Eastern Bankshares, Inc. (EBC) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including, but not limited to, those discussed under Part I, Item 1A, “Risk Factors” appearing elsewhere in this Annual Report on Form 10-K.

Overview

We are a bank holding company, and our principal subsidiary, Eastern Bank, is a Massachusetts-chartered bank that has served the banking needs of our customers since 1818. Our business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services primarily to retail, commercial and small business customers. We had total assets of $23.5 billion and $16.0 billion at December 31, 2021 and 2020, respectively. We are subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Board and the Consumer Financial Protection Bureau.

We manage our business under two business segments: our banking business, which contributed $531.1 million, which is 84.5%, of our total income for the year ended December 31, 2021, and our insurance agency business, which contributed $97.2 million, which is 15.5%, of our total income for the year ended December 31, 2021. Our banking business consists of a full range of banking, lending (commercial, residential and consumer), savings and small business offerings, including our wealth management and trust operations that we conduct through our Eastern Wealth Management division. Our insurance agency business consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients. See the section of this Annual Report on Form 10-K titled “Business” for further discussion of our banking business and insurance agency business.

Net income for the year ended December 31, 2021 computed in accordance with GAAP was $154.7 million, as compared to $22.7 million for the year ended December 31, 2020. Net income for years ended December 31, 2021 and 2020 included items that our management considers noncore, which are excluded for purposes of assessing operating earnings. Operating net income, a non-GAAP financial measure, for year ended December 31, 2021 was $165.9 million compared to operating net income of $102.1 million for year ended December 31, 2020, representing a 62.4% increase. This increase was largely driven by a decrease in the provision for allowance for loan losses which is attributable to greater prior period provisions that resulted from the impact of the COVID-19 pandemic on the Bank’s borrowers during such periods, and current period releases of allowance for loan losses totaling $9.7 million. See “Non-GAAP Financial Measures” below for a reconciliation of net operating earnings to GAAP net income.

On November 12, 2021, we acquired Century, which operated 29 banking offices in 21 cities and towns in Massachusetts and southern New Hampshire for $641.9 million in cash. Century had total assets of approximately $6.8 billion at the time of our acquisition, at fair value and excluding goodwill and intangible assets.

Outlook and Trends

Interest Rates

We expect increases in the federal funds rate in 2022 which is anticipated to be beneficial to our net interest income and net interest margin. In its statement released on January 26, 2022, the Federal Open Market Committee stated that it would soon be appropriate to raise the target range for the federal funds rate above the current range of 0.0% to 0.25% in response to inflation that is above their 2.0% target and a strong labor market. Approximately 40% of our loans are indexed to a market rate that is expected to reprice along with the federal funds rate. Refer to the section titled “Management of Market Risk” within this Item 7 for additional discussion including the estimated change to net interest income which assumes a variety of immediate and parallel changes in the U.S. Treasury yield curve.

CECL Adoption

We adopted the current expected credit losses accounting methodology (ASU 2016-13), commonly referred to as the “CECL standard” on January 1, 2022. The cumulative day one impact is estimated to be an increase of between $25.0 million and $30.0 million to the allowance which is attributable to the change in accounting methodology for estimating the allowance for credit losses from our adoption of ASU 2016-13 and includes the impact of loans acquired from Century. The portion of the total estimated impact that is attributable to loans acquired from Century is estimated to be between $25.0 million and $28.0 million. The anticipated increase in the allowance is expected to be a result of a) the change in accounting treatment

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for loans acquired from Century; and b) transitioning from an “incurred loss” model, which estimates the allowance for loan losses based upon current known and inherent losses within our portfolio, to an “expected loss” model, which estimates the allowance for credit losses based upon losses expected to be incurred over the life of loans in our portfolio. For further information, refer to Note 2, “Summary of Significant Accounting Policies” within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.

Paycheck Protection Program Loans

We are a participating lender in the SBA’s Paycheck Protection Program. We concluded PPP loan originations in the second quarter of 2021 as the SBA announced in May 2021 that PPP funds were exhausted. The majority of our PPP borrowers are existing commercial and small business borrowers, non-profit customers, retail banking customers and clients of our Eastern Wealth Management division and Eastern Insurance Group.

•During the year ended December 31, 2021, we originated approximately 6,600 PPP loans totaling $543.2 million. These loans have a maturity of five years. Fees received from the SBA and direct loan origination costs are being deferred over the five-year loan term. Through December 31, 2021, we had received $28.7 million in fees from the SBA and had deferred $4.0 million in direct loan origination costs related to 2021 originations.

•During the year ended year ended December 31, 2020, we originated approximately 8,900 PPP loans totaling $1.2 billion. The majority of these loans have a maturity of two years. Fees received from the SBA and direct loan origination costs are being deferred over the loan term, which is generally two years. During the year ended December 31, 2020, we received $37.1 million in fees from the SBA and deferred $4.6 million in direct loan origination costs. During the year ended December 31, 2021, certain 2020 originations were modified and we received a nominal amount of additional fees from the SBA.

•Net PPP fee accretion (fee accretion less cost amortization) for all PPP loans for the year ended December 31, 2021 was $34.3 million.

In connection with the Century acquisition, we acquired Century’s PPP loans with a remaining unpaid principal balance of $73.7 million at the time of our acquisition. In accordance with ASC 805, Business Combinations (commonly referred to as “purchase accounting”), remaining unearned fees received from the SBA and unamortized direct loan origination costs associated with these loans were written off with a corresponding adjustment to goodwill. The net purchase discount associated with these loans was $1.1 million, of which $0.1 million was accreted into income during the year ended December 31, 2021.

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The following table shows certain data related to PPP originations by period. This table is specific to Eastern PPP loan originations and does not include data related to PPP loans that we acquired from Century:

(1)Total SBA fees received on 2020 originations includes additional fees received from the SBA in 2021 for originations that were modified in 2021.

(2)Reflects life-to-date accretion.

The following table shows certain data related to the remaining balance of our aggregate PPP loans (Eastern originations and Century originations) as of December 31, 2021:

The following table shows the balance of our PPP loans (Eastern originations and Century originations) by industry as of December 31, 2021:

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Non-GAAP Financial Measures

We present certain non-GAAP financial measures, which management uses to evaluate our performance, and which exclude the effects of certain transactions, non-cash items and GAAP adjustments that we believe are unrelated to our core business and are therefore not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility for investors into our core businesses as well as underlying trends that may, to some extent, be obscured by inclusion of such items in the corresponding GAAP financial measures.

There are items in our financial statements that impact our results but which we believe are unrelated to our core business. Accordingly, we present operating net income, noninterest income on an operating basis, noninterest expense on an operating basis, total operating revenue, operating earnings per share, and the operating efficiency ratio, each of which excludes the impact of such items because we believe such exclusion can provide greater visibility into our core business and underlying trends. Such items that we do not consider to be core to our business include (i) income and expenses from investments held in rabbi trusts, (ii) gains and losses on sales of securities available for sale, net, (iii) gains and losses on the sale of other assets, (iv) rabbi trust employee benefits, (v) impairment charges on tax credit investments and associated tax credit benefits, (vi) expenses indirectly associated with our IPO, (vii) other real estate owned (“OREO”) gains, (viii) merger and acquisition expenses, (ix) the stock donation to the Eastern Bank Foundation (formerly known as the Eastern Bank Charitable Foundation, or the “Foundation”) in connection with our mutual-to-stock conversion and IPO, and (x) settlement of putative consumer class action litigation matters related to overdraft and non-sufficient fund fees, and associated settlement expenses.

We also present tangible shareholders’ equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, and tangible book value per share, each of which excludes the impact of goodwill and other intangible assets, as we believe these financial measures provide investors with the ability to further assess our performance, identify trends in our core business and provide a comparison of our capital adequacy to other companies. We have included the 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.

Our non-GAAP financial measures should not be considered as an alternative or substitute to GAAP net income, or as an indication of our cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. An item which we consider to be non-core and exclude when computing these non-GAAP financial measures can be of substantial importance to our results for any particular period. In addition, our methodology for calculating non-GAAP financial measures may differ from the methodologies employed by other companies to calculate the same or similar performance measures and, accordingly, our reported non-GAAP financial measures may not be comparable to the same or similar performance measures reported by other companies.

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The following table summarizes the impact of non-core items recorded for the time periods indicated below and reconciles them to the most directly comparable GAAP financial measure.

(1)Reflects costs associated with the IPO that are indirectly related to the IPO and were not recorded as a reduction of capital.

(2)The net tax benefit (expense) associated with these items is determined by assessing whether each item is included or excluded from net taxable income and applying our combined statutory tax rate only to those items included in net taxable income. The 2020 net tax benefit amount reflects the impact of the $12.0 million valuation allowance associated with the stock donation to the Eastern Bank Foundation. The 2021 net tax benefit amount reflects the impact of the reversal of $11.3 million of the $12.0 million valuation allowance associated with the stock donation to the Eastern Bank Foundation.

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The following table summarizes the impact of non-core items with respect to our total revenue, noninterest income, noninterest expense and the efficiency ratio, which reconciles to the most directly comparable respective GAAP financial measure, for the periods indicated:

(1)Reflects costs associated with the IPO that are indirectly related to the IPO and were not recorded as a reduction of capital.

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The following table summarizes the calculation of our tangible shareholders’ equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, and tangible book value per share, which reconciles to the most directly comparable respective GAAP measure, as of the dates indicated:

Financial Position

Summary of Financial Position

Cash and cash equivalents

Total cash and cash equivalents decreased by $0.8 billion, or 40.0%, to $1.2 billion at December 31, 2021 from $2.1 billion at December 31, 2020. This decrease was primarily due to available for sale security purchases partially offset by deposit growth.

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Securities

Our current investment policy authorizes us to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate notes, asset-backed securities and municipal securities. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk investment products. We typically invest in the following types of securities:

U.S. government securities: At December 31, 2021 and 2020 our U.S. government securities consisted of U.S. Agency bonds, U.S. Treasury securities and Small Business Administration pooled securities. We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes, and as collateral for interest rate derivative positions. U.S. Agency bonds include securities issued by Fannie Mae, Freddie Mac, the Federal Home Loan Bank, and the Federal Farm Credit Bureau.

Mortgage-backed securities: We invest in residential and commercial mortgage-backed securities insured or guaranteed by Freddie Mac, Ginnie Mae or Fannie Mae, including collateralized mortgage obligations. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac or Fannie Mae.

Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.

State and municipal securities: We invest in fixed rate investment grade bonds issued primarily by municipalities in our local communities within Massachusetts and by the Commonwealth of Massachusetts. The market value of these securities may be affected by call options, long dated maturities, general market liquidity and credit factors.

The Risk Management Committee of our Board of Directors is responsible for approving and overseeing our investment policy, which it reviews at least annually. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns and market risk considerations.

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The following table shows the fair value of our securities by investment category as of the dates indicated:

Securities Portfolio Composition

The following table presents the composition of securities acquired in connection with our acquisition of Century at fair value as of the November 12, 2021 acquisition date:

Acquired Securities at Fair Value

Our securities portfolio has increased year-to-date. Available for sale securities increased $5.3 billion, or 167.3%, to $8.5 billion at December 31, 2021 from $3.2 billion at December 31, 2020. This increase is due to investment purchases during the year ended December 31, 2021 and securities acquired in the Century acquisition as shown in the table above. Partially offsetting the increase in the securities portfolio from December 31, 2020 to December 31, 2021, was the reduction in the unrealized gain on the securities. At December 31, 2021 the unrealized loss was $76.0 million compared to an unrealized gain of $58.7 million at December 31, 2020, representing a $134.6 million decrease. This change is primarily driven by a steepening yield curve.

We did not have trading or held-to-maturity investments at December 31, 2021 and 2020.

A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled $279.8 million at December 31, 2021 compared to $280.9 million at December 31, 2020.

Our 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. As of both December 31, 2021 and 2020, we had no securities categorized as level 3 within the fair value hierarchy.

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The following table shows investment security weighted-average yields by category of security and contractual maturity at December 31, 2021. Weighted-average yields in the table below have been calculated based upon the amortized cost of the security:

Securities Portfolio, Weighted-Average Yield

(1)Investment security weighted-average yields were calculated on a level-yield basis by weighting the tax equivalent yield for each security type by the book value of each maturity.

(2)The negative yield indicated in the “Within One Year” category is the result of premium amortization that is in excess of earned income.

The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a fully taxable equivalent basis (“FTE”) 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.

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Loans

The following table shows the composition of our loan portfolio, by category, as of the dates indicated, the loans, by category, that were acquired from Century, and their balances as of the acquisition date of November 12, 2021 and net PPP loan activity for the year ended December 31, 2021:

(1)Balances of loans acquired through our acquisition of Century represent unpaid principal balances and do not include the fair value adjustment recorded upon acquisition. Refer to Note 3, “Mergers and Acquisitions” within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.

(2)Amounts presented exclude unamortized premiums, unearned discounts and deferred fees and costs.

(3)Amounts exclude change attributable to acquired PPP loans.

We consider our loan portfolio to be relatively diversified by borrower and industry. Our loans increased $2.6 billion, or 26.2%, to $12.3 billion at December 31, 2021 from $9.7 billion at December 31, 2020. The increase as of December 31, 2021 was primarily due to loans acquired from Century of $2.9 billion partially offset by a decrease in our PPP loan balances within our commercial and industrial balances and business banking portfolios. The changes to our loan portfolio, excluding the impact of the Century acquisition and PPP loan activity, are further detailed below:

•The $342.7 million increase in our commercial real estate loans from December 31, 2020 to December 31, 2021 was primarily a result of an increase of $296.3 million in our investment commercial real estate loan balances, which represents loans secured by commercial real estate that are non-owner-occupied, during the year ended December 31, 2021.

•The $59.4 million increase in our retail portfolio was primarily a result of an increase of $137.7 million in residential real estate loans during the year ended December 31, 2021 which was partially offset by a decrease in our other consumer and consumer home equity portfolios of $72.7 million and $5.6 million, respectively. The increase in residential real estate loans is due to the Company retaining more residential real estate loans as held for investment rather than selling such loans on the secondary market. The decrease in other consumer is primarily the result of the continued run-off of our indirect auto loan portfolio.

We believe that our commercial loan portfolio composition is relatively diversified in terms of industry sectors, property types and various lending specialties. As of December 31, 2021, concentrations in our commercial loan portfolios were as follows and includes loans acquired from Century:

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We believe that the loan to value ratio (“LTV”) is an important factor in monitoring the risk characteristics of our loans secured by real estate. The following tables show the distribution of loan balances by LTV and year of origination for each of our portfolios of loans, including those acquired from Century, secured by real estate as of December 31, 2021:

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(1)Current LTV is calculated based upon exposure amount and the most recently available appraisal value as of the reporting period.

(2)Insufficient data available to calculate LTV.

(3)We generally require an LTV of 80% or less on new CRE loan originations. Certain CRE loans with LTVs greater than 80% may have additional collateral pledged which is not included in the computation of the amounts stated.

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The maturity distribution of our loan portfolio is one factor used by management to evaluate the risk characteristics of our loan portfolio. The following table shows the maturity distribution of our loans, including those acquired from Century, as of December 31, 2021:

Scheduled Contractual Loan Maturity

(1)Includes demand loans, or loans without a stated maturity.

The interest rate risk to our loan portfolio is an important element in the management of net interest margin. We attempt to manage the relationship between the interest rate sensitivity of our assets and liabilities to produce an effective interest differential that is not significantly impacted by changes in the level of interest rates. The following table shows the interest rate risk of our loans, on a gross basis, due one year after December 31, 2021:

Loan Interest Rate Risk

Asset quality. We continually monitor the asset quality of our loan portfolio utilizing portfolio scorecards and various credit quality indicators. Based on this process, loans meeting certain criteria are categorized as delinquent, impaired, or non-performing and further assessed to determine if non-accrual status is appropriate.

For the commercial portfolio, which includes our commercial and industrial, commercial real estate, commercial construction and business banking loans, we monitor credit quality using a risk rating scale, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Management utilizes a loan risk rating methodology based on a 15-point scale with the assistance of risk rating scorecard tools. Pass grades are 0-10 and non-pass categories, which align with regulatory guidelines, are: special mention (11), substandard (12), doubtful (13) and loss (14).

Risk rating assignment is determined using one of 14 separate scorecards developed for distinctive portfolio segments based on common attributes. Key factors include: industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral and other considerations. The new risk rating methodology, inclusive of the expanded grade levels and the scorecard tools, has increased, and is expected to continue to increase granularity and distribution of risk rating assignment with more precision and effectiveness; provide customized and enhanced templates to incorporate more risk factors and attributes applicable to loan and collateral types; increase precision and effectiveness of credit risk identification; and provide a foundation for enhanced reporting, including migration of risk rating analysis.

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Special mention, substandard and doubtful loans totaled 5.8% and 7.7% of total commercial loans outstanding at December 31, 2021 and 2020, respectively. This decrease was driven by risk rating upgrades in the construction and commercial and industrial portfolios.

Our philosophy toward managing our loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. We seek to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.

For the retail portfolio, which includes residential real estate, consumer home equity, and other consumer portfolios, we monitor credit quality using the borrower’s FICO score. As of December 31, 2021, 70.8% of retail borrowers, based on loan balance, have a FICO score of 740 or greater. The following table shows the balances by borrower’s current FICO score as of the dates indicated:

(1)Borrower FICO scores are updated on a semi-annual basis, and the most recent update occurred in August 2021. With respect to loans acquired in connection with our acquisition of Century, borrower FICO scores were updated in December 2021.

(2)Insufficient data available to report.

The delinquency rate of our total loan portfolio increased to 0.65% at December 31, 2021 from 0.49% at December 31, 2020.

The following table provides details regarding our delinquency rates as of the dates indicated:

Loan Delinquency Rates

(1)In the calculation of the delinquency rate as of December 31, 2021 and 2020, the total amount of loans outstanding includes $0.3 billion and $1.0 billion, respectively, of PPP loans.

As a general rule, loans more than 90 days past due with respect to principal or interest are classified as non-accrual loans. However, based on our assessment of collateral and/or payment prospects, certain loans that are more than 90 days past due may be kept on an accruing status. Income accruals are suspended on all non-accrual loans and all previously accrued and uncollected interest is reversed against current income. A loan is expected to remain on non-accrual status until it becomes current with respect to principal and interest, the loan is liquidated, or the loan is determined to be uncollectible and is charged-off against the allowance for loan losses.

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Non-performing assets (“NPAs”) are comprised of non-performing loans (“NPLs”), OREO and non-performing securities. NPLs consist of non-accrual loans and loans that are more than 90 days past due but still accruing interest. OREO consists of real estate properties, which primarily serve as collateral to secure our loans, that we control due to foreclosure. These properties are recorded at the fair value less estimated costs to sell on the date we obtain control. Any write-downs to the cost of the related asset upon transfer to OREO to reflect the asset at fair value less estimated costs to sell is recorded through the allowance for loan losses.

NPLs decreased $8.3 million, or 20%, to $35.0 million at December 31, 2021 from $43.3 million at December 31, 2020. NPLs as a percentage of total loans decreased to 0.29% at December 31, 2021 from 0.45% at December 31, 2020 primarily due to a decrease in residential non-accrual loans, commercial real estate non-accrual loans, and commercial and industrial loans greater than 90 days past due and still accruing. The decreases in these categories was partially offset by an increase in consumer loans greater than 90 days and still accruing. For additional discussion of non-accrual loans, refer to the later “Credit Ratios” section.

The total amount of interest recorded on NPLs was $0.5 million for the year ended December 31, 2021. The gross interest income that would have been recorded under the original terms of those loans if they had been performing amounted to $3.2 million for the year ended December 31, 2021. The total amount of interest recorded on NPLs was $1.0 million for the year ended December 31, 2020. The gross interest income that would have been recorded under the original terms of those loans if they had been performing amounted to $3.4 million for the year ended December 31, 2020.

In the course of resolving NPLs, we may choose to restructure the contractual terms of certain loans. We attempt to work-out alternative payment schedules with the borrowers in order to avoid foreclosure actions. We review any loans that are modified to identify whether a TDR has occurred. TDRs involve situations in which, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. As described further below, loan modifications made in response to the COVID-19 pandemic met the criteria of either Section 4013 of the CARES Act or the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) and therefore are not deemed TDRs.

All TDR loans are considered impaired and therefore are subject to a specific review for impairment loss. The impairment analysis discounts the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification or the fair value of collateral if the loan is collateral dependent. The amount of impairment loss, if any, is recorded as a specific reserve to each individual loan in the allowance for loan losses. Commercial loans (commercial and industrial, commercial real estate, commercial construction, and business banking) and residential loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent.

TDR loans modified during the years ended December 31, 2021 and 2020 were $0.8 million and $4.2 million, respectively (post modification balance). The overall decrease in TDR loans consisted of a decrease of $2.3 million in commercial loan TDRs and a decrease of $1.2 million in consumer loan TDRs. No loans were modified during the preceding 12 months which subsequently defaulted during the year ended December 31, 2021.

It is our policy to have any restructured loans that are on non-accrual status prior to being modified remain on non-accrual status for approximately six months subsequent to being modified before we consider its return to accrual status. If the restructured loan is on accrual status prior to being modified, we review it to determine if the modified loan should remain on accrual status.

PCI loans are loans we acquired that have shown evidence of deterioration of credit quality since origination and, therefore, it was deemed unlikely that all contractually required payments would be collected upon the acquisition date. We consider factors such as payment history, collateral values and accrual status when determining whether there was evidence of deterioration at the acquisition date. The carrying value and prospective income recognition of PCI loans are predicated on future cash flows expected to be collected. As of December 31, 2021 and 2020 the carrying amount of PCI loans was $69.6 million and $9.3 million, respectively. The increase of $60.3 million was primarily attributable to PCI loans acquired from Century of $67.3 million, partially offset by borrower principal payments during the year ended December 31, 2021.

COVID-19 Modifications In light of the COVID-19 pandemic, we implemented loan modification programs for our borrowers in 2020 that allowed for either full payment deferrals (both interest and principal) or deferral of principal only. These modifications met the criteria of either Section 4013 of the CARES Act or the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) and therefore are not deemed TDRs. We have deemed these modified loans “COVID-19 modifications.”

The Appropriations Act, which was enacted on December 27, 2020, extended certain expiring tax provisions related to the COVID-19 pandemic in the United States and provides additional emergency relief to individuals and businesses. Included

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within the provisions of the Appropriations Act was the extension of Section 4013 of the CARES Act to January 1, 2022. As such, we applied CARES Act TDR relief to qualifying loan modifications executed during the allowable time period.

The following table presents the balance of loans that received a COVID-19 modification and have not yet resumed repayment as of December 31, 2021 and 2020 and excludes loans acquired from Century:

(1)Remaining COVID-19 modifications reflect only those loans which underwent a modification and have not yet resumed payment. We define a modified loan to have resumed payment if it is one month past the modification end date and not more than 30 days past due.

As of December 31, 2021, the aggregate amount of loans that received a COVID-19 modification and have become a non-performing loan after the respective deferral period is $4.7 million and are included in the total remaining COVID-19 modifications shown in the table above.

COVID-19 Pandemic-Impacted Industries. Management evaluated the risk present in our commercial loan portfolios with respect to COVID-19 pandemic-impacted industries as of December 31, 2021 and, in connection with that evaluation, identified commercial real estate loans collateralized by properties with office space as a high risk industry sector primarily resulting from the delay in many companies’ return to office plans. As of December 31, 2021, we believe loans to our borrowers in office, retail, restaurant, and hotel industry categories represent those which have experienced and will likely continue to experience the most adverse effects of the COVID-19 pandemic. As of December 31, 2021, the aggregate outstanding balance of loans to our borrowers in office, retail, restaurant, and hotel industry categories was $1.1 billion, $549.0 million, $188.9 million, and $189.0 million respectively, representing 8.8%, 4.5%, 1.5% and 1.5% of total loans, respectively. As of December 31, 2020, the aggregate outstanding loan balance of loans to our borrowers in office, retail, restaurant, and hotel industry categories was $1.0 billion, $496.4 million, $197.4 million, and $178.7 million, respectively, representing 10.6%, 5.1%, 2.0%, and 1.8% of total loans, respectively.

As of December 31, 2021, the current balance of loans modified which we considered to be COVID-19 modifications was $987.0 million, of which 40% were for full payment deferrals, while 60% were for full deferral of principal only. This includes $631.7 million in commercial real estate (including commercial construction loans), $105.7 million in commercial and industrial loans, $133.5 million in business banking loans, $88.5 million in residential real estate loans, and $27.5 million in consumer loans. The balance of COVID-19 modifications that have not resumed scheduled repayment or have become delinquent as of December 31, 2021 was $106.7 million compared to $332.7 million as of December 31, 2020. As of December 31, 2021, the percentage of loans to our borrowers in retail, restaurant and hotel industries that were modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020 which have not yet resumed payment were less than 0.1%, 2.9%, and 37.6%, respectively. As of December 31, 2021, there were no loans to our borrowers in office industries that were modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020 and which have not yet resumed payment. As of December 31, 2020, the percentage of loans to our borrowers in office, retail, restaurant, and hotel industries that were modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020 which have not yet resumed payment were 7.7%, 2.1%, 12.7%, and 39.4%, respectively.

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In the normal course of business, we become aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which currently do not yet meet the criteria for classification as NPLs. In response to the COVID-19 pandemic, we reviewed all of our credit exposures in industries that were expected to experience significant problems due to the pandemic and resulting economic contraction. As part of that review, we downgraded our hotel loans, restaurant loans and other loans that we expected to have associated challenges as a result of the economic impact of the COVID-19 pandemic. These loans were neither delinquent nor on non-accrual status. Management evaluated loans to borrowers in our office segment as of December 31, 2021 and observed increases in vacancy rates in properties collateralized by such properties. Due to the long-term nature of leases at such properties, the full impact of the COVID-19 pandemic on borrowers’ ability to repay is not currently reasonably estimable. However, based upon management’s regular evaluation of such loans, downgrades to the respective risk ratings have occurred and may occur again at such time heightened risk is identified. At December 31, 2021 and 2020, our potential problem loans (including these COVID-19 pandemic-impacted loans), or loans with potential weaknesses that were not included in the non-accrual loans or in the loans 90 days or more past due categories, totaled $470.9 million and $563.3 million, respectively. Included in these potential problem loans was $335.9 million and $319.5 million at December 31, 2021 and 2020, respectively, of loans in COVID-19 impacted industries, which includes borrowers in office industries as previously described at both December 31, 2021 and 2020.

Allowance for loan losses. Because we continued to qualify for emerging growth company status under the Jumpstart Our Business (“JOBS”) Act until December 31, 2021, we were permitted to delay adoption of the CECL standard until the earlier of the date at which non-public business entities are required to adopt the standard and the date we ceased to be an EGC. Included in the Appropriations Act was an extension of the adoption date to the earlier of January 1, 2022 or 60 days after the date on which the COVID-19 national emergency terminates. We elected this extension and, accordingly, adopted the CECL standard on January 1, 2022. As of December 31, 2021, we followed the incurred loss allowance GAAP accounting model. See “Risk Factors—Our loan loss allowance at December 31, 2021 may be difficult to evaluate in comparison to our peers” in Part I, Item 1A of this Annual Report on Form 10-K.

For the purpose of estimating our allowance for loan losses, we segregate the loan portfolio into homogenous loan pools that possess unique risk characteristics such as loan purpose, repayment source, and collateral that are considered when determining the appropriate level of the allowance for loan losses for each category.

While we use available information to recognize losses on loans, future additions or subtractions to/from the allowance for loan losses may be necessary based on changes in NPLs, changes in economic conditions, or other reasons. Additionally, various regulatory agencies, as an integral part of our examination process, periodically assess the adequacy of the allowance for loan losses to assess whether the allowance for loan losses was determined in accordance with GAAP and applicable guidance.

We perform an evaluation of our allowance for loan losses on a regular basis (at least quarterly), and establish the allowance for loan losses based upon an evaluation of our loan categories, as each possess unique risk characteristics that are considered when determining the appropriate level of allowance for loan losses, including:

•estimated future loss in all impaired loans in each category;

•known increases in concentrations within each category;

•certain higher risk classes of loans, or pledged collateral;

•historical loan loss experience within each category;

•results of any independent review and evaluation of the category’s credit quality;

•trends in volume, maturity and composition of each category;

•volume and trends in delinquencies and non-accruals;

•national and local economic conditions and downturns in specific local industries;

•corporate goals and objectives;

•expertise of our lending staff;

•lending policy and practices; and

•current and forecasted banking industry conditions, as well as regulatory environment.

Loans are periodically evaluated using changes in asset quality, historical losses, and other loss allocation factors, which form our basis for estimating incurred losses. For risk rated loans, our risk-rating system takes into consideration a number of quantitative and qualitative factors, such as the borrower’s financial capacity, cash flow, liquidity, leverage, adequacy of collateral, tangible net worth, management team, industry, sales and supplier concentration, credit history,

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additional support and the impact of outside factors on repayment ability. Homogenous populations of loans that are not risk rated loans, are analyzed by loan category, taking into account delinquency ratios and historical loss experience.

The allowance for loan losses is allocated to loan categories using both a formula-based approach and an analysis of certain individual loans for impairment. We use a methodology to systematically estimate the amount of credit loss incurred in the loan portfolio. Under our current methodology, the allowance for loan losses contains specific, general and other components.

The specific component consists of reserves for impaired loans (defined as those where we determine it is probable we will not collect all payments when due, typically classified as either doubtful or substandard). All commercial, residential and consumer loan portfolios are periodically reviewed to identify the loans with deteriorating performance. The reports used to identify those loans include, but are not limited to, delinquency reports, risk rating migration (for risk rated loans), asset quality reports, watch loan list and other credit risk management reports. When a loan is determined to be impaired, the measurement will be based on the present value of expected future cash flows, except for collateral-dependent loans, where the impairment is based on the fair value of the collateral.

The general loss reserves methodology, which is applied to categories of loans with similar characteristics, covers all non-impaired loans and is based on our portfolio’s segment historical loss experience adjusted for qualitative factors. The general loss reserve methodology considers multiple qualitative factors that may impact the loss experience during the incurred loss horizon period, including internal infrastructure factors, external macroeconomic factors, internal credit quality factors and external industry data, tailored to the specific loan category.

For additional discussion of our risk rating methodology, see Note 5, “Loans and Allowance for Loan Losses” within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.

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The following table summarizes credit ratios for the periods presented:

Credit Ratios

(1)Average loan balances exclude loans held for sale.

Non-accrual loans decreased $8.0 million, or 20%, to $33.0 million at December 31, 2021 from $41.0 million at December 31, 2020, primarily due to a decrease in non-accrual loans in our business banking portfolio and commercial real estate portfolio, partially offset by an increase in non-accrual loans in our commercial and industrial portfolio.

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The allowance for loan losses decreased by $15.2 million, or 13.5%, to $97.8 million, or 0.80% of total loans (including PPP loans), at December 31, 2021 from $113.0 million, or 1.16% of total loans at December 31, 2020. The decrease in the allowance for loan losses was primarily a result of improved macroeconomic conditions, risk rating upgrades in the commercial portfolios during the period and loans acquired from Century for which the estimated incurred losses were substantively included in the initial fair value determination as of the acquisition date of November 12, 2021. The economic environment during the year ended December 31, 2021 was assisted by government stimulus, the impacts of loan deferral programs, reductions in unemployment and reductions in COVID-19 related restrictions. These, along with other factors, resulted in a release of allowance for loan losses of $9.7 million for the year ended December 31, 2021, as compared to a provision for allowance for loan losses of $38.8 million for the year ended December 31, 2020.

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The following table sets forth the allocation of the allowance for loan losses by loan categories listed in loan portfolio composition as of the dates indicated:

Summary of Allocation of Allowance for Loan Losses

(1)PPP loans are included within these portfolios as of December 31, 2021 and December 31, 2020; however, as of December 31, 2021 and December 31, 2020, no allowance for loan losses have been recorded on these loans due to the SBA guarantee of 100% of the loans.

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, liquidation of the 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 loan losses and any recoveries of such previously charged-off amounts are credited to the allowance for loan losses.

Regardless of whether a loan is unsecured or collateralized, we charge 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.

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For additional information regarding our allowance for loan losses, see Note 5, “Loans and Allowance for Loan Losses” within the Notes to the Consolidated Financial Statements included in Item 8 in this Annual Report on Form 10-K.

We adopted the CECL standard on January 1, 2022 and will use the CECL methodology to determine our allowance for loan loss in future periods. For information about risks associated with our adoption of the CECL standard, see “Risk Factors—“We increased our allowance for loan losses as a result of our adoption as of January 1, 2022 of the new accounting standard for determining the amount of the allowance for loan losses and may be required to do so again in the future.” in Part I, Item 1A of this Annual Report on Form 10-K.

Federal Home Loan Bank stock

The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for our membership in the FHLBB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. We purchase and/or are subject to redemption of FHLBB stock proportional to the volume of funding received and view the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.

We held an investment in the FHLBB of $10.9 million and $8.8 million at December 31, 2021 and 2020, respectively.

Goodwill and other intangible assets

Goodwill and other intangible assets were $649.7 million and $376.5 million at December 31, 2021 and 2020, respectively. The increase in goodwill and other intangibles assets was due to our acquisition of Century which resulted in the addition of goodwill and intangible assets of $259.0 million and $11.6 million, respectively, as well as two insurance agency acquisitions which resulted in additional goodwill and intangible assets that are not considered to be material. This was partially offset by amortization of definite-lived intangibles during the year ended December 31, 2021. We did not record any impairment to our goodwill or other intangible assets during the years ended December 31, 2021 and 2020. We routinely assess our goodwill and other intangible assets to determine if impairments are necessary.

Deposits and other interest-bearing liabilities

Deposits originating within the markets we serve continue to be our primary source of funding our earning assets. We have been able to compete effectively for deposits in our primary market areas. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in our assessment of the stability of our fund sources and our access to additional funds. Furthermore, we shift the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize net interest margin.

The following table presents our deposits, including those acquired from Century in 2021, as of the dates presented:

Components of Deposits

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(1)The Bank’s estimate of total uninsured deposits was $11.0 billion and $5.5 billion at December 31, 2021 and December 31, 2020, respectively. The increase in estimated uninsured deposits between December 31, 2020 and December 31, 2021 was primarily due to our acquisition of Century.

The following table presents the composition of deposits acquired in connection with our acquisition of Century at fair value as of the November 12, 2021 acquisition date:

Acquired Deposits at Fair Value

Deposits increased by $7.5 billion, or 61.5%, to $19.6 billion at December 31, 2021 from $12.2 billion at December 31, 2020. This increase was primarily a result of our acquisition of Century through which we acquired $6.1 billion total deposits. For more information regarding deposits acquired as a result of the Century acquisition, see Note 26, “Subsequent Events” within the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on form 10-K. Excluding deposits acquired from Century, interest checking deposits, money market deposits and demand deposits, the deposit types primarily contributed to the increase in legacy deposits (e.g., deposits not acquired from Century) and increased $0.7 billion, $0.6 billion and $0.4 billion, respectively. The increases in these deposit categories reflect strong deposit flows, in part due to government stimulus.

The following table presents the classification of deposits on an average basis for the years indicated:

Classification of Deposits on an Average Basis

Other time deposits in excess of the FDIC insurance limit of $250,000, including certificates of deposits as of the dates indicated had maturities as follows:

Maturities of Time Certificates of Deposit $250,000 and Over

Borrowings

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Our borrowings may consist of both short-term and long-term borrowings and provide us with sources of funding. Maintaining available borrowing capacity provides us with a contingent source of liquidity.

Our total borrowings increased by $6.2 million, or 22.2%, to $34.3 million at December 31, 2021 compared to $28.0 million at December 31, 2020.

The following table sets forth information concerning balances on our borrowings as of the dates indicated:

Borrowings by Category

Results of Operations

Summary of Results of Operations

Comparison of the Years Ended December 31, 2021 and 2020

Interest and Dividend Income

Interest and dividend income increased by $21.8 million, or 5.3%, to $435.2 million during the year ended December 31, 2021 from $413.3 million during the year ended December 31, 2020. This increase was primarily a result of our acquisition of Century on November 12, 2021 which added approximately $6.6 billion in interest-earning assets. Overall, the average balance of our interest-earning assets increased $3.9 billion, or 30.7%, to $16.7 billion as of December 31, 2021 compared to $12.8 billion as of December 31, 2020, reflecting the addition of Century assets and the purchase of investment securities resulting from the investment of the proceeds from our October 2020 IPO. Partially offsetting this increase was a decrease in the yield on average interest-earning assets which decreased by 64 basis points to 2.64% during the year ended December 31, 2021. Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans or securities are calculated and added to the yield. Management believes that this presentation allows for better comparability between institutions with different tax structures.

•Interest income on securities and federal funds sold and other short-term investments increased $26.4 million, or 64.1%, to $67.6 million for the year ended December 31, 2021 compared to $41.2 million for the year ended December 31, 2020. The increase in interest income on securities was primarily due to an increase in the average balance of such securities of $3.6 billion, or 114.0%, to $6.7 billion as of December 31, 2021 compared to $3.1 billion as of December 31, 2020, which was partially offset by a decrease in the yield on such securities. The increase in the average balance of securities was attributable to security purchases of $3.3 billion during the year ended December 31, 2021, reflecting the investment of the proceeds from our October 2020 IPO, and investment securities acquired of $3.1 billion as a result of our acquisition of Century.

•Interest income on loans decreased by $4.6 million, or 1.2%, to $367.6 million during the year ended December 31, 2021 from $372.2 million during the year ended December 31, 2020. The decrease in interest income on our

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loans was primarily due to the decrease in yield on average loans which was driven by the downward adjustment of the interest rates on our existing adjustable-rate loans as a result of lower interest rates. The FTE yield on average loans decreased 18 basis points to 3.71% during the year ended December 31, 2021. The decrease in loan yields was partially offset by an increase in net accretion of PPP loan deferred fees and costs of $20.4 million to $34.3 million during year ended December 31, 2021 from $13.9 million during the year ended December 31, 2020. Also partially offsetting the decline in average yield was a slight increase in the average balance of loans of $371.9 million, or 3.9%, from $9.7 billion to $10.0 billion which was primarily the result of our acquisition of Century which added $2.9 billion in loans as of November 12, 2021, partially offset by a decline in PPP loan balances of $0.7 billion reflecting pay-offs of such balances.

Interest Expense

Interest expense decreased $6.7 million, or 55.8%, to $5.3 million during the year ended December 31, 2021 from $12.1 million during the year ended December 31, 2020. The decrease was a result of lower funding costs associated with the decline in the market interest rates.

•Interest expense on our interest-bearing deposits decreased by $6.1 million, or 54.3%, to $5.2 million during the year ended December 31, 2021 from $11.3 million during the year ended December 31, 2020.

•Interest expense on borrowed funds decreased by $0.6 million, or 78.3%, to $0.2 million during the year ended December 31, 2021 from $0.8 million during the year ended December 31, 2020.

Average interest-bearing deposits increased $1.6 billion, or 23.8%, for year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to the Century acquisition. The increase in deposit costs associated with the increase in average deposits was more than offset by the reduction in rates paid on deposits during the year ended December 31, 2021 compared to the year ended December 31, 2020.

Net Interest Income

Net interest income increased by $28.6 million, or 7.1%, to $429.8 million during the year ended December 31, 2021, from $401.3 million during the year ended December 31, 2020. Net interest income increased slightly as the reduction in interest income associated with the lower interest rate environment was more than offset by a related reduction in interest expense. In addition, the average balances of interest-earning assets substantially increased during the year ended December 31, 2021 compared to year ended December 31, 2020 which reflects assets acquired in connection with our acquisition of Century and the investment of the proceeds from our October 2020 IPO in investment securities.

Net interest margin is determined by dividing FTE net interest income by average-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using a marginal tax rate of 21.0% for the year ended December 31, 2021, and 21.8% for the years ended December 31, 2020 and 2019. Net interest margin decreased 57 basis points to 2.61% during the year ended December 31, 2021, from 3.19% during the year ended December 31, 2020.

The following tables set forth average balance sheet items, average yields and costs, and certain other information for the periods indicated. All average balances in the table reflect daily average balances. Non-accrual loans were included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

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Average Balances, Interest Earned/Paid, & Average Yields

(1)Non-accrual loans are included in Loans.

(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.