INDEPENDENT BANK CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission (the "2020 Form 10-K"). Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q (this "Report"), in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by forward-looking terminology such as “should,” “could,” “will,” “may,” “expect,” “believe,” “forecast,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” “intend,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, in addition to those risk factors listed under the “Risk Factors” section of the 2020 Form 10-K and the Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021 include, but are not limited to: • further weakening in the United States economy in general and the regional and local economies within the New England region and the Company’s market area, including future weakening caused by the COVID-19 pandemic and variables such as global supply chain disruptions, labor shortages and inflation; 48 Table of Contents • the length and extent of economic contraction as a result of the COVID-19 pandemic and variables such as global supply chain disruptions, labor shortages and stoppages and inflation (which could adversely impact us or our customers or suppliers); • unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, pandemics or other external events; • adverse changes or volatility in the local real estate market; • adverse changes in asset quality and any unanticipated credit deterioration in our loan portfolio including those related to one or more large commercial relationships; • failure to consummate or a delay in consummating the acquisition of Meridian Bancorp, Inc. ("Meridian"), which is subject to standard closing conditions, including the receipt of regulatory approvals; • acquisitions, including the acquisition of Meridian, may not produce results at levels or within time frames originally anticipated and may result in unforeseen integration issues or impairment of goodwill and/or other intangibles; • additional regulatory oversight and related compliance costs, including the additional costs associated with the Company's increase in assets to over $10 billion; • changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; • higher than expected tax expense, resulting from failure to comply with general tax laws and changes in tax laws; • changes in market interest rates for interest earning assets and/or interest bearing liabilities and changes related to the phase-out of LIBOR; • increased competition in the Company’s market areas; • adverse weather, changes in climate, natural disasters, the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic, other public health crises or man-made events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations; • a deterioration in the conditions of the securities markets; • a deterioration of the credit rating for U.S. long-term sovereign debt; • inability to adapt to changes in information technology, including changes to industry accepted delivery models driven by a migration to the internet as a means of service delivery; • electronic fraudulent activity within the financial services industry, especially in the commercial banking sector; • adverse changes in consumer spending and savings habits; • the inability to retain customers and employees, including those of previous and pending mergers; • the effect of laws and regulations regarding the financial services industry; • changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) generally applicable to the Company’s business; • the Company's potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory and government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic; • changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters including, but not limited to, changes to how the Company accounts for credit losses; • cyber security attacks or intrusions that could adversely impact our businesses; and • other unexpected material adverse changes in our operations or earnings. Further, the foregoing factors may be exacerbated by the ultimate impact of the COVID-19 pandemic, which is unknown at this time, particularly given the threats posed by the rise and spread of variants of the virus that causes COVID-19. Statements about the COVID-19 pandemic and its potential impact on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that actual results may differ, possibly materially, from what is reflected in such statements due to factors and future developments that are uncertain, unpredictable and, in many cases, beyond our control, including the scope, duration and extent of the pandemic and any resurgences, vaccination rates, actions taken by governmental authorities in response to the pandemic and the direct and indirect impact on the Company’s employees, customers, business and third-parties with which the Company conducts business. Except as required by law, the Company disclaims any intent or obligation to update publicly any such forward-looking statements, whether in response to new information, future events or otherwise. Any public statements or disclosures by the Company following this Report which modify or impact any of the forward-looking statements contained in this Report will be deemed to modify or supersede such statements in this Report. 49 Table of Contents Selected Quarterly Financial Data The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related notes, appearing elsewhere in this Report. Three Months Ended September 30 2021 June 30 2021 March 31 2021 December 31 2020 September 30 2020 (Dollars in thousands, except per share data) Financial condition data Securities $ 2,318,757 $ 1,682,751 $ 1,431,430 $ 1,162,317 $ 1,106,782 Loans 8,808,013 8,938,988 9,246,691 9,392,866 9,405,193 Allowance for credit losses (92,246) (102,357) (107,549) (113,392) (115,625) Goodwill and other intangible assets 525,261 526,576 527,894 529,313 530,749 Total assets 14,533,311 14,194,207 13,773,914 13,204,301 13,173,665 Total deposits 12,260,140 11,986,971 11,593,524 10,993,170 10,851,308 Total borrowings 157,045 171,713 176,387 181,060 295,734 Stockholders’ equity 1,755,954 1,741,622 1,715,371 1,702,685 1,689,724 Nonperforming loans 45,810 47,818 59,201 66,861 98,025 Nonperforming assets 45,810 47,818 59,201 66,861 98,025 Income statement Interest income $ 93,016 $ 96,702 $ 99,637 $ 96,805 $ 97,919 Interest expense 2,925 3,348 4,053 5,362 7,036 Net interest income 90,091 93,354 95,584 91,443 90,883 Provision for credit losses (10,000) (5,000) (2,500) — 7,500 Noninterest income 26,457 24,967 25,246 27,468 29,347 Noninterest expenses 72,419 73,302 69,682 73,727 66,658 Net income 40,007 37,572 41,711 34,641 34,873 Per share data Net income—basic $ 1.21 $ 1.14 $ 1.26 $ 1.05 $ 1.06 Net income—diluted 1.21 1.14 1.26 1.05 1.06 Cash dividends declared 0.48 0.48 0.48 0.46 0.46 Book value per share 53.14 52.72 51.94 51.65 51.27 Tangible book value per share (1) 37.24 36.78 35.96 35.59 35.17 Performance ratios Return on average assets 1.11 % 1.08 % 1.26 % 1.04 % 1.07 % Return on average common equity 9.04 % 8.70 % 9.87 % 8.10 % 8.21 % Net interest margin (on a fully tax equivalent basis) 2.78 % 2.99 % 3.25 % 3.10 % 3.13 % Dividend payout ratio 39.64 % 42.19 % 36.35 % 43.76 % 43.45 % Asset Quality Ratios Nonperforming loans as a percent of gross loans 0.52 % 0.53 % 0.64 % 0.71 % 1.04 % Nonperforming assets as a percent of total assets 0.32 % 0.34 % 0.43 % 0.51 % 0.74 % Allowance for credit losses as a percent of total loans 1.05 % 1.15 % 1.16 % 1.21 % 1.23 % Allowance for credit losses as a percent of nonperforming loans 201.37 % 214.06 % 181.67 % 169.59 % 117.95 % Capital ratios 50 Table of Contents Equity to assets 12.08 % 12.27 % 12.45 % 12.89 % 12.83 % Tangible equity to tangible assets (1) 8.79 % 8.89 % 8.96 % 9.26 % 9.17 % Tier 1 leverage capital ratio 9.36 % 9.41 % 9.63 % 9.56 % 9.52 % Common equity tier 1 capital ratio 13.53 % 13.31 % 13.16 % 12.67 % 12.41 % Tier 1 risk-based capital ratio 14.21 % 13.98 % 13.85 % 13.34 % 13.08 % Total risk-based capital ratio 15.78 % 15.67 % 15.61 % 15.13 % 14.87 % (1) Represents a non-GAAP measure. For reconciliation to GAAP book value per share, see Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Level Overview - Non-GAAP Measures" below. 51 Table of Contents Executive Level Overview Management evaluates the Company's operating results and financial condition using measures that include net income, earnings per share, return on assets and equity, return on tangible common equity, net interest margin, tangible book value per share, asset quality indicators, and many others. These metrics are used by management to make key decisions regarding the Company's balance sheet, liquidity, interest rate sensitivity, and capital resources and assist with identifying opportunities for improving the Company's financial position or operating results. The Company is focused on organic growth, but will also consider acquisition opportunities that can provide a satisfactory financial return. On April 22, 2021 the Company announced the signing of a definitive merger agreement under which the Company will acquire Meridian, with the Company as the surviving entity, and East Boston Savings Bank will merge with and into Rockland Trust (the “Merger Agreement”). Under the Merger Agreement, each share of Meridian common stock will be exchanged for 0.2750 shares of the Company’s common stock. The transaction is intended to qualify as a tax-free reorganization for federal income tax purposes and to provide Meridian stockholders with a tax-free exchange for the Company common stock consideration they will receive in the merger. The Company anticipates issuing approximately 14.2 million shares of its common stock in the merger. Based upon the closing price of $79.57 per share of the Company’s common stock on April 21, 2021, the transaction is valued at approximately $1.15 billion. The closing of the Meridian acquisition, which is expected to occur during the fourth quarter of 2021, was approved by the Company's shareholders and by Meridian's stockholders on August 5, 2021, and remains subject to required regulatory approvals and satisfaction of other customary closing conditions set forth in the Merger Agreement. During the ongoing COVID-19 pandemic, the Company has been and remains committed to supporting and working with its customers as they navigate these unprecedented times. The Company has abided by government mandates requiring a temporary moratorium on foreclosures and has offered a variety of relief measures to its customers consistent with prudent banking principles and regulatory guidance. These relief measures have included temporary deferrals of loan payments, waiving certain fees and permitting customers easier access to their deposits. The Company’s charitable foundations have engaged and will continue to engage in outreach to local communities during this difficult time and have committed funds to be made available to key nonprofits with urgent needs, such as local food banks. The Company concluded its participation in the government-sponsored Paycheck Protection Program ("PPP"), designed to help deploy stimulus funds in the form of loans to businesses within the community, after the second round PPP closed to new applicants. During the first half of 2021, the Company funded an additional $370.0 million of PPP loans in the second round of the program. While the full macroeconomic impacts of the COVID-19 pandemic have yet to be fully determined, overall conditions have begun to improve as a result of vaccine availability, leading to the re-opening of businesses and loosening of certain travel restrictions and social distancing measures. Despite the observed improvements, the future outlook of the COVID-19 pandemic remains highly dependent on the speed of vaccine administration, the efficacy of the vaccines and the possibility for resurgences of COVID-19 or other variants of the virus, including the Delta variant. As a result, the Company is not able to provide any assurances that the Company’s earnings, asset quality, regulatory capital ratios and economic condition will not be materially adversely impacted on a short term or long term basis. 52 Table of Contents Interest-Earning Assets The results depicted in the following table reflect the trend of the Company's interest-earning assets over the past five quarters. Management’s asset strategy typically emphasizes loan growth, however, the mix of interest earning assets has experienced volatility over the last five quarters due to the unique operating environment. With significant growth in deposits over this time period, along with over $400 million of PPP loans being forgiven and repaid during the first three quarters of 2021, securities and interest earning cash balances have increased significantly, while loan growth has been challenging due to elevated payoffs and lower line utilization. However, during the third quarter of 2021, the Company continued to execute its strategy to deploy excess cash balances into investment securities, resulting in net growth of the securities portfolio of $636.0 million, or 37.8%, from the prior quarter. Management strives to be disciplined about loan pricing and considers interest rate sensitivity when generating loan assets. In addition, management takes a disciplined approach to credit underwriting, seeking to avoid undue credit risk and loan losses. 53 Table of Contents Funding and Net Interest Margin The Company's overall sources of funding reflect strong business and retail deposit growth with a management emphasis on core deposit growth to fund loans. During the third quarter of 2021, the Company realized growth in deposits, which increased $273.2 million, or 2.3%, from June 30, 2021 to $12.3 billion at September 30, 2021, reflecting continued robust new account activity in both consumer and business products, as well as increases on existing balances. Core deposits remained at 92.0% of total deposits at September 30, 2021, as higher-cost time deposits continued to run-off. The following chart shows the sources of funding and the percentage of core deposits to total deposits for the trailing five quarters: The 2021 third quarter net interest margin continued to be heavily impacted by the increased excess liquidity position, decreasing by 21 basis points from the prior quarter to 2.78%. Net interest income for the third quarter decreased to $90.1 million compared to $93.4 million for the prior quarter, driven by a $5.0 million reduction in PPP fee income as compared to the prior quarter, along with increases in balances of lower yielding, short term assets. 54 Table of Contents The following table shows the net interest margin and cost of deposits trends for the trailing five quarters: Noninterest Income Noninterest income is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees and mortgage banking income. The increases in deposit fees, interchange and ATM fees for the three months ended September 30, 2021 were primarily volume driven and reflected a rise in customer spending. Investment management income also increased for the third quarter, primarily attributable to increased insurance commissions. The following chart shows the components of noninterest income over the past five quarters: 55 Table of Contents Expense Control Management seeks to take a balanced approach to noninterest expense control by monitoring ongoing operating expenses while making needed capital expenditures and prudently investing in growth initiatives. The Company’s primary expenses arise from Rockland Trust’s employee salaries and benefits, as well as expenses associated with buildings and equipment. Noninterest expense decreased slightly during the third quarter of 2021, however when combined with lower total revenues, the efficiency ratio remained elevated for the three months ended September 30, 2021. The following chart depicts the Company's efficiency ratio on a GAAP basis (calculated by dividing noninterest expense by the sum of noninterest income and net interest income), as well as the Company's efficiency ratio on a non-GAAP operating basis, if applicable (calculated by dividing noninterest expense, excluding certain noncore items, by the sum of noninterest income, excluding certain noncore items, and net interest income), over the past five quarters: *See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures. 56 Table of Contents Capital The Company's approach with respect to revenue and expense is designed to promote long-term earnings growth, which in turn contributes to capital growth. Strong earnings retention has contributed to capital growth, both on an absolute level and per share basis. The following chart shows the Company's book value and tangible book value per share over the past five quarters (see "Non-GAAP Measures" below for a reconciliation to GAAP financial measures): *See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures. The Company declared quarterly cash dividends of $0.48 per share for each of the first three quarters of 2021, representing an increase of 4.3% from the 2020 quarterly dividend rate of $0.46 per share. Third Quarter 2021 Results Net income for the third quarter of 2021 was $40.0 million, or $1.21 on a diluted earnings per share basis, and increased 14.7% and 14.2%, respectively, as compared to $34.9 million, or $1.06 on a diluted earnings per share basis, for the prior year third quarter. Third quarter 2021 results were positively impacted by a release of provision for credit losses of $10.0 million, in contrast to the prior year period results, which included a provision for credit losses of $7.5 million reflecting management's assumptions and expectations related to the COVID-19 pandemic at that time. The third quarter of 2021 included merger and acquisition costs, while the third quarter of 2020 included a loss on the termination of a derivative contract, which the Company deems to be noncore. Excluding these noncore items, third quarter 2021 and 2020 operating net income was $41.4 million and $35.4 million, respectively. See "Non-GAAP Measures" below for a reconciliation of non-GAAP measures. 2021 Outlook During the Company's third quarter 2021 earnings call, the Company's Chief Financial Officer provided the following key expectations regarding business activity to serve as near term guidance for the remainder of 2021: • Loan growth is expected to mirror third quarter results, such that continued payoffs will mitigate strong anticipated closing activity, resulting in relatively flat balances. However, any increase in line utilization rates could also serve as a catalyst to stronger loan growth; • Deposit growth is expected to be in the low single digits; • Near term deployment of excess liquidity is expected to continue to be in the form of increased securities balances; • Assuming an anticipated trend of improving general economic factors and no significant unexpected changes in overall asset quality, the provision for credit losses is expected to continue to track at levels below net charge-offs; • Non-interest income is expected to decrease slightly primarily due to anticipated seasonal declines in deposit fees, reduced mortgage banking income attributable to compressed gain on sale margins and an anticipated increase in loan production retained in the portfolio, as well as reduced equity investment gains which positively impacted both second and third quarter results in 2021; 57 Table of Contents • Non-interest expense is expected to increase slightly. Non-GAAP Measures When management assesses the Company’s financial performance for purposes of making day-to-day and strategic decisions, it does so based upon the performance of its core banking business, which is primarily derived from the combination of net interest income and noninterest or fee income, reduced by operating expenses, the provision for credit losses, and the impact of income taxes and other noncore items shown in the tables that follow. There are items that impact the Company's results that management believes are unrelated to its core banking business such as merger and acquisition expenses and other items. Management, therefore, computes certain non-GAAP measures including operating net income and operating EPS, noninterest income on an operating basis, noninterest expense on an operating basis, operating return on average assets, operating return on average equity, and efficiency ratio on an operating basis, which exclude items management considers to be noncore. Management believes excluding these items facilitates greater visibility into the Company’s core banking business and underlying trends that may, to some extent, be obscured by inclusion of such items. Management also supplements its evaluation of financial performance with analyses of tangible book value per share (which is computed by dividing stockholders' equity less goodwill and identifiable intangible assets, or "tangible common equity", by common shares outstanding) and the tangible common equity to tangible assets ratio (which is computed by dividing tangible common equity by "tangible assets", defined as total assets less goodwill and other intangibles). The Company has included information on tangible book value per share and the tangible common equity to tangible assets ratio because management believes that investors may find it useful to have access to the same analytical tools used by management. As a result of merger and acquisition activity, the Company has recognized goodwill and other intangible assets in conjunction with business combination accounting principles. Excluding the impact of goodwill and other intangibles in measuring asset and capital values for the ratios provided, along with other bank standard capital ratios, provides a framework to compare the capital adequacy of the Company to other companies in the financial services industry. These non-GAAP measures should not be viewed as a substitute for operating results and other financial measures determined in accordance with GAAP. An item which management deems to be noncore and excludes when computing these non-GAAP measures can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP performance measures including those non-GAAP measures referenced above, are not necessarily comparable to non-GAAP performance measures which may be presented by other companies. 58 Table of Contents The following tables summarize adjustments for noncore items for the periods indicated below and reconcile non-GAAP measures: Three Months Ended September 30 Net Income Diluted Earnings Per Share 2021 2020 2021 2020 (Dollars in thousands, except per share data) Net income available to common shareholders (GAAP) $ 40,007 $ 34,873 $ 1.21 $ 1.06 Non-GAAP adjustments Noninterest expense components Add: loss on termination of derivatives — 684 — 0.02 Add: merger and acquisition expenses 1,943 — 0.06 — Noncore increases to income before taxes 1,943 684 0.06 0.02 Net tax benefit associated with noncore items (1) (546) (192) (0.02) (0.01) Total tax impact (546) (192) (0.02) (0.01) Noncore increases to net income 1,397 492 0.04 0.01 Operating net income (Non-GAAP) $ 41,404 $ 35,365 $ 1.25 $ 1.07 Nine Months Ended September 30 Net Income Diluted Earnings Per Share 2021 2020 2021 2020 (Dollars in thousands, except per share data) Net income available to common shareholders (GAAP) $ 119,290 $ 86,526 $ 3.61 $ 2.59 Non-GAAP adjustments Noninterest expense components Add: loss on termination of derivatives — 684 — 0.02 Add: merger and acquisition expenses 3,674 — 0.11 — Noncore increases to income before taxes 3,674 684 0.11 0.02 Net tax benefit associated with noncore items (1) (1,033) (192) (0.03) (0.01) Noncore increases to net income 2,641 492 0.08 0.01 Operating net income (Non-GAAP) $ 121,931 $ 87,018 $ 3.69 $ 2.61 (1) The net tax benefit associated with noncore items is determined by assessing whether each noncore item is included or excluded from net taxable income and applying the Company's combined marginal tax rate to only those items included in net taxable income. 59 Table of Contents Three Months Ended September 30 2021 June 30 2021 March 31 2021 December 31 2020 September 30 2020 (Dollars in thousands) Net interest income (GAAP) $ 90,091 $ 93,354 $ 95,584 $ 91,443 $ 90,883 (a) Noninterest income (GAAP) $ 26,457 $ 24,967 $ 25,246 $ 27,468 $ 29,347 (b) Noninterest expense (GAAP) $ 72,419 $ 73,302 $ 69,682 $ 73,727 $ 66,658 (c) Less: Merger and acquisition expense 1,943 1,731 — — — Loss on termination of derivatives — — — — 684 Noninterest expense on an operating basis (Non-GAAP) $ 70,476 $ 71,571 $ 69,682 $ 73,727 $ 65,974 (d) Total revenue (GAAP) $ 116,548 $ 118,321 $ 120,830 $ 118,911 $ 120,230 (a+b) Ratios Noninterest income as a % of revenue (GAAP based) 22.70 % 21.10 % 20.89 % 23.10 % 24.41 % (b/(a+b)) Efficiency ratio (GAAP based) 62.14 % 61.95 % 57.67 % 62.00 % 55.44 % (c/(a+b)) Efficiency ratio on an operating basis (Non-GAAP) 60.47 % 60.49 % 57.67 % 62.00 % 54.87 % (d/(a+b)) 60 Table of Contents The following table summarizes the calculation of the Company's tangible common equity to tangible assets ratio, tangible book value per share, and loan and allowance metrics, exclusive of PPP loan balances as of the dates indicated: September 30 2021 June 30 2021 March 31 2021 December 31 2020 September 30 2020 (Dollars in thousands, except per share data) Tangible common equity Stockholders' equity (GAAP) $ 1,755,954 $ 1,741,622 $ 1,715,371 $ 1,702,685 $ 1,689,724 (a) Less: Goodwill and other intangibles 525,261 526,576 527,895 529,313 530,749 Tangible common equity (Non-GAAP) 1,230,693 1,215,046 1,187,476 1,173,372 1,158,975 (b) Tangible assets Assets (GAAP) 14,533,311 14,194,207 13,773,914 13,204,301 13,173,665 (c) Less: Goodwill and other intangibles 525,261 526,576 527,895 529,313 530,749 Tangible assets (Non-GAAP) $ 14,008,050 $ 13,667,631 $ 13,246,019 $ 12,674,988 $ 12,642,916 (d) Common shares 33,043,812 33,037,859 33,024,882 32,965,692 32,955,547 (e) Common equity to assets ratio (GAAP) 12.08 % 12.27 % 12.45 % 12.89 % 12.83 % (a/c) Tangible common equity to tangible assets ratio (Non-GAAP) 8.79 % 8.89 % 8.96 % 9.26 % 9.17 % (b/d) Book value per share (GAAP) $ 53.14 $ 52.72 $ 51.94 $ 51.65 $ 51.27 (a/e) Tangible book value per share (Non-GAAP) $ 37.24 $ 36.78 $ 35.96 $ 35.59 $ 35.17 (b/e) Total loans (GAAP) $ 8,808,013 $ 8,938,988 $ 9,246,691 $ 9,392,866 $ 9,405,193 Total loans, excluding PPP (Non-GAAP) $ 8,424,442 $ 8,456,338 $ 8,400,390 $ 8,600,956 $ 8,593,470 Allowance as a % of total loans (GAAP) 1.05 % 1.15 % 1.16 % 1.21 % 1.23 % Allowance as a % of total loans, excluding PPP (Non-GAAP) 1.09 % 1.21 % 1.28 % 1.32 % 1.35 % Critical Accounting Policies Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments. There have been no material changes in critical accounting policies during the first nine months of 2021. Refer to the Company's 2020 Form 10-K for a complete listing of critical accounting policies. FINANCIAL POSITION Securities Portfolio The Company’s securities portfolio consists of trading securities, equity securities, securities available for sale, and securities which management intends to hold until maturity. Securities increased by $1.2 billion, or 99.5%, at September 30, 2021 as compared to December 31, 2020, r eflecting $1.4 billion of purchases offset by paydowns, called securities, and maturities. Purchases made during 2021 reflect the Company's continued direct strategy to deploy a portion of excess cash balances into investment securities. The ratio of securities to total assets was 16.0% and 8.8% at September 30, 2021 and December 31, 2020, respectively. The Company estimates expected credit losses for its available for sale and held to maturity securities in accordance with the current expected credit loss ("CECL") methodology. Further details regarding the Company's measurement of expected credit losses on securities can be found in Note 3 “Securities” within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report. 61 Table of Contents Residential Mortgage Loan Sales The Company’s primary loan sale activity arises from the sale of government sponsored enterprise eligible residential mortgage loans. The Company originates residential loans with the intention of selling them in the secondary market or holding them in the Company's residential real estate portfolio. When a loan is sold, the Company enters into agreements that contain representations and warranties about the characteristics of the loans sold and their origination. The Company may be required to either repurchase mortgage loans or to indemnify the purchaser from losses if representations and warranties are breached. The Company incurred no material losses related to residential mortgage repurchases during the three and nine months ended September 30, 2021 and 2020, respectively. The Company experienced strong closing volumes within the residential real estate portfolio during the three and nine months ended September 30, 2021, with a larger portion of residential real estate closings being retained in the portfolio rather than sold into the secondary market as compared to prior year periods. The following table shows the total residential real estate loans that were closed and whether the amounts were held in the portfolio or sold/held for sale in the secondary market during the periods indicated: Table 1 - Closed Residential Real Estate Loans Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 (Dollars in thousands) Held in portfolio $ 65,832 $ 54,826 $ 279,176 $ 125,392 Sold or held for sale in the secondary market 183,794 262,323 611,795 654,772 Total closed loans $ 249,626 $ 317,149 $ 890,971 $ 780,164 The table below reflects additional information related to the loans which were sold during the periods indicated: Table 2 - Residential Mortgage Loan Sales Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 (Dollars in thousands) Sold with servicing rights released $ 171,256 $ 252,907 $ 618,171 $ 581,206 Sold with servicing rights retained (1) 3,029 — 11,116 45,394 Total loans sold $ 174,285 $ 252,907 $ 629,287 $ 626,600 (1) All loans sold with servicing rights retained during the nine months ended September 30, 2021 were sold without recourse. When a loan is sold, the Company may decide to also sell the servicing of sold loans for a servicing release premium, simultaneously with the sale of the loan, or the Company may opt to sell the loan and retain the servicing. In the event of a sale with servicing rights retained, a mortgage servicing asset is established, which represents the then current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets in the consolidated balance sheets, are amortized in proportion to and over the period of estimated net servicing income, and are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying the rights based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to income. The principal balance of loans serviced by the Bank on behalf of investors was $342.3 million, $453.7 million and $508.7 million at September 30, 2021, December 31, 2020, and September 30, 2020, respectively. 62 Table of Contents The following table shows the adjusted cost of the servicing rights associated with these loans and the changes for the periods indicated: Table 3 - Mortgage Servicing Asset Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 (Dollars in thousands) Balance at beginning of period $ 2,295 $ 3,321 $ 2,365 $ 5,116 Additions 30 — 95 424 Amortization (244) (316) (769) (927) Change in valuation allowance 122 (250) 512 (1,858) Balance at end of period $ 2,203 $ 2,755 $ 2,203 $ 2,755 See Note 6, “Derivative and Hedging Activities” within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report for more information on mortgage activity and mortgage related derivatives. Loan Portfolio Total loans at September 30, 2021 decreased by $584.9 million, or 6.23%, when compared to December 31, 2020, which was primarily attributable to a net reduction in PPP loan balances of $408.3 million, or 51.6%. Despite strong origination volumes and loan pipelines across all products, overall portfolio growth continued to be constrained by ongoing paydowns and re-financing activity. Excluding PPP loans of $383.6 million and $791.9 million outstanding at September 30, 2021 and December 31, 2020, respectively, total loans declined by $176.5 million or 2.05%, for the nine months ended September 30, 2021. Exclusive of PPP loans, commercial loan balances decreased by $36.2 million, or 0.6%, from December 31, 2020 to September 30, 2021, as strong pipelines and closing activity continued to be counterbalanced by elevated payoffs and lower line utilization levels. Consumer loan balances also declined with increased prepayments and refinancing activity, as well as lower home equity line utilization, which resulted in reductions of 5.7% and 6.4% within the residential mortgage and home equity portfolios, respectively, for the nine months ended September 30, 2021. (See "Non-GAAP Measures" in the "Executive Level Overview" above for a reconciliation to the GAAP financial measure, including the measure of total loans, excluding PPP). 63 Table of Contents The Company's commercial loan portfolio is comprised primarily of commercial and industrial loans, commercial real estate loans. Management considers the Company’s commercial and industrial portfolio to be well-diversified with loans to various types of industries. The Company's participation in the PPP resulted in significant loan fundings within the commercial and industrial category throughout 2020 and first half of 2021, with outstanding balances totaling $383.6 million at September 30, 2021, comprising 23.4% of the total commercial and industrial category. Accordingly, the composition of the portfolio by sector is skewed as compared to periods prior to the commencement of the PPP in the second quarter of 2020, as the PPP loans are reflected within the various sectors below. In connection with PPP loan originations during the first half of 2021, the Company recognized fee revenue of $18.3 million, which is deferred and amortized over the life of the loan. During the three and nine months ended September 30, 2021, the Company amortized into income $2.2 million and $18.9 million, respectively, in PPP fee revenue related to loans forgiven under the program. The following pie chart shows the diversification of the commercial and industrial portfolio as of September 30, 2021: (Dollars in thousands) Average loan size (excluding floor plan tranches) $ 218 Largest individual commercial and industrial loan outstanding $ 24,962 Commercial and industrial nonperforming loans/commercial and industrial loans 1.17 % The Company’s commercial real estate loan portfolio, inclusive of commercial construction, is the Company’s largest loan type concentration. The Company believes that this portfolio is also well-diversified with loans secured by a variety of property types, such as owner-occupied and nonowner-occupied commercial, retail, office, industrial, warehouse, and other special purpose properties, such as hotels, motels, nursing homes, restaurants, churches, recreational facilities, marinas, and golf courses. Commercial real estate also includes loans secured by certain residential-related property types, including multi-family apartment buildings, residential development tracts and condominiums. The following pie chart shows the diversification of the commercial real estate loan portfolio as of September 30, 2021: 64 Table of Contents (Dollars in thousands) Average loan size $ 1,117 Largest individual commercial real estate mortgage outstanding $ 33,354 Commercial real estate nonperforming loans/commercial real estate loans 0.25 % Owner occupied commercial real estate loans/commercial real estate loans 15.1 % 65 Table of Contents The Company's consumer portfolio primarily consists of both fixed-rate and adjustable-rate residential real estate loans as well as residential construction lending related to single-home residential development within the Company's market area. The Company also provides home equity loans and lines of credit that may be made as a fixed-rate term loan or under a variable rate revolving line of credit secured by a first or junior mortgage on the borrower's residence or second home. Additionally, the Company makes loans for a wide variety of other personal needs. Other consumer loans primarily consist of installment loans and overdraft protections. The residential real estate, home equity and other consumer portfolios totaled $2.2 billion at September 30, 2021, as noted below: Asset Quality The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this assessment, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, nonperforming and/or put on nonaccrual status. In the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring ("TDR"). In addition, the Company has offered need-based payment relief options for commercial and small business loans, residential mortgages, and home equity loans and lines of credit in response to the COVID-19 pandemic. In accordance with the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), these modifications are not accounted for as TDRs or reflected as delinquent or non-accrual loans if the borrower was in compliance with the loan terms as of December 31, 2019. Delinquency The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. Generally, the Company requires that a delinquency notice be mailed to a borrower upon expiration of a grace period (typically no longer than 15 days beyond the due date). Reminder notices may be sent and telephone calls may be made prior to the expiration of the grace period. If the delinquent status is not resolved within a reasonable time frame following the mailing of a delinquency notice, the Bank’s personnel charged with managing its loan portfolios contacts the borrower to ascertain the reasons for delinquency and the prospects for payment. Any subsequent actions taken to resolve the delinquency will depend upon the nature of the loan and the length of time that the loan has been delinquent. The borrower’s needs are considered as much as reasonably possible without jeopardizing the Bank’s position. A late charge is usually assessed on loans upon expiration of the grace period. Nonaccrual Loans As a general rule, loans 90 days or more past due with respect to principal or interest are classified as nonaccrual loans. However, certain loans that are 90 days or more past due may be kept on an accruing status if the loans are well secured and in the process of collection. Income accruals are suspended on all nonaccrual loans and all previously accrued 66 and uncollected interest is reversed against current income. A loan remains on nonaccrual status until it becomes current with respect to principal and interest (and in certain instances remains current for up to six months), the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for credit losses. Troubled Debt Restructurings In the course of resolving problem loans, the Company may choose to restructure the contractual terms of certain loans. The Company attempts to work out an alternative payment schedule with the borrower in order to avoid or cure a default. Loans that are modified are reviewed by the Company to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan 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 Bank, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. If such efforts by the Bank do not result in satisfactory performance, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan. It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status for six months, subsequent to being modified, before management considers their return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Loans that are considered TDRs are classified as performing, unless they are on nonaccrual status or are delinquent for 90 days or more. Loans classified as TDRs remain classified as such for the life of the loan, except in limited circumstances, when it may be determined that the borrower is performing under modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable market rate for a comparable new loan at the time of the restructuring. Purchased Credit Deteriorated Loans Purchased Credit Deteriorated ("PCD") loans are acquired loans which have shown a more-than-insignificant deterioration in credit quality since origination. PCD loans are recorded at amortized cost with an allowance for credit losses recorded upon purchase, as appropriate. Nonperforming Assets Nonperforming assets are typically comprised of nonperforming loans and other real estate owned. Nonperforming loans consist of nonaccrual loans and loans that are 90 days or more past due but still accruing interest. 67 Table of Contents The following table sets forth information regarding nonperforming assets held by the Company at the dates indicated: Table 4 - Nonperforming Assets September 30 2021 December 31 2020 September 30 2020 (Dollars in thousands) Loans accounted for on a nonaccrual basis Commercial and industrial $ 19,275 $ 34,729 $ 36,851 Commercial real estate 11,788 10,195 38,164 Small business 46 825 542 Residential real estate 10,872 15,528 16,229 Home equity 3,746 5,427 6,159 Other consumer 83 156 79 Total (1) $ 45,810 $ 66,860 $ 98,024 Loans past due 90 days or more but still accruing Other consumer — 1 1 Total $ — $ 1 $ 1 Total nonperforming loans $ 45,810 $ 66,861 $ 98,025 Other real estate owned — — — Total nonperforming assets $ 45,810 $ 66,861 $ 98,025 Nonperforming loans as a percent of gross loans 0.52 % 0.71 % 1.04 % Nonperforming assets as a percent of total assets 0.32 % 0.51 % 0.74 % (1) Inclusive of TDRs on nonaccrual status of $21.1 million, $22.2 million, and $23.8 million at September 30, 2021, December 31, 2020, and September 30, 2020, respectively. The following table summarizes the changes in nonperforming assets for the periods indicated: Table 5 - Activity in Nonperforming Assets Three Months Ended March 31 2021 2020 Three Months Ended Nine Months Ended September 30 2021 September 30 2020 September 30 2021 September 30 2020 (Dollars in thousands) Nonperforming assets beginning balance $ 47,818 $ 48,814 $ 66,861 $ 48,049 New to nonperforming (1) 4,613 60,850 9,205 75,580 Loans charged-off (332) (4,304) (4,499) (5,748) Loans paid-off (3,488) (5,050) (17,877) (12,339) Loans restored to performing status (2,813) (2,229) (8,143) (7,319) Other 12 (56) 263 (198) Nonperforming assets ending balance $ 45,810 $ 98,025 $ 45,810 $ 98,025 (1) The higher balance for the periods ended September 30, 2020 primarily reflect three large commercial relationships that were newly nonperforming, all related to industries previously identified as being highly impacted by the COVID-19 pandemic. 68 Table of Contents The following table sets forth information regarding troubled debt restructured loans as of the dates indicated: Table 6 - Troubled Debt Restructurings September 30 2021 December 31 2020 September 30 2020 (Dollars in thousands) Performing troubled debt restructurings $ 15,950 $ 16,983 $ 17,521 Nonaccrual troubled debt restructurings 21,104 22,209 23,810 Total $ 37,054 $ 39,192 $ 41,331 Performing troubled debt restructurings as a % of total loans 0.18 % 0.18 % 0.19 % Nonaccrual troubled debt restructurings as a % of total loans 0.24 % 0.24 % 0.25 % Total troubled debt restructurings as a % of total loans 0.42 % 0.42 % 0.44 % The following table summarizes changes in TDRs for the periods indicated: Table 7 - Activity in Troubled Debt Restructurings Three Months Ended Nine Months Ended September 30 2021 September 30 2020 September 30 2021 September 30 2020 (Dollars in thousands) TDRs beginning balance $ 39,707 $ 41,839 $ 39,192 $ 44,365 New to TDR status — 625 3,918 1,874 Paydowns (2,637) (1,133) (6,040) (4,886) Charge-offs (16) — (16) (22) TDRs ending balance $ 37,054 $ 41,331 $ 37,054 $ 41,331 69 Table of Contents Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. The table below shows interest income that was recognized or collected on all nonaccrual loans and TDRs for the periods indicated: Table 8 - Interest Income - Nonaccrual Loans and Troubled Debt Restructurings Three Months Ended Nine Months Ended September 30 2021 September 30 2020 September 30 2021 September 30 2020 (Dollars in thousands) The amount of incremental gross interest income that would have been recorded if nonaccrual loans had been current in accordance with their original terms $ 678 $ 744 $ 2,289 $ 1,909 The amount of interest income on nonaccrual loans and performing TDRs that was included in net income $ 257 $ 345 $ 673 $ 804 Potential problem loans are any loans which are not included in nonaccrual or nonperforming loans, where known information about possible credit problems of the borrowers causes management to have concerns as to the ability of such borrowers to comply with present loan repayment terms. At September 30, 2021, there were 79 relationships, with an aggregate balance of $135.7 million, deemed to be potential problem loans. These potential problem loans continued to perform with respect to payments. Management actively monitors these loans and strives to minimize any possible adverse impact to the Company. A portion of the potential problem loans identified by management were granted a deferral in accordance with the relief options offered in response to the COVID-19 pandemic. If applicable, these potential problem loans with an active deferral as of September 30, 2021 have been included in the table below. As previously noted, the Company has offered need-based payment relief options to its customers in response to the COVID-19 pandemic, primarily in the form of payment deferrals, all of which were granted prior to December 31, 2020. Loans that were modified are not accounted for as TDRs or reflected as delinquent or nonaccrual loans if the borrower was in compliance with their loan terms as of December 31, 2019. The following table summarizes active deferrals by modification type as of September 30, 2021: Table 9 - Deferrals by Modification Type Deferral of Principal and Interest Deferral of Principal Only Deferral of Interest Only Total Deferrals Total Portfolio % Deferral (Dollars in thousands) Commercial and industrial $ 2,300 $ 560 $ 1,165 $ 4,025 $ 1,640,709 0.2 % Commercial real estate (1) 7,950 210,335 — 218,285 4,736,674 4.6 % Business banking — 588 — 588 184,138 0.3 % Residential real estate — — — — 1,222,849 — % Home equity — — — — 1,000,468 — % Consumer — — — — 23,175 — % Total active deferrals as of September 30, 2021 $ 10,250 $ 211,483 $ 1,165 $ 222,898 $ 8,808,013 2.5 % (1) Balances include commercial construction deferrals. 70 Table of Contents As a result of the COVID-19 pandemic, management has also enhanced monitoring of loan portfolios in certain industries that have been highly impacted. While management is unable to predict the full impact on all industries affected by the COVID-19 pandemic, there are assumptions as to which industries have been, and may continue to be, more greatly impacted by social distancing and other restrictive measures, as well as the duration or re-imposition of any such restrictions. Management has identified approximately $1.3 billion of loans within highly impacted industries, including Accommodations, Food Services, Retail Trade, Other Services (except Public Administration), and Arts, Entertainment and Recreation. Loss exposure within these industries is mitigated by a number of factors such as collateral values, loan-to-value ratios, and other key indicators, however, some degree of credit loss is expected and has been incorporated into the allowance for credit loss recognition under the CECL model. The table below provides total outstanding balances of commercial loans as of the date indicated within industries that management has deemed to be highly impacted by the COVID-19 pandemic: Table 10 - Industries Highly Impacted By COVID-19 - Details September 30, 2021 (Dollars in thousands) Accommodations Balance $ 388,083 Average borrower loan size $ 4,283 % secured by real estate 99.8 % Weighted average loan to value 54.0 % Other information: – The accommodation portfolio consists of 65 properties representing a combination of flagged (61%) and non-flagged (39%) hotels, motels and inns. – Loans secured by hotel properties deemed to be located in areas of leisure comprise $146.6 million, or 38% of the hotel portfolio. – Approximately 89% of the balances outstanding are secured by properties located within the six New England states with the largest concentration in Massachusetts (60%). Food Services Balance $ 142,059 Average borrower loan size $ 384 % secured by real estate 67.7 % Weighted average loan to value 50.5 % Other information: – The food services portfolio includes full-service restaurants (55%), limited service restaurants and fast food (43%), and other types of food service (caterers, bars, and mobile food service 2%). Retail Trade Balance $ 527,957 Average borrower loan size $ 499 % secured by real estate 43.3 % Weighted average loan to value 57.4 % Other information: – The retail trade portfolio consists broadly of food and beverage stores (47%), motor vehicle and parts dealers (24%), and gasoline stations (14%). All other retailers account for 15% of the current outstanding balance. – Collateral for these loans varies and may consist of real estate, motor vehicles inventories, other types of inventories and general business assets. Other Services (except Public Administration) Balance $ 139,679 71 Table of Contents Average borrower loan size $ 250 % secured by real estate 51.6 % Weighted average loan to value 48.8 % Other information: – The other services portfolio consists of various for-profit and not-for-profit services diversified across religious, civic and social service organizations (43%), repair and maintenance business (31%) and other personal services, including beauty salons, laundry services, pet care and other types of services (26%). Arts, Entertainment, and Recreation Balance $ 99,699 Average borrower loan size $ 793 % secured by real estate 85.5 % Weighted average loan to value 52.3 % Other information: – Amusement, gambling and recreational industries make up a majority of this category (95%) and include amusement/theme parks, bowling centers, fitness centers, golf courses, marinas, and other recreational industries. Other industries including museums, performing arts, and spectator sports account for the remaining outstanding balances (5%). Allowance for Credit Losses The allowance for credit losses is maintained at a level that management considers appropriate to provide for the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. The allowance is increased by providing for credit losses through a charge to expense and by credits for recoveries of loans previously charged-off and is reduced by loans being charged-off. In accordance with the CECL methodology, the Company estimates credit losses for financial assets on a collective basis for loans sharing similar risk characteristics 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. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of prepayments. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period of one year, beyond which is a reversion to the Company's historical long-run average for a period of 6 months. The Company's qualitative assessment is structured based upon nine environmental factors impacting the expected risk of loss within the loan portfolio. Loans that do not share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that will be individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable. The allowance for credit losses of $92.2 million at September 30, 2021 represents a decrease of $21.1 million, or 18.6% compared to December 31, 2020. The Company recorded a release of provision for credit losses of $17.5 million during the nine months ended September 30, 2021, reflecting improvements in expected overall macro-economic forecast assumptions and continued strong asset quality metrics, along with lower loan levels. As a result, the allowance for credit losses at September 30, 2021 includes a release of qualitative reserves that reflects a general reduction in potential risk previously assessed on portions of the portfolio related to industries expected to be at heightened risk due to the COVID-19 pandemic, while reserves related to loans with non-owner occupied real estate and junior lien home equity collateral positions were also reduced as performance trends within these portfolio segments remained relatively strong during the third quarter of 2021. Quantitative reserves also decreased as of September 30, 2021, attributable to continued improvements in credit quality, including decreases in the weighted average probability of default across most portfolios, as well as increased stability in economic variables. While management is unable to know with certainty the direct, indirect, and future impacts of the COVID-19 pandemic, it is expected that the pandemic could potentially have a significant impact on future losses across a broad range of loan segments. As such, the allowance for credit losses at September 30, 2021 continues to reflect elevated reserve allocations to those loan segments that management considers to have heightened loss exposure associated with the COVID-19 pandemic. The reasonable and supportable forecast modeled in the allowance for credit losses incorporates an economic scenario which reflects management's assumption that some uncertainty remains as the economy recovers, such as that the federal funds rates 72 Table of Contents will remain near 0% through 2023, and that recent federal stimulus activity will be less effective as consumers are reluctant to spend the funds, some concerns about the speed of widespread vaccine administration, and the efficacy of the vaccines and the possibility for resurgences of COVID-19 or other variants of the virus. 73 Table of Contents The following table summarizes changes in the allowance for credit losses and other selected statistics for the periods presented: Table 11 - Summary of Changes in the Allowance for Credit Losses Three Months Ended September 30 2021 June 30 2021 March 31 2021 December 31 2020 September 30 2020 (Dollars in thousands) Average total loans $ 8,827,249 $ 9,107,446 $ 9,343,769 $ 9,396,192 $ 9,375,522 Allowance for credit losses, beginning of period $ 102,357 $ 107,549 $ 113,392 $ 115,625 $ 112,176 Charged-off loans Commercial and industrial 1 142 3,331 2,124 185 Commercial real estate — — — — 3,885 Commercial construction — — — — — Small business 83 35 66 186 49 Residential real estate — — — 105 — Home equity — 69 — — — Other consumer 248 235 289 283 185 Total charged-off loans 332 481 3,686 2,698 4,304 Recoveries on loans previously charged-off Commercial and industrial 1 35 64 242 1 Commercial real estate — — 57 — 9 Commercial construction — — — — — Small business 50 4 11 25 2 Residential real estate — — 1 — 1 Home equity 49 45 13 36 21 Other consumer 121 205 197 162 219 Total recoveries 221 289 343 465 253 Net loans charged-off (recovered) Commercial and industrial — 107 3,267 1,882 184 Commercial real estate — — (57) — 3,876 Commercial construction — — — — — Small business 33 31 55 161 47 Residential real estate — — (1) 105 (1) Home equity (49) 24 (13) (36) (21) Other consumer 127 30 92 121 (34) Total net loans charged-off 111 192 3,343 2,233 4,051 Provision for credit losses (10,000) (5,000) (2,500) — 7,500 Total allowance for credit losses, end of period $ 92,246 $ 102,357 $ 107,549 $ 113,392 $ 115,625 Net loans charged-off as a percent of average total loans (annualized) 0.00 % 0.01 % 0.15 % 0.09 % 0.17 % Allowance for credit losses as a percent of total loans 1.05 % 1.15 % 1.16 % 1.21 % 1.23 % Allowance for credit losses as a percent of nonperforming loans 201.37 % 214.06 % 181.67 % 169.59 % 117.95 % 74 Table of Contents For purposes of the allowance for credit losses, management segregates the loan portfolio into the portfolio segments detailed in the table below. The allocation of the allowance for credit losses is made to each loan category using the analytical techniques and estimation methods described in this Report. While these amounts represent management’s best estimate of credit losses at the evaluation dates, they are not necessarily indicative of either the categories in which actual losses may occur or the extent of such actual losses that may be recognized within each category. Each of these loan categories possess unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. The total allowance is available to absorb losses from any segment of the loan portfolio. The following table sets forth the allocation of the allowance for credit losses by loan category at the dates indicated: Table 12 - Summary of Allocation of Allowance for Credit Losses September 30 2021 December 31 2020 Allowance Amount Percent of Loans In Category To Total Loans Allowance Amount Percent of Loans In Category To Total Loans (Dollars in thousands) Commercial and industrial (1) $ 16,014 18.5 % $ 21,086 22.4 % Commercial real estate 37,798 47.9 % 45,009 44.4 % Commercial construction 4,468 5.9 % 5,397 5.9 % Small business 3,667 2.1 % 5,095 1.9 % Residential real estate 11,047 13.9 % 14,275 13.8 % Home equity 18,868 11.4 % 22,060 11.4 % Other consumer 384 0.3 % 470 0.2 % Total allowance for credit losses $ 92,246 100.0 % $ 113,392 100.0 % (1) This loan category includes loans originated as part of the PPP established by the CARES Act, which have been excluded from the credit loss calculations because these loans are 100% guaranteed by the U.S. Government. 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, the value of the Bank’s 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 credit losses and any recoveries of such previously charged-off amounts are credited to the allowance. Regardless of whether a loan is unsecured or collateralized, the Company charges 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 the Company’s allowance for credit losses, see Note 4 "Loans, Allowance for Credit Losses and Credit Quality " within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report. Federal Home Loan Bank Stock The Bank held investments in FHLB of Boston stock of $8.7 million and $10.3 million at September 30, 2021 and December 31, 2020, respectively. The FHLB is a cooperative that provides services to its member banking institutions. The primary reason for the FHLB of Boston membership is to gain access to a reliable source of wholesale funding as a tool to manage liquidity and interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. The Company either purchases additional FHLB stock or is subject to redemption of FHLB stock proportional to the volume of funding received. The Company views the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return. Goodwill and Other Intangible Assets Goodwill and other intangible assets were $525.3 million and $529.3 million at September 30, 2021 and December 31, 2020, respectively. The decrease was primarily due to amortization of definite-lived intangibles. The Company typically performs its annual goodwill impairment testing during the third quarter of the year, unless certain indicators suggest earlier testing to be warranted. Accordingly, the Company last performed its annual goodwill 75 Table of Contents impairment testing during the third quarter of 2021 and determined that the Company's goodwill was not impaired as of September 30, 2021. Other intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. There were no events or changes during the third quarter of 2021 that indicated impairment of goodwill and other intangible assets. Cash Surrender Value of Life Insurance Policies The Bank holds life insurance policies for the purpose of offsetting its future obligations to its employees under its retirement and benefits plans. The cash surrender value of life insurance policies was $244.6 million at September 30, 2021 compared to $200.5 million at December 31, 2020, representing an increase of $44.0 million, or 22.0%, primarily due to new policy purchases. The Company recorded tax exempt income from life insurance policies of $1.6 million and $1.3 million for the three months ended September 30, 2021 and 2020, respectively, and $4.5 million and $3.9 million for the nine months ended September 30, 2021 and 2020, respectively. There were no gains on life insurance benefits recorded for the three months ended September 30, 2021 and September 30, 2020. The Company recorded gains on life insurance benefits of $258,000, and $692,000 for the nine months ended September 30, 2021 and 2020, respectively. Deposits As of September 30, 2021, total deposits were $12.3 billion, representing a $1.3 billion, or 11.5%, increase from December 31, 2020, as robust new account opening activity and the ongoing impact o f government stimulus payments continued to fuel significant growth. The total cost of deposits was 0.05% and 0.20% for the three months ended September 30, 2021 and 2020, respectively and 0.07% and 0.31% for the nine months ended September 30, 2021 and 2020, respectively. Core deposits increased from 91.6% of total deposits as of June 30, 2021 to 92.0% of total deposits as of September 30, 2021, while noncore time deposits continued to runoff. The Company also participates in the IntraFi Network, allowing the Bank to provide easy access to multi-million dollar Federal Deposit Insurance Corporation ("FDIC") deposit insurance protection on certificate of deposit and money market investments for consumers, businesses and public entities. This channel allows the Company to seek additional funding in potentially large quantities by attracting deposits from outside the Bank’s core market, and amounted to $244.6 million and $237.9 million at September 30, 2021 and December 31, 2020, respectively. In addition, the Company may occasionally raise funds through the use of brokered deposits outside of the IntraFi Network, which amounted to $6.0 million and $8.5 million at September 30, 2021 and December 31, 2020, respectively. Borrowings The Company’s borrowings consist of both short-term and long-term borrowings and provide the Bank with one of its primary sources of funding. Maintaining available borrowing capacity provides the Bank with a contingent source of liquidity. The following table presents the components of borrowings as of the dates indicated: Table 13 - Borrowings September 30 2021 December 31 2020 (Dollars in thousands) Federal Home Loan Bank borrowings $ 25,675 $ 35,740 Long-term borrowings 18,750 32,773 Junior subordinated debentures 62,853 62,851 Subordinated debentures 49,767 49,696 Total borrowings $ 157,045 $ 181,060 Additionally, the Bank had $3.6 billion and $4.1 billion of assets pledged as collateral against borrowings at September 30, 2021 and December 31, 2020, respectively. These assets are primarily pledged to the FHLB of Boston and the Federal Reserve Bank of Boston. 76 Table of Contents Capital Resources On September 16, 2021, the Company’s Board of Directors declared a cash dividend of $0.48 per share to shareholders of record as of the close of business on September 27, 2021. This dividend was paid on October 8, 2021. The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 Capital and Common Equity Tier 1 Capital (as defined for regulatory purposes) to risk weighted assets (as defined for regulatory purposes) and Tier 1 Capital to average assets (as defined for regulatory purposes). At September 30, 2021 and December 31, 2020, the Company and the Bank exceeded the minimum requirements for all applicable ratios that were in effect during the respective periods. The Company’s and the Bank’s capital amounts and ratios are presented in the following table, along with the applicable minimum requirements as of each date indicated: Table 14 - Company and Bank's Capital Amounts and Ratios Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio September 30, 2021 (Dollars in thousands) Company (consolidated) Total capital (to risk weighted assets) $ 1,432,353 15.78 % $ 726,292 ≥ 8.0 % N/A N/A Common equity tier 1 capital (to risk weighted assets) 1,228,670 13.53 % 408,539 ≥ 4.5 % N/A N/A Tier 1 capital (to risk weighted assets) 1,289,672 14.21 % 544,719 ≥ 6.0 % N/A N/A Tier 1 capital (to average assets) 1,289,672 9.36 % 571,437 ≥ 4.0 % N/A N/A Bank Total capital (to risk weighted assets) $ 1,389,105 15.30 % $ 726,448 ≥ 8.0 % $ 908,060 ≥ 10.0 % Common equity tier 1 capital (to risk weighted assets) 1,296,191 14.27 % 408,627 ≥ 4.5 % 590,239 ≥ 6.5 % Tier 1 capital (to risk weighted assets) 1,296,191 14.27 % 544,836 ≥ 6.0 % 726,448 ≥ 8.0 % Tier 1 capital (to average assets) 1,296,191 9.40 % 571,492 ≥ 4.0 % 714,365 ≥ 5.0 % December 31, 2020 (Dollars in thousands) Company (consolidated) Total capital (to risk weighted assets) $ 1,374,349 15.13 % $ 726,482 ≥ 8.0 % N/A N/A Common equity tier 1 capital (to risk weighted assets) 1,150,177 12.67 % 408,646 ≥ 4.5 % N/A N/A Tier 1 capital (to risk weighted assets) 1,211,177 13.34 % 544,861 ≥ 6.0 % N/A N/A Tier 1 capital (to average assets) 1,211,177 9.56 % 506,805 ≥ 4.0 % N/A N/A Bank Total capital (to risk weighted assets) $ 1,320,056 14.54 % $ 726,313 ≥ 8.0 % $ 907,892 ≥ 10.0 % Common equity tier 1 capital (to risk weighted assets) 1,206,566 13.29 % 408,551 ≥ 4.5 % 590,130 ≥ 6.5 % Tier 1 capital (to risk weighted assets) 1,206,566 13.29 % 544,735 ≥ 6.0 % 726,313 ≥ 8.0 % Tier 1 capital (to average assets) 1,206,566 9.54 % 505,747 ≥ 4.0 % 632,184 ≥ 5.0 % 77 Table of Contents In addition to the minimum risk-based capital requirements outlined in the table above, the Company is required to maintain a minimum capital conservation buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the capital conservation buffer is 2.5%. At September 30, 2021, the Company's capital levels exceeded the buffer. Dividend Restrictions The Company is subject to capital and dividend requirements administered by federal and state bank regulators, and the Company will not declare a cash dividend that would cause the Company to violate regulatory requirements. The Company is, in the ordinary course of business, dependent upon the receipt of cash dividends from the Bank to pay cash dividends to shareholders and satisfy the Company’s other cash needs. Federal and state law impose limits on capital distributions by the Bank. Massachusetts-chartered banks, such as the Bank, may declare from net profits cash dividends not more frequently than quarterly and non-cash dividends at any time. No dividends may be declared, credited, or paid if the Bank’s capital stock would be impaired. Massachusetts Bank Commissioner approval is required if the total of all dividends declared by the Bank in any calendar year would exceed the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. Dividends of $33.9 million and $16.2 million were paid by the Bank to the Company for the three months ended September 30, 2021 and September 30, 2020, respectively, and dividends of $38.9 million and $139.8 million were paid by the Bank to the Company for the nine months ended September 30, 2021 and September 30, 2020, respectively. Trust Preferred Securities In accordance with the applicable accounting standard related to variable interest entities, the common stock of trusts which have issued trust preferred securities has not been included in the consolidated financial statements of the Company. At each of September 30, 2021 and December 31, 2020 there were $61.0 million in trust preferred securities included in the Tier 1 capital of the Company for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines. Investment Management As of September 30, 2021, the Rockland Trust Investment Management Group had assets under administration of $5.4 billion, representing 6,368 trust, fiduciary, and agency accounts. At December 31, 2020, assets under administration were $4.9 billion, representing approximately 6,175 trust, fiduciary, and agency accounts. Included in these amounts as of September 30, 2021 and December 31, 2020 were assets under administration of $405.9 million and $369.6 million, respectively, relating to the Company’s registered investment advisor, Bright Rock Capital Management, LLC, which provides institutional quality investment management services to institutional and high net worth clients. Revenue from the Investment Management Group was $8.1 million and $7.0 million for the three months ended September 30, 2021 and 2020, respectively, and $23.6 million and $20.1 million for the nine months ended September 30, 2021 and 2020, respectively. Retail investments and insurance revenue was $1.0 million and $573,000 for the three months ended September 30, 2021 and 2020, respectively, and $2.8 million and $1.6 million for the nine months ended September 30, 2021 and 2020, respectively. Retail investments and insurance revenue include commission revenue from LPL Financial (“LPL”) and its affiliates and their insurance subsidiary, LPL Insurance Associates, Inc., which offers the sale of mutual fund shares, unit investment trust shares, general securities, fixed and variable annuities and life insurance. Registered representatives who are both employed by the Bank and licensed and contracted with LPL are onsite to offer these products to the Bank’s customer base. These same agents are also approved and appointed with various other broker general agents for the purpose of processing insurance solutions for clients. 78 Table of Contents RESULTS OF OPERATIONS The following table provides a summary of results of operations for the three and nine months ended September 30, 2021 and 2020: Table 15 - Summary of Results of Operations Three Months Ended September 30 Nine Months Ended September 30 2021 2020 2021 2020 (Dollars in thousands, except per share data) Net income $ 40,007 $ 34,873 $ 119,290 $ 86,526 Diluted earnings per share $ 1.21 $ 1.06 $ 3.61 $ 2.59 Return on average assets 1.11 % 1.07 % 1.15 % 0.93 % Return on average equity 9.04 % 8.21 % 9.20 % 6.80 % Net interest margin 2.78 % 3.13 % 3.00 % 3.36 % The Company's results of operations for the nine months ended September 30, 2021 were positively impacted by a release of provision for credit losses in the amount of $17.5 million, as well as elevated interest income from forgiven PPP loans. In comparison, results for the same nine ended September 30, 2020 reflected an increased provision for credit loss of $52.5 million, driven by anticipated credit losses related to the COVID-19 pandemic. Net Interest Income The amount of net interest income is affected by changes in interest rates and by the volume, mix, and interest rate sensitivity of interest-earning assets and interest-bearing liabilities. On a fully tax equivalent basis ("FTE"), net interest income for the third quarter of 2021 was $90.3 million, representing a decrease of $801,000, or 0.9%, when compared to the third quarter of 2020. For the nine months ended September 30, 2021, the net interest income on a FTE basis was $279.7 million, representing an increase of $2.7 million, or 1.0%, when compared to the year ago period. 79 Table of Contents The following tables present the Company’s average balances, net interest income, interest rate spread, and net interest margin for the three and nine months ended September 30, 2021 and 2020. Nontaxable income from loans and securities is presented on a FTE basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing income tax rate that would have been paid if the income had been fully taxable. Table 16 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date Three Months Ended September 30 2021 2020 Average Balance Interest Earned/ Paid Yield/Rate Average Balance Interest Earned/ Paid Yield/Rate (Dollars in thousands) Interest-earning assets Interest-earning deposits with banks, federal funds sold, and short term investments $ 2,135,031 $ 815 0.15 % $ 997,921 $ 254 0.10 % Securities Securities - trading 3,498 — — % 2,607 — — % Securities - taxable investments 1,880,863 7,792 1.64 % 1,139,843 7,218 2.52 % Securities - nontaxable investments (1) 468 5 4.24 % 1,146 11 3.82 % Total securities $ 1,884,829 $ 7,797 1.64 % $ 1,143,596 $ 7,229 2.51 % Loans held for sale 30,143 193 2.54 % 50,709 326 2.56 % Loans (2) Commercial and industrial (1) 1,640,422 15,309 3.70 % 2,033,385 17,724 3.47 % Commercial real estate (1) 4,232,575 41,469 3.89 % 4,086,594 41,578 4.05 % Commercial construction 507,393 4,916 3.84 % 568,007 5,126 3.59 % Small business 181,953 2,341 5.10 % 168,662 2,303 5.43 % Total commercial 6,562,343 64,035 3.87 % 6,856,648 66,731 3.87 % Residential real estate 1,231,606 10,955 3.53 % 1,387,055 13,436 3.85 % Home equity 1,007,371 9,043 3.56 % 1,107,685 9,658 3.47 % Total consumer real estate 2,238,977 19,998 3.54 % 2,494,740 23,094 3.68 % Other consumer 25,929 398 6.09 % 24,134 515 8.49 % Total loans $ 8,827,249 $ 84,431 3.79 % $ 9,375,522 $ 90,340 3.83 % Total interest-earning assets $ 12,877,252 $ 93,236 2.87 % $ 11,567,748 $ 98,149 3.38 % Cash and due from banks 144,556 124,482 Federal Home Loan Bank stock 8,904 15,090 Other assets 1,268,199 1,313,194 Total assets $ 14,298,911 $ 13,020,514 Interest-bearing liabilities Deposits Savings and interest checking accounts $ 4,426,106 $ 338 0.03 % $ 3,836,488 $ 838 0.09 % Money market 2,375,492 443 0.07 % 2,087,822 945 0.18 % Time deposits 795,943 852 0.42 % 1,076,546 3,649 1.35 % Total interest-bearing deposits $ 7,597,541 $ 1,633 0.09 % $ 7,000,856 $ 5,432 0.31 % Borrowings Federal Home Loan Bank borrowings $ 31,118 $ 165 2.10 % $ 145,766 $ 408 1.11 % Long-term borrowings 18,742 77 1.63 % 37,439 141 1.50 % Junior subordinated debentures 62,852 432 2.73 % 62,850 438 2.77 % Subordinated debentures 49,753 617 4.92 % 49,659 617 4.94 % 80 Table of Contents Total borrowings $ 162,465 $ 1,291 3.15 % $ 295,714 $ 1,604 2.16 % Total interest-bearing liabilities $ 7,760,006 $ 2,924 0.15 % $ 7,296,570 $ 7,036 0.38 % Noninterest bearing demand deposits 4,502,045 3,700,902 Other liabilities 280,754 332,937 Total liabilities $ 12,542,805 $ 11,330,409 Stockholders' equity 1,756,106 1,690,105 Total liabilities and stockholders' equity $ 14,298,911 $ 13,020,514 Net interest income (1) $ 90,312 $ 91,113 Interest rate spread (3) 2.72 % 3.00 % Net interest margin (4) 2.78 % 3.13 % Supplemental information Total deposits, including demand deposits $ 12,099,586 $ 1,633 $ 10,701,758 $ 5,432 Cost of total deposits 0.05 % 0.20 % Total funding liabilities, including demand deposits $ 12,262,051 $ 2,924 $ 10,997,472 $ 7,036 Cost of total funding liabilities 0.09 % 0.25 % (1) The total amount of adjustment to interest income and yield on a FTE basis was $220,000 and $230,000 for the three months ended September 30, 2021 and 2020, respectively. The FTE adjustment relates to tax exempt income relating to securities with average balances of $468,000 and $1.1 million and tax exempt income relating to loans with average balances of $61.2 million and $81.6 million, for the three months ended September 30, 2021 and 2020, respectively. (2) Includes average nonaccruing loans. (3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. 81 Table of Contents Table 17 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date Nine Months Ended September 30 2021 2020 Average Balance Interest Earned/ Paid Yield/ Rate Average Balance Interest Earned/ Paid Yield/ Rate (Dollars in thousands) Interest-earning assets Interest-earning deposits with banks, federal funds sold, and short-term investments $ 1,782,463 $ 1,654 0.12 % $ 599,827 $ 546 0.12 % Securities Securities - trading 3,267 — — % 2,421 — — % Securities - taxable investments 1,550,859 21,603 1.86 % 1,178,671 23,006 2.61 % Securities - nontaxable investments (1) 555 17 4.10 % 1,176 34 3.86 % Total securities $ 1,554,681 $ 21,620 1.86 % $ 1,182,268 $ 23,040 2.60 % Loans held for sale 35,953 675 2.51 % 43,150 917 2.84 % Loans (2) Commercial and industrial (1) 1,898,100 58,706 4.14 % 1,784,715 52,027 3.89 % Commercial real estate (1) 4,195,200 123,377 3.93 % 4,050,154 129,800 4.28 % Commercial construction 525,652 14,976 3.81 % 554,222 17,341 4.18 % Small business 178,294 6,924 5.19 % 172,575 7,253 5.61 % Total commercial 6,797,246 203,983 4.01 % 6,561,666 206,421 4.20 % Residential real estate 1,242,991 34,449 3.71 % 1,473,812 41,856 3.79 % Home equity 1,027,311 26,391 3.43 % 1,125,817 31,617 3.75 % Total consumer real estate 2,270,302 60,840 3.58 % 2,599,629 73,473 3.78 % Other consumer 23,382 1,241 7.10 % 25,643 1,587 8.27 % Total loans $ 9,090,930 $ 266,064 3.91 % $ 9,186,938 $ 281,481 4.09 % Total interest-earning assets $ 12,464,027 $ 290,013 3.11 % $ 11,012,183 $ 305,984 3.71 % Cash and due from banks 147,269 122,302 Federal Home Loan Bank stock 9,516 17,645 Other assets 1,256,066 1,256,074 Total assets $ 13,876,878 $ 12,408,204 Interest-bearing liabilities Deposits Savings and interest checking accounts $ 4,292,992 $ 1,145 0.04 % $ 3,592,069 $ 3,873 0.14 % Money market 2,337,445 1,393 0.08 % 1,978,006 5,495 0.37 % Time deposits 848,143 3,823 0.60 % 1,202,746 13,983 1.55 % Total interest-bearing deposits $ 7,478,580 $ 6,361 0.11 % $ 6,772,821 $ 23,351 0.46 % Borrowings Federal Home Loan Bank borrowings $ 34,185 $ 544 2.13 % $ 205,244 $ 1,369 0.89 % Long-term borrowings 23,434 282 1.61 % 61,240 1,045 2.28 % Junior subordinated debentures 62,852 1,287 2.74 % 62,849 1,362 2.89 % Subordinated debentures 49,729 1,852 4.98 % 49,635 1,852 4.98 % Total borrowings $ 170,200 $ 3,965 3.11 % $ 378,968 $ 5,628 1.98 % Total interest-bearing liabilities $ 7,648,780 $ 10,326 0.18 % $ 7,151,789 $ 28,979 0.54 % Noninterest bearing demand deposits 4,213,764 3,257,058 Other liabilities 280,002 300,248 82 Table of Contents Total liabilities $ 12,142,546 $ 10,709,095 Stockholders' equity 1,734,332 1,699,109 Total liabilities and stockholders' equity $ 13,876,878 $ 12,408,204 Net interest income (1) $ 279,687 $ 277,005 Interest rate spread (3) 2.93 % 3.17 % Net interest margin (4) 3.00 % 3.36 % Supplemental information Total deposit, including demand deposits $ 11,692,344 $ 6,361 $ 10,029,879 $ 23,351 Cost of total deposits 0.07 % 0.31 % Total funding liabilities, including demand deposits $ 11,862,544 $ 10,326 $ 10,408,847 $ 28,979 Cost of total funding liabilities 0.12 % 0.37 % (1) The total amount of adjustment to present interest income and yield on a FTE basis was $658,000 and $720,000 for the nine months ended September 30, 2021 and 2020, respectively. The FTE adjustment relates to nontaxable investment securities with average balances of $555,000 and $1.2 million and tax exempt income relating to loans with average balances of $63.9 million and $83.0 million for the nine months ended September 30, 2021 and 2020, respectively. (2) Includes average nonaccruing loans. (3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) Net interest margin represents annualized net interest income as a percentage of average interest-earning assets. 83 Table of Contents The following table presents certain information on a FTE basis regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in rate (change in rate multiplied by prior period volume), (2) changes in volume (change in volume multiplied by old rate), and (3) changes in volume/rate (change in volume multiplied by change in rate) which is allocated to the change due to rate column: Table 18 - Volume Rate Analysis Three Months Ended September 30 Nine Months Ended September 30 2021 Compared To 2020 2021 Compared To 2020 Change Due to Rate Change Due to Volume Total Change Change Due to Rate Change Due to Volume Total Change (Dollars in thousands) Income on interest-earning assets Interest earning deposits, federal funds sold and short term investments $ 272 $ 289 $ 561 $ 31 $ 1,077 $ 1,108 Securities Securities - taxable investments (4,118) 4,692 574 (8,668) 7,265 (1,403) Securities - nontaxable investments (1) 1 (7) (6) 1 (18) (17) Total securities 568 (1,420) Loans held for sale (1) (132) (133) (89) (153) (242) Loans Commercial and industrial (1) 1,010 (3,425) (2,415) 3,374 3,305 6,679 Commercial real estate (1) (1,594) 1,485 (109) (11,071) 4,648 (6,423) Commercial construction 337 (547) (210) (1,471) (894) (2,365) Small business (143) 181 38 (569) 240 (329) Total commercial (2,696) (2,438) Residential real estate (975) (1,506) (2,481) (852) (6,555) (7,407) Home equity 260 (875) (615) (2,460) (2,766) (5,226) Total consumer real estate (3,096) (12,633) Other consumer (155) 38 (117) (206) (140) (346) Total loans (1)(2) (5,909) (15,417) Total income of interest-earning assets $ (4,913) $ (15,971) Expense of interest-bearing liabilities Deposits Savings and interest checking accounts $ (629) $ 129 $ (500) $ (3,484) $ 756 $ (2,728) Money market (632) 130 (502) (5,101) 999 (4,102) Time certificates of deposits (1,846) (951) (2,797) (6,037) (4,123) (10,160) Total interest bearing deposits (3,799) (16,990) Borrowings Federal Home Loan Bank borrowings 78 (321) (243) 316 (1,141) (825) Line of Credit — — — — Long-term borrowings 6 (70) (64) (118) (645) (763) Junior subordinated debentures (6) — (6) (75) — (75) Subordinated debentures (1) 1 — (4) 4 — Total borrowings (313) (1,663) Total expense of interest-bearing liabilities (4,112) (18,653) Change in net interest income $ (801) $ 2,682 (1) Reflects income determined on a FTE basis. See footnote (1) to tables 16 and 17 in this Report for the related adjustments. (2) Loans include portfolio loans and nonaccrual loans; however, unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. 84 Table of Contents Provision For Credit Losses The provision for credit losses represents the charge to expense that is required to maintain an adequate level of allowance for credit losses. The Company recorded a release of provision for credit losses of $10.0 million and $17.5 million for the three and nine months ended September 30, 2021, primarily due to improvements in expected overall macro-economic forecast assumptions and continued strong asset quality metrics, as well as lower loan balances during 2021. In comparison, the Company recorded a provision expense of $7.5 million and $52.5 million for the three and nine months ended September 30, 2020, which was primarily driven by anticipated loan losses related to the COVID-19 pandemic. The Company’s allowance for credit losses, as a percentage of total loans, was 1.05% at September 30, 2021, 1.21% at December 31, 2020, and 1.23% at September 30, 2020. The Company recorded net charge-offs of $111,000 and $3.6 million for the three and nine months ended September 30, 2021, respectively, as compared to $4.1 million and $4.6 million for the three and nine months ended September 30, 2020, respectively. Refer to Note 4, "Loans, Allowance for Credit Losses and Credit Quality " within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report, for further details surrounding the primary drivers of the provision for credit losses for the period. Noninterest Income The following table sets forth information regarding noninterest income for the periods shown: Table 19 - Noninterest Income Three Months Ended September 30 Change 2021 2020 Amount % (Dollars in thousands) Deposit account fees $ 4,298 $ 3,428 $ 870 25.38 % Interchange and ATM fees 3,441 3,044 397 13.04 % Investment management 9,174 7,571 1,603 21.17 % Mortgage banking income 2,825 7,704 (4,879) (63.33) % Increase in cash surrender value of life insurance policies 1,596 1,314 282 21.46 % Loan level derivative income 586 2,457 (1,871) (76.15) % Unrealized gain on equity securities — 308 (308) (100.00) % Other noninterest income 4,537 3,521 1,016 28.86 % Total $ 26,457 $ 29,347 $ (2,890) (9.85) % Nine Months Ended September 30 Change 2021 2020 Amount % (Dollars in thousands) Deposit account fees $ 11,704 $ 11,227 $ 477 4.25 % Interchange and ATM fees 9,229 13,154 (3,925) (29.84) % Investment management 26,350 21,696 4,654 21.45 % Mortgage banking income 11,270 13,570 (2,300) (16.95) % Gain on life insurance benefits 258 692 (434) (62.72) % Increase in cash surrender value of life insurance policies 4,508 3,902 606 15.53 % Loan level derivative income 875 8,918 (8,043) (90.19) % Unrealized gain on equity securities 723 1,694 (971) (57.32) % Other noninterest income 11,753 9,119 2,634 28.88 % Total $ 76,670 $ 83,972 $ (7,302) (8.70) % The primary reasons for the variances in the noninterest income categories for the three and nine months ended September 30, 2021 as compared to the respective prior year periods shown in the preceding table include: • Deposit fee income was impacted by the timing and extent of government mandated shutdowns and social distancing measures, as well as the timing of economic stimulus payments received by customers. 85 Table of Contents • Interchange and ATM fees increased for the three months ended September 30, 2021 due to increased volume and rise in customer spending in comparison to the prior year period. Such fees decreased for the nine months ended September 30, 2021 in comparison to the year ago period, reflecting the negative impact of the Durbin Amendment, which the Company became subject to effective July 1, 2020 as a result of crossing the $10 billion asset threshold, coupled with an overall decrease in consumer spending as customers focused on retaining liquidity following the onset of COVID-19 pandemic late in the first quarter of 2020. • Investment management income increased for the three and nine months ended September 30, 2021 in comparison to the year ago periods, primarily driven by more favorable market conditions during 2021, along with overall growth in assets under administration which increased 19.7% to $5.4 billion at September 30, 2021 from $4.5 billion at September 30, 2020. • Mortgage banking income decreased during the three and nine months ended September 30, 2021 in comparison to the year ago periods. The changes are driven primarily by demand within the respective prevailing interest rate environments in those periods, as well as percentage of closings sold in the secondary market versus retained in the portfolio. • Loan level derivative income decreased for the three and nine months ended September 30, 2021, primarily as a result of lower customer demand in comparison to the year ago periods. • Unrealized gain on equity securities decreased for the three and nine months ended September 30, 2021, due primarily to significant market volatility during the first half of 2020 caused by the onset of the COVID-19 pandemic, the result of which was a sell-off late in the first quarter of 2020, followed by a period of elevated growth during the second and third quarters of 2020. • Other noninterest income increased for the three and nine months ended September 30, 2021 compared to the prior year periods, primarily attributable to income recognized from other investments, income from like-kind exchanges and business credit card income. 86 Table of Contents Noninterest Expense The following table sets forth information regarding non-interest expense for the periods shown: Table 20 - Noninterest Expense Three Months Ended September 30 Change 2021 2020 Amount % (Dollars in thousands) Salaries and employee benefits $ 42,235 $ 38,409 $ 3,826 9.96 % Occupancy and equipment expenses 8,564 9,273 (709) (7.65) % Data processing & facilities management 1,673 1,567 106 6.76 % FDIC assessment 980 1,034 (54) (5.22) % Advertising expense 884 1,215 (331) (27.24) % Consulting expense 1,560 1,305 255 19.54 % Amortization of intangible assets 1,310 1,449 (139) (9.59) % Debit card expense 1,347 1,105 242 21.90 % Loss on termination of derivatives — 684 (684) (100.00) % Merger and acquisition expenses 1,943 — 1,943 100.00% Software maintenance 2,018 1,753 265 15.12 % Other noninterest expenses 9,905 8,864 1,041 11.74 % Total $ 72,419 $ 66,658 $ 5,761 8.64 % Nine Months Ended September 30 Change 2021 2020 Amount % (Dollars in thousands) Salaries and employee benefits $ 124,759 $ 113,027 $ 11,732 10.38 % Occupancy and equipment expenses 26,543 27,863 (1,320) (4.74) % Data processing & facilities management 5,024 4,684 340 7.26 % FDIC assessment 2,805 1,537 1,268 82.50 % Advertising expense 2,949 3,107 (158) (5.09) % Consulting expense 5,443 4,244 1,199 28.25 % Amortization of intangible assets 4,037 4,704 (667) (14.18) % Debit card expense 3,693 3,312 381 11.50 % Loss on termination of derivatives — 684 (684) (100.00) % Merger and acquisition expenses 3,674 — 3,674 100.00% Software maintenance 5,903 5,218 685 13.13 % Other noninterest expenses 30,573 31,725 (1,152) (3.63) % Total $ 215,403 $ 200,105 $ 15,298 7.64 % The primary reasons for the variances in the noninterest expense categories for the three and nine months ended September 30, 2021 as compared to the respective prior year periods shown in the preceding table include: • The increase in salaries and employee benefits for the three and nine months ended September 30, 2021 as compared to the prior year periods is primarily due to increases in incentive programs, commissions, payroll taxes, general salary increases, and retirement costs. • Occupancy and equipment decreased during both the three and nine months ended September 30, 2021 as compared to the prior year periods. These decreases were primarily due to reductions in depreciation expense 87 Table of Contents from disposals of equipment, as well as decreased computer hardware and software costs which were elevated in the prior year to facilitate remote work for employees after onset of the COVID-19 pandemic. Partially offsetting the decrease for the nine months ended September 30, 2021 were increases in cleaning costs and snow removal expenses in comparison to the prior year period. • Data processing and facilities management expenses increased for both the three and nine months ended September 30, 2021 as compared to the prior year periods, primarily due to timing of certain initiatives and system upgrades. • FDIC assessment increased for the nine months ended September 30, 2021, in comparison to year ago period as the Company previously benefited from a small bank assessment credit, which resulted in no expense during the first quarter of 2020 and reduced expense during the second quarter of 2020. Assessment fees for the three months ended September 30, 2021 were slightly lower than the year ago period, due to normal fluctuations in the company's assessment base. • Consulting expense increased for the three and nine months ended September 30, 2021, in comparison to the prior year periods, primarily due to the Company's overall growth and implementation of strategic initiatives. • The Company recorded merger and acquisitions expenses of $1.9 million and $3.7 million during the three and nine months ended September 30, 2021, respectively, relating to the Meridian acquisition. No such costs were incurred during either period in 2020. • Software maintenance increased for the three and nine months ended September 30, 2021, as compared to the prior year periods, primarily due to the Company's continued investment in its technology infrastructure. • Other noninterest expense for the three months ended September 30, 2021 increased when compared to the prior year period, with increases in recruitment expense, sponsorships, unrealized loss on equity securities, and legal fees. Other noninterest expense decreased for the nine months ended September 30, 2021 as compared to the prior year period, mainly due to decreases in unrealized loss on equity securities, prepayment fees on borrowings, loss on the sale of fixed assets, office supplies, retail branch traffic control, and miscellaneous other expenses. Income Taxes The tax effect of all income and expense transactions is recognized by the Company 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 the Company’s tax provision and applicable tax rates for the periods indicated: Table 21 - Tax Provision and Applicable Tax Rates Three Months Ended Nine Months Ended September 30 September 30 2021 2020 2021 2020 (Dollars in thousands) Combined federal and state income tax provision $ 14,122 $ 11,199 $ 38,506 $ 21,126 Effective income tax rate 26.09 % 24.31 % 24.40 % 19.62 % Blended statutory tax rate 27.92 % 27.89 % 27.92 % 27.89 % The Company’s effective tax rate in 2021 thus far is higher as compared to the year ago period primarily due to higher pre-tax income, as well as the impact of discrete items, including tax benefits related to low income housing tax credits and equity compensation. The discrete tax amounts for the nine months ended September 30, 2020 also reflect a benefit of $4.7 million associated with the net operating loss (NOL) carryback provision of the CARES Act. The NOL was generated in relation to the acquisition of Blue Hills Bancorp, Inc. in 2019. The effective tax rates in the table above are lower than the blended statutory tax rates due to the aforementioned discrete items as well as certain tax preference assets such as life insurance policies, tax exempt bonds, and federal tax credits. The Company’s blended statutory tax rate for the three and nine months ended September 30, 2021 are comparable to the year ago periods. The Company invests in various low income housing projects, which are real estate limited partnerships that acquire, develop, own and operate low and moderate-income housing developments. As a limited partner in these operating partnerships, the Company will receive tax credits and tax deductions for losses incurred by the underlying properties. The investments are accounted for using the proportional amortization method and will be amortized over various periods through 2039, which represents the period that the tax credits and other tax benefits will be utilized. The total committed investment in 88 Table of Contents these partnerships is $162.9 million, of which $88.7 million had been funded as of September 30, 2021. It is expected that the limited partnership investments will generate a net tax benefit of approximately $3.4 million for the fiscal year 2021 and a total of $22.4 million over the remaining life of the investments from the combination of the tax credits and operating losses. Risk Management The Board of Directors has approved an Enterprise Risk Management Policy to state the Company’s goals and objectives in identifying, measuring, and managing the risks associated with the Company’s current and near future anticipated size and complexity. Management is responsible for comprehensive enterprise risk management, and continually strives to adopt and implement practices that strike an appropriate balance between risk and reward and permit the achievement of strategic goals in a controlled environment. The Company has implemented the “three lines of defense” enterprise risk management model. The first line of defense are the executives in charge of business units, operational areas, and corporate functions who, sometimes assisted by management committees, teams, and working groups, own and manage risks. The second line of defense is the Chief Risk Officer and the risk department, who monitor and provide advice with respect to first line risk management. The third line of defense is independent assurance performed by the Chief Internal Auditor, who reports to the Audit Committee of the Company's Board of Directors, and by the Company's internal audit department. The Board of Directors, with the assistance of its Risk Committee, oversees management’s enterprise risk management practices. As risks must be taken to create value, the Board of Directors has approved a Risk Appetite Statement that defines the acceptable residual risk tolerances for the Company and the seven major risk types identified as having the potential to create significant adverse impacts on the Company, such as financial losses, reputational damage, legal or regulatory actions, non‐achievement of strategic objectives, diminished customer experience, and/or cultural erosion. The seven major risk types identified by the Company and addressed in the Risk Appetite Statement are strategic risk, culture risk, credit risk, liquidity risk, market risk, operational risk, and reputation risk, each of which is discussed below. Strategic Risk Strategic risk is the risk arising from adverse strategic or business decisions, misalignment of strategic direction with the Company’s mission and values, failure to execute strategies or tactics, or an inadequate adaptation or lack of responsiveness to industry and/or operating environment changes. Management seeks to mitigate strategic risk through strategic planning, frequent executive review of strategic plan progress, monitoring of competitors and technology, assessment of new products, new branches, and new business initiatives, customer advocacy, and crisis management planning. Culture Risk Culture risk is the risk arising from failed leadership and/or ineffective colleague engagement and workplace management that causes the Company to lose sight of core values and, through acts or omissions, damage the relationship-based culture which has been one of the foundations of the Company’s consistent success. Management mitigates culture risk through effective employee relations, leadership that encourages continuous improvement, cultural development and reinforcement of core values, communication of clear ethical and behavioral standards, consistent enforcement of policies and programs, discipline of misbehavior, alignment of incentives and compensation, and by promoting diversity, equity, and inclusion. Credit Risk Credit risk is the risk arising from the failure of a borrower or a counterparty to a contract to make payments as agreed, and includes the risks arising from inadequate collateral and mismanagement of loan concentrations. While the collateral securing loans may be sufficient in some cases to recover the amount due, in other cases the Company may experience significant credit losses which could have an adverse effect on its operating results. The Company makes assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of collateral for the repayment of loans. For further discussion regarding the credit risk and the credit quality of the Company’s loan portfolio, see Note 4, “Loans, Allowance for Credit Losses and Credit Quality” within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report . Liquidity Risk Liquidity risk is the risk arising from the Company being unable to meet obligations when due. Liquidity risk includes the inability to access funding sources or manage fluctuations in available funding levels. Liquidity risk also results from a failure to recognize or address market condition changes that affect the ability to liquidate assets quickly with minimal value loss. The Company’s primary sources of funds are deposits, borrowings, and the amortization, prepayment, and maturities of loans and securities. The Bank utilizes its extensive branch network to access retail customers who provide a base of in-market core deposits. These funds are principally comprised of demand deposits, interest checking accounts, savings accounts, and money market accounts. Deposit levels are greatly influenced by interest rates, economic conditions, and competitive factors. 89 Table of Contents The Company’s primary measure of short-term liquidity is the Total Basic Surplus/Deficit as a percentage of assets. This ratio, which is an analysis of the relationship between liquid assets plus available Federal Home Loan Bank funding, less short-term liabilities relative to total assets, was within policy limits at September 30, 2021. The Total Basic Surplus/Deficit measure is affected primarily by changes in deposits, securities and short-term investments, loans, and borrowings. An increase in deposits, without a corresponding increase in nonliquid assets, will improve the Total Basic Surplus/Deficit measure, whereas, an increase in loans, with no increase in deposits, will decrease the measure. Other factors affecting the Total Basic Surplus/Deficit include Federal Home Loan Bank collateral requirements, securities portfolio changes, and the mix of deposits. The Company seeks to increase deposits without adversely impacting its weighted average funding cost. As a result of PPP loan funding, government stimulus programs, and a customer focus on retaining liquidity, the Company has experienced significant deposit growth and a buildup of liquidity throughout the first three quarters of 2021. The Company also maintains a variety of liquidity sources, including Federal Home Loan Bank advances, Federal Reserve borrowing capacity, and repurchase agreement lines. These funding sources serve as a contingent source of liquidity and, when profitable lending and investment opportunities exist, the Company may access them to provide the liquidity needed to grow the balance sheet. The amount and type of assets that the Company has available to pledge impacts the Company's Federal Home Loan Bank and Federal Reserve borrowing capacity. For example, a prime one-to-four family residential loan may provide 75 cents of borrowing capacity for every $1.00 pledged, whereas a pledged commercial loan may increase borrowing capacity in a lower amount. The Company’s lending decisions, therefore, can also affect its liquidity position. The Company can also raise additional funds through the issuance of equity or unsecured debt privately or publicly and has done so in the past. Additionally, the Company is able to enter into repurchase agreements or acquire brokered deposits at its discretion. The availability and cost of equity or debt on an unsecured basis is dependent on many factors, including the Company’s financial position, the market environment, and the Company’s credit rating. The Company monitors the factors that could impact its ability to raise liquidity through these channels. The following table depicts current and unused liquidity capacity from various sources as of the dates indicated: Table 22 - Liquidity Sources September 30, 2021 December 31, 2020 Outstanding Additional Borrowing Capacity Outstanding Additional Borrowing Capacity (Dollars in thousands) Federal Home Loan Bank of Boston (1) $ 25,675 $ 1,354,115 $ 35,740 $ 1,372,671 Federal Reserve Bank of Boston (2) — 1,067,818 — 1,355,809 Unpledged Securities — 1,613,818 — 716,961 Line of Credit — 50,000 — 50,000 Long-term borrowing (3) 18,750 — 32,773 — Junior subordinated debentures (3) 62,853 — 62,851 — Subordinated debt (3) 49,767 — 49,696 — Reciprocal deposits (3) 244,586 — 237,902 — Brokered deposits (3) 6,000 — 8,538 — $ 407,631 $ 4,085,751 $ 427,500 $ 3,495,441 (1) Loans with a carrying value of $2.0 billion and $2.1 billion at September 30, 2021 and December 31, 2020, respectively, were pledged to the Federal Home Loan Bank of Boston resulting in this additional unused borrowing capacity. (2) Loans with a carrying value of $1.6 billion and $1.9 billion at September 30, 2021 and December 31, 2020, respectively, were pledged to the Federal Reserve Bank of Boston resulting in this additional unused borrowing capacity. (3) The additional borrowing capacity has not been assessed for these categories. In addition to customary operational liquidity practices, the Board of Directors and management recognize the need to establish reasonable guidelines to manage a heightened liquidity risk environment. Catalysts for elevated liquidity risk can be Company-specific issues and/or systemic industry-wide events. It is therefore the responsibility of management to institute systems and controls designed to provide advanced detection of potentially significant funding shortages, establish methods for assessing and monitoring risk levels, and institute responses that may alleviate or circumvent a potential liquidity crisis. Management has established a Liquidity Contingency Plan to provide a framework to detect potential liquidity problems and 90 Table of Contents appropriately address them in a timely manner. In a period of perceived heightened liquidity risk, the Liquidity Contingency Plan provides for the establishment of a Liquidity Crisis Task Force to monitor the potential for a liquidity crisis and establish and execute an appropriate response. Market Risk Market risk is the risk arising from changes in interest rates and the value of investments due to market conditions or other external factors or events. The Company’s primary market risk exposure is interest rate risk. Interest rate risk is the sensitivity of income to changes in interest rates. Interest rate changes, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, the Company’s primary source of revenue. Interest rate risk arises directly from the Company’s 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, and have other effects. Management strives to control interest rate risk within limits approved by the Board of Directors that reflect the Company’s tolerance for interest rate risk over short-term and long-term horizons. The Company attempts to manage interest rate risk by identifying, quantifying, and, where appropriate, hedging exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. It is the Company's objective 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 within limits management deems prudent, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors, and caps. The Company quantifies its interest rate exposures using net interest income simulation models, as well as simpler gap analysis, and an Economic Value of Equity analysis. Key assumptions in these analyses relate to behavior of interest rates and behavior of the Company’s deposit and loan customers. The most material assumptions relate to the prepayment of mortgage assets (including mortgage loans and mortgage-backed securities) and the life and sensitivity of non-maturity deposits (e.g., demand deposit, negotiable order of withdrawal, savings, and money market accounts). In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, interest rate sensitivity of loans cannot be determined with precision and actual behavior may differ from assumptions to a significant degree. Based upon the net interest income simulation models, the Company currently forecasts that assets are anticipated to re-price faster than liabilities. As a result, net interest income will be positively impacted as market rates increase and negatively impacted if market rates decrease. The Company runs several scenarios to quantify and effectively assist in managing interest rate risk, including instantaneous parallel shifts in market rates as well as gradual (12-24 months) shifts in market rates, and may also include other alternative scenarios as management deems necessary given the interest rate environment. 91 Table of Contents The results of all scenarios and the impact to net interest income are outlined in the table below: Table 23 - Interest Rate Sensitivity September 30 2021 2020 Year 1 Year 2 Year 1 Year 2 Parallel rate shocks (basis points) -100 (3.4) % (9.8) % (0.8) % (9.9) % +100 8.4 % 9.6 % 6.0 % 1.6 % +200 18.0 % 22.8 % 12.5 % 11.0 % +300 27.9 % 36.4 % 19.4 % 20.5 % +400 37.5 % 49.5 % 25.9 % 29.5 % Gradual rate shifts (basis points) -100 over 12 months (1.4) % (8.0) % 0.1 % (9.3) % +200 over 12 months 8.6 % 20.3 % 5.8 % 8.5 % +400 over 24 months 8.6 % 31.6 % 5.8 % 15.4 % Alternative scenarios Yield Curve Twist (1) n/a n/a 1.6 % 2.9 % Flat up 200 basis points scenario 8.0 % 17.8 n/a n/a (1) In the yield curve twist scenario, rates increase 200 basis points over a two year horizon. The parallel shift occurs faster on the long end of the curve than it does on the short end, creating a temporary increase in the steepness of the curve during the interim period of the twist. The results depicted in the table above are dependent on material assumptions. For instance, asymmetrical rate behavior can have a material impact on the simulation results. If competition for deposits prompts the Company to raise rates on those liabilities more quickly than is assumed in the simulation analysis without a corresponding increase in asset yields, net interest income would be negatively impacted. Alternatively, if the Company is able to lag increases in deposit rates as loans re-price upward, net interest income would be positively impacted. The most significant market factors affecting the Company’s net interest income during the nine months ended September 30, 2021 were the shape of the U.S. Government securities and interest rate swap yield curve, the U.S. prime interest rate and LIBOR rates, and the interest rates being offered on long-term fixed rate loans. The full economic impact of the COVID-19 pandemic on these factors remains uncertain. The Company manages the interest rate risk inherent in both its loan and borrowing portfolios by using interest rate swap agreements and interest rate caps and floors. An interest rate swap is an agreement in which 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 the other party. Interest rate caps and floors are agreements where one party agrees to pay a floating rate of interest on a notional principal amount for a predetermined period of time to a second party if certain market interest rate thresholds are realized. While interest is paid or received in swap, cap, and floors agreements, the notional principal amount is not actually exchanged. The Company may also manage the interest rate risk inherent in its mortgage banking operations by entering into forward sales contracts under which the Company agrees to deliver whole mortgage loans to various investors. See Note 6, “ Derivative and Hedging Activities ” within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report for additional information regarding the Company’s derivative financial instruments. The Company’s 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. See Note 3, “Securities” within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report. There were no material changes in off-balance sheet financial instruments during the three months ended September 30, 2021. See Note 6, “Derivative and Hedging Activities ” and Note 10, "Commitments and Contingencies " within the Notes to 92 Table of Contents Consolidated Financial Statements included in Part I. of Item 1 of this Report for more information relating to the Company's other off-balance sheet financial instruments. Operational Risk Operational risk is the risk arising from human error or misconduct, transaction errors or delays, inadequate or failed internal systems or processes, data unavailability, loss, or poor quality, or adverse external events. Operational risk includes business resiliency risk, consumer compliance risk, data governance risk, fraud risk, information security risk, information technology risk, legal risk, model risk, regulatory compliance risk, and third party vendor risk. Potential operational risk exposure exists throughout the Company. The continued effectiveness of colleagues, technical systems, operational infrastructure, and relationships with key third party service providers are integral to mitigating operational risk, and any shortcomings subject the Company to risks that vary in size, scale and scope. Operational risks include operational or technical failures, unlawful tampering with technical systems, cyber security, terrorist activities, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or a failure of key individuals to perform properly. Reputation Risk Reputational risk is the risk arising from negative public opinion of the Company and the Bank. Management seeks to mitigate reputation risk through actions that include a structured process of customer complaint resolution and ongoing reputational monitoring. Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Financial Information Off-Balance Sheet Arrangements There were no material changes in off-balance sheet financial instruments during the three months ended September 30, 2021. See Note 6, "Derivative and Hedging Activities" and Note 10, "Commitments and Contingencies" within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report for more information relating to the Company's other off-balance sheet financial instruments. Contractual Obligations, Commitments, and Contingencies There were no material changes in contractual obligations, commitments, or contingencies during the three months ended September 30, 2021. Refer to the 2020 Form 10-K for a complete table of contractual obligations, commitments and contingencies. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information required by this Item 3 is included in the "Risk Management" section of Part I. Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report and is incorporated herein by reference.