking industry;
•decreases in the value of securities and other assets;
•decreases in deposit levels necessitating
increased borrowing to fund loans, investments and other needs;
•competitive pressures from other financial institutions;
•operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics;
•changes in regulation;
•changes in accounting standards and practices;
•the risk that goodwill and intangibles recorded in our financial statements will become impaired;
•the risk that deferred tax assets will not be realized in full;
•risks related to the
implementation of acquisitions, dispositions, and restructurings, including the risk that acquisitions may not produce results at levels or within time frames originally anticipated;
•the risk that we may not be successful in the implementation of our business strategy;
•changes in assumptions used in making such forward-looking statements; and
•other risks and uncertainties detailed in Part I, Item 1A of our 2022 Form 10-K and as may be further updated in our filings with the SEC from time to time.
Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking
statement to reflect circumstances or events that occur after the date the forward-looking statements are made.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could
differ from these estimates. Our significant accounting policies are discussed in detail in our 2022 Form 10-K, as updated by the notes to our Unaudited Interim Condensed Consolidated Financial Statements accompanying this Quarterly Report on Form 10-Q. Effective January 1, 2023, we adopted ASU 2022-02, the accounting policy for which is described in Note 2, “Summary of Significant Accounting Policies,” and Note 4, “Loans and Allowance for Credit Losses”within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. There have been no other material changes in critical accounting policies during the three months ended March 31, 2023.
Overview
We
are a bank holding company, and our principal subsidiary, Eastern Bank, is a Massachusetts-chartered bank that has served the banking needs of our customers since 1818. Our business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services primarily to retail, commercial and small business customers. We had total assets of $22.7 billion and $22.6 billion at March 31, 2023 and December 31, 2022, respectively. We are subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board and the Consumer Financial Protection Bureau.
We manage our business under two business segments: our banking business, which contributed $171.9 million, or 122.9%, of our total loss (pre-provision net interest
and dividend income and noninterest loss/income) for the three months
ended March 31, 2023, and our insurance agency business, which partially offset the banking business loss by $32.0 million, or 22.9%, of our total loss for the three months ended March 31, 2023. Our banking business consists of a full range of banking, lending (commercial, residential and consumer), savings and small business offerings, including our wealth management and trust operations that we conduct through our Eastern Wealth Management division.
Our insurance agency business consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients.
Net loss for the three months ended March 31, 2023 computed in accordance with GAAP was $194.1 million as compared to net income of $51.5 million for the three months ended March 31, 2022. This decrease was primarily due to the sale of available for sale securities at a loss in connection with our balance sheet repositioning completed in March 2023. Refer to the later sections titled “Outlook and Trends” and “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”within this Item
2 for additional discussion. Net loss for the three months ended March 31, 2023 and net income for the three months ended March 31, 2022 included items that our management considers non-core, which management excludes for purposes of assessing our operating net income, a non-GAAP financial measure. Operating net income for the three months ended March 31, 2023 was $61.1 million compared to operating net income for the three months ended March 31, 2022 of $55.1 million representing an increase of 10.9%. This increase was primarily due to an increase in net interest income. See “Non-GAAP Financial Measures” below for a reconciliation of operating net income to GAAP net income.
The
following chart shows our basic earnings per share on a GAAP and operating basis over the past five quarters (refer to the “Non-GAAP Financial Measures”section below for a reconciliation of GAAP earnings to operating earnings):
Earnings per share decreased from $0.30 for the three months ended March 31, 2022 to a loss per share of $1.20 for the three months ended March 31, 2023. This decrease was due to our balance sheet repositioning which included a sale of AFS securities at a loss and which was completed in March 2023 as described above.
Our GAAP efficiency ratio is our noninterest expenses divided by the sum of our net interest income and noninterest income. The following chart shows our efficiency ratio on a GAAP and operating basis over the past five quarters (refer to the “Non-GAAP Financial Measures” section below for additional information on the determination of each measure):
The GAAP efficiency ratio for the three months ended March 31, 2023 decreased compared to the three months ended March 31, 2022. The decrease in the GAAP efficiency ratio during the
three months ended March 31, 2023 was attributable to a net loss for the period, while in all other periods shown we had net income. The net loss for the three months ended March 31, 2023 was due to the balance sheet repositioning completed in March 2023 described above. The non-GAAP operating efficiency ratio during the three months ended March 31, 2023 remained relatively consistent compared to the three months ended March 31, 2022. Refer to the “Results of Operations” section below for additional discussion of the changes in net interest income, noninterest income and noninterest expense.
Banking Business
Our banking business offers
a range of commercial, retail, wealth management and banking services, and consists primarily of attracting deposits from the general public, including municipalities, and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. The financial condition and results of operations of our banking business depend primarily on (i) attracting and retaining relatively low cost, stable deposits, (ii) using those deposits to originate and acquire loans and earn net interest income and (iii) operating expenses incurred.
Lending Activities
We use funds obtained from deposits, as well as funds obtained from the FHLBB advances and federal funds, primarily to originate loans and to invest in securities. Our lending focuses on the following categories of loans:
Commercial
Lending
•Commercial and industrial: Loans in this category consist of lines of credit and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As of both March 31, 2023 and December 31, 2022, we had total commercial and industrial loans of $3.2 billion, representing 23.2% of our total loans as of each period end. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Our primary focus for commercial and industrial loans is middle-market companies located in the markets we serve. In addition, we participate in the
syndicated loan market and the SNC Program. As of March 31, 2023 and December 31, 2022, our SNC Program portfolio totaled $790.5 million and $685.8 million, or 24.9% and 21.9%, respectively, of our commercial and industrial portfolio, and 37.3% for both periods, of our SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial and industrial portfolio also includes our Asset Based Lending Portfolio (“ABL Portfolio”), and industrial revenue bonds (“IRBs”), the balances of which are detailed below:
◦As of March 31, 2023 and December 31, 2022,
our ABL Portfolio totaled $211.5 million and $208.8 million, or 6.7% and 6.6%, respectively, of our commercial and industrial portfolio.
◦As of March 31, 2023 and December 31, 2022, our commercial and industrial IRB portfolio, which is comprised of municipal bonds issued to finance major capital projects, totaled $0.9 billion and $1.0 billion, or 29.6% and 31.7%, respectively, of our commercial real estate portfolio.
•Commercial real estate: Loans in this category include mortgage loans and lines of credit on commercial real estate, both investment and owner occupied. Property types financed include office, industrial, multi-family, affordable housing, retail, hotel, and other type properties. As of both March 31,
2023 and December 31, 2022, we had total commercial real estate loans of $5.2 billion, representing 38.1% and 38.0%, respectively, of our total loans as of each period end. As of March 31, 2023, and December 31, 2022, owner occupied loans totaled $0.9 billion and $1.0 billion, representing 17.2% and 17.8%, respectively, of our commercial real estate loans. Collateral values are established by independent third-party appraisals and evaluations. The primary repayment sources include operating income generated by the real estate, permanent debt refinancing and/or the sale of the real estate. Our commercial real estate loan portfolio also included IRB loans of $587.0 million and $608.0 million as of March 31, 2023 and December 31,
2022, respectively.
•Commercial construction: Loans in this category include construction project financing and are comprised of commercial real estate, business banking and residential loans for the purpose of constructing and developing real estate. As of March 31, 2023 and December 31, 2022, we had total commercial construction loans of $357.1 million and $336.3 million, representing 2.6% and 2.5%, respectively, of our total loans. Our commercial construction loan portfolio also included IRB loans as of $43.1 million and $36.9 million as of March 31, 2023 and December 31, 2022, respectively
•Business banking:
Loans in this category are comprised of loans to small businesses with exposures of under $1.0 million and small investment real estate projects with exposures of under $3.0 million. These loans are separate and distinct from our commercial and industrial and commercial real estate portfolios described above due to the size of the loans. As of both March 31, 2023 and December 31, 2022, we had total business banking loans of $1.1 billion, representing 7.9% and 8.0%, respectively, of our total loans as of each period end. In this category, commercial and industrial loans and commercial real estate loans totaled $200.3 million and $878.3 million, respectively, as of March 31, 2023, and $208.4 million and $882.1 million, respectively, as of December 31, 2022.
Business
banking originations include traditionally underwritten loans as well as partially automated scored loans. Our proprietary decision matrix, which includes a number of quantitative factors including, but not limited to, a guarantor’s credit score, industry risk, and time in business, is used to determine whether to make business banking loans. We also engage in SBA lending. SBA guarantees reduce our risk of loss when default occurs and are considered a credit enhancement to the loan structure.
Residential Lending
•Residential real estate: Loans in this category consist of mortgage loans on residential real estate. As of both March 31, 2023 and December 31, 2022, we had total residential loans of $2.5 billion, representing 18.3% and 18.1%,
respectively, of our total loans as of each period end. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit repayment history, financial resources including cash reserves and the value of the collateral. We maintain policy standards for minimum credit scores and cash reserves and maximum loan-to-value consistent with a “prime” portfolio. Collateral consists of mortgage liens on residential dwellings. We do not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or to retain in our loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and our capital needs. During the three months ended March 31, 2023, residential real estate
mortgage originations were $57.2 million, of which $9.1 million were sold on the secondary markets. Comparatively, during the three months ended March 31, 2022, residential real estate mortgage originations were $118.3 million, of which $29.2 million were sold on the secondary markets. We began purchasing residential real estate mortgage loans
during the third quarter of 2022. Loans purchased were subject to the same underwriting criteria as those loans originated directly by us. During the three months ended March 31, 2023,
we purchased $32.0 million of residential real estate mortgage loans. No residential real estate mortgage loans were purchased during the three months ended March 31, 2022.
Consumer Lending
•Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of both March 31, 2023 and December 31, 2022, we had total consumer home equity loans of $1.2 billion, representing 8.6% and 8.8%, respectively, of our total loans as of each period end. Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Full principal repayment is required at the end of the ten-year draw period. Home equity lines of credit
can be converted to term loans that are fully amortized. Underwriting considerations are materially consistent with those utilized in the residential real estate category. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
•Other consumer: Loans in this category consist of unsecured personal lines of credit, overdraft protection, automobile and aircraft loans, home improvement loans and other personal loans. As of March 31, 2023 and December 31, 2022, we had total other consumer loans of $190.5 million and $194.1 million, representing 1.4% of our total loans as of each period end. Our policy and underwriting in this category include the following factors, among others: income sources and reliability, credit histories, term of repayment and
collateral value, as applicable.
Other Banking Products and Services
In addition to our lending activities, which are the core part of our banking business, we offer other banking products and services primarily related to (i) other commercial banking products, (ii) other consumer deposit products and (iii) wealth management services.
Other Commercial Banking Products
•We offer a variety of deposit, treasury management, electronic banking, interest rate protection and foreign exchange products to our customers. In addition, we offer cash management services to our corporate and municipal clients. Deposit products include checking products, both interest-bearing and noninterest-bearing, as well as money market deposits, savings deposits and certificates of deposits. Our
treasury management products include a variety of cash management and payment products. Our interest rate protection and foreign exchange products include interest rate swaps and currency related transactions.
Other Consumer Deposit Products
•We offer a wide variety of deposit products and services to our consumer customers. We service these customers through our 97 branches located in eastern Massachusetts and New Hampshire, through our call center in our facility in Lynn, MA and through our online and mobile banking applications.
Wealth Management Services
•Through our Eastern Wealth Management division, we provide a wide range of trust services, including (i) managing customer investments, (ii) serving as custodian for customer assets, and (iii) providing
other fiduciary services, including serving as the trustee and personal representative of estates. As of March 31, 2023 and December 31, 2022, we held $3.1 billion and $2.9 billion, respectively, of assets in a fiduciary, custodial or agency capacity for customers, which are not our assets and therefore not included on the Consolidated Balance Sheets included in this Quarterly Report on Form 10-Q. For the three months ended March 31, 2023, we had noninterest income of $5.8 million from providing these services compared to $6.1 million for the three months ended March 31, 2022, respectively.
Insurance Agency Business
Our insurance agency business consists of insurance-related activities
such as acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients through our wholly-owned agency, Eastern Insurance Group. Our insurance products include commercial property and liability, workers compensation, life, accident and health and automobile insurance. We also offer a wide range of employee benefits products and services, including professional advice related to health care cost management, employee engagement and executive
services. As an agency business, we do not assume any underwriting or insurance risk. The commissions
we earn on the sale of these insurance products and services is the most significant portion of our noninterest income, representing $31.5 million or 11.3% of our noninterest loss on a GAAP basis and 60.6%% of our noninterest income on an operating basis during the three months ended March 31, 2023. Comparatively, during the three months ended March 31, 2022, such income represented $28.7 million, or 61.9%, of our noninterest income on a GAAP basis and 53.9% of our noninterest income on an operating basis. Refer to the “Non-GAAP Financial Measures” section below for additional information on the determination of noninterest income on an operating basis. Our insurance business operates through 22 non-branch offices located primarily in eastern Massachusetts and had 408 full-time equivalent employees as of March 31,
2023.
Outlook and Trends
Interest Rates
Beginning in March 2022, the Federal Open Market Committee (“FOMC”) voted to increase the federal funds rate multiple times from a range of 0.00% to 0.25% to a range of 5.00% to 5.25% on May 3, 2023, when the FOMC stated that it will closely monitor incoming information and assess the implications for monetary policy. In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial
developments.
Inevitably, not all of our interest rate-sensitive assets and liabilities will re-price simultaneously and in equal volume in response to changes in the federal funds rate, and therefore the potential for interest rate exposure exists. Management believes that several factors will affect the actual impact of interest rate changes on our balance sheet and operating results, including, but not limited to, actual changes in interest rates or expectations of future changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. We attempt to manage interest rate risk by identifying, quantifying, and, where appropriate, hedging our exposure. Approximately 34% of the outstanding principal balance of our loans as of March 31, 2023 was indexed to a market rate that is expected to
reprice along with the federal funds rate. A portion of these loans have been hedged using interest rate swaps to convert the floating rate interest receipts to a fixed rate. The notional amount of floating rate loans swapped totaled $2.4 billion on March 31, 2023, representing approximately 17.5% of the outstanding principal balance of our loans at that date. For more detail regarding such hedging financial instruments, refer to Note 14, “Derivative Financial Instruments”within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. We anticipate that an increase in market interest rates, whether due to an increase in the federal funds rate or otherwise, will decrease the fair value of those interest rate swaps and consequently reduce the positive impact on our net interest income that an interest
rate increase would otherwise have. Refer to the section titled “Management of Market Risk” within this Item 2 for additional discussion including the estimated change to our net interest income under interest rate risk measurement methodologies that use a variety of hypothetical scenarios assuming immediate and parallel changes in interest rates that may not reflect the manner in which actual yields and costs respond to changes in market interest rates.
Increases in the federal funds rate over the last twelve months and greater industry-wide competition for deposits have had a significant impact on our cost of interest-bearing liabilities and funding betas. Beginning in the third quarter of 2022 and to assist in meeting our loan-growth needs, we placed additional reliance on wholesale funding in the form of borrowings and then, in the fourth quarter of 2022, we started
to purchase brokered certificates of deposit. These funding sources generally have a higher cost than deposits originating within the markets we serve and are not our preferred sources of funding. We expect both our cost of interest bearing liabilities and funding betas to improve in 2023, as during the three months ended March 31, 2023, we completed a balance sheet repositioning by selling a portion of our AFS securities portfolio for total proceeds of $1.9 billion. The proceeds from the sale of such securities have been used to increase cash levels and may be used to reduce wholesale funds over time and, in turn, improve our net interest margin.
The
following chart depicts our funding betas and cost of interest bearing liabilities for the previous twelve months as of March 31, 2023:
(1)The total cost of interest bearing liabilities is charted on the left-hand y-axis and cycle beta data is charted on the right-hand y-axis.
(2)Cycle beta calculated as the change in monthly average total interest-bearing liabilities cost in each respective month from the beginning of the cycle, defined as February, 2022, divided by the respective change in the average monthly upper bound of the Federal Funds target range during the same period.
Liquidity
and Uninsured Deposits
As noted previously, we completed a balance sheet repositioning during the three months ended March 31, 2023 by selling a portion of our AFS investment securities portfolio for total proceeds of $1.9 billion. Such securities were lower-yielding U.S. Agency bonds and government-sponsored residential and commercial mortgage-backed securities which were purchased when interest rates were historically low. The record rise in interest rates over the last twelve months caused the fair value of such securities to decline and, after careful consideration, management made the decision in early March and prior to the failures of Silicon Valley Bank and Signature Bank to sell these securities to improve liquidity and future earnings.
We also took steps to strengthen our backup sources of liquidity during the three months
ended March 31, 2023 by pledging securities to the Federal Reserve’s Bank Term Funding Program. As of March 31, 2023, cash and cash equivalents were $2.1 billion and secured borrowing capacity at the Federal Reserve Bank and Federal Home Loan Bank totaled $5.0 billion, providing total liquidity sources of $7.1 billion. These liquidity sources provide 107% coverage of all customer uninsured and uncollateralized deposits, which totaled $6.7 billion, or 36% of total deposits, on March 31, 2023. For further discussion of liquidity, refer to “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”within this Item 2 and for further discussion of uninsured deposits, refer to the “Deposits” discussion
within “Financial Position” within this Item 2.
Commercial Real Estate Office Exposure
Our total office-related CRE loans (which is comprised of loans secured by office space, medical office space, and mixed-use retail/office space in our commercial real estate, business banking, and construction portfolios) totaled $1.2 billion as of both March 31, 2023 and December 31, 2022. Given prevailing market conditions such as rising interest rates, reduced occupancy as a result of the increase in hybrid work arrangements post-COVID, and lower commercial real estate valuations, we are carefully monitoring these loans for signs of deterioration in credit quality. As of March 31, 2023, three
of these loans, totaling $0.8 million and within our business banking portfolio, were on non-accrual status. As of December 31, 2022, five of these loans, totaling $0.6 million and within our business banking portfolio, were on non-accrual status.
We present certain non-GAAP financial measures, which management uses to evaluate our performance and which exclude the effects of certain
transactions, non-cash items and GAAP adjustments that we believe are unrelated to our core business and are therefore not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility for investors into our core businesses as well as underlying trends that may, to some extent, be obscured by inclusion of such items in the corresponding GAAP financial measures.
There are items in our financial statements that impact our results but which we believe are unrelated to our core business. Accordingly, we present operating net income, noninterest income on an operating basis, noninterest expense on an operating basis, total operating revenue, operating earnings per share, operating net income to average tangible shareholders’ equity, tangible book value per share, and the operating efficiency ratio, each of which excludes the impact of such items
because we believe such exclusion can provide greater visibility into our core business and underlying trends. Such items that we do not consider to be core to our business include (i) income and expenses from investments held in rabbi trusts, (ii) gains and losses on sales of securities available for sale, net, (iii) gains and losses on the sale of other assets, (iv) rabbi trust employee benefits, (v) impairment charges on tax credit investments and associated tax credit benefits, (vi) OREO gains and losses, (vii) merger and acquisition expenses, (viii) the non-cash pension settlement charge recognized related to our Defined Benefit Plan, and (ix) certain discrete tax items. There were no expenses indirectly associated with OREO gains or losses, or impairment charges on tax credit investments and associated tax credit benefits during the periods presented in this Quarterly Report on Form 10-Q.
We also present tangible shareholders’
equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, average tangible shareholders’ equity, the ratios of net (loss) income and operating net income to average tangible shareholders’ equity and tangible book value per share, each of which excludes the impact of goodwill and other intangible assets, as we believe these financial measures provide investors with the ability to further assess our performance, identify trends in our core business and provide a comparison of our capital adequacy to other companies. We have included the tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends.
Our non-GAAP financial measures should not be considered as an alternative or substitute to GAAP net (loss) income, or as an indication of our cash flows from operating activities, a
measure of our liquidity or an indication of funds available for our cash needs. An item which we consider to be non-core and exclude when computing these non-GAAP financial measures can be of substantial importance to our results for any particular period. In addition, our methodology for calculating non-GAAP financial measures may differ from the methodologies employed by other companies to calculate the same or similar performance measures and, accordingly, our reported non-GAAP financial measures may not be comparable to the same or similar performance measures reported by other companies.
The following table summarizes
the impact of non-core items recorded for the time periods indicated below and reconciles them to the most directly comparable GAAP financial measure:
(Income) losses from investments held in rabbi trusts
(2,857)
4,433
Losses
on sales of securities available for sale, net
333,170
2,172
(Gains) losses on sales of other assets
(1)
274
Noninterest expense components:
Rabbi trust employee benefit expense (income)
1,274
(2,087)
Merger
and acquisition expenses
—
34
Total impact of non-GAAP adjustments
331,586
4,826
Less net tax benefit associated with non-GAAP adjustment (1)
76,377
1,235
Non-GAAP adjustments, net of tax
$
255,209
$
3,591
Operating
net income (non-GAAP)
$
61,113
$
55,107
Weighted average common shares outstanding during the period:
Basic
161,991,373
169,857,950
Diluted
162,059,431
169,968,156
(Losses)
earnings per share, basic
$
(1.20)
$
0.30
(Losses) earnings per share, diluted
$
(1.20)
$
0.30
Operating earnings per share, basic (non-GAAP)
$
0.38
$
0.32
Operating
earnings per share, diluted (non-GAAP)
$
0.38
$
0.32
(1)The net tax benefit associated with these items is determined by assessing whether each item is included or excluded from net taxable income and applying our combined statutory tax rate only to those items included in net taxable income. For the three months ended March 31, 2023, this amount is primarily comprised of a $53.2 million tax benefit, net of a valuation allowance, resulting from the sale of securities classified as available for sale and a $23.7 million tax benefit resulting from the transfer of certain securities from Market Street
Securities Corp., a wholly owned subsidiary which was liquidated during the three months ended March 31, 2023, to Eastern Bank. Upon the sale of securities, we established a valuation allowance of $17.4 million as it was determined at that time it was not more likely than not that the entirety of the deferred tax asset related to the loss on such securities would be realized.
The following table summarizes the impact of non-core items with respect to our total (loss) revenue, noninterest (loss) income, noninterest expense, and the efficiency ratio, which reconciles to
the most directly comparable respective GAAP financial measure, for the periods indicated:
Fully-taxable equivalent net interest income (non-GAAP)
142,754
130,385
Noninterest (loss) income (GAAP)
(278,330)
46,415
Less:
Income
(losses) from investments held in rabbi trusts
2,857
(4,433)
Losses on sales of securities available for sale, net
(333,170)
(2,172)
Gains (losses) on sales of other assets
1
(274)
Noninterest income on an operating basis (non-GAAP)
51,982
53,294
Noninterest
expense (GAAP)
$
116,294
$
108,866
Less:
Rabbi trust employee benefit expense (income)
1,274
(2,087)
Merger and acquisition expenses
—
34
Noninterest
expense on an operating basis (non- GAAP)
$
115,020
$
110,919
Total (loss) revenue (GAAP)
$
(140,021)
$
174,539
Total operating revenue (non-GAAP)
$
194,736
$
183,679
Ratios:
Efficiency
ratio (GAAP)
(83.05)
%
62.37
%
Operating efficiency ratio (non-GAAP)
59.06
%
60.39
%
The following table summarizes the calculation of our tangible shareholders’ equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, and tangible book value per share, which reconciles to the most directly comparable respective GAAP measure, as of the dates indicated:
The following table summarizes the calculation of our average tangible shareholders’ equity and ratio of net (loss) income and operating net income to average tangible shareholders’ equity (“operating return on average tangible shareholders’ equity”), which reconciles to the most directly comparable GAAP
measure, for the periods indicated:
Total cash and cash equivalents increased by $2.0 billion to $2.1 billion at March 31, 2023 from $169.5 million at December 31, 2022. This increase was primarily due to proceeds from sales of AFS securities of $1.9 billion during the three months ended March 31,
2023. For further discussion of the change in securities, refer to the later “Securities” section in this Item 2.
Securities
Our current investment policy authorizes us to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate notes, asset-backed securities and municipal securities. The Risk Management Committee of our Board of Directors is responsible for approving and overseeing our investment policy, which it reviews at least annually. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential
returns and market risk considerations. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk investment products. We typically invest in the following types of securities:
U.S. government securities: At March 31, 2023 and December 31, 2022, our U.S. government securities consisted of U.S. Agency bonds and U.S. Treasury securities. We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes, and as collateral for interest rate derivative positions. U.S. Agency bonds include securities issued by Fannie Mae, Freddie Mac, the FHLB, and the Federal Farm Credit Bureau.
Mortgage-backed
securities: We invest in residential and commercial mortgage-backed securities insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae, including collateralized mortgage obligations. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Ginnie Mae or Fannie Mae.
Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment
estimates require modification that could cause amortization or accretion adjustments. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.
State and municipal securities: We invest in fixed rate investment grade bonds issued primarily by municipalities in our local communities within Massachusetts and by the Commonwealth of Massachusetts. The market value of these securities may be affected by call options, long dated maturities, general market liquidity and credit factors.
The following table shows the fair value of our securities by investment category as of the dates indicated:
Total held to maturity securities, at amortized cost
471,185
476,647
Total
$
5,171,319
$
7,167,425
Our securities portfolio has decreased $2.0
billion, or 27.8%, to $5.2 billion at March 31, 2023 from $7.2 billion at December 31, 2022. This decrease was primarily due to the completion of balance sheet repositioning in March 2023 through the sale of AFS securities for total proceeds of $1.9 billion. Refer to the sections titled “Outlook and Trends” and “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”within this Item 2 for additional discussion of such sales.
A portion of our securities portfolio continues to
be tax-exempt. Investments in federally tax-exempt securities totaled $187.9 million at March 31, 2023 compared to $182.9 million at December 31, 2022.
Our AFS securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as Level 3 within the fair value hierarchy. As of both March 31,
2023 and December 31, 2022, we had no securities categorized as Level 3 within the fair value hierarchy.
Maturities of our securities portfolio are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur.
The following tables show contractual maturities of our AFS and HTM securities and weighted average yields at and for the periods ended March 31, 2023 and December 31, 2022. Weighted average yields in the tables below have been calculated based on the amortized cost of the security:
(1)Investment security weighted-average yields were calculated on a level-yield basis by weighting the tax equivalent yield for each security type by the book value of each maturity.
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to an FTE basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing federal income taxes that would have been paid if the income had been fully taxable.
Loans
We consider our loan portfolio to be relatively diversified by borrower and industry. Our gross loans increased $99.7 million, or 0.7%, to $13.7 billion at March 31, 2023 from $13.6 billion at December 31,
2022. The increase as of March 31, 2023 was primarily due to increases in our commercial real estate and residential real estate portfolio balances.
•Our commercial real estate portfolio increased by $45.9 million from December 31, 2022 to March 31, 2023 which was primarily attributable to an increase of $70.1 million in commercial real estate investment loan balances. Such loans represent loans secured by commercial real estate that are non-owner-occupied. The increase in such loan balances was primarily due to management’s active focus on originating loans collateralized by industrial/warehouse and multi-family property types, which are included in the commercial real estate investment loan category, due to management’s belief that the credit performance
of such loans has a stable outlook. The increase in commercial real estate investment loan balances was partially offset by a decrease in commercial real estate owner-occupied loans of $24.0 million which was due to net paydowns of such loans during the three months ended March 31, 2023.
•Our residential real estate portfolio increased by $36.6 million during the three months ended March 31, 2023. The increase in residential real estate loan balances was primarily due to purchases of such loans which totaled $32.0 million during the three months ended March 31, 2023.
The following table shows the composition of our loan portfolio, by category, as of the dates indicated:
Unamortized
premiums, net of unearned discounts and deferred fees
(13,597)
(13,003)
Total loans receivable, net
$
13,520,715
$
13,420,317
We believe that our commercial loan portfolio composition is relatively diversified in terms of industry sectors, property types and various lending specialties, and is concentrated in the New England geographical area, with 81.5% of our commercial loans in Massachusetts and New Hampshire as of March 31,
2023.
Asset quality. We continually monitor the asset quality of our loan portfolio utilizing portfolio scorecards and various credit quality indicators. Based on this process, loans meeting certain criteria are categorized as delinquent or non-performing and further assessed to determine if non-accrual status is appropriate.
For the commercial portfolio, which includes our commercial and industrial, commercial real estate, commercial construction and business banking loans, we monitor credit quality using a risk rating scale, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Management utilizes a loan risk rating methodology based on a 15-point scale with the assistance of risk rating scorecard tools. Pass grades are 0-10 and non-pass categories, which align
with regulatory guidelines, are: special mention (11), substandard (12), doubtful (13) and loss (14).
Risk rating assignment is determined using one of 15 separate scorecards developed for distinctive portfolio segments based on common attributes. Key factors include: industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral and other considerations.
Special mention, substandard and doubtful loans totaled 3.0% and 2.2%
of total commercial loans outstanding at March 31, 2023 and December 31, 2022, respectively. This increase was driven by risk rating downgrades of several credits in the commercial and industrial and commercial real estate portfolios. Management is not aware of any pervasive credit trends leading to this increase and the the percentage of such loans to total commercial loans as of March 31, 2023 remains consistent with our long-term average.
Our philosophy toward managing our loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. We seek to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.
The delinquency
rate of our total loan portfolio improved to 0.37% at March 31, 2023, compared to 0.50% at December 31, 2022.
The following table provides details regarding our delinquency rates as of the dates indicated:
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.
the later “Allowance for Loan Losses” section in this Item 2 for a discussion of the change in non-accrual loans which comprise our NPLs as of March 31, 2023.
The total amount of interest recorded on NPLs during both the three months ended March 31, 2023 and 2022 was not significant. The gross interest income that would have been recorded under the original terms of those loans if they had been performing amounted to $1.1 million and $0.5 million for the three months ended March 31, 2023 and 2022, respectively.
In
the course of resolving NPLs, we may choose to restructure the contractual terms of certain loans. We attempt to work-out alternative payment schedules with the borrowers in order to avoid foreclosure actions. As noted within Note 2, “Summary of Significant Accounting Policies”within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q, we adopted ASU 2022-02 on January 1, 2023 which eliminated TDR accounting. Prior to the adoption of this standard, we reviewed each loan that was modified to identify whether a TDR had occurred. TDRs involved situations in which, for economic or legal reasons related to the borrower’s financial difficulties, we granted a concession to the borrower that we would not otherwise have considered. Subsequent to our adoption of this standard, we apply the loan refinancing
and restructuring guidance codified in paragraphs 310-20-35-9 through 35-11 of the Accounting Standards Codification to determine whether a modification results in a new loan or a continuation of an existing loan.
ASU 2022-02 requires disclosure of loan modifications to borrowers experiencing financial difficulty. The aggregate amortized cost balance as of March 31, 2023 of loans modified during the three months ended March 31, 2023, determined in accordance with ASU 2022-02, which were determined to be modifications to borrowers experiencing financial difficulty was $2.3 million. As of March 31, 2023, there were no loans that had been modified to borrowers experiencing financial difficulty during the three months ended March 31, 2023
and which subsequently defaulted during the period.
Under previous accounting guidance, in cases where a borrower experienced financial difficulties and we made certain concessionary modifications to contractual terms, the loan was classified as a TDR. Loans modified during the three months ended March 31, 2022 which were determined to be TDRs, determined in accordance with previous accounting guidance in effect through December 31, 2022, totaled $0.8 million. As of March 31, 2022, there were no loans that had been modified during the preceding 12 months, which were party to a TDR and which subsequently defaulted during the three months ended March 31, 2022.
It is our policy to have any
restructured loan, which is on non-accrual status prior to being modified, remain on non-accrual status for approximately six months subsequent to being modified before we consider its return to accrual status. If the restructured loan is on accrual status prior to being modified, we review it to determine if the modified loan should remain on accrual status.
Purchased credit deteriorated (“PCD”) loans are loans that we acquired that have shown evidence of deterioration of credit quality since origination and, therefore, it was deemed unlikely that all contractually required payments would be collected upon the acquisition date. We consider factors such as payment history, collateral values and accrual status when determining whether there was evidence of deterioration at the acquisition date. As of March 31, 2023 and December 31,
2022, the carrying amount of PCD loans was $56.0 million and $56.6 million, respectively.
Potential Problem Loans. In the normal course of business, we become aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which currently do not yet meet the criteria for classification as NPLs. These loans are neither delinquent nor on non-accrual status. Our potential problem loans, or loans with potential weaknesses that were not included in the non-accrual loans or in the loans 90 or more past due categories, increased by $70.2 million, or 37.5%, to $257.2 million at March 31, 2023 from $187.0 million at December 31, 2022. These loans as a percentage of total loans increased to 1.9% at March 31,
2023 from 1.4% at December 31, 2022. The increase in potential problem loans from December 31, 2022 to March 31, 2023 was primarily due to the downgrade of several commercial and industrial and commercial real estate loans during the three months ended March 31, 2023.
Allowance for credit losses. For the purpose of estimating our allowance for loan losses, we segregate the loan portfolio into loan categories, for loans that share similar risk characteristics, that possess unique risk characteristics such as loan purpose, repayment source, and collateral that are considered when determining the appropriate level of the allowance for loan losses for each category. Loans that do not share similar risk characteristics
with other loans are evaluated individually.
While we use available information to recognize losses on loans, future additions or subtractions to/from the allowance for loan losses may be necessary based on changes in NPLs, changes in economic conditions, or other reasons. Additionally, various regulatory agencies, as an integral part of our examination process, periodically assess the adequacy of the allowance for loan losses to assess whether the allowance for loan losses was determined in accordance with GAAP and applicable guidance.
We perform an evaluation of our allowance for loan losses on a regular basis (at least quarterly), and establish the allowance for loan losses based upon an evaluation of our loan categories, as each possesses unique risk characteristics that are considered when determining the appropriate level of allowance for loan losses, including:
•known increases in concentrations within each category;
•certain higher risk classes of loans, or pledged collateral;
•historical loan loss experience within each category;
•results of any independent review and evaluation of the category’s credit quality;
•trends in volume, maturity and composition of each category;
•volume and trends in delinquencies and non-accruals;
•national and local economic conditions and downturns in specific local
industries;
•corporate goals and objectives;
•lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; and
•current and forecasted banking industry conditions, as well as the regulatory and competitive environment.
Loans are evaluated on a regular basis by management. Expected lifetime losses are estimated on a collective basis for loans sharing similar risk characteristics and are determined using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. For commercial and industrial, commercial real estate, commercial construction and business banking
portfolios, the quantitative model uses a loan rating system which is comprised of management’s determination of probability of default, or PD, loss given default, or LGD and exposure at default, or EAD, which are derived from historical loss experience and other factors. For residential real estate, consumer home equity and other consumer portfolios, our quantitative model uses historical loss experience
The allowance for loan losses is allocated to loan categories using both a formula-based approach and an analysis of certain individual loans for impairment. We use a methodology to systematically estimate the amount of expected credit loss in the loan portfolio. Under our current methodology, the allowance for loan losses contains reserves related to loans for which the related allowance for loan losses is determined on individual loan basis and on a collective basis, and other qualitative components.
In
the ordinary course of business, we enter into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the reserving method for loans receivable previously described. The reserve for unfunded lending commitments is included in other liabilities in the Consolidated Balance Sheet.
The allowance for loan losses decreased by $1.3 million, or 0.9%, to $140.9 million, or 1.03% of total loans, at March 31, 2023 from $142.2 million, or 1.05% of total loans at December 31, 2022. The decrease in the allowance for loan losses was primarily the result of our adoption of ASU 2022-02, as previously described above, which resulted in a change in reserving method
for loans previously classified as TDRs. Upon adoption of ASU 2022-02, TDR loans for which the allowance for loan losses was determined by a discounted cash flow analysis, transitioned to their respective pools of loans sharing similar risk characteristics for which the allowance for loan losses is determined on a collective basis. As a result, the allowance for loan losses for such loans was reduced by $1.1 million.
For additional discussion of our allowance for credit losses measurement methodology, see Note 2, “Summary of Significant Accounting Policies” and Note 4, “Loans and Allowance for Loan Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. For additional discussion of the change in allowance for loan losses, refer to the
later “Provision for Loan Losses,” included in the “Results of Operations” section within this Item 2.
Non-accrual loans increased $0.8 million, or 2.2%, to $34.6 million at March 31, 2023 from $33.8 million at March 31,
2022, primarily due to an increase in residential real estate non-accrual loans of $1.3 million which was partially offset by a decrease in commercial real estate and business banking non-accrual loans of $0.5 million and $0.4 million, respectively. The increase in non-accrual residential real estate loans is primarily due to an overall increase in the residential real estate loan portfolio which increased 29.0% from March 31, 2022 to March 31, 2023. Non-accrual residential real estate loans as a percentage of total gross residential loans decreased from 0.43% at March 31, 2022 to 0.38% at March 31, 2023. Non-accrual commercial real estate loans and business banking loans decreased primarily due to payoffs and curing of delinquency of such loans.
The
following table sets forth the allocation of the allowance for loan losses by loan categories listed in loan portfolio composition as of the dates indicated:
Summary of Allocation of Allowance for Loan Losses
Percent of Allowance in Category to Total Allocated Allowance
Percent of Loans in Category to Total Loans
Allowance for Loan Losses
Percent of Allowance in Category to Total Allocated Allowance
Percent of Loans in Category to
Total Loans (1)
(Dollars in thousands)
Commercial and industrial
$
26,929
19.11
%
23.07
%
$
26,859
18.89
%
23.10
%
Commercial
real estate
55,193
39.15
%
38.04
%
54,730
38.49
%
37.98
%
Commercial construction
7,578
5.38
%
2.60
%
7,085
4.98
%
2.46
%
Business
banking
15,085
10.70
%
7.93
%
16,189
11.38
%
8.08
%
Residential real estate
27,130
19.25
%
18.42
%
28,129
19.78
%
18.29
%
Consumer
home equity
6,182
4.39
%
8.67
%
6,454
4.54
%
8.78
%
Other consumer
2,841
2.02
%
1.26
%
2,765
1.94
%
1.31
%
Total
$
140,938
100.00
%
100.00
%
$
142,211
100.00
%
100.00
%
(1)Percentages
were revised from the percentages presented in our 2022 10-K. The revised figures were computed based upon loan amortized cost balances whereas the percentages presented in the 2022 10-K were computed based upon recorded investment balances.
To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, liquidation of the collateral and the strength of co-makers or guarantors. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for loan losses and any recoveries of such previously charged-off amounts are credited to the allowance for loan losses.
Regardless of whether a loan is unsecured or collateralized, we charge off the amount of any confirmed loan loss in the period when
the loans, or portions of loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss confirming events may include an appraisal or other valuation that reflects a shortfall between the value of the collateral and the carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral.
For additional information regarding our allowance for loan losses, see Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Federal Home Loan Bank stock
The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for our membership in the FHLBB is to gain access to a reliable
source of wholesale funding and as a tool to manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. We purchase and/or are subject to redemption of FHLBB stock proportional to the volume of funding received and view the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.
We held an investment in the FHLBB of $45.2 million and $41.4 million at March 31, 2023 and December 31, 2022, respectively. The amount of stock we are required to purchase is proportional to our FHLB borrowings and level of total assets. Accordingly, the increase in FHLB stock is due to increased borrowings.
Goodwill and other intangible assets were $660.2 million and $661.1 million at March 31, 2023 and December 31, 2022, respectively. We did not record any impairment to our goodwill or other intangible assets during the three months ended March 31, 2023. We will continue to assess our goodwill and other intangible assets to determine if impairments are necessary.
Deposits
Deposits originating within the markets we serve continue to be our primary source of funding our earning assets. Historically, we have been able to compete effectively for deposits in our primary market areas. The distribution and market share of deposits by type
of deposit and by type of depositor are important considerations in our assessment of the stability of our fund sources and our access to additional funds. Furthermore, we shift the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize net interest margin.
The following table presents our deposits as of the dates presented:
(1)Brokered certificates of deposit are included in total certificates of deposit and amounted to $609.7 million and $928.6 million at March 31, 2023 and December 31, 2022, respectively.
Deposits
decreased by $0.4 billion, or 2.3%, to $18.5 billion at March 31, 2023 from $19.0 billion at December 31, 2022. This decrease was primarily the result of a decrease in brokered certificates of deposit of $318.9 million. Brokered certificates of deposit decreased as such accounts matured and were not renewed in full as we emphasized other means for increasing our overall liquidity as of March 31, 2023. The decrease in brokered certificates of deposit was more than offset by a shift in deposit mix of certain core deposits from demand and interest checking deposits, which decreased by $0.7 billion and $0.3 billion, respectively, to certificates of deposit resulting in a net increase in certificates of deposit. This shift in deposit mix during the three months ended March 31, 2023
was due primarily to increases in rates paid on certificates of deposit, which attracted depositors to such products. Money market investments increased $0.4 billion primarily due to increased IntraFi Network deposits. Refer to the later “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies” section in this Item 2 for additional discussion of such deposits.
The Bank’s estimate of total uninsured deposits was $8.4 billion and $9.0 billion at March 31, 2023 and December 31, 2022, respectively. In accordance with the FDIC’s Call Report instructions, these estimates include accounts of wholly-owned subsidiaries, the holding company, and internal operating
deposit accounts (together referred to as “internal deposit accounts”). In addition, these estimates include municipal deposit accounts for which securities were pledged by us to secure such deposits (“collateralized deposits”). For liquidity monitoring purposes, we exclude internal deposit accounts and collateralized deposits from our estimate of uninsured deposits. Our estimate of uninsured deposits, excluding internal deposit accounts and collateralized deposits, was $6.7 billion and $7.3 billion at March 31, 2023 and December 31, 2022, respectively.
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:
Our borrowings consist of both short-term and
long-term borrowings and provide us with sources of funding. Maintaining available borrowing capacity provides us with a contingent source of liquidity.
Our total borrowings increased by $397.6 million to $1.1 billion at March 31, 2023 compared to $740.8 million at December 31, 2022. The increase was primarily due to an increase in FHLB short-term advances, which we borrowed to increase our liquidity. Refer to the later “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies” section in this Item 2 for additional discussion of our liquidity position.
The following table sets forth information concerning balances on our borrowings as of the dates and for the periods indicated:
Interest and dividend income increased by $57.4 million, or 43.7%, to $188.9 million during the three months ended March 31, 2023 from
$131.5 million during the three months ended March 31, 2022. The increase was primarily a result of an increase in the yield on average interest-earning assets which increased by 112 basis points compared with the three months ended March 31, 2022. Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans and securities are calculated and added to the yield. Management believes that this presentation allows for better comparability between institutions with different tax structures. Partially offsetting the impact of increased yields was a decrease in the average balance of our interest-earning assets which decreased slightly by $83.2 million, or 0.4%, to $21.8 billion during the three months ended March 31, 2023 compared to $21.9 billion during the three months ended
March 31, 2022, which was primarily attributable to a decrease in the average balance of securities.
•Interest income on loans increased $52.2 million, or 51.5%, to $153.5 million during the three months ended March 31, 2023 from $101.4 million during the three months ended March 31, 2022. The increase in interest income on our loans was due to an increase in our yields on loans and an increase in the average balance of loans. The overall yield on our loans increased 126 basis points during the three months ended March 31, 2023 in comparison to the three months ended March 31, 2022. The increase in yield was primarily due to increases in market rates of
interest which resulted in increased yields on variable rate loans which repriced and new loans originated at higher rates of interest. The average balance of our loans increased $1.4 billion, or 11.7%, to $13.6 billion during the three months ended March 31, 2023 from $12.2 billion during the three months ended March 31, 2022. Refer to the earlier “Loans” discussion within the “Financial Position” section within this Item 2 for additional discussion of changes in our loans balances.
•Interest income on securities and other short-term investments increased $5.2 million, or 17.3%, to $35.3 million during the three months ended March 31, 2023 from
$30.1 million during the three months ended March 31, 2022. The increase in interest income on our securities was due to an increase in the average yield of such securities. The yield on our securities and short-term investments increased 50 basis points during the three months ended March 31, 2023 in comparison to the three months ended March 31, 2022 primarily due to an increase in the rate paid on our cash held at the Federal Reserve Bank of Boston from an average of 0.19% during the three months ended March 31, 2022 to an average of 4.59% during the three months ended March 31, 2023. In addition, our cash deposited at the Federal Reserve Bank of Boston increased during the three months ended March
31, 2023 compared to the three months ended March 31, 2022 due primarily to the deposit of proceeds from the sale of AFS securities (discussed earlier) in March 2023. Partially offsetting this increase was a corresponding decrease in our average securities balance, which decreased $1.5 billion, or 15.7%, to $8.1 billion for the three months ended March 31, 2023 from $9.7 billion for the three months ended March 31, 2022 primarily due to the sales of AFS securities in March 2023. For additional discussion of the sales, refer to the section titled “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies” within this Item 2.
During the three months ended March 31, 2023, interest expense increased $47.2 million to $50.6 million from $3.4 million during the three months ended March 31, 2022. The increase was primarily attributable to an increase in deposit interest expense, which was primarily attributable to an increase in the deposit rates we offered.
During the three months ended March 31, 2023, interest expense on our interest-bearing deposits increased by $39.6 million to $42.9 million from $3.3 million during the three months ended March 31, 2022. This increase was due to an increase in the rates paid on deposits and an increase in average
interest-bearing deposits. Rates paid on deposits increased by 122 basis points to 1.33% during the three months ended March 31, 2023 from 0.11% during the three months ended March 31, 2022, which we increased in response to an increase in market rates of interest and heightened industry-wide competition for deposits. In addition, beginning in the fourth quarter of 2022, we began purchasing brokered certificates of deposit. Such deposits bear higher rates of interest in comparison to our core deposits. Consequently, the purchases of brokered certificates of deposit contributed to the increase in rates paid on deposits.
Interest expense related to our borrowings increased by $7.6 million to $7.6 million during the three months ended March 31, 2023 from less than $0.1 million during
the three months ended March 31, 2022. The increase in borrowings interest expense is attributable to an increase in our utilization of our FHLB borrowing capacity. For additional discussion of the increase in borrowings, refer to the section titled “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies” within this Item 2.
Net Interest Income
Net interest income increased by $10.2 million, or 7.9%, to $138.3 million during the three months ended March 31, 2023 from $128.1 million for the three months ended March 31, 2022. Net interest income increased due to an increase in yield on interest-earning assets which exceeded the increase in the cost of
interest-bearing liabilities. Partially offsetting the increase in yields on our interest-earning assets was the decrease in the balance of average net interest-earning assets of $1.1 billion, or 11.7%, to $8.0 billion during the three months ended March 31, 2023 from $9.1 billion during the three months ended March 31, 2022.
The following chart shows our net interest margin over the past five quarters:
Net interest margin is determined by dividing FTE net interest income by average interest-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using
a marginal tax rate of 21.7% for the three months ended March 31, 2023 and 21.5% for the three months ended March 31, 2022. Net interest margin increased 24 basis points to 2.66% during the three months ended March 31, 2023, from 2.42% during the three months ended March 31, 2022. The increase in net interest margin for the three months ended March 31,
2023 from the three months ended March
31, 2022 was primarily due to an increase in market rates of interest which resulted in an increase in our yield on interest-earning assets.
The following tables set forth average balance sheet items, annualized average yields and costs, and certain other information for the periods indicated. All average balances in the table reflect daily average balances. Non-accrual loans were included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs, discounts and premiums that are amortized or
accreted to interest income or expense.
Average Balances, Interest Earned/Paid, & Average Yields
Average
interest-earning assets to interest-bearing liabilities
158.55
%
171.36
%
(Loss) return on average assets (5)(6)
(3.50)
%
0.90
%
(Loss)
return on average equity (5)(7)
(32.00)
%
6.38
%
Noninterest expense to average assets
2.10
%
1.90
%
(1)Non-accrual
loans are included in loans.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin - FTE represents fully-taxable equivalent net interest income divided by average total interest-earning assets. Refer to
the earlier “Non-GAAP Financial Measures” section within this Item 2 for additional information.
(5)Presented on an annualized basis.
(6)Represents net (loss) income divided by average total assets.
(7)Represents net (loss) income divided by average equity.
The following chart shows the composition of our quarterly average interest-earning assets for the past five quarters:
Provision for Loan Losses
The provision for loan losses represents the
charge to expense that is required to maintain an appropriate level of allowance for loan losses.
We recorded a provision for loan losses of less than $0.1 million for the three months ended March 31, 2023, compared to a release of $0.5 million for the three months ended March 31, 2022. Management determined a provision to be necessary due primarily to increased loan balances.
Management’s estimate of our allowance for loan losses as of March 31, 2023 and the provision for loan losses for the three months ended March 31, 2023, was supported, in part, by Oxford Economics’ March 2023 Baseline forecast (“the forecast”) which was used to develop management’s estimate of the effect
of expected future economic conditions on the allowance for loan losses. The forecast assumed the U.S. economy will enter a recession in the third quarter of 2023 compared to the assumption used as of December 31, 2022 which had assumed the U.S. economy would enter a recession in the second quarter of 2023. This forecast reflects the combination of continued strong consumer product demand, consistent labor market metrics, and stronger economic growth rates than anticipated following the recent increases to the federal funds rate by the FOMC. Primary macroeconomic assumptions included in management’s evaluation of the adequacy of the allowance for loan losses included continued low unemployment rates and a steady gross domestic product (“GDP”). Further, the forecast assumed that the FOMC will continue to raise interest rates into mid-2023 following its most recent March 2023 increase. The core consumer price index
remained steady, and is expected to remain well above the FOMC’s 2% target through 2023. Refer to the section titled “Outlook and Trends” within this Item 2 for additional discussion. For additional discussion of our allowance for credit losses measurement methodology, see Note 2, “Summary of Significant Accounting Policies” and Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
To
illustrate the sensitivity of the modeled result to the impact of a hypothetical change in the economic forecast, management calculated the allowance for loan losses assuming the downside economic forecast scenario and, separately, the upside economic forecast scenario. The downside scenario assumed the U.S. economy will enter a more severe recession in the third quarter of 2023 and experience a decline in GDP of 3.0% peak-to-trough. Use of the downside scenario would have resulted in an incremental increase in the allowance for loan losses of approximately $9.0 million as of March 31, 2023. The upside scenario assumed GDP growth of 1.8% in 2023, 2.0% in 2024 and sustained recovery. Use of the upside scenario would have resulted in an incremental decrease in the allowance for loan losses of approximately $4.9 million as of March 31, 2023.
Our
periodic evaluation of the appropriate allowance for loan losses considers the risk characteristics of the loan portfolio, current economic conditions, and trends in loan delinquencies and charge-offs.
Noninterest Income
The following table sets forth information regarding noninterest income for the periods shown:
Noninterest Income
Three
Months Ended March 31,
Change
2023
2022
Amount
%
(Dollars in thousands)
Insurance commissions
$
31,503
$
28,713
$
2,790
9.7
%
Service
charges on deposit accounts
6,472
8,537
(2,065)
(24.2)
%
Trust and investment advisory fees
5,770
6,141
(371)
(6.0)
%
Debit
card processing fees
3,170
2,945
225
7.6
%
Interest rate swap (losses) income
(408)
2,932
(3,340)
(113.9)
%
Income
(losses) from investments held in rabbi trusts
2,857
(4,433)
7,290
(164.4)
%
(Losses) gains on sales of mortgage loans held for sale, net
(74)
169
(243)
(143.8)
%
(Losses)
on sales of securities available for sale, net
(333,170)
(2,172)
(330,998)
15,239.3
%
Other
5,550
3,583
1,967
54.9
%
Total
noninterest (loss) income
$
(278,330)
$
46,415
$
(324,745)
(699.7)
%
Noninterest income decreased $324.7 million, to a net loss of $278.3 million for the three months ended March 31, 2023 from income of $46.4 million for the three months ended March 31, 2022. This decrease was primarily due to a $331.0 million increase
in losses on sales of securities available for sale, a $3.3 million decrease in interest rate swap income which resulted from a current period net loss from such swaps compared to net income in the comparative prior period, and a $2.1 million decrease in service charges on deposit accounts. These unfavorable items were partially offset by a $7.3 million increase in income from investments held in rabbi trusts and a $2.8 million increase in insurance commissions.
•Losses on sales of securities available for sale, net, increased by $331.0 million to $333.2 million for the three months ended March 31, 2023 from $2.2 million for the three months ended March 31, 2022 due to balance sheet repositioning which was completed in March 2023 and included the decision by management to sell certain available for sale
securities. Refer to the section titled“Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies”within this Item 2 for additional discussion of such sales.
•Interest rate swap income decreased to a loss primarily as a result of an unfavorable mark-to-market adjustment for the three months ended March 31, 2023 compared a favorable mark-to-market adjustment for the three months ended March 31, 2022.
•Service charges on deposit accounts decreased primarily as a result of decreased corporate account analysis charges which was due primarily to lower commercial deposit account customer activity because of heightened industry-wide competition for deposits. Also
contributing to the decrease was a decrease in customer overdraft charges which decreased primarily as a result of our decision to reduce the amount of the overdraft fees charged to our customers beginning in the third quarter of 2022.
•Income from investments held in rabbi trusts increased primarily as a result of a favorable mark-to-market adjustment on equity securities held in these accounts for the three months ended March 31, 2023 resulting from an increase in the market value of equity securities held in the rabbi trusts as compared to an unfavorable mark-to-market adjustment for the three months ended March 31, 2022.
•Insurance commissions increased primarily as a result of an increase in recurring commission income which was attributable
to recent agency acquisitions consummated during the year ended December 31, 2022.
The following table sets forth information regarding noninterest expense for the periods shown:
Noninterest Expense
Three
Months Ended March 31,
Change
2023
2022
Amount
%
(Dollars in thousands)
Salaries and employee benefits
$
78,478
$
69,526
$
8,952
12.9
%
Office
occupancy and equipment
9,878
11,614
(1,736)
(14.9)
%
Data processing
13,441
15,320
(1,879)
(12.3)
%
Professional
services
3,420
3,950
(530)
(13.4)
%
Marketing
1,097
1,574
(477)
(30.3)
%
Loan
expenses
1,095
1,919
(824)
(42.9)
%
FDIC insurance
2,546
1,412
1,134
80.3
%
Amortization
of intangible assets
960
827
133
16.1
%
Other
5,379
2,724
2,655
97.5
%
Total
noninterest expense
$
116,294
$
108,866
$
7,428
6.8
%
Noninterest expense increased by $7.4 million, or 6.8%, to $116.3 million during the three months ended March 31, 2023 from $108.9 million during the three months ended March 31, 2022. This increase was primarily due
to a $9.0 million increase in salaries and employee benefits and a $2.7 million increase in other noninterest expenses. Partially offsetting these increases were a $1.9 million decrease in data processing expenses and a $1.7 million decrease in office occupancy and equipment expenses.
•Salaries and employee benefits increased primarily due to an increase of $3.7 million in regular salaries and wages expense, which was primarily due to costs of living salary and wage increases and the addition of new employees. Also contributing to the increase was a $3.4 million increase in benefit expense related to our defined contribution supplemental executive retirement plan (“DC SERP”). Participant benefits are adjusted based upon deemed investment performance. Accordingly, such investments experienced an increase in value during the three months ended March
31, 2023 resulting in a corresponding increase in the related benefit expense. Also contributing to the increase in salaries and employee benefits was an increase in the legacy long-term cash-based incentive plan compensation expense as well as an increase in the restricted stock award expense. Expense related to the long-term cash-based incentive plan was a net credit (reduction of expense) during the three months ended March 31, 2023 and 2022, which resulted from a decline in certain metrics to which the awards are tied during such periods. The decline in expense during the three months ended March 31, 2023 was less than the decline during the three months ended March 31, 2022. Also contributing to the increase was a $1.4 million increase in restricted stock award
expense, which increased due to the restricted stock awards granted during the second quarter of 2022. Partially offsetting this increase was a decrease of $1.5 million in the pension service cost, which was primarily driven by a decrease in the assumed rate of compensation increase.
•Other noninterest expenses increased primarily due to a $3.1 million increase in other pension expense. This is primarily due to a decrease in expected return on plan assets in our Defined Benefit Plan. For further discussion on the Company’s Defined Benefit Plan refer to see Note 10, “Employee Benefits”within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. Also contributing to this increase was a $1.4
million increase in the provision for credit losses on off balance sheet exposures, which is primarily due to an increase in unfunded commercial loan commitments. Partially offsetting these items was a $1.0 million decrease in bad check losses, which is primarily due to recuperated losses from the year ended December 31, 2022. Also partially offsetting these increases was a $0.7 million decrease in other professional fees, which was driven by a decrease in printed check costs, which was higher than usual during the three months ended March 31, 2022 in order to accommodate new customers from our acquisition of Century.
•Data processing expenses are primarily comprised of costs associated with the processing of customer transactions including loans and deposits and are partially impacted by fluctuations
in related transaction
volume. Such expenses, including core data processing expenses, decreased during the three months ended March 31, 2023 from the three months ended March 31, 2022, primarily due to decreased customer deposit activity.
•Office occupancy and equipment expenses decreased primarily due to a decrease in depreciation expense during the three months ended March 31, 2023 compared to during
the three months ended March 31, 2022.
Income Taxes
We recognize the tax effect of all income and expense transactions in each year’s Consolidated Statements of Income, regardless of the year in which the transactions are reported for income tax purposes. The following table sets forth information regarding our tax provision and applicable tax rates for the periods indicated:
Combined federal and state income tax (benefit) provision
$
(62,244)
$
14,642
Effective income tax rate
24.3
%
22.1
%
Blended
statutory tax rate
28.2
%
28.1
%
Income tax expense decreased by $76.9 million to a $62.2 million benefit in the three months ended March 31, 2023 from a $14.6 million expense in the three months ended March 31, 2022. The decrease in income tax expense, which resulted in a tax benefit for the three months ended March 31, 2023, was primarily due to lower income before income tax expense, which decreased to a loss as a consequence of losses realized on sales of available for sale securities. For additional information related to the
Company’s income taxes see Note 12, “Income Taxes”within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Provision
for (release of) allowance for loan losses
25
—
—
25
(485)
—
—
(485)
Net interest income after provision for loan losses
138,284
—
—
138,284
128,609
—
—
128,609
Noninterest
(loss) income
(310,206)
32,044
(168)
(278,330)
18,137
28,449
(171)
46,415
Noninterest expense
95,946
21,588
(1,240)
116,294
90,446
19,473
(1,053)
108,866
(Loss)
income before income tax expense
(267,868)
10,456
1,072
(256,340)
56,300
8,976
882
66,158
Income tax (benefit) expense
(65,193)
2,949
—
(62,244)
12,108
2,534
—
14,642
Net
(loss) income
$
(202,675)
$
7,507
$
1,072
$
(194,096)
$
44,192
$
6,442
$
882
$
51,516
Total
assets
$
22,579,422
$
218,582
$
(77,474)
$
22,720,530
$
22,695,895
$
211,401
$
(71,224)
$
22,836,072
Total
liabilities
$
20,174,053
$
44,828
$
(77,474)
$
20,141,407
$
19,848,995
$
49,909
$
(71,224)
$
19,827,680
Banking
Segment
•Interest and dividend income increased by $57.4 million, or 43.7%, to $188.9 million for the three months ended March 31, 2023 from $131.5 million for the three months ended March 31, 2022 which was primarily driven by an increase in the yields on interest-earning assets. The overall increase in our yield on interest-earning assets, which increased 112 basis points from 2.48% during the three months ended March 31, 2022 to 3.60% during the three months ended March 31, 2023, was partially offset by a decrease in average interest-earning assets, which resulted in an increase in interest income. For additional discussion, refer to the earlier “Interest and Dividends”
section.
•Interest expense increased by $47.2 million to $50.6 million during the three months ended March 31, 2023 from $3.4 million during the three months ended March 31, 2022, which was driven by an increase in the rates paid on deposits. There was an increase of 122 basis points in rates paid on deposits, which increased from 0.11% during the three months ended March 31, 2022 to 1.33% during the three months ended March 31, 2023. For additional discussion, refer to the earlier “Interest and Dividends” section.
•We recorded a provision for loan losses of less than $0.1 million
for the three months ended March 31, 2023, compared to a release of $0.5 million for the three months ended March 31, 2022. We determined a provision to be appropriate due to overall increased loan balances during the three months ended March 31, 2023 in comparison to the first quarter of 2022. During the three months ended March 31, 2022 and following continued improved economic and credit conditions, we determined that a release of the provision was necessary. For additional discussion, refer to the earlier “Provision for Loan Losses”section.
•Losses on sales of securities available for sale, net, were $333.2 million during the three months ended
March 31, 2023 which represents an increase of $331.0 million compared to a loss of $2.2 million during the three months ended March 31, 2022. The loss on sale was due to the decision by management to sell certain available for sale securities in March 2023, the majority of which were in a net unrealized loss position at the time of sale.
•Also contributing to the decrease in noninterest income during the three months ended March 31, 2023 was a $3.3 million decrease in our interest rate swap income resulting in a loss position, primarily as a result of an unfavorable mark-to-market adjustment during the three months ended March 31, 2023 compared to a favorable mark-to-market adjustment during the three
months ended March 31, 2022.
•Partially offsetting the decrease in noninterest income was income from investments held in rabbi trust accounts, which were $2.5 million for the three months ended March 31, 2023 which represents an increase of $6.5 million from a $3.9 million loss recorded for the three months ended March 31, 2022. The increase was primarily a result of a favorable mark-to-market adjustment on equity securities held in these accounts during the three months ended March 31, 2023.
•Noninterest expense increased $5.5 million, or 6.1%, to $95.9 million during the three months ended March 31, 2023 from $90.4 million during the three months ended March 31, 2022. This increase was driven primarily by a $3.0 million increase in regular salaries and wages expenses, a $2.8 million increase in other pension expenses, a $1.6 million increase in the legacy long-term cash-based incentive plan compensation expense, and a $1.4 million increase in the provision for credit losses on off balance sheet exposures. Partially offsetting these increases were a $1.9 million decrease in data processing expenses, a $1.8 million decrease in office occupancy and equipment expenses, and a $1.0 million decrease in bad check losses. Refer to the
earlier “Noninterest Expense” section for additional discussion of these items.
Insurance Agency Segment
•Noninterest income related to our insurance agency business increased by $3.6 million, or 12.6%, to $32.0 million during the three months ended March 31, 2023 from $28.4 million during the three months ended March 31, 2022. This increase is primarily attributable to increased commission income. Refer to the earlier “Noninterest Income”section for additional discussion of this items.
•Noninterest expense related to our insurance agency business increased by $2.1 million, or 10.9%,
to $21.6 million during three months ended March 31, 2023 from $19.5 million during three months ended March 31, 2022. The increase in noninterest expense for the three months ended March 31, 2023, compared to the three months ended March 31, 2022 was primarily due to an increase in benefit expense related to our DC SERP and increases in salaries and wages expenses. Refer to the earlier “Noninterest Expense”section for additional discussion of this items
Management of Market Risk
General.
Market risk is the sensitivity of the net present value of assets and liabilities and/or income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. Interest rate sensitivity is the most significant market risk to which we are exposed. Interest rate risk is the sensitivity of the net present value of assets and liabilities and/or income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, our primary source of income. Interest rate risk arises directly from our core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of assets and liabilities, as well as other effects. The primary goal of interest rate risk management is to attempt
to control this risk within limits approved by the Risk Management Committee of our Board of Directors.
These limits reflect our tolerance for interest rate risk over both short-term and long-term horizons. We attempt to manage interest rate risk by identifying, quantifying, and where appropriate, hedging our exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. Our objective is to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary and within limits that management determines to be prudent, through the use of off-balance sheet hedging instruments including, but not limited to, interest rate swaps, floors and caps.
As noted in the earlier section titled “Outlook
and Trends” and the later section titled “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies” in this Item 2, we completed a balance sheet repositioning during the three months ended March 31, 2023 by selling a portion of our AFS investment securities portfolio for total proceeds of $1.9 billion. Such securities were lower-yielding U.S. Agency bonds and government-sponsored residential and commercial mortgage-backed securities which were purchased when interest rates were historically low. As a result of such sales, we expect our net interest margin to be less susceptible to decline as a result of future increases to the federal funds rate which may occur. Prior to the sale, we placed reliance on wholesale funding, including brokered deposits, to meet our loan-growth needs which have a higher cost than deposits
originating within the markets we serve and are not our preferred sources of funding. Subsequent to the sale, our reliance on such funding sources is lessened as we believe we have a stronger liquidity position.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. We estimate what our net interest income would be for a 12-month period assuming no changes in interest rates. We then estimate what the net interest income would be for the same period under the assumption that market rates increase or decrease instantaneously by +100, +200, +400, -100, -200, and -400 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example,
a 100 basis point increase in the “Changes in Interest Rates” column below. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. We do not model negative interest rate scenarios.
The tables below set forth, as of March 31, 2023 and December 31, 2022, the calculation of the estimated changes in our net interest income on an FTE basis that would
result from the designated immediate changes in market interest rates:
(1)Assumes
an immediate uniform change in market interest rates at all maturities, except in the down 400 basis point scenario as it relates to information as of March 31, 2023 and the down 200 basis point scenario as it relates to information as of December 31, 2022, where rates are floored at zero at all maturities.
As of March 31, 2023, our models, as indicated above, show a decline in our net interest income in rising rate and falling rate scenarios. In the rising rate scenarios, funding costs are modeled to rise faster than the yield on earning assets, due, in part, to the mix of funding which has shifted towards higher rate paying deposits and wholesale funding in recent quarters. In the falling rate scenarios, particularly the 400 basis point decrease scenario, faster prepayment speeds
on certain loan and investment types are modeled to reduce earning asset yields at a faster rate than the rate of decline in funding costs. The tables above indicate that at March 31, 2023 and December 31, 2022, in the event of an instantaneous parallel 200 basis points increase in rates, we would have experienced a 0.9% decrease and a 4.2% decrease, respectively, in net interest income on an FTE basis, and in the event of an instantaneous 200 basis points decrease in interest rates, we would have experienced a 1.8% decrease and a 1.8% increase at March 31, 2023 and December 31, 2022, respectively, in net interest income, on an FTE basis. We also modeled an instantaneous 400 basis point decrease in interest rates at March 31,
2023, the results of which showed we would have experienced a 9.3% decrease in net interest income on an FTE basis. We did not model an instantaneous 400 basis point decrease in interest rates at December 31, 2022 given the lower level of interest rates compared to March 31, 2023. Management may use investment strategy, loan and deposit pricing, non-core funding strategies, and interest rate derivative financial instruments, within internal policy guidelines, to manage interest rate risk as part of our asset/liability strategy. These derivatives provide significant protection against falling interest rates. For additional information related to our interest rate derivative financial instruments see Note 14, “Derivative Financial Instruments”within the Notes to the Unaudited Consolidated Financial Statements included
in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Economic Value of Equity Analysis. We also analyze the sensitivity of our financial condition in interest rates through our economic value of equity (“EVE”) model. This analysis calculates the difference between the present value of expected cash flows from assets and liabilities assuming various changes in current interest rates.
The tables below represent an analysis of our interest rate risk as measured by the estimated changes in our EVE, resulting from an instantaneous and sustained parallel shift in the yield curve (+100, +200, +400 basis points and -100, -200, and -400 basis points) at March 31, 2023 and (+200, +300, +400 basis points and -100, -200 basis points) at December 31,
2022. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates.
Our earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines and by affecting the amount of unrealized gains and losses from securities held in rabbi trusts which are partially offset by a corresponding but opposite impact to the amount of employee benefit expense associated with the change in value of plan assets.
(1)Assumes
an immediate uniform change in market interest rates at all maturities, except in the down 400 basis point scenario as it relates to information as of March 31, 2023 and the down 200 basis point scenario as it relates to information as of December 31, 2022, where rates are floored at zero at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Total assets is the net present value of expected cash flows.
Certain shortcomings are inherent in the interest rate risk measurement methodologies underlying the data presented
in the tables in this section. Modeling changes require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. For example, the models assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.
Liquidity,
Capital Resources, Contractual Obligations, Commitments and Contingencies
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet deposit withdrawals and anticipated loan fundings, as well as current and planned expenditures. We seek to maintain sources of liquidity that are deep and diversified and that may be used during the normal course of business as well as on a contingency basis.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities, subject to market conditions. While maturities and scheduled amortization of loans
and securities are predictable sources of funds, deposit flows and loan and securities prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are unencumbered cash and due from banks and securities classified as available for sale, which could be liquidated, subject to market conditions. In the future, our liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and share repurchases in which we may engage. For the next twelve months, we believe that our existing resources, including our capacity to use brokered deposits and wholesale borrowings, will be sufficient to meet the liquidity and capital requirements of our operations. We may elect to raise additional capital through the sale of additional equity or debt financing to fund business
activities such as strategic acquisitions, share repurchases, or other purposes beyond the next twelve months.
At March 31, 2023, we had $2.1 billion of cash and cash equivalents, an increase of $2.0 billion from $169.5 million at December 31, 2022. The increase in cash levels was due primarily to a decrease of $2.0 billion in AFS securities from $6.7 billion at December 31, 2022 to $4.7 billion at March 31, 2023. In March 2023, we completed a balance sheet repositioning by selling lower yielding AFS securities. The sale allowed us to redeploy the proceeds in the current higher interest rate environment either through increased cash levels or the reduction of wholesale funds over time. The increased cash levels at March 31,
2023 provided strong balance sheet liquidity to support the needs of our depositors as part of our liquidity contingency planning during the uncertain environment created by the bank failures in the month of March 2023. Advances from the FHLBB were used to support ongoing operations and bolster on-balance sheet liquidity and totaled $1.1 billion and $0.7 billion at March 31, 2023 and December 31, 2022, respectively.
We participate in the IntraFi Network, which allows us to provide access to FDIC deposit insurance protection on customer deposits for consumers, businesses and public entities that exceed same-bank FDIC insurance thresholds. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. At both March 31,
2023 and December 31, 2022 we had no IntraFi Network one-way sell deposits. At March 31, 2023 and December 31, 2022, we had repurchased $863.4 million and $665.0 million, respectively, of previously sold reciprocal deposits.
Although customer deposits remain our preferred source of funds, maintaining additional sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. At March 31, 2023, we had $1.1 billion in outstanding advances and the ability to borrow up to an additional $1.5 billion. We also have the ability to borrow from the Federal Reserve Bank of Boston. At March 31, 2023, we had a $2.6 billion collateralized
line of credit from the Federal Reserve Bank of Boston through the Bank Term Funding Program. The Bank Term Funding Program was created by the Federal Reserve in March 2023. At March 31, 2023 we had the ability to borrow up to $879.1 million from the Federal Reserve Bank of Boston Discount Window In addition, we were able to acquire brokered deposits at our discretion to raise additional funds. At March 31, 2023, we had $609.7 million in brokered certificates of deposit. At March 31, 2023, cash and cash equivalents were $2.1 billion and secured borrowing capacity at the Federal Reserve Bank and Federal Home Loan Bank totaled $5.0 billion, providing total liquidity sources of $7.1 billion. These liquidity sources provided 107% coverage of all customer uninsured and uncollateralized deposits, which totaled $6.7 billion,
or 36% of total deposits, as of March 31, 2023.
(1)The additional borrowing capacity has not been assessed for this category.
(2)As of March 31, 2023 and December 31, 2022, loans have been pledged to the FHLBB with a carrying value of $4.1 billion and $3.9 billion resulting in this additional unused borrowing capacity.
(3)Securities with a carrying value of $2.6 billion at March 31, 2023 have been pledged to the Federal Reserve Bank of Boston under the Bank Term Funding Program, resulting in this additional unused borrowing capacity.
(4)Loans
with a carrying value of $1.1 billion at both March 31, 2023 and December 31, 2022, and securities with a carrying value of $376.8 million at March 31, 2023 were pledged to the Discount Window, resulting in this additional borrowing capacity. No securities were pledged to the Discount Window at December 31, 2022.
We believe that advanced preparation, early detection, and prompt responses can avoid, minimize, or shorten potential liquidity crises. Our Board of Directors and our management’s Asset Liability Committee have put a liquidity contingency plan in place to establish methods for assessing and monitoring risk levels, as well as potential responses during unanticipated stress events. As part of our risk management framework,
we perform periodic liquidity stress testing to assess our need for liquid assets as well as backup sources of liquidity.
Capital Resources. We are subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks, the FDIC and the Federal Reserve (with respect to our consolidated capital requirements). At March 31, 2023 and December 31, 2022, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines. To be categorized as well-capitalized, the Company must maintain (1) a minimum of total regulatory capital ratio of 10.0%; (2) a minimum common equity Tier 1 capital ratio of 6.5%; (3) a minimum Tier 1 capital
ratio of 8.0%; and (4) a minimum of Tier 1 leverage ratio of 5.0%. Management believes that the Company met all capital adequacy requirements to which it is subject as of March 31, 2023 and December 31, 2022. There have been no conditions or events that management believes would cause a change in the Company’s categorization.
In March 2015, the FDIC issued a Financial Institution Letter (FIL-12-2015) indicating that non-advanced approaches institutions may make a one-time, permanent election to opt out of the requirement to include most components of accumulated other comprehensive income (“AOCI”) in regulatory capital. At that time, we opted to
make such an election. Accordingly, unrealized gains and losses on our AFS securities portfolio are not included in regulatory capital. Consequently, the balance sheet repositioning we completed in March 2023 with the sale of AFS securities reduced our regulatory capital and related capital ratios, as the unrealized loss on such securities (which was included in AOCI and excluded from regulatory capital) was effectively reclassified to retained earnings (which is included in regulatory capital).
The Company’s actual capital ratios are presented in the following table:
Contractual Obligations, Commitments and Contingencies.In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. At March 31, 2023, there were no
material changes in our contractual obligations, other commitments and contingencies from those disclosed in our 2022 Form 10-K.
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit, unadvanced portions of construction loans and standby letters of credit, all of which involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
At March 31, 2023, we had $5.7 billion of commitments to originate loans, comprised
of $3.3 billion of commitments under commercial loans and lines of credit (including $702.1 million of unadvanced portions of construction loans), $2.1 billion of commitments under home equity loans and lines of credit, $199.5 million in standard overdraft coverage commitments, $20.9 million of unfunded commitments related to residential real estate loans and $60.5 million in other consumer loans and lines of credit. In addition, at March 31, 2023, we had $62.8 million in standby letters of credit outstanding. We also had $10.5 million in forward commitments to sell loans.
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
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.”
ITEM 4. CONTROLS AND PROCEDURES
Effectiveness of Disclosure Controls and Procedures
The
Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(c) promulgated under the Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer along with the
Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023, the end of the period covered by this Quarterly Report on Form 10-Q.
Changes to Internal Controls over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
The Company has not experienced any material impact to the Company’s internal controls over financial reporting due to the fact that most of the Company’s employees responsible for financial reporting are working remotely and/or hybrid. The Company is continually monitoring and assessing the impact of working remotely and/or hybrid on the Company’s internal controls to minimize the impact to their design and operating effectiveness.
PART
II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We operate in a legal and regulatory environment that exposes us to potentially significant risks. For more information regarding the Company’s exposure generally to legal and regulatory risks, see “Business—Legal and Regulatory Proceedings” in Part I, Item 1 of the 2022 Form 10-K.
As of the date of this Quarterly Report on Form 10-Q, we are not involved in any pending legal proceeding as a plaintiff or a defendant the outcome of which we believe would be material to our financial condition or results of operations. For additional information related to the
Company’s ongoing legal proceedings see Note 13, “Commitments and
Contingencies” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
For information regarding the Company’s
risk factors, see Part I, Item 1A “Risk Factors” in our 2022 Form 10-K. As of the date of this Quarterly Report on Form 10-Q, the risk factors of the Company have not changed materially from those disclosed in our 2022 Form 10-K.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The exhibits listed in the Exhibit Index (following the signatures section
of this report) are included in, or incorporated by reference into, this Quarterly Report on Form 10-Q.
The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (and are numbered in accordance with Item 601 of Regulation S-K):
Interactive data files pursuant to Rule
405 of Regulation S-T: (i) the Unaudited Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, (ii) the Unaudited Consolidated Statements of Income for the three months ended March 31, 2023 and 2022 (iii) the Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022, (iv) the Unaudited Consolidated Statements of Changes in Equity for the three months ended March 31, 2023 and 2022, (v) the Unaudited Consolidated Statements of Cash Flows for the three months ended March
31, 2023 and 2022, and (vi) the Notes to the Unaudited Consolidated Financial Statements.
104
Cover page interactive data file (formatted as inline XBRL with applicable taxonomy extension information) contained in Exhibit 101 to this report+
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
