What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-03 · 155 added, 146 removed, 766 unchanged (28% of the section changed)

9 unchanged sentences

• the effects of inflationary pressures, labor market shortages and supply chain issues;

• the instability or volatility in financial markets and unfavorable general economic or business conditions, globally, nationally or regionally, whether caused by geopolitical concerns, including as a result of the conflict between Russia and Ukraine, recent disruptions in the banking industry or other factors;

• the instability or volatility in financial markets and unfavorable general economic or business conditions, globally, nationally or regionally, whether caused by geopolitical concerns, including the Russia/Ukraine conflict, the conflict in Israel and surrounding areas and the possible expansion of such conflicts, recent disruptions in the banking industry, or other factors;

• unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, pandemics or other external events;

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• changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

• higher than expected tax expense, resulting from failure to comply with general tax laws and changes in tax laws;

• changes in market interest rates for interest earning assets and/or interest bearing liabilities and changes related to the phase-out of the London Interbank Offered Rate ("LIBOR");

• higher than expected tax expense, including as a result of failure to comply with general tax laws and changes in tax laws;

• changes in market interest rates for interest earning assets and/or interest bearing liabilities;

• increased competition in the Company’s market areas;

• adverse weather, changes in climate, natural disasters, geopolitical concerns, including those arising from the conflict between Russia and Ukraine;

• adverse weather, changes in climate, natural disasters, and geopolitical concerns;

• the emergence of widespread health emergencies or pandemics, any further resurgences or variants of the "COVID-19 virus", actions taken by governmental authorities in response thereto, other public health crises or man-made events, and their impact on the Company's local economies or the Company's operations;

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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).

Second Quarter 2023 Results

Net income for the three months ended June 30, 2023 was $62.6 million, or $1.42 on a diluted earnings per share basis, as compared to $61.8 million, or $1.32 on a diluted earnings per share basis, for the three months ended June 30, 2022, representing increases of 1.4% and 7.6%, respectively.

Results for the six months ended June 30, 2022 reflect merger and acquisition-related costs of $7.1 million, pre-tax, associated with the acquisition of Meridian Bancorp, Inc.

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

Excluding these merger and acquisition costs, operating net income was $120.0 million, or $2.55 on a diluted per share basis for six months ended June 30, 2022.

There were no such costs for the six months ended June 30, 2023.

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

Second quarter 2023 results reflected the following key drivers:

Third Quarter 2023 Results

Net income for the three months ended September 30, 2023 was $60.8 million, or $1.38 on a diluted earnings per share basis, as compared to $71.9 million, or $1.57 on a diluted earnings per share basis, for the three months ended September 30, 2022, representing decreases of 15.4% and 12.1%, respectively, as the third quarter of 2023 reflected solid overall business activity amidst a challenging environment, including the following key drivers:

• Disciplined loan growth;

• Stabilizing deposit balances;

• Wealth Management assets under administration increased to $6.3 billion;

• Seasonal deposit declines;

stable product mix;

• Margin compression of 7 basis points;

• Solid fee income growth;

• Asset quality remains solid;

• Nonperforming asset decrease;

stable asset quality;

• Prudent expense management;

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• Robust capital levels;

$100.0 million share repurchase authorization

Interest-Earning Assets

The results depicted in the following table reflect the trend of the Company's interest-earning assets over the past five quarters.

While the Company employs a longer term strategy that typically emphasizes loan growth commensurate with overall economic growth, changes over the five quarter period reflect a decline in interest-earning cash balances, largely attributable to a competitive rate environment, redeployment of excess customer liquidity, and the completion of two stock repurchase programs over the course of 2022 and through the first quarter of 2023.

While the Company employs a longer term strategy that typically emphasizes loan growth commensurate with overall economic growth, changes over the five quarter period reflect a decline in total interest-earning assets, driven primarily by decreases in cash balances commensurate with deposit balance reductions.

The following table summarizes the Company's interest-earning assets as of the periods indicated:

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The Company's overall sources of funding reflect strong business and retail deposit growth with a management strategy of relying upon core deposit growth to substantially fund loans.

Total borrowings increased by $787.9 million at June 30, 2023 as compared to December 31, 2022, primarily in response to deposit balance reductions and preemptive measures to bolster on-balance sheet liquidity in response to the high deposit risk environment experienced recently across the banking industry during the first half of 2023, as well as share repurchase activity during the first quarter of 2023.

Total borrowings increased by $887.0 million at September 30, 2023 as compared to December 31, 2022, primarily in response to deposit balance reductions and preemptive measures to bolster on-balance sheet liquidity in response to the high deposit risk environment experienced across the banking industry during 2023.

The following chart shows sources of funding and percentage of core deposits to total deposits for the trailing five quarters:

The Company's ratio of core deposits to total deposits decreased over the first three quarters of 2023, primarily attributable to core deposit outflows in conjunction with existing deposit balances shifting into higher cost time deposits.

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

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

The Company declared a quarterly cash dividend of $0.55 per share for the second quarter of 2023, representing an increase of 7.8% from the 2022 second quarter dividend rate of $0.51.

The Company declared a quarterly cash dividend of $0.55 per share for the third quarter of 2023, representing an increase of 7.8% from the 2022 third quarter dividend rate of $0.51.

Non-GAAP Measures

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The following table summarizes adjustments for noncore items for the periods indicated below and shows the reconciliation of non-GAAP measures:

Six Months Ended June 30

Nine Months Ended September 30

Net Income Diluted

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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.

There have been no material changes in critical accounting estimates during the first six months of 2023.

There have been no material changes in critical accounting estimates during the first nine months of 2023.

Refer to "Critical Accounting Estimates" in Item 7.

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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 decreased by $106.2 million, or 3.4%, at June 30, 2023 as compared to December 31, 2022, driven primarily by paydowns, calls, and maturities, partially offset by unrealized gains of $7.2 million in the available for sale portfolio.

As a result, the Company's ratio of securities to total assets decreased to 15.6% at June 30, 2023 compared to 16.2% at December 31, 2022.

Securities decreased by $155.3 million, or 5.0%, at September 30, 2023 as compared to December 31, 2022, driven primarily by paydowns, calls, and maturities.

As a result, the Company's ratio of securities to total assets decreased to 15.4% at September 30, 2023 compared to 16.2% at December 31, 2022.

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

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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 residential mortgage repurchases during the three and six months ended June 30, 2023 and 2022, respectively.

The Company incurred no material losses related to residential mortgage repurchases during the three and nine months ended September 30, 2023 and 2022, respectively.

The following table shows the total residential real estate loans closed and the breakdown of amounts held in portfolio or sold (or held for sale) in the secondary market during the periods indicated:

Table 1 - Closed Residential Real Estate Loans

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2023 2022 2023 2022

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Table 2 - Residential Mortgage Loan Sales

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2023 2022 2023 2022

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Total loans sold $ 27,579 $ 18,388 $ 53,293 $ 94,869

(1) All loans sold with servicing rights retained during the three and six months ended June 30, 2022 were sold without recourse.

(1) All loans sold with servicing rights retained during the three and nine months ended September 30, 2022 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 $311.5 million, $327.5 million and $348.1 million at June 30, 2023, December 31, 2022, and June 30, 2022, respectively.

The principal balance of loans serviced by the Bank on behalf of investors was $304.7 million, $327.5 million and $336.2 million at September 30, 2023, December 31, 2022, and September 30, 2022, respectively.

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

Table 3 - Mortgage Servicing Asset

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2023 2022 2023 2022

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Item 1 of this Report for more information on mortgage activity and mortgage related derivatives.

Loan Portfolio Total loans at June 30, 2023 increased by $211.2 million, or 1.5%, (3.1% on an annualized basis) when compared to December 31, 2022.

The commercial portfolio increased by $27.1 million, or 0.3% during the six months ended June 30, 2023, primarily reflecting strong closing activity in the commercial and industrial and commercial real estate portfolios, as well as modest growth in small business loans.

On the consumer side, the vast majority of residential real estate originations were retained on the balance sheet during the six months ended June 30, 2023, resulting in growth of $185.8 million, or 9.1%, as compared to December 31, 2022.

Loan Portfolio Total loans at September 30, 2023 increased by $295.6 million, or 2.1% (2.8% on an annualized basis), when compared to December 31, 2022.

The commercial portfolio decreased by $8.8 million, or 0.1% during the nine months ended September 30, 2023, reflecting reduced closing activity compared to prior years.

On the consumer side, the vast majority of residential real estate originations were retained on the balance sheet during the nine months ended September 30, 2023, resulting in growth of $302.6 million, or 14.9%, within the residential portfolio, as compared to December 31, 2022.

The Company’s commercial real estate loan portfolio, inclusive of commercial construction, is the Company’s largest loan type concentration.

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Commercial real estate also includes loans secured by certain residential-related property types, including multi-family apartment buildings, residential development tracts and condominiums.

The following pie chart shows the diversification of the commercial real estate loan portfolio as of June 30, 2023:

The following pie chart shows the diversification of the commercial real estate loan portfolio as of September 30, 2023:

(1) Included in the total commercial real estate balance are $1.4 billion, or 15.3%, of owner occupied commercial real estate loans.

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Management considers the Company’s commercial and industrial portfolio to be well-diversified with loans to various types of industries.

The following pie chart shows the diversification of the commercial and industrial portfolio as of June 30, 2023:

The following pie chart shows the diversification of the commercial and industrial portfolio as of September 30, 2023:

(Dollars in thousands)

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Other consumer loans primarily consist of installment loans and overdraft protections.

The residential real estate, home equity and other consumer portfolios totaled $3.3 billion at June 30, 2023, as noted below:

The residential real estate, home equity and other consumer portfolios totaled $3.5 billion at September 30, 2023, as noted below:

(Dollars in thousands)

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

Nonperforming Assets Nonperforming assets are typically comprised of nonperforming loans and other real estate owned.

Nonperforming 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 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.

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

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2023 December 31

2022 September 30

(Dollars in thousands)

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Total (1) $ 39,168 $ 54,881 $ 56,017

Loans past due 90 days or more but still accruing

Other consumer 3 — —

Total $ 3 $ — $ —

Total nonperforming loans $ 39,171 $ 54,881 $ 56,017

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Nonperforming assets as a percent of total assets 0.20 % 0.28 % 0.28 %

(1) Inclusive of troubled debt restructurings ("TDRs") on nonaccrual status of $11.5 million at December 31, 2022, and $1.7 million at June 30, 2022, in accordance with previously applicable accounting guidance.

(1) Inclusive of troubled debt restructurings ("TDRs") on nonaccrual status of $11.5 million at December 31, 2022, and $1.5 million at September 30, 2022, in accordance with previously applicable accounting guidance.

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

Table 5 - Activity in Nonperforming Assets

Three Months Ended Six Months Ended

Three Months Ended Nine Months Ended

2023 September 30

2022 September 30

2023 September 30

(Dollars in thousands)

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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.

factors designed to address forecast risk and model risk inherent in the quantitative model output.

The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of prepayments.

Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period of one year, beyond which is a reversion to the Company's historical long-run average for a period of six months.

The Company's qualitative

assessment is structured based upon nine environmental factors impacting the expected risk of loss within the loan portfolio.

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.

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

The balance of allowance for credit losses decreased to $140.6 million as of June 30, 2023 compared to $152.4 million at December 31, 2022, driven primarily by outsized charge-offs and specific reserve allocations over certain commercial loans.

Management's forecast anticipates that the recent U.S.

bank failures are not symptomatic of a serious broader problem in the financial system, that a full-employment economy is expected to continue, that the U.S.

debt ceiling increase will have a modest dampening effect on the economy, and that home sales are expected to remain low reflecting a lack of inventory.

Management's forecast anticipates that the Federal Reserve has finished tightening rates and will begin easing rates gradually in mid-2024, that the 10-year treasury yield will decline from recent highs and ease slightly until 2025, that the labor market will begin to weaken throughout 2024, that recent U.S.

bank failures are not symptomatic of a serious broader problem in the financial system, that a decline in the commercial real estate price index will continue until 2025, and that home sales are expected to remain low reflecting a lack of inventory and high interest rates.

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 balance of allowance for credit losses decreased to $140.6 million as of September 30, 2023 compared to $152.4 million at December 31, 2022, driven primarily by outsized charge-offs on two large commercial loans, as shown in the table below, partially offset by net loan growth during the nine months ended September 30, 2023.

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

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(Dollars in thousands)

Three Months Ended June 30, 2023 Six Months Ended June 30, 2023

Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023

Commercial and industrial (1) $ (111) $ 1,682,000 (0.03) % $ 23,339 $ 1,662,459 1.88 %

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Total $ 5,578 $ 14,155,257 0.16 % $ 29,600 $ 14,042,097 0.28 %

(1) The increase in net charge-offs during the three and six months ended June 30, 2023 was driven primarily by the full charge-off of a single large nonperforming commercial and industrial credit which had previously been fully reserved for as of March 31, 2023.

(1) The increase in net charge-offs during the nine months ended September 30, 2023 was driven primarily by the full charge-off of a single large nonperforming commercial and industrial credit.

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

(Dollars in thousands)

Three Months Ended June 30, 2022 Six Months Ended June 30, 2022

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

Commercial and industrial $ (2) $ 1,520,924 — % $ (44) $ 1,531,421 — %

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Total allowance for credit losses $ 140,569 100.0 % $ 152,419 100.0 %

(1) Total loans in this category are inclusive of $5.7 million and $9.1 million in loans at June 30, 2023 and December 31, 2022, respectively, which were originated as part of the Paycheck Protection Program ("PPP") established by the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act").

(1) Total loans in this category are inclusive of $5.1 million and $9.1 million in loans at September 30, 2023 and December 31, 2022, respectively, which were originated as part of the Paycheck Protection Program ("PPP") established by the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act").

These loans have been excluded from the credit loss calculations as these loans are 100% guaranteed by the U.S.

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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.

The Company's investments in FHLB of Boston stock increased to $39.5 million at June 30, 2023 compared to $5.2 million at December 31, 2022, driven by an increase in FHLB borrowings of $787.8 million during the first half of 2023.

Goodwill and Other Intangible Assets Goodwill and other intangible assets were $1.0 billion at both June 30, 2023 and December 31, 2022.

The Company's investments in FHLB of Boston stock increased to $43.9 million at September 30, 2023 compared to $5.2 million at December 31, 2022, driven by a net increase in FHLB borrowings of $886.9 million during the nine months of 2023.

Goodwill and Other Intangible Assets Goodwill and other intangible assets were $1.0 billion at both September 30, 2023 and December 31, 2022.

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.

In light of the turmoil experienced in the U.S.

banking industry during the first half of 2023, and the related industry wide impact on bank stock valuations, the Company performed an interim goodwill impairment analysis during the quarter and determined that the Company's goodwill was not impaired as of June 30, 2023.

banking industry during the first half of 2023, and the related industry wide impact on bank stock valuations, the Company performed interim goodwill impairment tests as of March 31, 2023 and June 30, 2023, both of which determined that goodwill was not impaired.

During the third quarter of 2023, the Company performed its annual goodwill impairment testing and determined that the Company's goodwill was not impaired as of September 30, 2023.

Other intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.

There were no other events or changes during the second quarter of 2023 that indicated impairment of goodwill and other intangible assets.

There were no other events or changes during the third quarter of 2023 that indicated impairment of goodwill and other intangible assets.

Cash Surrender Value of Life Insurance Policies The Bank holds life insurance policies for the purpose of offsetting its future obligations to its employees under its retirement and benefits plans.

The cash surrender value of life insurance policies was $296.7 million at June 30, 2023 compared to $293.3 million at December 31, 2022, representing an increase of $3.4 million, or 1.1%, primarily due to income earned on the policies.

The Company recorded tax exempt income from life insurance policies of $1.9 million for both the three months ended June 30, 2023 and 2022, respectively, and $3.8 million and $3.7 million for the six months ended June 30, 2023 and 2022, respectively.

Deposits As of June 30, 2023, total deposits were $15.2 billion, representing a $631.0 million, or 4.0%, decrease from December 31, 2022, primarily reflective of industry wide dislocations occurring during the first quarter of 2023, which subsequently began to stabilize during the second quarter, as well as a competitive rate environment and redeployment of customer excess liquidity due to inflationary and other factors.

The total cost of deposits was 0.85% and 0.05% for the three months ended June 30, 2023 and 2022, respectively, and 0.72% and 0.05% for the six months ended June 30, 2023 and 2022, respectively.

The increase in the cost of deposits was driven by the higher rate environment driven by the Federal Reserve's rate hikes over the past year.

The cash surrender value of life insurance policies was $295.7 million at September 30, 2023 compared to $293.3 million at December 31, 2022, representing an increase of $2.3 million, or 0.8%, primarily due to income earned on the policies.

The Company recorded tax exempt income from life insurance policies of $2.0 million and $1.9 million for the three months ended September 30, 2023 and 2022, respectively, and $5.8 million and $5.5 million for the nine months ended September 30, 2023 and 2022, respectively.

The Company recorded gains on life insurance benefits of $1.9 million and $477,000 for the three months ended September 30, 2023 and 2022, respectively, and $2.1 million and $600,000 for the nine months ended September 30, 2023 and 2022, respectively.

Deposits As of September 30, 2023, total deposits were $15.1 billion, representing an $819.5 million, or 5.2%, decrease from December 31, 2022, primarily reflective of industry wide dislocations occurring during the first quarter of 2023 and seasonal declines in municipal accounts during the third quarter of 2023, coupled with an overall competitive rate environment and a redeployment of customer excess liquidity due to inflationary and other factors.

The total cost of deposits was 1.07% and 0.15% for the three months ended September 30, 2023 and 2022, respectively, and 0.84% and 0.08% for the nine months ended September 30, 2023 and 2022, respectively.

The increase in the cost of deposits was a result of the higher rate environment driven by the Federal Reserve's rate hikes over the latter half of 2022 and 2023.

The Company's deposits are comprised primarily of core deposits (demand, savings, and money market), as well as time deposits.

Core deposits represented 82.6% and 87.9% of total deposits as of June 30, 2023 and December 31, 2022, respectively, with the 2023 first half decrease driven primarily by core deposit outflows in conjunction with growth in higher yielding time deposits.

In addition, the Company may also utilize brokered deposit sources, as needed, with balances of $95.5 million and $102.6 million outstanding at June 30, 2023 and December 31, 2022, respectively.

Core deposits represented 80.5% and 87.9% of total deposits as of September 30, 2023 and December 31, 2022, respectively, with the 2023 decrease driven primarily by core deposit outflows in conjunction with growth in higher yielding time deposits.

In addition, the Company may also utilize brokered deposit sources, as needed, with balances of $100.9 million and $102.6 million outstanding at September 30, 2023 and December 31, 2022, respectively.

The Company's deposit accounts are insured to the maximum extent permitted by the Deposit Insurance Fund which is administered by the Federal Deposit Insurance Corporation ("FDIC").

1 unchanged sentence

The Company participates in the IntraFi Network, allowing it to provide easy access to multi-million dollar FDIC deposit insurance protection on certificate of deposit and money market investments for consumers, businesses and public entities.

This channel, which is not included in the Company's core deposits, allows the Company to seek additional funding in potentially large quantities by attracting deposits from outside the Bank’s core market, and amounted to $822.8 million and $653.6 million at June 30, 2023 and December 31, 2022, respectively.

The estimated balance of uninsured deposits at the Bank were $4.9 billion and $5.3 billion as of June 30, 2023 and December 31, 2022, respectively.

This channel allows the Company to access a reciprocal deposit exchange that can be used to benefit customers seeking increased FDIC insurance protection, and amounted to $920.4 million and $653.6 million at September 30, 2023 and December 31, 2022, respectively.

The estimated balance of uninsured deposits at the Bank were $4.7 billion and $5.4 billion as of September 30, 2023 and December 31, 2022, respectively.

Included in these amounts are $700.4 million and $605.0 million of collateralized deposits, which offer additional protection.

1 unchanged sentence

Maintaining available borrowing capacity provides the Bank with a contingent source of liquidity.

Borrowings were $901.3 million at June 30, 2023, representing an increase of $787.9 million as compared to December 31, 2022, driven primarily by deposit balance reductions.

Additionally, the Bank had $8.3 billion and $4.4 billion of assets pledged as collateral against borrowings at June 30, 2023 and December 31, 2022, respectively.

Borrowings were $1.0 billion at September 30, 2023, representing an increase of $887.0 million as compared to December 31, 2022, driven primarily by deposit balance reductions.

Additionally, the Company had $8.5 billion and $4.4 billion of assets pledged as collateral against borrowings at September 30, 2023 and December 31, 2022, respectively.

These assets are primarily pledged to the FHLB of Boston and the Federal Reserve Bank of Boston and pledged amounts were proactively increased by management during the first quarter of 2023 as part of the Company's strategy to bolster off-balance sheet liquidity in response to recent industry events.

Capital Resources On June 15, 2023 the Company’s Board of Directors declared a cash dividend of $0.55 per share to shareholders of record as of the close of business on June 26, 2023.

This dividend was paid on July 7, 2023.

Capital Resources On September 21, 2023 the Company’s Board of Directors declared a cash dividend of $0.55 per share to shareholders of record as of the close of business on October 2, 2023.

This dividend was paid on October 6, 2023.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.

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Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 Capital and Common Equity Tier 1 Capital (as defined for regulatory purposes) to risk weighted assets (as defined for regulatory purposes) and Tier 1 Capital to average assets (as defined for regulatory purposes).

At June 30, 2023 and December 31, 2022, the Company and the Bank exceeded the minimum requirements for all applicable ratios that were in effect during the respective periods.

At September 30, 2023 and December 31, 2022, the Company and the Bank exceeded the minimum requirements for all applicable ratios that were in effect during the respective periods.

The Company’s and the Bank’s capital amounts and ratios are presented in the following table, along with the applicable minimum requirements as of each date indicated:

3 unchanged sentences

Amount Ratio Amount Ratio Amount Ratio

June 30, 2023

September 30, 2023

(Dollars in thousands)

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The required amount of the capital conservation buffer is 2.5%.

At June 30, 2023, the Company's capital levels exceeded the buffer.

At September 30, 2023, the Company's capital levels exceeded the buffer.

Dividend Restrictions The Company is subject to capital and dividend requirements administered by federal and state bank regulators, and the Company will not declare a cash dividend that would cause the Company to violate regulatory requirements.

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Massachusetts Bank Commissioner approval is required if the total of all dividends declared by the Bank in any calendar year would exceed the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock.

Dividends paid by the Bank to the Company totaled $55.9 million and $53.2 million for the three months ended June 30, 2023 and 2022, respectively and totaled $122.2 million and $78.2 million for the six months ended June 30, 2023 and 2022, respectively.

Dividends paid by the Bank to the Company totaled $56.0 million and $64.5 million for the three months ended September 30, 2023 and 2022, respectively and totaled $178.2 million and $142.7 million for the nine months ended September 30, 2023 and 2022, respectively.

Trust Preferred Securities In accordance with the applicable accounting standard related to variable interest entities, the common stock of trusts which have issued trust preferred securities has not been included in the consolidated financial statements of the Company.

At each of June 30, 2023 and December 31, 2022 there were $61.0 million in trust preferred securities included in the Tier 2 capital of the Company for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines.

At each of September 30, 2023 and December 31, 2022 there were $61.0 million in trust preferred securities included in the Tier 2 capital of the Company for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines.

Investment Management The following table presents total assets under administration and number of accounts held by the Rockland Trust Investment Management Group at the following dates:

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2023 December 31

2022 September 30

(Dollars in thousands)

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

The Investment Management Group generated gross fee revenues of $8.9 million and $7.8 million for the three months ended June 30, 2023 and 2022, respectively and $17.0 million and $15.7 million for the six months ended June 30, 2023 and 2022, respectively.

Total assets under administration at June 30, 2023 were $6.3 billion, including $637.0 million of investment solutions designed by Rockland Trust that are administered and executed through its agreement with LPL Financial ("LPL"), compared to $5.8 billion and $603.7 million, respectively, at December 31, 2022.

The Investment Management Group generated gross fee revenues of $8.7 million and $7.8 million for the three months ended September 30, 2023 and 2022, respectively and $25.7 million and $23.6 million for the nine months ended September 30, 2023 and 2022, respectively.

Total assets under administration at September 30, 2023 were $6.1 billion, including $562.1 million of investment solutions designed by Rockland Trust that are administered and executed through its agreement with LPL Financial ("LPL"), compared to $5.8 billion and $603.7 million, respectively, at December 31, 2022.

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

Included in these same amounts as of June 30, 2023 and December 31, 2022 are assets under administration of $432.3 million and $390.1 million, respectively, related to Bright Rock.

Included in these same amounts as of September 30, 2023 and December 31, 2022 are assets under administration of $418.5 million and $390.1 million, respectively, related to Bright Rock.

The administration of trust and fiduciary accounts is monitored by the Trust Committee of the Bank’s Board of Directors.

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These same agents are also approved and appointed with various other Broker General Agents for the purposes of processing insurance solutions for clients.

Retail investments and insurance revenue was $1.5 million for both the three months ended June 30, 2023 and 2022, and $3.1 million and $2.3 million for the six months ended June 30, 2023 and 2022, respectively.

Retail investments and insurance revenue was $1.6 million and $601,000 for the three months ended September 30, 2023 and 2022, respectively, and $4.7 million and $2.9 million for the nine months ended September 30, 2023 and 2022, respectively.

RESULTS OF OPERATIONS

The following table provides a summary of results of operations for the three and six months ended June 30, 2023 and 2022:

The following table provides a summary of results of operations for the three and nine months ended September 30, 2023 and 2022:

Table 10 - Summary of Results of Operations

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2023 2022 2023 2022

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Net Interest Income The amount of net interest income is affected by changes in interest rates and by the volume, mix, and interest rate sensitivity of interest-earning assets and interest-bearing liabilities.

On a fully tax equivalent basis ("FTE"), net interest income for the second quarter of 2023 was $153.7 million, representing an increase of $7.9 million, or 5.4%, when compared to the second quarter of 2022.

For the six months ended June 30, 2023, the net interest income on a FTE basis was $313.8 million, representing an increase of $29.5 million, or 10.4%, when compared to the six months ended June 30, 2022.

These year-over-year increase in net interest income were primarily attributable to the positive impact of asset repricing in the rising rate environment, partially offset by higher funding costs from elevated deposit pricing as well as increased borrowings assumed by the Company during the six months ended June 30, 2023.

The following tables present the Company’s average balances, net interest income, interest rate spread, and net interest margin for the six months ended June 30, 2023 and 2022.

On a fully tax equivalent basis ("FTE"), net interest income for the third quarter of 2023 was $151.0 million, representing a decrease of $12.6 million, or 7.7%, when compared to the third quarter of 2022, as deposit cost increases outpaced asset repricing.

For the nine months ended September 30, 2023, the net interest income on a FTE basis was $464.8 million, representing an increase of $16.9 million, or 3.8%, when compared to the nine months ended September 30, 2022.

The year-over-year increase in net interest income was primarily attributable to the positive impact of asset repricing in the rising rate environment, partially offset by higher funding costs from elevated deposit pricing as well as increased borrowings assumed by the Company during the nine months ended September 30, 2023.

The following tables present the Company’s average balances, net interest income, interest rate spread, and net interest margin for the three and nine months ended September 30, 2023 and 2022.

Nontaxable income from loans and securities is presented on a FTE basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing income tax rate that would have been paid if the income had been fully taxable.

Table 11 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date

Three Months Ended June 30

Three Months Ended September 30

Balance Interest

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Cost of total funding liabilities 1.31 % 0.18 %

(1) The total amount of adjustment to interest income and yield on a FTE basis was $1.1 million and $956,000 for the three months ended June 30, 2023 and 2022, respectively.

(1) The total amount of adjustment to interest income and yield on a FTE basis was $1.2 million and $1.0 million for the three months ended September 30, 2023 and 2022, respectively.

(2) Includes average nonaccruing loans.

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Table 12 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date

Six Months Ended June 30

Nine Months Ended September 30

Balance Interest

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Cost of total funding liabilities 1.06 % 0.11 %

(1) The total amount of adjustment to present interest income and yield on a FTE basis was $2.2 million and $1.9 million for the six months ended June 30, 2023 and 2022, respectively.

(1) The total amount of adjustment to present interest income and yield on a FTE basis was $3.4 million and $3.0 million for the nine months ended September 30, 2023 and 2022, respectively.

(2) Includes average nonaccruing loans.

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Table 13 - Volume Rate Analysis

Three Months Ended June 30 Six Months Ended June 30

Three Months Ended September 30 Nine Months Ended September 30

2023 Compared To 2022 2023 Compared To 2022

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Provision For Credit Losses The provision for credit losses represents the charge to expense that is required to maintain an appropriate level of allowance for credit losses.

The Company recorded a provision for credit loss of $5.0 million and $12.3 million for the three and six months ended June 30, 2023, respectively, as compared to no provision for the three months ended June 30, 2022 and a release of provision for credit loss of $2.0 million for the six months ended June 30, 2022.

The provision for credit losses for the first half of 2023 was driven primarily by reserve allocations associated with one large commercial and industrial credit which was fully reserved for as of March 31, 2023 and subsequently charged off during the second quarter, as well as a single large commercial real estate credit that migrated to non-performing status during the second quarter of 2023, as well as additional provisioning for loan growth.

The Company’s allowance for credit losses as a percentage of total loans, was 0.99%, 1.09%, and 1.06% at June 30, 2023, December 31, 2022, and June 30, 2022, respectively.

The Company recorded net charge-offs of $23.5 million and $24.0 million for the three and six months ended June 30, 2023, respectively, as compared to net charge-offs of $199,000 and $603,000 for the three and six months ended June 30, 2022, respectively.

The Company recorded a provision for credit loss of $5.5 million and $17.8 million for the three and nine months ended September 30, 2023, respectively, as compared to $3.0 million provision for the three months ended September 30, 2022 and $1.0 million for the nine months ended September 30, 2022.

The provision for credit losses in 2023 was driven primarily by outsized charge-offs on two large commercial loans as well as net loan growth during the nine months ended September 30, 2023.

The Company’s allowance for credit losses as a percentage of total loans, was 0.99%, 1.09%, and 1.08% at September 30, 2023, December 31, 2022, and September 30, 2022, respectively.

Refer to Note 3 "Loans, Allowance for Credit Losses and Credit Quality " within the Notes to Consolidated Financial Statements included in Part I.

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Three Months Ended

June 30 Change

September 30 Change

2023 2022 Amount %

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Mortgage banking income 739 585 154 26.32 %

Gain on life insurance benefits 176 123 53 43.09 %

Increase in cash surrender value of life insurance policies 1,983 1,883 100 5.31 %

Gain on life insurance benefits 1,924 477 1,447 303.35 %

Loan level derivative income 842 471 371 78.77 %

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Total $ 33,543 $ 28,195 $ 5,348 18.97 %

Six Months Ended

June 30 Change

Nine Months Ended

September 30 Change

2023 2022 Amount %

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Mortgage banking income 1,717 2,989 (1,272) (42.56) %

Gain on life insurance benefits 187 123 64 52.03 %

Increase in cash surrender value of life insurance policies 5,777 5,549 228 4.11 %

Gain on life insurance benefits 2,111 600 1,511 251.83 %

Loan level derivative income 2,525 1,511 1,014 67.11 %

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The primary reasons for the variances in the noninterest income categories shown in the preceding table include:

• Deposit account fees decreased during the three months ended June 30, 2023 as compared to the same prior year period, driven primarily by reduced overdraft fees stemming from the Company's policy changes, which went into effect in March 2023.

For the six months ended June 30, 2023, deposit account fees were largely consistent with prior year as cash management fees partially offset the impact of the aforementioned policy changes.

• Interchange and ATM fees for the three and six months ended June 30, 2023 increased as compared to the same prior year periods due primarily to higher volumes.

• Investment management income increased driven primarily by higher levels of assets under administration, which increased by $1.1 billion, or 22.2%, to $6.3 billion at June 30, 2023 as compared to $5.2 billion at June 30, 2022, as well as strong retail and insurance commission income during the first half of 2023.

• Mortgage banking income decreased for the three and six months ended June 30, 2023 in comparison to the same prior year periods, primarily reflecting overall reduced saleable volumes from rising interest rate environment.

• Loan level derivative income increased for the three and six months ended June 30, 2023 in comparison to the same prior year periods due to higher customer demand.

• Other noninterest income increased for the three and six months ended June 30, 2023, primarily attributable to interest income recognized from income tax return refunds received during the second quarter of 2023, increased unrealized gains on equity securities, and FHLB dividend income.

The six months ended June 30, 2023 also reflected increased rental income from equipment leases as compared to the same prior year period.

• Deposit account fees decreased during the three and nine months ended September 30, 2023, as compared to the same prior year periods, driven primarily by reduced overdraft fees stemming from the Company's policy changes that went into effect in March 2023.

These reductions were partially offset by increased cash management fees during both the three and none months ended September 30, 2023, as compared to the same prior year periods.

• Interchange and ATM fees for the three and nine months ended September 30, 2023 increased as compared to the same prior year periods due primarily to higher transaction volumes.

• Investment management income increased driven primarily by higher levels of assets under administration, which increased by $1.0 billion, or 20.2%, to $6.1 billion at September 30, 2023 as compared to $5.1 billion at September 30, 2022, as well as strong retail and insurance commission income during the first nine months of 2023 as compared to the prior year.

• Mortgage banking income increased for the three months ended September 30, 2023 as compared to the same prior year quarter, due to slightly higher saleable volumes, but decreased $1.3 million, or 42.6%, for the nine months ended September 30, 2023 in comparison to the same prior year period, primarily reflecting overall reduced saleable volumes as a result of the rising interest rate environment experienced throughout the first nine months of 2023.

• Loan level derivative income increased for the three and nine months ended September 30, 2023 in comparison to the same prior year periods due to higher customer demand.

• Other noninterest income increased for the three and nine months ended September 30, 2023, primarily attributable to increased FHLB dividend income, loan fees, and discounted purchases of Massachusetts historical tax credits.

The nine months ended September 30, 2023 also reflected increased unrealized gains on equity securities, rental income from equipment leases, and credit card fee income as compared to the same prior year period.

Noninterest Expense The following table sets forth information regarding non-interest expense for the periods shown:

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Three Months Ended

June 30 Change

September 30 Change

2023 2022 Amount %

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Total $ 97,782 $ 92,728 $ 5,054 5.45 %

Six Months Ended

June 30 Change

Nine Months Ended

September 30 Change

2023 2022 Amount %

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The primary reasons for the variances in the noninterest expense categories shown in the preceding table include:

• The increase in salaries and employee benefits was primarily attributable to non-recurring CEO transition related expenses incurred during the first quarter of 2023, as well as increases in general salaries, equity compensation, payroll taxes, and medical plan insurance, partially offset by decreases in incentive compensation.

• Occupancy and equipment expenses increased for both the three and six months ended June 30, 2023, driven primarily by increased utilities costs, equipment and furniture, and depreciation on leased equipment, partially offset by reduced snow removal costs.

• The increase in salaries and employee benefits was primarily attributable to increases in general salaries, medical insurance, severance, equity compensation, and payroll taxes, partially offset by decreases in incentive compensation.

The nine months ended September 30, 2023 also reflect non-recurring CEO transition related expenses incurred during the first quarter of 2023.

• Occupancy and equipment expenses increased for the nine months ended September 30, 2023, driven primarily by increased utilities costs and rent on leased properties.

The increase for the nine months ended September 30, 2023 was partially offset by reduced snow removal costs as compared to the same prior year period.

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

• FDIC assessment increased primarily due to increased assessment rates.

• FDIC assessment increased primarily due to increased assessment rates in the current year.

• Debit card expense increased due to higher processing fees driven by increased volume.

• Consulting expense decreased for the three and six months ended June 30, 2023 as compared to the same prior year period due primarily to the timing of strategic initiatives.

• Consulting expense increased for the three months ended September 30, 2023, and decreased for the nine months ended September 30, 2023, as compared to the same respective prior year periods due primarily to the timing 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.

No such costs were incurred during the first half of 2023.

• Other noninterest expense decreased for the three and six months ended June 30, 2023, primarily due to decreases in unrealized losses on equity securities, partially offset by increased sponsorships and legal costs during the first half of 2023.

No such costs were incurred during the nine months ended September 30, 2023.

• Other noninterest expense increased for the three months ended September 30, 2023, as compared to the same prior year period, primarily due to increases in advertising costs and losses on sales of fixed assets.

Other noninterest expense decreased slightly for the nine months ended September 30, 2023, driven primarily by reduced unrealized losses on equity securities and telecommunications costs, partially offset by increased expenses related to marketing and public relations, internet banking, and examinations and audits.

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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Table 16 - Tax Provision and Applicable Tax Rates

Three Months Ended Six Months Ended

June 30 June 30

Three Months Ended Nine Months Ended

September 30 September 30

2023 2022 2023 2022

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Blended statutory tax rate 27.85 % 27.11 % 27.85 % 27.11 %

The Company’s effective tax rate in 2023 thus far is consistent with the year ago period.

The Company’s effective tax rate in 2023 is consistent with the year ago period.

The effective tax rates in the table above are lower than the blended statutory tax rates due to the impact of discrete items, including tax benefits related to low income housing tax credits and equity compensation, as well as certain tax preference assets such as life insurance policies, tax exempt bonds, and federal tax credits.

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The investments are accounted for using the proportional amortization method and will be amortized over various periods through 2040, which represents the period that the tax credits and other tax benefits will be utilized.

The total committed investment in these partnerships is $212.8 million, of which $156.2 million had been funded as of June 30, 2023.

The total committed investment in these partnerships is $212.8 million, of which $159.3 million had been funded as of September 30, 2023.

It is expected that the limited partnership investments will generate a net tax benefit of approximately $3.9 million for the fiscal year 2023 and a total of $26.4 million over the remaining life of the investments from the combination of the tax credits and operating losses.

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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 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.

The nine major risk categories 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.

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

This ratio, which is an analysis of the relationship between liquid assets plus available FHLB funding, less short-term liabilities relative to total assets, was within policy limits at June 30, 2023.

The Total Basic Surplus/Deficit measure is affected primarily by changes in deposits, securities and short-term investments, loans, and borrowings.

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Additionally, the Company is able to enter into repurchase agreements or acquire brokered deposits at its discretion.

The availability and cost of equity or debt on an unsecured basis is dependent on

many factors, including the Company’s financial position, the market environment, and the Company’s credit rating.

The 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 affect its ability to raise liquidity through these channels.

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Table 17 - Liquidity Sources

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Outstanding Additional

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$ 2,021,623 $ 6,135,482 $ 869,658 $ 5,248,415

(1) Loans with a carrying value of $3.7 billion and $2.7 billion at June 30, 2023 and December 31, 2022, respectively, were pledged to the FHLB of Boston.

(2) Loans with a carrying value of $4.6 billion and $1.7 billion at June 30, 2023 and December 31, 2022, respectively, were pledged to the Federal Reserve Bank of Boston.

(1) Loans with a carrying value of $3.8 billion and $2.7 billion at September 30, 2023 and December 31, 2022, respectively, were pledged to the FHLB of Boston.

(2) Loans with a carrying value of $4.7 billion and $1.7 billion at September 30, 2023 and December 31, 2022, respectively, were pledged to the Federal Reserve Bank of Boston.

(3) The additional borrowing capacity has not been assessed for these categories.

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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 execute an appropriate response.

In response to the recent turmoil within the banking industry, the Company has operated under its Liquidity Contingency Plan, resulting in various immediate action items taken during the first quarter.

From a liquidity management perspective, the Company proactively borrowed under its existing FHLB capacity to increase current cash on hand to improve direct on balance sheet liquidity, while also pledging additional assets to increase overall borrowing capacity.

During the second quarter of 2023, the Company reduced its proactive borrowing position in conjunction with an overall stabilization in deposit balances.

The Company continues to monitor both on and off balance sheet liquidity sources to understand vulnerabilities through the application of various stress testing scenarios and other analyses.

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.

In response to the banking industry turmoil experienced earlier this year, the Company has been operating under the parameters of its Liquidity Contingency Plan, which resulted in various immediate action items taken during the first quarter.

From a liquidity management perspective, the Company proactively borrowed under its existing FHLB capacity to increase current cash on hand, while also pledging additional assets to increase overall borrowing capacity.

On an ongoing basis, the Company continues to monitor both on and off balance sheet liquidity sources to understand vulnerabilities through the application of various stress testing scenarios and other analyses.

Market and Interest Rate Risk Market and 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.

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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.

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.

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Non-maturity deposits, assumptions over customer behavior, shifts in deposits categories, and magnitude of impact to the cost of deposits all may differ from what is currently anticipated by the models or analyses.

Based upon the net interest income simulation models, the Company anticipates that assets will generally re-price faster than liabilities over the long term, though short term volatility may exist depending on the current state of the overall rate cycle, as well as the pace and magnitude of interest rate changes.

As a result, net interest income will be positively impacted as market rates increase and negatively impacted if market rates decrease.

Management has been proactive in managing the Company's interest rate risk position with the intention of achieving a more neutral position, reflecting the general uncertainty of future rate changes.

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 those scenarios are summarized in the following table:

The relative results of all scenarios and the impact to net interest income as they compare to the year 1 base scenario are outlined in the table below:

Table 18 - Interest Rate Sensitivity

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Parallel rate shocks (basis points)

-300 (6.9) % n/a

-300 (3.4) % (15.2) %

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+300 0.7 % 6.4 %

+400 1.2 % 8.7 %

Gradual rate shifts (basis points)

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+400 over 24 months 0.2 % 2.3 %

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 affected.

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 six months ended June 30, 2023 were the shape of the U.S.

The results depicted in the table above are dependent on material assumptions, such as prepayment rates, decay rates, pricing decisions on loans and deposits, and other factors, which management believes are reasonable.

These assumptions may be impacted by customer preferences or competitive influences and therefore actual experience may differ from the assumptions in the model.

Accordingly, although the tables provide an indication of the Company's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates, and actual results may differ.

The most significant market factors affecting the Company’s net interest income during the nine months ended September 30, 2023 were the shape of the U.S.

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

prime interest rate, LIBOR rates, the secured overnight financing rates ("SOFR"), and interest rates offered on long-term fixed rate loans.

prime interest rate, the secured overnight financing rates ("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.

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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.

Regulatory and Compliance Risk Regulatory and 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 and Cyber Risk Technology and Cyber 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 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.

The Bank manages cybersecurity threats proactively and maintains robust controls to protect its critical systems and data by investing in secure, reliable and resilient technology infrastructure, fostering a culture of technology risk awareness and continuously improving its technology risk management practices

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

Off-Balance Sheet Arrangements There were no material changes in off-balance sheet arrangements during the three months ended June 30, 2023.

Off-Balance Sheet Arrangements There were no material changes in off-balance sheet arrangements during the three months ended September 30, 2023.

See Note 6, "Derivative and Hedging Activities" and Note 10, "Commitments and Contingencies" within the Notes to Consolidated Financial Statements included in Part I.

Item 1 of this Report for more information relating to the Company's other off-balance sheet financial instruments.

Contractual Obligations, Commitments, and Contingencies There were no material changes in contractual obligations, commitments, or contingencies during the three months ended June 30, 2023.

Contractual Obligations, Commitments, and Contingencies There were no material changes in contractual obligations, commitments, or contingencies during the three months ended September 30, 2023.

Quantitative and Qualitative Disclosures About Market Risk

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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-Q

Item 2. Management’s Discussion and Analysis