Eastern Bankshares, Inc. - Quarter Report: 2022 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
(Mark one)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2022
Or
| ☐ | 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) | |||||||
265 Franklin 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
182,674,973 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of May 4, 2022.
Index
2
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PART I — FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
| (In thousands, except per share data) | March 31, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | 118,362 | $ | 144,634 | |||||||
| Short-term investments | 712,132 | 1,087,158 | |||||||||
| Cash and cash equivalents | 830,494 | 1,231,792 | |||||||||
| Securities: | |||||||||||
Available for sale (amortized cost $8,456,620 and $8,587,179, respectively) | 7,917,305 | 8,511,224 | |||||||||
Held to maturity (fair value $392,123 and $0, respectively) | 395,434 | — | |||||||||
| Total securities | 8,312,739 | 8,511,224 | |||||||||
| Loans held for sale | 1,166 | 1,206 | |||||||||
| Loans: | |||||||||||
| Commercial and industrial | 2,886,560 | 2,960,527 | |||||||||
| Commercial real estate | 4,609,824 | 4,522,513 | |||||||||
| Commercial construction | 246,093 | 222,328 | |||||||||
| Business banking | 1,201,007 | 1,334,694 | |||||||||
| Residential real estate | 1,936,182 | 1,926,810 | |||||||||
| Consumer home equity | 1,099,211 | 1,100,153 | |||||||||
| Other consumer | 203,326 | 214,485 | |||||||||
| Total loans | 12,182,203 | 12,281,510 | |||||||||
| Less: allowance for loan losses | (124,166) | (97,787) | |||||||||
| Less: unamortized premiums, net of unearned discounts and deferred fees | (24,434) | (26,442) | |||||||||
| Net loans | 12,033,603 | 12,157,281 | |||||||||
| Federal Home Loan Bank stock, at cost | 10,904 | 10,904 | |||||||||
| Premises and equipment | 73,180 | 80,984 | |||||||||
| Bank-owned life insurance | 157,954 | 157,091 | |||||||||
| Goodwill and other intangibles, net | 654,759 | 649,703 | |||||||||
| Deferred income taxes, net | 183,137 | 76,535 | |||||||||
| Prepaid expenses | 188,704 | 179,330 | |||||||||
| Other assets | 389,432 | 456,078 | |||||||||
| Total assets | $ | 22,836,072 | $ | 23,512,128 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Deposits: | |||||||||||
| Demand | $ | 6,788,742 | $ | 7,020,864 | |||||||
| Interest checking accounts | 4,662,134 | 4,478,566 | |||||||||
| Savings accounts | 2,089,427 | 2,077,495 | |||||||||
| Money market investment | 5,406,198 | 5,525,005 | |||||||||
| Certificates of deposit | 446,315 | 526,381 | |||||||||
| Total deposits | 19,392,816 | 19,628,311 | |||||||||
| Borrowed funds: | |||||||||||
| Federal Home Loan Bank advances | 13,689 | 14,020 | |||||||||
| Escrow deposits of borrowers | 21,233 | 20,258 | |||||||||
| Total borrowed funds | 34,922 | 34,278 | |||||||||
| Other liabilities | 399,942 | 443,187 | |||||||||
| Total liabilities | 19,827,680 | 20,105,776 | |||||||||
| Commitments and contingencies (see footnote 12) | |||||||||||
| Shareholders’ equity | |||||||||||
Common shares, $0.01 par value, 1,000,000,000 shares authorized, 183,438,711 and 186,305,332 shares issued and outstanding at, March 31, 2022 and December 31, 2021, respectively | 1,834 | 1,863 | |||||||||
| Additional paid in capital | 1,777,670 | 1,835,241 | |||||||||
| Unallocated common shares held by the Employee Stock Ownership Plan | (141,455) | (142,709) | |||||||||
| Retained earnings | 1,782,997 | 1,768,653 | |||||||||
| Accumulated other comprehensive loss, net of tax | (412,654) | (56,696) | |||||||||
| Total shareholders’ equity | 3,008,392 | 3,406,352 | |||||||||
| Total liabilities and shareholders’ equity | $ | 22,836,072 | $ | 23,512,128 | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Interest and dividend income: | |||||||||||
| Interest and fees on loans | $ | 101,367 | $ | 88,639 | |||||||
| Taxable interest and dividends on securities | 27,876 | 10,206 | |||||||||
| Non-taxable interest and dividends on securities | 1,806 | 1,856 | |||||||||
| Interest on federal funds sold and other short-term investments | 436 | 432 | |||||||||
| Total interest and dividend income | 131,485 | 101,133 | |||||||||
| Interest expense: | |||||||||||
| Interest on deposits | 3,322 | 1,002 | |||||||||
| Interest on borrowings | 39 | 40 | |||||||||
| Total interest expense | 3,361 | 1,042 | |||||||||
| Net interest income | 128,124 | 100,091 | |||||||||
| Release of allowance for loan losses | (485) | (580) | |||||||||
| Net interest income after provision for loan losses | 128,609 | 100,671 | |||||||||
| Noninterest income: | |||||||||||
| Insurance commissions | 28,713 | 28,147 | |||||||||
| Service charges on deposit accounts | 8,537 | 5,367 | |||||||||
| Trust and investment advisory fees | 6,141 | 5,663 | |||||||||
| Debit card processing fees | 2,945 | 2,749 | |||||||||
| Interest rate swap income | 2,932 | 5,405 | |||||||||
| (Losses) income from investments held in rabbi trusts | (4,433) | 1,846 | |||||||||
| Gains on sales of mortgage loans held for sale, net | 169 | 1,479 | |||||||||
| (Losses) gains on sales of securities available for sale, net | (2,172) | 1,164 | |||||||||
| Other | 3,583 | 3,392 | |||||||||
| Total noninterest income | 46,415 | 55,212 | |||||||||
| Noninterest expense: | |||||||||||
| Salaries and employee benefits | 69,526 | 64,040 | |||||||||
| Office occupancy and equipment | 11,614 | 8,217 | |||||||||
| Data processing | 15,320 | 12,129 | |||||||||
| Professional services | 4,701 | 4,148 | |||||||||
| Marketing | 1,574 | 1,691 | |||||||||
| Loan expenses | 1,168 | 1,847 | |||||||||
| FDIC insurance | 1,412 | 948 | |||||||||
| Amortization of intangible assets | 827 | 532 | |||||||||
| Other | 2,724 | 497 | |||||||||
| Total noninterest expense | 108,866 | 94,049 | |||||||||
| Income before income tax expense | 66,158 | 61,834 | |||||||||
| Income tax expense | 14,642 | 14,171 | |||||||||
| Net income | $ | 51,516 | $ | 47,663 | |||||||
| Basic earnings per share | $ | 0.30 | $ | 0.28 | |||||||
| Diluted earnings per share | $ | 0.30 | $ | 0.28 | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Net income | $ | 51,516 | $ | 47,663 | |||||||
| Other comprehensive loss, net of tax: | |||||||||||
| Net change in fair value of securities available for sale | (352,025) | (74,904) | |||||||||
| Net change in fair value of cash flow hedges | (3,809) | (5,948) | |||||||||
Net change in other comprehensive income for defined benefit postretirement plans | (124) | 426 | |||||||||
| Total other comprehensive loss | (355,958) | (80,426) | |||||||||
| Total comprehensive loss | $ | (304,442) | $ | (32,763) | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended March 31, 2022 and 2021
| Shares of Common Stock Outstanding | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Unallocated Common Stock Held by ESOP | Total | |||||||||||||||||||||||||||||||||||
| (In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | 186,758,154 | $ | 1,868 | $ | 1,854,068 | $ | 1,665,607 | $ | 54,234 | $ | (147,725) | $ | 3,428,052 | ||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | (10,324) | — | — | (10,324) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 47,663 | — | — | 47,663 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (80,426) | — | (80,426) | ||||||||||||||||||||||||||||||||||
| ESOP shares committed to be released | — | — | 827 | — | — | 1,253 | 2,080 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 186,758,154 | $ | 1,868 | $ | 1,854,895 | $ | 1,702,946 | $ | (26,192) | $ | (146,472) | $ | 3,387,045 | ||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 186,305,332 | $ | 1,863 | $ | 1,835,241 | $ | 1,768,653 | $ | (56,696) | $ | (142,709) | $ | 3,406,352 | ||||||||||||||||||||||||||||
| — | — | — | (20,098) | — | — | (20,098) | |||||||||||||||||||||||||||||||||||
| Dividends to common shareholders | — | — | — | (17,074) | — | — | (17,074) | ||||||||||||||||||||||||||||||||||
| Repurchased common stock | (2,866,621) | (29) | (60,566) | — | — | — | (60,595) | ||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | 1,623 | — | — | — | 1,623 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 51,516 | — | — | 51,516 | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (355,958) | — | (355,958) | ||||||||||||||||||||||||||||||||||
| ESOP shares committed to be released | — | — | 1,372 | — | — | 1,254 | 2,626 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 183,438,711 | $ | 1,834 | $ | 1,777,670 | $ | 1,782,997 | $ | (412,654) | $ | (141,455) | $ | 3,008,392 | ||||||||||||||||||||||||||||
(1)Represents gross transition adjustment amount of $28.0 million, net of taxes of $7.9 million, to reflect the cumulative impact on retained earnings pursuant to the Company’s adoption of Accounting Standards Update 2016-13. Refer to Note 4, “Loans and Allowance for Credit Losses” for additional discussion.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended March 31, | |||||||||||
| (In thousands) | 2022 | 2021 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | 51,516 | $ | 47,663 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Release of provision for loan losses | (485) | (580) | |||||||||
| Depreciation and amortization | 3,803 | 3,283 | |||||||||
| Accretion of deferred loan fees and premiums, net | (2,653) | (6,859) | |||||||||
| Deferred income tax expense | 14,129 | 5,118 | |||||||||
| Amortization of investment security premiums and discounts | 4,669 | 3,277 | |||||||||
| Right-of-use asset amortization | 3,272 | 2,862 | |||||||||
| Share-based compensation | 1,623 | — | |||||||||
| Increase in cash surrender value of bank-owned life insurance | (863) | (549) | |||||||||
| Loss (gain) on sale of securities available for sale, net | 2,172 | (1,164) | |||||||||
| Amortization of gains from terminated interest rate swaps | (5,298) | (8,274) | |||||||||
| Employee Stock Ownership Plan expense | 2,626 | 2,080 | |||||||||
| Other | 1,013 | (8) | |||||||||
| Change in: | |||||||||||
| Loans held for sale | 40 | (863) | |||||||||
| Prepaid pension expense | (7,680) | 838 | |||||||||
| Other assets | 40,300 | 43,683 | |||||||||
| Other liabilities | (39,806) | (25,597) | |||||||||
| Net cash provided by operating activities | 68,378 | 64,910 | |||||||||
| Investing activities | |||||||||||
| Proceeds from sales of securities available for sale | 232,561 | 23,236 | |||||||||
| Proceeds from maturities and principal paydowns of securities available for sale | 362,680 | 214,085 | |||||||||
| Purchases of securities available for sale | (471,543) | (1,137,969) | |||||||||
| Proceeds from maturities and principal paydowns of securities held to maturity | 421 | — | |||||||||
| Purchases of securities held to maturity | (395,835) | — | |||||||||
| Contributions to low income housing tax credit investments | (5,642) | (2,727) | |||||||||
| Distributions from other equity investments | 606 | 7 | |||||||||
| Net decrease (increase) in outstanding loans | 99,847 | (171,325) | |||||||||
| Proceeds from life insurance policies | 19,736 | — | |||||||||
| Acquisitions, net of cash and cash equivalents acquired | (5,200) | — | |||||||||
| Purchased banking premises and equipment, net | (3,280) | (719) | |||||||||
| Proceeds from sale of premises held for sale | 8,390 | 736 | |||||||||
| Net cash used in investing activities | (157,259) | (1,074,676) | |||||||||
| Financing activities | |||||||||||
| Net (decrease) increase in demand, savings, interest checking, and money market investment deposit accounts | (155,429) | 840,423 | |||||||||
| Net decrease in time deposits | (80,066) | (15,332) | |||||||||
| Net increase in borrowed funds | 644 | 1,302 | |||||||||
| Contingent consideration paid | (63) | (41) | |||||||||
| Payments for repurchases of common stock | (60,595) | — | |||||||||
| Dividends declared and paid to common shareholders | (16,908) | (10,324) | |||||||||
| Net cash provided by financing activities | (312,417) | 816,028 | |||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (401,298) | (193,738) | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 1,231,792 | 2,054,070 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 830,494 | $ | 1,860,332 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest paid | $ | 3,343 | $ | 1,049 | |||||||
| Income taxes | 5,505 | 4,858 | |||||||||
| Non-cash activities | |||||||||||
| Net increase in capital commitments relating to low income housing tax credit projects | $ | 530 | $ | 2,943 | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
8
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 subsidiaries, Eastern Bank (the “Bank”) and Eastern Insurance Group LLC (“Eastern Insurance Group”), the Company provides a variety of banking, trust and investment, and insurance services, through its full-service bank branches and insurance offices, located primarily in Eastern Massachusetts, southern and coastal New Hampshire and Rhode Island. Eastern Insurance Group LLC is a wholly-owned subsidiary of the Bank.
The activities of the Company are subject to the regulatory supervision of the Board of Governors of the Federal Reserve System (“Federal Reserve”). The activities of the Bank are subject to the regulatory supervision of the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation (“FDIC”) and the Consumer Financial Protection Bureau. The Company and the activities of the Bank and Eastern Insurance Group 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 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.
The accompanying consolidated balance sheet as of March 31, 2022, the consolidated statements of income and comprehensive income and of changes in equity for the three months ended March 31, 2022 and 2021 and statement of cash flows for the three months ended March 31, 2022 and 2021 are unaudited. The consolidated balance sheet as of December 31, 2021 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, 2021 (“2021 Form 10-K”), as filed with the SEC. In the opinion of management, the Company’s consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented. The results for the three months ended March 31, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods, 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 March 31, 2022 and those that were adopted during the three months ended March 31, 2022. For a full discussion of significant accounting policies, refer to the notes included within the Company’s 2021 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.
9
Recent Accounting Pronouncements
Relevant standards that were recently issued but not yet adopted as of March 31, 2022:
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). This update modifies how an acquiring entity measures contract assets and contract liabilities of an acquiree in a business combination in accordance with Topic 606. The amendments in this update require the acquiring entity in a business combination to account for revenue contracts as if they had originated the contract and assess how the acquiree accounted for the contract under Topic 606. ASU 2021-08 improves comparability of recognition and measurement of revenue contracts with customers both before and after a business combination. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date of the amendments with early adoption permitted. The Company expects the adoption of this standard will not have a material impact on its consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments–Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). The amendments in this update eliminate the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310-40 and amends the guidance on vintage disclosures, referenced in ASC 326-20-50, to require disclosure of current-period gross write-offs by year of origination. This update supersedes the existing account guidance for TDRs in ASC 310-40 in its entirety and requires entities to evaluate all receivable modifications under existing accounting guidance in ASC 310-20 to determine whether a modification made to a borrower results in a new loan or a continuation of an existing loan. In addition to the elimination of TDR accounting guidance, entities that adopt this update no longer consider renewals, modification and extensions that result from reasonably expected TDRs in their calculation of the allowance for credit losses. Further, if an entity employs a discounted cash flow method to calculate the allowance for credit losses, it will be required to use a post-modification-derived effective interest rate as part of its calculation. The update also requires new disclosures for receivables for which there has been a modification in their contractual cash flows resulting from borrowers experiencing financial difficulties. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method. The amendments on TDR disclosures and vintage disclosures should be adopted prospectively. The Company expects the adoption of this standard will not have a material impact on its consolidated financial statements.
Relevant standards that were adopted during the three months ended March 31, 2022:
In June 2016, the FASB issued ASU 2016-13, Financial Instruments–Credit Losses on Financial Instruments and relevant amendments (Topic 326) (“ASU 2016-13”). This update was created to replace the then-current GAAP method of calculating credit losses. Specifically, the standard replaces the existing incurred loss impairment guidance by requiring immediate recognition of expected credit losses. For financial assets carried at amortized cost that are held at the reporting date (including trade and other receivables, loans and commitments, held-to-maturity debt securities and other financial assets), credit losses are measured based on historical experience, current conditions and reasonable supportable forecasts. The standard also amends existing impairment guidance for available for sale securities, in which credit losses will be recorded as an allowance versus a write-down of the amortized cost basis of the security. It also allows for a reversal of impairment loss when the credit of the issuer improves. The guidance requires a cumulative effect of the initial application to be recognized in retained earnings at the date of initial application.
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses (“ASU 2018-19”). The amendments in ASU 2018-19 were intended to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. This update requires entities to include expected recoveries of the amortized cost basis previously written off or expected to be written off in the valuation account for purchased financial assets with credit deterioration. In addition, the amendments in this update clarify and improve various aspects of the guidance for ASU 2016-13.
On January 1, 2022, the Company adopted ASUs 2016-13, 2018-19 and 2019-11 (codified in ASC 326, “Financial Instruments-Credit Losses”), which replaced the incurred loss methodology (codified in ASC 450, “Contingencies,” ASC 310, “Receivables” and ASC 320, “Debt Securities”) with an expected loss methodology that is referred to as current expected credit losses methodology (“CECL methodology”). The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures by means of a cumulative-effect adjustment to the opening retained earnings balance on the Company’s consolidated balance sheet as of the Company’s date of adoption of January 1, 2022. Accordingly, results for reporting periods beginning after December
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31, 2021 are presented under ASU 2016-13, while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $20.1 million, net of deferred taxes of $7.9 million, as of January 1, 2022, for the cumulative effect of adopting ASU 2016-13. The Company adopted ASU 2016-13 using the prospective transition approach for purchased credit-deteriorated (“PCD”) financial assets that were previously classified as purchased credit-impaired (“PCI”) financial assets and accounted for under ASC 310-30. In accordance with ASU 2016-13, the Company did not reassess whether its assets previously classified as PCI assets met the criteria of PCD assets as of the date of adoption. Rather, loans previously determined to be PCI loans are considered to be PCD loans as of January 1, 2022. On January 1, 2022, the amortized cost basis of the PCD assets was adjusted to reflect the addition of the allowance for loan losses on PCD loans. The remaining noncredit discount will be accreted into the Company’s interest income at the then-effective interest rate as of January 1, 2022. The amount of the adjustment for PCD assets was not material to the Company.
In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This update addresses optional expedients and exceptions for applying GAAP to certain contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The new guidance applies only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. For public and nonpublic entities, the guidance is effective as of March 12, 2020 through December 31, 2022 and does not apply to contract modifications made after December 31, 2022. The Company performed a review its contracts and existing processes to assess the risks and potential impact of the transition away from LIBOR and noted no material impact to the Company’s consolidated financial statements as of March 31, 2022.
Significant Accounting Policies
The adoption of the ASUs 2016-13, 2018-19 and 2019-11 resulted in changes in the Company’s accounting policies and estimates as it relates to available for sale securities, held to maturity securities, loans receivable and off-balance sheet commitments to lend. The following describes the changes to the Company’s significant accounting policies from December 31, 2021, that resulted from the adoption of the ASUs described above:
Allowance for Credit Losses - Available for Sale Securities
ASU 2016-13 made targeted changes to ASC 320 to eliminate the concept of “other than temporary” from the impairment loss estimation model for available for sale (“AFS”) securities. A summary of the changes made by the Company to the existing impairment model (previously referred to as the “OTTI” impairment model) as a result of adoption of ASU 2016-13 is as follows:
•The use of an allowance approach, rather than a permanent write-down of a security’s cost basis upon determination of an impairment loss.
•The amount of the allowance is limited to the amount at which the security’s fair value is less than its amortized cost basis.
•The Company may not consider the length of time a security’s fair value has been less than amortized cost.
•The Company may not consider recoveries in fair value after the balance sheet date when assessing whether a credit loss exists.
The Company’s AFS securities are carried at fair value. For AFS securities in an unrealized loss position, management will first evaluate whether there is intent to sell a security, or if it is more likely than not that the Company will be required to sell a security prior to anticipated recovery of its amortized cost basis. If either of these criteria are met, the Company will record a write-down of the security’s amortized cost basis to fair value through income. For those AFS securities which do not meet the intent or requirement to sell criteria, management will evaluate whether the decline in fair value is a result of credit related matters or other factors. In performing this assessment, management considers the creditworthiness of the issuer including whether the security is guaranteed by the U.S. federal government or other government agency, the extent to which fair value is less than amortized cost, and changes in credit rating during the period, among other factors. If this assessment indicates the existence of credit losses, the security will be written down to fair value, as determined by a discounted cash flow analysis. To the extent the estimated cash flows do not support the amortized cost, the deficiency is considered to be due to credit loss and is recognized in earnings.
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when the security is determined to be uncollectible, or when either of the aforementioned criteria surrounding intent or requirement to sell have been met. On January 1, 2022, the date on which the Company adopted ASU 2016-13, no allowance for credit losses was recorded for AFS securities.
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Refer to Note 3, “Securities” for additional information regarding the measurement of impairment losses on AFS securities.
Allowance for Credit Losses - Held to Maturity Securities
The Company measures expected credit losses on held to maturity (“HTM”) securities on a collective basis by major security type which, as of March 31, 2022, includes government-sponsored residential and commercial mortgage-backed securities. Securities in the Company’s held to maturity portfolio are guaranteed by either the U.S. federal government or other government sponsored agencies with a long history of no credit losses. As a result, management has determined that these securities have a zero loss expectation and therefore does not estimate an allowance for credit losses on these securities. The Company held no securities classified as held to maturity at December 31, 2021. Refer to Note 3, “Securities” for additional information regarding the measurement of credit losses on HTM securities.
Allowance for Loan Losses - Loans Held for Investment
Loans Individually Assessed for Impairment
ASU 2016-13 indicates that a loan should be measured for impairment individually if that loan shares no similar risk characteristics with other loans. For the Company, loans which have been identified as those to be individually assessed for impairment under CECL include loans that do not share similar risk characteristics with other loans in the corresponding reserve segment. Characteristics of loans meeting this definition may include, but is not limited to:
•Loans previously restructured and determined to be TDR loans;
•Loans on non-accrual status; and
•Loans with a risk rating of 12 under the Company’s risk rating scale, substandard (well-defined weakness) or worse.
Collateral-Dependent Loans
Management considers a loan to be collateral-dependent when foreclosure of the underlying collateral is probable. In addition, in accordance with ASU 2016-13, the Company elected to apply the collateral-dependent practical expedient whereby the Company measures expected credit losses using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty.
Troubled Debt Restructured Loans
In cases where a borrower experiences financial difficulties and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a TDR. Modifications may include adjustments to interest rates, extensions of maturity, consumer loans where the borrower’s obligations have been effectively discharged through Chapter 7 bankruptcy and the borrower has not reaffirmed the debt to the Company, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. Prior to the Company’s adoption of ASU 2016-13, all TDR loans were subject to a specific review for impairment loss each period beginning in the period in which the modification was executed. Subsequent to the adoption of ASU 2016-13, management identifies loans as TDR loans when it has a reasonable expectation that it will execute a TDR modification with a borrower. In addition, subsequent to adoption of ASU 2016-13, management estimates expected credit losses on a collective basis if a group of TDR loans share similar risk characteristics. If a TDR loan’s risk characteristics are not similar to those of any of the Company’s other TDR loans, expected credit losses on the TDR loan are measured individually. The impairment analysis discounts the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification or the fair value of collateral if the loan is collateral dependent. The amount of credit loss, if any, is recorded as a specific loss allocation to each individual loan or as a loss allocation to the pool of loans, for those loans for which credit loss is measured on a collective basis, in the allowance for credit losses. Any commercial (commercial and industrial, commercial real estate, commercial construction, and business banking loans) or residential loan that has been classified as a TDR and which subsequently defaults is reviewed to determine if the loan should be deemed collateral-dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell.
The Company’s policy is to retain any restructured loan, which is on non-accrual status prior to being modified, on non-accrual status for approximately six months subsequent to being modified before the Company considers its return to accrual status. If the restructured loan is on accrual status prior to being modified, the Company reviews it to determine if the modified loan should remain on accrual status.
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Purchased Credit-Deteriorated Loans
As described above, the Company applied the prospective transition approach with respect to PCD assets upon adoption of ASU 2016-13. Under this approach, loans previously determined to be PCI loans are considered to be PCD loans as of January 1, 2022. PCD loans are acquired individual loans (or acquired groups of loans with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by the Company’s assessment. A PCD loan is recorded at its purchase price plus the allowance for loan losses expected at the time of acquisition, or “gross up” of the amortized cost basis, if any. Changes in the current estimate of the allowance for loan losses subsequent to acquisition from the estimated allowance previously recorded are recognized in the income statement as provision for credit losses or reversal of provision for credit losses in subsequent periods as they arise. A purchased loan that does not qualify as a PCD asset is accounted for similar to the Company’s method of accounting for originated assets, whereby an allowance for loan losses is recognized with a corresponding increase to the income statement provision for loan losses. Evidence that purchased loans, measured at amortized cost, have more-than-insignificant deterioration in credit quality since origination and, therefore meet the PCD definition, may include past-due status, non-accrual status, risk rating and other standard indicators (i.e., TDRs, charge-offs, bankruptcy).
Allowance for Credit Losses
Through December 31, 2021, the allowance for loan losses represented management’s best estimate of incurred probable losses in the Company’s loan portfolios based upon management’s assessment of various factors, including the risk characteristics of its loan portfolio, current economic conditions, and trends in loan delinquencies and charge-offs. The Company’s methodology for determining the qualitative component through December 31, 2021 included an assessment of factors affecting the determination of incurred losses in the loan portfolio. Such factors included trends in economic conditions, loan growth, credit underwriting policy exceptions, regulatory and audit findings, and peer comparisons, among others. Upon adoption of ASU 2016-13, effective January 1, 2022, the Company changed its reserve methodology to estimate expected credit losses over the contractual life of loans and leases.
The allowance for credit losses, or ACL, is established to provide for the Company’s current estimate of expected lifetime credit losses on loans measured at amortized cost and unfunded lending commitments at the balance sheet date and is established through a provision for credit losses charged to net income. Credit losses are charged directly to the ACL. Subsequent recoveries, if any, are credited to the ACL. 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 finance loans, policies and procedures exist that require charge-off consideration upon a certain triggering event depending on the product type. Charge-off triggers include: 120 days delinquent for automobile, home equity, and other consumer loans with the exception of cash reserve loans for which the trigger is 150 days delinquent; death of the borrower; or Chapter 7 bankruptcy. In addition to those events, the charge-off determination includes other loan quality indicators, such as collateral position and adequacy or the presence of other repayment sources.
The ACL is evaluated on a regular basis by management. Management uses a methodology to systematically estimate the amount of expected lifetime losses in the portfolio. 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 a financial asset’s probability of default (“PD”), loss given default (“LGD”) and exposure at default (“EAD”), which are derived from historical loss experience and other factors. For residential real estate, consumer home equity and other consumer portfolios, the Company’s quantitative model uses historical loss experience.
The quantitative model estimates expected credit losses using loan level data over the estimated life of the exposure, considering the effect of prepayments. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the Company’s historical loss average. Management has determined that a reasonable and supportable forecast period of eight quarters, and a straight-line reversion period of four quarters, are appropriate forecast periods for purposes of estimating expected credit losses. As described above, quantitative model results are adjusted for risk factors not considered within the model but which are relevant in estimating the expected credit losses within the loan portfolio. The qualitative risk factors impacting the expected risk of loss within the loan portfolio include the following:
•Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices;
•Nature and volume of the portfolio;
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•Volume and severity of past-due, non-accrual and classified loans;
•The value of the underlying collateral for loans that are not collateral dependent;
•Concentrations of credit risk;
•Model and data limitations; and
•Other external factors, such as changes in legal, regulatory or competitive environments.
Loans that do not share similar risk characteristics with any pools of assets are subject to individual evaluation and are removed from the collectively assessed pools. For loans that are individually evaluated, the Company uses either a discounted cash flow (“DCF”) approach or, for loans deemed to be collateral dependent or when foreclosure is probable, a fair value of collateral approach.
Accrued interest receivable amounts are excluded from balances of loans held at amortized cost and are included within other assets on the consolidated balance sheet. Management has elected not to measure an allowance for credit losses on these amounts as the Company employs a timely write-off policy. Consistent with the Company's policy for non-accrual loans, accrued interest receivable is typically written off when loans reach 90 days past due and are placed on non-accrual status.
In the ordinary course of business, the Company enters 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 balance sheet.
Additionally, various regulatory agencies, as an integral part of the Company’s examination process, periodically assess the appropriateness of the allowance for credit losses and may require the Company to increase its allowance for loan losses or recognize further loan charge-offs, in accordance with GAAP.
Refer to Note 4, “Loans and Allowance for Credit Losses” for additional information regarding the Company’s measurement of credit losses on loans receivable and off-balance sheet commitments to lend as of March 31, 2022. For comparative allowance for loan loss information for which ASC 450, “Contingencies” and ASC 310, “Receivables” were applied (i.e., prior to the Company’s adoption of the CECL methodology previously described), refer to Note 5, “Loans and Allowance for Loan Losses.”
3. Securities
Available for Sale Securities
The amortized cost, gross unrealized gains and losses, allowance for credit losses and fair value of AFS securities as of March 31, 2022 and December 31, 2021 were as follows:
| As of March 31, 2022 | |||||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Allowance for Credit Losses | Fair Value | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 5,329,748 | $ | 264 | $ | (360,666) | $ | — | $ | 4,969,346 | |||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 1,707,131 | — | (91,204) | — | 1,615,927 | ||||||||||||||||||||||||
| U.S. Agency bonds | 1,099,916 | — | (86,017) | — | 1,013,899 | ||||||||||||||||||||||||
| U.S. Treasury securities | 59,458 | — | (3,223) | — | 56,235 | ||||||||||||||||||||||||
| State and municipal bonds and obligations | 258,769 | 2,792 | (1,245) | — | 260,316 | ||||||||||||||||||||||||
| Other debt securities | 1,598 | — | (16) | — | 1,582 | ||||||||||||||||||||||||
| $ | 8,456,620 | $ | 3,056 | $ | (542,371) | $ | — | $ | 7,917,305 | ||||||||||||||||||||
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| As of December 31, 2021 | |||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 5,577,292 | $ | 17,918 | $ | (70,502) | $ | 5,524,708 | |||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 1,420,748 | 760 | (12,640) | 1,408,868 | |||||||||||||||||||
| U.S. Agency bonds | 1,202,377 | 1,067 | (28,430) | 1,175,014 | |||||||||||||||||||
| U.S. Treasury securities | 89,434 | 5 | (834) | 88,605 | |||||||||||||||||||
| State and municipal bonds and obligations | 263,910 | 16,460 | (41) | 280,329 | |||||||||||||||||||
| Small business administration pooled securities | 31,821 | 282 | — | 32,103 | |||||||||||||||||||
| Other debt securities | 1,597 | — | — | 1,597 | |||||||||||||||||||
| $ | 8,587,179 | $ | 36,492 | $ | (112,447) | $ | 8,511,224 | ||||||||||||||||
The Company did not record a provision for credit losses on any AFS securities for the three months ended March 31, 2022. Accrued interest receivable on AFS securities totaled $13.8 million and $14.3 million as of March 31, 2022 and December 31, 2021, respectively, and is included within other assets on the consolidated balance sheets. The Company did not record any write-offs of accrued interest income on AFS securities during the three months ended March 31, 2022. No securities held by the Company were delinquent on contractual payments as of March 31, 2022, nor were any securities placed on non-accrual status for the period then ended.
Gross realized gains from sales of AFS securities during the three months ended March 31, 2022 and 2021 were $1.0 million and $1.2 million, respectively. Gross realized losses from sales of AFS securities during the three months ended March 31, 2022 were $3.2 million. The Company had no significant gross realized losses from sales of AFS securities during the three months ended March 31, 2021. There was no OTTI recorded during the three months ended March 31, 2021.
Prior to the Company’s adoption of ASU 2016-13, management prepared an estimate of the Company’s expected cash flows for AFS investment securities that potentially may be deemed to have been an OTTI. This estimate began with the contractual cash flows of the security which was then reduced by an estimate of probable credit losses associated with the security. When estimating the extent of probable losses on the securities, management considered the credit quality and the ability to pay of the underlying issuers. Indicators of diminished credit quality of the issuers included defaults, interest deferrals, or “payments in kind.” Management also considered those factors listed in the “Investments – Debt and Equity Securities” topic of the FASB ASC when estimating the ultimate realizability of the cash flows for each individual security.
The resulting estimate of expected cash flows after considering credit was then subject to a present value computation using a discount rate equal to the current yield used to accrete the beneficial interest or the effective interest rate implicit in the security at the date of acquisition. If the present value of the estimated expected cash flows was less than the current amortized cost basis, an OTTI was considered to have occurred and the security was written down to the fair value indicated by the cash flow analysis. As part of the analysis, management considered whether it intended to sell the security or whether it was more than likely that it would be required to sell the security before the expected recovery of its amortized cost basis.
Information pertaining to AFS securities with gross unrealized losses as of March 31, 2022, for which the Company did not recognize a provision for credit losses under CECL, and as of December 31, 2021, for which the Company did not deem to be OTTI under its prior methodology, aggregated by investment category and length of time that individual securities had been in a continuous loss position, follows:
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| As of March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| 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 | 322 | $ | 223,347 | $ | 3,513,073 | $ | 137,319 | $ | 1,403,234 | $ | 360,666 | $ | 4,916,307 | ||||||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 205 | 85,425 | 1,548,080 | 5,779 | 67,847 | 91,204 | 1,615,927 | ||||||||||||||||||||||||||||||||||
| U.S. Agency bonds | 37 | 12,573 | 226,708 | 73,444 | 787,191 | 86,017 | 1,013,899 | ||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 2 | 3,223 | 56,235 | — | — | 3,223 | 56,235 | ||||||||||||||||||||||||||||||||||
| State and municipal bonds and obligations | 103 | 1,245 | 82,709 | — | — | 1,245 | 82,709 | ||||||||||||||||||||||||||||||||||
| Other debt securities | 3 | 16 | 1,582 | — | — | 16 | 1,582 | ||||||||||||||||||||||||||||||||||
| 672 | $ | 325,829 | $ | 5,428,387 | $ | 216,542 | $ | 2,258,272 | $ | 542,371 | $ | 7,686,659 | |||||||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| 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 | 264 | $ | 70,502 | $ | 4,615,457 | $ | — | $ | — | $ | 70,502 | $ | 4,615,457 | ||||||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 165 | 12,218 | 1,102,444 | 422 | 15,682 | 12,640 | 1,118,126 | ||||||||||||||||||||||||||||||||||
| U.S. Agency bonds | 27 | 2,169 | 191,222 | 26,261 | 794,353 | 28,430 | 985,575 | ||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 3 | 834 | 78,588 | — | — | 834 | 78,588 | ||||||||||||||||||||||||||||||||||
| State and municipal bonds and obligations | 11 | 41 | 5,436 | — | — | 41 | 5,436 | ||||||||||||||||||||||||||||||||||
| 470 | $ | 85,764 | $ | 5,993,147 | $ | 26,683 | $ | 810,035 | $ | 112,447 | $ | 6,803,182 | |||||||||||||||||||||||||||||
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 a provision for credit losses on these investments as of March 31, 2022. As it relates to securities with gross unrealized losses as of December 31, 2021, the Company did not consider these investments to be OTTI under its prior methodology. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, and volatility of earnings.
As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the tables above by category are as follows as of March 31, 2022 and December 31, 2021:
•Government-sponsored residential mortgage-backed securities – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•Government-sponsored commercial mortgage-backed securities – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to
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changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•U.S. Agency bonds – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•U.S. Treasury securities – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. government.
•State and municipal bonds and obligations – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality.
•Other debt securities – This securities portfolio consists of three foreign debt securities which are performing in accordance with the terms of the respective contractual agreements. The decline in market value of these securities is attributable to changes in interest rates and not credit quality.
Held to Maturity Securities
The amortized cost, gross unrealized gains and losses, and fair value of HTM securities as of March 31, 2022 were as follows:
| As of March 31, 2022 | |||||||||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Allowance for Credit Losses | Fair Value | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 192,231 | $ | — | $ | (3,318) | $ | — | $ | 188,913 | |||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 203,203 | 17 | (10) | — | 203,210 | ||||||||||||||||||||||||
| $ | 395,434 | $ | 17 | $ | (3,328) | $ | — | $ | 392,123 | ||||||||||||||||||||
The Company held no HTM securities as of December 31, 2021.
The Company did not record a provision for estimated credit losses on any HTM securities for the three months ended March 31, 2022. Accrued interest receivable on HTM securities totaled $0.8 million as of March 31, 2022 and is included within other assets on the consolidated balance sheets. The Company did not record any write-offs of accrued interest income on HTM securities during the three months ended March 31, 2022. No securities held by the Company were delinquent on contractual payments as of March 31, 2022, nor were any securities placed on non-accrual status for the period then ended.
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Available for Sale and Held to Maturity Securities Contractual Maturity
The amortized cost and estimated fair value of AFS and HTM securities by contractual maturities as of March 31, 2022 and December 31, 2021 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 March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available for sale securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 1 | $ | 1 | $ | 20,992 | $ | 21,143 | $ | 832,510 | $ | 790,125 | $ | 4,476,245 | $ | 4,158,077 | $ | 5,329,748 | $ | 4,969,346 | |||||||||||||||||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | — | 190,509 | 182,639 | 700,994 | 658,732 | 815,628 | 774,556 | 1,707,131 | 1,615,927 | |||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Agency bonds | — | — | 578,810 | 537,301 | 521,106 | 476,598 | — | — | 1,099,916 | 1,013,899 | |||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 10,000 | 9,955 | 49,458 | 46,280 | — | — | — | — | 59,458 | 56,235 | |||||||||||||||||||||||||||||||||||||||||||||||||
| State and municipal bonds and obligations | 4,659 | 4,653 | 36,766 | 36,723 | 68,574 | 68,850 | 148,770 | 150,090 | 258,769 | 260,316 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other debt securities | 300 | 299 | 1,298 | 1,283 | — | — | — | — | 1,598 | 1,582 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total available for sale securities | 14,960 | 14,908 | 877,833 | 825,369 | 2,123,184 | 1,994,305 | 5,440,643 | 5,082,723 | 8,456,620 | 7,917,305 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Held to maturity securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | — | — | — | — | — | — | 192,231 | 188,913 | 192,231 | 188,913 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | — | — | — | 203,203 | 203,210 | — | — | 203,203 | 203,210 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total held to maturity securities | — | — | — | — | 203,203 | 203,210 | 192,231 | 188,913 | 395,434 | 392,123 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 14,960 | $ | 14,908 | $ | 877,833 | $ | 825,369 | $ | 2,326,387 | $ | 2,197,515 | $ | 5,632,874 | $ | 5,271,636 | $ | 8,852,054 | $ | 8,309,428 | |||||||||||||||||||||||||||||||||||||||
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| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available for sale securities | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | — | $ | — | $ | 24,935 | $ | 25,962 | $ | 899,169 | $ | 892,029 | $ | 4,653,188 | $ | 4,606,717 | $ | 5,577,292 | $ | 5,524,708 | |||||||||||||||||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | — | 139,095 | 137,755 | 387,177 | 378,414 | 894,476 | 892,699 | 1,420,748 | 1,408,868 | |||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Agency bonds | 5,508 | 5,515 | 531,821 | 520,935 | 665,048 | 648,564 | — | — | 1,202,377 | 1,175,014 | |||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 40,010 | 40,001 | 49,424 | 48,604 | — | — | — | — | 89,434 | 88,605 | |||||||||||||||||||||||||||||||||||||||||||||||||
| State and municipal bonds and obligations | 6,137 | 6,116 | 33,692 | 34,704 | 72,226 | 75,416 | 151,855 | 164,093 | 263,910 | 280,329 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Small Business Administration pooled securities | — | — | 4,062 | 4,092 | — | — | 27,759 | 28,011 | 31,821 | 32,103 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Other debt securities | 300 | 300 | 1,297 | 1,297 | — | — | — | — | 1,597 | 1,597 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 51,955 | $ | 51,932 | $ | 784,326 | $ | 773,349 | $ | 2,023,620 | $ | 1,994,423 | $ | 5,727,278 | $ | 5,691,520 | $ | 8,587,179 | $ | 8,511,224 | |||||||||||||||||||||||||||||||||||||||
Securities Pledged as Collateral
As of March 31, 2022 and December 31, 2021, securities with a carrying value of $491.2 million and $2.2 billion, respectively, were pledged to secure public deposits and for other purposes required by law. As of March 31, 2022 and December 31, 2021, deposits with associated pledged collateral included Eastern Wealth Management cash accounts and municipal accounts. At March 31, 2022 and December 31, 2021, the carrying value of securities pledged as collateral with respect to municipal accounts acquired from Century Bancorp, Inc. (“Century”) was approximately $461.9 million and $2.1 billion, respectively. During the first quarter of 2022, the Company eliminated certain pledging arrangements acquired from Century which resulted in the decrease in securities pledged at March 31, 2022 compared to December 31, 2021.
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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:
| At March 31, | At December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Commercial and industrial | $ | 2,886,560 | $ | 2,960,527 | |||||||
| Commercial real estate | 4,609,824 | 4,522,513 | |||||||||
| Commercial construction | 246,093 | 222,328 | |||||||||
| Business banking | 1,201,007 | 1,334,694 | |||||||||
| Residential real estate | 1,936,182 | 1,926,810 | |||||||||
| Consumer home equity | 1,099,211 | 1,100,153 | |||||||||
| Other consumer | 203,326 | 214,485 | |||||||||
| Gross loans before unamortized premiums, unearned discounts and deferred fees | 12,182,203 | 12,281,510 | |||||||||
| Allowance for loan losses (1) | (124,166) | (97,787) | |||||||||
| Unamortized premiums, net of unearned discounts and deferred fees | (24,434) | (26,442) | |||||||||
| Loans after the allowance for loan losses, unamortized premiums, unearned discounts and deferred fees | $ | 12,033,603 | $ | 12,157,281 | |||||||
(1)The Company adopted ASU 2016-13 on January 1, 2022 with a modified retrospective approach. Accordingly, at March 31, 2022 the allowance for loan losses at was determined in accordance with ASC 326, “Financial Instruments-Credit Losses” and ASC 310, “Receivables,” as amended. At December 31, 2021 the allowance for loan losses was determined in accordance with ASC 450, “Contingencies” and ASC 310, “Receivables.”
There are no other loan categories that exceed 10% of total loans not already reflected in the preceding table.
The Company’s lending activities are conducted principally in the New England area with the exception of its Shared National Credit Program (“SNC Program”) portfolio. The Company participates in the SNC Program in an effort to improve its industry and geographical diversification. The SNC Program portfolio is included in the Company’s commercial and industrial portfolio. The SNC Program portfolio is defined as loan syndications with exposure over $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 $3.0 billion and $2.6 billion March 31, 2022 and December 31, 2021, respectively. The balance of funds borrowed from the FHLBB were $13.7 million and $14.0 million at March 31, 2022 and December 31, 2021, respectively.
The carrying value of loans pledged to secure advances from the Federal Reserve Bank (“FRB”) were $799.9 million and $784.0 million at March 31, 2022 and December 31, 2021, respectively. There were no funds borrowed from the FRB outstanding at March 31, 2022 and December 31, 2021.
Serviced Loans
At March 31, 2022 and December 31, 2021, mortgage loans partially or wholly-owned by others and serviced by the Company amounted to approximately $91.2 million and $95.8 million, respectively.
Allowance for Loan Losses
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The allowance for loan losses is established to provide for management’s estimate of expected lifetime credit losses on loans measured at amortized cost at the balance sheet date and is established through a provision for loan losses charged to net income. Charge-offs, net of recoveries, are charged directly to the allowance. 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 table summarizes the change in the allowance for loan losses by loan category for the three months ended March 31, 2022:
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, prior to adoption of ASU 2016-13 | $ | 18,018 | $ | 52,373 | $ | 2,585 | $ | 10,983 | $ | 6,556 | $ | 3,722 | $ | 3,308 | $ | 242 | $ | 97,787 | |||||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle (1) | 11,533 | (6,655) | 1,485 | 6,160 | 13,489 | 1,857 | (541) | (242) | 27,086 | ||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | (1) | — | — | (945) | — | — | (661) | — | (1,607) | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 250 | 14 | — | 928 | 10 | 4 | 179 | — | 1,385 | ||||||||||||||||||||||||||||||||||||||||||||
| (Release of) provision | (2,959) | (1,120) | 344 | 143 | 2,188 | 435 | 484 | — | (485) | ||||||||||||||||||||||||||||||||||||||||||||
| Ending balance (2) | $ | 26,841 | $ | 44,612 | $ | 4,414 | $ | 17,269 | $ | 22,243 | $ | 6,018 | $ | 2,769 | $ | — | $ | 124,166 | |||||||||||||||||||||||||||||||||||
(1)Represents the adjustment needed to reflect the cumulative day one impact pursuant to the Company’s adoption of ASU 2016-13 (i.e., cumulative effect adjustment related the adoption of ASU 2016-13 as of January 1, 2022). The adjustment represents a $27.1 million increase to the allowance attributable to the change in accounting methodology for estimating the allowance for loan losses resulting from the Company’s adoption of the standard. The adjustment also includes the adjustment needed to reflect the day one reclassification of the Company’s PCI loan balances to PCD and the associated gross-up of $0.1 million, pursuant to the Company’s adoption of ASU 2016-13.
(2)The balance of accrued interest receivable excluded from amortized cost and the calculation of the allowance for loan losses amounted to $31.4 million at March 31, 2022.
Reserve for Unfunded Commitments
Management evaluates the need for a reserve on unfunded lending commitments in a manner consistent with loans held for investment. Upon adoption of ASU 2016-13 on January 1, 2022, the Company recorded a transition adjustment related to the reserve for unfunded lending commitments of $1.0 million, resulting in a total reserve for unfunded lending commitments of $11.1 million as of January 1, 2022. As of March 31, 2022, the Company’s reserve for unfunded commitments was $10.4 million which is recorded within other liabilities.
Portfolio Segmentation
Management uses a methodology to systematically estimate the amount of expected losses in the 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 commercial and industrial and 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
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Commercial and industrial: The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Collateral frequently consists of a first lien position on business assets including, but not limited to accounts receivable, inventory, aircraft and equipment. The primary repayment source is operating cash flow and, secondarily, the liquidation of assets. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals that hold material ownership in the borrowing entity when the loan-to-value of a commercial and industrial loan is in excess of a specified threshold.
Commercial real estate: Collateral values are established by independent third-party appraisals and evaluations. Primary repayment sources include operating income generated by the real estate, permanent debt refinancing, sale of the real estate and, secondarily, liquidation of the collateral. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals that hold material ownership in the borrowing entity when the loan-to-value of a commercial real estate loan is in excess of a specified threshold.
Commercial construction: These loans are generally considered to present a higher degree of risk than other real estate loans and may be affected by a variety of factors, such as adverse changes in interest rates and the borrower’s ability to control costs and adhere to time schedules. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. Construction loan repayment is substantially dependent on the ability of the borrower to complete the project and obtain permanent financing.
Business banking: These loans are typically secured by all business assets or commercial real estate. Business banking originations include traditionally underwritten loans as well as partially automated scored loans. Business banking scored loans are determined by utilizing the Company’s proprietary decision matrix that has a number of quantitative factors including, but not limited to, a guarantor’s credit score, industry risk, and time in business. The Company also engages in Small Business Association (“SBA”) lending, both in the business banking and commercial banking divisions. 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 Company does not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or retained in the Company’s loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and the Company’s capital needs.
Consumer 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 loans 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
22
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 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.
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.
23
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 March 31, 2022:
| 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans | Revolving Loans Converted to Term Loans (1) | Total | |||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 117,534 | $ | 566,764 | $ | 498,791 | $ | 231,968 | $ | 142,428 | $ | 689,728 | $ | 504,127 | $ | 686 | $ | 2,752,026 | |||||||||||||||||||||||||||||||||||
| Special Mention | — | 886 | — | 514 | 278 | 4,459 | 51,581 | — | 57,718 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 11,302 | 3,756 | 340 | 23,031 | 8,275 | 790 | 346 | 47,840 | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | 4,996 | — | — | — | 114 | 3,384 | — | 8,494 | ||||||||||||||||||||||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total commercial and industrial | 117,534 | 583,948 | 502,547 | 232,822 | 165,737 | 702,576 | 559,882 | 1,032 | 2,866,078 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 378,744 | 845,405 | 641,300 | 676,903 | 495,084 | 1,304,769 | 43,970 | 3,478 | 4,389,653 | ||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | 26,613 | — | 16,142 | 3,796 | 19,562 | 19,776 | — | — | 85,889 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 29,903 | 58 | 4,663 | 1,654 | 38,038 | 49,327 | 8,000 | — | 131,643 | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | 435,260 | 845,463 | 662,105 | 682,353 | 552,684 | 1,373,872 | 51,970 | 3,478 | 4,607,185 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial construction | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 3,623 | 124,777 | 59,181 | 32,857 | — | — | 15,760 | — | 236,198 | ||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | — | — | 2,097 | — | — | — | — | — | 2,097 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | 6,743 | — | — | — | — | 6,743 | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total commercial construction | 3,623 | 124,777 | 61,278 | 39,600 | — | — | 15,760 | — | 245,038 | ||||||||||||||||||||||||||||||||||||||||||||
| Business banking | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | 54,881 | 309,961 | 200,726 | 141,974 | 69,341 | 285,849 | 77,782 | 3,436 | 1,143,950 | ||||||||||||||||||||||||||||||||||||||||||||
| Special Mention | 2,174 | 2,176 | 3,219 | 9,152 | 7,181 | 14,498 | 1,908 | — | 40,308 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 464 | 1,617 | 4,993 | 564 | 9,542 | 1,244 | 680 | 19,104 | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | 203 | — | 103 | — | — | 306 | ||||||||||||||||||||||||||||||||||||||||||||
| Loss | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total business banking | 57,055 | 312,601 | 205,562 | 156,322 | 77,086 | 309,992 | 80,934 | 4,116 | 1,203,668 | ||||||||||||||||||||||||||||||||||||||||||||
| Residential real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current and accruing | 81,889 | 740,106 | 406,401 | 112,976 | 78,320 | 505,432 | — | — | 1,925,124 | ||||||||||||||||||||||||||||||||||||||||||||
| 30-89 days past due and accruing | — | 2,553 | 1,387 | 201 | 1,513 | 6,808 | — | — | 12,462 | ||||||||||||||||||||||||||||||||||||||||||||
| Accruing loans past 90 days due | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
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| Non-accrual | — | — | 129 | 582 | 784 | 6,761 | — | — | 8,256 | ||||||||||||||||||||||||||||||||||||||||||||
| Total residential real estate | 81,889 | 742,659 | 407,917 | 113,759 | 80,617 | 519,001 | — | — | 1,945,842 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer home equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current and accruing | 15,321 | 12,792 | 6,903 | 6,448 | 26,582 | 91,599 | 929,383 | 1,788 | 1,090,816 | ||||||||||||||||||||||||||||||||||||||||||||
| 30-89 days past due and accruing | — | 33 | 31 | — | 170 | 1,490 | 2,004 | 67 | 3,795 | ||||||||||||||||||||||||||||||||||||||||||||
| Accruing loans past 90 days due | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Non-accrual | — | — | 74 | 679 | 1,293 | 1,948 | 3,147 | — | 7,141 | ||||||||||||||||||||||||||||||||||||||||||||
| Total consumer home equity | 15,321 | 12,825 | 7,008 | 7,127 | 28,045 | 95,037 | 934,534 | 1,855 | 1,101,752 | ||||||||||||||||||||||||||||||||||||||||||||
| Other consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Current and accruing | 15,652 | 39,868 | 22,534 | 25,531 | 33,967 | 33,664 | 15,295 | — | 186,511 | ||||||||||||||||||||||||||||||||||||||||||||
| 30-89 days past due and accruing | 12 | 107 | 76 | 117 | 449 | 429 | — | — | 1,190 | ||||||||||||||||||||||||||||||||||||||||||||
| Accruing loans past 90 days due | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Non-accrual | — | 95 | 27 | 37 | 174 | 172 | — | — | 505 | ||||||||||||||||||||||||||||||||||||||||||||
| Total other consumer | 15,664 | 40,070 | 22,637 | 25,685 | 34,590 | 34,265 | 15,295 | — | 188,206 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 726,346 | $ | 2,662,343 | $ | 1,869,054 | $ | 1,257,668 | $ | 938,759 | $ | 3,034,743 | $ | 1,658,375 | $ | 10,481 | $ | 12,157,769 | |||||||||||||||||||||||||||||||||||
(1)The amounts presented represent the amortized cost as of March 31, 2022 of revolving loans that were converted to term loans during the three months ended March 31, 2022.
Paycheck Protection Program (“PPP”) loans are included within the unrated category of the commercial and industrial and business banking portfolios in the tables above. Commercial and industrial PPP loans and business banking PPP loans amounted to $51.7 million and $89.5 million, respectively, at March 31, 2022 and $112.8 million and $218.6 million, respectively, at December 31, 2021 on a recorded investment basis. The Company does not have an allowance for loan losses for PPP loans as they are 100% guaranteed by the SBA.
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:
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| As of March 31, 2022 | |||||||||||||||||||||||||||||||||||
| 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 | $ | 146 | $ | — | $ | 1,994 | $ | 2,140 | $ | 2,863,938 | $ | 2,866,078 | |||||||||||||||||||||||
| Commercial real estate | 600 | — | 501 | 1,101 | 4,606,084 | 4,607,185 | |||||||||||||||||||||||||||||
| Commercial construction | 6,743 | — | — | 6,743 | 238,295 | 245,038 | |||||||||||||||||||||||||||||
| Business banking | 4,599 | 875 | 3,294 | 8,768 | 1,194,900 | 1,203,668 | |||||||||||||||||||||||||||||
| Residential real estate | 10,384 | 2,162 | 6,379 | 18,925 | 1,926,917 | 1,945,842 | |||||||||||||||||||||||||||||
| Consumer home equity | 2,517 | 1,348 | 6,726 | 10,591 | 1,091,161 | 1,101,752 | |||||||||||||||||||||||||||||
| Other consumer | 971 | 219 | 505 | 1,695 | 186,511 | 188,206 | |||||||||||||||||||||||||||||
| Total | $ | 25,960 | $ | 4,604 | $ | 19,399 | $ | 49,963 | $ | 12,107,806 | $ | 12,157,769 | |||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| 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 | $ | 45 | $ | 31 | $ | 1,672 | $ | 1,748 | $ | 2,958,779 | $ | 2,960,527 | |||||||||||||||||||||||
| Commercial real estate | 25,931 | — | 1,196 | 27,127 | 4,495,386 | 4,522,513 | |||||||||||||||||||||||||||||
| Commercial construction | — | — | — | — | 222,328 | 222,328 | |||||||||||||||||||||||||||||
| Business banking | 5,043 | 1,793 | 4,640 | 11,476 | 1,323,218 | 1,334,694 | |||||||||||||||||||||||||||||
| Residential real estate | 17,523 | 3,511 | 5,543 | 26,577 | 1,900,233 | 1,926,810 | |||||||||||||||||||||||||||||
| Consumer home equity | 3,774 | 1,510 | 4,571 | 9,855 | 1,090,298 | 1,100,153 | |||||||||||||||||||||||||||||
| Other consumer | 1,194 | 548 | 889 | 2,631 | 211,854 | 214,485 | |||||||||||||||||||||||||||||
| Total (1) | $ | 53,510 | $ | 7,393 | $ | 18,511 | $ | 79,414 | $ | 12,202,096 | $ | 12,281,510 | |||||||||||||||||||||||
(1)The amounts presented in the table above represent the recorded investment balance of loans as of December 31, 2021.
The following table presents information regarding non-accrual loans as of the dates indicated:
| As of and for the Three Months Ended March 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Non-Accrual Loans With ACL | Non-Accrual Loans Without ACL (4) | Total Non-Accrual Loans | Amortized Cost of Loans >90 DPD and Still Accruing (2) | Total Non-Accrual Loans (1) | Recorded Investment >90 DPD and Still Accruing | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 3,496 | $ | 6,990 | $ | 10,486 | $ | — | $ | 12,400 | $ | — | |||||||||||||||||||||||
| Commercial real estate | — | 501 | 501 | — | — | 1,196 | |||||||||||||||||||||||||||||
| Commercial construction | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Business banking | 6,410 | 522 | 6,932 | — | 8,230 | — | |||||||||||||||||||||||||||||
| Residential real estate | 8,256 | — | 8,256 | — | 6,681 | 769 | |||||||||||||||||||||||||||||
| Consumer home equity | 7,141 | — | 7,141 | — | 4,732 | 25 | |||||||||||||||||||||||||||||
| Other consumer | 505 | — | 505 | — | 950 | — | |||||||||||||||||||||||||||||
| Total non-accrual loans | $ | 25,808 | $ | 8,013 | $ | 33,821 | $ | — | $ | 32,993 | $ | 1,990 | |||||||||||||||||||||||
(1)The amounts presented represent the recorded investment balance of loans as of December 31, 2021.
(2)“DPD” indicated in the table above refers to “days past due.”
(3)The amount of interest income recognized on non-accrual loans during the three months ended March 31, 2022 was not significant.
(4)The loans on non-accrual status and without an ACL as of March 31, 2022, were primarily comprised of collateral dependent loans for which the fair value of the underlying loan collateral exceeded the loan carrying value.
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It is the Company’s policy to reverse any accrued interest when a loan is put on non-accrual status, and, as such, the Company did not record any interest income on non-accrual loans during the three months ended March 31, 2022. Accrued interest reversed against interest income for the three months ended March 31, 2022 was insignificant.
For collateral values for residential mortgage and home equity loans, the Company relies primarily upon third-party valuation information from certified appraisers and values are generally based upon recent appraisals of the underlying collateral, brokers’ opinions based upon recent sales of comparable properties, estimated equipment auction or liquidation values less estimated costs to sell. As of March 31, 2022 and December 31, 2021, the Company had collateral-dependent residential mortgage and home equity loans totaling $0.8 million and $0.6 million, respectively.
For collateral-dependent commercial loans, the amount of the allowance for loan losses is individually assessed based upon the fair value of the collateral. Various types of collateral are used, including real estate, inventory, equipment, accounts receivable, securities and cash, among others. For commercial real estate loans, the Company relies primarily upon third-party valuation information from certified appraisers and values are generally based upon recent appraisals of the underlying collateral, brokers’ opinions based upon recent sales of comparable properties, estimated equipment auction or liquidation values, income capitalization, or a combination of income capitalization and comparable sales. As of March 31, 2022 and December 31, 2021, the Company had collateral-dependent commercial loans totaling $11.6 million and $13.1 million, respectively.
Appraisals for all loan types are obtained at the time of loan origination as part of the loan approval process and are updated at the time of a loan modification and/or refinance and as considered necessary by management for impairment review purposes. In addition, appraisals are updated as required by regulatory pronouncements.
As of both March 31, 2022 and December 31, 2021, the Company had no residential real estate held in other real estate owned (“OREO”). As of both March 31, 2022 and December 31, 2021, there were no mortgage loans collateralized by residential real estate property for which formal foreclosure proceedings were in-process.
In the normal course of business, the Company may become aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which currently do not yet meet the criteria for classification as non-performing loans (which consist of non-accrual loans and loans that are more than 90 days past due but still accruing interest). Based upon the Company’s past experiences, some of the loans with potential weaknesses will ultimately be restructured or placed in non-accrual status. As of both March 31, 2022 and December 31, 2021, management is unable to reasonably estimate the amount of these loans that will be restructured or placed on non-accrual status.
Troubled Debt Restructurings
As described above in Note 2, “Summary of Significant Accounting Policies,” in cases where a borrower experiences financial difficulty and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a TDR. The process through which management identifies loans as TDR loans, the methodology employed to record any loan losses, and the calculation of any shortfall on collateral dependent loans, is also described above.
In response to the novel coronavirus (“COVID-19”) pandemic, the Company has granted loan modifications to allow deferral of payments for borrowers negatively impacted by the COVID-19 pandemic. Modifications granted to customers allowed for full payment deferrals (principal and interest) or deferral of only principal payments. The balance of loans which underwent a modification and have not yet resumed payment as of March 31, 2022 and December 31, 2021 was $49.0 million and $106.7 million, respectively. The Company defines a modified loan to have resumed payment if it is one month past the modification end date and not more than 30 days past due. These modifications with active deferrals met the criteria of either Section 4013 of the CARES Act or the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) and therefore are not deemed troubled debt restructurings, or TDRs. Additionally, loans that are performing in accordance with the contractual terms of the modification are not reflected as being past due and therefore are not impacting non-accrual or delinquency totals as of March 31, 2022 and December 31, 2021. The Company continued to accrue interest on these COVID-19 modified loans and evaluated the deferred interest for collectability as of March 31, 2022 and December 31, 2021.
The Consolidated Appropriations Act, which was enacted on December 27, 2020, extended certain provisions related to the COVID-19 pandemic in the United States (which were due to expire) and provided additional emergency relief to individuals and businesses. Included within the provisions of the Consolidated Appropriations Act is the extension to January 1, 2022 of Section 4013 of the CARES Act, which provides relief from a requirement to evaluate loans that had received a COVID-19 modification to determine if the loans required TDR treatment, provided certain criteria were met. As such, the
27
Company applied the TDR relief granted pursuant to such section to any qualifying loan modification executed during the allowable time period.
The Company’s policy is to have any TDR 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 management considers its return to accrual status. If the TDR loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status.
TDR loan information as of December 31, 2021 and the period then ended was prepared in accordance with U.S. GAAP effective for the Company as of December 31, 2021, or prior to our adoption of ASU 2016-13.
The following tables show the TDR loans on accrual and non-accrual status as of the dates indicated:
| As of March 31, 2022 | |||||||||||||||||||||||||||||||||||
| TDRs on Accrual Status | TDRs on Non-Accrual Status | Total TDRs | |||||||||||||||||||||||||||||||||
| Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | 1 | $ | 3,894 | 7 | $ | 8,381 | 8 | $ | 12,275 | ||||||||||||||||||||||||||
| Commercial real estate | 1 | 3,520 | — | — | 1 | 3,520 | |||||||||||||||||||||||||||||
| Business banking | 5 | 3,771 | 8 | 814 | 13 | 4,585 | |||||||||||||||||||||||||||||
| Residential real estate | 116 | 17,786 | 29 | 3,583 | 145 | 21,369 | |||||||||||||||||||||||||||||
| Consumer home equity | 66 | 3,028 | 15 | 859 | 81 | 3,887 | |||||||||||||||||||||||||||||
| Other consumer | 2 | 17 | — | — | 2 | 17 | |||||||||||||||||||||||||||||
| Total | 191 | $ | 32,016 | 59 | $ | 13,637 | 250 | $ | 45,653 | ||||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| TDRs on Accrual Status | TDRs on Non-Accrual Status | Total TDRs | |||||||||||||||||||||||||||||||||
| Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | 1 | $ | 3,745 | 6 | $ | 9,983 | 7 | $ | 13,728 | ||||||||||||||||||||||||||
| Commercial real estate | 1 | 3,520 | — | — | 1 | 3,520 | |||||||||||||||||||||||||||||
| Business banking | 5 | 3,830 | 3 | 383 | 8 | 4,213 | |||||||||||||||||||||||||||||
| Residential real estate | 121 | 19,119 | 27 | 3,015 | 148 | 22,134 | |||||||||||||||||||||||||||||
| Consumer home equity | 67 | 3,104 | 16 | 818 | 83 | 3,922 | |||||||||||||||||||||||||||||
| Other consumer | 2 | 18 | — | — | 2 | 18 | |||||||||||||||||||||||||||||
| Total (1) | 197 | $ | 33,336 | 52 | $ | 14,199 | 249 | $ | 47,535 | ||||||||||||||||||||||||||
(1)The amounts presented in the table above represent the recorded investment balance of loans as of December 31, 2021.
The amount of allowance for loan losses associated with the TDR loans was $2.5 million and $3.4 million at March 31, 2022 and December 31, 2021, respectively. There were no additional commitments to lend to borrowers who have been a party to a TDR loan as of both March 31, 2022 and December 31, 2021.
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The following tables show the modifications which occurred during the periods and the change in the recorded investment subsequent to the modifications occurring:
| For the Three Months Ended March 31, 2022 | For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
| Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment (1) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment (1) | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Business banking | 5 | $ | 440 | $ | 448 | — | $ | — | $ | — | |||||||||||||||||||||||||
| Residential real estate | 1 | 134 | 134 | 1 | 295 | 295 | |||||||||||||||||||||||||||||
| Consumer home equity | 1 | 210 | 210 | — | — | — | |||||||||||||||||||||||||||||
| Total | 7 | $ | 784 | $ | 792 | 1 | $ | 295 | $ | 295 | |||||||||||||||||||||||||
(1)The post-modification balances represent the balance of the loan on the date of modification. These amounts may show an increase when modification includes capitalization of interest.
At March 31, 2022 and December 31, 2021, the outstanding recorded investment of loans that were new TDR loans during both the three months ended March 31, 2022 and the year ended December 31, 2021 was $0.8 million.
The following table shows the Company’s post-modification balance of TDRs listed by type of modification during the periods indicated:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Extended maturity | $ | 402 | $ | — | |||||||
| Adjusted interest rate and extended maturity | 390 | — | |||||||||
| Court-ordered concession | — | 295 | |||||||||
| Total | $ | 792 | $ | 295 | |||||||
The following table shows the number of loans and the recorded investment amount of those loans, as of the respective date, that have been modified during the prior 12 months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due or is transferred to non-accrual:
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Number of Contracts | Recorded Investment | Number of Contracts | Recorded Investment | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Troubled debt restructurings that subsequently defaulted (1): | |||||||||||||||||||||||
| Business banking | — | $ | — | 1 | $ | 419 | |||||||||||||||||
| Consumer home equity | — | — | 1 | 59 | |||||||||||||||||||
| Total | — | $ | — | 2 | $ | 478 | |||||||||||||||||
(1)This table does not reflect any TDR loans which were fully charged off, paid off, or otherwise settled during the period.
During both the three months ended March 31, 2022 and 2021, no amounts were charged-off on TDR loans modified in the prior 12 months.
Loan Participations
The Company occasionally purchases commercial loan participations, or participates in syndications through the SNC Program. These participations meet the same underwriting, credit and portfolio management standards as the Company’s other loans and are applied against the same criteria to determine the allowance for loan losses as other loans.
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The following table summarizes the Company’s loan participations:
| As of and for the Three Months Ended March 31, 2022 | As of and for the Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Balance (1) | Non-performing Loan Rate (%) | Gross Charge-offs | Balance (1) | Non-performing Loan Rate (%) | Gross Charge-offs | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 744,231 | 1.13 | % | $ | — | $ | 732,425 | 1.36 | % | $ | — | |||||||||||||||||||||||
| Commercial real estate | 390,540 | 0.00 | % | — | 362,898 | 0.00 | % | — | |||||||||||||||||||||||||||
| Commercial construction | 42,661 | 0.00 | % | — | 37,081 | 0.00 | % | — | |||||||||||||||||||||||||||
| Business banking | 143 | 0.00 | % | — | 98 | 0.00 | % | — | |||||||||||||||||||||||||||
Total loan participations | $ | 1,177,575 | 0.71 | % | $ | — | $ | 1,132,502 | 0.88 | % | $ | — | |||||||||||||||||||||||
(1)The balance of loan participations as of March 31, 2022 represents the amortized cost basis and the balance as of December 31, 2021 represents the recorded investment balance. The difference between amortized cost basis and recorded investment basis as of March 31, 2022 is not material.
5. Loans and Allowance for Loan Losses
Allowance for Loan Losses
As disclosed in Note 2, “Summary of Significant Accounting Policies,” the Company adopted ASU 2016-13 effective January 1, 2022. As required by U.S. GAAP, the Company has included comparative prior period disclosures of its allowance for loan losses which were prepared in accordance with ASC 450, “Contingencies” and ASC 310, “Receivables” (i.e., prior to the Company’s adoption of ASU 2016-13). Refer to the Company’s 2021 Form 10-K for significant accounting policies related to the Company’s allowance for loan losses as of December 31, 2021. A discussion of the Company’s calculation of its allowance for loan losses for such prior periods follows.
The allowance for loan losses was established to provide for probable losses incurred in the Company’s loan portfolio at the balance sheet date and was established through a provision for loan losses charged to net income. Charge-offs, net of recoveries, were charged directly to the allowance. Commercial and residential loans were charged-off in the period in which they are deemed uncollectible. Delinquent loans in these product types were subject to ongoing review and analysis to determine if a charge-off in the current period was appropriate. For consumer loans, policies and procedures existed that required charge-off consideration upon a certain triggering event depending on the product type.
Management used a methodology to systematically estimate the amount of loss incurred in the portfolio. Commercial real estate, commercial and industrial, commercial construction and business banking loans were evaluated using a loan rating system, historical losses and other factors which formed the basis for estimating incurred losses. Portfolios of more homogeneous populations of loans, including residential mortgages and consumer loans, were analyzed as groups taking into account delinquency ratios, historical loss experience and charge-offs. For the purpose of estimating the allowance for loan losses, management segregated the loan portfolio into the categories noted in the credit quality tables presented in the “Credit Quality” section below. Each of these loan categories possesses unique risk characteristics such as the purpose of the loan, repayment source, and collateral. These characteristics were considered when determining the appropriate level of the allowance for each category. The Company’s historical approach to loan portfolio segmentation by risk characteristics and monitoring of credit quality for commercial loans under previous accounting guidance was consistent with that applied under the newly adopted CECL standard. See Note 4, “Loans and Allowance for Credit Losses” for further discussion regarding the Company’s policies for loan segmentation and credit monitoring.
The following tables summarize the changes in the allowance for loan losses by loan category for the three months ended March 31, 2021:
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| For the Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 26,617 | $ | 54,569 | $ | 4,553 | $ | 13,152 | $ | 6,435 | $ | 3,744 | $ | 3,467 | $ | 494 | $ | 113,031 | |||||||||||||||||||||||||||||||||||
| Charge-offs | — | (234) | — | (1,384) | — | — | (364) | — | (1,982) | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 9 | — | — | 365 | 10 | 71 | 156 | — | 611 | ||||||||||||||||||||||||||||||||||||||||||||
| (Release of) Provision | (1,220) | 803 | (1,203) | 1,371 | (210) | (239) | 239 | (121) | (580) | ||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 25,406 | $ | 55,138 | $ | 3,350 | $ | 13,504 | $ | 6,235 | $ | 3,576 | $ | 3,498 | $ | 373 | $ | 111,080 | |||||||||||||||||||||||||||||||||||
The following tables bifurcate the amount of loans and the allowance for loan losses allocated to each loan category based on the type of impairment analysis as of December 31, 2021:
| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 ending balance: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 1,540 | $ | — | $ | — | $ | 450 | $ | 1,549 | $ | 270 | $ | 161 | $ | — | $ | 3,970 | |||||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | 5 | 298 | — | — | 243 | — | — | — | 546 | ||||||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | 16,473 | 52,075 | 2,585 | 10,533 | 4,764 | 3,452 | 3,147 | 242 | 93,271 | ||||||||||||||||||||||||||||||||||||||||||||
| Total allowance for loan losses by group | $ | 18,018 | $ | 52,373 | $ | 2,585 | $ | 10,983 | $ | 6,556 | $ | 3,722 | $ | 3,308 | $ | 242 | $ | 97,787 | |||||||||||||||||||||||||||||||||||
| Loans ending balance: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Individually evaluated for impairment | $ | 16,145 | $ | 3,520 | $ | — | $ | 12,060 | $ | 22,378 | $ | 3,922 | $ | 179 | $ | — | $ | 58,204 | |||||||||||||||||||||||||||||||||||
| Acquired with deteriorated credit quality | 19,028 | 47,553 | — | — | 3,058 | — | — | — | 69,639 | ||||||||||||||||||||||||||||||||||||||||||||
| Collectively evaluated for impairment | 2,925,354 | 4,471,440 | 222,328 | 1,322,634 | 1,901,374 | 1,096,231 | 214,306 | — | 12,153,667 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans by group | $ | 2,960,527 | $ | 4,522,513 | $ | 222,328 | $ | 1,334,694 | $ | 1,926,810 | $ | 1,100,153 | $ | 214,485 | $ | — | $ | 12,281,510 | |||||||||||||||||||||||||||||||||||
Credit Quality
The following tables detail the internal risk-rating categories for the Company’s commercial and industrial, commercial real estate, commercial construction and business banking portfolios:
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| As of December 31, 2021 | ||||||||||||||||||||||||||||||||
| Category | Commercial and Industrial | Commercial Real Estate | Commercial Construction | Business Banking | Total | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Unrated | $ | 171,537 | $ | 4,378 | $ | — | $ | 696,629 | $ | 872,544 | ||||||||||||||||||||||
| Pass | 2,656,873 | 4,199,803 | 213,744 | 569,956 | 7,640,376 | |||||||||||||||||||||||||||
| Special mention | 70,141 | 104,517 | 1,889 | 50,085 | 226,632 | |||||||||||||||||||||||||||
| Substandard | 50,339 | 213,815 | 6,695 | 17,814 | 288,663 | |||||||||||||||||||||||||||
| Doubtful | 11,637 | — | — | 210 | 11,847 | |||||||||||||||||||||||||||
| Loss | — | — | — | — | — | |||||||||||||||||||||||||||
| Total | $ | 2,960,527 | $ | 4,522,513 | $ | 222,328 | $ | 1,334,694 | $ | 9,040,062 | ||||||||||||||||||||||
PPP loans are included within the unrated category of the commercial and industrial and business banking portfolios in the table above. Commercial and industrial PPP loans and business banking PPP loans amounted to $112.8 million and $218.6 million, respectively, at December 31, 2021. The Company does not have an allowance for loan losses for PPP loans as they are 100% guaranteed by the SBA.
Impaired Loans
Under previous accounting guidance, impaired loans consisted of all loans for which management had determined it was probable that the Company would be unable to collect all amounts due according to the contractual terms of the loan agreements. Factors considered by management in determining impairment included payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.
The Company measured impairment of loans using a discounted cash flow method, the loan’s observable market price, or the fair value of the collateral if the loan was collateral dependent. The Company defined the population of impaired loans to include certain non-accrual loans, TDR loans, and residential and home equity loans that had been partially charged off.
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The following table summarizes the Company’s impaired loans by loan portfolio as of December 31, 2021:
| As of December 31, 2021 | |||||||||||||||||
| Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||||
| (In thousands) | |||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||
| Commercial and industrial | $ | 12,309 | $ | 13,212 | $ | — | |||||||||||
| Commercial real estate | 3,520 | 3,520 | — | ||||||||||||||
| Business banking | 4,199 | 5,069 | — | ||||||||||||||
| Residential real estate | 11,217 | 12,587 | — | ||||||||||||||
| Consumer home equity | 1,924 | 1,924 | — | ||||||||||||||
| Other consumer | 18 | 18 | — | ||||||||||||||
| Sub-total | 33,187 | 36,330 | — | ||||||||||||||
| With an allowance recorded: | |||||||||||||||||
| Commercial and industrial | 3,836 | 4,226 | 1,540 | ||||||||||||||
| Commercial real estate | — | — | — | ||||||||||||||
| Business banking | 7,861 | 11,240 | 450 | ||||||||||||||
| Residential real estate | 11,161 | 11,161 | 1,549 | ||||||||||||||
| Consumer home equity | 1,998 | 1,998 | 270 | ||||||||||||||
| Other consumer | 161 | 161 | 161 | ||||||||||||||
| Sub-total | 25,017 | 28,786 | 3,970 | ||||||||||||||
| Total | $ | 58,204 | $ | 65,116 | $ | 3,970 | |||||||||||
The following table displays information regarding interest income recognized on impaired loans, by portfolio, for the three months ended March 31, 2021:
| For the Three Months Ended March 31, 2021 | |||||||||||
| Average Recorded Investment | Total Interest Recognized | ||||||||||
| (In thousands) | |||||||||||
| With no related allowance recorded: | |||||||||||
| Commercial and industrial | $ | 9,899 | $ | 46 | |||||||
| Commercial real estate | 4,176 | 44 | |||||||||
| Business banking | 5,024 | 26 | |||||||||
| Residential real estate | 14,648 | 144 | |||||||||
| Consumer home equity | 2,438 | 20 | |||||||||
| Other consumer | 27 | — | |||||||||
| Sub-total | 36,212 | 280 | |||||||||
| With an allowance recorded: | |||||||||||
| Commercial and industrial | 7,965 | — | |||||||||
| Commercial real estate | 657 | — | |||||||||
| Business banking | 16,325 | 14 | |||||||||
| Residential real estate | 12,248 | 127 | |||||||||
| Consumer home equity | 2,150 | 18 | |||||||||
| Sub-total | 39,345 | 159 | |||||||||
| Total | $ | 75,557 | $ | 439 | |||||||
Purchased Credit Impaired Loans
The following table displays the outstanding and carrying amounts of PCI loans as of December 31, 2021:
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| As of December 31, 2021 | |||||
| (In thousands) | |||||
| Outstanding balance | $ | 78,074 | |||
| Carrying amount | 69,639 | ||||
Under previous accounting guidance, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield,” was accreted into interest income over the life of the loans using the effective yield method. The following table summarizes activity in the accretable yield for the PCI loan portfolio:
| For the Three Months Ended March 31, 2021 | |||||
| (In thousands) | |||||
| Balance at beginning of period | $ | 2,495 | |||
| Accretion | (216) | ||||
| Other change in expected cash flows | (248) | ||||
| Balance at end of period | $ | 2,031 | |||
The estimate of cash flows expected to be collected was regularly re-assessed subsequent to acquisition. A decrease in expected cash flows in subsequent periods may have indicated that the loan was impaired which would require the establishment of an allowance for loan losses by a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods served, first, to reduce any previously established allowance for loan losses by the increase in the present value of cash flows expected to be collected, and resulted in a recalculation of the amount of accretable yield for the loan. The adjustment of accretable yield due to an increase in expected cash flows was accounted for as a change in estimate. The additional cash flows expected to be collected were reclassified from the non-accretable difference to the accretable yield, and the amount of periodic accretion was adjusted accordingly over the remaining life of the loans.
6. Leases
The Company leases certain office space and equipment under various non-cancelable operating leases. These leases have original terms ranging from 1 year to 25 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.
As of the dates indicated, the Company had the following related to operating leases:
| As of March 31, 2022 | As of December 31, 2021 | |||||||
| (In thousands) | ||||||||
| Right-of-use assets | $ | 80,408 | $ | 83,821 | ||||
| Lease liabilities | 85,573 | 89,296 | ||||||
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 tables are a summary of the Company’s components of net lease cost for the periods indicated:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Operating lease cost | $ | 3,694 | $ | 3,561 | |||||||
| Finance lease cost | 88 | 31 | |||||||||
| Variable lease cost | 829 | 490 | |||||||||
| Total lease cost | $ | 4,611 | $ | 4,082 | |||||||
During the three months ended March 31, 2022 and 2021 the Company made $4.7 million and $3.6 million, respectively, in cash payments for operating and finance lease payments.
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Supplemental balance sheet information related to operating leases are as follows:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| Weighted-average remaining lease term (in years) | 7.65 | 7.83 | |||||||||
| Weighted-average discount rate | 2.54 | % | 2.52 | % | |||||||
7. Goodwill and Other Intangibles
The following tables set forth the carrying amount of goodwill and other intangible assets, net of accumulated amortization, by reporting unit at the dates indicated below:
| As of March 31, 2022 | |||||||||||||||||
| Banking Business | Insurance Agency Business | Net Carrying Amount | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Balances not subject to amortization | |||||||||||||||||
| Goodwill | $ | 557,635 | $ | 77,144 | $ | 634,779 | |||||||||||
| Balances subject to amortization | |||||||||||||||||
| Insurance agency (1) | — | 8,708 | 8,708 | ||||||||||||||
| Core deposit intangible | 11,272 | — | 11,272 | ||||||||||||||
| Total other intangible assets | 11,272 | 8,708 | 19,980 | ||||||||||||||
| Total goodwill and other intangible assets | $ | 568,907 | $ | 85,852 | $ | 654,759 | |||||||||||
(1)Insurance agency intangible assets include customer list, non-compete agreement and supplier relationship intangible assets.
| As of December 31, 2021 | |||||||||||||||||
| Banking Business | Insurance Agency Business | Net Carrying Amount | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Balances not subject to amortization | |||||||||||||||||
| Goodwill | $ | 557,635 | $ | 73,861 | $ | 631,496 | |||||||||||
| Balances subject to amortization | |||||||||||||||||
| Insurance agency (1) | — | 6,635 | 6,635 | ||||||||||||||
| Core deposit intangible | 11,572 | — | 11,572 | ||||||||||||||
| Total other intangible assets | 11,572 | 6,635 | 18,207 | ||||||||||||||
| Total goodwill and other intangible assets | $ | 569,207 | $ | 80,496 | $ | 649,703 | |||||||||||
(1)Insurance agency intangible assets include customer list, non-compete agreement and supplier relationship intangible assets.
The Company acquired one insurance agency during the three months ended March 31, 2022. The purchase price and goodwill recorded as a result of the acquisition were not material.
The Company quantitatively assesses goodwill for impairment at the reporting unit level on an annual basis or sooner if an event occurs or circumstances change which might indicate that the fair value of a reporting unit is below its carrying amount. The Company has identified and assigned goodwill to two reporting units - the banking business and insurance agency business. The quantitative assessments for both the banking business and insurance agency business were most recently performed as of September 30, 2021. The assessment for the banking business included a market capitalization analysis, as well as a comparison of the banking business’ book value to the implied fair value using a pricing multiple of the Company’s tangible book value. The assessment for insurance agency business included a price-to-earnings analysis, as well as an earnings before interest, taxes, depreciation, and amortization ("EBITDA") multiplier valuation based upon recent and observed agency mergers and acquisitions. The Company considered the economic conditions for the period, including the potential impact of the COVID-19 pandemic, as it pertains to the goodwill above and determined that there was no indication of impairment related to goodwill as of March 31, 2022 or December 31, 2021.
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Other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company also considered the impact of the COVID-19 pandemic as it pertains to these intangible assets and determined that there was no indication of impairment related to other intangible assets as of March 31, 2022 or December 31, 2021.
8. Earnings Per Share (“EPS”)
Basic EPS represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the Company. Diluted EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the year, plus the effect of potential dilutive common share equivalents computed using the treasury stock method. There were no securities that had a dilutive effect during the three months ended March 31, 2021. 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.
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands, except per share data) | |||||||||||
| Net income applicable to common shares | $ | 51,516 | $ | 47,663 | |||||||
| Average number of common shares outstanding | 184,066,326 | 186,758,154 | |||||||||
| Less: Average unallocated ESOP shares | (14,208,376) | (14,709,110) | |||||||||
| Average number of common shares outstanding used to calculate basic earnings per common share | 169,857,950 | 172,049,044 | |||||||||
| Common stock equivalents - share-based compensation | 110,206 | — | |||||||||
| Average number of common shares outstanding used to calculate diluted earnings per common share | 169,968,156 | 172,049,044 | |||||||||
| Earnings per common share | |||||||||||
| Basic | $ | 0.30 | $ | 0.28 | |||||||
| Diluted | $ | 0.30 | $ | 0.28 | |||||||
9. 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 approximately 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 markets tax credit projects that qualify for CRA credits and eligible projects that qualify for renewable energy and historic tax credits.
As of March 31, 2022 and December 31, 2021, the Company had $82.5 million and $83.8 million, respectively, in tax credit investments that were included in other assets in the consolidated balance sheets.
When permissible, the Company accounts for its investments in LIHTC projects using the proportional amortization method, under which it amortizes the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognizes that amortization as a component of income tax expense. The net investment in the housing projects is included in other assets. The Company will continue to use the proportional amortization method on any new qualifying LIHTC investments.
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The following table presents the Company’s investments in LIHTC projects accounted for using the proportional amortization method for the periods indicated:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Current recorded investment included in other assets | $ | 79,722 | $ | 81,035 | |||||||
Commitments to fund qualified affordable housing projects included in recorded investment noted above | 43,287 | 48,399 | |||||||||
The following table presents additional information related to the Company's investments in LIHTC projects for the periods indicated:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Tax credits and benefits recognized | $ | 2,321 | $ | 1,464 | |||||||
| Amortization expense included in income tax expense | 1,843 | 1,264 | |||||||||
The Company accounts for certain other investments in renewable energy projects using the equity method of accounting. These investments in renewable energy projects are included in other assets on the consolidated balance sheet and totaled $2.8 million as of both March 31, 2022 and December 31, 2021. There were no outstanding commitments related to these investments as of both March 31, 2022 and December 31, 2021.
10. Shareholders’ Equity
Share Repurchases
On November 12, 2021, the Company announced receipt of a notice of non-objection from the Board of Governors of the Federal Reserve System to its previously announced share repurchase program which was approved by the Company’s Board of Directors on October 1, 2021. The program authorizes the purchase of up to 9,337,900 shares, or 5% of the Company’s then-outstanding shares of common stock over a 12-month period. Repurchases are made at management’s discretion from time to time at prices management considers to be attractive and in the best interests of both the Company and its shareholders, subject to the availability of shares, general market conditions, the trading price of the shares, alternative uses for capital, and the Company’s financial performance. Repurchases may be suspended, terminated or modified by the Company at any time for any reason. The program is limited to $225.0 million through November 30, 2022.
Information regarding the shares repurchased under the plan is presented in the following table:
| Period | Total Number of Shares Repurchased | Average Price Paid per Share | Total Number of Shares Repurchased as Part of the Share Repurchase Program at the end of Each Respective Period | Maximum Number of Shares That May Yet Be Purchased Under the Share Repurchase Program at the end of Each Respective Period | |||||||||||||||||||
| January 1, 2022 – January 31, 2022 | 987,526 | $ | 21.02 | 2,123,404 | 7,214,496 | ||||||||||||||||||
| February 1, 2022 – February 28, 2022 | 1,109,697 | $ | 21.08 | 3,233,101 | 6,104,799 | ||||||||||||||||||
| March 1, 2022 – March 31, 2022 | 769,398 | $ | 21.31 | 4,002,499 | 5,335,401 | ||||||||||||||||||
The Company repurchased no shares of its common stock during the three months ended March 31, 2021.
Dividends
During the three months ended March 31, 2022, the Company declared and paid aggregate dividends of $16.9 million at a dividend per share of $0.10. During the three months ended March 31, 2021, the Company declared and paid aggregate dividends of $10.3 million at a dividend per share of $0.06.
11. Employee Benefits
Pension Plans
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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 retired officers 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 March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Components of net periodic benefit cost: | |||||||||||
| Service cost | $ | 8,092 | $ | 7,896 | |||||||
| Interest cost | 2,430 | 1,269 | |||||||||
| Expected return on plan assets | (9,281) | (8,141) | |||||||||
| Past service credit | (2,970) | (2,946) | |||||||||
| Recognized net actuarial loss | 2,798 | 3,538 | |||||||||
| Net periodic benefit cost | $ | 1,069 | $ | 1,616 | |||||||
Service costs for the Defined Benefit Plan, the BEP, and the DB SERP are recognized within salaries and employee benefits in the consolidated statement of income. Service costs for the ODRCP are recognized within professional services in the consolidated statements of income. 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 year beginning November 1, 2021. The Company chose to make contributions to the Defined Benefit Plan of $7.2 million during the three months ended March 31, 2022. In accordance with the Pension Protection Act, the Company was not required to make any contributions to the Defined Benefit Plan for the plan year beginning November 1, 2020. Accordingly, during the three months ended March 31, 2021, there were no contributions made to the Defined Benefit Plan.
Rabbi Trust Variable Interest Entity
The Company established a rabbi trust to meet its obligations under certain executive non-qualified retirement benefits and deferred compensation plans and to mitigate the expense volatility of the aforementioned retirement plans. The rabbi trust is considered a variable interest entity (“VIE”) as the equity investment at risk is insufficient to permit the trust to finance its activities without additional subordinated financial support from the Company. The Company is considered the primary beneficiary of the rabbi trust as it has the power to direct the activities of the rabbi trust that significantly affect the rabbi trust’s economic performance and it has the obligation to absorb losses of the rabbi trust that could potentially be significant to the rabbi trust by virtue of its contingent call options on the rabbi trust’s assets in the event of the Company’s bankruptcy. As the primary beneficiary of this VIE, the Company consolidates the rabbi trust investments. In general, the rabbi trust investments and any earnings received thereon are accumulated, reinvested and used exclusively for trust purposes. These rabbi trust investments consist primarily of cash and cash equivalents, U.S. government agency obligations, equity securities, mutual funds and other exchange-traded funds, and are recorded at fair value in other assets in the Company's consolidated
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balance sheet. Changes in fair value are recorded in noninterest income. At March 31, 2022 and December 31, 2021 the amount of rabbi trust investments at fair value were $87.3 million and $104.4 million, respectively.
Investments in rabbi trust accounts are recorded at fair value within the Company's consolidated balance sheets with changes in fair value recorded through noninterest income. The following table presents the book value, mark-to-market, and fair value of assets held in rabbi trust accounts by asset type:
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Book Value | Mark-to-Market | Fair Value | Book Value | Mark-to-Market | Fair Value | ||||||||||||||||||||||||||||||
| Asset Type | (In thousands) | ||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 5,445 | $ | — | $ | 5,445 | $ | 4,494 | $ | — | $ | 4,494 | |||||||||||||||||||||||
| Equities (1) | 59,487 | 14,257 | 73,744 | 67,401 | 24,295 | 91,696 | |||||||||||||||||||||||||||||
| Fixed income | 8,466 | (363) | 8,103 | 8,126 | 56 | 8,182 | |||||||||||||||||||||||||||||
| Total assets | $ | 73,398 | $ | 13,894 | $ | 87,292 | $ | 80,021 | $ | 24,351 | $ | 104,372 | |||||||||||||||||||||||
(1) Equities include mutual funds and other exchange-traded funds.
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 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 vest pro-rata on an annual basis over a five-year period. The maximum term for stock options is ten years. On March 1, 2022, the Company granted to all of the Company’s executive officers and certain other employees a total of 978,364 RSUs, which vest pro-rata on an annual basis over a period of or five years, and a total of 533,676 performance stock units (“PSUs”), for which vesting is contingent upon the Compensation Committee of the Board of Director’s certification that the Company has attained a threshold level of certain performance criteria over a three-year period. As of March 31, 2022 and December 31, 2021, there were 5,275,230 and 6,787,270 shares available for issuance as restricted stock or RSU awards and 18,675,815 shares that remain available for issuance upon the exercise of stock options, respectively. As of both March 31, 2022 and December 31, 2021, no stock options had been awarded under the 2021 Plan.
The following table summarizes the Company’s restricted stock award activity for the three months ended March 31, 2022:
| Number of Shares | Weighted-Average Grant Price Per Share | ||||||||||
Non-vested restricted stock as of December 31, 2021 | 683,056 | $ | 20.13 | ||||||||
| Granted | — | — | |||||||||
Non-vested restricted stock as of March 31, 2022 | 683,056 | $ | 20.13 | ||||||||
The following table summarizes the Company’s restricted stock unit activity for the three months ended March 31, 2022:
| Number of Shares | Weighted-Average Grant Price Per Share | ||||||||||
Non-vested restricted stock units as of December 31, 2021 | — | $ | — | ||||||||
| Granted | 978,364 | 21.08 | |||||||||
Non-vested restricted stock units as of March 31, 2022 | 978,364 | $ | 21.08 | ||||||||
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The following table summarizes the Company’s performance stock unit activity for the three months ended March 31, 2022:
| Number of Shares | Weighted-Average Grant Price Per Share | ||||||||||
Non-vested performance stock units as of December 31, 2021 | — | $ | — | ||||||||
| Granted | 533,676 | 21.12 | |||||||||
Non-vested performance stock units as of March 31, 2022 | 533,676 | $ | 21.12 | ||||||||
As of both March 31, 2022 and December 31, 2021, no awards had vested.
For the three months ended March 31, 2022, share-based compensation expense under the 2021 Plan and the related tax benefit totaled $1.6 million and $0.4 million, respectively. No share-based compensation expense was incurred for the three months ended March 31, 2021 as the Company began issuing awards in November 2021.
As of March 31, 2022 and December 31, 2021, there was $44.0 million and $13.5 million, respectively, of total unrecognized compensation expense related to non-vested restricted stock awards, restricted stock units and performance stock units granted and issued under the 2021 Plan. This cost is expected to be recognized over a weighted average remaining period of approximately 4.1 years.
12. 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 March 31, 2022 | As of December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Commitments to extend credit | $ | 5,306,596 | $ | 5,175,521 | |||||||
| Standby letters of credit | 65,687 | 65,602 | |||||||||
| Forward commitments to sell loans | 12,917 | 24,440 | |||||||||
Other Contingencies
The Company has been named a defendant in various legal proceedings arising in the normal course of business. Set out below are descriptions of significant legal matters involving the Company and its subsidiaries. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company’s consolidated financial statements.
In the second quarter of 2021, the Company entered into a preliminary settlement of two purported class action matters concerning overdraft and nonsufficient funds fees. The matters were filed in the Massachusetts Superior Court in November 2019 and April 2021, respectively, and were consolidated into one matter for final settlement purposes. The matters were settled during the quarter ended March 31, 2022 and the total settlement expense, including related costs, was $3.3
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million. The Company incurred no costs in 2022 related to these matters as the total settlement expense had been accrued in 2021 when management determined the loss contingency to be both probable and estimable. The Company’s regulators conducted inquiries and reviewed data related to one of these class action matters and, in February 2022, made an additional request for data and notified management that they may require additional restitution for certain matters associated with the nonsufficient funds fees matter. Based on this discussion, management believed that a loss contingency for this restitution was probable but was not able to determine a reasonable estimate for the loss. However, later during the quarter ended March 31, 2022, the Company was informed by its regulators that no additional remediation on this issue would be required. As a result, as of March 31, 2022, management no longer believes that a loss contingency for restitution associated with this issue is probable.
As a member of the Federal Reserve System, the Bank is required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank of Boston (the “FRBB”). However, in response to the COVID-19 pandemic, the Federal Reserve temporarily eliminated reserve requirements and therefore there was no minimum reserve requirement as of either March 31, 2022 or December 31, 2021.
13. 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 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.
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 may enter 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 commercial loans. 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. As of March 31, 2022 and December 31, 2021, the Company did not have any active interest rate swaps which qualify as cash flow hedges for accounting purposes.
Due to the phase-out, and eventual discontinuation, of LIBOR, central clearinghouses have begun to transition to alternative rates for valuation purposes. As of October 16, 2020, the Company changed its valuation methodology to reflect changes made by the Chicago Mercantile Exchange (“CME”), through which the Company clears derivative financial instruments that are eligible for clearing. The changes from the CME changed the discounting methodology and interest calculation of cash margin from Overnight Index Swap to the Secured Overnight Financing Rate, or SOFR, for U.S. dollar cleared interest rate swaps. The Company believes that the improvements to its valuation methodology will result in valuations for cleared interest rate swaps that better reflect prices obtainable in the markets in which the Company transacts. The changes in valuation methodology are applied prospectively as a change in accounting estimate and are immaterial to the Company’s financial statements.
The following table presents the pre-tax impact of terminated cash flow hedges on accumulated other comprehensive income (“AOCI”) for the three months ended March 31, 2022 and March 31, 2021:
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| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Unrealized gains on terminated hedges included in AOCI – beginning of respective period | $ | 10,239 | $ | 41,473 | |||||||
| Unrealized gains on terminated hedges arising during the period | — | — | |||||||||
| Reclassification adjustments for amortization of unrealized (gains) into net income | (5,298) | (8,274) | |||||||||
| Unrealized gains on terminated hedges included in AOCI – end of respective period | $ | 4,941 | $ | 33,199 | |||||||
The balance of terminated cash flow hedges in AOCI will be amortized into earnings through January 2023. The Company expects the remaining $4.9 million to be reclassified into interest income from other comprehensive income related to the Company’s terminated cash flow hedges in the next 12 months as of March 31, 2022.
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 dealer 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.
| March 31, 2022 | |||||||||||
| Number of Positions | Total Notional | ||||||||||
| (Dollars in thousands) | |||||||||||
| Interest rate swaps | 468 | $ | 2,867,637 | ||||||||
| Risk participation agreements | 63 | 263,496 | |||||||||
| Foreign exchange contracts: | |||||||||||
| Matched commercial customer book | 70 | 10,343 | |||||||||
| Foreign currency loan | 5 | 11,586 | |||||||||
| December 31, 2021 | |||||||||||
| Number of Positions | Total Notional | ||||||||||
| (Dollars in thousands) | |||||||||||
| Interest rate swaps | 494 | $ | 3,009,150 | ||||||||
| Risk participation agreements | 64 | 238,772 | |||||||||
| Foreign exchange contracts: | |||||||||||
| Matched commercial customer book | 72 | 7,922 | |||||||||
| Foreign currency loan | 6 | 10,830 | |||||||||
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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 sheet for the periods indicated. There were no derivatives designated as hedging instruments at March 31, 2022 or December 31, 2021.
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||
| Balance Sheet Location | Fair Value at March 31, 2022 | Fair Value at December 31, 2021 | Balance Sheet Location | Fair Value at March 31, 2022 | Fair Value at December 31, 2021 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Customer-related positions: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | 23,725 | $ | 64,338 | Other liabilities | $ | 24,988 | $ | 17,880 | |||||||||||||||||||||||||
| Risk participation agreements | Other assets | 196 | 315 | Other liabilities | 401 | 580 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts - matched customer book | Other assets | 91 | 61 | Other liabilities | 78 | 46 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts - foreign currency loan | Other assets | 7 | — | Other liabilities | 16 | 87 | |||||||||||||||||||||||||||||
| Total | $ | 24,019 | $ | 64,714 | $ | 25,483 | $ | 18,593 | |||||||||||||||||||||||||||
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 March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Derivatives designated as hedges: | |||||||||||
| (Loss) gain in OCI on derivatives | $ | — | $ | — | |||||||
| Gain reclassified from OCI into interest income (effective portion) | $ | 5,298 | $ | 8,274 | |||||||
| 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 recognized in interest rate swap income | $ | 2,298 | $ | 4,851 | |||||||
| Gain recognized in interest rate swap income for risk participation agreements | 60 | 369 | |||||||||
| (Loss) gain recognized in other income for foreign currency exchange contracts: | |||||||||||
| Matched commercial customer book | (2) | 6 | |||||||||
| Foreign currency loan | 78 | 73 | |||||||||
| Total gain for derivatives not designated as hedges | $ | 2,434 | $ | 5,299 | |||||||
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,
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then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
The Company’s exposure related to its customer-related interest rate swap derivatives consists of exposure on cleared derivative transactions and exposure on non-cleared derivative transactions.
Cleared derivative transactions are with the Chicago Mercantile Exchange, or CME, and exposure is settled to market daily, with additional credit exposure related to initial-margin collateral pledged to CME at trade execution. At March 31, 2022 and December 31, 2021, the Company’s exposure to CME for settled variation margin in excess of the customer-related interest rate swap termination values was $1.4 million and $0.4 million, respectively. In addition, at March 31, 2022 and December 31, 2021, the Company had posted initial-margin collateral in the form of U.S. Treasury notes amounting to $37.0 million and $48.9 million, respectively, to CME for these derivatives. The U.S. Treasury notes were considered restricted assets and were included in AFS securities.
At March 31, 2022 and December 31, 2021 the fair value of all customer-related interest rate swap derivatives with credit-risk related contingent features that were in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk, was $0.2 million and $13.7 million, respectively. 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 March 31, 2022 and December 31, 2021, the Company had posted collateral in the form of cash amounting to $5.5 million and $21.3 million, respectively, which was considered to be a restricted asset and was included in other short-term investments. If the Company had breached any of these provisions at March 31, 2022 or December 31, 2021, it would have been required to settle its obligations under the agreements at the termination value. In addition, the Company had cross-default provisions with its commercial customer loan agreements which provide cross-collateralization with the customer loan collateral.
Mortgage Banking Derivatives
The Company enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to fund mortgage loans at specified rates and times in the future. In addition, the Company enters into forward sale commitments to sell such residential mortgage loans at specified prices and times in the future. These commitments are short-term in nature and generally expire in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale and the related forward sale commitments are considered derivative instruments under ASC Topic 815, “Derivatives and Hedging” and are reported at fair value. Changes in fair value are reported in earnings and included in other non-interest income on the consolidated statements of income. As of March 31, 2022 and December 31, 2021, the Company had an outstanding notional balance of residential mortgage loan origination commitments of $22.8 million and $31.9 million, respectively and forward sale commitments of $12.9 million and $24.4 million, respectively. During both the three months ended March 31, 2022 and 2021, the Company recorded $0.2 million of net losses related to the change in fair value of commitments to originate and sell mortgage loans. The aggregate fair value of the Company’s mortgage banking derivative asset and liability as of March 31, 2022 was $0.2 million and $0.2 million, respectively. The aggregate fair value of the Company’s mortgage banking derivative asset and liability as of December 31, 2021 was $0.3 million and $0.1 million, respectively. Mortgage banking derivative assets and liabilities are included in other assets and other liabilities, respectively, on the consolidated balance sheet. Residential mortgages sold are generally sold with servicing rights released. Mortgage banking derivatives do not qualify as hedges for accounting purposes.
14. 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 March 31, 2022 and December 31, 2021, it was determined that no additional collateral would have to be posted to immediately settle these instruments.
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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 March 31, 2022 | |||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||
| Customer-related positions: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 23,725 | $ | — | $ | 23,725 | $ | 3,470 | $ | — | $ | 20,255 | |||||||||||||||||||||||
| Risk participation agreements | 196 | — | 196 | — | — | 196 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – matched customer book | 91 | — | 91 | — | — | 91 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – foreign currency loan | 7 | — | 7 | — | — | 7 | |||||||||||||||||||||||||||||
| $ | 24,019 | $ | — | $ | 24,019 | $ | 3,470 | $ | — | $ | 20,549 | ||||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||||||||
| Customer-related positions: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 24,988 | $ | — | $ | 24,988 | $ | 3,470 | $ | 21,518 | $ | — | |||||||||||||||||||||||
| Risk participation agreements | 401 | — | 401 | — | — | 401 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – matched customer book | 78 | — | 78 | — | — | 78 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – foreign currency loan | 16 | — | 16 | — | — | 16 | |||||||||||||||||||||||||||||
| $ | 25,483 | $ | — | $ | 25,483 | $ | 3,470 | $ | 21,518 | $ | 495 | ||||||||||||||||||||||||
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| As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||
| Customer-related positions: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 64,338 | $ | — | $ | 64,338 | $ | 1,440 | $ | — | $ | 62,898 | |||||||||||||||||||||||
| Risk participation agreements | 315 | — | 315 | — | — | 315 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – matched customer book | 61 | — | 61 | — | — | 61 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – foreign currency loan | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| $ | 64,714 | $ | — | $ | 64,714 | $ | 1,440 | $ | — | $ | 63,274 | ||||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||||||||
| Customer-related positions: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 17,880 | $ | — | $ | 17,880 | $ | 1,440 | $ | 16,440 | $ | — | |||||||||||||||||||||||
| Risk participation agreements | 580 | — | 580 | — | — | 580 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – matched customer book | 46 | — | 46 | — | — | 46 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – foreign currency loan | 87 | — | 87 | — | — | 87 | |||||||||||||||||||||||||||||
| $ | 18,593 | $ | — | $ | 18,593 | $ | 1,440 | $ | 16,440 | $ | 713 | ||||||||||||||||||||||||
15. Fair Value of Assets and Liabilities
The Company uses fair value measurements to record adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
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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. government-sponsored residential and commercial mortgage-backed securities, U.S. Agency bonds 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, including SBA pooled securities, are evaluated using relevant trade data, benchmark quotes and spreads obtained from publicly available trade data, and generated on a price, yield or spread basis as determined by the observed market data. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
The fair value of U.S. government-sponsored residential and commercial mortgage-backed securities were estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
The fair value of state and municipal bonds were estimated using a valuation matrix with inputs including observable bond interest rate tables, recent transactions, and yield relationships. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
The fair value of other debt securities were estimated using a valuation matrix with inputs including observable bond interest rate tables, recent transactions, and yield relationships. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
Fair value was based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. The estimated fair value of the Company’s securities, by type, is disclosed in Note 3, “Securities.”
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.
The fair value of PPP loans, which are fully guaranteed by the SBA, approximates the carrying amount.
Loans are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. Loans that are deemed to be collateral-dependent, as described in Note 2, “Summary of Significant Accounting Policies” 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
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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 $45.8 million at March 31, 2022 and $58.1 million at December 31, 2021. There were no redemption restrictions on these mutual funds at the end of any period presented.
Bank-Owned Life Insurance
The fair value of bank-owned life insurance was based upon quotations received from bank-owned life insurance dealers. These assets were classified as Level 2 given the use of observable inputs.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and interest checking accounts, and money market accounts, was equal to their carrying amount. The fair value of time deposits was based on the discounted value of contractual cash flows using current market interest rates. Deposits were classified as Level 2 given the use of observable market inputs.
The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the wholesale market (core deposit intangibles).
FHLB Advances
The fair value of FHLB advances was based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on instruments with similar remaining maturities. FHLB advances were classified as Level 2.
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 Swaps
The fair value of interest rate swaps was determined using discounted cash flow analysis on the expected cash flows of the interest rate swaps. This analysis reflects the contractual terms of the interest rate swaps, including the period of maturity, and uses observable market-based inputs, including interest rate curves and implied volatility. In addition, for customer-related interest rate swaps, the analysis reflects a credit valuation adjustment to reflect the Company’s own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. The majority of inputs used to value the Company's interest rate swaps fall within Level 2 of the fair value hierarchy, but the credit valuation adjustments associated with the interest rate swaps utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, at March 31, 2022 and December 31, 2021, the impact of the Level 3 inputs on the overall valuation of the interest rate swaps was deemed insignificant to the overall valuation. As a result, the interest rate swaps were categorized as Level 2 within the fair value hierarchy.
Risk Participations
The fair value of risk participations was determined based upon the total expected exposure of the derivative which considers the present value of cash flows discounted using market-based inputs and were therefore categorized as Level 2 within the fair value hierarchy. The fair value also included a credit valuation adjustment which evaluates the credit risk of its counterparties by considering factors such as the likelihood of default by the counterparties, its net exposures, the remaining contractual life, as well as the amount of collateral securing the position. The change in value of derivative assets and liabilities attributable to credit risk was not significant during the reported periods.
Foreign Currency Forward Contracts
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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.
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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 March 31, 2022 and December 31, 2021:
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Balance as of March 31, 2022 | 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 | $ | 4,969,346 | $ | — | $ | 4,969,346 | $ | — | |||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 1,615,927 | — | 1,615,927 | — | |||||||||||||||||||
| U.S. Agency bonds | 1,013,899 | — | 1,013,899 | — | |||||||||||||||||||
| U.S. Treasury securities | 56,235 | 56,235 | — | — | |||||||||||||||||||
| State and municipal bonds and obligations | 260,316 | — | 260,316 | — | |||||||||||||||||||
| Other debt securities | 1,582 | — | 1,582 | — | |||||||||||||||||||
| Rabbi trust investments | 87,292 | 79,189 | 8,103 | — | |||||||||||||||||||
| Loans held for sale | 1,166 | — | 1,166 | — | |||||||||||||||||||
| Interest rate swap contracts | |||||||||||||||||||||||
| Customer-related positions | 23,725 | — | 23,725 | — | |||||||||||||||||||
| Risk participation agreements | 196 | — | 196 | — | |||||||||||||||||||
| Foreign currency forward contracts | |||||||||||||||||||||||
| Matched customer book | 91 | — | 91 | — | |||||||||||||||||||
| Foreign currency loan | 7 | — | 7 | — | |||||||||||||||||||
| Mortgage derivatives | 239 | — | 239 | — | |||||||||||||||||||
| Total | $ | 8,030,021 | $ | 135,424 | $ | 7,894,597 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swap contracts | |||||||||||||||||||||||
| Customer-related positions | $ | 24,988 | $ | — | $ | 24,988 | $ | — | |||||||||||||||
| Risk participation agreements | 401 | — | 401 | — | |||||||||||||||||||
| Foreign currency forward contracts | |||||||||||||||||||||||
| Matched customer book | 78 | — | 78 | — | |||||||||||||||||||
| Foreign currency loan | 16 | — | 16 | — | |||||||||||||||||||
| Mortgage derivatives | 168 | — | 168 | — | |||||||||||||||||||
| Total | $ | 25,651 | $ | — | $ | 25,651 | $ | — | |||||||||||||||
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| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Description | Balance as of December 31, 2021 | 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 | $ | 5,524,708 | $ | — | $ | 5,524,708 | $ | — | |||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 1,408,868 | — | 1,408,868 | — | |||||||||||||||||||
| U.S. Agency bonds | 1,175,014 | — | 1,175,014 | — | |||||||||||||||||||
| U.S. Treasury securities | 88,605 | 88,605 | — | — | |||||||||||||||||||
| State and municipal bonds and obligations | 280,329 | — | 280,329 | — | |||||||||||||||||||
| Small Business Administration pooled securities | 32,103 | — | 32,103 | — | |||||||||||||||||||
| Other debt securities | 1,597 | — | 1,597 | — | |||||||||||||||||||
| Rabbi trust investments | 104,372 | 96,190 | 8,182 | — | |||||||||||||||||||
| Loans held for sale | 1,206 | — | 1,206 | — | |||||||||||||||||||
| Interest rate swap contracts | |||||||||||||||||||||||
| Customer-related positions | 64,338 | — | 64,338 | — | |||||||||||||||||||
| Risk participation agreements | 315 | — | 315 | — | |||||||||||||||||||
| Foreign currency forward contracts | |||||||||||||||||||||||
| Matched customer book | 61 | — | 61 | — | |||||||||||||||||||
| Mortgage derivatives | 256 | — | 256 | — | |||||||||||||||||||
| Total | $ | 8,681,772 | $ | 184,795 | $ | 8,496,977 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swap contracts | |||||||||||||||||||||||
| Customer-related positions | $ | 17,880 | $ | — | $ | 17,880 | $ | — | |||||||||||||||
| Risk participation agreements | 580 | — | 580 | — | |||||||||||||||||||
| Foreign currency forward contracts | |||||||||||||||||||||||
| Matched customer book | 46 | — | 46 | — | |||||||||||||||||||
| Foreign currency loan | 87 | — | 87 | — | |||||||||||||||||||
| Mortgage derivatives | 16 | — | 16 | — | |||||||||||||||||||
| Total | $ | 18,609 | $ | — | $ | 18,609 | $ | — | |||||||||||||||
There were no transfers to or from Level 1, 2 and 3 during the three months ended March 31, 2022 and twelve months ended December 31, 2021.
The Company held no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2022 or December 31, 2021.
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis
The Company may also be required, from time to time, to measure certain other assets on a nonrecurring basis in accordance with generally accepted accounting principles. The following tables summarize the fair value of assets and liabilities measured at fair value on a nonrecurring basis, as of March 31, 2022 and December 31, 2021.
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| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Description | Balance as of March 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Individually assessed collateral-dependent loans whose fair value is based upon appraisals | $ | 11,879 | $ | — | $ | — | $ | 11,879 | |||||||||||||||
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Description | Balance as of December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
Collateral-dependent impaired loans whose fair value is based upon appraisals | $ | 12,068 | $ | — | $ | — | $ | 12,068 | |||||||||||||||
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. Refer to Note 2, “Summary of Significant Accounting Policies” and Note 4, “Loans and Allowance for Credit Losses” for further discussion regarding the Company’s adoption of ASU 2016-13 and the effect of that adoption on the management’s process for estimating the allowance for loan losses.
Loans for which a reserve was established based upon expected cash flows discounted at the loan’s effective interest rate are not deemed to be measured at fair value.
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:
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| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||
| Description | Carrying Value as of March 31, 2022 | Fair Value as of March 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Held to maturity securities: | |||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 192,231 | $ | 188,913 | $ | — | $ | 188,913 | $ | — | |||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 203,203 | 203,210 | — | 203,210 | — | ||||||||||||||||||||||||
| Loans, net of allowance for loan losses | 12,033,603 | 11,817,706 | — | — | 11,817,706 | ||||||||||||||||||||||||
| FHLB stock | 10,904 | 10,904 | — | 10,904 | — | ||||||||||||||||||||||||
| Bank-owned life insurance | 157,954 | 157,954 | — | 157,954 | — | ||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Deposits | $ | 19,392,816 | $ | 19,387,023 | $ | — | $ | 19,387,023 | $ | — | |||||||||||||||||||
| FHLB advances | 13,689 | 12,767 | — | 12,767 | — | ||||||||||||||||||||||||
| Escrow deposits from borrowers | 21,233 | 21,233 | — | 21,233 | — | ||||||||||||||||||||||||
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||
| Description | Carrying Value as of December 31, 2021 | Fair Value as of December 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Loans, net of allowance for loan losses | $ | 12,157,281 | $ | 12,282,323 | $ | — | $ | — | $ | 12,282,323 | |||||||||||||||||||
| FHLB stock | 10,904 | 10,904 | — | 10,904 | — | ||||||||||||||||||||||||
| Bank-owned life insurance | 157,091 | 157,091 | — | 157,091 | — | ||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Deposits | $ | 19,628,311 | $ | 19,626,376 | $ | — | $ | 19,626,376 | $ | — | |||||||||||||||||||
| FHLB advances | 14,020 | 13,558 | — | 13,558 | — | ||||||||||||||||||||||||
| Escrow deposits from borrowers | 20,258 | 20,258 | — | 20,258 | — | ||||||||||||||||||||||||
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.
16. 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.
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5.Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Performance obligations
The Company’s performance obligations are generally satisfied either at a point in time or over time, as services are rendered. Unsatisfied performance obligations at the report date are not material to the Company’s consolidated financial statements.
A portion of the Company's noninterest income is derived from contracts with customers within the scope of ASC 606. The Company has disaggregated such revenues by type of service, as presented in the table below. These categories reflect how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Insurance commissions | $ | 28,713 | $ | 28,147 | |||||||
| Service charges on deposit accounts | 8,537 | 5,367 | |||||||||
| Trust and investment advisory fees | 6,141 | 5,663 | |||||||||
| Debit card processing fees | 2,945 | 2,749 | |||||||||
| Other noninterest income | 2,361 | 1,792 | |||||||||
| Total noninterest income in-scope of ASC 606 | 48,697 | 43,718 | |||||||||
| Total noninterest (loss) income out-of-scope of ASC 606 | (2,282) | 11,494 | |||||||||
| Total noninterest income | $ | 46,415 | $ | 55,212 | |||||||
Additional information related to each of the revenue streams is further noted below.
Insurance Commissions
The Company acts as an agent in offering property, casualty, and life and health insurance to both commercial and consumer customers though Eastern Insurance Group. The Company earns a fixed commission on the sales of these products and services. The Company may also earn bonus commissions based upon meeting certain volume thresholds. In general, the Company recognizes commission revenues when earned based upon the effective date of the policy. For certain insurance products, the Company may also earn and recognize annual residual commissions commensurate with annual premiums being paid.
The Company also earns profit-sharing, or contingency revenues from the insurers with whom the Company places business. These profit-sharing revenues are performance bonuses from the insurers based upon certain performance metrics such as floors on written premiums, loss rates, and growth rates. Because the Company’s expectation of the ultimate profit-sharing revenue amounts to be earned can vary from period to period, the Company does not recognize this revenue until it has concluded that, based on all the facts and information available, it is probable that a significant revenue reversal will not occur in future periods.
Insurance commissions earned but not yet received amounted to $11.9 million as of March 31, 2022, and $15.6 million as of December 31, 2021 and were included in other assets.
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 charges 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
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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 $2.3 million and $1.8 million as of March 31, 2022 and December 31, 2021 and were included in other assets.
Trust and Investment Advisory Fees
The Company offers investment management and trust services to individuals, institutions, small businesses and charitable institutions. Each investment management product is governed by its own contract along with a separate identifiable fee schedule unique to that product. The Company also offers additional services, such as estate settlement, financial planning, tax services, and other special services quoted at the customer’s request.
The asset management and/or custody fees are primarily based upon a percentage of the monthly valuation of the principal assets in the customer’s account. Customers are also charged a base fee which is prorated over a twelve-month period. Fees for additional or special services are generally fixed in nature and are charged as services are rendered. All revenue is recognized in correlation to the monthly management fee determinations or as transactional services are provided.
Debit Card Processing Fees
The Company provides debit cards to its customers which are authorized and settled through various card payment networks, and in exchange, the Company earns revenue as determined by each payment network’s interchange program. Regardless of the network that is utilized to authorize and settle the payment, the merchant that provides the product or service to the debit card holder is ultimately responsible for the interchange payment to the Company. Debit card processing fees are recognized as card transactions are settled within each network. Debit card processing fees earned but not yet received amounted to $0.3 million as of both March 31, 2022 and December 31, 2021 and were included in other assets.
Other Noninterest Income
The Company earns various types of other noninterest income that have been aggregated into one general revenue stream in the table noted above. Noninterest income includes, but is not limited to, the following types of revenue with customers: safe deposit rent, ATM surcharge fees and customer checkbook fees. Individually, these sources of noninterest income are immaterial.
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17. Other Comprehensive Income
The following tables present a reconciliation of the changes in the components of other comprehensive (loss) income for the dates indicated including the amount of income tax (expense) benefit allocated to each component of other comprehensive (loss) income:
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
| 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 | $ | (465,532) | $ | 112,008 | $ | (353,524) | $ | (94,979) | $ | 20,982 | $ | (73,997) | |||||||||||||||||||||||
| Less: reclassification adjustment for gains included in net income | (2,172) | 673 | (1,499) | 1,164 | (257) | 907 | |||||||||||||||||||||||||||||
| Net change in fair value of securities available for sale | (463,360) | 111,335 | (352,025) | (96,143) | 21,239 | (74,904) | |||||||||||||||||||||||||||||
| Unrealized gains (losses) on cash flow hedges: | |||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedges | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Less: net cash flow hedge gains reclassified into interest income(1) | 5,298 | (1,489) | 3,809 | 8,274 | (2,326) | 5,948 | |||||||||||||||||||||||||||||
| Net change in fair value of cash flow hedges | (5,298) | 1,489 | (3,809) | (8,274) | 2,326 | (5,948) | |||||||||||||||||||||||||||||
| Defined benefit pension plans: | |||||||||||||||||||||||||||||||||||
| Change in actuarial net loss | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Less: amortization of actuarial net loss | (2,798) | 787 | (2,011) | (3,537) | 994 | (2,543) | |||||||||||||||||||||||||||||
| Less: accretion of prior service credit | 2,970 | (835) | 2,135 | 2,945 | (828) | 2,117 | |||||||||||||||||||||||||||||
| Net change in other comprehensive income for defined benefit postretirement plans | (172) | 48 | (124) | 592 | (166) | 426 | |||||||||||||||||||||||||||||
| Total other comprehensive loss | $ | (468,830) | $ | 112,872 | $ | (355,958) | $ | (103,825) | $ | 23,399 | $ | (80,426) | |||||||||||||||||||||||
(1)Represents amortization of realized gains on terminated cash flow hedges for the three months ended March 31, 2022 and 2021. The total realized gain of $41.2 million, net of tax, will be recognized in earnings through January 2023. The balance of this gain had amortized to $3.6 million and $7.4 million, net of tax, at March 31, 2022 and December 31, 2021, respectively.
The following table illustrates the changes in the balances of each component of accumulated other comprehensive income (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, 2022 | $ | (58,586) | $ | 7,361 | $ | (5,471) | $ | (56,696) | |||||||||||||||
| Other comprehensive loss before reclassifications | (353,524) | — | — | (353,524) | |||||||||||||||||||
| Less: Amounts reclassified from accumulated other comprehensive (loss) income | (1,499) | 3,809 | 124 | 2,434 | |||||||||||||||||||
| Net current-period other comprehensive loss | (352,025) | (3,809) | (124) | (355,958) | |||||||||||||||||||
| Ending Balance: March 31, 2022 | $ | (410,611) | $ | 3,552 | $ | (5,595) | $ | (412,654) | |||||||||||||||
| Beginning Balance: January 1, 2021 | $ | 45,672 | $ | 29,815 | $ | (21,253) | $ | 54,234 | |||||||||||||||
| Other comprehensive loss before reclassifications | (73,997) | — | — | (73,997) | |||||||||||||||||||
| Less: Amounts reclassified from accumulated other comprehensive income (loss) | 907 | 5,948 | (426) | 6,429 | |||||||||||||||||||
| Net current-period other comprehensive (loss) income | (74,904) | (5,948) | 426 | (80,426) | |||||||||||||||||||
| Ending Balance: March 31, 2021 | $ | (29,232) | $ | 23,867 | $ | (20,827) | $ | (26,192) | |||||||||||||||
18. Segment Reporting
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The Company’s primary reportable segment is its banking business, which offers a range of commercial, retail, wealth management and banking services and consists primarily of attracting deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. Revenue from the banking business reportable segment consists primarily of interest earned on loans and investment securities. In addition to its banking business reportable segment, the Company has an insurance agency business reportable segment, which consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients. Revenue from the insurance agency business consists primarily of commissions on sales of insurance products and services.
Results of operations and selected financial information by segment and reconciliation to the consolidated financial statements as of and for the three months ended March 31, 2022 and 2021 was as follows:
| As of and for the three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Banking Business | Insurance Agency Business | Other / Eliminations | Total | Banking Business | Insurance Agency Business | Other / Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 128,124 | $ | — | $ | — | $ | 128,124 | $ | 100,091 | $ | — | $ | — | $ | 100,091 | |||||||||||||||||||||||||||||||
| (Release of) provision for loan losses | (485) | — | — | (485) | (580) | — | — | (580) | |||||||||||||||||||||||||||||||||||||||
Net interest income after provision for loan losses | 128,609 | — | — | 128,609 | 100,671 | — | — | 100,671 | |||||||||||||||||||||||||||||||||||||||
Noninterest income | 18,137 | 28,449 | (171) | 46,415 | 26,960 | 28,284 | (32) | 55,212 | |||||||||||||||||||||||||||||||||||||||
Noninterest expense | 90,446 | 19,473 | (1,053) | 108,866 | 75,274 | 19,811 | (1,036) | 94,049 | |||||||||||||||||||||||||||||||||||||||
Income before provision for income taxes | 56,300 | 8,976 | 882 | 66,158 | 52,357 | 8,473 | 1,004 | 61,834 | |||||||||||||||||||||||||||||||||||||||
Income tax provision | 12,108 | 2,534 | — | 14,642 | 11,793 | 2,378 | — | 14,171 | |||||||||||||||||||||||||||||||||||||||
Net income | $ | 44,192 | $ | 6,442 | $ | 882 | $ | 51,516 | $ | 40,564 | $ | 6,095 | $ | 1,004 | $ | 47,663 | |||||||||||||||||||||||||||||||
Total assets | $ | 22,695,895 | $ | 211,401 | $ | (71,224) | $ | 22,836,072 | $ | 16,595,311 | $ | 194,664 | $ | (63,180) | $ | 16,726,795 | |||||||||||||||||||||||||||||||
Total liabilities | $ | 19,848,995 | $ | 49,909 | $ | (71,224) | $ | 19,827,680 | $ | 13,359,075 | $ | 43,855 | $ | (63,180) | $ | 13,339,750 | |||||||||||||||||||||||||||||||
19. Subsequent Events
On January 14, 2022, the Company announced it had entered into an asset purchase agreement for the transfer of the Company’s cannabis-related and money service business deposits relationships, which it had acquired from Century, to Needham Bank. On April 1, 2022, the Company completed the transfer of such deposits which amounted to $297.7 million. The Company did not recognize a material gain or loss in connection with this transaction. The terms of the transfer included a post-transfer settlement period of 60 days from the date of the initial transfer of April 1, 2022.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at March 31, 2022, and our results of operations for the three months ended March 31, 2022 and 2021. 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 2021 Form 10-K.
Forward-Looking Statements
When we use the terms “we,” “us,” “our,” and the “Company,” we mean Eastern Bankshares, Inc., a Massachusetts corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words
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“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, factors:
•the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations;
•the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in employment levels and other general business and economic conditions on a national basis and in the local markets in which the Company operates;
•changes in customer behavior;
•changes in regional, national or international macroeconomic conditions, including especially changes in inflation or interest rates in the United States;
•the possibility that future credit losses, loan defaults and charge-off rates are higher than expected due to changes in economic assumptions or adverse economic developments;
•turbulence in the capital and debt markets;
•decreases in the value of securities and other assets;
•decreases in deposit levels necessitating increased borrowing to fund loans and investments;
•competitive pressures from other financial institutions;
•operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics;
•changes in regulation and associated increases in compliance costs, as well as enforcement and litigation risk;
•reputational risks relating to the Company’s participation in the PPP and other pandemic-related legislative and regulatory initiatives and programs;
•changes in accounting standards and practices;
•the risk that goodwill and intangibles recorded in our financial statements will become impaired;
•risks related to the implementation of acquisitions, dispositions, and restructurings, including the risk that acquisitions may not produce results at levels or within time frames originally anticipated;
•the risk that we may not be successful in the implementation of our business strategy;
•changes in assumptions used in making such forward-looking statements; and
•other risks and uncertainties detailed in Part I, Item 1A of our 2021 Form 10-K.
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 2021 Form 10-K, as updated by the notes to our unaudited interim condensed consolidated financial statements accompanying this Quarterly Report on Form 10-Q. Effective January 1, 2022, we adopted ASU 2016-13 (“CECL”), the accounting policy for which is described in Note 2, “Summary of Significant Accounting Policies,” Note 3, “Securities,” and Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. There have been no other material changes in critical accounting policies during the three months ended March 31, 2022.
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Overview
We are a bank holding company, and our principal subsidiary, Eastern Bank, is a Massachusetts-chartered bank that has served the banking needs of our customers since 1818. Our business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services primarily to retail, commercial and small business customers. We had total assets of $22.8 billion and $23.5 billion at March 31, 2022 and December 31, 2021, respectively. We are subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board and the Consumer Financial Protection Bureau.
We manage our business under two business segments: our banking business, which contributed $146.3 million, or 83.7%, of our total income (pre-provision net interest and dividend income and noninterest income) for the three months ended March 31, 2022, and our insurance agency business, which contributed $28.4 million, or 16.3%, of our total income for the three months ended March 31, 2022. Our banking business consists of a full range of banking, lending (commercial, residential and consumer), savings and small business offerings, including our wealth management and trust operations that we conduct through our Eastern Wealth Management division. Our insurance agency business consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients.
Net income for the three months ended March 31, 2022 computed in accordance with GAAP was $51.5 million, as compared to $47.7 million for the three months ended March 31, 2021, representing an 8.1% increase. This increase was primarily due to an increase in average interest earning assets, which primarily was the result of our 2021 acquisition of Century. Refer to the “Results of Operations” section below for additional discussion. Net income for the three months ended March 31, 2022 and 2021 included items that our management considers non-core, which management excludes for purposes of assessing our operating net income, a non-GAAP financial measure. Operating net income for the three months ended March 31, 2022 was $55.1 million compared to operating net income for the three months ended March 31, 2021 of $46.5 million, representing an increase of 18.4%. This increase was largely driven by the aforementioned change in average interest-earning assets. See “Non-GAAP Financial Measures” below for a reconciliation of operating net income to GAAP net income.
The following chart shows our basic earnings per share on a GAAP and operating basis over the past five quarters (refer to the “Non-GAAP Financial Measures” section below for a reconciliation of GAAP earnings to operating earnings):
Earnings per share increased from $0.28 for the three months ended March 31, 2021 to $0.30 for the three months ended March 31, 2022, a 9.5% increase. This increase was due to an increase in net income and a decrease in average number of common shares outstanding, which was caused by our previously announced share repurchase program.
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The following chart shows our efficiency ratio on a GAAP and operating basis over the past five quarters (refer to the “Non-GAAP Financial Measures” section below for additional information on the determination of each measure):
The GAAP efficiency ratio for the three months ended March 31, 2022 remained consistent with the three months ended March 31, 2021 and decreased quarter-over-quarter. The decrease in the GAAP efficiency ratio from the prior quarter was primarily attributable to higher prior period noninterest expenses associated with our acquisition of Century which were primarily incurred during the fourth quarter of 2021. The decrease in the operating efficiency ratio from the prior quarter is primarily attributable to increased noninterest income.
Banking Business
Our banking business offers a range of commercial, retail, wealth management and banking services, and consists primarily of attracting deposits from the general public, including municipalities, and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. The financial condition and results of operations of our banking business depend primarily on (i) attracting and retaining low cost, stable deposits, (ii) using those deposits to originate and acquire loans and earn net interest income and (iii) operating expenses incurred.
Lending Activities
We use funds obtained from deposits, as well as funds obtained from the FHLBB advances and federal funds, primarily to originate loans and to invest in securities. Our lending focuses on the following categories of loans:
Commercial Lending
•Commercial and industrial: Loans in this category consist of revolving and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As of March 31, 2022 and December 31, 2021, we had total commercial and industrial loans of $2.9 billion and $3.0 billion, representing 23.7% and 24.2%, respectively, of our total loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Our primary focus for commercial and industrial loans is middle-market companies located in the markets we serve. In addition, we participate in the syndicated loan market and the SNC Program. As of March 31, 2022 and December 31, 2021, our SNC Program portfolio totaled $499.7 million and $480.9 million, or 17.3% and 16.2%, respectively, of our commercial and industrial portfolio, and 37.9% and 40.3%, respectively, of our SNC Program portfolio were
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loans to borrowers headquartered in our primary lending market. Our commercial and industrial portfolio also includes our Asset Based Lending Portfolio (“ABL Portfolio”). As of March 31, 2022 and December 31, 2021, our ABL Portfolio totaled $225.2 million and $224.8 million, or 7.8% and 7.6%, respectively, of our commercial and industrial portfolio. Our commercial and industrial portfolio also includes a portion of our PPP loans. As of March 31, 2022 and December 31, 2021, the amount of PPP loans included in our commercial and industrial portfolio was $51.7 million and $112.8 million, respectively. Our commercial and industrial portfolio also includes industrial revenue bonds (“IRBs”), which are municipal bonds issued to finance major capital projects. As of both March 31, 2022 and December 31, 2021, our commercial and industrial IRB portfolio totaled $1.0 billion.
•Commercial real estate: Loans in this category include mortgage loans on commercial real estate, both investment and owner occupied. As of March 31, 2022 and December 31, 2021, we had total commercial real estate loans of $4.6 billion and $4.5 billion, representing 37.9% and 36.9%, respectively, of our total loans. As of March 31, 2022, and December 31, 2021, owner occupied loans totaled $966.8 million and $958.5 million, representing 21.0% and 21.2%, respectively, of our commercial real estate loans. In connection with our adoption of ASU 2016-13, we revised our methodology for determining owner occupied commercial real estate loans in order to conform with our corresponding pools for CECL reserve modeling purposes, and our totals as of March 31, 2022 reflect such revision. Accordingly, the amount of our owner occupied commercial real estate loans as of December 31, 2021 was also revised from the amount disclosed in our 2021 Form 10-K to accommodate comparability. 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 IRB loans of $601.5 million and $629.6 million as of March 31, 2022 and December 31, 2021, respectively.
•Commercial construction: Loans in this category include construction project financing and are comprised of commercial real estate, business banking and residential loans for the purpose of constructing and developing real estate. As of March 31, 2022 and December 31, 2021, we had total commercial construction loans of $246.1 million and $222.3 million, representing 2.0% and 1.8%, respectively, of our total loans.
•Business banking: Loans in this category are comprised of loans to small businesses with exposures of under $1 million and small investment real estate projects with exposures of under $3 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 March 31, 2022 and December 31, 2021, we had total business banking loans of $1.2 billion and $1.3 billion, respectively, representing 9.9% and 10.9% of our total loans for each period end, respectively. In this category, commercial and industrial loans and commercial real estate loans totaled $304.3 million and $896.7 million, respectively, as of March 31, 2022, and $440.6 million and $894.1 million, respectively, as of December 31, 2021. 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. Our business banking portfolio also includes a portion of our PPP loans which are included in the aforementioned commercial and industrial business banking total. As of March 31, 2022 and December 31, 2021, the amount of PPP loans included in our business banking portfolio was $89.5 million and $218.6 million, respectively.
Residential Lending
•Residential real estate: Loans in this category consist of mortgage loans on residential real estate. As of both March 31, 2022 and December 31, 2021, we had total residential loans of $1.9 billion, representing 15.9% and 15.7%, respectively, of our total loans for such periods. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit repayment history, financial resources including cash reserves and the value of the collateral. We maintain policy standards for minimum credit scores and cash reserves and maximum loan to value consistent with a “prime” portfolio. Collateral consists of mortgage liens on residential dwellings. We do not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or to retain in our loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and our capital needs.
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During the three months ended March 31, 2022, residential real estate mortgage originations were $118.3 million of which $29.2 million were sold on the secondary markets. Comparatively, during the three months ended March 31, 2021, residential real estate mortgage originations were $260.1 million of which $57.2 million were sold on the secondary markets. We generally do not continue to service residential loans that we sell in the secondary market.
Consumer Lending
•Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of both March 31, 2022 and December 31, 2021, we had total consumer home equity loans of $1.1 billion, representing 9.0% and 9.0%, respectively, of our total loans. Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Home equity lines of credit can be converted to term loans that are fully amortized. Underwriting considerations are materially consistent with those utilized in the residential real estate category. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
•Other consumer: Loans in this category consist of unsecured personal lines of credit, overdraft protection, automobile and aircraft loans, home improvement loans and other personal loans. As of March 31, 2022 and December 31, 2021, we had total other consumer loans of $203.3 million and $214.5 million, representing 1.7% and 1.8%, 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 Banking Products and Services
In addition to our lending activities, which are the core part of our banking business, we offer other banking products and services primarily related to (i) other commercial banking products, (ii) other consumer deposit products and (iii) wealth management services.
Other Commercial Banking Products
•We offer a variety of deposit, treasury management, electronic banking, interest rate protection and foreign exchange products to our customers. In addition, we offer automated lock box collection services, cash management services and account reconciliation services to our corporate and institutional customers, as well as cash management services to our 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. As of March 31, 2022 and December 31, 2021, our total commercial deposits were $7.9 billion and $8.1 billion, respectively. During the three months ended March 31, 2022 our commercial noninterest income was $5.8 million compared to $5.1 million for the three months ended March 31, 2021.
Other Consumer Deposit Products
•We offer a wide variety of deposit products and services to our consumer customers. We service these customers through our 96 branches located in eastern Massachusetts and New Hampshire, through our call center in our facility in Lynn, Massachusetts and through our online and mobile banking applications.
Wealth Management Services
•Through our Eastern Wealth Management division, we provide a wide range of trust services, including (i) managing customer investments, (ii) serving as custodian for customer assets and (iii) providing other fiduciary services, including serving as the trustee and personal representative of estates. As of March 31, 2022 and December 31, 2021, we held $3.2 billion and $3.4 billion, respectively, of assets in a fiduciary, custodial or agency capacity for customers, which are not our assets and therefore not included on the consolidated balance sheets included in this Quarterly Report on Form 10-Q. For the three months ended March 31, 2022, we had noninterest income of $6.1 million from providing these services compared to $5.7 million for the three months ended March 31, 2021.
Insurance Agency Business
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Our insurance agency business consists of insurance-related activities such as acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients through our wholly-owned agency, Eastern Insurance Group. Our insurance products include commercial property and liability, workers compensation, life, accident and health and automobile insurance. We also offer a wide range of employee benefits products and services, including professional advice related to health care cost management, employee engagement and executive services. As an agency business, we do not assume any underwriting or insurance risk. The commissions we earn on the sale of these insurance products and services is the most significant portion of our noninterest income, representing $28.7 million and $28.1 million, respectively, or 61.9% and 51.0%, respectively, of our noninterest income during the three months ended March 31, 2022. Our insurance business operates through 22 non-branch offices located primarily in eastern Massachusetts and had 399 full-time equivalent employees as of March 31, 2022.
Acquisitions
During the three months ended March 31, 2022, Eastern Insurance Group completed one insurance agency acquisition. The purchase price and goodwill recorded as a result of the acquisition were not material.
Outlook and Trends
Interest Rates
We expect additional increases in the federal funds rate in 2022 which is anticipated to be beneficial to our net interest income and net interest margin. On March 16, 2022, the Federal Open Market Committee (the “Committee”) voted to increase interest rates by a quarter of a percentage point to a range of 0.25% to 0.50%. The Committee then further raised the target range on May 4, 2022 to a range of 0.75% to 1.00% and stated that it anticipates that ongoing increases in the target range will be appropriate. Approximately 40% of our loans are indexed to a market rate that is expected to reprice along with the federal funds rate. 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 which assumes a variety of immediate and parallel changes in the U.S. Treasury yield curve.
Paycheck Protection Program Loans
We are a participating lender in the SBA’s Paycheck Protection Program, or PPP. We concluded PPP loan originations in the second quarter of 2021 as the SBA announced in May 2021 that PPP funds were exhausted. The majority of our PPP borrowers are existing commercial and small business borrowers, non-profit customers, retail banking customers and clients of our Eastern Wealth Management division and Eastern Insurance Group. As of March 31, 2022 and December 31, 2021, the remaining balance of our PPP loans was $141.2 million and $331.4 million, respectively. Net PPP loan fee accretion (fee accretion less cost amortization) for all PPP loans for the three months ended March 31, 2022 and 2021 was $5.8 million and $8.3 million, respectively. We expect to recognize the remaining net unearned fees of $3.4 million as of March 31, 2022 during the remainder of the year ended December 31, 2022 resulting in total recognized net fee accretion of $9.2 million for the year ended December 31, 2022 compared to $34.3 million recognized during the year ended December 31, 2021. Our net interest margin is expected to be adversely affected as a result of the decline in net fee accretion, which is associated with the decreased volume of PPP loan payoffs. The impact to our net interest margin resulting from the decline in net PPP loan fee accretion is estimated to be 0.25% (change computed based upon average total loans for the year ended December 31, 2021).
Non-GAAP Financial Measures
We present certain non-GAAP financial measures, which management uses to evaluate our performance and which exclude the effects of certain transactions, non-cash items and GAAP adjustments that we believe are unrelated to our core business and are therefore not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility for investors into our core businesses as well as underlying trends that may, to some extent, be obscured by inclusion of such items in the corresponding GAAP financial measures.
There are items in our financial statements that impact our results but which we believe are unrelated to our core business. Accordingly, we present operating net income, noninterest income on an operating basis, noninterest expense on an operating basis, total operating revenue, operating earnings per share, and the operating efficiency ratio, each of which excludes the impact of such items because we believe such exclusion can provide greater visibility into our core business and underlying trends. Such items that we do not consider to be core to our business include (i) income and expenses from investments held in rabbi trusts, (ii) gains and losses on sales of securities available for sale, net, (iii) gains and losses on the sale of other assets, (iv) rabbi trust employee benefits, (v) impairment charges on tax credit investments and associated tax credit benefits, (vi)
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expenses indirectly associated with our initial public offering (“IPO”), (vii) OREO gains and losses, (viii) merger and acquisition expenses, (ix) the stock donation to the Eastern Bank Foundation (the “Foundation”) in connection with our mutual-to-stock conversion and IPO, and (x) settlement of putative consumer class action litigation matters related to overdraft and non-sufficient funds fees, and associated settlement expenses. There were no expenses indirectly associated with our IPO, stock donations to the Foundation, OREO gains or losses, impairment charges on tax credit investments and associated tax credit benefits, or expenses associated with the settlement for putative consumer class action matters during the three-month 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, 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, 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 March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands, except per share data) | |||||||||||
| Net income (GAAP) | $ | 51,516 | $ | 47,663 | |||||||
| Non-GAAP adjustments: | |||||||||||
| Add: | |||||||||||
| Noninterest income components: | |||||||||||
| Losses (income) from investments held in rabbi trusts | 4,433 | (1,846) | |||||||||
| Losses (gains) on sales of securities available for sale, net | 2,172 | (1,164) | |||||||||
| Losses (gains) on sales of other assets | 274 | (18) | |||||||||
| Noninterest expense components: | |||||||||||
| Rabbi trust employee (income) benefit expense | (2,087) | 986 | |||||||||
| Merger and acquisition expenses | 34 | 589 | |||||||||
| Total impact of non-GAAP adjustments | 4,826 | (1,453) | |||||||||
Less net tax benefit (expense) associated with non-GAAP adjustment (2) | 1,235 | (327) | |||||||||
| Non-GAAP adjustments, net of tax | $ | 3,591 | $ | (1,126) | |||||||
| Operating net income (non-GAAP) | $ | 55,107 | $ | 46,537 | |||||||
| Weighted average common shares outstanding during the period: | |||||||||||
| Basic | 169,857,950 | 172,049,044 | |||||||||
| Diluted | 169,968,156 | 172,049,044 | |||||||||
| Earnings per share, basic | $ | 0.30 | $ | 0.28 | |||||||
| Earnings per share, diluted | $ | 0.30 | $ | 0.28 | |||||||
| Operating earnings per share, basic (non-GAAP) | $ | 0.32 | $ | 0.27 | |||||||
| Operating earnings per share, diluted (non-GAAP) | $ | 0.32 | $ | 0.27 | |||||||
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(1)The net tax benefit (expense) associated with these items is determined by assessing whether each item is included or excluded from net taxable income and applying our combined statutory tax rate only to those items included in net taxable income.
The following table summarizes the impact of non-core items with respect to our total revenue, noninterest income, noninterest expense, and the efficiency ratio, which reconciles to the most directly comparable respective GAAP financial measure, for the periods indicated:
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Net interest income (GAAP) | $ | 128,124 | $ | 100,091 | |||||||
| Add: | |||||||||||
| Tax-equivalent adjustment (non-GAAP) | 2,261 | 1,297 | |||||||||
| Fully-taxable equivalent net interest income (non-GAAP) | 130,385 | 101,388 | |||||||||
| Noninterest income (GAAP) | 46,415 | 55,212 | |||||||||
| Less: | |||||||||||
| (Loss) income from investments held in rabbi trusts | (4,433) | 1,846 | |||||||||
| Gains (losses) on sales of securities available for sale, net | (2,172) | 1,164 | |||||||||
| Gains (losses) on sales of other assets | (274) | 18 | |||||||||
| Noninterest income on an operating basis (non-GAAP) | 53,294 | 52,184 | |||||||||
| Noninterest expense (GAAP) | $ | 108,866 | $ | 94,049 | |||||||
| Less: | |||||||||||
| Rabbi trust (income) benefit expense | (2,087) | 986 | |||||||||
| Merger and acquisition expenses | 34 | 589 | |||||||||
| Noninterest expense on an operating basis (non- GAAP) | $ | 110,919 | $ | 92,474 | |||||||
| Total revenue (GAAP) | $ | 174,539 | $ | 155,303 | |||||||
| Total operating revenue (non-GAAP) | $ | 183,679 | $ | 153,572 | |||||||
| Ratios: | |||||||||||
| Efficiency ratio (GAAP) | 62.37 | % | 60.56 | % | |||||||
| Operating efficiency ratio (non-GAAP) | 60.39 | % | 60.22 | % | |||||||
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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 March 31, | As of December 31, | ||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands, except per share data) | |||||||||||
| Tangible shareholders’ equity: | |||||||||||
| Total shareholders’ equity (GAAP) | $ | 3,008,392 | $ | 3,406,352 | |||||||
| Less: Goodwill and other intangibles | 654,759 | 649,703 | |||||||||
| Tangible shareholders’ equity (non-GAAP) | 2,353,633 | 2,756,649 | |||||||||
| Tangible assets: | |||||||||||
| Total assets (GAAP) | 22,836,072 | 23,512,128 | |||||||||
| Less: Goodwill and other intangibles | 654,759 | 649,703 | |||||||||
| Tangible assets (Non-GAAP) | $ | 22,181,313 | $ | 22,862,425 | |||||||
| Shareholders’ equity to assets ratio (GAAP) | 13.2 | % | 14.5 | % | |||||||
| Tangible shareholders’ equity to tangible assets ratio (Non-GAAP) | 10.6 | % | 12.1 | % | |||||||
| Book value per share: | |||||||||||
| Common shares issued and outstanding | 183,438,711 | 186,305,332 | |||||||||
| Book value per share (GAAP) | $ | 16.40 | $ | 18.28 | |||||||
| Tangible book value per share (non-GAAP) | $ | 12.83 | $ | 14.80 | |||||||
Financial Position
Summary of Financial Position
| As of March 31, 2022 | As of December 31, 2021 | Change | |||||||||||||||||||||
| Amount ($) | Percentage (%) | ||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 830,494 | $ | 1,231,792 | $ | (401,298) | (32.6) | % | |||||||||||||||
| Securities available for sale | 7,917,305 | 8,511,224 | (593,919) | (7.0) | % | ||||||||||||||||||
| Securities held to maturity | 395,434 | — | 395,434 | 100.0 | % | ||||||||||||||||||
| Loans, net of allowance for loan losses | 12,033,603 | 12,157,281 | (123,678) | (1.0) | % | ||||||||||||||||||
| Federal Home Loan Bank Stock | 10,904 | 10,904 | — | — | % | ||||||||||||||||||
| Goodwill and other intangible assets | 654,759 | 649,703 | 5,056 | 0.8 | % | ||||||||||||||||||
| Deposits | 19,392,816 | 19,628,311 | (235,495) | (1.2) | % | ||||||||||||||||||
| Borrowed funds | 34,922 | 34,278 | 644 | 1.9 | % | ||||||||||||||||||
Cash and cash equivalents
Total cash and cash equivalents decreased by $0.4 billion, or 32.6%, to $0.8 billion at March 31, 2022 from $1.2 billion at December 31, 2021. This decrease was primarily due to security purchases and a decrease in total customer deposits.
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. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk investment products. We typically invest in the following types of securities:
U.S. government securities: At March 31, 2022, our U.S. government securities consisted of U.S. Agency bonds and U.S. Treasury securities. At December 31, 2021, our U.S. government securities consisted of U.S. Agency bonds, U.S.
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Treasury securities and Small Business Administration pooled securities. We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes, and as collateral for interest rate derivative positions. U.S. Agency bonds include securities issued by Fannie Mae, Freddie Mac, the FHLB, and the Federal Farm Credit Bureau.
Mortgage-backed securities: We invest in residential and commercial mortgage-backed securities insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae, including collateralized mortgage obligations. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac, Ginnie Mae or Fannie Mae.
Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration 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 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.
The following table shows the fair value of our securities by investment category as of the dates indicated:
Securities Portfolio Composition
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Available for sale securities, at fair value: | |||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 4,969,346 | $ | 5,524,708 | |||||||
| Government-sponsored commercial mortgage-backed securities | 1,615,927 | 1,408,868 | |||||||||
| U.S. Agency bonds | 1,013,899 | 1,175,014 | |||||||||
| U.S. Treasury securities | 56,235 | 88,605 | |||||||||
| State and municipal bonds and obligations | 260,316 | 280,329 | |||||||||
| Small Business Administration pooled securities | — | 32,103 | |||||||||
| Other debt securities | 1,582 | 1,597 | |||||||||
| Total available for sale securities, at fair value | 7,917,305 | 8,511,224 | |||||||||
| Held to maturity securities, at amortized cost: | |||||||||||
| Government-sponsored residential mortgage-backed securities | 192,231 | — | |||||||||
| Government-sponsored commercial mortgage-backed securities | 203,203 | — | |||||||||
| Total held to maturity securities, at amortized cost | 395,434 | — | |||||||||
| Total | $ | 8,312,739 | $ | 8,511,224 | |||||||
Our securities portfolio has decreased year-to-date. Available for sale (“AFS”) securities decreased $0.6 billion, or 7.0%, to $7.9 billion at March 31, 2022 from $8.5 billion at December 31, 2021. This decrease is primarily due to a decrease in the fair value of AFS securities. At March 31, 2022, the unrealized loss was $539.3 million compared to an unrealized loss of $76.0 million at December 31, 2021, representing a $463.4 million decrease in the fair value of AFS securities. The change from December 31, 2021 to March 31, 2022 is primarily driven by rising market rates of interest. In addition, AFS securities sales, maturities and principal paydowns totaled $595.2 million during the three months ended March 31, 2022 which also contributed to the overall decline. Partially offsetting the decrease in the securities portfolio from December 31, 2021 to March 31, 2022 were purchases of available for sale securities of $471.5 million. In addition, during the three months ended
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March 31, 2022, we purchased $395.8 million of securities classified as held to maturity (“HTM”). We did not have any securities classified as HTM at December 31, 2021.
We did not have trading investments at March 31, 2022 or December 31, 2021.
A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled $259.9 million at March 31, 2022 compared to $279.8 million at December 31, 2021.
Our AFS securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as Level 3 within the fair value hierarchy. As of both March 31, 2022 and December 31, 2021, we had no securities categorized as Level 3 within the fair value hierarchy.
Maturities of our securities portfolio are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur.
The following tables show contractual maturities of our AFS and HTM securities and weighted average yields at and for the period ended March 31, 2022 and contractual maturities of our AFS and weighted average yields at and for the period ended December 31, 2021. 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 March 31, 2022 | |||||||||||||||||||||||||||||
| 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 | 2.74% | 2.64% | 0.96% | 1.48% | 1.41% | ||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | 1.34 | 1.23 | 1.94 | 1.58 | ||||||||||||||||||||||||
| U.S. Agency bonds | — | 0.72 | 0.93 | — | 0.82 | ||||||||||||||||||||||||
| U.S. Treasury securities | 0.13 | 0.78 | — | — | 0.67 | ||||||||||||||||||||||||
| State and municipal bonds and obligations | 0.75 | 2.50 | 3.19 | 4.04 | 3.54 | ||||||||||||||||||||||||
| Other debt securities | 1.01 | 0.84 | — | — | 0.87 | ||||||||||||||||||||||||
| Total available for sale securities | 0.34 | 0.98 | 1.11 | 1.62 | 1.43 | ||||||||||||||||||||||||
| Held to maturity securities: | |||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | — | — | — | 2.64 | 2.64 | ||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | — | 2.23 | — | 2.23 | ||||||||||||||||||||||||
| Total held to maturity securities | — | — | 2.23 | 2.64 | 2.43 | ||||||||||||||||||||||||
| Total | 0.34% | 0.98% | 1.21% | 1.66% | 1.47% | ||||||||||||||||||||||||
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| Securities Maturing as of December 31, 2021 | |||||||||||||||||||||||||||||
| 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 | —% | 2.64% | 1.01% | 1.44% | 1.38% | ||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | 1.14 | 1.20 | 1.95 | 1.67 | ||||||||||||||||||||||||
| U.S. Agency bonds | 1.11 | 0.73 | 1.00 | — | 0.88 | ||||||||||||||||||||||||
| U.S. Treasury securities | 0.15 | 0.78 | — | — | 0.50 | ||||||||||||||||||||||||
| State and municipal bonds and obligations (2) | (1.24) | 2.46 | 3.17 | 4.04 | 3.48 | ||||||||||||||||||||||||
| Small Business Administration pooled securities | — | 1.72 | — | 1.93 | 1.90 | ||||||||||||||||||||||||
| Other debt securities | 1.01 | 0.84 | — | — | 0.87 | ||||||||||||||||||||||||
| Total | 0.10% | 0.95% | 1.12% | 1.60% | 1.42% | ||||||||||||||||||||||||
(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.
(2)The negative yield indicated in the “Within One Year” category is the result of premium amortization that is in excess of earned income.
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a 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.
Net unrealized losses on AFS securities as of March 31, 2022 and December 31, 2021 totaled $539.3 million and $76.0 million, respectively. The change from December 31, 2021 to March 31, 2022 is primarily driven by rising market rates of interest.
Loans
We consider our loan portfolio to be relatively diversified by borrower and industry. Our loans decreased $99.3 million, or 0.8%, to $12.2 billion at March 31, 2022 from $12.3 billion at December 31, 2021. The decrease as of March 31, 2022 was primarily due to a decrease in our PPP loan balances within the C&I and business banking portfolios, as further noted below.
•Our business banking portfolio decreased by $133.7 million primarily as a result of a $129.1 million decrease in business banking PPP loan balances during the three months ended March 31, 2022 as such loans were paid off or forgiven by the SBA.
•Similarly, our commercial and industrial portfolio decreased by $74.0 million primarily as a result of a decrease of $61.1 million in commercial and industrial PPP loan balances during the three months ended March 31, 2022.
•Our retail portfolio decreased slightly by $2.7 million which was primarily attributable to our other consumer portfolio which decreased by $11.2 million and was partially offset by an increase of $9.4 million in our residential real estate loans during the three months ended March 31, 2022.
•Partially offsetting the above balance declines was an increase in our commercial real estate loans of $87.3 million from December 31, 2021 to March 31, 2022 which was primarily attributable to an increase of $81.1 million in commercial real estate investment loan balances. Such loans represent loans secured by commercial real estate that are non-owner-occupied.
The following table shows the composition of our loan portfolio, by category, as of the dates indicated:
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Loan Portfolio Composition
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Commercial and industrial | $ | 2,886,560 | $ | 2,960,527 | |||||||
| Commercial real estate | 4,609,824 | 4,522,513 | |||||||||
| Commercial construction | 246,093 | 222,328 | |||||||||
| Business banking | 1,201,007 | 1,334,694 | |||||||||
| Residential real estate | 1,936,182 | 1,926,810 | |||||||||
| Consumer home equity | 1,099,211 | 1,100,153 | |||||||||
| Other consumer | 203,326 | 214,485 | |||||||||
| Total loans | 12,182,203 | 12,281,510 | |||||||||
| Allowance for loan losses | (124,166) | (97,787) | |||||||||
| Unamortized premiums, net of unearned discounts and deferred fees | (24,434) | (26,442) | |||||||||
| Total loans receivable, net | $ | 12,033,603 | $ | 12,157,281 | |||||||
We believe that our commercial loan portfolio composition is relatively diversified in terms of industry sectors, property types and various lending specialties, and is concentrated in the New England geographical area, with 83.3% of our commercial loans in Massachusetts and New Hampshire as of March 31, 2022.
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 14 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 4.5% and 5.8% of total commercial loans outstanding at March 31, 2022 and December 31, 2021, respectively. This decrease was driven by risk rating upgrades in the construction 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 0.41% at March 31, 2022 from 0.65% at December 31, 2021.
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The following table provides details regarding our delinquency rates as of the dates indicated:
Loan Delinquency Rates
Delinquency Rate as of (1)(2) | |||||||||||
| March 31, 2022 | December 31, 2021 | ||||||||||
| Portfolio | |||||||||||
| Commercial and industrial | 0.07 | % | 0.06 | % | |||||||
| Commercial real estate | 0.02 | % | 0.60 | % | |||||||
| Commercial construction | 2.74 | % | — | % | |||||||
| Business banking | 0.73 | % | 0.86 | % | |||||||
| Residential real estate | 0.98 | % | 1.38 | % | |||||||
| Consumer home equity | 0.96 | % | 0.90 | % | |||||||
| Other consumer | 0.83 | % | 1.23 | % | |||||||
| Total | 0.41 | % | 0.65 | % | |||||||
(1)In the calculation of the delinquency rate as of March 31, 2022 and December 31, 2021, the total amount of loans outstanding includes $0.1 billion and $0.3 billion, respectively, of PPP loans.
(2)Delinquency rates as of March 31, 2022 were computed based upon amortized cost balances while delinquency rates as of December 31, 2021 were computed based upon recorded investment balances. The effect on the above delinquency rates of the difference in methodology is not significant.
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 $1.2 million, or 3.3%, to $33.8 million at March 31, 2022 from $35.0 million at December 31, 2021. NPLs as a percentage of total loans decreased to 0.28% at March 31, 2022 from 0.29% at December 31, 2021 primarily due to a decrease in business banking non-accrual loans, commercial and industrial non-accrual loans, and commercial real estate nonperforming loans. Loans that were past due 90 days or more and still accruing at December 31, 2021 were comprised solely of purchased credit impaired (PCI) loans. PCI loans were not subject to classification as non-accrual in the same manner as originated loans as their interest income related to the accretable yield recognized and not to contractual interest payments at the loan level. In connection with our adoption of ASU 2016-13 on January 1, 2022, all PCI loans are now considered purchased credit deteriorated (PCD) loans. Interest income recognition for PCD loans is consistent with originated loans and, therefore, PCD loans cease accruing interest at 90 days past due unless management believes that the applicable collateral held by the Company is clearly sufficient and in full satisfaction of both principal and interest. There were no PCD or originated loans at March 31, 2022 that were past due 90 days or more and still accruing. For additional discussion of non-accrual loans, refer to the later “Credit Ratios” section in this Item 2.
The total amount of interest recorded on NPLs during both the three months ended March 31, 2022 and 2021 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 $0.5 million and $0.8 million for the three months ended March 31, 2022 and 2021, respectively.
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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. We review each loan that is modified to identify whether a TDR has occurred. TDRs involve situations in which, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. As noted within Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Consolidated Financial Statements included in Part I, Item I in this Quarterly Report on Form 10-Q, loan modifications made in response to the COVID-19 pandemic that met the criteria of either Section 4013 of the CARES Act or the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) are not deemed TDRs. This election afforded by the CARES Act and Interagency guidance expired on January 1, 2022.
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a TDR. Loans modified during the three months ended March 31, 2022 and 2021 which were determined to be TDRs were $0.8 million (post modification balance) and $0.3 million, respectively. The overall increase in TDR loans modified during the aforementioned periods consisted of an increase of $0.5 million in commercial loan TDR modifications. No loans were modified during the preceding 12 months, which subsequently defaulted during the three months ended March 31, 2022 or 2021.
It is our policy to have any restructured loan, which is on non-accrual status prior to being modified, remain on non-accrual status for approximately six months subsequent to being modified before we consider its return to accrual status. If the restructured loan is on accrual status prior to being modified, we review it to determine if the modified loan should remain on accrual status.
PCD loans are loans that we acquired that have shown evidence of deterioration of credit quality since origination and, therefore, it was deemed unlikely that all contractually required payments would be collected upon the acquisition date. We consider factors such as payment history, collateral values and accrual status when determining whether there was evidence of deterioration at the acquisition date. As of March 31, 2022, the carrying amount of PCD loans was $67.6 million. As discussed further below, we adopted ASU 2016-13, which is commonly referred to as CECL, on January 1, 2022. Prior to such adoption, our acquired loans that exhibited evidence of deterioration of credit quality since origination were designated as PCI loans. As of December 31, 2021, the carrying amount of PCI loans was $69.6 million.
COVID-19 Modifications. In light of the COVID-19 pandemic, we implemented loan modification programs for our borrowers that allowed for either full payment deferrals (both interest and principal) or deferral of principal only. These modifications met the criteria of either Section 4013 of the CARES Act or the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) and therefore are not deemed TDRs. We have deemed these modified loans "COVID-19 modifications".
The Appropriations Act, which was enacted on December 27, 2020, extended certain expiring tax provisions related to the COVID-19 pandemic in the United States and provided additional emergency relief to individuals and businesses. Included within the provisions of the Appropriations Act is the extension of Section 4013 of the CARES Act to January 1, 2022. As such, we applied CARES Act TDR relief to any qualifying loan modifications executed during the allowable time period.
The following table presents the balance of loans that received a COVID-19 modification and have not yet resumed repayment as of March 31, 2022 and December 31, 2021:
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Remaining COVID-19 Modifications as of March 31, 2022 (1) | Remaining COVID-19 Modifications as of December 31, 2021 (1) | ||||||||||||||||||||||
| Balance | % of Total Portfolio | Balance | % of Total Portfolio | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Portfolio | |||||||||||||||||||||||
| Commercial and industrial | $ | — | — | % | $ | 4,548 | 0.2 | % | |||||||||||||||
| Commercial real estate | 39,438 | 0.9 | % | 93,519 | 2.1 | % | |||||||||||||||||
| Commercial construction | — | — | % | — | — | % | |||||||||||||||||
| Business banking | 882 | 0.1 | % | 649 | 0.1 | % | |||||||||||||||||
| Residential real estate | 6,660 | 0.3 | % | 5,870 | 0.3 | % | |||||||||||||||||
| Consumer home equity | 1,521 | 0.1 | % | 1,365 | 0.1 | % | |||||||||||||||||
| Other consumer | 532 | 0.3 | % | 706 | 0.3 | % | |||||||||||||||||
| Total | $ | 49,033 | 0.4 | % | $ | 106,657 | 0.9 | % | |||||||||||||||
(1)Remaining COVID-19 modifications reflect only those loans which underwent a modification and have not yet resumed repayment. We define a modified loan to have resumed payment if it is one month past the modification end date and not more than 30 days past due.
As of March 31, 2022 and December 31, 2021, the aggregate amount of loans that received a COVID-19 modification and have become a non-performing loan after the respective deferral period is $4.6 million and $4.7 million, respectively.
COVID-19 Pandemic-Impacted Industries. As of March 31, 2022, we believe loans to our borrowers in office, retail, restaurant, and hotel industry categories represent those which have experienced and will likely continue to experience the most adverse effects of the COVID-19 pandemic. As of March 31, 2022, the aggregate outstanding loan balance of loans to our borrowers in office, retail, restaurant, and hotel industry categories was $1.1 billion, $586.6 million, $197.1 million and $170.6 million, respectively, representing 8.9%, 4.8%, 1.6% and 1.4% of total loans, respectively. As of December 31, 2021, the aggregate outstanding loan balance of loans to our borrowers in retail, restaurant, and hotel industry categories was $1.1 billion, $549.0 million, $188.9 million and $189.0 million, respectively, representing 8.8%, 4.5%, 1.5% and 1.5% of total loans, respectively.
As of March 31, 2022, the percentage of loans to our borrowers in the hotel industry category that we modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020 and which have not yet resumed repayment was 23.1%. As of December 31, 2021, the percentage of loans to our borrowers in retail, restaurant, and hotel industry categories that we modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020 and which had not yet resumed repayment were less than 0.1%, 2.9% and 37.6%, respectively. As of March 31, 2022 there were no loans to our borrowers in office, retail or restaurant industries that had been modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020 and which had not yet resumed repayment. As of December 31, 2021, there were no loans to our borrowers in office industries that were modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020 and which had not yet resumed repayment.
In the normal course of business, we become aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which currently do not yet meet the criteria for classification as NPLs. These loans are neither delinquent nor on non-accrual status. At March 31, 2022 and December 31, 2021, our potential problem loans (including COVID-19-related loans), or loans with potential weaknesses that were not included in the non-accrual loans or in the loans 90 days or more past due categories, totaled $382.7 million and $470.9 million, respectively. Of these potential problem loans, $266.6 million and $335.9 million at March 31, 2022 and December 31, 2021, respectively, are loans in COVID-19 impacted industries.
Allowance for credit losses. Because we continued to qualify for emerging growth company (“EGC”) status under the Jumpstart Our Business (“JOBS”) Act until December 31, 2021, we were permitted to delay adoption of the CECL standard until the earlier of the date at which non-public business entities are required to adopt the standard and the date that we ceased to be an EGC. Included in the Appropriations Act was an extension of the adoption date to the earlier of January 1, 2022 or 60 days after the date on which the COVID-19 national emergency terminates. We elected this extension and, accordingly, adopted
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the CECL standard on January 1, 2022. As of December 31, 2021, we followed the incurred loss allowance GAAP accounting model.
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 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, the Company’s quantitative model uses historical loss experience
The allowance for loan losses is allocated to loan categories using both a formula-based approach and an analysis of certain individual loans for impairment. We use a methodology to systematically estimate the amount of expected credit loss in the loan portfolio. Under our current methodology, the allowance for loan losses contains reserves related to loans for which the related allowance for loan losses is determined on individual loan basis and on a collective basis, and other qualitative components.
In the ordinary course of business, the Company enters 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 balance sheet.
The allowance for loan losses increased by $26.4 million, or 27.0%, to $124.2 million, or 1.02% of total loans, at March 31, 2022 from $97.8 million, or 0.80% of total loans at December 31, 2021. The increase in the allowance for loan losses was primarily a result of our adoption of CECL, as previously described above. The additional reserves required as a result of our adoption of CECL were primarily attributable to the loans we acquired in connection with our acquisition of Century which were recorded at fair value at the time of acquisition. Under ASU 2016-13, the credit mark that is a component of the day-one fair value adjustment on acquired loans cannot be considered in the allowance computation, whereas under the incurred loss
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model, the credit mark could be considered for reserve determination purposes. In connection with our adoption of this standard, we recorded an increase to the allowance for loan losses of $27.1 million.
For additional discussion of our allowance for credit losses measurement methodology, see Note 2, “Summary of Significant Accounting Policies” and Note 4, “Loans and Allowance for Loan Losses” within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. For discussion of our previous methodology for estimating the allowance for loan losses, refer to Note 5, “Loans and Allowance for Loan Losses” within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q and Note 2, “Summary of Significant Accounting Policies” included in Part II, Item 8 of the 2021 Form 10-K.
The following table summarizes credit ratios for the periods presented:
Credit Ratios
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Net loan charge-offs (recoveries): | |||||||||||
| Commercial and industrial | $ | (249) | $ | (9) | |||||||
| Commercial real estate | (14) | 234 | |||||||||
| Commercial construction | — | — | |||||||||
| Business banking | 17 | 1,019 | |||||||||
| Residential real estate | (10) | (10) | |||||||||
| Consumer home equity | (4) | (71) | |||||||||
| Other consumer | 482 | 208 | |||||||||
| Total net loan charge-offs | 222 | 1,371 | |||||||||
| Average loans: | |||||||||||
| Commercial and industrial | 2,963,414 | 2,029,252 | |||||||||
| Commercial real estate | 4,735,257 | 3,761,767 | |||||||||
| Commercial construction | 169,608 | 206,315 | |||||||||
| Business banking | 1,104,815 | 1,320,617 | |||||||||
| Residential real estate | 1,936,629 | 1,391,935 | |||||||||
| Consumer home equity | 1,088,487 | 843,120 | |||||||||
| Other consumer | 205,002 | 262,578 | |||||||||
| Average total loans (1) | $ | 12,203,212 | $ | 9,815,584 | |||||||
| Net charge-offs (recoveries) to average loans outstanding during the period: | |||||||||||
| Commercial and industrial | (0.01) | % | 0.00 | % | |||||||
| Commercial real estate | — | 0.01 | |||||||||
| Commercial construction | — | — | |||||||||
| Business banking | — | 0.08 | |||||||||
| Residential real estate | — | — | |||||||||
| Consumer home equity | — | (0.01) | |||||||||
| Other consumer | 0.24 | 0.08 | |||||||||
| Total net charge-offs (recoveries) to average loans outstanding during the period: | 0.00 | % | 0.01 | % | |||||||
| Total loans | $ | 12,157,769 | $ | 9,883,802 | |||||||
| Total non-accrual loans | 33,821 | 42,275 | |||||||||
| Allowance for loan losses | 124,166 | 109,138 | |||||||||
| Allowance for loan losses as a percent of total loans | 1.02 | % | 1.10 | % | |||||||
| Non-accrual loans as a percent of total loans | 0.28 | % | 0.43 | % | |||||||
| Allowance for loan losses as a percent of non-accrual loans | 367.13 | % | 258.16 | % | |||||||
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(1)Average loan balances exclude loans held for sale.
Non-accrual loans decreased $8.5 million, or 20.0%, to $33.8 million at March 31, 2022 from $42.3 million at March 31, 2021, primarily due to a decrease in non-accrual loans in our business banking portfolio which was partially offset by an increase in non-accrual loans in our consumer home equity portfolio. Non-accrual business banking loans decreased $10.1 million, or 59.2%, to $6.9 million at March 31, 2022 from $17.0 million at March 31, 2021 primarily due to payoffs and curing of delinquency of such loans. Non-accrual consumer home equity loans increased $3.6 million, or 102.6%, to $7.1 million at March 31, 2022 from $3.5 million at March 31, 2021 primarily due to several loans moving to non-accrual status which had been acquired in connection with our acquisition of Century.
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 March 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||||||||||||||
| 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 (1) | $ | 26,841 | 21.62 | % | 23.57 | % | $ | 18,018 | 18.43 | % | 24.10 | % | |||||||||||||||||||||||
| Commercial real estate | 44,612 | 35.93 | % | 37.90 | % | 52,373 | 53.56 | % | 36.82 | % | |||||||||||||||||||||||||
| Commercial construction | 4,414 | 3.55 | % | 2.02 | % | 2,585 | 2.64 | % | 1.81 | % | |||||||||||||||||||||||||
Business banking (1) | 17,269 | 13.91 | % | 9.90 | % | 10,983 | 11.23 | % | 10.87 | % | |||||||||||||||||||||||||
| Residential real estate | 22,243 | 17.91 | % | 16.00 | % | 6,556 | 6.70 | % | 15.69 | % | |||||||||||||||||||||||||
| Consumer home equity | 6,018 | 4.85 | % | 9.06 | % | 3,722 | 3.81 | % | 8.96 | % | |||||||||||||||||||||||||
| Other consumer | 2,769 | 2.23 | % | 1.55 | % | 3,308 | 3.38 | % | 1.75 | % | |||||||||||||||||||||||||
| Other | — | — | % | — | % | 242 | 0.25 | % | — | % | |||||||||||||||||||||||||
| Total | $ | 124,166 | 100.00 | % | 100.00 | % | $ | 97,787 | 100.00 | % | 100.00 | % | |||||||||||||||||||||||
(1)PPP loans are included within these portfolios as of March 31, 2022 and December 31, 2021; however, as of March 31, 2022 and December 31, 2021 no allowance for loan losses was recorded on these loans due to the SBA guarantee of 100% of the loans
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 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.
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We held an investment in the FHLBB of $10.9 million at both March 31, 2022 and December 31, 2021.
Goodwill and other intangible assets
Goodwill and other intangible assets were $654.8 million and $649.7 million at March 31, 2022 and December 31, 2021, respectively. The increase in goodwill and other intangibles assets was due to the purchase of one insurance agency during the three months ended March 31, 2022. We did not record any impairment to our goodwill or other intangible assets during the three months ended March 31, 2022. We regularly assess our goodwill and other intangible assets to determine if impairments are necessary.
Deposits and other interest-bearing liabilities
Deposits originating within the markets we serve continue to be our primary source of funding our earning assets. We have been able to compete effectively for deposits in our primary market areas. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in our assessment of the stability of our fund sources and our access to additional funds. Furthermore, we shift the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize net interest margin. We do not rely upon, and in recent years have not obtained, deposit funding through brokered deposits.
The following table presents our deposits as of the dates presented:
Components of Deposits
| As of March 31, 2022 | As of December 31, 2021 | Change | |||||||||||||||||||||
| Amount ($) | Percentage (%) | ||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Demand | $ | 6,788,742 | $ | 7,020,864 | $ | (232,122) | (3.3) | % | |||||||||||||||
| Interest checking | 4,662,134 | 4,478,566 | 183,568 | 4.1 | % | ||||||||||||||||||
| Savings | 2,089,427 | 2,077,495 | 11,932 | 0.6 | % | ||||||||||||||||||
| Money market investments | 5,406,198 | 5,525,005 | (118,807) | (2.2) | % | ||||||||||||||||||
| Certificate of deposits | 446,315 | 526,381 | (80,066) | (15.2) | % | ||||||||||||||||||
| Total deposits | $ | 19,392,816 | $ | 19,628,311 | $ | (235,495) | (1.2) | % | |||||||||||||||
(1)The Bank’s estimate of total uninsured deposits was $10.6 billion and $11.0 billion at March 31, 2022 and December 31, 2021, respectively.
Deposits decreased by $0.2 billion, or 1.2%, to $19.4 billion at March 31, 2022 from $19.6 billion at December 31, 2021. This decrease was primarily the result of a decrease in demand deposits of $232.1 million, a decrease in money market deposits of $118.8 million and a decrease in certificate of deposits of $80.1 million. These decreases were partially offset by an increase in interest checking deposits of $183.6 million and reflected normal deposit activity during the three months ended March 31, 2022.
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 Three Months Ended March 31, 2022 | For the Year Ended December 31, 2021 | ||||||||||||||||||||||
| Average Amount | Average Rate | Average Amount | Average Rate | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Demand | $ | 6,821,811 | — | % | $ | 5,547,615 | — | % | |||||||||||||||
| Interest checking | 4,596,026 | 0.18 | % | 2,866,091 | 0.07 | % | |||||||||||||||||
| Savings | 2,076,754 | 0.01 | % | 1,483,271 | 0.02 | % | |||||||||||||||||
| Money market investments | 5,568,264 | 0.07 | % | 3,870,712 | 0.06 | % | |||||||||||||||||
| Certificate of deposits | 481,833 | 0.27 | % | 280,141 | 0.21 | % | |||||||||||||||||
| Total deposits | $ | 19,544,688 | 0.07 | % | $ | 14,047,830 | 0.04 | % | |||||||||||||||
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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:
Maturities of Time Certificates of Deposit $250,000 and Over
| As of March 31, 2022 | As of December 31, 2021 | |||||||||||||
| Maturing in | (In thousands) | |||||||||||||
| Three months or less | $ | 61,465 | $ | 113,019 | ||||||||||
| Over three months through six months | 51,411 | 53,899 | ||||||||||||
| Over six months through 12 months | 28,945 | 33,295 | ||||||||||||
| Over 12 months | 23,368 | 23,827 | ||||||||||||
| Total | $ | 165,189 | $ | 224,040 | ||||||||||
Borrowings
Our borrowings consist of both short-term and long-term borrowings and provide us with sources of funding. Maintaining available borrowing capacity provides us with a contingent source of liquidity.
Our total borrowings increased by $0.6 million, or 1.9%, to $34.9 million at March 31, 2022 compared to $34.3 million at December 31, 2021. The increase was primarily due to an increase in escrow deposits of our borrowers.
The following table sets forth information concerning balances on our borrowings as of the dates and for the periods indicated:
Borrowings by Category
| Change | |||||||||||||||||||||||
| As of March 31, 2022 | As of December 31, 2021 | Amount ($) | Percentage (%) | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| FHLB advances | $ | 13,689 | $ | 14,020 | $ | (331) | (2.4) | % | |||||||||||||||
| Escrow deposits of borrowers | 21,233 | 20,258 | 975 | 4.8 | % | ||||||||||||||||||
| Total | $ | 34,922 | $ | 34,278 | $ | 644 | 1.9 | % | |||||||||||||||
Results of Operations
Summary of Results of Operations
| Three Months Ended March 31, | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| 2022 | 2021 | Amount ($) | Percentage | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Interest and dividend income | $ | 131,485 | $ | 101,133 | $ | 30,352 | 30.0 | % | |||||||||||||||
| Interest expense | 3,361 | 1,042 | 2,319 | 222.6 | % | ||||||||||||||||||
| Net interest income | 128,124 | 100,091 | 28,033 | 28.0 | % | ||||||||||||||||||
| Release of allowance for loan losses | (485) | (580) | 95 | (16.4) | % | ||||||||||||||||||
| Noninterest income | 46,415 | 55,212 | (8,797) | (15.9) | % | ||||||||||||||||||
| Noninterest expense | 108,866 | 94,049 | 14,817 | 15.8 | % | ||||||||||||||||||
| Income tax expense | 14,642 | 14,171 | 471 | 3.3 | % | ||||||||||||||||||
| Net income | 51,516 | 47,663 | 3,853 | 8.1 | % | ||||||||||||||||||
Comparison of the three months ended March 31, 2022 and 2021
Interest and Dividend Income
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Interest and dividend income increased by $30.4 million, or 30.0%, to $131.5 million during the three months ended March 31, 2022 from $101.1 million during the three months ended March 31, 2021. The increase was primarily a result of our acquisition of Century on November 12, 2021, which added approximately $6.6 billion in interest-earning assets. Overall, the average balance of our interest-earning assets increased $6.7 billion, or 43.9%, to $21.9 billion as of March 31, 2022 compared to $15.2 billion as of March 31, 2021, reflecting the addition of Century assets. Partially offsetting this increase was a decrease in the yield on average interest-earning assets which decreased by 25 basis points compared with the three months ended March 31, 2021. Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans or securities are calculated and added to the yield. Management believes that this presentation allows for better comparability between institutions with different tax structures.
•Interest income on securities and federal funds sold and other short-term investments increased $17.6 million, or 141.1%, to $30.1 million during the three months ended March 31, 2022 from $12.5 million during the three months ended March 31, 2021. The increase in interest income on our securities was primarily due to an increase in the average balance of such securities of $4.3 billion, or 79.6%, to $9.7 billion for the three months ended March 31, 2022 from $5.4 billion for the three months ended March 31, 2021, which was primarily due to securities acquired in connection with our acquisition of Century of $3.1 billion combined with security purchases.
•Interest income on loans increased $12.7 million, or 14.4%, to $101.4 million during the three months ended March 31, 2022 from $88.6 million during the three months ended March 31, 2021. The increase in interest income on our loans was primarily due to a $2.4 billion, or 24%, increase in average totals loans. Average loans increased to $12.2 billion during the three months ended March 31, 2022 from $9.8 billion during the three months ended March 31, 2021. The increase in interest income on our loans was partially offset by a decrease in net accretion of PPP loan deferred fees and costs of $2.5 million, or 30.1%, to $5.8 million during the three months ended March 31, 2022 from $8.3 million during three months ended March 31, 2021.
Interest Expense
Interest expense increased $2.3 million, or 222.6%, to $3.4 million during the three months ended March 31, 2022 from $1.0 million during the three months ended March 31, 2021. The increase was attributable to an increase in deposit interest expense.
Interest expense on our interest-bearing deposits increased by $2.3 million, or 231.5%, to $3.3 million during the three months ended March 31, 2022 from $1.0 million during the three months ended March 31, 2021. This increase was primarily due to an increase in average interest-bearing deposits which increased $5.3 billion, or 72.3%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to the Century acquisition. An increase in rates paid on deposits also contributed to the overall increase in deposit interest expense. Rates paid on deposits increased by 5 basis points to 0.11% during the three months ended March 31, 2022 from 0.06% during the three months ended March 31, 2021.
Net Interest Income
Net interest income increased by $28.0 million, or 28.0%, to $128.1 million during the three months ended March 31, 2022 from $100.1 million during the three months ended March 31, 2021. Net interest income increased primarily due to an increase in net interest-earning assets of $1.3 billion, or 17.0%, to $9.1 billion during the three months ended March 31, 2022 from $7.8 billion during the three months ended March 31, 2021.
The following chart shows our net interest margin over the past five quarters including and excluding net PPP loan fee accretion:
79
Net interest margin is determined by dividing FTE net interest income by average-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using a marginal tax rate of 21.5% for the three months ended March 31, 2022 and 21.0% for the three months ended March 31, 2021. Net interest margin, including PPP loan interest income, decreased 29 basis points to 2.42% during the three months ended March 31, 2022, from 2.71% during the three months ended March 31, 2021, which was primarily due to the downward repricing of our commercial loans and investment securities since March 31, 2021. Refer to the above “Interest and Dividend Income” and “Interest Expense” sections for a description of the primary causes of the decline in net interest margin.
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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, discounts and premiums that are amortized or accreted to interest income or expense.
Average Balances, Interest Earned/Paid, & Average Yields
| As of and for the three months ended March 31, | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| 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 | $ | 1,937,494 | $ | 14,471 | 3.03 | % | $ | 1,393,139 | $ | 11,274 | 3.28 | % | |||||||||||||||||||||||
| Commercial | 8,973,094 | 78,226 | 3.54 | % | 7,317,951 | 69,210 | 3.84 | % | |||||||||||||||||||||||||||
| Consumer | 1,293,489 | 10,450 | 3.28 | % | 1,105,698 | 8,937 | 3.28 | % | |||||||||||||||||||||||||||
| Total loans | 12,204,077 | 103,147 | 3.43 | % | 9,816,788 | 89,421 | 3.69 | % | |||||||||||||||||||||||||||
| Non-taxable investment securities | 259,908 | 2,287 | 3.57 | % | 260,870 | 2,371 | 3.69 | % | |||||||||||||||||||||||||||
| Taxable investment securities | 8,387,292 | 27,876 | 1.35 | % | 3,370,660 | 10,206 | 1.23 | % | |||||||||||||||||||||||||||
| Federal funds sold and other short-term investments | 1,003,416 | 436 | 0.18 | % | 1,740,561 | 432 | 0.10 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 21,854,693 | 133,746 | 2.48 | % | 15,188,879 | 102,430 | 2.73 | % | |||||||||||||||||||||||||||
| Non-interest-earning assets | 1,436,702 | 1,120,603 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 23,291,395 | $ | 16,309,482 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Deposits: | |||||||||||||||||||||||||||||||||||
| Savings account | $ | 2,076,754 | $ | 51 | 0.01 | % | $ | 1,300,057 | $ | 64 | 0.02 | % | |||||||||||||||||||||||
| Interest checking account | 4,596,026 | 2,032 | 0.18 | % | 2,391,025 | 234 | 0.04 | % | |||||||||||||||||||||||||||
| Money market investment | 5,568,264 | 920 | 0.07 | % | 3,440,214 | 587 | 0.07 | % | |||||||||||||||||||||||||||
| Time account | 481,833 | 319 | 0.27 | % | 251,115 | 117 | 0.19 | % | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 12,722,877 | 3,322 | 0.11 | % | 7,382,411 | 1,002 | 0.06 | % | |||||||||||||||||||||||||||
| Borrowings | 30,669 | 39 | 0.52 | % | 25,625 | 40 | 0.63 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 12,753,546 | 3,361 | 0.11 | % | 7,408,036 | 1,042 | 0.06 | % | |||||||||||||||||||||||||||
| Demand accounts | 6,821,811 | 5,125,831 | |||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 442,591 | 358,087 | |||||||||||||||||||||||||||||||||
| Total liabilities | 20,017,948 | 12,891,954 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 3,273,447 | 3,417,528 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 23,291,395 | $ | 16,309,482 | |||||||||||||||||||||||||||||||
Net interest income – FTE | $ | 130,385 | $ | 101,388 | |||||||||||||||||||||||||||||||
| Net interest rate spread (2) | 2.37 | % | 2.67 | % | |||||||||||||||||||||||||||||||
| Net interest-earning assets (3) | $ | 9,101,147 | $ | 7,780,843 | |||||||||||||||||||||||||||||||
Net interest margin – FTE (4) | 2.42 | % | 2.71 | % | |||||||||||||||||||||||||||||||
| Average interest-earning assets to interest-bearing liabilities | 171.36 | % | 205.03 | % | |||||||||||||||||||||||||||||||
| Return on average assets (5) | 0.90 | % | 1.19 | % | |||||||||||||||||||||||||||||||
| Return on average equity (6) | 6.38 | % | 5.66 | % | |||||||||||||||||||||||||||||||
| Noninterest expenses to average assets | 1.90 | % | 2.34 | % | |||||||||||||||||||||||||||||||
(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 represents net interest income divided by average total interest-earning assets.
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(5)Represents net income divided by average total assets.
(6)Represents net income divided by average equity.
The following chart shows the composition of our interest-earning assets as of the end of 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 release of the allowance for loan losses of $0.5 million for the three months ended March 31, 2022, compared to a release of provision of $0.6 million for the three months ended March 31, 2021. Given relatively consistent economic and credit conditions during the three months ended March 31, 2022 compared with three months ended March 31, 2021, we determined that a slight release of the allowance was necessary.
Our periodic evaluation of the appropriate allowance for loan losses considers, among other criteria, the risk characteristics of the loan portfolio, current and expected future 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
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| Three Months Ended March 31, | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Insurance commissions | $ | 28,713 | $ | 28,147 | $ | 566 | 2.0 | % | |||||||||||||||
| Service charges on deposit accounts | 8,537 | 5,367 | 3,170 | 59.1 | % | ||||||||||||||||||
| Trust and investment advisory fees | 6,141 | 5,663 | 478 | 8.4 | % | ||||||||||||||||||
| Debit card processing fees | 2,945 | 2,749 | 196 | 7.1 | % | ||||||||||||||||||
| Interest swap income | 2,932 | 5,405 | (2,473) | (45.8) | % | ||||||||||||||||||
| (Losses) income from investments held in rabbi trusts | (4,433) | 1,846 | (6,279) | (340.1) | % | ||||||||||||||||||
| Gains on sales of mortgage loans held for sale, net | 169 | 1,479 | (1,310) | (88.6) | % | ||||||||||||||||||
| (Losses) gains on sales of securities available for sale, net | (2,172) | 1,164 | (3,336) | (286.6) | % | ||||||||||||||||||
| Other | 3,583 | 3,392 | 191 | 5.6 | % | ||||||||||||||||||
| Total noninterest income | $ | 46,415 | $ | 55,212 | $ | (8,797) | (15.9) | % | |||||||||||||||
Noninterest income decreased by $8.8 million, or 15.9%, to $46.4 million for the three months ended March 31, 2022 from $55.2 million for the three months ended March 31, 2021. This decrease was primarily due to a $6.3 million decrease in income from investments held in rabbi trusts which resulted from a current period net loss, a $3.3 million decrease in gain on sales of securities available for sale which resulted from a current period net loss on sale, and a $2.5 million decrease in interest swap income. The decreases in these line items were partially offset by a $3.2 million increase in service charges on deposit accounts.
•Income from investments held in rabbi trusts decreased to a net loss primarily as a result of an unfavorable mark-to-market adjustment on equity securities held in these accounts resulting from a decline in the market value of equity securities held in the rabbi trusts.
•Gains on sales of securities available for sale, net, decreased to a net loss due to the decision by management to sell certain available for sale securities during the three months ended March 31, 2022, the majority of which were acquired in connection with our acquisition of Century and were in a net unrealized loss position at the time of sale.
•Interest rate swap income decreased primarily as a result of a less favorable mark-to-market adjustment during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
•Service charges on deposit accounts increased primarily as a result of increased corporate account analysis charges as a result of greater commercial deposit customer activity and increased overdraft fees as a result of greater customer deposit activity. The increased customer deposit activity is primarily attributable to our acquisition of Century.
Noninterest Expense
The following table sets forth information regarding noninterest expense for the periods shown:
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Noninterest Expense
| Three Months Ended March 31, | |||||||||||||||||||||||
| Change | |||||||||||||||||||||||
| 2022 | 2021 | Amount | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 69,526 | $ | 64,040 | $ | 5,486 | 8.6 | % | |||||||||||||||
| Office occupancy and equipment | 11,614 | 8,217 | 3,397 | 41.3 | % | ||||||||||||||||||
| Data processing | 15,320 | 12,129 | 3,191 | 26.3 | % | ||||||||||||||||||
| Professional services | 4,701 | 4,148 | 553 | 13.3 | % | ||||||||||||||||||
| Marketing | 1,574 | 1,691 | (117) | (6.9) | % | ||||||||||||||||||
| Loan expenses | 1,168 | 1,847 | (679) | (36.8) | % | ||||||||||||||||||
| FDIC insurance | 1,412 | 948 | 464 | 48.9 | % | ||||||||||||||||||
| Amortization of intangible assets | 827 | 532 | 295 | 55.5 | % | ||||||||||||||||||
| Other | 2,724 | 497 | 2,227 | 448.1 | % | ||||||||||||||||||
| Total noninterest expense | $ | 108,866 | $ | 94,049 | $ | 14,817 | 15.8 | % | |||||||||||||||
Noninterest expense increased by $14.8 million, or 15.8%, to $108.9 million during the three months ended March 31, 2022 from $94.0 million during the three months ended March 31, 2021. This increase was primarily due to an $5.5 million increase in salaries and employee benefits, a $3.4 million increase in office occupancy and equipment expenses, a $3.2 million increase in data processing, and a $2.2 million increase in other noninterest expenses.
•Salaries and employee benefits increased primarily due to salaries and wages for former employees of Century who were retained subsequent to the acquisition. In addition, we incurred $1.6 million in share-based compensation expense related to restricted stock awards granted in the fourth quarter of 2021 and awards of restricted stock units and performance stock units granted in the first quarter of 2022. No related expenses were incurred during the three months ended March 31, 2021 as no such awards had been granted.
•Office occupancy and equipment increased during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 primarily due to a $0.8 million increase in depreciation expense, which was related to fixed assets acquired from Century, lease impairment charges of $0.6 million, which were due to an early termination of a lease acquired from Century, and a $0.6 million increase in outsourced facilities maintenance expenses, which was primarily due to janitorial services at properties acquired from Century.
•Data processing expenses are primarily comprised of costs associated with the processing of customer transactions including loans and deposits and are partially impacted by fluctuations in related transaction volume. Such expenses increased during the three months ended March 31, 2022 from the three months ended March 31, 2021 primarily due to our acquisition of Century in the fourth quarter of 2022 which resulted in the acquisition of additional loan and deposit customers.
•Other noninterest expenses increased primarily due to a $1.1 million increase in customer bad check losses during the three months ended March 31, 2022 compared to during three months ended March 31, 2021, consistent with a nationwide increase in mail-based check fraud, and a $0.7 million increase in liability insurance expense, which was primarily due to regular insurance rate premium increases and our acquisition of Century, which increased the number of our properties and, therefore, our required insurance coverage.
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Income Taxes
We recognize the tax effect of all income and expense transactions in each year’s consolidated statements of income, regardless of the year in which the transactions are reported for income tax purposes. The following table sets forth information regarding our tax provision and applicable tax rates for the periods indicated:
Tax Provision and Applicable Tax Rates
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Combined federal and state income tax provisions | $ | 14,642 | $ | 14,171 | |||||||
| Effective income tax rates | 22.1 | % | 22.9 | % | |||||||
| Blended statutory tax rate | 28.1 | % | 28.1 | % | |||||||
Income tax expense increased by $0.4 million, or 3.3%, to $14.6 million during the three months ended March 31, 2022 from $14.2 million during the three months ended March 31, 2021. The effective tax rate was 22.1% for the three months ended March 31, 2022 as compared to 22.9% for the three months ended March 31, 2021. The increase in income tax expense was due primarily to higher pre-tax income during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The decrease in the effective tax rate primarily resulted from increases in favorable permanent differences, including investment tax credits and tax exempt income. For additional information related to the Company’s income taxes see Note 12, “Income Taxes” within the Notes to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s 2021 10-K.
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Financial Position and Results of Operations of our Business Segments
Comparison of the three months ended March 31, 2022 and 2021
| As of and for the three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| Banking Business | Insurance Agency Business | Other/ Eliminations | Total | Banking Business | Insurance Agency Business | Other/ Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 128,124 | $ | — | $ | — | $ | 128,124 | $ | 100,091 | $ | — | $ | — | $ | 100,091 | |||||||||||||||||||||||||||||||
| (Release of) provision for loan losses | (485) | — | — | (485) | (580) | — | — | (580) | |||||||||||||||||||||||||||||||||||||||
| Net interest income after provision for loan losses | 128,609 | — | — | 128,609 | 100,671 | — | — | 100,671 | |||||||||||||||||||||||||||||||||||||||
| Noninterest income | 18,137 | 28,449 | (171) | 46,415 | 26,960 | 28,284 | (32) | 55,212 | |||||||||||||||||||||||||||||||||||||||
| Noninterest expense | 90,446 | 19,473 | (1,053) | 108,866 | 75,274 | 19,811 | (1,036) | 94,049 | |||||||||||||||||||||||||||||||||||||||
| Income before provision for income taxes | 56,300 | 8,976 | 882 | 66,158 | 52,357 | 8,473 | 1,004 | 61,834 | |||||||||||||||||||||||||||||||||||||||
| Income tax provision | 12,108 | 2,534 | — | 14,642 | 11,793 | 2,378 | — | 14,171 | |||||||||||||||||||||||||||||||||||||||
| Net income | $ | 44,192 | $ | 6,442 | $ | 882 | $ | 51,516 | $ | 40,564 | $ | 6,095 | $ | 1,004 | $ | 47,663 | |||||||||||||||||||||||||||||||
| Total assets | $ | 22,695,895 | $ | 211,401 | $ | (71,224) | $ | 22,836,072 | $ | 16,595,311 | $ | 194,664 | $ | (63,180) | $ | 16,726,795 | |||||||||||||||||||||||||||||||
| Total liabilities | $ | 19,848,995 | $ | 49,909 | $ | (71,224) | $ | 19,827,680 | $ | 13,359,075 | $ | 43,855 | $ | (63,180) | $ | 13,339,750 | |||||||||||||||||||||||||||||||
Banking Segment
•Average interest-earning assets increased $6.7 billion, or 43.9%, to $21.9 billion for the three months ended March 31, 2022 from $15.2 billion for the three months ended March 31, 2021. The increase is primarily due the acquisition of Century, which closed on November 12, 2021 and added $6.6 billion in interest-earning assets. The increase in average interest-earning assets resulted in an increase in interest income which was partially offset by a decline in yields on interest-earning assets. For additional discussion, refer to the earlier “Interest and Dividends” section.
•Average interest-bearing liabilities grew $5.3 billion, or 72%, to $12.8 billion for the three months ended March 31, 2022 from $7.4 billion for the three months ended March 31, 2021, with average total interest-bearing deposits, our largest category of average interest-bearing liabilities, growing $5.3 billion, or 72%, to $12.7 billion for the three months ended March 31, 2022 compared to $7.4 billion for the three months ended March 31, 2021. Average deposits increased due to our acquisition of Century, which added $4.4 billion in interest-bearing deposits. Also contributing to the increase in interest expense was an increase of 5 basis points in rates paid on deposits. For additional discussion, refer to the earlier “Interest and Dividends” section.
•Losses from investments held in rabbi trust accounts were $3.9 million for the three months ended March 31, 2022, which represents a decrease of $5.7 million, compared to gains of $1.8 million during three months ended March 31, 2021. The decrease was primarily a result of an unfavorable mark-to-market adjustment on equity securities held in these accounts during the three months ended March 31, 2022.
•Interest rate swap income decreased $2.5 million primarily as a result of a less favorable mark-to-market adjustment during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
•Gains on sales of securities available for sale, net, decreased $3.2 million to a net loss due to the decision by management to sell certain AFS securities during the three months ended March 31, 2022, the majority of which were acquired in connection with our acquisition of Century and were in a net unrealized loss position at the time of sale.
•Service charges on deposit accounts increased $3.2 million primarily as a result of increased corporate account analysis charges as a result of greater commercial deposit customer activity and increased overdraft fees as a result of greater customer deposit activity.
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•Noninterest expense increased $15.2 million, or 20.2%, to $90.4 million during the three months ended March 31, 2022 from $75.3 million during the three months ended March 31, 2021. This increase was driven primarily by a $4.5 million increase in salary and wages expenses, a $3.4 million increase in office occupancy and equipment expenses, a $3.2 million increase in data processing expenses, and a $1.8 million increase in operational losses, which was driven by a $1.1 million increase in bad check losses. Refer to the earlier “Noninterest Expense” section for additional discussion of this items.
Insurance Agency Segment
•Noninterest income related to our insurance agency business remained relatively consistent with a slight increase of $0.2 million, or 0.58%, to $28.4 million during the three months ended March 31, 2022 from $28.3 million during the three months ended March 31, 2021.
•Noninterest expense related to our insurance agency business decreased $0.3 million 1.7% to $19.5 million during three months ended March 31, 2022 from $19.8 million during three months ended March 31, 2021.
Management of Market Risk
General. Market risk is the sensitivity of 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 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 securities and derivatives, as well as other effects. The primary goal of interest rate risk management is to control this risk within limits approved by the Risk Management Committee of our Board of Directors.
These limits reflect our tolerance for interest rate risk over both short-term and long-term horizons. We attempt to manage interest rate risk by identifying, quantifying, and where appropriate, hedging its exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. Our objective is to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary and within limits that management determines to be prudent, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors and caps.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. We estimate what our net interest income would be for a 12-month period assuming no changes in interest rates. We then calculate what the net interest income would be for the same period under the assumption that the U.S. Treasury yield curve increases or decreases instantaneously by +200, +300, +400 and -100 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Changes in Interest Rates” column below. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent at March 31, 2022 and December 31, 2021 precluded the modeling of certain falling rate scenarios. We do not model negative interest rate scenarios.
The tables below set forth, as of March 31, 2022 and December 31, 2021, the calculation of the estimated changes in our net interest income on an FTE basis that would result from the designated immediate changes in the U.S. Treasury yield curve:
Interest Rate Sensitivity
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| As of March 31, 2022 | ||||||||||||||
| Change in Interest Rates (basis points) (1) | Net Interest Income Year 1 Forecast | Year 1 Change from Flat | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| 400 | $ | 659,394 | 22.4 | % | ||||||||||
| 300 | 628,624 | 16.7 | % | |||||||||||
| 200 | 598,666 | 11.2 | % | |||||||||||
| Flat | 538,605 | — | % | |||||||||||
| (100) | 506,509 | (6.0) | % | |||||||||||
| As of December 31, 2021 | ||||||||||||||
| Change in Interest Rates (basis points) (1) | Net Interest Income Year 1 Forecast | Year 1 Change from Flat | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| 400 | $ | 663,207 | 30.2 | % | ||||||||||
| 300 | 624,384 | 22.6 | % | |||||||||||
| 200 | 586,319 | 15.1 | % | |||||||||||
| Flat | 509,379 | — | % | |||||||||||
| (100) | 479,489 | (5.9) | % | |||||||||||
(1)Assumes an immediate uniform change in interest rates at all maturities, except in the down 100 basis points scenario, where rates are floored at zero at all maturities.
The tables above indicate that at March 31, 2022 and December 31, 2021, in the event of an instantaneous parallel 200 basis points increase in rates, we would have experienced an 11.2% and 15.1% increase, respectively, in net interest income on an FTE basis, and in the event of an instantaneous 100 basis points decrease in interest rates, we would have experienced a 6.0% and a 5.9% decrease at March 31, 2022 and December 31, 2021, respectively, in net interest income, on an FTE basis. Management may use interest rate derivative financial instruments, within internal policy guidelines, to manage interest rate risk as part of our asset/liability strategy. These derivatives provide significant protection against falling interest rates.
Economic Value of Equity Analysis. We also analyze the sensitivity of our financial condition in interest rates through our economic value of equity (“EVE”) model. This analysis calculates the difference between the present value of expected cash flows from assets and liabilities assuming various changes in current interest rates.
The table below represents an analysis of our interest rate risk (excluding the effect of our pension plans) as measured by the estimated changes in our EVE, resulting from an instantaneous and sustained parallel shift in the yield curve (+200, +300, +400 basis points and -100 basis points) at March 31, 2022 and December 31, 2021. 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. The relatively low level of interest rates prevalent at March 31, 2022 and December 31, 2021 precluded the modeling of certain falling rate scenarios, including negative 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.
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EVE Interest Rate Sensitivity
| Change in Interest Rate (basis points) (1) | As of March 31, 2022 | |||||||||||||||||||||||||
| Estimated EVE (2) | Estimated Increase (Decrease) in EVE from Flat | EVE as a Percentage of Total Assets (3) | ||||||||||||||||||||||||
| Amount | Percent | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
| 400 | $ | 4,383,545 | $ | (92,836) | (2.1) | % | 21.61 | % | ||||||||||||||||||
| 300 | 4,398,598 | (77,783) | (1.7) | % | 21.20 | % | ||||||||||||||||||||
| 200 | 4,438,315 | (38,066) | (0.9) | % | 20.88 | % | ||||||||||||||||||||
| Flat | 4,476,381 | — | — | 20.02 | % | |||||||||||||||||||||
| (100) | 4,409,709 | (66,672) | (1.5) | % | 19.22 | % | ||||||||||||||||||||
| Change in Interest Rate (basis points) (1) | As of December 31, 2021 | |||||||||||||||||||||||||
| Estimated EVE (2) | Estimated Increase (Decrease) in EVE from Flat | EVE as a Percentage of Total Assets (3) | ||||||||||||||||||||||||
| Amount | Percent | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
| 400 | $ | 4,573,359 | $ | 27,408 | 0.6 | % | 21.30 | % | ||||||||||||||||||
| 300 | 4,565,019 | 19,068 | 0.4 | % | 20.80 | % | ||||||||||||||||||||
| 200 | 4,589,035 | 43,084 | 0.9 | % | 20.39 | % | ||||||||||||||||||||
| Flat | 4,545,951 | — | — | 17.06 | % | |||||||||||||||||||||
| (100) | 4,270,433 | (275,518) | (6.1) | % | 17.75 | % | ||||||||||||||||||||
(1)Assumes an immediate uniform change in interest rates at all maturities, except in the down 100 basis points scenario, where rates are floored at zero at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
Liquidity, Capital Resources, Contractual Obligations, Commitments and Contingencies
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet deposit withdrawals and anticipated loan fundings, as well as current and planned expenditures. We seek to maintain sources of liquidity that are deep and diversified and that may be used during the normal course of business as well as on a contingency basis.
The net proceeds from our IPO significantly increased our liquidity and capital resources at both Eastern Bankshares, Inc. and Eastern Bank. Over time, the initial level of liquidity has been and will continue to be reduced as net proceeds from the IPO are used for general corporate purposes. Our financial condition and results of operations were enhanced by the net proceeds from the stock offering and resulted in increased net interest-earning assets and net interest and dividend income. On November 12, 2021, we completed our merger with Century for $641.9 million in cash. Although the transaction reduced the net proceeds from the IPO, we continue to expect that, due to the increase in equity resulting from the net proceeds raised in our IPO, our return on equity has been and will continue to be adversely affected until we can effectively deploy the remaining proceeds of the IPO.
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 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. In the future, our liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and stock repurchases in which we may engage. We believe that our existing resources will be sufficient to meet the liquidity and capital requirements of our operations for the foreseeable future.
We participate in the IntraFi Network, which allows us to provide access to multi-million dollar FDIC deposit insurance protection on customer deposits for consumers, businesses and public entities. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. At March 31, 2022 and December 31, 2021, we had a total of $656.3 million and $520.5 million of IntraFi Network one-way sell deposits, respectively. At March 31, 2022, we had repurchased $29.1 million of previously sold reciprocal deposits. At December 31, 2021, no
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amounts were repurchased of previously sold reciprocal deposits. The additional capacity of $656.3 million and $520.5 million at March 31, 2022 and December 31, 2021, respectively, should be considered a source of liquidity.
Although customer deposits remain our preferred source of funds, maintaining additional back up sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. At March 31, 2022, we had $13.7 million in outstanding advances and the ability to borrow up to an additional $2.1 billion. At March 31, 2022, we had a $412.9 million collateralized line of credit from the FRBB with no outstanding balance. We had a total of $790.0 million of discretionary lines of credit at March 31, 2022.
Sources of Liquidity
| As of March 31, 2022 | As of December 31, 2021 | ||||||||||||||||||||||
| Outstanding | Additional Capacity | Outstanding | Additional Capacity | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| IntraFi Network deposits | $ | 29,098 | $ | 656,295 | $ | — | $ | 520,461 | |||||||||||||||
| Federal Home Loan Bank (1) | 13,689 | 2,138,705 | 14,020 | 1,839,540 | |||||||||||||||||||
| Federal Reserve Bank of Boston (2) | — | 412,902 | — | 456,148 | |||||||||||||||||||
| Unsecured lines of credit | — | 790,000 | — | 790,000 | |||||||||||||||||||
| Total deposits | $ | 42,787 | $ | 3,997,902 | $ | 14,020 | $ | 3,606,149 | |||||||||||||||
(1)As of March 31, 2022 and December 31, 2021, loans have been pledged to the FHLBB with a carrying value of $3.0 billion and $2.6 billion, respectively, to secure additional borrowing capacity.
(2)Loans with a carrying value of $799.9 million and $784.0 million at March 31, 2022 and December 31, 2021, respectively, have been pledged to the FRBB resulting in this additional unused borrowing capacity.
We believe that advanced preparation, early detection, and prompt responses can avoid, minimize, or shorten potential liquidity crises. Our Board of Directors and our management's Asset Liability Committee have put a liquidity contingency plan in place to establish methods for assessing and monitoring risk levels, as well as potential responses during unanticipated stress events. As part of our risk management framework, we perform periodic liquidity stress testing to assess its need for liquid assets as well as backup sources of liquidity.
Capital Resources. We are subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks, the FDIC and the Federal Reserve (with respect to our consolidated capital requirements). At March 31, 2022 and December 31, 2021, 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%; (2) a minimum of Tier 1 risk-based capital ratio of 8%; (3) a minimum of common equity Tier 1 capital ratio of 6.5%; and (4) a minimum of Tier 1 leverage ratio of 5%. Management believes that the Company met all capital adequacy requirements to which it is subject to as of March 31, 2022 and December 31, 2021. 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 March 31, 2022 | As of December 31, 2021 | ||||||||||
| Capital Ratios: | |||||||||||
| Average equity to average assets | 14.05 | % | 19.17 | % | |||||||
| Total regulatory capital (to risk-weighted assets) | 19.42 | % | 19.77 | % | |||||||
| Common equity Tier 1 capital (to risk-weighted assets) | 18.53 | % | 19.04 | % | |||||||
| Tier 1 capital (to risk-weighted assets) | 18.53 | % | 19.04 | % | |||||||
| Tier 1 capital (to average assets) leverage | 12.18 | % | 13.96 | % | |||||||
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Contractual Obligations, Commitments and Contingencies. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. At March 31, 2022, there were no material changes in our contractual obligations, other commitments and contingencies from those disclosed in our 2021 Form 10-K.
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit, unadvanced portions of construction loans and standby letters of credit, all of which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
At March 31, 2022, we had $5.3 billion of commitments to originate loans, comprised of $3.1 billion of commitments under commercial loans and lines of credit (including $473.8 million of unadvanced portions of construction loans), $1.9 billion of commitments under home equity loans and lines of credit, $196.9 million in standard overdraft coverage commitments, $41.7 million of unfunded commitments related to residential real estate loans and $60.5 million in other consumer loans and lines of credit. In addition, at March 31, 2022, we had $65.7 million in standby letters of credit outstanding. We also had $12.9 million in forward commitments to sell loans.
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total commitments do not necessarily represent future cash requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
The information required by this Item is included in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Management of Market Risk.”
ITEM 4. CONTROLS AND PROCEDURES
Effectiveness of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(c) promulgated under the Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022, the end of the period covered by this Quarterly Report on Form 10-Q.
Internal Controls over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting. The Company has not experienced any material impact to the Company’s internal controls over financial reporting due to the fact that most of the Company’s employees responsible for financial reporting are working remotely during the COVID-19 pandemic. The Company is continually monitoring and assessing the impact of the COVID-19 pandemic on the Company’s internal controls to minimize the impact to their design and operating effectiveness.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We operate in a legal and regulatory environment that exposes us to potentially significant risks. For more information regarding the Company’s exposure generally to legal and regulatory risks, see “Business—Legal and Regulatory Proceedings” in Part I, Item 1 of the 2021 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.
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For additional information related to the Company’s ongoing legal proceedings see Note 12, “Commitments and Contingencies” within the Notes to the 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 2021 Form 10-K. Other than the additional risk factor set forth below, as of the date of this Quarterly Report on Form 10-Q, the risk factors of the Company have not changed materially from those disclosed in our 2021 Form 10-K. The COVID-19 pandemic has led to general uncertainty and adverse changes in economic conditions and has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in our 2021 Form 10-K. The risk factors disclosure in our 2021 Form 10-K is therefore qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q.
Regulatory developments could adversely affect our business by increasing our costs and thereby making our business less profitable.
Our profitability may be adversely affected by current and future rulemaking and enforcement activity by the various federal, state and self-regulatory organizations to which we are subject. Regulations can adversely affect our compliance costs and other non-interest expenses, and failure to comply with regulations could subject us to regulatory actions or litigation, which could have a material adverse effect on our business, results of operations, or financial condition.
New laws, rules and regulations, or changes to the interpretation or enforcement of existing laws, rules or regulations, from time to time could increase our expenses, causing our recent historical expenses not to be indicative of future expenses, and could result in limitations on the lines of business we conduct or plan to conduct, modifications to our current or future business practices, and increased capital requirements. For example, in March 2022 the SEC proposed extensive rules to standardize climate-related disclosures for investors. In addition, regulators, including the FDIC, have also proposed principles for banks to manage exposures to climate-related financial risks. We expect that these developments could negatively impact our results, including by increasing our legal, compliance, and information technology expenditures and could result in other costs, as well as greater risks of lawsuits and enforcement activity by regulators. These changes may also affect the array of products and services we offer to our customers.
It is unclear how and whether our regulators, including the SEC, FDIC, other banking regulators and other state insurance regulators may respond to, or enforce elements of, these new regulations or develop their own similar laws and regulations. The impacts, degree and timing of the effect of applicable laws, future regulations and industry principles on our business cannot now be anticipated and may have further impacts on our products and services and the results of operations. Please consult the “Regulation” section within Part I, “Item 1. Business” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, for specific information about risks associated with various regulations and their potential impact on our operations.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES
The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended March 31, 2022:
| Period | Total Number of Shares | Average Price Paid per Share | Total Number of Shares Purchased as Part of the Publicly Announced Share Repurchase Program | Maximum Number of Shares That May Yet Be Purchased Under the Share Repurchase Program (1) | |||||||||||||||||||
| January 1, 2022 – January 31, 2022 | 987,526 | $ | 21.02 | 2,123,404 | 7,214,496 | ||||||||||||||||||
| February 1, 2022 – February 28, 2022 | 1,109,697 | $ | 21.08 | 3,233,101 | 6,104,799 | ||||||||||||||||||
| March 1, 2022 – March 31, 2022 | 769,398 | $ | 21.31 | 4,002,499 | 5,335,401 | ||||||||||||||||||
| Total | 2,866,621 | $ | 21.12 | ||||||||||||||||||||
(1)On October 28, 2021, the Company announced that its Board of Directors had approved a share repurchase program, subject to receipt of a notice of non-objection from the Board of Governors of the Federal Reserve System (“Non-Objection Notice”). On November 12, 2021, the Company announced it had received the Non-Objection Notice to the share repurchase program, which authorizes the purchase of up to 9,337,900 shares over a 12-month period. The program is limited to $225 million through November 30, 2022.
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See Note 10, Shareholders’ Equity, within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for additional information.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
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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 March 31, 2022 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. | Description | |||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 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 March 31, 2022 and December 31, 2021, (ii) the Unaudited Consolidated Statements of Income for the three months ended March 31, 2022 and 2021 (iii) the Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021, (iv) the Unaudited Consolidated Statements of Changes in Equity for the three months ended March 31, 2022 and 2021, (v) the Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021, 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+ | |||||||
*Filed herewith
+ Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EASTERN BANKSHARES, INC. | |||||||||||
| Date : May 10, 2022 | /s/ Robert F. Rivers | ||||||||||
| By: | Robert F. Rivers | ||||||||||
| Chief Executive Officer and Chair of the Board | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date : May 10, 2022 | /s/ James B. Fitzgerald | ||||||||||
| By: | James B. Fitzgerald | ||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
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