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Eastern Bankshares, Inc. - Quarter Report: 2023 June (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 June 30, 2023
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)
___________________________
Massachusetts84-4199750
(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 classTrading SymbolName of exchange on which registered
Common StockEBCNasdaq 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 filerAccelerated filer
Non-accelerated filerSmaller 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
176,376,675 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding as of August 2, 2023.


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Index
PAGE
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
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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)June 30, 2023December 31, 2022
ASSETS
Cash and due from banks$105,066 $106,040 
Short-term investments768,436 63,465 
Cash and cash equivalents873,502 169,505 
Securities:
Available for sale (amortized cost $5,358,289 and $7,825,435, respectively)
4,520,293 6,690,778 
Held to maturity (fair value $412,864 and $423,226, respectively)
465,061 476,647 
Total securities4,985,354 7,167,425 
Loans held for sale2,835 4,543 
Loans:
Commercial and industrial3,341,976 3,150,946 
Commercial real estate5,242,290 5,155,323 
Commercial construction371,367 336,276 
Business banking1,089,548 1,090,492 
Residential real estate2,510,705 2,460,849 
Consumer home equity1,198,290 1,187,547 
Other consumer207,702 194,098 
Total loans13,961,878 13,575,531 
Allowance for loan losses(147,955)(142,211)
Unamortized premiums, net of unearned discounts and deferred fees(15,202)(13,003)
Net loans13,798,721 13,420,317 
Federal Home Loan Bank stock, at cost26,894 41,363 
Premises and equipment59,501 62,656 
Bank-owned life insurance162,718 160,790 
Goodwill and other intangibles, net658,993 661,126 
Deferred income taxes, net351,054 331,648 
Prepaid expenses158,388 165,900 
Other assets505,533 461,585 
Total assets$21,583,493 $22,646,858 
LIABILITIES AND EQUITY
Deposits:
Demand$5,346,693 $6,240,637 
Interest checking accounts4,173,079 4,568,122 
Savings accounts1,495,540 1,831,123 
Money market investment4,814,412 4,710,095 
Certificates of deposit2,351,248 1,624,382 
Total deposits18,180,972 18,974,359 
Borrowed funds:
Short-term Federal Home Loan Bank advances301,295 691,297 
Escrow deposits of borrowers22,980 22,314 
Interest rate swap collateral funds14,210 14,430 
Long-term Federal Home Loan Bank advances12,726 12,787 
Total borrowed funds351,211 740,828 
Other liabilities524,538 459,881 
Total liabilities19,056,721 20,175,068 
Commitments and contingencies (see footnote 13)
Shareholders’ equity
Common shares, $0.01 par value, 1,000,000,000 shares authorized, 176,376,675 and 176,172,073 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively
1,766 1,762 
Additional paid in capital1,656,750 1,649,141 
Unallocated common shares held by the Employee Stock Ownership Plan(135,232)(137,696)
Retained earnings1,704,470 1,881,775 
Accumulated other comprehensive income, net of tax(700,982)(923,192)
Total shareholders’ equity2,526,772 2,471,790 
Total liabilities and shareholders’ equity$21,583,493 $22,646,858 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans$160,862 $107,236 $314,402 $208,603 
Taxable interest and dividends on securities24,618 31,121 53,260 58,997 
Non-taxable interest and dividends on securities1,434 1,862 2,868 3,668 
Interest on federal funds sold and other short-term investments14,851 652 20,115 1,088 
Total interest and dividend income201,765 140,871 390,645 272,356 
Interest expense:
Interest on deposits56,146 3,061 99,079 6,383 
Interest on borrowings4,031 53 11,669 92 
Total interest expense60,177 3,114 110,748 6,475 
Net interest income141,588 137,757 279,897 265,881 
Provision for allowance for loan losses7,501 1,050 7,526 565 
Net interest income after provision for allowance for loan losses134,087 136,707 272,371 265,316 
Noninterest income (loss):
Insurance commissions27,609 24,682 59,112 53,395 
Service charges on deposit accounts7,242 8,313 13,714 16,850 
Trust and investment advisory fees6,131 5,994 11,901 12,135 
Debit card processing fees3,513 3,223 6,683 6,168 
Interest rate swap income825 1,593 417 4,525 
Income (losses) from investments held in rabbi trusts3,002 (7,316)5,859 (11,749)
(Losses) gains on sales of mortgage loans held for sale, net(50)49 (124)218 
Losses on sales of securities available for sale, net— (104)(333,170)(2,276)
Other5,559 5,443 11,109 9,026 
Total noninterest income (loss)53,831 41,877 (224,499)88,292 
Noninterest expense:
Salaries and employee benefits79,224 72,996 157,702 142,522 
Office occupancy and equipment9,802 9,888 19,680 21,502 
Data processing13,874 14,345 27,315 29,665 
Professional services4,056 3,532 7,476 7,482 
Marketing expenses2,136 2,651 3,233 4,225 
Loan expenses1,115 1,626 2,210 3,545 
FDIC insurance3,034 1,720 5,580 3,132 
Amortization of intangible assets1,172 907 2,132 1,734 
Other7,235 3,474 12,614 6,198 
Total noninterest expense121,648 111,139 237,942 220,005 
Income (loss) before income tax expense (benefit) 66,270 67,445 (190,070)133,603 
Income tax expense (benefit)17,613 16,273 (44,631)30,915 
Net income (loss)$48,657 $51,172 $(145,439)$102,688 
Basic earnings (loss) per share$0.30 $0.31 $(0.90)$0.61 
Diluted earnings (loss) per share$0.30 $0.31 $(0.90)$0.61 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands)
Net income (loss)$48,657 $51,172 $(145,439)$102,688 
Other comprehensive (loss) income, net of tax:
Net change in fair value of securities available for sale(58,486)(246,775)233,545 (598,800)
Net change in fair value of cash flow hedges(32,271)(1,611)(10,593)(5,420)
Net change in other comprehensive income for defined benefit postretirement plans
(361)(123)(742)(247)
Total other comprehensive (loss) income(91,118)(248,509)222,210 (604,467)
Total comprehensive (loss) income$(42,461)$(197,337)$76,771 $(501,779)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended June 30, 2023 and 2022

Shares of Common Stock OutstandingCommon StockAdditional Paid in CapitalRetained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Unallocated Common Stock Held by ESOPTotal
(In thousands, except share data)
Balance at March 31, 2022183,438,711 $1,834 $1,777,670 $1,782,997 $(412,654)$(141,455)$3,008,392 
Dividends to common shareholders— — — (16,695)— — (16,695)
Repurchased common stock(4,216,469)(42)(81,184)— — — (81,226)
Issuance of restricted stock awards31,559 (1)— — — — 
Share-based compensation— — 2,908 — — — 2,908 
Net income— — — 51,172 — — 51,172 
Other comprehensive loss, net of tax— — — — (248,509)— (248,509)
ESOP shares committed to be released— — 1,102 — — 1,252 2,354 
Balance at June 30, 2022179,253,801 $1,793 $1,700,495 $1,817,474 $(661,163)$(140,203)$2,718,396 
Balance at March 31, 2023176,328,426 $1,764 $1,651,524 $1,672,169 $(609,864)$(136,470)$2,579,123 
Dividends to common shareholders— — — (16,356)— — (16,356)
Issuance of restricted stock awards47,820 (1)— — — — 
Issuance of common stock under share-based compensation arrangements429 (2)— — — (1)
Share-based compensation— — 4,668 — — — 4,668 
Net income— — — 48,657 — — 48,657 
Other comprehensive loss, net of tax— — — — (91,118)— (91,118)
ESOP shares committed to be released— — 561 — — 1,238 1,799 
Balance at June 30, 2023176,376,675 $1,766 $1,656,750 $1,704,470 $(700,982)$(135,232)$2,526,772 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Six Months Ended June 30, 2023 and 2022

Shares of Common Stock OutstandingCommon StockAdditional Paid in CapitalRetained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Unallocated Common Stock Held by ESOPTotal
(In thousands, except share data)
Balance at December 31, 2021186,305,332 $1,863 $1,835,241 $1,768,653 $(56,696)$(142,709)$3,406,352 
Cumulative effect of accounting adjustment (1)— — — (20,098)— — (20,098)
Dividends to common shareholders— — — (33,769)— — (33,769)
Repurchased common stock(7,083,090)(71)(141,750)— — — (141,821)
Issuance of restricted stock awards31,559 (1)— — — — 
Share-based compensation— — 4,531 — — — 4,531 
Net income— — — 102,688 — — 102,688 
Other comprehensive loss, net of tax— — — — (604,467)— (604,467)
ESOP shares committed to be released— — 2,474 — — 2,506 4,980 
Balance at June 30, 2022179,253,801 $1,793 $1,700,495 $1,817,474 $(661,163)$(140,203)$2,718,396 
Balance at December 31, 2022176,172,073 $1,762 $1,649,141 $1,881,775 $(923,192)$(137,696)$2,471,790 
Cumulative effect of accounting adjustment (2)— — — 822 — — 822 
Dividends to common shareholders— — — (32,688)— — (32,688)
Issuance of restricted stock awards47,820 (1)— — — — 
Issuance of common stock under share-based compensation arrangements (3)156,782 (1,167)— — — (1,164)
Share-based compensation— — 7,712 — — — 7,712 
Net loss— — — (145,439)— — (145,439)
Other comprehensive income, net of tax— — — — 222,210 — 222,210 
ESOP shares committed to be released— — 1,065 — — 2,464 3,529 
Balance at June 30, 2023176,376,675 $1,766 $1,656,750 $1,704,470 $(700,982)$(135,232)$2,526,772 
(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” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for additional discussion.
(2)Represents gross transition adjustment amount of $1.1 million, net of taxes of $0.3 million, to reflect the cumulative impact on retained earnings pursuant to the Company’s adoption of Accounting Standards Update 2022-02. Refer to Note 4, “Loans and Allowance for Credit Losses” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for additional discussion.
(3)Represents shares issued, net of employee tax withheld, during the six months ended June 30, 2023 upon the vesting of restricted stock units. Refer to Note 11, “Share-Based Compensation” within the Notes to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q for additional discussion.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
(In thousands)20232022
Operating activities
Net (loss) income$(145,439)$102,688 
Adjustments to reconcile net income to net cash provided by operating activities
Provision for allowance for loan losses7,526 565 
Depreciation and amortization7,520 7,327 
Amortization (accretion) of deferred loan fees and premiums, net2,487 (4,722)
Deferred income tax (benefit) expense(76,861)14,824 
Amortization of investment security premiums and discounts, net3,871 8,936 
Right-of-use asset amortization6,184 6,559 
Share-based compensation7,712 4,531 
Increase in cash surrender value of bank-owned life insurance(1,928)(1,799)
Loss on sale of securities available for sale, net333,170 2,276 
Accretion of gains from terminated interest rate swaps(46)(8,389)
Employee Stock Ownership Plan expense3,529 4,980 
Other373 337 
Change in:
Loans held for sale1,723 435 
Prepaid pension expense2,404 (8,140)
Other assets(45,216)49,483 
Other liabilities65,937 (14,075)
Net cash provided by operating activities172,946 165,816 
Investing activities
Proceeds from sales of securities available for sale1,899,724 238,197 
Proceeds from maturities and principal paydowns of securities available for sale230,154 624,350 
Purchases of securities available for sale— (670,728)
Proceeds from maturities and principal paydowns of securities held to maturity11,813 5,219 
Purchases of securities held to maturity— (493,678)
Proceeds from sale of Federal Home Loan Bank stock168,578 5,190 
Purchases of Federal Home Loan Bank stock(154,109)— 
Contributions to low income housing tax credit investments(19,178)(11,228)
Contributions to other equity investments(540)(450)
Distributions from other equity investments159 669 
Net increase in outstanding loans, excluding loan purchases(355,294)(117,706)
Purchases of loans(31,980)— 
Proceeds from life insurance policies— 20,446 
Acquisitions, net of cash and cash equivalents acquired— (5,200)
Purchased banking premises and equipment(2,237)(4,863)
Proceeds from sale of premises held for sale— 12,200 
Net cash provided by (used in) investing activities1,747,090 (397,582)
Financing activities
Net decrease in demand, savings, interest checking, and money market investment deposit accounts(1,520,253)(346,127)
Net increase (decrease) in time deposits726,866 (118,383)
Net (decrease) increase in borrowed funds(389,617)8,838 
Contingent consideration paid(645)(185)
Payments for repurchases of common stock— (141,821)
Dividends declared and paid to common shareholders(32,390)(33,434)
Net cash used in financing activities(1,216,039)(631,112)
Net increase (decrease) in cash, cash equivalents, and restricted cash703,997 (862,878)
Cash, cash equivalents, and restricted cash at beginning of period169,505 1,231,792 
Cash, cash equivalents, and restricted cash at end of period$873,502 $368,914 
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Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest paid on deposits and borrowings$105,130 $6,471 
Income taxes21,637 19,960 
Non-cash activities
Net increase in capital commitments relating to low income housing tax credit projects$89,500 $6,905 
Net decrease in operating lease right-of-use assets and operating lease liabilities relating to lease remeasurements/modifications(4,423)— 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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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 services, trust and investment services, and insurance services, through its full-service bank branches and insurance offices, located primarily in eastern Massachusetts, southern and coastal New Hampshire and Rhode Island. Eastern Insurance Group LLC is a wholly-owned subsidiary of the Bank.
The activities of the Company are subject to the regulatory supervision of the Board of Governors of the Federal Reserve System (“Federal Reserve”). The activities of the Bank are subject to the regulatory supervision of the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation (“FDIC”) and the Consumer Financial Protection Bureau. The Company and the activities of the Bank and its subsidiaries are also subject to various Massachusetts, New Hampshire and Rhode Island business, banking and insurance regulations.

Basis of Presentation
The Company’s Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”) as set forth by the Financial Accounting Standards Board (“FASB”) and its Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) as well as the rules and interpretive releases of the U.S. Securities and Exchange Commission (“SEC”) under the authority of federal securities laws.
The Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries and entities in which it holds a controlling financial interest through being the primary beneficiary or through holding a majority of the voting interest. All intercompany accounts and transactions have been eliminated in consolidation.
Certain previously reported amounts have been reclassified to conform to the current period’s presentation which included certain loan servicing-related costs which have been reclassified from professional services to loan expense.
The accompanying Consolidated Balance Sheet as of June 30, 2023, the Consolidated Statements of Income and Comprehensive Income and of Changes in Shareholders’ Equity for the three and six months ended June 30, 2023 and 2022 and Statements of Cash Flows for the six months ended June 30, 2023 and 2022 are unaudited. The Consolidated Balance Sheet as of December 31, 2022 was derived from the Audited Consolidated Financial Statements as of that date. The interim Consolidated Financial Statements and the accompanying notes should be read in conjunction with the annual Consolidated Financial Statements and the accompanying notes contained within the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“2022 Form 10-K”), as filed with the SEC. In the opinion of management, the Company’s Consolidated Financial Statements reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented. The results for the three and six months ended June 30, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023, any other interim periods, or any future year or period.
2. Summary of Significant Accounting Policies
The following describes the Company’s use of estimates as well as relevant accounting pronouncements that were recently issued but not yet adopted as of June 30, 2023 and those that were adopted during the six months ended June 30, 2023. For a full discussion of significant accounting policies, refer to the Notes to the Consolidated Financial Statements included within the Company’s 2022 Form 10-K.
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.
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Recent Accounting Pronouncements
Relevant standards that were recently issued but not yet adopted as of June 30, 2023:
In March 2023, the FASB issued ASU 2023-02, Investments–Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (“ASU 2023-02”). This update permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if the following conditions are met:
1.It is probable that the income tax credits allocable to the tax equity investor will be available.
2.The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project.
3.Substantially all of the projected benefits are from income tax credits and other income tax benefits. Projected benefits include income tax credits, other income tax benefits, and other non-income-tax-related benefits. The projected benefits are determined on a discounted basis, using a discount rate that is consistent with the cash flow assumptions used by the tax equity investor in making its decision to invest in the project.
4.The tax equity investor’s projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive.
5.The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor’s liability is limited to its capital investment.
Under existing accounting standards, the proportional amortization method is allowable only for equity investments in low-income-housing tax credit structures. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). Updates made by ASU 2023-02 allow a reporting entity to make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis. The Company had previously made an accounting policy election to account for its investments in low-income-housing tax credit investments using the proportional amortization method. This election was made upon the Company’s adoption of ASU 2014-01, Investments–Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, which introduced the option to apply proportional amortization to low-income-housing tax credit investments. For public business entities, the amendments in ASU 2023-02 are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted for all entities in an interim period. The Company expects the adoption of this standard will not have a material impact on its Consolidated Financial Statements.
Relevant standards that were adopted during the six months ended June 30, 2023:
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). This update modifies how an acquiring entity measures contract assets and contract liabilities of an acquiree in a business combination in accordance with Topic 606. The amendments in this update require the acquiring entity in a business combination to account for revenue contracts as if they had originated the contract and assess how the acquiree accounted for the contract under Topic 606. ASU 2021-08 improves comparability of recognition and measurement of revenue contracts with customers both before and after a business combination. For public business entities, the amendments in this update were effective for fiscal years beginning after December 15, 2022. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date of the amendments with early adoption permitted. The adoption of this standard on January 1, 2023 did not have a material impact on the Company’s Consolidated Financial Statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments–Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). The amendments in this update eliminate the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in ASC 310-40 and amends the guidance on vintage disclosures, referenced in ASC 326-20-50, to require disclosure of current-period gross write-offs by year of origination. This update supersedes the existing accounting guidance for TDRs in ASC 310-40 in its entirety and requires entities to evaluate all receivable modifications under existing accounting guidance in ASC 310-20 to determine whether a modification made to a borrower results in a new loan or a continuation of an existing loan. In addition to the elimination of TDR accounting guidance, entities that adopt this update will no longer consider renewals, modifications and extensions that result from reasonably expected TDRs in their calculation of the allowance for credit losses. Further, if an entity employs a discounted cash flow method to calculate the allowance for credit losses, it will be required to use a post-modification-derived effective interest rate as part of its calculation. This 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
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amendments in this update were effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities may elect to apply the updated guidance on TDR recognition and measurement by using a modified retrospective transition method. The amendments on TDR disclosures and vintage disclosures should be adopted prospectively. On January 1, 2023, the Company adopted this standard by using the modified retrospective transition method, except with regard to amendments on TDR and vintage disclosures which were adopted prospectively. Accordingly, the Company recorded a cumulative-effect adjustment to retained earnings as of January 1, 2023. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements.
Significant Accounting Policies
The adoption of ASU 2022-02 resulted in changes in the Company’s accounting policies and estimates as it relates to loans receivable and the allowance for loan losses. The following describes the changes to the Company’s significant accounting policies from December 31, 2022, that resulted from the adoption of ASU 2022-02:
Allowance for Loan Losses - Loans Held for Investment
Modifications of Loans to Borrowers Experiencing Financial Difficulty
The amendments in ASU 2022-02 eliminated the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Thus, as a result of adoption of this standard on January 1, 2023, rather than applying the recognition and measurement guidance for TDRs, the Company now applies the loan refinancing and restructuring guidance codified in paragraphs 310-20-35-9 through 35-11 of the Accounting Standards Codification to determine whether a modification results in a new loan or a continuation of an existing loan.
Modifications to borrowers experiencing financial difficulty include principal forgiveness, interest rate reductions, term extensions, other-than-insignificant payment delays and combinations thereof. Expected losses or recoveries related to loans where modifications have been granted to borrowers experiencing financial difficulty have been included in the Company’s determination of the allowance for loan losses. Upon adoption of ASU 2022-02, the Company is no longer required to use a discounted cash flow method to measure the allowance for loan losses resulting from a modification to a borrower experiencing financial difficulty. Accordingly, the Company now applies the same credit methodology it uses for similar loans that were not modified. As previously indicated, the Company adopted ASU 2022-02 using the modified retrospective transition method. Accordingly, upon adoption, commercial loan TDRs existing at that time which were measured using a discounted cash flow methodology and all residential real estate and consumer home equity loan TDRs were transitioned to the applicable segment of loans collectively evaluated for impairment based upon their risk characteristics. Commercial loan TDRs determined to be collateral dependent continue to be assessed for impairment on an individual basis.
Prior to the Company’s adoption of ASU 2022-02, in cases where a borrower was experiencing financial difficulties and the Company made certain concessionary modifications to contractual terms, the loan was classified as a TDR. Modifications included adjustments to interest rates, extensions of maturity, consumer loans where the borrower’s obligations had been effectively discharged through Chapter 7 bankruptcy and the borrower had not reaffirmed the debt to the Company, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. Management identified loans as TDR loans when it had a reasonable expectation that it would execute a TDR modification with a borrower. In addition, management estimated expected credit losses on a collective basis if a group of TDR loans shared similar risk characteristics. If a TDR loan’s risk characteristics were not similar to those of any of the Company’s other TDR loans, expected credit losses on the TDR loan were measured individually. The impairment analysis discounted the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification or the fair value of collateral if the loan was collateral dependent. The amount of credit loss, if any, was recorded as a specific loss allocation to each individual loan or as a loss allocation to the pool of loans, for those loans for which credit loss was measured on a collective basis, in the allowance for credit losses. Any commercial (commercial and industrial, commercial real estate, commercial construction, and business banking loans) or residential loan that had been classified as a TDR and which subsequently defaulted was reviewed to determine if the loan should be deemed collateral-dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan was determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell.
Refer to Note 4, “Loans and Allowance for Credit Losses” for additional information regarding the Company’s measurement of the allowance for loan losses as of June 30, 2023 and information regarding the Company’s TDR loans as of December 31, 2022 and for the three and six months ended June 30, 2022.
3. Securities
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Available for Sale Securities
The amortized cost, gross unrealized gains and losses, allowance for credit losses (“ACL”) and fair value of AFS securities as of the dates indicated were as follows:
As of June 30, 2023
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Allowance for Credit LossesFair
Value
(In thousands)
Debt securities:
Government-sponsored residential mortgage-backed securities$3,470,727 $— $(579,663)$— $2,891,064 
Government-sponsored commercial mortgage-backed securities1,354,187 — (214,027)— 1,140,160 
U.S. Agency bonds235,844 — (25,774)— 210,070 
U.S. Treasury securities99,437 — (6,355)— 93,082 
State and municipal bonds and obligations197,994 15 (12,192)— 185,817 
Other debt securities100 — — — 100 
$5,358,289 $15 $(838,011)$— $4,520,293 
As of December 31, 2022
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Allowance for Credit LossesFair
Value
(In thousands)
Debt securities:
Government-sponsored residential mortgage-backed securities$4,855,763 $— $(743,855)$— $4,111,908 
Government-sponsored commercial mortgage-backed securities1,570,119 — (221,165)— 1,348,954 
U.S. Agency bonds1,100,891 — (148,409)— 952,482 
U.S. Treasury securities99,324 — (6,267)— 93,057 
State and municipal bonds and obligations198,039 (14,956)— 183,092 
Other debt securities1,299 — (14)— 1,285 
$7,825,435 $$(1,134,666)$— $6,690,778 
The Company did not record a provision for credit losses on any AFS securities for either the three and six months ended June 30, 2023 or 2022. Accrued interest receivable on AFS securities totaled $9.8 million and $12.9 million as of June 30, 2023 and December 31, 2022, respectively, and is included within other assets on the Consolidated Balance Sheets. The Company did not record any write-offs of accrued interest income on AFS securities during either the three and six months ended June 30, 2023 or 2022. No securities held by the Company were delinquent on contractual payments as of June 30, 2023 or December 31, 2022, nor were any securities placed on non-accrual status during the six and twelve month periods then ended.
The following table summarizes gross realized gains and losses from sales of AFS securities for the periods indicated:
Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
(In thousands)
Gross realized gains from sales of AFS securities$— $— $— $1,045 
Gross realized losses from sales of AFS securities— (104)(333,170)(3,321)
Net (losses) gains from sales of AFS securities$— $(104)$(333,170)$(2,276)
Information pertaining to AFS securities with gross unrealized losses as of June 30, 2023 and December 31, 2022, for which the Company did not recognize a provision for credit losses under the current expected credit loss methodology
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(“CECL”), aggregated by investment category and length of time that individual securities had been in a continuous loss position, is as follows:
As of June 30, 2023
Less than 12 Months12 Months or LongerTotal
# 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 securities324$5,254 $79,823 $574,409 $2,811,241 $579,663 $2,891,064 
Government-sponsored commercial mortgage-backed securities188— — 214,027 1,140,160 214,027 1,140,160 
U.S. Agency bonds23— — 25,774 210,070 25,774 210,070 
U.S. Treasury securities6519 19,364 5,836 73,718 6,355 93,082 
State and municipal bonds and obligations2342,521 74,764 9,671 103,742 12,192 178,506 
775$8,294 $173,951 $829,717 $4,338,931 $838,011 $4,512,882 
As of December 31, 2022
Less than 12 Months12 Months or LongerTotal
# 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 securities322$42,196 $435,690 $701,659 $3,676,218 $743,855 $4,111,908 
Government-sponsored commercial mortgage-backed securities19938,944 300,476 182,221 1,048,478 221,165 1,348,954 
U.S. Agency bonds37645 4,145 147,764 948,337 148,409 952,482 
U.S. Treasury securities51,311 48,451 4,956 44,606 6,267 93,057 
State and municipal bonds and obligations23714,942 179,614 14 225 14,956 179,839 
Other debt securities2— — 14 1,285 14 1,285 
802$98,038 $968,376 $1,036,628 $5,719,149 $1,134,666 $6,687,525 
The Company does not intend to sell these investments and has determined based upon available evidence that it is more likely than not that the Company will not be required to sell each security before the expected recovery of its amortized cost basis. As a result, the Company did not recognize an ACL on these investments as of either June 30, 2023 or December 31, 2022.
The causes of the impairments listed in the tables above by category are as follows as of June 30, 2023 and December 31, 2022:
Government-sponsored mortgage-backed securities, U.S. Agency bonds and U.S. Treasury securities – The securities with unrealized losses in these portfolios have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
State and municipal bonds and obligations – The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality.
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Other debt securities – As of December 31, 2022, there were two securities included in this portfolio in an unrealized loss position which consisted of of two foreign debt securities. Both securities were performing in accordance with the terms of their respective contractual agreements. The decline in market value of these securities was attributable to changes in interest rates and not credit quality.
Held to Maturity Securities
The amortized cost, gross unrealized gains and losses, allowance for credit losses and fair value of HTM securities as of the dates indicated were as follows:
As of June 30, 2023
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Allowance for Credit LossesFair
Value
(In thousands)
Debt securities:
Government-sponsored residential mortgage-backed securities$266,140 $— $(28,001)$— $238,139 
Government-sponsored commercial mortgage-backed securities198,921 — (24,196)— 174,725 
$465,061 $— $(52,197)$— $412,864 
As of December 31, 2022
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Allowance for Credit LossesFair
Value
(In thousands)
Debt securities:
Government-sponsored residential mortgage-backed securities$276,493 $— $(30,150)$— $246,343 
Government-sponsored commercial mortgage-backed securities200,154 — (23,271)— 176,883 
$476,647 $— $(53,421)$— $423,226 
The Company did not record a provision for estimated credit losses on any HTM securities for either the three and six months ended June 30, 2023 or 2022. The accrued interest receivable on HTM securities totaled $1.0 million as of both June 30, 2023 and December 31, 2022 and is included within other assets on the Consolidated Balance Sheets. The Company did not record any write-offs of accrued interest receivable on HTM securities during either the three and six months ended June 30, 2023 or 2022. No securities held by the Company were delinquent on contractual payments as of either June 30, 2023 or December 31, 2022, nor were any securities placed on non-accrual status during the six and twelve month periods then ended.
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Available for Sale and Held to Maturity Securities Contractual Maturity
The amortized cost and estimated fair value of AFS and HTM securities by contractual maturities as of June 30, 2023 and December 31, 2022 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
The scheduled contractual maturities of AFS and HTM securities as of the dates indicated were as follows:
As of June 30, 2023
Due in one year or lessDue after one year to five yearsDue after five to ten yearsDue after ten yearsTotal
Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
(In thousands)
AFS securities
Government-sponsored residential mortgage-backed securities$— $— $20,580 $19,521 $38,751 $35,949 $3,411,396 $2,835,594 $3,470,727 $2,891,064 
Government-sponsored commercial mortgage-backed securities— — 135,485 121,687 507,668 435,327 711,034 583,146 1,354,187 1,140,160 
U.S. Agency bonds— — 201,915 180,538 33,929 29,532 — — 235,844 210,070 
U.S. Treasury securities— — 99,437 93,082 — — — — 99,437 93,082 
State and municipal bonds and obligations211 209 28,027 26,725 43,778 42,353 125,978 116,530 197,994 185,817 
Other debt securities100 100 — — — — — — 100 100 
Total available for sale securities311 309 485,444 441,553 624,126 543,161 4,248,408 3,535,270 5,358,289 4,520,293 
HTM securities
Government-sponsored residential mortgage-backed securities— — — — — — 266,140 238,139 266,140 238,139 
Government-sponsored commercial mortgage-backed securities— — — — 198,921 174,725 — — 198,921 174,725 
Total held to maturity securities— — — — 198,921 174,725 266,140 238,139 465,061 412,864 
Total$311 $309 $485,444 $441,553 $823,047 $717,886 $4,514,548 $3,773,409 $5,823,350 $4,933,157 
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As of December 31, 2022
Due in one year or lessDue after one year to five yearsDue after five to ten yearsDue after ten yearsTotal
Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
(In thousands)
AFS securities
Government-sponsored residential mortgage-backed securities$— $— $21,221 $20,284 $727,908 $648,132 $4,106,634 $3,443,492 $4,855,763 $4,111,908 
Government-sponsored commercial mortgage-backed securities— — 191,762 171,992 649,659 556,641 728,698 620,321 1,570,119 1,348,954 
U.S. Agency bonds— — 877,371 767,464 223,520 185,018 — — 1,100,891 952,482 
U.S. Treasury securities— — 99,324 93,057 — — — — 99,324 93,057 
State and municipal bonds and obligations213 209 22,100 21,283 42,554 40,970 133,172 120,630 198,039 183,092 
Other debt securities1,299 1,285 — — — — — — 1,299 1,285 
Total available for sale securities1,512 1,494 1,211,778 1,074,080 1,643,641 1,430,761 4,968,504 4,184,443 7,825,435 6,690,778 
HTM securities
Government-sponsored residential mortgage-backed securities— — — — — — 276,493 246,343 276,493 246,343 
Government-sponsored commercial mortgage-backed securities— — — — 200,154 176,883 0— — 200,154 176,883 
Total held to maturity securities— — — — 200,154 176,883 276,493 246,343 476,647 423,226 
Total$1,512 $1,494 $1,211,778 $1,074,080 $1,843,795 $1,607,644 $5,244,997 $4,430,786 $8,302,082 $7,114,004 

Securities Pledged as Collateral
As of June 30, 2023 and December 31, 2022, securities with a carrying value of $446.4 million and $437.9 million, respectively, were pledged to secure public deposits and for other purposes required by law. As of June 30, 2023 and December 31, 2022, deposits with associated pledged collateral included cash accounts from the Company’s wealth management division (“Eastern Wealth Management”) and municipal deposit accounts.
In March 2023 the Federal Reserve created the Bank Term Funding Program (the “Program”) in order to support American businesses and households. The Program helps make available additional funding to eligible depository institutions in order to help assure banks have the ability to meet the needs of their depositors. The Program offers loans up to one year in length to banks in return for any collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. As of June 30, 2023, securities with a carrying value of $2.5 billion were pledged as collateral through the Program. In addition, the Company pledged securities with a carrying value of $374.9 million to the Federal Reserve Discount Window (the “Discount Window”) as of June 30, 2023. No securities were pledged to the Program or the Discount Window as of December 31, 2022.
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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:
June 30, 2023December 31, 2022
(In thousands)
Commercial and industrial$3,341,976 $3,150,946 
Commercial real estate5,242,290 5,155,323 
Commercial construction371,367 336,276 
Business banking1,089,548 1,090,492 
Residential real estate2,510,705 2,460,849 
Consumer home equity1,198,290 1,187,547 
Other consumer (2)207,702 194,098 
Gross loans before unamortized premiums, unearned discounts and deferred fees13,961,878 13,575,531 
Allowance for loan losses (1)(147,955)(142,211)
Unamortized premiums, net of unearned discounts and deferred fees(15,202)(13,003)
Loans after the allowance for loan losses, unamortized premiums, unearned discounts and deferred fees$13,798,721 $13,420,317 
(1)The balance of accrued interest receivable excluded from amortized cost and the calculation of the allowance for loan losses amounted to $49.1 million and $45.2 million as of June 30, 2023 and December 31, 2022, respectively, and is included within other assets on the Consolidated Balance Sheets.
(2)Automobile loans are included in the other consumer portfolio and amounted to $10.1 million and $18.1 million at June 30, 2023 and December 31, 2022, respectively.
There are no other loan categories that exceed 10% of total loans not already reflected in the preceding table.
The Company’s lending activities are conducted principally in the New England area with the exception of its Shared National Credit Program (“SNC Program”) portfolio. The Company participates in the SNC Program in an effort to improve its industry and geographical diversification. The SNC Program portfolio is included in the Company’s commercial and industrial portfolio. The SNC Program portfolio is defined as loan syndications with exposure over $100 million and with three or more lenders participating.
Most loans originated by the Company are either collateralized by real estate or other assets or guaranteed by federal and local governmental authorities. The ability and willingness of the single-family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers’ geographic areas and real estate values. The ability and willingness of commercial real estate, commercial and industrial, and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate economy in the borrowers’ geographic areas and the general economy.
Loans Pledged as Collateral
The carrying value of loans pledged to secure advances from the Federal Home Loan Bank (“FHLB”) of Boston (“FHLBB”) were $4.2 billion and $3.9 billion at June 30, 2023 and December 31, 2022, respectively. The balance of funds borrowed from the FHLBB were $314.0 million and $704.1 million at June 30, 2023 and December 31, 2022, respectively.
The carrying value of loans pledged to secure advances from the Federal Reserve Bank (“FRB”) were $1.1 billion at both June 30, 2023 and December 31, 2022, respectively. There were no funds borrowed from the FRB outstanding at June 30, 2023 or December 31, 2022.
Serviced Loans
At June 30, 2023 and December 31, 2022, mortgage loans partially or wholly-owned by others and serviced by the Company amounted to approximately $80.4 million and $84.0 million, respectively.
Purchased Loans
The Company began purchasing residential real estate mortgage loans during the third quarter of 2022. Loans purchased were subject to the same underwriting criteria as those loans originated directly by the Company. During the six months ended June 30, 2023, the Company purchased $32.0 million of residential real estate mortgage loans. The Company
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ceased purchases of residential real estate mortgage loans in the first quarter of 2023. Accordingly, no residential real estate mortgage loans were purchased during the three months ended June 30, 2023. No residential real estate mortgage loans were purchased during the six months ended June 30, 2022. As of June 30, 2023 and December 31, 2022, the amortized cost balance of loans purchased was $396.4 million and $376.1 million, respectively.
Allowance for Loan Losses
The allowance for loan losses is established to provide for management’s estimate of expected lifetime credit losses on loans measured at amortized cost at the balance sheet date through a provision for loan losses charged to net income. Charge-offs, net of recoveries, are charged directly to the allowance for loan losses. Commercial and residential loans are charged-off in the period in which they are deemed uncollectible. Delinquent loans in these product types are subject to ongoing review and analysis to determine if a charge-off in the current period is appropriate. For consumer loans, policies and procedures exist that require charge-off consideration upon a certain triggering event depending on the product type.
The following tables summarize the changes in the allowance for loan losses by loan category for the periods indicated:
For the Three Months Ended June 30, 2023
Commercial
and
Industrial
Commercial
Real Estate
Commercial
Construction
Business
Banking
Residential
Real Estate
Consumer
Home
Equity
Other
Consumer
Total
(In thousands)
Allowance for loan losses:
Beginning balance$26,929 $55,193 $7,578 $15,085 $27,130 $6,182 $2,841 $140,938 
Charge-offs— — — (254)— — (591)(845)
Recoveries26 — 204 18 — 111 361 
Provision (release)2,580 4,329 85 193 (136)(138)588 7,501 
Ending balance$29,535 $59,524 $7,663 $15,228 $27,012 $6,044 $2,949 $147,955 
For the Three Months Ended June 30, 2022
Commercial
and
Industrial
Commercial
Real Estate
Commercial
Construction
Business
Banking
Residential
Real Estate
Consumer
Home Equity
Other
Consumer
Total
(In thousands)
Allowance for loan losses:
Beginning balance$26,841 $44,612 $4,414 $17,269 $22,243 $6,018 $2,769 $124,166 
Charge-offs(1)— — (608)— — (490)(1,099)
Recoveries698 36 — 464 14 196 1,414 
Provision (release)(1,686)2,907 1,060 (426)(594)(362)151 1,050 
Ending balance$25,852 $47,555 $5,474 $16,699 $21,663 $5,662 $2,626 $125,531 
For the Six Months Ended June 30, 2023
Commercial
and
Industrial
Commercial
Real Estate
Commercial
Construction
Business
Banking
Residential
Real Estate
Consumer
Home Equity
Other
Consumer
Total
(In thousands)
Allowance for loan losses:
Beginning balance$26,859 $54,730 $7,085 $16,189 $28,129 $6,454 $2,765 $142,211 
Cumulative effect of change in accounting principle (1)47 — — (140)(849)(201)— (1,143)
Charge-offs— — — (597)— (7)(1,152)(1,756)
Recoveries165 — 685 33 227 1,117 
Provision (release)2,464 4,788 578 (909)(301)(203)1,109 7,526 
Ending balance$29,535 $59,524 $7,663 $15,228 $27,012 $6,044 $2,949 $147,955 
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For the Six Months Ended June 30, 2022
Commercial
and
Industrial
Commercial
Real Estate
Commercial
Construction
Business
Banking
Residential
Real Estate
Consumer
Home Equity
Other
Consumer
OtherTotal
(In thousands)
Allowance for loan losses:
Beginning balance$18,018 $52,373 $2,585 $10,983 $6,556 $3,722 $3,308 $242 $97,787 
Cumulative effect of change in accounting principle (2)11,533 (6,655)1,485 6,160 13,489 1,857 (541)(242)$27,086 
Charge-offs(2)— — (1,553)— — (1,151)— (2,706)
Recoveries948 50 — 1,392 24 10 375 — 2,799 
Provision (release)(4,645)1,787 1,404 (283)1,594 73 635 — 565 
Ending balance$25,852 $47,555 $5,474 $16,699 $21,663 $5,662 $2,626 $— $125,531 
(1)Represents the adjustment needed to reflect the cumulative day one impact pursuant to the Company’s adoption of ASU 2022-02 (i.e., cumulative effect adjustment related to the adoption of ASU 2022-02 as of January 1, 2023). The adjustment represents a $1.1 million decrease to the allowance attributable to the change in accounting methodology for estimating the allowance for loan losses resulting from the Company’s adoption of the standard.
(2)Represents the adjustment needed to reflect the cumulative day one impact pursuant to the Company’s adoption of ASU 2016-13 (i.e., cumulative effect adjustment related to the adoption of ASU 2016-13 as of January 1, 2022). The adjustment represents a $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.
Reserve for Unfunded Commitments
Management evaluates the need for a reserve on unfunded lending commitments in a manner consistent with loans held for investment. The Company’s adoption of ASU 2022-02 on January 1, 2023 did not impact the reserve for unfunded lending commitments. Upon adoption of ASU 2016-13 on January 1, 2022, the Company recorded a transition adjustment related to the reserve for unfunded lending commitments of $1.0 million, resulting in a total reserve for unfunded lending commitments of $11.1 million as of January 1, 2022. As of June 30, 2023 and December 31, 2022, the Company’s reserve for unfunded lending commitments was $16.0 million and $13.2 million, respectively, which is recorded within other liabilities in the Company's Consolidated Balance Sheets.
Portfolio Segmentation
Management uses a methodology to systematically estimate the amount of expected losses in each segment of loans in the Company’s portfolio. Commercial and industrial business banking, investment commercial real estate, and commercial and industrial loans are evaluated based upon loan-level risk characteristics, historical losses and other factors which form the basis for estimating expected losses. Other portfolios, including owner occupied commercial real estate (which includes business banking owner occupied commercial real estate), commercial construction, residential mortgages, home equity and consumer loans, are analyzed as groups taking into account delinquency ratios, and the Company’s and peer banks’ historical loss experience. For the purposes of estimating the allowance for loan losses, management segregates the loan portfolio into loan categories that share similar risk characteristics such as the purpose of the loan, repayment source, and collateral. These characteristics are considered when determining the appropriate level of the allowance for each category. Some examples of these risk characteristics unique to each loan category include:
Commercial Lending
Commercial and industrial: The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Collateral frequently consists of a first lien position on business assets including, but not limited to, accounts receivable, inventory, aircraft and equipment. The primary repayment source is operating cash flow and, secondarily, the liquidation of assets. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals that hold material ownership in the borrowing entity when the loan-to-value of a commercial and industrial loan is in excess of a specified threshold.
Commercial real estate: Collateral values are established by independent third-party appraisals and evaluations. Primary repayment sources include operating income generated by the real estate, permanent debt refinancing, sale of the real
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estate and, secondarily, liquidation of the collateral. Under its lending guidelines, the Company generally requires a corporate or personal guarantee from individuals that hold material ownership in the borrowing entity when the loan-to-value of a commercial real estate loan is in excess of a specified threshold.
Commercial construction: These loans are generally considered to present a higher degree of risk than other real estate loans and may be affected by a variety of factors, such as adverse changes in interest rates and the borrower’s ability to control costs and adhere to time schedules. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. Construction loan repayment is substantially dependent on the ability of the borrower to complete the project and obtain permanent financing.
Business banking: These loans are typically secured by all business assets or commercial real estate. Business banking originations include traditionally underwritten loans as well as partially automated scored loans. Business banking scored loans are determined by utilizing the Company’s proprietary decision matrix that has a number of quantitative factors including, but not limited to, a guarantor’s credit score, industry risk, and time in business. The Company also engages in Small Business Association (“SBA”) lending. The SBA guarantees reduce the Company’s loss due to default and are considered a credit enhancement to the loan structure.
Residential Lending
These loans are made to borrowers who demonstrate the ability to repay principal and interest on a monthly basis. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit repayment history, financial resources (including cash reserves) and the value of the collateral. The Company maintains policy standards for minimum credit score and cash reserves and maximum loan-to-value consistent with a “prime” portfolio. Collateral consists of mortgage liens on 1-4 family residential dwellings. The policy standards applied to loans originated by the Company are the same as those applied to purchased loans. The Company does not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or retained in the Company’s loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and the Company’s capital needs.
Consumer Lending
Consumer home equity: Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Full principal repayment is required at the end of the ten-year draw period. Home equity loans are term loans that require the monthly payment of principal and interest such that the loan will be fully amortized at maturity. Underwriting considerations are materially consistent with those utilized in residential real estate. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
Other consumer: The Company’s policy and underwriting in this category, which is comprised primarily of home improvement, automobile and aircraft loans, include the following factors, among others: income sources and reliability, credit histories, term of repayment, and collateral value, as applicable. These are typically granted on an unsecured basis, with the exception of aircraft and automobile loans.
Credit Quality
Commercial Lending Credit Quality
The credit quality of the Company’s commercial loan portfolio is actively monitored and supported by a comprehensive credit approval process and all large dollar transactions are sent for approval to a committee of seasoned business line and credit professionals. The Company maintains an independent credit risk review function that reports directly to the Risk Management Committee of the Board of Directors. Credits that demonstrate significant deterioration in credit quality are transferred to a specialized group of experienced officers for individual attention.
The Company monitors credit quality indicators and utilizes portfolio scorecards to assess the risk of its commercial portfolio. Specifically, the Company utilizes a 15-point credit risk-rating system to manage risk and identify potential problem loans. Under this point system, risk-rating assignments are based upon a number of quantitative and qualitative factors that are under continual review. Factors include cash flow, collateral coverage, liquidity, leverage, position within the industry, internal controls and management, financial reporting, and other considerations. Commercial loan risk ratings are (re)evaluated for each loan at least once-per-year. The risk-rating categories under the credit risk-rating system are defined as follows:
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0 Risk Rating - Unrated
Certain segments of the portfolios are not rated. These segments include aircraft loans, business banking scored loan products, and other commercial loans managed by exception. Loans within this unrated loan segment are monitored by delinquency status; and for lines of credit greater than $100,000 in exposure, an annual review is conducted which includes the review of the business score and loan and deposit account performance. The Company supplements performance data with current business credit scores for the business banking portfolio on a quarterly basis. Unrated commercial and business banking loans are generally restricted to commercial exposure of less than $1.5 million. Loans included in this category generally are not required to provide regular financial reporting or regular covenant monitoring.
For purposes of estimating the allowance for loan losses, unrated loans are considered in the same manner as “Pass” rated loans. Unrated loans are included with “Pass” rated loans for disclosure purposes.
1-10 Risk Rating – Pass
Loans with a risk rating of 1-10 are classified as “Pass” and are comprised of loans that range from “substantially risk free” which indicates borrowers of unquestioned credit standing, well-established national companies with a very strong financial condition, and loans fully secured by policy conforming cash levels, through “low pass” which indicates acceptable rated loans that may be experiencing weak cash flow, impending lease rollover or minor liquidity concerns.
11 Risk Rating – Special Mention (Potential Weakness)
Loans to borrowers in this category exhibit potential weaknesses or downward trends deserving management’s close attention. While potentially weak, no loss of principal or interest is envisioned. Included in this category are borrowers who are performing as agreed, are weak when compared to industry standards, may be experiencing an interim loss and may be in declining industries. An element of asset quality, financial flexibility or management is below average. The Company does not consider borrowers within this category as new business prospects. Borrowers rated special mention may find it difficult to obtain alternative financing from traditional bank sources.
12 Risk Rating – Substandard (Well-Defined Weakness)
Loans with a risk-rating of 12 exhibit well-defined weaknesses that, if not corrected, may jeopardize the orderly liquidation of the debt. A loan is classified as substandard if it is inadequately protected by the repayment capacity of the obligor or by the collateral pledged. Specifically, repayment under market rates and terms, or by the requirements under the existing loan documents, is in jeopardy, but no loss of principal or interest is envisioned. There is a possibility that a partial loss of principal and/or interest will occur in the future if the deficiencies are not corrected. Loss potential, while existing in the aggregate portfolio of substandard assets, does not have to exist in individual assets classified as substandard. Non-accrual is possible, but not mandatory, in this class.
13 Risk Rating – Doubtful (Loss Probable)
Loans classified as doubtful have comparable weaknesses as found in the loans classified as substandard, with the added provision that such weaknesses make collection of the debt in full (based on currently existing facts, conditions and values) highly questionable and improbable. Serious problems exist such that a partial loss of principal is likely. The probability of loss exists, but because of reasonably specific pending factors that may work to strengthen the credit, estimated losses are deferred until a more exact status can be determined. Specific reserves will be the amount identified after specific review. Non-accrual is mandatory in this class.
14 Risk Rating – Loss
Loans to borrowers in this category are deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the Company is not warranted. This classification does not mean that the loans have no recovery or salvage value, but rather, it is not practical or desirable to defer writing off these assets even though partial recovery may occur in the future. Loans in this category have a recorded investment of $0 at the time of the downgrade.
Residential and Consumer Lending Credit Quality
For the Company’s residential and consumer portfolios, the quality of the loan is best indicated by the repayment performance of an individual borrower. Updated appraisals, broker opinions of value and other collateral valuation methods are employed in the residential and consumer portfolios, typically for credits that are deteriorating. Delinquency status is determined using payment performance, while accrual status may be determined using a combination of payment performance,
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expected borrower viability and collateral value. Delinquent consumer loans are handled by a team of seasoned collection specialists.
The following table details the amortized cost balances of the Company’s loan portfolios, presented by credit quality indicator and origination year as of June 30, 2023, and gross charge-offs for the six month period then ended:
20232022202120202019PriorRevolving LoansRevolving Loans Converted to Term Loans (1)Total
(In thousands)
Commercial and industrial
Pass$443,306 $630,894 $447,036 $358,942 $162,734 $672,756 $549,008 $3,534 $3,268,210 
Special Mention— 10,090 — 14,131 — 655 852 — 25,728 
Substandard— 8,333 15,706 439 37 2,766 4,734 — 32,015 
Doubtful— — — — — — — 
Loss— — — — — — — — — 
Total commercial and industrial443,306 649,317 462,742 373,512 162,771 676,185 554,594 3,534 3,325,961 
Current period gross charge-offs— — — — — — — — — 
Commercial real estate
Pass255,484 1,449,542 814,467 585,707 538,764 1,390,561 57,492 2,603 5,094,620 
Special Mention— — — 752 — 15,560 — — 16,312 
Substandard— — 19,326 4,866 32,251 62,888 8,209 — 127,540 
Doubtful— — — — — — — — — 
Loss— — — — — — — — — 
Total commercial real estate255,484 1,449,542 833,793 591,325 571,015 1,469,009 65,701 2,603 5,238,472 
Current period gross charge-offs— — — — — — — — — 
Commercial construction
Pass42,767 139,127 160,158 — 14,615 — 8,998 — 365,665 
Special Mention3,454 — — 11 — — — — 3,465 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Loss— — — — — — — — — 
Total commercial construction46,221 139,127 160,158 11 14,615 — 8,998 — 369,130 
Current period gross charge-offs— — — — — — — — — 
Business banking
Pass69,045 168,161 192,236 159,445 124,249 267,125 76,124 2,993 1,059,378 
Special Mention— 526 977 2,771 4,090 9,845 68 27 18,304 
Substandard1,404 — 3,625 2,183 1,097 5,115 1,311 24 14,759 
Doubtful— — — 21 1,103 519 — — 1,643 
Loss— — — — — — — — — 
Total business banking70,449 168,687 196,838 164,420 130,539 282,604 77,503 3,044 1,094,084 
Current period gross charge-offs— 54 51 33 68 259 — 132 597 
Residential real estate
Current and accruing122,270 746,261 675,190 369,323 95,281 476,481 — — 2,484,806 
30-89 days past due and accruing961 9,534 10,087 1,884 1,996 11,155 — — 35,617 
Loans 90 days or more past due and still accruing— — — — — — — — — 
Non-accrual— 470 284 — 289 7,753 — — 8,796 
Total residential real estate123,231 756,265 685,561 371,207 97,566 495,389 — — 2,529,219 
Current period gross charge-offs— — — — — — — — — 
Consumer home equity
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Current and accruing21,721 89,846 9,894 5,426 4,606 89,534 959,311 5,238 1,185,576 
30-89 days past due and accruing— 264 — — — 926 7,428 69 8,687 
Loans 90 days or more past due and still accruing— — — — — — — — — 
Non-accrual— — — — — 2,064 5,249 48 7,361 
Total consumer home equity21,721 90,110 9,894 5,426 4,606 92,524 971,988 5,355 1,201,624 
Current period gross charge-offs— — — — — — — 
Other consumer
Current and accruing52,817 41,880 28,008 14,871 14,592 21,877 12,994 73 187,112 
30-89 days past due and accruing26 155 121 22 41 355 131 — 851 
Loans 90 days or more past due and still accruing— — — — — — — — — 
Non-accrual— 79 58 16 47 18 — 223 
Total other consumer52,843 42,114 28,187 14,898 14,649 22,279 13,143 73 188,186 
Current period gross charge-offs461 177 163 76 54 138 83 — 1,152 
Total$1,013,255 $3,295,162 $2,377,173 $1,520,799 $995,761 $3,037,990 $1,691,927 $14,609 $13,946,676 
(1)The amounts presented represent the amortized cost as of June 30, 2023 of revolving loans that were converted to term loans during the six months ended June 30, 2023.
The following table details the amortized cost balances of the Company’s loan portfolios, presented by credit quality indicator and origination year as of December 31, 2022:
20222021202020192018PriorRevolving LoansRevolving Loans Converted to Term Loans (1)Total
(In thousands)
Commercial and industrial
Pass$778,144 $479,317 $415,990 $199,865 $100,716 $639,825 $473,148 $50 $3,087,055 
Special Mention2,298 1,307 7,267 4,841 147 — 1,196 670 17,726 
Substandard294 4,954 2,644 46 2,598 7,854 485 346 19,221 
Doubtful— 5,249 — — — 23 3,254 — 8,526 
Loss— — — — — — — — — 
Total commercial and industrial780,736 490,827 425,901 204,752 103,461 647,702 478,083 1,066 3,132,528 
Commercial real estate
Pass1,510,675 825,620 586,567 581,840 461,296 1,006,160 52,590 4,187 5,028,935 
Special Mention— — 771 4,204 15,366 12,255 — — 32,596 
Substandard— — 2,621 19,796 24,532 34,883 8,000 — 89,832 
Doubtful— — — — — — — — — 
Loss— — — — — — — — — 
Total commercial real estate1,510,675 825,620 589,959 605,840 501,194 1,053,298 60,590 4,187 5,151,363 
Commercial construction
Pass91,397 178,648 28,956 20,767 — — 12,130 — 331,898 
Special Mention— — 2,361 — — — — — 2,361 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Loss— — — — — — — — — 
Total commercial construction91,397 178,648 31,317 20,767 — — 12,130 — 334,259 
Business banking
Pass178,806 202,230 170,088 128,282 59,452 233,484 78,080 4,770 1,055,192 
Special Mention— 991 4,635 4,605 3,740 7,584 145 — 21,700 
Substandard— 3,482 1,424 2,663 570 7,505 2,230 221 18,095 
Doubtful— — — 181 — 70 — — 251 
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Loss— — — — — — — — — 
Total business banking178,806 206,703 176,147 135,731 63,762 248,643 80,455 4,991 1,095,238 
Residential real estate
Current and accruing761,442 696,959 382,262 99,494 66,702 434,720 — — 2,441,579 
30-89 days past due and accruing4,652 5,470 1,245 2,762 2,951 11,646 — — 28,726 
Loans 90 days or more past due and still accruing— — — — — — — — — 
Non-accrual— — 144 1,491 1,015 7,100 — — 9,750 
Total residential real estate766,094 702,429 383,651 103,747 70,668 453,466 — — 2,480,055 
Consumer home equity
Current and accruing97,395 10,774 5,840 5,015 21,092 73,927 953,829 7,320 1,175,192 
30-89 days past due and accruing559 — — — 72 944 7,239 247 9,061 
Loans 90 days or more past due and still accruing— — — — — — — — — 
Non-accrual— — — 61 274 1,303 5,120 296 7,054 
Total consumer home equity97,954 10,774 5,840 5,076 21,438 76,174 966,188 7,863 1,191,307 
Other consumer
Current and accruing55,414 32,390 17,641 18,298 18,832 16,603 17,476 — 176,654 
30-89 days past due and accruing143 68 43 61 240 178 58 798 
Loans 90 days or more past due and still accruing— — — — — — — — — 
Non-accrual31 93 39 92 44 15 10 326 
Total other consumer55,588 32,551 17,723 18,361 19,164 16,825 17,549 17 177,778 
Total$3,481,250 $2,447,552 $1,630,538 $1,094,274 $779,687 $2,496,108 $1,614,995 $18,124 $13,562,528 
(1)The amounts presented represent the amortized cost as of December 31, 2022 of revolving loans that were converted to term loans during the year ended December 31, 2022.
Asset Quality
The Company manages its loan portfolio with careful monitoring. As a general rule, loans more than 90 days past due with respect to principal and interest are classified as non-accrual loans. Exceptions may be made if management believes that collateral held by the Company is clearly sufficient and in full satisfaction of both principal and interest. The Company may also use discretion regarding other loans over 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 June 30, 2023
30-59
Days