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

The Company is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust, a Massachusetts trust company chartered in 1907. For a full list of corporate entities see Item 1 "Business — General."

All material intercompany balances and transactions have been eliminated in consolidation. When necessary, certain amounts in prior year financial statements have been reclassified to conform to the current year’s presentation. The following should be read in conjunction with the Consolidated Financial Statements and related notes.

Executive Level Overview

Management evaluates the Company's operating results and financial condition using measures that include net income, earnings per share, return on assets and equity, return on tangible common equity, net interest margin, tangible book value per share, asset quality indicators, and many others. These metrics are used by management to make key decisions regarding the Company's balance sheet, liquidity, interest rate sensitivity, and capital resources and assist with identifying opportunities for improving the Company's financial position or operating results.

Results for the year ended December 31, 2020 were significantly impacted by the ongoing COVID-19 pandemic, resulting in $52.5 million of loan provisioning during the year. The full macroeconomic impacts of the pandemic remain unclear and are continuing to evolve; however, the stay-at-home orders, business closures, social distancing measures, limitations on travel and restrictions on gatherings that have been put in place for public health and safety have led to a decline in consumer spending and historically high levels of unemployment as workplaces have been forced to shut down or severely limit operations. The duration of these restrictions has varied, and restrictions have been and may continue to be tightened or re-instituted in light of resurgences of COVID-19 in particular areas. In addition, the effectiveness of recently approved vaccines, as well as their availability and the timing of their distribution to the public remain largely unknown at this time. As a result, the Company is not able to provide any assurances that the Company’s earnings, asset quality, regulatory capital ratios and economic condition will not be materially adversely impacted on a short term or long term basis.

The Company has been and remains committed to supporting and working with its customers as they navigate these unprecedented times. The Company has abided by government mandates requiring temporary moratorium on foreclosures, and has offered a variety of relief measures to its customers consistent with prudent banking principles and regulatory guidance. These relief measures have included temporary deferrals of loan payments, waiving certain fees and permitting customers easier access to their deposits. The Company’s charitable foundations have engaged and will continue to engage in outreach to local communities during this difficult time and have committed funds to be made available to key nonprofits with urgent needs, such as local food banks. The Company has been an active participant in the government-sponsored Paycheck Protection Program ("PPP") designed to help deploy stimulus funds in the form of loans to businesses within the community, funding approximately 6,100 loans during the year, with a total balance of $791.9 million outstanding as of December 31, 2020. The Company received fee revenue of $27.1 million for the origination of these PPP loans, which is deferred and amortized over the life of the loan. As of December 31, 2020, $9.1 million in fee revenue has been amortized into income, with the remaining amount to be amortized over the remaining loan maturity. Subsequent to year end, the Company has been participating in the second round of PPP funding, continuing to offer its customers access to much needed relief funds.

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Interest-Earning Assets

Management’s asset strategy typically emphasizes loan growth, primarily in the commercial and home equity portfolios. The results depicted in the following table reflect the trend of the Company's interest-earning assets over the past five years. For 2020, the increase in interest-earning assets was driven primarily by an increase in commercial loan balances, reflecting the Company's PPP loan funding activity, as well as growth in cash balances attributable to elevated deposits from PPP loans and other government stimulus payments, partially offset by decreases in the residential and home equity loan portfolios.

Management strives to be disciplined about loan pricing and considers interest rate sensitivity when generating loan assets. In addition, management takes a disciplined approach to credit underwriting, seeking to avoid undue credit risk and credit losses.

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Funding and the Net Interest Margin

The Company's overall sources of funding reflect strong business and retail deposit growth with a management emphasis on core deposit growth to fund loans. During 2020, the Company realized growth in deposits, which increased $1.8 billion or 20.2% from December 31, 2019 to $11.0 billion, which was attributable to a combination of funds received for PPP loans and from other government stimulus programs and an overall customer focus on retaining liquidity. The following chart shows the sources of funding and the percentage of core deposits to total deposits for the trailing five years:

The cost of deposits at December 31, 2020 was 0.27%, a 20 basis point decrease compared to December 31, 2019 due primarily to deposit rate reductions across all products. The Company's net interest margin was 3.29% for the year ended December 31, 2020, representing a 75 basis point decrease from the comparative 2019 period, primarily reflective of the lower interest-rate environment, along with other factors, such as increases in low yielding cash balances and PPP loans.

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

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Noninterest Income

Management continues to focus on noninterest income, which is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees and mortgage banking income. The following chart shows the components of noninterest income over the past five years:

Expense Control

Management seeks to take a balanced approach to noninterest expense control by monitoring ongoing operating expenses while making needed capital expenditures and prudently investing in growth initiatives. The Company’s primary expenses arise from Rockland Trust’s employee salaries and benefits, as well as expenses associated with buildings and equipment. During 2020, the Company incurred additional expenses due to the COVID-19 pandemic relating to cleaning costs, the purchase of office supplies and protective equipment, such as face masks, plexiglass dividers and other protective measures, as well as increased equipment expense related to setting up employees with remote capabilities. Additionally, the 2020 results included a $4.2 million lease impairment charge in connection with the decision to exit two branch locations.

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The following chart depicts the Company's efficiency ratio on a GAAP basis (calculated by dividing noninterest expense by the sum of noninterest income and net interest income), as well as the Company's efficiency ratio on a non-GAAP operating basis, (calculated by dividing noninterest expense, excluding certain noncore items, by the sum of noninterest income, excluding certain noncore items, and net interest income) over the past five years:

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

Capital

The Company's approach with respect to revenue and expense is designed to promote long-term earnings growth, which in turn contributes to capital growth. During the first half of 2020, the Company completed its previously announced stock repurchase program, repurchasing all 1.5 million shares available under the program at a total cost of $95.1 million and an average cost per share of $63.39. The following chart shows the Company's book value and tangible book value per share over the past five years:

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

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Cash dividends declared by the Company increased from an aggregate of $1.76 per share in 2019 to $1.84 per share in 2020, representing an increase of 4.5%.

2020 Results

Net income for 2020 computed in accordance with GAAP was $121.2 million, or $3.64 on a diluted earnings per share basis, as compared to $165.2 million, or $5.03 per diluted share, for the prior year. Net income for 2020 and 2019 included items that are considered noncore, which are excluded for purposes of assessing operating earnings. Net operating earnings for 2020 were $121.7 million, or $3.66 on a diluted earnings per share basis, a decrease of 34.1% and 34.9%, respectively, when compared to net operating earnings of $184.6 million, or $5.62 per diluted share, for the year ended December 31, 2019. See "Non-GAAP Measures" below for a reconciliation of net operating earnings and diluted earnings per share to GAAP net income and earnings per share, respectively.

2021 Outlook

During the Company's fourth quarter 2020 earnings call, the Company provided the following key expectations regarding business activity to serve as near term guidance into the year 2021:

•excluding PPP activity, the Company anticipates modest net growth in total commercial loan balances;

•while loan closing activity is expected to remain strong heading into 2021, the anticipated persistence of pay-down activity will continue to challenge any meaningful growth in the consumer loan portfolios;

•excess liquidity and the timing on PPP fee income recognition will continue to create some level of volatility in net interest margin. Excluding these factors, the core margin will continue to be impacted by expected asset yield compression as assets continue to reprice into an anticipated low interest rate environment. However, the Company believes there is still some level of further reductions in the deposit base at December 31, 2020 that should continue to mitigate the asset yield compression in the near term, resulting in a modest net core margin compression;

•assuming no material changes to the overall macroeconomic forecast, the Company anticipates that the build of the allowance for credit losses in 2020 should cause the provision for credit losses to more closely correlate to charge-off activity, with some element of loss reserve reductions if the economic environment stabilizes;

•the Company expects mortgage demand to remain strong with gain on sale margins expected to normalize down from 2020 levels, while swap fee income is expected to return to historical levels;

•a continued stabilization of the economy should reflect positive increases to deposit fees that were negatively impacted for much of 2020, and continued growth in investment management results are expected; and,

•the Company's effective tax rate is expected to be approximately 24% in 2021 assuming no change in tax laws.

Non-GAAP Measures

When management assesses the Company’s financial performance for purposes of making day-to-day and strategic decisions, it does so based upon the performance of its core banking business, which is primarily derived from the combination of net interest income and noninterest or fee income, reduced by operating expenses, the provision for credit losses, and the impact of income taxes and other noncore items shown in the table that follows. There are items that impact the Company's results that management believes are unrelated to its core banking business such as gains or losses on the sales of securities, merger and acquisition expenses, loss on extinguishment of debt, impairment, and other items, such as one-time adjustments as a result of changes in laws and regulations. Management, therefore, excludes items management considers to be noncore when computing the Company’s non-GAAP operating earnings and operating EPS, noninterest income on an operating basis and efficiency ratio on an operating basis. Management believes excluding these items facilitates greater visibility into the Company’s core banking business and underlying trends that may, to some extent, be obscured by inclusion of such items.

Management also supplements its evaluation of financial performance with an analysis of tangible book value per share (which is computed by dividing stockholders' equity less goodwill and identifiable intangible assets, or tangible common equity, by common shares outstanding) and with the Company's tangible common equity ratio (which is computed by dividing tangible common equity by tangible assets) which are non-GAAP measures. The Company has included information on these

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tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends. The Company has recognized goodwill and other intangible assets in conjunction with merger and acquisition activities. Excluding the impact of goodwill and other intangibles in measuring asset and capital values for the ratios provided, along with other bank standard capital ratios, facilitates comparison of the capital adequacy of the Company to other companies in the financial services industry.

These non-GAAP measures should not be viewed as a substitute for financial results determined in accordance with GAAP. An item which management deems to be noncore and excludes when computing these non-GAAP measures can be of substantial importance to the Company’s results for any particular period. The Company’s non-GAAP performance measures are not necessarily comparable to similarly named non-GAAP performance measures which may be presented by other companies.

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

Net Income Diluted Earnings Per Share

(Dollars in thousands, except per share data)

Non-GAAP adjustments

Noninterest income components

Less: gain on sale of loans — 951 — 0.03

Noninterest expense components

Add: loss on termination of derivatives 684 — 0.03 —

Add: merger and acquisition expenses — 26,433 — 0.80

Net tax benefit associated with noncore items (1) (192) (6,686) (0.01) (0.20)

(1)The net tax benefit associated with noncore items is determined by assessing whether each noncore item is included or excluded from net taxable income and applying the Company's combined marginal tax rate only to those items included in net taxable income.

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

Years Ended December 31

(Dollars in thousands)

Less:

Gain on sale of loans — 951 — — —

Less:

Loss on extinguishment of debt — — — — 437

Loss on termination of derivatives 684 — — — —

Ratios

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

Years Ended December 31

(Dollars in thousands, except per share data)

Tangible common equity

Tangible assets

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Financial Position

Securities Portfolio The Company’s securities portfolio consists of trading securities, equity securities, securities available for sale and securities which management intends to hold until maturity. Securities decreased by $28.4 million, or 2.4%, at December 31, 2020 as compared to December 31, 2019. The ratio of securities to total assets at December 31, 2020 was 8.80%, compared to 10.45% at December 31, 2019. The Company estimates expected credit losses for its available for sale and held to maturity securities in accordance with the current expected credit loss ("CECL") methodology. Further details regarding the Company's measurement of expected credit losses can be found in Note 1, "Summary of Significant Accounting Policies" within the Notes to Consolidated Financial Statements included in Item 8 of this Report.

The following table sets forth the fair value of available for sale securities and the amortized cost of held to maturity securities along with the percentage distribution:

Table 1 - Securities Portfolio Composition

December 31

Amount Percent Amount Percent Amount Percent

(Dollars in thousands)

Fair value of securities available for sale

Amortized cost of securities held to maturity

U.S. government agency securities — — % 12,874 1.7 % — — %

The Company’s available for sale securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as level 3 within the fair value hierarchy. At December 31, 2020, and 2019, the Company had $1.1 million of securities categorized as level 3 within the fair value hierarchy. At December 31, 2018, the Company had $1.3 million of securities categorized as level 3 within the fair value hierarchy.

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The following tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2020. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Weighted average yields in the table below have been calculated based on the amortized cost of the security.

Table 2 - Securities Portfolio, Amounts Maturing

(Dollars in thousands)

Fair value of securities available for sale

Agency collateralized mortgage obligations — — — — — — 91,683 2.0 % 91,683 2.0 %

State, county and municipal securities 601 3.2 % — — 206 3.0 % — — 807 3.1 %

Amortized cost of securities held to maturity

As of December 31, 2020, the weighted average life of the securities portfolio was 3.00 years and the modified duration was 2.90 years.

At December 31, 2020, the aggregate book value of securities issued by Fannie Mae and Freddie Mac exceeded 10% of stockholders' equity. The aggregate book value and market value of securities issued by Fannie Mae at December 31, 2020 was $674.9 million and $700.3 million, respectively. The aggregate book value and market value of securities issued by Freddie Mac at December 31, 2020 was $276.6 million and $286.8 million, respectively.

Residential Mortgage Loan Sales The Company’s primary loan sale activity arises from the sale of government sponsored enterprise eligible residential mortgage loans. The Company originates residential loans with the intention of selling them in the secondary market or to hold in the Company's residential portfolio. When a loan is sold, the Company enters into agreements that contain representations and warranties about the characteristics of the loans sold and their origination. The Company may be required to either repurchase mortgage loans or to indemnify the purchaser from losses if representations and warranties are breached. The Company incurred no material losses related to mortgage repurchases during the years ended December 31, 2020, 2019, and 2018.

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

Table 3 - Closed Residential Real Estate Loans

Years Ended December 31

(Dollars in thousands)

The table below reflects additional information related to loans which were sold during the periods indicated:

Table 4 - Residential Mortgage Loan Sales

Years Ended December 31

(Dollars in thousands)

(1)The Company had recourse on all loans sold with servicing rights retained.

When a loan is sold, the Company may decide to also sell the servicing of sold loans for a servicing release premium, simultaneously with the sale of the loan, or the Company may opt to sell the loan and retain the servicing. In the event of a sale with servicing rights retained, a mortgage servicing asset is established, which represents the then current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets in the consolidated balance sheets, are amortized in proportion to and over the period of estimated net servicing income, and are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying the rights based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to income. The principal balance of loans serviced by the Bank on behalf of investors was $453.7 million at December 31, 2020 and $656.4 million at December 31, 2019.

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

Table 5 - Mortgage Servicing Asset

(Dollars in thousands)

Acquired portfolio — 3,198

Change in valuation allowance (1,934) (59)

See Note 12, "Derivatives and Hedging Activities," within the Notes to Consolidated Financial Statements included in Item 8 of this Report for more information on mortgage activity and mortgage related derivatives.

Loan Portfolio The Company’s loan portfolio increased by $519.2 million during 2020. The overall increase is primarily attributable to the Company's participation in the PPP. There were approximately 6,100 PPP loans funded during the year with a total outstanding balance of $791.9 million at December 31, 2020. When excluding PPP activity, loans declined by $272.7 million, or 3.07%, compared to December 31, 2019. During 2020, growth across most commercial loan categories was outpaced by runoff in the consumer loan portfolios. Growth across commercial loan categories generally reflects strong closing activity diversified across a number of industries and property types. Within the consumer portfolios, the low interest rate environment has driven record mortgage banking volumes and results, while portfolio balances further declined as the majority of residential mortgage production continues to be sold into the secondary market. Similarly, on the home equity side, despite strong closing activity, loan growth continues to be challenged by attrition.

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

Table 6 - Loan Portfolio Composition

December 31

(Dollars in thousands)

Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

The following table sets forth the scheduled contractual amortization of the Bank’s loan portfolio at December 31, 2020. Loans having no schedule of repayments or no stated maturity are reported as being due in greater than five years. The following table also sets forth the rate structure of loans scheduled to mature after one year:

Table 7 - Scheduled Contractual Loan Amortization

(Dollars in thousands)

Amounts due in:

Interest rate terms on amounts due after one year:

(1)Includes certain construction loans that will convert to commercial mortgages and will be reclassified to commercial real estate upon the completion of the construction phase.

At December 31, 2020, $18.8 million of loans scheduled to mature within one year were nonperforming.

Generally, the actual maturity of loans is substantially shorter than their contractual maturity due to prepayments and, in the case of real estate loans, due-on-sale clauses, which generally give the Bank the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells the property subject to the mortgage and the loan is not repaid. The average life of real estate loans tends to increase when current real estate loan rates are higher than rates on mortgages in the portfolio and, conversely, tends to decrease when rates on mortgages in the portfolio are higher than current real estate loan rates. Due to the fact that the Bank may, consistent with industry practice, renew a significant portion of commercial and commercial real estate loans at or immediately prior to their maturity by renewing the loans on substantially similar or revised terms, the principal repayments actually received by the Bank are anticipated to be significantly less than the amounts

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

Asset Quality The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this assessment, loans demonstrating certain payment issues or other weaknesses may be categorized as delinquent, nonperforming and/or put on nonaccrual status. In the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition. If a restructured loan meets certain criteria, it may be categorized as a troubled debt restructuring ("TDR"). In addition, the Company has been offering needs based payment relief options for commercial and small business loans, residential mortgages, and home equity loans and lines of credit in response to the COVID-19 pandemic. In accordance with the CARES Act, these modifications will not be accounted for as TDRs or be reflected as delinquent or non-accrual loans if the borrower was in compliance with the loan terms as of December 31, 2019.

DelinquencyThe Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. Generally, the Company requires that a delinquency notice be mailed to a borrower upon expiration of a grace period (typically no longer than 15 days beyond the due date). Reminder notices may be sent and telephone calls may be made prior to the expiration of the grace period. If the delinquent status is not resolved within a reasonable time frame following the mailing of a delinquency notice, the Bank’s personnel charged with managing its loan portfolios contacts the borrower to ascertain the reasons for delinquency and the prospects for payment. Any subsequent actions taken to resolve the delinquency will depend upon the nature of the loan and the length of time that the loan has been delinquent. The borrower’s needs are considered as much as reasonably possible without jeopardizing the Bank’s position. A late charge is usually assessed on loans upon expiration of the grace period.

Nonaccrual Loans As a general rule, loans 90 days or more past due with respect to principal or interest are classified as nonaccrual loans. However, certain loans that are 90 days or more past due may be kept on an accruing status if the loans are well secured and in the process of collection. The Company may also put a junior lien mortgage on nonaccrual status as a result of delinquency with respect to the first position, which is held by another financial institution, while the junior lien is currently performing. Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. A loan remains on nonaccrual status until it becomes current with respect to principal and interest (and in certain instances remains current for up to six months), the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for credit losses.

Troubled Debt RestructuringsIn the course of resolving problem loans, the Company may choose to restructure the contractual terms of certain loans. The Company attempts to work out an alternative payment schedule with the borrower in order to avoid or cure a default. Loans that are modified are reviewed by the Company to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include adjustments to interest rates, extensions of maturity, consumer loans where the borrower's obligations have been effectively discharged through Chapter 7 Bankruptcy and the borrower has not reaffirmed the debt to the Bank, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. If such efforts by the Bank do not result in satisfactory performance, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.

It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status for six months, subsequent to being modified, before management considers their return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Loans that are considered TDRs are classified as performing, unless they are on nonaccrual status or are delinquent for 90 days or more. Loans classified as TDRs remain classified as such for the life of the loan, except in limited circumstances, when it may be determined that the borrower is performing under modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable market rate for a comparable new loan at the time of the restructuring.

Purchased Credit Deteriorated LoansPurchased Credit Deteriorated ("PCD") loans are acquired loans which have shown a more-than-insignificant deterioration in credit quality since origination. PCD loans are recorded at amortized cost with an allowance for credit losses recorded upon purchase, as appropriate.

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Nonperforming Assets Nonperforming assets are typically comprised of nonperforming loans and other real estate owned ("OREO"). Nonperforming loans consist of nonaccrual loans and loans that are 90 days or more past due but still accruing interest. OREO consists of real estate properties, which have primarily served as collateral to secure loans, that are controlled or owned by the Bank. These properties are recorded at fair value less estimated costs to sell at the date control is established, resulting in a new cost basis. The amount by which the recorded investment in the loan exceeds the fair value (net of estimated costs to sell) of the foreclosed asset is charged to the allowance for credit losses. Subsequent declines in the fair value of the foreclosed asset below the new cost basis are recorded through the use of a valuation allowance. Subsequent increases in the fair value are recorded as reductions in the valuation allowance, but not below zero. All costs incurred thereafter in maintaining the property are generally charged to noninterest expense. In the event the real estate is utilized as a rental property, net rental income and expenses are recorded as incurred within noninterest expense.

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

Table 8 - Nonperforming Assets

December 31

(Dollars in thousands)

Loans accounted for on a nonaccrual basis

Loans past due 90 days or more but still accruing

Commercial real estate (2) — $ 218 — — —

Residential real estate (2) — 1,652 — — —

Home equity (2) — 265 — — —

Other real estate owned — — — 612 4,173

(1)Included in these amounts were nonaccrual TDRs of $22.2 million at December 31, 2020, $24.8 million at December 31, 2019, $29.3 million at December 31, 2018, $6.1 millionat December 31, 2017, and $5.2 million at December 31, 2016. The increase in nonaccrual TDRs in 2018 was due to nonaccrual loans associated with a large commercial loan customer that had previously declared bankruptcy which were modified when a court confirmed the customer's bankruptcy reorganization plan. That revision to loan terms required the Company to deem loans associated with the customer as TDRs at December 31, 2018 which amounted to $25.9 million.

(2)Represents purchased credit impaired ("PCI") loans that were accruing interest due to the expectation of future cash collections. Under CECL guidance, the concept of PCI loans was eliminated (and was replaced with classification as PCD loans) and is therefore not applicable for periods subsequent to the Company's adoption of CECL on January 1, 2020.

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

Table 9 - Activity in Nonperforming Assets

(Dollars in thousands)

Nonperforming assets beginning balance $ 48,049 $ 45,418

Acquired nonperforming loans — 2,317

Loans restored to accrual status (12,692) (2,603)

Acquired other real estate owned — 2,818

Valuation write down — (389)

Sale of other real estate owned — (2,500)

Nonperforming assets ending balance $ 66,861 $ 48,049

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

Table 10 - Troubled Debt Restructurings

December 31

(Dollars in thousands)

(1) During the fourth quarter of 2018 nonaccrual loans associated with a large commercial loan customer that had previously declared bankruptcy were modified when a court confirmed the customer's bankruptcy reorganization plan. That revision to loan terms required the Company to deem $25.9 million of loans associated with the customer as TDRs at December 31, 2018.

The following table summarizes changes in TDRs for the periods indicated:

Table 11 - Activity in Troubled Debt Restructurings

(Dollars in thousands)

Charge-offs (22) (38)

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Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. The table below shows interest income that was recognized or collected on all nonaccrual loans and TDRs as of the dates indicated:

Table 12 - Interest Income - Nonaccrual Loans and Troubled Debt Restructurings

Years Ended December 31

(Dollars in thousands)

Potential problem loans are any loans which are not included in nonaccrual or nonperforming loans, where known information about possible credit problems of the borrowers causes management to have concerns as to the ability of such borrowers to comply with present loan repayment terms. At December 31, 2020, there were 83 relationships, with an aggregate balance of $145.6 million, deemed to be potential problem loans. These potential problem loans continued to perform with respect to payments. Management actively monitors these loans and strives to minimize any possible adverse impact to the Company. A portion of the potential problem loans identified by management have been granted a deferral during 2020 in accordance with the relief options offered in response to the COVID-19 pandemic. If applicable, these potential problem loans with an active deferral as of December 31, 2020 have been included in the table below.

As ntoed above, as a result of the COVID-19 pandemic, the Company has been offering needs based payment relief options to its customers in response to the COVID-19 pandemic. These modifications will not be accounted for as TDRs or reflected as delinquent or nonaccrual loans if the borrower was in compliance with their loan terms as of December 31, 2019. The following table summarizes active deferrals by modification type as of December 31, 2020:

Table 13 - Deferrals by Modification Type

(Dollars in thousands)

Consumer — — — — 21,862 — %

(1)Balances include commercial construction deferrals.

Additionally, as a result of the COVID-19 pandemic, management has also enhanced monitoring of loan portfolios in certain industries that have been or could be highly impacted. While management is unable to predict the full impact of all industries affected by the pandemic, there are assumptions as to which industries will be more greatly impacted due to social distancing and other protective measures and restrictions put in place by government and private businesses, as well as the duration of these measures and restrictions. Management has identified approximately $1.3 billion of loans within highly impacted industries, such as Accommodations, Food Services, Retail Trade, Other Services (except Public Administration), and Arts, Entertainment & Recreation. Loss exposure within these industries is mitigated by a number of factors such as collateral values, loan-to-value ratios, and other key indicators, however, some degree of credit loss is expected and has been incorporated into the allowance for credit loss recognition under the CECL model.

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The table below provides total outstanding balances of commercial loans at December 31, 2020 within industries that management has deemed to be highly impacted by the COVID-19 pandemic:

Table14 - Highly Impacted COVID-19 Industries - Details

(Dollars in thousands)

Accommodations

Average borrower loan size $ 4,055

% secured by real estate 99.7 %

Weighted average loan to value 54.4 %

Other information:

Food Services

Average borrower loan size $ 374

% secured by real estate 65.6 %

Weighted average loan to value 51.2 %

Other information:

Retail Trade

Average borrower loan size $ 490

% secured by real estate 42.2 %

Weighted average loan to value 55.5 %

Other information:

Other Services (except Public Administration)

Average borrower loan size $ 257

% secured by real estate 51.0 %

Weighted average loan to value 50.8 %

Other information:

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Arts, Entertainment, and Recreation

Average borrower loan size $ 807

% secured by real estate 84.1 %

Weighted average loan to value 52.9 %

Other information:

Allowance for Credit Losses The allowance for credit losses is maintained at a level that management considers appropriate to provide for the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. The allowance is increased by providing for credit losses through a charge to expense and by credits for recoveries of loans previously charged-off and is reduced by loans being charged-off.

In accordance with the CECL methodology, adopted January 1, 2020, the Company estimates credit losses for financial assets on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of prepayments. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period of one year, beyond which is a reversion to the Company's historical long-run average for a period of 6 months. The Company's qualitative assessment is structured based upon nine environmental factors impacting the expected risk of loss within the loan portfolio. Loans that do not share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that will be individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable. The Company's adoption of CECL had a minimal impact on the allowance for credit losses as compared to the incurred loss methodology prescribed by previously applicable accounting guidance.

The allowance for credit losses of $113.4 million at December 31, 2020 represents an increase of $45.6 million, or 67.3%, in comparison to the implementation balances at January 1, 2020. This increase in the allowance was primarily driven by anticipated credit deterioration caused by the COVID-19 pandemic, which resulted in an elevated provision for credit losses of $52.5 million for the year ended December 31, 2020.

While management is unable to know with certainty the direct, indirect, and future impacts of the COVID-19 pandemic, it is expected that the pandemic will have a material adverse impact on future losses across a broad range of loan segments. Accordingly, the forecast used by the model was adjusted to use a more severe outlook as compared to the baseline forecast used to calculate the opening balances on January 1, 2020 as a result of the uncertainty in the outlook due to the ongoing pandemic. Additionally, the provision for credit loss recognized for the year ended December 31, 2020 reflects increased reserve allocations to loan segments identified as having an elevated loss exposure associated with the COVID-19 pandemic. The underlying assumptions related to the Company's economic forecast included items such as, unemployment increasing through mid-2022, federal funds rates holding steady near 0% until 2022 and an expectation that no sustained economic recovery will occur until 2022.

The provision for credit losses was qualitatively adjusted upward for the year ended December 31, 2020 in order to ensure coverage for highly impacted relationships as management performed detailed analysis consisting of a review of maximum levels of historic loss given default ("LGD") and stressed probability of default ("PD") scenarios for loans that were deemed to be more at risk within the industries that are highly impacted by the COVID-19 pandemic. In addition to these industry exposures, qualitative adjustments were also made in order to provide coverage over the additional risk of loss attributable to collateral values associated with non-owner occupied real estate with significant retail tenant exposure, as well as home equity loans within a junior lien position. Refer to Note 4, "Loans, Allowance for Credit Losses and Credit Quality" within the Notes to the Consolidated Financial Statements included in Item 8 of this Report for further details regarding the Company's adoption of CECL and full disclosures under the new standard.

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The following table summarizes changes in the allowance for credit losses and other selected statistics for the periods presented:

Table 15 - Summary of Changes in the Allowance for Credit Losses

December 31

(Dollars in thousands)

Cumulative effect accounting adjustment (1) (1,137) — — — —

Cumulative effect accounting adjustment (2) 1,157 — — — —

Charged-off loans:

Recoveries on loans previously charged-off

Net loans charged-off (recoveries)

(1)Represents adjustment needed to reflect the cumulative day one impact pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment represents a $1.1 million decrease to the allowance attributable to the change in accounting methodology for estimating the allowance for credit losses resulting from the Company's adoption of the standard.

(2)Represents adjustment needed to reflect the day one reclassification of the Company's PCI loan balances to PCD and the associated gross-up, pursuant to the adoption of Accounting Standards Update 2016-13. The adjustment represents a $1.2 million increase to the allowance resulting from the day one reclassification.

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For purposes of the allowance for credit losses, management segregates the loan portfolio into the portfolio segments detailed in the table below. The allocation of the allowance for credit losses is made to each loan category using the analytical techniques and estimation methods described in this Report. While these amounts represent management’s best estimate of credit losses at the evaluation dates, they are not necessarily indicative of either the categories in which actual losses may occur or the extent of such actual losses that may be recognized within each category. Each of these loan categories possess unique risk characteristics that are considered when determining the appropriate level of allowance for each segment. The Company began estimating its allowance for credit losses in accordance with the CECL methodology as of January 1, 2020, while prior period amounts were estimated using the incurred loss methodology prescribed by previously applicable accounting guidance. The total allowance is available to absorb losses from any segment of the loan portfolio.

The following table sets forth the allocation of the allowance for credit losses by loan category at the dates indicated:

Table 16 - Summary of Allocation of Allowance for Credit Losses

December 31

(Dollars in thousands)

Allocated Allowance

(1)Total loans in this category increased during 2020 due to loans originated as part of the PPP established by the CARES Act. These loans have been excluded from the credit loss calculations as these loans are 100% guaranteed by the U.S. Government.

To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, the value of the Bank’s collateral, and the strength of co-makers or guarantors. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for credit losses and any recoveries of such previously charged-off amounts are credited to the allowance.

Regardless of whether a loan is unsecured or collateralized, the Company charges off the amount of any confirmed loan loss in the period when the loans, or portions of loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss-confirming events may include an appraisal or other valuation that reflects a shortfall between the value of the collateral and the carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral.

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

Federal Home Loan Bank Stock The Bank held an investment in Federal Home Loan Bank ("FHLB") of Boston, of $10.3 million and $14.4 million at December 31, 2020 and December 31, 2019, respectively. The FHLB is a cooperative that provides services to its member banking institutions. The primary reason for the FHLB of Boston membership is to gain access to a reliable source of wholesale funding as a tool to manage liquidity and interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. The Company either purchases additional FHLB stock or is subject to redemption of FHLB stock proportional to the volume of funding received. The Company views the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.

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Goodwill and Other Intangible Assets Goodwill and Other Intangible Assets were $529.3 million and $535.5 million at December 31, 2020 and December 31, 2019, respectively. The decrease in 2020 is due to primarily to the amortization of definite-lived intangibles.

The Company typically performs its annual goodwill impairment testing during the third quarter of the year, unless certain indicators suggest earlier testing to be warranted. The COVID-19 pandemic resulted in significant levels of volatility in the capital markets and presents heightened uncertainty surrounding the future impact to operations of the Company and its customers. Given these conditions, the Company identified the impact of the pandemic as a triggering event warranting interim tests for impairment as of March 31, June 30, and September 30, 2020. Accordingly, the Company performed impairment tests as of each date and determined that there was no impairment of its goodwill. No additional test for impairment was deemed warranted as of the year ended December 31, 2020. Although the Company utilizes quoted market prices when estimating fair value of the reporting unit for purposes of the quantitative impairment tests, it also considers certain qualitative factors, including the concept of a control premium, which increases the fair value as compared to market capitalization. Other intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company also considered the impact of the COVID-19 pandemic on other intangible assets and determined that there was no indication of impairment related to other intangible assets as of December 31, 2020. For additional information regarding the goodwill and other intangible assets, see Note 7, "Goodwill and Other Intangible Assets" within the Notes to Consolidated Financial Statements included in Item 8 hereof.

Cash Surrender Value of Life Insurance Policies The Bank holds life insurance policies for the purpose of offsetting its future obligations to its employees under its retirement and benefits plans. The cash surrender value of life insurance policies was $200.5 million and $197.4 million at December 31, 2020 and December 31, 2019, respectively. The Company recorded tax exempt income from life insurance policies in the amounts of $5.4 million, $5.0 million, and $4.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company also recorded gains on life insurance benefits of $1.0 million, $434,000, and $1.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Deposits At December 31, 2020, total deposits were $11.0 billion, representing a $1.8 billion, or 20.2%, increase from the prior year-end. The increase is due primarily to a combination of funds received for PPP loans and from other government stimulus programs and a customer focus on retaining liquidity, which fueled strong growth during the twelve months ended December 31, 2020. Core deposits represented 89.6% of total deposits at December 31, 2020, and the total cost of deposits was 0.27% for the year ended December 31, 2020, representing a decrease from the prior year of 20 basis points.

The Company also participates in the IntraFi Network, allowing the Bank to provide easy access to multi-million dollar Federal Deposit Insurance Corporation ("FDIC") deposit insurance protection on certificate of deposit and money market investments for consumers, businesses and public entities. This channel allows the Company to seek additional funding in potentially large quantities by attracting deposits from outside the Bank’s core market and amounted to $237.9 million and $211.2 million, at December 31, 2020 and December 31, 2019, respectively. In addition, the Company may occasionally raise funds through the use of brokered deposits outside of the IntraFi Network, which amounted to $8.5 million and $281.8 million, at December 31, 2020 and December 31, 2019, respectively. The decline is due primarily to the maturity of brokered certificates of deposit during 2020.

The following table sets forth the maturities of the Bank’s time certificates of deposits in the amount of $100,000 or more as of December 31, 2020:

Table 17 - Maturities of Time Certificates of Deposits $100,000 and Over

Balance Percentage

(Dollars in thousands)

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Borrowings The Company's borrowings consist of both short-term and long-term borrowings and provide the Bank with one of its primary sources of funding. Maintaining available borrowing capacity provides the Bank with a contingent source of liquidity. Borrowings decreased by $122.0 million, or 40.3%, at December 31, 2020, as compared to December 31, 2019. In relation to its funding strategy, and in light of the steady buildup of its liquidity position, the Bank used excess cash to pay down various forms of borrowings during the year, including short term borrowings held with the FHLB as well a $37.5 million pay down on a long-term line of credit.

The following table presents balances within each of the Company's major borrowing categories as of the periods indicated:

Table 18 - Components of Borrowings by Category

December 31

(Dollars in thousands)

See Note 9, "Borrowings" within the Notes to Consolidated Financial Statements included in Item 8 of this Report for more information regarding borrowings.

Capital Resources The Federal Reserve Board ("Federal Reserve"), the FDIC, and other regulatory agencies have established risk-based capital guidelines for banks and bank holding companies that require banks to meet a minimum Common Equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0% and a total capital ratio of 8.0%. A minimum requirement of 4.0% Tier 1 leverage capital is also mandated. In addition, the Company is required to maintain a minimum capital conservation buffer of 2.5%, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. At December 31, 2020, the Company and the Bank exceeded the minimum requirements for Common Equity Tier 1 capital, Tier 1 capital, total capital, and Tier 1 leverage capital, inclusive of the capital conservation buffer. See Note 21, "Regulatory Matters" within the Notes to Consolidated Financial Statements included in Item 8 of this Report for more information regarding capital requirements.

Results of Operations

Table 19 - Summary of Results of Operations

Years Ended December 31

(Dollars in thousands, except per share data)

Diluted earnings per share $ 3.64 $ 5.03

Return on average assets 0.96 % 1.52 %

Return on average equity 7.13 % 10.85 %

Stockholders' equity as % of assets 12.89 % 14.99 %

Net interest margin 3.29 % 4.04 %

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

On a fully tax-equivalent basis, net interest income was $368.7 million for the year ended December 31, 2020, representing a 6.5% decrease from net interest income of $394.1 million for the year ended December 31, 2019. The overall decrease in net interest income is due primarily to the negative impact of a lower interest rate environment and mix of interest earnings assets, partially offset by the full year impact of the BHB acquisition, which closed in the second quarter of 2019.

The following table presents the Company’s average balances, net interest income, interest rate spread, and net interest margin for the years ended December 31, 2020, 2019 and 2018. Nontaxable income from loans and securities is presented on a

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fully tax-equivalent basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing federal income taxes that would have been paid if the income had been fully taxable.

Table 20 - Average Balance, Interest Earned/Paid & Average Yields

Years Ended December 31

(Dollars in thousands)

Interest-earning assets

Securities

Loans (2)

Interest-bearing liabilities

Deposits

Borrowings

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Supplemental Information

Cost of total funding liabilities 0.32 % 0.59 % 0.35 %

(1)The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $927,000, $963,000 and $724,000 for 2020, 2019 and 2018, respectively. The FTE adjustment relates to nontaxable investment securities with average balances of $1.1 million, $1.7 million, and $2.1 million in 2020, 2019, and 2018, respectively, and tax exempt income relating to loans with average balances of $80.1 million, $80.0 million and $55.7 million at 2020, 2019 and 2018, respectively.

(2)Includes average nonaccruing loans.

(3)Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average costs of interest-bearing liabilities.

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

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The following table presents certain information on a fully-tax equivalent basis regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate) and (3) changes in volume/rate (change in rate multiplied by change in volume) which is allocated to the change due to rate column:

Table 21 - Volume Rate Analysis

Years Ended December 31

(Dollars in thousands)

Income on interest-earning assets

Securities

Loans

Expense of interest-bearing liabilities

Deposits

Borrowings

(1)The table above reflects income determined on a fully tax equivalent basis. See footnotes to Table 20 above for the related adjustments.

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Provision For Credit Losses The provision for credit losses represents the charge to expense that is required to maintain an appropriate level of allowance for credit losses. The provision for credit losses totaled $52.5 million for the year ended December 31, 2020, compared with $6.0 million for the year ended December 31, 2019. The elevated provision for credit losses for the year ended December 31, 2020 was calculated under the new CECL methodology, which was adopted as of January 1, 2020, and was driven primarily by anticipated credit losses related to the COVID-19 pandemic. The Company’s allowance for credit losses, as a percentage of total loans, was 1.21% at December 31, 2020, as compared to 0.76% at December 31, 2019. Net charge-offs for the years ended December 31, 2020 and 2019 totaled $6.9 million and $2.6 million, respectively. The increase in net charge-offs for the year ended December 31, 2020 was due primarily to charge-offs recorded on two large commercial relationships. See Note 4, "Loans, Allowance for Credit Losses and Credit Quality" within the Notes to Consolidated Financial Statements included in Part I. Item 1 of this Report, for further details surrounding the primary drivers of the provision for credit losses during the period.

Noninterest Income The following table sets forth information regarding noninterest income for the periods shown:

Table 22 - Noninterest Income

Years Ended December 31

Change

(Dollars in thousands)

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

Deposit account fees decreased year over year primarily due to reductions in overdraft fees as customers benefited from government stimulus payments disbursed during 2020.

Interchange and ATM fees decreased during the year reflective of the negative impact of the Durbin Amendment, which the Company became subject to effective July 1, 2020 as a result of crossing the $10 billion asset threshold. In addition there was an overall decrease in consumer spending as customers focused on retaining liquidity during the COVID-19 pandemic leading to further reduced fees.

Investment management revenue increased primarily due to growth in overall assets under administration, which grew from $4.6 billion at December 31, 2019 to $4.9 billion at December 31, 2020.

Mortgage banking income increased in comparison to the prior year primarily due to increased volume and strong demand driven by the low interest rate environment.

The increase in cash surrender value of life insurance policies was primarily due to policies obtained from the BHB acquisition, which closed in the second quarter of 2019.

The Company received proceeds on life insurance policies during 2020, resulting in gains of $1.0 million for the year ended December 31, 2020, compared to gains of $434,000 for the year ended December 31, 2019.

Loan level derivative income increased primarily as a result of higher customer demand during the year.

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Other noninterest income decreased during the year, largely attributable to a one-time $3.1 million insurance recovery and a gain on the sale of residential loans of $1.4 million, each recognized in 2019. Gain on sale of fixed assets and FHLB dividend income also decreased in 2020.

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

Table 23 - Noninterest Expense

Years Ended December 31

Change

(Dollars in thousands)

Data processing and facilities management 6,265 6,516 (251) (3.9) %

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

Loss on termination of derivatives 684 — 684 nm

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

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

The increase in salaries and employee benefits reflects overall increases in the employee base, primarily due to the BHB acquisition which occurred on April 1, 2019, along with increases in retirement benefit costs and medical insurance costs, partially offset by decreases in incentive compensation.

Occupancy and equipment expense increases were primarily attributable to the full year impact of the acquired BHB branch network and costs attributable to the Company's infrastructure in response to the COVID-19 pandemic.

FDIC assessment expense increased during 2020 primarily due to an increase in the assessment base driven by the Company's crossing the $10 billion asset threshold. Additionally, the Company benefited from the small bank assessment credits allocated in conjunction with the Deposit Insurance Fund's attainment of a 1.38 percent reserve ratio, which resulted in no expense during the second half of 2019 and reduced expense during the first half of 2020.

Advertising expense in 2020 decreased in comparison to the prior year due primarily to the timing and scope of various marketing campaigns.

Consulting expense increased in 2020 in conjunction with the Company's overall growth, implementation of strategic initiatives and COVID-19 related projects.

During the fourth quarter of 2020, the Company recorded an impairment charge of $4.2 million reflecting accelerated lease termination costs and the write-off of leasehold improvements related to two branch closure decisions made during the quarter. There were no such impairment charges recorded during the prior year.

For the fourth quarter of 2020, the Company recognized a loss of $1.0 million on the sale of certain Small Business Investment Company ("SBIC") investment holdings that were acquired in the BHB merger in 2019. No such losses were recognized during the prior year.

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In 2020, the Company recorded a $684,000 loss on the termination of a swap derivative contract with a notional amount of $100.0 million. There were no such charges recorded during the prior year.

Merger and acquisition expense in 2019 was primarily attributable to the BHB acquisition. The majority of these costs include legal, professional fees and integration costs. There were no merger and acquisition costs incurred during 2020.

Software maintenance expense increased during 2020 reflecting the Company's continued investment in its technology infrastructure.

Other noninterest expenses increased in 2020 in comparison to the prior year, primarily due to increased consultant fees, retail branch traffic control, subscription fees, defined benefit plan costs, recruitment expenses, prepayment fees on borrowings, COVID-19 related office supplies and protective equipment, which were partially offset by a reduction in the provision for unfunded commitments and sponsorships.

Income Taxes The tax effect of all income and expense transactions is recognized by the Company in each year’s consolidated statements of income, regardless of the year in which the transactions are reported for income tax purposes. The following table sets forth information regarding the Company’s tax provision and applicable tax rates for the periods indicated:

Table 24 - Tax Provision and Applicable Tax Rates

Years Ended December 31

(Dollars in thousands)

The Company’s effective tax rate for 2020 is lower as compared to the year ago period primarily due to lower pre-tax net income, as well as the impact of discrete items, which are subject to fluctuation year over year. The discrete tax amounts for the year ended December 31, 2020 include a benefit of $4.8 million associated with the net operating loss (NOL) carryback provision of the CARES Act. This NOL was generated in relation to the BHB acquisition. The effective tax rates reported in the table above are lower than the blended statutory tax rates due to the aforementioned discrete items as well as certain tax preference assets such as life insurance policies, tax exempt bonds, and federal tax credits. The Company’s blended statutory tax rate for the year ended December 31, 2020 is comparable to the year ago period.

The Company invests in various low-income housing projects which are real estate limited partnerships that acquire, develop, own and operate low and moderate-income housing developments. As a limited partner in these operating partnerships, the Company receives tax credits and tax deductions for losses incurred by the underlying properties. The investments are accounted for using the proportional amortization method and will be amortized over various periods through 2039, which represents the period that the tax credits and other tax benefits will be utilized. The total committed investment in these partnerships at December 31, 2020 was $128.8 million, of which $79.2 million has been funded. The Company recognized a net tax benefit of approximately $1.9 million for 2020 and anticipates additional net tax benefits of $18.8 million over the remaining life of the investments from the combination of tax credits and operating losses.

For additional information related to the Company's income taxes see Note 13, "Income Taxes" and Note 14, "Low Income Housing Project Investments" within the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

Dividends The Company declared quarterly cash dividends totaling $1.84 per common share in 2020 and $1.76 per common share in 2019. The 2020 and 2019 ratio of dividends paid to earnings was 50.21% and 32.25%, respectively.

Since substantially all of the funds available for the payment of dividends are derived from the Bank, future dividends of the Company will depend on the earnings of the Bank, its financial condition, its need for funds, applicable governmental policies and regulations, and other such matters as the Board of Directors deems appropriate.

Comparison of 2019 vs. 2018 For a discussion of our results for the year ended December 31, 2019 compared to the year ended December 31, 2018, please see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with the SEC on February 27, 2020.

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Risk Management

The Board of Directors and management have identified significant risks which affect the Company, including credit risk, market risk, liquidity risk, price risk, operations risk, cybersecurity risk, consumer compliance risk, reputation risk, and strategic risk. The Board of Directors has approved an Enterprise Risk Management Policy, and management has adopted a Risk Appetite Statement that addresses each risk category. Management reviews key risks and their mitigation on an ongoing basis and provides regular enterprise risk management reports to the Board of Directors. The Board of Directors, with the assistance of the Board’s Risk Committee, oversees management’s enterprise risk assessment and management.

Credit Risk Credit risk is the possibility that customers or other counterparties may not repay loans or other contractual obligations according to their terms. While the collateral securing loans may be sufficient in some cases to recover the amount due, in other cases the Company may experience significant credit losses which could have an adverse effect on its operating results. The Company makes assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of collateral for the repayment of loans. For further discussion regarding the credit risk and the credit quality of the Company’s loan portfolio, see Note 4, "Loans, Allowance for Credit Losses and Credit Quality" within Notes to Consolidated Financial Statements included in Item 8 of this Report.

Operational Risk Operational risk is the risk of loss from the Company’s operations due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters, and security risks. Potential operational risk exposure exists throughout the Company. The continued effectiveness of colleagues, technical systems, operational infrastructure, and relationships with key third party service providers are integral to mitigating operations risk, and any shortcomings subject the Company to risks that vary in size, scale and scope. Operational risks include, but are not limited to, operational or technical failures, unlawful tampering with technical systems, cyber security, terrorist activities, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or failure on the part of the key individuals to perform properly. Management maintains an Operational Risk Committee to assess and mitigate operational risk which contributes to periodic enterprise risk management reporting to the Board of Directors.

Compliance Risk Compliance risk is the risk of regulatory sanctions or financial loss resulting from the failure to comply with rules and regulations issued by the various banking agencies, the SEC, the NASDAQ Stock Market, and good banking practices. Activities which may expose the Company to compliance risk include money laundering, privacy and data protection, adherence to laws and regulations, community reinvestment initiatives, and employment and tax matters. Compliance risk is mitigated through the use of written policies and procedures, staff training, and continuous monitoring of activities for adherence to policies and procedures. Management maintains a Consumer Compliance Advisory team to assess and mitigate compliance risk that contributes to periodic enterprise risk management reporting to the Board of Directors.

Strategic and Reputation Risk Strategic and reputation risk is the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess current and new opportunities and threats in business, markets, and products. Management seeks to mitigate strategic and reputational risk through annual strategic planning, frequent executive review of strategic plan progress, ongoing competitive and technological observation, assessment processes of new products, new branches, and new business initiatives, adherence to ethical standards, a philosophy of customer advocacy, a structured process of customer complaint resolution, and ongoing reputational monitoring, crisis management planning, and management tools.

Market Risk Market risk is the sensitivity of income to changes in interest rates, equity prices, foreign exchange rates, commodity prices, and other market-driven rates or prices. The Company’s most significant market risk exposure is interest rate risk.

Interest rate risk is the sensitivity of income due to changes in interest rates. Interest rate changes, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, the Company’s primary source of revenue. Interest rate risk arises directly from the Company’s core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of securities and derivatives, and have other effects.

Management maintains an Asset Liability Committee to manage interest rate risk, which strives to control interest rate risk within limits approved by the Board of Directors that reflect the Company’s tolerance for interest rate risk over short-term and long-term horizons. The Company attempts to manage interest rate risk by identifying, quantifying, and, where appropriate, hedging exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. It is the Company's objective to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary, within limits

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management determines to be prudent, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors, and caps.

The Company quantifies its interest rate exposures using net interest income simulation models, as well as simpler gap analysis, and an Economic Value of Equity analysis. Key assumptions in these simulation analyses relate to changes in interest rates and the behavior of the Company’s deposit and loan customers. The most material assumptions relate to the prepayment of mortgage assets (including mortgage loans and mortgage-backed securities) and the life and sensitivity of non-maturity deposits (e.g., demand deposit, negotiable order of withdrawal, savings, and money market accounts). In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, interest rate sensitivity of loans cannot be determined exactly and actual behavior may differ from assumptions.

Based upon the net interest income simulation models, the Company currently forecasts that the Bank’s assets re-price faster than the liabilities. As a result, the net interest income of the Bank will benefit as market rates increase, and contract if market rates decrease. The Company runs several scenarios to quantify and effectively assist in managing this position. These scenarios include instantaneous parallel shifts in market rates as well as gradual (12-24 months) shifts in market rates, and may also include other alternative scenarios as management deems necessary, given the interest rate environment.

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The results of such scenarios are outlined in the table below:

Table 25 - Interest Rate Sensitivity

Years Ended December 31

Year 1 Year 2 Year 1 Year 2

Parallel rate shocks (basis points)

Gradual rate shifts (basis points)

Alternative scenarios

(1)In the yield curve twist scenario, rates increase 200 basis points over a two year horizon. The parallel shift occurs faster on the long end of the curve than it does on the short end, creating a temporary increase in the steepness of the curve during the interim period of the twist.

The results depicted in the table above are dependent on material assumptions. For instance, asymmetrical rate behavior can have a material impact on the simulation results. If competition for deposits prompts the Company to raise rates on those liabilities more quickly than is assumed in the simulation analysis without a corresponding increase in asset yields, net interest income would be negatively impacted. Alternatively, if the Company is able to lag increases in deposit rates as loans re-price upward, net interest income would be positively impacted.

The most significant factors affecting market risk exposure of the Company’s net interest income for the year ended December 31, 2020 were the shape of the U.S. Government securities and interest rate swap yield curve, the absolute level of U.S. prime interest rate and LIBOR rates, and the interest rates being offered on long-term fixed rate loans. Additionally, the full economic impact of the COVID-19 pandemic on these factors remains uncertain.

The Company manages the interest rate risk inherent in both its loan and borrowing portfolios by using interest rate swap agreements and interest rate caps and floors. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount for a predetermined period of time from the other party. Interest rate caps and floors are agreements where one party agrees to pay a floating rate of interest on a notional principal amount for a predetermined period of time to a second party if certain market interest rate thresholds are realized. The amounts relating to the notional principal amount are not actually exchanged. Additionally, the Company may manage the interest rate risk inherent in its mortgage banking operations by entering into forward sales contracts. In an effort to mitigate that risk, forward delivery sales commitments are executed, under which the Company agrees to deliver whole mortgage loans to various investors. See Note 12,"Derivatives and Hedging Activities" within Notes to Consolidated Financial Statements included in Item 8 of this Report for additional information regarding the Company’s derivative financial instruments.

The Company’s earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines. See Note 3, "Securities" within the Notes to Consolidated Financial Statements included in Item 8 of this Report.

Liquidity Risk Liquidity risk is the risk that the Company will not have the ability to generate adequate amounts of cash in the most economical way to meet its ongoing obligations to pay deposit withdrawals, repay borrowings, and fund loans. The Company’s primary sources of funds are deposits, borrowings, and the amortization, prepayment, and maturities of loans and securities. The Bank utilizes its extensive branch network to access retail customers who provide a base of in-market core

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deposits. These funds are principally comprised of demand deposits, interest checking accounts, savings accounts, and money market accounts. Deposit levels are greatly influenced by interest rates, economic conditions, and competitive factors.

Management maintains an Asset Liability Committee to manage liquidity risk. The Company’s primary measure of short-term liquidity is the Total Basic Surplus/Deficit as a percentage of assets. This ratio, which is an analysis of the relationship between liquid assets plus available funding at the FHLB, less short-term liabilities relative to total assets, was within policy limits at December 31, 2020. The Total Basic Surplus/Deficit measure is affected primarily by changes in deposits, securities and short-term investments, loans, and borrowings. An increase in deposits, without a corresponding increase in nonliquid assets, will improve the Total Basic Surplus/Deficit measure, whereas, an increase in loans, with no increase in deposits, will decrease the measure. Other factors affecting the Total Basic Surplus/Deficit measure include collateral requirements at the FHLB, changes in the securities portfolio, and the mix of deposits.

The Bank seeks to increase deposits without adversely impacting the weighted average cost of those funds. As part of a prudent liquidity risk management practice, the Company maintains various liquidity sources, some of which are only accessed on a contingency basis. Accordingly, management has implemented funding strategies that include FHLB advances, Federal Reserve Bank borrowing capacity, and repurchase agreement lines. These funding sources are a contingent source of liquidity and, when profitable lending and investment opportunities exist, access to them provides a means to grow the balance sheet.

Borrowing capacity at the FHLB and the Federal Reserve is impacted by the amount and type of assets available to be pledged. For example, a prime, one-to-four family, residential loan, may provide 75 cents of borrowing capacity for every $1.00 pledged, whereas a commercial loan may provide a lower amount. As a result, the Company’s lending decisions can also affect its liquidity position.

The Company can raise additional funds through the issuance of equity or unsecured debt privately or publicly and has done so in the past. Additionally, the Company is able to enter into repurchase agreements or acquire brokered deposits at its discretion. The availability and cost of equity or debt on an unsecured basis is dependent on many factors. Some factors that will impact this source of liquidity are the Company’s financial position, the market environment, and the Company’s credit rating. The Company monitors the factors that could impact its ability to raise liquidity through these channels.

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

Table 26 - Sources of Liquidity

December 31

(Dollars in thousands)

(1)Loans with a carrying value of $2.1 billion and $2.5 billion at December 31, 2020 and 2019, respectively, have been pledged to the Federal Home Loan Bank of Boston resulting in this additional borrowing capacity.

(2)Loans with a carrying value of $1.9 billion and $1.5 billion at December 31, 2020 and 2019, respectively, have been pledged to the Federal Reserve Bank of Boston resulting in this additional unused borrowing capacity.

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

In addition to policies used for managing operational liquidity, the Board of Directors and management recognize the need to establish reasonable guidelines for managing through an environment of heightened liquidity risk. Catalysts for elevated liquidity risk can be Bank-specific issues and/or systemic industry-wide events. It is therefore the responsibility of management to institute systems and controls to provide advanced detection of potentially significant funding shortages,

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establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate or circumvent a potential liquidity crisis. Management has established a Liquidity Contingency Plan to provide a framework for the Bank to help detect liquidity problems promptly and appropriately address potential liquidity problems in a timely manner. In a period of perceived heightened liquidity risk, the Liquidity Contingency Plan provides for the establishment of a Liquidity Crisis Task Force. The Liquidity Crisis Task Force is responsible for monitoring the potential for a liquidity crisis and for establishing and executing an appropriate response.

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

The Company has entered into contractual obligations, commitments, residential loans sold with recourse and other off-balance sheet financial instruments. The amounts below assume the contractual obligations and commitments will run through the end of the applicable term and, as such, do not include early termination fees or penalties where applicable. The following tables summarize the Company’s contractual obligations, other commitments, contingencies, loans sold with recourse and off-balance sheet financial instruments at December 31, 2020:

Table 27 - Contractual Obligations, Commitments, Contingencies, and Off-Balance Sheet Financial Instruments by Maturity

Payments Due — By Period

(Dollars in thousands)

Amount of Commitment Expiring — By Period

(Dollars in thousands)

Customer-related positions

(1)The Company has hedged certain short-term borrowings and variable rate junior subordinated debentures, effectively converting the borrowings to a fixed rate. Amounts maturing represent contractual amounts due and do not include any issuance costs, which may be presented on a net basis in the financial statements.

(2)Items with no maturity are presented in the table in the after five years category.

(3)Retirement benefit obligations include expected contributions to the Company’s frozen pension plan, post retirement plans and supplemental executive retirement plans. Expected contributions for the pension plan have been included only through plan year July 1, 2020 - June 30, 2021 and reflect only the expected minimum required contribution. Contributions beyond this plan year cannot be quantified as they will be determined based upon the return on the investments in the plan and the discount rate used to quantify the liability. Expected contributions for the post retirement plans and supplemental executive retirement plans include obligations that are payable over the life of the participants.

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Impact of Inflation and Changing Prices

The consolidated financial statements and related notes thereto presented in Item 8 of this Report have been prepared in accordance with GAAP which requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

The financial nature of the Company’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect the Company because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. The impact on the Company is a noted increase in the size of loan requests with resulting growth in total assets. In addition, operating expenses may increase without a corresponding increase in productivity. There is no precise method, however, to measure the effects of inflation on the Company’s consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation.

Critical Accounting Policies and Estimates

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. Management believes that the Company’s most critical accounting policies upon which the Company’s financial condition depends, and which involve the most complex or subjective decisions or assessments, are as follows:

Allowance for Credit Losses - Loans Held for Investment The Company estimates the allowance for credit losses in accordance with the current expected credit loss ("CECL") methodology for loans measured at amortized cost. The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses. Arriving at an appropriate amount of allowance for credit losses involves a high degree of judgment.

The Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. Management's judgement is required for the selection and application of these factors which are derived from historical loss experience as well as assumptions surrounding expected future losses and economic forecasts.

Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that are individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable. Changes in these estimates could be due to a number of circumstances which may have a direct impact on the provision for loan losses and may result in changes to the amount of allowance.

The allowance for credit losses is increased by the provision for credit losses and by recoveries of loans previously charged off. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. For additional discussion of the Company’s methodology of assessing the appropriateness of the allowance for credit losses, see Note 4, "Loans, Allowance for Credit Losses and Credit Quality" within the Notes to Consolidated Financial Statements included in Item 8 of this Report.

Income Taxes The Company accounts for income taxes using two components of income tax expense, current and deferred. Current taxes represent the net estimated amount due to or to be received from taxing authorities in the current year. In estimating accrued taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions, taking into account statutory, judicial, and regulatory guidance in the context of the Company’s tax position. Deferred tax assets and liabilities represent the future effects on income taxes that result from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, and carry-forwards that exist at the end of a period. Deferred tax assets and liabilities are measured using enacted tax rates and provisions of the enacted tax law and are not discounted to reflect the time-value of money. The effect of any change in enacted tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Deferred tax assets are assessed for recoverability and the Company may record a valuation allowance if it believes based on available evidence that it is more likely than not that the deferred tax assets recognized will not be realized before their expiration. The amount of the deferred tax asset recognized and considered realizable could be reduced if projected income is not achieved due to various factors such as unfavorable business conditions. If projected income is not expected to be achieved, the Company may record a valuation allowance to reduce its deferred tax assets to the amount that it believes can be realized in its future tax returns. Additionally, deferred tax assets and liabilities are calculated based on tax rates expected to be in effect in future periods. Previously

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recorded tax assets and liabilities need to be adjusted when the expected date of the future event is revised based upon current information. The Company may also record an unrecognized tax benefit related to uncertain tax positions taken by the Company on its tax returns for which there is less than a 50% likelihood of being recognized upon a tax examination. All movements in unrecognized tax benefits are recognized through the provision for income taxes. Taxes are discussed in more detail in Note 13, "Income Taxes" within the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

Valuation of Goodwill/Intangible Assets and Analysis for Impairment The Company has increased its market share through the acquisition of entire financial institutions accounted for under the acquisition method of accounting, as well as from the acquisition of branches (not the entire institution) and other nonbanking entities. For all acquisitions, the Company is required to record assets acquired and liabilities assumed at their fair value, which is an estimate determined by the use of internal or other valuation techniques, which may include the use of third party specialists. Goodwill is evaluated for impairment at least annually, or more often if warranted, using a combined qualitative and quantitative impairment approach. The initial qualitative approach assesses whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company determines it is more likely than not that the fair value is less than carrying value, a quantitative impairment test is performed to compare carrying value to the fair value of the reporting unit. If the carrying amount of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The quantitative impairment test was performed as of March 31, June 30 and September 30, 2020 in response to the COVID-19 pandemic, and the Company determined that no impairment of goodwill existed as of each testing date. No additional test for impairment was deemed warranted as of the year ended December 31, 2020. The Company’s goodwill relates to acquisitions that are fully integrated into the retail banking operations, which management does not consider to be at risk of failing step one in the near future. The Company’s other intangible assets are subject to amortization and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When applicable, the Company tests each of the other intangibles by comparing the carrying value of the intangible to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The Company also considered the impacts of the COVID-19 pandemic on other intangible assets and determined that there was no indication of impairment related to other intangible assets as of December 31, 2020.

Valuation of Investment Securities Securities that the Company has the ability and intent to hold until maturity are classified as securities held-to-maturity and are accounted for using historical cost, adjusted for amortization of premium and accretion of discount. Trading and equity securities are carried at fair value, with unrealized gains and losses recorded in other noninterest income. All other securities are classified as securities available-for-sale and are carried at fair market value. The fair values of securities are based on either quoted market price or third party pricing services. In general, the third-party pricing services employ various methodologies, including but not limited to, broker quotes and proprietary models. Management does not typically adjust the prices received from third-party pricing services. Depending upon the type of security, management employs various techniques to analyze the pricing it receives from third-parties, such as reviewing model inputs, reviewing comparable trades, analyzing changes in market yields and, in certain instances, reviewing the underlying collateral of the security. Management reviews changes in fair values from period to period and performs testing to ensure that the prices received from the third parties are consistent with their expectation of the market.

Management determines if the market for a security is active primarily based upon the frequency of which the security, or similar securities, are traded. For securities which are determined to have an inactive market, fair value models are calibrated and to the extent possible, significant inputs are back tested on a quarterly basis. The third-party service provider performs calibration and testing of the models by comparing anticipated inputs to actual results, on a quarterly basis. Unrealized gains and losses on securities available-for-sale are reported, on an after-tax basis, as a separate component of stockholders’ equity in accumulated other comprehensive income.

Allowance for Credit Losses - Available for Sale Securities The Company estimates an allowance for credit losses on available for sale securities in accordance with the CECL methodology. For any holdings in an unrealized loss position, management will first evaluate whether there is intent to sell, or if it is more likely than not that the Company will be required to sell a security prior to anticipated recovery of its amortized cost basis. If either of these criteria are met, the Company will establish an allowance for credit losses, limited by the amount that the amortized cost basis exceeds fair value, as determined by a discounted cash flow analysis. For those available for sale securities which do not meet the intent or requirement to sell criteria, management will evaluate whether the decline in fair value is a result of credit related matters or other factors. In performing this assessment, management considers the creditworthiness of the issuer including whether the security is guaranteed by the U.S. Federal Government or other government agency, the extent to which fair value is less than amortized cost, and changes in credit rating during the period, among other factors. If this assessment indicates the existence of credit losses, the security will be written down to fair value, as determined by a discounted cash flow analysis. Once an allowance for credit losses is established, management will reassess credit loss estimates at each reporting date, with subsequent changes in

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the estimated allowance recorded as credit loss expense, or reversal of credit loss expense. The allowance may not be reversed to a negative amount and is limited by the amount that amortized cost exceeds fair value.

Allowance for Credit Losses - Held to Maturity Securities The Company estimates an allowance for credit losses on held to maturity securities in accordance with the CECL methodology. Securities in this portfolio are charged-off against the allowance for credit losses when deemed uncollectible by management. When applicable, adjustments to the allowance are reported in the Company's income statement as a component of credit loss expense. For held to maturity securities, the Company measures expected credit losses on a collective basis by major security type. Management classifies the held-to-maturity portfolio into the following major security types: U.S. Government Agency, U.S. Treasury, Agency Mortgage-Backed Securities, Agency Collateralized Mortgage Obligations, Small Business Administration Pooled Securities, and Single Issuer Trust Preferred Securities. Securities in the Company's held to maturity portfolio are guaranteed by either the U.S. Federal Government or other government sponsored agencies with a long history of no credit losses. As a result, management has determined these securities to have a zero loss expectation and therefore does not estimate an allowance for credit losses on these securities.

For additional discussion of the Company’s methodology of assessing the adequacy of the allowance for credit losses for its security portfolios, see Note 3, "Securities" within the Notes to Consolidated Financial Statements included in Item 8 of this Report.

Recent Accounting Developments

See Note 1, "Summary of Significant Accounting Policies" within the Notes to Consolidated Financial Statements included in Item 8 of this Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Independent Bank Corp.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Independent Bank Corp. (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2021 expressed an unqualified opinion thereon.

Adoption of ASU No. 2016-13

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for credit losses in 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and the related amendments. See below for discussion of our related critical audit matter.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Allowance for credit losses

/s/ Ernst & Young LLP

We have served as the Company's auditor since 2009

Boston, Massachusetts

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INDEPENDENT BANK CORP.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

December 31

Assets

Securities

Loans

Cash surrender value of life insurance policies 200,525 197,372

Liabilities and Stockholders' Equity

Deposits

Borrowings

Commitments and contingencies — —

Stockholders' Equity

Deferred compensation obligation 3,066 4,735

Accumulated other comprehensive income, net of tax 40,695 18,169

The accompanying notes are an integral part of these consolidated financial statements.

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31

(Dollars in thousands, except per share data)

Interest income

Nontaxable interest and dividends on securities 35 51 60

Interest on federal funds sold and short-term investments 847 2,207 2,676

Interest expense

Noninterest income

Increase in cash surrender value of life insurance policies 5,362 5,013 4,060

Noninterest expenses

Lease impairment 4,163 — —

Loss on sale of other equity investments 1,033 — —

Loss on sale of securities — 1,462 —

Loss on termination of derivatives 684 — —

Diluted earnings per share $ 3.64 $ 5.03 $ 4.40

Cash dividends declared per common share $ 1.84 $ 1.76 $ 1.52

The accompanying notes are an integral part of these consolidated financial statements.

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31

(Dollars in thousands)

Other comprehensive income (loss), net of tax

Net change in fair value of securities available for sale 8,857 10,345 (4,501)

The accompanying notes are an integral part of these consolidated financial statements.

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except per share data)

Opening balance reclassification (1) — — — — — 397 (397) —

Cumulative effect accounting adjustment (2) — — — — — 831 (831) —

Other comprehensive income — — — — — — 1,886 1,886

Common dividend declared ($1.52per share) — — — — — (42,051) — (42,051)

Stock based compensation — — — — 4,225 — — 4,225

Shares issued under direct stock purchase plan 35,287 — — — 2,712 — — 2,712

Other comprehensive income — — — — — — 19,342 19,342

Common dividend declared ($1.76 per share) — — — — — (57,729) — (57,729)

Stock based compensation — — — — 4,403 — — 4,403

Shares issued under direct stock purchase plan 66,244 1 — — 4,950 — — 4,951

Cumulative effect accounting adjustment (3) — — — — — 1,553 — 1,553

Other comprehensive income — — — — — — 22,526 22,526

Common dividend declared ($1.84 per share) — — — — — (60,878) — (60,878)

Stock based compensation — — — — 4,123 — — 4,123

Shares issued under direct stock purchase plan 32,249 — — — 2,132 — — 2,132

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(1)Represents adjustment needed to reflect the cumulative impact on retained earnings for reclassification of the income tax effects attributable to accumulated other comprehensive income, as a result of the Tax Cuts and Jobs Act of 2017. Pursuant to the Company's adoption of Accounting Standards Update 2018-02, the Company has elected to reclassify amounts stranded in other comprehensive income to retained earnings.

(2)Represents adjustment needed to reflect the cumulative impact on retained earnings for the classification and measurement of investments in equity securities. Pursuant to the Company's adoption of Accounting Standards Update 2016-01, the Company's investments in equity securities will no longer be classified as available for sale, therefore the Company was required to reclassify the net unrealized gain recognized on the change in fair value of these equity securities from other comprehensive income to retained earnings.

(3)Represents adjustment needed to reflect the cumulative impact on retained earnings pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment presented includes $1.1 million ($817,000, net of tax) attributable to the change in accounting methodology for estimating the allowance for credit losses and $1.0 million ($736,000, net of tax) related to the reserve for unfunded commitments resulting from the Company's adoption of the standard. Amount shown in the table above is presented net of tax.

The accompanying notes are an integral part of these consolidated financial statements.

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INDEPENDENT BANK CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31

(Dollars in thousands)

Cash flow from operating activities

Adjustments to reconcile net income to net cash provided by operating activities

Change in unamortized net loan costs and premiums (13,412) (10,086) 365

Net (gain) loss on equity securities (528) (1,566) 1,225

Net loss on sale of securities — 1,462 —

Net (gain) loss on bank premises and equipment 372 (474) (1,126)

Lease impairment 4,163 — —

Loss on termination of derivatives 684 — —

Net loss on other real estate owned and foreclosed assets — 401 112

Realized gain on sale leaseback transaction (578) (578) (730)

Change in fair value on loans held for sale (1,296) (822) 51

Net change in:

Cash flows provided by (used) in investing activities

Proceeds from sales of equity securities — 1,461 5,752

Proceeds from sales of securities available for sale — 45,863 —

Net redemption (purchases) of Federal Home Loan Bank stock 4,174 18,896 (2,376)

Purchases of life insurance policies (164) (163) (164)

Net cash paid in business combinations — (105,264) (6,906)

Proceeds from the sale of bank premises and equipment 6,095 3,796 2,189

Payments on early termination of hedging relationship (684) — —

Cash flows provided by (used in) financing activities

Net decrease in customer repurchase agreements — — (21,503)

Proceeds from line of credit, net of issuance costs — 49,980 —

Repayment of line of credit, net of issuance costs — (49,980) —

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Repayments of junior subordinated debentures, net of issuance costs — (13,329) —

Proceeds from subordinated debentures, net of issuance costs — 49,526 —

Repayments of subordinated debentures, net of issuance costs — (34,767) —

Net proceeds from exercise of stock options 197 281 184