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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
(Mark one)
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2024
Or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-39610
___________________________
Eastern Bankshares, Inc.
(Exact name of the registrant as specified in its charter)
___________________________
| | | | | | | | |
| Massachusetts | | 84-4199750 |
| (State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification Number) |
| | |
125 High Street, Boston, Massachusetts | | 02110 |
| (Address of principal executive offices) | | (Zip Code) |
(800) 327-8376
(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 |
| Common Stock | EBC | Nasdaq 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. ☒ Yes ☐ 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). ☒ Yes ☐ 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:
| | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| | | | |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | |
| (Do not check if a smaller reporting company) | | Emerging Growth Company | ☐ |
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). ☐ Yes ☒ No
215,648,299 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of July 31, 2024.
Index
INTRODUCTORY NOTE
On July 12, 2024, the Company completed its previously announced stock-for stock merger with Cambridge Bancorp (“Cambridge”). Neither the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q nor the sections of this Quarterly Report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” included in Part I, Items 2 and 3, respectively, of this Quarterly Report reflect Cambridge’s financial condition at June 30, 2024 or Cambridge’s operating results or cash flows for the three and six months ended June 30, 2024 and 2023. Likewise, neither the shares of Company common stock issued in the merger nor any purchase accounting adjustment that the Company will make in connection with merger are reflected in the Company’s financial condition as of June 30, 2024 or the Company’s operating results or cash flows for the three and six months ended June 30, 2024 and 2023. For additional information regarding the Company’s merger with Cambridge, refer to Note 16, “Subsequent Events” to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q and “Outlook and Trends—Cambridge Bancorp Acquisition” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part I, Item 2 of this Quarterly Report.
PART I — FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| (In thousands, except per share data) | June 30, 2024 | | December 31, 2023 |
| ASSETS | | | |
| Cash and due from banks | $ | 72,890 | | | $ | 87,233 | |
| Short-term investments | 677,958 | | | 605,843 | |
| Cash and cash equivalents | 750,848 | | | 693,076 | |
| Securities: | | | |
Available for sale (amortized cost $4,893,056 and $5,161,904, respectively) | 4,097,842 | | | 4,407,521 | |
Held to maturity (fair value $385,398 and $404,822, respectively) | 436,712 | | | 449,721 | |
| Total securities | 4,534,554 | | | 4,857,242 | |
| Loans held for sale | 1,308 | | | 1,124 | |
| Total loans | 14,145,520 | | | 13,973,428 | |
| Allowance for loan losses | (156,146) | | | (148,993) | |
| Unamortized premiums, net of unearned discounts and deferred fees | (35,601) | | | (25,068) | |
| Net loans | 13,953,773 | | | 13,799,367 | |
| Federal Home Loan Bank stock, at cost | 5,879 | | | 5,904 | |
| Premises and equipment | 60,910 | | | 60,133 | |
| Bank-owned life insurance | 166,710 | | | 164,702 | |
| Goodwill and other intangibles, net | 565,196 | | | 566,205 | |
| Deferred income taxes, net | 276,064 | | | 266,185 | |
| Prepaid expenses | 183,245 | | | 183,073 | |
| Other assets | 545,682 | | | 536,267 | |
| Total assets | $ | 21,044,169 | | | $ | 21,133,278 | |
| LIABILITIES AND EQUITY | | | |
| Deposits: | | | |
| Demand | $ | 4,808,938 | | | $ | 5,162,218 | |
| Interest checking accounts | 3,532,811 | | | 3,737,361 | |
| Savings accounts | 1,238,009 | | | 1,323,126 | |
| Money market investment | 5,014,900 | | | 4,664,475 | |
| Certificates of deposit | 2,943,151 | | | 2,709,037 | |
| Total deposits | 17,537,809 | | | 17,596,217 | |
| Borrowed funds: | | | |
| Escrow deposits of borrowers | 20,155 | | | 21,978 | |
| Interest rate swap collateral funds | 11,370 | | | 8,500 | |
| Federal Home Loan Bank advances | 17,415 | | | 17,738 | |
| Total borrowed funds | 48,940 | | | 48,216 | |
| Other liabilities | 489,947 | | | 513,990 | |
| Total liabilities | 18,076,696 | | | 18,158,423 | |
| Commitments and contingencies (see Note 9) | | | |
| Shareholders’ equity | | | |
Common shares, $0.01 par value, 1,000,000,000 shares authorized, 176,687,829 and 176,426,993 shares issued and outstanding at June 30, 2024 and December 31, 2023, respectively | 1,770 | | | 1,767 | |
| Additional paid in capital | 1,673,722 | | | 1,666,441 | |
| Unallocated common shares held by the Employee Stock Ownership Plan | (130,295) | | | (132,755) | |
| Retained earnings | 2,076,566 | | | 2,047,754 | |
| Accumulated other comprehensive income, net of tax | (654,290) | | | (608,352) | |
| Total shareholders’ equity | 2,967,473 | | | 2,974,855 | |
| Total liabilities and shareholders’ equity | $ | 21,044,169 | | | $ | 21,133,278 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (In thousands, except per share data) | 2024 | | 2023 | | 2024 | | 2023 |
| Interest and dividend income: | | | | | | | |
| Interest and fees on loans | $ | 172,514 | | | $ | 160,862 | | | $ | 342,495 | | | $ | 314,402 | |
| Taxable interest and dividends on securities | 22,724 | | | 24,618 | | | 46,097 | | | 53,260 | |
| Non-taxable interest and dividends on securities | 1,439 | | | 1,434 | | | 2,876 | | | 2,868 | |
| Interest on federal funds sold and other short-term investments | 10,699 | | | 14,851 | | | 18,519 | | | 20,115 | |
| Total interest and dividend income | 207,376 | | | 201,765 | | | 409,987 | | | 390,645 | |
| Interest expense: | | | | | | | |
| Interest on deposits | 78,473 | | | 56,146 | | | 150,931 | | | 99,079 | |
| Interest on borrowings | 254 | | | 4,031 | | | 507 | | | 11,669 | |
| Total interest expense | 78,727 | | | 60,177 | | | 151,438 | | | 110,748 | |
| Net interest income | 128,649 | | | 141,588 | | | 258,549 | | | 279,897 | |
| Provision for allowance for loan losses | 6,126 | | | 7,501 | | | 13,577 | | | 7,526 | |
| Net interest income after provision for allowance for loan losses | 122,523 | | | 134,087 | | | 244,972 | | | 272,371 | |
| Noninterest income (loss): | | | | | | | |
| Service charges on deposit accounts | 7,930 | | | 7,242 | | | 15,438 | | | 13,714 | |
| Trust and investment advisory fees | 6,711 | | | 6,131 | | | 13,255 | | | 11,901 | |
| Debit card processing fees | 3,522 | | | 3,513 | | | 6,769 | | | 6,683 | |
| Interest rate swap income | 418 | | | 825 | | | 1,085 | | | 417 | |
| Income from investments held in rabbi trusts | 1,761 | | | 3,002 | | | 6,079 | | | 5,859 | |
| Losses on sales of mortgage loans held for sale, net | (152) | | | (50) | | | (210) | | | (124) | |
| Losses on sales of securities available for sale, net | (7,557) | | | — | | | (7,557) | | | (333,170) | |
| Other | 12,715 | | | 5,541 | | | 18,181 | | | 11,071 | |
| Total noninterest income (loss) | 25,348 | | | 26,204 | | | 53,040 | | | (283,649) | |
| Noninterest expense: | | | | | | | |
| Salaries and employee benefits | 65,218 | | | 62,183 | | | 129,689 | | | 124,366 | |
| Office occupancy and equipment | 10,109 | | | 9,067 | | | 19,293 | | | 18,156 | |
| Data processing | 17,990 | | | 12,814 | | | 34,499 | | | 25,112 | |
| Professional services | 4,250 | | | 3,025 | | | 7,762 | | | 6,152 | |
| Marketing expenses | 1,910 | | | 2,111 | | | 3,425 | | | 3,134 | |
| FDIC insurance | 4,508 | | | 3,034 | | | 6,793 | | | 5,580 | |
| Amortization of intangible assets | 504 | | | 504 | | | 1,008 | | | 795 | |
| Other | 5,380 | | | 7,196 | | | 8,602 | | | 12,530 | |
| Total noninterest expense | 109,869 | | | 99,934 | | | 211,071 | | | 195,825 | |
| Income (loss) from continuing operations before income tax expense (benefit) | 38,002 | | | 60,357 | | | 86,941 | | | (207,103) | |
| Income tax expense (benefit) | 11,671 | | | 15,938 | | | 21,963 | | | (49,441) | |
| Net income (loss) from continuing operations | $ | 26,331 | | | $ | 44,419 | | | $ | 64,978 | | | $ | (157,662) | |
| Net income from discontinued operations | — | | | 4,238 | | | — | | | 12,223 | |
| Net income (loss) | $ | 26,331 | | | $ | 48,657 | | | $ | 64,978 | | | $ | (145,439) | |
| Basic earnings (loss) per share: | | | | | | | |
| Basic earnings (loss) per share from continuing operations | $ | 0.16 | | | $ | 0.27 | | | $ | 0.40 | | | $ | (0.98) | |
| Basic earnings per share from discontinued operations | — | | | 0.03 | | | — | | | 0.08 | |
| Basic earnings (loss) per share | $ | 0.16 | | | $ | 0.30 | | | $ | 0.40 | | | $ | (0.90) | |
| Diluted earnings (loss) per share: | | | | | | | |
| Diluted earnings (loss) per share from continuing operations | $ | 0.16 | | | $ | 0.27 | | | $ | 0.40 | | | $ | (0.98) | |
| Diluted earnings per share from discontinued operations | — | | | 0.03 | | | — | | | 0.08 | |
| Diluted earnings (loss) per share | $ | 0.16 | | | $ | 0.30 | | | $ | 0.40 | | | $ | (0.90) | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (In thousands) |
| Net income (loss) | $ | 26,331 | | | $ | 48,657 | | | $ | 64,978 | | | $ | (145,439) | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Net change in fair value of securities available for sale | (394) | | | (58,486) | | | (27,953) | | | 233,545 | |
| Net change in fair value of cash flow hedges | 1,494 | | | (32,271) | | | (16,953) | | | (10,593) | |
Net change in other comprehensive income for defined benefit postretirement plans | (516) | | | (361) | | | (1,032) | | | (742) | |
| Total other comprehensive income (loss) | 584 | | | (91,118) | | | (45,938) | | | 222,210 | |
| Total comprehensive income (loss) | $ | 26,915 | | | $ | (42,461) | | | $ | 19,040 | | | $ | 76,771 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended June 30, 2024 and 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Unallocated Common Stock Held by ESOP | | Total |
| (In thousands, except share data) |
| Balance at March 31, 2023 | 176,328,426 | | | $ | 1,764 | | | $ | 1,651,524 | | | $ | 1,672,169 | | | $ | (609,864) | | | $ | (136,470) | | | $ | 2,579,123 | |
| Dividends to common shareholders (1) | — | | | — | | | — | | | (16,356) | | | — | | | — | | | (16,356) | |
| Issuance of restricted stock awards | 47,820 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
| Issuance of common stock under share-based compensation arrangements | 429 | | | 1 | | | (2) | | | — | | | — | | | — | | | (1) | |
| Share-based compensation | — | | | — | | | 4,668 | | | — | | | — | | | — | | | 4,668 | |
| Net income | — | | | — | | | — | | | 48,657 | | | — | | | — | | | 48,657 | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (91,118) | | | — | | | (91,118) | |
| ESOP shares committed to be released | — | | | — | | | 561 | | | — | | | — | | | 1,238 | | | 1,799 | |
| Balance at June 30, 2023 | 176,376,675 | | | $ | 1,766 | | | $ | 1,656,750 | | | $ | 1,704,470 | | | $ | (700,982) | | | $ | (135,232) | | | $ | 2,526,772 | |
| | | | | | | | | | | | | |
| Balance at March 31, 2024 | 176,631,477 | | | $ | 1,769 | | | $ | 1,669,133 | | | $ | 2,068,315 | | | $ | (654,874) | | | $ | (131,512) | | | $ | 2,952,831 | |
| Dividends to common shareholders (1) | — | | | — | | | — | | | (18,080) | | | — | | | — | | | (18,080) | |
| Issuance of restricted stock awards | 56,352 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
| Issuance of common stock under share-based compensation arrangements | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Share-based compensation | — | | | — | | | 4,242 | | | — | | | — | | | — | | | 4,242 | |
| Net income | — | | | — | | | — | | | 26,331 | | | — | | | — | | | 26,331 | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 584 | | | — | | | 584 | |
| ESOP shares committed to be released | — | | | — | | | 348 | | | — | | | — | | | 1,217 | | | 1,565 | |
| Balance at June 30, 2024 | 176,687,829 | | | $ | 1,770 | | | $ | 1,673,722 | | | $ | 2,076,566 | | | $ | (654,290) | | | $ | (130,295) | | | $ | 2,967,473 | |
(1)The Company declared quarterly cash dividends of $0.11 and $0.10 per share of common stock during the three months ended June 30, 2024 and 2023, respectively.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Six Months Ended June 30, 2024 and 2023
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
(Loss) Income | | Unallocated Common Stock Held by ESOP | | Total |
| (In thousands, except share data) |
| Balance at December 31, 2022 | 176,172,073 | | | $ | 1,762 | | | $ | 1,649,141 | | | $ | 1,881,775 | | | $ | (923,192) | | | $ | (137,696) | | | $ | 2,471,790 | |
| Cumulative effect of accounting adjustment (2) | — | | | — | | | — | | | 822 | | | — | | | — | | | 822 | |
| Dividends to common shareholders (1) | — | | | — | | | — | | | (32,688) | | | — | | | — | | | (32,688) | |
| Issuance of restricted stock awards | 47,820 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
| Issuance of common stock under share-based compensation arrangements (3) | 156,782 | | | 3 | | | (1,167) | | | — | | | — | | | — | | | (1,164) | |
| Share-based compensation | — | | | — | | | 7,712 | | | — | | | — | | | — | | | 7,712 | |
| Net loss | — | | | — | | | — | | | (145,439) | | | — | | | — | | | (145,439) | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | 222,210 | | | — | | | 222,210 | |
| ESOP shares committed to be released | — | | | — | | | 1,065 | | | — | | | — | | | 2,464 | | | 3,529 | |
| Balance at June 30, 2023 | 176,376,675 | | | $ | 1,766 | | | $ | 1,656,750 | | | $ | 1,704,470 | | | $ | (700,982) | | | $ | (135,232) | | | $ | 2,526,772 | |
| | | | | | | | | | | | | |
| Balance at December 31, 2023 | 176,426,993 | | | $ | 1,767 | | | $ | 1,666,441 | | | $ | 2,047,754 | | | $ | (608,352) | | | $ | (132,755) | | | $ | 2,974,855 | |
| Dividends to common shareholders (1) | — | | | — | | | — | | | (36,166) | | | — | | | — | | | (36,166) | |
| Issuance of restricted stock awards | 56,352 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
| Issuance of common stock under share-based compensation arrangements (3) | 204,484 | | | 2 | | | (1,264) | | | — | | | — | | | — | | | (1,262) | |
| Share-based compensation | — | | | — | | | 7,831 | | | — | | | — | | | — | | | 7,831 | |
| Net income | — | | | — | | | — | | | 64,978 | | | — | | | — | | | 64,978 | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | (45,938) | | | — | | | (45,938) | |
| ESOP shares committed to be released | — | | | — | | | 715 | | | — | | | — | | | 2,460 | | | 3,175 | |
| Balance at June 30, 2024 | 176,687,829 | | | $ | 1,770 | | | $ | 1,673,722 | | | $ | 2,076,566 | | | $ | (654,290) | | | $ | (130,295) | | | $ | 2,967,473 | |
(1)The Company declared cumulative cash dividends of $0.22 and $0.20 per share of common stock during the six months ended June 30, 2024 and 2023, respectively.
(2)Represents gross transition adjustment amount of $1.1 million, net of taxes of $0.3 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 upon the vesting of restricted stock units. Refer to Note 8, “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 for additional discussion.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | |
| Six Months Ended June 30, |
| (In thousands) | 2024 | | 2023 |
| |
| Operating activities | | | |
| Net income (loss) from continuing operations | $ | 64,978 | | | $ | (157,662) | |
| Net income from discontinued operations | — | | | 12,223 | |
| Net income (loss) | 64,978 | | | (145,439) | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | |
| Provision for allowance for loan losses | 13,577 | | | 7,526 | |
| Depreciation and amortization | 6,742 | | | 6,053 | |
| Amortization of deferred loan fees and premiums, net | 5,611 | | | 2,487 | |
| Deferred income tax expense (benefit) | 9,890 | | | (77,552) | |
| Amortization of investment security premiums and discounts, net | 2,271 | | | 3,871 | |
| Right-of-use asset amortization | 5,161 | | | 5,481 | |
| Share-based compensation | 7,831 | | | 7,712 | |
| Increase in cash surrender value of bank-owned life insurance | (2,008) | | | (1,928) | |
| Loss on sale of securities available for sale, net | 7,557 | | | 333,170 | |
| Employee Stock Ownership Plan expense | 3,175 | | | 3,529 | |
| Other | 329 | | | 327 | |
| Change in: | | | |
| Loans held for sale | (151) | | | 1,723 | |
| Prepaid pension expense | (889) | | | 2,404 | |
| Other assets | (3,864) | | | (44,517) | |
| Other liabilities | (33,360) | | | 58,613 | |
| Net cash provided by operating activities - continuing operations | 86,850 | | | 151,237 | |
| Net cash provided by operating activities - discontinued operations | — | | | 21,709 | |
| Net cash provided by operating activities | 86,850 | | | 172,946 | |
| Investing activities | | | |
| Proceeds from sales of securities available for sale | 85,220 | | | 1,899,724 | |
| Proceeds from maturities and principal paydowns of securities available for sale | 173,584 | | | 230,154 | |
| Proceeds from maturities and principal paydowns of securities held to maturity | 13,225 | | | 11,813 | |
| Proceeds from sale of Federal Home Loan Bank stock | 3,638 | | | 168,578 | |
| Purchases of Federal Home Loan Bank stock | (3,613) | | | (154,109) | |
| Contributions to low income housing tax credit investments | (27,261) | | | (19,178) | |
| Contributions to other equity investments | (180) | | | (540) | |
| Distributions from other equity investments | 167 | | | 159 | |
| Net increase in outstanding loans, excluding loan purchases | (173,594) | | | (355,294) | |
| Purchases of loans | — | | | (31,980) | |
| Purchased banking premises and equipment | (6,512) | | | (2,190) | |
| Net cash provided by investing activities - continuing operations | 64,674 | | | 1,747,137 | |
| Net cash used in investing activities - discontinued operations | — | | | (47) | |
| Net cash provided by investing activities | 64,674 | | | 1,747,090 | |
| Financing activities | | | |
| Net decrease in demand, savings, interest checking, and money market investment deposit accounts | (292,522) | | | (1,520,253) | |
| Net increase in time deposits | 234,114 | | | 726,866 | |
| Net increase (decrease) in borrowed funds | 724 | | | (389,617) | |
| Dividends declared and paid to common shareholders | (36,068) | | | (32,390) | |
| Net cash used in financing activities - continuing operations | (93,752) | | | (1,215,394) | |
| Net cash used in financing activities - discontinued operations | — | | | (645) | |
| Net cash used in financing activities | (93,752) | | | (1,216,039) | |
| Net increase in cash, cash equivalents, and restricted cash | 57,772 | | | 703,997 | |
| Cash, cash equivalents, and restricted cash at beginning of period | 693,076 | | | 169,505 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 750,848 | | | $ | 873,502 | |
| | | | | | | | | | | |
| Supplemental disclosure of cash flow information | | | |
| Cash paid during the period for: | | | |
| Interest paid on deposits and borrowings | $ | 150,565 | | | $ | 105,130 | |
| Income taxes | 19,571 | | | 21,637 | |
| Non-cash activities | | | |
| Net increase in capital commitments relating to low income housing tax credit projects | $ | 8,963 | | | $ | 89,500 | |
| Net increase (decrease) in operating lease right-of-use assets and operating lease liabilities relating to lease remeasurements/modifications | 2,717 | | | (4,423) | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
EASTERN BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate 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 subsidiary, Eastern Bank (the “Bank”), the Company provides a variety of banking services and trust and investment services, through its full-service bank branches, located primarily in eastern Massachusetts, and southern and coastal New Hampshire. Eastern Insurance Group was a wholly-owned subsidiary of the Bank. On September 19, 2023, the Company and the Bank entered into an asset purchase agreement in which Arthur J. Gallagher & Co. (“Gallagher”) agreed to purchase substantially all of Eastern Insurance Group’s assets for cash consideration and to assume certain liabilities. On October 31, 2023, the Company completed its sale of its insurance agency business to Gallagher. Substantially all of the historical results of our previously reported insurance agency business segment have been reflected as discontinued operations in our Consolidated Financial Statements for the three and six months ended June 30, 2023. Refer to Note 15, “Discontinued Operations” for further discussion regarding discontinued operations.
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 (“CFPB”). The Company and the activities of the Bank and its subsidiaries are also subject to various Massachusetts, New Hampshire and Rhode Island business and banking regulations.
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. In addition, as a result of the decision to sell substantially all of the assets and transfer substantially all of the liabilities of Eastern Insurance Group, the Company reclassified certain amounts previously reported including:
•certain components of noninterest income and noninterest expense, including the associated income tax effects, previously reported in the insurance agency business were reclassified to net income from discontinued operations on the Consolidated Statements of Income; and
•certain operating, investing, and financing cash flows previously reported on their applicable lines within the Consolidated Statements of Cash Flows were reclassified to cash flows used in/provided by operating activities of, investment activities of and financing activities of discontinued operations, respectively.
The accompanying Consolidated Balance Sheet as of June 30, 2024, the Consolidated Statements of Income and Comprehensive Income and of Changes in Shareholders’ Equity for the three and six months ended June 30, 2024 and 2023 and Statements of Cash Flows for the six months ended June 30, 2024 and 2023 are unaudited. The Consolidated Balance Sheet as of December 31, 2023 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, 2023 (“2023 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 and six months ended June 30, 2024 are not necessarily indicative of results to be expected for the year ending December 31, 2024, any other interim period, or any future year or period.
2. Summary 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 June 30, 2024 and those that were adopted during the six months ended June 30, 2024.
For a full discussion of significant accounting policies, refer to the Notes to the Consolidated Financial Statements included within the Company’s 2023 Form 10-K.
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.
Recent Accounting Pronouncements
Relevant standards that were recently issued but not yet adopted as of June 30, 2024:
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements–Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”). The amendments in this update modify the disclosure or presentation requirements for a variety of topics in the codification. Certain amendments represent clarifications to or technical corrections of the current requirements. The following is a summary of the topics included in the update and which pertain to the Company:
1.Statement of cash flows (Topic 230): Requires an accounting policy disclosure in annual periods of where cash flows associated with derivative instruments and their related gains and loses are presented in the statement of cash flows;
2.Accounting changes and error corrections (Topic 250): Requires that when there has been a change in the reporting entity, the entity disclose any material prior-period adjustment and the effect of the adjustment on retained earnings in interim financial statements;
3.Earnings per share (Topic 260): Requires disclosure of the methods used in the diluted earnings-per-share computation for each dilutive security and clarifies that certain disclosures should be made during interim periods, and amends illustrative guidance to illustrate disclosure of the methods used in the diluted earnings per share computation;
4.Commitments (Topic 440): Requires disclosure of assets mortgaged, pledged, or otherwise subject to lien and the obligations collateralized; and
5.Debt (Topic 470): Requires disclosure of amounts and terms of unused lines of credit and unfunded commitments and the weighted-average interest rate on outstanding short-term borrowings.
For public business entities, the amendments in ASU 2023-06 are effective on the date which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the codification and will not become effective for any entity. Early adoption is not permitted and the amendments are required to be applied on a prospective basis. The Company expects the adoption of this standard will not have a material impact on its Consolidated Financial Statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this update are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in this update:
1.Require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision-maker (“CODM”) and included within each reported measure of segment profit or loss (collectively referred to as the “significant expense principle”).
2.Require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the segment expenses disclosed under the significant expense principle and each reported measure of segment profit or loss.
3.Require that a public entity provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by ASC 280, Segment Reporting in interim periods.
4.Clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements. In other words, in
addition to the measure that is most consistent with the measurement principles under U.S. GAAP, a public entity is not precluded from reporting additional measures of a segment’s profit or loss that are used by the CODM in assessing segment performance and deciding how to allocate resources.
5.Require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.
6.Require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this update and all existing segment disclosures in Topic 280.
For public business entities, the amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted and adoption is required to be done on a retrospective basis. The Company expects the adoption of this standard will not have a material impact on its Consolidated Financial Statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this update are intended to improve income tax disclosure requirements, primarily through enhanced disclosures related to the existing requirements to disclose a rate reconciliation, income taxes paid and certain other required disclosures. Specifically, the amendments in this update:
1.Require that a public entity disclose, on an annual basis: (1) specific categories in the rate reconciliation and (2) additional information for reconciling items that meet a quantitative threshold. The update requires disclosure of such reconciling items according to requirements indicated in the update.
2.Require that all entities disclose certain disaggregated information regarding income taxes paid.
3.Require that all entities disclose certain disaggregated information regarding income tax expense.
4.Eliminate the requirement to: (1) disclose the nature and estimate of the range of reasonably possible changes in the unrecognized tax benefits balance in the next 12 months or (2) make a statement that an estimate of the range cannot be made.
5.Remove the requirement to disclose the cumulative amount of each type of temporary difference when a deferred tax liability is not recognized because of exceptions to comprehensive recognition of deferred taxes related to subsidiaries and corporate joint ventures.
For public business entities, the amendments in ASU 2023-09 are effective for annual periods beginning after December 15, 2024. Adoption should be done on a prospective basis and retrospective application is permitted.
Relevant standards that were adopted during the six months ended June 30, 2024:
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. The Company adopted this standard on January 1, 2024 and such adoption did not have a material impact on its Consolidated Financial Statements.
3. Securities
Available for Sale Securities
The amortized cost, gross unrealized gains and losses, allowance for credit losses (“ACL”) and fair value of available for sale (“AFS”) securities as of the dates indicated were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Allowance for Credit Losses | | Fair
Value |
| (In thousands) |
| Debt securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | 3,148,711 | | | $ | — | | | $ | (551,161) | | | $ | — | | | $ | 2,597,550 | |
| Government-sponsored commercial mortgage-backed securities | 1,302,782 | | | — | | | (211,888) | | | — | | | 1,090,894 | |
| U.S. Agency bonds | 144,227 | | | — | | | (13,989) | | | — | | | 130,238 | |
| U.S. Treasury securities | 99,667 | | | — | | | (4,113) | | | — | | | 95,554 | |
| State and municipal bonds and obligations | 197,669 | | | — | | | (14,063) | | | — | | | 183,606 | |
| $ | 4,893,056 | | | $ | — | | | $ | (795,214) | | | $ | — | | | $ | 4,097,842 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Allowance for Credit Losses | | Fair
Value |
| (In thousands) |
| Debt securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | 3,302,165 | | | $ | — | | | $ | (521,527) | | | $ | — | | | $ | 2,780,638 | |
| Government-sponsored commercial mortgage-backed securities | 1,326,029 | | | — | | | (201,653) | | | — | | | 1,124,376 | |
| U.S. Agency bonds | 236,454 | | | — | | | (20,443) | | | — | | | 216,011 | |
| U.S. Treasury securities | 99,552 | | | — | | | (4,400) | | | — | | | 95,152 | |
| State and municipal bonds and obligations | 197,704 | | | 172 | | | (6,532) | | | — | | | 191,344 | |
| $ | 5,161,904 | | | $ | 172 | | | $ | (754,555) | | | $ | — | | | $ | 4,407,521 | |
The Company did not record a provision for credit losses on any AFS securities for either the three and six months ended June 30, 2024 or 2023. Accrued interest receivable on AFS securities totaled $8.7 million and $9.2 million as of June 30, 2024 and December 31, 2023, respectively, and is included within other assets on the Consolidated Balance Sheets. The Company did not record any write-offs of accrued interest receivable on AFS securities during either the three and six months ended June 30, 2024 or 2023. No AFS securities held by the Company were delinquent on contractual payments as of June 30,
2024 or December 31, 2023, nor were any AFS securities placed on non-accrual status during the six- and twelve-month periods then ended.
The following table summarizes gross realized gains and losses from sales of AFS securities for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (In thousands) |
| Gross realized gains from sales of AFS securities | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Gross realized losses from sales of AFS securities | (7,557) | | | — | | | (7,557) | | | (333,170) | |
| Net losses from sales of AFS securities | $ | (7,557) | | | $ | — | | | $ | (7,557) | | | $ | (333,170) | |
Information pertaining to AFS securities with gross unrealized losses as of June 30, 2024 and December 31, 2023, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| | | Less than 12 Months | | 12 Months or Longer | | Total |
| # of
Holdings | | Gross
Unrealized
Losses | | Fair
Value | | Gross
Unrealized
Losses | | Fair
Value | | Gross
Unrealized
Losses | | Fair
Value |
| (Dollars in thousands) |
| Government-sponsored residential mortgage-backed securities | 324 | | $ | — | | | $ | — | | | $ | 551,161 | | | $ | 2,597,550 | | | $ | 551,161 | | | $ | 2,597,550 | |
| Government-sponsored commercial mortgage-backed securities | 187 | | — | | | — | | | 211,888 | | | 1,090,894 | | | 211,888 | | | 1,090,894 | |
| U.S. Agency bonds | 14 | | — | | | — | | | 13,989 | | | 130,238 | | | 13,989 | | | 130,238 | |
| U.S. Treasury securities | 6 | | — | | | — | | | 4,113 | | | 95,554 | | | 4,113 | | | 95,554 | |
| State and municipal bonds and obligations | 240 | | 1,312 | | | 32,451 | | | 12,751 | | | 151,155 | | | 14,063 | | | 183,606 | |
| 771 | | $ | 1,312 | | | $ | 32,451 | | | $ | 793,902 | | | $ | 4,065,391 | | | $ | 795,214 | | | $ | 4,097,842 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| | | Less than 12 Months | | 12 Months or Longer | | Total |
| # of
Holdings | | Gross
Unrealized
Losses | | Fair
Value | | Gross
Unrealized
Losses | | Fair
Value | | Gross
Unrealized
Losses | | Fair
Value |
| (Dollars in thousands) |
| Government-sponsored residential mortgage-backed securities | 324 | | $ | — | | | $ | — | | | $ | 521,527 | | | $ | 2,780,638 | | | $ | 521,527 | | | $ | 2,780,638 | |
| Government-sponsored commercial mortgage-backed securities | 187 | | — | | | — | | | 201,653 | | | 1,124,376 | | | 201,653 | | | 1,124,376 | |
| U.S. Agency bonds | 23 | | — | | | — | | | 20,443 | | | 216,011 | | | 20,443 | | | 216,011 | |
| U.S. Treasury securities | 6 | | 36 | | | 4,927 | | | 4,364 | | | 90,225 | | | 4,400 | | | 95,152 | |
| State and municipal bonds and obligations | 196 | | 233 | | | 22,894 | | | 6,299 | | | 135,279 | | | 6,532 | | | 158,173 | |
| 736 | | $ | 269 | | | $ | 27,821 | | | $ | 754,286 | | | $ | 4,346,529 | | | $ | 754,555 | | | $ | 4,374,350 | |
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 either June 30, 2024 or December 31, 2023.
The causes of the impairments listed in the tables above by category are as follows as of June 30, 2024 and December 31, 2023:
•Government-sponsored mortgage-backed securities, U.S. Agency bonds and U.S. Treasury securities – The securities with unrealized losses in these portfolios 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
Held to Maturity Securities
The amortized cost, gross unrealized gains and losses, allowance for credit losses and fair value of held to maturity (“HTM”) securities as of the dates indicated were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Allowance for Credit Losses | | Fair
Value |
| (In thousands) |
| Debt securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | 243,919 | | | $ | — | | | $ | (29,438) | | | $ | — | | | $ | 214,481 | |
| Government-sponsored commercial mortgage-backed securities | 192,793 | | | — | | | (21,876) | | | — | | | 170,917 | |
| $ | 436,712 | | | $ | — | | | $ | (51,314) | | | $ | — | | | $ | 385,398 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Allowance for Credit Losses | | Fair
Value |
| (In thousands) |
| Debt securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | 254,752 | | | $ | — | | | $ | (24,433) | | | $ | — | | | $ | 230,319 | |
| Government-sponsored commercial mortgage-backed securities | 194,969 | | | — | | | (20,466) | | | — | | | 174,503 | |
| $ | 449,721 | | | $ | — | | | $ | (44,899) | | | $ | — | | | $ | 404,822 | |
The Company did not record a provision for estimated credit losses on any HTM securities for either the three and six months ended June 30, 2024 or 2023. The accrued interest receivable on HTM securities totaled $0.9 million as of both June 30, 2024 and December 31, 2023 and is included within other assets on the Consolidated Balance Sheets. The Company did not record any write-offs of accrued interest receivable on HTM securities during either the three and six months ended June 30, 2024 or 2023. No HTM securities held by the Company were delinquent on contractual payments as of either June 30, 2024 or December 31, 2023, nor were any HTM securities placed on non-accrual status during the six and twelve month 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 June 30, 2024 and December 31, 2023 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.
The scheduled contractual maturities of AFS and HTM securities as of the dates indicated were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| Due in one year or less | | Due after one year to five years | | Due after five to ten years | | Due after ten years | | Total |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| (In thousands) |
| AFS securities | | | | | | | | | | | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | — | | | $ | — | | | $ | 27,804 | | | $ | 26,680 | | | $ | 15,471 | | | $ | 14,222 | | | $ | 3,105,436 | | | $ | 2,556,648 | | | $ | 3,148,711 | | | $ | 2,597,550 | |
| Government-sponsored commercial mortgage-backed securities | — | | | — | | | 403,508 | | | 364,695 | | | 224,736 | | | 187,823 | | | 674,538 | | | 538,376 | | | 1,302,782 | | | 1,090,894 | |
| U.S. Agency bonds | — | | | — | | | 144,227 | | | 130,238 | | | — | | | — | | | — | | | — | | | 144,227 | | | 130,238 | |
| U.S. Treasury securities | 29,964 | | | 29,383 | | | 69,703 | | | 66,171 | | | — | | | — | | | — | | | — | | | 99,667 | | | 95,554 | |
| State and municipal bonds and obligations | 3,299 | | | 3,240 | | | 33,012 | | | 31,373 | | | 47,707 | | | 44,979 | | | 113,651 | | | 104,014 | | | 197,669 | | | 183,606 | |
| Total available for sale securities | 33,263 | | | 32,623 | | | 678,254 | | | 619,157 | | | 287,914 | | | 247,024 | | | 3,893,625 | | | 3,199,038 | | | 4,893,056 | | | 4,097,842 | |
| HTM securities | | | | | | | | | | | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | — | | | — | | | — | | | — | | | — | | | — | | | 243,919 | | | 214,481 | | | 243,919 | | | 214,481 | |
| Government-sponsored commercial mortgage-backed securities | — | | | — | | | 135,611 | | | 121,904 | | | 57,182 | | | 49,013 | | | — | | | — | | | 192,793 | | | 170,917 | |
| Total held to maturity securities | — | | | — | | | 135,611 | | | 121,904 | | | 57,182 | | | 49,013 | | | 243,919 | | | 214,481 | | | 436,712 | | | 385,398 | |
| Total | $ | 33,263 | | | $ | 32,623 | | | $ | 813,865 | | | $ | 741,061 | | | $ | 345,096 | | | $ | 296,037 | | | $ | 4,137,544 | | | $ | 3,413,519 | | | $ | 5,329,768 | | | $ | 4,483,240 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| Due in one year or less | | Due after one year to five years | | Due after five to ten years | | Due after ten years | | Total |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| (In thousands) |
| AFS securities | | | | | | | | | | | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | — | | | $ | — | | | $ | 29,288 | | | $ | 28,188 | | | $ | 22,735 | | | $ | 21,235 | | | $ | 3,250,142 | | | $ | 2,731,215 | | | $ | 3,302,165 | | | $ | 2,780,638 | |
| Government-sponsored commercial mortgage-backed securities | — | | | — | | | 256,229 | | | 234,725 | | | 379,749 | | | 327,198 | | | 690,051 | | | 562,453 | | | 1,326,029 | | | 1,124,376 | |
| U.S. Agency bonds | — | | | — | | | 236,454 | | | 216,011 | | | — | | | — | | | — | | | — | | | 236,454 | | | 216,011 | |
| U.S. Treasury securities | — | | | — | | | 99,552 | | | 95,152 | | | — | | | — | | | — | | | — | | | 99,552 | | | 95,152 | |
| State and municipal bonds and obligations | 213 | | | 209 | | | 30,131 | | | 29,393 | | | 44,047 | | | 43,260 | | | 123,313 | | | 118,482 | | | 197,704 | | | 191,344 | |
| Total available for sale securities | 213 | | | 209 | | | 651,654 | | | 603,469 | | | 446,531 | | | 391,693 | | | 4,063,506 | | | 3,412,150 | | | 5,161,904 | | | 4,407,521 | |
| HTM securities | | | | | | | | | | | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | — | | | — | | | — | | | — | | | — | | | — | | | 254,752 | | | 230,319 | | | 254,752 | | | 230,319 | |
| Government-sponsored commercial mortgage-backed securities | — | | | — | | | 80,014 | | | 72,952 | | | 114,955 | | | 101,551 | | 0 | — | | | — | | | 194,969 | | | 174,503 | |
| Total held to maturity securities | — | | | — | | | 80,014 | | | 72,952 | | | 114,955 | | | 101,551 | | | 254,752 | | | 230,319 | | | 449,721 | | | 404,822 | |
| Total | $ | 213 | | | $ | 209 | | | $ | 731,668 | | | $ | 676,421 | | | $ | 561,486 | | | $ | 493,244 | | | $ | 4,318,258 | | | $ | 3,642,469 | | | $ | 5,611,625 | | | $ | 4,812,343 | |
Securities Pledged as Collateral
As of June 30, 2024 and December 31, 2023, securities with a carrying value of $852.1 million and $615.7 million, respectively, were pledged to secure public deposits and for other purposes required by law. As of June 30, 2024 and December 31, 2023, 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”) that offered eligible depository institutions loans up to one year in length in return for any collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries. As of December 31, 2023, securities with a carrying value of $2.4 billion were pledged as collateral through the Program. On January 24, 2024, the Federal Reserve Board announced the Program would cease making new loans as scheduled on March 11, 2024. Accordingly, no securities were pledged as collateral under the Program as of June 30, 2024. Separately, as of June 30, 2024 and December 31, 2023, the Company pledged securities with a carrying value of $1.9 billion and $168.8 million, respectively, to the Federal Reserve Discount Window (the “Discount Window”).
4. Loans and Allowance for Credit Losses
Loans
The following table provides a summary of the Company’s loan portfolio as of the dates indicated:
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| (In thousands) |
| Commercial and industrial | $ | 3,084,186 | | | $ | 3,034,068 | |
| Commercial real estate | 5,440,411 | | | 5,457,349 | |
| Commercial construction | 447,157 | | | 386,999 | |
| Business banking | 1,108,163 | | | 1,085,763 | |
| Residential real estate | 2,562,808 | | | 2,565,485 | |
| Consumer home equity | 1,254,105 | | | 1,208,231 | |
| Other consumer | 248,690 | | | 235,533 | |
| Gross loans before unamortized premiums, unearned discounts and deferred fees | 14,145,520 | | | 13,973,428 | |
| Allowance for loan losses (1) | (156,146) | | | (148,993) | |
| Unamortized premiums, net of unearned discounts and deferred fees | (35,601) | | | (25,068) | |
| Loans after the allowance for loan losses, unamortized premiums, unearned discounts and deferred fees | $ | 13,953,773 | | | $ | 13,799,367 | |
(1)The balance of accrued interest receivable excluded from amortized cost and the calculation of the allowance for loan losses amounted to $55.8 million and $53.9 million as of June 30, 2024 and December 31, 2023, respectively, and is included within other assets on the Consolidated Balance Sheets.
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 and certain purchased loans. 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, commercial real estate, and commercial construction portfolios. The SNC Program portfolio is defined as loan syndications with exposure over $100 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 $4.4 billion and $4.6 billion at June 30, 2024 and December 31, 2023, respectively. The balance of funds borrowed from the FHLBB were $17.4 million and $17.7 million at June 30, 2024 and December 31, 2023, respectively.
The carrying value of loans pledged to secure advances from the Federal Reserve Bank (“FRB”) were $1.2 billion and $1.1 billion at June 30, 2024 and December 31, 2023, respectively. There were no funds borrowed from the FRB outstanding at June 30, 2024 or December 31, 2023.
Serviced Loans
At June 30, 2024 and December 31, 2023, mortgage loans partially or wholly-owned by others and serviced by the Company amounted to approximately $74.3 million and $77.2 million, respectively.
Purchased Loans
The Company began purchasing residential real estate mortgage loans during the third quarter of 2022 and ceased such purchases in the first quarter of 2023. Loans purchased were subject to the same underwriting criteria as those loans originated directly by the Company. During the six months ended June 30, 2024, the Company did not purchase any residential real estate mortgage loans. The Company purchased $32.0 million of residential real estate mortgage loans during the six
months ended June 30, 2023. As of June 30, 2024 and December 31, 2023, the amortized cost balance of loans purchased was $377.0 million and $385.5 million, respectively.
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 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.
The following tables summarize the changes in the allowance for loan losses by loan category for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, 2024 |
| Commercial
and
Industrial | | Commercial
Real Estate | | Commercial
Construction | | Business
Banking | | Residential
Real Estate | | Consumer
Home
Equity | | Other
Consumer | | Total |
| (In thousands) |
| Allowance for loan losses: | | | | | | | | | | | | | | | |
| Beginning balance | $ | 28,863 | | | $ | 64,629 | | | $ | 6,204 | | | $ | 14,631 | | | $ | 25,935 | | | $ | 5,684 | | | $ | 3,244 | | | $ | 149,190 | |
| Charge-offs | — | | | — | | | — | | | (1,002) | | | — | | | (32) | | | (658) | | | (1,692) | |
| Recoveries | 56 | | | 2,011 | | | — | | | 199 | | | 27 | | | 91 | | | 138 | | | 2,522 | |
| Provision (release) | (3) | | | 2,439 | | | 184 | | | 2,920 | | | (133) | | | 38 | | | 681 | | | 6,126 | |
| Ending balance | $ | 28,916 | | | $ | 69,079 | | | $ | 6,388 | | | $ | 16,748 | | | $ | 25,829 | | | $ | 5,781 | | | $ | 3,405 | | | $ | 156,146 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, 2023 |
| Commercial
and
Industrial | | Commercial
Real Estate | | Commercial
Construction | | Business
Banking | | Residential
Real Estate | | Consumer
Home Equity | | Other
Consumer | | Total |
| (In thousands) |
| Allowance for loan losses: | | | | | | | | | | | | | | | |
| Beginning balance | $ | 26,929 | | | $ | 55,193 | | | $ | 7,578 | | | $ | 15,085 | | | $ | 27,130 | | | $ | 6,182 | | | $ | 2,841 | | | $ | 140,938 | |
| Charge-offs | — | | | — | | | — | | | (254) | | | — | | | — | | | (591) | | | (845) | |
| Recoveries | 26 | | | 2 | | | — | | | 204 | | | 18 | | | — | | | 111 | | | 361 | |
| Provision (release) | 2,580 | | | 4,329 | | | 85 | | | 193 | | | (136) | | | (138) | | | 588 | | | 7,501 | |
| Ending balance | $ | 29,535 | | | $ | 59,524 | | | $ | 7,663 | | | $ | 15,228 | | | $ | 27,012 | | | $ | 6,044 | | | $ | 2,949 | | | $ | 147,955 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2024 |
| Commercial
and
Industrial | | Commercial
Real Estate | | Commercial
Construction | | Business
Banking | | Residential
Real Estate | | Consumer
Home Equity | | Other
Consumer | | Total |
| (In thousands) |
| Allowance for loan losses: | | | | | | | | | | | | | | | |
| Beginning balance | $ | 26,959 | | | $ | 65,475 | | | $ | 6,666 | | | $ | 14,913 | | | $ | 25,954 | | | $ | 5,595 | | | $ | 3,431 | | | $ | 148,993 | |
| Charge-offs | — | | | (7,250) | | | — | | | (1,104) | | | (10) | | | (34) | | | (1,309) | | | (9,707) | |
| Recoveries | 81 | | | 2,143 | | | — | | | 609 | | | 58 | | | 91 | | | 301 | | | 3,283 | |
| Provision (release) | 1,876 | | | 8,711 | | | (278) | | | 2,330 | | | (173) | | | 129 | | | 982 | | | 13,577 | |
| Ending balance | $ | 28,916 | | | $ | 69,079 | | | $ | 6,388 | | | $ | 16,748 | | | $ | 25,829 | | | $ | 5,781 | | | $ | 3,405 | | | $ | 156,146 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2023 |
| Commercial
and
Industrial | | Commercial
Real Estate | | Commercial
Construction | | Business
Banking | | Residential
Real Estate | | Consumer
Home Equity | | Other
Consumer | | Other | | Total |
| (In thousands) |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 26,859 | | | $ | 54,730 | | | $ | 7,085 | | | $ | 16,189 | | | $ | 28,129 | | | $ | 6,454 | | | $ | 2,765 | | | $ | — | | | $ | 142,211 | |
| Cumulative effect of change in accounting principle (1) | 47 | | | — | | | — | | | (140) | | | (849) | | | (201) | | | — | | | — | | | $ | (1,143) | |
| Charge-offs | — | | | — | | | — | | | (597) | | | — | | | (7) | | | (1,152) | | | — | | | (1,756) | |
| Recoveries | 165 | | | 6 | | | — | | | 685 | | | 33 | | | 1 | | | 227 | | | — | | | 1,117 | |
| Provision (release) | 2,464 | | | 4,788 | | | 578 | | | (909) | | | (301) | | | (203) | | | 1,109 | | | — | | | 7,526 | |
| Ending balance | $ | 29,535 | | | $ | 59,524 | | | $ | 7,663 | | | $ | 15,228 | | | $ | 27,012 | | | $ | 6,044 | | | $ | 2,949 | | | $ | — | | | $ | 147,955 | |
(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 $1.1 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.
The Company recorded provisions for allowance for loan losses of $13.6 million and $7.5 million for the six months ended June 30, 2024 and 2023, respectively. Management determined a provision to be necessary for the six months ended June 30, 2024 primarily due to a $7.3 million partial charge-off of a commercial real estate loan collateralized by a property in the office risk segment which transitioned to non-accrual status during the three months ended March 31, 2024 and had not been previously reserved for on a specific reserve basis, and due to an increase in specific reserves for commercial real estate loans collateralized by a property in the office risk segment.
Reserve for Unfunded Commitments
Management evaluates the need for a reserve on unfunded lending commitments in a manner consistent with loans held for investment. As of June 30, 2024 and December 31, 2023, the Company’s reserve for unfunded lending commitments was $11.6 million and $14.1 million, respectively, which is recorded within other liabilities in the Company's Consolidated Balance Sheets. The Company’s adoption of ASU 2022-02 on January 1, 2023 did not impact the reserve for unfunded lending commitments.
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 any entity or individual that holds a 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 liquidity and capital needs.
Consumer Lending
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 $100,000 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 $1.5 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.
12 Risk Rating – Substandard (Well-Defined Weakness)
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.
The following table details the amortized cost balances of the Company’s loan portfolios, presented by credit quality indicator and origination year as of June 30, 2024, and gross charge-offs for the six month period then ended:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | Revolving Loans | | Revolving Loans Converted to Term Loans (1) | | Total |
| (In thousands) |
| Commercial and industrial | | | | | | | | | | | | | | | | | |
| Pass | $ | 173,503 | | | $ | 391,758 | | | $ | 369,396 | | | $ | 266,102 | | | $ | 326,612 | | | $ | 744,362 | | | $ | 559,005 | | | $ | 501 | | | $ | 2,831,239 | |
| Special Mention | 10,886 | | | 20,156 | | | 20,782 | | | 67,706 | | | 3,978 | | | 6,785 | | | 35,917 | | | 303 | | | 166,513 | |
| Substandard | — | | | 18,519 | | | 20,170 | | | — | | | 10,520 | | | 555 | | | 23,247 | | | 436 | | | 73,447 | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | 8 | | | — | | | — | | | 8 | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total commercial and industrial | 184,389 | | | 430,433 | | | 410,348 | | | 333,808 | | | 341,110 | | | 751,710 | | | 618,169 | | | 1,240 | | | 3,071,207 | |
| Current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | | | | | | | |
| Pass | 194,930 | | | 474,588 | | | 1,380,390 | | | 804,934 | | | 552,530 | | | 1,630,590 | | | 45,966 | | | — | | | 5,083,928 | |
| Special Mention | 1,256 | | | 45,208 | | | 7,927 | | | 48,067 | | | 11,234 | | | 15,170 | | | 5,863 | | | — | | | 134,725 | |
| Substandard | 8,319 | | | 40,571 | | | 12,486 | | | 6,673 | | | 2,291 | | | 117,267 | | | 2 | | | 7,878 | | | 195,487 | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | 23,258 | | | — | | | — | | | 23,258 | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total commercial real estate | 204,505 | | | 560,367 | | | 1,400,803 | | | 859,674 | | | 566,055 | | | 1,786,285 | | | 51,831 | | | 7,878 | | | 5,437,398 | |
| Current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | 7,250 | | | — | | | — | | | 7,250 | |
| | | | | | | | | | | | | | | | | |
| Commercial construction | | | | | | | | | | | | | | | | | |
| Pass | 41,542 | | | 164,646 | | | 193,997 | | | 21,538 | | | — | | | — | | | — | | | — | | | 421,723 | |
| Special Mention | — | | | 485 | | | — | | | — | | | — | | | — | | | — | | | — | | | 485 | |
| Substandard | — | | | 23,019 | | | — | | | — | | | — | | | — | | | — | | | — | | | 23,019 | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total commercial construction | 41,542 | | | 188,150 | | | 193,997 | | | 21,538 | | | — | | | — | | | — | | | — | | | 445,227 | |
| Current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| Business banking | | | | | | | | | | | | | | | | | |
| Pass | 87,499 | | | 128,351 | | | 158,460 | | | 171,739 | | | 137,208 | | | 314,233 | | | 79,495 | | | 3,055 | | | 1,080,040 | |
| Special Mention | 905 | | | 224 | | | 2,332 | | | 2,364 | | | 2,563 | | | 9,380 | | | 111 | | | 41 | | | 17,920 | |
| Substandard | 171 | | | 1,150 | | | 565 | | | 2,459 | | | 2,890 | | | 5,087 | | | 214 | | | 64 | | | 12,600 | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | 8 | | | 375 | | | — | | | 383 | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total business banking | 88,575 | | | 129,725 | | | 161,357 | | | 176,562 | | | 142,661 | | | 328,708 | | | 80,195 | | | 3,160 | | | 1,110,943 | |
| Current period gross charge-offs | — | | | 405 | | | — | | | 418 | | | 144 | | | 119 | | | — | | | 18 | | | 1,104 | |
| | | | | | | | | | | | | | | | | |
| Residential real estate | | | | | | | | | | | | | | | | | |
| Current and accruing | 86,079 | | | 248,027 | | | 712,314 | | | 644,880 | | | 340,910 | | | 516,722 | | | — | | | — | | | 2,548,932 | |
| 30-89 days past due and accruing | — | | | 1,286 | | | 3,388 | | | 4,910 | | | 2,502 | | | 9,958 | | | — | | | — | | | 22,044 | |
| Loans 90 days or more past due and still accruing | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Non-accrual | — | | | — | | | 2,340 | | | 336 | | | — | | | 4,113 | | | — | | | — | | | 6,789 | |
| Total residential real estate | 86,079 | | | 249,313 | | | 718,042 | | | 650,126 | | | 343,412 | | | 530,793 | | | — | | | — | | | 2,577,765 | |
| Current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | 10 | | | — | | | — | | | 10 | |
| | | | | | | | | | | | | | | | | |
| Consumer home equity | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current and accruing | 3,689 | | | 27,147 | | | 79,038 | | | 8,263 | | | 4,604 | | | 84,413 | | | 1,023,450 | | | 10,413 | | | 1,241,017 | |
| 30-89 days past due and accruing | — | | | 64 | | | 143 | | | — | | | — | | | 779 | | | 7,871 | | | 221 | | | 9,078 | |
| Loans 90 days or more past due and still accruing | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Non-accrual | — | | | — | | | 52 | | | — | | | — | | | 1,144 | | | 5,437 | | | 82 | | | 6,715 | |
| Total consumer home equity | 3,689 | | | 27,211 | | | 79,233 | | | 8,263 | | | 4,604 | | | 86,336 | | | 1,036,758 | | | 10,716 | | | 1,256,810 | |
| Current period gross charge-offs | — | | | — | | | — | | | — | | | — | | | 2 | | | 32 | | | — | | | 34 | |
| | | | | | | | | | | | | | | | | |
| Other consumer | | | | | | | | | | | | | | | | | |
| Current and accruing | 46,608 | | | 70,543 | | | 31,372 | | | 20,407 | | | 10,046 | | | 19,196 | | | 11,759 | | | 29 | | | 209,960 | |
| 30-89 days past due and accruing | 29 | | | 96 | | | 95 | | | 49 | | | 29 | | | 46 | | | 89 | | | 48 | | | 481 | |
| Loans 90 days or more past due and still accruing | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Non-accrual | — | | | 54 | | | 22 | | | 7 | | | 12 | | | 25 | | | 8 | | | — | | | 128 | |
| Total other consumer | 46,637 | | | 70,693 | | | 31,489 | | | 20,463 | | | 10,087 | | | 19,267 | | | 11,856 | | | 77 | | | 210,569 | |
| Current period gross charge-offs | 494 | | | 183 | | | 301 | | | 183 | | | 24 | | | 66 | | | 58 | | | — | | | 1,309 | |
| | | | | | | | | | | | | | | | | |
| Total | $ | 655,416 | | | $ | 1,655,892 | | | $ | 2,995,269 | | | $ | 2,070,434 | | | $ | 1,407,929 | | | $ | 3,503,099 | | | $ | 1,798,809 | | | $ | 23,071 | | | $ | 14,109,919 | |
(1)The amounts presented represent the amortized cost as of June 30, 2024 of revolving loans that were converted to term loans during the six months ended June 30, 2024.
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, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans | | Revolving Loans Converted to Term Loans (1) | | Total |
| (In thousands) |
| Commercial and industrial | | | | | | | | | | | | | | | | | |
| Pass | $ | 477,138 | | | $ | 442,896 | | | $ | 350,782 | | | $ | 341,243 | | | $ | 140,641 | | | $ | 641,342 | | | $ | 485,448 | | | $ | 3,255 | | | $ | 2,882,745 | |
| Special Mention | 4,229 | | | 25,796 | | | 14,994 | | | 13,563 | | | 89 | | | 553 | | | 51,106 | | | 455 | | | 110,785 | |
| Substandard | 1,534 | | | 11,995 | | | 1,775 | | | 405 | | | — | | | 2,581 | | | 7,803 | | | — | | | 26,093 | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | 8 | | | — | | | — | | | 8 | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total commercial and industrial | 482,901 | | | 480,687 | | | 367,551 | | | 355,211 | | | 140,730 | | | 644,484 | | | 544,357 | | | 3,710 | | | 3,019,631 | |
| | | | | | | | | | | | | | | | | |
| Commercial real estate | | | | | | | | | | | | | | | | | |
| Pass | 498,590 | | | 1,435,893 | | | 855,014 | | | 573,370 | | | 516,689 | | | 1,291,189 | | | 47,581 | | | 2,556 | | | 5,220,882 | |
| Special Mention | 15,200 | | | 7,990 | | | — | | | 736 | | | 2,281 | | | 34,803 | | | — | | | — | | | 61,010 | |
| Substandard | 19,738 | | | 12,589 | | | 15,237 | | | 3,938 | | | 33,413 | | | 48,978 | | | 8,006 | | | — | | | 141,899 | |
| Doubtful | 10,615 | | | — | | | — | | | — | | | — | | | 19,441 | | | — | | | — | | | 30,056 | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total commercial real estate | 544,143 | | | 1,456,472 | | | 870,251 | | | 578,044 | | | 552,383 | | | 1,394,411 | | | 55,587 | | | 2,556 | | | 5,453,847 | |
| | | | | | | | | | | | | | | | | |
| Commercial construction | | | | | | | | | | | | | | | | | |
| Pass | 133,463 | | | 151,957 | | | 96,147 | | | — | | | — | | | — | | | 2,614 | | | — | | | 384,181 | |
| Special Mention | 456 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 456 | |
| Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total commercial construction | 133,919 | | | 151,957 | | | 96,147 | | | — | | | — | | | — | | | 2,614 | | | — | | | 384,637 | |
| | | | | | | | | | | | | | | | | |
| Business banking | | | | | | | | | | | | | | | | | |
| Pass | 139,237 | | | 165,247 | | | 182,606 | | | 146,180 | | | 110,638 | | | 229,636 | | | 73,054 | | | 3,996 | | | 1,050,594 | |
| Special Mention | 1,474 | | | 2,553 | | | 1,009 | | | 4,294 | | | 4,692 | | | 11,479 | | | 23 | | | 27 | | | 25,551 | |
| Substandard | 1,310 | | | 596 | | | 2,684 | | | 2,071 | | | 1,464 | | | 3,423 | | | 594 | | | 579 | | | 12,721 | |
| Doubtful | — | | | — | | | — | | | — | | | 507 | | | 220 | | | — | | | — | | | 727 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total business banking | 142,021 | | | 168,396 | | | 186,299 | | | 152,545 | | | 117,301 | | | 244,758 | | | 73,671 | | | 4,602 | | | 1,089,593 | |
| | | | | | | | | | | | | | | | | |
| Residential real estate | | | | | | | | | | | | | | | | | |
| Current and accruing | 257,671 | | | 728,997 | | | 665,811 | | | 354,003 | | | 93,817 | | | 451,812 | | | — | | | — | | | 2,552,111 | |
| 30-89 days past due and accruing | 750 | | | 6,615 | | | 2,437 | | | 2,112 | | | 1,496 | | | 8,219 | | | — | | | — | | | 21,629 | |
| Loans 90 days or more past due and still accruing | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Non-accrual | — | | | 1,755 | | | 1,433 | | | 291 | | | 288 | | | 4,958 | | | — | | | — | | | 8,725 | |
| Total residential real estate | 258,421 | | | 737,367 | | | 669,681 | | | 356,406 | | | 95,601 | | | 464,989 | | | — | | | — | | | 2,582,465 | |
| | | | | | | | | | | | | | | | | |
| Consumer home equity | | | | | | | | | | | | | | | | | |
| Current and accruing | 30,393 | | | 84,065 | | | 9,151 | | | 4,899 | | | 4,166 | | | 80,687 | | | 970,882 | | | 9,472 | | | 1,193,715 | |
| 30-89 days past due and accruing | 148 | | | 483 | | | — | | | — | | | — | | | 558 | | | 7,509 | | | 223 | | | 8,921 | |
| Loans 90 days or more past due and still accruing | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Non-accrual | — | | | 66 | | | — | | | — | | | — | | | 1,466 | | | 6,770 | | | 230 | | | 8,532 | |
| Total consumer home equity | 30,541 | | | 84,614 | | | 9,151 | | | 4,899 | | | 4,166 | | | 82,711 | | | 985,161 | | | 9,925 | | | 1,211,168 | |
| | | | | | | | | | | | | | | | | |
| Other consumer | | | | | | | | | | | | | | | | | |
| Current and accruing | 93,659 | | | 36,601 | | | 23,962 | | | 12,427 | | | 11,367 | | | 14,609 | | | 13,353 | | | 85 | | | 206,063 | |
| 30-89 days past due and accruing | 170 | | | 271 | | | 153 | | | 25 | | | 12 | | | 92 | | | 40 | | | — | | | 763 | |
| Loans 90 days or more past due and still accruing | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Non-accrual | 50 | | | 61 | | | 25 | | | 2 | | | 14 | | | 34 | | | 7 | | | — | | | 193 | |
| Total other consumer | 93,879 | | | 36,933 | | | 24,140 | | | 12,454 | | | 11,393 | | | 14,735 | | | 13,400 | | | 85 | | | 207,019 | |
| | | | | | | | | | | | | | | | | |
| Total | $ | 1,685,825 | | | $ | 3,116,426 | | | $ | 2,223,220 | | | $ | 1,459,559 | | | $ | 921,574 | | | $ | 2,846,088 | | | $ | 1,674,790 | | | $ | 20,878 | | | $ | 13,948,360 | |
(1)The amounts presented represent the amortized cost as of December 31, 2023 of revolving loans that were converted to term loans during the year ended December 31, 2023.
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 90 days delinquent if the loan is well secured and in the process of collection. Non-accrual loans and loans that are more than 90 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.
The following tables show the age analysis of past due loans as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| 30-59
Days Past
Due | | 60-89
Days Past
Due | | 90 or More
Days Past
Due | | Total Past
Due | | Current | | Total
Loans |
| (In thousands) |
| Commercial and industrial | $ | — | | | $ | — | | | $ | 9 | | | $ | 9 | | | $ | 3,071,198 | | | $ | 3,071,207 | |
| Commercial real estate | — | | | — | | | — | | | — | | | 5,437,398 | | | 5,437,398 | |
| Commercial construction | — | | | — | | | — | | | — | | | 445,227 | | | 445,227 | |
| Business banking | 3,499 | | | 187 | | | 1,876 | | | 5,562 | | | 1,105,381 | | | 1,110,943 | |
| Residential real estate | 16,801 | | | 5,574 | | | 5,147 | | | 27,522 | | | 2,550,243 | | | 2,577,765 | |
| Consumer home equity | 7,880 | | | 1,392 | | | 6,256 | | | 15,528 | | | 1,241,282 | | | 1,256,810 | |
| Other consumer | 297 | | | 184 | | | 128 | | | 609 | | | 209,960 | | | 210,569 | |
| Total | $ | 28,477 | | | $ | 7,337 | | | $ | 13,416 | | | $ | 49,230 | | | $ | 14,060,689 | | | $ | 14,109,919 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| 30-59
Days Past
Due | | 60-89
Days Past
Due | | 90 or More
Days Past
Due | | Total Past
Due | | Current | | Total
Loans |
| (In thousands) |
| Commercial and industrial | $ | 3,316 | | | $ | — | | | $ | 465 | | | $ | 3,781 | | | $ | 3,015,850 | | | $ | 3,019,631 | |
| Commercial real estate | — | | | — | | | — | | | — | | | 5,453,847 | | | 5,453,847 | |
| Commercial construction | — | | | — | | | — | | | — | | | 384,637 | | | 384,637 | |
| Business banking | 3,455 | | | 1,647 | | | 1,202 | | | 6,304 | | | 1,083,289 | | | 1,089,593 | |
| Residential real estate | 17,116 | | | 4,888 | | | 6,764 | | | 28,768 | | | 2,553,697 | | | 2,582,465 | |
| Consumer home equity | 6,517 | | | 2,600 | | | 8,204 | | | 17,321 | | | 1,193,847 | | | 1,211,168 | |
| Other consumer | 532 | | | 235 | | | 189 | | | 956 | | | 206,063 | | | 207,019 | |
| Total (1) | $ | 30,936 | | | $ | 9,370 | | | $ | 16,824 | | | $ | 57,130 | | | $ | 13,891,230 | | | $ | 13,948,360 | |
(1)The amounts presented in the table above represent the recorded investment balance of loans as of December 31, 2023.
The following table presents information regarding non-accrual loans as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| Non-Accrual Loans With ACL | | Non-Accrual Loans Without ACL (1) | | Total Nonaccrual Loans | | Non-Accrual Loans With ACL | | Non-Accrual Loans Without ACL (1) | | Total Nonaccrual Loans |
| (In thousands) | | |
| Commercial and industrial | $ | 4 | | | $ | 8 | | | $ | 12 | | | $ | 4 | | | $ | 464 | | | $ | 468 | |
| Commercial real estate | 23,258 | | | — | | | 23,258 | | | 13,969 | | | 16,087 | | | 30,056 | |
| Commercial construction | — | | | — | | | — | | | — | | | — | | | — | |
| Business banking | 2,864 | | | 5 | | | 2,869 | | | 4,572 | | | 11 | | | 4,583 | |
| Residential real estate | 6,789 | | | — | | | 6,789 | | | 8,725 | | | — | | | 8,725 | |
| Consumer home equity | 6,715 | | | — | | | 6,715 | | | 8,532 | | | — | | | 8,532 | |
| Other consumer | 128 | | | — | | | 128 | | | 193 | | | — | | | 193 | |
| Total non-accrual loans | $ | 39,758 | | | $ | 13 | | | $ | 39,771 | | | $ | 35,995 | | | $ | 16,562 | | | $ | 52,557 | |
(1)The loans on non-accrual status and without an ACL as of both June 30, 2024 and December 31, 2023, 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 and six months ended June 30, 2024 and 2023 was not significant. As of both June 30, 2024 and December 31, 2023, 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 and six months ended June 30, 2024 and 2023 was not significant.
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 June 30, 2024 and December 31, 2023, the Company had collateral-dependent residential mortgage and home equity loans totaling $1.5 million and $0.8 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 June 30, 2024 and December 31, 2023, the Company had collateral-dependent commercial loans totaling $23.3 million and $30.7 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 June 30, 2024 and December 31, 2023, the Company had no residential real estate held in other real estate owned (“OREO”). As of June 30, 2024, there were three residential real estate loans, which had an aggregate balance of $0.3 million, collateralized by residential real estate property for which formal foreclosure proceedings were in-process. As of December 31, 2023, there were two residential real estate loans, which had an aggregate balance of $0.2 million, collateralized by residential real estate property for which formal foreclosure proceedings were in-process. As of June 30, 2024, there were ten consumer home equity loans, which had an aggregate balance of $0.9 million, collateralized by residential real estate property for which formal foreclosure proceedings were in-process. As of December 31, 2023, there were three consumer home equity loans, which had an aggregate balance of $0.2 million, collateralized by residential real estate property for which formal foreclosure proceedings were in-process.
Loan Modifications to Borrowers Experiencing Financial Difficulty
The following table shows the amortized cost balance as of June 30, 2024 of loans modified during the three and six month periods then ended to borrowers experiencing financial difficulty by the type of concession granted:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2024 | | Six Months Ended June 30, 2024 |
| Amortized Cost Balance | | % of Total Portfolio | | Amortized Cost Balance | | % of Total Portfolio |
| (Dollars in thousands) |
| Interest Rate Reduction: | | | | | | | |
| Business banking | $ | 38 | | | 0.00 | % | | $ | 38 | | | 0.00 | % |
| Consumer home equity | 449 | | | 0.04 | % | | 991 | | | 0.08 | % |
| Total interest rate reduction | $ | 487 | | | 0.00 | % | | $ | 1,029 | | | 0.01 | % |
| Other-than-Insignificant Delay in Repayment: | | | | | | | |
| Commercial real estate | $ | 13,462 | | | 0.25 | % | | $ | 13,462 | | | 0.25 | % |
| Business banking | 45 | | | 0.00 | % | | 45 | | | 0.00 | % |
| Residential real estate | 117 | | | 0.00 | % | | 117 | | | 0.00 | % |
| Consumer home equity | 734 | | | 0.06 | % | | 734 | | | 0.06 | % |
| Total other-than-insignificant delay in repayment | $ | 14,358 | | | 0.10 | % | | $ | 14,358 | | | 0.10 | % |
| Term Extension: | | | | | | | |
| Commercial real estate | $ | 7,878 | | | 0.14 | % | | $ | 7,878 | | | 0.14 | % |
| Business banking | — | | | — | % | | 32 | | | 0.00 | % |
| Residential real estate | — | | | — | % | | 219 | | | 0.01 | % |
| Consumer home equity | 6 | | | 0.00 | % | | 6 | | | 0.00 | % |
| Total term extension | $ | 7,884 | | | 0.06 | % | | $ | 8,135 | | | 0.06 | % |
| Combination—Interest Rate Reduction & Other-than-Insignificant Delay in Repayment: | | | | | | | |
| Consumer home equity | $ | — | | | — | % | | $ | 126 | | | 0.01 | % |
| Total combination—interest rate reduction & other-than-insignificant delay in repayment | $ | — | | | — | % | | $ | 126 | | | 0.00 | % |
| Combination—Interest Rate Reduction & Term Extension: | | | | | | | |
| Business banking | $ | 4 | | | 0.00 | % | | $ | 4 | | | 0.00 | % |
| Total combination—interest rate reduction & term extension | $ | 4 | | | 0.00 | % | | $ | 4 | | | 0.00 | % |
| Combination—Interest Rate Reduction, Term Extension & Other-than-Insignificant Delay in Repayment | | | | | | | |
| Business banking | $ | 35 | | | 0.00 | % | | $ | 35 | | | 0.00 | % |
| Consumer home equity | 12 | | | 0.00 | % | | 12 | | | 0.00 | % |
| Total combination—interest rate reduction, term extension & other-than-insignificant delay in repayment | $ | 47 | | | 0.00 | % | | $ | 47 | | | 0.00 | % |
| Total by portfolio segment | | | | | | | |
| Commercial real estate | $ | 21,340 | | | 0.39 | % | | $ | 21,340 | | | 0.39 | % |
| Business banking | 122 | | | 0.01 | % | | 154 | | | 0.01 | % |
| Residential real estate | 117 | | 0.00 | % | | 336 | | | 0.01 | % |
| Consumer home equity | 1,201 | | | 0.10 | % | | 1,869 | | | 0.15 | % |
| Total | $ | 22,780 | | | 0.16 | % | | $ | 23,699 | | | 0.17 | % |
The following table shows the amortized cost balance as of June 30, 2023 of loans modified during the three and six month periods then ended to borrowers experiencing financial difficulty by the type of concession granted:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2023 | | Six Months Ended June 30, 2023 |
| Amortized Cost Balance | | % of Total Portfolio | | Amortized Cost Balance | | % of Total Portfolio |
| (Dollars in thousands) |
| Interest Rate Reduction: | | | | | | | |
| Business banking | $ | 3 | | | 0.00 | % | | $ | 50 | | | 0.00 | % |
| Residential real estate | 311 | | | 0.01 | % | | 311 | | | 0.01 | % |
| Consumer home equity | 426 | | | 0.04 | % | | 1,239 | | | 0.10 | % |
| Total interest rate reduction | $ | 740 | | | 0.01 | % | | $ | 1,600 | | | 0.01 | % |
| Other-than-Insignificant Delay in Repayment: | | | | | | | |
| Residential real estate | $ | 387 | | | 0.02 | % | | $ | 713 | | | 0.03 | % |
| Consumer home equity | 578 | | | 0.05 | % | | 600 | | | 0.05 | % |
| Total other-than-insignificant delay in repayment | $ | 965 | | | 0.01 | % | | $ | 1,313 | | | 0.01 | % |
| Term Extension: | | | | | | | |
| Business banking | 340 | | | 0.03 | % | | 340 | | | 0.03 | % |
| Total term extension | $ | 340 | | | 0.00 | % | | $ | 340 | | | 0.00 | % |
| Combination—Interest Rate Reduction & Other-than-Insignificant Delay in Repayment: | | | | | | | |
| Business banking | $ | 33 | | | 0.00 | % | | $ | 94 | | | 0.01 | % |
| Consumer home equity | — | | | — | % | | 175 | | | 0.01 | % |
| Total combination—interest rate reduction & other-than-insignificant delay in repayment | $ | 33 | | | 0.00 | % | | $ | 269 | | | 0.00 | % |
| Combination—Interest Rate Reduction & Term Extension: | | | | | | | |
| Business banking | $ | 71 | | | 0.01 | % | | $ | 524 | | | 0.05 | % |
| Consumer home equity | — | | | — | % | | 218 | | | 0.02 | % |
| Total combination—interest rate reduction & term extension | $ | 71 | | | 0.00 | % | | $ | 742 | | | 0.01 | % |
| Combination—Term Extension & Other-than-Insignificant Delay in Repayment: | | | | | | | |
| Business banking | $ | — | | | — | % | | $ | 28 | | | 0.00 | % |
| Residential real estate | 143 | | | 0.01 | % | | 143 | | | 0.01 | % |
| Total combination—term extension & other-than-insignificant delay in repayment | $ | 143 | | | 0.00 | % | | $ | 171 | | | 0.00 | % |
| Combination—Interest Rate Reduction, Term Extension & Other-than-Insignificant Delay in Repayment | | | | | | | |
| Business banking | $ | — | | | — | % | | $ | 119 | | | 0.01 | % |
| Residential real estate | 85 | | | 0.00 | % | | 85 | | | 0.00 | % |
| Total combination—interest rate reduction, term extension & other-than-insignificant delay in repayment | $ | 85 | | | 0.00 | % | | $ | 204 | | | 0.00 | % |
| Total by portfolio segment | | | | | | | |
| Business banking | $ | 447 | | | 0.04 | % | | $ | 1,155 | | | 0.11 | % |
| Residential real estate | 926 | | 0.04 | % | | 1,252 | | | 0.05 | % |
| Consumer home equity | 1,004 | | | 0.08 | % | | 2,232 | | | 0.19 | % |
| Total | $ | 2,377 | | | 0.02 | % | | $ | 4,639 | | | 0.03 | % |
The following tables describe the financial effect of the modifications made during the periods indicated to borrowers experiencing financial difficulty. Loans that were modified in more than one manner are included in each modification type corresponding to the types of modifications performed.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2024 |
| Loan Type | Financial Effect (1) |
| Interest Rate Reduction |
| Business banking | Reduced weighted-average contractual interest rate from 14.0% to 7.5%. |
| Consumer home equity | Reduced weighted-average contractual interest rate from 8.0% to 5.0%. |
| Other-than-Insignificant Delay in Repayment |
| Commercial real estate | Deferred a weighted average of 6 payments. The loans were re-amortized over an extended payment period resulting in reduced monthly payment amounts for the borrowers. |
| Business banking | Deferred a weighted average of 3 payments. For the principal and interest deferral, the loan was re-amortized over an extended payment period resulting in reduced monthly payment amounts for the borrower. 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 12 principal and interest payments which were added to the end of the loan life. |
| Consumer home equity | Deferred a weighted average of 6 principal and interest payments which were added to the end of the loan life. |
| Term Extension |
| Commercial real estate | Added 4.0 years to the life of the loan, which reduced the monthly payment amount for the borrower. |
| Business banking | Added a weighted-average 1.1 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| Consumer home equity | Added a weighted-average 7.2 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2024 |
| Loan Type | Financial Effect (1) |
| Interest Rate Reduction |
| Business banking | Reduced weighted-average contractual interest rate from 14.0% to 7.5%. |
| Consumer home equity | Reduced weighted-average contractual interest rate from 8.0% to 4.6%. |
| Other-than-Insignificant Delay in Repayment |
| Commercial real estate | Deferred a weighted average of 6 payments. The loans were re-amortized over an extended payment period resulting in reduced monthly payment amounts for the borrowers. |
| Business banking | Deferred a weighted average of 3 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 12 principal and interest payments which were added to the end of the loan life. |
| Consumer home equity | Deferred a weighted average of 6 principal and interest payments which were added to the end of the loan life. |
| Term Extension |
| Commercial real estate | Added 4.0 years to the life of the loan, which reduced the monthly payment amount for the borrower. |
| Business banking | Added a weighted-average 2.4 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| Residential real estate | Added 2.0 years to the life of the loan, which reduced the monthly payment amount for the borrower. |
| Consumer home equity | Added a weighted-average 7.2 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2023 |
| Loan Type | Financial Effect (1) |
| Interest Rate Reduction |
| Business banking | Reduced weighted-average contractual interest rate from 11.3% to 8.7%. |
| Residential real estate | Reduced weighted-average contractual interest rate from 5.4% to 3.6%. |
| Consumer home equity | Reduced weighted-average contractual interest rate from 7.5% to 4.0%. |
| Other-than-Insignificant Delay in Repayment |
| Business banking | Deferred a weighted average of 1 payment. For the principal and interest deferral, the loan was re-amortized over an extended payment period resulting in reduced monthly payment amounts for the borrower. |
| Residential real estate | Deferred a weighted average of 11 principal and interest payments which were added to the end of the loan life. |
| Consumer home equity | Deferred a weighted average of 11 principal and interest payments which were added to the end of the loan life. |
| Term Extension |
| Business banking | Added a weighted-average 4.3 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| Residential real estate | Added a weighted-average 23.7 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2023 |
| Loan Type | Financial Effect (1) |
| Interest Rate Reduction |
| Business banking | Reduced weighted-average contractual interest rate from 9.7% to 7.2%. |
| Residential real estate | Reduced weighted-average contractual interest rate from 5.4% to 3.6%. |
| Consumer home equity | Reduced weighted-average contractual interest rate from 7.1% to 4.3%. |
| Other-than-Insignificant Delay in Repayment |
| Business banking | Deferred a weighted average of 10 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 10 principal and interest payments which were added to the end of the loan life. |
| Consumer home equity | Deferred a weighted average of 10 principal and interest payments which were added to the end of the loan life. |
| Term Extension |
| Business banking | Added a weighted-average 4.3 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| Residential real estate | Added a weighted-average 23.7 years to the life of loans, which reduced monthly payment amounts for the borrowers. |
| Consumer home equity | Added a weighted-average 17.2 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 June 30, 2024, loans to borrowers experiencing financial difficulty modified during the prior twelve months and which had a payment default during the six months ended June 30, 2024 totaled $0.1 million. As of June 30, 2023, no loans to borrowers experiencing financial difficulty modified during the six months then ended had a payment default during the six months ended June 30, 2023.
Management closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the age analysis of past due loans to borrowers experiencing financial difficulty that were modified during the prior twelve months as of June 30, 2024:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| 30-59
Days Past
Due | | 60-89
Days Past
Due | | 90 or More
Days Past
Due | | Total Past
Due | | Current | | Total |
| (In thousands) |
| Commercial real estate | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 21,340 | | | $ | 21,340 | |
| Business banking | 16 | | | — | | | — | | | 16 | | | 363 | | | 379 | |
| Residential real estate | 272 | | | 402 | | | — | | | 674 | | | 2,119 | | | 2,793 | |
| Consumer home equity | 520 | | | 292 | | | — | | | 812 | | | 2,506 | | | 3,318 | |
| Total | $ | 808 | | | $ | 694 | | | $ | — | | | $ | 1,502 | | | $ | 26,328 | | | $ | 27,830 | |
The following table shows the age analysis of past due loans to borrowers experiencing financial difficulty as of June 30, 2023 that were modified during the six months ended June 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2023 |
| 30-59
Days Past
Due | | 60-89
Days Past
Due | | 90 or More
Days Past
Due | | Total Past
Due | | Current | | Total |
| (In thousands) |
| Business banking | $ | 93 | | | $ | 27 | | | $ | 158 | | | $ | 278 | | | $ | 877 | | | $ | 1,155 | |
| Residential real estate | — | | | — | | | — | | | — | | | 1,252 | | | 1,252 | |
| Consumer home equity | — | | | — | | | — | | | — | | | 2,232 | | | 2,232 | |
| Total | $ | 93 | | | $ | 27 | | | $ | 158 | | | $ | 278 | | | $ | 4,361 | | | $ | 4,639 | |
As of June 30, 2024, there was one additional commitment to lend amounting to $0.3 million to borrowers experiencing financial difficulty and which were modified during the six months ended June 30, 2024 in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant delay in repayment, or a term extension. As of December 31, 2023, there were no additional commitments to lend to borrowers experiencing financial difficulty and which were modified during year ended December 31, 2023 in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant delay in repayment, or a term extension.
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.
The following table summarizes the Company’s loan participations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the Six Months Ended June 30, 2024 | | As of and for the Year Ended December 31, 2023 |
| Balance | | Non-performing
Loan Rate
(%) | | Gross
Charge-offs | | Balance | | Non-performing
Loan Rate
(%) | | Gross
Charge-offs |
| (Dollars in thousands) |
| Commercial and industrial | $ | 938,897 | | | — | % | | $ | — | | | $ | 985,394 | | | 0.00 | % | | $ | — | |
| Commercial real estate | 515,477 | | | — | % | | — | | | 447,550 | | | 0.00 | % | | — | |
| Commercial construction | 139,040 | | | — | % | | — | | | 146,043 | | | 0.00 | % | | — | |
| Business banking | 57 | | | — | % | | 22 | | | 72 | | | 0.00 | % | | 22 | |
| Total loan participations | $ | 1,593,471 | | | — | % | | $ | 22 | | | $ | 1,579,059 | | | 0.00 | % | | $ | 22 | |
5. Leases
The Company leases certain office space and equipment under various non-cancelable operating leases. These leases have original terms ranging from 2 years to 24 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. The information presented within this Note excludes discontinued operations with regard to information pertaining to the three and six months ended June 30, 2023. Refer to Note 15, “Discontinued Operations” for further discussion regarding discontinued operations.
As of the dates indicated, the Company had the following related to operating leases:
| | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| (In thousands) |
| Right-of-use assets | $ | 48,020 | | | $ | 50,641 | |
| Lease liabilities | 52,709 | | | 55,617 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (In thousands) |
| Operating lease cost | $ | 2,758 | | | $ | 2,929 | | | $ | 5,858 | | | $ | 5,955 | |
| Finance lease cost | 112 | | | 81 | | | 224 | | | 159 | |
| Variable lease cost | 620 | | | 683 | | | 1,420 | | | 1,338 | |
| Total lease cost | $ | 3,490 | | | $ | 3,693 | | | $ | 7,502 | | | $ | 7,452 | |
During the three and six months ended June 30, 2024, the Company made $3.2 million and $6.7 million, respectively, in cash payments for operating and finance lease payments. During the three and six months ended June 30, 2023, the Company made $3.2 million and $6.5 million, respectively, in cash payments for operating and finance lease payments.
Supplemental balance sheet information related to operating leases are as follows:
| | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| Weighted-average remaining lease term (in years) | 8.43 | | 8.26 |
| Weighted-average discount rate | 3.84 | % | | 3.76 | % |
6. Earnings (Loss) Per Share (“EPS”)
Basic EPS represents income/(loss) allocable 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/(loss) allocable 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.
On July 12, 2024, the Company completed its previously announced merger with Cambridge Bancorp (“Cambridge”). In connection with the merger the Company issued 38.9 million shares of its common stock to the holders of Cambridge’s common stock. Such shares were not included in the computation of the average number of common shares outstanding below. Refer to Refer to Note 16, “Subsequent Events” for further discussion regarding the Company’s merger with Cambridge. | | | | | | | | | | | |
| For the Three Months Ended June 30, 2024 | | For the Six Months Ended June 30, 2024 |
| (Dollars in thousands, except per share data) |
| Net income applicable to common shares | $ | 26,331 | | | $ | 64,978 | |
| | | |
| Average number of common shares outstanding | 176,235,507 | | | 176,155,197 | |
| Less: Average unallocated ESOP shares | (13,090,252) | | | (13,151,104) | |
| Average number of common shares outstanding used to calculate basic earnings per common share | 163,145,255 | | | 163,004,093 | |
| Common stock equivalents | 354,041 | | | 386,328 | |
| Average number of common shares outstanding used to calculate diluted earnings per common share | 163,499,296 | | | 163,390,421 | |
| | | |
| Earnings per common share: | | | |
| Basic | $ | 0.16 | | | $ | 0.40 | |
| Diluted | $ | 0.16 | | | $ | 0.40 | |
| | | | | | | | | | | |
| For the Three Months Ended June 30, 2023 | | For the Six Months Ended June 30, 2023 |
| (Dollars in thousands, except per share data) |
| Net income (loss) applicable to common shares: | | | |
| Net income (loss) from continuing operations | $ | 44,419 | | | $ | (157,662) | |
| Net income from discontinued operations | 4,238 | | | 12,223 | |
| Total net income (loss) | $ | 48,657 | | | $ | (145,439) | |
| | | |
| Average number of common shares outstanding | 175,817,284 | | | 175,758,658 | |
| Less: Average unallocated ESOP shares | (13,585,048) | | | (13,646,435) | |
| Average number of common shares outstanding used to calculate basic earnings (loss) per common share | 162,232,236 | | | 162,112,223 | |
| Common stock equivalents | 14,439 | | | 24,761 | |
| Average number of common shares outstanding used to calculate diluted earnings (loss) per common share | 162,246,675 | | | 162,136,984 | |
| | | |
| Basic earnings (loss) per common share: | | | |
| Earnings (loss) per share from continuing operations | $ | 0.27 | | | $ | (0.98) | |
| Earnings per share from discontinued operations | 0.03 | | | 0.08 | |
| Total basic earnings (loss) per share | $ | 0.30 | | | $ | (0.90) | |
| | | |
| Diluted earnings (loss) per common share: | | | |
| Earnings (loss) per share from continuing operations | $ | 0.27 | | | $ | (0.98) | |
| Earnings per share from discontinued operations | 0.03 | | | 0.08 | |
| Total diluted earnings (loss) per share | $ | 0.30 | | | $ | (0.90) | |
7. Low 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 15 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 June 30, 2024 and December 31, 2023, the Company had $222.9 million and $223.4 million, respectively, in tax credit investments that were included in other assets in the Company’s Consolidated Balance Sheets.
When permissible, the Company accounts for its investments in LIHTC projects and other qualifying investments 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 Company’s Consolidated Balance Sheets. The Company will continue to use the proportional amortization method on any new qualifying investments.
The following table presents the Company’s investments in LIHTC projects accounted for using the proportional amortization method for the periods indicated: | | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| (In thousands) |
| Current recorded investment included in other assets | $ | 220,864 | | | $ | 221,190 | |
Commitments to fund qualified affordable housing projects included in recorded investment noted above | 130,783 | | | 149,207 | |
The following table presents additional information related to the Company’s investments in LIHTC projects for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (In thousands) |
| Tax credits and benefits recognized | $ | 4,940 | | | $ | 3,305 | | | $ | 10,291 | | | $ | 6,567 | |
| Amortization expense included in income tax expense (benefit) | 4,574 | | | 2,811 | | | 9,162 | | | 5,577 | |
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 in the Company’s Consolidated Balance Sheets and totaled $2.1 million and $2.2 million as of June 30, 2024 and December 31, 2023, respectively. There were no outstanding commitments related to these investments as of either June 30, 2024 or December 31, 2023.
8. Employee Benefits
Pension Plans
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
The components of net pension expense for the plans for the periods indicated are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (In thousands) |
| Components of net periodic benefit cost: | | | | | | | |
| Service cost (1) | $ | 5,588 | | | $ | 6,338 | | | $ | 11,177 | | | $ | 12,677 | |
| Interest cost | 4,630 | | | 4,298 | | | 9,260 | | | 8,596 | |
| Expected return on plan assets | (8,451) | | | (7,532) | | | (16,904) | | | (15,064) | |
| Prior service credit | (2,489) | | | (2,970) | | | (4,977) | | | (5,940) | |
| Recognized net actuarial loss | 1,775 | | | 2,468 | | | 3,550 | | | 4,936 | |
| Net periodic benefit cost | $ | 1,053 | | | $ | 2,602 | | | $ | 2,106 | | | $ | 5,205 | |
(1)Includes service costs related to employees of our insurance agency business with regard to the three and six months ended June 30, 2023. Such service costs were included in net income from discontinued operations as such costs are no longer incurred by the Company following the sale of the insurance agency business in October 2023. All other costs included in the determination of the benefit obligation for the Defined Benefit Plan and the BEP were included in net income from continuing operations as the Bank assumed the related liability upon dissolution of its Eastern Insurance Group subsidiary. Service costs included in net income from discontinued operations and included in the above table were $1.5 million and $3.0 million for the three and six months ended June 30, 2023, respectively.
Except as described above, 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 and six months ended June 30, 2024 and 2023. 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, 2023 and 2022. Accordingly, during the three and six months ended June 30, 2024 and 2023, there were no contributions made to the Defined Benefit Plan.
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 26,146,141 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, 7,470,326 shares may be issued as restricted stock or RSUs, including those issued as performance shares and performance share units (“PSUs”), and 18,675,815 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 three 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 (“RSAs”) vest pro-rata on an annual basis over a five-year period. The maximum term for stock options is ten years.
In May 2024, the Company granted a total of 56,352 shares of restricted stock to the Company’s non-employee directors which vest after approximately one year from the date of grant. In May 2023, the Company granted a total of 47,820 shares of restricted stock to the Company’s non-employee directors which vest after approximately one year from the date of grant.
In March 2024, the Company granted to all of the Company’s executive officers and certain other employees a total of 416,276 RSUs, which vest pro-rata on an annual basis over a period of three years from the date of the grant, and a total of 234,091 PSUs for which vesting is contingent upon the Compensation and Human Capital Management Committee of the Board of Director’s certification, after the conclusion of a period of approximately 2.8 years from the date of the grant, that the Company has attained a threshold level of certain performance criteria over such period. In March 2023, the Company granted to all of the Company’s executive officers and certain other employees a total of 318,577 RSUs, which vest pro-rata on an
annual basis over a period of three years from the date of the grant, and a total of 108,984 PSUs for which vesting is contingent upon the Compensation and Human Capital Management Committee of the Board of Director’s certification, after the conclusion of a three-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 June 30, 2024 and December 31, 2023, there were 4,170,755 shares and 4,872,494 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 18,675,815 shares that remained available for issuance upon the exercise of stock options at both dates. As of both June 30, 2024 and December 31, 2023, no stock options had been awarded under the 2021 Plan.
The following table summarizes the Company’s restricted stock award activity for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, |
| 2024 | | 2023 |
| Restricted Stock Awards | Number of Shares | | Weighted-Average Grant Price Per Share | | Number of Shares | | Weighted-Average Grant Price Per Share |
| Non-vested restricted stock as of the beginning of the respective period | 420,400 | | $ | 19.15 | | | 525,460 | | $ | 20.08 | |
| Granted | 56,352 | | 13.84 | | | 47,820 | | 11.50 | |
| Vested | (47,820) | | 11.50 | | | (28,690) | | 19.17 | |
| Forfeited | — | | — | | | — | | — | |
| Non-vested restricted stock as of the end of the respective period (1) | 428,932 | | $ | 18.47 | | | 544,590 | | $ | 19.37 | |
(1)Includes the effect of modifications to previously awarded and unvested restricted share awards for two plan participants to accelerate vesting. The financial effect of the modifications on total unrecognized compensation expense was not significant.
During the six months ended June 30, 2024 and 2023, 47,820 and 28,690 RSA awards vested, respectively. In the aggregate, the amount of RSAs granted each year had a grant date fair value of $0.5 million.
The following table summarizes the Company’s restricted stock unit activity for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, |
| 2024 | | 2023 |
| Restricted Stock Units | Number of Shares | | Weighted-Average Grant Price Per Share | | Number of Shares | | Weighted-Average Grant Price Per Share |
| Non-vested restricted stock units as of the beginning of the respective period | 952,001 | | $ | 19.46 | | | 972,325 | | $ | 21.08 | |
| Granted | 416,276 | | 12.81 | | | 318,577 | | 15.63 | |
| Vested (1) | (303,015) | | 19.38 | | | (231,407) | | 21.08 | |
| Forfeited | (4,980) | | 14.59 | | | (640) | | 21.08 | |
| Non-vested restricted stock units as of the end of the respective period | 1,060,282 | | $ | 16.89 | | | 1,058,855 | | $ | 19.44 | |
(1)Includes 98,531 and 74,625 shares withheld upon settlement for employee taxes for the six months ended June 30, 2024 and 2023, respectively.
During the six months ended June 30, 2024 and 2023, 303,015 and 231,407 RSU awards vested, respectively. Such awards had a grant date fair value of $5.9 million and $4.9 million, respectively.
The following table summarizes the Company’s performance stock unit activity for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, |
| 2024 | | 2023 |
| Performance Stock Units | Number of Shares | | Weighted-Average Grant Price Per Share | | Number of Shares | | Weighted-Average Grant Price Per Share |
| Non-vested performance stock units as of the beginning of the respective period | 633,034 | | $ | 19.40 | | | 533,676 | | $ | 21.12 | |
| Granted | 234,091 | | 10.82 | | | 108,984 | | 10.16 | |
| Vested | — | | — | | | — | | — | |
| Forfeited | — | | — | | | — | | — | |
| Non-vested performance stock units as of the end of the respective period | 867,125 | | $ | 17.08 | | | 642,660 | | $ | 19.26 | |
During both the six months ended June 30, 2024 and 2023, no PSU awards vested.
The following table shows share-based compensation expense under the 2021 Plan and the related tax benefit for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (In millions) |
| Share-based compensation expense | $ | 4.2 | | | $ | 4.7 | | | $ | 7.8 | | | $ | 7.7 | |
| Related tax benefit (1) | 1.2 | | | 1.3 | | | 2.2 | | | 2.2 | |
(1)Estimated based upon the Company’s statutory rate for each respective period.
As of June 30, 2024 and December 31, 2023, there was $27.2 million and $26.8 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 June 30, 2024, this cost is expected to be recognized over a weighted average remaining period of approximately 1.9 years. As of December 31, 2023, this cost was expected to be recognized over a weighted average remaining period of approximately 2.2 years.
9. Commitments 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.
The following table summarizes the above financial instruments as of the dates indicated:
| | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| (In thousands) |
| Commitments to extend credit | $ | 5,931,039 | | | $ | 6,027,356 | |
| Standby letters of credit | 53,361 | | | 58,632 | |
| Forward commitments to sell loans | 13,702 | | | 9,198 | |
Other Contingencies
Legal Proceedings
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 is not expected to have a material effect on the Company’s Consolidated Financial Statements.
10. Derivative 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 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. The following tables reflect the Company’s derivative positions for interest rate swaps which qualify as cash flow hedges for accounting purposes as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| | | | | Weighted Average Rate | | |
| Notional
Amount | | Weighted Average
Maturity | | Current
Rate Paid | | Receive Fixed
Swap Rate | | Fair Value (1) |
| (In thousands) | | (In Years) | | | | | | (In thousands) |
| Interest rate swaps on loans | $ | 2,400,000 | | | 3.07 | | 5.34 | % | | 3.02 | % | | $ | (231) | |
| Total | $ | 2,400,000 | | | | | | | | | $ | (231) | |
(1)The fair value included a net accrued interest payable balance of $2.5 million as of June 30, 2024. In addition, the fair value includes netting adjustments which represent the amounts recorded to convert derivative assets and liabilities cleared through the Chicago Mercantile Exchange, or CME, from a gross basis to a net basis in accordance with applicable accounting guidance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| | | | | Weighted Average Rate | | |
| Notional
Amount | | Weighted Average
Maturity | | Current
Rate Paid | | Receive Fixed
Swap Rate | | Fair Value (1) |
| (In thousands) | | (In Years) | | | | | | (In thousands) |
| Interest rate swaps on loans | $ | 2,400,000 | | | 3.57 | | 5.35 | % | | 3.02 | % | | $ | (883) | |
| Total | $ | 2,400,000 | | | | | | | | | $ | (883) | |
(1)The fair value included a net accrued interest payable balance of $2.6 million as of December 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.
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 3.2 years.
The Company expects approximately $44.8 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 June 30, 2024. The reclassification is due to anticipated net payments on the swaps based upon the forward curve as of June 30, 2024.
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.
The following tables present the Company’s customer-related derivative positions as of the dates indicated below for those derivatives not designated as hedging:
| | | | | | | | | | | |
| June 30, 2024 |
| Number of Positions | | Total Notional |
| (Dollars in thousands) |
| Interest rate swaps | 346 | | $ | 2,409,950 | |
| Risk participation agreements | 78 | | 314,187 | |
| Foreign exchange contracts: | | | |
| Matched commercial customer book | 328 | | 112,771 | |
| Foreign currency loan | 8 | | 7,970 | |
| | | | | | | | | | | |
| December 31, 2023 |
| Number of Positions | | Total Notional |
| (Dollars in thousands) |
| Interest rate swaps | 356 | | | $ | 2,405,835 | |
| Risk participation agreements | 78 | | | 323,957 | |
| Foreign exchange contracts: | | | |
| Matched commercial customer book | 98 | | | 87,601 | |
| Foreign currency loan | 10 | | | 10,242 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| Balance
Sheet
Location | | Fair Value at June 30,
2024 | | Fair Value at December 31,
2023 | | Balance Sheet
Location | | Fair Value at June 30,
2024 | | Fair Value at December 31,
2023 |
| (In thousands) |
| Derivatives designated as hedging instruments | | | | | | | | | | | |
| Interest rate swaps | Other assets | | $ | 10 | | | $ | 10 | | | Other liabilities | | $ | 241 | | | $ | 893 | |
| Derivatives not designated as hedging instruments | | | | | | | | | | | |
| Customer-related positions: | | | | | | | | | | | |
| Interest rate swaps | Other assets | | $ | 19,240 | | | $ | 19,535 | | | Other liabilities | | $ | 67,944 | | | $ | 61,217 | |
| Risk participation agreements | Other assets | | 5 | | | 151 | | | Other liabilities | | 2 | | | 106 | |
| Foreign currency exchange contracts - matched customer book | Other assets | | 616 | | | 760 | | | Other liabilities | | 626 | | | 672 | |
| Foreign currency exchange contracts - foreign currency loan | Other assets | | 38 | | | — | | | Other liabilities | | 14 | | | 187 | |
| | | $ | 19,899 | | | $ | 20,446 | | | | | $ | 68,586 | | | $ | 62,182 | |
| Total | | | $ | 19,909 | | | $ | 20,456 | | | | | $ | 68,827 | | | $ | 63,075 | |
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:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
June 30, | | Six Months Ended
June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (In thousands) |
| Derivatives designated as hedges: | | | | | | | |
| Loss in OCI on derivatives | $ | (11,996) | | | $ | (56,892) | | | $ | (51,551) | | | $ | (37,146) | |
| Loss reclassified from OCI into interest income (effective portion) | $ | (14,062) | | | $ | (11,928) | | | $ | (28,103) | | | $ | (20,834) | |
| Gain recognized in income on derivatives (ineffective portion and amount excluded from effectiveness test) | | | | | | | |
| Interest income | — | | | — | | | — | | | — | |
| Other income | — | | | — | | | — | | | — | |
| Total | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Derivatives not designated as hedges: | | | | | | | |
| Customer-related positions: | | | | | | | |
| Gain (loss) recognized in interest rate swap income | $ | 373 | | | $ | 390 | | | $ | 508 | | | $ | (140) | |
| Gain (loss) recognized in interest rate swap income for risk participation agreements | — | | | 8 | | | (42) | | | 29 | |
| (Loss) gain recognized in other income for foreign currency exchange contracts: | | | | | | | |
| Matched commercial customer book | (148) | | | 6 | | | (98) | | | 20 | |
| Foreign currency loan | (11) | | | (288) | | | 211 | | | (152) | |
| Net gain (loss) for derivatives not designated as hedges | $ | 214 | | | $ | 116 | | | $ | 579 | | | $ | (243) | |
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 both June 30, 2024 and December 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 $0.4 million. In addition, at June 30, 2024 and December 31, 2023, the Company had posted initial-margin collateral in the form of U.S. Treasury notes amounting to $86.3 million and $85.9 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 June 30, 2024 there were no customer-related interest rate swap derivatives with credit-risk contingent features in a net liability position. At December 31, 2023, there was $1.9 million of 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 June 30, 2024 and December 31, 2023, the Company had posted collateral in the form of cash amounting to $2.2 million and $3.0 million, respectively, 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 June 30, 2024 or December 31, 2023, 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 June 30, 2024 and December 31, 2023, the Company had an outstanding notional balance of residential mortgage loan origination commitments of $19.9 million and $10.5 million, respectively, and forward sale commitments of $13.7 million and $9.2 million, respectively. During the three months ended June 30, 2024 and June 30, 2023, the Company recorded net losses related to the change in fair value of commitments to originate and sell mortgage loans of less than $0.1 million and $0.1 million, respectively. During both the six months ended June 30, 2024 and June 30, 2023, the Company recorded net losses related to the change in fair value of commitments to originate and sell mortgage loans of $0.1 million. The aggregate fair value of the Company’s mortgage banking derivative asset as of June 30, 2024 and December 31, 2023 was less than $0.1 million and $0.1 million, respectively. The aggregate fair value of the Company’s mortgage banking derivative liability as of June 30, 2024 and December 31, 2023 was $0.1 million and less than $0.1 million, respectively. Mortgage banking derivative assets and liabilities are included in other assets and other liabilities, respectively, in 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.
11. Balance 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 June 30, 2024 and December 31, 2023, 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
| Gross
Amounts
Recognized | | Gross
Amounts
Offset in the
Consolidated Balance Sheet | | Net
Amounts
Presented in
the Consolidated Balance Sheet | | Gross Amounts Not Offset
in the Consolidated Balance Sheet | | Net
Amount |
| Description | | | | Financial
Instruments | | Collateral
Pledged/
(Received) | |
| (In thousands) |
| Derivative Assets | | | | | | | | | | | |
| Interest rate swaps | $ | 10 | | | $ | — | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 10 | |
| Customer-related positions: | | | | | | | | | | | |
| Interest rate swaps | 19,240 | | | — | | | 19,240 | | | 2,998 | | | (11,370) | | | 4,872 | |
| Risk participation agreements | 5 | | | — | | | 5 | | | — | | | — | | | 5 | |
| Foreign currency exchange contracts – matched customer book | 616 | | | — | | | 616 | | | — | | | — | | | 616 | |
| Foreign currency exchange contracts – foreign currency loan | 38 | | | — | | | 38 | | | — | | | — | | | 38 | |
| $ | 19,909 | | | $ | — | | | $ | 19,909 | | | $ | 2,998 | | | $ | (11,370) | | | $ | 5,541 | |
| Derivative Liabilities | | | | | | | | | | | |
| Interest rate swaps | $ | 241 | | | $ | — | | | $ | 241 | | | $ | — | | | $ | 241 | | | $ | — | |
| Customer-related positions: | | | | | | | | | | | |
| Interest rate swaps | 67,944 | | | — | | | 67,944 | | | 2,998 | | | — | | | 64,946 | |
| Risk participation agreements | 2 | | | — | | | 2 | | | — | | | — | | | 2 | |
| Foreign currency exchange contracts – matched customer book | 626 | | | — | | | 626 | | | — | | | — | | | 626 | |
| Foreign currency exchange contracts – foreign currency loan | 14 | | | — | | | 14 | | | — | | | — | | | 14 | |
| $ | 68,827 | | | $ | — | | | $ | 68,827 | | | $ | 2,998 | | | $ | 241 | | | $ | 65,588 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2023 |
| Gross
Amounts
Recognized | | Gross
Amounts
Offset in the
Consolidated Balance Sheet | | Net
Amounts
Presented in
the Consolidated Balance Sheet | | Gross Amounts Not Offset
in the Consolidated Balance Sheet | | Net
Amount |
| Description | | | | Financial
Instruments | | Collateral
Pledged/
(Received) | |
| (In thousands) |
| Derivative Assets | | | | | | | | | | | |
| Interest rate swaps | $ | 10 | | | $ | — | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 10 | |
| Customer-related positions: | | | | | | | | | | | |
| Interest rate swaps | 19,535 | | | — | | | 19,535 | | | 4,871 | | | (8,500) | | | 6,164 | |
| Risk participation agreements | 151 | | | — | | | 151 | | | — | | | — | | | 151 | |
| Foreign currency exchange contracts – matched customer book | 760 | | | — | | | 760 | | | — | | | — | | | 760 | |
| $ | 20,456 | | | $ | — | | | $ | 20,456 | | | $ | 4,871 | | | $ | (8,500) | | | $ | 7,085 | |
| Derivative Liabilities | | | | | | | | | | | |
| Interest rate swaps | $ | 893 | | | $ | — | | | $ | 893 | | | $ | — | | | $ | 893 | | | $ | — | |
| Customer-related positions: | | | | | | | | | | | |
| Interest rate swaps | 61,217 | | | — | | | 61,217 | | | 4,871 | | | 1,860 | | | 54,486 | |
| Risk participation agreements | 106 | | | — | | | 106 | | | — | | | — | | | 106 | |
| Foreign currency exchange contracts – matched customer book | 672 | | | — | | | 672 | | | — | | | — | | | 672 | |
| Foreign currency exchange contracts – foreign currency loan | 187 | | | — | | | 187 | | | — | | | — | | | 187 | |
| $ | 63,075 | | | $ | — | | | $ | 63,075 | | | $ | 4,871 | | | $ | 2,753 | | | $ | 55,451 | |
12. Fair Value of Assets and Liabilities
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 judgments 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 judgment, 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 90 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, and state and municipal bonds. 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.
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.
Loans Held for Sale
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.
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 2023 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 was 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 $48.6 million at June 30, 2024 and $48.9 million at December 31, 2023. 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, 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.
Escrow Deposits of Borrowers
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 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 June 30, 2024 and December 31, 2023, 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 the 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.
Foreign Currency Forward Contracts
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
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| Balance as of June 30, 2024 | | Quoted Prices in
Active Markets
for Identical
Assets (Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) |
| Description | | | |
| (In thousands) |
| Assets | | | | | | | |
| Securities available for sale: | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | 2,597,550 | | | $ | — | | | $ | 2,597,550 | | | $ | — | |
| Government-sponsored commercial mortgage-backed securities | 1,090,894 | | | — | | | 1,090,894 | | | — | |
| U.S. Agency bonds | 130,238 | | | — | | | 130,238 | | | — | |
| U.S. Treasury securities | 95,554 | | | 95,554 | | | — | | | — | |
| State and municipal bonds and obligations | 183,606 | | | — | | | 183,606 | | | — | |
| Rabbi trust investments | 94,424 | | | 86,874 | | | 7,550 | | | — | |
| Loans held for sale | 1,308 | | — | | 1,308 | | — |
| Interest rate swap contracts: | | | | | | | |
| Cash flow hedges - interest rate positions | 10 | | | — | | | 10 | | | — | |
| Customer-related positions | 19,240 | | | — | | | 19,240 | | | — | |
| Risk participation agreements | 5 | | | — | | | 5 | | | — | |
| Foreign currency forward contracts: | | | | | | | |
| Matched customer book | 616 | | | — | | | 616 | | | — | |
| Foreign currency loan | 38 | | | — | | | 38 | | | — | |
| Mortgage derivatives | 41 | | | — | | | 41 | | | — | |
| Total | $ | 4,213,524 | | | $ | 182,428 | | | $ | 4,031,096 | | | $ | — | |
| Liabilities | | | | | | | |
| Interest rate swap contracts: | | | | | | | |
| Cash flow hedges - interest rate positions | $ | 241 | | | $ | — | | | $ | 241 | | | $ | — | |
| Customer-related positions | 67,944 | | | — | | | 67,944 | | | — | |
| Risk participation agreements | 2 | | | — | | 2 | | | — |
| Foreign currency forward contracts: | | | | | | | |
| Matched customer book | 626 | | | — | | 626 | | | — |
| Foreign currency loan | 14 | | | — | | 14 | | | — |
| Mortgage derivatives | 85 | | | — | | | 85 | | | — | |
| Total | $ | 68,912 | | | $ | — | | | $ | 68,912 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| Description | Balance as of December 31, 2023 | | Quoted Prices in
Active Markets
for Identical
Assets (Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) |
| (In thousands) |
| Assets | | | | | | | |
| Securities available for sale: | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | 2,780,638 | | | $ | — | | | $ | 2,780,638 | | | $ | — | |
| Government-sponsored commercial mortgage-backed securities | 1,124,376 | | | — | | | 1,124,376 | | | — | |
| U.S. Agency bonds | 216,011 | | | — | | | 216,011 | | | — | |
| U.S. Treasury securities | 95,152 | | | 95,152 | | | — | | | — | |
| State and municipal bonds and obligations | 191,344 | | | — | | | 191,344 | | | — | |
| Rabbi trust investments | 87,435 | | | 81,278 | | | 6,157 | | | — | |
| Loans held for sale | 1,124 | | — | | 1,124 | | — |
| Interest rate swap contracts: | | | | | | | |
| Cash flow hedges - interest rate positions | 10 | | | — | | | 10 | | | — | |
| Customer-related positions | 19,535 | | | — | | | 19,535 | | | — | |
| Risk participation agreements | 151 | | | — | | | 151 | | | — | |
| Foreign currency forward contracts: | | | | | | | |
| Matched customer book | 760 | | | — | | | 760 | | | — | |
| Mortgage derivatives | 69 | | | — | | | 69 | | | — | |
| Total | $ | 4,516,605 | | | $ | 176,430 | | | $ | 4,340,175 | | | $ | — | |
| Liabilities | | | | | | | |
| Interest rate swap contracts: | | | | | | | |
| Cash flow hedges - interest rate positions | $ | 893 | | | $ | — | | | $ | 893 | | | $ | — | |
| Customer-related positions | 61,217 | | | — | | | 61,217 | | | — | |
| Risk participation agreements | 106 | | | — | | | 106 | | | — | |
| Foreign currency forward contracts: | | | | | | | |
| Matched customer book | 672 | | | — | | | 672 | | | — | |
| Foreign currency loan | 187 | | | — | | | 187 | | | — | |
| Mortgage derivatives | 36 | | | — | | | 36 | | | — | |
| Total | $ | 63,111 | | | $ | — | | | $ | 63,111 | | | $ | — | |
There were no transfers to or from Level 1, 2 and 3 during the six months ended June 30, 2024 and twelve months ended December 31, 2023.
The Company held no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2024 or December 31, 2023.
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 and liabilities on a nonrecurring basis in accordance with GAAP. The following tables summarize the fair value of assets and liabilities measured at fair value on a nonrecurring basis, as of June 30, 2024 and December 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| Description | Balance as of June 30, 2024 | | 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 | $ | 21,276 | | | $ | — | | | $ | — | | | $ | 21,276 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements at Reporting Date Using |
| Description | Balance as of December 31, 2023 | | 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 | $ | 27,874 | | | $ | — | | | $ | — | | | $ | 27,874 | |
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.
During the six months ended June 30, 2024, the Company transferred one property, located in Lynn, Massachusetts, that has housed Company offices and which is comprised of an office building and land, to held for sale. As of June 30, 2024, the property was recorded at the lower of cost or market and amounted to $10.7 million. At the time of transfer to held for sale, the carrying value of the property approximated its fair value. Therefore, no write-down was recorded upon transfer.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using |
| Description | Carrying Value as of June 30, 2024 | | Fair Value as of June 30, 2024 | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) |
| (In thousands) |
| Assets | | | | | | | | | |
| Held to maturity securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | 243,919 | | | $ | 214,481 | | | $ | — | | | $ | 214,481 | | | $ | — | |
| Government-sponsored commercial mortgage-backed securities | 192,793 | | | 170,917 | | | — | | | 170,917 | | | — | |
| Loans, net of allowance for loan losses | 13,953,773 | | | 13,245,517 | | | — | | | — | | | 13,245,517 | |
| FHLB stock | 5,879 | | | 5,879 | | | — | | | 5,879 | | | — | |
| Bank-owned life insurance | 166,710 | | | 166,710 | | | — | | | 166,710 | | | — | |
| Liabilities | | | | | | | | | |
| Deposits | $ | 17,537,809 | | | $ | 17,530,331 | | | $ | — | | | $ | 17,530,331 | | | $ | — | |
| FHLB advances | 17,415 | | | 15,085 | | | — | | | 15,085 | | | — | |
| Escrow deposits of borrowers | 20,155 | | | 20,155 | | | — | | | 20,155 | | | — | |
| Interest rate swap collateral funds | 11,370 | | | 11,370 | | | — | | | 11,370 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using |
| Description | Carrying Value as of December 31, 2023 | | Fair Value as of December 31, 2023 | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs (Level 2) | | Significant
Unobservable
Inputs (Level 3) |
| (In thousands) |
| Assets | | | | | | | | | |
| Held to maturity securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | $ | 254,752 | | | $ | 230,319 | | | $ | — | | | $ | 230,319 | | | $ | — | |
| Government-sponsored commercial mortgage-backed securities | 194,969 | | | 174,503 | | | — | | | 174,503 | | | — | |
| Loans, net of allowance for loan losses | 13,799,367 | | | 13,145,455 | | | — | | | — | | | 13,145,455 | |
| FHLB stock | 5,904 | | | 5,904 | | | — | | | 5,904 | | | — | |
| Bank-owned life insurance | 164,702 | | | 164,702 | | | — | | | 164,702 | | | — | |
| Liabilities | | | | | | | | | |
| Deposits | $ | 17,596,217 | | | $ | 17,593,214 | | | $ | — | | | $ | 17,593,214 | | | $ | — | |
| FHLB advances | 17,738 | | | 15,366 | | | — | | | 15,366 | | | — | |
| Escrow deposits of borrowers | 21,978 | | | 21,978 | | | — | | | 21,978 | | | — | |
| Interest rate swap collateral funds | 8,500 | | | 8,500 | | | — | | | 8,500 | | | — | |
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.
13. Revenue from Contracts with Customers
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:
1.Identify the contract(s) with the customers
2.Identify the performance obligations
3.Determine the transaction price
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.
The information presented within this Note excludes discontinued operations with regard to information pertaining to the three and six months ended June 30, 2023. Refer to Note 15, “Discontinued Operations” for further discussion regarding discontinued operations.
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 income/(loss) 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.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (In thousands) |
| Service charges on deposit accounts | $ | 7,930 | | | $ | 7,242 | | | $ | 15,438 | | | $ | 13,714 | |
| Trust and investment advisory fees | 6,711 | | | 6,131 | | | 13,255 | | | 11,901 | |
| Debit card processing fees | 3,522 | | | 3,513 | | | 6,769 | | | 6,683 | |
| Other noninterest income (1) | 10,717 | | | 2,902 | | | 13,843 | | | 5,175 | |
| Total noninterest income in-scope of ASC 606 | 28,880 | | | 19,788 | | | 49,305 | | | 37,473 | |
| Total noninterest (loss) income out-of-scope of ASC 606 | (3,532) | | | 6,416 | | | 3,735 | | | (321,122) | |
| Total noninterest income (loss) | $ | 25,348 | | | $ | 26,204 | | | $ | 53,040 | | | $ | (283,649) | |
(1)Includes income of $7.8 million, recognized during the three months ended June 30, 2024, representing a penalty for the early withdrawal of an omnibus deposit contract. No such income was recognized for the three and six months ended June 30, 2023.
Additional information related to each of the revenue streams is further noted below.
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 $1.6 million as of both June 30, 2024 and December 31, 2023, and were included in other assets in the Company’s Consolidated Balance Sheets.
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 $0.4 million as of both June 30, 2024 and December 31, 2023, and were included in other assets in the Company’s Consolidated Balance Sheets.
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 in-scope of ASC 606 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.
14. Other Comprehensive Income
The following tables present a reconciliation of the changes in the components of other comprehensive income (loss) for the dates indicated including the amount of income tax benefit (expense) allocated to each component of other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2024 | | Six Months Ended June 30, 2024 |
| Pre Tax
Amount | | Tax
Benefit (Expense) | | After Tax
Amount | | Pre Tax
Amount | | Tax
Benefit (Expense) | | After Tax
Amount |
| (In thousands) |
| Unrealized losses on securities available for sale: | | | | | | | | | | | |
Change in fair value of securities available for sale | $ | (11,303) | | | $ | 5,446 | | | $ | (5,857) | | | $ | (48,388) | | | $ | 14,972 | | | $ | (33,416) | |
| Less: reclassification adjustment for losses included in net income | (7,557) | | | 2,094 | | | (5,463) | | | (7,557) | | | 2,094 | | | (5,463) | |
Net change in fair value of securities available for sale | (3,746) | | | 3,352 | | | (394) | | | (40,831) | | | 12,878 | | | (27,953) | |
| Unrealized losses on cash flow hedges: | | | | | | | | | | | |
Change in fair value of cash flow hedges | (11,996) | | | 3,323 | | | (8,673) | | | (51,551) | | | 14,279 | | | (37,272) | |
| Less: net cash flow hedge losses reclassified into interest income | (14,062) | | | 3,895 | | | (10,167) | | | (28,103) | | | 7,784 | | | (20,319) | |
Net change in fair value of cash flow hedges | 2,066 | | | (572) | | | 1,494 | | | (23,448) | | | 6,495 | | | (16,953) | |
Defined benefit pension plans: | | | | | | | | | | | |
| Change in actuarial net loss | — | | | — | | | — | | | — | | | — | | | — | |
| Less: amortization of actuarial net loss | (1,775) | | | 492 | | | (1,283) | | | (3,550) | | | 984 | | | (2,566) | |
| Less: accretion of prior service credit | 2,489 | | | (690) | | | 1,799 | | | 4,977 | | | (1,379) | | | 3,598 | |
Net change in other comprehensive income for defined benefit postretirement plans | (714) | | | 198 | | | (516) | | | (1,427) | | | 395 | | | (1,032) | |
| Total other comprehensive income (loss) | $ | (2,394) | | | $ | 2,978 | | | $ | 584 | | | $ | (65,706) | | | $ | 19,768 | | | $ | (45,938) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2023 | | Six Months Ended June 30, 2023 |
| Pre Tax
Amount | | Tax
Benefit (Expense) | | After Tax
Amount | | Pre Tax
Amount | | Tax
Benefit (Expense) | | After Tax
Amount |
| (In thousands) |
| Unrealized losses on securities available for sale: | | | | | | | | | | | |
Change in fair value of securities available for sale | $ | (78,810) | | | $ | 20,324 | | | $ | (58,486) | | | $ | (36,509) | | | $ | 11,514 | | | $ | (24,995) | |
| Less: reclassification adjustment for losses included in net income | — | | | — | | | — | | | (333,170) | | | 74,630 | | | (258,540) | |
Net change in fair value of securities available for sale | (78,810) | | | 20,324 | | | (58,486) | | | 296,661 | | | (63,116) | | | 233,545 | |
| Unrealized losses on cash flow hedges: | | | | | | | | | | | |
Change in fair value of cash flow hedges | (56,892) | | | 16,060 | | | (40,832) | | | (37,146) | | | 11,602 | | | (25,544) | |
| Less: net cash flow hedge losses reclassified into interest income | (11,929) | | | 3,368 | | | (8,561) | | | (20,834) | | | 5,883 | | | (14,951) | |
Net change in fair value of cash flow hedges | (44,963) | | | 12,692 | | | (32,271) | | | (16,312) | | | 5,719 | | | (10,593) | |
Defined benefit pension plans: | | | | | | | | | | | |
| Change in actuarial net loss | — | | | — | | | — | | | — | | | — | | | — | |
| Less: amortization of actuarial net loss | (2,468) | | | 697 | | | (1,771) | | | (4,936) | | | 1,394 | | | (3,542) | |
| Less: accretion of prior service credit | 2,970 | | | (838) | | | 2,132 | | | 5,940 | | | (1,656) | | | 4,284 | |
Net change in other comprehensive income for defined benefit postretirement plans | (502) | | | 141 | | | (361) | | | (1,004) | | | 262 | | | (742) | |
| Total other comprehensive (loss) income | $ | (124,275) | | | $ | 33,157 | | | $ | (91,118) | | | $ | 279,345 | | | $ | (57,135) | | | $ | 222,210 | |
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 | | Unrealized
Gains and
(Losses) on
Cash Flow
Hedges | | Defined Benefit
Pension Plans | | Total |
| (In thousands) |
| Beginning Balance: January 1, 2024 | $ | (584,243) | | | $ | (31,571) | | | $ | 7,462 | | | $ | (608,352) | |
| Other comprehensive loss before reclassifications | (33,416) | | | (37,272) | | | — | | | (70,688) | |
| Less: Amounts reclassified from accumulated other comprehensive loss | (5,463) | | | (20,319) | | | 1,032 | | | (24,750) | |
| Net current-period other comprehensive loss | (27,953) | | | (16,953) | | | (1,032) | | | (45,938) | |
| Ending Balance: June 30, 2024 | $ | (612,196) | | | $ | (48,524) | | | $ | 6,430 | | | $ | (654,290) | |
| Beginning Balance: January 1, 2023 | $ | (880,156) | | | $ | (50,159) | | | $ | 7,123 | | | $ | (923,192) | |
| Other comprehensive loss before reclassifications | (24,995) | | | (25,544) | | | — | | | (50,539) | |
| Less: Amounts reclassified from accumulated other comprehensive loss | (258,540) | | | (14,951) | | | 742 | | | (272,749) | |
| Net current-period other comprehensive income (loss) | 233,545 | | | (10,593) | | | (742) | | | 222,210 | |
| Ending Balance: June 30, 2023 | $ | (646,611) | | | $ | (60,752) | | | $ | 6,381 | | | $ | (700,982) | |
15. Discontinued Operations
On September 19, 2023, the Company announced that it had entered into an asset purchase agreement (“the agreement”) with Arthur J. Gallagher & Co. (“Gallagher”) to sell substantially all of the assets of its insurance agency business for a gross purchase price of $515.0 million. The agreement also provided for the assumption of certain liabilities of the
insurance agency business by Gallagher. Management made the decision to sell certain assets of its insurance agency business to recognize the valuation premium of the business, while allowing the Company to focus on growth and strategic initiatives of its core banking business.
In September 2023, following the approval of the sale by the Company’s board of directors, the Company reclassified substantially all of the assets and certain liabilities of its insurance agency business as held for sale in connection with a planned disposition of the business. A business is classified as held for sale when management, having the authority to approve the action, commits to a plan to sell the business, the sale is probable to occur during the next 12 months at a price that is reasonable in relation to its current fair value, and certain other criteria are met. In accordance with ASC 205, Presentation of Financial Statements, the Company classifies operations as discontinued when they meet all the criteria to be classified as held for sale and when the sale represents a strategic shift that will have a major impact on the Company’s financial condition and results of operations. Accordingly, the Consolidated Statements of Income and Consolidated Statements of Cash flows were adjusted on a retrospective basis for prior periods.
On October 31, 2023, the Company completed the sale of its insurance agency business for net cash consideration at closing of $498.1 million, subject to customary post-closing working capital adjustments. The net cash proceeds at closing included the gross purchase price pursuant to the agreement of $515.0 million and an estimated working capital adjustment of $4.2 million, which were reduced by transaction expenses of $17.0 million and the settlement of certain obligations of the Company primarily related to employee post-retirement liabilities that originated prior to closing of $4.1 million. In addition, the Company transferred $7.4 million in fiduciary cash to Gallagher upon closing which is included in the determination of the gain on sale as of December 31, 2023 but was not included in the amount of net cash consideration of $498.1 million. In connection with the sale, the Company recognized a gain on sale of $408.6 million, which was subject to certain post-closing adjustments during the 120 day post-closing settlement period which ended on February 28, 2024. The amount of the post-closing settlement was not material. The Company recognized indirect noninterest expenses associated with the sale of approximately $22.3 million.
The following presents operating results of the discontinued insurance agency business for the three and six months ended June 30, 2023:
| | | | | | | | | | | |
| Three Months Ended June 30, 2023 | | Six Months Ended June 30, 2023 |
| (In thousands) |
| Noninterest income: | | | |
| Insurance commissions | $ | 27,609 | | | $ | 59,280 | |
| Other noninterest income | 18 | | | 38 | |
| Total noninterest income | 27,627 | | | 59,318 | |
| Noninterest expense: | | | |
| Salaries and employee benefits | 17,041 | | | 33,336 | |
| Office occupancy and equipment | 735 | | | 1,524 | |
| Data processing | 1,060 | | | 2,203 | |
| Professional services | 1,031 | | | 1,324 | |
| Marketing expenses | 25 | | | 99 | |
| Amortization of intangible assets | 668 | | | 1,337 | |
| Other | 1,154 | | | 2,462 | |
| Total noninterest expense | 21,714 | | | 42,285 | |
| Income from discontinued operations before income tax expense | 5,913 | | | 17,033 | |
| Income tax expense | 1,675 | | | 4,810 | |
| Income from discontinued operations, net of taxes (1) | $ | 4,238 | | | $ | 12,223 | |
(1)Represents net income from discontinued operations that is presented in the Consolidated Statements of Income.
Certain income and expense amounts were excluded from discontinued operations as they relate to assets and liabilities which were not assumed by Gallagher. The following is a summary of such items and the corresponding income tax effect for the three and six months ended June 30, 2023:
| | | | | | | | | | | |
| Three Months Ended June 30, 2023 | | Six Months Ended June 30, 2023 |
| (In thousands) |
| Noninterest income: | | | |
| Income from investments held in rabbi trusts | $ | 241 | | | $ | 580 | |
| Other noninterest income (1) | 14 | | | 28 | |
| Total noninterest income | 255 | | | 608 | |
| Noninterest expense: | | | |
| Salaries and employee benefits (2) | 245 | | | 580 | |
| Office occupancy and equipment (3) | 117 | | | 241 | |
| Other (4) | 439 | | | 994 | |
| Total noninterest expense | 801 | | | 1,815 | |
| Loss before income tax expense | (546) | | | (1,207) | |
| Income tax benefit | (153) | | | (339) | |
| Net loss | $ | (393) | | | $ | (868) | |
(1)Includes income on Company-owned life insurance policies which were not disposed of and were transferred to the Bank upon dissolution of Eastern Insurance Group.
(2)Includes expenses associated with certain employee post-retirement benefit plan expenses.
(3)Includes depreciation expense associated with buildings and related improvements and ROU asset amortization related to one lease which were not disposed of and were transferred to the Bank as of January 1, 2024.
(4)Includes intercompany expenses and other credits associated with the Defined Benefit Plan and the BEP. Components of net periodic benefit cost associated with the Defined Benefit Plan and the BEP included in other noninterest expense above were a net credit for the period presented.
Continuing Involvement
Pursuant to the agreement, the Company agreed to provide certain transitional services to Gallagher for up to six months following the closing of the sale. Such services included certain information and technology support and human resources support. The Company was compensated for such services on a monthly basis and the total compensation over the six month period plus reimbursement of amounts paid by the Company in connection with its performance of the transitional services was not material.
16. Subsequent Events
Acquisition of Cambridge Bancorp
Effective July 12, 2024, the Company completed its previously announced merger with Cambridge. In accordance with the merger agreement, each share of Cambridge common stock was exchanged for 4.956 shares of Company common stock. The transaction was intended to qualify as a tax-free reorganization for federal income tax purposes and provided Cambridge shareholders with a tax-free exchange of their shares of Cambridge common stock in exchange for Company common stock as the consideration they received in the merger. The Company issued 38.9 million shares of its common stock in the merger. Based upon the closing price of Company common stock on July 12, 2024 of $14.87 per share, the transaction is valued at approximately $580.6 million which includes cash paid in-lieu of fractional shares and recognition of RSU and PSU service accruals for service accrued by Cambridge personnel prior to the merger.
Cambridge, a Massachusetts corporation, was a federally registered bank holding company headquartered in Cambridge, Massachusetts. Cambridge Trust Company, a Massachusetts-chartered trust company formed in 1890, was a wholly-owned subsidiary of Cambridge that operated through a network of 19 full-service banking offices in eastern Massachusetts and New Hampshire with $5.3 billion in total assets and $3.9 billion in deposits as of July 12, 2024. Cambridge’s core services also included wealth management. Through its wealth management group, which has offices in Massachusetts and New Hampshire, it offered comprehensive investment management, as well as trust administration, estate
settlement, and financial planning services. Cambridge had assets under management and administration of approximately $5.0 billion as of July 12, 2024.
The Company has not yet completed the purchase accounting due to the timing of the merger. Accordingly, the fair value of the assets and liabilities acquired, including goodwill and other intangible assets, is not yet available.
Following the completion of the merger, the Company sold substantially all of the investment securities acquired through its merger with Cambridge. The amount of securities sold amounted to approximately $0.9 billion and no gain or loss was recognized upon sale as such securities had been recorded by the Company based upon the quoted sale prices in determination of the purchase accounting fair value adjustment.
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 June 30, 2024, and our results of operations for the three and six months ended June 30, 2024 and 2023. This section should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto of the Company appearing in Part I, Item 1 of this Quarterly Report on Form 10-Q and the Company’s 2023 Form 10-K.
Introductory Note
On July 12, 2024, the Company completed its previously announced stock-for stock merger with Cambridge Bancorp (“Cambridge”). Neither the unaudited consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q nor the sections of this Quarterly Report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk” included in Items 2 and 3 of Part I, respectively, of this Quarterly Report reflect Cambridge’s financial condition at June 30, 2024 or Cambridge’s operating results or cash flows for the three and six months ended June 30, 2024 and 2023. Likewise, neither the shares of Company common stock issued in the merger nor any purchase accounting adjustment that the Company will make in connection with merger are reflected in the Company’s financial condition as of June 30, 2024 or the Company’s operating results or cash flows for the three and six months ended June 30, 2024 and 2023. For additional information regarding the Company’s merger with Cambridge, refer to “Outlook and Trends—Cambridge Bancorp Acquisition,” below, and Note 16, “Subsequent Events” to the Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.
Forward-Looking Statements
When we use the terms “we,” “us,” “our,” and the “Company,” we mean Eastern Bankshares, Inc., a Massachusetts corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.
Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among others, the following factors:
•changes in regional, national or international macroeconomic conditions, including changes in inflation, recessionary pressures or interest rates in the United States;
•risks related to the implementation of acquisitions, dispositions, and restructurings;
•risks related to the integration of Cambridge Bancorp and Cambridge Trust Company, including that revenue and expense synergies or other expected benefits may not materialize or in the time frame originally anticipated or may be more costly to achieve than anticipated and that the combined businesses may not perform as expected;
•the possibility that future credit losses, loan defaults and charge-off rates are higher than expected due to changes in economic assumptions or adverse economic developments;
•general business and economic conditions on a national basis and in the local markets in which we operate, including those impacting credit quality;
•turbulence in the capital and debt markets and within the banking industry;
•decreases in the value of securities and other assets;
•decreases in deposit levels necessitating increased borrowing to fund loans, investments and other needs;
•competitive pressures from other financial institutions;
•operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics, including COVID-19;
•changes in regulation, legislation, accounting standards and practices, and monetary policy;
•the risk that goodwill and intangibles recorded in our financial statements will become impaired;
•the risk that deferred tax assets will not be realized in full;
•the risk that we may not be successful in the implementation of our business strategy;
•changes in assumptions used in making such forward-looking statements; and
•other risks and uncertainties detailed in this Quarterly Report on Form 10-Q and in Part I, Item 1A of our 2023 Form 10-K and as may be further updated in our filings with the SEC from time to time.
Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could differ from these estimates. Our significant accounting policies are discussed in detail in our 2023 Form 10-K, as updated by the notes to our Unaudited Interim Condensed Consolidated Financial Statements accompanying this Quarterly Report on Form 10-Q.
In September 2023, following the approval of the sale of our insurance agency business by our board of directors, we reclassified our insurance agency business as held for sale in connection with a planned disposition of the business. Accordingly, the Consolidated Statements of Income for the three and six months ended June 30, 2023 and Consolidated Statements of Cash flows for the six months ended June 30, 2023 present discontinued operations. For further discussion, refer to Note 15, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
There have been no other material changes in critical accounting policies during the three and six months ended June 30, 2024.
Overview
We are a bank holding company, and our principal subsidiary, Eastern Bank, is a Massachusetts-chartered bank that has served the banking needs of our customers since 1818. Our business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services primarily to retail, commercial and small business customers. We had total assets of $21.0 billion and $21.1 billion at June 30, 2024 and December 31, 2023, respectively. We are subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board and the Consumer Financial Protection Bureau. Our business consists of a full range of banking, lending (commercial, residential and consumer), savings and small business offerings, including our wealth management and trust operations that we conduct through our Eastern Wealth Management division.
In recent years, we managed our business under two business segments: our banking business and our insurance agency business. On October 31, 2023, we sold substantially all of the assets and transferred certain liabilities of our insurance agency business. In the third quarter of 2023, following management’s decision to sell our insurance agency business, we reclassified the related assets and liabilities to assets and liabilities of discontinued operations, respectively, on our Consolidated Balance Sheets. Accordingly, the results of discontinued operations were reclassified to “net income from discontinued operations” on our Consolidated Statements of Income. For additional discussion of discontinued operations, refer to Note 15,
“Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. The following discussion excludes amounts reported as discontinued operations.
Net income from continuing operations for the three and six months ended June 30, 2024 computed in accordance with GAAP was $26.3 million and $65.0 million, respectively, as compared to net income and net loss from continuing operations of $44.4 million and $157.7 million for the three and six months ended June 30, 2023, respectively, representing a decrease of 40.7% and an increase of 141.2%, respectively. The decrease in net income from continuing operations for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily due to lower net interest income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 and higher noninterest expense for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Refer to the later sections titled “Results of Operations” within this Item 2 for additional discussion. The increase in net income from continuing operations for the six months ended June 30, 2024 from a net loss from continuing operations for the six months ended June 30, 2023 was primarily due to the sale of available for sale securities at a loss in connection with our balance sheet repositioning completed in March 2023 which resulted in a net loss for the six months ended June 30, 2023. Refer to the later section titled “Results of Operations” within this Item 2 for additional discussion.
Net income from continuing operations for the three and six months ended June 30, 2024 and net income and net loss from continuing operations for the three and six months ended June 30, 2023, respectively, included items that our management considers non-core, which management excludes for purposes of assessing our operating net income, a non-GAAP financial measure. Operating net income for the three and six months ended June 30, 2024 was $36.5 million and $74.6 million, respectively, compared to operating net income for the three and six months ended June 30, 2023 of $41.1 million and $94.2 million, respectively, representing decreases of 11.1% and 20.8%, respectively. These decreases were primarily due to lower net interest income and higher noninterest expense on an operating basis for both the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023. See “Non-GAAP Financial Measures” and “Results of Operations” within this Item 2 for a reconciliation of operating net income to net income on a GAAP basis and further discussion of noninterest income and noninterest expense.
Banking Business
Our banking business offers a range of commercial, retail, wealth management and banking service, and consists primarily of attracting deposits from the general public, including municipalities, and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. Our financial condition and results of operations depend primarily on (i) attracting and retaining relatively low cost, stable deposits, (ii) using those deposits to originate and acquire loans and earn net interest income and (iii) operating expenses incurred.
Lending Activities
We use funds obtained from deposits, as well as funds obtained from the FHLBB advances, primarily to originate loans and to invest in securities. Our lending focuses on the following categories of loans:
Commercial Lending
•Commercial and industrial: Loans in this category consist of revolving and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As of June 30, 2024 and December 31, 2023, we had total commercial and industrial loans of $3.1 billion and $3.0 billion, respectively, representing 21.9% and 21.8%, respectively, of our total loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Our primary focus for commercial and industrial loans is middle-market companies located in the markets we serve. In addition, we participate in the syndicated loan market and the SNC Program. As of June 30, 2024 and December 31, 2023, commercial and industrial loans in our SNC Program portfolio totaled $653.5 million and $606.2 million, respectively, or 21.2% and 20.1%, respectively, of our commercial and industrial portfolio, and 47.6% and 45.1%, respectively, of our commercial and industrial SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial and industrial portfolio also includes our Asset Based Lending Portfolio (“ABL Portfolio”) and industrial revenue bonds (“IRBs”), the balances of which are detailed below:
◦As of June 30, 2024 and December 31, 2023, our ABL Portfolio totaled $195.2 million and $203.1 million, respectively, or 6.3% and 6.7%, respectively, of our commercial and industrial portfolio.
◦As of June 30, 2024 and December 31, 2023, our commercial and industrial IRB portfolio, which is comprised of municipal bonds issued to finance major capital projects, totaled $930.3 million and
$934.5 million, respectively, or 30.2% and 30.8%, respectively, of our commercial and industrial portfolio.
•Commercial real estate: Loans in this category include mortgage loans and lines of credit on commercial real estate, both investment and owner occupied. Property types financed include office, industrial, multi-family, affordable housing, retail, hotel, and other type properties. As of June 30, 2024 and December 31, 2023, we had total commercial real estate loans of $5.4 billion and $5.5 billion, representing 38.6% and 39.1%, respectively, of our total loans as of each period end. As of June 30, 2024 and December 31, 2023, owner occupied loans totaled $0.9 billion and $1.0 billion, respectively, representing 17.2% and 18.2%, respectively, of our commercial real estate loans. Collateral values are established by independent third-party appraisals and evaluations. The primary repayment sources include operating income generated by the real estate, permanent debt refinancing and/or the sale of the real estate. Our commercial real estate loan portfolio also includes loans included in our SNC Program portfolio described above. As of June 30, 2024 and December 31, 2023, commercial real estate loans in our SNC Program portfolio totaled $92.0 million and $86.3 million, respectively, or 1.7% and 1.6%, respectively, of our commercial real estate loan portfolio. As of June 30, 2024 and December 31, 2023, 93.5% and 100.0%, respectively, of our commercial real estate SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial real estate loan portfolio also included IRB loans of $598.3 million and $591.0 million as of June 30, 2024 and December 31, 2023, respectively, representing 11.0% and 10.8%, respectively, of our commercial real estate portfolio.
•Commercial construction: Loans in this category include construction project financing and are comprised of commercial real estate, business banking and residential loans for the purpose of constructing and developing real estate. As of June 30, 2024 and December 31, 2023, we had total commercial construction loans of $447.2 million and $387.0 million, respectively, representing 3.2% and 2.8%, respectively, of our total loans. Our commercial construction loan portfolio also includes loans included in our SNC Program portfolio described above. As of June 30, 2024 and December 31, 2023, commercial construction loans in our SNC Program portfolio totaled $37.6 million and $10.2 million, respectively, or 8.4% and 2.6% respectively, of our commercial construction loan portfolio. As of both June 30, 2024 and December 31, 2023, 100.0% of our commercial construction SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial construction loan portfolio also included IRB loans of $101.1 million and $63.8 million as of June 30, 2024 and December 31, 2023, respectively, representing 22.6% and 16.5% respectively, of our commercial construction portfolio.
•Business banking: Loans in this category are comprised of loans to small businesses with exposures of under $1.0 million and small investment real estate projects with exposures of under $3.0 million. These loans are separate and distinct from our commercial and industrial and commercial real estate portfolios described above due to the size of the loans. As of both June 30, 2024 and December 31, 2023, we had total business banking loans of $1.1 billion, representing 7.9% and 7.8% of our total loans for each period end, respectively. In this category, commercial and industrial loans and commercial real estate loans totaled $204.8 million and $903.4 million, respectively, as of June 30, 2024, and $186.9 million and $898.9 million, respectively, as of December 31, 2023.
Business banking originations include traditionally underwritten loans as well as partially automated scored loans. Our proprietary decision matrix, which includes a number of quantitative factors including, but not limited to, a guarantor’s credit score, industry risk, and time in business, is used to determine whether to make business banking loans. We also engage in SBA lending. SBA guarantees reduce our risk of loss when default occurs and are considered a credit enhancement to the loan structure.
Residential Lending
•Residential real estate: Loans in this category consist of mortgage loans on residential real estate. As of both June 30, 2024 and December 31, 2023, we had total residential real estate loans of $2.6 billion, representing 18.2% and 18.4%, respectively, of our total loans. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit repayment history, financial resources including cash reserves and the value of the collateral. We maintain policy standards for minimum credit scores and cash reserves and maximum loan-to-value consistent with a “prime” portfolio. Collateral consists of mortgage liens on residential dwellings. We do not originate or purchase sub-prime or other high-risk loans. Residential real estate loans are originated either for sale to investors or to retain in our loan portfolio. Decisions about whether to sell or retain residential real estate loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and our capital
needs. During the three and six months ended June 30, 2024, residential real estate mortgage loan originations were $89.3 million and $127.6 million, respectively, of which $14.8 million and $34.7 million, respectively, were sold on the secondary markets. Comparatively, during the three and six months ended June 30, 2023, residential real estate mortgage loan originations were $80.5 million and $137.7 million, respectively, of which $12.8 million and $21.8 million, respectively, were sold on the secondary markets.
Consumer Lending
•Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of June 30, 2024 and December 31, 2023, we had total consumer home equity loans of $1.3 billion and $1.2 billion, respectively, representing 8.9% and 8.7%, respectively, of our total loans. Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Full principal repayment is required at the end of the ten-year draw period. Home equity lines of credit can be converted to term loans that are fully amortized. Underwriting considerations are materially consistent with those utilized in the residential real estate category. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
•Other consumer: Loans in this category consist of unsecured personal lines of credit, overdraft protection, automobile and aircraft loans, home improvement loans and other personal loans. As of June 30, 2024 and December 31, 2023, we had total other consumer loans of $248.7 million and $235.5 million, respectively, representing 1.8% and 1.7%, respectively, of our total loans. Our policy and underwriting in this category include the following factors, among others: income sources and reliability, credit histories, term of repayment and collateral value, as applicable.
Other Products and Services
In addition to our lending activities, which are the core part of our banking business, we offer other banking products and services primarily related to (i) other commercial banking products, (ii) other consumer deposit products and (iii) wealth management services.
Other Commercial Banking Products
•We offer a variety of deposit, treasury management, electronic banking, interest rate protection and foreign exchange products to our customers. In addition, we offer cash management services to our corporate and municipal clients. Deposit products include checking products, both interest-bearing and noninterest-bearing, as well as money market deposits, savings deposits and certificates of deposits. Our treasury management products include a variety of cash management and payment products. Our interest rate protection and foreign exchange products include interest rate swaps and currency related transactions.
Other Consumer Deposit Products
•We offer a wide variety of deposit products and services to our consumer customers. We service these customers through our 97 branches located in eastern Massachusetts and New Hampshire, through our call center in our facility in Lynn, MA and through our online and mobile banking applications.
Wealth Management Services
•Through our Eastern Wealth Management division, we provide a wide range of trust services, including (i) managing customer investments, (ii) serving as custodian for customer assets, and (iii) providing other fiduciary services, including serving as the trustee and personal representative of estates. As of June 30, 2024 and December 31, 2023, we held $3.5 billion and $3.3 billion, respectively, of assets in a fiduciary, custodial or agency capacity for customers, which are not our assets and therefore not included on the Consolidated Balance Sheets included in this Quarterly Report on Form 10-Q. For the three and six months ended June 30, 2024, we had noninterest income of $6.7 million and $13.3 million, respectively, from providing these services compared to $6.1 million and $11.9 million for the three and six months ended June 30, 2023, respectively.
Outlook and Trends
Cambridge Bancorp Acquisition
On July 12, 2024, we consummated our previously announced merger with Cambridge Bancorp (“Cambridge”) and Cambridge Trust Company (“Cambridge Trust”). In accordance with the terms of the definitive merger agreement, through which we agreed to acquire Cambridge through a merger with the Company as the surviving entity, each share of Cambridge common stock was exchanged for 4.956 shares of our common stock. The transaction was intended to qualify as a tax-free reorganization for federal income tax purposes and provided Cambridge shareholders with a tax-free exchange of their shares of Cambridge common stock in exchange for our common stock as the consideration they received in the merger. We issued 38.9 million shares of our common stock in the exchange which resulted in a transaction value of approximately $580.6 million based upon the closing price of our common stock on July 12, 2024 of $14.87 per share.
Cambridge, a Massachusetts corporation, was a federally registered bank holding company headquartered in Cambridge, Massachusetts. Cambridge Trust, a Massachusetts-chartered trust company formed in 1890, was a wholly-owned subsidiary of Cambridge that operated through a network of 19 full-service banking offices in eastern Massachusetts and New Hampshire with $5.3 billion in total assets and $3.9 billion in deposits as of July 12, 2024. Cambridge’s core services also included wealth management. Through its wealth management group, which had offices in Massachusetts and New Hampshire, it offered comprehensive investment management, as well as trust administration, estate settlement, and financial planning services. Cambridge had assets under management and administration of approximately $5.0 billion as of July 12, 2024.
During the three and six months ended June 30, 2024, we incurred and recorded merger and acquisition costs related to our acquisition of Cambridge of $3.7 million and $5.5 million, respectively. The following table presents Cambridge-related merger and acquisition costs by financial statement line item on the Consolidated Statements of Income for the three and six months ended June 30, 2024:
| | | | | | | | | | | |
| For the Three Months Ended June 30, 2024 | | For the Six Months Ended June 30, 2024 |
| (In thousands) |
| Salaries and employee benefits | $ | 383 | | | $ | 386 | |
| Office occupancy and equipment | 11 | | | 17 | |
| Data processing | 2,249 | | | 3,114 | |
| Professional services | 944 | | | 1,731 | |
| Other | 97 | | | 252 | |
| Total | $ | 3,684 | | | $ | 5,500 | |
No merger and acquisition costs were incurred related to our acquisition of Cambridge during the six months ended June 30, 2023.
Interest Rates
Beginning in March 2022, the Federal Open Market Committee (“FOMC”) voted to increase the federal funds rate multiple times from a range of 0.00% to 0.25% to a range of 5.25% to 5.50% on July 26, 2023, when the FOMC stated that it will continue to assess additional information and its implications for monetary policy. At its most recent meeting on July 31, 2024, the FOMC decided to maintain the target range for the federal funds rate at the range set at its July 26, 2023 meeting. The FOMC indicated, in consideration of adjustments to the target range for the federal funds rate, it will carefully assess incoming data, the evolving outlook, and the balance of risks. Further, it indicated that it does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward its long-term target of 2%.
Inevitably, not all of our interest rate-sensitive assets and liabilities will re-price simultaneously and in equal volume in response to changes in the federal funds rate, and therefore the potential for interest rate exposure exists. Management believes that several factors will affect the actual impact of interest rate changes on our balance sheet and operating results, including, but not limited to, actual changes in interest rates or expectations of future changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve. We attempt to manage interest rate risk by identifying, quantifying, and, where appropriate, hedging our exposure. Approximately 36% of the outstanding principal balance of our loans, gross of outstanding interest rate swaps as described further below, as of June 30, 2024 was indexed to a market rate that is expected to reprice with similar magnitude and direction as the federal funds rate. A portion of these loans have been hedged using interest rate swaps to convert the floating rate interest receipts to a fixed rate. The notional amount of floating rate loans swapped totaled $2.4 billion on June 30, 2024, representing approximately 17.0% of the outstanding principal balance of our loans at that date. For more detail regarding such hedging financial instruments, refer to Note 10, “Derivative Financial Instruments” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. Refer to the section titled “Management of Market Risk” within this Item 2 for additional discussion including the estimated change to our net interest income under interest rate
risk measurement methodologies that use a variety of hypothetical scenarios assuming immediate and parallel changes in interest rates that may not reflect the manner in which actual yields and costs respond to changes in market interest rates.
Non-GAAP Financial Measures
We present certain non-GAAP financial measures, which management uses to evaluate our performance, and which exclude the effects of certain transactions, non-cash items and GAAP adjustments that we believe are unrelated to our core business and are therefore not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility for investors into our core business as well as underlying trends that may, to some extent, be obscured by inclusion of such items in the corresponding GAAP financial measures. Except as otherwise indicated, the information presented for the three and six months ended June 30, 2023 within this section excludes discontinued operations. Refer to Note 15, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for further discussion regarding discontinued operations.
There are items in our financial statements that impact our results but which we believe are unrelated to our core business. Accordingly, we present operating net income, noninterest income on an operating basis, noninterest expense on an operating basis, total operating revenue, operating earnings per share, operating net income to average tangible shareholders’ equity, tangible book value per share, and the operating efficiency ratio, each of which excludes the impact of such items because we believe such exclusion can provide greater visibility into our core business and underlying trends. Such items that we do not consider to be core to our business include (i) income and expenses from investments held in rabbi trusts, (ii) gains and losses on sales of securities available for sale, net, (iii) gains and losses on the sale of other assets, (iv) rabbi trust employee benefits expense, (v) impairment charges on tax credit investments and associated tax credit benefits, (vi) OREO gains and losses, (vii) merger and acquisition expenses, and (viii) certain discrete tax items. There were no expenses indirectly associated with OREO gains or losses, or impairment charges on tax credit investments and associated tax credit benefits during the periods presented in this Quarterly Report on Form 10-Q.
We also present tangible shareholders’ equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, average tangible shareholders’ equity, the ratios of net income (loss) from continuing operations and operating net income to average tangible shareholders’ equity and tangible book value per share, each of which excludes the impact of goodwill and other intangible assets, as we believe these financial measures provide investors with the ability to further assess our performance, identify trends in our core business and provide a comparison of our capital adequacy to other companies. We have included the tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends.
Our non-GAAP financial measures should not be considered as an alternative or substitute to GAAP net income (loss), or as an indication of our cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. An item which we consider to be non-core and exclude when computing these non-GAAP financial measures can be of substantial importance to our results for any particular period. In addition, our methodology for calculating non-GAAP financial measures may differ from the methodologies employed by other companies to calculate the same or similar performance measures and, accordingly, our reported non-GAAP financial measures may not be comparable to the same or similar performance measures reported by other companies.
The following table summarizes the impact of non-core items recorded for the time periods indicated below and reconciles them to the most directly comparable GAAP financial measure:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in thousands, except per share data) |
| Net income (loss) from continuing operations (GAAP) | $ | 26,331 | | | $ | 44,419 | | | $ | 64,978 | | | $ | (157,662) | |
| Non-GAAP adjustments: | | | | | | | |
| Add: | | | | | | | |
| Noninterest income components: | | | | | | | |
| Income from investments held in rabbi trusts | (1,761) | | | (3,002) | | | (6,079) | | | (5,859) | |
| Losses on sales of securities available for sale, net | 7,557 | | | — | | | 7,557 | | | 333,170 | |
| Losses on sales of other assets | 2 | | | — | | | 2 | | | 5 | |
| Noninterest expense components: | | | | | | | |
| Rabbi trust employee benefit expense | 930 | | | 1,314 | | | 2,676 | | | 2,588 | |
| Merger and acquisition expenses | 3,684 | | | — | | | 5,500 | | | — | |
| Total impact of non-GAAP adjustments | 10,412 | | | (1,688) | | | 9,656 | | | 329,904 | |
| Less net tax benefit associated with non-GAAP adjustment (1) | 224 | | | 1,639 | | | 34 | | | 78,016 | |
| Non-GAAP adjustments, net of tax | $ | 10,188 | | | $ | (3,327) | | | $ | 9,622 | | | $ | 251,888 | |
| Operating net income (non-GAAP) | $ | 36,519 | | | $ | 41,092 | | | $ | 74,600 | | | $ | 94,226 | |
| | | | | | | |
| Weighted average common shares outstanding during the period: | | | | | | | |
| Basic | 163,145,255 | | 162,232,236 | | 163,004,093 | | 162,112,223 |
| Diluted | 163,499,296 | | 162,246,675 | | 163,390,421 | | 162,136,984 |
| | | | | | | |
| Earnings (losses) per share from continuing operations, basic | $ | 0.16 | | | $ | 0.27 | | | $ | 0.40 | | | $ | (0.98) | |
| Earnings (losses) per share from continuing operations, diluted | $ | 0.16 | | | $ | 0.27 | | | $ | 0.40 | | | $ | (0.98) | |
| | | | | | | |
| Operating earnings per share, basic (non-GAAP) | $ | 0.22 | | | $ | 0.25 | | | $ | 0.46 | | | $ | 0.58 | |
| Operating earnings per share, diluted (non-GAAP) | $ | 0.22 | | | $ | 0.25 | | | $ | 0.46 | | | $ | 0.58 | |
(1)The net tax benefit associated with these items is generally determined by assessing whether each item is included or excluded from net taxable income and applying our combined statutory tax rate only to those items included in net taxable income. The net tax benefit for the three months ended June 30, 2023 was primarily the net effect of changes in management’s estimate of the Company’s annual taxable income. The net tax benefit amount for the six months ended June 30, 2023 primarily resulted from the sale of securities classified as available for sale in the first quarter of 2023 and a $23.7 million tax benefit resulting from the transfer of certain securities from Market Street Securities Corp (“MSSC”), a wholly owned subsidiary which was liquidated during the first quarter of 2023, to Eastern Bank. In addition, upon the sale of securities in the first quarter of 2023, we established a valuation allowance of $17.4 million, which is included in the net tax benefit amount, as it was determined at that time that it was not more-likely-than-not that the entirety of the deferred tax asset related to the loss on such securities would be realized.
The following table summarizes the impact of non-core items with respect to our total revenue (loss), noninterest income (loss), noninterest expense, and the efficiency ratio, which reconciles to the most directly comparable respective GAAP financial measure, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in thousands) |
| Net interest income (GAAP) | $ | 128,649 | | | $ | 141,588 | | | $ | 258,549 | | | $ | 279,897 | |
| Add: | | | | | | | |
| Tax-equivalent adjustment (non-GAAP) | 4,553 | | | 3,877 | | | 9,036 | | | 8,322 | |
| Fully-taxable equivalent net interest income (non-GAAP) | 133,202 | | | 145,465 | | | 267,585 | | | 288,219 | |
| Noninterest income (loss) (GAAP) | 25,348 | | | 26,204 | | | 53,040 | | | (283,649) | |
| Less: | | | | | | | |
| Income from investments held in rabbi trusts | 1,761 | | | 3,002 | | | 6,079 | | | 5,859 | |
| Losses on sales of securities available for sale, net | (7,557) | | | — | | | (7,557) | | | (333,170) | |
| Losses on sales of other assets | (2) | | | — | | | (2) | | | (5) | |
| Noninterest income on an operating basis (non-GAAP) | 31,146 | | | 23,202 | | | 54,520 | | | 43,667 | |
| Noninterest expense (GAAP) | $ | 109,869 | | | $ | 99,934 | | | $ | 211,071 | | | $ | 195,825 | |
| Less: | | | | | | | |
| Rabbi trust employee benefit expense | 930 | | | 1,314 | | | 2,676 | | | 2,588 | |
| Merger and acquisition expenses | 3,684 | | | — | | | 5,500 | | | — | |
| Noninterest expense on an operating basis (non- GAAP) | $ | 105,255 | | | $ | 98,620 | | | $ | 202,895 | | | $ | 193,237 | |
| Total revenue (loss) from continuing operations (GAAP) | $ | 153,997 | | | $ | 167,792 | | | $ | 311,589 | | | $ | (3,752) | |
| Total operating revenue (non-GAAP) | $ | 164,348 | | | $ | 168,667 | | | $ | 322,105 | | | $ | 331,886 | |
| Ratios: | | | | | | | |
| Efficiency ratio (GAAP) | 71.34 | % | | 59.56 | % | | 67.74 | % | | (5,219.22) | % |
| Operating efficiency ratio (non-GAAP) | 64.04 | % | | 58.47 | % | | 62.99 | % | | 58.22 | % |
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:
| | | | | | | | | | | |
| As of June 30, | | As of December 31, |
| 2024 | | 2023 |
| (Dollars in thousands, except per share data) |
| Tangible shareholders’ equity: | | | |
| Total shareholders’ equity (GAAP) | $ | 2,967,473 | | | $ | 2,974,855 | |
| Less: Goodwill and other intangibles | 565,196 | | | 566,205 | |
| Tangible shareholders’ equity (non-GAAP) | 2,402,277 | | | 2,408,650 | |
| Tangible assets: | | | |
| Total assets (GAAP) | 21,044,169 | | | 21,133,278 | |
| Less: Goodwill and other intangibles | 565,196 | | | 566,205 | |
| Tangible assets (non-GAAP) | $ | 20,478,973 | | | $ | 20,567,073 | |
| Shareholders’ equity to assets ratio (GAAP) | 14.1 | % | | 14.1 | % |
| Tangible shareholders’ equity to tangible assets ratio (non-GAAP) | 11.7 | % | | 11.7 | % |
| Book value per share: | | | |
| Common shares issued and outstanding | 176,687,829 | | 176,426,993 |
| Book value per share (GAAP) | $ | 16.80 | | | $ | 16.86 | |
| Tangible book value per share (non-GAAP) | $ | 13.60 | | | $ | 13.65 | |
The following table summarizes the calculation of our average tangible shareholders’ equity and ratio of net income (loss) from continuing operations and operating net income to average tangible shareholders’ equity (“operating return on average tangible shareholders’ equity”), which reconciles to the most directly comparable GAAP measure, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in thousands) |
| Net income (loss) from continuing operations (GAAP) | $ | 26,331 | | | $ | 44,419 | | | $ | 64,978 | | | $ | (157,662) | |
| Operating net income (non-GAAP) (1) | 36,519 | | | 41,092 | | | 74,600 | | | 94,226 | |
| Average tangible shareholders’ equity: | | | | | | | |
| Average total shareholders’ equity (GAAP) | $ | 2,928,101 | | | $ | 2,599,325 | | | $ | 2,949,430 | | | $ | 2,530,132 | |
| Less: Average goodwill and other intangibles (2) | 565,523 | | | 659,825 | | | 565,775 | | | 660,307 | |
| Average tangible shareholders’ equity (non-GAAP) | 2,362,578 | | | 1,939,500 | | | 2,383,655 | | | 1,869,825 | |
| Ratios: | | | | | | | |
| Return (loss) on average total shareholders’ equity (GAAP) (3) | 3.62 | % | | 6.85 | % | | 4.43 | % | | (12.57) | % |
| Return (loss) on average tangible shareholders’ equity (non-GAAP) (3) | 4.48 | % | | 9.19 | % | | 5.48 | % | | (17.00) | % |
| Operating return on average tangible shareholders’ equity (non-GAAP) (3) | 6.22 | % | | 8.50 | % | | 6.29 | % | | 10.16 | % |
(1)Refer to the table above within this “Non-GAAP Financial Measures” section for a reconciliation of operating net income to net income (loss) from continuing operations.
(2)Includes goodwill and other intangibles included in assets of discontinued operations within the Company’s Consolidated Balance Sheets for the three and six months ended June 30, 2023.
(3)Presented on an annualized basis.
Financial Position
Summary of Financial Position
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 | | Change |
| Amount ($) | | Percentage (%) |
| (Dollars in thousands) |
| Cash and cash equivalents | $ | 750,848 | | | $ | 693,076 | | | $ | 57,772 | | | 8.3 | % |
| Securities available for sale | 4,097,842 | | | 4,407,521 | | | (309,679) | | | (7.0) | % |
| Securities held to maturity | 436,712 | | | 449,721 | | | (13,009) | | | (2.9) | % |
| Loans, net of allowance for loan losses | 13,953,773 | | | 13,799,367 | | | 154,406 | | | 1.1 | % |
| Federal Home Loan Bank stock | 5,879 | | | 5,904 | | | (25) | | | (0.4) | % |
| Goodwill and other intangible assets | 565,196 | | | 566,205 | | | (1,009) | | | (0.2) | % |
| Deposits | 17,537,809 | | | 17,596,217 | | | (58,408) | | | (0.3) | % |
| Borrowed funds | 48,940 | | | 48,216 | | | 724 | | | 1.5 | % |
Cash and cash equivalents
Total cash and cash equivalents increased by $57.8 million, or 8.3%, to $750.8 million at June 30, 2024 from $693.1 million at December 31, 2023. This increase was primarily due to proceeds from maturities and principal paydowns of AFS and HTM securities of $186.8 million and proceeds from the sale of AFS securities of $85.2 million. Partially offsetting this increase was an increase in gross loans of $172.1 million during the six months ended June 30, 2024 and a net decrease in deposits of $58.4 million during the six months ended June 30, 2024. For further discussion of the change in securities, deposits, and loans, refer to the later “Securities,” “Loans,” and “Deposits,” sections in this Item 2.
Securities
Our current investment policy authorizes us to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate notes, asset-backed securities and municipal securities. The Risk Management Committee of our Board of Directors is responsible for approving and overseeing our investment policy, which it reviews at least annually. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns and market risk considerations. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk investment products. We typically invest in the following types of securities:
U.S. government securities: Our U.S. government securities consisted of U.S. Agency bonds and U.S. Treasury securities. We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes, and as collateral for interest rate derivative positions. U.S. Agency bonds include securities issued by Fannie Mae, Freddie Mac, the FHLB, and the Federal Farm Credit Bureau.
Mortgage-backed securities: We invest in residential and commercial mortgage-backed securities insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae, including collateralized mortgage obligations. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Ginnie Mae or Fannie Mae.
Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.
State and municipal securities: We invest in fixed rate investment grade bonds issued primarily by municipalities in our local communities within Massachusetts and by the Commonwealth of Massachusetts. The market value of these securities may be affected by call options, long dated maturities, general market liquidity and credit factors.
The following table shows the fair value of our securities by investment category as of the dates indicated:
Securities Portfolio Composition
| | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| (In thousands) |
| Available for sale securities, at fair value: | | | |
| Government-sponsored residential mortgage-backed securities | $ | 2,597,550 | | | $ | 2,780,638 | |
| Government-sponsored commercial mortgage-backed securities | 1,090,894 | | | 1,124,376 | |
| U.S. Agency bonds | 130,238 | | | 216,011 | |
| U.S. Treasury securities | 95,554 | | | 95,152 | |
| State and municipal bonds and obligations | 183,606 | | | 191,344 | |
| Total available for sale securities, at fair value | 4,097,842 | | | 4,407,521 | |
| Held to maturity securities, at amortized cost: | | | |
| Government-sponsored residential mortgage-backed securities | 243,919 | | | 254,752 | |
| Government-sponsored commercial mortgage-backed securities | 192,793 | | | 194,969 | |
| Total held to maturity securities, at amortized cost | 436,712 | | | 449,721 | |
| Total | $ | 4,534,554 | | | $ | 4,857,242 | |
Our securities portfolio decreased $0.3 billion, or 6.6%, to $4.5 billion at June 30, 2024 from $4.9 billion at December 31, 2023. This decrease was primarily due to maturities and principal paydowns of AFS and HTM securities of $186.8 million and sales of AFS securities of $85.2 million.
We did not have trading investments at June 30, 2024 or December 31, 2023.
A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled $183.4 million at June 30, 2024 compared to $191.1 million at December 31, 2023.
Our AFS securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as Level 3 within the fair value hierarchy. As of both June 30, 2024 and December 31, 2023, we had no securities categorized as Level 3 within the fair value hierarchy.
The following tables show contractual maturities of our AFS and HTM securities and weighted average yields at and for the periods ended June 30, 2024 and December 31, 2023. Maturities of our securities portfolio are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. Weighted average yields in the tables below have been calculated based on the amortized cost of the security:
Securities Portfolio, Weighted Average Yield
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities Maturing as of June 30, 2024 (1) |
| Within One
Year | | After One
Year But
Within Five
Years | | After Five Years But Within Ten Years | | After Ten
Years | | Total |
| Available for sale securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | — | % | | 2.38 | % | | 1.70 | % | | 1.58 | % | | 1.59 | % |
| Government-sponsored commercial mortgage-backed securities | — | | | 1.66 | | | 1.54 | | | 1.95 | | | 1.79 | |
| U.S. Agency bonds | — | | | 1.41 | | | — | | | — | | | 1.41 | |
| U.S. Treasury securities | 2.89 | | | 1.57 | | | — | | | — | | | 1.96 | |
| State and municipal bonds and obligations | 2.30 | | | 2.63 | | | 3.51 | | | 4.11 | | | 3.69 | |
| Total available for sale securities | 2.83 | % | | 1.68 | % | | 1.88 | % | | 1.72 | % | | 1.73 | % |
| Held to maturity securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | — | % | | — | % | | — | % | | 2.87 | % | | 2.87 | % |
| Government-sponsored commercial mortgage-backed securities | — | | | 2.16 | | | 2.37 | | | — | | | 2.22 | |
| Total held to maturity securities | — | % | | 2.16 | % | | 2.37 | % | | 2.87 | % | | 2.59 | % |
| Total | 2.83 | % | | 1.76 | % | | 1.96 | % | | 1.79 | % | | 1.80 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities Maturing as of December 31, 2023 (1) |
Within One
Year | | After One Year But Within Five Years | | After Five Years But Within Ten Years | | After Ten Years | | Total |
| Available for sale securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | — | % | | 2.35 | % | | 1.90 | % | | 1.59 | % | | 1.60 | % |
| Government-sponsored commercial mortgage-backed securities | — | | | 1.92 | | | 1.40 | | | 1.95 | | | 1.79 | |
| U.S. Agency bonds | — | | | 1.35 | | | — | | | — | | | 1.35 | |
| U.S. Treasury securities | — | | | 1.96 | | | — | | | — | | | 1.96 | |
| State and municipal bonds and obligations | 1.33 | | | 2.41 | | | 3.34 | | | 4.09 | | | 3.66 | |
| Total available for sale securities | 1.33 | % | | 1.76 | % | | 1.62 | % | | 1.73 | % | | 1.72 | % |
| Held to maturity securities: | | | | | | | | | |
| Government-sponsored residential mortgage-backed securities | — | % | | — | % | | — | % | | 2.87 | % | | 2.87 | % |
| Government-sponsored commercial mortgage-backed securities | — | | | 2.18 | | | 2.25 | | | — | | | 2.22 | |
| Total held to maturity securities | — | % | | 2.18 | % | | 2.25 | % | | 2.87 | % | | 2.59 | % |
| Total | 1.33 | % | | 1.81 | % | | 1.75 | % | | 1.79 | % | | 1.79 | % |
(1)Investment security weighted-average yields were calculated on a level-yield basis by weighting the tax equivalent yield for each security type by the book value of each maturity category.
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a fully-taxable equivalent (“FTE”) basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing federal income taxes that would have been paid if the income had been fully taxable.
Loans
The following table shows the composition of our loan portfolio, by category, as of the dates indicated:
Loan Portfolio Composition
| | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| (In thousands) |
| Commercial and industrial | $ | 3,084,186 | | | $ | 3,034,068 | |
| Commercial real estate | 5,440,411 | | | 5,457,349 | |
| Commercial construction | 447,157 | | | 386,999 | |
| Business banking | 1,108,163 | | | 1,085,763 | |
| Residential real estate | 2,562,808 | | | 2,565,485 | |
| Consumer home equity | 1,254,105 | | | 1,208,231 | |
| Other consumer | 248,690 | | | 235,533 | |
| Total loans | 14,145,520 | | | 13,973,428 | |
| Allowance for loan losses | (156,146) | | | (148,993) | |
| Unamortized premiums, net of unearned discounts and deferred fees | (35,601) | | | (25,068) | |
| Total loans receivable, net | $ | 13,953,773 | | | $ | 13,799,367 | |
We consider our loan portfolio to be relatively diversified by borrower and industry. Our gross loans increased $172.1 million, or 1.2%, to $14.1 billion at June 30, 2024 from $14.0 billion at December 31, 2023. The increase was primarily due to increases in our commercial construction and commercial and industrial portfolio balances.
•Our commercial construction portfolio increased by $60.2 million, or 15.5%, from December 31, 2023 to June 30, 2024 which was primarily due to draws by borrowers on previously originated construction commitments and new construction loan originations during the six months ended June 30, 2024.
•Our commercial and industrial portfolio increased by $50.1 million, or 1.7%, from December 31, 2023 to June 30, 2024 which was primarily due to new loan originations within the commercial and industrial portfolio during the six months ended June 30, 2024.
We believe that our commercial loan portfolio composition is relatively diversified in terms of industry sectors, property types and various lending specialties, and it is concentrated in the New England geographical area, with 82.8% of our commercial loans in Massachusetts and New Hampshire as of June 30, 2024.
Asset quality. We continually monitor the asset quality of our loan portfolio utilizing portfolio scorecards and various credit quality indicators. Based on this process, loans meeting certain criteria are categorized as delinquent or non-performing and further assessed to determine if non-accrual status is appropriate.
For the commercial portfolio, which includes our commercial and industrial, commercial real estate, commercial construction and business banking loans, we monitor credit quality using a risk rating scale, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Management utilizes a loan risk rating methodology based on a 15-point scale with the assistance of risk rating scorecard tools. Pass grades are 0-10 and non-pass categories, which align with regulatory guidelines, are: special mention (11), substandard (12), doubtful (13) and loss (14).
Risk rating assignment is determined using one of 15 separate scorecards developed for distinctive portfolio segments based on common attributes. Key factors include: industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral and other considerations.
Special mention, substandard and doubtful loans totaled 6.4% and 4.1% of total commercial loans outstanding at June 30, 2024 and December 31, 2023, respectively. This increase was driven by several risk rating downgrades of loans in the commercial real estate and commercial and industrial portfolios.
Our philosophy toward managing our loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. We seek to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.
The delinquency rate of our total loan portfolio decreased to 0.35% at June 30, 2024, compared to 0.41% at December 31, 2023.
The following table provides details regarding our delinquency rates as of the dates indicated:
Loan Delinquency Rates
| | | | | | | | | | | |
| Delinquency Rate as of |
| June 30, 2024 | | December 31, 2023 |
| Portfolio | | | |
| Commercial and industrial | — | % | | 0.13 | % |
| Commercial real estate | — | % | | — | % |
| Commercial construction | — | % | | — | % |
| Business banking | 0.50 | % | | 0.58 | % |
| Residential real estate | 1.07 | % | | 1.11 | % |
| Consumer home equity | 1.24 | % | | 1.43 | % |
| Other consumer | 0.29 | % | | 0.46 | % |
| Total | 0.35 | % | | 0.41 | % |
As a general rule, loans more than 90 days past due with respect to principal or interest are classified as non-accrual loans. However, based on our assessment of collateral and/or payment prospects, certain loans that are more than 90 days past due may be kept on an accruing status. Income accruals are suspended on all non-accrual loans and all previously accrued and uncollected interest is reversed against current income. A loan is expected to remain on non-accrual status until it becomes current with respect to principal and interest, the loan is liquidated, or the loan is determined to be uncollectible and is charged-off against the allowance for loan losses.
Non-performing assets (“NPAs”) are comprised of non-performing loans (“NPLs”), OREO and non-performing securities. NPLs consist of non-accrual loans and loans that are more than 90 days past due but still accruing interest. OREO consists of real estate properties, which primarily serve as collateral to secure our loans, that we control due to foreclosure. These properties are recorded at the fair value less estimated costs to sell on the date we obtain control. Any write-downs to the cost of the related asset upon transfer to OREO to reflect the asset at fair value less estimated costs to sell is recorded through the allowance for loan losses.
NPLs decreased $12.8 million, or 24.3%, to $39.8 million at June 30, 2024 from $52.6 million at December 31, 2023. NPLs as a percentage of total loans decreased to 0.28% at June 30, 2024 from 0.38% at December 31, 2023. Refer to the later “Allowance for Loan Losses” section in this Item 2 for a discussion of the change in non-accrual loans which comprise our NPLs as of June 30, 2024 and December 31, 2023.
The total amount of interest recorded on NPLs during both the six months ended June 30, 2024 and 2023 was not significant. The gross interest income that would have been recorded under the original terms of those loans if they had been performing amounted to $1.6 million and $2.7 million for the six months ended June 30, 2024 and 2023, respectively.
In the course of resolving NPLs, we may choose to restructure the contractual terms of certain loans. We attempt to work-out alternative payment schedules with the borrowers in order to avoid foreclosure actions. The aggregate amortized cost balance as of June 30, 2024 of loans modified during the three and six months ended June 30, 2024 which were determined to be modifications to borrowers experiencing financial difficulty was $22.8 million and $23.7 million, respectively, which included three commercial real estate loans collateralized by properties in our office risk segment. The aggregate amortized cost balance as of June 30, 2023 of loans modified during the three and six months ended June 30, 2023 which were determined to be modifications to borrowers experiencing financial difficulty was $2.4 million and $4.6 million, respectively.
As of June 30, 2024, there were two loans with an aggregate balance of $0.1 million that had been modified to borrowers experiencing financial difficulty during the during the twelve-month period then ended which had subsequently defaulted during the six months ended June 30, 2024. As of June 30, 2023, there were no loans that had been modified to borrowers experiencing financial difficulty during the six-month period then ended which had subsequently defaulted during the six months ended June 30, 2023.
Our policy is that any restructured loan, which is on non-accrual status prior to being modified, remain on non-accrual status for approximately six months subsequent to being modified before we consider its return to accrual status. If the
restructured loan is on accrual status prior to being modified, we review it to determine if the modified loan should remain on accrual status.
Purchased credit deteriorated (“PCD”) loans are loans that we acquired that have shown evidence of deterioration of credit quality since origination and, therefore, it was deemed unlikely that all contractually required payments would be collected upon the acquisition date. We consider factors such as payment history, collateral values and accrual status when determining whether there was evidence of deterioration at the acquisition date. As of June 30, 2024 and December 31, 2023, the carrying amount of PCD loans was $47.6 million and $49.1 million, respectively.
Potential Problem Loans. In the normal course of business, we become aware of possible credit problems in which borrowers exhibit the potential to be unable to comply in the future 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 $247.5 million, or 66.2%, to $621.2 million at June 30, 2024 from $373.7 million at December 31, 2023. These loans as a percentage of total loans increased to 4.4% at June 30, 2024 from 2.7% at December 31, 2023. The increase in potential problem loans from December 31, 2023 to June 30, 2024 was primarily due to the downgrade of certain commercial real estate and commercial and industrial loans during the six months ended June 30, 2024, including certain commercial real estate loans collateralized by properties in the office risk segment. Refer to the below “Commercial Real Estate Office Exposure” section of this Item 2 for additional information.
Commercial Real Estate Office Exposure. Our total office-related commercial real estate (“CRE”) loans (which is comprised of loans within our commercial real estate and construction portfolios that are secured by office space, medical office space, and mixed-use properties where rental income is primarily from office space) totaled $793.4 million and $818.9 million as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, our office-related CRE loans are primarily concentrated in Massachusetts, where approximately 89.2% of the total recorded investment balance of office-related CRE loans are located, and approximately 18.5% of the total recorded investment balance of office-related CRE loans are located in the City of Boston.
Given prevailing market conditions such as rising interest rates, reduced occupancy as a result of the increase in hybrid work arrangements post-COVID, and lower commercial real estate valuations, we are carefully monitoring these loans for signs of deterioration in credit quality. Such monitoring includes incremental risk management strategies undertaken by management including monthly internal CRE office exposure portfolio reporting, more frequent portfolio reviews, ongoing monitoring of market conditions, and additional portfolio analysis such as maturity risk analysis and rent rollover risk analysis. As of June 30, 2024, two of these loans, which had a total recorded investment balance of $23.3 million, were on non-accrual status, one of which transitioned to non-accrual status during the six months ended June 30, 2024. We recorded a partial charge-off of $7.3 million of the commercial real estate loan which transitioned to non-accrual during the six months ended June 30, 2024. As of December 31, 2023, two of these loans were on non-accrual status and had a total recorded investment balance of $14.0 million.
The following table sets forth the unpaid principal balance of office-related CRE loans by loan segment and credit quality indicator as of the dates indicated:
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| (In thousands) |
| Commercial real estate | | | |
| Pass | $ | 628,032 | | | $ | 683,545 | |
| Special mention | 8,967 | | | — | |
| Substandard | 109,580 | | | 104,962 | |
| Doubtful | 23,257 | | | 13,969 | |
| Total commercial real estate | $ | 769,836 | | | $ | 802,476 | |
| Commercial construction | | | |
| Pass | $ | — | | | $ | 15,986 | |
| Special mention | 484 | | | 454 | |
| Substandard | 23,046 | | | — | |
| Doubtful | — | | | — | |
| Total commercial construction | $ | 23,530 | | | $ | 16,440 | |
| Total | $ | 793,366 | | | $ | 818,916 | |
The following table sets forth the unpaid principal balance of office-related CRE loans by loan segment and collateral use type as of the dates indicated:
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| (In thousands) |
| Commercial real estate | | | |
| Office | $ | 406,025 | | | $ | 425,682 | |
| Medical office | 113,028 | | | 113,110 | |
| Mixed-use | 250,783 | | | 263,684 | |
| Total commercial real estate | $ | 769,836 | | | $ | 802,476 | |
| Commercial construction | | | |
| Office | $ | 484 | | | $ | 454 | |
| Medical office | 23,046 | | | 14,961 | |
| Mixed-use | — | | | 1,025 | |
| Total commercial construction | $ | 23,530 | | | $ | 16,440 | |
| Total | $ | 793,366 | | | $ | 818,916 | |
Allowance for credit losses. For the purpose of estimating our allowance for loan losses, we segregate the loan portfolio into loan categories, for loans that share similar risk characteristics, that possess unique risk characteristics such as loan purpose, repayment source, and collateral that are considered when determining the appropriate level of the allowance for loan losses for each category. Loans that do not share similar risk characteristics with other loans are evaluated individually.
While we use available information to recognize losses on loans, future additions or subtractions to/from the allowance for loan losses may be necessary based on changes in NPLs, changes in economic conditions, or other reasons. Additionally, various regulatory agencies, as an integral part of our examination process, periodically assess the adequacy of the allowance for loan losses to assess whether the allowance for loan losses was determined in accordance with GAAP and applicable guidance.
We perform an evaluation of our allowance for loan losses on a regular basis (at least quarterly), and establish the allowance for loan losses based upon an evaluation of our loan categories, as each possesses unique risk characteristics that are considered when determining the appropriate level of allowance for loan losses, including:
•known increases in concentrations within each category;
•certain higher risk classes of loans, or pledged collateral;
•historical loan loss experience within each category;
•results of any independent review and evaluation of the category’s credit quality;
•trends in volume, maturity and composition of each category;
•volume and trends in delinquencies and non-accruals;
•national and local economic conditions and downturns in specific local industries;
•corporate goals and objectives;
•lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; and
•current and forecasted banking industry conditions, as well as the regulatory and competitive environment.
Loans are evaluated on a regular basis by management. Expected lifetime losses are estimated on a collective basis for loans sharing similar risk characteristics and are determined using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. For commercial and industrial, commercial real estate, commercial construction and business banking portfolios, the quantitative model uses a loan rating system which is comprised of management’s determination of probability of default, or PD, loss given default, or LGD, and exposure at default, or EAD, which are derived from historical loss experience and other factors. For residential real estate, consumer home equity and other consumer portfolios, our quantitative model uses historical loss experience.
The allowance for loan losses is allocated to loan categories using both a formula-based approach and an analysis of certain individual loans for impairment. We use a methodology to systematically estimate the amount of expected credit loss in the loan portfolio. Under our current methodology, the allowance for loan losses contains reserves related to loans for which the related allowance for loan losses is determined on an individual loan basis and on a collective basis, and other qualitative components.
The allowance for loan losses increased by $7.2 million, or 4.8%, to $156.1 million, or 1.11% of total loans, at June 30, 2024 from $149.0 million, or 1.07% of total loans at December 31, 2023. The increase in the allowance for loan losses was primarily the result of a $7.3 million partial charge-off of a commercial real estate loan collateralized by a property in the office risk segment which transitioned to non-accrual status during the first quarter of 2024 and had not been previously reserved for on a specific reserve basis and due to an increase in specific reserves for commercial real estate loans collateralized by a property in the office risk segment.
In the ordinary course of business, we enter into commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the reserving method for loans receivable previously described. The reserve for unfunded lending commitments is included in other liabilities in the Consolidated Balance Sheets. Our reserve for unfunded lending commitments decreased by $2.5 million, or 17.7%, to $11.6 million at June 30, 2024 from $14.1 million at December 31, 2023. The decrease was primarily due to lower reserve rates and unfunded balances within the commercial construction portfolio, which were attributable to an improved economic forecast and draws by borrowers which served to reduce unfunded balances. The decrease in our reserve for unfunded lending commitments contributed to a decrease in our other non-interest expense during the six months ended June 30, 2024.
For additional discussion of the change in allowance for loan losses, refer to the later “Provision for Loan Losses,” included in the “Results of Operations” section within this Item 2.
The following table summarizes credit ratios for the periods presented:
Credit Ratios
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in thousands) |
| Net loan charge-offs (recoveries): | | | | | | | |
| Commercial and industrial | $ | (56) | | | $ | (26) | | | $ | (81) | | | $ | (165) | |
| Commercial real estate | (2,011) | | | (2) | | | 5,107 | | | (6) | |
| Commercial construction | — | | | — | | | — | | | — | |
| Business banking | 803 | | | 50 | | | 495 | | | (88) | |
| Residential real estate | (27) | | | (18) | | | (48) | | | (33) | |
| Consumer home equity | (59) | | | — | | | (57) | | | 6 | |
| Other consumer | 520 | | | 480 | | | 1,008 | | | 925 | |
| Total net loan (recoveries) charge-offs | $ | (830) | | | $ | 484 | | | $ | 6,424 | | | $ | 639 | |
| Average loans: | | | | | | | |
| Commercial and industrial | $ | 3,111,817 | | $ | 3,274,462 | | $ | 3,094,739 | | $ | 3,231,236 |
| Commercial real estate | 5,547,859 | | 5,318,945 | | 5,565,085 | | 5,294,871 |
| Commercial construction | 426,808 | | 351,942 | | 394,115 | | 343,506 |
| Business banking | 1,017,190 | | 975,259 | | 1,010,047 | | 973,738 |
| Residential real estate | 2,563,126 | | 2,512,673 | | 2,566,223 | | 2,511,004 |
| Consumer home equity | 1,241,324 | | 1,175,054 | | 1,227,759 | | 1,172,404 |
| Other consumer | 205,219 | | 194,957 | | 205,559 | | 191,940 |
| Average total loans (1) | $ | 14,113,343 | | $ | 13,803,292 | | $ | 14,063,527 | | $ | 13,718,699 |
| Net charge-offs (recoveries) to average loans outstanding during the period: | | | | | | | |
| Commercial and industrial | 0.00 | % | | 0.00 | % | | 0.00 | % | | (0.01) | % |
| Commercial real estate | (0.04) | | | 0.00 | | | 0.09 | | | 0.00 | |
| Commercial construction | — | | | — | | | — | | | — | |
| Business banking | 0.08 | | | 0.01 | | | 0.05 | | | (0.01) | |
| Residential real estate | 0.00 | | | 0.00 | | | 0.00 | | | 0.00 | |
| Consumer home equity | 0.00 | | | — | | | 0.00 | | | 0.00 | |
| Other consumer | 0.25 | | | 0.25 | | | 0.49 | | | 0.48 | |
| Total net (recoveries) charge-offs to average loans outstanding during the period: | (0.01) | % | | 0.01 | % | | 0.05 | % | | 0.01 | % |
| Total loans | $ | 14,109,919 | | $ | 13,946,676 | | $ | 14,109,919 | | $ | 13,946,676 |
| Total non-accrual loans | $ | 39,771 | | | $ | 30,558 | | | $ | 39,771 | | | $ | 30,558 | |
| Allowance for loan losses | $ | 156,146 | | | $ | 147,955 | | | $ | 156,146 | | | $ | 147,955 | |
| Allowance for loan losses as a percent of total loans | 1.11 | % | | 1.06 | % | | 1.11 | % | | 1.06 | % |
| Non-accrual loans as a percent of total loans | 0.28 | % | | 0.22 | % | | 0.28 | % | | 0.22 | % |
| Allowance for loan losses as a percent of non-accrual loans | 392.61 | % | | 484.18 | % | | 392.61 | % | | 484.18 | % |
(1)Average loan balances exclude loans held for sale
Non-accrual loans increased $9.2 million, or 30.1%, to $39.8 million at June 30, 2024 from $30.6 million at June 30, 2023, primarily due to an increase in commercial real estate non-accrual loans of $23.3 million and was partially offset by a decrease in commercial and industrial non-accrual loans of $8.1 million. Non-accrual commercial real estate loans increased due to several loans, which are collateralized by properties in the office risk segment, transitioning to non-accrual status subsequent to June 30, 2023, one of which transitioned to non-accrual status during the six months ended June 30, 2024 and is collateralized by real estate in the office risk segment. As of June 30, 2024, we had two non-accrual commercial real estate loans. For additional information regarding the credit quality of our loans, see Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
The following table sets forth the allocation of the allowance for loan losses by loan categories listed in loan portfolio composition as of the dates indicated:
Summary of Allocation of Allowance for Loan Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| 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 |
| (Dollars in thousands) |
| Commercial and industrial | $ | 28,916 | | | 18.52 | % | | 21.77 | % | | $ | 26,959 | | | 18.09 | % | | 21.71 | % |
| Commercial real estate | 69,079 | | | 44.24 | % | | 38.54 | % | | 65,475 | | | 43.95 | % | | 39.05 | % |
| Commercial construction | 6,388 | | | 4.09 | % | | 3.16 | % | | 6,666 | | | 4.47 | % | | 2.77 | % |
| Business banking | 16,748 | | | 10.73 | % | | 7.87 | % | | 14,913 | | | 10.01 | % | | 7.77 | % |
| Residential real estate | 25,829 | | | 16.54 | % | | 18.27 | % | | 25,954 | | | 17.42 | % | | 18.36 | % |
| Consumer home equity | 5,781 | | | 3.70 | % | | 8.91 | % | | 5,595 | | | 3.76 | % | | 8.65 | % |
| Other consumer | 3,405 | | | 2.18 | % | | 1.49 | % | | 3,431 | | | 2.30 | % | | 1.69 | % |
| Total | $ | 156,146 | | | 100.00 | % | | 100.00 | % | | $ | 148,993 | | | 100.00 | % | | 100.00 | % |
To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, liquidation of the collateral and the strength of co-makers or guarantors. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for loan losses and any recoveries of such previously charged-off amounts are credited to the allowance for loan losses.
Regardless of whether a loan is unsecured or collateralized, we charge off the amount of any confirmed loan loss in the period when the loans, or portions of loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss confirming events may include an appraisal or other valuation that reflects a shortfall between the value of the collateral and the carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral.
For additional information regarding our allowance for loan losses, see Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Federal Home Loan Bank stock
The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for our membership in the FHLBB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. We purchase and/or are subject to redemption of FHLBB stock proportional to the volume of funding received and view the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.
We held an investment in the FHLBB of $5.9 million at both June 30, 2024 and December 31, 2023. The amount of stock we are required to purchase is proportional to our FHLB borrowings and level of total assets.
Goodwill and other intangible assets
The table below sets forth the carrying amount of goodwill and other intangible assets, net of accumulated amortization, as of the dates indicated below:
| | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| (In thousands) |
| Balances not subject to amortization | | | |
| Goodwill | $ | 557,635 | | | $ | 557,635 | |
| Balances subject to amortization | | | |
| Core deposit intangible | 7,561 | | | 8,570 | |
| Total goodwill and other intangible assets | $ | 565,196 | | | $ | 566,205 | |
The balance of our goodwill and core deposit intangible asset was $565.2 million and $566.2 million at June 30, 2024 and December 31, 2023, respectively. We did not record any impairment to our goodwill or core deposit intangible asset during the six months ended June 30, 2024.
Deposits
Deposits originating within the markets we serve continue to be our primary source of funding our earning assets. Historically, we have been able to compete effectively for deposits in our primary market areas. The distribution and market share of deposits by type of deposit and y type of depositor are important considerations in our assessment of the stability of our funding sources and our access to additional funds. Furthermore, we shift the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize net interest margin.
The following table presents our deposits as of the dates presented:
Components of Deposits
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 | | Change |
| Amount ($) | | Percentage (%) |
| (Dollars in thousands) |
| Demand | $ | 4,808,938 | | | $ | 5,162,218 | | | $ | (353,280) | | | (6.8) | % |
| Interest checking | 3,532,811 | | | 3,737,361 | | | (204,550) | | | (5.5) | % |
| Savings | 1,238,009 | | | 1,323,126 | | | (85,117) | | | (6.4) | % |
| Money market investments | 5,014,900 | | | 4,664,475 | | | 350,425 | | | 7.5 | % |
| Certificate of deposits | 2,943,151 | | | 2,709,037 | | | 234,114 | | | 8.6 | % |
| Total deposits | $ | 17,537,809 | | | $ | 17,596,217 | | | $ | (58,408) | | | (0.3) | % |
Deposits decreased by $0.1 billion, or 0.3%, to $17.5 billion at June 30, 2024 from $17.6 billion at December 31, 2023. This decrease was primarily driven by an early termination of an omnibus deposit contract which totaled $100.0 million and which contributed to the decrease in interest checking deposits at June 30, 2024 from December 31, 2023. Further, the remaining decrease in interest checking and in demand deposits was more-than-offset by an increase in money market investment deposits and certificates of deposit. These changes reflect a continued shift in deposit mix from non-interest-bearing deposit accounts to interest-bearing deposit accounts during the six months ended June 30, 2024 and was due primarily to increases in rates paid on money market investment deposits and certificates of deposit, which attracted depositors to such products.
The Bank’s estimate of total uninsured deposits was $7.9 billion and $8.0 billion at June 30, 2024 and December 31, 2023, respectively. In accordance with the FDIC’s Call Report instructions, these estimates include accounts of wholly-owned subsidiaries, the holding company, and internal operating deposit accounts (together referred to as “internal deposit accounts”). In addition, these estimates include municipal deposit accounts for which securities were pledged by us to secure such deposits (“collateralized deposits”). For liquidity monitoring purposes, we exclude internal deposit accounts and collateralized deposits from our estimate of uninsured deposits. Our estimate of uninsured deposits, excluding internal deposit accounts and collateralized deposits, was $5.4 billion and $5.5 billion at June 30, 2024 and December 31, 2023, respectively.
The following table presents the classification of deposits on an average basis for the periods below:
Classification of Deposits on an Average Basis
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2024 | | For the Year Ended December 31, 2023 |
| Average
Amount | | Average
Rate | | Average
Amount | | Average
Rate |
| (Dollars in thousands) |
| Demand | $ | 4,916,290 | | | — | % | | $ | 5,404,208 | | | — | % |
| Interest checking | 3,742,251 | | | 0.91 | % | | 4,070,585 | | | 0.60 | % |
| Savings | 1,278,466 | | | 0.01 | % | | 1,515,713 | | | 0.01 | % |
| Money market investments | 4,858,917 | | | 2.67 | % | | 4,918,343 | | | 2.11 | % |
| Certificate of deposits | 2,859,145 | | | 4.88 | % | | 2,303,520 | | | 4.24 | % |
| Total deposits | $ | 17,655,069 | | | 1.72 | % | | $ | 18,212,369 | | | 1.24 | % |
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: | | | | | | | | | | | | | | |
| | As of June 30, 2024 | | As of December 31, 2023 |
| Maturing in | | (In thousands) |
| Three months or less | $ | 118,806 | | | $ | 278,281 | |
| Over three months through six months | 445,310 | | | 262,761 | |
| Over six months through 12 months | 352,221 | | | 316,408 | |
| Over 12 months | 635 | | | 10,146 | |
| Total | $ | 916,972 | | | $ | 867,596 | |
Borrowings
Our borrowings consist of both short-term and long-term borrowings and provide us with sources of funding. Maintaining available borrowing capacity provides us with a contingent source of liquidity. The following table sets forth the balances on our borrowings as of the dates and for the periods indicated:
Borrowings by Category
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Change |
| As of June 30, 2024 | | As of December 31, 2023 | | Amount ($) | | Percentage (%) |
| (In thousands) |
| Escrow deposits of borrowers | $ | 20,155 | | | $ | 21,978 | | | $ | (1,823) | | | (8.3) | % |
| Interest rate swap collateral funds | 11,370 | | | 8,500 | | | 2,870 | | | 33.8 | % |
| FHLB advances | 17,415 | | | 17,738 | | | (323) | | | (1.8) | % |
| Total | $ | 48,940 | | | $ | 48,216 | | | $ | 724 | | | 1.5 | % |
Our total borrowings increased by $0.7 million to $48.9 million at June 30, 2024 compared to $48.2 million at December 31, 2023. The increase was primarily due to increased balances of interest rate swap collateral funds. Refer to the later “Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies” section in this Item 2 for additional discussion of our liquidity position.
Results of Operations
The information presented within this section excludes discontinued operations with respect to information related to the three and six months ended June 30, 2023. Refer to Note 15, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q for further discussion regarding discontinued operations.
Summary of Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | | Change | | | | | | Change |
| 2024 | | 2023 | | Amount
($) | | Percentage | | 2024 | | 2023 | | Amount
($) | | Percentage |
| (Dollars in thousands) |
| Interest and dividend income | $ | 207,376 | | | $ | 201,765 | | | $ | 5,611 | | | 2.8 | % | | $ | 409,987 | | | $ | 390,645 | | | $ | 19,342 | | | 5.0 | % |
| Interest expense | 78,727 | | | 60,177 | | | 18,550 | | | 30.8 | % | | 151,438 | | | 110,748 | | | 40,690 | | | 36.7 | % |
| Net interest income | 128,649 | | | 141,588 | | | (12,939) | | | (9.1) | % | | 258,549 | | | 279,897 | | | (21,348) | | | (7.6) | % |
| Provision for allowance for loan losses | 6,126 | | | 7,501 | | | (1,375) | | | (18.3) | % | | 13,577 | | | 7,526 | | | 6,051 | | | 80.4 | % |
| Noninterest income (loss) | 25,348 | | | 26,204 | | | (856) | | | (3.3) | % | | 53,040 | | | (283,649) | | | 336,689 | | | (118.7) | % |
| Noninterest expense | 109,869 | | | 99,934 | | | 9,935 | | | 9.9 | % | | 211,071 | | | 195,825 | | | 15,246 | | | 7.8 | % |
| Income tax expense (benefit) | 11,671 | | | 15,938 | | | (4,267) | | | (26.8) | % | | 21,963 | | | (49,441) | | | 71,404 | | | (144.4) | % |
| Net income (loss) | 26,331 | | | 44,419 | | | (18,088) | | | (40.7) | % | | 64,978 | | | (157,662) | | | 222,640 | | | (141.2) | % |
Comparison of the three and six months ended June 30, 2024 and 2023
Interest and Dividend Income
Interest and dividend income increased by $5.6 million, or 2.8%, to $207.4 million during the three months ended June 30, 2024 from $201.8 million during the three months ended June 30, 2023. The increase was due to an increase in our yields and average balance of our loan portfolio. The overall yield on our loans increased 25 basis points during the three months ended June 30, 2024 in comparison to the three months ended June 30, 2023. Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans and securities are calculated and added to the yield. Management believes that this presentation allows for better comparability between institutions with different tax structures. The average balance of our loan portfolio increased $0.3 billion, or 2.2%, to $14.1 billion during the three months ended June 30, 2024 from $13.8 billion during the three months ended June 30, 2023. Partially offsetting the increase in interest and dividend income was a decrease in the average balance and yield of our securities and other short-term investments. The average balance of our securities and other short-term investments decreased $0.8 billion, or 12.0%, to $6.2 billion for the three months ended June 30, 2024 from $7.1 billion for the three months ended June 30, 2023. The overall yield on our securities and other short-term investments decreased 6 basis points during the three months ended June 30, 2024 in comparison to the three months ended June 30, 2023.
•Interest income on loans increased $11.7 million, or 7.2%, to $172.5 million during the three months ended June 30, 2024 from $160.9 million during the three months ended June 30, 2023. The increase in interest income on our loans was due to an increase in our yields and an increase in the average balance of our loan portfolio. The overall yield on our loans increased 25 basis points during the three months ended June 30, 2024 in comparison to the three months ended June 30, 2023. The increase in yield was primarily due to increases in market rates of interest which resulted in increased yields on variable rate loans which repriced, and new loans originated at higher rates of interest. The average balance of our loan portfolio increased $0.3 billion, or 2.2%, to $14.1 billion during the three months ended June 30, 2024 from $13.8 billion during the three months ended June 30, 2023.
•Interest income on securities and other short-term investments decreased by $6.0 million, or 14.8%, to $34.9 million during the three months ended June 30, 2024 from $40.9 million during the three months ended June 30, 2023. The decrease was primarily driven by a decrease in the average balance of our securities and other short-term investments, which decreased $0.8 billion, or 12.0%, to $6.2 billion for the three months ended June 30, 2024 from $7.1 billion for the three months ended June 30, 2023, which was primarily due to our sales of AFS securities in May 2024 and maturities and principal paydowns on AFS and HTM securities. Also contributing to the decrease in interest income on securities and other short-term investments was a decrease in our combined yield on our securities and other short-term investments, which decreased 6 basis points during the three months ended June 30, 2024 in comparison to the three months ended June 30, 2023 due to a shift in investment mix primarily driven by a reduction in other short-term investments.
Interest and dividend income increased by $19.3 million, or 5.0%, to $410.0 million during the six months ended June 30, 2024 from $390.6 million during the six months ended June 30, 2023. The increase was primarily the result of an overall increase in the yield on average interest-earning assets which increased by 39 basis points compared to the six months ended June 30, 2023. Partially offsetting the impact of increased yields was a decrease in the average balance of securities and other short-term investments which decreased by $1.4 billion, or 18.6%, to $6.2 billion during the six months ended June 30, 2024 compared to $7.6 billion during the six months ended June 30, 2023.
•Interest income on loans increased $28.1 million, or 8.9%, to $342.5 million during the six months ended June 30, 2024 from $314.4 million during the six months ended June 30, 2023. The increase in interest income on our loans was due to an increase in our yields and an increase in the average balance of our loan portfolio. The overall yield on our loans increased 29 basis points during the six months ended June 30, 2024 in comparison to the six months ended June 30, 2023. The increase in yield was primarily due to increases in market rates of interest which resulted in increased yields on variable rate loans which repriced and new loans originated at higher rates of interest.
•Interest income on securities and other short-term investments decreased by $8.8 million, or 11.5%, to $67.5 million during the six months ended June 30, 2024 from $76.2 million during the six months ended June 30, 2023. The decrease was primarily driven by a decrease in the average balance of our securities and other short-term investments, which decreased $1.4 billion, or 18.6%, to $6.2 billion for the six months ended June 30, 2024 from $7.6 billion for the six months ended June 30, 2023, which was primarily due to our sales of AFS securities in May 2024 and maturities and principal paydowns on AFS and HTM securities. Partially offsetting the decrease in the average balance of our securities and other short-term investments, and contributing to the overall increase in interest income during the six months ended June 30, 2024, was an increase in our yield on our securities and other short-term investments which increased 18 basis points during the six months ended June 30, 2024 in comparison to the six months ended June 30, 2023 primarily due to an increase in the rate paid on our cash held at the Federal Reserve Bank of Boston from an average of 4.82% during the six months ended June 30, 2023 to an average of 5.40% during the six months ended June 30, 2024.
Interest Expense
During the three and six months ended June 30, 2024, interest expense increased $18.6 million and $40.7 million, respectively, to $78.7 million and $151.4 million, respectively, from $60.2 million and $110.7 million during the three and six months ended June 30, 2023, respectively. These increases were primarily attributable to an increase in deposit interest expense partially offset by a decrease in borrowings interest expense.
During the three months ended June 30, 2024, interest expense on our interest-bearing deposits increased by $22.3 million to $78.5 million from $56.1 million during the three months ended June 30, 2023. This increase was due to an increase in the rates paid on deposits. Rates paid on deposits increased by 74 basis points to 2.45% during the three months ended June 30, 2024 from 1.71% during the three months ended June 30, 2023. This was primarily due to our increasing overall deposit rates paid in response to an increase in market rates of interest and heightened industry-wide competition for deposits. Partially offsetting the impact of the increase in rates paid on deposits was a decrease in the average balance of interest-bearing deposits for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. During the three months ended June 30, 2024, the average interest-bearing deposits balance decreased by $0.3 billion to $12.9 billion from $13.2 billion during the three months ended June 30, 2023 primarily as a result of a decrease in the average balance of brokered certificates of deposit. The average balance of brokered certificates of deposit decreased by $0.8 billion during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023.
Interest expense related to our borrowings decreased by $3.8 million to $0.3 million during three months ended June 30, 2024 from $4.0 million during the three months ended June 30, 2023. The decrease in borrowings interest expense during the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was due to a decrease in our utilization of our FHLB borrowing capacity. Our utilization of FHLBB borrowings was greater during the three months ended June 30, 2023 compared to the three months ended June 30, 2024 as we had bolstered our on-balance sheet liquidity in response to the bank failures in the first quarter of 2023. In addition, during the four quarter of 2023, we paid down our FHLB advances primarily with the proceeds from the sale of our insurance agency business, which also occurred in the fourth quarter of 2023. Both of these factors resulted in a reduced average balance of borrowings during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.
During the six months ended June 30, 2024, interest expense on our interest-bearing deposits increased by $51.9 million to $150.9 million from $99.1 million during the six months ended June 30, 2023. This increase was due to an increase in the rates paid on deposits. Rates paid on deposits increased by 86 basis points to 2.38% during the six months ended June 30, 2024 from 1.52% during the six months ended June 30, 2023. This was primarily due to our increasing overall deposit rates paid in response to an increase in market rates of interest and heightened industry-wide competition for deposits. Partially offsetting the impact of the increase in rates paid on deposits was a decrease in the average balance of interest-bearing deposits for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. During the six months ended June 30, 2024, the average balance of our interest-bearing deposits decreased by $0.4 billion to $12.7 billion from $13.1 billion during the six months ended June 30, 2023 primarily as a result of a decrease in the average balance of brokered deposits. The average
balance of brokered certificates of deposit decreased to $4.1 million during the six months ended June 30, 2024 from $773.6 million during the six months ended June 30, 2023.
Interest expense related to our borrowings decreased by $11.2 million to $0.5 million during the six months ended June 30, 2024 from $11.7 million during the six months ended June 30, 2023. The decrease in borrowings interest expense during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was due to a decrease in our utilization of our FHLB borrowing capacity. Our utilization of FHLBB borrowings was greater during the six months ended June 30, 2023 compared to the six months ended June 30, 2024 as we had bolstered our on-balance sheet liquidity in response to the bank failures in the first quarter of 2023. In addition, during the four quarter of 2023, we paid down our FHLB advances primarily with the proceeds from the sale of our insurance agency business, which occurred in the fourth quarter of 2023. Both of these factors resulted in a reduced average balance of borrowings during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Net Interest Income
Net interest income decreased by $12.9 million, or 9.1%, to $128.6 million during the three months ended June 30, 2024 from $141.6 million for the three months ended June 30, 2023. Net interest income decreased due to a decrease in our net interest margin, which decreased 16 basis points during the three months ended June 30, 2024 to 2.64% from 2.80% during the three months ended June 30, 2023.
Net interest income decreased by $21.3 million, or 7.6%, to $258.5 million during the six months ended June 30, 2024 from $279.9 million for the six months ended June 30, 2023. Net interest income decreased due to a decrease in the average balance of net interest-earning assets of $0.2 billion, or 3.1%, to $7.5 billion during the six months ended June 30, 2024 from $7.7 billion during the six months ended June 30, 2023.
The following chart shows our net interest margin over the past five quarters:
Net interest margin is determined by dividing FTE net interest income by average total interest-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using marginal tax rates of 21.7% for both the three and six months ended June 30, 2024, and 21.8% and 21.7% for the three and six months ended June 30, 2023, respectively.
Net interest margin decreased 16 basis points during the three months ended June 30, 2024 to 2.64% from 2.80% during the three months ended June 30, 2023. The decrease in net interest margin for the three months ended June 30, 2024 from the three months ended June 30, 2023 was primarily due to an increase in the average cost of our interest-earning liabilities which exceeded the increase in our average yield on interest-earning assets.
Net interest margin decreased 7 basis points to 2.66% during the six months ended June 30, 2024 from 2.73% during the six months ended June 30, 2023. The decrease in net interest margin for the six months ended June 30, 2024 from the six months ended June 30, 2023 was primarily due to an increase in the average cost of our interest-earning liabilities which exceeded the increase in our average 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 asset and liability balances included in discontinued operations are included in non-interest-earnings assets and liabilities, respectively.
Average Balances, Interest Earned/Paid, & Average Yields
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three months ended June 30, |
| 2024 | | 2023 |
| Average
Outstanding
Balance | | Interest | | Average
Yield/Cost
(5) | | Average
Outstanding
Balance | | Interest | | Average
Yield /Cost
(5) |
| (Dollars in thousands) |
| Interest-earning assets: | | | | | | | | | | | |
| Loans (1) | | | | | | | | | | | |
| Residential | $ | 2,563,646 | | | $ | 24,313 | | | 3.81 | % | | $ | 2,513,941 | | | $ | 21,992 | | | 3.51 | % |
| Commercial | 10,103,674 | | | 128,402 | | | 5.11 | % | | 9,920,608 | | | 121,319 | | | 4.91 | % |
| Consumer | 1,446,543 | | | 23,960 | | | 6.66 | % | | 1,370,011 | | | 21,045 | | | 6.16 | % |
| Total loans | 14,113,863 | | | 176,675 | | | 5.03 | % | | 13,804,560 | | | 164,356 | | | 4.78 | % |
| Non-taxable investment securities | 197,450 | | | 1,831 | | | 3.73 | % | | 197,744 | | | 1,817 | | | 3.69 | % |
| Taxable investment securities | 5,231,133 | | | 22,724 | | | 1.75 | % | | 5,687,801 | | | 24,618 | | | 1.74 | % |
| Other short-term investments | 787,387 | | | 10,699 | | | 5.47 | % | | 1,174,964 | | | 14,851 | | | 5.07 | % |
| Total interest-earning assets | $ | 20,329,833 | | | $ | 211,929 | | | 4.19 | % | | $ | 20,865,069 | | | $ | 205,642 | | | 3.95 | % |
| Non-interest-earning assets | 912,302 | | | | | | | 1,084,413 | | | | | |
| Total assets | $ | 21,242,135 | | | | | | | $ | 21,949,482 | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | |
| Savings account | $ | 1,259,573 | | | $ | 42 | | | 0.01 | % | | $ | 1,552,702 | | | $ | 47 | | | 0.01 | % |
| Interest checking account | 3,739,590 | | | 8,827 | | | 0.95 | % | | 4,270,945 | | | 6,141 | | | 0.58 | % |
| Money market investment | 4,975,843 | | | 34,022 | | | 2.75 | % | | 5,064,469 | | | 26,611 | | | 2.11 | % |
| Time account | 2,933,160 | | | 35,582 | | | 4.88 | % | | 2,275,844 | | | 23,347 | | | 4.11 | % |
| Total interest-bearing deposits | 12,908,166 | | | 78,473 | | | 2.45 | % | | 13,163,960 | | | 56,146 | | | 1.71 | % |
| Borrowings | 49,536 | | | 254 | | | 2.06 | % | | 348,597 | | | 4,031 | | | 4.64 | % |
| Total interest-bearing liabilities | $ | 12,957,702 | | | $ | 78,727 | | | 2.44 | % | | $ | 13,512,557 | | | $ | 60,177 | | | 1.79 | % |
| Demand accounts | 4,843,336 | | | | | | | 5,332,045 | | | | | |
| Other noninterest-bearing liabilities | 512,996 | | | | | | | 505,555 | | | | | |
| Total liabilities | 18,314,034 | | | | | | | 19,350,157 | | | | | |
| Shareholders’ equity | 2,928,101 | | | | | | | 2,599,325 | | | | | |
| Total liabilities and shareholders’ equity | $ | 21,242,135 | | | | | | | $ | 21,949,482 | | | | | |
Net interest income – FTE | | | $ | 133,202 | | | | | | | $ | 145,465 | | | |
| Net interest rate spread (2) | | | | | 1.75 | % | | | | | | 2.16 | % |
| Net interest-earning assets (3) | $ | 7,372,131 | | | | | | | $ | 7,352,512 | | | | | |
Net interest margin – FTE (4) | | | | | 2.64 | % | | | | | | 2.80 | % |
| Average interest-earning assets to interest-bearing liabilities | 156.89 | % | | | | | | 154.41 | % | | | | |
| Return on average assets (5)(6) | 0.50 | % | | | | | | 0.89 | % | | | | |
| Return on average equity (5)(7) | 3.62 | % | | | | | | 7.51 | % | | | | |
| Noninterest expense to average assets (8) | 2.08 | % | | | | | | 2.22 | % | | | | |
(1)Non-accrual loans are included in loans.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin - FTE represents fully-taxable equivalent net interest income divided by average total interest-earning assets. Refer to the earlier “Non-GAAP Financial Measures” section within this Item 2 for additional information.
(5)Presented on an annualized basis.
(6)Represents net income, including net income from discontinued operations, divided by average total assets.
(7)Represents net income, including net income from discontinued operations, divided by average equity.
(8)Includes noninterest expenses included in results of discontinued operations. Refer to Note 15, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for such amounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the six months ended June 30, |
| 2024 | | 2023 |
| Average
Outstanding
Balance | | Interest | | Average
Yield /Cost
(5) | | Average
Outstanding
Balance | | Interest | | Average
Yield/Cost
(5) |
| (Dollars in thousands) |
| Interest-earning assets: | | | | | | | | | | | |
| Loans (1) | | | | | | | | | | | |
| Residential | $ | 2,567,225 | | | $ | 48,307 | | | 3.78 | % | | $ | 2,513,679 | | | $ | 43,605 | | | 3.50 | % |
| Commercial | 10,063,985 | | | 255,243 | | | 5.10 | % | | 9,843,351 | | | 237,248 | | | 4.86 | % |
| Consumer | 1,433,317 | | | 47,198 | | | 6.62 | % | | 1,364,345 | | | 41,105 | | | 6.08 | % |
| Total loans | 14,064,527 | | | 350,748 | | | 5.02 | % | | 13,721,375 | | | 321,958 | | | 4.73 | % |
| Non-taxable investment securities | 197,458 | | | 3,659 | | | 3.73 | % | | 197,755 | | | 3,634 | | | 3.71 | % |
| Taxable investment securities | 5,304,117 | | | 46,097 | | | 1.75 | % | | 6,582,380 | | | 53,260 | | | 1.63 | % |
| Other short-term investments | 681,963 | | | 18,519 | | | 5.46 | % | | 814,257 | | | 20,115 | | | 4.98 | % |
| Total interest-earning assets | $ | 20,248,065 | | | $ | 419,023 | | | 4.16 | % | | $ | 21,315,767 | | | $ | 398,967 | | | 3.77 | % |
| Non-interest-earning assets | 931,849 | | | | | | | 912,120 | | | | | |
| Total assets | $ | 21,179,914 | | | | | | | $ | 22,227,887 | | | | | |
| Interest-bearing liabilities: | | | | | | | | | | | |
| Deposits: | | | | | | | | | | | |
| Savings account | $ | 1,278,466 | | | $ | 83 | | | 0.01 | % | | $ | 1,636,457 | | | $ | 129 | | | 0.02 | % |
| Interest checking account | 3,742,251 | | | 17,014 | | | 0.91 | % | | 4,316,981 | | | 10,853 | | | 0.51 | % |
| Money market investment | 4,858,917 | | | 64,517 | | | 2.67 | % | | 5,052,467 | | | 46,916 | | | 1.87 | % |
| Time account | 2,859,145 | | | 69,317 | | | 4.88 | % | | 2,104,802 | | | 41,181 | | | 3.95 | % |
| Total interest-bearing deposits | 12,738,779 | | | 150,931 | | | 2.38 | % | | 13,110,707 | | | 99,079 | | | 1.52 | % |
| Borrowings | 50,159 | | | 507 | | | 2.03 | % | | 510,925 | | | 11,669 | | | 4.61 | % |
| Total interest-bearing liabilities | $ | 12,788,938 | | | $ | 151,438 | | | 2.38 | % | | $ | 13,621,632 | | | $ | 110,748 | | | 1.64 | % |
| Demand accounts | 4,916,290 | | | | | | | 5,577,294 | | | | | |
| Other noninterest-bearing liabilities | 525,256 | | | | | | | 498,829 | | | | | |
| Total liabilities | 18,230,484 | | | | | | | 19,697,755 | | | | | |
| Shareholders’ equity | 2,949,430 | | | | | | | 2,530,132 | | | | | |
| Total liabilities and shareholders’ equity | $ | 21,179,914 | | | | | | | $ | 22,227,887 | | | | | |
Net interest income – FTE | | | $ | 267,585 | | | | | | | $ | 288,219 | | | |
| Net interest rate spread (2) | | | | | 1.78 | % | | | | | | 2.13 | % |
| Net interest-earning assets (3) | $ | 7,459,127 | | | | | | | $ | 7,694,135 | | | | | |
Net interest margin – FTE (4) | | | | | 2.66 | % | | | | | | 2.73 | % |
| Average interest-earning assets to interest-bearing liabilities | 158.32 | % | | | | | | 156.48 | % | | | | |
| (Loss) return on average assets (5)(6) | 0.62 | % | | | | | | (1.32) | % | | | | |
| (Loss) return on average equity (5)(7) | 4.43 | % | | | | | | (11.59) | % | | | | |
| Noninterest expense to average assets (8) | 2.00 | % | | | | | | 2.16 | % | | | | |
(1)Non-accrual loans are included in loans.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin - FTE represents fully-taxable equivalent net interest income divided by average total interest-earning assets. Refer to the earlier “Non-GAAP Financial Measures” section within this Item 2 for additional information.
(5)Presented on an annualized basis.
(6)Represents net income (loss), including net income from discontinued operations, divided by average total assets.
(7)Represents net income (loss), including net income from discontinued operations, divided by average equity.
(8)Includes noninterest expenses included in results of discontinued operations. Refer to Note 15, “Discontinued Operations” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for such amounts.
The following chart shows the composition of our quarterly average interest-earning assets for the past five quarters:
Provision for Loan Losses
The provision for loan losses represents the charge to expense that is required to maintain an appropriate level of allowance for loan losses.
We recorded a provision for allowance for loan losses of $6.1 million for the three months ended June 30, 2024, compared to a provision of $7.5 million for the three months ended June 30, 2023 and a provision for allowance for loan losses of $13.6 million for the six months ended June 30, 2024 compared to a provision of $7.5 million for the six months ended June 30, 2023. Management determined a provision to be necessary for the three months ended June 30, 2024 primarily due to an increase in specific reserves on commercial real estate office loans during the three months ended June 30, 2024. The provision recorded for the six months ended June 30, 2024 was the combined effect of an increase in specific reserves on commercial real estate office loans recorded during the six months ended June 30, 2024 and a partial charge-off of $7.3 million recorded in the first quarter of 2024 of a commercial real estate investment loan which transitioned to non-accrual status during the first quarter of 2024 and had not been previously reserved for on a specific reserve basis.
Our periodic evaluation of the appropriate allowance for loan losses considers the risk characteristics of the loan portfolio, current economic conditions, and trends in loan delinquencies and charge-offs.
Management’s estimate of our allowance for loan losses as of June 30, 2024 and the provision for allowance for loan losses for the three and six months ended June 30, 2024, was supported, in part, by Oxford Economics’ June 2024 Baseline forecast (“the forecast”) which was used to develop management’s estimate of the effect of expected future economic conditions on the allowance for loan losses. The forecast assumed the U.S. economy will grow in the second half of 2024 and will start to slow in growth, but not stall, starting in 2025. This forecast reflects the impact of steady consumer spending and continued increases in U.S. gross domestic product (“GDP”). Primary macroeconomic assumptions included in management’s evaluation of the adequacy of the allowance for loan losses included a steady unemployment rate and a rise in U.S. GDP that is
projected to remain steady through the second half of 2024 and into 2025. Further, the forecast assumed that the FOMC will decrease federal rates in September 2024 and December 2024. Although the core consumer price index declined slightly in June 2024 from the prior month, inflation is expected to remain above the FOMC’s 2% target through 2024 and therefore, no material reduction in federal rates was forecast. Refer to the section titled “Outlook and Trends” within this Item 2 for additional discussion. For additional discussion of our allowance for credit losses measurement methodology, see Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
To illustrate the sensitivity of the modeled result to the impact of a hypothetical change in the economic forecast, management calculated the allowance for loan losses assuming the downside economic forecast scenario and, separately, the upside economic forecast scenario. The downside scenario assumed the U.S. economy will experience growth of GDP on an annual basis in 2024 of 1.7%. Use of the downside scenario would have resulted in an incremental increase in the allowance for loan losses of approximately $14.7 million as of June 30, 2024. The upside scenario assumed GDP growth on an annual basis of 2.9%, along with sustained recovery. Use of the upside scenario would have resulted in an incremental decrease in the allowance for loan losses of approximately $6.6 million as of June 30, 2024.
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 June 30, | | Six Months Ended June 30, |
| | | | | Change | | | | | | Change |
| 2024 | | 2023 | | Amount | | % | | 2024 | | 2023 | | Amount | | % |
| (Dollars in thousands) |
| Service charges on deposit accounts | $ | 7,930 | | | $ | 7,242 | | | $ | 688 | | | 9.5 | % | | $ | 15,438 | | | $ | 13,714 | | | $ | 1,724 | | | 12.6 | % |
| Trust and investment advisory fees | 6,711 | | | 6,131 | | | 580 | | | 9.5 | % | | 13,255 | | | 11,901 | | | 1,354 | | | 11.4 | % |
| Debit card processing fees | 3,522 | | | 3,513 | | | 9 | | | 0.3 | % | | 6,769 | | | 6,683 | | | 86 | | | 1.3 | % |
| Interest rate swap income | 418 | | | 825 | | | (407) | | | (49.3) | % | | 1,085 | | | 417 | | | 668 | | | 160.2 | % |
| Income from investments held in rabbi trusts | 1,761 | | | 3,002 | | | (1,241) | | | (41.3) | % | | 6,079 | | | 5,859 | | | 220 | | | 3.8 | % |
| Losses on sales of mortgage loans held for sale, net | (152) | | | (50) | | | (102) | | | 204.0 | % | | (210) | | | (124) | | | (86) | | | 69.4 | % |
| Losses on sales of securities available for sale, net | (7,557) | | | — | | | (7,557) | | | 100.0 | % | | (7,557) | | | (333,170) | | | 325,613 | | | (97.7) | % |
| Other | 12,715 | | | 5,541 | | | 7,174 | | | 129.5 | % | | 18,181 | | | 11,071 | | | 7,110 | | | 64.2 | % |
| Total noninterest income (loss) | $ | 25,348 | | | $ | 26,204 | | | $ | (856) | | | (3.3) | % | | $ | 53,040 | | | $ | (283,649) | | | $ | 336,689 | | | (118.7) | % |
Noninterest income decreased $0.9 million, or 3.3%, to $25.3 million for the three months ended June 30, 2024 from $26.2 million for the three months ended June 30, 2023. This decrease was primarily due to a $7.6 million increase in losses on sales of securities available for sale and a $1.2 million decrease in income from investments held in rabbi trusts partially offset by a $7.2 million increase in other noninterest income.
•We recorded losses of $7.6 million on sales of securities available for sale, net, for the three months ended June 30, 2024. In May 2024, an early withdrawal of an omnibus deposit contract occurred which had a balance of $100.0 million at the time of the contract termination. Management made the decision to sell certain available for sale securities following the early termination in order to recoup liquidity. There were no sales of securities available for sale during the three months ended June 30, 2023.
•Income from investments held in rabbi trusts decreased primarily as a result of a less favorable mark-to-market adjustment on equity securities held in those accounts for the three months ended June 30, 2024 compared to the adjustment for the three months ended June 30, 2023.
•Other noninterest income increased primarily as a result of $7.8 million of fee income received as a result of the early withdrawal of an omnibus deposit contract which had a balance of $100.0 million, as described above.
Noninterest income increased $336.7 million, or 118.7%, to $53.0 million for the six months ended June 30, 2024 from a net loss of $283.6 million for the six months ended June 30, 2023. This increase was primarily due to a $325.6 million decrease in losses on sales of securities available for sale and a $7.1 million increase in other noninterest income.
•We recorded losses of $7.6 million and $333.2 million on sales of securities available for sale, net, for the six months ended June 30, 2024 and 2023, respectively. In May 2024, an early withdrawal of an omnibus deposit contract occurred which had a balance of $100.0 million at the time of the contract termination. Management made the decision to sell certain available for sale securities following the early termination in order to recoup liquidity. We recorded losses during the six months ended June 30, 2023 as management made the decision to sell certain available for sale securities in connection with a balance sheet repositioning in March 2023.
•Other noninterest income increased primarily as a result of $7.8 million of fee income received as a result of the early withdrawal of an omnibus deposit contract which had a balance of $100.0 million, as described above.
Noninterest Expense
The following table sets forth information regarding noninterest expense for the periods shown:
Noninterest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| | | | | Change | | | | | | Change |
| 2024 | | 2023 | | Amount | | % | | 2024 | | 2023 | | Amount | | % |
| | | | | | | (Dollars in thousands) | | | | | | |
| Salaries and employee benefits | $ | 65,218 | | | $ | 62,183 | | | $ | 3,035 | | | 4.9 | % | | $ | 129,689 | | | $ | 124,366 | | | $ | 5,323 | | | 4.3 | % |
| Office occupancy and equipment | 10,109 | | | 9,067 | | | 1,042 | | | 11.5 | % | | 19,293 | | | 18,156 | | | 1,137 | | | 6.3 | % |
| Data processing | 17,990 | | | 12,814 | | | 5,176 | | | 40.4 | % | | 34,499 | | | 25,112 | | | 9,387 | | | 37.4 | % |
| Professional services | 4,250 | | | 3,025 | | | 1,225 | | | 40.5 | % | | 7,762 | | | 6,152 | | | 1,610 | | | 26.2 | % |
| Marketing | 1,910 | | | 2,111 | | | (201) | | | (9.5) | % | | 3,425 | | | 3,134 | | | 291 | | | 9.3 | % |
| FDIC insurance | 4,508 | | | 3,034 | | | 1,474 | | | 48.6 | % | | 6,793 | | | 5,580 | | | 1,213 | | | 21.7 | % |
| Amortization of intangible assets | 504 | | | 504 | | | — | | | — | % | | 1,008 | | | 795 | | | 213 | | | 26.8 | % |
| Other | 5,380 | | | 7,196 | | | (1,816) | | | (25.2) | % | | 8,602 | | | 12,530 | | | (3,928) | | | (31.3) | % |
| Total noninterest expense | $ | 109,869 | | | $ | 99,934 | | | $ | 9,935 | | | 9.9 | % | | $ | 211,071 | | | $ | 195,825 | | | $ | 15,246 | | | 7.8 | % |
Noninterest expense increased by $9.9 million, or 9.9%, to $109.9 million during the three months ended June 30, 2024 from $99.9 million during the three months ended June 30, 2023. This increase was primarily due to a $5.2 million increase in data processing expenses, a $3.0 million increase in salary and employee benefits expenses, and a $1.5 million increase in FDIC insurance expense. These increases were partially offset by a $1.8 million decrease in other noninterest expenses.
•Data processing expenses increased during the three months ended June 30, 2024 compared to during the three months ended June 30, 2023, which were primarily driven by an increase in core data processing expense, which was primarily driven by merger and acquisition data processing expenses of $2.2 million incurred during the three months ended June 30, 2024 related to our merger with Cambridge, which closed in July 2024. Also contributing to the increase was an increase in software expenses, which were primarily driven by increases in customer relationship management and cybersecurity software expenses. The increase in these expenses was driven by efforts to improve our customer relationship management with current and potential customers, as well as improve our cybersecurity technology to better protect against cybersecurity threats.
•Salaries and employee benefits expenses increased primarily due to an increase in salaries and wages expense, an increase in other compensation expense, and an increase in outside clerical expense.
◦Salaries and wages expense increased $1.3 million primarily due to cost of living salary and wage increases and the addition of new employees.
◦Other compensation expense increased primarily due to an increase in severance pay for terminated employees and voluntary early retirements.
◦Outside clerical expense increased primarily due to the hiring of an outside vendor to assist with the conversion of our new online banking system which was launched in May 2024.
•FDIC insurance expense increased primarily due to an incremental increase to the FDIC’s special assessment, which we first accrued for during the fourth quarter of 2023. We received the FDIC's additional special assessment invoice in June 2024, which included an incremental assessment amount of $1.9 million, which we recorded during the three months ended June 30, 2024.
•Other noninterest expenses decreased primarily due to a $2.7 million decrease in the provision for credit losses on off-balance sheet exposures, which was primarily due to a reduction in the reserve rate for commercial construction unfunded commitments. For further discussion of the change in the provision for credit losses on off-balance sheet exposures, refer to the earlier discussion under “Allowance for Credit Losses,” included in the “Financial Position” section within this Item 2. Partially offsetting this decrease was a $0.7 million increase in post retirement bank owned life insurance expense which was primarily caused by a decrease in the discount rate used to determine the liability related to our split-dollar life insurance policies. This decrease in the discount rate resulted in an increase in the expense associated with such liabilities.
Noninterest expense increased by $15.2 million, or 7.8%, to $211.1 million during the six months ended June 30, 2024 from $195.8 million during the six months ended June 30, 2023. This increase was primarily due to a $9.4 million increase in data processing expenses, a $5.3 million increase in salary and employee benefits expenses, and a $1.6 million increase in professional services expense. These increases were partially offset by a $3.9 million decrease in other noninterest expenses.
•Data processing expenses increased during the six months ended June 30, 2024 compared to during the six months ended June 30, 2023, which were primarily due to an increase in software expenses, which were primarily driven by increases in customer relationship management and cybersecurity software expenses. The increase in these expenses was driven by efforts to improve our customer relationship management with current and potential customers, as well as improve our cybersecurity technology to better protect against cybersecurity threats. Also contributing to the increase in data processing expenses were $3.1 million in merger and acquisition expenses incurred during the six months ended June 30, 2024 related to our merger with Cambridge, which closed in July 2024.
•Salaries and employee benefits expenses increased primarily due to an increase in salaries and wages expense, an increase in the pension service cost, an increase in other compensation expense, and an increase in outside clerical expense. Partially offsetting these increases was an increase in loan origination fee expense reductions.
◦Salaries and wages expense increased $2.4 million primarily due to cost of living salary and wage increases and the addition of new employees.
◦Pension service costs increased primarily due to a change in the mix of employees which increased the present value of benefits based upon salary growth levels in comparison to the six months ended June 30, 2023.
◦Other compensation expense increased primarily due to an increase in severance pay and voluntary early retirements.
◦Outside clerical expense increased primarily due to the hiring of an outside vendor to assist with the conversion of our new online banking platform which was launched in May 2024.
◦Loan origination fee expense reductions increased primarily due to an increase in standard loan origination costs during the six months ended June 30, 2024.
•Professional services expenses increased primarily due to $1.7 million in merger and acquisition expenses incurred during the six months ended June 30, 2024 related to our merger with Cambridge, which closed in July 2024.
•Other noninterest expenses decreased primarily due to a $5.4 million decrease in the provision for credit losses on off-balance sheet exposures, which was caused by a reduction in reserve rates and balances in commercial construction unfunded commitments. For further discussion of the change in the provision for credit losses on off-balance sheet exposures, refer to the earlier discussion under “Allowance for Credit Losses,” included in the “Financial Position” section within this Item 2. Partially offsetting this decrease was a $1.5 million increase in post retirement bank owned life insurance expense which was primarily caused by a
decrease in the discount rate used to determine the liability related to our split-dollar life insurance policies. This decrease in the discount rate resulted in an increase in the expense associated with such liabilities.
Income Taxes
We recognize the tax effect of all income and expense transactions in each year’s Consolidated Statements of Income, regardless of the year in which the transactions are reported for income tax purposes. The following table sets forth information regarding our tax provision and applicable tax rates for the periods indicated and excludes income tax expense related to discontinued operations:
Tax Provision and Applicable Tax Rates
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in thousands) |
| Combined federal and state income tax (benefit) provision | $ | 11,671 | | | $ | 15,938 | | | $ | 21,963 | | | $ | (49,441) | |
| Effective income tax rate | 30.7 | % | | 26.4 | % | | 25.3 | % | | 23.9 | % |
| Blended statutory tax rate | 27.7 | % | | 28.2 | % | | 27.7 | % | | 28.2 | % |
Income tax expense decreased by $4.3 million to $11.7 million for the three months ended June 30, 2024 from $15.9 million for the three months ended June 30, 2023. The decrease was primarily due to a decrease in net income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.
Income tax expense increased by $71.4 million to $22.0 million for the six months ended June 30, 2024 from a benefit of $49.4 million for the six months ended June 30, 2023. The increase in income tax expense was primarily due to higher income before income tax expense, which increased from a net loss for the six months ended June 30, 2023 to net income for the six months ended June 30, 2024. The tax benefit for the six months ended June 30, 2023 was primarily due to a net loss during the six months ended June 30, 2023, which primarily resulted from losses realized on sales of available for sale securities during the six months ended June 30, 2023. In addition, during the first quarter of 2023, the Company liquidated MSSC, a wholly owned subsidiary, and transferred all of MSSC’s assets to Eastern Bank. In connection with the liquidation and subsequent transfer of securities previously held by MSSC to Eastern Bank, the Company recognized an additional deferred income tax benefit of $23.7 million during the first quarter of 2023. This deferred income tax benefit resulted from a state tax rate change applied to the deferred tax asset related to the securities transferred to Eastern Bank.
Management of Market Risk
General. Market risk is the sensitivity of the net present value of assets and liabilities and/or income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. Interest rate sensitivity is the most significant market risk to which we are exposed. Interest rate risk is the sensitivity of the net present value of assets and liabilities and income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, our primary source of income. Interest rate risk arises directly from our core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of assets and liabilities, as well as other aspects of our business.
Governance. The primary goal of interest rate risk management is to attempt to control this risk within policy limits approved by the Risk Management Committee of our Board of Directors (“RMC”), and within the Risk Appetite Statement formally adopted by the Board of Directors and described further below.
These limits reflect our tolerance for interest rate risk over both short-term and long-term horizons, are designed to encompass market rate shocks that would take place with both gradual and immediate effect and cover a range of scenarios from mild to extreme market shocks. More specifically, and as further described below, our policy limits govern:
•The maximum amount of acceptable earnings loss due to market risk in year one of a two-year earnings simulation, determined by net interest income analysis;
•The maximum amount of acceptable earnings loss due to market risk in year two of a two-year earnings simulation, determined by net interest income analysis;
•The maximum amount of acceptable decline in the present value of equity due to market risk, determined by economic value of equity analysis;
•The maximum acceptable size of the investment portfolio relative to total assets;
•Concentration limits on investment asset types to ensure appropriate portfolio diversification;
•Maximum maturity and weighted average life per security at time of purchase in both a base case and a shocked rate scenario to measure extension risk;
•The maximum acceptable duration of the investment and hedging derivatives portfolio; and
•Guidelines on accounting classification of securities including held for trading, available for sale and held to maturity.
Policy limits are tested quarterly, and the results are reported to the Asset and Liability Management Committee (“ALCO”), which is a subset of management’s Enterprise Risk Management Committee (“ERMC”), and to the RMC. The RMC advises the Board of Directors with respect to the adequacy of capital allocated based on the level of risk as well as risk issues that could impact liquidity and/or capital adequacy. From time to time, we expect we will exceed policy limits, in which case we may seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. A remediation plan will be presented to the ALCO, ERMC and the RMC that carefully outlines the proposed corrective action.
We attempt to manage interest rate risk by identifying, quantifying, and where appropriate, hedging our exposure to market risk. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. Our objective is to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary and within limits that management determines to be prudent, through the use of off-balance sheet hedging instruments including, but not limited to, interest rate swaps, floors and caps.
Our asset-liability management strategy is devised and monitored by our ALCO in accordance with policies approved by the RMC. ALCO operates under a charter developed and approved by the ERMC. ALCO meets at least monthly, or more frequently as needed, to review, among other things, our sensitivity to interest rate changes, loan pricing and activity, investment activity and strategy, hedging strategies, deposit pricing and funding strategies with respect to overall balance sheet composition, as well as earnings simulations over multiple years. ALCO may meet more frequently if there are changes in the economic environment, such as rapid increases or decreases in interest rates due to or as a result of exogenous or unknown factors so that ALCO can make any necessary strategic adjustments to better manage interest rate risk. ALCO’s membership is comprised of executive management of the Company, and representatives from various lines of business are in regular attendance, including representation from Enterprise Risk Management (“ERM”). ALCO reports regularly to the RMC on these risks and objectives with independent oversight and reporting from our Financial and Model Risk Management group within ERM.
As a company offering banking and other financial services, certain elements of risk are inherent in our transactions and operations and are present in the business decisions we make. We, therefore, encounter risk as part of the normal course of our business, and we design risk management processes to help manage these risks. In its oversight of our risk management framework, the Board of Directors has adopted a formal Risk Appetite Statement (“RAS”) which defines the aggregate level of risk and the types of risk the Company is willing to assume to achieve its corporate strategy and objectives. The Board of Directors ensures that approved policy limits, as described further above, conform to stated risk appetite. The Board of Directors monitors, on at least a quarterly basis, a set of key risk metrics, including those, but not limited to those, pertaining to market risk. Monitoring these metrics ensures that management is operating within the Board of Directors’ stated risk appetite, can help to identify trends in risk profile or emerging risks over time, and where applicable, determine where adjustments may be required to business strategy or tactics. Within our risk management framework, the functional responsibilities of risk management are divided into a tiered model, involving three lines of defense:
1.The Finance Department to which primary market risk ownership belongs including monitoring and tracking of risk, model development and maintenance, and execution of strategy and tactics to mitigate market risk;
2.The ERM Department which conducts independent risk and controls assessments to ensure appropriate risk identification, management, and reporting. The Model Risk Management group (“MRM”) within ERM is responsible for independent oversight of models used to measure market risk, including model and assumption implementation, development, and conceptual soundness; and
3.The Internal Audit Department which independently assesses the operating effectiveness of the first- and second-line processes and controls.
Comments on Recent Developments. As noted in the earlier section titled “Outlook and Trends” within this Item 7, beginning in March 2022, the Federal Open Market Committee (“FOMC”) voted to increase the federal funds rate multiple times from a range of 0.00% to 0.25% to a range of 5.25% to 5.50% on July 26, 2023, when the FOMC stated that it will continue to assess additional information and its implications for monetary policy. Our market risk management framework is designed for the potential for such rapid changes in interest rates, by establishing policy limits on such rapid shocks and periodically back-testing modeled to actual results. Back-testing of top-line results as well as key assumptions is performed against established thresholds as part of our ongoing monitoring governance of our models, and results are reported to the ALCO and the MRM. Should back-testing results exceed established performance thresholds, the model and underlying assumptions will be reviewed for recalibration.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income (“NII”) model. We model our NII over a 12-month and 24-month period assuming no changes in interest rates and a static balance sheet, where cash flows from financial assets and liabilities are replaced with new business of similar terms at current rates. The impact of our interest rate derivatives designated as hedging instruments are included in the model results. We then model NII for the same period under the assumption that market rates increase and decrease instantaneously by certain basis point increments, which vary by period depending upon market conditions, with changes in interest rates representing immediate, permanent, and parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Changes in Interest Rates” column in the table below.
Many assumptions are made in the modeling process for both NII and economic value of equity (“EVE”, discussed further below), including but not limited to the repricing and maturity characteristics of existing and new business, loan and security prepayments, administered deposit rate betas, duration of deposits without stated maturity dates, and other option risks. Management believes these assumptions to be reasonable for the various interest rate environments modeled. However, differences in actual results from these assumptions could change our exposure to interest rate risk. The models assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Additionally, the model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. We do not model negative interest rate scenarios.
Because of the limitations inherent in any modeling approach used to measure market risk, including NII and EVE sensitivity analysis, and because, in the event of changes in interest rates, management would take active steps to manage interest rate risk exposure among its financial assets and liabilities, modeling results, including those discussed in “Interest Rate Sensitivity” and “EVE Interest Rate Sensitivity” below, should not be relied upon as a forecast of actual NII or EVE, nor should they be interpreted as management’s expectations of actual results in the event of such interest rate fluctuations. The tables provide an indication of our interest rate risk exposure at a particular point in time, and actual results may differ.
The tables below set forth, as of June 30, 2024 and December 31, 2023, the modeled changes in our net interest income on an FTE basis that would result from the designated immediate changes in market interest rates:
Interest Rate Sensitivity
| | | | | | | | | | | | | | | | | |
| As of June 30, 2024 |
Change in
Interest Rates
(basis points) (1) | Net Interest
Income Year 1
Forecast | | Year 1
Change from
Level | | Policy Limit |
| (Dollars in thousands) |
| 400 | $ | 535,502 | | | (7.1) | % | | (20.0) | % |
| 200 | 557,168 | | | (3.3) | % | | (12.0) | % |
| 100 | 567,077 | | | (1.6) | % | | (10.0) | % |
| Flat | 576,222 | | | — | % | | — | % |
| (100) | 583,746 | | | 1.3 | % | | (10.0) | % |
| (200) | 588,158 | | | 2.1 | % | | (12.0) | % |
| (400) | 582,970 | | | 1.2 | % | | (20.0) | % |
| | | | | |
| As of December 31, 2023 |
Change in
Interest Rates
(basis points) (1) | Net Interest
Income Year 1
Forecast | | Year 1
Change from
Level | | Policy Limit |
| (Dollars in thousands) |
| 400 | $ | 541,166 | | | (6.1) | % | | (20.0) | % |
| 200 | 559,901 | | | (2.9) | % | | (12.0) | % |
| 100 | 568,281 | | | (1.4) | % | | (10.0) | % |
| Flat | 576,482 | | | — | % | | — | % |
| (100) | 582,014 | | | 1.0 | % | | (10.0) | % |
| (200) | 584,105 | | | 1.3 | % | | (12.0) | % |
| (400) | 574,352 | | | (0.4) | % | | (20.0) | % |
(1)Assumes an immediate uniform change in market interest rates at all maturities.
As of June 30, 2024, our model, as indicated above, shows a decline in our net interest income in rising rate scenarios. In the rising rate scenarios, funding costs are modeled to rise faster than income on earning assets, due, in part, to the mix of funding which has shifted towards higher rate paying deposits, which are more sensitive to changes in interest rates. As shown in the table above, the model generated similar results as of December 31, 2023. That is, the model showed a decline in our net interest income in the rising rate scenarios as funding costs were modeled to rise faster than income on earning assets, due, in part, to the shift in our mix of funding. The simulation results are within policy limits and management therefore does not expect a material change to our current strategy over the near term. The rate scenarios that we model at each period end are dependent upon market conditions, which is why the rate scenarios that we model may differ from period-to-period.
Management may use techniques such as investment strategy, loan and deposit pricing, non-core funding strategies, and interest rate derivative financial instruments, within internal policy guidelines, to manage interest rate risk as part of our asset/liability strategy. Hedging strategies such as, for example, receive-fixed and pay-fixed swaps, interest rate caps, floors, or collars, may be used to protect against benchmark interest rates either rising or falling. The type of derivatives we primarily use to hedge market risk are interest rate swap agreements designated as cash flow hedging instruments. When the Federal Reserve began raising interest rates in March of 2022 from very low levels, management began evaluating a derivative strategy designed to limit our exposure to downward rate scenarios. In 2022, management executed a total of $2.4 billion in notional value of receive-fixed interest rate swap agreements on floating-rate loans. These swaps are designated as cash flow hedges and management believes these derivatives provide significant protection against falling interest rates, as they have the effect of converting floating rate loan exposure to fixed rates. These receive-fixed swaps constitute the entirety of our current hedge portfolio. Management may, from time to time, due to actual or projected changes in market rates or our risk exposure, evaluate other hedging strategies, although we believe our current Net Interest Income and Economic Value of Equity simulation analyses support maintaining the current derivatives strategy. For additional information related to our interest rate derivative financial instruments, see Note 10, “Derivative Financial Instruments” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Economic Value of Equity Analysis. We also analyze the sensitivity of our financial condition to changes in interest rates through our EVE model. This analysis calculates the difference between the present value of expected cash flows from assets and liabilities assuming various changes in current interest rates.
The tables below represent an analysis of our interest rate risk as measured by the estimated changes in our EVE, resulting from an instantaneous and sustained parallel shift in the yield curve (+100, +200, +400 basis points and -100, -200, and -400 basis points) at both June 30, 2024 and December 31, 2023. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates.
Our earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines and by affecting the amount of unrealized gains and losses from securities held in rabbi trusts, the latter of which are partially offset by a corresponding but opposite impact to the amount of employee benefit expense associated with the change in value of plan assets.
EVE Interest Rate Sensitivity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in Interest
Rates (basis points) (1) | | | As of June 30, 2024 | | |
| Estimated EVE (2) | | Estimated Increase (Decrease) in EVE from Level | | EVE as a
Percentage of
Total Assets (3) |
| Amount | | Percent | | Policy Limit | |
| (Dollars in thousands) |
| 400 | $ | 3,692,921 | | | $ | (493,253) | | | (11.8) | % | | (30.0) | % | | 20.18 | % |
| 200 | 3,915,167 | | | (271,007) | | | (6.5) | % | | (20.0) | % | | 20.43 | % |
| 100 | 4,038,519 | | | (147,655) | | | (3.5) | % | | N/A | | 20.55 | % |
| Flat | 4,186,174 | | | — | | | — | | | — | % | | 20.74 | % |
| (100) | 4,344,735 | | | 158,561 | | | 3.8 | % | | N/A | | 20.93 | % |
| (200) | 4,454,549 | | | 268,375 | | | 6.4 | % | | (20.0) | % | | 20.89 | % |
| (400) | 4,562,678 | | | 376,504 | | | 9.0 | % | | (30.0) | % | | 20.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in Interest
Rates (basis points) (1) | | | As of December 31, 2023 | | |
| Estimated EVE (2) | | Estimated Increase (Decrease) in EVE from Level | | EVE as a
Percentage of
Total Assets (3) |
| Amount | | Percent | | Policy Limit | |
| (Dollars in thousands) |
| 400 | $ | 3,406,402 | | | $ | (712,648) | | | (17.3) | % | | (30.0) | % | | 18.76 | % |
| 200 | 3,709,501 | | | (409,549) | | | (9.9) | % | | (20.0) | % | | 19.37 | % |
| 100 | 3,890,531 | | | (228,519) | | | (5.5) | % | | N/A | | 19.73 | % |
| Flat | 4,119,050 | | | — | | | — | | | — | % | | 20.22 | % |
| (100) | 4,339,006 | | | 219,956 | | | 5.3 | % | | N/A | | 20.62 | % |
| (200) | 4,498,088 | | | 379,038 | | | 9.2 | % | | (20.0) | % | | 20.73 | % |
| (400) | 4,660,358 | | | 541,308 | | | 13.1 | % | | (30.0) | % | | 20.34 | % |
(1)Assumes an immediate uniform change in market interest rates at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Total assets is the net present value of expected cash flows.
Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet deposit withdrawals and anticipated loan fundings, as well as current and planned expenditures. We seek to maintain sources of liquidity that are reliable and diversified and that may be used during the normal course of business as well as on a contingency basis.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities, subject to market conditions. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan and securities prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are unencumbered cash and cash equivalents and securities classified as available for sale, which could be liquidated, subject to market conditions. In the future,
our liquidity position will continue to be affected by the level of customer deposits and payments, loan originations and repayments, as well as any acquisitions, dividends, and share repurchases in which we may engage. For the next twelve months, we believe that our existing resources, including our capacity to use brokered deposits and wholesale borrowings, will be sufficient to meet the liquidity and capital requirements of our operations. We may elect to raise additional capital through the sale of additional equity or debt financing to fund business activities such as strategic acquisitions, share repurchases, or other purposes beyond the next twelve months.
We participate in the IntraFi Network, which allows us to provide access to FDIC deposit insurance protection on customer deposits for consumers, businesses and public entities that exceed same-bank FDIC insurance thresholds. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. At both June 30, 2024 and December 31, 2023 we had no IntraFi Network one-way sell deposits. At June 30, 2024 and December 31, 2023, we had repurchased $1.4 billion and $1.3 billion, respectively, of previously sold reciprocal deposits.
Although customer deposits remain our preferred source of funds, maintaining additional sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. At June 30, 2024, we had $17.4 million in outstanding advances and the ability to borrow up to an additional $2.7 billion. We also have the ability to borrow from the Federal Reserve Bank of Boston. At June 30, 2024, we had the ability to borrow up to $2.5 billion from the Federal Reserve Bank of Boston Discount Window. At June 30, 2024, cash and cash equivalents were $750.8 million and secured borrowing capacity at the Federal Reserve Bank and Federal Home Loan Bank totaled $5.2 billion, providing total liquidity sources of $5.9 billion. These liquidity sources provided 109% coverage of all customer uninsured and uncollateralized deposits, which totaled $5.4 billion, or 31% of total deposits, as of June 30, 2024. For further discussion of uninsured deposits, refer to the “Deposits” discussion within the “Financial Position” section within this Item 2.
Sources of Liquidity
| | | | | | | | | | | | | | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| Outstanding | | Additional
Capacity | | Outstanding | | Additional
Capacity |
| | | (In thousands) | | |
| IntraFi deposits | $ | 1,412,673 | | | $ | — | | | $ | 1,309,816 | | | $ | — | |
| Brokered deposits (1) | — | | | — | | | 50,000 | | | — | |
| Federal Home Loan Bank (2) | 17,415 | | | 2,692,199 | | | 17,738 | | | 2,865,582 | |
| Federal Reserve Bank of Boston- Bank Term Funding Program (3) | — | | | — | | | — | | | 2,449,438 | |
| Federal Reserve Bank of Boston- Discount Window (4) | — | | | 2,469,908 | | | — | | | 775,869 | |
| Total | $ | 1,430,088 | | | $ | 5,162,107 | | | $ | 1,377,554 | | | $ | 6,090,889 | |
(1)The additional borrowing capacity has not been assessed for this category.
(2)As of June 30, 2024 and December 31, 2023, loans have been pledged to the FHLBB with a carrying value of $4.4 billion and $4.6 billion, respectively, resulting in this additional unused borrowing capacity.
(3)Securities with a carrying value of $2.4 billion at December 31, 2023 were pledged to the Federal Reserve Bank of Boston under the Bank Term Funding Program, resulting in this additional unused borrowing capacity. The Bank Term Funding Program ceased extending new loans March 11, 2024. Accordingly, we had no additional capacity nor any securities pledged to the Federal Reserve Bank of Boston under the Bank Term Funding Program as of June 30, 2024.
(4)Loans with a carrying value of $1.2 billion and $1.1 billion at June 30, 2024 and December 31, 2023, respectively, and securities with a carrying value of $1.9 billion and $168.8 million at June 30, 2024 and December 31, 2023, respectively, were pledged to the Discount Window, resulting in this additional borrowing capacity. The increase in the amount of securities pledged to the Discount Window at June 30, 2024 from December 31, 2023 is due to additional securities pledged which were previously pledged as collateral to the Bank Term Funding Program.
We believe that advanced preparation, early detection, and prompt responses can avoid, minimize, or shorten potential liquidity constraints. Our Board of Directors and management’s ALCO oversee the assessment and monitoring of risk levels, as well as potential responses during unanticipated stress events. As part of our risk management framework, we perform periodic liquidity stress testing to assess our need for liquid assets as well as backup sources of liquidity.
Capital Resources. We are subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks, the FDIC and the Federal Reserve (with respect to our consolidated capital requirements). At June 30, 2024 and December 31, 2023, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines. To be categorized as well-capitalized, the Company must maintain (1) a minimum of total risk-based capital ratio of 10.0%; (2) a minimum of common equity Tier 1 capital ratio of 6.5%; (3) a minimum of Tier 1 capital ratio of 8.0%; and (4) a minimum of Tier 1 leverage ratio of 5.0%. Management believes that the Company met all
capital adequacy requirements to which it is subject as of June 30, 2024 and December 31, 2023. There have been no conditions or events that management believes would cause a change in the Company’s categorization.
The Company’s actual capital ratios are presented in the following table:
| | | | | | | | | | | |
| As of June 30, 2024 | | As of December 31, 2023 |
| Capital Ratios: | | | |
| Average equity to average assets (1) | 13.78 | % | | 11.83 | % |
| Total regulatory capital (to risk-weighted assets) | 19.64 | % | | 19.55 | % |
| Common equity Tier 1 capital (to risk-weighted assets) | 18.63 | % | | 18.55 | % |
| Tier 1 capital (to risk-weighted assets) | 18.63 | % | | 18.55 | % |
| Tier 1 capital (to average assets) leverage | 14.24 | % | | 14.00 | % |
(1)The ratio presented as of June 30, 2024 represents quarter-to-date average equity as a percentage of quarter-to-date average total assets.
Contractual Obligations, Commitments and Contingencies. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. At June 30, 2024, there were no material changes in our contractual obligations, other commitments and contingencies from those disclosed in our 2023 Form 10-K.
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit, unadvanced portions of construction loans and standby letters of credit, all of which involve elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
At June 30, 2024, we had $5.9 billion of commitments to originate loans, comprised of $3.5 billion of commitments under commercial loans and lines of credit (including $776.5 million of unadvanced portions of construction loans), $2.1 billion of commitments under home equity loans and lines of credit, $202.8 million in standard overdraft coverage commitments, $16.1 million of unfunded commitments related to residential real estate loans and $52.1 million in other consumer loans and lines of credit. In addition, at June 30, 2024, we had $53.4 million in standby letters of credit outstanding. We also had $13.7 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 Executive Chair (the Company’s principal executive officer) along with the Company’s Senior Advisor, who also served as the Company’s Chief Financial Officer through July 31, 2024, and is the Company’s principal 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 Executive Chair along with the Company’s Senior Advisor concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q.
Changes to Internal Controls over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended June 30, 2024 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
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 2023 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 9, “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 2023 Form 10-K. As of the date of this Quarterly Report on Form 10-Q, the risk factors of the Company have not changed materially from those disclosed in our 2023 Form 10-K.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
ITEM 6.EXHIBITS
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.
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 (and are numbered in accordance with Item 601 of Regulation S-K):
| | | | | | | | |
Exhibit No. | | Description |
| |
| 10.1 | | |
| | |
| 10.2*† | | |
| | |
| 10.3† | | |
| | |
| 10.4† | | |
| | |
| 10.5†+ | | |
| | |
| 31.1* | | |
| | |
| 31.2* | | |
| | |
| 32.1+ | | |
| | |
| 32.2+ | | |
| | |
| 101* | | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Unaudited Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023, (ii) the Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2024 and 2023 (iii) the Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2024 and 2023, (iv) the Unaudited Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2024 and 2023, (v) the Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2024 and 2023, 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+ |
†Management contract or compensatory plan, contract or arrangement
*Filed herewith
+ Furnished herewith
SIGNATURES
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.
| | | | | | | | | | | |
| EASTERN BANKSHARES, INC. |
| |
| Date: August 7, 2024 | /s/ Robert F. Rivers |
| By: | | Robert F. Rivers |
| | | Executive Chair and Chair of the Board |
| | | (Principal Executive Officer) |
| |
| Date: August 7, 2024 | /s/ James B. Fitzgerald |
| By: | | James B. Fitzgerald |
| | | Senior Advisor |
| | | (Principal Financial Officer) |
