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, 2021, filed with the Securities and Exchange Commission (the "2021 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 2021 Form 10-K, 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 any future weakening caused by the COVID-19 pandemic and any uncertainty regarding the length and extent of economic contraction as a result of the pandemic; • the potential effects of inflationary pressures, labor market shortages and supply chain issues; • instability or volatility in financial markets and unfavorable general economic or business conditions, globally, nationally or regionally, caused by geopolitical concerns, including as a result of the conflict between Russia and Ukraine, could have an adverse effect on our business or results of operations; • 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; • acquisitions 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; • changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System; 47 Table of Contents • 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, geopolitical concerns, including those arising from the conflict between Russia and Ukraine, 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 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 remains unknown at this time due to factors and future developments that are uncertain, unpredictable and, in many cases, beyond the Company's control, including the scope, duration and extent of the pandemic and any further resurgences, the efficacy, availability and public acceptance of vaccines, boosters or other treatments, actions taken by governmental authorities in response to the pandemic and the direct and indirect impact of these actions and the pandemic generally 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. 48 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 March 31 2022 December 31 2021 September 30 2021 June 30 2021 March 31 2021 (Dollars in thousands, except per share data) Financial condition data Securities $ 2,861,739 $ 2,664,859 $ 2,318,757 $ 1,682,751 $ 1,431,430 Loans 13,580,027 13,587,286 8,808,013 8,938,988 9,246,691 Allowance for credit losses (144,518) (146,922) (92,246) (102,357) (107,549) Goodwill and other intangible assets 1,015,831 1,017,844 525,261 526,576 527,894 Total assets 20,159,178 20,423,405 14,533,311 14,194,207 13,773,914 Total deposits 16,763,392 16,917,044 12,260,140 11,986,971 11,593,524 Total borrowings 138,328 152,374 157,045 171,713 176,387 Stockholders’ equity 2,965,439 3,018,449 1,755,954 1,741,622 1,715,371 Nonperforming loans 56,618 27,820 45,810 47,818 59,201 Nonperforming assets 56,618 27,820 45,810 47,818 59,201 Income statement Interest income $ 140,619 $ 125,921 $ 93,016 $ 96,702 $ 99,637 Interest expense 3,187 3,391 2,925 3,348 4,053 Net interest income 137,432 122,530 90,091 93,354 95,584 Provision for credit losses (2,000) 35,705 (10,000) (5,000) (2,500) Noninterest income 26,272 29,180 26,457 24,967 25,246 Noninterest expenses 95,500 117,126 72,419 73,302 69,682 Net income 53,097 1,702 40,007 37,572 41,711 Per share data Net income—basic $ 1.12 $ 0.04 $ 1.21 $ 1.14 $ 1.26 Net income—diluted 1.12 0.04 1.21 1.14 1.26 Cash dividends declared 0.51 0.48 0.48 0.48 0.48 Book value per share 62.59 63.75 53.14 52.72 51.94 Tangible book value per share (1) 41.15 42.25 37.24 36.78 35.96 Performance ratios Return on average assets 1.06 % 0.04 % 1.11 % 1.08 % 1.26 % Return on average common equity 7.16 % 0.28 % 9.04 % 8.70 % 9.87 % Net interest margin (on a fully tax equivalent basis) 3.09 % 3.05 % 2.78 % 2.99 % 3.25 % Dividend payout ratio 42.80 % 931.90 % 39.64 % 42.19 % 36.35 % Asset Quality Ratios Nonperforming loans as a percent of gross loans 0.42 % 0.20 % 0.52 % 0.53 % 0.64 % Nonperforming assets as a percent of total assets 0.28 % 0.14 % 0.32 % 0.34 % 0.43 % Allowance for credit losses as a percent of total loans 1.06 % 1.08 % 1.05 % 1.15 % 1.16 % Allowance for credit losses as a percent of nonperforming loans 255.25 % 528.12 % 201.37 % 214.06 % 181.67 % Capital ratios 49 Table of Contents Equity to assets 14.71 % 14.78 % 12.08 % 12.27 % 12.45 % Tangible equity to tangible assets (1) 10.18 % 10.31 % 8.79 % 8.89 % 8.96 % Tier 1 leverage capital ratio 10.62 % 12.03 % 9.36 % 9.41 % 9.63 % Common equity tier 1 capital ratio 14.45 % 14.30 % 13.53 % 13.31 % 13.16 % Tier 1 risk-based capital ratio 14.45 % 14.30 % 14.21 % 13.98 % 13.85 % Total risk-based capital ratio 16.18 % 16.04 % 15.78 % 15.67 % 15.61 % (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. 50 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 are expected to provide a satisfactory financial return, including the recent acquisition of Meridian Bancorp, Inc. ("Meridian") and its subsidiary, East Boston Savings Bank ("EBSB"), which closed in the fourth quarter of 2021. First Quarter 2022 Results Net income for the first quarter of 2022 was $53.1 million, or $1.12 on a diluted earnings per share basis, as compared to $41.7 million, or $1.26 on a diluted earnings per share basis, for the prior year first quarter, representing an increase of 27.3% and decrease of 11.1%, respectively. The first quarter of 2022 results reflect merger-related costs of $7.1 million, pre-tax, associated with the Meridian acquisition while no such costs were incurred during the same prior year quarter. Excluding the merger and acquisition costs incurred during the first quarter of 2022, operating net income was $58.2 million, or $1.23 per diluted share. See "Non-GAAP Measures" below for a reconciliation of non-GAAP measures. First quarter 2022 results reflected the following key drivers: • 3.3% annualized net loan growth, when excluding PPP loans; • Modest cash deployment into the securities portfolio; • Increase in non-performing assets, yet minimal credit losses resulting in a $2 million release of credit reserves for the quarter; • Solid fee income results; • Overall expenses in line with EBSB merger related cost save expectations 51 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, as well as the Company's acquisition of Meridian during the fourth quarter of 2021. The following table summarizes the Company's interest-earning assets as of the periods indicated. 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 credit losses. 52 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. The following chart shows the sources of funding and the percentage of core deposits to total deposits for the trailing five quarters: The following table shows the net interest margin and cost of deposits trends for the trailing five quarters: 53 Table of Contents Noninterest Income Noninterest income is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees and mortgage banking income. The following chart shows the components of noninterest income over the past five quarters: 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. 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: 54 Table of Contents *See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures. 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 a quarterly cash dividend of $0.51 per share for the first quarter of 2022, representing an increase of 6.3% from the 2021 quarterly dividend rate of $0.48 per share. 55 Table of Contents 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 table that follows. There are items that impact the Company's results that management believes are unrelated to its core banking business such as gains or losses on the sales of securities, merger and acquisition expenses, provision for credit losses on acquired portfolios, loss on extinguishment of debt, impairment, and other items, such as one-time adjustments as a result of changes in laws and regulations. Management, therefore, excludes items management considers to be noncore when computing the Company’s non-GAAP operating earnings and operating EPS, noninterest income on an operating basis and efficiency ratio on an operating basis. 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 an analysis 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 with the Company's tangible common equity ratio (which is computed by dividing tangible common equity by tangible assets) which are non-GAAP measures. The Company has included information on these tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends. The Company has recognized goodwill and other intangible assets in conjunction with merger and acquisition activities. 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, facilitates comparison of 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 financial results 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 period. The Company’s non-GAAP performance measures are not necessarily comparable to similarly named non-GAAP performance measures which may be presented by other companies. The following tables summarize adjustments for noncore items for the periods indicated below and reconcile non-GAAP measures: Three Months Ended March 31 Net Income Diluted Earnings Per Share 2022 2021 2022 2021 (Dollars in thousands, except per share data) Net income available to common shareholders (GAAP) $ 53,097 $ 41,711 $ 1.12 $ 1.26 Non-GAAP adjustments Noninterest expense components Add: merger and acquisition expenses 7,100 — 0.15 — Noncore increases to income before taxes 7,100 — 0.15 — Net tax benefit associated with noncore items (1) (1,995) — (0.04) — Total tax impact (1,995) — (0.04) — Noncore increases to net income 5,105 — 0.11 — Operating net income (Non-GAAP) $ 58,202 $ 41,711 $ 1.23 $ 1.26 (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. 56 Table of Contents Three Months Ended March 31 2022 December 31 2021 September 30 2021 June 30 2021 March 31 2021 (Dollars in thousands) Net interest income (GAAP) $ 137,432 $ 122,530 $ 90,091 $ 93,354 $ 95,584 (a) Noninterest income (GAAP) $ 26,272 $ 29,180 $ 26,457 $ 24,967 $ 25,246 (b) Noninterest expense (GAAP) $ 95,500 $ 117,126 $ 72,419 $ 73,302 $ 69,682 (c) Less: Merger and acquisition expense 7,100 37,166 1,943 1,731 — Noninterest expense on an operating basis (Non-GAAP) $ 88,400 $ 79,960 $ 70,476 $ 71,571 $ 69,682 (d) Total revenue (GAAP) $ 163,704 $ 151,710 $ 116,548 $ 118,321 $ 120,830 (a+b) Ratios Noninterest income as a % of revenue (GAAP based) 16.05 % 19.23 % 22.70 % 21.10 % 20.89 % (b/(a+b)) Efficiency ratio (GAAP based) 58.34 % 77.20 % 62.14 % 61.95 % 57.67 % (c/(a+b)) Efficiency ratio on an operating basis (Non-GAAP) 54.00 % 52.71 % 60.47 % 60.49 % 57.67 % (d/(a+b)) 57 Table of Contents The following table summarizes the calculation of the Company's tangible common equity to tangible assets ratio and tangible book value per share: March 31 2022 December 31 2021 September 30 2021 June 30 2021 March 31 2021 (Dollars in thousands, except per share data) Tangible common equity Stockholders' equity (GAAP) $ 2,965,439 $ 3,018,449 $ 1,755,954 $ 1,741,622 $ 1,715,371 (a) Less: Goodwill and other intangibles 1,015,831 1,017,844 525,261 526,576 527,895 Tangible common equity (Non-GAAP) 1,949,608 2,000,605 1,230,693 1,215,046 1,187,476 (b) Tangible assets Assets (GAAP) 20,159,178 20,423,405 14,533,311 14,194,207 13,773,914 (c) Less: Goodwill and other intangibles 1,015,831 1,017,844 525,261 526,576 527,895 Tangible assets (Non-GAAP) $ 19,143,347 $ 19,405,561 $ 14,008,050 $ 13,667,631 $ 13,246,019 (d) Common shares 47,377,125 47,349,778 33,043,812 33,037,859 33,024,882 (e) Common equity to assets ratio (GAAP) 14.71 % 14.78 % 12.08 % 12.27 % 12.45 % (a/c) Tangible common equity to tangible assets ratio (Non-GAAP) 10.18 % 10.31 % 8.79 % 8.89 % 8.96 % (b/d) Book value per share (GAAP) $ 62.59 $ 63.75 $ 53.14 $ 52.72 $ 51.94 (a/e) Tangible book value per share (Non-GAAP) $ 41.15 $ 42.25 $ 37.24 $ 36.78 $ 35.96 (b/e) 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 three months of 2022. Refer to "Critical Accounting Policies and Estimates" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2021 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 $196.9 million, or 7.4%, at March 31, 2022 as compared to December 31, 2021, primarily r eflecting $365.2 million of purchases which were partially offset by unrealized losses of $81.6 million related to the available for sale portfolio, as well as paydowns, calls, and maturities. The ratio of securities to total assets was 14.2% and 13.0% at March 31, 2022 and December 31, 2021, 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. 58 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 months ended March 31, 2022 and 2021, respectively. 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 March 31 2022 2021 (Dollars in thousands) Held in portfolio $ 180,525 $ 81,921 Sold or held for sale in the secondary market 37,245 270,161 Total closed loans $ 217,770 $ 352,082 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 March 31 2022 2021 (Dollars in thousands) Sold with servicing rights released $ 53,864 $ 281,139 Sold with servicing rights retained (1) 420 1,430 Total loans sold $ 54,284 $ 282,569 (1) All loans sold with servicing rights retained during the three months ended March 31, 2022 and March 31, 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 $361.7 million, $382.6 million and $401.2 million at March 31, 2022, December 31, 2021, and March 31, 2021, respectively. 59 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 March 31 2022 2021 (Dollars in thousands) Balance at beginning of period $ 2,627 $ 2,365 Additions 4 13 Amortization (194) (243) Change in valuation allowance 368 406 Balance at end of period $ 2,805 $ 2,541 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 March 31, 2022 decreased by $7.3 million, or 0.05%, when compared to December 31, 2021. Excluding $116.6 million of net paydowns associated with the PPP, t he loan portfolio increased by $109.4 million compared to the prior quarter, or 3.3% on an annualized basis. Organic loan growth was primarily driven by line utilization increases within the commercial and industrial portfolio as well as a healthy increase in the residential real estate portfolio as a higher portion of new closings were retained on balance sheet. Partially offsetting these growth drivers were ongoing reductions in the acquired Meridian portfolio which led to a decrease in commercial real estate balances, while continued low home equity utilization rates and attrition continue to negate strong home equity closing volumes. 60 Table of Contents The Company's commercial loan portfolio is comprised primarily of commercial and industrial loans as well as 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 previous participation in the PPP resulted in significant loan fundings within the commercial and industrial category, which have now declined to $99.6 million or 6.4% of the total commercial and industrial category at March 31, 2022, primarily as a result of the ongoing forgiveness process, and are reflected within the various sectors below. During the three months ended March 31, 2022, the Company amortized into income $3.5 million 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 March 31, 2022: (Dollars in thousands) Average loan size (excluding floor plan tranches) $ 323 Largest individual commercial and industrial loan outstanding $ 24,048 Commercial and industrial nonperforming loans/commercial and industrial loans 0.22 % 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 March 31, 2022: 61 Table of Contents (Dollars in thousands) Average loan size $ 1,574 Largest individual commercial real estate mortgage outstanding $ 64,527 Commercial real estate nonperforming loans/commercial real estate loans 0.45 % Owner occupied commercial real estate loans/commercial real estate loans 11.5 % 62 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 $2.8 billion at March 31, 2022, 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 and uncollected interest is reversed against current income. A loan remains on nonaccrual status until it becomes current with 63 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. 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. 64 Table of Contents The following table sets forth information regarding nonperforming assets held by the Company at the dates indicated: Table 4 - Nonperforming Assets March 31 2022 December 31 2021 March 31 2021 (Dollars in thousands) Loans accounted for on a nonaccrual basis Commercial and industrial $ 3,517 $ 3,439 $ 29,785 Commercial real estate 40,470 10,870 9,635 Small business 20 44 660 Residential real estate 8,457 9,182 13,392 Home equity 3,761 3,781 5,592 Other consumer 393 504 136 Total (1) $ 56,618 $ 27,820 $ 59,200 Loans past due 90 days or more but still accruing Other consumer — — 1 Total $ — $ — $ 1 Total nonperforming loans $ 56,618 $ 27,820 $ 59,201 Other real estate owned — — — Total nonperforming assets $ 56,618 $ 27,820 $ 59,201 Nonperforming loans as a percent of gross loans 0.42 % 0.20 % 0.64 % Nonperforming assets as a percent of total assets 0.28 % 0.14 % 0.43 % (1) Inclusive of TDRs on nonaccrual status of $2.0 million at both March 31, 2022 and December 31, 2021 and $21.2 million at March 31, 2021. The following table summarizes the changes in nonperforming assets for the periods indicated: Table 5 - Activity in Nonperforming Assets Three Months Ended March 31 2022 Three Months Ended March 31 2022 March 31 2021 (Dollars in thousands) Nonperforming assets beginning balance $ 27,820 $ 66,861 New to nonperforming 33,754 2,359 Loans charged-off (706) (3,686) Loans paid-off (1,485) (4,025) Loans restored to performing status (2,702) (2,559) Other (63) 251 Nonperforming assets ending balance $ 56,618 $ 59,201 65 Table of Contents The following table sets forth information regarding troubled debt restructured loans as of the dates indicated: Table 6 - Troubled Debt Restructurings March 31 2022 December 31 2021 March 31 2021 (Dollars in thousands) Performing troubled debt restructurings $ 13,288 $ 14,635 $ 20,262 Nonaccrual troubled debt restructurings 1,972 1,993 21,167 Total $ 15,260 $ 16,628 $ 41,429 Performing troubled debt restructurings as a % of total loans 0.10 % 0.11 % 0.22 % Nonaccrual troubled debt restructurings as a % of total loans 0.01 % 0.01 % 0.23 % Total troubled debt restructurings as a % of total loans 0.11 % 0.12 % 0.45 % The following table summarizes changes in TDRs for the periods indicated: Table 7 - Activity in Troubled Debt Restructurings Three Months Ended March 31 2022 March 31 2021 (Dollars in thousands) TDRs beginning balance $ 16,628 $ 39,192 New to TDR status — 3,836 Paydowns (1,368) (1,599) TDRs ending balance $ 15,260 $ 41,429 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 March 31 2022 March 31 2021 (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 $ 1,262 $ 917 The amount of interest income on nonaccrual loans and performing TDRs that was included in net income $ 180 $ 264 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 March 31, 2022, there were 48 relationships, with an aggregate balance of $127.7 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 March 31, 2022 have been included in the table below. 66 Table of Contents 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 March 31, 2022: Table 9 - Deferrals by Modification Type Deferral of Principal Only Total Portfolio % Deferral (Dollars in thousands) Commercial and industrial $ — $ 1,566,192 — % Commercial real estate (1) 304,508 9,051,561 3.4 % Business banking — 200,405 — % Residential real estate — 1,706,045 — % Home equity — 1,025,815 — % Consumer — 30,009 — % Total active deferrals as of March 31, 2022 $ 304,508 $ 13,580,027 2.2 % (1) Balances include commercial construction deferrals. 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 $144.5 million at March 31, 2022 represents a decrease of $2.4 million, or 1.6% compared to December 31, 2021. The Company recorded a release of provision for credit losses of $2.0 million during the three months ended March 31, 2022, primarily reflecting the stabilized credit quality environment. In addition, the allowance for credit losses at March 31, 2022 is reflective of a lower quantitative reserve due to continued strong asset quality metrics experienced by the Company. Partially offsetting this decline was the increased impact of the reasonable and supportable forecast modeled in the allowance for credit losses, which incorporates an economic scenario reflective of management's assumption that some economic uncertainty remains. Although the federal funds rates are expected to be increased in the near term, management anticipates that supply chain issues will continue to worsen with increased shortages of goods, the military conflict between Russia and Ukraine will persist longer than originally anticipated for the foreseeable future, potentially impacting global oil supplies and the supply chain more generally and general economic conditions, as well as concerns regarding rising COVID-19 cases and the possibility of resurgences. Additionally, the allowance for credit losses continues to be qualitatively adjusted in order to ensure coverage for relationships that are deemed to be more at risk within certain industries, specific collateral types, or other specific characteristics that may be highly impacted by the current economic environment. 67 Table of Contents The following table summarizes the ratio of net charge-offs to average loans outstanding within each major loan category for the periods presented: Table 10 - Summary Net Charge-Offs to Average Loans Outstanding Net Charge-Off (Recoveries) Average Amount Outstanding Ratio of Annualized Net Charge-Offs/(Recoveries) to Average Loans (Dollars in thousands) Three Months Ended March 31, 2022 Commercial and industrial $ (13) $ 1,535,619 — % Commercial real estate (3) 7,911,349 — % Commercial construction — 1,190,659 — % Small business 22 194,819 0.05 % Residential real estate — 1,649,157 — % Home equity (2) 1,032,308 — % Other consumer 400 29,814 5.44 % Total $ 404 $ 13,543,725 0.01 % Three Months Ended March 31, 2021 Commercial and industrial $ 3,267 $ 2,115,069 0.63 % Commercial real estate (57) 4,156,012 (0.01) % Commercial construction — 555,153 — % Small business 55 174,320 0.13 % Residential real estate (1) 1,271,283 — % Home equity (13) 1,050,234 (0.01) % Other consumer 92 21,698 1.72 % Total $ 3,343 $ 9,343,769 0.15 % The Company recorded net charge-offs of $404,000 for the three months ended March 31, 2022 compared to $3.3 million for the three months ended March 31, 2021. As noted in the table above, net charge-offs incurred by the Company have been minimal for the periods presented, with larger losses being isolated to individual loan workouts, and are not indicative of declining credit quality in the Company's overall loan portfolio. 68 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 11 - Summary of Allocation of Allowance for Credit Losses March 31 2022 December 31 2021 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) $ 14,169 11.5 % $ 14,402 11.5 % Commercial real estate 84,436 58.1 % 83,486 58.8 % Commercial construction 11,867 8.5 % 12,316 8.6 % Small business 3,159 1.5 % 3,508 1.4 % Residential real estate 18,388 12.6 % 14,484 11.8 % Home equity 11,750 7.6 % 17,986 7.7 % Other consumer 749 0.2 % 740 0.2 % Total allowance for credit losses $ 144,518 100.0 % $ 146,922 100.0 % (1) Total loans in this category are inclusive of $99.6 million and $216.2 million in loans, at March 31, 2022 and December 31, 2021, respectively, which were originated as part of the PPP established by the CARES Act. These loans have been excluded from the credit loss calculations as 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 $11.4 million at both March 31, 2022 and December 31, 2021. 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 $1.0 billion and at both March 31, 2022 and December 31, 2021. 69 Table of Contents 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 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 first quarter of 2022 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 $291.2 million at March 31, 2022 compared to $289.3 million at December 31, 2021, representing an increase of $1.9 million, or 0.7%. The Company recorded tax exempt income from life insurance policies of $1.8 million and $1.3 million for the three months ended March 31, 2022 and 2021, respectively. There were no gains on life insurance benefits recorded for the three months ended March 31, 2022 and $258,000 for the three months ended March 31, 2021. Deposits As of March 31, 2022, total deposits were $16.8 billion, representing a $153.7 million, or 0.9%, decrease from December 31, 2021, primarily attributable to continued runoff in time deposits. The total cost of deposits was 0.05% and 0.10% for the three months ended March 31, 2022 and 2021, respectively. Core deposits increased from 84.5% of total deposits as of December 31, 2021 to 85.8% of total deposits as of March 31, 2022. 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 $916.8 million and $998.1 million at March 31, 2022 and December 31, 2021, respectively. In addition, the Company may occasionally raise funds through the use of brokered deposits outside of the IntraFi Network, which amounted to $115.9 million and $141.6 million at March 31, 2022 and December 31, 2021, 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. Borrowings were $138.3 million at March 31, 2022, a decrease of $14.0 million, or 9.22%, as compared to December 31, 2022, due primarily to the re-payment of a revolving loan credit facility. Additionally, the Bank had $4.2 billion of assets pledged as collateral against borrowings at both March 31, 2022 and December 31, 2021. These assets are primarily pledged to the FHLB of Boston and the Federal Reserve Bank of Boston. 70 Table of Contents Capital Resources On March 17, 2022 the Company’s Board of Directors declared a cash dividend of $0.51 per share to shareholders of record as of the close of business on March 28, 2022. This dividend was paid on April 8, 2022. 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 March 31, 2022 and December 31, 2021, 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 12 - 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 March 31, 2022 (Dollars in thousands) Company (consolidated) Total capital (to risk weighted assets) $ 2,291,537 16.18 % $ 1,132,722 ≥ 8.0 % N/A N/A Common equity tier 1 capital (to risk weighted assets) 2,046,456 14.45 % 637,156 ≥ 4.5 % N/A N/A Tier 1 capital (to risk weighted assets) 2,046,456 14.45 % 849,542 ≥ 6.0 % N/A N/A Tier 1 capital (to average assets) 2,046,456 10.62 % 771,037 ≥ 4.0 % N/A N/A Bank Total capital (to risk weighted assets) $ 2,114,659 14.94 % $ 1,132,279 ≥ 8.0 % $ 1,415,349 ≥ 10.0 % Common equity tier 1 capital (to risk weighted assets) 1,980,392 13.99 % 636,907 ≥ 4.5 % 919,977 ≥ 6.5 % Tier 1 capital (to risk weighted assets) 1,980,392 13.99 % 849,209 ≥ 6.0 % 1,132,279 ≥ 8.0 % Tier 1 capital (to average assets) 1,980,392 10.28 % 770,864 ≥ 4.0 % 963,580 ≥ 5.0 % December 31, 2021 (Dollars in thousands) Company (consolidated) Total capital (to risk weighted assets) $ 2,262,740 16.04 % $ 1,128,900 ≥ 8.0 % N/A N/A Common equity tier 1 capital (to risk weighted assets) 2,017,497 14.30 % 635,006 ≥ 4.5 % N/A N/A Tier 1 capital (to risk weighted assets) 2,017,497 14.30 % 846,675 ≥ 6.0 % N/A N/A Tier 1 capital (to average assets) 2,017,497 12.03 % 670,659 ≥ 4.0 % N/A N/A Bank Total capital (to risk weighted assets) $ 2,083,689 14.77 % $ 1,128,536 ≥ 8.0 % $ 1,410,670 ≥ 10.0 % Common equity tier 1 capital (to risk weighted assets) 1,949,237 13.82 % 634,801 ≥ 4.5 % 916,935 ≥ 6.5 % Tier 1 capital (to risk weighted assets) 1,949,237 13.82 % 846,402 ≥ 6.0 % 1,128,536 ≥ 8.0 % Tier 1 capital (to average assets) 1,949,237 11.62 % 670,827 ≥ 4.0 % 838,534 ≥ 5.0 % 71 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 March 31, 2022, 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 $25.0 million and were paid by the Bank to the Company for the three months ended March 31, 2022 and there were no dividends paid by the Bank to the Company for the three months ended March 31, 2021. 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 March 31, 2022 and December 31, 2021 there were $61.0 million in trust preferred securities included in the Tier 2 capital of the Company for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines. Investment Management As of March 31, 2022, the Rockland Trust Investment Management Group had assets under administration of $5.7 billion, representing 6,667 trust, fiduciary, and agency accounts. At December 31, 2021, assets under administration were also $5.7 billion, representing approximately 6,379 trust, fiduciary, and agency accounts. Also, included in these amounts as of March 31, 2022 and December 31, 2021 are assets under administration of $428.1 million and $447.4 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 $7.9 million and $7.4 million for the three months ended March 31, 2022 and 2021, respectively. Retail investments and insurance revenue was $769,000 and $902,000 for the three months ended March 31, 2022 and 2021, respectively. The administration of trust and fiduciary accounts is monitored by the Trust Committee of the Bank’s Board of Directors. The Trust Committee has delegated administrative responsibilities to three committees, one for investments, one for administration, and one for operations, all of which are comprised of Investment Management Group officers who meet no less than quarterly. The Bank has an agreement with LPL Financial ("LPL") and its affiliates and their insurance subsidiary, LPL Insurance Associates, Inc., to offer 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 purposes of processing insurance solutions for clients. 72 Table of Contents RESULTS OF OPERATIONS The following table provides a summary of results of operations for the three months ended March 31, 2022 and 2021: Table 13 - Summary of Results of Operations Three Months Ended March 31 2022 2021 (Dollars in thousands, except per share data) Net income $ 53,097 $ 41,711 Diluted earnings per share $ 1.12 $ 1.26 Return on average assets 1.06 % 1.26 % Return on average equity 7.16 % 9.87 % Net interest margin 3.09 % 3.25 % 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 first quarter of 2022 was $138.4 million, representing an increase of $42.6 million, or 44.4%, when compared to the first quarter of 2021, driven primarily by the full quarter impact of the Meridian acquisition. 73 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 months ended March 31, 2022 and 2021. 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 14 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date Three Months Ended March 31 2022 2021 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 $ 1,906,164 $ 886 0.19 % $ 1,321,430 $ 326 0.10 % Securities Securities - trading 3,732 — — % 2,939 — — % Securities - taxable investments 2,726,281 10,043 1.49 % 1,250,451 6,627 2.15 % Securities - nontaxable investments (1) 201 1 2.02 % 642 6 3.79 % Total securities $ 2,730,214 $ 10,044 1.49 % $ 1,254,032 $ 6,633 2.15 % Loans held for sale 9,475 64 2.74 % 49,652 296 2.42 % Loans (2) Commercial and industrial (1) 1,535,619 17,031 4.50 % 2,115,069 23,046 4.42 % Commercial real estate (1) 7,911,349 76,030 3.90 % 4,156,012 40,376 3.94 % Commercial construction 1,190,659 12,268 4.18 % 555,153 5,283 3.86 % Small business 194,819 2,416 5.03 % 174,320 2,281 5.31 % Total commercial 10,832,446 107,745 4.03 % 7,000,554 70,986 4.11 % Residential real estate 1,649,157 13,697 3.37 % 1,271,283 12,436 3.97 % Home equity 1,032,308 8,662 3.40 % 1,050,234 8,757 3.38 % Total consumer real estate 2,681,465 22,359 3.38 % 2,321,517 21,193 3.70 % Other consumer 29,814 489 6.65 % 21,698 432 8.07 % Total loans $ 13,543,725 $ 130,593 3.91 % $ 9,343,769 $ 92,611 4.02 % Total interest-earning assets $ 18,189,578 $ 141,587 3.16 % $ 11,968,883 $ 99,866 3.38 % Cash and due from banks 171,533 154,870 Federal Home Loan Bank stock 11,407 10,250 Other assets 1,851,196 1,241,651 Total assets $ 20,223,714 $ 13,375,654 Interest-bearing liabilities Deposits Savings and interest checking accounts $ 6,255,843 $ 598 0.04 % $ 4,109,747 $ 423 0.04 % Money market 3,608,793 559 0.06 % 2,288,030 521 0.09 % Time deposits 1,466,651 950 0.26 % 906,613 1,767 0.79 % Total interest-bearing deposits $ 11,331,287 $ 2,107 0.08 % $ 7,304,390 $ 2,711 0.15 % Borrowings Federal Home Loan Bank borrowings $ 25,696 $ 133 2.10 % $ 35,785 $ 188 2.13 % Long-term borrowings 9,063 31 1.39 % 28,247 111 1.59 % Junior subordinated debentures 62,853 299 1.93 % 62,851 426 2.75 % Subordinated debentures 49,800 617 5.02 % 49,705 617 5.03 % 74 Table of Contents Total borrowings $ 147,412 $ 1,080 2.97 % $ 176,588 $ 1,342 3.08 % Total interest-bearing liabilities $ 11,478,699 $ 3,187 0.11 % $ 7,480,978 $ 4,053 0.22 % Noninterest bearing demand deposits 5,443,465 3,895,447 Other liabilities 293,597 285,857 Total liabilities $ 17,215,761 $ 11,662,282 Stockholders' equity 3,007,953 1,713,372 Total liabilities and stockholders' equity $ 20,223,714 $ 13,375,654 Net interest income (1) $ 138,400 $ 95,813 Interest rate spread (3) 3.05 % 3.16 % Net interest margin (4) 3.09 % 3.25 % Supplemental information Total deposits, including demand deposits $ 16,774,752 $ 2,107 $ 11,199,837 $ 2,711 Cost of total deposits 0.05 % 0.10 % Total funding liabilities, including demand deposits $ 16,922,164 $ 3,187 $ 11,376,425 $ 4,053 Cost of total funding liabilities 0.08 % 0.14 % (1) The total amount of adjustment to interest income and yield on a FTE basis was $968,000 and $229,000 for the three months ended March 31, 2022 and 2021, respectively. The FTE adjustment relates to tax exempt income relating to securities with average balances of $201,000 and $642,000 and tax exempt income relating to loans with average balances of $418.7 million and $70.2 million, for the three months ended March 31, 2022 and 2021, 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. 75 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 15 - Volume Rate Analysis Three Months Ended March 31 2022 Compared To 2021 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 $ 416 $ 144 $ 560 Securities Securities - taxable investments (4,405) 7,821 3,416 Securities - nontaxable investments (1) (1) (4) (5) Total securities 3,411 Loans held for sale 8 (240) (232) Loans Commercial and industrial (1) 299 (6,314) (6,015) Commercial real estate (1) (829) 36,483 35,654 Commercial construction 937 6,048 6,985 Small business (133) 268 135 Total commercial 36,759 Residential real estate (2,435) 3,696 1,261 Home equity 54 (149) (95) Total consumer real estate 1,166 Other consumer (105) 162 57 Total loans (1)(2) 37,982 Total income of interest-earning assets $ 41,721 Expense of interest-bearing liabilities Deposits Savings and interest checking accounts $ (46) $ 221 $ 175 Money market (263) 301 38 Time certificates of deposits (1,909) 1,092 (817) Total interest bearing deposits (604) Borrowings Federal Home Loan Bank borrowings (2) (53) (55) Line of Credit — Long-term borrowings (5) (75) (80) Junior subordinated debentures (127) — (127) Subordinated debentures (1) 1 — Total borrowings (262) Total expense of interest-bearing liabilities (866) Change in net interest income $ 42,587 (1) Reflects income determined on a FTE basis. See footnote (1) to Table 14 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. 76 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 $2.0 million and $2.5 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The Company’s allowance for credit losses, as a percentage of total loans, was 1.06% at March 31, 2022, 1.08% at December 31, 2021, and 1.16% at March 31, 2021. The Company recorded net charge-offs of $404,000 for the three months ended March 31, 2022, as compared to $3.3 million for the three months ended March 31, 2021. 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 16 - Noninterest Income Three Months Ended March 31 Change 2022 2021 Amount % (Dollars in thousands) Deposit account fees $ 5,493 $ 3,584 $ 1,909 53.26 % Interchange and ATM fees 3,609 2,720 889 32.68 % Investment management 8,673 8,304 369 4.44 % Mortgage banking income 1,362 5,740 (4,378) (76.27) % Gain on life insurance benefits — 258 (258) (100.00) % Increase in cash surrender value of life insurance policies 1,795 1,323 472 35.68 % Loan level derivative income 604 173 431 249.13 % Other noninterest income 4,736 3,144 1,592 50.64 % Total $ 26,272 $ 25,246 $ 1,026 4.06 % The primary reasons for the variances in the noninterest income categories shown in the preceding table in comparison to the year ago period include: • Deposit account fee income increased due to the increased volume attributable to the Meridian acquisition, as well as lower levels of overdraft fees as customers benefited from government stimulus payments disbursed during the first quarter of 2021. • Interchange and ATM fees increased primarily due to increased volume attributable to both the Meridian acquisition and rise in customer spending. • Investment management income increased primarily driven by overall growth in assets under administration which increased 10.4% to $5.7 billion at March 31, 2022 from $5.2 billion at March 31, 2021. This increase was partially offset by depressed market valuations experienced during the first quarter of 2022. • Mortgage banking income decreased primarily due to overall reduced volumes and a greater portion of new originations being retained in the Company's portfolio versus being sold in the secondary market. • The cash surrender value of life insurance policies increased primarily due the impact of policies acquired from Meridian. • Loan level derivative income increased primarily as a result of higher customer demand. • Other noninterest income increased primarily attributable to increases in rental income from equipment leases as well as income from other investments, and business credit card interchange fees, partially offset by lower unrealized gains on equity securities. 77 Table of Contents Noninterest Expense The following table sets forth information regarding non-interest expense for the periods shown: Table 17 - Noninterest Expense Three Months Ended March 31 Change 2022 2021 Amount % (Dollars in thousands) Salaries and employee benefits $ 48,711 $ 39,889 $ 8,822 22.12 % Occupancy and equipment expenses 13,302 9,273 4,029 43.45 % Data processing & facilities management 2,372 1,665 707 42.46 % Merger and acquisition expenses 7,100 — 7,100 100.00% Software maintenance 2,564 1,970 594 30.15 % Amortization of intangible assets 2,001 1,413 588 41.61 % FDIC assessment 1,805 1,050 755 71.90 % Debit card expense 1,765 1,181 584 49.45 % Consulting expense 1,750 2,391 (641) (26.81) % Other noninterest expenses 14,130 10,850 3,280 30.23 % Total $ 95,500 $ 69,682 $ 25,818 37.05 % The primary reasons for the variances in the noninterest expense categories shown in the preceding table in comparison to the year ago period include: • The increase in salaries and employee benefits was primarily due to the Company's increased workforce base following the Meridian acquisition. • Occupancy and equipment expenses increased primarily driven by a full quarter of costs associated with the Company's expanded branch network, real estate and other fixed assets resulting from the Meridian acquisition, as well as an increase in snow removal costs. • Data processing and facilities management expenses increased primarily due to timing of certain initiatives and general increases associated with the Company's higher transaction volume. • Merger and acquisition costs incurred in relation to the Meridian acquisition were $7.1 million for the first quarter of 2022. The majority of first quarter 2022 costs related to lease terminations associated with exited branch locations, along with additional integration costs and professional fees incurred during the quarter. No such costs were incurred during the year ago period. • Software maintenance increased primarily due to the Company's continued investment in its technology infrastructure. • FDIC assessment increased primarily due to an increased assessment base resulting from the Meridian acquisition. • Consulting expense decreased primarily due to timing of strategic initiatives and elevated expenses related to projects and measures implemented in response to the COVID-19 pandemic during the first quarter of 2021. • Other noninterest expense increased primarily due to a full quarter of general increases associated with the Meridian acquisition, along with elevated unrealized losses on equity securities recognized during the first quarter of 2022. 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: 78 Table of Contents Table 18 - Tax Provision and Applicable Tax Rates Three Months Ended March 31 2022 2021 (Dollars in thousands) Combined federal and state income tax provision $ 17,107 $ 11,937 Effective income tax rate 24.37 % 22.25 % Blended statutory tax rate 27.11 % 27.92 % The Company’s effective tax rate in 2022 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 three months ended March 31, 2021 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 months ended March 31, 2022 is comparable to the year ago period. 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 these partnerships is $178.8 million, of which $112.6 million had been funded as of March 31, 2022. It is expected that the limited partnership investments will generate a net tax benefit of approximately $3.6 million for the fiscal year 2022 and a total of $21.3 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, nonachievement 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. 79 Table of Contents 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. 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 March 31, 2022. 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. 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. 80 Table of Contents The following table depicts current and unused liquidity capacity from various sources as of the dates indicated: Table 19 - Liquidity Sources March 31, 2022 December 31, 2021 Outstanding Additional Borrowing Capacity Outstanding Additional Borrowing Capacity (Dollars in thousands) Federal Home Loan Bank of Boston (1) $ 25,660 $ 1,693,948 $ 25,667 $ 1,622,494 Federal Reserve Bank of Boston (2) — 1,318,718 — 1,176,486 Unpledged Securities — 2,056,302 — 1,897,148 Line of Credit — 85,000 — 85,000 Long-term borrowing (3) — — 14,063 — Junior subordinated debentures (3) 62,854 — 62,853 — Subordinated debt (3) 49,814 — 49,791 — Reciprocal deposits (3) 916,841 — 998,121 — Brokered deposits (3) 115,906 — 141,572 — $ 1,171,075 $ 5,153,968 $ 1,292,067 $ 4,781,128 (1) Loans with a carrying value of $2.4 billion and $2.3 billion at March 31, 2022 and December 31, 2021, 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 $1.8 billion at both March 31, 2022 and December 31, 2021 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 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., 81 Table of Contents 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. The results of all scenarios and the impact to net interest income are outlined in the table below: Table 20 - Interest Rate Sensitivity March 31 2022 2021 Year 1 Year 2 Year 1 Year 2 Parallel rate shocks (basis points) -100 (4.8) % (7.2) % (2.8) % (14.0) % +100 5.1 % 11.9 % 6.8 % 2.0 % +200 10.0 % 20.4 % 14.5 % 12.6 % +300 15.5 % 30.1 % 22.7 % 23.6 % +400 20.9 % 39.8 % 30.5 % 34.0 % Gradual rate shifts (basis points) -100 over 12 months (2.1) % (5.2) % (1.1) % (12.4) % +200 over 12 months 5.0 % 19.0 % 6.6 % 10.2 % +400 over 24 months 5.0 % 26.1 % 6.7 % 18.7 % Alternative scenarios Flat up 200 basis points scenario 3.6 % 11.6 6.8 % 9.7 % 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 three months ended March 31, 2022 were the shape of the U.S. Government securities and interest rate swap yield curve, the U.S. prime interest rate, LIBOR rates, the secured overnight financing rates ("SOFR"), and the interest rates being offered on long-term fixed rate loans. 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. 82 Table of Contents 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. 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 March 31, 2022. 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 March 31, 2022. 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.