EDGAR 10-K Filing

Company CIK: 1049782
Filing Year: 2023
Filename: 1049782_10-K_2023_0001049782-23-000025.json

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ITEM 1. BUSINESS
Item 1. Business
General
Brookline Bancorp, Inc. (the "Company"), a Delaware corporation, is the holding company for Brookline Bank and its subsidiaries, Bank Rhode Island ("BankRI") and its subsidiaries, PCSB Bank and its subsidiaries, Brookline Securities Corp. and Clarendon Private, LLC (“Clarendon Private”).
Brookline Bank, headquartered in Boston, Massachusetts, has three wholly-owned subsidiaries, Longwood Securities Corp., First Ipswich Insurance Agency, and Eastern Funding LLC ("Eastern Funding"), and operates 29 full-service banking offices and two lending offices in the greater Boston metropolitan area. In 2020, First Ipswich Bank, formerly a wholly-owned subsidiary of the Company, was merged with and into Brookline Bank.
BankRI, headquartered in Providence, Rhode Island, has three direct subsidiaries, Acorn Insurance Agency, BRI Realty Corp., and BRI Investment Corp. and its wholly-owned subsidiary, BRI MSC Corp., and operates 20 full-service banking offices in the greater Providence, Rhode Island area. Macrolease Corporation, previously a subsidiary of BankRI, was merged into Eastern Funding LLC in the second quarter of 2022.
On January 1, 2023, the Company completed its acquisition of PCSB Financial Corporation ("PCSB'), the parent company of PCSB Bank. PCSB Bank, headquartered in Brewster, New York, operates as a separate subsidiary of the Company. PCSB Bank has one wholly-owned subsidiary, UpCounty Realty Corp., and operates 15 banking offices throughout the lower Hudson Valley of New York. Because the acquisition of PCSB Bank was completed on January 1, 2023, information provided in this 10-K as of December 31, 2022 concerning the “Banks” does not include information concerning PCSB Bank.
The Company, through Brookline Bank, BankRI and PCSB Bank (the "Banks"), offers a wide range of commercial, business and retail banking services, including a full complement of cash management products, on-line banking services, consumer and residential loans and investment services, designed to meet the financial needs of small- to mid-sized businesses and individuals throughout central New England and the lower Hudson Valley in New York. Specialty lending activities, including equipment financing, are focused in the New York and New Jersey metropolitan area, with services offered
throughout the United States. As full-service financial institutions, the Banks and their subsidiaries focus on the continued addition of well-qualified customers, the deepening of long-term banking relationships through a full complement of products and excellent customer service, and strong risk management. Clarendon Private is a registered investment advisor with the Securities and Exchange Commission (the "SEC"). Through Clarendon Private, the Company offers a wide range of wealth management services to individuals, families, endowments and foundations to help these clients meet their long-term financial goals.
The Company's headquarters and executive management are located at 131 Clarendon Street, Boston, Massachusetts 02116, and its telephone number is 617-425-4600.
Overview of Results
The loan and lease portfolio increased $489.9 million, or 6.8%, to $7.6 billion at December 31, 2022 from $7.2 billion at December 31, 2021. Paycheck Protection Program (the “PPP”) loans decreased $67.4 million, or 99.6%, to $0.3 million at December 31, 2022 from $67.7 million at December 31, 2021. Excluding PPP loan activity, the core loan portfolio increased $557.4 million, or 7.9%, to $7.6 billion at December 31, 2022 from $7.1 billion at December 31, 2021. The Company's commercial loan portfolios, which totaled $6.4 billion, or 84.0% of total loans and leases, as of December 31, 2022, increased $430.5 million, or 7.2%, from $6.0 billion, or 83.7% of total loans and leases, as of December 31, 2021.
Total deposits decreased $527.8 million, or 7.5%, to $6.5 billion at December 31, 2022 from $7.0 billion as of December 31, 2021. Core deposits, which include demand checking, NOW, money market and savings accounts, decreased 8.4% to $5.3 billion as of December 31, 2022 from $5.8 billion at December 31, 2021. The Company's core deposits were 81.0% of total deposits at December 31, 2022, a decrease from 81.8% at December 31, 2021.
The allowance for loan and lease losses decreased $0.6 million, or 0.6%, to $98.5 million as of December 31, 2022 from $99.1 million as of December 31, 2021. The ratio of the allowance for loan and lease losses to total loans and leases was 1.29% as of December 31, 2022 compared to 1.38% as of December 31, 2021. Nonperforming assets as of December 31, 2022 were $15.3 million, down from $33.2 million at the end of 2021. Nonperforming assets were 0.17% and 0.39% of total assets as of December 31, 2022 and December 31, 2021, respectively. The Company's credit quality compares favorably to its peers, and remains a top priority within the Company.
Net interest income increased $17.4 million, or 6.2%, to $299.8 million in 2022 compared to $282.4 million in 2021. Net interest margin increased 18 basis points to 3.67% in 2022 from 3.49% in 2021. Net income for 2022 decreased $5.7 million, or 4.9%, to $109.7 million from $115.4 million for 2021. Basic and fully diluted earnings per common share ("EPS") decreased to $1.42 for 2022 from $1.48 for 2021. See Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Competition
The Company provides banking services in the greater Boston, Massachusetts, Providence, Rhode Island, and New York, New York, metropolitan marketplaces, each of which is dominated by several large national banking institutions. The Company faces considerable competition from banking and non-banking organizations, including traditional banks, digital banks, financial technology companies and others, in its market area for all aspects of banking and related service activities. Competitive factors considered for loan generation include product offerings, interest rates, terms offered, services provided and geographic locations. Competitive factors considered in attracting and retaining deposits include product offerings and rate of return, convenient branch locations and automated teller machines and online access to accounts.
Market Area and Credit Risk Concentration
As of December 31, 2022, the Company, through its Banks, operated 49 full-service banking offices in greater Boston, Massachusetts, and greater Providence, Rhode Island. The Banks' deposits are gathered from the general public, primarily in the communities in which the banking offices are located. The deposit market in Massachusetts and Rhode Island is highly concentrated in several banks. Based on June 30, 2022 Federal Deposit Insurance Corporation ("FDIC") statistics, the five largest banks in Massachusetts have an aggregate market share of approximately 66%, and the three largest banks in Rhode Island have an aggregate deposit market share of approximately 72%. The Banks' lending activities are concentrated primarily in the greater Boston, Massachusetts, and Providence, Rhode Island, metropolitan areas, eastern Massachusetts, southern New Hampshire and other Rhode Island areas. In addition, the Company, through subsidiaries of Brookline Bank and BankRI, conducts equipment financing activities in the greater New York and New Jersey metropolitan area and elsewhere in the United States.
Commercial real estate loans. Multi-family and commercial real estate mortgage loans typically generate higher yields, but also involve greater credit risk. In addition, many of the Banks' borrowers have more than one multi-family or commercial
real estate loan outstanding. The Banks manage this credit risk by prudent underwriting with conservative debt service coverage and loan-to-value ratios at origination; lending to seasoned real estate owners/managers; frequently with personal guarantees of repayment; using reasonable appraisal practices; cross-collateralizing loans to one borrower when deemed prudent; and limiting the amount and types of construction lending. As of December 31, 2022, the largest commercial real estate relationship in the Company's portfolio was $72.9 million.
Commercial loans and equipment leasing. Brookline Bank originates commercial loans and leases for working capital and other business-related purposes, and concentrate such lending to companies located primarily in Massachusetts, and, in the case of Eastern Funding, on a nationwide basis. BankRI originates commercial loans and lines of credit for various business-related purposes, for businesses located primarily in Rhode Island.
Because commercial loans are typically made on the basis of the borrower's ability to repay from the cash flow of the business, the availability of funds for the repayment of commercial and industrial loans may be significantly dependent on the success of the business itself. Further, the collateral securing the loans may be difficult to value, may fluctuate in value based on the success of the business and may deteriorate over time. For this reason, these loans and leases involve greater credit risk. Loans and leases originated by Eastern Funding generally earn higher yields because the borrowers are typically small businesses with limited capital such as laundries, fitness centers and tow truck operators. The Banks manage the credit risk inherent in commercial lending by requiring strong debt service coverage ratios; limiting loan-to-value ratios; securing personal guarantees from borrowers; and limiting industry concentrations, franchisee concentrations and the duration of loan maturities. As of December 31, 2022, the largest commercial relationship in the Company's portfolio was $66.1 million.
Consumer loans. Retail customers of Brookline Bank typically live and work in the Boston metropolitan area and eastern Massachusetts. Retail customers of BankRI typically live and work throughout Rhode Island. Our consumers value personalized service, local community knowledge and engagement and the choice between branch access and technology solutions. The Banks' consumer loan portfolios, which include residential mortgage loans, home equity loans and lines of credit, and other consumer loans, cater to the borrowing needs of this customer base. Credit risk in these portfolios is managed by limiting loan-to-value ratios at loan origination and by requiring borrowers to demonstrate strong credit histories. As of December 31, 2022, the largest consumer relationship in the Company's portfolio was $65.6 million.
Economic Conditions and Governmental Policies
Repayment of multi-family and commercial real estate loans are generally dependent on the properties generating sufficient income to cover operating expenses and debt service. Repayment of commercial loans and leases generally are dependent on the demand for the borrowers' products or services and the ability of borrowers to compete and operate on a profitable basis. Repayment of residential mortgage loans and home equity loans generally are dependent on the financial well-being of the borrowers and their capacity to service their debt levels. The asset quality of the Company's loan and lease portfolio, therefore, is greatly affected by the economy. Should there be any setback in the economy or increase in the unemployment rates in the Boston, Providence, or New York, metropolitan areas, the resulting negative consequences could affect occupancy rates in the properties financed by the Company and cause certain individual and business borrowers to be unable to service their debt obligations.
Personnel and Human Capital Resources
As of December 31, 2022, the Company had 813 full-time employees and 39 part-time employees. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good.
We encourage and support the growth and development of our employees. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs, customized corporate training engagements and educational reimbursement programs.
The safety, health and wellness of our employees is a top priority. On an ongoing basis, we promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, keeping the employee portion of health care premiums to a minimum and sponsoring various wellness programs.
We believe our commitment to living out our core values, actively prioritizing concern for our employees' well-being, supporting our employees' career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees.
Access to Available Information
As a public company, Brookline Bancorp, Inc. is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith, files reports, proxy and information statements and other information with the SEC. The Company makes available on or through its internet website, www.brooklinebancorp.com, without charge, its annual reports on Form 10-K, proxy, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company's reports filed with, or furnished to, the SEC are also available at the SEC's website at www.sec.gov. Press releases are also maintained on the Company's website. Additional information for Brookline Bank, BankRI, PCSB Bank, Eastern Funding, and Clarendon Private can be found at www.brooklinebank.com, www.bankri.com, www.pcsb.com, www.easternfunding.com, and www.clarendonprivate.com, respectively. Information on the Company's and any subsidiary's website is not incorporated by reference into this document and should not be considered part of this Report.
The Company's common stock is traded on the Nasdaq Global Select MarketSM under the symbol “BRKL”.
Supervision and Regulation
The following discussion addresses elements of the regulatory framework applicable to bank holding companies and their subsidiaries. This regulatory framework is intended primarily for the protection of the safety and soundness of depository institutions, the federal deposit insurance system, and depositors, rather than for the protection of shareholders of a bank holding company such as the Company.
As a bank holding company, the Company is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System ( the "FRB") under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and by the Massachusetts Commissioner of Banks (the “Commissioner”) under Massachusetts General Laws Chapter 167A. The FRB is also the primary federal regulator of the Banks. In addition, Brookline Bank is subject to regulation, supervision and examination by the Massachusetts Division of Banks (“MDOB”), BankRI is subject to regulation, supervision and examination by the Banking Division of the Rhode Island Department of Business Regulation (the “RIBD”), and PCSB Bank is subject to regulation, supervision and examination by the New York State Department of Financial Services (“NYDFS”).
The following is a summary of certain aspects of various statutes and regulations applicable to the Company and its subsidiaries. This summary is not a comprehensive analysis of all applicable law, and is qualified by reference to the full text of the statutes and regulations referenced below, which may be modified or amended from time to time.
Regulation of the Company
The Company is subject to regulation, supervision and examination by the FRB, which has the authority, among other things, to order bank holding companies to cease and desist from unsafe or unsound banking practices; to assess civil money penalties; and to order termination of non-banking activities or termination of ownership and control of a non-banking subsidiary by a bank holding company.
Source of Strength
Under the BHCA, as amended by the Dodd-Frank Act, the Company is required to serve as a source of financial strength for the Banks in the event of the financial distress of the Banks. This provision of the Dodd-Frank Act codifies the longstanding policy of the FRB. This support may be required at times when the bank holding company may not have the resources to provide the additional financial support required by its subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment.
Acquisitions and Activities
The BHCA prohibits a bank holding company, without prior approval of the FRB, from acquiring all or substantially all the assets of a bank, acquiring control of a bank, merging or consolidating with another bank holding company, or acquiring direct or indirect ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, the acquiring bank holding company would control more than 5% of any class of the voting shares of such other bank or bank holding company. Further, as a Massachusetts bank holding company, the Company generally must obtain the prior approval of the Massachusetts Board of Bank Incorporation to acquire ownership or control of more than 5% of any voting stock in any other banking institution, acquire substantially all the assets of a bank, or merge with another bank holding company. However, there is an exemption from this approval requirement in certain cases in which the banking institution to be acquired,
simultaneously with the acquisition, merges with a banking institution subsidiary of the Company in a transaction approved by the Commissioner.
The BHCA also generally prohibits a bank holding company from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks. However, among other permitted activities, a bank holding company may engage in and may own shares of companies engaged in certain activities that the FRB has determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto, subject to certain notification requirements.
Limitations on Acquisitions of Company Common Stock
The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the FRB has been notified and has not objected to the transaction. Under rebuttable presumptions of control established by the FRB, the acquisition of control of voting securities of a bank holding company constitutes an acquisition of control under the Change in Bank Control Act, requiring prior notice to the FRB, if, immediately after the transaction, the acquiring person (or persons acting in concert) will own, control, or hold with power to vote 10% or more of any class of voting securities of the bank holding company, and if either (i) the bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934, or (ii) no other person will own, control, or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction.
In addition, the BHCA prohibits any company from acquiring control of a bank or bank holding company without first having obtained the approval of the FRB. Among other circumstances, under the BHCA, a company has control of a bank or bank holding company if the company owns, controls or holds with power to vote 25% or more of a class of voting securities of the bank or bank holding company; controls in any manner the election of a majority of directors or trustees of the bank or bank holding company; or the FRB has determined, after notice and opportunity for hearing, that the company has the power to exercise a controlling influence over the management or policies of the bank or bank holding company. The FRB has established presumptions of control under which the acquisition of control of 5% or more of a class of voting securities of a bank holding company, together with other factors enumerated by the FRB, could constitute the acquisition of control of a bank holding company for purposes of the BHCA.
Regulation of the Banks
Brookline Bank is subject to regulation, supervision and examination by the MDOB and the FRB. BankRI is subject to regulation, supervision and examination by the RIBD and the FRB. PCSB Bank is subject to regulation, supervision and examination by the NYDFS and is a member bank of the Federal Reserve System subject to regulation, supervision and examination by the FRB. The enforcement powers available to federal and state banking regulators include, among other things, the ability to issue cease and desist or removal orders to terminate insurance of deposits; to assess civil money penalties; to issue directives to increase capital; to place the bank into receivership; and to initiate injunctive actions against banking organizations and institution-affiliated parties.
Deposit Insurance
Deposit obligations of the Banks are insured by the FDIC's Deposit Insurance Fund up to $250,000 per separately insured depositor for deposits held in the same right and capacity.
Deposit insurance premiums are based on assets. For the year ending December 31, 2022, the Banks' FDIC insurance assessments costs were approximately $3.2 million.
The FDIC has the authority to adjust deposit insurance assessment rates at any time. In addition, under the Federal Deposit Insurance Act (the “FDIA”), the FDIC may terminate deposit insurance, among other circumstances, upon a finding that the institution has engaged in unsafe and unsound practices; is in an unsafe or unsound condition to continue operations; or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Until July 31, 2019, Brookline Bank was a member bank of the Depositors Insurance Fund (the “DIF”), a private, industry-sponsored insurance fund that insures all deposits above FDIC limits for Massachusetts-chartered savings banks. Brookline Bank converted its charter from a Massachusetts-chartered savings bank to a Massachusetts-chartered trust company and ended its membership in the DIF on July 31, 2019. Term deposits in excess of the FDIC insurance coverage will continue to be insured by the DIF until they reach maturity.
Cross-Guarantee
Under the cross-guarantee provisions of the FDIA, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (i) the “default” of a commonly controlled FDIC-insured depository institution; or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default.”
Acquisitions and Branching
The Banks must seek prior approval from the FRB to acquire another bank or establish a new branch office. Brookline Bank must also seek prior approval from the MDOB to acquire another bank or establish a new branch office, BankRI must also seek prior approval from the RIBD to acquire another bank or establish a new branch office, and PCSB Bank must also seek prior approval from the NYDFS to acquire another bank or establish a new branch office. Well capitalized and well managed banks may acquire other banks in any state, subject to certain deposit concentration limits and other conditions, pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended by the Dodd-Frank Act. In addition, the Dodd-Frank Act authorizes a state-chartered bank to establish new branches on an interstate basis to the same extent a bank chartered by the host state may establish branches.
Activities and Investments of Insured State-Chartered Banks
The FDIA generally limits the types of equity investments that FDIC-insured state-chartered member banks, such as the Banks, may make and the kinds of activities in which such banks may engage, as a principal, to those that are permissible for national banks. Further, the Gramm-Leach-Bliley Act of 1999 (the “GLBA”) permits state banks, to the extent permitted under state law, to engage through “financial subsidiaries” in certain activities which are permissible for subsidiaries of a financial holding company. In order to form a financial subsidiary, a state-chartered bank must be well capitalized, and must comply with certain capital deduction, risk management and affiliate transaction rules, among other requirements. In addition, the Federal Reserve Act provides that state member banks are subject to the same restrictions with respect to purchasing, selling, underwriting, and holding of investment securities as national banks.
Brokered Deposits
The FDIA and federal regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution's capital category is “well capitalized” or, with regulatory approval, “adequately capitalized.” Depository institutions that have brokered deposits in excess of 10% of total assets will be subject to increased FDIC deposit insurance premium assessments. Additionally, depository institutions considered “adequately capitalized” that need regulatory approval to accept, renew or roll over any brokered deposits are subject to additional restrictions on the interest rate they may pay on deposits. As of December 31, 2022, neither of the Banks had brokered deposits in excess of 10% of total assets.
Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act"), which was enacted in 2018, amended the FDIA to exempt a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions.
The Community Reinvestment Act
The Community Reinvestment Act (“CRA”) requires the FRB to evaluate each of the Banks with regard to their performance in helping to meet the credit needs of the communities each of the Banks serve, including low and moderate-income neighborhoods, consistent with safe and sound banking operations, and to take this record into consideration when evaluating certain applications. The FRB's CRA regulations are generally based upon objective criteria of the performance of institutions under three key assessment tests: (i) a lending test, to evaluate the institution's record of making loans in its service areas; (ii) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of services through its branches, ATMs, and other offices. Failure of an institution to receive at least a “satisfactory” rating could inhibit the Banks or the Company from undertaking certain activities, including engaging in activities permitted as a financial holding company under GLBA and acquisitions of other financial institutions. Each Bank has achieved a rating of “satisfactory” on its most recent CRA examination. Massachusetts, Rhode Island and New York have adopted specific community reinvestment requirements which are substantially similar to those of the FRB.
Lending Restrictions
Federal law limits a bank's authority to extend credit to directors and executive officers of the bank or its affiliates and persons or companies that own, control or have power to vote more than 10% of any class of securities of a bank or an affiliate of a bank, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank's capital.
Capital Adequacy and Safety and Soundness
Regulatory Capital Requirements
The FRB has issued risk-based and leverage capital rules applicable to U.S. banking organizations such as the Company and the Banks. These rules are intended to reflect the relationship between the banking organization's capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet items. The FRB may from time to time require that a banking organization maintain capital above the minimum levels discussed below, due to the banking organization's financial condition or actual or anticipated growth.
The capital adequacy rules define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets that banking organizations are required to maintain. Common equity Tier 1 capital generally includes common stock and related surplus, retained earnings and, in certain cases and subject to certain limitations, minority interest in consolidated subsidiaries, less goodwill, other non-qualifying intangible assets and certain other deductions. Tier 1 capital for banks and bank holding companies generally consists of the sum of common equity Tier 1 elements, non-cumulative perpetual preferred stock, and related surplus in certain cases and subject to limitations, minority interests in consolidated subsidiaries that do not qualify as common equity Tier 1 capital, less certain deductions. Tier 2 capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred stock, and, subject to limitations, allowances for loan losses. The sum of Tier 1 and Tier 2 capital less certain required deductions represents qualifying total risk-based capital. Prior to the effectiveness of certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred securities and cumulative perpetual preferred stock in Tier 1 capital, subject to limitations. However, the FRB's capital rule applicable to bank holding companies permanently grandfathers nonqualifying capital instruments, including trust preferred securities, issued before May 19, 2010 by depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, subject to a limit of 25% of Tier 1 capital. In addition, under rules that became effective January 1, 2015, accumulated other comprehensive income (positive or negative) must be reflected in Tier 1 capital; however, the Company was permitted to make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. The Company has made this election.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under the FRB's rules, the Company and the Banks are each required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6.0%, a minimum total capital requirement of 8.0% and a minimum leverage ratio requirement of 4.0%. Additionally, these rules require an institution to establish a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements for "adequately capitalized" institutions of more than 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engaged in share repurchases.
A bank holding company, such as the Company, is considered "well capitalized" if the bank holding company (i) has a total risk based capital ratio of at least 10.0%, (ii) has a Tier 1 risk-based capital ratio of at least 6.0%, and (iii) is not subject to any written agreement order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. In addition, under the FRB's prompt corrective action rules, a state member bank is considered “well capitalized” if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of at least 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (v) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. The FRB also considers: (i) concentrations of credit risk; (ii) interest rate risk; and (iii) risks from non-traditional activities, as well as an institution's ability to manage those risks. When determining the adequacy of an institution's capital, this evaluation is a part of the institution's regular safety and soundness examination. Each of the Banks is currently considered well-capitalized under all regulatory definitions.
Generally, a bank, upon receiving notice that it is not adequately capitalized (i.e., that it is “undercapitalized”), becomes subject to the prompt corrective action provisions of Section 38 of FDIA that, for example, (i) restrict payment of capital distributions and management fees, (ii) require that its federal bank regulator monitor the condition of the institution and its efforts to restore its capital, (iii) require submission of a capital restoration plan, (iv) restrict the growth of the institution's assets, and (v) require prior regulatory approval of certain expansion proposals. A bank that is required to submit a capital restoration plan must concurrently submit a performance guarantee by each company that controls the bank. A bank that is “critically undercapitalized” (i.e., has a ratio of tangible equity to total assets that is equal to or less than 2.0%) will be subject to further restrictions, and generally will be placed in conservatorship or receivership within 90 days.
The Banks are considered “well capitalized” under the FRB's prompt corrective action rules and the Company is considered “well capitalized” under the FRB's rules applicable to bank holding companies.
Safety and Soundness Standards
Guidelines adopted by the federal bank regulatory agencies pursuant to the FDIA establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal banking agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order restricting asset growth, requiring an institution to increase its ratio of tangible equity to assets or directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDIA. See “- Regulatory Capital Requirements” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Dividend Restrictions
The Company is a legal entity separate and distinct from the Banks. The revenue of the Company (on a parent company only basis) is derived primarily from dividends paid to it by the Banks. The right of the Company, and consequently the right of shareholders of the Company, to participate in any distribution of the assets or earnings of the Banks through the payment of such dividends or otherwise is subject to the prior claims of creditors of the Banks (including depositors), except to the extent that certain claims of the Company in a creditor capacity may be recognized.
Restrictions on Bank Holding Company Dividends
The FRB has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The FRB has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company's net income for the prior year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization's capital needs, asset quality and overall financial condition. Further, under the FRBs capital rules, the Company's ability to pay dividends will be restricted if it does not maintain the required capital conservation buffer. See “Capital Adequacy and Safety and Soundness-Regulatory Capital Requirements” above.
Restrictions on Bank Dividends
The FRB has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. In addition, a state member bank may not declare or pay a dividend: (i) if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the bank's net income during the current calendar year and the retained net income of the prior two calendar years; or (ii) that would exceed its undivided profits; in either case, unless the dividend has been approved by the FRB. Payment of dividends by a bank is also restricted pursuant to various state regulatory limitations.
Certain Transactions by Bank Holding Companies with their Affiliates
There are various statutory restrictions on the extent to which bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in “covered transactions” with their insured depository institution subsidiaries. An insured depository institution (and its subsidiaries) may not lend money to, or engage in covered transactions
with, its non-depository institution affiliates if the aggregate amount of covered transactions outstanding involving the bank, plus the proposed transaction, exceeds the following limits: (i) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and (ii) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. For this purpose, “covered transactions” are defined by statute to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the FRB, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, securities borrowing or lending transactions with an affiliate that creates a credit exposure to such affiliate, or a derivatives transaction with an affiliate that creates a credit exposure to such affiliate. Covered transactions are also subject to certain collateral security requirements. Covered transactions as well as other types of transactions between a bank and a bank holding company must be conducted under terms and conditions, including credit standards, that are at least as favorable to the bank as prevailing market terms. Section 106 of the Bank Holding Company Act Amendment of 1970 provides that, to further competition, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or the furnishing of any service. As of and for the year ending December 31, 2022, there were no such transactions.
Enhanced Prudential Supervision
None of the Banks currently have $10 billion or more of total consolidated assets, but it is possible that one of them may in the near future. In addition, with the merger of PCSB Financial Corporation with and into the Company effective January 1, 2023, the Company’s assets exceeded $10 billion. The Dodd-Frank Act and other federal banking laws subject companies with $10 billion or more of consolidated assets to additional regulatory requirements. Section 1075 of the Dodd-Frank Act, commonly known as the “Durbin Amendment”, amended the Electronic Fund Transfer Act to restrict the amount of interchange fees that may be charged and prohibit network exclusivity for debit card transactions. The Banks were not subject to the restrictions on interchange fees as of December 31, 2022, but they will become subject to them, which may negatively impact future payment network fees.
In addition, Section 619 of the Dodd-Frank Act, commonly known as the “Volcker Rule”, which generally prohibits banking entities from engaging in proprietary trading and from acquiring or retaining an ownership interest in or sponsoring certain types of investment funds, does not apply to an insured depository institution if it, and every company that controls it, has total consolidated assets of $10 billion or less and consolidated trading assets and liabilities that are 5% or less of consolidated assets. While each Bank had total consolidated assets of less than $10 billion as of December 31, 2022, the Company, which controls the Banks, had total consolidated assets in excess of $10 billion as of January 1, 2023. The Banks were not subject to the Volcker Rule in 2022, but they are subject to it now. However, we do not anticipate that becoming subject to the Volcker Rule will significantly impact the operations of the Company and the Banks.
Finally, Section 1025 of the Dodd-Frank Act provides that the CFPB has authority to examine any insured depository institution with total assets of more than $10 billion and any affiliate thereof. None of the Banks had, as of December 31, 2022, or has total assets of more than $10 billion.
Consumer Protection Regulation
The Company and the Banks are subject to a number of federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices. These laws include the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), GLBA, Truth in Lending Act ("TILA"), the CRA, the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services. Further, the Consumer Financial Protection Bureau ("CFPB") also has a broad mandate to prohibit unfair, deceptive or abusive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The FRB examines the Banks for compliance with CFPB rules and enforces CFPB rules with respect to the Banks.
The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower's ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of the TILA as a defense to foreclosure proceedings. Additionally, the CFPB's qualified mortgage rule requires creditors, such as the Banks, to make a reasonable good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling prior to making the loan.
Privacy and Customer Information Security
The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the Banks must provide their customers with an annual disclosure that explains their policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required or permitted by law, the Banks are prohibited from disclosing such information except as provided in such policies and procedures. If the financial institution only discloses information under exceptions from the GLBA that do not require an opt out to be provided and if there has been no change in the financial institutions privacy policies and procedures since its most recent disclosures provide to customers, an annual disclosure is not required to be provided by the financial institution. The GLBA also requires that the Banks develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information (as defined under GLBA), to protect against anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Banks are also required to send a notice to customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible.” Most of the states, including the states where the Banks operate, have enacted legislation concerning breaches of data security and the duties of the Banks in response to a data breach. Congress continues to consider federal legislation that would require consumer notice of data security breaches. Pursuant to the FACT Act, the Banks must also develop and implement a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. Additionally, the FACT Act amended the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and method to opt out of the making of such solicitations.
Anti-Money Laundering
The Bank Secrecy Act
Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report to the United States Treasury any cash transactions involving at least $10,000. In addition, financial institutions are required to file suspicious activity reports for any transaction or series of transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system. The USA PATRIOT Act has significant implications for financial institutions and businesses of other types involved in the transfer of money. The USA PATRIOT Act, together with the implementing regulations of various federal regulatory agencies, has caused financial institutions, such as the Banks, to adopt and implement additional policies or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis. In evaluating an application to acquire a bank or to merge banks or effect a purchase of assets and assumption of deposits and other liabilities, the applicable federal banking regulator must consider the anti-money laundering compliance record of both the applicant and the target. In addition, under the USA PATRIOT Act, financial institutions are required to take steps to monitor their correspondent banking and private banking relationships as well as, if applicable, their relationships with “shell banks.”
Office of Foreign Assets Control
The U.S. has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the U.S. Treasury's Office of Foreign Assets Control (“OFAC”), take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial or other transactions relating to a sanctioned country or with certain designated persons and entities; (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons); and (iii) restrictions on transactions with or involving certain persons or entities. Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for the Company. As of December 31, 2022, the Company did not have any transactions with sanctioned countries, nationals, and others.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Before deciding to invest in us or deciding to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occur, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose your investment.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
The possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position, and results of operations.
The economy in the United States and globally has experienced volatility in recent years and may continue to experience such volatility for the foreseeable future. There can be no assurance that economic conditions will not worsen. Unfavorable or uncertain economic conditions can be caused by declines in economic growth, business activity, or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of changing governmental policies, natural disasters, climate change, epidemics, the COVID-19 pandemic and future pandemics, terrorist attacks, acts of war, or a combination of these or other factors. A worsening of business and economic conditions could have adverse effects on our business, including the following:
•investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on our stock price and resulting market valuation;
•economic and market developments may further affect consumer and business confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates;
•our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite loans become less predictive of future behaviors;
•we could suffer decreases in demand for loans or other financial products and services or decreased deposits or other investments in accounts with us;
•competition in the financial services industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions or otherwise; and
•the value of loans and other assets or collateral securing loans may decrease.
Our business may be adversely affected by changes in economic conditions in our market area.
We primarily serve individuals and businesses located in the greater Boston metropolitan area, eastern Massachusetts, Rhode Island, New York, and New Jersey. Our success is largely dependent on local and regional economic conditions. Unlike other larger institutions, we are not able to spread the risks of unfavorable local economic conditions across a large number of diversified economies. An economic downturn could, therefore, result in losses that materially and adversely affect our business. Recessionary economic conditions, increased unemployment, inflation, a decline in real estate values or other factors beyond our control may adversely affect the ability of our borrowers to repay their loans, and could result in higher loan and lease losses and lower net income for us.
In addition, deterioration or defaults made by issuers of the underlying collateral of our investment securities may cause additional credit-related other-than-temporary impairment charges to our income statement. Our ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.
Changes to interest rates could adversely affect our results of operations and financial condition.
Our consolidated results of operations depend, on a large part, on net interest income, which is the difference between (i) interest income on interest-earning assets, such as loans, leases and securities, and (ii) interest expense on interest-bearing liabilities, such as deposits and borrowed funds. As a result, our earnings and growth are significantly affected by interest rates, which are subject to the influence of economic conditions generally, both domestic and foreign, to events in the capital markets and also to the monetary and fiscal policies of the United States and its agencies, particularly the FRB. The nature and timing of any changes in such policies or general economic conditions and their effect on us cannot be controlled and are extremely difficult to predict. An increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures
and charge-offs, but also necessitate further increases to our allowances for loan losses. A decrease in interest rates may trigger loan prepayments, which may serve to reduce net interest income if we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates.
Inflationary pressures and rising prices may affect our results of operations and financial condition.
Inflation rose sharply at the end of 2021 and throughout 2022. Inflationary pressures are currently expected to remain elevated throughout 2023. Small to medium-sized businesses may be impacted more during periods of high inflation as they are not able to leverage economics of scale to mitigate cost pressures compared to larger businesses. Consequently, the ability of our business customers to repay their loans may deteriorate, and in some cases this deterioration may occur quickly, which would adversely impact our results of operations and financial condition. Furthermore, a prolonged period of inflation could cause wages and other costs increase, which could adversely affect our results of operations and financial condition.
We face significant and increasing competition in the financial services industry.
We operate in a highly competitive environment that includes financial and non-financial services firms, including traditional banks, online banks, financial technology companies and others. These companies compete on the basis of, among other factors, size, quality and type of products and services offered, price, technology and reputation. Emerging technologies have the potential to intensify competition and accelerate disruption in the financial services industry. In recent years, non-financial services firms, such as financial technology companies, have begun to offer services traditionally provided by financial institutions. These firms attempt to use technology and mobile platforms to enhance the ability of companies and individuals to borrow money, save and invest. Our ability to compete successfully depends on a number of factors, including our ability to develop and execute strategic plans and initiatives; to develop competitive products and technologies; and to attract, retain and develop a highly skilled employee workforce. If we are not able to compete successfully, we could be placed at a competitive disadvantage, which could result in the loss of customers and market share, and our business, results of operations and financial condition could suffer.
Our business may be adversely affected if we fail to adapt our products and services to evolving industry standards and consumer preferences.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services. The widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as the introduction of new or modified products and services can entail significant time and resources. We might not be successful in developing or introducing new products and services, integrating new products or services into our existing offerings, responding or adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits, achieving market acceptance of our products and services, reducing costs in response to pressures to deliver products and services at lower prices or sufficiently developing and maintaining loyal customers.
Development of new products and services may impose additional costs on us and may expose us to increased operational risk.
The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from its clients, the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the preparation of marketing, sales and other materials that fully and accurately describe the product or service and its underlying risks. Our failure to manage these risks and uncertainties also exposes it to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to our clients. Products and services relying on internet and mobile technologies may expose us to fraud and cybersecurity risks. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business and reputation, as well as on its consolidated results of operations and financial condition.
If our allowance for credit losses is not sufficient to cover actual loan and lease losses, our earnings may decrease.
We periodically make a determination of an allowance for credit losses based on available information, including, but not limited to, the quality of the loan and lease portfolio as indicated by trends in loan risk ratings, payment performance, economic conditions, the value of the underlying collateral and the level of nonaccruing and criticized loans and leases. Management relies on its loan officers and credit quality reviews, its experience and its evaluation of economic conditions, among other
factors, in determining the amount of provision required for the allowance for credit losses. Provisions to this allowance result in an expense for the period. If, as a result of general economic conditions, previously incorrect assumptions, or an increase in defaulted loans or leases, we determine that additional increases in the allowance for credit losses are necessary, additional expenses may be incurred.
Determining the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and trends, all of which may undergo material changes. We cannot be sure that we will be able to identify deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans and leases that are identified. We have in the past been, and in the future may be, required to increase our allowance for credit losses for any of several reasons. State and federal regulators, in reviewing our loan and lease portfolio as part of a regulatory examination, may request that we increase the allowance for credit losses. Changes in economic conditions or individual business or personal circumstances affecting borrowers, new information regarding existing loans and leases, identification of additional problem loans and leases and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. Any increases in the allowance for credit losses may result in a decrease in our net income and, possibly, our capital, and could have an adverse effect on our financial condition and results of operations.
Our loan and lease portfolios include commercial real estate mortgage loans and commercial loans and leases, which are generally riskier than other types of loans.
Our commercial real estate and commercial loan and lease portfolios currently comprise 84.0% of total loans and leases. Commercial loans and leases generally carry larger balances and involve a higher risk of nonpayment or late payment than residential mortgage loans. Most of the commercial loans and leases are secured by borrower business assets such as accounts receivable, inventory, equipment and other fixed assets. Compared to real estate, these types of collateral are more difficult to monitor, harder to value, may depreciate more rapidly and may not be as readily saleable if repossessed. Repayment of commercial loans and leases is largely dependent on the business and financial condition of borrowers. Business cash flows are dependent on the demand for the products and services offered by the borrower's business. Such demand may be reduced when economic conditions are weak or when the products and services offered are viewed as less valuable than those offered by competitors. Because of the risks associated with commercial loans and leases, we may experience higher rates of default than if the portfolio were more heavily weighted toward residential mortgage loans. Higher rates of default could have an adverse effect on our financial condition and results of operations.
Environmental liability associated with our lending activities could result in losses.
In the course of business, we may acquire, through foreclosure, properties securing loans originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered on these properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our financial condition and results of operations.
Our securities portfolio performance in difficult market conditions could have adverse effects on our results of operations.
Unrealized losses on investment securities result from changes in credit spreads and liquidity issues in the marketplace, along with changes in the credit profile of individual securities issuers. Under GAAP, we are required to review our investment portfolio periodically for the presence of impairment of our securities, taking into consideration current and future market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts' evaluations, our ability and intent to hold investments until a recovery of fair value, as well as other factors. Adverse developments with respect to one or more of the foregoing factors may require us to deem particular securities to be impaired, with the credit-related portion of the reduction in the value recognized as a charge to our earnings through an allowance. Subsequent valuations, in light of factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require us to recognize further impairments in the value of our securities portfolio, which may have an adverse effect on our results of operations in future periods.
The fair value of our investment securities can fluctuate due to factors outside of our control.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions with respect to individual securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects. The process for determining whether impairment of a security is other than-temporary usually requires complex, subjective judgments about the
future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Significant negative changes to valuations could result in impairments in the value of our securities portfolio, which could have an adverse effect on our financial condition or results of operations.
Potential downgrades of U.S. government securities by one or more of the credit ratings agencies could have a material adverse effect on our operations, earnings and financial condition.
A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could impact our ability to obtain funding that is collateralized by affected instruments, as well as affect the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact on us. Among other things, a downgrade in the U.S. government’s credit rating could adversely impact the value of our securities portfolio and may trigger requirements that we post additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which we are subject and any related adverse effects on the business, financial condition and results of operations.
Uncertainty about the future of LIBOR may adversely affect our business.
LIBOR is used extensively in the United States as a benchmark for various commercial and financial contracts, including funding sources, adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which will stop reporting such information after June 30, 2023. Other benchmarks may perform differently than LIBOR or may have other consequences that cannot currently be anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which of those instruments may remain outstanding or be renegotiated if LIBOR ceases to exist. The transition from LIBOR to another benchmark rate or rates, such as the Secured Overnight Financing Rate, or "SOFR", could have adverse impacts on our funding costs or net interest margins, as well as any floating-rate obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and, ultimately, adversely affect our financial condition and results of operations.
We are subject to liquidity risk, which could negatively affect our funding levels.
Market conditions or other events could negatively affect our access to or the cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, or fund asset growth and new business initiatives at a reasonable cost, in a timely manner and without adverse consequences.
Although we maintain a liquid asset portfolio and have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a material adverse effect on us. If the cost effectiveness or the availability of supply in these credit markets is reduced for a prolonged period of time, our funding needs may require us to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, extending the maturity of wholesale borrowings, borrowing under certain secured borrowing arrangements, using relationships developed with a variety of fixed income investors, and further managing loan growth and investment opportunities. These alternative means of funding may result in an increase to the overall cost of funds and may not be available under stressed conditions, which would cause us to liquidate a portion of our liquid asset portfolio to meet any funding needs.
Loss of deposits or a change in deposit mix could increase our cost of funding.
Deposits are a low cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if clients shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest margin, net interest income and net income.
Wholesale funding sources may prove insufficient to replace deposits at maturity and support our operations and future growth.
We and our banking subsidiaries must maintain sufficient funds to respond to the needs of depositors and borrowers. To manage liquidity, we draw upon a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include Federal Home Loan Bank advances, proceeds from the sale of investments and loans, and liquidity resources at the holding company. Our ability to manage liquidity will be severely constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, operating margins and profitability would be adversely affected. Turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.
Potential deterioration in the performance or financial position of the FHLBB might restrict our funding needs and may adversely impact our financial condition and results of operations.
Significant components of our liquidity needs are met through our access to funding pursuant to our membership in the FHLBB. The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for joining the FHLBB is to obtain funding. The purchase of stock in the FHLBB is a requirement for a member to gain access to funding. Any deterioration in the FHLBB’s performance or financial condition may affect our ability to access funding and/or require us to deem the required investment in FHLBB stock to be impaired. If we are not able to access funding through the FHLBB, we may not be able to meet our liquidity needs, which could have an adverse effect on our results of operations or financial condition. Similarly, if we deem all or part of our investment in FHLBB stock impaired, such action could have an adverse effect on our financial condition or results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other institutions and organizations. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
Damage to our reputation could significantly harm our business, including our competitive position and business prospects.
We are dependent on our reputation within our market area, as a trusted and responsible financial services company, for all aspects of our business with customers, employees, vendors, third-party service providers, and others, with whom we conduct business or potential future businesses. Negative public opinion about the financial services industry generally (including the types of banking and other services that we provide) or us specifically could adversely affect our reputation and our ability to keep and attract customers and employees. Our actual or perceived failure to address various issues could give rise to negative public opinion and reputational risk that could cause harm to us and our business prospects. These issues include, but are not limited to, legal and regulatory requirements; properly maintaining customer and employee personal information; record keeping; money-laundering; sales and trading practices; ethical issues; appropriately addressing potential conflicts of interest; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions and legal risks, which could, among other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.
The proliferation of social media websites utilized by us and other third parties, as well as the personal use of social media by our employees and others, including personal blogs and social network profiles, also may increase the risk that negative, inappropriate or unauthorized information may be posted or released publicly that could harm our reputation or have other negative consequences, including as a result of our employees interacting with our customers in an unauthorized manner in various social media outlets. Any damage to our reputation could affect our ability to retain and develop the business relationships necessary to conduct business, which in turn could negatively impact our financial condition, results of operations, and the market price of our common stock.
We may be unable to attract and retain qualified key employees, which could adversely affect our business prospects, including our competitive position and results of operations.
Our success is dependent upon our ability to attract and retain highly skilled individuals. There is significant competition for those individuals with the experience and skills required to conduct many of our business activities. We may not be able to hire or retain the key personnel that we depend upon for success. The unexpected loss of services of one or more of these or other key personnel could have a material adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of industry experience and the difficulty of promptly finding qualified replacement personnel. Frequently, we compete in the market for talent with entities that are not subject to comprehensive regulation, including with respect to the structure of incentive compensation. Our inability to attract new employees and retain and motivate our existing employees could adversely impact our business.
Our ability to service our debt and pay dividends is dependent on capital distributions from our subsidiary banks, and these distributions are subject to regulatory limits and other restrictions.
We are a legal entity that is separate and distinct from the Banks. Our revenue (on a parent company only basis) is derived primarily from dividends paid to us by the Banks. Our right, and consequently the right of our shareholders, to participate in any distribution of the assets or earnings of the Banks through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Banks (including depositors), except to the extent that certain claims of ours in a creditor capacity may be recognized. It is possible, depending upon the financial condition of our subsidiary banks and other factors, that applicable regulatory authorities could assert that payment of dividends or other payments is an unsafe or unsound practice. If one or more of our subsidiary banks is unable to pay dividends to us, we may not be able to service our debt or pay dividends on our common stock. Further, as a result of the capital conservation buffer requirement of the Final Capital Rule, our ability to pay dividends on our common stock or service our debt could be restricted if we do not maintain a capital conservation buffer. A reduction or elimination of dividends could adversely affect the market price of our common stock and would adversely affect our business, financial condition, results of operations and prospects. See Item 1, “Business-Supervision and Regulation-Dividend Restrictions” and “Business-Supervision and Regulation-Capital Adequacy and Safety and Soundness-Regulatory Capital Requirements.”
We face continuing and growing security risks to our information base, including the information we maintain relating to our customers.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our business and to store sensitive data, including financial information regarding customers. Our electronic communications and information systems infrastructure, as well as the systems infrastructures of the vendors we use to meet our data processing and communication needs, could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions. Hacking and identity theft risks, in particular, could cause serious reputational harm. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. No matter how well designed or implemented our controls are, we will not be able to anticipate all security breaches of these types, and we may not be able to implement effective preventive measures against such security breaches in a timely manner. A failure or circumvention of our security systems could have a material adverse effect on our business operations and financial condition.
We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cyber-security and the continued enhancement of our controls and processes to protect our systems, data and networks from attacks, unauthorized access or significant damage remain a priority. Accordingly, we may be required to expend additional resources to enhance our protective measures or to investigate and remediate any information security vulnerabilities or exposures. Any breach of our system security could result in disruption of our operations, unauthorized access to confidential customer information, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or losses could exceed the amount of available insurance coverage, if any, and would adversely affect our earnings. Also, any failure to prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence, damaging our reputation and undermining our ability to attract and keep customers.
We may not be able to successfully implement future information technology system enhancements, which could adversely affect our business operations and profitability.
We invest significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. We may not be able to successfully implement and integrate future system enhancements, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in our stock, among others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact our financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
We rely on other companies to provide key components of our business infrastructure.
Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control them or their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third party vendors could also entail significant delay and expense.
We may incur significant losses as a result of ineffective risk management processes and strategies.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance, and legal reporting systems; internal controls; management review processes; and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes.
Our internal controls, procedures and policies may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
Natural disasters, acts of terrorism, pandemics and other external events could harm our business.
Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest or future pandemics could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.
Our financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.
Pursuant to U.S. GAAP, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining loan loss and litigation reserves, goodwill impairment and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material losses. See the "Critical Accounting Policies" section in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board, or "FASB", changes the financial accounting and reporting principles that govern the preparation of our financial statements. These changes can be hard to anticipate and implement, and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. Additionally, significant changes to accounting standards may require costly technology changes, additional training and personnel, and other expense that will negatively impact our results of operations.
As a result of the adoption of ASU 2016-13 effective January 1, 2020, we updated its critical accounting policy to the allowance for credit losses. The updates in this standard replace the incurred loss impairment methodology GAAP with the current expected credit losses, or "CECL" methodology. The CECL methodology incorporates current condition, and "reasonable and supportable" forecasts, as well as prepayments, to estimate loan losses over the life of the loan.
Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may adversely impact our financial statements.
From time to time, local, state or federal tax authorities change tax laws and regulations, which may result in a decrease or increase to our net deferred tax assets. Local, state or federal tax authorities may interpret tax laws and regulations differently than we do and challenge tax positions that we have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties that could have a material adverse effect on our results.
Future capital offerings may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources or, if our banking subsidiaries' capital ratios fall below required minimums, we could be forced to raise additional capital by making additional offerings of debt, common or preferred stock, trust preferred securities, and senior or subordinated notes. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Moreover, we cannot assure you that such capital will be available to us on acceptable terms or at all. Our inability to raise sufficient additional capital on acceptable terms when needed could adversely affect our businesses, financial condition and results of operations.
The market price and trading volume of our common stock may be volatile.
The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
•quarterly variations in our operating results or the quality of our assets;
•operating results that vary from the expectations of management, securities analysts and investors;
•changes in expectations as to our future financial performance;
•announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by us or our competitors;
•the operating and securities price performance of other companies that investors believe are comparable to us;
•our past and future dividend practices;
•future sales of our equity or equity-related securities; and
•changes in global financial markets and global economies and general market conditions, such as interest rates, stock, commodity or real estate valuations or volatility.
Anti-takeover provisions could negatively impact our stockholders.
Provisions of Delaware law and provisions of our certificate of incorporation and by-laws could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us, even if a merge might be in the best interest of our stockholders. Our articles of organization authorize our Board of Directors to issue preferred stock without stockholder approval and such preferred stock could be issued as a defensive measure in response to a takeover proposal. These and other provisions could make it more difficult for a third party to acquire us.
If we acquire or seek to acquire other companies, our business may be negatively impacted by certain risks inherent with such acquisitions.
We have acquired and will continue to consider the acquisition of other financial services companies. To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. Some of these risks include the following:
•We may incur substantial expenses in pursuing potential acquisitions;
•Management may divert its attention from other aspects of our business;
•We may assume potential and unknown liabilities of the acquired company as a result of an acquisition;
•The acquired business will not perform in accordance with management's expectations, including because we may lose key clients or employees of the acquired business as a result of the change in ownership;
•Difficulties may arise in connection with the integration of the operations of the acquired business with the operations of our businesses; and
•We may lose key employees of the combined business.
We may be unable to successfully integrate PCSB’s operations and may not realize the anticipated benefits of acquiring PCSB.
On January 1, 2023, we completed the acquisition of PCSB. The merger involves the integration of two companies that previously operated independently. The difficulties of combining the companies’ operations include:
• integrating personnel with diverse business backgrounds;
• integrating departments, systems, operating procedures and information technologies;
• combining different corporate cultures;
• retaining existing customers and attracting new customers; and
• retaining key employees.
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businesses and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have a material adverse effect on the business and results of operations of the combined company.
The success of the merger will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the business of PCSB with our business. If we are unable to successfully integrate PCSB, the anticipated benefits and cost savings of the merger may not be realized fully or may take longer to realize than expected. For example, we may fail to realize the anticipated increase in earnings and cost savings anticipated to be derived from the acquisition. In addition, as with regard to any merger, a significant change in interest rates or economic conditions or decline in asset valuations may also cause us not to realize expected benefits and result in the merger not being as accretive as expected.
We may be required to write down goodwill and other acquisition-related identifiable intangible assets.
When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired determines the amount of the purchase price that is allocated to goodwill acquired. As of December 31, 2022, goodwill and other identifiable intangible assets were $162.2 million. Under current accounting guidance, if we determine that goodwill or intangible assets are impaired, we would be required to write down the value of these assets. We conduct an annual review to determine whether goodwill and other identifiable intangible assets are impaired. We conduct a quarterly review for
indicators of impairment of goodwill and other identifiable intangible assets. Our management recently completed these reviews and concluded that no impairment charge was necessary for the year ended December 31, 2022. We cannot provide assurance whether we will be required to take an impairment charge in the future. Any impairment charge would have a negative effect on stockholders' equity and financial results and may cause a decline in our stock price.
Attractive acquisition opportunities may not be available to us in the future which could limit the growth of our business.
We may not be able to sustain a positive rate of growth or expand our business. We expect that other banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring other financial institutions if we pursue such acquisitions. This competition could increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate regulatory approvals for a transaction, we will not be able to consummate such transaction which we believe to be in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Other factors, such as economic conditions and legislative considerations, may also impede or prohibit our ability to expand our market presence. If we are not able to successfully grow our business, our financial condition and results of operations could be adversely affected.
RISKS RELATED TO OUR REGULATORY ENVIRONMENT
We operate in a highly regulated industry, and laws and regulations, or changes in them, could limit or restrict our activities and could have a material adverse effect on our operations.
We and our banking subsidiaries are subject to extensive state and federal regulation and supervision. Federal and state laws and regulations govern numerous matters affecting us, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The FRB and the state banking regulators have the power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we and our banking subsidiaries may conduct business and obtain financing.
The laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change. Such changes could, among other things, subject us to additional costs, including costs of compliance; limit the types of financial services and products we may offer; and/or increase the ability of non-banks to offer competing financial services and products. Failure to comply with laws, regulations, policies, or supervisory guidance could result in enforcement and other legal actions by federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on our business, financial condition, and results of operations. See the "Supervision and Regulation" section of Item 1, "Business."
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The CFPB, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA, the Equal Credit Opportunity Act, the Fair Housing Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
We may become subject to enforcements actions even though noncompliance was inadvertent or unintentional.
The financial services industry is subject to intense scrutiny from bank supervisors in the examination process and aggressive enforcement of federal and state regulations, particularly with respect to mortgage-related practices and other consumer compliance matters, and compliance with anti-money laundering, BSA and OFAC regulations, and economic sanctions against certain foreign countries and nationals. Enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations; however, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance. Failure to comply with these and other regulations, and supervisory expectations related thereto, may result in fines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictions on our business.
We face significant legal risks, both from regulatory investigations and proceedings and from private actions brought against us.
As a participant in the financial services industry, many aspects of our business involve substantial risk of legal liability. From time to time, customers and others make claims and take legal action pertaining to the performance of our responsibilities. Whether customer claims and legal action related to the performance of our responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant expenses, attention from management and financial liability. Any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. There is no assurance that litigation with private parties will not increase in the future. Actions currently pending against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us.
The FRB may require us to commit capital resources to support the Banks.
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the FRB may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may require the holding company to borrow the funds or raise capital. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by us to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.
We are subject to stringent capital requirements which may adversely impact return on equity, require additional capital raises, or limit the ability to pay dividends or repurchase shares.
Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%, which if complied will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount. The application of these capital requirements could, among other things, require us to maintain higher capital resulting in lower returns on equity, and we may be required to obtain additional capital to comply or result in regulatory actions if we are unable to comply with such requirements. See Item 1, “Business-Supervision and Regulation-Capital Adequacy and Safety and Soundness-Regulatory Capital Requirements.”

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company’s executive administration offices are located at 131 Clarendon Street, Boston, Massachusetts, which is owned by Brookline Bank, as well as its corporate operations center in Lincoln, Rhode Island, which is owned by BankRI, with other administrative and operations functions performed at several different locations. Clarendon Private conducts its business from a portion of the Company's executive administration offices which it leases.
Brookline Bank conducts its business from 29 banking offices, 6 of which are owned, 22 of which are leased, and one of which is subleased. Brookline Bank's main banking office is leased and located in Brookline, Massachusetts. Brookline Bank also has two additional lending offices and one remote ATM locations, all of which are leased. Eastern Funding conducts its business from leased premises in New York City, New York, in Melville, New York, and in Plainview, New York.
BankRI conducts its business from 20 banking offices, six of which are owned and 14 of which are leased. BankRI's main banking office is leased and located in Providence, Rhode Island. BankRI also has two remote ATM locations, all of which are leased.
Refer to Note 13, "Commitments and Contingencies," to the consolidated financial statements for information regarding the Company's lease commitments as of December 31, 2022.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
During the fiscal year ended December 31, 2022, the Company was not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Management believes that those routine legal proceedings involve, in the aggregate, amounts that are immaterial to the Company's financial condition and results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)The common stock of the Company is traded on NASDAQ under the symbol BRKL. The approximate number of registered holders of common stock as of February 27, 2023 was 2,768. The Company currently pays quarterly cash dividends in the amount of $0.135 per share. The Company expects comparable cash dividends will be paid in the future.
Equity Compensation Plan Information
Refer to Note 20, "Employee Benefit Plans" for a discussion of the Company's equity compensation plans.
Five-Year Performance Comparison
The following graph compares total shareholder return on the Company's common stock over the last five years with the S&P 500 Index, the Russell 2000 Index, the KBW Regional Banking Index and the SNL Index of Banks with assets between $5 billion and $10 billion1. Index values are as of December 31 of each of the indicated years.
1 During 2021, S&P Capital IQ discontinued publishing bank indexes by asset size. Brookline Bancorp chose the KBW Regional Banking Index as a replacement. The Company is a member of the KBW Regional Bank Index and believes it accurately reflects the stock performance of our industry.
At December 31,
Index 2017 2018 2019 2020 2021 2022
Brookline Bancorp, Inc. 100.00 90.14 110.50 84.36 117.03 105.98
Russell 2000 Index 100.00 88.99 111.70 133.97 153.77 122.23
KBW Regional Banking Index 100.00 82.51 102.20 93.33 127.42 118.57
SNL Bank $5B-$10B Index1
100.00 90.50 112.14 85.77 N/A N/A
S&P 500 Index 100.00 95.62 125.72 148.84 191.52 156.72
The graph assumes $100 invested on December 31, 2017 in each of the Company's common stock, the S&P 500 Index, the Russell 2000 Index, the KBW Regional Banking Index and the SNL Index of Banks with assets between $5 billion and $10 billion. The graph also assumes reinvestment of all dividends.
(b)Not applicable.
(c) Not applicable.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The Company, a Delaware corporation, operates as a multi-bank holding company for Brookline Bank and its subsidiaries; Bank Rhode Island and its subsidiaries ("BankRI"); PCSB Bank and its subsidiaries; Brookline Securities Corp; and Clarendon Private, LLC.
As a commercially-focused financial institution with 64 full-service banking offices throughout greater Boston, the north shore of Massachusetts, Rhode Island and New York, the Company, through the Banks, offers a wide range of commercial, business and retail banking services, including a full complement of cash management products, foreign exchange services, on-line and mobile banking services, consumer and residential loans and investment advisory services, designed to meet the financial needs of small- to mid-sized businesses and individuals throughout central New England and the lower Hudson Valley in New York. Brookline Bank, BankRI and their subsidiaries lend primarily in all New England states, with the exception of equipment financing, 26.5% of which is in the greater New York and New Jersey metropolitan area and 73.5% of which is in other areas in the United States of America as of December 31, 2022. Clarendon Private is a registered investment advisor with the SEC. Through Clarendon Private, the Company offers a wide range of wealth management services to individuals, families, endowments and foundations to help these clients meet their long-term financial goals.
The Company focuses its business efforts on profitably growing its commercial lending businesses, both organically and through acquisitions. The Company’s customer focus, multi-bank structure, and risk management are integral to its organic growth strategy and serve to differentiate the Company from its competitors. As full-service financial institutions, the Banks and their subsidiaries focus their efforts on developing and deepening long-term banking relationships with qualified customers through a full complement of products and excellent customer service, and strong risk management.
The Company manages the Banks under uniform strategic objectives, with one set of uniform policies consistently applied by one executive management team. Within this environment, the Company believes that the ability to make customer decisions locally enhances management's motivation, service levels and, as a consequence, the Company's financial results. As such, while most back-office functions are consolidated at the holding company level, branding and decision-making, including credit decisions and pricing, remain largely local in order to better meet the needs of bank customers and further motivate the Banks’ commercial, business and retail bankers. These credit decisions, at the local level, are executed through corporate policies overseen by the Company's credit department.
The competition for loans and leases and deposits remains intense. The Company expects the operating environment to remain challenging. The volume of loan and lease originations and loan and lease losses will depend, to a large extent, on how the economy performs. Loan and lease growth and deposit growth are also greatly influenced by the rate-setting actions of the FRB. A sustained, low interest rate environment with a flat interest rate curve may negatively impact the Company's yields and net interest margin. While the Company is slightly asset sensitive and should benefit from rising rates, changes in interest rates could also precipitate a change in the mix and volume of the Company's deposits and loans. The future operating results of the Company will depend on its ability to maintain or increase the current net interest margin, while minimizing exposure to credit risk, along with increasing sources of non-interest income, while controlling the growth of non-interest expenses.
The Company’s common stock is traded on the Nasdaq Global Select MarketSM under the symbol “BRKL.”
Selected Financial Data
The selected financial and other data of the Company set forth below are derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere herein.
At or for the year ended December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands, Except Per Share Data)
FINANCIAL CONDITION DATA
Total assets $ 9,185,836 $ 8,602,622 $ 8,942,424 $ 7,856,853 $ 7,392,805
Total loans and leases 7,644,388 7,154,457 7,269,553 6,737,816 6,303,516
Allowance for loan and lease losses (6)
98,482 99,084 114,379 61,082 58,692
Investment securities available-for-sale 656,766 720,866 745,822 498,995 502,793
Investment securities held-to-maturity - - - 86,780 114,776
Equity securities held-for-trading - - 526 3,581 4,207
Goodwill and identified intangible assets 162,208 162,703 163,579 164,850 166,513
Total deposits 6,522,146 7,049,906 6,910,696 5,830,072 5,454,044
Core deposits (1)
5,283,859 5,766,669 4,826,789 3,808,430 3,664,879
Certificates of deposit 928,143 1,117,695 1,389,998 1,671,738 1,438,478
Brokered deposits 310,144 165,542 693,909 349,904 350,687
Total borrowed funds 1,432,652 357,321 820,247 902,749 920,542
Stockholders' equity 992,125 995,342 941,778 945,606 900,140
Tangible stockholders' equity (*) 829,917 832,639 778,199 780,756 733,627
Nonperforming loans and leases (2)
14,894 32,459 38,448 19,461 24,097
Nonperforming assets (3)
15,302 33,177 44,963 22,092 28,116
EARNINGS DATA
Interest and dividend income $ 345,186 $ 311,529 $ 326,817 $ 347,626 $ 313,893
Interest expense 45,415 29,156 66,654 94,326 66,194
Net interest income 299,771 282,373 260,163 253,300 247,699
Provision (credit) for credit losses 8,627 (7,837) 61,886 9,583 4,951
Non-interest income 28,347 26,989 24,644 29,793 25,224
Non-interest expense 179,542 162,608 160,844 157,481 155,232
Provision for income taxes 30,205 39,151 14,442 28,269 26,189
Net income 109,744 115,440 47,635 87,717 83,062
Operating earnings (*) 111,255 115,468 46,124 88,184 85,796
PER COMMON SHARE DATA
Earnings per share - Basic $ 1.42 $ 1.48 $ 0.60 $ 1.10 $ 1.04
Earnings per share - Diluted 1.42 1.48 0.60 1.10 1.04
Operating earnings per share (*) 1.44 1.48 0.58 1.10 1.07
Dividends paid per common share 0.520 0.480 0.460 0.440 0.395
Book value per share (end of period) 12.91 12.82 12.05 11.87 11.30
Tangible book value per share (*) 10.80 10.73 9.96 9.80 9.21
Stock price (end of period) 14.15 16.19 12.04 16.46 13.82
PERFORMANCE RATIOS
Net interest margin 3.67 % 3.49 % 3.17 % 3.51 % 3.61 %
Return on average assets 1.27 % 1.36 % 0.55 % 1.15 % 1.15 %
Operating return on average assets (*) 1.29 % 1.36 % 0.53 % 1.15 % 1.19 %
Return on average tangible assets (*) 1.30 % 1.38 % 0.56 % 1.17 % 1.18 %
At or for the year ended December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands, Except Per Share Data)
Operating return on average tangible assets (*) 1.32 % 1.38 % 0.54 % 1.17 % 1.22 %
Return on average stockholders' equity 11.15 % 11.93 % 5.09 % 9.56 % 9.51 %
Operating return on average stockholders' equity (*) 11.30 % 11.93 % 4.93 % 9.61 % 9.82 %
Return on average tangible stockholders' equity (*) 13.35 % 14.35 % 6.17 % 11.67 % 11.70 %
Operating return on average tangible stockholders' equity (*) 13.53 % 14.35 % 5.97 % 11.73 % 12.09 %
Dividend payout ratio (*) 36.52 % 32.45 % 76.41 % 40.03 % 37.85 %
Efficiency ratio (4)
54.72 % 52.56 % 56.47 % 55.63 % 56.88 %
GROWTH RATIOS
Total loan and lease growth (5)
6.85 % (1.58) % 7.89 % 6.89 % 10.00 %
Total deposit growth (5)
(7.49) % 2.01 % 18.54 % 6.89 % 11.96 %
ASSET QUALITY RATIOS
Net loan and lease charge-offs as a percentage of average loans and leases 0.05 % 0.08 % 0.18 % 0.11 % 0.08 %
Nonperforming loans and lease losses as a percentage of total loans and leases 0.19 % 0.45 % 0.53 % 0.29 % 0.38 %
Nonperforming assets as a percentage of total assets 0.17 % 0.39 % 0.50 % 0.28 % 0.38 %
Total allowance for loan and leases losses as a percentage of total loans and leases 1.29 % 1.38 % 1.57 % 0.91 % 0.93 %
CAPITAL RATIOS
Stockholders' equity to total assets 10.80 % 11.57 % 10.53 % 12.04 % 12.18 %
Tangible equity ratio (*) 9.20 % 9.87 % 8.86 % 10.15 % 10.15 %
Tier 1 leverage capital ratio 10.26 % 10.15 % 8.92 % 10.28 % 10.58 %
Common equity Tier 1 capital ratio (**) 12.05 % 11.86 % 11.04 % 11.44 % 11.94 %
Tier 1 risk-based capital ratio 12.18 % 11.99 % 11.18 % 11.58 % 12.26 %
Total risk-based capital ratio 14.44 % 14.30 % 13.51 % 13.59 % 14.42 %
_______________________________________________________________________________
(1) Core deposits consist of demand checking, NOW, money market and savings accounts.
(2) Nonperforming loans and leases consist of nonaccrual loans and leases.
(3) Nonperforming assets consist of nonperforming loans and leases, other real estate owned and other repossessed assets.
(4) The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income for the period.
(5) Total growth is calculated by dividing the change in the balance during the period by the balance at the beginning of the period.
(6) The allowance for loan and lease losses for the years ending after December 31, 2019 reflect the adoption of CECL.
(*) Refer to Non-GAAP Financial Measures and Reconciliation to GAAP.
(**) Common equity tier 1 capital ratio is calculated by dividing common equity Tier 1 capital by risk-weighted assets. The ratio was established as part of the implementation of Basel III, effective January 1, 2015.
Executive Overview
Balance Sheet
Total assets increased $583.2 million, or 6.8%, to $9.2 billion as of December 31, 2022 from $8.6 billion as of December 31, 2021. The increase was primarily driven by increases in loans and leases, cash and cash equivalents, other assets, and restricted equity investments, partially offset by a decrease in investment securities.
Cash and cash equivalents increased $55.2 million, or 16.8%, to $383.0 million as of December 31, 2022 from $327.7 million as of December 31, 2021.
Total loans and leases increased $489.9 million, or 6.8%, to $7.6 billion as of December 31, 2022 from $7.2 billion as of December 31, 2021. The Company's commercial loan portfolios, which are comprised of commercial real estate loans and
commercial loans and leases, totaled $6.4 billion, or 84.0% of total loans and leases as of December 31, 2022, an increase of $430.5 million, or 7.2%, from $6.0 billion, or 83.7% of total loans and leases, as of December 31, 2021.
PPP loans decreased $67.4 million, or 99.6%, to $0.3 million as of December 31, 2022 from $67.7 million as of December 31, 2021.
Total deposits decreased $527.8 million, or 7.5%, to $6.5 billion as of December 31, 2022 from $7.0 billion as of December 31, 2021. Core deposits, which include demand checking, NOW, money market and savings accounts, totaled $5.3 billion, or 81.0% of total deposits as of December 31, 2022, a decrease of $482.8 million, or 8.4%, from $5.8 billion, or 81.8% of total deposits as of December 31, 2021. Certificate of deposit balances totaled $0.9 billion, or 14.2% of total deposits as of December 31, 2022, a decrease of $189.6 million, or 17.0% from $1.1 billion, or 15.9% of total deposits, as of December 31, 2021. Brokered deposit balances totaled $0.3 billion, or 4.8% of total deposits as of December 31, 2022, an increase of $144.6 million, or 87.4% from $0.2 billion, or 2.3% of total deposits, as of December 31, 2021.
Total borrowed funds increased $1.1 billion, or 300.9%, to $1.4 billion as of December 31, 2022 from $357.3 million as of December 31, 2021.
Asset Quality
Nonperforming assets as of December 31, 2022 totaled $15.3 million, or 0.17% of total assets, compared to $33.2 million, or 0.39% of total assets, as of December 31, 2021. Net charge-offs for the year ended December 31, 2022 were $3.3 million, or 0.05% of average loans and leases, compared to $5.7 million, or 0.08% of average loans and leases, for the year ended December 31, 2021. The decrease of $17.9 million in nonperforming assets was primarily driven by the payoffs of seven commercial real estate relationships of $10.6 million, several equipment financing relationships of $8.2 million, several commercial relationships of $1.7 million, and eight residential relationships of $1.5 million, along with several equipment financing relationships worth $4.7 million returning to accrual during the year ended December 31, 2022.
The ratio of the allowance for loan and lease losses to total loans and leases was 1.29% as of December 31, 2022, compared to 1.38% as of December 31, 2021.
The ratio of the allowance for loan and lease losses to nonaccrual loans and leases was 661.22% as of December 31, 2022, compared to 305.26% as of December 31, 2021.
Capital Strength
The Company is a "well-capitalized" bank holding company as defined in the FRB's Regulation Y. The Company's common equity Tier 1 capital ratio was 12.05% as of December 31, 2022, compared to 11.86% as of December 31, 2021. The Company's Tier 1 leverage ratio was 10.26% as of December 31, 2022, compared to 10.15% as of December 31, 2021. As of December 31, 2022, the Company's Tier 1 risk-based ratio was 12.18%, compared to 11.99% as of December 31, 2021. The Company's Total risk-based ratio was 14.44% as of December 31, 2022, compared to 14.30% as of December 31, 2021.
The Company's ratio of stockholders' equity to total assets was 10.80% and 11.57% as of December 31, 2022 and December 31, 2021, respectively. The Company's tangible equity ratio was 9.20% and 9.87% as of December 31, 2022 and December 31, 2021, respectively.
Net Income
For the year ended December 31, 2022, the Company reported net income of $109.7 million, or $1.42 per basic and diluted share, a decrease of $5.7 million, or 4.9%, from $115.4 million, or $1.48 per basic and diluted share for the year ended December 31, 2021. The decrease in net income is primarily the result of an increase in non-interest expense of $16.9 million and an increase in the provision for credit losses of $16.5 million, partially offset by an increase in net interest income of $17.4 million, a decrease in the provision for income taxes of $8.9 million, and an increase in non-interest income of $1.4 million.
The return on average assets was 1.27% for the year ended December 31, 2022, compared to 1.36% for the year ended December 31, 2021. The return on average stockholders' equity was 11.15% for the year ended December 31, 2022, compared to 11.93% for the year ended December 31, 2021.
The net interest margin was 3.67% for the year ended December 31, 2022, up from 3.49% for the year ended December 31, 2021. The increase in the net interest margin is a result of an increase in the yield on interest-earning assets of 37 basis points to 4.22% in 2022 from 3.85% in 2021, partially offset by an increase of 21 basis points in the Company's overall cost of funds (including non-interest-bearing demand checking accounts) to 0.61% in 2022 from 0.40% in 2021.
Results for 2022 included a provision for credit losses of $8.6 million, as discussed in the "Allowance for Credit Losses-Allowance for Loan and Lease Losses" section below.
Non-interest income increased $1.4 million to $28.3 million for the year ended December 31, 2022 from $27.0 million for the year ended December 31, 2021. Several factors contributed to the year over year increase, including increases of $0.6 million in other non-interest income, $0.4 million in gain on sales of loans and leases, $0.4 million in gain on sales of investment securities, net, $0.3 million in deposit fees, and $0.1 million in loan fees, partially offset by a decrease of $0.4 million in loan level derivative income, net.
Non-interest expense increased $16.9 million to $179.5 million for the year ended December 31, 2022 from $162.6 million for the year ended December 31, 2021. The increase was largely attributable to increases of $6.7 million in compensation and employee benefits expense, $3.4 million in other non-interest expense, $2.5 million in equipment and data processing expense, $2.2 million in merger and acquisition expense, $1.0 million in occupancy expense, $0.8 million in advertising and marketing expense, $0.4 million in professional services expense, and $0.2 million in FDIC insurance expense, partially offset by a decrease of $0.4 million in amortization of identified intangible assets.
Critical Accounting Policies and Estimates
The accounting policies described below are considered critical to understanding the Company's financial condition and operating results. Such accounting policies are considered to be especially important because they involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about matters that are inherently uncertain. The use of different judgments, assumptions and estimates could result in material differences in the Company's operating results or financial condition.
Allowance for Credit Losses
Description. The allowance for credit losses represents management's estimate of expected losses over the life of the loan and lease portfolio. The allowance for credit losses consists of the allowance for loan and lease losses and reserve for unfunded commitments, which are classified as a contra-asset and liability within other liabilities, respectively, on the Consolidated Balance Sheets. Additions to the allowance for credit losses are made by charges to the provision for credit losses. Losses on loans and leases are deducted from the allowance when all or a portion of a loan or lease is considered uncollectible. The determination of the loans on which full collectability is not reasonably assured, the estimates of the fair value of the underlying collateral, and the assessment of economic and other conditions are subject to assumptions and judgments by management. Valuation allowances could differ materially as a result of changes in, or different interpretations of, these assumptions and judgments.
Management evaluates the adequacy of the allowance on a quarterly basis and reviews its conclusion as to the amount to be established with the Audit Committee and the Board of Directors.
As a result of the adoption of ASU 2016-13 effective January 1, 2020, the Company updated its critical accounting policy for the allowance for credit losses. The updates in this standard replace the incurred loss impairment GAAP methodology with the CECL methodology. The CECL methodology incorporates current condition, and "reasonable and supportable" forecasts, as well as prepayments, to estimate credit losses over the life of the loan.
Judgments and Uncertainties. In estimating the allowance for credit losses, the Company relies on models and economic forecasts developed by external parties as the primary driver of the allowance for credit losses. These models and forecasts are based on nationwide sets of data. As a result, the Company has calibrated the output of these models to match the performance of a relevant set of peer institutions during the development dataset in order to make the results more relevant to the Company. Additionally, economic forecasts can change significantly over an economic cycle and have a significant level of uncertainty associated with them. The performance of the models is dependent on the variables used in the models being reasonable proxies for the portfolio’s performance; however, these variables may not capture all sources of risk within the portfolio. As a result, management reviews the results and makes qualitative adjustments to the models to capture limitations of the models as necessary. Such qualitative factors may include adjustments to better capture the risk of specialty lending portfolios, the imprecision associated with the economic forecasts, and the ability of the models to capture emerging risks within the portfolio that may not be represented in the historical dataset. These judgments are thoroughly evaluated through management’s review process, and revised on a quarterly basis to account for changes in the facts and circumstances of the portfolio.
Effect if Actual Results Differ From Assumptions. The allowance for credit losses is a reflection of the Company’s best estimate of loss based on a forecast of future conditions as of a point in time. Conditions in the future may vary from those forecasts, causing realized losses to be either higher or lower than forecasted, which will result in either additional provisions from income or a benefit to income based on the performance of the portfolio.
Impairment of Goodwill
Description. Goodwill is presumed to have an indefinite useful life and is tested at least annually for impairment. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. If fair value exceeds the carrying amount at the time of testing, goodwill is not considered impaired. Quoted market prices in active markets are the best evidence of fair value and are considered to be used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. Differences in valuation techniques could result in materially different evaluations of impairment. In September 2011, the FASB issued Accounting Standards Update ("ASU") 2011-08 which provides guidance for companies when testing goodwill for impairment. The objective of the ASU is to simplify how entities test goodwill for impairment. Pursuant to the ASU, entities may now assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the one-step goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50%.
To determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity should consider the extent to which each of the adverse events or circumstances identified could affect the comparison of a reporting unit's fair value with its carrying amount.
Pursuant to the ASU, an entity should place more weight on the events and circumstances that have the greatest impact on a reporting unit's fair value or the carrying amount of its net assets; and may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
In accordance with ASC 350-20-35-3B, an entity can bypass the qualitative assessment and perform the quantitative impairment test. Given the current economic environment, a quantitative analysis was performed where management selected a sample of comparable acquisitions and calculated the control premium associated with each sale. The Company’s market capitalization times the sampled control premium allowed management to compare the calculated market capitalization to the Company’s current book value to determine if an adjustment to goodwill is warranted. The Company did not have any impairment of Goodwill and other identified intangible assets as of December 31, 2022. Further analysis of the Company’s goodwill can be found in Note 9 “Goodwill and Other Intangible Assets” within the notes to the consolidated financial statements.
Judgments and Uncertainties. The determination of fair value is based on valuations using management’s assumptions of comparable transactions including announcement or completion date, industry, asset size, region, or other relevant factors.
Effect if Actual Results Differ From Assumptions. Changes in these quantitative factors, as well as downturns in economic or business conditions, could have a significant adverse impact on the fair value of the reporting unit in relation to the carrying value of goodwill and could result in an impairment loss affecting our consolidated financial statements as a whole.
Recent Accounting Developments
In March 2020, the FASB issued ASU 2020-04, " Reference Rate Reform (Topic 848)-Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04") to provide optional expedients and exceptions for applying GAAP to certain contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients provided that those elections are retained through the end of the hedging relationship. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022 and do not apply to contract modifications made after December 31, 2022.
In January 2021, FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)" an update to address concerns around structural risk of interbank offered rates ("IBORs"), particularly, the risk of cessation of the LIBOR. The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. In December 2022, FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848)" which deferred the sunset date of Topic 848 to December 31, 2024, to allow for a transition period after the sunset of LIBOR. The Company has adopted the amendments in these updates and established a LIBOR transition committee to guide the Company’s transition from LIBOR. The Company has completed much of the work to transition off the LIBOR index consistent with industry timelines. The working group has identified its products that utilize LIBOR and has implemented fallback language to facilitate the transition to alternative rates. The Company has also evaluated its infrastructure and identified fallback rates as well as started offering alternative indices and new products tied to these alternative indices. The Company does not anticipate the adoption of these standards to have a material impact to the consolidated financial statements.
In August 2021, the FASB issued ASU 2021-06, "Presentation of Financial Statements (Topic 205), Financial Services - Depository and Lending (Topic 942), and Financial Services - Investment Companies (Topic 946)" which updated guidance to align with new SEC regulations with regards to statistical disclosures for banking and savings and loan institutions. This ASU is effective for fiscal years ending on or after December 15, 2021. The Company has adopted ASU 2021-06 as of December 31, 2021. The adoption did not have a material impact on the Company’s consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures" which addresses concerns regarding the complex accounting for loans modified as troubled debt restructurings (“TDR”s) and also the disclosure of gross writeoff information included in required vintage disclosures. Management has determined that ASU 2022-02 does apply to the Company. The adoption is not expected to have a material impact on the Company’s consolidated financial statements.
See Note 1, “Basis of Presentation” in the notes to the consolidated financial statements for additional information regarding recent accounting developments.
Non-GAAP Financial Measures and Reconciliation to GAAP
In addition to evaluating the Company’s results of operations in accordance with GAAP, management periodically supplements this evaluation with an analysis of certain non-GAAP financial measures, such as the operating earnings metrics, the return on average tangible assets, return on average tangible equity, the tangible stockholders' equity, tangible equity ratio, tangible book value per share and dividend payout ratio. Management believes that these non-GAAP financial measures provide information useful to investors in understanding the Company’s underlying operating performance and trends, and facilitates comparisons with the performance assessment of financial performance, including non-interest expense control, while the tangible equity ratio and tangible book value per share are used to analyze the relative strength of the Company’s capital position.
The methodologies used by the Company for determining the non-GAAP financial measures discussed above may differ from those used by other financial institutions.
Operating Earnings
Operating earnings exclude the after-tax impact of securities gains and merger and acquisition expense. By excluding such items, the Company's results can be measured and assessed on a more consistent basis from period to period. Items excluded from operating earnings are also excluded when calculating the operating return and operating efficiency ratios.
The following table summarizes the Company's operating earnings and operating earnings per share ("EPS") for the periods indicated:
Year Ended December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands, Except Per Share Data)
Net income, as reported $ 109,744 $ 115,440 $ 47,635 $ 87,717 $ 83,062
Less:
Security (losses) gains (after-tax) 252 (28) 1,511 384 174
Add:
Merger and acquisition expense (after-tax) (1)
1,763 - - 851 2,908
Operating earnings $ 111,255 $ 115,468 $ 46,124 $ 88,184 $ 85,796
Earnings per share, as reported $ 1.42 $ 1.48 $ 0.60 $ 1.10 $ 1.04
Less:
Security gains (after-tax) - - 0.02 - -
Add:
Merger and acquisition expense (after-tax) (1)
0.02 - - - 0.03
Operating earnings per share $ 1.44 $ 1.48 $ 0.58 $ 1.10 $ 1.07
_________________________________________________________________________
(1) Merger and acquisition expense related to the acquisition of First Commons Bank in the first quarter of 2018, the purchase of the remaining minority interest of Eastern Funding in the first quarter of 2019, and the acquisition of PCSB in the first quarter of 2023.
The following table summarizes the Company's operating return on average assets, operating return on average tangible assets, operating return on average stockholders' equity and operating return on average tangible stockholders' equity for the periods indicated:
Year Ended December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands)
Operating earnings $ 111,255 $ 115,468 $ 46,124 $ 88,184 $ 85,796
Average total assets $ 8,623,403 $ 8,518,200 $ 8,683,569 $ 7,654,634 $ 7,223,081
Less: Average goodwill and average identified intangible assets, net 162,447 163,122 164,227 165,697 163,712
Average tangible assets $ 8,460,956 $ 8,355,078 $ 8,519,342 $ 7,488,937 $ 7,059,369
Return on average assets 1.27 % 1.36 % 0.55 % 1.15 % 1.15 %
Less:
Security gains (after-tax) - % - % 0.02 % 0.01 % - %
Add:
Merger and acquisition expense (after-tax) 0.02 % - % - % 0.01 % 0.04 %
Operating return on average assets 1.29 % 1.36 % 0.53 % 1.15 % 1.19 %
Return on average tangible assets 1.30 % 1.38 % 0.56 % 1.17 % 1.18 %
Less:
Security gains (after-tax) - % - % 0.02 % 0.01 % - %
Add:
Merger and acquisition expense (after-tax) 0.02 % - % - % 0.01 % 0.04 %
Operating return on average tangible assets 1.32 % 1.38 % 0.54 % 1.17 % 1.22 %
Average total stockholders' equity $ 984,237 $ 967,538 $ 936,075 $ 917,286 $ 873,388
Less: Average goodwill and average identified intangible assets, net 162,447 163,122 164,227 165,697 163,712
Average tangible stockholders' equity $ 821,790 $ 804,416 $ 771,848 $ 751,589 $ 709,676
Return on average stockholders' equity 11.15 % 11.93 % 5.09 % 9.56 % 9.51 %
Less:
Security gains (after-tax) 0.03 % - % 0.16 % 0.04 % 0.02 %
Add:
Merger and acquisition expense (after-tax) 0.18 % - % - % 0.09 % 0.33 %
Operating return on average stockholders' equity 11.30 % 11.93 % 4.93 % 9.61 % 9.82 %
Return on average tangible stockholders' equity 13.35 % 14.35 % 6.17 % 11.67 % 11.70 %
Less:
Security gains (after-tax) 0.03 % - % 0.20 % 0.05 % 0.02 %
Add:
Merger and acquisition expense (after-tax) 0.21 % - % - % 0.11 % 0.41 %
Operating return on average tangible stockholders' equity 13.53 % 14.35 % 5.97 % 11.73 % 12.09 %
The following table summarizes the Company’s return on average tangible assets and return on average tangible stockholders’ equity for the periods indicated:
Year Ended December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands)
Net income, as reported $ 109,744 $ 115,440 $ 47,635 $ 87,717 $ 83,062
Average total assets $ 8,623,403 $ 8,518,200 $ 8,683,569 $ 7,654,634 $ 7,223,081
Less: Average goodwill and average identified intangible assets, net 162,447 163,122 164,227 165,697 163,712
Average tangible assets $ 8,460,956 $ 8,355,078 $ 8,519,342 $ 7,488,937 $ 7,059,369
Return on average tangible assets 1.30 % 1.38 % 0.56 % 1.17 % 1.18 %
Average total stockholders' equity $ 984,237 $ 967,538 $ 936,075 $ 917,286 $ 873,388
Less: Average goodwill and average identified intangible assets, net 162,447 163,122 164,227 165,697 163,712
Average tangible stockholders' equity $ 821,790 $ 804,416 $ 771,848 $ 751,589 $ 709,676
Return on average tangible stockholders' equity 13.35 % 14.35 % 6.17 % 11.67 % 11.70 %
The following table summarizes the Company's tangible equity ratio for the periods indicated:
At December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands)
Total stockholders' equity $ 992,125 $ 995,342 $ 941,778 $ 945,606 $ 900,140
Less: Goodwill and identified intangible assets, net 162,208 162,703 163,579 164,850 166,513
Tangible stockholders' equity $ 829,917 $ 832,639 $ 778,199 $ 780,756 $ 733,627
Total assets $ 9,185,836 $ 8,602,622 $ 8,942,424 $ 7,856,853 $ 7,392,805
Less: Goodwill and identified intangible assets, net 162,208 162,703 163,579 164,850 166,513
Tangible assets $ 9,023,628 $ 8,439,919 $ 8,778,845 $ 7,692,003 $ 7,226,292
Tangible equity ratio 9.20 % 9.87 % 8.86 % 10.15 % 10.15 %
The following table summarizes the Company's tangible book value per share for the periods indicated:
Year Ended December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands)
Tangible stockholders' equity $ 829,917 $ 832,639 $ 778,199 $ 780,756 $ 733,627
Common shares issued 85,177,172 85,177,172 85,177,172 85,177,172 85,177,172
Less:
Treasury shares 7,731,445 7,037,464 6,525,783 5,003,127 5,020,025
Unallocated ESOP - 24,660 51,114 79,548 109,950
Unvested restricted stock 601,495 500,098 458,800 406,450 390,636
Common shares outstanding 76,844,232 77,614,950 78,141,475 79,688,047 79,656,561
Tangible book value per share $ 10.80 $ 10.73 $ 9.96 $ 9.80 $ 9.21
The following table summarizes the Company's dividend payout ratio for the periods indicated:
Year Ended December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands)
Dividends paid $ 40,077 $ 37,463 $ 36,396 $ 35,110 $ 31,441
Net income, as reported $ 109,744 $ 115,440 $ 47,635 $ 87,717 $ 83,062
Dividend payout ratio 36.52 % 32.45 % 76.41 % 40.03 % 37.85 %
Financial Condition
Loans and Leases
The following table summarizes the Company's portfolio of loan and lease receivables as of the dates indicated:
At December 31,
2022 2021 2020 2019 2018
Balance Percent
of Total Balance Percent
of Total Balance Percent
of Total Balance Percent
of Total Balance Percent
of Total
(Dollars in Thousands)
Commercial real estate loans:
Commercial real estate $ 3,046,746 39.9 % $ 2,842,791 39.6 % $ 2,578,773 35.4 % $ 2,491,011 37.0 % $ 2,330,725 37.0 %
Multi-family mortgage 1,150,597 15.1 % 1,099,818 15.4 % 1,013,432 13.9 % 932,163 13.8 % 847,711 13.4 %
Construction 206,805 2.7 % 160,431 2.2 % 231,621 3.2 % 246,048 3.7 % 173,300 2.7 %
Total commercial real estate loans 4,404,148 57.7 % 4,103,040 57.2 % 3,823,826 52.5 % 3,669,222 54.5 % 3,351,736 53.1 %
Commercial loans and leases:
Commercial 752,691 9.9 % 666,677 10.3 % 642,452 15.6 % 729,502 10.8 % 736,418 11.7 %
Equipment financing 1,216,585 15.9 % 1,105,611 15.5 % 1,092,461 15.0 % 1,052,408 15.6 % 982,089 15.6 %
Condominium association 46,966 0.6 % 47,137 0.7 % 50,770 0.7 % 56,838 0.8 % 50,451 0.8 %
PPP 257 - % 67,711 0.9 % 489,216 6.7 % - - % - - %
Total commercial loans and leases 2,016,499 26.4 % 1,887,136 26.5 % 2,274,899 31.3 % 1,838,748 27.2 % 1,768,958 28.1 %
Consumer loans:
Residential mortgage 844,614 11.0 % 799,737 11.2 % 791,317 10.9 % 814,245 12.1 % 782,968 12.4 %
Home equity 322,622 4.2 % 324,156 4.5 % 346,652 4.8 % 376,819 5.6 % 376,484 6.0 %
Other consumer 56,505 0.7 % 40,388 0.6 % 32,859 0.5 % 38,782 0.6 % 23,370 0.4 %
Total consumer loans 1,223,741 15.9 % 1,164,281 16.3 % 1,170,828 16.2 % 1,229,846 18.3 % 1,182,822 18.8 %
Total loans and leases 7,644,388 100.0 % 7,154,457 100.0 % 7,269,553 100.0 % 6,737,816 100.0 % 6,303,516 100.0 %
Allowance for loan and lease losses (98,482) (99,084) (114,379) (61,082) (58,692)
Net loans and leases $ 7,545,906 $ 7,055,373 $ 7,155,174 $ 6,676,734 $ 6,244,824
PPP loans are fully guaranteed by the SBA and therefore, have not been reserved for in the allowance for credit losses as of December 31, 2022, 2021 and 2020.
The following table sets forth the growth in the Company’s loan and lease portfolios during the year ending December 31, 2022:
At December 31,
2022 At December 31,
2021 Dollar Change Percent Change
(Annualized)
(Dollars in Thousands)
Commercial real estate $ 4,404,148 $ 4,103,040 $ 301,108 7.3 %
Commercial 2,016,499 1,887,136 129,363 6.9 %
Consumer 1,223,741 1,164,281 59,460 5.1 %
Total loans and leases $ 7,644,388 $ 7,154,457 $ 489,931 6.8 %
Less: PPP (257) (67,711) (67,454) -99.6 %
Total core loans and leases $ 7,644,131 $ 7,086,746 $ 557,385 7.9 %
The following table presents the maturity distribution of the Company's loan portfolio as of December 31, 2022.
At December 31, 2022
1 Year or Less After 1-5 Years After 5-15 Years After 15 Years Total
(Dollars in Thousands)
Commercial real estate $ 1,745,627 $ 1,637,508 $ 1,012,262 $ 8,751 $ 4,404,148
Commercial 307,498 1,245,058 395,193 68,750 2,016,499
Consumer 263,219 204,157 167,665 588,700 1,223,741
Total $ 2,316,344 $ 3,086,723 $ 1,575,120 $ 666,201 $ 7,644,388
The following table presents the distribution of the Company's loans that were due after one year between fixed and variable interest rates as of December 31, 2022.
At December 31, 2022
Fixed Variable Total
(Dollars in Thousands)
Commercial real estate $ 1,311,558 $ 1,346,963 $ 2,658,521
Commercial 992,685 716,315 1,709,000
Consumer 496,142 464,382 960,524
Total $ 2,800,385 $ 2,527,660 $ 5,328,045
The Company's loan portfolio consists primarily of first mortgage loans secured by commercial, multi-family and residential real estate properties located in the Company's primary lending area, loans to business entities, including commercial lines of credit, loans to condominium associations and loans and leases used to finance equipment used by small businesses. The Company also provides financing for construction and development projects, home equity and other consumer loans.
The Company employs seasoned commercial lenders and retail bankers who rely on community and business contacts as well as referrals from customers, attorneys and other professionals to generate loans and deposits. Existing borrowers are also an important source of business since many of them have more than one loan outstanding with the Company. The Company's ability to originate loans depends on the strength of the economy, trends in interest rates, and levels of customer demand and market competition.
The Company's current policy is that the total credit exposure to one obligor relationship may not exceed $60.0 million unless approved by the Credit Committee, a committee of the Company's Board of Directors. As of December 31, 2022, there were three borrowers with commitments over $60.0 million. The total of those commitments was $208.5 million or 2.2% of total loans and commitments as of December 31, 2022. As of December 31, 2021, there were six borrowers with loans and commitments over $50.0 million. The total of those loans and commitments was $322.5 million, or 3.0% of total loans and commitments, as of December 31, 2021.
The Company has written underwriting policies to control the inherent risks in loan origination. The policies address approval limits, loan-to-value ratios, appraisal requirements, debt service coverage ratios, loan concentration limits and other matters relevant to loan underwriting.
Commercial Real Estate Loans
The commercial real estate portfolio is comprised of commercial real estate loans, multi-family mortgage loans, and construction loans and is the largest component of the Company's overall loan portfolio, representing 57.7% of total loans and leases outstanding as of December 31, 2022.
Typically, commercial real estate loans are larger in size and involve a greater degree of risk than owner-occupied residential mortgage loans. Loan repayment is usually dependent on the successful operation and management of the properties and the value of the properties securing the loans. Economic conditions can greatly affect cash flows and property values.
A number of factors are considered in originating commercial real estate and multi-family mortgage loans. The qualifications and financial condition of the borrower (including credit history), as well as the potential income generation and the value and condition of the underlying property, are evaluated. When evaluating the qualifications of the borrower, the Company considers the financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with the Company and other financial institutions. Factors considered in evaluating the underlying property include the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of cash flow before debt service to debt service), the use of conservative capitalization rates, and the ratio of the loan amount to the appraised value. Generally, personal guarantees are obtained from commercial real estate loan borrowers.
Commercial real estate and multi-family mortgage loans are typically originated for terms of five to fifteen years with amortization periods of 20 to 30 years. Many of the loans are priced at inception on a fixed-rate basis generally for periods ranging from two to five years with repricing periods for longer-term loans. When possible, prepayment penalties are included in loan covenants on these loans. For commercial customers who are interested in loans with terms longer than five years, the Company offers loan level derivatives to accommodate customer need.
The Company's urban and suburban market area is characterized by a large number of apartment buildings, condominiums and office buildings. As a result, commercial real estate and multi-family mortgage lending has been a significant part of the Company's activities for many years. These types of loans typically generate higher yields, but also involve greater credit risk. Many of the Company's borrowers have more than one multi-family or commercial real estate loan outstanding with the Company.
The commercial real estate portfolio was composed primarily of loans secured by apartment buildings ($1.0 billion), office buildings ($704.6 million), retail stores ($686.0 million), industrial properties ($591.6 million), mixed-use properties ($402.8 million), lodging services ($152.4 million) and food services ($59.3 million) as of December 31, 2022. As of that date, approximately 95.4% of the commercial real estate loans outstanding were secured by properties located in New England.
Construction and development financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate and thus has lower concentration limits than do other commercial credit classes. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of construction costs, the estimated time to sell or rent the completed property at an adequate price or rate of occupancy, and market conditions. If the estimates and projections prove to be inaccurate, the Company may be confronted with a project which, upon completion, has a value that is insufficient to assure full loan repayment.
Criteria applied in underwriting construction loans for which the primary source of repayment is the sale of the property is different from the criteria applied in underwriting construction loans for which the primary source of repayment is the stabilized cash flow from the completed project. For those loans where the primary source of repayment is from resale of the property, in addition to the normal credit analysis performed for other loans, the Company also analyzes project costs, the attractiveness of the property in relation to the market in which it is located and demand within the market area. For those construction loans where the source of repayment is the stabilized cash flow from the completed project, the Company analyzes not only project costs but also how long it might take to achieve satisfactory occupancy and the reasonableness of projected rental rates in relation to market rental rates.
Commercial Loans
The commercial loan and lease portfolio is comprised of commercial loans, equipment financing loans and leases and condominium association loans representing 26.4% of total loans outstanding as of December 31, 2022.
The commercial loan and lease portfolio is composed primarily of loans in the following sectors: small businesses ($761.6 million), transportation services ($379.2 million), food services ($190.4 million), recreation services ($127.5 million), rental and leasing services ($47.6 million), manufacturing ($111.3 million), and retail ($108.1 million) as of December 31, 2022.
The Company provides commercial banking services to companies in its market area. Approximately 39.0% of the commercial loans outstanding as of December 31, 2022 were made to borrowers located in New England. The remaining 61.0% of the commercial loans outstanding were made to borrowers in other areas in the United States of America, primarily by the Company's equipment financing divisions. Product offerings include lines of credit, term loans, letters of credit, deposit services and cash management. These types of credit facilities have as their primary source of repayment cash flows from the operations of a business. Interest rates offered are available on a floating basis tied to the prime rate or a similar index or on a fixed-rate basis referenced on the Federal Home Loan Bank of Boston ("FHLBB") index.
Credit extensions are made to established businesses on the basis of loan purpose and assessment of capacity to repay as determined by an analysis of their financial statements, the nature of collateral to secure the credit extension and, in most instances, the personal guarantee of the owner of the business as well as industry and general economic conditions. The Company also participates in U.S. Government programs such as the SBA in both the 7A program and as an SBA preferred lender. Included in the commercial loans balances are PPP loans totaling $0.3 million as of December 31, 2022.
The Company’s equipment financing divisions focus on market niches in which its lenders have deep experience and industry contacts, and on making loans to customers with business experience. An important part of the Company’s equipment financing loan origination volume comes from equipment manufacturers and existing customers as they expand their operations. The equipment financing portfolio is composed primarily of loans to finance laundry, tow trucks, fitness, dry cleaning and convenience store equipment. Approximately 16.0% of the commercial loans outstanding were made by the equipment financing divisions to borrowers located primarily in the greater New York and New Jersey metropolitan area. Typically, the loans are priced at a fixed rate of interest and require monthly payments over their three- to seven-year life. The yields earned on equipment financing loans are higher than those earned on the commercial loans made by the Banks because they involve a higher degree of credit risk. Equipment financing customers are typically small-business owners who operate with limited financial resources and who face greater risks when the economy weakens or unforeseen adverse events arise. Because of these characteristics, personal guarantees of borrowers are usually obtained along with liens on available assets. The size of loan is determined by an analysis of cash flow and other characteristics pertaining to the business and the equipment to be financed, based on detailed revenue and profitability data of similar operations.
Loans to condominium associations are for the purpose of funding capital improvements, are made for five- to ten-year terms and are secured by a general assignment of condominium association revenues. Among the factors considered in the underwriting of such loans are the level of owner occupancy, the financial condition and history of the condominium association, the attractiveness of the property in relation to the market in which it is located and the reasonableness of estimates of the cost of capital improvements to be made. Depending on loan size, funds are advanced as capital improvements are made and, in more complex situations, after completion of engineering inspections.
Consumer Loans
The consumer loan portfolio is comprised of residential mortgage loans, home equity loans and lines of credit, and other consumer loans representing, 15.9% of total loans outstanding as of December 31, 2022. The Company focuses its mortgage and home equity lending on existing and new customers within its branch networks in its urban and suburban marketplaces in the greater Boston and Providence metropolitan areas.
The Company originates adjustable and fixed rate residential mortgage loans secured by one- to four-family residences. Each residential mortgage loan granted is subject to a satisfactorily completed application, employment verification, credit history and a demonstrated ability to repay the debt. Generally, loans are not made when the loan-to-value ratio exceeds 80% unless private mortgage insurance is obtained and/or there is a financially strong guarantor. Appraisals are performed by outside independent fee appraisers.
Underwriting guidelines for home equity loans and lines of credit are similar to those for residential mortgage loans. Home equity loans and lines of credit are limited to no more than 80% of the appraised value of the property securing the loan including the amount of any existing first mortgage liens.
Other consumer loans have historically been a modest part of the Company's loan originations. As of December 31, 2022, other consumer loans equaled $56.5 million, or 0.7% of total loans outstanding.
Asset Quality
Criticized and Classified Assets
The Company's management rates certain loans and leases as "other assets especially mentioned" ("OAEM"), "substandard" or "doubtful" based on criteria established under banking regulations. These loans and leases are collectively referred to as "criticized" assets. Loans and leases rated OAEM have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the loan or lease at some future date. Loans and leases rated as substandard are inadequately protected by the payment capacity of the obligor or of the collateral pledged, if any. Substandard loans and leases have a well-defined weakness or weaknesses that jeopardize the liquidation of debt and are characterized by the distinct possibility that the Company will sustain some loss if existing deficiencies are not corrected. Loans and leases rated as doubtful have well-defined weaknesses that jeopardize the orderly liquidation of debt and partial loss of principal is likely. As of December 31, 2022, the Company had $108.2 million of total assets that were designated as criticized. This compares to $95.4 million of assets designated as criticized as of December 31, 2021. The increase of $12.8 million in criticized assets was primarily driven by three construction relationships totaling $10.2 million, several commercial relationships totaling $29.3 million, and several equipment financing relationships totaling $7.6 million becoming criticized during the year ended December 31, 2022. This was partially offset by $10.9 million in commercial real estate relationships, $12.3 million in commercial relationships, and $10.2 million in equipment financing relationships being paid or charged off during the year ending December 31, 2022.
Nonperforming Assets
"Nonperforming assets" consist of nonaccrual loans and leases, other real estate owned ("OREO") and other repossessed assets. Under certain circumstances, the Company may restructure the terms of a loan or lease as a concession to a borrower, except for acquired loans and leases which are individually evaluated against expected performance on the date of acquisition. These restructured loans and leases are generally considered "nonperforming loans and leases" until a history of collection of at least six months on the restructured terms of the loan or lease has been established. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure. Other repossessed assets consist of assets that have been acquired through foreclosure that are not real estate and are included in other assets on the Company's consolidated balance sheets.
Accrual of interest on loans generally is discontinued when contractual payment of principal or interest becomes past due 90 days or, if in management's judgment, reasonable doubt exists as to the full timely collection of interest. When a loan is placed on nonaccrual status, interest accruals cease and all previously accrued and uncollected interest is reversed and charged against current interest income. Interest payments on nonaccrual loans are generally applied to principal. If collection of the principal is reasonably assured, interest payments are recognized as income on the cash basis. Loans are generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured and a consistent record of at least six months of performance has been achieved.
In cases where a borrower experiences financial difficulties and the Company makes or reasonably expects to make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructured loan. In determining whether a debtor is experiencing financial difficulties, the Company considers, among other factors, if the debtor is in payment default or is likely to be in payment default in the foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that the debtor will continue as a going concern, the debtor's entity-specific projected cash flows will not be sufficient to service its debt, or the debtor cannot obtain funds from sources other than the existing creditors at market terms for debt with similar risk characteristics.
As of December 31, 2022, the Company had nonperforming assets of $15.3 million, representing 0.17% of total assets, compared to nonperforming assets of $33.2 million, or 0.39% of total assets as of December 31, 2021. The decrease of $17.9 million was primarily driven by the payoffs of seven commercial real estate relationships of $10.6 million, several equipment financing relationships of $8.2 million, several commercial relationships of $1.7 million, and eight residential relationships of $1.5 million, along with several equipment financing relationships worth $4.7 million returning to accrual during the year ended December 31, 2022.
The Company evaluates the underlying collateral of each nonaccrual loan and lease and continues to pursue the collection of interest and principal. Management believes that the current level of nonperforming assets remains manageable relative to the size of the Company's loan and lease portfolio. If economic conditions were to worsen or if the marketplace were to experience prolonged economic stress, it is likely that the level of nonperforming assets would increase, as would the level of charged-off loans.
Past Due and Accruing
As of December 31, 2022 and December 31, 2021, the Company had minimal loans and leases greater than 90 days past due and accruing.
The following table sets forth information regarding nonperforming assets for the periods indicated:
At December 31,
2022 2021 2020 2019 2018
(Dollars in Thousands)
Nonperforming loans and leases:
Nonaccrual loans and leases:
Commercial real estate $ 607 $ 10,848 $ 3,300 $ 2,845 $ 3,928
Multi-family mortgage - - - 84 330
Construction 707 - 3,853 - 396
Total commercial real estate loans 1,314 10,848 7,153 2,929 4,654
Commercial 464 2,318 7,702 4,909 6,621
Equipment financing 9,653 15,014 16,757 9,822 9,500
Condominium association 58 84 112 151 265
Total commercial loans and leases 10,175 17,416 24,571 14,882 16,386
Residential mortgage 2,680 3,909 5,587 753 2,132
Home equity 723 285 1,136 896 908
Other consumer 2 1 1 1 17
Total consumer loans 3,405 4,195 6,724 1,650 3,057
Total nonaccrual loans and leases 14,894 32,459 38,448 19,461 24,097
Other real estate owned - - 5,415 - 3,054
Other repossessed assets 408 718 1,100 2,631 965
Total nonperforming assets $ 15,302 $ 33,177 $ 44,963 $ 22,092 $ 28,116
Loans and leases past due greater than 90 days and accruing $ 33 $ 1 $ 11,975 $ 10,109 $ 13,482
Total delinquent loans and leases 61-90 days past due 2,218 6,081 16,129 4,978 3,308
Restructured loans and leases not included in nonperforming assets 16,385 12,580 11,483 17,076 12,257
Total nonaccrual loans and leases as a percentage of total loans and leases 0.19 % 0.45 % 0.53 % 0.29 % 0.38 %
Total nonperforming assets as a percentage of total assets 0.17 % 0.39 % 0.50 % 0.28 % 0.38 %
Total delinquent loans and leases 61-90 days past due as a percentage of total loans and leases 0.03 % 0.08 % 0.22 % 0.07 % 0.05 %
Troubled Debt Restructured Loans and Leases
Total troubled debt restructured ("TDR") loans increased by $0.6 million to $19.9 million at December 31, 2022 from $19.3 million at December 31, 2021.
The following table sets forth information regarding TDR loans and leases at the dates indicated:
At December 31, 2022 At December 31, 2021
(Dollars in Thousands)
Troubled debt restructurings:
Commercial real estate mortgage $ 1,151 $ 1,454
Commercial 8,442 5,432
Equipment financing 5,730 7,533
Residential mortgage 2,778 2,851
Home equity 1,811 2,019
Total troubled debt restructurings $ 19,912 $ 19,289
The following table sets forth information regarding troubled debt restructured loans and leases at the dates indicated:
At December 31, 2022 At December 31, 2021
(Dollars in Thousands)
Troubled debt restructurings:
On accrual $ 16,385 $ 12,580
On nonaccrual 3,527 6,709
Total troubled debt restructurings $ 19,912 $ 19,289
Changes in TDR loans and leases were as follows for the periods indicated:
Year ended December 31,
2022 2021
(Dollars in Thousands)
Balance at beginning of period $ 19,289 $ 18,959
Additions 7,536 5,879
Net recoveries (charge-offs ) 96 (713)
Repayments (7,009) (4,836)
Balance at end of period $ 19,912 $ 19,289
Allowances for Credit Losses
The allowance for credit losses consists of general and specific allowances and reflects management's estimate of expected loan and lease losses over the life of the loan or lease. Management uses a consistent and systematic process and methodology to evaluate the adequacy of the allowance for credit losses on a quarterly basis. Management continuously evaluates and challenges inputs and assumptions in the allowance for credit losses.
While management evaluates currently available information in establishing the allowance for credit losses, future adjustments to the allowance for loan and lease losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Management performs a comprehensive review of the allowance for credit losses on a quarterly basis. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institution's allowance for credit losses and carrying amounts of other real estate owned. Such agencies may require the financial institution to recognize additions or reductions to the allowance based on their judgments about information available to them at the time of their examination.
The Company’s allowance methodology provides a quantification of probable losses in the portfolio. Under the current methodology, management estimates losses over the life of the loan using reasonable and supportable forecasts. Forecasts, loan data, and model documentation are extensively analyzed and reviewed throughout the quarter to ensure estimated losses are appropriate at quarter end. Qualitative adjustments are applied when model output does not align with management expectations. These adjustments are thoroughly reviewed and documented to provide clarity and a reasonable basis for any
deviations from the model. For December 31, 2022, qualitative adjustments were applied to the commercial real estate, commercial, and consumer portfolios resulting in a net addition in total reserves compared to modeled calculations.
The following tables present the changes in the allowance for loans and lease losses by portfolio category for the years ended December 31, 2022, 2021, 2020, 2019, and 2018, respectively.
Year Ended December 31, 2022
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2021 $ 69,213 $ 27,055 $ 2,816 $ 99,084
Charge-offs (37) (5,068) (28) (5,133)
Recoveries 24 1,725 64 1,813
Provision (credit) for loan and lease losses (1,046) 2,892 872 2,718
Balance at December 31, 2022 $ 68,154 $ 26,604 $ 3,724 $ 98,482
Total loans and leases $ 4,404,148 $ 2,016,499 $ 1,223,741 $ 7,644,388
Total allowance for loan and lease losses as a percentage of total loans and leases 1.55 % 1.32 % 0.30 % 1.29 %
Year Ended December 31, 2021
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2020 $ 80,132 $ 29,498 $ 4,749 $ 114,379
Charge-offs (28) (7,464) (34) (7,526)
Recoveries 12 1,541 239 1,792
Provision (credit) for loan and lease losses (10,903) 3,480 (2,138) (9,561)
Balance at December 31, 2021 $ 69,213 $ 27,055 $ 2,816 $ 99,084
Total loans and leases $ 4,103,040 $ 1,887,136 $ 1,164,281 $ 7,154,457
Total allowance for loan and lease losses as a percentage of total loans and leases 1.69 % 1.43 % 0.24 % 1.38 %
Year Ended December 31, 2020
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2019 $ 30,285 $ 24,826 $ 5,971 $ 61,082
Adoption of ASU 2016-13 (CECL) 11,694 (2,672) (2,390) 6,632
Balance at beginning of period, adjusted 41,979 22,154 3,581 67,714
Charge-offs (3,514) (11,113) (36) (14,663)
Recoveries 94 1,407 201 1,702
Provision (credit) for loan and lease losses 41,573 17,050 1,003 59,626
Balance at December 31, 2020 $ 80,132 $ 29,498 $ 4,749 $ 114,379
Total loans and leases $ 3,823,826 $ 2,274,899 $ 1,170,828 $ 7,269,553
Allowance for loan and lease losses as a percentage of total loans and leases 2.10 % 1.30 % 0.41 % 1.57 %
Year Ended December 31, 2019
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2018 $ 28,187 $ 25,283 $ 5,222 $ 58,692
Charge-offs - (8,911) (127) (9,038)
Recoveries - 1,688 179 1,867
Provision (credit) for loan and lease losses 2,098 6,766 697 9,561
Balance at December 31, 2019 $ 30,285 $ 24,826 $ 5,971 $ 61,082
Total loans and leases $ 3,669,222 $ 1,838,748 $ 1,229,846 $ 6,737,816
Allowance for loan and lease losses as a percentage of total loans and leases 0.83 % 1.35 % 0.49 % 0.91 %
Year Ended December 31, 2018
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2017 $ 27,112 $ 26,333 $ 5,147 $ 58,592
Charge-offs (103) (6,585) (540) (7,228)
Recoveries - 2,287 290 2,577
Provision (credit) for loan and lease losses 1,178 3,248 325 4,751
Balance at December 31, 2018 $ 28,187 $ 25,283 $ 5,222 $ 58,692
Total loans and leases $ 3,351,736 $ 1,768,958 $ 1,182,822 $ 6,303,516
Allowance for loan and lease losses as a percentage of total loans and leases 0.84 % 1.43 % 0.44 % 0.93 %
At December 31, 2022, the allowance for loan and lease losses decreased to $98.5 million, or 1.29% of total loans and leases outstanding. This compared to an allowance for loan and lease losses of $99.1 million, or 1.38% of total loans and leases outstanding, as of December 31, 2021. Both figures exclude PPP loans which are not subject to an allowance reserve since they are guaranteed by the SBA.
Net charge-offs in the loans and leases portfolio for the years ending December 31, 2022 and 2021 were $3.3 million and $5.7 million, respectively. The decrease in the net charge-offs of $2.4 million was primarily driven by the decrease in the net charge-offs of commercial loans of $2.6 million.
Management believes that the allowance for loan and lease losses as of December 31, 2022 is appropriate based on the facts and circumstances discussed further below.
The following tables set forth the Company's percent of allowance for loan and lease losses to the total allowance for loan and lease losses and the percent of loans to total loans for each of the categories listed at the dates indicated.
At December 31,
2022 2021 2020
Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans
(Dollars in Thousands)
Commercial real estate $ 44,536 45.3 % 39.9 % $ 44,843 45.3 % 39.6 % $ 46,357 40.6 % 35.4 %
Multi-family mortgage 16,885 17.1 % 15.1 % 17,474 17.6 % 15.4 % 22,559 19.7 % 13.9 %
Construction 6,733 6.8 % 2.7 % 6,896 7.0 % 2.2 % 11,216 9.8 % 3.2 %
Total commercial real estate loans 68,154 69.2 % 57.7 % 69,213 69.9 % 57.2 % 80,132 70.1 % 52.5 %
Commercial 12,190 12.4 % 9.9 % 9,068 9.2 % 10.3 % 8,089 7.1 % 15.6 %
Equipment financing 14,315 14.5 % 15.9 % 17,907 18.0 % 15.5 % 21,292 18.6 % 15.0 %
Condominium association 99 0.1 % 0.6 % 80 0.1 % 0.7 % 117 0.1 % 0.7 %
Total commercial loans and leases 26,604 27.0 % 26.4 % 27,055 27.3 % 26.5 % 29,498 25.8 % 31.3 %
Residential mortgage 1,894 1.9 % 11.0 % 1,297 1.3 % 11.2 % 1,967 1.7 % 10.9 %
Home equity 1,478 1.5 % 4.2 % 1,335 1.3 % 4.5 % 2,504 2.2 % 4.8 %
Other consumer 352 0.4 % 0.7 % 184 0.2 % 0.6 % 278 0.2 % 0.5 %
Total consumer loans 3,724 3.8 % 15.9 % 2,816 2.8 % 16.3 % 4,749 4.1 % 16.2 %
Total $ 98,482 100.0 % 100.0 % $ 99,084 100.0 % 100.0 % $ 114,379 100.0 % 100.0 %
At December 31,
2019 2018
Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans
(Dollars in Thousands)
Commercial real estate $ 21,519 35.3 % 37.0 % $ 20,779 35.4 % 37.0 %
Multi-family mortgage 6,436 10.5 % 13.8 % 5,915 10.1 % 13.4 %
Construction 2,330 3.8 % 3.7 % 1,494 2.5 % 2.7 %
Total commercial real estate loans 30,285 49.6 % 54.5 % 28,188 48.0 % 53.1 %
Commercial 12,849 21.0 % 10.8 % 14,047 23.9 % 11.7 %
Equipment financing 11,595 19.0 % 15.6 % 10,888 18.6 % 15.6 %
Condominium association 382 0.6 % 0.8 % 347 0.6 % 0.8 %
Total commercial loans and leases 24,826 40.6 % 27.2 % 25,282 43.1 % 28.1 %
Residential mortgage 3,717 6.1 % 12.1 % 3,076 5.2 % 12.4 %
Home equity 2,132 3.5 % 5.6 % 2,047 3.5 % 6.0 %
Other consumer 122 0.2 % 0.6 % 99 0.2 % 0.4 %
Total consumer loans 5,971 9.8 % 18.3 % 5,222 8.9 % 18.8 %
Total $ 61,082 100.0 % 100.0 % $ 58,692 100.0 % 100.0 %
Investment Securities and Restricted Equity Securities
The investment portfolio exists primarily for liquidity purposes, and secondarily as sources of interest and dividend income, interest-rate risk management and tax planning as a counterbalance to loan and deposit flows. Investment securities are utilized as part of the Company's asset/liability management and may be sold in response to, or in anticipation of, factors such as changes in market conditions and interest rates, security prepayment rates, deposit outflows, liquidity concentrations and regulatory capital requirements.
The investment policy of the Company, which is reviewed and approved by the Board of Directors on an annual basis, specifies the types of investments that are acceptable, required investment ratings by at least one nationally recognized rating agency, concentration limits and duration guidelines. Compliance with the investment policy is monitored on a regular basis. In general, the Company seeks to maintain a high degree of liquidity and targets cash, cash equivalents and investment securities available-for-sale balances between 10% and 30% of total assets.
Cash, cash equivalents, and investment securities decreased $8.9 million, or 0.8%, to $1.04 billion as of December 31, 2022 compared to $1.05 billion as of December 31, 2021. The decrease was primarily driven by a decrease in short-term investments and investment securities available-for-sale. Cash, cash equivalents, and investment securities were 11.32% of total assets as of December 31, 2022, compared to 12.19% of total assets at December 31, 2021.
The following table sets forth certain information regarding the amortized cost and market value of the Company's investment securities at the dates indicated:
At December 31,
2022 2021 2020
Amortized
Cost Fair Value Amortized
Cost Fair Value Amortized
Cost Fair Value
(In Thousands)
Investment securities available-for-sale:
GSE debentures $ 176,751 $ 152,422 $ 219,723 $ 217,505 $ 273,820 $ 278,645
GSE CMOs 19,977 18,220 27,892 28,139 44,937 46,028
GSE MBSs 159,824 140,576 196,930 199,772 312,658 323,609
Corporate debt obligations 14,076 13,764 22,178 22,683 22,299 23,467
U.S. Treasury bonds 362,850 331,307 253,878 252,268 70,339 73,577
Foreign government obligations 500 477 500 499 500 496
Total investment securities available-for-sale $ 733,978 $ 656,766 $ 721,101 $ 720,866 $ 724,553 $ 745,822
Equity securities held-for-trading $ - $ - $ - $ - $ - $ 526
Restricted equity securities:
FHLBB stock $ 52,914 $ 10,488 $ 31,293
FRB stock 18,241 18,241 18,241
Other 152 252 252
Total restricted equity securities $ 71,307 $ 28,981 $ 49,786
Total investment securities and restricted equity securities primarily consist of investment securities available-for-sale, stock in the FHLBB and stock in the FRB. The total securities portfolio decreased $21.8 million, or 2.9% since December 31, 2021. As of December 31, 2022, the total securities portfolio was 7.93% of total assets, compared to 8.72% of total assets as of December 31, 2021.
The fair value of investment securities is based principally on market prices and dealer quotes received from third-party, nationally-recognized pricing services for identical investment securities such as U.S. Treasury and agency securities. The Company's equity securities held-for-trading are priced this way and are included in Level 1. These prices are validated by comparing the primary pricing source with an alternative pricing source when available. When quoted market prices for identical securities are unavailable, the Company uses market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads and estimated prepayment speeds where applicable. These investments include certain U.S. and government agency debt securities, municipal and corporate debt securities, U.S. Government-sponsored enterprises ("GSE") residential mortgage backed securities ("MBSs") and collateralized mortgage obligations ("CMOs"), trust preferred securities, and equity securities held-for-trading, all of which are included in Level 1 and 2.
Additionally, management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with their expectation of the market. Changes in the prices obtained from the pricing service are analyzed from month to month, taking into consideration changes in market conditions including changes in mortgage spreads, changes in U.S. Treasury security yields and changes in generic pricing of 15-year and 30-year securities. Additional analysis may include a review of prices provided by other independent parties, a yield analysis, a review of average life changes using Bloomberg analytics and a review of historical pricing for the particular security.
As of December 31, 2022, the fair value of all investment securities available-for-sale was $656.8 million and carried a total of $77.2 million of net unrealized losses, compared to a fair value of $720.9 million and net unrealized losses of $0.2 million as of December 31, 2021. As of December 31, 2022, $630.5 million, or 96.0%, of the portfolio, had gross unrealized losses of $77.5 million. This compares to $353.8 million, or 49.1%, of the portfolio with gross unrealized losses of $7.9 million as of December 31, 2021. The Company's unrealized loss position increased in 2022 driven by a change in the portfolio mix from shorter duration MBS to longer duration U.S. Treasury bonds. For additional discussion on investment securities available-for-sale by security type, see Note 4, "Investment Securities."
The Company reviews its debt securities portfolio on a quarterly basis in accordance with ASC 326. This analysis is done using probability of default and loss given default assumptions where a model is created to determine CECL for the remaining life of the securities. For the year ended December 31, 2022, the Company recognized $0.1 million as an allowance for credit loss. For additional discussion on how the Company validates fair values provided by the third-party pricing service, see Note 21, “Fair Value of Financial Instruments.”
Maturities, calls and principal repayments for investment securities available-for-sale totaled $98.6 million for the year ended December 31, 2022 compared to $184.2 million for the same period in 2021. For the year ended December 31, 2022, the Company sold $78.8 million of investment securities available for sale, compared to $39.7 million for the same period in 2021. For the year ended December 31, 2022, the Company purchased $197.6 million of investment securities available-for-sale, compared to $233.1 million for the same period in 2021.
Restricted Equity Securities
FHLBB Stock-The Company invests in the stock of the FHLBB as one of the requirements to borrow. As of December 31, 2022, the Company did not have excess balance of capital stock, compared to $0.1 million at December 31, 2021.
As of December 31, 2022, the Company owned stock in the FHLBB with a carrying value of $52.9 million, an increase of $42.4 million from $10.5 million as of December 31, 2021. The Company continually reviews its investment to determine if impairment exists. The Company reviews recent public filings, rating agency analysis and other factors when making its determination. See Note 5, "Restricted Equity Securities" to the consolidated financial statements for further information about the FHLBB.
Federal Reserve Bank Stock-The Company invests in the stock of the Federal Reserve Bank of Boston, as a condition of the membership for the Banks in the Federal Reserve System. In 2022, the Company maintained its investment in the stock of the Federal Reserve Bank of Boston to adjust for deposit growth. The FRB is the primary federal regulator for the Company and the Banks.
Carrying Value, Weighted Average Yields, and Contractual Maturities of Investment and Restricted Equity Securities
The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company's investment and restricted equity securities portfolio at the date indicated.
Balance at December 31, 2022
One Year or Less After One Year
Through Five Years After Five Years
Through Ten Years After Ten Years Total
Carrying
Value Weighted
Average
Yield (1) Carrying
Value Weighted
Average
Yield (1) Carrying
Value Weighted
Average
Yield (1) Carrying
Value Weighted
Average
Yield (1) Carrying
Value Weighted
Average
Yield (1)
(Dollars in Thousands)
Investment securities available-for-sale:
GSE debentures $ 32,806 2.25 % $ 23,912 2.34 % $ 88,826 1.16 % $ 6,876 2.00 % $ 152,422 1.62 %
GSE CMOs - - % 727 1.47 % 1,999 1.54 % 15,495 1.92 % 18,220 1.86 %
GSE MBSs 280 1.77 % 6,371 1.97 % 19,573 1.25 % 114,353 2.14 % 140,576 2.15 %
Corporate debt obligations 7,413 2.42 % 6,352 2.79 % - - % - - % 13,764 2.59 %
U.S. Treasury bonds 78,576 3.52 % 118,281 2.42 % 134,450 1.25 % - - % 331,307 2.21 %
Foreign government obligations - - % 477 1.97 % - - % - - % 477 1.97 %
Total investment securities available-for-sale $ 119,075 3.10 % $ 156,120 2.40 % $ 244,848 1.30 % $ 136,724 2.10 % $ 656,766 2.06 %
Restricted equity
securities (2):
FHLBB stock $ - - % $ - - % $ - - % $ 52,914 3.53 % $ 52,914 3.53 %
FRB stock - - % - - % - - % 18,241 6.00 % 18,241 6.00 %
Other stock - - % - - % - - % 152 - % 152 - %
Total restricted equity securities $ - - % $ - - % $ - - % $ 71,307 4.15 % $ 71,307 4.15 %
_______________________________________________________________________________
(1) Yields have been calculated on a pre-tax basis. The Company holds no investment securities available-for-sale that are tax-exempt.
(2) Equity securities have no contractual maturity, therefore they are reported above in the over ten year maturity column.
Deposits
The following table presents the Company's deposit mix at the dates indicated.
At December 31,
2022 2021 2020
Amount Percent
of Total Weighted
Average
Rate Amount Percent
of Total Weighted
Average
Rate Amount Percent
of Total Weighted
Average
Rate
(Dollars in Thousands)
Non-interest-bearing deposits:
Demand checking accounts $ 1,802,518 27.6 % - % $ 1,888,462 26.8 % - % $ 1,592,205 23.0 % - %
Interest-bearing deposits:
NOW accounts 544,118 8.3 % 0.18 % 604,097 8.6 % 0.08 % 513,948 7.4 % 0.09 %
Savings accounts 762,271 11.7 % 0.70 % 915,804 13.0 % 0.09 % 701,659 10.2 % 0.13 %
Money market accounts 2,174,952 33.4 % 1.63 % 2,358,306 33.5 % 0.26 % 2,018,977 29.2 % 0.31 %
Certificate of deposit accounts 928,143 14.2 % 1.68 % 1,117,695 15.9 % 0.71 % 1,389,998 20.1 % 1.44 %
Brokered deposit accounts 310,144 4.8 % 3.00 % 165,542 2.3 % 0.04 % 693,909 10.0 % 0.39 %
Total interest-bearing deposits 4,719,628 72.4 % 1.41 % 5,161,444 73.2 % 0.30 % 5,318,491 77.0 % 0.57 %
Total deposits $ 6,522,146 100.0 % 1.02 % $ 7,049,906 100.0 % 0.22 % $ 6,910,696 100.0 % 0.44 %
The Company seeks to increase its core deposits and decrease its loan-to-deposit ratio over time, while continuing to increase deposits as a percentage of total funding sources. The Company's loan-to-deposit ratio was 117.2% as of December 31, 2022, compared to 101.5% as of December 31, 2021.
Total deposits decreased $0.5 billion, or 7.5%, to $6.5 billion as of December 31, 2022, compared to $7.0 billion as of December 31, 2021. Deposits as a percentage of total assets decreased from 82.0% as of December 31, 2021 to 71.0% as of December 31, 2022. The decrease in deposits as a percentage of total assets is due to decreases in all deposit accounts, with certificate of deposit accounts seeing the largest decrease.
In 2022, core deposits decreased $0.5 billion. The ratio of core deposits to total deposits decreased from 81.8% as of December 31, 2021 to 81.0% as of December 31, 2022, as a result of decreases in all core deposit accounts.
Certificate of deposit accounts decreased $189.6 million to $0.9 billion as of December 31, 2022, compared to $1.1 billion as of December 31, 2021. Certificate of deposit accounts decreased as a percentage of total deposits to 14.2% as of December 31, 2022 from 15.9% as of December 31, 2021.
Brokered deposits increased $144.6 million to $310.1 million as of December 31, 2022, compared to $165.5 million as of December 31, 2021. Brokered deposits increased as a percentage of total deposits to 4.8% as of December 31, 2022 from 2.3% as of December 31, 2021. The increase in brokered deposits was primarily driven by the purchase of brokered certificate of deposits. Brokered deposits allow the Company to seek additional funding by attracting deposits from outside the Company's core market. The Company's investment policy limits the amount of brokered deposits to 15% of total assets.
The following table sets forth the distribution of the average balances of the Company's deposit accounts for the years indicated and the weighted average interest rates on each category of deposits presented. Averages for the years presented are based on daily balances.
Year Ended December 31,
2022 2021 2020
Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate
(Dollars in Thousands)
Core deposits:
Non-interest-bearing demand checking accounts $ 1,879,620 27.3 % - % $ 1,787,959 25.8 % - % $ 1,451,556 22.5 % - %
NOW accounts 598,267 8.7 % 0.14 % 502,189 7.3 % 0.10 % 408,374 6.3 % 0.12 %
Savings accounts 882,881 12.8 % 0.25 % 793,141 11.5 % 0.12 % 670,217 10.4 % 0.22 %
Money market accounts 2,387,670 34.6 % 0.64 % 2,288,740 33.1 % 0.27 % 1,817,085 28.2 % 0.52 %
Total core deposits 5,748,438 83.4 % 0.32 % 5,372,029 77.6 % 0.14 % 4,347,232 67.5 % 0.40 %
Certificate of deposit accounts 998,580 14.5 % 0.82 % 1,210,451 17.5 % 0.97 % 1,577,104 24.5 % 1.92 %
Brokered deposit accounts 146,038 2.1 % 1.99 % 338,734 4.9 % 0.38 % 512,803 8.0 % 1.28 %
Total deposits $ 6,893,056 100.0 % 0.43 % $ 6,921,214 100.0 % 0.30 % $ 6,437,139 100.0 % 0.75 %
As of December 31, 2022 and 2021, the Company had outstanding certificate of deposit of $250,000 or more, maturing as follows:
At December 31,
2022 2021
Amount Weighted
Average Rate Amount Weighted
Average Rate
(Dollars in Thousands)
Maturity period:
Six months or less $ 108,100 1.32 % $ 182,082 0.58 %
Over six months through 12 months 62,489 1.82 % 125,888 0.66 %
Over 12 months 101,654 2.96 % 51,377 1.86 %
Total certificate of deposit of $250,000 or more $ 272,243 2.05 % $ 359,347 0.79 %
Borrowed Funds
The following table sets forth certain information regarding FHLBB advances, subordinated debentures and notes and other borrowed funds for the periods indicated:
Year Ended December 31,
2022 2021 2020
(Dollars in Thousands)
Borrowed funds:
Average balance outstanding $ 542,923 $ 404,814 $ 1,033,643
Maximum amount outstanding at any month end during the year 1,432,652 686,346 1,406,669
Balance outstanding at end of year 1,432,652 357,321 820,247
Weighted average interest rate for the period 2.87 % 2.06 % 1.73 %
Weighted average interest rate at end of period 4.41 % 1.70 % 1.51 %
Advances from the FHLBB
On a long-term basis, the Company intends to continue to increase its core deposits. The Company also uses FHLBB borrowings and other wholesale borrowings as part of the Company's overall strategy to fund loan growth and manage interest-rate risk and liquidity. The advances are secured by a blanket security agreement which requires the Banks to maintain certain qualifying assets as collateral, principally mortgage loans and securities in an aggregate amount at least equal to outstanding advances. The maximum amount that the FHLBB will advance to member institutions, including the Company, fluctuates from time to time in accordance with the policies of the FHLBB. The Company may also borrow from the FRB's "discount window" as necessary.
FHLBB borrowings increased $1.1 billion to $1.2 billion as of December 31, 2022 from $147.9 million as of December 31, 2021. The increase in FHLBB borrowings was primarily due to liquidity needs.
Other Borrowed Funds
In addition to advances from the FHLBB and subordinated debentures and notes, the Company utilizes other funding
sources as part of the overall liquidity strategy. Those funding sources include repurchase agreements and committed and uncommitted lines of credit with several financial institutions.
The Company periodically enters into repurchase agreements with its larger deposit and commercial customers as part of its cash management services which are typically overnight borrowings. Repurchase agreements with customers decreased
$43.5 million to $52.0 million as of December 31, 2022 from $95.5 million as of December 31, 2021.
The Company has access to a $30.0 million committed line of credit as of December 31, 2022. As of December 31, 2022 and December 31, 2021, the Company did not have any borrowings on this committed line of credit outstanding.
The Banks also have access to funding through several uncommitted lines of credit of $863.0 million. As of
December 31, 2022, the Company had no borrowings on outstanding uncommitted lines compared to December 31, 2021, when the Company had $30.0 million borrowings on outstanding uncommitted lines.
Subordinated Debentures and Notes
In connection with the acquisition of Bancorp Rhode Island, Inc., the Company assumed three subordinated debentures issued by a subsidiary of Bancorp Rhode Island, Inc.
On September 15, 2014, the Company offered $75.0 million of 6.0% fixed-to-floating subordinated notes due September
15, 2029. The Company is obligated to pay 6.0% interest semiannually between September 2014 and September 2024. Subsequently, the Company is obligated to pay 3-month LIBOR plus 3.315% quarterly until the notes mature in September 2029. As of December 31, 2022, the Company had capitalized costs of $0.7 million in relation to the issuance of these subordinated notes.
The following table summarizes the Company's subordinated debentures and notes at the dates indicated.
Carrying Amount
Issue Date Rate Maturity Date Next Call Date December 31, 2022 December 31, 2021
(Dollars in Thousands)
June 26, 2003 Variable;
3-month LIBOR + 3.10% June 26, 2033 March 25, 2023 $ 4,887 $ 4,868
March 17, 2004 Variable;
3-month LIBOR + 2.79% March 17, 2034 March 16, 2023 4,830 4,802
September 15, 2014 6.0% Fixed-to-Variable;
3-month LIBOR + 3.315% September 15, 2029 September 15, 2024 74,327 74,227
Total $ 84,044 $ 83,897
On and after July 3, 2023 (the first London banking day after June 30, 2023), references to 3-month LIBOR will mean the 3-month CME Term SOFR.
Derivative Financial Instruments
The Company has entered into loan level derivatives, risk participation agreements, and foreign exchange contracts with certain commercial customers and concurrently enters into offsetting swaps with third-party financial institutions. The Company may also, from time to time, enter into risk participation agreements. The Company uses interest rate futures that are designated and qualify as cash flow hedging instruments.
The following table summarizes certain information concerning the Company's loan level derivatives, risk participation agreements, and foreign exchange contracts at December 31, 2022 and 2021:
At December 31, 2022 At December 31, 2021
(Dollars in Thousands)
Interest rate derivatives $ 150,000 $ 6,000
Loan level derivatives (Notional Amount):
Receive fixed, pay variable $ 1,489,709 $ 1,324,608
Pay fixed, receive variable 1,489,709 1,324,608
Risk participation-out agreements 393,624 288,374
Risk participation-in agreements 75,223 77,016
Foreign exchange contracts (Notional Amount)
Buys foreign currency, sells U.S. currency $ 2,383 $ 2,004
Sells foreign currency, buys U.S. currency 2,400 2,006
Fixed weighted average interest rate from the Company to counterparty 2.65 % 2.85 %
Floating weighted average interest rate from counterparty to the Company 4.68 % 0.78 %
Weighted average remaining term to maturity (in months) 69 82
Fair value:
Recognized as an asset:
Interest rate derivatives $ 34 $ 43
Loan level derivatives 108,963 73,462
Risk participation-out agreements 347 1,236
Foreign exchange contracts 130 9
Recognized as a liability:
Interest rate derivatives $ 3,170 $ 1
Loan level derivatives 108,963 73,462
Risk participation-in agreements 31 207
Foreign exchange contracts 112 7
Stockholders' Equity and Dividends
The Company's total stockholders' equity was $992.1 million as of December 31, 2022, representing a $3.2 million decrease compared to $995.3 million at December 31, 2021. The decrease for the twelve months ended December 31, 2022, primarily reflects the unrealized loss on securities available-for-sale of $60.3 million, dividends paid by the Company of $40.1 million, and the common stock repurchase of $13.8 million, partially offset by net income attributable to the Company of $109.7 million.
For the year ended December 31, 2022, the dividend payout ratio was 36.5%, compared to 32.5% for the year ended December 31, 2021. The dividends paid in the fourth quarter of 2022 represented the Company's 95th consecutive quarter of dividend payments. The Company's quarterly dividend distribution for each quarter was $0.125, $0.130, $0.130, and $0.135 respectively per share for 2022.
Stockholders' equity represented 10.80% of total assets as of December 31, 2022 and 11.57% of total assets as of December 31, 2021. Tangible stockholders' equity (total stockholders' equity less goodwill and identified intangible assets, net) represented 9.20% of tangible assets (total assets less goodwill and identified intangible assets, net) as of December 31, 2022 and 9.87% as of December 31, 2021.
Results of Operations
The primary drivers of the Company's net income are net interest income, which is strongly affected by the net yield on and growth of interest-earning assets and liabilities ("net interest margin"), the quality of the Company's assets, its levels of non-interest income and non-interest expense, and its tax provision.
The Company's net interest income represents the difference between interest income earned on its investments, loans and leases, and its cost of funds. Interest income is dependent on the amount of interest-earning assets outstanding during the period and the yield earned thereon. Cost of funds is a function of the average amount of deposits and borrowed money outstanding
during the year and the interest rates paid thereon. The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The increases or decreases, as applicable, in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate, are summarized under "Rate/Volume Analysis" below. Information as to the components of interest income, interest expense and average rates is provided under "Average Balances, Net Interest Income, Interest-Rate Spread and Net Interest Margin" below.
Because the Company's assets and liabilities are not identical in duration and in repricing dates, the differential between the two is vulnerable to changes in market interest rates as well as the overall shape of the yield curve. These vulnerabilities are inherent to the business of banking and are commonly referred to as "interest-rate risk." How interest-rate risk is measured and, once measured, how much interest-rate risk is taken are based on numerous assumptions and other subjective judgments. See the discussion in the "Measuring Interest-Rate Risk" section of Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" below.
The quality of the Company's assets also influences its earnings. Loans and leases that are not paid on a timely basis and exhibit other weaknesses can result in the loss of principal and/or interest income. Additionally, the Company must make timely provisions to the allowance for loan and lease losses based on estimates of probable losses inherent in the loan and lease portfolio. These additions, which are charged against earnings, are necessarily greater when greater probable losses are expected. Further, the Company incurs expenses as a result of resolving troubled assets. These variables reflect the "credit risk" that the Company takes on in the ordinary course of business and are further discussed under "Financial Condition-Asset Quality" above.
Average Balances, Net Interest Income, Interest-Rate Spread and Net Interest Margin
The following table sets forth information about the Company's average balances, interest income and interest rates earned on average interest-earning assets, interest expense and interest rates paid on average interest-bearing liabilities, interest-rate spread and net interest margin for the years ended December 31, 2022, 2021 and 2020. Average balances are derived from daily average balances and yields include fees, costs and purchase-accounting-related premiums and discounts which are considered adjustments to coupon yields in accordance with GAAP.
Year Ended December 31,
2022 2021 2020
Average
Balance Interest (1) Average
Yield/
Cost Average
Balance Interest (1) Average
Yield/
Cost Average
Balance Interest (1) Average
Yield/
Cost
(Dollars in Thousands)
Assets:
Interest-earning assets:
Debt securities $ 706,580 $ 13,079 1.85 % $ 729,147 $ 12,178 1.67 % $ 750,689 $ 13,823 1.84 %
Marketable and restricted equity securities 36,813 1,898 5.15 % 34,074 1,172 3.44 % 61,873 2,862 4.63 %
Short-term investments 104,288 1,440 1.38 % 217,784 252 0.12 % 186,617 413 0.22 %
Total investments 847,681 16,417 1.94 % 981,005 13,602 1.39 % 999,179 17,098 1.71 %
Commercial real estate loans (2)
4,238,960 172,811 4.02 % 3,854,357 139,451 3.57 % 3,781,201 148,438 3.86 %
Commercial loans (2)
744,972 34,105 4.52 % 1,020,627 47,647 4.61 % 1,140,699 41,391 3.57 %
Equipment financing (2)
1,148,673 75,767 6.60 % 1,081,287 71,906 6.65 % 1,074,561 75,563 7.03 %
Residential mortgage loans (2)
823,512 29,726 3.61 % 788,614 27,933 3.54 % 810,855 31,392 3.87 %
Other consumer loans (2)
376,292 16,569 4.40 % 369,326 11,209 3.03 % 402,672 13,255 3.28 %
Total loans and leases 7,332,409 328,978 4.49 % 7,114,211 298,146 4.19 % 7,209,988 310,039 4.30 %
Total interest-earning assets 8,180,090 345,395 4.22 % 8,095,216 311,748 3.85 % 8,209,167 327,137 3.99 %
Allowance for loan and lease losses (95,542) (110,122) (105,824)
Non-interest-earning assets 538,855 533,106 580,226
Total assets $ 8,623,403 $ 8,518,200 $ 8,683,569
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts $ 598,267 853 0.14 % $ 502,189 493 0.10 % $ 408,374 484 0.12 %
Savings accounts 882,881 2,228 0.25 % 793,141 950 0.12 % 670,217 1,503 0.22 %
Money market accounts 2,387,670 15,392 0.64 % 2,288,740 6,214 0.27 % 1,817,085 9,519 0.52 %
Certificate of deposit accounts 998,580 8,210 0.82 % 1,210,451 11,758 0.97 % 1,577,104 30,355 1.92 %
Brokered deposit accounts 146,038 2,909 1.99 % 338,734 1,298 0.38 % 512,803 6,565 1.28 %
Total interest-bearing deposits (3)
5,013,436 29,592 0.59 % 5,133,255 20,713 0.40 % 4,985,583 48,426 0.97 %
Advances from the FHLBB 340,569 9,355 2.71 % 232,175 3,302 1.40 % 859,389 12,842 1.47 %
Subordinated debentures and notes 83,971 5,133 6.11 % 83,821 4,967 5.93 % 83,667 5,038 6.02 %
Other borrowed funds 118,383 1,335 1.13 % 88,818 174 0.20 % 90,587 348 0.38 %
Total borrowed funds 542,923 15,823 2.87 % 404,814 8,443 2.06 % 1,033,643 18,228 1.73 %
Total interest-bearing liabilities 5,556,359 45,415 0.82 % 5,538,069 29,156 0.53 % 6,019,226 66,654 1.11 %
Non-interest-bearing liabilities:
Non-interest-bearing demand checking accounts (3)
1,879,620 1,787,959 1,451,556
Other non-interest-bearing liabilities 203,187 224,634 276,712
Total liabilities 7,639,166 7,550,662 7,747,494
Stockholders' equity 984,237 967,538 936,075
Total liabilities and equity $ 8,623,403 $ 8,518,200 $ 8,683,569
Net interest income (tax-equivalent basis) / Interest-rate spread (4)
299,980 3.40 % 282,592 3.32 % 260,483 2.88 %
Less adjustment of tax-exempt income 209 219 320
Net interest income $ 299,771 $ 282,373 $ 260,163
Net interest margin (5)
3.67 % 3.49 % 3.17 %
_________________________________________________________________________
(1) Tax-exempt income on debt securities, equity securities and industrial revenue bonds are included in commercial real estate loans on a tax-equivalent basis.
(2) Loans on nonaccrual status are included in the average balances.
(3) Including non-interest-bearing checking accounts, the average interest rate on total deposits was 0.43%, 0.30% and 0.75% in the years ended December 31, 2022, 2021 and 2020, respectively.
(4) Interest-rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.
See "Comparison of Years Ended December 31, 2022 and December 31, 2021" and "Comparison of Years Ended December 31, 2021 and December 31, 2020" below for a discussion of average assets and liabilities, net interest income, interest-rate spread and net interest margin.
Rate/Volume Analysis
The following table presents, on a tax-equivalent basis, the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended
December 31, 2022
Compared to Year Ended
December 31, 2021 Year Ended
December 31, 2021
Compared to Year Ended
December 31, 2020
Increase
(Decrease) Due To Increase
(Decrease) Due To
Volume Rate Net Change Volume Rate Net Change
(In Thousands)
Interest and dividend income:
Investments:
Debt securities $ (385) $ 1,286 $ 901 $ (390) $ (1,255) $ (1,645)
Marketable and restricted equity securities 101 625 726 (1,075) (615) (1,690)
Short-term investments (203) 1,391 1,188 57 (218) (161)
Total investments (487) 3,302 2,815 (1,408) (2,088) (3,496)
Loans and leases:
Commercial real estate loans 14,740 18,620 33,360 2,651 (11,638) (8,987)
Commercial loans and leases (12,629) (913) (13,542) (4,637) 10,893 6,256
Equipment financing 4,410 (549) 3,861 468 (4,125) (3,657)
Residential mortgage loans 1,239 554 1,793 (842) (2,617) (3,459)
Other consumer loans 215 5,145 5,360 (1,065) (981) (2,046)
Total loans 7,975 22,857 30,832 (3,425) (8,468) (11,893)
Total change in interest and dividend income 7,488 26,159 33,647 (4,833) (10,556) (15,389)
Interest expense:
Deposits:
NOW accounts 116 244 360 100 (91) 9
Savings accounts 121 1,157 1,278 226 (779) (553)
Money market accounts 281 8,897 9,178 2,027 (5,332) (3,305)
Certificate of deposit accounts (1,884) (1,664) (3,548) (5,945) (12,652) (18,597)
Brokered deposit accounts (1,100) 2,711 1,611 (1,715) (3,552) (5,267)
Total deposits (2,466) 11,345 8,879 (5,307) (22,406) (27,713)
Borrowed funds:
Advances from the FHLBB 2,015 4,038 6,053 (8,956) (584) (9,540)
Subordinated debentures and notes 9 157 166 9 (80) (71)
Other borrowed funds 78 1,083 1,161 (7) (167) (174)
Total borrowed funds 2,102 5,278 7,380 (8,954) (831) (9,785)
Total change in interest expense (364) 16,623 16,259 (14,261) (23,237) (37,498)
Change in tax-exempt income (10) - (10) (101) - (101)
Change in net interest income $ 7,862 $ 9,536 $ 17,398 $ 9,529 $ 12,681 $ 22,210
See "Comparison of Years Ended December 31, 2022 and December 31, 2021" and "Comparison of Years Ended December 31, 2021 and December 31, 2020" below for a discussion of changes in interest income, interest-rate spread and net interest margin resulting from changes in rates and volumes.
Comparison of Years Ended December 31, 2022 and December 31, 2021
Net Interest Income
Net interest income increased $17.4 million to $299.8 million for the year ended December 31, 2022 from $282.4 million for the year ended December 31, 2021. The increase year over year reflects a $30.8 million increase in interest income on loans and leases, along with a $2.8 million increase in interest income on investment securities and short term investments, offset by a $16.3 million increase in interest expense on deposit and borrowings, which is reflective of the rising interest rate environment.
Net interest margin increased by 18 basis points to 3.67% in 2022 from 3.49% in 2021. Excluding the PPP loans, net interest margin increased by 31 basis points to 3.65% in 2022 from 3.34% in 2021. The Company's weighted average interest rate on loans (prior to purchase accounting adjustments) increased to 4.49% for the year ended December 31, 2022 from 4.19% for the year ended December 31, 2021.
The yield on interest-earning assets increased to 4.22% for the year ended December 31, 2022 from 3.85% for the year ended December 31, 2021. This increase is the result of higher yields on loans and leases and investments, partially offset by lower fee income from PPP loans. The Company recorded $4.8 million in prepayment penalties and late charges, which contributed 6 basis points to yields on interest-earning assets for the year ended December 31, 2022 compared to $5.9 million, or 7 basis points, for the year ended December 31, 2021.
The overall cost of funds (including non-interest-bearing demand checking accounts) increased 29 basis points to 0.82% for the year ended December 31, 2022 from 0.53% for the year ended December 31, 2021. Refer to "Financial Condition - Borrowed Funds" above for more details.
Management seeks to position the balance sheet to be neutral to assets sensitive to changes in interest rates. From 2017 through 2019, short term interest rates rose while at the same time net interest income, net interest spread, and net interest margin also increased. During 2020, interest rates declined sharply in response to the economic impact of the COVID-19 pandemic, and started to rise in the first quarter of 2022. In recent months, the yield curve has begun to invert and flatten on the long end. Short term rates are continuing to rise due to multiple rate hikes imposed by the FRB. The shape of the curve indicates rates will begin to fall within a year and flatten around the 7-year mark. This type of curve positively effects the Company’s net interest income, net interest spread, and net interest margin in the short term but will have a negative effect in the long term. Due to, among other things, ongoing pricing pressures in the loan and deposit portfolios, net interest income may also be negatively affected by changes in the amount of accretion on acquired loans and leases, deposits and borrowed funds, which is included in interest income and interest expense, respectively.
Interest Income-Loans and Leases
Year Ended
December 31, Dollar
Change Percent
Change
2022 2021
(Dollars in Thousands)
Interest income-loans and leases:
Commercial real estate loans $ 172,811 $ 139,451 $ 33,360 23.9 %
Commercial loans 33,896 47,426 (13,530) (28.5) %
Equipment financing 75,767 71,906 3,861 5.4 %
Residential mortgage loans 29,726 27,933 1,793 6.4 %
Other consumer loans 16,569 11,211 5,358 47.8 %
Total interest income-loans and leases $ 328,769 $ 297,927 $ 30,842 10.4 %
Interest income from loans and leases was $328.8 million for 2022, and represented a yield on total loans of 4.49%. This compares to $297.9 million of interest on loans and leases and a yield of 4.19% for 2021. The $30.8 million increase in interest income from loans and leases was primarily due to an increase of $8.0 million in origination volume, and an increase of $22.8 million related to interest rates changes.
Interest Income-Investments
Year Ended
December 31, Dollar
Change Percent
Change
2022 2021
(Dollars in Thousands)
Interest income-investments:
Debt securities $ 13,079 $ 12,178 $ 901 7.4 %
Marketable and restricted equity securities 1,898 1,172 726 61.9 %
Short-term investments 1,440 252 1,188 471.4 %
Total interest income-investments $ 16,417 $ 13,602 $ 2,815 20.7 %
Total investment income was $16.4 million for the year ended December 31, 2022 compared to $13.6 million for the year ended December 31, 2021. As of December 31, 2022, the yield on total investments was 1.94% compared to 1.39% as of December 31, 2021. This year over year increase in total investment income of $2.8 million, or 20.7%, was driven by a $3.3 million increase due to rates and a $0.5 million decrease due to volume.
Interest Expense-Deposits and Borrowed Funds
Year Ended
December 31, Dollar
Change Percent
Change
2022 2021
(Dollars in Thousands)
Interest expense:
Deposits:
NOW accounts $ 853 $ 493 $ 360 73.0 %
Savings accounts 2,228 950 1,278 134.5 %
Money market accounts 15,392 6,214 9,178 147.7 %
Certificate of deposit accounts 8,210 11,758 (3,548) (30.2) %
Brokered deposit accounts 2,909 1,298 1,611 124.1 %
Total interest expense-deposits 29,592 20,713 8,879 42.9 %
Borrowed funds:
Advances from the FHLBB 9,355 3,302 6,053 183.3 %
Subordinated debentures and notes 5,133 4,967 166 3.3 %
Other borrowed funds 1,335 174 1,161 667.2 %
Total interest expense-borrowed funds 15,823 8,443 7,380 87.4 %
Total interest expense $ 45,415 $ 29,156 $ 16,259 55.8 %
Deposits
In 2022, interest paid on deposits increased $8.9 million, or 42.9%, compared to 2021. The increase in interest expense on deposits was driven by an increase of $11.3 million due to higher interest rates, offset by a decrease of $2.5 million primarily driven by the decline in volume of average certificate of deposit and brokered deposit balances.
Borrowed Funds
As of December 31, 2022, the Company's borrowed funds include: $1.2 billion in FHLBB advances, $110.8 million in other borrowed funds, and $84.0 million in subordinated debentures and notes. In 2022, the average balance of FHLBB advances increased $108.4 million, or 46.7%, the average balance of other borrowed funds, which includes repurchase agreements and other borrowings, increased $29.6 million, or 33.3%, and the average balance of subordinated debentures and notes increased $0.2 million, or 0.2%, for the year ended December 31, 2022.
For the year ended December 31, 2022, interest paid on borrowed funds increased $7.4 million, or 87.4% year over year. The cost of borrowed funds increased to 2.87% for the year ended December 31, 2022 from 2.06% for the year ended December 31, 2021. The increase in interest expense was driven by an increase of $5.3 million due to borrowing rates and an increase of $2.1 million due to volume. For the year ended December 31, 2022, purchase accounting accretion was $47.0 thousand on acquired borrowed funds compared to accretion of $51.0 thousand for the year ended December 31, 2021. Purchase accounting accretion had no impact on the Company's net interest margin.
Provision for Credit Losses
The provisions for credit losses are set forth below:
Year Ended
December 31,
2022 2021
(In Thousands)
Provision (credit) for credit losses:
Commercial real estate $ (1,046) $ (10,903)
Commercial 2,892 3,480
Consumer 872 (2,138)
Total provision (credit) for loan and lease losses 2,718 (9,561)
Unfunded credit commitments 5,807 1,724
Investment securities available-for-sale 102 -
Total provision (credit) for credit losses $ 8,627 $ (7,837)
For the year ended December 31, 2022, the provision for credit losses increased $16.4 million to $8.6 million from a credit of $7.8 million for the year ended December 31, 2021. This increase in the provision for 2022 is primarily related to loan growth and projected economic forecasts.
See management’s discussion of “Financial Condition - Allowance for Loan and Lease Losses” and Note 7, “Allowance for Credit Losses,” to the unaudited consolidated financial statements for a description of how management determined the allowance for loan and lease losses for each portfolio and class of loans.
Non-Interest Income
The following table sets forth the components of non-interest income:
Year Ended
December 31, Dollar
Change Percent
Change
2022 2021
(Dollars in Thousands)
Deposit fees $ 10,919 $ 10,578 $ 341 3.2 %
Loan fees 2,208 2,095 113 5.4 %
Loan level derivative income, net 4,246 4,680 (434) (9.3) %
Gain (loss) on sales of investment securities, net 321 (38) 359 (944.7) %
Gain on sales of loans and leases 4,136 3,737 399 10.7 %
Other 6,517 5,937 580 9.8 %
Total non-interest income $ 28,347 $ 26,989 $ 1,358 5.0 %
For the year ended December 31, 2022, non-interest income increased $1.4 million, or 5.0%, to $28.3 million compared to $27.0 million for the same period in 2021. The increase was primarily driven by increases of $0.6 million in other income, $0.4 million in gain on sales of loans and leases, and $0.4 million in gain on sales of investment securities, partially offset by a decrease of $0.4 million in loan level derivative income, net.
Other income increased $0.6 million, or 9.8%, to $6.5 million for the year ended December 31, 2022 from $5.9 million for the same period in 2021, primarily driven by higher wealth management income, other income, commissions-insurance agency and rental income, partially offset by higher losses on interest rate derivatives, lower BOLI income, and higher losses on sale of fixed assets.
Gain on sales of loans and leases increased $0.4 million, or 10.7%, to $4.1 million for the year ended December 31, 2022 from $3.7 million for the same period in 2021, primarily driven by an increase in loan participations in 2022.
For the year ended December 31, 2022, gain on sales of investment securities increased $0.4 million, or 944.7%, to $0.3 million, compared to a loss of $38.0 thousand for the same period in 2021, primarily driven by a $6.1 million gain on sales of restricted equity securities, partially offset by a $5.8 million loss on sales of investments.
Non-Interest Expense
The following table sets forth the components of non-interest expense:
Year Ended
December 31, Dollar
Change Percent
Change
2022 2021
(Dollars in Thousands)
Compensation and employee benefits $ 113,487 $ 106,786 $ 6,701 6.3 %
Occupancy 16,002 14,961 1,041 7.0 %
Equipment and data processing 20,833 18,322 2,511 13.7 %
Professional services 5,060 4,694 366 7.8 %
FDIC insurance 3,177 2,980 197 6.6 %
Advertising and marketing 4,980 4,167 813 19.5 %
Amortization of identified intangible assets 494 876 (382) (43.6) %
Merger and acquisition expense 2,249 - 2,249 N/A
Other 13,260 9,822 3,438 35.0 %
Total non-interest expense $ 179,542 $ 162,608 $ 16,934 10.4 %
For the year ended December 31, 2022, non-interest expense increased $16.9 million, or 10.4%, to $179.5 million compared to $162.6 million for the same period in 2021. The increase was primarily driven by increases of $6.7 million in compensation and employee benefits, $3.4 million in other expense, $2.5 million in equipment and data processing, $2.2 million in merger and acquisition expense, $1.0 million in occupancy, $0.8 million in advertising and marketing, and $0.4 million in professional services, partially offset by a decrease of $0.4 million in amortization of identified intangible assets.
The efficiency ratio increased to 54.72% for the year ended December 31, 2022 from 52.56% for the same period in 2021. The increase year over year was primarily driven by higher non-interest expense, partially offset by higher net interest income and non-interest income in 2022.
Compensation and employee benefits expense increased $6.7 million, or 6.3%, to $113.5 million for the year ended December 31, 2022 from $106.8 million for the same period in 2021. The increase was primarily driven by increases in employee headcount and salaries and a decrease in salaries deferred costs, partially offset by a decrease in retirement plan benefits.
Equipment and data processing expense increased $2.5 million, or 13.7%, to $20.8 million for the year ended December 31, 2022 from $18.3 million for the same period in 2021. The increase was primarily driven by higher software licenses and subscription expenses, professional services-IT consulting expense, equipment depreciation expense, and ATM maintenance expense.
Merger and acquisition expense increased $2.2 million to $2.2 million for the year ended December 31, 2022. For the same period in 2021, the Company did not incur any merger-related expenses. The increase in 2022 was primarily driven by merger-related expenses related to the PCSB acquisition.
Other expense increased $3.4 million, or 35.0%, to $13.3 million for the year ended December 31, 2022 from $9.8 million for the same period in 2021. The increase was primarily driven by a gain of $2.2 million on the sale of other real estate owned property in 2021, and increases in travel and accommodations expense in 2022, partially offset by decreases in commissions paid to a third party for new leases in 2022.
Provision for Income Taxes
Year Ended
December 31, Dollar
Change Percent
Change
2022 2021
(Dollars in Thousands)
Income before provision for income taxes $ 139,949 $ 154,591 $ (14,642) (9.5) %
Provision for income taxes 30,205 39,151 (8,946) (22.8) %
Net income, before non-controlling interest in subsidiary $ 109,744 $ 115,440 $ (5,696) (4.9) %
Effective tax rate 21.6 % 25.3 % N/A (14.6) %
The Company recorded income tax expense of $30.2 million for 2022, compared to $39.2 million for 2021. This represents an effective tax rate of 21.6% and 25.3% for 2022 and 2021, respectively. The decrease in the Company's effective tax rate is reflective of the Company's participation in energy tax credit deals done during the third and fourth quarters of 2022.
Comparison of Years Ended December 31, 2021 and December 31, 2020
Net Interest Income
Net interest income increased $22.2 million to $282.4 million for the year ended December 31, 2021 from $260.2 million for the year ended December 31, 2020. The increase year over year reflects a $11.9 million decrease in interest income on loans and leases, along with a $3.4 million decrease in interest income on debt securities, offset by a $37.5 million decrease in interest expense on deposit and borrowings, which is reflective of the sustained, low interest rate environment. This was then offset by income from participation in the PPP.
Net interest margin increased by 32 basis points to 3.49% in 2021 from 3.17% in 2020, of which 15 basis points is attributed to additional fee income from the PPP. The Company's weighted average interest rate on loans (prior to purchase accounting adjustments) decreased to 4.19% for the year ended December 31, 2021 from 4.30% for the year ended December 31, 2020. The increase in net interest margin over the period is a result of the Company's asset sensitive positioning as interest rates remained at low levels.
The yield on interest-earning assets decreased to 3.85% for the year ended December 31, 2021 from 3.99% for the year ended December 31, 2020. This decrease is the result of lower yields on loans and leases. The Company recorded $5.9 million in prepayment penalties and late charges, which contributed 7 basis points to yields on interest-earning assets for the year ended December 31, 2021 compared to $4.5 million, or 5 basis points, for the year ended December 31, 2020.
The overall cost of funds (including non-interest-bearing demand checking accounts) decreased 58 basis points to 0.53% for the year ended December 31, 2021 from 1.11% for the year ended December 31, 2020. Refer to "Financial Condition - Borrowed Funds" above for more details.
Management seeks to position the balance sheet to be neutral to assets sensitive to changes in interest rates. From 2017 through 2019, short term interest rates rose while at the same time net interest income, net interest spread, and net interest margin also increased. During 2020, interest rates declined sharply in response to the economic impact of the COVID-19 pandemic, and remained low throughout 2021. In general, the Company's balance sheet position should respond positively in a rising interest rate environment and when the rate curves are steepening, which should result in a positive impact to net interest income, net interest spread, and the net interest margin. A declining interest rate or flattening yield curve environment is expected to have a negative impact on the Company's yields and net interest margin. Due to, among other things, ongoing pricing pressures in the loan and deposit portfolios, net interest income may also be negatively affected by changes in the amount of accretion on acquired loans and leases, deposits and borrowed funds, which is included in interest income and interest expense, respectively.
Interest Income-Loans and Leases
Year Ended
December 31, Dollar
Change Percent
Change
2021 2020
(Dollars in Thousands)
Interest income-loans and leases:
Commercial real estate loans $ 139,451 $ 148,438 $ (8,987) (6.1) %
Commercial loans 47,426 41,150 6,276 15.3 %
Equipment financing 71,906 75,563 (3,657) (4.8) %
Residential mortgage loans 27,933 31,392 (3,459) (11.0) %
Other consumer loans 11,211 13,255 (2,044) (15.4) %
Total interest income-loans and leases $ 297,927 $ 309,798 $ (11,871) (3.8) %
Interest income from loans and leases was $297.9 million for 2021, and represented a yield on total loans of 4.19%. This compares to $309.8 million of interest on loans and a yield of 4.30% for 2020. The $11.9 million decrease in interest income from loans and leases was primarily due to a decrease of $3.4 million in origination volume, and a decrease of $8.5 million related to interest rates changes.
Interest Income-Investments
Year Ended
December 31, Dollar
Change Percent
Change
2021 2020
(Dollars in Thousands)
Interest income-investments:
Debt securities $ 12,178 $ 13,758 $ (1,580) (11.5) %
Marketable and restricted equity securities 1,172 2,848 (1,676) (58.8) %
Short-term investments 252 413 (161) (39.0) %
Total interest income-investments $ 13,602 $ 17,019 $ (3,417) (20.1) %
Total investment income was $13.6 million for the year ended December 31, 2021 compared to $17.0 million for the year ended December 31, 2020. As of December 31, 2021, the yield on total investments was 1.39% compared to 1.71% as of December 31, 2020. This year over year decrease in total investment income of $3.4 million, or 20.1%, was driven by a $2 million decrease due to rates and a $1.4 million decrease due to volume.
Interest Expense-Deposits and Borrowed Funds
Year Ended
December 31, Dollar
Change Percent
Change
2021 2020
(Dollars in Thousands)
Interest expense:
Deposits:
NOW accounts $ 493 $ 484 $ 9 1.9 %
Savings accounts 950 1,503 (553) (36.8) %
Money market accounts 6,214 9,519 (3,305) (34.7) %
Certificate of deposit accounts 11,758 30,355 (18,597) (61.3) %
Brokered deposit accounts 1,298 6,565 (5,267) (80.2) %
Total interest expense-deposits 20,713 48,426 (27,713) (57.2) %
Borrowed funds:
Advances from the FHLBB 3,302 12,842 (9,540) (74.3) %
Subordinated debentures and notes 4,967 5,038 (71) (1.4) %
Other borrowed funds 174 348 (174) (50.0) %
Total interest expense-borrowed funds 8,443 18,228 (9,785) (53.7) %
Total interest expense $ 29,156 $ 66,654 $ (37,498) (56.3) %
Deposits
In 2021, interest paid on deposits decreased $27.7 million, or 57.2%, compared to 2020. The decrease in interest expense on deposits was driven by a decrease of $22.4 million due to lower interest rates and a decrease of $5.3 million primarily driven by lower certificate of deposit balances. There were no purchase accounting amortizations on acquired deposits for the year ended December 31, 2021, compared to $44.0 thousand for the year ended December 31, 2020. Purchase accounting amortization had no impact on the Company's net interest margin.
Borrowed Funds
As of December 31, 2021, the Company's borrowed funds include: $147.9 million in FHLBB advances, $83.9 million in subordinated debentures and notes, and $125.5 million in other borrowed funds. In 2021, the average balance of FHLBB advances decreased $627.2 million, or 73.0%, while the average balance of subordinated debentures and notes increased $0.2 million, or 0.2%. The average balance of other borrowed funds, which includes repurchase agreements, decreased $1.8 million, or 2.0%, for the year ended December 31, 2021.
During the year ended December 31, 2021, interest paid on borrowed funds decreased $9.8 million, or 53.7% year over year. The cost of borrowed funds increased to 2.06% for the year ended December 31, 2021 from 1.73% for the year ended December 31, 2020. The decrease in interest expense was driven by a decrease of $9.0 million due to volume and a decrease of $0.8 million due to borrowing rates. For the year ended December 31, 2021, purchase accounting accretion was $51.0 thousand compared to $54.0 thousand for the year ended December 31, 2020. Purchase accounting accretion had no impact on the Company's net interest margin.
Provision for Credit Losses
The provisions for credit losses are set forth below:
Year Ended
December 31,
2021 2020
(In Thousands)
Provision for loan and lease losses:
Commercial real estate $ (10,903) $ 41,573
Commercial 3,480 17,050
Consumer (2,138) 1,003
Total provision for loan and
lease losses (9,561) 59,626
Unfunded credit commitments 1,724 2,260
Total provision for credit losses $ (7,837) $ 61,886
For the year ended December 31, 2021, the provision for credit losses decreased $69.7 million to a credit of $7.8 million from $61.9 million for the year ended December 31, 2020. The significant provision in 2020 was primarily driven by increased credit risk associated with the COVID-19 pandemic. The significant decrease in the 2021 provision was primarily driven by improvements in the economic forecasts used in the CECL estimate, which was partially offset by $5.7 million in charge-offs in 2021.
See management’s discussion of “Financial Condition - Allowance for Loan and Lease Losses” and Note 7, “Allowance for Credit Losses,” to the unaudited consolidated financial statements for a description of how management determined the allowance for loan and lease losses for each portfolio and class of loans.
Non-Interest Income
The following table sets forth the components of non-interest income:
Year Ended
December 31, Dollar
Change Percent
Change
2021 2020
(Dollars in Thousands)
Deposit fees $ 10,578 $ 9,050 $ 1,528 16.9 %
Loan fees 2,095 2,048 47 2.3 %
Loan level derivative income, net 4,680 4,268 412 9.7 %
(Loss) gain on sales of investment securities, net (38) 1,970 (2,008) (101.9) %
Gain on sales of loans and leases 3,737 1,118 2,619 234.3 %
Other 5,937 6,190 (253) (4.1) %
Total non-interest income $ 26,989 $ 24,644 $ 2,345 9.5 %
For the year ended December 31, 2021, non-interest income increased $2.3 million, or 9.5%, to $27.0 million compared to $24.6 million for the same period in 2020. The increase was primarily driven by increases of $2.6 million in gain on sales of loans and leases, $1.5 million in deposit fees and $0.4 million in loan level derivative income, net, partially offset by a decrease of $2.0 million in gain on sales of investment securities and a decrease of $0.3 million in other income.
Gain on sales of loans and leases increased $2.6 million, or 234.3%, to $3.7 million for the year ended December 31, 2021 from $1.1 million for the same period in 2020, primarily driven by an increase in loan participations in 2021.
Deposit fees increased $1.5 million, or 16.9%, to $10.6 million for the year ended December 31, 2021 from $9.1 million for the same period in 2020, primarily driven by higher debit card fees, foreign exchange incoming wire income, ATM fees and account service fees.
For the year ended December 31, 2021, gain on sales of investment securities decreased $2.0 million, or 101.9%, and the Company recognized a loss of $38.0 thousand compared to a gain of $2.0 million for the same period in 2020, primarily driven by a $3.2 million gain on sales of investment securities offset by a $1.3 million loss on equity securities held-for-trading primarily driven by a sale of equity securities in 2020 compared to a $32 thousand loss on four investment securities sold in 2021.
Non-Interest Expense
The following table sets forth the components of non-interest expense:
Year Ended
December 31, Dollar
Change Percent
Change
2021 2020
(Dollars in Thousands)
Compensation and employee benefits $ 106,786 $ 100,985 $ 5,801 5.7 %
Occupancy 14,961 15,386 (425) (2.8) %
Equipment and data processing 18,322 17,345 977 5.6 %
Professional services 4,694 5,157 (463) (9.0) %
FDIC insurance 2,980 4,229 (1,249) (29.5) %
Advertising and marketing 4,167 4,126 41 1.0 %
Amortization of identified intangible assets 876 1,271 (395) (31.1) %
Other 9,822 12,345 (2,523) (20.4) %
Total non-interest expense $ 162,608 $ 160,844 $ 1,764 1.1 %
For the year ended December 31, 2021, non-interest expense increased $1.8 million, or 1.1%, to $162.6 million compared to $160.8 million for the same period in 2020. The increase was primarily driven by an increase of $5.8 million in compensation and employee benefits and an increase of $1.0 million in equipment and data processing, partially offset by decreases of $2.5 million in other expense, $1.2 million in FDIC insurance, $0.5 million in professional services, $0.4 million in occupancy, and $0.4 million in amortization of identified intangible assets.
The efficiency ratio decreased to 52.56% for the year ended December 31, 2021 from 56.47% for the same period in 2020. The decrease year over year was primarily driven by higher net interest income and non-interest income, offset by higher non-interest expense in 2021.
Compensation and employee benefits increased $5.8 million, or 5.7%, to $106.8 million for the year ended December 31, 2021 from $101.0 million for the same period in 2020. The increase was primarily driven by increases in employee headcount, salaries and incentive bonuses, partially offset by a decrease in retirement plan benefits.
Equipment and data processing increased $1.0 million, or 5.6%, to $18.3 million for the year ended December 31, 2021 from $17.3 million for the same period in 2020. The increase was primarily driven by higher software licenses and subscriptions expense and higher computer equipment depreciation expense, partially offset by lower core processing expense.
Other expense decreased $2.5 million, or 20.4%, to $9.8 million for the year ended December 31, 2021 from $12.3 million for the same period in 2020. The decrease was primarily driven by a gain of $2.2 million on the sale of other real estate owned property in the second quarter of 2021, decreases in write-down of other repossessed assets, loan workout expense, customer losses and charge offs, and telephone expense, partially offset by a decrease in loan expense deferred costs and increases in commissions paid to a third party for new leases, correspondent bank fees, appraisal search expense, and recruiting expense.
FDIC insurance expense decreased $1.2 million, or 29.5%, to $3.0 million for the year ended December 31, 2021 from $4.2 million for the same period in 2020. The decrease was primarily driven by lower bank assessment fees from the FDIC.
Provision for Income Taxes
Year Ended
December 31, Dollar
Change Percent
Change
2021 2020
(Dollars in Thousands)
Income before provision for income taxes $ 154,591 $ 62,077 $ 92,514 149.0 %
Provision for income taxes 39,151 14,442 24,709 171.1 %
Net income, before non-controlling interest in subsidiary $ 115,440 $ 47,635 $ 67,805 142.3 %
Effective tax rate 25.3 % 23.3 % N/A 8.6 %
The Company recorded income tax expense of $39.2 million for 2021, compared to $14.4 million for 2020. This represents an effective tax rate of 25.3% and 23.3% for 2021 and 2020, respectively. The increase in the Company's effective tax rate was primarily driven by the NOL carryback rules seen in the CARES Act in 2020. The Company filed amended returns to take advantage of this one-off event in 2020.
Liquidity and Capital Resources
Liquidity
Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers, as well as to earnings enhancement opportunities, in a changing marketplace. Liquidity management is monitored by an Asset/Liability Committee ("ALCO"), consisting of members of management, which is responsible for establishing and monitoring liquidity targets as well as strategies and tactics to meet these targets.
The primary source of funds for the payment of dividends and expenses by the Company are dividends paid to it by the Banks and Brookline Securities Corp. The primary sources of liquidity for the Banks consist of deposit inflows, loan repayments, borrowed funds, and maturing investment securities.
Deposits, which are considered the most stable source of liquidity, totaled $6.5 billion as of December 31, 2022 and represented 82.0% of total funding (the sum of total deposits and total borrowings), compared to deposits of $7.0 billion, or 95.2% of total funding, as of December 31, 2021. Core deposits, which consist of demand checking, NOW, savings and money market accounts, totaled $5.3 billion as of December 31, 2022 and represented 81.0% of total deposits, compared to core deposits of $5.8 billion, or 81.8% of total deposits, as of December 31, 2021. Additionally, the Company had $310.1 million of brokered deposits as of December 31, 2022, which represented 4.8% of total deposits, compared to $165.5 million or 2.3% of total deposits, as of December 31, 2021. The Company offers attractive interest rates based on market conditions to increase deposits balances, while managing cost of funds.
Borrowings are used to diversify the Company's funding mix and to support asset growth. When profitable lending and investment opportunities exist, access to borrowings provides a means to grow the balance sheet. Borrowings totaled $1.4 billion as of December 31, 2022, representing 18.0% of total funding, compared to $357.3 million, or 4.8% of total funding, as of December 31, 2021.
As members of the FHLBB, the Banks have access to both short- and long-term borrowings. The Company's total borrowing limit from the FHLBB for advances and repurchase agreements remained consistent at $1.7 billion as of December 31, 2022 and December 31, 2021, based on the level of qualifying collateral available for these borrowings. As of December 31, 2022, the Company had $1.2 billion outstanding with the FHLBB.
As of December 31, 2022, the Banks also have access to funding through certain uncommitted lines of credit of $863.0 million. The Company had a $30.0 million committed line of credit for contingent liquidity as of December 31, 2022.
The Company has access to the FRB's "discount window" to supplement its liquidity. The Company has $148.7 million of borrowing capacity at the FRB as of December 31, 2022. As of December 31, 2022, the Company did not have any borrowings with the FRB outstanding. As of December 31, 2022, the Company had no borrowings outstanding with these committed and uncommitted lines.
Additionally, the Banks have access to liquidity through repurchase agreements and brokered deposits.
In general, the Company seeks to maintain a high degree of liquidity and targets cash, cash equivalents and investment securities available-for-sale balances of between 5% and 15% of total assets. As of December 31, 2022, cash, cash equivalents
and investment securities available-for-sale totaled $1.0 billion, or 11.3% of total assets. This compares to $1.0 billion, or 12.2% of total assets as of December 31, 2021.
While management believes that the Company has adequate liquidity to meet its commitments, and to fund the Banks' lending and investment activities, the availabilities of these funding sources are subject to broad economic conditions and could be restricted in the future. Such restrictions would impact the Company's immediate liquidity and/or additional liquidity needs.
Capital Resources
As of December 31, 2022 and 2021, the Company and the Banks were under the primary regulation of and required to comply with the capital requirements of the FRB. At those dates, the Company and the Banks exceeded all regulatory capital requirements and the banks were considered "well-capitalized." See "Supervision and Regulation" in Item 1 and Note 19, "Regulatory Capital Requirements", for the Company's and the Banks' actual and required capital amounts and ratios.
Off-Balance-Sheet Arrangements
The Company is party to off-balance sheet financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby and commercial letters of credit and loan level derivatives. According to GAAP, these financial instruments are not recorded in the financial statements until they are funded or related fees are incurred or received. The effect of such activity on the Company's financial condition and results of operations, such as recorded liability for unfunded credit commitment, is immaterial. See Note 13, "Commitments and Contingencies," to the consolidated financial statements for a description of off-balance-sheet financial instruments.
Contractual Obligations
A summary of contractual obligations by the expected payment period for the date indicated follows.
Payment Due by Period
Less Than
One Year One to
Three Years More than Three Years to
Five Years Over Five
Years Total
(In Thousands)
At December 31, 2022:
Advances from the FHLBB $ 1,003,300 $ 227,471 $ 364 $ 6,688 $ 1,237,823
Subordinated debentures and notes - - - 84,044 84,044
Other borrowed funds 110,785 - - - 110,785
Loan commitments (1)
2,767,752 - - - 2,767,752
Occupancy lease commitments (2)
5,890 7,689 3,996 5,416 22,991
Service provider contracts (3)
33,234 67,703 67,343 52,410 220,690
Postretirement benefit obligations (4)
588 1,457 1,852 14,195 18,092
$ 3,921,549 $ 304,320 $ 73,555 $ 162,753 $ 4,462,177
_______________________________________________________________________________
(1) These amounts represent commitments made by the Company to extend credit to borrowers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
(2) The Company leases certain office space under various noncancellable operating leases. These leases have original terms ranging from 3 years to over 25 years. Certain leases contain renewal options and escalation clauses for real estate taxes and other expenditures which can increase rental expenses based principally on the consumer price index and fair market rental value provisions.
(3) Payments to service providers under most of the existing contracts are based on the volume of accounts served or transactions processed. Some contracts also call for higher required payments when there are increases in the Consumer Price Index. The expected payments shown in this table are based on an estimate of the number of accounts to be served or transactions to be processed, but do not include any projection of the effect of changes in the Consumer Price Index.
(4) These amounts represent commitments made by the Company for a Supplemental Executive Retirement Plan as part of the acquisition of BankRI and a Postretirement Benefits Plan, at Brookline Bank, that provides part of the annual expense of health insurance premiums for retired employees and their dependents.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Market risk is the risk that the market value or estimated fair value of the Company's assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that the Company's net income will be significantly reduced by interest-rate changes.
Interest-Rate Risk
The principal market risk facing the Company is interest-rate risk, which can occur in a variety of forms, including repricing risk, yield-curve risk, basis risk, and prepayment risk. Repricing risk occurs when the change in the average yield of either interest-earning assets or interest-bearing liabilities is more sensitive than the other to changes in market interest rates. Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of the Company's assets and liabilities. Yield-curve risk reflects the possibility that changes in the shape of the yield curve could have different effects on the Company's assets and liabilities. Basis risk occurs when different parts of the balance sheet are subject to varying base rates reflecting the possibility that the spread from those base rates will deviate. Prepayment risk is associated with financial instruments with an option to prepay before the stated maturity, often a disadvantage to person selling the option; this risk is most often associated with the prepayment of loans, callable investments, and callable borrowings.
Asset/Liability Management
Market risk and interest-rate risk management is governed by the Company's Asset/Liability Committee ("ALCO"). The ALCO establishes exposure limits that define the Company's tolerance for interest-rate risk. The ALCO and the Company's Treasury Group measure and manage the composition of the balance sheet over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The ALCO monitors current exposures versus limits and reports those results to the Board of Directors. The policy limits and guidelines serve as benchmarks for measuring interest-rate risk and for providing a framework for evaluation and interest-rate risk-management decision-making. The Company measures its interest-rate risk by using an asset/liability simulation model. The model considers several factors to determine the Company's potential exposure to interest-rate risk, including measurement of repricing gaps, duration, convexity, value-at-risk, market value of portfolio equity under assumed changes in the level of interest rates, the shape of yield curves, and general market volatility.
Management controls the Company's interest-rate exposure using several strategies, which include adjusting the maturities of securities in the Company's investment portfolio, limiting or expanding the terms of loans originated, limiting fixed-rate deposits with terms of more than five years, and adjusting maturities of FHLBB advances. The Company limits this risk by restricting the types of MBSs it invests into those with limited average life changes under certain interest-rate-shock scenarios, or securities with embedded prepayment penalties. The Company also places limits on holdings of fixed-rate mortgage loans with maturities greater than five years. The Company enters into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments.
Measuring Interest-Rate Risk
As noted above, interest-rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest-rate sensitivity gap. An asset or liability is said to be interest-rate sensitive within a specific period if it will mature or reprice within that period. The interest-rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities. A gap is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. During a period of falling interest rates, therefore, a positive gap would tend to adversely affect net interest income. Conversely, during a period of rising interest rates, a positive gap position would tend to result in an increase in net interest income.
The Company's interest-rate risk position is measured using both income simulation and interest-rate sensitivity "gap" analysis. Income simulation is the primary tool for measuring the interest-rate risk inherent in the Company's balance sheet at a given point in time by showing the effect on net interest income, over a twelve-month period, of a variety of interest-rate shocks. These simulations take into account repricing, maturity, and prepayment characteristics of individual products. The ALCO reviews simulation results to determine whether exposure resulting from changes in market interest rates remains within established tolerance levels over a twelve-month horizon, and develops appropriate strategies to manage this exposure. The Company's interest-rate risk analysis remains modestly asset-sensitive as of December 31, 2022.
The assumptions used in the Company’s interest-rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates.
As of December 31, 2022, net interest income simulation indicated that the Company's exposure to changing interest rates was within tolerance. The ALCO reviews the methodology utilized for calculating interest-rate risk exposure and may periodically adopt modifications to this methodology. The following table presents the estimated impact of interest-rate changes on the Company's estimated net interest income over the twelve-month periods indicated:
Estimated Exposure to Net Interest Income
over Twelve-Month Horizon Beginning
December 31, 2022 December 31, 2021
Gradual Change in Interest Rate Levels Dollar
Change Percent
Change Dollar
Change Percent
Change
(Dollars in Thousands)
Up 300 basis points shock $ 22,790 7.4 % $ 27,487 10.2 %
Up 200 basis points ramp 8,747 2.8 % 16,549 6.1 %
Up 100 basis points ramp 4,477 1.5 % 10,875 4.0 %
Down 100 basis points ramp (6,160) (2.0) % (4,340) (1.6) %
The estimated impact of a 300 basis points increase in market interest rates on the Company's estimated net interest income over a twelve-month horizon was a positive 7.4% as of December 31, 2022, compared to a positive 10.2% as of December 31, 2021. The balance sheet became less asset sensitive as deposit outflows caused a reliance on wholesale funding.
Economic Value of Equity ("EVE") at Risk Simulation is conducted in tandem with net interest income simulations to ascertain a longer term view of the Company’s interest-rate risk position by capturing longer-term repricing risk and options risk embedded in the balance sheet. It measures the sensitivity of the economic value of equity to changes in interest rates. The EVE at Risk Simulation values only the current balance sheet and does not incorporate growth assumptions. As with the net interest income simulation, this simulation captures product characteristics such as loan resets, repricing terms, maturity dates, and rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity, and non-maturity deposit attrition rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. The Company conducts non-maturity deposit behavior studies on a periodic basis to support deposit assumptions used in the valuation process. All key assumptions are subject to a periodic review.
EVE at Risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates as well as parallel shocks to the current interest-rate environment. The following table sets forth the estimated percentage change in the Company’s EVE at Risk, assuming various shifts in interest rates.
Estimated Percent Change in Economic Value of Equity
Parallel Shock in Interest Rate Levels At December 31, 2022 At December 31, 2021
Up 300 basis points 0.3 % 8.2 %
Up 200 basis points 0.5 % 5.8 %
Up 100 basis points 0.8 % 3.7 %
Down 100 basis points (3.0) % (9.4) %
The Company's EVE asset sensitivity decreased from December 31, 2021 to December 31, 2022 due to deposit outflows, increase in wholesale funding, along with an inverted yield curve.
The Company also uses interest-rate sensitivity "gap" analysis to provide a more general overview of its interest-rate risk profile. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. The table below shows the Company's interest-rate sensitivity gap position as of December 31, 2022.
One Year
or Less More than
One Year to
Two Years More than
Two Years
to Three
Years More than
Three Years
to Five Years More than
Five Years Total
(Dollars in Thousands)
Interest-earning assets (1):
Short-term investments $ 191,192 $ - $ - $ - $ - $ 191,192
Weighted average rate 3.83 % - % - % - % - % 3.83 %
Investment securities (1) (3)
145,151 62,165 60,707 109,831 278,912 656,766
Weighted average rate 1.91 % 2.76 % 1.47 % 2.04 % 2.11 % 2.06 %
Commercial real estate loans (1)
2,216,233 532,006 439,142 785,078 431,689 4,404,148
Weighted average rate 5.67 % 4.27 % 4.12 % 4.24 % 4.93 % 5.02 %
Commercial loans and leases (1)
990,299 438,043 290,313 240,514 57,330 2,016,499
Weighted average rate 6.87 % 6.48 % 6.34 % 6.17 % 6.56 % 6.61 %
Consumer loans (1)
648,907 138,862 104,474 145,803 185,695 1,223,741
Weighted average rate 5.85 % 3.91 % 3.80 % 3.90 % 4.88 % 5.08 %
Total interest-earning assets 4,191,782 1,171,076 894,636 1,281,226 953,626 8,492,346
Weighted average rate 5.77 % 4.97 % 4.62 % 4.37 % 4.20 % 5.15 %
Interest-bearing liabilities (1):
NOW accounts $ - $ - $ - $ - $ 544,118 $ 544,118
Weighted average rate - % - % - % - % 0.18 % 0.18 %
Savings accounts - - - - 762,272 762,272
Weighted average rate - % - % - % - % 0.70 % 0.70 %
Money market savings accounts 2,174,952 - - - - 2,174,952
Weighted average rate 1.63 % - % - % - % - % 1.63 %
Certificates of deposit (1)
615,083 269,882 22,000 21,178 - 928,143
Weighted average rate 1.20 % 2.80 % 1.83 % 1.34 % - % 1.68 %
Brokered deposits 267,691 42,646 - (193) - 310,144
Weighted average rate 2.73 % 4.83 % - % - % - % 3.02 %
Borrowed funds (1)
1,124,760 226,796 1,937 1,349 77,809 1,432,651
Weighted average rate 4.28 % 4.83 % 1.04 % 2.94 % 4.45 % 4.37 %
Total interest-bearing liabilities 4,182,486 539,324 23,937 22,334 1,384,199 6,152,280
Weighted average rate 2.35 % 3.81 % 1.77 % 1.44 % 0.70 % 2.06 %
Interest sensitivity gap (2)
$ 9,296 $ 631,752 $ 870,699 $ 1,258,892 $ (430,573) $ 2,340,066
Cumulative interest sensitivity gap $ 9,296 $ 641,048 $ 1,511,747 $ 2,770,639 $ 2,340,066
Cumulative interest sensitivity gap as a percentage of total assets 0.10 % 6.98 % 16.46 % 30.16 % 25.47 %
Cumulative interest sensitivity gap as a percentage of total interest-earning assets 0.11 % 7.55 % 17.80 % 32.63 % 27.56 %
_______________________________________________________________________________
(1) Interest-earning assets and interest-bearing liabilities are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.
(2) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.
(3) Investment securities include all debt, equity and restricted equity securities and unrealized gains and losses on investment securities.
As of December 31, 2022, interest-earning assets maturing or repricing within one year amounted to $4.19 billion and interest-bearing liabilities maturing or repricing within one year amounted to $4.18 billion, resulting in a cumulative one-year positive gap position of $9.3 million or 0.11% of total interest-earning assets. As of December 31, 2021, the Company had a cumulative one-year positive gap position of $445.5 million, or 5.48% of total interest-earning assets. The change in the cumulative one-year gap position from December 31, 2021 was due to a shift in funding mix from non-maturity deposits to wholesale funding.
Interest rates paid on NOW accounts, savings accounts and money market accounts are subject to change at any time and such deposits are available for immediate withdrawal. A review of rates paid on these deposit categories over the last several years indicated that the amount and timing of rate changes did not coincide with the amount and timing of rate changes on other deposits when the FRB adjusted its benchmark federal funds rate.
Management views NOW and savings accounts to be less sensitive to interest rates than money market accounts and these accounts are therefore characterized as stable long-term funding sensitive beyond five years. Management views money market accounts to be more volatile deposits and these accounts are therefore characterized as sensitive to changes in interest rates within the first year.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The following financial statements and supplementary data required by this item are presented on the following pages which appear elsewhere herein:
Pages
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020
Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021, and 2020
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2022, 2021, and 2020
-
Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020
-
Notes to Consolidated Financial Statements
-

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer (Principal Executive Officer) and Chief Financial and Strategy Officer (Principal Financial Officer), the Company has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial and Strategy Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to the Company's management, including its Chief Financial and Strategy Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in the Company's internal control over financial reporting identified in connection with the quarterly evaluation that occurred during the Company's last fiscal quarter that has materially and detrimentally affected, or is reasonably likely to materially and detrimentally affect, the Company's internal control over financial reporting.
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control system was designed to provide reasonable assurance to its management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company's management assessed the effectiveness of its internal control over financial reporting as of the end of the period covered by this report. In addition, the effectiveness of the Company's internal control over financial reporting as of the end of the period covered by this report has been audited by KPMG LLP, an independent registered public accounting firm as stated in its report which is included in Item 8 of this Annual Report on Form 10-K.
Management's Report on Internal Control Over Financial Reporting as of December 31, 2022 appears on page herein and the related Report of Independent Registered Public Accounting Firm thereon appears on page herein.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the Company's Proxy Statement to be filed in connection with the Annual Meeting of Stockholders (the "Proxy Statement").

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the Proxy Statement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to the Proxy Statement.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
Our independent registered public accounting firm is KPMG LLP, Boston, MA, Auditor Firm ID: 185
The information required by this item is incorporated herein by reference to the Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(a)Financial Statements
All financial statements are included in Item 8 of Part II of this Annual Report on Form 10-K.
(2)Financial Statement Schedules
All financial statement schedules have been omitted because they are not required, not applicable or are included in the consolidated financial statements or related notes.
(3)Exhibits
The exhibits listed in paragraph (b) below are filed herewith or incorporated herein by reference to other filings.
(b)Exhibits
EXHIBIT INDEX
Exhibit Description
3.1 Certificate of Incorporation of Brookline Bancorp, Inc.
3.2 Amended and Restated Bylaws of Brookline Bancorp, Inc. (incorporated by reference to Exhibit 3.02 of the Company's Current Report on Form 8-K filed on January 10, 2013)
4 Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4 of the Registration Statement on Form S-1 filed by the Company on April 10, 2002 (Registration No. 333-85980))
4.1 Subordinated Indenture, dated as of September 16, 2014, between Brookline Bancorp, Inc. and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on September 17, 2014)
4.2 First Supplemental Indenture, dated as of September 16, 2014, between Brookline Bancorp, Inc. and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on September 17, 2014)
4.3 Form of Global Note to represent the 6.000% Fixed-to-Floating Rate Subordinated Notes due September 15, 2029 (contained in the First Supplemental Indenture included as Exhibit 4.2)
4.4 Description of Registrant’s Securities
10.1+ Brookline Bancorp, Inc. Deferred Compensation Plan effective January 1, 2011, as amended and restated January 1, 2018
10.4+ Brookline Bancorp, Inc. 2014 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 9, 2014)
10.4.1+ Form of Restricted Stock Award Agreement under the Brookline Bancorp, Inc. 2014 Equity Incentive Plan
10.5+ Brookline Bancorp, Inc. 2021 Stock Option and Incentive Plan (incorporated by reference to the Company's Current Report on Form 8-K filed on May 13, 2021.
10.5.1+ Form of Restricted Stock Award Agreement under the Brookline Bancorp, Inc. 2021 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.2 of the Company's Registration Statement on Form S-8).
10.6+ Employment Agreement, dated as of April 11, 2011, by and among Brookline Bancorp, Inc., Brookline Bank and Paul A. Perrault (incorporated by reference to Exhibit 10.10 of the Company's Current Report on Form 8-K filed on April 15, 2011)
10.6.1+ Amendment to the Employment Agreement, dated July 25, 2018, by and among the Brookline Bancorp, Inc., Brookline Bank and Paul Perrault.
10.6.2+ Second Amendment to the Employment Agreement, dated March 10, 2021, by and among Brookline Bancorp, Inc., Brookline Bank and Paul A. Perrault (incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on March 10, 2021).
10.6.3+ Third Amendment to the Employment Agreement, dated September 22, 2021, by and among Brookline Bancorp, Inc., Brookline Bank and Paul A. Perrault.
10.8+ Employment Letter Agreement, dated as of April 19, 2011, by and between Brookline Bancorp, Inc. and Mark J. Meiklejohn (incorporated by reference to Exhibit 10.3 of Pre-effective Amendment No. 2 of the Registration Statement on Form S-4 filed by the Company on July 25, 2011 (Registration Number 333-174731))
Exhibit Description
10.9+ Form of Amended Change in Control Agreement (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q filed May 9, 2014)
10.12+ Employment Agreement, dated September 22, 2021, by and among Brookline Bancorp, Inc., Brookline Bank, Bank Rhode Island and Michael W. McCurdy.
10.13+ Employment Agreement, dated September 22, 2021, by and among Brookline Bancorp, Inc., Brookline Bank, Bank Rhode Island and Carl M. Carlson.
10.14+ Employment Agreement, by and among Brookline Bancorp, Inc., PCSB Bank and Michael P. Goldrick, dated as of May 23, 2022 (incorporated by reference to Exhibit 10.2 of Brookline Bancorp, Inc.’s Form S-4 filed by Brookline Bancorp, Inc. with the Securities and Exchange Commission on June 27, 2022)
21 Subsidiaries of the Registrant (incorporated by reference in Part I, Item 1. "Business-General" of this Annual Report on Form 10-K)
23* Consent of Independent Registered Public Accounting Firm
31.1* Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1** Rule 13a-14(b) Certifications of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Rule 13a-14(b) Certifications of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)
_______________________________________________________________________________
* Filed herewith
** Furnished herewith
+ Management contract or compensatory plan or agreement
(c)Other Required Financial Statements and Schedules
Not applicable.