Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust, a Massachusetts trust company chartered in 1907. For a full list of corporate entities see Item 1 "Business — General."
All material intercompany balances and transactions have been eliminated in consolidation. When necessary, certain amounts in prior year financial statements have been reclassified to conform to the current year’s presentation. The following should be read in conjunction with the Consolidated Financial Statements and related notes.
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Executive Level Overview
Management evaluates the Company's operating results and financial condition using measures that include net income, earnings per share, return on assets and equity, return on tangible common equity, net interest margin, tangible book value per share, asset quality indicators, and many others. These metrics are used by management to make key decisions regarding the Company's balance sheet, liquidity, interest rate sensitivity, and capital resources and assist with identifying opportunities for improving the Company's financial position or operating results. The Company 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).
2023 Results
Net income for the year ended December 31, 2023 was $239.5 million, or $5.42 on a diluted earnings per share basis, as compared to $263.8 million, or $5.69 on a diluted earnings per share basis for the year ended December 31, 2022, representing decreases of 9.2% and 4.7%, respectively. Full year 2023 operating net income was also $239.5 million, or $5.42, on a diluted earnings per share basis, as no adjustments were recognized, while full year 2022 operating results reflect pre-tax merger and acquisition-related costs of $7.1 million associated with the fourth quarter 2021 acquisition of Meridian Bancorp, Inc. ("Meridian") and its subsidiary, East Boston Savings Bank. 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, representing decreases of 10.9% and 6.6%, respectively. See "Non-GAAP Measures" below for a reconciliation of non-GAAP measures.
Full year 2023 results reflected the following key drivers:
• Net interest margin increased by 8 basis points as compared to the full year 2022;
• Disciplined loan growth;
• Stable asset quality; provision for credit loss primarily impacted by loss exposure in the commercial portfolios;
• Strong fee income;
• Prudent expense management; 54% efficiency ratio for the year;
• Strong tangible book value growth of 7.3%; and
• Robust capital levels; Company active under two authorized stock buyback programs, repurchasing 2.9 million shares for $189 million during the year.
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Interest-Earning Assets
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, 2023 primarily reflects growth in the residential real estate loan portfolio, decreased securities balances reflecting paydowns, calls and maturities, and also reduced cash balances commensurate with deposit balance reductions. The following table summarizes the Company's average interest-earning assets for each year presented:
Management strives to be disciplined about loan pricing and considers interest rate sensitivity when generating loan assets. In addition, management takes a disciplined approach to credit underwriting, seeking to avoid undue credit risk and credit losses.
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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. Total borrowings increased by $1.1 billion at December 31, 2023 as compared to December 31, 2022, primarily in response to deposit balance reductions and to fund the Company's stock buyback activity. 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 following chart shows the sources of funding for the trailing five years:
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The Company's ratio of core deposits to total deposits decreased during 2023, primarily attributable to core deposit outflows in conjunction with existing deposit balances shifting into higher cost time deposits. The following chart shows the percentage of core deposits to total deposits for the trailing five years:
(1) The percentage of core deposits to total deposits presented above is inclusive of reciprocal money market deposits collected through the Company's participation in the IntraFi Network.
The following table shows the net interest margin and cost of deposits trends for the trailing five year period:
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Noninterest Income
Noninterest income is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees and mortgage banking income. The following chart shows the components of noninterest income over the past five years:
Expense Control
Management seeks to take a balanced approach to noninterest expense control by monitoring ongoing operating expenses while making needed capital expenditures and prudently investing in growth initiatives. The Company’s primary expenses arise from Rockland Trust’s employee salaries and benefits, as well as expenses associated with buildings and equipment.
The following chart depicts the Company's efficiency ratio on a GAAP basis (calculated by dividing noninterest expense by the sum of noninterest income and net interest income), as well as the Company's efficiency ratio on a non-GAAP operating basis, (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.
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Capital
The Company's approach with respect to revenue and expense is designed to promote long-term earnings growth, which in turn contributes to capital growth. Capital balances during 2023 were impacted primarily by earnings retention, dividends, changes in other comprehensive income, and opportunistic share repurchases. 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 GAAP financial measures.
Cash dividends declared by the Company increased from an aggregate of $2.08 per share in 2022 to $2.20 per share in 2023, representing an increase of 5.8%. During the first quarter of 2023, the Company repurchased 1.6 million shares of its common stock for $120.0 million at an average price of $74.18, marking the full completion of its stock repurchase program announced in October 2022. Additionally, in consideration of the Company's strong capital position, the Company announced another stock repurchase plan in October 2023 which authorized repurchases by the Company of up to $100 million in common stock. Under this new plan, the Company repurchased an additional 1.3 million shares of common stock for $69.0 million at an average price per share of $53.73 during the fourth quarter of 2023.
Non-GAAP Measures
When management assesses the Company’s financial performance for purposes of making day-to-day and strategic decisions, it does so based upon the performance of its core banking business, which is primarily derived from the combination of net interest income and noninterest or fee income, reduced by operating expenses, the provision for credit losses, and the impact of income taxes and other noncore items shown in the table that follows. There are items that impact the Company's results that management believes are unrelated to its core banking business such as gains or losses on the sales of securities, merger and acquisition expenses, provision for credit losses on acquired portfolios, loss on extinguishment of debt, impairment and other items. Management, therefore, excludes items management considers to be noncore when computing the Company’s non-GAAP operating earnings and operating EPS, noninterest income on an operating basis and efficiency ratio on an operating basis. Management believes excluding these items facilitates greater visibility into the Company’s core banking business and underlying trends that may, to some extent, be obscured by inclusion of such items.
Management also supplements its evaluation of financial performance with an analysis of tangible book value per share (which is computed by dividing stockholders' equity less goodwill and identifiable intangible assets, or tangible common equity, by common shares outstanding) and with the Company's tangible common equity ratio (which is computed by dividing tangible common equity by tangible assets) which are non-GAAP measures. The Company has included information on these tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends. The Company has recognized goodwill and other intangible assets in conjunction with merger and acquisition activities. Excluding the impact of goodwill and other intangibles in measuring asset and capital values for the ratios provided, along with other bank standard capital ratios, facilitates comparison of the capital adequacy of the Company to other companies in the financial services industry.
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These non-GAAP measures should not be viewed as a substitute for financial results determined in accordance with GAAP. An item which management deems to be noncore and excludes when computing these non-GAAP measures can be of substantial importance to the Company’s results for any particular period. The Company’s non-GAAP performance measures are not necessarily comparable to similarly named non-GAAP performance measures which may be presented by other companies.
The following 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
2023 2022 2023 2022
(Dollars in thousands, except per share data)
Net income available to common shareholders (GAAP) $ 239,502 $ 263,813 $ 5.42 $ 5.69
Non-GAAP adjustments
Noninterest expense components
Add: merger and acquisition expenses — 7,100 — 0.15
Noncore increases to income before taxes — 7,100 — 0.15
Net tax benefit associated with noncore items (1) — (1,995) — (0.04)
Noncore increases to net income $ — $ 5,105 $ — $ 0.11
Net operating earnings (Non-GAAP) $ 239,502 $ 268,918 $ 5.42 $ 5.80
(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:
Years Ended December 31
2023 2022 2021 2020 2019
(Dollars in thousands)
Net interest income $ 606,521 $ 613,249 $ 401,559 $ 367,728 $ 393,135 (a)
Noninterest income (GAAP) $ 124,609 $ 114,667 $ 105,850 $ 111,440 $ 115,294 (b)
Less:
Gain on sale of loans — — — — 951
Noninterest income on an operating basis (non-GAAP) $ 124,609 $ 114,667 $ 105,850 $ 111,440 $ 114,343 (c)
Noninterest expense (GAAP) $ 392,746 $ 373,662 $ 332,529 $ 273,832 $ 284,321 (d)
Less:
Loss on termination of derivatives — — — 684 —
Merger and acquisition expenses — 7,100 40,840 — 26,433
Noninterest expense on an operating basis (non-GAAP) $ 392,746 $ 366,562 $ 291,689 $ 273,148 $ 257,888 (e)
Total revenue (GAAP) $ 731,130 $ 727,916 $ 507,409 $ 479,168 $ 508,429 (a+b)
Total operating revenue (non-GAAP) $ 731,130 $ 727,916 $ 507,409 $ 479,168 $ 507,478 (a+c)
Ratios
Noninterest income as a % of total revenue (GAAP) (calculated by dividing total noninterest income by total revenue) 17.04 % 15.75 % 20.86 % 23.26 % 22.68 % (b/(a+b))
Noninterest income as a % of total revenue on an operating basis (Non-GAAP) (calculated by dividing total noninterest income on an operating basis by total revenue) 17.04 % 15.75 % 20.86 % 23.26 % 22.53 % (c/(a+c))
Efficiency ratio (GAAP) (calculated by dividing total noninterest expense by total revenue) 53.72 % 51.33 % 65.53 % 57.15 % 55.92 % (d/(a+b))
Efficiency ratio on an operating basis (Non-GAAP) (calculated by dividing total noninterest expense on an operating basis by total revenue) 53.72 % 50.36 % 57.49 % 57.00 % 50.82 % (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:
Years Ended December 31
2023 2022 2021 2020 2019
(Dollars in thousands, except per share data)
Tangible common equity
Stockholders’ equity $ 2,895,251 $ 2,886,701 $ 3,018,449 $ 1,702,685 $ 1,708,143 (a)
Less: Goodwill and other intangibles 1,003,262 1,010,140 1,017,844 529,313 535,492
Tangible common equity (Non-GAAP) 1,891,989 1,876,561 2,000,605 1,173,372 1,172,651 (b)
Tangible assets
Assets (GAAP) 19,347,373 19,294,174 20,423,405 13,204,301 11,395,165 (c)
Less: Goodwill and other intangibles 1,003,262 1,010,140 1,017,844 529,313 535,492
Tangible assets (Non-GAAP) $ 18,344,111 $ 18,284,034 $ 19,405,561 $ 12,674,988 $ 10,859,673 (d)
Common shares 42,873,187 45,641,238 47,349,778 32,965,692 34,377,388 (e)
Common equity to assets ratio (GAAP) 14.96 % 14.96 % 14.78 % 12.89 % 14.99 % (a/c)
Tangible common equity to tangible assets ratio (Non-GAAP) 10.31 % 10.26 % 10.31 % 9.26 % 10.80 % (b/d)
Book value per share (GAAP) $ 67.53 $ 63.25 $ 63.75 $ 51.65 $ 49.69 (a/e)
Tangible book value per share (Non-GAAP) $ 44.13 $ 41.12 $ 42.25 $ 35.59 $ 34.11 (b/e)
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SELECTED FINANCIAL DATA
The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related notes, appearing elsewhere herein.
Table 1 - Selected Financial Data
As of or for the Years Ended December 31
2023 2022 2021 2020 2019
(Dollars in thousands, except per share data)
Financial condition data
Securities $ 2,930,860 $ 3,129,281 $ 2,664,859 $ 1,162,317 $ 1,190,670
Loans 14,278,070 13,928,675 13,587,286 9,392,866 8,873,639
Allowance for credit losses (142,222) (152,419) (146,922) (113,392) (67,740)
Goodwill and other intangibles 1,003,262 1,010,140 1,017,844 529,313 535,492
Total assets 19,347,373 19,294,174 20,423,405 13,204,301 11,395,165
Deposits 14,865,547 15,879,007 16,917,044 10,993,170 9,147,367
Borrowings 1,218,379 113,377 152,374 181,060 303,103
Stockholders’ equity 2,895,251 2,886,701 3,018,449 1,702,685 1,708,143
Nonperforming loans 54,383 54,881 27,820 66,861 48,049
Nonperforming assets 54,493 54,881 27,820 66,861 48,049
Operating data
Interest income $ 795,726 $ 642,840 $ 415,276 $ 402,069 $ 447,014
Interest expense 189,205 29,591 13,717 34,341 53,879
Net interest income 606,521 613,249 401,559 367,728 393,135
Provision for credit losses 23,250 6,500 18,205 52,500 6,000
Noninterest income 124,609 114,667 105,850 111,440 115,294
Noninterest expenses 392,746 373,662 332,529 273,832 284,321
Net income 239,502 263,813 120,992 121,167 165,175
Per share data
Net income — basic $ 5.42 $ 5.69 $ 3.47 $ 3.64 $ 5.03
Net income — diluted 5.42 5.69 3.47 3.64 5.03
Cash dividends declared 2.20 2.08 1.92 1.84 1.76
Book value 67.53 63.25 63.75 51.65 49.69
Tangible book value (1) 44.13 41.12 42.25 35.59 34.11
Performance ratios
Return on average assets 1.24 % 1.33 % 0.81 % 0.96 % 1.52 %
Return on average common equity 8.31 % 9.05 % 6.34 % 7.13 % 10.85 %
Net interest margin (on a fully tax equivalent basis) 3.54 % 3.46 % 3.02 % 3.29 % 4.04 %
Dividend payout ratio 40.92 % 35.53 % 51.85 % 50.21 % 32.25 %
Asset quality ratios
Nonperforming loans as a percent of gross loans 0.38 % 0.39 % 0.20 % 0.71 % 0.54 %
Nonperforming assets as a percent of total assets 0.28 % 0.28 % 0.14 % 0.51 % 0.42 %
Allowance for credit losses as a percent of total loans 1.00 % 1.09 % 1.08 % 1.21 % 0.76 %
Allowance for credit losses as a percent of nonperforming loans 261.52 % 277.73 % 528.12 % 169.59 % 140.98 %
Capital ratios
Equity to assets 14.96 % 14.96 % 14.78 % 12.89 % 14.99 %
Tangible equity to tangible assets (1) 10.31 % 10.26 % 10.31 % 9.26 % 10.80 %
Tier 1 leverage capital ratio 10.96 % 10.99 % 12.03 % 9.56 % 11.28 %
Common equity tier 1 capital ratio 14.19 % 14.33 % 14.30 % 12.67 % 12.86 %
Tier 1 risk-based capital ratio 14.19 % 14.33 % 14.30 % 13.34 % 13.53 %
Total risk-based capital ratio 15.91 % 16.11 % 16.04 % 15.13 % 14.83 %
(1) Represents a non-GAAP measurement. 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 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. U.S. 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 decreased by $198.4 million, or 6.3%, at December 31, 2023 as compared to December 31, 2022, primarily reflecting the impact of paydowns, calls, and maturities, partially offset by unrealized gains of $42.0 million related to the available for sale portfolio. The ratio of securities to total assets decreased to 15.1% at December 31, 2023 as 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 CECL methodology, as described in Note 1, "Summary of Significant Accounting Policies" within the Notes to Consolidated Financial Statements included in Item 8 of this Report.
The following table sets forth the fair value of available for sale securities and the amortized cost of held to maturity securities along with the percentage distribution:
Table 2 - Securities Portfolio Composition
December 31
2023 2022
Amount Percent Amount Percent
(Dollars in thousands)
Fair value of securities available for sale
U.S. government agency securities $ 207,138 15.5 % $ 202,300 14.5 %
U.S. treasury securities 769,102 57.6 % 791,341 56.5 %
Agency mortgage-backed securities 277,047 20.8 % 313,688 22.4 %
Agency collateralized mortgage obligations 33,189 2.5 % 38,843 2.8 %
State, county and municipal securities 190 — % 191 — %
Pooled trust preferred securities issued by banks and insurers 1,018 0.1 % 1,034 0.1 %
Small business administration pooled securities 46,572 3.5 % 51,757 3.7 %
Total fair value of securities available for sale 1,334,256 100.0 % 1,399,154 100.0 %
Amortized cost of securities held to maturity
U.S. government agency securities 29,521 1.9 % 31,258 1.8 %
U.S. treasury securities 100,712 6.4 % 100,634 5.9 %
Agency mortgage-backed securities 829,431 52.9 % 898,927 52.8 %
Agency collateralized mortgage obligations 477,517 30.4 % 535,971 31.4 %
Single issuer trust preferred securities issued by banks 1,500 0.1 % 1,500 0.1 %
Small business administration pooled securities 130,426 8.3 % 136,830 8.0 %
Total amortized cost of securities held to maturity 1,569,107 100.0 % 1,705,120 100.0 %
Total $ 2,903,363 $ 3,104,274
The Company’s available for sale securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as level 3 within the fair value hierarchy. At December 31, 2023 and 2022, 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 available for sale and held to maturity securities portfolios at December 31, 2023. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields in the table below have been calculated based on the amortized cost of the security.
Table 3 - Securities Portfolio, Weighted Average Yields
Within One Year One Year to Five Years Five Years to Ten Years Over Ten Years Total
Weighted Average Yield
Securities available for sale:
U.S. government agency securities — 1.2 % 1.6 % — 1.3 %
U.S. treasury securities 0.4 % 0.9 % — — 0.8 %
Agency mortgage-backed securities 4.0 % 1.6 % 1.9 % 2.0 % 1.8 %
Agency collateralized mortgage obligations — — 2.1 % 3.6 % 3.5 %
State, county, and municipal securities — 3.0 % — — 3.0 %
Single issuer trust preferred securities issued by banks — — — 3.7 % 3.7 %
Pooled trust preferred securities issued by banks and insurers — — — 6.1 % 6.1 %
Small business administration pooled securities — — — 2.2 % 2.2 %
Total available for sale securities 0.4 % 1.1 % 1.8 % 2.3 % 1.2 %
Securities held to maturity:
U.S. government agency securities: 0.5 % — — — 0.5 %
U.S. treasury securities — 1.3 % 1.5 % — 1.3 %
Agency mortgage-backed securities — 2.9 % 2.4 % 3.2 % 2.8 %
Agency collateralized mortgage obligations — 2.5 % 1.1 % 1.6 % 1.7 %
Single issuer trust preferred securities issued by banks — 8.3 % — — 8.3 %
Small business administration pooled securities — — 2.2 % 4.1 % 4.0 %
Total held to maturity securities 0.5 % 2.6 % 2.3 % 2.5 % 2.5 %
Total 0.4 % 1.6 % 2.2 % 2.4 % 1.8 %
As of December 31, 2023, the weighted average life of the securities portfolio was 4.1 years and the modified duration was 3.6 years.
At December 31, 2023, 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 discloses the aggregate book value and market value of these securities at December 31, 2023:
Table 4 - Aggregate Book Value and Market Value of Select Securities
Aggregate Book Value Aggregate Market Value
(Dollars in thousands)
Securities issued by:
Fannie Mae $ 1,215,236 $ 1,089,194
Freddie Mac 439,502 390,877
U.S. Department of the Treasury 925,309 860,637
Total $ 2,580,047 $ 2,340,708
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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 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 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, 2023, 2022, and 2021.
The Company experienced a lower volume of residential real estate loan sales for the years ended December 31, 2023 and 2022, as compared to 2021, driven primarily by reduced customer demand in the rising interest rate environment. 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
Years Ended December 31
2023 2022 2021
(Dollars in thousands)
Held in portfolio $ 512,991 $ 689,636 $ 411,850
Sold or held for sale in the secondary market 79,665 84,059 756,025
Total closed loans $ 592,656 $ 773,695 $ 1,167,875
Additionally, during the years ended December 31, 2023 and 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 driven mainly by the current interest-rate environment.
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. The table below reflects additional information related to loans which were sold during the periods indicated:
Table 6 - Residential Mortgage Loan Sales
Years Ended December 31
2023 2022 2021
(Dollars in thousands)
Sold with servicing rights released $ 75,548 $ 103,221 $ 772,234
Sold with servicing rights retained (1) 649 863 11,116
Total loans sold $ 76,197 $ 104,084 $ 783,350
(1) All loans sold with servicing rights retained during the above periods were sold without recourse.
In the event of a sale with servicing rights retained, a mortgage servicing asset is established, which represents the then current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets in the Consolidated Balance Sheets, are amortized in proportion to and over the period of estimated net servicing income, and are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying the rights based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to income. The principal balance of loans serviced by the Bank on behalf of investors was $298.8 million at December 31, 2023 and $327.5 million at December 31, 2022.
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The following table shows the adjusted cost of the servicing rights associated with these loans and the changes for the periods indicated:
Table 7 - Mortgage Servicing Asset
2023 2022
(Dollars in thousands)
Beginning balance $ 2,947 $ 2,627
Additions 5 8
Amortization (485) (649)
Change in valuation allowance 174 961
Ending balance $ 2,641 $ 2,947
See Note 9, "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 at December 31, 2023 increased by $349.4 million, or 2.5%, when compared to December 31, 2022. Loan growth was driven primarily by strong consumer real estate activity in 2023, with the majority of residential real estate originations retained on the balance sheet, leading to an increase of $389.2 million, or 19.1%, within the residential portfolio. Total commercial loans decreased by $45.8 million, or 0.4% compared to December 31, 2022, reflecting disciplined origination activity and decreased line utilizations as compared to prior year.
The following table sets forth information concerning the composition of the Bank’s loan portfolio by loan type at the dates indicated:
Table 8 - Loan Portfolio Composition
December 31
2023 2022
(Dollars in thousands)
Amount Percent Amount Percent
Commercial and industrial $ 1,579,986 11.1 % $ 1,635,103 11.7 %
Commercial real estate 8,041,508 56.3 % 7,760,230 55.7 %
Commercial construction 849,586 6.0 % 1,154,413 8.3 %
Small business 251,956 1.8 % 219,102 1.6 %
Residential real estate 2,424,754 16.9 % 2,035,524 14.6 %
Home equity 1,097,626 7.7 % 1,088,750 7.8 %
Other consumer 32,654 0.2 % 35,553 0.3 %
Gross loans 14,278,070 100.0 % 13,928,675 100.0 %
Allowance for credit losses (142,222) (152,419)
Net loans $ 14,135,848 $ 13,776,256
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The following table summarizes loans by contractual maturity as of December 31, 2023, along with the indication of whether interest rates are fixed or adjustable:
Table 9 - Scheduled Contractual Loan Amortization
December 31, 2023
1 Year or Less 1 - 5 Years 5 - 15 years (2) After 15 Years Total
(Dollars in thousands)
Fixed rate
Commercial and industrial $ 90,311 $ 177,213 $ 184,051 $ 25,307 $ 476,882
Commercial real estate 400,055 1,317,637 1,204,155 261,597 3,183,444
Commercial construction (1) 77,995 30,809 95,739 36,220 240,763
Small business 24,858 78,616 75,858 1,178 180,510
Residential real estate 49,968 252,754 788,936 767,654 1,859,312
Home equity 25,076 103,245 192,620 3,164 324,105
Other consumer 1,966 2,297 283 — 4,546
Total fixed rate loans 670,229 1,962,571 2,541,642 1,095,120 6,269,562
Adjustable rate
Commercial and industrial 385,505 430,283 241,294 46,022 1,103,104
Commercial real estate 933,306 1,641,027 1,760,701 523,030 4,858,064
Commercial construction (1) 276,360 111,490 148,689 72,284 608,823
Small business 19,940 22,644 28,687 175 71,446
Residential real estate 12,887 78,694 225,985 247,876 565,442
Home equity 68,076 188,348 508,335 8,762 773,521
Other consumer 16,836 11,272 — — 28,108
Total adjustable rate loans 1,712,910 2,483,758 2,913,691 898,149 8,008,508
Total loans $ 2,383,139 $ 4,446,329 $ 5,455,333 $ 1,993,269 $ 14,278,070
(1) Includes certain construction loans that will convert to commercial mortgages and will be reclassified to commercial real estate upon the completion of the construction phase.
(2) Loans having no schedule of repayments or no stated maturity are reported as being due in the 5-15 years category above.
Generally, the actual maturity of loans is substantially shorter than their contractual maturity due to prepayments and, in the case of real estate loans, due-on-sale clauses, which generally give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage and the loan is not repaid. 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 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.
Asset Quality The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this assessment, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, nonperforming and/or put on nonaccrual status. Further details surrounding relevant asset quality categories are summarized below:
Delinquency The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. Generally, the Company requires that a delinquency notice be mailed to a borrower upon expiration of a grace period (typically no longer than 15 days beyond the due
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date). Reminder notices may be sent and telephone calls may be made prior to the expiration of the grace period. If the delinquent status is not resolved within a reasonable time frame following the mailing of a delinquency notice, the Bank’s personnel charged with managing its loan portfolios contacts the borrower to ascertain the reasons for delinquency and the prospects for payment. Any subsequent actions taken to resolve the delinquency will depend upon the nature of the loan and the length of time that the loan has been delinquent. The borrower’s needs are considered as much as reasonably possible without jeopardizing the Bank’s position. A late charge is usually assessed on loans upon expiration of the grace period.
Nonaccrual Loans As a general rule, loans 90 days or more past due with respect to principal or interest are classified as nonaccrual loans. However, certain loans that are 90 days or more past due may be kept on an accruing status if the loans are well secured and in the process of collection. Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. A loan remains on nonaccrual status until it becomes current with respect to principal and interest and remains current for a minimum period of six months, the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for credit losses.
Loan Modifications In the course of resolving problem loans, the Company may choose to modify the contractual terms of certain loans. The Company attempts to work out an alternative payment schedule with the borrower in order to avoid or cure a default. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and may include adjustments to term extensions, interest rates, other than insignificant payment delays and/or a combination thereof. These actions are intended to minimize economic loss and avoid foreclosure or repossession of collateral. If such efforts by the Bank do not result in satisfactory performance, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan. All loan modifications are reviewed by the Company to identify if a borrower is deemed to be experiencing financial difficulty at time of the modification.
Purchased Credit Deteriorated Loans Purchased Credit Deteriorated ("PCD") loans are acquired loans which have shown a more-than-insignificant deterioration in credit quality since origination. PCD loans are recorded at amortized cost with an allowance for credit losses recorded upon purchase.
Nonperforming Assets Nonperforming assets are typically comprised of nonperforming loans and other real estate owned ("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.
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The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated:
Table 10 - Nonperforming Assets
December 31
2023 2022
(Dollars in thousands)
Loans accounted for on a nonaccrual basis
Commercial and industrial $ 20,188 $ 26,693
Commercial real estate 22,952 15,730
Small business 398 104
Residential real estate 7,634 8,479
Home equity 3,171 3,400
Other consumer 40 475
Total nonperforming loans (1) 54,383 54,881
Other real estate owned 110 —
Total nonperforming assets (1) $ 54,493 $ 54,881
Nonperforming loans as a percent of gross loans 0.38 % 0.39 %
Nonperforming assets as a percent of total assets 0.28 % 0.28 %
(1) Nonaccrual balances at December 31, 2022 included $11.5 million of nonaccruing TDRs.
The following table summarizes the changes in nonperforming assets for the periods indicated:
Table 11 - Activity in Nonperforming Assets
2023 2022
(Dollars in thousands)
Nonperforming assets beginning balance $ 54,881 $ 27,820
New to nonperforming 58,712 72,960
Loans charged-off (34,782) (2,652)
Loans paid-off (19,719) (35,622)
Loans transferred to other real estate owned/other assets (110) —
Loans restored to accrual status (4,994) (7,652)
New to other real estate owned 110 —
Other 395 27
Nonperforming assets ending balance $ 54,493 $ 54,881
Allowance for Credit Losses The allowance for credit losses is maintained at a level that management considers appropriate to provide for the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. The allowance is increased by providing for credit losses through a charge to expense and by credits for recoveries of loans previously charged-off and is reduced by loans being charged-off.
In accordance with the CECL methodology, the Company estimates credit losses for financial assets on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of prepayments. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period of one year, beyond which is a reversion to the Company's historical long-run average for a period of six months. The Company's qualitative assessment is structured based upon nine environmental factors impacting the expected risk of loss within the loan portfolio, with an additional factor designed to capture model imprecision. Loans that do not share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that will be individually assessed, the Company uses either a discounted cash flow (“DCF”) approach
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or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable.
Management's allowance for credit loss estimate incorporates an economic forecast over a reasonable and supportable period of 12 months. As of December 31, 2023, the forecast selected by management assumes that the Federal Reserve will begin easing rates gradually in mid-2024, inflation will return to 2% target by the end of 2024, job growth will slow in 2024 with unemployment peaking at 4.1%, home prices will decline slightly in 2024, and that prices for office real estate will generally decrease as uncertainty over occupancy and operating cash flows persists. 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.
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The following table summarizes the ratio of net charge-offs to average loans outstanding within each major loan category for the periods presented:
Table 12 - Summary Net Charge-Offs to Average Loans Outstanding
Net Charge-Offs (Recoveries) Average Amount Outstanding Ratio of Net Charge-Offs/(Recoveries) to Average Loans
(Dollars in thousands)
December 31, 2023
Commercial and industrial $ 23,419 $ 1,646,939 1.42 %
Commercial real estate 7,855 7,839,476 0.10 %
Commercial construction — 1,019,871 — %
Small business 392 235,108 0.17 %
Residential real estate — 2,217,971 — %
Home equity (15) 1,093,546 — %
Other consumer (1) 1,796 31,202 5.76 %
Total $ 33,447 $ 14,084,113 0.24 %
December 31, 2022
Commercial and industrial $ (49) $ 1,538,848 — %
Commercial real estate (271) 7,807,427 — %
Commercial construction — 1,191,394 — %
Small business 47 204,982 0.02 %
Residential real estate — 1,831,493 — %
Home equity 1 1,061,228 — %
Other consumer (1) 1,275 31,986 3.99 %
Total $ 1,003 $ 13,667,358 0.01 %
December 31, 2021
Commercial and industrial $ 788 $ 1,823,914 0.04 %
Commercial real estate (57) 4,702,346 — %
Commercial construction — 616,037 — %
Small business 121 180,473 0.07 %
Residential real estate (1) 1,286,470 — %
Home equity (180) 1,025,809 (0.02) %
Other consumer (1) 544 23,885 2.28 %
Total $ 1,215 $ 9,658,934 0.01 %
(1) Other consumer portfolio is inclusive of deposit account overdrafts recorded as loan balances and the associated net charge-offs.
For purposes of the allowance for credit losses, management segregates the portfolio based upon loans sharing similar risk characteristics. The allocation of the allowance for credit losses is made to each loan category using the analytical techniques and estimation methods described in this Report. While these amounts represent management’s best estimate of credit losses at the evaluation dates, they are not necessarily indicative of either the categories in which actual losses may occur or the extent of such actual losses that may be recognized within each category. Each of these loan categories possess unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. The total allowance is available to absorb losses from any segment of the loan portfolio.
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The following table sets forth the allocation of the allowance for credit losses by loan category at the dates indicated:
Table 13 - Summary of Allocation of Allowance for Credit Losses
December 31
2023 2022
Allowance
Amount Percent of Allowance of Total Allowance Percent of Loans In Category of Total Loans Allowance
Amount Percent of Allowance of Total Allowance Percent of Loans In Category of Total Loans
(Dollars in thousands)
Commercial and industrial $ 19,243 13.5 % 11.1 % $ 27,559 18.1 % 11.7 %
Commercial real estate 74,148 52.2 % 56.3 % 77,799 51.0 % 55.7 %
Commercial construction 7,683 5.4 % 6.0 % 10,762 7.1 % 8.3 %
Small business 3,963 2.8 % 1.8 % 2,834 1.9 % 1.6 %
Residential real estate 23,637 16.6 % 16.9 % 20,973 13.8 % 14.6 %
Home equity 12,797 9.0 % 7.7 % 11,504 7.5 % 7.8 %
Other consumer 751 0.5 % 0.2 % 988 0.6 % 0.3 %
Total $ 142,222 100.0 % 100.0 % $ 152,419 100.0 % 100.0 %
To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, the value of the Bank’s collateral, and the strength of co-makers or guarantors. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for credit losses and any recoveries of such previously charged-off amounts are credited to the allowance.
Regardless of whether a loan is unsecured or collateralized, the Company charges off the amount of any confirmed loan loss in the period when the loans, or portions of loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss-confirming events may include an appraisal or other valuation that reflects a shortfall between the value of the collateral and the carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral.
For additional information regarding the Bank’s allowance for credit losses, see Note 1, "Summary of Significant Accounting Policies" and Note 3, "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 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. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. The Company either purchases additional FHLB stock or is subject to redemption of FHLB stock proportional to the volume of funding received. The Company views the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return. The Company's investments in FHLB of Boston stock increased to $43.6 million at December 31, 2023 compared to $5.2 million at December 31, 2022, reflecting a net increase in FHLB borrowings of $1.1 billion during the year ended 2023.
Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets were $1.0 billion at both December 31, 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, using a combined qualitative and quantitative approach. The initial qualitative approach assesses whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of the Company's single reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a quantitative impairment test is performed to compare carrying value to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
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The Company's annual impairment test was performed as of August 31, 2023 using a quantitative impairment test which leveraged a combination of income and market valuation approaches to determine the implied fair value of the reporting unit. The income valuation approach utilized a discounted cash flow analysis, while the market approach utilized a guideline public company approach whereby market multiples were derived from market prices of stocks of public companies that are engaged in the same or similar lines of business. The results of the annual assessment determined that the Company’s goodwill was not impaired, however the fair value of its reporting unit was in excess of its carrying value by less than 10%, indicating that goodwill may be at risk of impairment. Events or circumstances that could negatively impact the fair value of the Company’s reporting unit in the future include a sustained decrease in the Company’s stock price, continued decline in industry peer multiples, and further deterioration of the Company’s financial projections.
The quantitative impairment test relied upon certain key assumptions, including projected financial information deemed by management to be reasonable based on the Company’s past and expected future performance, as well as a discount rate consistent with the Company’s cost of capital. Additionally, management performed sensitivity analyses over various financial assumptions used in the model noting results which further corroborated the conclusions reached. 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 fourth quarter of 2023 that indicated impairment of goodwill and other intangible assets. For additional information regarding the goodwill and other intangible assets, see Note 5, "Goodwill and Other Intangible Assets " within the Notes to Consolidated Financial Statements included in Item 8 hereof.
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 $297.4 million and $293.3 million at December 31, 2023 and December 31, 2022, respectively.
The Company recorded tax exempt income from life insurance policies in the amounts of $7.9 million, $7.7 million, and $6.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. The Company also recorded gains on life insurance benefits of $2.3 million, $1.3 million, and $258,000 for the years ended December 31, 2023, 2022 and 2021, respectively.
Deposits At December 31, 2023, total deposits were $14.9 billion, representing a decrease of $1.0 billion, or 6.4% compared to December 31, 2022, primarily reflective of industry wide dislocations occurring during the first quarter of 2023, coupled with an overall competitive rate environment and a redeployment of customer excess liquidity due to inflation and other factors. The total cost of deposits was 0.96% for the year ended December 31, 2023, representing an increase from the prior year of 81 basis points, fueled primarily by 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. The Company's ratio of core deposits, inclusive of reciprocal money market deposits, to total deposits represented 84.6% at December 31, 2023 compared to 91.8% at December 31, 2022, 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 December 31, 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"). The FDIC offers insurance coverage on deposits up to the federally insured limit of $250,000. 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 allows the Company to access a reciprocal deposit exchange that can be used to benefit customers seeking increased FDIC insurance protection, and amounted to $959.1 million and $653.6 million in deposits, at December 31, 2023 and December 31, 2022, respectively. The estimated balance of uninsured deposits at the Bank were $4.6 billion and $5.4 billion as of December 31, 2023 and December 31, 2022, respectively. Included in these amounts are $720.5 million and $605.0 million of collateralized deposits, which offer additional protection to the customer.
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Scheduled maturities of time deposits not covered by deposit insurance at December 31, 2023, were as follows:
Table 14 - Maturities of Uninsured Time Deposits
December 31, 2023
(Dollars in thousands)
Due within 3 months or less $ 109,595
Due after 3 months through 6 months 93,131
Due after 6 months through 12 months 85,167
Due after 12 months 65,032
Total uninsured time deposits (1) 352,925
(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. Maintaining available borrowing capacity provides the Bank with a contingent source of liquidity. Borrowings increased by $1.1 billion, or 974.6%, at December 31, 2023, as compared to December 31, 2022, due primarily to deposit outflows experienced during 2023 as well as to fund stock buyback activity during the fourth quarter of 2023. See Note 7, "Borrowings" within the Notes to Consolidated Financial Statements included in Item 8 of this Report for more information regarding borrowings.
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. In response to the banking industry turmoil experienced during the year, management took immediate actions during the first quarter by proactively borrowing under its existing FHLB capacity to increase on balance sheet liquidity, as well as pledging additional assets to increase overall off balance sheet liquidity. For further details surrounding the Company’s liquidity risks and related strategy, see the " Risk Management – Liquidity Risk" section below within Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations within this Report.
At December 31, 2023, the Company and the Bank exceeded the minimum requirements for Common Equity Tier 1 capital, Tier 1 capital, total capital, and Tier 1 leverage capital, inclusive of the capital conservation buffer. See Note 18, "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 following table presents total assets under administrations and number of accounts held by the Rockland Trust Investment Management Group at the following dates:
Table15 - Assets Under Administration
December 31
2023 December 31
2022 December 31
2021
(Dollars in thousands)
Assets under administration $ 6,537,905 $ 5,792,857 $ 5,726,368
Number of trust, fiduciary and agency accounts 6,550 6,459 6,379
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 $34.6 million, $32.8 million, and $31.6 million for the years ended December 31, 2023, 2022, and 2021, respectively. Total
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assets under administration as of December 31, 2023 were $6.5 billion, including $622.9 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, which provides institutional quality investment management services to both institutional and high net worth clients. As of December 31, 2023 and December 31, 2022, included in the assets under administration amounts above, there were $449.8 million and $390.1 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 revenues were $5.6 million, $4.1 million, and $3.7 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Results of Operations
Table 16 - Summary of Results of Operations
Years Ended December 31
2023 2022 2021
(Dollars in thousands, except per share data)
Net income $ 239,502 $ 263,813 $ 120,992
Diluted earnings per share $ 5.42 $ 5.69 $ 3.47
Return on average assets 1.24 % 1.33 % 0.81 %
Return on average equity 8.31 % 9.05 % 6.34 %
Stockholders' equity as % of assets 14.96 % 14.96 % 14.78 %
Net interest margin 3.54 % 3.46 % 3.02 %
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, net interest income was $611.0 million for the year ended December 31, 2023, representing a 1.0% decrease from net interest income of $617.3 million for the year ended December 31, 2022.
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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, 2023, 2022 and 2021. Nontaxable income from loans and securities is presented on a fully tax-equivalent basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing federal income taxes that would have been paid if the income had been fully taxable.
Table 17 - Average Balance, Interest Earned/Paid & Average Yields
Years Ended December 31
2023 2022 2021
Average Balance Interest Earned/ Paid Average Yield Average Balance Interest Earned/ Paid Average Yield Average Balance Interest Earned/ Paid Average Yield
(Dollars in thousands)
Interest-earning assets
Interest-earning deposits with banks, federal funds sold, and short term investments $ 118,806 $ 5,186 4.37 % $ 1,222,434 $ 14,385 1.18 % $ 1,864,346 $ 2,494 0.13 %
Securities
Securities - trading 4,411 — — % 3,764 — — % 3,344 — — %
Securities - taxable investments 3,027,769 60,336 1.99 % 2,948,358 50,354 1.71 % 1,795,199 30,477 1.70 %
Securities - nontaxable investments (1) 190 7 3.68 % 196 7 3.57 % 469 20 4.26 %
Total securities 3,032,370 60,343 1.99 % 2,952,318 50,361 1.71 % 1,799,012 30,497 1.70 %
Loans held for sale 3,289 190 5.78 % 4,774 172 3.60 % 34,056 856 2.51 %
Loans (2)
Commercial and industrial 1,646,939 115,752 7.03 % 1,538,848 77,074 5.01 % 1,823,914 79,752 4.37 %
Commercial real estate (1) 7,839,476 376,586 4.80 % 7,807,427 326,593 4.18 % 4,702,346 185,908 3.95 %
Commercial construction 1,019,871 66,440 6.51 % 1,191,394 57,804 4.85 % 616,037 24,696 4.01 %
Small business 235,108 14,428 6.14 % 204,982 10,886 5.31 % 180,473 9,276 5.14 %
Total commercial 10,741,394 573,206 5.34 % 10,742,651 472,357 4.40 % 7,322,770 299,632 4.09 %
Residential real estate 2,217,971 88,210 3.98 % 1,831,493 63,443 3.46 % 1,286,470 46,279 3.60 %
Home equity 1,093,546 70,698 6.47 % 1,061,228 44,048 4.15 % 1,025,809 35,160 3.43 %
Total consumer real estate 3,311,517 158,908 4.80 % 2,892,721 107,491 3.72 % 2,312,279 81,439 3.52 %
Other consumer 31,202 2,418 7.75 % 31,986 2,114 6.61 % 23,885 1,668 6.98 %
Total loans 14,084,113 734,532 5.22 % 13,667,358 581,962 4.26 % 9,658,934 382,739 3.96 %
Total Interest-Earning Assets 17,238,578 800,251 4.64 % 17,846,884 646,880 3.62 % 13,356,348 416,586 3.12 %
Cash and Due from Banks 180,553 184,812 152,723
Federal Home Loan Bank Stock 33,734 7,134 10,283
Other Assets 1,853,585 1,858,210 1,335,193
Total Assets $ 19,306,450 $ 19,897,040 $ 14,854,547
Interest-bearing liabilities
Deposits
Savings and interest checking accounts $ 5,489,923 $ 43,073 0.78 % $ 6,159,289 $ 8,339 0.14 % $ 4,590,055 $ 1,610 0.04 %
Money market 3,022,322 51,630 1.71 % 3,489,981 11,683 0.33 % 2,516,871 1,930 0.08 %
Time certificates of deposits 1,724,625 50,050 2.90 % 1,310,442 4,630 0.35 % 936,046 4,787 0.51 %
Total interest bearing deposits 10,236,870 144,753 1.41 % 10,959,712 24,652 0.22 % 8,042,972 8,327 0.10 %
Borrowings
Federal Home Loan Bank borrowings 782,121 37,624 4.81 % 16,138 313 1.94 % 41,556 897 2.16 %
Long-term borrowings — — — % 2,235 31 1.39 % 21,072 331 1.57 %
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Junior subordinated debentures 62,857 4,359 6.93 % 62,854 2,125 3.38 % 62,852 1,692 2.69 %
Subordinated debt 49,933 2,470 4.95 % 49,837 2,470 4.96 % 49,741 2,470 4.97 %
Total borrowings 894,911 44,453 4.97 % 131,064 4,939 3.77 % 175,221 5,390 3.08 %
Total interest-bearing liabilities 11,131,781 189,206 1.70 % 11,090,776 29,591 0.27 % 8,218,193 13,717 0.17 %
Noninterest-bearing demand deposits 4,918,787 5,559,997 4,443,410
Other liabilities 374,585 330,371 284,679
Total liabilities 16,425,153 16,981,144 12,946,282
Stockholders’ equity 2,881,297 2,915,896 1,908,265
Total liabilities and stockholders’ equity $ 19,306,450 $ 19,897,040 $ 14,854,547
Net interest income (1) $ 611,045 $ 617,289 $ 402,869
Interest rate spread (3) 2.94 % 3.35 % 2.95 %
Net interest margin (4) 3.54 % 3.46 % 3.02 %
Supplemental Information
Total deposits, including demand deposits $ 15,155,657 $ 144,753 $ 16,519,709 $ 24,652 $ 12,486,382 $ 8,327
Cost of total deposits 0.96 % 0.15 % 0.07 %
Total funding liabilities, including demand deposits $ 16,050,568 $ 189,206 $ 16,650,773 $ 29,591 $ 12,661,603 $ 13,717
Cost of total funding liabilities 1.18 % 0.18 % 0.11 %
(1) The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $4.5 million, $4.0 million, and $1.3 million for 2023, 2022 and 2021, respectively.
(2) Includes average nonaccruing loans.
(3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average costs of interest-bearing liabilities.
(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. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate) and (3) changes in volume/rate (change in rate multiplied by change in volume) which is allocated to the change due to rate column:
Table 18 - Volume Rate Analysis
Years Ended December 31
2023 Compared To 2022 2022 Compared To 2021 2021 Compared To 2020
Change
Due to
Rate Change
Due to
Volume Total
Change Change
Due to
Rate Change
Due to
Volume Total
Change Change
Due to
Rate Change
Due to
Volume Total
Change
(Dollars in thousands)
Income on interest-earning assets
Interest-earning deposits, federal funds sold and short term investments $ 3,788 $ (12,987) $ (9,199) $ 12,750 $ (859) $ 11,891 $ 384 $ 1,263 $ 1,647
Securities
Taxable securities 8,626 1,356 9,982 300 19,577 19,877 (15,979) 16,323 344
Nontaxable securities (1) — — — (1) (12) (13) 2 (26) (24)
Total securities 9,982 19,864 320
Loans held for sale 72 (54) 18 52 (736) (684) (76) (286) (362)
Loans
Commercial and industrial 33,264 5,414 38,678 9,787 (12,465) (2,678) 10,743 (1,326) 9,417
Commercial real estate 48,652 1,341 49,993 17,925 122,760 140,685 (11,652) 26,547 14,895
Commercial construction 16,958 (8,322) 8,636 10,043 23,065 33,108 (486) 2,232 1,746
Small business 1,942 1,600 3,542 350 1,260 1,610 (732) 479 (253)
Total commercial 100,849 172,725 25,805
Residential real estate 11,379 13,388 24,767 (2,442) 19,606 17,164 (1,999) (5,598) (7,597)
Home equity 25,309 1,341 26,650 7,674 1,214 8,888 (2,523) (3,313) (5,836)
Total consumer real estate 51,417 26,052 (13,433)
Total other consumer 356 (52) 304 (120) 566 446 (280) (107) (387)
Loans (1) 152,570 199,223 11,985
Total $ 153,371 $ 230,294 $ 13,590
Expense of interest-bearing liabilities
Deposits
Savings and interest checking accounts $ 35,640 $ (906) $ 34,734 $ 6,179 $ 550 $ 6,729 $ (3,882) $ 1,079 $ (2,803)
Money market 41,513 (1,566) 39,947 9,007 746 9,753 (5,670) 1,434 (4,236)
Time certificates of deposits 43,957 1,463 45,420 (2,072) 1,915 (157) (8,786) (3,181) (11,967)
Total interest-bearing deposits 120,101 16,325 (19,006)
Borrowings
Federal Home Loan Bank borrowings 22,455 14,856 37,311 (35) (549) (584) 498 (1,165) (667)
Line of credit —
Long-term borrowings — (31) (31) (4) (296) (300) (127) (718) (845)
Junior subordinated debentures 2,234 — 2,234 433 — 433 (106) — (106)
Subordinated debt (5) 5 — (5) 5 — (5) 5 —
Total borrowings 39,514 (451) (1,618)
Total $ 159,615 $ 15,874 $ (20,624)
Change in net interest income $ (6,244) $ 214,420 $ 34,214
(1) The table above reflects income determined on a fully tax equivalent basis. See footnotes to Table 17 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 Company's provision for credit losses totaled $23.3 million, $6.5 million and $18.2 million for the years ended December 31, 2023, 2022, and 2021, respectively. The provision for credit losses for the years ended December 31, 2023, 2022, and 2021, respectively has been driven primarily by idiosyncratic events within the commercial portfolios.
The Company’s allowance for credit losses, as a percentage of total loans, was 1.00%, 1.09% and 1.08% at December 31, 2023, 2022 and 2021, respectively. See Note 3, "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.
Noninterest Income The following table sets forth information regarding noninterest income for the periods shown:
Table 19 - Noninterest Income
Years Ended December 31
Change
2023 2022 Amount %
(Dollars in thousands)
Deposit account fees $ 23,486 $ 23,370 $ 116 0.5 %
Interchange and ATM fees 18,108 16,249 1,859 11.4 %
Investment management 40,191 36,832 3,359 9.1 %
Mortgage banking income 2,326 3,515 (1,189) (33.8) %
Increase in cash surrender value of life insurance policies 7,868 7,685 183 2.4 %
Gain on life insurance benefits 2,291 1,291 1,000 77.5 %
Loan level derivative income 3,327 2,932 395 13.5 %
Other noninterest income 27,012 22,793 4,219 18.5 %
Total $ 124,609 $ 114,667 $ 9,942 8.7 %
The primary reasons for significant variances in the noninterest income categories shown in the preceding table are noted below:
• Interchange and ATM fees increased year over year due primarily to higher debit card service charges driven by increased transaction volume.
• Investment management revenue increased due in part to growth in overall assets under administration, which increased from $5.8 billion at December 31, 2022 to $6.5 billion at December 31, 2023, reflecting healthy new asset inflows and increased market valuations, as well as due to higher retail and insurance commission income recognized during 2023.
• Mortgage banking income decreased in comparison to the prior year, primarily attributable to overall reduced saleable volumes as a result of the rising interest rate environment in 2023.
• Gain on life insurance benefits was higher in 2023 due to elevated proceeds on life insurance policies received in comparison 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 FHLB dividend income, unrealized gains on equity securities, outsized loan fees, and discounted purchases of Massachusetts historical tax credits, partially offset by decreases in gains on sales of fixed assets, equity capital gain distributions, and income from like-kind exchanges.
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Noninterest Expense The following table sets forth information regarding noninterest expense for the periods shown:
Table 20 - Noninterest Expense
Years Ended December 31
Change
2023 2022 Amount %
(Dollars in thousands)
Salaries and employee benefits $ 222,135 $ 204,711 $ 17,424 8.5 %
Occupancy and equipment 50,582 49,841 741 1.5 %
Data processing and facilities management 9,884 9,320 564 6.1 %
Software maintenance 13,115 10,961 2,154 19.7 %
FDIC assessment 11,953 6,951 5,002 72.0 %
Debit card expense 9,003 7,670 1,333 17.4 %
Consulting 8,954 9,617 (663) (6.9) %
Amortization of intangible assets 6,878 7,655 (777) (10.2) %
Merger & acquisitions — 7,100 (7,100) (100.0) %
Other noninterest expense 60,242 59,836 406 0.7 %
Total $ 392,746 $ 373,662 $ 19,084 5.1 %
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 year was primarily attributable to non-recurring CEO transition expenses incurred during the first quarter of 2023, as well as increases in general salaries, equity compensation, severance and medical plan insurance, partially offset by decreases in incentive programs and payroll taxes.
• Occupancy and equipment expense increased year-over-year, primarily driven by costs associated with the Company's leased real estate, including one-time lease exit costs associated with two leased locations related to the 2021 Meridian acquisition, as well as increased utilities costs, partially offset by reduced snow removal costs as compared to the prior year.
• Data processing and facilities management expenses increased primarily due to the timing of certain initiatives and general increases associated with higher transaction volumes.
• Software maintenance increased primarily due to the Company's continued investment in its technology infrastructure.
• FDIC assessment expense increased in comparison to the prior year due an increased assessment base as well as an estimated $1.1 million special assessment based on rules implemented by the FDIC to recover losses incurred by the Deposit Insurance Fund in 2023.
• Consulting expense decreased year-over-year 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 2023.
• Other noninterest expenses increased year-over year due primarily to increased interest paid on cash collateral accounts, loan workout costs, sponsorships, and internet banking costs, partially offset by decreases in unrealized losses on equity securities, telecommunications costs, and mortgage operations expense.
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Income Taxes The tax effect of all income and expense transactions is recognized by the Company in each year’s consolidated statements of income, regardless of the year in which the transactions are reported for income tax purposes. The following table sets forth information regarding the Company’s tax provision and applicable tax rates for the periods indicated:
Table 21 - Tax Provision and Applicable Tax Rates
Years Ended December 31
2023 2022 2021
(Dollars in thousands)
Combined federal and state income tax provisions $ 75,632 $ 83,941 $ 35,683
Effective income tax rates 24.00 % 24.14 % 22.78 %
Blended Statutory tax rate 27.91 % 27.85 % 27.92 %
The Company’s effective tax rate for 2023 is lower as compared to the year ago period primarily due to lower 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.
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. 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 at December 31, 2023 was $229.0 million, of which $170.3 million has been funded. The Company recognized a net tax benefit of approximately $3.7 million for 2023 and anticipates additional net tax benefits of $30.3 million over the remaining life of the investments from the combination of tax credits and operating losses.
For additional information related to the Company's income taxes see Note 10, "Income Taxes" and Note 11, "Low Income Housing Project Investments" within the Notes to the Consolidated Financial Statements included in Item 8 of this Report.
Dividends The Company declared quarterly cash dividends totaling $2.20 per common share in 2023 and $2.08 per common share in 2022. The 2023 and 2022 ratio of dividends paid to earnings was 40.92% and 35.53%, respectively.
Since substantially all of the funds available for the payment of dividends are derived from the Bank, future dividends of the Company will depend on the earnings of the Bank, its financial condition, its need for funds, applicable governmental policies and regulations, and other such matters as the Board of Directors deems appropriate.
Comparison of 2022 vs. 2021 For a discussion of our results for the year ended December 31, 2022 compared to the year ended December 31, 2021, please see Item 7. " Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with the SEC on February 28, 2023 .
Risk Management
The Board of Directors has approved an Enterprise Risk Management Policy to state the Company’s goals and objectives in identifying, measuring, and managing the risks associated with the Company’s current and near future anticipated size and complexity. Management is responsible for comprehensive enterprise risk management, and continually strives to adopt and implement practices that strike an appropriate balance between risk and reward and permit the achievement of strategic goals in a controlled environment.
The Company has implemented the “three lines of defense” enterprise risk management model. The first line of defense are the executives in charge of business units, operational areas, and corporate functions who, sometimes assisted by management committees, teams, and working groups, own and manage risks. The second line of defense 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.
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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 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. 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 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 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. For further discussion regarding the credit risk and the credit quality of the Company’s loan portfolio, see Note 3, “Loans, Allowance for Credit Losses and Credit Quality” within the Notes to Consolidated Financial Statements included in Item 8 of this Report .
Liquidity Risk Liquidity risk is the risk arising from the Company being unable to meet obligations when due. Liquidity risk includes the inability to access funding sources or manage fluctuations in available funding levels. Liquidity risk also results from a failure to recognize or address market condition changes that affect the ability to liquidate assets quickly with minimal value loss.
The Company’s primary sources of funds are deposits, borrowings, and the amortization, prepayment, and maturities of loans and securities. The Bank utilizes its extensive branch network to access retail customers who provide a base of in-market core deposits. These funds are principally comprised of demand deposits, interest checking accounts, savings accounts, and money market accounts. 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. 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 December 31, 2023. The Total Basic Surplus/Deficit measure is affected primarily by changes in deposits, securities and short-term investments, loans, and borrowings. An increase in deposits, without a corresponding increase in nonliquid assets, will improve the Total Basic Surplus/Deficit measure, whereas, an increase in loans, with no increase in deposits, will decrease the measure. Other factors affecting the Total Basic Surplus/Deficit include FHLB collateral requirements, securities portfolio changes, and the mix of deposits.
The Company prioritizes core deposits as a primary funding source and continues to maintain a variety of available liquidity sources, including FHLB advances, and Federal Reserve borrowing capacity. 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 affects the Company's FHLB 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 Company may also have the ability to raise additional funds through the issuance of equity or unsecured debt privately or publicly and has done so in the past. Additionally, the Company is able to enter into repurchase agreements or acquire brokered deposits at its discretion. The availability and cost of equity or debt on an unsecured basis is dependent on many factors, including the Company’s financial position, the market environment, and the Company’s credit rating. The Company monitors the factors that could 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:
Table 22 - Sources of Liquidity
December 31
2023 2022
Outstanding Additional
Borrowing Capacity Outstanding Additional
Borrowing Capacity
(Dollars in thousands)
Federal Home Loan Bank borrowings (1) $ 1,105,541 $ 1,577,746 637 1,808,729
Federal Reserve Bank of Boston (2) — 3,078,179 — 1,210,451
Unpledged securities — 1,187,882 — 2,144,235
Line of Credit — 85,000 — 85,000
Junior subordinated debentures (3) 62,858 — 62,855 —
Subordinated debt (3) 49,980 — 49,885 —
Reciprocal deposits (3) 959,068 — 653,638 —
Brokered deposits (3) 100,923 — 102,643 —
$ 2,278,370 $ 5,928,807 $ 869,658 $ 5,248,415
(1) Assets with a carrying value of $3.9 billion and $2.7 billion at December 31, 2023 and 2022, respectively, were pledged to the Federal Home Loan Bank of Boston.
(2) Loans with a carrying value of $4.6 billion and $1.7 billion at December 31, 2023 and 2022, respectively, were pledged to the Federal Reserve Bank of Boston.
(3) The additional borrowing capacity has not been assessed for these categories.
In addition to customary operational liquidity practices, the Board of Directors and management recognize the need to establish reasonable guidelines to manage a heightened liquidity risk environment. Catalysts for elevated liquidity risk can be Company-specific issues and/or systemic industry-wide events. 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 execute an appropriate response.
In response to the banking industry turmoil experienced in 2023, the Company operated 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 risk refers to the risk of potential losses arising from changes in interest rates and the value of investments due to market conditions or other external factors or events. Interest rate risk is the most significant market risk to which the Company has exposure to due to the nature of its operations.
Interest rate risk is the sensitivity of income to changes in interest rates. Interest rate changes, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, which is the Company’s primary source of revenue. Interest rate risk arises directly from the Company’s core banking activities. 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.
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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. 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 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, 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. 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.
Given the volatility associated with market rates, and the uncertainty surrounding future rate movements, management has been proactive in achieving a more neutral interest rate risk position as compared to the prior year. In 2023, management continued to increase the duration of its assets by marginally increasing exposure to fixed rate loans while deposit attrition reduced the amount of rate sensitive cash on hand at the Federal Reserve Bank. 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:
Table 23 - Interest Rate Sensitivity
Years Ended December 31
2023 2022
Year 1 Year 1
Parallel rate shocks (basis points)
-300 (1.7)% (10.0)%
-200 (0.9)% (5.7)%
-100 (0.3)% (2.5)%
+100 (0.3)% 1.5%
+200 0.8% 2.4%
+300 (1.0)% 4.0%
Gradual rate shifts (basis points)
-200 over 12 months (0.1)% (2.3)%
-100 over 12 months 0.0% (1.1)%
+200 over 12 months (0.3)% 1.4%
+400 over 24 months n/a 1.4%
Alternative scenarios
Steep down 200 basis points scenario 1.2% (0.5)%
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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 twelve months ended December 31, 2023 were the shape of the U.S. Government securities and interest rate swap yield curve, the U.S. prime interest rate, the secured overnight financing rate ("SOFR"), and other 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 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 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 9," 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.
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. See Note 2 , "Securities " within the Notes to Consolidated Financial Statements included in Item 8 of this Report.
Operational Risk Operational risk is the risk arising from human error or misconduct, transaction errors or delays, inadequate or failed internal systems or processes, data unavailability, loss, or poor quality, or adverse external events. Operational risk includes fraud risk and model risk. Potential operational risk exposure exists throughout the Company. 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.
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 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.
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Contractual Obligations, Commitments, Contingencies and Off-Balance Sheet Obligations
In the ordinary course of business the Company has entered into contractual obligations, commitments, residential loans sold with recourse and other off-balance sheet financial instruments. 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, 2023. These include payments related to (i) borrowings (Note 7 - Borrowings ), (ii) lease obligations ( Note 16 - Leases), (iii) time deposits with stated maturity dates ( Note 6 - Deposits ), (iv) commitments to extend credit ( Note 17 - Commitments and Contingencies ), (v) derivative positions ( Note 9 - Derivatives and Hedging Activities), and (vi) unfunded commitments on low income housing project investments ( Note 11 - Low Income Housing Project Investments). Also refer to Table 22 - Sources of Liquidity within Item 7 of this report for further details surrounding the Company's current and unused liquidity resources.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes thereto presented in Item 8 of this Report have been prepared in accordance with GAAP which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
The financial nature of the Company’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. 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. In addition, operating expenses may increase without a corresponding increase in productivity. There is no precise method, however, to measure the effects of inflation on the Company’s consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation.
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. 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. The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses. Arriving at an appropriate amount of allowance for credit losses involves a high degree of judgment.
The Company estimates credit losses 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. Management's judgement is required for the selection and application of these factors which are derived from historical loss experience as well as assumptions surrounding expected future losses and economic forecasts.
Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that are 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. 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.
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. Given the Company's benign loss history, the analyses
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performed have not resulted in a material change to the quantitative allowance but has informed management's determination of qualitative adjustments and act as corroborating evidence as to the appropriateness of the allowance as a whole. For additional discussion of the Company’s methodology of assessing the appropriateness of the allowance for credit losses, see Note 3, "Loans, Allowance for Credit Losses and Credit Quality " within the Notes to Consolidated Financial Statements included in Item 8 of this Report.
Income Taxes The Company accounts for income taxes using two components of income tax expense, current and deferred. Current taxes represent the net estimated amount due to or to be received from taxing authorities in the current year. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of the Company’s tax position. Deferred tax assets and liabilities represent the future effects on income taxes that result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, and carry-forwards that exist at the end of a period. Deferred tax assets and liabilities are measured using enacted tax rates and provisions of the enacted tax law and are not discounted to reflect the time-value of money. The effect of any change in enacted tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred tax assets are assessed for recoverability and the Company may record a valuation allowance if it believes based on available evidence that it is more likely than not that the deferred tax assets recognized will not be realized before their expiration. The amount of the deferred tax asset recognized and considered realizable could be reduced if projected income is not achieved due to various factors such as unfavorable business conditions. If projected income is not expected to be achieved, the Company may record a valuation allowance to reduce its deferred tax assets to the amount that it believes can be realized in its future tax returns. 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. 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. All movements in unrecognized tax benefits are recognized through the provision for income taxes. Taxes are discussed in more detail in Note 10, "Income Taxes" within the Notes to the Consolidated Financial Statements included in Item 8 of this Report.
Valuation of Goodwill/Intangible Assets and Analysis for Impairment The Company has increased its market share through the acquisition of entire financial institutions accounted for under the acquisition method of accounting, as well as from the acquisition of branches (not the entire institution) and other nonbanking entities. For all acquisitions, the Company is required to record assets acquired and liabilities assumed at their fair value, which is an estimate determined by the use of internal or other valuation techniques, which may include the use of third party specialists. Goodwill is evaluated for impairment at least annually, or more often if warranted, using a combined qualitative and quantitative impairment approach. The initial qualitative approach assesses whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a quantitative impairment test is performed to compare carrying value to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company completed its annual impairment test as of August 31, 2023, using the quantitative impairment test, and determined that the Company's goodwill was not impaired. There were no other events or changes during the fourth quarter of 2023 that indicated impairment of goodwill and other intangible assets.
The Company’s goodwill relates to acquisitions that are fully integrated into the retail banking operations, which management does not consider to be at risk of failing step one in the near future. The Company’s other intangible assets are subject to amortization and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When applicable, the Company tests each of the other intangibles by comparing the carrying value of the intangible to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. There were no other events or changes during the fourth quarter of 2023 that indicated impairment of goodwill and other intangible assets.
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. Trading and equity securities are carried at fair value, with unrealized gains and losses recorded in other noninterest income. All other securities are classified as securities available-for-sale and are carried at fair market value. The fair values of securities is based on either quoted market price or third party pricing services. In general, the third-party pricing services employ various methodologies, including but not limited to, broker quotes and proprietary models. Management does not typically adjust the prices received from third-party pricing services. Depending upon the type of security, management employs various techniques to analyze the pricing it receives from third-parties, such as reviewing model inputs, reviewing
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comparable trades, analyzing changes in market yields and, in certain instances, reviewing the underlying collateral of the security. Management reviews changes in fair values from period to period and performs testing to ensure that the prices received from the third parties are consistent with their expectation of the market.
Management determines if the market for a security is active primarily based upon the frequency of which the security, or similar securities, are traded. For securities which are determined to have an inactive market, fair value models are calibrated and to the extent possible, significant inputs are back tested on a quarterly basis. The third-party service provider performs calibration and testing of the models by comparing anticipated inputs to actual results, on a quarterly basis. 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.
Recent Accounting Developments
See Note 1, "Summary of Significant Accounting Policies " within the Notes to Consolidated Financial Statements included in Item 8 of this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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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