Mergers and Acquisitions

12 Months Ended

Dec. 31, 2024

Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract]

Cambridge Bancorp, Inc. Merger

On July 12, 2024, the Company completed its merger with Cambridge. In accordance with the merger agreement, each share of Cambridge common stock was exchanged for 4.956 shares of Company common stock. The transaction qualified as a tax-free reorganization for federal income tax purposes and provided Cambridge shareholders with a tax-free exchange of their shares of Cambridge common stock for Company common stock as the consideration they received in the merger. In connection with the merger, Citadel MS 2023, Inc. (“Merger Sub”), a wholly-owned subsidiary of the Company, merged with and into Cambridge, with Cambridge continuing as the surviving entity. Immediately after the merger, Cambridge merged with and into the Company, with the Company continuing as the surviving entity. Immediately following, Cambridge Trust, a wholly owned subsidiary of Cambridge, merged with and into Eastern Bank, with Eastern Bank continuing as the surviving entity. The Company issued 38.9 million shares of its common stock in the merger. Based upon the closing price of Company common stock on July 12, 2024 of $14.87 per share, the transaction is valued at $580.6 million, which includes cash paid in-lieu of fractional shares and recognition of restricted stock units (“RSU”) and performance share units (“PSU”) service accruals for service accrued by Cambridge personnel prior to the merger. In addition to increasing its loan and deposit base, the merger enabled the Company to expand its wealth management customer base and service offerings, which includes comprehensive investment management, as well as trust administration, estate settlement, and financial planning services.

The merger was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Under this method of accounting, the respective assets acquired and liabilities assumed were recorded at their estimated fair values. The excess of consideration paid over the estimated fair value of the net assets acquired totaled $357.3 million and was recorded as goodwill. The results of Cambridge’s operations were included in the Company’s consolidated financial statements subsequent to the merger date.

The calculation of goodwill is subject to change for up to one year after the closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available, including the filing of the 2024 tax return for Cambridge. As the Company finalizes its analysis of these assets and liabilities, there may be adjustments to the recorded carrying values.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of merger from Cambridge:


	Net Assets Acquired at Fair Value
	(In thousands)
Assets
Cash and due from banks	$	20,008
Short-term investments	4,877
Investment securities	883,021
Loans	3,650,600
Allowance for loan losses	(55,830)
FHLB stock	27,255
Premises and equipment	23,417
Bank owned life insurance	35,676
Goodwill	357,322
Intangible assets	141,200
Deferred income taxes, net	107,989
Other assets	134,608
Total assets acquired	5,330,143
Liabilities
Deposits (1)	3,873,717
FHLB advances (2)	782,000
Escrow deposits of borrowers	3,633
Other liabilities	90,200
Total liabilities assumed	4,749,550
Purchase price	$	580,593

(1)Includes certificates of deposit, at fair value, of $418.7 million.

(2)The FHLB advances assumed were overnight borrowings which matured immediately following the completion of the merger and therefore were not adjusted to fair value.

Fair Value Measurement of Assets Assumed and Liabilities Assumed

The methods used to determine the fair value of the assets acquired and liabilities assumed in the Cambridge merger were as follows:

Investment Securities

The estimated fair values of the available for sale debt securities and held-to-maturity debt securities, primarily comprised of U.S. Government Sponsored Enterprises mortgage-backed securities, U.S. Government Sponsored Enterprises obligations, corporate debt securities, municipal securities, and U.S. Treasury securities carried on Cambridge’s balance sheet, was confirmed using actual sales quotations from sales of the securities, as the Company sold all of the acquired securities immediately following the closing of the merger. Based upon management’s determination, a fair value adjustment of $158.9 million, reflecting a net discount, was recorded on acquired securities and reflects the net unrealized loss position of such securities at the date of merger. Securities acquired that were classified on Cambridge’s balance sheet as held-to-maturity were reclassified as available for sale upon the completion of the merger and prior to sale by the Company, reflecting management’s intent with respect to such securities.

Immediately following the completion of the merger, investment securities acquired through its merger with Cambridge paid down or were sold in their entirety. No gain or loss was recognized upon sale as such securities had been recorded by the Company based upon the quoted sale prices in determination of the purchase accounting fair value adjustment.

Loans

Loans acquired in the Cambridge merger were recorded at fair value, and there was no carryover of the allowance for loan losses. The fair value of the loans acquired from Cambridge was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted for an estimate

of future credit losses and prepayments, and then applying a market-based discount rate to those cash flows. Management retained a third-party valuation specialist to assist with the determination of fair values of loans acquired, the results of which were reviewed by management. The resulting total fair value mark was estimated to be a discount of $277.0 million.

Acquired loans were reviewed to determine if any had experienced a more-than-insignificant deterioration in credit quality since origination. Loans meeting established criteria to indicate more-than-insignificant deterioration were identified as purchased credit deteriorated (“PCD”) loans, and an allowance for loan losses was calculated using management’s best estimate of projected losses over the remaining life of the loan in accordance with current expected credit loss (“CECL”) methodology. In connection with the Cambridge merger, the Company recorded an allowance for loan losses on PCD loans of approximately $55.8 million, which was added to the amortized cost of loans.

The following is a reconciliation of the difference between the purchase price and par value of PCD loans acquired in the merger:


	As of July 12, 2024
	(In thousands)
Gross amortized cost basis at July 12, 2024	$	356,148
Allowance for loan losses on PCD loans	(55,830)
Interest and liquidity discount	(26,019)
Purchase price of PCD loans (at fair value)	$	274,299

For loans acquired without evidence of more-than-insignificant deterioration in credit quality since origination, also referred to as non-PCD loans, the Company estimated an allowance for loan losses based on the Company's methodology for determining the allowance under CECL. The resulting allowance on non-PCD loans was $40.9 million, which was recorded through a charge to provision for loan losses on the date of merger.

Premises and Equipment

The Company acquired 18 branches in the merger as of the date of closing, five of which were owned premises. In addition, the Company acquired two corporate properties in the merger with Cambridge. The fair value of properties acquired was derived by valuations prepared by an independent third party utilizing a combination of the income approach and the sales comparison approach to value the property as improved.

Leases

As part of the merger the Company added 23 lease obligations. The Company recorded a $25.5 million right-of-use asset and a $32.0 million lease liability for these lease obligations. Lease assets and liabilities were measured using a methodology to estimate the future rental payments over the remaining lease term with discounting using the Company’s incremental borrowing rate. The lease term was determined for individual leases based on the Company’s assessment of the probability of exercising renewal options. The net effect of any off-market terms in a lease was also discounted and applied to the balance of the lease asset.

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through FHLBB borrowing rates and national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. Management retained a third-party valuation specialist to assist with the determination of projected cash flows, the results of which were reviewed by management. The core deposit intangible totaled $115.0 million and is being amortized on a cash-flow weighted basis over its estimated useful life of 7 years.

Cambridge Trust Wealth Management Customer List and Trade Name Intangibles

The fair value of the Cambridge Trust wealth management customer list intangible (“customer list intangible”) and trade name intangible (“trade name intangible”) were determined based upon discounted cash flow analyses using discount rates commensurate with market participants. The projected cash flows for the customer list intangible were developed using current revenue grown at a constant rate, and projected customer attrition rates were used to allocate those revenues to existing customers. Adjustments were made to the projected cash flows to account for sales and marketing expenses as well as contributory asset charges associated with the customer list. The discounted cash flows for the trade name intangible were developed using current revenue grown at a constant rate, multiplied by a royalty rate determined based on market observations.

Management retained a third-party valuation specialist to assist with the determination of the projected cash flows, the results of which were reviewed by management. The estimated fair value of the customer list and trade name intangibles amounted to $25.0 million and $1.2 million, respectively, and are being amortized on a cash-flow weighted basis over their estimated useful lives of 11 years and 5 years, respectively.

Goodwill

The calculation of goodwill is subject to change for up to one year after the date of merger as additional information relative to the closing date estimates and uncertainties become available. As the Company finalizes its review of the acquired assets and liabilities, certain adjustments to the recorded carrying values may be required. The goodwill will be evaluated annually for impairment. The goodwill is not deductible for tax purposes.

Bank Owned Life Insurance (“BOLI”)

Cambridge’s BOLI cash surrender value was $35.7 million with no fair value adjustment.

Certificates of Deposit

The fair value adjustment for certificates of deposit represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The certificate of deposit discount, which was estimated to be $1.6 million, is being amortized into income on a level yield amortization method over the contractual life of the deposits.

Escrow Deposits of Borrowers

Cambridge’s escrow deposits of borrowers was $3.6 million with no fair value adjustment.

Merger-Related Expenses

The Company recorded merger and acquisition expenses of $36.7 million and $5.5 million during the years ended December 31, 2024 and 2023, respectively, related to the Cambridge merger. These merger and acquisition expenses were included in the following line items of the Consolidated Statements of Income:


	For the Years Ended December 31,
	2024		2023
	(In thousands)
Salaries and employee benefits	$	14,719	$	5
Office occupancy and equipment	4,583		2
Data processing	4,919		1,357
Professional services	7,320		4,080
Marketing	70		—
Other noninterest expense	5,053		51
	$	36,664	$	5,495

The following table presents certain unaudited pro forma information for the years ended December 31, 2024 and 2023. This unaudited estimated pro forma financial information was calculated as if the merger had occurred as of January 1, 2023. This unaudited pro forma information combines the historical results of Cambridge with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the merger occurred as of the beginning of the year prior to the merger. The unaudited pro forma information does not consider any changes to the provision for loan losses resulting from recording loan assets at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented.


	Unaudited Pro Forma Financial Information for the Years Ended December 31,
	2024		2023
	(In thousands)
Net interest income	$	681,467	$	722,380
Net income (loss)	126,158		(4,342)

Financial results of Cambridge from the date of merger through December 31, 2024 are not presented as management considers the determination of such amounts to be impracticable.