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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-28 · 192 added, 286 removed, 736 unchanged (39% of the section changed)

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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, which closed during the fourth quarter of 2021.

The acquisition resulted in the net addition of twenty-seven branch locations and includes the acquisition of $4.9 billion in loans, and the assumption of $4.4 billion in deposits, and $576.1 million of borrowings, each at fair value.

The acquired borrowings were paid off in full immediately subsequent to the acquisition.

The Company's business has been, and continues to be impacted by the ongoing COVID-19 pandemic, however it remains committed to supporting and working with its customers as they navigate through uncertain times.

While the full macroeconomic impacts of the COVID-19 pandemic have yet to be fully determined, overall conditions have begun to improve as a result of vaccine availability, leading to the re-opening of businesses and loosening of certain travel restrictions and social distancing measures.

Despite the observed improvements, the future outlook with regard to the COVID-19 pandemic remains uncertain, with the possibility for resurgences of COVID-19 or other variants of the virus and other factors described under Item 1A.

Risk Factors under "Risks Related to the COVID-19 Pandemic." As a result, the Company is not able to provide any assurances that the Company’s earnings, asset quality, regulatory capital ratios and economic condition will not be adversely impacted on a short term or long term basis.

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The Company maintains an asset-sensitive profile and, accordingly, has benefited from recent interest rate increases.

While asset quality remains strong, management is closely monitoring the economic environment, including elevated inflationary pressures, supply chain issues, and labor shortages being experienced in the current operating environment across various industries.

The Company focuses on organic growth, but will also consider growth through acquisition.

Any potential acquisition opportunities are evaluated for the potential to provide a satisfactory financial return as well as other criteria (ease of integration, synergies, geographical location).

Recent acquisitions include Meridian Bancorp, Inc.

("Meridian") and its subsidiary, East Boston Savings Bank ("EBSB"), which closed in the fourth quarter of 2021.

Net income for the year ended December 31, 2022 was $263.8 million, or $5.69 on a diluted earnings per share basis, as compared to $121.0 million, or $3.47 on a diluted earnings per share basis for the year ended December 31, 2021, representing increases of 118.0% and 64.0%, respectively.

Full year 2022 results reflect pre-tax merger and acquisition-related costs of $7.1 million associated with the Meridian acquisition, as compared to $40.8 million of such costs during the same prior year period.

Excluding these merger and acquisition-related costs, operating net income was $268.9 million, or $5.80 on a diluted per share

basis, for the year ended December 31, 2022, as compared to $187.6 million, or $5.38 on a diluted per share basis for the year ended December 31, 2021, representing increases of 43.3% and 7.8%, respectively.

See "Non-GAAP Measures" below for a reconciliation of non-GAAP measures.

Full year 2022 results reflected the following key drivers:

• Improvement in the net interest margin of 44 basis points;

• 4.1% net loan growth, excluding Paycheck Protection Program ("PPP") runoff;

• Deployment of excess cash balances into investment portfolio and paydowns of outstanding borrowings;

• Low deposit betas, with total cost of deposits contained at 15 basis points for the year;

• Relatively modest provision for credit loss, reflecting increase in nonperforming assets and a specific reserve allocation;

• Strong fee income;

• 51% efficiency ratio for the year;

• Completion of the Company's share repurchase program announced in January 2022, resulting in the repurchase of 1.8 million shares for approximately $140 million.

Interest-Earning Assets

Management’s asset strategy typically emphasizes loan growth, however, the mix of the Company's interest earning assets has experienced volatility in recent periods due to the unique operating environment.

For 2021, the increase in interest-earning assets was driven primarily by an increase in commercial loan balances, primarily reflecting the acquisition of Meridian's $4.5 billion commercial portfolio, offset partially by a net reduction in PPP loan balances of $616.2 million during the year ended December 31, 2021.

The Company continued to experience elevated levels of interest earning cash, driven by significant growth in deposits during 2021, a portion of which the Company elected to deploy into investment securities resulting in net growth of the securities portfolio of $1.5 billion during the year.

The results depicted in the following table reflect the trend of the Company's interest-earning assets over the past five years and reflect a longer term overall strategy that typically emphasizes loan growth commensurate with overall economic growth.

Compared to the prior year, the composition of interest-earnings assets at December 31, 2022 primarily reflects reduced cash balances driven largely by decreased deposit balances and additional securities purchases.

The following table summarizes the Company's interest-earning assets as of December 31st for each year presented:

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In addition, management takes a disciplined approach to credit underwriting, seeking to avoid undue credit risk and credit losses.

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Funding and the Net Interest Margin

The Company's overall sources of funding reflect strong business and retail deposit growth with a management emphasis on core deposit growth to fund loans.

During 2021, the Company experienced significant growth in deposits, which increased $5.9 billion, or 53.9%, from December 31, 2020 to $16.9 billion.

This increase was primarily attributable to Meridian acquired deposit balances of $4.4 billion, along with robust new account opening activity.

The following chart shows the sources of funding and the percentage of core deposits to total deposits as of December 31st for the trailing five years:

The Company's core deposits decreased to 84.5% of total deposits at December 31, 2021, in comparison to the prior year, reflective of a higher ratio of non-core time and brokered deposits acquired from Meridian.

The cost of deposits at

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December 31, 2021 was 0.07%, a 20 basis point decrease compared to December 31, 2020 due primarily to managed deposit rate reductions across all products.

The Company's net interest margin was 3.02% for the year ended December 31, 2021, representing a 27 basis point decrease from the comparative 2020 period, which primarily reflects the elevated levels of excess liquidity throughout 2021.

The following table shows the net interest margin and cost of deposits trends for the trailing five year period:

Noninterest Income

Non-interest income represented 20.9% of the Company's total revenue for 2021, and is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees and mortgage banking 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 years:

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The Company’s primary expenses arise from Rockland Trust’s employee salaries and benefits, as well as expenses associated with buildings and equipment.

Noninterest expense for the year ended December 31, 2021 was also inclusive of $40.8 million in merger related costs associated with the Meridian acquisition.

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The following chart depicts the Company's efficiency ratio on a U.S.

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, (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 years:

*See "Non-GAAP Measures" below for a reconciliation to U.S.

GAAP financial measures.

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, (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 years:

*See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures.

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.

At December 31, 2021, the Company's tangible book value per share was $42.25, representing an increase of 18.7% from the prior year, reflecting the immediate accretive impact of the Meridian acquisition, as well as earnings retention.

Strong earnings retention has contributed to capital growth, both on an absolute level and per share basis, which has been offset in the last year by share repurchases and other comprehensive losses.

The following chart shows the Company's book value and tangible book value per share over the past five years:

*See "Non-GAAP Measures" below for a reconciliation to U.S.

GAAP financial measures.

*See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures.

Cash dividends declared by the Company increased from an aggregate of $1.92 per share in 2021 to $2.08 per share in 2022, representing an increase of 8.3%.

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Net income for 2021 was $121.0 million, or $3.47 on a diluted earnings per share basis, as compared to $121.2 million, or $3.64 per diluted share, for the prior year.

While results for the year ended December 31, 2021 included $40.8 million in merger related costs associated with the Meridian acquisition, they were positively impacted by reduced levels of loan provisioning in comparison to the prior year, as the Company recorded a total credit loss provision of $18.2 million in 2021, representing a decrease of 65.3% from $52.5 million for the twelve months ended December 31, 2020.

The current year provision was the net result of $50.7 million in initial allowance reserves recorded on non-purchased credit deteriorated ("non-PCD") loans acquired from Meridian, partially offset by a reversal of credit loss expense of $32.5 million, primarily reflecting improvements in overall macro-economic forecast assumptions and continued strong asset quality metrics.

Net income for 2021 and 2020 included items that are considered noncore, which are excluded for purposes of assessing operating earnings.

Net operating earnings for 2021 were $187.6 million, or $5.38 on a diluted earnings per share basis, an increase of 54.2% and 47.0%, respectively, when compared to net operating earnings of $121.7 million, or $3.66 per diluted share, for the year ended December 31, 2020.

See "Non-GAAP Measures" below for a reconciliation of net operating earnings and diluted earnings per share to U.S.

GAAP net income and earnings per share, respectively.

During the Company's fourth quarter 2021 earnings call, the Company provided the following key expectations regarding business activity to serve as near term guidance into the year 2022:

• Despite healthy loan closing expectations, loan balances for the year are expected to contract at a low single digit percentage, due primarily to reductions in the remaining PPP balances and a continued level of attrition attributable to Meridian balances, which is anticipated to offset legacy core growth in the low to mid single digit range.

Upon stabilization of the acquired balances, modest net loan growth is expected, which is targeted for late 2022 and into early 2023.

Additionally, any increases in line utilization would be expected to serve as a catalyst to stronger loan growth;

• The outlook for deposit balances remain somewhat uncertain, with core household growth remaining a priority, while time deposit attrition and some modest level of acquired deposit balance runoff is expected in the first half of the year;

• Net interest income is anticipated to include the recognition of the remaining $5.9 million in PPP fees, and may reflect quarter over quarter volatility due primarily to purchase accounting loan accretion.

However, assuming no changes in interest rates from the Federal Reserve and a continued measured approach of increasing securities balances, and excluding PPP fee income and purchase accounting, management estimates the core margin to be in the 2.9 to 3.0% range for the full year;

• Assuming continued expected improvement in general economic factors and no major change in overall asset quality, the provision for credit loss is expected to continue to track at levels below net charge-offs, which the Company anticipates to be well contained;

• Non-interest income is expected to be primarily impacted by the following:

◦ Reflecting the current rate environment and year end mortgage pipeline levels, a majority portion of closing activity is expected to be retained in the portfolio, which will drive decreases in mortgage banking income in the short term while contributing modestly to net interest income;

◦ Wealth management income is expected to continue to reflect positive net inflows of new money plus market appreciation or depreciation impact;

◦ Assuming that expectations over Federal Reserve interest rate increases remain high, management anticipates loan level derivative income to increase from the full year 2021 results, though likely lower than the Company's 2020 record levels;

• Regarding non-interest expense, with the majority of the systems and contract terminations already completed in 2021, the Company is confident in the 45% cost savings assumptions originally announced with the Meridian deal, while increasing the legacy spending at a mid-single digit percentage rate when compared to pre-Meridian 2021 results;

• The full year tax rate is expected to be in the 24-25% range, with a typical first quarter low point reflective of discrete equity compensation vesting benefits.

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In 2022, the Company repurchased a total of 1.8 million shares of its common stock at an average price of $78.32 under the January 2022 program which was completed in the third quarter of 2022.

In consideration of the Company's strong current capital position, on October 20, 2022 the Company announced a new share repurchase program, which authorizes repurchases by the Company of up to $120 million in common stock.

The new plan will be in effect through October 19, 2023 and no repurchases had been executed by the Company under the plan as of December 31, 2022.

Non-GAAP Measures

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The following table summarizes the impact of noncore items on net income and reconciles non-GAAP net operating earnings to net income available to common shareholders for the periods indicated:

Years Ended December 31

Net Income Diluted Earnings Per Share

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Noninterest expense components

loss on termination of derivatives — 684 — 0.03

merger and acquisition expenses 7,100 40,840 0.15 1.17

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(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 only to those items included in net taxable income.

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The following table summarizes the impact of noncore items with respect to the Company's total revenue, noninterest income as a percentage of total revenue, and the efficiency ratio for the periods indicated:

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Efficiency ratio on an operating basis (non-GAAP) 50.36 % 57.49 % 57.00 % 50.82 % 55.55 % (e/(a+c))

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The following table summarizes the calculation of the Company's tangible common equity ratio and tangible book value per share for the periods indicated:

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Tangible book value per share (Non-GAAP) $ 41.12 $ 42.25 $ 35.59 $ 34.11 $ 28.57 (b/e)

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SELECTED FINANCIAL DATA

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For reconciliation to GAAP measurement, see Item 7 " Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Level Overview - Non-GAAP Measures ".

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Financial Position

Securities Portfolio The Company’s securities portfolio consists of trading securities, equity securities, securities available for sale and securities which management intends to hold until maturity.

Securities increased by $1.5 billion, or 129.3%, at December 31, 2021 as compared to December 31, 2020, reflecting $1.9 billion of purchases, offset by paydowns, calls and maturities.

Purchases made during 2021 reflect the Company's direct strategy to deploy a portion of excess cash balances into investment securities, and accordingly the ratio of securities to total assets increased to 13.05% at December 31, 2021, as compared to 8.80% at December 31, 2020.

Securities Portfolio The Company's securities portfolio primarily consists of U.S.

Treasury, U.S.

government agency securities, agency mortgage-backed securities, agency collateralized mortgage obligations, and small business administration pooled securities.

Also included in the Company's security portfolio are trading and equity securities related to certain employee benefit programs.

The majority of these securities are investment grade debt obligations with average lives of five years or less.

government agency securities entail a lesser degree of risk than loans made by the Bank by virtue of the guarantees that back them, require less capital under risk-based capital rules than noninsured or nonguaranteed mortgage loans, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Bank.

The Bank views its securities portfolio as a source of income and liquidity.

Interest and principal payments generated from securities provide a source of liquidity to fund loans and meet short-term cash needs.

Total securities increased by $464.4 million, or 17.4%, at December 31, 2022 as compared to December 31, 2021, reflecting $927.4 million of purchases, partially offset by unrealized losses of $155.0 million related to the available for sale portfolio, as well as paydowns, calls and maturities.

The ratio of securities to total assets increased to 16.2% at December 31, 2022 as compared to 13.1% at December 31, 2021, reflecting the Company's strategy to deploy excess cash balances into investment securities.

The Company estimates expected credit losses for its available for sale and held to maturity securities in accordance with the CECL methodology.

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At December 31, 2022 and 2021, the Company had no securities categorized as level 3 within the fair value hierarchy.

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The following table sets forth the weighted average yield for each range of contractual maturities of the Bank’s held to maturity securities portfolio at December 31, 2022.

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As of December 31, 2022, the weighted average life of the securities portfolio was 4.80 years and the modified duration was 4.20 years.

At December 31, 2021, the aggregate book value of securities issued by Fannie Mae, Freddie Mac and the U.S.

Department of the Treasury exceeded 10% of stockholders' equity, accordingly the following table disclosed the aggregate book value and market value of these securities at December 31, 2021:

At December 31, 2022, the aggregate book value of securities issued by Fannie Mae and Freddie Mac exceeded 10% of stockholders' equity, accordingly the following table disclosed the aggregate book value and market value of these securities at December 31, 2022:

Table 4 - Aggregate Book Value and Market Value of Select Securities

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Freddie Mac 387,245 341,461

Department of the Treasury 976,028 963,690

Total $ 1,315,433 $ 1,164,450

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.

Residential Mortgage Loan Sales The Bank’s residential mortgage loans are generally originated in compliance with terms, conditions and documentation which permit the sale of such loans to investors in the secondary market.

Loan sales in the secondary market provide funds for additional lending and other banking activities.

Depending on market conditions, the Bank may sell the servicing of the sold loans for a servicing released premium, simultaneous with the sale of the loan.

For the remainder of the sold loans for which the Company retains the servicing, a mortgage servicing asset is recognized.

Additionally, as part of its asset/liability management strategy, the Bank may opt to retain certain adjustable rate and fixed rate residential real estate loan originations for its 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 may be required to either repurchase mortgage loans or to indemnify the purchaser from losses if representations and warranties are found to be not accurate in all material respects.

The Company incurred no material losses related to mortgage repurchases during the years ended December 31, 2022, 2021, and 2020.

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The Company experienced strong closing volumes within the residential real estate portfolio during the twelve months ended December 31, 2021, with a larger portion of new residential real estate closings being retained in the portfolio rather than sold into the secondary market as compared to prior year periods.

The following table shows the total residential loans that were closed and whether the amounts were held in the portfolio or sold/held for sale in the secondary market for the periods indicated:

For the year ended December 31, 2022, a larger portion of new residential real estate closings were retained in the portfolio rather than sold into the secondary market as compared to prior year periods.

The following table shows the total residential loans that were closed and whether the amounts were held in the portfolio or sold (or held for sale) in the secondary market for the periods indicated:

Table 5 - Closed Residential Real Estate Loans

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Total loans sold $ 104,084 $ 783,350 $ 862,826

(1) All loans sold with servicing rights retained during the year ended December 31, 2021 were sold without recourse, while loans sold during the years ended December 31, 2020 and 2019 loans were sold with recourse.

(1) All loans sold with servicing rights retained during the years ended December 31, 2022 and 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.

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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 $382.6 million at December 31, 2021 (inclusive of $67.0 million of loans serviced acquired from the Meridian acquisition) and $453.7 million at December 31, 2020.

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The principal balance of loans serviced by the Bank on behalf of investors was $327.5 million at December 31, 2022 and $382.6 million at December 31, 2021.

The following table shows the adjusted cost of the servicing rights associated with these loans and the changes for the periods indicated:

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See Note 10, "Derivatives and Hedging Activities," within the Notes to Consolidated Financial Statements included in Item 8 of this Report for more information on mortgage activity and mortgage related derivatives.

Loan Portfolio The Company’s loan portfolio increased by $4.2 billion during 2021, primarily due to the Meridian loans acquired.

This increase was offset partially by a decrease in PPP loan balances of $575.7 million, or 72.7%, bringing total outstanding PPP loan balances to $216.2 million at December 31, 2021.

The following table summarizes loan growth/decline during the periods indicated:

Table 8 - Components of Loan Growth/(Decline)

December 31 December 31 Meridian Organic Growth/ Organic Growth/

2021 2020 Acquisition (Decline) $ (Decline) %

(Dollars in thousands)

Commercial and industrial (1) $ 1,563,279 $ 2,103,152 $ 110,359 $ (650,232) (30.9) %

Commercial real estate 7,992,344 4,173,927 3,702,407 116,010 2.8 %

Commercial construction 1,165,457 553,929 691,978 (80,450) (14.5) %

Small business 193,189 175,023 1,552 16,614 9.5 %

Residential real estate 1,604,686 1,296,183 338,959 (30,456) (2.3) %

Home equity 1,039,611 1,068,790 54,355 (83,534) (7.8) %

Other consumer 28,720 21,862 9,339 (2,481) (11.3) %

Total loans $ 13,587,286 $ 9,392,866 $ 4,908,949 $ (714,529) (7.6) %

(1) Organic loan growth/(decline) within commercial and industrial in the table above includes $40.5 million in Meridian acquired PPP loans, resulting in an organic decrease in PPP loan balances of $616.2 million.

Excluding PPP activity, the organic commercial portfolio increased compared to the prior year, as strong pipelines and closing activity were counterbalanced by elevated payoffs and lower line utilization levels.

On the consumer side, balances declined across all portfolios on an organic basis, largely attributable to increased prepayments and refinancing activity, as well as lower home equity line utilization.

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Loan Portfolio The Company’s loan portfolio at December 31, 2022 increased by $341.4 million, or 2.5%, when compared to December 31, 2021.

Excluding $207.1 million of net paydowns associated with PPP loans during the twelve months ended December 31, 2022, the loan portfolio increased by $548.5 million, or 4.1%, compared to December 31, 2021.

Organic loan growth was driven primarily by strong consumer loan activity, as the majority of residential real estate loan closings were retained on the balance sheet, while increased demand and line utilization fueled growth in home equity balances.

Excluding the net reduction in PPP loans, the commercial portfolio increased $61.7 million, or 0.58% at December 31, 2022 in comparison to December 31, 2021, primarily driven by increased line utilization and higher closing volumes within the commercial and industrial category, which grew by $278.9 million, or 20.7%, which was partially offset by elevated levels of attrition within the commercial real estate portfolio.

The following table sets forth information concerning the composition of the Bank’s loan portfolio by loan type at the dates indicated:

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The average life of real estate loans tends to increase when current real estate loan rates are higher than rates on mortgages in the portfolio and, conversely, tends to decrease when rates on mortgages in the portfolio are higher than current real estate loan rates.

Due to the fact that the Bank may, consistent with industry practice, renew a significant portion of commercial and

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commercial real estate loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any particular period.

Due to the fact that the Bank may, consistent with industry practice, renew a significant portion of commercial and commercial real estate loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts contractually due in any particular period.

In other circumstances, a loan, or a portion of a loan, may not be repaid due to the borrower’s inability to satisfy the contractual obligations of the loan.

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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 addition, in response to the COVID-19 pandemic, but prior to January 1, 2022, the Company offered need-based payment relief options for commercial and small business loans, residential mortgages, and home equity loans and lines of credit.

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.

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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.

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.

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Purchased Credit Deteriorated Loans Purchased Credit Deteriorated ("PCD") loans are acquired loans which have shown a more-than-insignificant deterioration in credit quality since origination.

PCD loans are recorded at amortized cost with an allowance for credit losses recorded upon purchase, as appropriate.

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 ("OREO").

Nonperforming loans consist of nonaccrual loans and loans that are 90 days or more past due but still

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accruing interest.

OREO consists of real estate properties, which have primarily served as collateral to secure loans, that are controlled or owned by the Bank.

These properties are recorded at fair value less estimated costs to sell at the date control is established, resulting in a new cost basis.

The amount by which the recorded investment in the loan exceeds the fair value (net of estimated costs to sell) of the foreclosed asset is charged to the allowance for credit losses.

Subsequent declines in the fair value of the foreclosed asset below the new cost basis are recorded through the use of a valuation allowance.

Subsequent increases in the fair value are recorded as reductions in the valuation allowance, but not below zero.

All costs incurred thereafter in maintaining the property are generally charged to noninterest expense.

In the event the real estate is utilized as a rental property, net rental income and expenses are recorded as incurred within noninterest expense.

Nonperforming loans consist of nonaccrual loans and loans that are 90 days or more past due but still accruing interest.

The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated:

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Other consumer 475 504

Total (1) 27,820 66,860

Loans past due 90 days or more but still accruing

Other consumer — 1

Total nonperforming loans (1)(2) 54,881 27,820

Other real estate owned — —

Total nonperforming assets $ 27,820 $ 66,861

Nonperforming loans as a percent of gross loans 0.39 % 0.20 %

Nonperforming assets as a percent of total assets 0.28 % 0.14 %

(1) Included in these amounts were nonaccrual TDRs of $2.0 million at December 31, 2021, and $22.2 million at December 31, 2020.

(1) Included in these amounts were nonaccrual TDRs of $11.5 million and $2.0 million at December 31, 2022 and 2021, respectively.

(2) There were no nonperforming loans that were not on nonaccrual status and no other real estate owned as of December 31, 2022 and 2021.

The following table summarizes the changes in nonperforming assets for the periods indicated:

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Loans restored to accrual status (7,652) (13,068)

Other 467 (16)

Nonperforming assets ending balance $ 54,881 $ 27,820

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The following table sets forth information regarding TDR loans at the dates indicated:

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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 have been 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 December 31, 2021 have been included in the table below.

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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, including deferral of principal only, deferral of interest only, or a deferral of principal and interest, depending upon needs of the borrower.

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 January 1, 2022.

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 remaining active deferrals as of December 31, 2021, the entirety of which were deferrals of principal only:

Table 16 - Deferrals by Modification Type

Deferral of Principal Only Total Portfolio % of Total Portfolio Deferred

(Dollars in thousands)

Commercial and industrial $ 560 $ 1,563,279 — %

Commercial real estate (1) 382,535 9,157,801 4.2 %

Business Banking — 193,189 — %

Residential real estate — 1,604,686 — %

Home equity — 1,039,611 — %

Consumer — 28,720 — %

Total active deferrals as of December 31, 2021 (2)

$ 383,095 $ 13,587,286 2.8 %

(1) Balances include commercial construction deferrals.

(2) Total active deferrals are inclusive of Meridian acquired deferrals of $194.3 million.

The Company held $55.6 million of loans with active deferrals at December 31, 2022, of which $46.9 million are scheduled to mature during 2023.

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 adjusted 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.

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 the Company reverts to its historical long-run average over a period of 6 months.

The reasonable and supportable forecast modeled in the allowance for credit losses incorporates an economic scenario which reflects management's assumptions as follows:

that some uncertainty remains as the economy recovers, that the federal funds rates will remain near 0% through 2023, and that recent federal stimulus activity will be less effective as consumers are reluctant to spend the funds, that some concerns remain regarding the speed of widespread vaccine administration, and the efficacy and public acceptance of vaccines and the possibility for resurgences of COVID-19 or other variants of the virus.

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 six 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 loans that are individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach.

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 $146.9 million at December 31, 2021 represents an increase of $33.5 million, or 29.6% compared to December 31, 2020, driven primarily by $67.2 million in initial allowance reserves recorded on the acquired Meridian loan portfolio, including $50.7 million and $16.5 million attributable to non-PCD and PCD loans, respectively.

This increase in allowance was partially offset by a reversal of provision for credit losses of $32.5 million recorded for the year ended December 31, 2021, reflecting decreases in both quantitative and qualitative reserves, driven primarily by improvements in expected overall macro-economic forecast assumptions, continued strong asset quality metrics, along with lower organic loan growth.

Decreased quantitative reserves at December 31, 2021 were attributable to continued improvements in credit quality, including decreases in the weighted average probability of default across most portfolios, as well as increased stability in economic variables.

Additionally, the allowance for credit losses continues to reflect elevated qualitative reserve allocations to those loan segments that management considers to have heightened loss exposure associated with the COVID-19 pandemic, however the amount of this elevated reserve has decreased and contributed to the release of reserves as COVID-19 restrictions

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have lessened.

Further qualitative reserves related to loans with non-owner occupied real estate and junior lien home equity collateral positions were also reduced as performance trends within these portfolio segments remained relatively strong during 2021.

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The allowance for credit losses of $152.4 million at December 31, 2022 represents an increase of $5.5 million, or 3.7% compared to December 31, 2021.

An additional reserve allocation associated with a single large commercial and industrial credit that migrated to nonperforming status during 2022, as well as additional provisioning for net loan growth contributed to an overall higher quantitative allowance at December 31, 2022.

This increase was offset partially by a stabilized credit environment and continued strong asset quality metrics experienced during the year.

Management's forecast anticipates that the federal funds rates will rise in the near term, that supply chain issues will persist, inflation will remain elevated, and the military conflict between Russia and Ukraine will persist for the foreseeable future, potentially impacting the production of chips, semiconductors and the supply chain more generally.

The forecast used by management also anticipates that the U.S.

economy will fall into a mild recession during the first quarter of 2023 and that the recession will persist for the short term.

Additionally, the allowance for credit losses is qualitatively adjusted on a quarterly basis 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.

The following table summarizes the ratio of net charge-offs to average loans outstanding within each major loan category for the periods presented:

Table 15 - 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

Net Charge-Offs (Recoveries) Average Amount Outstanding Ratio of Annualized Net Charge-Offs/(Recoveries) to Average Loans

(Dollars in thousands)

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Total $ 6,868 $ 9,239,538 0.07 %

The Company recorded net charge-offs of $1.2 million for 2021 compared to $6.9 million and $2.6 million in 2020 and 2019, respectively.

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.

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For purposes of the allowance for credit losses, management segregates the loan portfolio into the portfolio segments detailed in the table below.

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(Dollars in thousands)

Allocated Allowance

Commercial and industrial (1) $ 27,559 11.7 % $ 14,402 11.5 %

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For additional information regarding the Bank’s allowance for credit losses, see Note 1, "Summary of Significant Accounting Policies" and Note 4, "Loans, Allowance for Credit Losses and Credit Quality " within the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

Federal Home Loan Bank Stock The Bank held an investment in Federal Home Loan Bank ("FHLB") of Boston, of $11.4 million and $10.3 million at December 31, 2021 and December 31, 2020, respectively.

The FHLB is a cooperative that provides services to its member banking institutions.

Federal Home Loan Bank Stock The Federal Home Loan Bank ("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.

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The Company views the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.

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Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets were $1.0 billion and $529.3 million at December 31, 2021 and December 31, 2020, respectively.

The increase in 2021 is primarily due to the Meridian acquisition, partially offset by amortization of definite-lived intangibles.

The Bank held an investment in FHLB of Boston, of $5.2 million and $11.4 million at December 31, 2022 and December 31, 2021, respectively, reflecting redemption activity occurring during 2022.

Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets were $1.0 billion at both December 31, 2022 and December 31, 2021, respectively.

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.

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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 $289.3 million and $200.5 million at December 31, 2021 and December 31, 2020, respectively, reflecting primarily $42.9 million in policies obtained in the Meridian acquisition, in addition to new policy purchases made during 2021.

The cash surrender value of life insurance policies was $293.3 million and $289.3 million at December 31, 2022 and December 31, 2021, respectively.

The Company recorded tax exempt income from life insurance policies in the amounts of $7.7 million, $6.4 million, and $5.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The Company also recorded gains on life insurance benefits of $258,000, $1.0 million, and $434,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

Deposits At December 31, 2021, total deposits were $16.9 billion, representing a $5.9 billion, or 53.9%, increase from the prior year-end, reflecting primarily $4.4 billion in balances acquired from Meridian, in addition to robust new account opening activity and the ongoing impact of government stimulus payments which resulted in organic deposit growth of $1.5 billion, or 13.5%, compared to December 31, 2020.

Core deposits represented 84.5% of total deposits at December 31, 2021, reflecting primarily a higher ratio of noncore-time deposits acquired from Meridian.

The total cost of deposits was 0.07% for the year ended December 31, 2021, representing a decrease from the prior year of 20 basis points.

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.

The Company also recorded gains on life insurance benefits of $1.3 million, $258,000, and $1.0 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Deposits At December 31, 2022, total deposits were $15.9 billion, representing a decrease of $1.0 billion, or 6.1% compared to December 31, 2021, fueled by a combination of overall reductions in excess customer liquidity and market pricing pressures in the rising rate environment .

The total cost of deposits was 0.15% for the year ended December 31, 2022, representing an increase from the prior year of eight basis points.

As part of a strategy to contain its cost of deposits, the Company strives to maintain elevated levels of core deposit balances relative to total deposit balances.

The Company's ratio of core deposits to total deposits increased to 87.9% at December 31, 2022 from 84.5% at December 31, 2021.

In addition to its core deposits, 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 $653.6 million and $998.1 million in deposits, at December 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 $102.6 million and $141.6 million, at December 31, 2022 and December 31, 2021, respectively.

The aforementioned increases in funding through both the IntraFi Network and brokered deposits during 2021 were primarily the result of deposit balances acquired from Meridian.

Excluding the effects of the Meridian acquisition, the Company's deposits have increased on a net organic basis as compared to the prior year end as summarized in the table below:

Table 19 - Components of Deposit Growth/(Decline)

2021 December 31

2020 Meridian Bancorp Acquisition Organic Growth/(Decline) $ Organic Growth/(Decline) %

(Dollars in thousands)

Noninterest-bearing demand deposits $ 5,479,503 $ 3,762,306 $ 819,792 $ 897,405 23.9 %

Savings and interest checking 6,350,016 4,047,332 1,647,600 655,084 16.2 %

Money market 3,556,375 2,232,903 1,156,563 166,909 7.5 %

Time certificates of deposits 1,531,150 950,629 816,477 (235,956) (24.8) %

Total $ 16,917,044 $ 10,993,170 $ 4,440,432 $ 1,483,442 13.5 %

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Scheduled maturities of time deposits not covered by deposit insurance at December 31, 2022, were as follows:

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(1) Amounts of uninsured time deposits presented in the table above are estimates determined based upon a relative proportion of customer account balances in excess of FDIC insurance limits, and in a manner consistent with the Company's regulatory reporting requirements.

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.

Borrowings The Company's borrowings typically 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 decreased by $28.7 million, or 15.8%, at December 31, 2021, as compared to December 31, 2020, reflecting primarily the repayment of outstanding debt, including the maturity of a $10.0 million advance from the Federal Home Loan Bank.

The Company assumed $576.1 million in borrowings as part of its acquisition of Meridian, the entirety of which was paid off subsequent to the acquisition.

Borrowings decreased by $39.0 million, or 25.6%, at December 31, 2022, as compared to December 31, 2021, due primarily to the re-payment of a revolving loan credit facility during the first quarter of 2022 and the maturity of a short term FHLB borrowing during the third quarter of 2022.

See Note 8, "Borrowings" within the Notes to Consolidated Financial Statements included in Item 8 of this Report for more information regarding borrowings.

Capital Resources The Federal Reserve Board ("Federal Reserve"), the FDIC, and other regulatory agencies have established risk-based capital guidelines for banks and bank holding companies that require banks to meet a minimum Common Equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%.

Liquidity and Capital Resources The Company proactively manages its liquidity and cash flow requirements with the intent to maintain stable, cost-effective funding and to promote the strength of its overall balance sheet.

The liquidity position of the Company is continuously monitored by management and adjustments are made to appropriately balance sources and uses of funds, as needed.

For further details surrounding the Company’s liquidity risks and related strategy, see “Risk Management

– Liquidity Risk” section below within Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Report.

The Federal Reserve Board ("Federal Reserve"), the FDIC, and other regulatory agencies have established risk-based capital guidelines for banks and bank holding companies that require banks to meet a minimum Common Equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%.

A minimum requirement of 4.0% Tier 1 leverage capital is also mandated.

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See Note 19, "Regulatory Matters " within the Notes to Consolidated Financial Statements included in Item 8 of this Report for more information regarding capital requirements.

Investment Management

The Company's Investment Management Group provides investment management and trust services to individuals, institutions, small businesses, and charitable institutions.

Accounts maintained by the Investment Management Group consist of managed and nonmanaged accounts.

Managed accounts are those for which the Bank is responsible for administration and investment management and/or investment advice, while nonmanaged accounts are those for which the Bank acts solely as a custodian or directed trustee.

The Bank receives fees dependent upon the level and type of service(s) provided.

The Investment Management Group generated gross fee revenues of $32.8 million, $31.6 million, and $27.2 million for the year ended December 31, 2022, 2021, and 2020, respectively.

Total assets under administration as of December 31, 2022 were $5.8 billion, including $603.7 million of investment solutions designed by Rockland Trust that are administered and executed through its agreement with LPL Financial ("LPL"), compared to $5.7 billion and $372.2 million, respectively, at December 31, 2021.

The Company also has a subsidiary that is a registered investment advisor, Bright Rock Capital Management, LLC, which provides institutional quality investment management services to both institutional and high net worth clients.

As of December 31, 2022 and December 31, 2021, included in the assets under administration amounts above, there were $390.1 million and $447.4 million, respectively, relating to the Company's registered investment advisor.

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 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, advisory platforms, 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.

The retail investments and insurance group generated gross fee revenues of $4.1 million, $3.7 million, and $2.3 million for the years ended December 31, 2022, 2021, and 2020, respectively.

Results of Operations

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On a fully tax-equivalent basis, net interest income was $617.3 million for the year ended December 31, 2022, representing a 53.2% increase from net interest income of $402.9 million for the year ended December 31, 2021.

The increase was attributable primarily to PPP fee recognition of $26.5 million for the twelve months ended December 31, 2021 in comparison to $9.1 million for the prior year, in addition to increased average interest-earning assets resulting from the 2021 fourth quarter Meridian acquisition.

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The year-over-year increase in net interest income was primarily attributable to the full year impact of the Meridian acquisition which closed during the fourth quarter of 2021, along with the positive impact of asset repricing in the rising rate environment in conjunction with relatively stable funding costs.

The following table presents the Company’s average balances, net interest income, interest rate spread, and net interest margin for the years ended December 31, 2022, 2021 and 2020.

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Federal Home Loan Bank borrowings 16,138 313 1.94 % 41,556 897 2.16 % 162,776 1,564 0.96 %

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Line of credit — — — % — — — % 2,673 104 3.89 %

Long-term borrowings 2,235 31 1.39 % 21,072 331 1.57 % 54,082 1,176 2.17 %

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Cost of total funding liabilities 0.18 % 0.11 % 0.32 %

(1) The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $1.3 million, $927,000 and $963,000 for 2021, 2020 and 2019, respectively.

(1) The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $4.0 million, $1.3 million, and $927,000 for 2022, 2021 and 2020, respectively.

(2) Includes average nonaccruing loans.

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(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.

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The following table presents certain information on a fully-tax equivalent basis regarding changes in the Company’s interest income and interest expense for the periods indicated.

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Federal Home Loan Bank borrowings (35) (549) (584) 498 (1,165) (667) (2,479) (395) (2,874)

Customer repurchase agreements and other short-term borrowings — — — — — — — (248) (248)

Line of credit — (104) (104)

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See footnotes to Table 19 above for the related adjustments.

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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 provision for credit losses totaled $18.2 million for the year ended December 31, 2021, compared with $52.5 million for the year ended December 31, 2020.

The provision for credit losses for 2021 included $50.7 million of provision required to establish an allowance for credit losses on non-purchased credit deteriorated loans acquired from Meridian, offset by a $32.5 million release of credit reserves, reflecting primarily continued improvement in expected asset quality metrics and overall macro-economic assumptions.

The elevated provision for credit losses for the year ended December 31, 2020 was driven primarily by anticipated credit losses related to the COVID-19 pandemic.

The Company’s allowance for credit losses, as a percentage of total loans, was 1.08% at December 31, 2021, as compared to 1.21% at December 31, 2020.

Net charge-offs for the years ended December 31, 2021 and 2020 totaled $1.2 million and $6.9 million, respectively.

The Company's provision for credit losses totaled $6.5 million, $18.2 million and $52.5 million for the years ended December 31, 2022, 2021, and 2020, respectively.

The provision for credit losses recorded for 2022 was largely attributable to an additional reserve allocation associated with a large commercial and industrial credit that migrated to nonperforming status during 2022 as well as additional provisioning for net loan growth, partially offset by a stabilized credit environment and continued strong asset quality metrics.

The elevated provision for credit losses for the year ended December 31, 2021 was driven primarily by the initial provision required to establish an allowance for credit losses on non-purchased deteriorated loans acquired from Meridian in 2021, while the 2020 provision was driven primarily by anticipated credit losses associated with the COVID-19 pandemic.

The Company’s allowance for credit losses, as a percentage of total loans, was 1.09%, 1.08% and 1.21% at December 31, 2022, 2021 and 2020, respectively.

See Note 4, "Loans, Allowance for Credit Losses and Credit Quality " within the Notes to Consolidated Financial Statements included in Item 8 of this Report, for further details surrounding the primary drivers of the provision for credit losses during the period.

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The primary reasons for significant variances in the noninterest income categories shown in the preceding table are noted below:

Deposit account fees increased year over year due primarily to higher overdraft fees which were impacted in the prior year by the timing and extent of government mandated shutdowns and social distancing measures, as well as the timing of economic stimulus payments received by customers.

Interchange and ATM fees decreased during the year, mostly reflective of the negative impact of the Durbin Amendment, which the Company became subject to effective July 1, 2020 as a result of crossing the $10 billion asset threshold.

Investment management revenue increased primarily due to growth in overall assets under administration, which grew 15.7% from $4.9 billion at December 31, 2020 to $5.7 billion at December 31, 2021, along with overall more favorable market conditions during 2021.

Mortgage banking income decreased in comparison to the prior year, primarily due to a larger portion of new residential originations being retained in the Company's portfolio versus being sold in the secondary market in comparison to the prior year.

Loan level derivative income decreased primarily as a result of lower customer demand during 2021 in comparison to the prior year.

Other noninterest income increased during the year, primarily due to increases in income recognized from other investments, income from like-kind exchanges, capital gains distributions on equity securities, business credit card interchange fees and commercial loan late charge fees, offset partially by decreases in unrealized gains on equity securities, rental income from equipment leases, and FHLB dividend income.

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Deposit account fees and interchange and ATM fees increased year over year due primarily to increased transaction volume attributable to the larger customer base as a result of the Meridian acquisition.

Investment management revenue increased as a result of growth in overall assets under administration, which increased from $5.7 billion at December 31, 2021 to $5.8 billion at December 31, 2022, reflecting healthy new asset inflows and strong retail and insurance commission income, offset partially by a decline in market valuations.

The income for 2022 was also inclusive of a one-time incentive of $649,000.

Mortgage banking income decreased in comparison to the prior year, due primarily to overall reduced activity resulting from increased interest rates, as well as elevated levels of new residential originations being retained in the Company's portfolio versus sold in the secondary market.

The cash surrender value of life insurance increased primarily due to the impact of policies acquired from Meridian.

The Company also received elevated levels of proceeds on life insurance policies during 2022 resulting in an increase of $1.0 million compared to the prior year.

The changes in loan level derivative income primarily reflect customer demand during the respective periods.

Other noninterest income increased during the year, primarily due to increases in equipment rental income, gain on the sale of a closed branch facility which was consolidated in conjunction with the Meridian acquisition, discounted purchases of Massachusetts historical tax credits, and foreign currency exchange fees, offset partially by decreases in income from other investments, and income from like-kind exchanges.

Noninterest Expense The following table sets forth information regarding noninterest expense for the periods shown:

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FDIC assessment 6,951 3,980 2,971 74.6 %

Advertising 4,085 4,258 (173) (4.1) %

Consulting 9,617 8,271 1,346 16.3 %

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Debit card expense 7,670 5,144 2,526 49.1 %

Lease impairment — 4,163 (4,163) nm

Loss on sale of other equity investments — 1,033 (1,033) nm

Loss on termination of derivatives — 684 (684) nm

Merger & acquisitions 40,840 — 40,840 nm

Merger & acquisitions 7,100 40,840 (33,740) (82.6) %

Software maintenance 10,961 8,149 2,812 34.5 %

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Total $ 373,662 $ 332,529 $ 41,133 12.4 %

The use of "nm" indicated that the percentage was not meaningful.

The primary reasons for significant variances in the noninterest expense categories shown in the preceding tables are noted below:

The increase in salaries and employee benefits in comparison to the prior was driven by increases in incentive programs, commissions, payroll taxes, and general salary increases, which included the impact of an expanded employee base from the Meridian acquisition which closed during the fourth quarter of 2021.

Occupancy and equipment expense decreases were primarily attributable to decreased computer hardware and software costs which were elevated in the prior year to facilitate remote work for employees after the onset of the COVID-19 pandemic, along with reduced depreciation due to a reduction in leased equipment.

These decreases were partially offset by increases in general equipment maintenance and repairs, in addition to increased costs attributable to the acquired Meridian branch network.

FDIC assessment expense increased during 2021 in comparison to the prior year as the Company previously benefited from a small bank assessment credit, which resulted in no expense for the first quarter of 2020 and reduced expense for the second quarter of 2020.

The Company's assessment base has also increased in comparison to the prior year, further increasing the expense.

Consulting expense increased in 2021 in conjunction with the Company's overall growth and implementation of strategic initiatives.

In 2020, the Company recorded an impairment charge of $4.2 million reflecting accelerated lease termination costs and the write-off of leasehold improvements related to two branch closure decisions made during the quarter.

During the 2021, the Company recognized approximately $2.3 million in impairment charges associated with several branch closure decisions as part of its acquisition of Meridian, however these charges were recorded within merger and acquisition expense.

Merger and acquisition expenses in 2021 were attributable to the Meridian acquisition.

The majority of these costs included change-in-control contracts, severance, branch closure and conversion costs, contract terminations costs and other integration costs.

There were no merger and acquisition costs incurred during 2020.

Other noninterest expenses decreased in 2021 in comparison to the prior year, primarily due to decreased prepayment fees on borrowings, loss on the sale of fixed assets, office supplies, retail branch traffic control, partially offset by increases in legal fees, telecommunications expense, and service charges to correspondent banks.

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The increase in salaries and employee benefits in comparison to the prior year was primarily attributable to the Company's increased workforce base following the Meridian acquisition.

Occupancy and equipment expense increased year-over-year, primarily driven by costs associated with the Company's expanded branch network, real estate and other fixed assets resulting from the Meridian acquisition as well as increased depreciation on leased equipment.

Data processing and facilities management expenses increased primarily due to the timing of certain initiatives and general increases associated with higher transaction volumes.

FDIC assessment expense increased in comparison to the prior year due primarily to an increased assessment base following the Meridian acquisition.

Consulting expense increased year-over-year in conjunction with the Company's overall growth and implementation of strategic initiatives.

The Company incurred merger and acquisition costs related to the Meridian acquisition of $7.1 million during the first quarter of 2022, primarily related to lease terminations associated with exited branch locations, along with additional integration costs and professional fees.

Merger and acquisition expenses in 2021 were also attributable to the Meridian acquisition and largely comprised of change-in-control contracts, severance, branch closure and conversion costs, contract terminations costs and other integration costs.

Software maintenance increased primarily due to the Company's continued investment in its technology infrastructure.

Other noninterest expenses increased year-over year due primarily to increased advertising costs, customer fraud reimbursements, unrealized losses on equity securities, internet banking costs, insurance, telecommunications, and postage costs.

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.

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Blended Statutory tax rate 27.85 % 27.92 % 27.92 %

The Company’s effective tax rate for 2021 is higher as compared to the year ago period primarily due to the impact of discrete items, which are subject to fluctuation year over year.

The discrete tax amounts for the year ended December 31, 2020 include a benefit of $4.8 million associated with the net operating loss (NOL) carryback provision of the CARES Act.

This NOL was generated in relation to the Blue Hills Bancorp.("BHB acquisition").

The Company’s effective tax rate for 2022 is higher as compared to the year ago period primarily due to higher pre-tax net income, as well as the impact of discrete items, such as provision to return adjustments, changes in uncertain tax positions, and excess benefits from equity compensation, which are subject to fluctuation year over year.

The effective tax rates reported 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 year ended December 31, 2021 is consistent with the 2020 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.

Additionally, 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 receives tax credits and tax deductions for losses incurred by the underlying properties.

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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

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Officer and the risk department, who monitor and provide advice with respect to first line risk management.

The second line of defense monitors and provides risk management advice across all risk domains, and is comprised of the enterprise risk department, with oversight from the Chief Risk Officer.

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.

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 nine 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, failure to achieve strategic objectives, diminished customer experience, and/or cultural erosion.

The nine major risk types identified by the Company and addressed in the Risk Appetite Statement are strategic and emerging risk, culture risk, credit risk, liquidity risk, interest rate risk, operational risk, reputation risk, compliance risk, and technology risk, each of which is discussed below.

Strategic and Emerging Risk Strategic and emerging risk is the risk arising from adverse strategic or business decisions, misalignment of strategic direction with the Company’s mission and values, failure to execute strategies or tactics, or an inadequate adaptation or lack of responsiveness to industry and/or operating environment changes.

Management seeks to mitigate strategic risk through strategic planning, frequent executive review of strategic plan progress, monitoring of competitors and technology, assessment of new products, new branches, and new business initiatives, customer advocacy, and crisis management planning.

Culture Risk Culture risk is the risk arising from failed leadership and/or ineffective colleague engagement and workplace management that causes the Company to lose sight of core values and, through acts or omissions, damage the relationship-based culture which has been one of the foundations of the Company’s consistent success.

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 that has been one of the foundations of the Company’s consistent success.

Management seeks to mitigate 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.

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 that 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.

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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.

Interest rates, economic conditions, and competitive factors greatly influence deposit levels.

The Company’s primary measure of short-term liquidity is the Total Basic Surplus/Deficit as a percentage of assets.

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The Company seeks to increase deposits without adversely impacting its weighted average funding cost.

In consideration of the Company's strong capital position, the Company has put in a place a stock buyback plan, which authorizes repurchases of up to $140 million in common stock and will be in effect through January 18, 2023.

The plan was previously approved by the Company's Board of Directors, pending the receipt of non-objection from the Federal Reserve, which was received on January 19, 2022.

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The Company also maintains a variety of liquidity sources, including Federal Home Loan Bank advances, Federal Reserve borrowing capacity, and repurchase agreement lines.

As a result of PPP loan fundings, government stimulus programs, and a customer focus on retaining liquidity, the Company experienced significant deposit growth and a buildup of liquidity in recent years, which began to normalize and run off throughout 2022, contributing to an overall decline in deposit balances at December 31, 2022.

However, 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 amount and type of assets that the Company has available to pledge affects 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.

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The availability and cost of equity or debt on an unsecured basis is dependent on many factors, including the Company’s financial position, the market environment, and the Company’s credit rating.

The Company monitors the factors that could impact its ability to raise liquidity through these channels.

The Company monitors the factors that could affect its ability to raise liquidity through these channels.

The table below shows current and unused liquidity capacity from various sources at the dates indicated:

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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 is therefore responsible for instituting systems and controls designed to provide advanced detection of potentially significant funding shortages, establishing methods for assessing and monitoring risk levels, and instituting 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 Interest rate 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.

Interest rate risk includes market risk.

Interest rate risk is the sensitivity of income to changes in interest rates.

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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.

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In addition to directly affecting 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.

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, with off-balance sheet hedging instruments such as interest rate swaps, floors, and caps.

The Company quantifies its interest rate exposures using net interest income simulation models, as well as simpler gap analysis, and an Economic Value of Equity analysis.

Key assumptions in these analyses relate to behavior of interest rates and behavior of the Company’s deposit and loan customers.

The most material assumptions relate to the prepayment of mortgage assets (including mortgage loans and mortgage-backed securities) and the life and sensitivity of non-maturity deposits (e.g., demand deposit, negotiable order of withdrawal, savings, and money market accounts).

In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans.

The most material assumptions relate to the prepayment of mortgage assets (including mortgage loans and mortgage-backed securities) and the life and sensitivity of non-maturity deposits ( e.g.

, demand deposit, negotiable order of withdrawal, savings, and money market accounts).

In the case of prepayment of mortgage assets, assumptions are derived from published 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.

Based upon the net interest income simulation models, the Company anticipates that assets will 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 such scenarios are outlined in the table below:

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The results of those scenarios are summarized in the following table:

Table 25 - Interest Rate Sensitivity

Years Ended December 31

Year 1 Year 2 Year 1 Year 2

Year 1 Year 1

Parallel rate shocks (basis points)

-300 (10.0)% n/a

-200 (5.7)% n/a

-100 (2.5)% (4.5)%

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Gradual rate shifts (basis points)

-200 over 12 months (2.3)% n/a

-100 over 12 months (1.1)% (1.6)%

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Alternative scenarios

Yield curve twist (1) n/a n/a 1.5% 3.0%

(1) In the yield curve twist scenario, rates increase 200 basis points over a two year horizon.

The parallel shift occurs faster on the long end of the curve than it does on the short end, creating a temporary increase in the steepness of the curve during the interim period of the twist.

Steep down 200 basis points scenario (0.5)% n/a

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.

Alternatively, if the Company were 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 year ended December 31, 2022 were the shape of the U.S.

Government securities and interest rate swap yield curve, the U.S.

prime, LIBOR, Secured Overnight Funding Rate ("SOFR") and other interest rates being offered on long-term fixed rate loans.

prime, LIBOR, SOFR, and interest rates 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.

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 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 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 10," Derivatives and Hedging Activities " within Notes to Consolidated Financial Statements included in Item 8 of this Report for additional information regarding the Company’s derivative financial instruments.

The Company’s earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices.

Movements in foreign currency rates or commodity prices do not directly or materially affect the Company's earnings.

Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines.

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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.

Operational risk includes fraud risk and model 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

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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.

Reputational Risk Reputational risk is the risk arising from negative public opinion of the Company and the Bank.

The continued effectiveness of colleagues and operational infrastructure are integral to mitigating operational risk, and any shortcomings subject the Company to risks that vary in size, scale and scope.

Reputation Risk Reputation risk is the risk arising from negative public opinion of the Company and the Bank.

Management seeks to mitigate reputational risk through actions that include a structured process of customer complaint resolution and ongoing reputational monitoring.

Compliance Risk Compliance risk is the risk arising from violations of laws or regulations, non-conformance with prescribed practices, internal bank policies and procedures, or ethical standards.

Compliance risk includes consumer compliance risk, legal risk, and regulatory compliance risk.

Management seeks to mitigate compliance risk through compliance training and regulatory change management processes.

Technology Risk Technology risk is the risk of losses or other impacts arising from the failure of technology systems to function in accordance with expectations and business requirements.

Technology risk includes information technology risk, information security risk, and cyber security.

Technology risks include technical failures, unlawful tampering with technical systems, cyber security, terrorist activities, ineffectiveness or exposure due to interruption in third party support.

Management seeks to mitigate technology risk through appropriate security and controls over data and its technological environment.

Contractual Obligations, Commitments, Contingencies and Off-Balance Sheet Obligations

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Refer to the accompanying notes to consolidated financial statements in this report for further information and the expected timing of the applicable payments as of December 31, 2022.

These include payments related to (i) borrowings (Note 9 - Borrowings ), (ii) lease obligations ( Note 18 - Leases), (iii) time deposits with stated maturity dates ( Note 8 - Deposits ), (iv) commitments to extend credit ( Note 19 - Commitments and Contingencies ), (v) derivative positions ( Note 111 - Derivatives and Hedging Activities), (vi) unfunded commitments on low income housing project investments ( Note 13 - Low Income Housing Project Investments).

These include payments related to (i) borrowings (Note 8 - Borrowings ), (ii) lease obligations ( Note 17 - Leases), (iii) time deposits with stated maturity dates ( Note 7 - Deposits ), (iv) commitments to extend credit ( Note 18 - Commitments and Contingencies ), (v) derivative positions ( Note 10 - Derivatives and Hedging Activities), and (vi) unfunded commitments on low income housing project investments ( Note 12 - Low Income Housing Project Investments).

Also refer to Table 24 - Sources of Liquidity within Item 7 of this report for further details surrounding the Company's current and unused liquidity resources.

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However, inflation does affect the Company because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations.

The impact on the Company is a noted increase in the size of loan requests with resulting growth in total assets.

The impact on the Company is a noted increase in the size of loan

requests with resulting growth in total assets.

In addition, operating expenses may increase without a corresponding increase in productivity.

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Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

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.

Management believes that the Company’s most critical accounting policies upon which the Company’s financial condition depends, and which involve the most complex or subjective decisions or assessments, are as follows:

Certain estimates associated with these policies inherently have a greater reliance on the use of assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.

These critical accounting estimates are defined as estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on financial condition or results of operations.

Management believes that the Company’s most critical accounting policies and estimates upon which the Company’s financial condition depends, and which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Credit Losses - Loans Held for Investment The Company estimates the allowance for credit losses in accordance with the CECL methodology for loans measured at amortized cost.

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The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable.

Changes in these estimates could be due to a number of circumstances which may have a direct impact on the provision for loan losses and may result in changes to the amount of allowance.

Changes in these judgements and assumptions could be due to a number of circumstances which may have a direct impact on the provision for loan losses and may result in changes to the amount of allowance.

The allowance for credit losses is increased by the provision for credit losses and by recoveries of loans previously charged off.

Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan.

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Management performs periodic sensitivity and stress testing using available economic forecasts in order to evaluate the adequacy of the allowance for credit losses under varying scenarios.

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Additionally, deferred tax assets and liabilities are calculated based on tax rates expected to be in effect in future periods.

Previously recorded tax assets and liabilities need to be adjusted when the expected date of the future event is revised based upon current information.

recorded tax assets and liabilities need to be adjusted when the expected date of the future event is revised based upon current information.

The Company may also record an unrecognized tax benefit related to uncertain tax positions taken by the Company on its tax returns for which there is less than a 50% likelihood of being recognized upon a tax examination.

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Taxes are discussed in more detail in Note 11, "Income Taxes" within the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

Business Combinations In accordance with applicable accounting guidance, the Company recognizes assets acquired and liabilities assumed at their respective fair values as of the date of acquisition, with the related transaction costs expensed in the period incurred.

The Company may use third party valuation specialists to assist in the determination of fair value of certain assets and liabilities at the acquisition date, including loans, core deposit intangibles and time deposits.

While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed on the acquisition date, the estimates are inherently uncertain.

The allowance for credit losses on PCD loans is recognized within business combination accounting.

The allowance for credit losses on non-PCD loans is recognized as a provision expense in the same period as the business combination.

For further discussion of the Company’s accounting policies for estimating credit losses on acquired loans, see Note 4, "Loans, Allowance for Credit Losses and Credit Quality " within the Notes to Consolidated Financial Statements included in Item 8 of this Report.

Valuation of Investment Securities Securities that the Company has the ability and intent to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premium and accretion of discount.

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Unrealized gains and losses on securities available-for-sale are reported, on an after-tax basis, as a separate component of stockholders’ equity in accumulated other comprehensive income.

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Recent Accounting Developments

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See "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management" in Item 7 of this Report.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis