Eastern Bankshares, Inc. - Quarter Report: 2020 June (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
Or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 333-239251
Eastern Bankshares, Inc.
(Exact name of the registrant as specified in its charter)
Massachusetts | 84-4199750 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification Number) | |
265 Franklin Street, Boston, Massachusetts | 02110 | |
(Address of principal executive offices) | (Zip Code) |
(800) 327-8376
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. ☐ Yes ☒ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||
(Do not check if a smaller reporting company) | Emerging Growth Company | ☒ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
No shares of the Registrants common stock, par value $0.01 per share, were issued and outstanding as of September 23, 2020.
Table of Contents
PAGE | ||||||
PART I. |
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ITEM 1. |
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2 | ||||||
4 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
10 | ||||||
ITEM 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
55 | ||||
ITEM 3. |
85 | |||||
ITEM 4. |
85 | |||||
PART II. |
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ITEM 1. |
86 | |||||
ITEM 1A. |
86 | |||||
ITEM 2. |
86 | |||||
ITEM 3. |
86 | |||||
ITEM 4. |
86 | |||||
ITEM 5. |
86 | |||||
ITEM 6. |
86 | |||||
87 | ||||||
89 |
Table of Contents
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
UNAUDITED CONSOLIDATED BALANCE SHEETS
As of June 30, | As of December 31, |
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2020 | 2019 | |||||||
(In Thousands) | ||||||||
ASSETS |
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Cash and due from banks |
$ | 67,264 | $ | 135,503 | ||||
Short-term investments |
1,365,297 | 227,099 | ||||||
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Cash and cash equivalents |
1,432,561 | 362,602 | ||||||
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Securities: |
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Trading |
| 961 | ||||||
Available for sale |
1,600,354 | 1,508,236 | ||||||
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Total securities |
1,600,354 | 1,509,197 | ||||||
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Loans held for sale |
2,972 | 26 | ||||||
Loans: |
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Commercial and industrial |
2,271,700 | 1,642,184 | ||||||
Commercial real estate |
3,584,358 | 3,535,441 | ||||||
Commercial construction |
282,246 | 273,774 | ||||||
Business banking |
1,234,961 | 771,498 | ||||||
Residential real estate |
1,400,855 | 1,428,630 | ||||||
Consumer home equity |
905,484 | 933,088 | ||||||
Other consumer |
334,734 | 402,431 | ||||||
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Total Loans |
10,014,338 | 8,987,046 | ||||||
Less: allowance for loan losses |
(116,636 | ) | (82,297 | ) | ||||
Less: unamortized premiums, net of unearned discounts and deferred fees |
(34,722 | ) | (5,565 | ) | ||||
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Net Loans |
9,862,980 | 8,899,184 | ||||||
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Federal Home Loan Bank stock, at cost |
8,805 | 9,027 | ||||||
Premises and equipment |
52,475 | 57,453 | ||||||
Bank-owned life insurance |
77,528 | 77,546 | ||||||
Goodwill and other intangibles, net |
376,331 | 377,734 | ||||||
Deferred income taxes, net |
7,663 | 28,207 | ||||||
Prepaid expenses |
92,517 | 61,336 | ||||||
Other assets |
482,337 | 246,463 | ||||||
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Total Assets |
$ | 13,996,523 | $ | 11,628,775 | ||||
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LIABILITIES AND EQUITY |
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Deposits: |
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Demand |
$ | 4,740,125 | $ | 3,517,447 | ||||
Interest checking accounts |
2,385,912 | 1,814,327 | ||||||
Savings accounts |
1,157,606 | 971,119 | ||||||
Money market investment |
3,254,202 | 2,919,360 | ||||||
Certificate of deposits |
308,920 | 329,139 | ||||||
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Total deposits |
11,846,765 | 9,551,392 | ||||||
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Borrowed funds: |
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Federal funds purchased |
| 201,082 | ||||||
Federal Home Loan Bank advances |
14,922 | 18,964 | ||||||
Escrow deposits of borrowers |
14,233 | 15,349 | ||||||
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Total borrowed funds |
29,155 | 235,395 | ||||||
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Other liabilities |
426,973 | 241,835 | ||||||
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Total Liabilities |
12,302,893 | 10,028,622 | ||||||
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Commitments and contingencies |
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Retained earnings |
1,681,164 | 1,644,000 | ||||||
Accumulated other comprehensive income, net of tax |
12,466 | (43,847 | ) | |||||
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Total equity |
1,693,630 | 1,600,153 | ||||||
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Total liabilities and equity |
$ | 13,996,523 | $ | 11,628,775 | ||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
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UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In Thousands) | ||||||||||||||||
Interest and dividend income: |
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Interest and fees on loans |
$ | 92,143 | $ | 102,216 | $ | 187,681 | $ | 202,772 | ||||||||
Taxable interest and dividends on available for sale securities |
7,600 | 7,901 | 15,778 | 15,953 | ||||||||||||
Non-taxable interest and dividends on available for sale securities |
1,905 | 2,049 | 3,826 | 4,403 | ||||||||||||
Interest on federal funds sold and other short-term investments |
284 | 612 | 801 | 965 | ||||||||||||
Interest and dividends on trading securities |
1 | 60 | 6 | 228 | ||||||||||||
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Total interest and dividend income |
101,933 | 112,838 | 208,092 | 224,321 | ||||||||||||
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Interest expense: |
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Interest on deposits |
3,104 | 7,313 | 8,518 | 13,832 | ||||||||||||
Interest on borrowings |
74 | 2,002 | 673 | 4,294 | ||||||||||||
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Total interest expense |
3,178 | 9,315 | 9,191 | 18,126 | ||||||||||||
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Net interest income |
98,755 | 103,523 | 198,901 | 206,195 | ||||||||||||
Provision for allowance for credit losses |
8,600 | 1,500 | 37,200 | 4,500 | ||||||||||||
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Net interest income after provision for credit losses |
90,155 | 102,023 | 161,701 | 201,695 | ||||||||||||
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Noninterest income: |
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Insurance commissions |
22,697 | 24,135 | 50,174 | 48,897 | ||||||||||||
Service charges on deposit accounts |
4,364 | 6,771 | 10,462 | 13,175 | ||||||||||||
Trust and investment advisory fees |
5,194 | 4,980 | 10,289 | 9,608 | ||||||||||||
Debit card processing fees |
2,337 | 2,638 | 4,807 | 5,048 | ||||||||||||
Interest rate swap income (losses) |
771 | (810 | ) | (5,238 | ) | (470 | ) | |||||||||
Income from investments held in rabbi trusts |
7,745 | 1,822 | 1,002 | 5,969 | ||||||||||||
(Losses) gains on trading securities, net |
(1 | ) | 152 | (3 | ) | 1,294 | ||||||||||
Gains on sales of mortgage loans held for sale, net |
1,420 | 159 | 1,513 | 209 | ||||||||||||
Gains on sales of securities available for sale, net |
163 | 1,966 | 285 | 2,016 | ||||||||||||
Other |
2,967 | 3,819 | 7,735 | 7,686 | ||||||||||||
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Total noninterest income |
47,657 | 45,632 | 81,026 | 93,432 | ||||||||||||
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Noninterest expense: |
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Salaries and employee benefits |
63,335 | 62,364 | 124,924 | 129,670 | ||||||||||||
Office occupancy and equipment |
8,615 | 8,383 | 17,304 | 17,182 | ||||||||||||
Data processing |
12,180 | 10,912 | 22,184 | 21,588 |
4
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Professional services |
4,396 | 3,966 | 8,085 | 7,104 | ||||||||||||
Charitable contributions |
2,797 | 3,683 | 3,984 | 7,331 | ||||||||||||
Marketing |
1,645 | 2,683 | 4,113 | 4,406 | ||||||||||||
Loan expenses |
2,036 | 886 | 3,148 | 1,551 | ||||||||||||
FDIC insurance |
944 | 927 | 1,850 | 1,800 | ||||||||||||
Amortization of intangible assets |
701 | 886 | 1,403 | 1,773 | ||||||||||||
Net periodic benefit cost, excluding service cost |
(2,443 | ) | (1,334 | ) | (4,885 | ) | (2,668 | ) | ||||||||
Other |
6,559 | 8,214 | 13,827 | 16,662 | ||||||||||||
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Total noninterest expense |
100,765 | 101,570 | 195,937 | 206,399 | ||||||||||||
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Income before income tax expense |
37,047 | 46,085 | 46,790 | 88,728 | ||||||||||||
Income tax expense |
7,197 | 11,032 | 8,495 | 20,710 | ||||||||||||
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Net Income |
$ | 29,850 | $ | 35,053 | $ | 38,295 | $ | 68,018 | ||||||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In Thousands) | ||||||||||||||||
Net income |
$ | 29,850 | $ | 35,053 | $ | 38,295 | $ | 68,018 | ||||||||
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Other comprehensive income, net of tax: |
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Net change in fair value of securities available for sale |
287 | 10,134 | 26,479 | 35,124 | ||||||||||||
Net change in fair value of cash flow hedges |
(2,645 | ) | 11,375 | 26,430 | 15,377 | |||||||||||
Net change in other comprehensive income for defined benefit postretirement plans |
3,404 | | 3,404 | | ||||||||||||
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Total other comprehensive income |
1,046 | 21,509 | 56,313 | 50,501 | ||||||||||||
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Total comprehensive income |
$ | 30,896 | $ | 56,562 | $ | 94,608 | $ | 118,519 | ||||||||
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Retained Earnings |
Accumulated Other Comprehensive Income |
Total | ||||||||||
(In Thousands) | ||||||||||||
Balance at December 31, 2019 |
$ | 1,644,000 | $ | (43,847 | ) | $ | 1,600,153 | |||||
Cumulative effect accounting adjustment (1) |
(1,131 | ) | (1,131 | ) | ||||||||
Net income |
8,445 | | 8,445 | |||||||||
Other comprehensive income, net of tax |
| 55,267 | 55,267 | |||||||||
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Balance at March 31, 2020 |
$ | 1,651,314 | $ | 11,420 | $ | 1,662,734 | ||||||
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Net income |
29,850 | | 29,850 | |||||||||
Other comprehensive income, net of tax |
| 1,046 | 1,046 | |||||||||
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Balance at June 30, 2020 |
$ | 1,681,164 | $ | 12,466 | $ | 1,693,630 | ||||||
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Balance at December 31, 2018 |
$ | 1,508,902 | $ | (75,761 | ) | $ | 1,433,141 | |||||
Net income |
32,965 | | 32,965 | |||||||||
Other comprehensive income, net of tax |
| 28,992 | 28,992 | |||||||||
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Balance at March 31, 2019 |
$ | 1,541,867 | $ | (46,769 | ) | $ | 1,495,098 | |||||
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Net income |
35,053 | | 35,053 | |||||||||
Other comprehensive income, net of tax |
| 21,509 | 21,509 | |||||||||
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Balance at June 30, 2019 |
$ | 1,576,920 | $ | (25,260 | ) | $ | 1,551,660 | |||||
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(1) | Represents cumulative impact on retained earnings pursuant to the Companys adoption of Accounting Standards Update 2016-02 Leases. The transition adjustment to the opening balance of retained earnings on January 1, 2020 amounted to $1.1 million, net of tax, related to an incremental accrued rent adjustment calculated as a result of electing the hindsight practical expedient. |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, | ||||||||
2020 | 2019 | |||||||
(In Thousands) | ||||||||
Operating activities |
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Net income |
$ | 38,295 | $ | 68,018 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
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Provision for loan losses |
37,200 | 4,500 | ||||||
Depreciation and amortization |
8,471 | 9,781 | ||||||
Change in unamortized net loan costs and premiums |
(3,155 | ) | 2,501 | |||||
Deferred income tax expense (benefit) |
1,773 | 6,052 | ||||||
Amortization of investment security premiums and discounts |
1,656 | 1,502 | ||||||
Right-of-use asset amortization |
6,042 | | ||||||
Increase in cash surrender value of bank-owned life insurance |
(1,155 | ) | (1,092 | ) | ||||
Gain on life insurance benefits |
(147 | ) | | |||||
Net gain on sale of securities available for sale |
(285 | ) | (2,016 | ) | ||||
Net gain on sale of mortgage loans held for sale |
(1,513 | ) | (209 | ) | ||||
Mark-to-market on loans held for sale |
19 | | ||||||
Proceeds from sale of loans held for sale |
172,872 | 53,104 | ||||||
Originations of loans held for sale |
(174,324 | ) | (54,857 | ) | ||||
Amortization of gains from terminated interest rate swaps |
(373 | ) | | |||||
Loss on sale of premises and equipment |
| 131 | ||||||
Change in: |
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Trading securities |
961 | 51,444 | ||||||
Prepaid pension expense |
(28,432 | ) | (15,515 | ) | ||||
Other assets |
(133,413 | ) | (30,070 | ) | ||||
Other liabilities |
77,509 | (8,620 | ) | |||||
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Net cash provided by operating activities |
2,001 | 84,654 | ||||||
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Investing activities |
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Proceeds from sales of securities available for sale |
9,098 | 47,986 | ||||||
Proceeds from maturities and principal paydowns of securities available for sale |
153,542 | 85,226 | ||||||
Purchases of securities available for sale |
(171,226 | ) | (35,981 | ) | ||||
Proceeds from sale of Federal Home Loan Bank stock |
749 | 31,862 | ||||||
Purchases of Federal Home Loan Bank stock |
(527 | ) | (27,453 | ) | ||||
Contributions to low income housing tax credit investments |
(7,435 | ) | (946 | ) | ||||
Distributions from low income housing tax credit investments |
| 3 | ||||||
Contributions to other equity investments |
(1,092 | ) | | |||||
Distributions from equity investments |
54 | 15 | ||||||
Net increase in outstanding loans |
(997,881 | ) | (176,135 | ) | ||||
Purchased banking premises and equipment, net |
(2,146 | ) | (3,780 | ) | ||||
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Net cash used in investing activities |
(1,016,864 | ) | (79,203 | ) | ||||
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Financing activities |
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Net increase in demand, savings, interest checking, and money market investment deposit accounts |
2,315,592 | 107,136 | ||||||
Net decrease in time deposits |
(20,219 | ) | (65,525 | ) | ||||
Net decrease in borrowed funds |
(206,240 | ) | (14,714 | ) |
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Contingent consideration paid |
(158 | ) | (447 | ) | ||||
Payment of initial public offering costs |
(4,153 | ) | | |||||
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Net cash provided by financing activities |
2,084,822 | 26,450 | ||||||
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Net increase in cash, cash equivalents, and restricted cash |
1,069,959 | 31,901 | ||||||
Cash, cash equivalents, and restricted cash at beginning of period |
362,602 | 259,708 | ||||||
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Cash, cash equivalents, and restricted cash at end of period |
$ | 1,432,561 | $ | 291,609 | ||||
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Supplemental disclosure of cash flow information |
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Cash paid during the period for: |
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Interest paid |
$ | 10,533 | $ | 17,697 | ||||
Income taxes |
14,976 | 20,335 | ||||||
Non-cash activities |
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Net increase in capital commitments relating to low income housing tax credit projects |
$ | 13,214 | $ | | ||||
Initial recognition of operating lease right-of-use assets upon adoption of Accounting Standards Update 2016-02 |
92,948 | | ||||||
Initial recognition of operating lease liabilities upon adoption of Accounting Standards Update 2016-02 |
96,426 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
9
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business and Basis of Presentation
Nature of Operations
Eastern Bank Corporation (the Company) is a Massachusetts-chartered mutual bank holding company. Through its wholly-owned subsidiaries, Eastern Bank (the Bank) and Eastern Insurance Group LLC, the Company provides a variety of banking, trust and investment services, and insurance services, through its full-service bank branches and insurance offices, located primarily in Eastern Massachusetts, southern and coastal New Hampshire and Rhode Island.
The activities of the Company are subject to the regulatory supervision of the Federal Reserve Board. The activities of the Bank are subject to the regulatory supervision of the Federal Deposit Insurance Corporation (FDIC) and the Consumer Financial Protection Bureau (CFPB). The Company and the activities of the Bank are also subject to various Massachusetts and New Hampshire business and banking regulations.
Basis of Presentation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and entities in which it holds a controlling financial interest through being the primary beneficiary or through holding a majority of the voting interest. All intercompany accounts and transactions have been eliminated in consolidation.
The Companys consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) as set forth by the Financial Accounting Standards Board (FASB) and its Accounting Standards Codification and Accounting Standards Update as well as the rules and interpretive releases of the Securities and Exchange Commission (SEC) under the authority of federal securities laws.
2. Summary of Significant Accounting Policies
Use of Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheets and income and expenses for the periods reported. Actual results could differ from those estimates based on changing conditions, including economic conditions and future events. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, valuation and fair value measurements, other-than-temporary impairment on investment securities, the liabilities for benefit obligations (particularly pensions), the provision for income taxes and impairment of goodwill and other intangibles.
Unaudited Interim Financial Information
The accompanying consolidated balance sheet as of June 30, 2020, the consolidated statements of income and comprehensive income, of changes in equity and of cash flows for the three and six months ended June 30, 2020 and 2019 are unaudited. The consolidated balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements as of that date. The interim consolidated financial statements and the accompanying notes should be read in conjunction with the annual consolidated financial statements and the accompanying notes contained within the Companys prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on August 18, 2020. In the opinion of management, the Companys consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations for the periods presented. The results for the three and six months ended June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods, or any future year or period.
Leases
On January 1, 2020, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), using the modified retrospective method. The new guidance was applied to leases that existed or were entered into on or after January 1, 2020. The Companys results for the reporting period beginning on January 1, 2020 have been presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with previous guidance. See Note 5 Leases for further discussion of the adoption and the impact on the Companys consolidated financial statements.
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Recent Accounting Pronouncements
Relevant standards that were recently issued but not yet adopted as of June 30, 2020:
In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848). This update addresses optional expedients and exceptions for applying GAAP to certain contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The new guidance applies only to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. For public and nonpublic entities, the guidance is effective as of March 12, 2020 through December 31, 2022 and do not apply to contract modifications made after December 31, 2022. The Company qualifies as an emerging growth company (EGC) under the Jumpstart Our Business Act of 2012 and has elected to defer the adoption of new or revised accounting standards until the nonpublic company effective dates. As such, the Company will adopt this standard on the nonpublic company effective date and is currently in the process of reviewing its contracts and existing processes in order to assess the risks and potential impact of the transition away from LIBOR.
In June 2016, FASB issued ASU 2016-13, Financial InstrumentsCredit Losses on Financial Instruments and relevant amendments (Topic 326) (ASU 2016-13). This update was created to replace the current GAAP method of calculating credit losses Specifically, the standard replaces the existing incurred loss impairment guidance by requiring immediate recognition of expected credit losses. For financial assets carried at amortized cost that are held at the reporting date (including trade and other receivables, loans and commitments, held-to-maturity debt securities and other financial assets). Credit losses are measured based on historical experience, current conditions and reasonable supportable forecasts. The standard also amends existing impairment guidance for available for sale securities, in which credit losses will be recorded as an allowance versus a write-down of the amortized cost basis of the security. It will also allow for a reversal of impairment loss when the credit of the issuer improves. The guidance requires a cumulative effect of the initial application to be recognized in retained earnings at the date of initial application.
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments Credit Losses. The amendments in Update No. 2018-19 was intended to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. In November 2019, FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments Credit Losses. This update requires entities to include expected recoveries of the amortized cost basis previously written off or expected to be written off in the valuation account for purchased financial assets with credit deterioration. In addition, the amendments in this update clarify and improve various aspects of the guidance for ASU 2016-13.
For public entities that meet the definition of an SEC filer (excluding smaller reporting entities) the guidance is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities as of the fiscal years beginning after December 15, 2018. For all other entities, the guidance is effective for annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years.
The Company, which currently qualifies as an EGC, anticipates to early adopt this standard during the year ending on December 31, 2021 and is currently assessing the impact of the adoption of this standard on its consolidated financial statements. To date, the Company has been assessing the key differences and gaps between its current allowance methodology and model and those it is considering using upon adoption. The Company has contracted with a vendor and is currently assessing the adequacy of existing loss data and developing models for default and loss estimates. While currently unable to reasonably estimate the impact of adopting this ASU, it is expected that the impact of adoption will be influenced by the composition, characteristics and quality of the loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.
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Relevant standards that were adopted during the six months ended June 30, 2019 and 2020:
In accordance with the nonpublic company requirements, the Company adopted ASC 606 on January 1, 2019. In completing its assessment of the Companys revenue streams within the scope of ASC 606, the Company did not identify any revenue sources for which the timing of recognition needed to change under the new standard. The adoption of this standard on January 1, 2019 did not have a material impact on the Companys consolidated financial statements, its current accounting policies and practices, or the timing or amount of revenue recognized. As a result, no adjustment has been made to retained earnings. Additionally, the Company evaluated and made necessary changes, where appropriate, to business processes, systems, and internal controls in order to support the recognition, measurement, and disclosure requirements of the new standard. The Company also considered the impact of ASC 606 subtopic ASC 340-40. Under ASC 340-40, the Company is required to capitalize and amortize incremental costs of obtaining a contract, such as sales commissions, over the period of benefit. The Company does not pay sales commissions and has not identified any other incremental cost to obtain a contract, therefore ASC 340-40 had no impact to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842 (ASU 2018-01); ASU 2018-10, Codification Improvements to Topic 842, Leases (ASU 2018-10); ASU 2018-11, Targeted Improvements (ASU 2018-11); and ASU 2018-20 Leases (Topic 842): Narrow-Scope Improvements for Lessors (ASU 2018-20). ASU 2018-01 permits an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired before the entitys adoption of Topic 842 and that were not previously accounted for as leases under Topic 840. ASU 2018-10 was issued to clarify the Codification or to correct unintended application of guidance within ASU 2016-02. ASU 2018-11 allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements. Lastly, ASU 2018-20 provided narrow-scope improvements for lessors, which was issued to increase transparency and comparability among organizations. ASU 2016-02 and the several additional amendments thereto are collectively referred to herein as ASC 842.
ASC 842 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The standard represents a wholesale change to lease accounting and requires all leases with a term longer than 12 months to be reported on the balance sheet through recognition of a right-of-use asset and a corresponding liability for future lease obligations. Leases will be classified as financing or operating, with classification affecting the pattern and grouping of expenses in the income statement. The standard also requires extensive disclosures for assets, expenses, and cash flows associated with leases, as well as a maturity analysis of lease liabilities. In November 2019, FASB issued guidance delaying the effective date for all entities except for public business entities that are SEC filers. For public business entities the guidance is effective for fiscal year beginning after December 15, 2018, for all other entities the guidance is effective for fiscal year beginning after December 15, 2020, early adoption is permitted for all entities.
The Company early adopted this standard on January 1, 2020. In accordance with ASU 2018-11, the Company used the effective date as the date of application and, therefore, periods prior to January 1, 2020, were not restated. The new standard provides a number of optional practical expedients in transition. The Company elected the package of practical expedients, which permits the Company to not reassess prior conclusions about lease identification, lease classification, and initial direct costs under ASC 842. The Company also elected the hindsight practical expedient and, therefore, used the hindsight knowledge as of the effective date when determining lease terms and impairment. In addition, the Company elected the practical expedient to not separate lease and non-lease components and, therefore, accounts for each separate lease component of a contract and its associated non-lease components as a single lease component. The new standard also provides a practical expedient for an entitys ongoing accounting relating to leases of 12 months or less (short-term leases). The Company has elected the short-term lease recognition exemption for all leases that qualify and will not recognize right-of-use assets and lease liabilities for those leases. The adoption of this standard resulted in the recognition of right-of-use asset and lease liabilities on the Companys balance sheet for its real estate and equipment operating leases of $92.9 million and $96.4 million, respectively. The Company recorded an adjustment to remove the Companys existing deferred rent liability of approximately $3.5 million. The Company also recognized a transition adjustment to the opening balance of retained earnings on January 1, 2020 amounting to $1.1 million, net of tax, related to an incremental accrued rent adjustment calculated as a result of electing the hindsight practical expedient. The amount of right-of-use assets were determined based upon the present value of the remaining minimal rental payments under current leasing standards for existing operating leases, adjusted for options that the Company is reasonably certain to exercise, less accrued rent as of December 31, 2019 and the incremental accrued rent as a result of electing the hindsight practical expedient. Lastly, the amount of lease liabilities was determined based upon the present value of the remaining minimum rental payments under current leasing standards for existing operating leases, adjusted for options that the Company is reasonably certain to exercise.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). This update modifies the disclosure requirements related to the fair value measurements in Topic 820. Specifically, this update amends disclosure around changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used in Level 3 fair value measurements and the description of measurement uncertainty. The Company adopted ASU 2018-13 on January 1, 2020. This update did not have a material impact on its consolidated financial statements.
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In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16). This update permits the use of the Overnight Index Swap (OIS) rate based on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. The amendments should be adopted on a prospective basis for qualifying new or re-structured hedging relationships entered into on or after the date of adoption. The Company adopted this standard on January 1, 2020. This update did not have a material impact on its consolidated financial statements
3. Securities
Trading Securities
The Company had trading securities of $0 and $1.0 million as of June 30, 2020 and December 31, 2019, respectively. The reduction in the Companys trading portfolio was due to the Companys exit of its capital markets business during the year ended December 31, 2019.
Available for Sale Securities
The amortized cost, gross unrealized gains and losses, and fair value of available for sale securities for the periods below were as follows:
As of and for the six months ended June 30, 2020 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
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(In Thousands) | ||||||||||||||||
Debt securities: |
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Government-sponsored residential mortgage-backed securities |
$ | 1,207,274 | $ | 44,750 | $ | (225 | ) | $ | 1,251,799 | |||||||
U.S. Treasury securities |
60,189 | 747 | | 60,936 | ||||||||||||
State and municipal bonds and obligations |
264,615 | 16,725 | | 281,340 | ||||||||||||
Qualified zone academy bond |
6,209 | 70 | | 6,279 | ||||||||||||
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$ | 1,538,287 | $ | 62,292 | $ | (225 | ) | $ | 1,600,354 | ||||||||
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As of and for the year ended December 31, 2019 | ||||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
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(In Thousands) | ||||||||||||||||
Debt securities: |
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Government-sponsored residential mortgage-backed securities |
$ | 1,151,305 | $ | 17,208 | $ | (545 | ) | $ | 1,167,968 | |||||||
U.S. Treasury securities |
50,155 | 265 | | 50,420 | ||||||||||||
State and municipal bonds and obligations |
272,582 | 10,959 | (3 | ) | 283,538 | |||||||||||
Qualified zone academy bond |
6,155 | 155 | | 6,310 | ||||||||||||
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$ | 1,480,197 | $ | 28,587 | $ | (548 | ) | $ | 1,508,236 | ||||||||
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The amortized cost and estimated fair value of available for sale securities by contractual maturities as of June 30, 2020 and December 31, 2019 are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties. The scheduled contractual maturities of available for sale securities as of the dates indicated were as follows:
As of June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
Due in one year or less | Due after one year to five years | Due after five to ten years | Due after ten years | Total | ||||||||||||||||||||||||||||||||||||
Amortized | Fair Value | Amortized | Fair Value | Amortized | Fair Value | Amortized | Fair Value | Amortized | Fair Value | |||||||||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||||||||||
Available for sale securities: |
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Government-sponsored residential mortgage-backed securities |
$ | | $ | | $ | 24,413 | $ | 25,733 | $ | 150,726 | $ | 157,290 | $ | 1,032,135 | $ | 1,068,776 | $ | 1,207,274 | $ | 1,251,799 | ||||||||||||||||||||
U.S. Treasury securities |
50,070 | 50,778 | 10,119 | 10,158 | | | | | 60,189 | 60,936 | ||||||||||||||||||||||||||||||
State and municipal bonds and obligations |
407 | 411 | 18,205 | 18,966 | 73,890 | 77,868 | 172,113 | 184,095 | 264,615 | 281,340 | ||||||||||||||||||||||||||||||
Qualified zone academy bond |
6,209 | 6,279 | | | | | | | 6,209 | 6,279 | ||||||||||||||||||||||||||||||
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Total available for sale securities |
$ | 56,686 | $ | 57,468 | $ | 52,737 | $ | 54,857 | $ | 224,616 | $ | 235,158 | $ | 1,204,248 | $ | 1,252,871 | $ | 1,538,287 | $ | 1,600,354 | ||||||||||||||||||||
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As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
Due in one year or less | Due after one year to five years | Due after five to ten years | Due after ten years | Total | ||||||||||||||||||||||||||||||||||||
Amortized | Fair Value | Amortized | Fair Value | Amortized | Fair Value | Amortized | Fair Value | Amortized | Fair Value | |||||||||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||||||||||
Available for sale securities: |
||||||||||||||||||||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities |
$ | | $ | | $ | 8,139 | $ | 8,464 | $ | 199,428 | $ | 203,706 | $ | 943,738 | $ | 955,798 | $ | 1,151,305 | $ | 1,167,968 | ||||||||||||||||||||
U.S. Treasury securities |
40 | 40 | 50,115 | 50,380 | | | | | 50,155 | 50,420 | ||||||||||||||||||||||||||||||
State and municipal bonds and obligations |
381 | 381 | 8,889 | 9,109 | 77,227 | 79,504 | 186,085 | 194,544 | 272,582 | 283,538 | ||||||||||||||||||||||||||||||
Qualified zone academy bond |
6,155 | 6,310 | | | | | | | 6,155 | 6,310 | ||||||||||||||||||||||||||||||
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Total available for sale securities |
$ | 6,576 | $ | 6,731 | $ | 67,143 | $ | 67,953 | $ | 276,655 | $ | 283,210 | $ | 1,129,823 | $ | 1,150,342 | $ | 1,480,197 | $ | 1,508,236 | ||||||||||||||||||||
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Gross realized gains from sales of available for sale securities were $0.2 million and $2.0 million during the three months ended June 30, 2020 and 2019, respectively, and $0.3 million and $2.1 million during the six months ended June 30, 2020 and 2019, respectively. The Company had no significant gross realized losses from sales of securities available for sale during both the six months ended June 30, 2020 and 2019. No other-than-temporary impairment was recorded during the six months ended June 30, 2020 and 2019.
Management prepares an estimate of the expected cash flows for investment securities available for sale that potentially may be deemed to have OTTI. This estimate begins with the contractual cash flows of the security. This amount is then reduced by an estimate of probable credit losses associated with the security. When estimating the extent of probable losses on the securities, management considers the credit quality and the ability to pay of the underlying issuers. Indicators of diminished credit quality of the issuers include defaults, interest deferrals, or payments in kind. Management also considers those factors listed in the Investments Debt and Equity Securities topic of the FASB ASC when estimating the ultimate realizability of the cash flows for each individual security.
The resulting estimate of cash flows after considering credit is then subject to a present value computation using a discount rate equal to the current yield used to accrete the beneficial interest or the effective interest rate implicit in the security at the date of acquisition. If the present value of the estimated cash flows is less than the current amortized cost basis, an OTTI is considered to have occurred and the security is written down to the fair value indicated by the cash flow analysis. As part of the analysis, management considers whether it intends to sell the security or whether it is more than likely that it would be required to sell the security before the expected recovery of its amortized cost basis.
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Information pertaining to available for sale securities with gross unrealized losses as of June 30, 2020 and December 31, 2019, which the Company has not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
June 30, 2020 | ||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||
# of Holdings |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
||||||||||||||||||||||
(Dollars In Thousands) | ||||||||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities |
1 | 225 | 100,685 | | | 225 | 100,685 | |||||||||||||||||||||
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1 | $ | 225 | $ | 100,685 | $ | | $ | | $ | 225 | $ | 100,685 | ||||||||||||||||
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December 31, 2019 | ||||||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||
# of Holdings |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
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(Dollars In Thousands) | ||||||||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities |
1 | $ | 545 | $ | 74,550 | $ | | $ | | $ | 545 | $ | 74,550 | |||||||||||||||
State and municipal bonds and obligations |
2 | 3 | 850 | | | 3 | 850 | |||||||||||||||||||||
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3 | $ | 548 | $ | 75,400 | $ | | $ | | $ | 548 | $ | 75,400 | ||||||||||||||||
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The Company does not intend to sell these investments and has determined based upon available evidence that it is more likely than not that the Company will not be required to sell each security before the expected recovery of its amortized cost basis. As a result, the Company does not consider these investments to be OTTI. The Company made this determination by reviewing various qualitative and quantitative factors regarding each investment category, such as current market conditions, extent and nature of changes in fair value, issuer rating changes and trends, and volatility of earnings.
As a result of the Companys review of these qualitative and quantitative factors, the causes of the impairments listed in the tables above by category are as follows as of June 30, 2020 and December 31, 2019:
| Government-sponsored residential mortgage-backed securities - The securities with unrealized losses in this portfolio have contractual terms that generally do not permit the issuer to settle the security at a price less than the current par value of the investment. The decline in market value of these securities is attributable to changes in interest rates and not credit quality. The security at a loss position as of December 31, 2019 was subsequently in a gain position as of June 30, 2020. Additionally, these securities are implicitly guaranteed by the U.S. Government or one of its agencies. |
| State and municipal bonds and obligations - The securities with unrealized losses in this portfolio as of December 31, 2019 have contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities as of December 31, 2019 is attributable to changes in interest rates and not credit quality. These securities were subsequently in a gain position as of June 30, 2020. These bonds are investment grade and are rated AA Standard and Poors. |
4. Loans and Allowance for Loan Losses
The following table provides a summary of the Companys loan portfolio as of the dates indicated:
At June 30, | At December 31, | |||||||
2020 | 2019 | |||||||
(In thousands) | ||||||||
Commercial and industrial |
$ | 2,271,700 | $ | 1,642,184 | ||||
Commercial real estate |
3,584,358 | 3,535,441 | ||||||
Commercial construction |
282,246 | 273,774 | ||||||
Business banking |
1,234,961 | 771,498 | ||||||
Residential real estate |
1,400,855 | 1,428,630 | ||||||
Consumer home equity |
905,484 | 933,088 | ||||||
Other consumer |
334,734 | 402,431 | ||||||
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Gross loans before unamortized premiums, unearned discounts and deferred fees |
10,014,338 | 8,987,046 | ||||||
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Allowance for credit losses |
(116,636 | ) | (82,297 | ) | ||||
Unamortized premiums, net of unearned discounts and deferred fees |
(34,722 | ) | (5,565 | ) | ||||
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Loans after the allowance for credit losses, unamortized premiums, unearned discounts and deferred fees |
$ | 9,862,980 | $ | 8,899,184 | ||||
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15
Table of Contents
There are no other loan categories that exceed 10% of total loans not already reflected in the preceding table.
The Companys lending activities are conducted principally in the New England area with the exception of its Shared National Credit Program (SNC Program) portfolio. The Company participates in the SNC Program in an effort to improve industry and geographical diversification. The SNC Program portfolio is included in the Companys commercial and industrial, commercial real estate and commercial construction portfolios. The SNC Program portfolio is defined as loan syndications with exposure over $100 million and with three or more lenders participating.
Most loans originated by the Company are either collateralized by real estate or other assets or guaranteed by federal and local governmental authorities. The ability and willingness of the single-family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers geographic areas and real estate values. The ability and willingness of commercial real estate, commercial and industrial, and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate economy in the borrowers geographic areas and the general economy. The ability and willingness of airplane loan borrowers to repay is generally dependent on the health of the general economy.
Loans Pledged as Collateral
The carrying value of loans pledged to secure advances from the FHLB were $2.1 billion and $1.5 billion at June 30, 2020 and December 31, 2019, respectively.
At June 30, 2020 and December 31, 3019, mortgage loans partially or wholly-owned by others and serviced by the Company amounted to approximately $14.9 million and $15.6 million, respectively.
Allowance for Loan Losses
The allowance for loan losses is established to provide for probable losses incurred in the Companys loan portfolio at the balance sheet date and is established through a provision for loan losses charged to net income. Charge-offs, net of recoveries, are charged directly to the allowance. Commercial and residential loans are charged-off in the period in which they are deemed uncollectible. Delinquent loans in these product types are subject to ongoing review and analysis to determine if a charge-off in the current period is appropriate. For consumer loans, policies and procedures exist that require charge-off consideration upon a certain triggering event depending on the product type.
The following table summarizes the changes in the allowance for loan losses for the periods indicated:
For the Three Months Ended June 30, |
For the Six Months Ended June 30, |
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2020 | 2019 | 2020 | 2019 | |||||||||||||
(In thousands) |
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Balance at the beginning of period |
$ | 109,138 | $ | 82,493 | $ | 82,297 | $ | 80,655 | ||||||||
Loans charged off |
(1,264 | ) | (2,563 | ) | (3,607 | ) | (4,487 | ) | ||||||||
Recoveries |
162 | 1,232 | 746 | 1,994 | ||||||||||||
Provision charged to expense |
8,600 | 1,500 | 37,200 | 4,500 | ||||||||||||
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Balance at end of period |
$ | 116,636 | $ | 82,662 | $ | 116,636 | $ | 82,662 | ||||||||
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Table of Contents
The following tables summarize changes in the allowance for loan losses by loan category and bifurcates the amount of allowance allocated to each loan category based on collective impairment analysis and loans evaluated individually for impairment:
For the Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Commercial Construction |
Business Banking |
Residential Real Estate |
Consumer Home Equity |
Other Consumer |
Other | Total | ||||||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses: |
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Beginning balance |
$ | 30,531 | $ | 49,227 | $ | 4,712 | $ | 10,181 | $ | 6,228 | $ | 3,913 | $ | 4,019 | $ | 327 | $ | 109,138 | ||||||||||||||||||
Charge-offs |
(27 | ) | (24 | ) | | (1,198 | ) | | | (15 | ) | | (1,264 | ) | ||||||||||||||||||||||
Recoveries |
58 | 5 | | 27 | 13 | 8 | 51 | | 162 | |||||||||||||||||||||||||||
Provision (benefit) |
2,667 | 5,020 | 104 | 795 | 328 | (46 | ) | (293 | ) | 25 | 8,600 | |||||||||||||||||||||||||
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Ending balance |
$ | 33,229 | $ | 54,228 | $ | 4,816 | $ | 9,805 | $ | 6,569 | $ | 3,875 | $ | 3,762 | $ | 352 | $ | 116,636 | ||||||||||||||||||
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For the Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Commercial Construction |
Business Banking |
Residential Real Estate |
Consumer Home Equity |
Other Consumer |
Other | Total | ||||||||||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 20,844 | $ | 33,170 | $ | 4,225 | $ | 8,175 | $ | 7,169 | $ | 4,105 | $ | 4,390 | $ | 415 | $ | 82,493 | ||||||||||||||||||
Charge-offs |
(272 | ) | (169 | ) | | (1,371 | ) | (46 | ) | (124 | ) | (581 | ) | | (2,563 | ) | ||||||||||||||||||||
Recoveries |
908 | 2 | | 193 | 12 | 20 | 97 | | 1,232 | |||||||||||||||||||||||||||
Provision (benefit) |
(651 | ) | 583 | 537 | 1,057 | (335 | ) | 96 | 418 | (205 | ) | 1,500 | ||||||||||||||||||||||||
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|
|
|
|
|
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|
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|
|
|
|
|||||||||||||||||||
Ending balance |
$ | 20,829 | $ | 33,586 | $ | 4,762 | $ | 8,054 | $ | 6,800 | $ | 4,097 | $ | 4,324 | $ | 210 | $ | 82,662 | ||||||||||||||||||
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For the Six Months Ended June, 2020 | ||||||||||||||||||||||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Commercial Construction |
Business Banking |
Residential Real Estate |
Consumer Home Equity |
Other Consumer |
Other | Total | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 20,919 | $ | 34,730 | $ | 3,424 | $ | 8,260 | $ | 6,380 | $ | 4,027 | $ | 4,173 | $ | 384 | $ | 82,297 | ||||||||||||||||||
Charge-offs |
(27 | ) | (24 | ) | | (2,535 | ) | | (473 | ) | (548 | ) | | (3,607 | ) | |||||||||||||||||||||
Recoveries |
380 | 6 | | 154 | 73 | 22 | 111 | | 746 | |||||||||||||||||||||||||||
Provision (benefit) |
11,957 | 19,516 | 1,392 | 3,926 | 116 | 299 | 26 | (32 | ) | 37,200 | ||||||||||||||||||||||||||
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|
|
|
|
|
|||||||||||||||||||
Ending balance |
$ | 33,229 | $ | 54,228 | $ | 4,816 | $ | 9,805 | $ | 6,569 | $ | 3,875 | $ | 3,762 | $ | 352 | $ | 116,636 | ||||||||||||||||||
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|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 3,028 | $ | 230 | $ | 22 | $ | 578 | $ | 1,639 | $ | 277 | $ | | $ | | $ | 5,774 | ||||||||||||||||||
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|
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|
|
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|
|||||||||||||||||||
Ending balance: acquired with deteriorated credit quality |
$ | 1,732 | $ | 1,066 | $ | | $ | | $ | 293 | $ | | $ | | $ | | $ | 3,091 | ||||||||||||||||||
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|
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Ending balance: collectively evaluated for impairment |
$ | 28,469 | $ | 52,932 | $ | 4,794 | $ | 9,227 | $ | 4,637 | $ | 3,598 | $ | 3,762 | $ | 352 | $ | 107,771 | ||||||||||||||||||
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Loans ending balance: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 18,864 | $ | 4,920 | $ | 280 | $ | 20,301 | $ | 28,301 | $ | 5,947 | $ | 22 | $ | | $ | 78,635 | ||||||||||||||||||
Acquired with deteriorated credit quality |
3,572 | 5,413 | | | 3,426 | | | | 12,411 | |||||||||||||||||||||||||||
Collectively evaluated for impairment |
2,249,264 | 3,574,025 | 281,966 | 1,214,660 | 1,369,128 | 899,537 | 334,712 | | 9,923,292 | |||||||||||||||||||||||||||
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Total loans by group |
$ | 2,271,700 | $ | 3,584,358 | $ | 282,246 | $ | 1,234,961 | $ | 1,400,855 | $ | 905,484 | $ | 334,734 | $ | | $ | 10,014,338 | ||||||||||||||||||
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17
Table of Contents
For the Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||
Commercial and Industrial |
Commercial Real Estate |
Commercial Construction |
Business Banking |
Residential Real Estate |
Consumer Home Equity |
Other Consumer |
Other | Total | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 19,321 | $ | 32,400 | $ | 4,606 | $ | 8,167 | $ | 7,059 | $ | 4,113 | $ | 4,600 | $ | 389 | $ | 80,655 | ||||||||||||||||||
Charge-offs |
(272 | ) | (169 | ) | | (2,810 | ) | (63 | ) | (124 | ) | (1,049 | ) | | (4,487 | ) | ||||||||||||||||||||
Recoveries |
1,368 | 4 | | 320 | 71 | 28 | 203 | | 1,994 | |||||||||||||||||||||||||||
Provision (benefit) |
412 | 1,351 | 156 | 2,377 | (267 | ) | 80 | 570 | (179 | ) | 4,500 | |||||||||||||||||||||||||
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|
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Ending balance |
$ | 20,829 | $ | 33,586 | 4,762 | $ | 8,054 | $ | 6,800 | $ | 4,097 | $ | 4,324 | $ | 210 | $ | 82,662 | |||||||||||||||||||
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|
|||||||||||||||||||
Ending balance: individually evaluated for impairment |
$ | 1,918 | $ | 40 | $ | | $ | 198 | $ | 1,663 | $ | 296 | $ | | $ | | $ | 4,115 | ||||||||||||||||||
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|
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Ending balance: acquired with deteriorated credit quality |
$ | 227 | $ | 85 | $ | | $ | | $ | 213 | $ | | $ | | $ | | $ | 525 | ||||||||||||||||||
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Ending balance: collectively evaluated for impairment |
$ | 18,684 | $ | 33,461 | $ | 4,762 | $ | 7,856 | $ | 4,924 | $ | 3,801 | $ | 4,324 | $ | 210 | $ | 78,022 | ||||||||||||||||||
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Loans ending balance: |
||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 21,098 | $ | 10,421 | $ | | $ | 9,043 | $ | 27,287 | $ | 4,642 | $ | | $ | | $ | 72,491 | ||||||||||||||||||
Acquired with deteriorated credit quality |
4,109 | 7,591 | | | 3,405 | | | | 15,105 | |||||||||||||||||||||||||||
Collectively evaluated for impairment |
1,726,510 | 3,331,951 | 310,860 | 736,417 | 1,414,741 | 950,713 | 470,858 | | 8,942,050 | |||||||||||||||||||||||||||
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Total loans by group |
$ | 1,751,717 | $ | 3,349,963 | $ | 310,860 | $ | 745,460 | $ | 1,445,433 | $ | 955,355 | $ | 470,858 | $ | | $ | 9,029,646 | ||||||||||||||||||
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Management uses a methodology to systematically estimate the amount of loss incurred in the portfolio. Commercial real estate, commercial and industrial, commercial construction and business banking loans are evaluated using a loan rating system, historical losses and other factors which form the basis for estimating incurred losses. Portfolios of more homogeneous populations of loans, including residential mortgages and consumer loans, are analyzed as groups taking into account delinquency ratios, historical loss experience and charge-offs. For the purpose of estimating the allowance for loan losses, management segregates the loan portfolio into the categories noted in the above tables. Each of these loan categories possess unique risk characteristics such as the purpose of the loan, repayment source, and collateral. These characteristics are considered when determining the appropriate level of the allowance for each category. Some examples of these risk characteristics unique to each loan category include:
Commercial Lending
Commercial and industrial: The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Collateral frequently consists of a first lien position on business assets including, but not limited to accounts receivable, inventory, airplanes and equipment. The primary repayment source is operating cash flow and, secondarily, the liquidation of assets. The Company often obtains personal guarantees from individuals holding material ownership in the borrowing entity.
18
Table of Contents
Commercial real estate: Collateral values are established by independent third-party appraisals and evaluations. Primary repayment sources include operating income generated by the real estate, permanent debt refinancing, sale of the real estate and, secondarily, by liquidation of the collateral. The Company often obtains personal guarantees from individuals holding material ownership in the borrowing equity.
Commercial construction: These loans are generally considered to present a higher degree of risk than other real estate loans and may be affected by a variety of factors, such as adverse changes in interest rates and the borrowers ability to control costs and adhere to time schedules. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. Construction loan repayment is substantially dependent on the ability of the borrower to complete the project and obtain permanent financing.
Business banking: These loans are typically secured by all business assets or commercial real estate. Business banking originations include traditionally underwritten loans as well as partially automated scored loans. Business banking scored loans are determined by utilizing the Companys proprietary decision matrix that has a number of quantitative factors including, but not limited to, a guarantors credit score, industry risk, and time in business. The Company also engages in Small Business Association (SBA) lending, both in the business banking and commercial banking divisions. The SBA guarantees reduce the Companys loss due to default and are considered a credit enhancement to the loan structure.
Residential Lending
Residential real estate: These loans are made to borrowers who demonstrate the ability to repay principal and interest on a monthly basis. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit repayment history, financial resources (including cash reserves) and the value of the collateral. The Company maintains policy standards for minimum credit score and cash reserves and maximum loan to value consistent with a prime portfolio. Collateral consists of mortgage liens on 1-4 family residential dwellings. The Company does not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or retained in the Companys loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and the Companys capital needs.
Consumer Lending
Consumer home equity: Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Full principal repayment is required at the end of the ten-year draw period. Home equity loans are term loans that require the monthly payment of principal and interest such that the loan will be fully amortized at maturity. Underwriting considerations are materially consistent with those utilized in residential real estate. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
Other consumer: The Companys policy and underwriting in this category, which is comprised primarily of airplane and automobile loans, include the following factors, among others: income sources and reliability, credit histories, term of repayment, and collateral value, as applicable. These are typically granted on an unsecured basis, with the exception of airplane and automobile loans.
Credit Quality
Commercial Lending Credit Quality
The Company monitors credit quality indicators and utilizes portfolio scorecards to assess the risk of its commercial portfolio. Specifically, the Company utilizes a 12-point credit risk-rating system to manage risk and identify potential problem loans. Risk-rating assignments are based upon a number of quantitative and qualitative factors that are under continual review. Factors include cash flow, collateral coverage, liquidity, leverage, position within the industry, internal controls and management, financial reporting, and other considerations. The risk-rating categories are defined as follows:
0 Risk Rating - Unrated
Certain segments of the portfolios are not rated. These segments include airplane loans, business banking scored loan products, and other commercial loans managed by exception. Loans within this unrated loan segment are monitored by delinquency status; and for lines of credit greater than $100,000 in exposure, an annual review is conducted. The Company supplements performance data with current credit scores for the business banking portfolio on a quarterly basis. Unrated loans managed outside of airplane loans and business banking loans are generally restricted to commercial exposure less than $1 million with a line of credit component restricted
19
Table of Contents
to $350,000. Loans included in this category have qualification requirements that include risk rating of 6W or better at time of recommendation for unrated status, acceptable management of deposit accounts, and no known negative changes in management, operations or financial performance. Restricted from this category are lines of credit managed with borrowing base requirements.
For purposes of estimating the allowance for loan losses, unrated loans are considered in the same manner as pass rated loans.
1-6W Risk Rating Pass
Loans with a risk-rating of 1-6W are classified as Pass and are comprised of loans that range from substantially risk free which indicates borrowers of unquestioned credit standing, well-established national companies with a very strong financial condition, and loans fully secured by cash, through acceptable risk which indicates acceptable rated loans that may be experiencing weak cash flow, impending lease rollover or minor liquidity concerns. The top end of the risk-rating category (6W) includes loans that, although contain the same risk-rating as those with a rating of 6, are being more closely monitored to determine if a downgrade is necessary.
7 Risk Rating Special Mention (Potential Weakness)
Loans to borrowers in this category exhibit potential weaknesses or downward trends deserving managements close attention. While potentially weak, no loss of principal or interest is envisioned. Included in this category are borrowers who are performing as agreed, are weak when compared to industry standards, may be experiencing an interim loss and may be in declining industries. An element of asset quality, financial flexibility or management is below average. Management and owners may have limited depth, particularly when operating under strained circumstances. The Company does not consider borrowers within this category as new business prospects. Borrowers rated special mention may find it difficult to obtain alternative financing from traditional bank sources.
8 Risk Rating Substandard (Well-Defined Weakness)
Loans with a risk-rating of 8 exhibit well-defined weaknesses that, if not corrected, may jeopardize the orderly liquidation of the debt. A loan is classified as substandard if it is inadequately protected by the repayment capacity of the obligor or by the collateral pledged. Specifically, repayment under market rates and terms, or by the requirements under the existing loan documents, is in jeopardy, but no loss of principal or interest is envisioned. There is a possibility that a partial loss of principal and/or interest will occur in the future if the deficiencies are not corrected. Loss potential, while existing in the aggregate portfolio of substandard assets, does not have to exist in individual assets classified as substandard. Credits in this category often may have reported a loss in the most recent fiscal year end and are likely to continue to report losses in the interim period, or interim losses are expected to result in a fiscal year-end loss. Nonaccrual is possible, but not mandatory, in this class.
9 Risk Rating Doubtful (Loss Probably)
Loans classified as doubtful have comparable weaknesses as found in the loans classified as substandard with the added provision that such weaknesses make collection of the debt in full (based on currently existing facts, conditions and values) highly questionable and improbable. Serious problems exist such that partial loss of principal is likely. The probability of loss exceeds 50%, however, because of reasonably specific pending factors that may work to strengthen the credit, estimated losses are deferred until a more exact status can be determined. Pending factors may include the sale of the company, a merger, capital injection, new profitable purchase orders, and refinancing plans. Specific reserves will be the amount identified after specific review. Nonaccrual is mandatory in this class.
10 Risk Rating Loss
Loans to borrowers in this category are deemed incapable of repayment. Loans to such borrowers are considered uncollectable and of such little value that continuance as active assets of the Company is not warranted. This classification does not mean that the loans have no recovery or salvage value, but rather, it is not practical or desirable to defer writing off these assets even though partial recovery may occur in the future. Loans in this category have a recorded investment of $0 at the time of the downgrade.
The credit quality of the commercial loan portfolio is actively monitored and supported by a comprehensive credit approval process; and all large dollar transactions are sent for approval to a committee of seasoned business line and credit professionals. Risk ratings are periodically reviewed and the Company maintains an independent credit risk review function that reports directly to the Risk Management Committee of the Board of Directors. Credits that demonstrate significant deterioration in credit quality are transferred to a specialized group of seasoned workout officers for individual attention.
20
Table of Contents
The following table details the internal risk-rating categories for the Companys commercial and industrial, commercial real estate, commercial construction and business banking portfolios:
As of June 30, 2020 | ||||||||||||||||||||||||
Category |
Risk Rating |
Commercial and Industrial |
Commercial Real Estate |
Commercial Construction |
Business Banking |
Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Unrated |
0 | $ | 753,943 | $ | 42,919 | $ | 332 | $ | 900,296 | $ | 1,697,490 | |||||||||||||
Pass |
1-6W | 1,269,284 | 3,211,054 | 248,400 | 291,751 | 5,020,489 | ||||||||||||||||||
Special mention |
7 | 180,485 | 297,016 | 29,671 | 32,406 | 539,578 | ||||||||||||||||||
Substandard |
8 | 51,338 | 30,654 | 3,843 | 10,508 | 96,343 | ||||||||||||||||||
Doubtful |
9 | 16,650 | 2,715 | | | 19,365 | ||||||||||||||||||
Loss |
10 | | | | | | ||||||||||||||||||
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|
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|
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|
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Total |
$ | 2,271,700 | $ | 3,584,358 | $ | 282,246 | $ | 1,234,961 | $ | 7,373,265 | ||||||||||||||
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As of December 31, 2019 | ||||||||||||||||||||||||
Category |
Risk Rating |
Commercial and Industrial |
Commercial Real Estate |
Commercial Construction |
Business Banking |
Total | ||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Unrated |
0 | $ | 150,226 | $ | 48,266 | $ | 331 | $ | 445,201 | $ | 644,024 | |||||||||||||
Pass |
1-6W | 1,405,902 | 3,436,267 | 260,615 | 315,194 | 5,417,978 | ||||||||||||||||||
Special mention |
7 | 24,171 | 28,606 | 9,438 | 2,006 | 64,221 | ||||||||||||||||||
Substandard |
8 | 42,894 | 21,635 | 3,390 | 8,207 | 76,126 | ||||||||||||||||||
Doubtful |
9 | 18,991 | 667 | | 890 | 20,548 | ||||||||||||||||||
Loss |
10 | | | | | | ||||||||||||||||||
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|
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Total |
$ | 1,642,184 | $ | 3,535,441 | $ | 273,774 | $ | 771,498 | $ | 6,222,897 | ||||||||||||||
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Paycheck Protection Program (PPP) loans are included within the unrated category of the commercial and industrial and business banking portfolios in the table above. Commercial and industrial and business banking PPP loans amounted to $633.0 million and $467.2 million, respectively, at June 30, 2020. The Company does not have an allowance for loan losses for PPP loans as they are 100% guaranteed by the SBA.
Residential and Consumer Lending Credit Quality
For the Companys residential and consumer portfolios, the quality of the loan is best indicated by the repayment performance of an individual borrower. Updated appraisals, broker opinions of value and other collateral valuation methods are employed in the residential and consumer portfolios, typically for credits that are deteriorating. Delinquency status is determined using payment performance, while accrual status may be determined using a combination of payment performance, expected borrower viability and collateral value. Delinquent consumer loans are handled by a team of seasoned collection specialists.
Asset Quality
The Company manages its loan portfolio with careful monitoring. As a general rule, loans more than 90 days past due with respect to principal and interest are classified as nonaccrual loans. Exceptions may be made if management believes that collateral held by the Company is clearly sufficient and in full satisfaction of both principal and interest, or the loan is accounted for as a PCI loan. Therefore, as permitted by banking regulations, certain consumer loans past due 90 days or more may continue to accrue interest. The Company may also use discretion regarding other loans over 90 days delinquent if the loan is well secured and in the process of collection. Nonaccrual loans and loans that are more than 90 days past due but still accruing interest are considered nonperforming loans.
21
Table of Contents
Nonaccrual loans may be returned to an accrual status when principal and interest payments are no longer delinquent, and the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectability of principal and interest. Loans are considered past due based upon the number of days delinquent according to their contractual terms. Specifically, nonaccrual residential loans that have been restructured must perform for a period of six months before being considered for accrual status.
A loan is expected to remain on nonaccrual status until it becomes current with respect to principal and interest, the loan is liquidated, or the loan is determined to be uncollectible and is charged-off against the allowance for loan losses.
The following is a summary pertaining to the breakdown of the Companys nonaccrual loans:
As of June 30, | As of December 31, | |||||||
2020 | 2019 | |||||||
(In Thousands) | ||||||||
Commercial and industrial |
$ | 13,435 | $ | 21,471 | ||||
Commercial real estate |
1,399 | 4,120 | ||||||
Commercial construction |
281 | | ||||||
Business banking |
16,158 | 8,502 | ||||||
Residential real estate |
11,693 | 5,598 | ||||||
Consumer home equity |
6,403 | 2,137 | ||||||
Other consumer |
2,971 | 623 | ||||||
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|
|||||
Total non-accrual loans |
$ | 52,340 | $ | 42,451 | ||||
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|
The following table shows the age analysis of past due loans as of the dates indicated:
As of June 30, 2020 | ||||||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
90 or More Days Past Due |
Total Past Due |
Current | Total Loans |
Recorded Investment > 90 Days and Accruing |
||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 681 | $ | 671 | $ | 1,508 | $ | 2,860 | $ | 2,268,840 | $ | 2,271,700 | $ | 471 | ||||||||||||||
Commercial real estate |
| 257 | 3,045 | 3,302 | 3,581,056 | 3,584,358 | 2,331 | |||||||||||||||||||||
Commercial construction |
| | 280 | 280 | 281,966 | 282,246 | | |||||||||||||||||||||
Business banking |
4,541 | 4,160 | 13,021 | 21,722 | 1,213,239 | 1,234,961 | | |||||||||||||||||||||
Residential real estate |
26,859 | 2,084 | 8,981 | 37,924 | 1,362,931 | 1,400,855 | 244 | |||||||||||||||||||||
Consumer home equity |
3,413 | 1,971 | 4,511 | 9,895 | 895,589 | 905,484 | 9 | |||||||||||||||||||||
Other consumer |
2,992 | 1,734 | 2,971 | 7,697 | 327,037 | 334,734 | | |||||||||||||||||||||
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Total |
$ | 38,486 | $ | 10,877 | $ | 34,317 | $ | 83,680 | $ | 9,930,658 | $ | 10,014,338 | $ | 3,055 | ||||||||||||||
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22
Table of Contents
As of December 31, 2019 | ||||||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
90 or More Days Past Due |
Total Past Due |
Current | Total Loans |
Recorded Investment >90 Days and Accruing |
||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 1,407 | $ | | $ | 963 | $ | 2,370 | $ | 1,639,814 | $ | 1,642,184 | $ | | ||||||||||||||
Commercial real estate |
1,290 | 100 | 1,856 | 3,246 | 3,532,195 | 3,535,441 | 1,315 | |||||||||||||||||||||
Commercial Construction |
| | | 273,774 | 273,774 | | ||||||||||||||||||||||
Business banking |
3,031 | 763 | 6,095 | 9,889 | 761,609 | 771,498 | | |||||||||||||||||||||
Residential real estate |
14,030 | 2,563 | 3,030 | 19,623 | 1,409,007 | 1,428,630 | | |||||||||||||||||||||
Consumer home equity |
2,497 | 430 | 1,636 | 4,563 | 928,525 | 933,088 | 9 | |||||||||||||||||||||
Other consumer |
3,451 | 514 | 579 | 4,544 | 397,887 | 402,431 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 25,706 | $ | 4,370 | $ | 14,159 | $ | 44,235 | $ | 8,942,811 | $ | 8,987,046 | $ | 1,324 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the normal course of business, the Company may become aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which currently do not yet meet the criteria for classification as nonperforming loans. However, based upon the Companys past experiences, some of these loans with potential weaknesses will ultimately be restructured or placed in non-accrual status.
Troubled Debt Restructurings (TDR)
In cases where a borrower experiences financial difficulty and the Company makes certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructured loan. The objective is to aid in the resolution of nonperforming loans by modifying the contractual obligation to avoid the possibility of foreclosure.
All TDR loans are considered impaired and therefore are subject to a specific review for impairment loss. The amount of impairment loss, if any, is recorded as a specific loss allocation to each individual loan in the allowance for loan losses. Commercial loans and residential loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell.
The Companys policy is to have any TDR loans which are on nonaccrual status prior to being modified remain on nonaccrual status for approximately six months subsequent to being modified before management considers its return to accrual status. If the TDR loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status.
23
Table of Contents
The following table shows the TDR loans on accrual and nonaccrual status as of the dates indicated:
As of June 30, 2020 | ||||||||||||||||||||||||
TDRs on Accrual Status | TDRs on Nonaccrual Status | Total TDRs | ||||||||||||||||||||||
Balance of | Number of | Balance of | Number of | Balance of | ||||||||||||||||||||
Number of Loans | Loans | Loans | Loans | Loans | Loans | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial and industrial |
2 | $ | 5,429 | 10 | $ | 11,259 | 12 | $ | 16,688 | |||||||||||||||
Commercial real estate |
1 | 3,521 | 2 | 707 | 3 | 4,228 | ||||||||||||||||||
Business banking |
5 | 4,143 | 2 | 224 | 7 | 4,367 | ||||||||||||||||||
Residential real estate |
149 | 23,714 | 28 | 4,172 | 177 | 27,886 | ||||||||||||||||||
Consumer home equity |
86 | 3,862 | 12 | 2,085 | 98 | 5,947 | ||||||||||||||||||
Other consumer |
1 | 22 | | | 1 | 22 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
244 | $ | 40,691 | 54 | $ | 18,447 | 298 | $ | 59,138 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
As of December 31, 2019 | ||||||||||||||||||||||||
TDRs on Accrual Status | TDRs on Nonaccrual Status | Total TDRs | ||||||||||||||||||||||
Balance of | Number of | Balance of | Number of | Balance of | ||||||||||||||||||||
Number of Loans | Loans | Loans | Loans | Loans | Loans | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial and industrial |
4 | $ | 10,899 | 14 | $ | 19,781 | 18 | $ | 30,680 | |||||||||||||||
Commercial real estate |
1 | 3,520 | 3 | 3,338 | 4 | 6,858 | ||||||||||||||||||
Business banking |
2 | 3,156 | 1 | 204 | 3 | 3,360 | ||||||||||||||||||
Residential real estate |
152 | 25,093 | 27 | 3,977 | 179 | 29,070 | ||||||||||||||||||
Consumer home equity |
89 | 5,955 | 5 | 600 | 94 | 6,555 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
248 | $ | 48,623 | 50 | $ | 27,900 | 298 | $ | 76,523 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The amount of specific reserve associated with the TDRs was $4.4 million and $3.2 million at June 30, 2020 and December 31, 2019, respectively. During the six months ended June 30, 2020 and the year ended December 31, 2019, $0 and $0.3 million, respectively, in TDRs moved from nonaccrual to accrual. The amount of additional commitments to lend to borrowers who have been a party to a TDR was $0 and $2.5 million at June 30, 2020 and December 31, 2019, respectively.
24
Table of Contents
The following table shows the modifications which occurred during the periods and the change in the recorded investment subsequent to the modifications occurring:
For the Three Months Ended June 30, 2020 | For the Six Months Ended June 30, 2020 | |||||||||||||||||||||||
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Modification Outstanding Recorded Investment (1) |
Number of Contracts |
Pre-Modification Modification Outstanding Recorded Investment |
Post- Modification Modification Outstanding Recorded Investment (1) |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial and industrial |
1 | $ | 141 | $ | 141 | 1 | $ | 141 | $ | 141 | ||||||||||||||
Commercial real estate |
1 | 506 | 506 | 1 | 506 | 506 | ||||||||||||||||||
Business banking |
4 | 1,165 | 1,165 | 4 | 1,165 | 1,165 | ||||||||||||||||||
Residential real estate |
2 | 155 | 155 | 3 | 399 | 399 | ||||||||||||||||||
Consumer home equity |
4 | 113 | 113 | 12 | 527 | 531 | ||||||||||||||||||
Other consumer |
| | | 1 | 24 | 24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
12 | $ | 2,080 | $ | 2,080 | 22 | $ | 2,762 | $ | 2,766 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
25
Table of Contents
For the Three Months Ended June 30, 2019 | For the Six Months Ended June 30, 2019 | |||||||||||||||||||||||
Number of Contracts |
Pre- Modification Outstanding Recorded Investment |
Post- Modification Modification Outstanding Recorded Investment (1) |
Number of Contracts |
Pre-Modification Modification Outstanding Recorded Investment |
Post- Modification Modification Outstanding Recorded Investment (1) |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Commercial and industrial |
5 | $ | 7,141 | $ | 7,441 | 7 | $ | 7,462 | $ | 7,762 | ||||||||||||||
Commercial real estate |
2 | 3,277 | 3,277 | 2 | 3,277 | 3,277 | ||||||||||||||||||
Residential real estate |
3 | 433 | 445 | 3 | 433 | 445 | ||||||||||||||||||
Consumer home equity |
3 | 154 | 156 | 3 | 154 | 156 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
13 | $ | 11,005 | $ | 11,319 | 15 | $ | 11,326 | $ | 11,640 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The post-modification balances represent the balance of the loan on the date of modification. These amounts may show an increase when modification includes capitalization of interest. |
At June 30, 2020 and December 31, 2019, the outstanding recorded investment of loans that were new to TDR during the period were $2.7 million and $36.2 million, respectively.
The following table shows the Companys post-modification balance of TDRs listed by type of modification during the periods indicated:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In Thousands) | ||||||||||||||||
Adjusted interest rate and extended maturity |
$ | | $ | 668 | $ | | $ | 668 | ||||||||
Adjusted interest rate and principal deferred |
| 39 | | 39 | ||||||||||||
Interest only/principal deferred |
1,305 | 40 | 1,305 | 40 | ||||||||||||
Extended maturity |
35 | | 35 | | ||||||||||||
Extended maturity and interest only/principal deferred |
381 | | 427 | | ||||||||||||
Additional underwriting - increased exposure |
| 10,572 | | 10,572 | ||||||||||||
Court-ordered concession |
359 | | 999 | 321 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,080 | $ | 11,319 | $ | 2,766 | $ | 11,640 | ||||||||
|
|
|
|
|
|
|
|
26
Table of Contents
The following table shows the loans that have been modified during the prior 12 months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due or is transferred to nonaccrual:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
Number of Contracts |
Recorded Investment |
|||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Troubled debt restructurings that subsequently defaulted (1): |
||||||||||||||||||||||||||||||||
Commercial and industrial |
| $ | | 5 | $ | 6,435 | | $ | | 5 | $ | 6,435 | ||||||||||||||||||||
Commercial real estate |
| | 1 | 338 | | | 1 | 338 | ||||||||||||||||||||||||
Residential real estate |
| | 1 | 107 | | | 1 | 107 | ||||||||||||||||||||||||
Consumer Home Equity |
| | | | 1 | 1,317 | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
| $ | | 7 | $ | 6,880 | 1 | $ | 1,317 | 7 | $ | 6,880 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | This table does not reflect any TDRs which were charged off during the periods indicated. |
During the three and six months ended June 30, 2020 the amounts charged-off on TDRs modified in the prior 12 months were $0 and $0.4 million, respectively. During both the three and six months ended June 30, 2019 there were no charge-offs on TDR loans modified in the prior 12 months.
Impaired Loans
Impaired loans consist of all loans for which management has determined it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreements. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.
The Company measures impairment of loans using a discounted cash flow method, the loans observable market price, or the fair value of the collateral if the loan is collateral dependent. The Company has defined the population of impaired loans to include certain nonaccrual loans, TDR loans and residential and home equity loans that have been partially charged off.
The following table summarizes the Companys impaired loans by loan portfolio as of the dates indicated:
As of June 30, 2020 | As of December 31, 2019 | |||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
|||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Commercial and industrial |
$ | 13,052 | $ | 14,152 | $ | | $ | 22,074 | $ | 22,819 | $ | | ||||||||||||
Commercial real estate |
4,419 | 4,635 | | 7,553 | 7,808 | | ||||||||||||||||||
Business banking |
3,076 | 4,369 | | 2,738 | 4,062 | | ||||||||||||||||||
Residential real estate |
12,502 | 14,205 | | 16,517 | 17,858 | | ||||||||||||||||||
Consumer home equity |
3,279 | 3,697 | | 3,666 | 3,697 | | ||||||||||||||||||
Other Consumer |
22 | 22 | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Sub-total |
36,350 | 41,080 | | 52,548 | 56,244 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial and industrial |
5,812 | 6,041 | 3,028 | 10,296 | 10,503 | 2,337 | ||||||||||||||||||
Commercial real estate |
501 | 506 | 230 | 88 | 90 | 40 | ||||||||||||||||||
Commercial construction |
280 | 280 | 22 | | | | ||||||||||||||||||
Business banking |
17,225 | 21,418 | 578 | 8,920 | 13,176 | 571 | ||||||||||||||||||
Residential real estate |
15,799 | 15,799 | 1,639 | 13,015 | 14,072 | 1,399 | ||||||||||||||||||
Consumer home equity |
2,688 | 2,688 | 277 | 2,889 | 2,913 | 322 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Sub-total |
42,285 | 46,712 | 5,774 | 35,208 | 40,754 | 4,669 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 78,635 | $ | 87,792 | $ | 5,774 | $ | 87,756 | $ | 96,998 | $ | 4,669 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
27
Table of Contents
The following tables display information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2020 | June 30, 2020 | |||||||||||||||
Average Recorded Investment |
Total Interest Recognized |
Average Recorded Investment |
Total Interest Recognized |
|||||||||||||
(In Thousands) | ||||||||||||||||
With no related allowance recorded: |
||||||||||||||||
Commercial and industrial |
$ | 12,304 | $ | 49 | $ | 16,592 | $ | 119 | ||||||||
Commercial real estate |
4,401 | 44 | 5,946 | 89 | ||||||||||||
Business banking |
2,392 | 17 | 2,339 | 36 | ||||||||||||
Residential real estate |
11,678 | 125 | 11,728 | 252 | ||||||||||||
Consumer home equity |
3,315 | 16 | 3,155 | 37 | ||||||||||||
Other Consumer |
|
22 |
|
|
|
|
|
23 |
|
1 | ||||||
|
|
|
|
|
|
|
|
|||||||||
Sub-total |
34,112 | 251 | 39,783 | |
534 |
| ||||||||||
|
|
|
|
|
|
|
|
|||||||||
With an allowance recorded: |
||||||||||||||||
Commercial and industrial |
6,545 | | 9,138 | | ||||||||||||
Commercial real estate |
510 | | 429 | | ||||||||||||
Commercial construction |
93 | | 47 | | ||||||||||||
Business banking |
12,955 | 15 | 10,869 | 30 | ||||||||||||
Residential real estate |
14,664 | 169 | 14,707 | 343 | ||||||||||||
Consumer home equity |
2,706 | 22 | 3,087 | 51 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Sub-total |
37,473 | 206 | 38,277 | 424 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 71,585 | $ | 457 | $ | 78,060 | $ | 958 | ||||||||
|
|
|
|
|
|
|
|
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2019 | June 30, 2019 | |||||||||||||||
Average Recorded Investment |
Total Interest Recognized |
Average Recorded Investment |
Total Interest Recognized |
|||||||||||||
(In Thousands) | ||||||||||||||||
With no related allowance recorded: |
||||||||||||||||
Commercial and industrial |
$ | 12,022 | $ | 108 | $ | 11,343 | $ | 177 | ||||||||
Commercial real estate |
11,443 | 74 | 11,176 | 148 | ||||||||||||
Business banking |
1,465 | | 1,332 | | ||||||||||||
Residential real estate |
11,935 | 131 | 11,978 | 259 | ||||||||||||
Consumer home equity |
1,989 | 26 | 2,034 | 51 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Sub-total |
38,854 | 339 | 37,863 | 635 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
With an allowance recorded: |
||||||||||||||||
Commercial and industrial |
$ | 4,386 | $ | | $ | 3,629 | $ | | ||||||||
Commercial real estate |
1,179 | | 634 | | ||||||||||||
Business banking |
7,314 | | 6,937 | | ||||||||||||
Residential real estate |
12,606 | 153 | 12,625 | 302 | ||||||||||||
Consumer home equity |
2,320 | 30 | 2,373 | 59 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Sub-total |
27,805 | 183 | 26,198 | 361 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 66,659 | $ | 522 | $ | 64,061 | $ | 996 | ||||||||
|
|
|
|
|
|
|
|
28
Table of Contents
Purchased Credit Impaired Loans
The following table displays the outstanding and carrying amounts of PCI loans as of the dates indicated:
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
(In Thousands) | ||||||||
Outstanding balance |
$ | 13,572 | $ | 15,149 | ||||
Carrying amount |
12,411 | 13,451 |
The excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the accretable yield, is accreted into interest income over the life of the loans using the effective yield method. The following summarizes activity in the accretable yield for the PCI loan portfolio:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In Thousands) | ||||||||||||||||
Balance at beginning of period |
$ | 3,346 | $ | 5,526 | $ | 3,923 | $ | 6,161 | ||||||||
Acquisition |
| | | | ||||||||||||
Accretion |
(338 | ) | (569 | ) | (760 | ) | (1,142 | ) | ||||||||
Other change in expected cash flows |
(10 | ) | (338 | ) | (165 | ) | (400 | ) | ||||||||
Reclassification (to) from non-accretable difference for loans with (deteriorated) improved cash flows |
(4 | ) | 855 | (4 | ) | 855 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at end of period |
$ | 2,994 | $ | 5,474 | $ | 2,994 | $ | 5,474 | ||||||||
|
|
|
|
|
|
|
|
The estimate of cash flows expected to be collected is regularly re-assessed subsequent to acquisition. A decrease in expected cash flows in subsequent periods may indicate that the loan is impaired which would require the establishment of an allowance for loan losses by a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods serves, first, to reduce any previously established allowance for loan losses by the increase in the present value of cash flows expected to be collected, and results in a recalculation of the amount of accretable yield for the loan. The adjustment of accretable yield due to an increase in expected cash flows is accounted for as a change in estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is adjusted accordingly over the remaining life of the loans.
Loan Participations
The Company occasionally purchases commercial loan participations. These loan participations meet the same underwriting, credit and portfolio management standards as the Companys other loans and are applied against the same criteria to determine the allowance for loan losses as other loans. As of June 30, 2020 and December 31, 2019, the Company held commercial loan participation interests totaling $1.1 billion and $965.1 million, respectively.
29
Table of Contents
The following table summarizes the Companys loan participations:
As of and for the six months ended June 30, 2020 | As of and for the year ended December 31, 2019 | |||||||||||||||||||||||||||||||
Balance | NPL Rate (%) |
Impaired (%) |
Gross Charge-offs |
Balance | NPL Rate (%) |
Impaired (%) |
Gross Charge-offs |
|||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 668,667 | 1.62 | % | 1.62 | % | $ | | $ | 586,346 | 2.76 | % | 2.76 | % | $ | | ||||||||||||||||
Commercial real estate |
305,676 | 0.00 | % | 0.00 | % | | 314,487 | 0.00 | % | 0.00 | % | | ||||||||||||||||||||
Commercial construction |
86,636 | 0.00 | % | 0.00 | % | | 64,259 | 0.00 | % | 0.00 | % | | ||||||||||||||||||||
Business banking |
38 | 0.00 | % | 0.00 | % | 15 | 57 | 0.00 | % | 0.00 | % | | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total loan participations |
$ | 1,061,017 | 1.02 | % | 1.02 | % | $ | 15 | $ | 965,149 | 1.68 | % | 1.68 | % | $ | | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. Leases
The Company leases certain office space and equipment under various noncancelable operating leases. These leases have original terms ranging from 1 year to 25 years. Operating lease liabilities and right of use (ROU) assets are recognized at the lease commencement date based on the present value of the future minimum lease payments over the lease term. Operating lease liabilities are recorded within other liabilities and ROU assets are recorded within other assets in the Companys consolidated balance sheets.
As of June 30, 2020, the Company had the following related to operating leases:
As of June 30, 2020 |
||||
(in thousands) | ||||
Right-of-use assets |
$ | 87,573 | ||
Lease liabilities |
$ | 91,221 |
The following table is a summary of the Companys components of net lease cost for the three and six months ended June 30, 2020:
Three months ended June 30, 2020 |
Six months ended June 30, 2020 |
|||||||
(in thousands) | (in thousands) | |||||||
Operating lease cost |
$ | 3,601 | $ | 7,215 | ||||
Finance lease cost |
17 | 20 | ||||||
Variable lease cost |
448 | 970 | ||||||
|
|
|
|
|||||
Total lease cost |
$ | 4,066 | $ | 8,205 | ||||
|
|
|
|
30
Table of Contents
The rent expense under real estate operating leases for the three and six months ended June 30, 2019 amounted to $3.5 million and $7.1 million, respectively. The rent expense under equipment operating leases for the three and six months ended June 30, 2019 amounted to $0.2 million and $0.3 million, respectively.
During the three and six months ended June 30, 2020, the Company made $3.5 million and $7.1 million, respectively, in cash payments for operating and finance lease payments.
Finance leases are not material and are included in other assets, net in the Companys consolidated balance sheets.
Supplemental balance sheet information related to operating leases as of June 30, 2020 is as follows:
As of June 30, 2020 |
||||
Weighted-average remaining lease term (in years) |
8.84 | |||
Weighted-average discount rate |
2.63 | % |
The following table sets forth the undiscounted cash flows of base rent related to operating leases outstanding at June 30, 2020 with payments scheduled over the next five years and thereafter, including a reconciliation to the operating lease liability recognized in the Companys Consolidated Balance Sheet in other liabilities.
(in thousands) | ||||
Remainder of 2020 |
$ | 7,098 | ||
2021 |
13,746 | |||
2022 |
12,746 | |||
2023 |
12,206 | |||
2024 |
11,402 | |||
Thereafter |
45,534 | |||
|
|
|||
Total minimum lease payments |
$ | 102,732 | ||
Less: amount representing interest |
11,511 | |||
|
|
|||
Present value of future minimum lease payments |
$ | 91,221 | ||
|
|
6. Goodwill and Other Intangibles
The following tables sets forth the carrying amount of goodwill and other intangible assets, net of accumulated amortization by reporting unit at the dates indicated below:
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June 30, 2020 | ||||||||||||
Banking Business |
Insurance Agency Business |
Net Carrying Amount |
||||||||||
(In Thousands) | ||||||||||||
Balances not subject to amortization |
||||||||||||
Goodwill |
$ | 298,611 | $ | 70,420 | $ | 369,031 | ||||||
Balances subject to amortization |
||||||||||||
Insurance agency |
| 6,844 | 6,844 | |||||||||
Core deposits |
456 | | 456 | |||||||||
|
|
|
|
|
|
|||||||
Total other intangible assets |
456 | 6,844 | 7,300 | |||||||||
|
|
|
|
|
|
|||||||
Total goodwill and other intangible assets |
$ | 299,067 | $ | 77,264 | $ | 376,331 | ||||||
|
|
|
|
|
|
|||||||
December 31, 2019 | ||||||||||||
Banking Business |
Insurance Agency Business |
Net Carrying Amount |
||||||||||
(In Thousands) | ||||||||||||
Balances not subject to amortization |
||||||||||||
Goodwill |
$ | 298,611 | $ | 70,420 | $ | 369,031 | ||||||
Balances subject to amortization |
||||||||||||
Insurance agency |
| 7,949 | 7,949 | |||||||||
Core deposits |
754 | | 754 | |||||||||
|
|
|
|
|
|
|||||||
Total other intangible assets |
754 | 7,949 | 8,703 | |||||||||
|
|
|
|
|
|
|||||||
Total goodwill and other intangible assets |
$ | 299,365 | $ | 78,369 | $ | 377,734 | ||||||
|
|
|
|
|
|
The Company assesses goodwill for impairment at the reporting unit level on an annual basis or sooner if an event occurs or circumstances change which might indicate that the fair value of a reporting unit is below its carrying amount. The Company considered the current economic conditions including the potential impact of the COVID-19 pandemic as it pertains to the goodwill above and determined that there was no indication of impairment related to goodwill as of June 30, 2020. Additionally, the Company did not record any impairment charges during the year ended December 31, 2019.
Other intangible assets are 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 COVID-19 as it pertains to these intangible assets and determined that there was no indication of impairment related to other intangible assets as of June 30, 2020.
7. Income Taxes
The following table sets forth information regarding the Companys tax provision and applicable tax rates for the periods indicated:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In thousands) | ||||||||||||||||
Combined federal and state income tax provisions |
$ | 7,197 | $ | 11,032 | $ | 8,495 | $ | 20,710 | ||||||||
Effective income tax rates |
19.4 | % | 23.9 | % | 18.2 | % | 23.3 | % |
The Companys provision for income taxes was $7.2 million and $11.0 million for the three months ended June 30, 2020 and 2019, respectively, and $8.5 million and $20.7 million for the six months ended June 30, 2020 and 2019, respectively. The decrease in
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income tax expense was due primarily to lower pre-tax income during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019, while investment tax credits and other favorable permanent differences remained relatively constant.
The Company believes that it is more likely than not that its deferred tax assets as of June 30, 2020 and December 31, 2019 will be realized. As such, there was no deferred tax asset valuation allowance as of June 30, 2020 and December 31, 2019.
The Company files tax returns in the U.S. federal jurisdiction and various states. As of June 30, 2020, the Companys open tax years for examination by the Internal Revenue Services (IRS) were 2016, 2017 and 2018. The Companys open tax years for examination by state tax authorities varies by state, but no years prior to 2013 are open. The Company believes that its income tax returns have been filed based upon applicable statutes, regulations and case law in effect at the time of filing, however the IRS and/or state jurisdiction, upon examination, could disagree with the Companys interpretation.
Management has performed an evaluation of the Companys uncertain tax positions and determined that a liability for unrecognized tax benefits at June 30, 2020 and December 31, 2019 was not needed.
8. Low Income Housing Tax Credits and Other Tax Credit Investments
The Company has invested in several separate Low Income Housing Tax Credits (LIHTC) projects, also referred to as qualified affordable housing projects, which provide the Company with tax credits and operating loss tax benefits over a period of approximately 15 years. Typically, none of the original investment is expected to be repaid. The return on these investments is generally generated through tax credits and tax losses. The Company accounts for its investments in LIHTC projects using the proportional amortization method, under which it amortizes the initial cost of the investment in proportion to the amount of the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The Companys maximum exposure to loss in its investments in qualified affordable housing projects is limited to its carrying value included in other assets. The Company will continue to use the proportional amortization method on any new investments going forward.
The following table presents the Companys investments in low income housing projects accounted for using the proportional amortization method for the periods indicated:
Six Months Ended June 30, 2020 |
Year Ended December 31, 2019 |
|||||||
(In Thousands) | ||||||||
Current recorded investment included in other assets |
$ | 46,552 | $ | 37,665 | ||||
Commitments to fund qualified affordable housing projects included in recorded investment noted above |
23,821 | 18,042 | ||||||
Tax credits and benefits (1) |
3,058 | 5,962 | ||||||
Amortization of investments included in current tax expense (2) |
2,452 | 4,782 |
(1) | Amount reflects tax credits and tax benefits recognized in the consolidated statement of income for the six months ended June 30, 2020 (unaudited) and the year ended December 31, 2019. |
(2) | Amount reflects amortization of qualified affordable housing projects for the six months ended June 30, 2020 (unaudited) and the year ended December 31, 2019. |
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9. Employee Benefits
Components of Net Periodic Benefit Cost
The components of net pension expense for the plans for the periods indicated are as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(In Thousands) | ||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||
Service cost |
$ | 6,231 | $ | 4,730 | $ | 12,463 | $ | 9,463 | ||||||||
Interest cost |
2,615 | 2,750 | 5,232 | 5,500 | ||||||||||||
Expected return on plan assets |
(7,425 | ) | (5,906 | ) | (14,850 | ) | (11,812 | ) | ||||||||
Past service cost |
6 | 11 | 12 | 22 | ||||||||||||
Recognized net actuarial loss |
2,361 | 1,811 | 4,721 | 3,622 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost |
$ | 3,788 | $ | 3,396 | $ | 7,578 | $ | 6,795 | ||||||||
|
|
|
|
|
|
|
|
Service costs for the Defined Benefit Plan, the BEP, and the DB SERP are recognized within salaries and employee benefits in the statement of income. Service costs for the Outside Directors Retainer Continuance Plan are recognized within professional services in the statement of income. During the six months ended June 30, 2020, the Company made contributions for the Defined Benefit Plan of $32.5 million.
10. Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
In order to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates, the Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit, standby letters of credit, and forward commitments to sell loans, all of which involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in each particular class of financial instruments.
Substantially all of the Companys commitments to extend credit, which normally have fixed expiration dates or termination clauses, are contingent upon customers maintaining specific credit standards at the time of loan funding. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with terms of agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. For forward loan sale commitments, the contract or notional amount does not represent exposure to credit loss. The Company does not sell loans with recourse.
The following table summarizes the above financial instruments as of the dates indicated:
June 30, 2020 | December 31, 2019 | |||||||
(In Thousands) | ||||||||
Commitments to extend credit |
$ | 3,745,517 | $ | 3,606,182 | ||||
Standby letters of credit |
57,402 | 60,124 | ||||||
Forward commitments to sell loans |
67,745 | 21,357 |
Other Contingencies
The Company has been named a defendant in various legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Companys consolidated financial statements.
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As a member of the Federal Reserve System, the Bank is required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank of Boston. However, in response to the COVID-19 pandemic, the Federal Reserve temporarily eliminated reserve requirements and therefore there was no minimum reserve requirement as of June 30, 2020. The amount of this reserve requirement included in cash and cash equivalents was approximately $3.7 million on December 31, 2019.
11. Derivative Financial Instruments
The Company uses derivative financial instruments to manage the Companys interest rate risk resulting from the differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments. Additionally, the Company enters into interest rate derivatives and foreign exchange contracts to accommodate the business requirements of its customers (customer-related positions) and risk participation agreements entered into as financial guarantees of performance on customer-related interest rate swap derivatives. Derivative instruments are carried at fair value in the Companys financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not the instrument qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.
By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Companys credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty plus any initial margin collateral posted. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with those counterparties is remote.
Interest Rate Positions
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 a second party. The amounts relating to the notional principal amount are not actually exchanged. The Company has entered into interest rate swaps in which they pay floating and receive fixed interest in order to manage its interest rate risk exposure to the variability in interest cash flows on certain floating-rate commercial loans. The Company has interest rate swaps that effectively convert the floating rate one-month LIBOR interest payments received on the commercial loans to a fixed rate and consequently reduce the Banks exposure to variability in short-term interest rates. The Company also has interest rate swaps that are based on overnight indexed swap rates. These swaps are accounted for as cash flow hedges and therefore changes in fair value are included in other comprehensive income and reclassified into net income in the same period or periods during which the hedged forecasted transaction affects net income.
The following table reflects the Companys derivative positions as of June 30, 2020 and December 31, 2019 for interest rate swaps which qualify as cash flow hedges for accounting purposes.
June 30, 2020 |
||||||||||||||||||||
Weighted Average Rate | ||||||||||||||||||||
Notional Amount |
Weighted Average Maturity |
Current Rate Paid |
Receive Fixed Swap Rate |
Fair Value (1) | ||||||||||||||||
(In Thousands) | (In Years) | (In Thousands) | ||||||||||||||||||
Interest rate swaps on loans |
900,000 | 1.27 | 0.18 | % | 2.57 | % | (38 | ) | ||||||||||||
|
|
|
|
|||||||||||||||||
Total |
$ | 900,000 | $ | (38 | ) | |||||||||||||||
|
|
|
|
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December 31, 2019 |
||||||||||||||||||||
Weighted Average Rate | ||||||||||||||||||||
Notional Amount |
Weighted Average Maturity |
Current Rate Paid |
Receive Fixed Swap Rate |
Fair Value (1) | ||||||||||||||||
(In Thousands) | (In Years) | (In Thousands) | ||||||||||||||||||
Interest rate swaps on loans |
2,120,000 | 2.16 | 1.74 | % | 2.11 | % | (321 | ) | ||||||||||||
|
|
|
|
|||||||||||||||||
Total |
$ | 2,120,000 | $ | (321 | ) | |||||||||||||||
|
|
|
|
(1) | Fair value included net accrued interest receivable of $1.0 million at June 30, 2020 and $0.4 million at December 31, 2019. |
Central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for the London Interbank Offered Rate (LIBOR) based on observable market transactions because of the probable phase-out of LIBOR. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. Although the full impact of a transition, including the potential or actual discontinuance of LIBOR publication, remains unclear, this change may have an adverse impact on the value of, return on and trading markets for a broad array of financial products, including any LIBOR-based securities, loans and derivatives that are included in the Companys financial assets and liabilities. A transition away from LIBOR may also require extensive changes to the contracts that govern these LIBOR-based products, as well as the Companys systems and processes.
The maximum amount of time over which the Company is currently hedging its exposure to the variability in future cash flows of forecasted transactions related to the receipt of variable interest on existing financial instruments is 2 years.
The Company expects approximately $20.6 million and $10.7 million to be reclassified into interest income from other comprehensive income related to the Companys cash flow hedges in the next twelve months as of June 30, 2020 and December 31, 2019, respectively. This reclassification is due to anticipated payments that will be received on the swaps based upon the forward curve as of June 30, 2020 and December 31, 2019.
The Company expects approximately $12.8 million to be reclassified into interest income from other comprehensive income related to the Companys terminated cash flow hedges in the next 12 months as of June 30, 2020. This reclassification is due to the amortization of realized but unrecognized gains from the termination of interest rate swaps during the period ended June 30, 2020. At June 30, 2020, the remaining unamortized gain on terminated cash flow hedges is $30.6 million.
As of June 30, 2020 and December 31, 2019, the Companys exposure to CME and the fair value of interest rate swap derivatives which qualify as cash flow hedges that contain credit-risk related contingent features that are in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was less than $0.1 million and $0.3 million, respectively. In addition, at June 30, 2020 and December 31, 2019, the Company had posted initial-margin collateral in the form of cash and a U.S. Treasury Note, to CME for these derivatives amounting to $18.7 million and $22.8 million, respectively. The cash and U.S. Treasury Note were considered restricted assets and were included in cash and due from banks and in available for sale securities, respectively.
Customer-Related Positions
Interest rate swaps offered to commercial customers do not qualify as hedges for accounting purposes. These swaps allow the Company to retain variable rate commercial loans while allowing the commercial customer to synthetically fix the loan rate by entering into a variable-to-fixed rate interest rate swap. The Company believes that its exposure to commercial customer derivatives is limited to nonperformance by either the customer or the dealer because these contracts are simultaneously matched at inception with an offsetting dealer transaction.
Risk participation agreements are entered into as financial guarantees of performance on interest rate swap derivatives. The purchased (asset) or sold (liability) guarantee allow the Company to participate-out (fee paid) or participate-in (fee received) the risk associated with certain derivative positions executed with the borrower by the lead bank in a customer-related interest rate swap derivative.
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Foreign exchange contracts consist of those offered to commercial customers and those entered into to hedge the Companys foreign currency risk associated with a foreign-currency loan. Neither qualifies as a hedge for accounting purposes. These commercial customer derivatives are offset with matching derivatives with correspondent-bank counterparties in order to minimize foreign exchange rate risk to the Company. Exposure with respect to these derivatives is largely limited to nonperformance by either the customer or the other counterparty. Neither the Company, nor the correspondent-bank counterparty are required to post collateral but each has established foreign-currency transaction limits to manage the exposure risk. The Company requires its customers to post collateral to minimize risk exposure.
The following table presents the Companys customer-related derivative positions as of the dates indicated below for those derivatives not designated as hedging.
June 30, 2020 | ||||||||
Number of Positions | Total Notional | |||||||
(Dollars in Thousands) | ||||||||
Interest rate swaps |
603 | $ | 3,775,850 | |||||
Risk participation agreements |
66 | 290,131 | ||||||
Foreign exchange contracts: |
||||||||
Matched commercial customer book |
86 | 9,252 | ||||||
Foreign currency loan |
23 | 7,986 | ||||||
December 31, 2019 | ||||||||
Number of Positions | Total Notional | |||||||
Interest rate swaps |
603 | $ | 3,749,474 | |||||
Risk participation agreements |
67 | 299,576 | ||||||
Foreign exchange contracts: |
||||||||
Matched commercial customer book |
62 | 29,990 | ||||||
Foreign currency loan |
23 | 7,310 |
The level of interest rate swaps, risk participation agreements and foreign currency exchange contracts at the end of each period noted above was commensurate with the activity throughout those periods.
The table below presents the fair value of the Companys derivative financial instruments, as well as their classification on the balance sheet for the periods indicated.
Asset Derivatives | Liability Derivatives | |||||||||||||||||||||||
Balance Sheet Location |
Fair Value at June 30, 2020 |
Fair Value at December 31, 2019 |
Balance Sheet Location |
Fair Value at June 30, 2020 |
Fair Value at December 31, 2019 |
|||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||||||||||
Interest rate swaps |
Other assets | $ | | $ | | Other liabilities | $ | 38 | $ | 321 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||||||
Customer-related positions: |
||||||||||||||||||||||||
Interest rate swaps |
Other assets | $ | 171,433 | $ | 64,463 | Other liabilities | $ | 51,319 | $ | 18,057 | ||||||||||||||
Risk participation agreements |
Other assets | 995 | 482 | Other liabilities | 1,500 | 606 | ||||||||||||||||||
Foreign currency exchange contracts - matched customer book |
Other assets | 151 | 469 | Other liabilities | 40 | 428 | ||||||||||||||||||
Foreign currency exchange contracts - foreign currency loan |
Other assets | | | Other liabilities | 173 | 203 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 172,579 | $ | 65,414 | $ | 53,032 | $ | 19,294 | |||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 172,579 | $ | 65,414 | $ | 53,070 | $ | 19,615 | ||||||||||||||||
|
|
|
|
|
|
|
|
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The table below presents the net effect of the Companys derivative financial instruments on the consolidated income statements as well as the effect of the Companys derivative financial instruments included in OCI as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Derivatives designated as hedges: |
||||||||||||||||
Gain in OCI on derivatives |
$ | 3,455 | $ | 16,054 | $ | 47,011 | $ | 21,914 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gain reclassified from OCI into interest income (effective portion) |
7,134 | 231 | 10,246 | 524 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gain recognized in income on derivatives (ineffective portion and amount excluded from effectiveness test) |
||||||||||||||||
Interest income |
| | | | ||||||||||||
Other income |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Derivatives not designated as hedges: |
||||||||||||||||
Customer-related positions: |
||||||||||||||||
(Loss) recognized in interest rate swap income |
$ | (687 | ) | $ | (2,129 | ) | $ | (6,967 | ) | $ | (3,356 | ) | ||||
(Loss) recognized in interest rate swap income for risk participation agreements |
(80 | ) | (157 | ) | (381 | ) | (98 | ) | ||||||||
Gain (loss) recognized in other income for foreign currency exchange contracts: |
||||||||||||||||
Matched commercial customer book |
96 | (41 | ) | 69 | (40 | ) | ||||||||||
Foreign currency loan |
(367 | ) | (32 | ) | 30 | (24 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total (loss) for derivatives not designated as hedges |
$ | (1,039 | ) | $ | (2,359 | ) | $ | (7,249 | ) | $ | (3,518 | ) | ||||
|
|
|
|
|
|
|
|
The Company has agreements with its customer-related interest rate swap derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its customer-related interest rate swap derivative correspondent-bank counterparties that contain a provision whereby if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
The Companys exposure related to its customer-related interest rate swap derivative consists of exposure on cleared derivative transactions and exposure on non-cleared derivative transactions.
38
Table of Contents
Cleared derivative transactions are with CME and exposure is settled to market daily, with additional credit exposure related to initial-margin collateral pledged to CME at trade execution. At June 30, 2020 and December 31, 2019, the Companys exposure to CME for settled variation margin in excess of the customer-related interest rate swap termination values was $0.3 million, and $1.5 million, respectively. In addition, at June 30, 2020 and December 31, 2019, the Company had posted initial-margin collateral in the form of a U.S. Treasury Note amounting to $42.2 million and $27.6 million, respectively, to CME for these derivatives. The cash and U.S. Treasury Note were considered restricted assets and were included in cash and due from banks and in available for sale securities, respectively.
At June 30, 2020 and December 31, 2019 the fair value of non-cleared customer-related interest rate swap derivatives that contain credit-risk related contingent features that are in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $51.3 million and $14.6 million, respectively. The Company has minimum collateral posting thresholds with its non-cleared customer-related interest rate swap derivative correspondent-bank counterparties to the extent that the Company has a liability position with the correspondent-bank counterparties. At June 30, 2020 and December 31, 2019, the Company had posted collateral in the form of cash amounting to $51.7 million and $22.2 million, respectively, which was considered to be a restricted asset and was included in other short-term investments. If the Company had breached any of these provisions at June 30, 2020 or December 31, 2019, it would have been required to settle its obligations under the agreements at the termination value. In addition, the Company had cross-default provisions with its commercial customer loan agreements which provide cross-collateralization with the customer loan collateral.
12. Balance Sheet Offsetting
Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The Companys derivative transactions with upstream financial institution counterparties are generally executed under International Swaps and Derivative Association master agreements which include right of set-off provisions. In such cases there is generally a legally enforceable right to offset recognized amounts. However, the Company does not offset fair value amounts recognized for derivative instruments. The Company nets the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be maintained at dealer banks by the Company is monitored and adjusted as necessary. As of June 30, 2020 and December 31, 2019, it was determined that no additional collateral would have to be posted to immediately settle these instruments.
The following table presents the Companys asset and liability positions that were eligible for offset and the potential effect of netting arrangements on its financial position, as of the dates indicated:
Gross Amounts |
Net Amounts |
Gross Amounts Not Offset in the Statement of |
||||||||||||||||||||||
Offset in the | Presented in | Financial Position | ||||||||||||||||||||||
Gross | Statement of | the Statement | Collateral | |||||||||||||||||||||
Amounts | Financial | of Financial | Financial Instruments |
Pledged (Received) |
Net Amount |
|||||||||||||||||||
Description |
Recognized | Position | Position | |||||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
As of June 30, 2020 | ||||||||||||||||||||||||
Derivative Assets |
||||||||||||||||||||||||
Interest rate swaps |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Customer-related positions: |
||||||||||||||||||||||||
Interest rate swaps |
171,433 | | 171,433 | 8 | | 171,425 | ||||||||||||||||||
Risk participation agreements |
995 | | 995 | | | 995 | ||||||||||||||||||
Foreign currency exchange contracts - matched customer book |
151 | | 151 | 1 | | 150 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 172,579 | $ | | $ | 172,579 | $ | 9 | $ | | $ | 172,570 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Derivative Liabilities |
||||||||||||||||||||||||
Interest rate swaps |
$ | 38 | $ | | $ | 38 | $ | 38 | $ | | $ | | ||||||||||||
Customer-related positions: |
||||||||||||||||||||||||
Interest rate swaps |
51,319 | | 51,319 | 8 | 51,311 | | ||||||||||||||||||
Risk participation agreements |
1,500 | | 1,500 | | | 1,500 | ||||||||||||||||||
Foreign currency exchange contracts - matched customer book |
40 | | 40 | 1 | (7 | ) | 46 | |||||||||||||||||
Foreign currency exchange contracts - foreign currency loan |
173 | | 173 | | | 173 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 53,070 | $ | | $ | 53,070 | $ | 47 | $ | 51,304 | $ | 1,719 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
39
Table of Contents
Gross Amounts |
Net Amounts |
Gross Amounts Not Offset in the Statement of |
||||||||||||||||||||||
Offset in the | Presented in | Financial Position | ||||||||||||||||||||||
Gross | Statement of | the Statement | Collateral | |||||||||||||||||||||
Amounts | Financial | of Financial | Financial | Pledged | Net | |||||||||||||||||||
Description |
Recognized | Position | Position | Instruments | (Received) | Amount | ||||||||||||||||||
(In Thousands) | ||||||||||||||||||||||||
As of December 31, 2019 | ||||||||||||||||||||||||
Derivative Assets |
||||||||||||||||||||||||
Interest rate swaps |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Customer-related positions: |
||||||||||||||||||||||||
Interest rate swaps |
64,463 | | 64,463 | 1,434 | | 63,029 | ||||||||||||||||||
Risk participation agreements |
482 | | 482 | | | 482 | ||||||||||||||||||
Foreign currency exchange contracts - matched customer book |
469 | | 469 | 7 | (462 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 65,414 | $ | | $ | 65,414 | $ | 1,441 | $ | (462 | ) | $ | 63,511 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Derivative Liabilities |
||||||||||||||||||||||||
Interest rate swaps |
$ | 321 | $ | | $ | 321 | $ | 321 | $ | | $ | | ||||||||||||
Customer-related positions: |
||||||||||||||||||||||||
Interest rate swaps |
18,057 | | 18,057 | 1,434 | 16,623 | | ||||||||||||||||||
Risk participation agreements |
606 | | 606 | | | 606 | ||||||||||||||||||
Foreign currency exchange contracts - matched customer book |
428 | | 428 | 7 | | 421 | ||||||||||||||||||
Foreign currency exchange contracts - foreign currency loan |
203 | | 203 | | | 203 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 19,615 | $ | | $ | 19,615 | $ | 1,762 | $ | 16,623 | $ | 1,230 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
40
Table of Contents
13. Fair Value of Assets and Liabilities
The Company uses fair value measurements to record adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Companys various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Companys own assumptions are set to reflect those that the Company believes market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular financial instrument. Because no active market exists for a portion of the Companys financial instruments, fair value estimates are based on judgements regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore cannot be determined with precision. Changes in assumptions could significantly affect these estimates.
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Cash and Cash Equivalents
For these financial instruments, which have original maturities of 90 days or less, their carrying amounts reported in the consolidated balance sheets approximate fair value.
Trading Securities
Trading securities consisted of fixed income municipal securities and were recorded at fair value. All fixed income securities were categorized as Level 2 as the valuations were estimated by a third-party pricing vendor using a valuation matrix with inputs including observable bond interest rate tables, recent transactions, and yield relationships.
41
Table of Contents
Available for Sale Securities
Available for sale securities consisted of U.S. Treasury securities, U.S. government-sponsored residential mortgage-backed securities, state and municipal bonds, and others such as a qualified zone academy bond, and were recorded at fair value.
The Companys U.S. Treasury securities are traded on active markets and therefore these securities were classified as Level 1.
The fair value of other U.S. government-sponsored residential mortgage-backed securities was estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities were categorized as Level 2.
Municipal bonds were classified as Level 2 for the same reasons described for the trading municipal securities.
The valuation technique for the qualified zone academy bond was a discounted cash flow methodology using market discount rates. The assumptions used included at least one significant model assumption or input that was unobservable, and therefore, this security was classified as Level 3.
Fair value was based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. The estimated fair value of the Companys securities available for sale, by type, is disclosed in Note 3.
Loans Held for Sale
Fair value of loans held for sale, whose carrying amounts approximate fair value, was estimated using the anticipated market price based upon pricing indications provided by investor banks.
Loans
The fair value of commercial construction, commercial and industrial lines of credit, and certain other consumer loans was estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
For commercial, commercial real estate, residential real estate, automobile, and consumer home equity loans, fair value was estimated by discounting contractual cash flows adjusted for prepayment estimates using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For loans held for sale, whose carrying amounts approximate fair value, the fair value was estimated by the anticipated market price based upon pricing indications provided by investor banks.
The fair value of PPP loans, which are fully guaranteed by the SBA, approximates the carrying amount.
Loans that are deemed to be impaired were recorded at the fair value of the underlying collateral, if the loan is collateral-dependent, or at a carrying value based upon expected cash flows discounted using the loans effective interest rate.
FHLB Stock
The fair value of FHLB stock approximates the carrying amount based on the redemption provisions of the FHLB.
Rabbi Trust Investments
Rabbi trust investments consisted primarily of cash and cash equivalents, U.S. Government agency obligations, equity securities, mutual funds and other exchange-traded funds, and were recorded at fair value and included in other assets. The purpose of these rabbi trust investments is to fund certain executive non-qualified retirement benefits and deferred compensation.
The fair value of other U.S. government agency obligations was estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities were categorized as Level 2. The equity securities and other exchange-traded funds were valued based on quoted prices from the market. The equities, mutual funds and exchange-traded funds traded in an active market were categorized as Level 1. Mutual funds at net asset value amounted to $46.4 million at June 30, 2020 and $16.2 million at December 31, 2019. There were no redemption restrictions on these mutual funds at the end of any period presented.
42
Table of Contents
Bank-Owned Life Insurance
The fair value of bank-owned life insurance was based upon quotations received from bank-owned life insurance dealers.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and interest checking accounts, and money market accounts, was equal to their carrying amount. The fair value of time deposits was based on the discounted value of contractual cash flows using current market interest rates.
The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the wholesale market (core deposit intangibles).
Other Borrowed Funds
For other borrowed funds that mature in 90 days or less, the carrying amount reported in the consolidated balance sheets approximates fair value. For borrowed funds that mature in more than 90 days, the fair value was based on the discounted value of the contractual cash flows applying interest rates currently being offered in the market.
FHLB Advances
The fair value of FHLB advances was based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on instruments with similar remaining maturities.
Escrow Deposits of Borrowers
The fair value of escrow deposits of borrowers, which have no stated maturity, approximates the carrying amount.
Interest Rate Swaps
The fair value of interest rate swaps was determined using discounted cash flow analysis on the expected cash flows of the interest rate swaps. This analysis reflects the contractual terms of the interest rate swaps, including the period of maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. In addition, for customer-related interest rate swaps, the analysis reflects a credit valuation adjustment to reflect the Companys own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. The majority of inputs used to value its interest rate swaps fall within Level 2 of the fair value hierarchy, but the credit valuation adjustments associated with the interest rate swaps utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, at June 30, 2020 and December 31, 2019, the impact of the Level 3 inputs on the overall valuation of the interest rate swaps was deemed insignificant to the overall valuation. As a result, the interest rate swaps were categorized as Level 2 within the fair value hierarchy.
Risk Participations
The fair value of risk participations was determined based upon the total expected exposure of the derivative which considers the present value of cash flows discounted using market-based inputs and was categorized as Level 2 within the fair value hierarchy. The fair value also included a credit valuation adjustment which evaluates the credit risk of its counterparties by considering factors such as the likelihood of default by the counterparties, its net exposures, the remaining contractual life, as well as the amount of collateral securing the position. The change in value of derivative assets and liabilities attributable to credit risk was not significant during the reported periods.
Foreign Currency Forward Contracts
The fair values of foreign currency forward contracts were based upon the remaining expiration period of the contracts and bid quotations received from foreign exchange contract dealers and were categorized as Level 2 within the fair value hierarchy.
43
Table of Contents
The carrying amounts and estimated fair values of the Companys financial instruments as of June 30, 2020 and December 31, 2019 were as follows:
As of June 30, 2020 | As of December 31, 2019 | |||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
(In Thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents |
$ | 1,432,561 | $ | 1,432,561 | $ | 362,602 | $ | 362,602 | ||||||||
Trading securities |
| | 961 | 961 | ||||||||||||
Securities available for sale |
1,600,354 | 1,600,354 | 1,508,236 | 1,508,236 | ||||||||||||
Loans held for sale |
2,972 | 2,972 | 26 | 26 | ||||||||||||
Loans, net of allowance for loan losses |
9,862,980 | 10,191,776 | 8,889,184 | 9,116,018 | ||||||||||||
Accrued interest receivable |
28,017 | 28,017 | 26,835 | 26,835 | ||||||||||||
FHLB stock |
8,805 | 8,805 | 9,027 | 9,027 | ||||||||||||
Rabbi trust investments |
78,808 | 78,808 | 78,012 | 78,012 | ||||||||||||
Bank-owned life insurance |
77,528 | 77,528 | 77,546 | 77,546 | ||||||||||||
Interest rate swap contracts |
||||||||||||||||
Customer-related positions |
171,433 | 171,433 | 64,463 | 64,463 | ||||||||||||
Risk participation agreements |
995 | 995 | 482 | 482 | ||||||||||||
Foreign currency forward contracts |
||||||||||||||||
Matched customer book |
151 | 151 | 469 | 469 | ||||||||||||
Liabilities |
||||||||||||||||
Deposits |
$ | 11,846,765 | $ | 11,847,001 | $ | 9,551,392 | $ | 9,548,889 | ||||||||
Other borrowed funds |
| | 201,082 | 201,082 | ||||||||||||
FHLB advances |
14,922 | 14,847 | 18,964 | 18,188 | ||||||||||||
Escrow deposits of borrowers |
14,233 | 14,233 | 15,349 | 15,349 | ||||||||||||
Accrued interest payable |
370 | 370 | 1,712 | 1,712 | ||||||||||||
Interest rate swap contracts |
||||||||||||||||
Cash flow hedges - interest rate positions |
38 | 38 | 321 | 321 | ||||||||||||
Customer-related positions |
51,319 | 51,319 | 18,057 | 18,057 | ||||||||||||
Risk participation agreements |
1,500 | 1,500 | 606 | 606 | ||||||||||||
Foreign currency forward contracts |
||||||||||||||||
Matched customer book |
40 | 40 | 428 | 428 | ||||||||||||
Foreign currency loan |
173 | 173 | 203 | 203 |
44
Table of Contents
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019:
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Description |
Active Markets | Other | Significant | |||||||||||||
Balance as of | for Identical | Observable | Unobservable | |||||||||||||
June 30, 2020 | Assets (Level 1) | Inputs (Level 2) | Inputs (Level 3) | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Securities available for sale |
||||||||||||||||
U.S. Treasury securities |
$ | 60,936 | $ | 60,936 | $ | | $ | | ||||||||
Government-sponsored residential mortgage-backed securities |
1,251,799 | | 1,251,799 | | ||||||||||||
State and municipal bonds and obligations |
281,340 | | 281,340 | | ||||||||||||
Other bonds |
6,279 | | | 6,279 | ||||||||||||
Rabbi trust investments |
78,808 | 71,248 | 7,560 | | ||||||||||||
Interest rate swap contracts |
||||||||||||||||
Customer-related positions |
171,433 | | 171,433 | | ||||||||||||
Risk participation agreements |
995 | | 995 | | ||||||||||||
Foreign currency forward contracts |
||||||||||||||||
Matched customer book |
151 | | 151 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,851,741 | $ | 132,184 | $ | 1,713,278 | $ | 6,279 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Interest rate swap contracts |
||||||||||||||||
Cash flow hedges - interest rate positions |
$ | 38 | $ | | $ | 38 | $ | | ||||||||
Customer-related positions |
51,319 | | 51,319 | | ||||||||||||
Risk participation agreements |
1,500 | | 1,500 | | ||||||||||||
Foreign currency forward contracts |
||||||||||||||||
Matched customer book |
40 | | 40 | | ||||||||||||
Foreign currency loan |
173 | | 173 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 53,070 | $ | | $ | 53,070 | $ | | ||||||||
|
|
|
|
|
|
|
|
45
Table of Contents
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | Significant | |||||||||||||||
Description |
Balance as of | Active Markets | Other | Significant | ||||||||||||
December 31, 2019 |
for Identical Assets (Level 1) |
Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Trading securities |
||||||||||||||||
Municipal bonds |
$ | 961 | $ | | $ | 961 | $ | | ||||||||
Securities available for sale |
||||||||||||||||
U.S. Treasury securities |
50,420 | 50,420 | ||||||||||||||
Government-sponsored residential mortgage-backed securities |
1,167,968 | | 1,167,968 | | ||||||||||||
State and municipal bonds and obligations |
283,538 | | 283,538 | | ||||||||||||
Other bonds |
6,310 | | | 6,310 | ||||||||||||
Rabbi trust investments |
78,012 | 63,945 | 14,067 | | ||||||||||||
Interest rate swap contracts |
||||||||||||||||
Customer-related positions |
64,463 | | 64,463 | | ||||||||||||
Risk participation agreements |
482 | | 482 | | ||||||||||||
Foreign currency forward contracts |
||||||||||||||||
Matched customer book |
469 | | 469 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,652,623 | $ | 114,365 | $ | 1,531,948 | $ | 6,310 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Interest rate swap contracts |
||||||||||||||||
Cash flow hedges - interest rate positions |
$ | 321 | $ | | $ | 321 | $ | | ||||||||
Customer-related positions |
18,057 | | 18,057 | | ||||||||||||
Risk participation agreements |
606 | | 606 | | ||||||||||||
Foreign currency forward contracts |
||||||||||||||||
Matched customer book |
428 | | 428 | | ||||||||||||
Foreign currency loan |
203 | | 203 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 19,615 | $ | | $ | 19,615 | $ | | ||||||||
|
|
|
|
|
|
|
|
There were no transfers to or from Level 1, 2 and 3 during the six months ended June 30, 2020 and year ended December 31, 2019.
For the fair value measurements which are classified as Level 3 within the fair value hierarchy, the Companys Treasury and Finance groups determine the valuation policies and procedures. For the valuation of the qualified zone academy bond, the Company uses third-party valuation information. Management determined that no changes to the quantitative unobservable inputs were necessary. Management employs various techniques to analyze the valuation it receives from third parties, such as analyzing changes in market yields. Management reviews changes in fair value from period to period to ensure that values received from the third parties are consistent with their expectation of the market.
46
Table of Contents
The tables below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and six months ended June 30, 2020 and 2019:
Securities Available for Sale |
||||
(Dollars In Thousands) | ||||
Balance at January 1, 2019 |
$ | 6,045 | ||
Gains and losses (realized/unrealized): |
| |||
Included in earnings |
55 | |||
|
|
|||
Balance at June 30, 2019 |
$ | 6,100 | ||
|
|
|||
Balance at January 1, 2020 |
$ | 6,310 | ||
Gains and losses (realized/unrealized): |
| |||
Included in net income |
55 | |||
Included in other comprehensive income |
(86 | ) | ||
|
|
|||
Balance at June 30, 2020 |
$ | 6,279 | ||
|
|
|||
Balance at April 1, 2019 |
$ | 6,073 | ||
Gains and losses (realized/unrealized): |
||||
Included in earnings |
27 | |||
|
|
|||
Balance at June 30, 2019 |
$ | 6,100 | ||
|
|
|||
Balance at April 1, 2020 |
$ | 6,249 | ||
Gains and losses (realized/unrealized): |
||||
Included in earnings |
27 | |||
Included in other comprehensive income |
3 | |||
|
|
|||
Balance at June 30, 2020 |
$ | 6,279 | ||
|
|
The Company may also be required, from time to time, to measure certain other assets on a nonrecurring basis in accordance with generally accepted accounting principles. The following tables summarize the fair value of assets and liabilities measured at fair value on a nonrecurring basis, as of June 30, 2020 and December 31, 2019.
47
Table of Contents
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active |
Significant | |||||||||||||||
Description |
Markets for | Other | Significant | |||||||||||||
Balance as of June 30, 2020 |
Identical Assets (Level 1) |
Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Other real estate owned |
$ | 40 | $ | | $ | | $ | 40 | ||||||||
Collateral-dependent impaired loans whose fair value is based upon appraisals |
13,011 | | | 13,011 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 13,051 | $ | | $ | | $ | 13,051 | ||||||||
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in Active |
Significant | |||||||||||||||
Description |
Markets for | Other | Significant | |||||||||||||
Balance as of December 31, 2019 |
Identical Assets (Level 1) |
Observable Inputs (Level 2) |
Unobservable Inputs (Level 3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Collateral-dependent impaired loans whose fair value is based upon appraisals |
$ | 4,261 | $ | | $ | | 4,261 |
For the valuation of the other real estate owned and collateral-dependent impaired loans, the Company relies primarily on third-party valuation information from certified appraisers and values are generally based upon recent appraisals of the underlying collateral, brokers opinions based upon recent sales of comparable properties, estimated equipment auction or liquidation values, income capitalization, or a combination of income capitalization and comparable sales. Depending on the type of underlying collateral, valuations may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.
Impaired loans in which the reserve was established based upon expected cash flows discounted at the loans effective interest rate are not deemed to be measured at fair value.
14. Revenue from Contracts with Customers
The Company adopted the new revenue recognition standard under ASC 606 on January 1, 2019 using the modified retrospective approach. Revenue recognition remained substantially unchanged following adoption of ASC 606 and, therefore, there were no material changes to the Companys consolidated financial statements at or for the year ended December 31, 2019, as a result of adopting the new guidance.
The Company derives a portion of its noninterest income from contracts with customers, as such, revenue from such arrangements is recognized when control of goods or services is transferred to the customer, in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company considers the terms of the contract and all relevant facts and circumstances when applying this guidance. The Company measures revenue and timing of recognition by applying the following five steps:
1. | Identify the contract(s) with the customers |
2. | Identify the performance obligations |
3. | Determine the transaction price |
4. | Allocate the transaction price to the performance obligations |
5. | Recognize revenue when (or as) the entity satisfies a performance obligation |
The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
48
Table of Contents
Performance obligations
The Companys performance obligations are generally satisfied either at a point in time or over time, as services are rendered. Unsatisfied performance obligations at the report date are not material to the Companys consolidated financial statements.
The Company has disaggregated its revenue within the scope of ASC 606 by type of service, as presented in the table below. These categories reflect how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Dollars In Thousands) | ||||||||||||||||
Insurance commissions |
$ | 22,697 | $ | 24,135 | $ | 50,174 | $ | 48,897 | ||||||||
Service charges on deposit accounts |
4,364 | 6,771 | 10,462 | 13,175 | ||||||||||||
Trust and investment advisory fees |
5,194 | 4,980 | 10,289 | 9,608 | ||||||||||||
Debit card processing fees |
2,337 | 2,638 | 4,807 | 5,048 | ||||||||||||
Other non-interest income |
1,485 | 2,045 | 3,537 | 3,919 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest income in-scope of ASC 606 |
36,077 | 40,569 | 79,269 | 80,647 | ||||||||||||
Total noninterest income out-of-scope of ASC 606 |
11,580 | 5,063 | 1,757 | 12,785 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest income |
$ | 47,657 | $ | 45,632 | $ | 81,026 | $ | 93,432 | ||||||||
|
|
|
|
|
|
|
|
Additional information related to each of the revenue streams is further noted below.
Insurance Commissions
The Company acts as an agent in offering property, casualty, and life and health insurance to both commercial and consumer customers though Eastern Insurance Group LLC. The Company earns a fixed commission on the sales of these products and services. The Company may also earn bonus commissions based upon meeting certain volume thresholds. In general, the Company recognizes commission revenues when earned based upon the effective date of the policy. For certain insurance products, the Company may also earn and recognize annual residual commissions commensurate with annual premiums being paid.
The Company also earns profit-sharing, or contingency revenues from the insurers with whom the Company places business. These profit-sharing revenues are performance bonuses from the insurers based upon certain performance metrics such as floors on written premiums, loss rates, and growth rates. Because the Companys expectation of the ultimate profit-sharing revenue amounts to be earned can vary from period to period, the Company does not recognize this revenue until it has concluded that, based on all the facts and information available, it is probable that a significant revenue reversal will not occur in future periods.
Insurance commissions earned but not yet received amounted to $7.7 million as of June 30, 2020, and $3.9 million as of December 31, 2019, and were included in other assets.
Deposit Service Charges
The Company offers various deposit account products to its customers governed by specific deposit agreements applicable to either personal customers or business customers. These agreements identify the general conditions and obligations of both parties and include standard information regarding deposit account-related fees.
Deposit account services include providing access to deposit accounts as well as access to the various deposit transactional services of the Company. These transactional services are primarily those that are identified in the standard fee schedule, and include, but are not limited to, services such as overdraft protection, wire transfer, and check collection. The Company charges monthly fixed service fees associated with the customer having access to the deposit account as well as separate fixed fees associated with and at the time specific transactions are entered into by the customer. As such, the Company considers that its performance obligations are fulfilled when customers are provided deposit account access or when the requested deposit transaction is completed.
Cash Management
Cash management services are a subset of the deposit service charges revenue stream. These services include ACH transaction processing, positive pay, lockbox, and remote deposit services. These services are also governed by separate agreements entered into by the customer. The fee arrangement for these services is structured as a fixed fee per transaction which may be offset by earnings credits. An earnings credit is a discount that a customer receives based upon the investable balance in the applicable covered
49
Table of Contents
deposit account(s) for a given month. Earnings credits are only good for the given month. That is, if cash management fees for a given month are less than the months earnings credit, the remainder of the credit does not carry over to the following month. Cash management fees are recognized as revenue in the month that the services are provided. Cash Management fees earned but not yet received amounted to $0.8 million as of both June 30, 2020 and December 31, 2019 and were included in other assets.
Debit Card Processing Fees
The Company provides debit cards to its customers which are authorized and settled through various card payment networks, and in exchange, the Company earns revenue as determined by each payment networks interchange program. Regardless of the network that is utilized to authorize and settle the payment, the merchant that provides the product or service to the debit card holder is ultimately responsible for the interchange payment to the Company. Debit card processing fees are recognized as card transactions are settled within each network. Debit card processing fees earned but not yet received amounted to $0.3 million as of both June 30, 2020 and December 31, 2019 and were included in other assets.
Trust and Investment Advisory Fees
The Company offers investment management and trust services to individuals, institutions, small businesses and charitable institutions. Each investment management product is governed by its own contract along with a separate identifiable fee schedule unique to that product. The Company also offers additional services, such as estate settlement, financial planning, tax services, and other special services quoted at the customers request.
The asset management and/or custody fees are primarily based upon a percentage of the monthly valuation of the principal assets in the customers account. Customers are also charged a base fee which is prorated over a twelve-month period. Fees for additional or special services are generally fixed in nature and are charged as services are rendered. All revenue is recognized in correlation to the monthly management fee determinations or as transactional services are provided.
Other Noninterest Income
The Company earns various types of other noninterest income that fall within the scope of the new revenue recognition rules and have been aggregated into one general revenue stream in the table noted above. The amount includes, but is not limited to, the following types of revenue with customers: safe deposit rent, ATM surcharge fees, customer checkbook fees and insured cash sweep fee income. Individually, these sources of noninterest income are immaterial.
15. Other Comprehensive Income
The following tables present a reconciliation of the changes in the components of other comprehensive income (loss) for the dates indicated including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss):
Three months ended June 30, 2020 | Six months ended June 30, 2020 | |||||||||||||||||||||||
Pre Tax Amount |
Tax (Expense) Benefit |
After Tax Amount |
Pre Tax Amount |
Tax (Expense) Benefit |
After Tax Amount |
|||||||||||||||||||
(Dollars In Thousands) | ||||||||||||||||||||||||
Unrealized gains (losses) on securities available for sale: |
||||||||||||||||||||||||
Change in fair value of securities available for sale |
$ | 511 | $ | (97 | ) | $ | 414 | $ | 34,313 | $ | (7,612 | ) | $ | 26,701 | ||||||||||
Less: reclassification adjustment for gains included in net income |
163 | (36 | ) | 127 | 285 | (63 | ) | 222 | ||||||||||||||||
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Net change in fair value of securities available for sale |
348 | (61 | ) | 287 | 34,028 | (7,549 | ) | 26,479 | ||||||||||||||||
Unrealized gains (losses) on cash flow hedges: |
||||||||||||||||||||||||
Change in fair value of cash flow hedges |
3,455 | (971 | ) | 2,484 | 47,011 | (13,215 | ) | 33,796 | ||||||||||||||||
Less: net cash flow hedge losses reclassified into interest income |
7,134 | (2,005 | ) | 5,129 | 10,246 | (2,880 | ) | 7,366 | ||||||||||||||||
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Net change in fair value of cash flow hedges |
(3,679 | ) | 1,034 | (2,645 | ) | 36,765 | (10,335 | ) | 26,430 | |||||||||||||||
Defined benefit pension plans: |
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Amortization of actuarial net loss |
4,721 | (1,326 | ) | 3,395 | 4,721 | (1,326 | ) | 3,395 | ||||||||||||||||
Amortization of prior service cost |
12 | (3 | ) | 9 | 12 | (3 | ) | 9 | ||||||||||||||||
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Net change in other comprehensive income for defined benefit postretirement plans |
4,733 | (1,329 | ) | 3,404 | 4,733 | (1,329 | ) | 3,404 | ||||||||||||||||
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Total other comprehensive income |
$ | 1,402 | $ | (356 | ) | $ | 1,046 | $ | 75,526 | $ | (19,213 | ) | $ | 56,313 | ||||||||||
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Three months ended June 30, 2019 | Six months ended June 30, 2019 | |||||||||||||||||||||||
Pre Tax Amount |
Tax (Expense) Benefit |
After Tax Amount |
Pre Tax Amount |
Tax (Expense) Benefit |
After Tax Amount |
|||||||||||||||||||
(Dollars In Thousands) | ||||||||||||||||||||||||
Unrealized gains (losses) on securities available for sale: |
||||||||||||||||||||||||
Change in fair value of securities available for sale |
$ | 15,006 | $ | (3,354 | ) | $ | 11,652 | $ | 47,135 | $ | (10,454 | ) | $ | 36,681 | ||||||||||
Less: reclassification adjustment for gains included in net income |
1,966 | (448 | ) | 1,518 | 2,016 | (459 | ) | 1,557 | ||||||||||||||||
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Net change in fair value of securities available for sale |
13,040 | (2,906 | ) | 10,134 | 45,119 | (9,995 | ) | 35,124 | ||||||||||||||||
Unrealized gains (losses) on cash flow hedges: |
||||||||||||||||||||||||
Change in fair value of cash flow hedges |
16,054 | (4,513 | ) | 11,541 | 21,914 | (6,160 | ) | 15,754 | ||||||||||||||||
Less: net cash flow hedge losses reclassified into interest income |
231 | (65 | ) | 166 | 524 | (147 | ) | 377 | ||||||||||||||||
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Net change in fair value of cash flow hedges |
15,823 | (4,448 | ) | 11,375 | 21,390 | (6,013 | ) | 15,377 | ||||||||||||||||
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Total other comprehensive income |
$ | 28,863 | $ | (7,354 | ) | $ | 21,509 | $ | 66,509 | $ | (16,008 | ) | $ | 50,501 | ||||||||||
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(1) | Includes amortization of $0.3 million of the remaining balance of realized but unrecognized gains, net of tax, from the termination of interest rate swaps during Q2 2020. The original gain of $22.3 million, net of tax, will be recognized in earnings through January 2023. The balance of this gain had amortized to $22.0 million, net of tax, at June 30, 2020. |
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The following table illustrates the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax:
Unrealized Gains and (Losses) on Available for Sale Securities |
Unrealized Gains and (Losses) on Cash Flow Hedges |
Defined Benefit Pension Plans |
Total | |||||||||||||
(In Thousands) | ||||||||||||||||
Beginning balance: January 1, 2020 |
$ | 21,798 | $ | 15,624 | $ | 81,269 | $ | (43,847 | ) | |||||||
Other comprehensive income (loss) before reclassifications |
26,701 | 33,796 | | 60,497 | ||||||||||||
Less: Amounts reclassified from accumulated other comprehensive income |
222 | 7,366 | 3,404 | 4,184 | ||||||||||||
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Net current-period other comprehensive income |
26,479 | 26,430 | (3,404 | ) | 56,313 | |||||||||||
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Ending Balance: June 30, 2020 |
$ | 48,277 | $ | 42,054 | $ | 77,865 | $ | 12,466 | ||||||||
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Beginning Balance: January 1, 2019 |
$ | (19,360 | ) | $ | 2,988 | $ | 59,389 | $ | (75,761 | ) | ||||||
Other comprehensive income (loss) before reclassifications |
36,681 | 15,754 | | 52,435 | ||||||||||||
Less: Amounts reclassified from accumulated other comprehensive income |
1,557 | 377 | | 1,934 | ||||||||||||
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Net current-period other comprehensive income |
35,124 | 15,377 | | 50,501 | ||||||||||||
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Ending Balance: June 30, 2019 |
$ | 15,764 | $ | 18,365 | $ | 59,389 | $ | (25,260 | ) | |||||||
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16. Segment Reporting
The Companys primary reportable segment is its banking business, which offers a range of commercial, retail, wealth management and banking services, and consists primarily of attracting deposits from the general public and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. Revenue from the banking business consists primarily of interest earned on loans and investment securities. In addition to its banking business reportable segment, the Company has an insurance agency business reportable segment, which consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients. Revenue from the insurance agency business consists primarily of commissions on sales of insurance products and services.
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Results of operations and selected financial information by segment and reconciliation to the consolidated financial statements as of and for the three months ended June 30, 2020 and 2019, and for the six months ended June 30, 2020 and 2019, was as follows:
As of and for the three months ended June 30, | ||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||
Banking Business |
Insurance Agency Business |
Other / Eliminations |
Total | Banking Business |
Insurance Agency Business |
Other / Eliminations |
Total | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Net interest income |
$ | 98,755 | $ | | $ | | $ | 98,755 | $ | 103,523 | $ | | $ | | $ | 103,523 | ||||||||||||||||
Provision for loan losses |
8,600 | | | 8,600 | 1,500 | | | 1,500 | ||||||||||||||||||||||||
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Net interest income after provision for loan losses |
90,155 | | | 90,155 | 102,023 | | | 102,023 | ||||||||||||||||||||||||
Noninterest income |
23,779 | 23,886 | (8 | ) | 47,657 | 21,143 | 24,489 | | 45,632 | |||||||||||||||||||||||
Noninterest expense |
81,713 | 20,084 | (1,032 | ) | 100,765 | 83,205 | 19,200 | (835 | ) | 101,570 | ||||||||||||||||||||||
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Income before provision for income taxes |
32,221 | 3,802 | 1,024 | 37,047 | 39,961 | 5,289 | 835 | 46,085 | ||||||||||||||||||||||||
Income tax provision |
6,121 | 1,076 | | 7,197 | 9,517 | 1,515 | | 11,032 | ||||||||||||||||||||||||
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Net income |
$ | 26,100 | $ | 2,726 | $ | 1,024 | $ | 29,850 | $ | 30,444 | $ | 3,774 | $ | 835 | $ | 35,053 | ||||||||||||||||
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Total assets |
$ | 13,867,746 | $ | 193,320 | $ | (64,543 | ) | $ | 13,996,523 | $ | 11,397,392 | $ | 164,576 | $ | (48,284 | ) | $ | 11,513,684 | ||||||||||||||
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Total liabilities |
$ | 12,314,286 | $ | 53,150 | $ | (64,543 | ) | $ | 12,302,893 | $ | 9,975,081 | $ | 35,228 | $ | (48,284 | ) | $ | 9,962,025 | ||||||||||||||
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For the six months ended June 30, | ||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||
Banking Business |
Insurance Agency Business |
Other / Eliminations |
Total | Banking Business |
Insurance Agency Business |
Other / Eliminations |
Total | |||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
Net interest income |
$ | 198,901 | $ | | $ | | $ | 198,901 | $ | 206,195 | $ | | $ | | $ | 206,195 | ||||||||||||||||
Provision for loan losses |
37,200 | | | 37,200 | 4,500 | | | 4,500 | ||||||||||||||||||||||||
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Net interest income after provision for loan losses |
161,701 | | | 161,701 | 201,695 | | | 201,695 | ||||||||||||||||||||||||
Noninterest income |
30,647 | 50,408 | (29 | ) | 81,026 | 43,405 | 50,048 | (21 | ) | 93,432 | ||||||||||||||||||||||
Noninterest expense |
160,178 | 37,725 | (1,966 | ) | 195,937 | 169,096 | 39,067 | (1,764 | ) | 206,399 | ||||||||||||||||||||||
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Income before provision for income taxes |
32,170 | 12,683 | 1,937 | 46,790 | 76,004 | 10,981 | 1,743 | 88,728 | ||||||||||||||||||||||||
Income tax provision |
4,906 | 3,589 | | 8,495 | 17,576 | 3,134 | | 20,710 | ||||||||||||||||||||||||
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Net income |
$ | 27,264 | $ | 9,094 | $ | 1,937 | $ | 38,295 | $ | 58,428 | $ | 7,847 | $ | 1,743 | $ | 68,018 | ||||||||||||||||
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17. Subsequent Events
Plan of Reorganization and Conversion
On June 12, 2020, the Board of Trustees of the Company adopted a Plan of Conversion (the Plan). Pursuant to the Plan, the Company will reorganize from a mutual holding company into a publicly traded stock form of organization. In connection with the reorganization, the Company will transfer to Eastern Bankshares, Inc., a recently formed Massachusetts corporation, 100% of the Banks common stock, and immediately thereafter the Company will merge into Eastern Bankshares, Inc. Pursuant to the Plan, Eastern Bankshares, Inc. will issue shares of common stock in a public offering. Eastern Bankshares, Inc. will offer 100% of its outstanding common stock to the Companys eligible depositors, the employee stock ownership plan (ESOP) and certain other persons. Eastern Bankshares, Inc. will determine the range of the offering value and the number of shares of common stock to be issued based upon an independent appraisers valuation. The stock will be priced at $10.00 per share. In addition, the Boards of Directors of Eastern Bankshares, Inc. and the Company have adopted an ESOP, which is permitted to subscribe for up to 8% of the common stock to be outstanding following the completion of the reorganization and the offering. The Plan provides for Eastern Bankshares, Inc. to donate to the Eastern Bank Charitable Foundation (the Foundation) immediately after the offering a number of authorized but previously unissued shares of Eastern Bankshares, Inc. common stock equal to 4% of the number of shares of common stock that will be issued and outstanding immediately after the offering (including the shares donated to the Foundation) (the Stock Donation).
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On August 6, 2020, the corporators of the Company separately approved the Plan and the Stock Donation. The Board of Governors of the Federal Reserve System approved the application of Eastern Bankshares, Inc. to become a bank holding company upon the completion of the conversion, although the approval of the Federal Reserve Board is required before Eastern Bankshares, Inc. can consummate the offering. The Company has filed an application with respect to the offering with the Massachusetts Commissioner of Banks, and the Massachusetts Commissioner of Banks authorized Eastern Bankshares, Inc. to commence the offering. However, final regulatory approval is required before Eastern Bankshares, Inc. can consummate the offering. The subscription offering commenced on August 18, 2020 and expired on September 16, 2020. The Company expects that the offering will close and the conversion will be completed in October 2020.
The Plan provides that eligible account holders will receive an interest in a liquidation account maintained by Eastern Bankshares, Inc. in an amount equal to (i) the Companys ownership interest in the Banks total shareholders equity as of the date of the latest statement of financial position included in the latest prospectus filed with the U.S. Securities and Exchange Commission for the offering, plus (ii) the value of the net assets of the Company as of the date of the latest statement of financial position of the Company prior to the consummation of the conversion (excluding its ownership of the Bank). The Plan also provides for the establishment of a parallel liquidation account maintained at the Bank to support Eastern Bankshares, Inc.s liquidation account in the event Eastern Bankshares, Inc. does not have sufficient assets to fund its obligations under Eastern Bankshares, Inc.s liquidation account. Eastern Bankshares, Inc. and the Bank will hold the liquidation accounts for the benefit of eligible account holders who continue to maintain deposits in the Bank after the conversion. Following the completion of the offering, Eastern Bankshares, Inc. will not be permitted to pay dividends on its capital stock if the shareholders equity of Eastern Bankshares, Inc. would be reduced below the amount of the liquidation account. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holders interest in the liquidation accounts. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held.
Costs associated with the stock offering have been deferred and will be deducted from the proceeds of the shares sold in the stock issuance. If the stock offering is not completed, all costs will be charged to expense. At June 30, 2020, approximately $4.5 million of stock offering costs had been incurred and deferred.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition at June 30, 2020, and our results of operations for the three- and six-month periods ended June 30, 2020 and 2019. This section should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto of the Company appearing in Part I, Item 1 of this Quarterly Report and the Companys prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on August 18, 2020.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act) and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words may, will, should, could, would, plan, potential, estimate, project, believe, intend, anticipate, expect, target and similar expressions.
Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Companys actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors; the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in employment levels and other general business and economic conditions on a national basis and in the local markets in which the Company operates; changes in customer behavior; the possibility that future credit losses, loan defaults and charge-off rates are higher than expected due to changes in economic assumptions or adverse economic developments; turbulence in the capital and debt markets; changes in interest rates; decreases in the value of securities and other assets; decreases in deposit levels necessitating increased borrowing to fund loans and investments; competitive pressures from other financial institutions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; changes in regulation; reputational risks relating to the Companys participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; changes in accounting standards and practices; the risk that goodwill and intangibles recorded in our financial statements will become impaired; risks related to the implementation of acquisitions, dispositions, and restructurings, including the risk that acquisitions may not produce results at levels or within time frames originally anticipated; the risk that we may not be successful in the implementation of our business strategy; changes in assumptions used in making such forward-looking statements; and the other risks. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could differ from these estimates. Our significant accounting policies are discussed in detail in the Companys prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(3) on August 18, 2020. There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in the Companys prospectus.
Selected Financial Data
The selected consolidated financial and other data of the Company set forth below should be read in conjunction with more detailed information, including the Consolidated Financial Statements and related notes, appearing elsewhere in this Quarterly Report on Form 10-Q.
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As of June 30, 2020 |
As of December 31, 2019 |
|||||||
(Dollars in thousands) | ||||||||
Selected Financial Condition Data: |
| |||||||
Total assets |
$ | 13,996,523 | $ | 11,628,775 | ||||
Cash and cash equivalents |
1,432,561 | 362,602 | ||||||
Trading securities |
| 961 | ||||||
Securities available for sale |
1,600,354 | 1,508,236 | ||||||
Loans, net of allowance for loan losses and unamortized premiums, net of unearned discounts and deferred fees |
9,862,980 | 8,899,184 | ||||||
Federal Home Loan Bank stock, at cost |
8,805 | 9,027 | ||||||
Goodwill and other intangibles, net |
376,331 | 377,734 | ||||||
Total liabilities |
12,302,893 | 10,028,622 | ||||||
Total deposits |
11,846,765 | 9,551,392 | ||||||
Total borrowings |
29,155 | 235,395 | ||||||
Total equity |
1,693,630 | 1,600,153 | ||||||
Nonperforming loans |
55,395 | 43,775 | ||||||
Nonperforming assets |
55,435 | 43,775 | ||||||
Six months ended June 30, | ||||||||
2020 | 2019 | |||||||
(Dollars in thousands) | ||||||||
Selected Operating Data: |
| |||||||
Interest and dividend income |
$ | 208,092 | $ | 224,321 | ||||
Interest expense |
9,191 | 18,126 | ||||||
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Net interest income |
198,901 | 206,195 | ||||||
Provision for loan losses |
37,200 | 4,500 | ||||||
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Net interest income after provision for loan losses |
161,701 | 201,695 | ||||||
Noninterest income |
81,026 | 93,432 | ||||||
Noninterest expense |
195,937 | 206,399 | ||||||
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Income before income taxes |
46,790 | 88,728 | ||||||
Provision for income taxes |
8,495 | 20,710 | ||||||
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Net income |
$ | 38,295 | $ | 68,018 | ||||
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As of and for the six months ended June 30, | ||||||||
2020 | 2019 | |||||||
Performance Ratios: |
||||||||
Return on average assets (1) (6) |
0.61 | % | 1.21 | % | ||||
Return on average equity (2) (6) |
4.64 | % | 9.20 | % | ||||
Interest rate spread (FTE) (3) (6) |
3.38 | % | 3.80 | % | ||||
Net interest margin (FTE) (4) (6) |
3.49 | % | 4.03 | % | ||||
Noninterest expenses to average assets (6) |
3.11 | % | 3.68 | % | ||||
Efficiency ratio (5) |
70.00 | % | 68.89 | % | ||||
Average interest-earning assets to average interest-bearing liabilities |
172.86 | % | 165.60 | % | ||||
Capital Ratios: |
| |||||||
Average equity to average assets |
13.09 | % | 13.16 | % | ||||
Total capital to risk weighted assets |
14.00 | % | 12.79 | % | ||||
Tier 1 capital to risk weighted assets |
12.77 | % | 11.89 | % | ||||
Common equity tier 1 capital to risk weighted assets |
12.77 | % | 11.89 | % | ||||
Tier 1 capital to average assets |
9.99 | % | 10.99 | % | ||||
Asset Quality Ratios: |
| |||||||
Allowance for loan losses as a percentage of total loans |
1.17 | % | 0.92 | % | ||||
Allowance for loan losses as a percentage of nonperforming loans |
210.55 | % | 251.34 | % | ||||
Net charge-offs (recoveries) to average outstanding loans during the period (6) |
0.06 | % | 0.06 | % | ||||
Nonperforming loans as a percentage of total loans |
0.56 | % | 0.36 | % | ||||
Nonperforming loans as a percentage of total assets |
0.40 | % | 0.29 | % | ||||
Total nonperforming assets as a percentage of total assets |
0.40 | % | 0.29 | % |
(1) | Represents net income divided by average total assets. |
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(2) | Represents net income divided by average equity. |
(3) | Represents the difference between average yield on average interest-earning assets and the average cost of interest-bearing liabilities for the periods on a fully tax-equivalent (FTE) basis. |
(4) | Represents net interest income as a percentage of average interest-earning assets adjusted on a FTE basis. |
(5) | Represents noninterest expenses divided by the sum of net interest income and noninterest income. |
(6) | Ratios have been annualized. |
Overview
We are a Massachusetts-chartered bank that has served the banking needs of our customers since 1818. Our business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services primarily to retail, commercial and small business customers. We had total assets of $14.0 billion and $11.6 billion at June 30, 2020 and December 31, 2019, respectively. We are subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board and the Consumer Financial Protection Bureau.
We manage our business under two business segments: our banking business, which contributed $125.7 million, or 84.0%, of our total income (interest and dividend income and noninterest income) for the three months ended June 30, 2020 and contributed $238.7 million, or 82.6%, of our total income for the six months ended June 30, 2020, and our insurance agency business, which contributed $23.9 million, or 16.0%, of our total income for the three months ended June 30, 2020 and $50.4 million, or 17.4%, of our total income for the six months ended June 30, 2020. Our banking business consists of a full range of banking, lending (commercial, residential and consumer), savings and small business offerings, including our wealth management and trust operations that we conduct through our Eastern Wealth Management division.
Banking Business
Our banking business offers a range of commercial, retail, wealth management and banking services, and consists primarily of attracting deposits from the general public, including municipalities, and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. The financial condition and results of operations of our banking business depend primarily on (i) attracting and retaining low cost, stable deposits, (ii) using those deposits to originate and acquire loans and earn net interest income and (iii) operating expenses incurred.
Lending Activities
We use funds obtained from deposits, as well as funds obtained from the Federal Home Loan Bank (FHLB) of Boston (FHLBB) advances and Federal funds, primarily to originate loans and to invest in securities. Our lending focuses on the following categories of loans:
Commercial Lending
| Commercial and industrial: Loans in this category consist of revolving and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As of June 30, 2020 and December 31, 2019, we had total commercial and industrial loans of $2.3 billion and $1.6 billion, representing 22.7% and 18.3%, respectively, of our total loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results |
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consistent with those projected at origination. Our primary focus for commercial and industrial loans is middle-market companies located in the markets we serve. In addition, we participate in the syndicated loan market and the Shared National Credit Program (SNC Program). As of June 30, 2020 and December 31, 2019, our SNC Program portfolio totaled $514.5 million and $419.0 million, or 22.6%% and 25.5%, respectively, of our commercial and industrial portfolio, and 41.0% and 47.0%, respectively, of our SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial and industrial portfolio also includes our Asset Based Lending Portfolio (ABL Portfolio). As of June 30, 2020 and December 31, 2019, our ABL Portfolio totaled $159.1 million and $163.0 million, or 7.0% and 9.9%, respectively, of our commercial and industrial portfolio. |
| Commercial real estate: Loans in this category include mortgage loans on commercial real estate, both investment and owner occupied. As of June 30, 2020 and December 31, 2019, we had total commercial real estate loans of $3.6 billion and $3.5 billion, representing 35.8% and 39.3%, respectively, of our total loans. Property types financed include office, industrial, multi-family, affordable housing, retail, hotel and other types of properties. Collateral values are established by independent third-party appraisals and evaluations. The primary repayment sources include operating income generated by the real estate, permanent debt refinancing and/or the sale of the real estate. |
| Commercial construction: Loans in this category include construction project financing and are comprised of commercial real estate, business banking and residential loans for the purpose of constructing and developing real estate. Substantially all of our commercial construction portfolio is in commercial real estate. As of June 30, 2020 and December 31, 2019, we had total commercial construction loans of $282.2 million and $273.8 million, representing 2.8% and 3.0%, respectively, of our total loans. |
| Business banking: Loans in this category are comprised of loans to small businesses with exposures of under $ 1 million and small investment real estate projects with exposures of under $3 million. These loans are separate and distinct from our commercial and industrial and commercial real estate portfolios described above due to the size of the loans. As of June 30, 2020 and December 31, 2019, we had total business banking loans of $1.2 billion and $771.5 million, respectively, representing 12.3% and 8.6% of our total loans for each period, respectively. In this category, commercial and industrial loans and commercial real estate loans totaled $676.2 million and $558.8 million, respectively, as of June 30, 2020, and $229.0 million and $542.0 million, respectively, as of December 31, 2019. Business banking originations include traditionally underwritten loans as well as partially automated scored loans. Our proprietary decision matrix, which includes a number of quantitative factors including, but not limited to, a guarantors credit score, industry risk, and time in business, is used to determine whether to make business banking loans. We also engage in Small Business Association (SBA) lending. SBA guarantees reduce our risk of loss when default occurs and are considered a credit enhancement to the loan structure. During the three months ended June 30, 2020, we originated $1.1 billion of loans to approximately 8,100 borrowers under the Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), as described in further detail elsewhere in this Quarterly Report. |
Residential Lending
| Residential real estate: Loans in this category consist of mortgage loans on residential real estate. As of both June 30, 2020 and December 31, 2019, we had total residential loans of $1.4 billion, representing 14.0% and 15.9%, respectively, of our total loans. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit repayment history, financial resources including cash reserves and the value of the collateral. We maintain policy standards for minimum credit score and cash reserves and maximum loan to value consistent with a prime portfolio. Collateral consists of mortgage liens on residential dwellings. We do not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or to retain in our loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and our capital needs. During the three and six months ended June 30, 2020 and year ended December 31, 2019, residential real estate mortgage originations were $256.9 million, $380.3 million and $443.0 million, respectively, of which $130.9 million, $201.4 million and $209.0 million, respectively, were sold on the secondary markets. We generally do not continue to service residential loans that we sell in the secondary market. |
Consumer Lending
| Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of June 30, 2020 and December 31, 2019, we had total consumer home equity loans of $905.5 million and $933.1 million, representing 9.0% and 10.4%, respectively, of our total loans. Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Home equity lines of credit can be converted to term loans that are fully amortized. Underwriting considerations are materially consistent with those utilized in residential real estate. Collateral consists of a senior or subordinate lien on owner-occupied residential property. |
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| Other consumer: Loans in this category consist of unsecured personal lines of credit, overdraft protection, automobile and aircraft loans, and other personal loans. As of June 30, 2020 and December 31, 2019, we had total other consumer loans of $334.7 million and $402.4 million, representing 3.3% and 4.5%, respectively, of our total loans. Our policy and underwriting in this category include the following factors, among others, income sources and reliability, credit histories, term of repayment and collateral value, as applicable. Included in this category are $181.3 million and $243.9 million of automobile loans, respectively, at June 30, 2020 and December 31, 2019. |
Other Banking Products and Services
In addition to our lending activities, which are the core part of our banking business, we offer other banking products and services primarily related to (i) other commercial banking products, (ii) other consumer deposit products and (iii) wealth management services.
Other Commercial Banking Products
| We offer a variety of deposit, treasury management, electronic banking, interest rate protection and foreign exchange products to our customers. Deposit products include checking products, both interest-bearing and noninterest-bearing, as well as money market deposits, savings deposits and certificates of deposits. Our treasury management products include a variety of cash management and payment products. Our interest rate protection and foreign exchange products include interest rate swaps and currency related transactions. As of June 30, 2020 and December 31, 2019, our total commercial deposits were $4.6 billion and $3.2 billion, respectively, and our commercial noninterest income during the three and six months ended June 30, 2020 and year ended December 31, 2019 were $21.1 million, $26.1 million and $29.8 million, respectively. As of June 30, 2020, there were no Federal funds provided to us by financial institution customers. During the month of March 2020, Federal funds provided to us by our financial institution customers were transferred to interest-bearing deposits and totaled $299.5 million as of June 30, 2020. As of December 31, 2019, Federal funds provided to us by our financial institution customers were $201.1 million. |
Other Consumer Deposit Products
| We offer a wide variety of deposit products and services to our consumer customers. We service these customers through our 89 branches located in eastern Massachusetts and New Hampshire, through our call center in our facility in Lynn, MA and through our online and mobile banking applications. |
Wealth Management Services
| Through our Eastern Wealth Management division, we provide a wide range of trust services, including (i) managing customer investments, (ii) serving as custodian for customer assets and (iii) providing other fiduciary services, including serving as the trustee and personal representative of estates. As of June 30, 2020 and December 31, 2019, we held $2.6 billion and $2.7 billion, respectively, of assets in a fiduciary, custodial or agency capacity for customers, which are not our assets and therefore not included on the consolidated balance sheets included in this Quarterly Report. For the three and six months ended June 30, 2020 and the year ended December 31, 2019, we had noninterest income of $5.2 million, $10.3 million and $19.7 million, respectively, from providing these services. |
Insurance Agency Business
Our insurance agency business consists of insurance-related activities such as acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients through our wholly owned agency, Eastern Insurance Group LLC. Our insurance products include commercial property and liability, workers compensation, life, accident and health and automobile insurance. We also offer a wide range of employee benefits products and services, including professional advice related to health care cost management, employee engagement and retirement and executive services. As an agency business, we do not assume any underwriting or insurance risk. The commissions we earn on the sale of these insurance products and services is the most significant portion of our noninterest income, representing $22.7 million, $50.2 million and $90.6 million, or 47.6%, 62.0% and 49.7%, respectively, of our noninterest income during the three and six months ended June 30, 2020 and year ended December 31, 2019. Our insurance business operates through 22 non-branch offices located primarily in eastern Massachusetts and had 406 full-time equivalent employees as of June 30, 2020.
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Outlook and Trends
The COVID-19 pandemic has had and continues to have an adverse effect on our business and the markets in which we operate. We expect the short-term and long-term economic consequences of the COVID-19 pandemic to our customers will continue to be significant, and that the continuing health and safety concerns relating to the ongoing pandemic will change the way we conduct our business and interact with our customers. Consistent with our philosophy of seeking to be a source of economic strength to our communities, we have taken a broad range of steps to help our colleagues, our borrowers and our communities during the COVID-19 pandemic.
Our Colleagues. For our colleagues, we have enabled more than half of our employees to work remotely and we are providing premium pay for those colleagues who travel to our workplaces to serve in customer-facing positions or other positions that require them to work on-site. We have taken significant measures to ensure the health of our colleagues who must work in our branches, including promoting online and mobile banking and automatic teller machine/interactive teller machine transactions in an effort to limit in-branch transactions and limiting access to lobbies in branches with drive-through banking.
Our Borrowers. In light of the COVID-19 pandemic, we have temporarily modified our practices with respect to the collection of delinquent loans to assist our customers during this difficult economic time, and during the three months ended June 30, 2020, we originated $1.1 billion of PPP loans.
| For our retail customers, we suspended all collection of overdue payments beginning March 16, 2020, including residential property foreclosure and related property sales. We resumed collection activities with respect to delinquent consumer loans beginning in late July 2020. |
| For our commercial and small business customers, starting in March 2020, we began modifying the terms of loans with customers impacted by the COVID-19 pandemic. Through June 30, 2020, we had modified approximately $946.1 million of loans, of which approximately 56% were for full payment deferrals (both interest and principal) and 44% were for deferral of only principal payments, and included $558.9 million of commercial real estate loans, including construction loans, $157.4 million of commercial and industrial loans, $106.9 million of business banking loans, $92.8 million of residential real estate loans and $30.1 million of consumer loans, including home equity loans. Most of these deferrals will end in the third or fourth quarter of the year ending December 31, 2020. We have not deferred our recognition of interest income with respect to loans subject to modifications. |
| As of the date of this Quarterly Report, we are unable to reasonably estimate the aggregate amount of loans that will likely become delinquent after the respective deferral period. The following table shows certain data, as of June 30, 2020, related to loans to our borrowers in the industry categories that we believe will likely experience the most adverse effects of the COVID-19 pandemic. Loans included in the table that had been modified as of June 30, 2020 represented approximately 28.9% of our aggregate outstanding loan balances to all borrowers in those categories as of June 30, 2020. However, the table does not include all loans that had been modified on or before June 30, 2020. |
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Loan Balance | Credit Exposure (1) |
Number of Borrowers (2) |
COVID-19 Modification % (3) |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial and Industrial: Commercial and Business Banking |
||||||||||||||||
Restaurants |
$ | 148,373 | $ | 156,747 | 420 | 60.6 | % | |||||||||
Construction contractors |
105,127 | 281,435 | 1,036 | 11.0 | % | |||||||||||
Non-essential retail |
41,859 | 101,736 | 436 | 2.5 | % | |||||||||||
Entertainment and recreation |
34,368 | 49,664 | 158 | 31.1 | % | |||||||||||
Educational and child care services |
16,219 | 50,948 | 196 | 5.3 | % | |||||||||||
Private medical and dental offices |
16,299 | 34,602 | 294 | 20.2 | % | |||||||||||
Water and air passenger transportation |
19,811 | 30,557 | 12 | 0.1 | % | |||||||||||
Auto and other vehicle dealerships |
7,557 | 10,138 | 21 | | % | |||||||||||
Hotels |
377 | 527 | 12 | 37.3 | % | |||||||||||
Commercial Real Estate: Commercial and Business Banking |
||||||||||||||||
Retail |
437,267 | 458,839 | 298 | 26.7 | % | |||||||||||
Hotels |
179,577 | 181,076 | 45 | 37.6 | % | |||||||||||
Auto dealerships |
78,152 | 80,361 | 36 | 2.8 | % | |||||||||||
Restaurants |
51,566 | 52,766 | 67 | 48.5 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,136,552 | $ | 1,489,396 | 3,031 | 28.9 | % | |||||||||
|
|
|
|
|
|
|
|
(1) | Our aggregate potential credit exposure as of June 30, 2020, considering all loan agreements and lines of credit that permit a borrower to increase the borrowers indebtedness to us. |
(2) | Each individual obligor is a single borrower for purposes of this column. Affiliated borrowers under common control are not aggregated as a single borrower even if in the same industry category, and therefore the actual concentration of credit exposure may be greater than indicated |
(3) | The percentage of loans in each category, calculated as a percentage of aggregate outstanding loan balances for each category as of June 30, 2020, that we modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020. |
| During the quarter ended June 30, 2020, we originated $1.1 billion of loans to approximately 8,100 borrowers under the PPP under the CARES Act. The vast majority of our PPP borrowers are existing commercial and small business borrowers, non-profit customers, retail banking customers and clients of Eastern Wealth Management and Eastern Insurance Group LLC. We anticipate that the vast majority of our PPP exposure will be forgiven late in the year ending December 31, 2020 or early in the year ending December 31, 2021. Only $4.9 million of our PPP exposure at June 30, 2020 had a maturity of five years; all of our other PPP loans outstanding at June 30, 2020 have a two-year maturity. |
| We received approximately $35.8 million of PPP loan origination fees from the SBA. We also deferred certain origination costs, totaling $3.5 million, related to PPP loans. |
The following table shows certain data related to our PPP loans as of June 30, 2020:
Loan Size |
Loan Balance | Number of Loans |
Fees Collected |
|||||||||
(Dollars in thousands) | ||||||||||||
$0 to $50 thousand |
$ | 95,528 | 4,987 | $ | 4,826 | |||||||
$50 thousand to $150 thousand |
148,994 | 1,731 | 7,419 | |||||||||
$150 thousand to $1 million |
410,872 | 1,176 | 15,374 | |||||||||
$1 million to $2 million |
190,254 | 137 | 5,618 | |||||||||
$2 million to $5 million |
176,277 | 59 | 1,744 | |||||||||
Over $5 million |
78,256 | 13 | 785 | |||||||||
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|
|
|
|
|
|||||||
Total |
$ | 1,100,181 | 8,103 | $ | 35,766 | |||||||
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|
Our Operating Results. The COVID-19 pandemic has had a significant impact on our operating results for the six months ended June 30, 2020, and we believe it will continue to have a significant impact for at least the remainder of the year ending December 31, 2020 and likely continuing into the year ending December 31, 2021.
| During March 2020, the Federal Reserve took multiple steps to lower interest rates and reduced the target range for the federal funds rate to between 0.0% and 0.25%, compared to the previous target of between 1.00% and 1.25%. These interest rate reductions, combined with the decline in longer term rates, will lower our net interest income over time from the levels we experienced in the year ended December 31, 2019. |
| Our loan loss provision for the quarter ended June 30, 2020 was $8.6 million compared to $28.6 million for the quarter ended March 31, 2020. We experienced negative migrations in our loan risk ratings in the quarter ended June 30, 2020, although the extent of negative migrations was less than we experienced in the quarter ended March 31, 2020. We expect our loan loss provision to be greater in the remainder of the year ending December 31, 2020 as compared to comparable prior periods, as the positive impacts of the modifications and PPP loans wane. The economic uncertainties caused by the COVID-19 pandemic are significant, and the timing and pace of the economic recovery both locally and nationally will determine the severity and timing of our future loan losses. |
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Our Communities. To continue providing critical banking services in underbanked inner-city communities served by branches without drive-through banking capabilities, we have committed to remaining open in these communities to ensure our customers continue to have a place to bank. To further support our communities, the Eastern Bank Charitable Foundation has directed approximately $8 million through June 30, 2020 in charitable donations to help address food, shelter, small business and housing stability, particularly for vulnerable populations, as well as providing help to public health organizations fighting to contain the spread of COVID-19.
Non-GAAP Measures
We present non-GAAP measures, which are used to evaluate our performance and exclude the effects of certain transactions, non-cash items and GAAP adjustments that we believe are unrelated to our core business and not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility into our core businesses and underlying trends that may, to some extent, be obscured by inclusion of such items.
There are items that impact our results that we believe are unrelated to our core business. Therefore, we present net operating earnings, noninterest income on an operating basis, noninterest expense on an operating basis, total operating income and the efficiency ratio on an operating basis, each of which excludes the impact of the items that we do not believe are related to our core business as we believe excluding these items provides greater visibility into our core business and underlying trends. Items we do not consider to be core to our business include (i) income and expenses from investments held in rabbi trusts, (ii) gains and losses on sales of securities available for sale, net, (iii) gains and losses on the sale of other assets, (iv) rabbi trust employee benefit and (v) merger and acquisition expenses.
We also present tangible equity, tangible assets and tangible equity to tangible assets ratios, each of which excludes the impact of goodwill and other intangible assets, as we believe these measures provide the ability to further assess our performance, identify trends in our core business and provide a comparison of our capital adequacy to other companies. We have included information on these tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends.
Our non-GAAP measures should not be considered as an alternative to GAAP net income, an indication of our cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. An item which we consider to be noncore and exclude when computing these non-GAAP measures can be of substantial importance to our results for any particular period. In addition, our methodology for calculating non-GAAP measures may differ from the methodologies employed by other companies to calculate the same or similar performance measures and, accordingly, our reported non-GAAP measures may not be comparable to the same or similar performance measures reported by other companies.
The following table summarizes the impact of noncore items recorded for the time periods indicated below and reconciles them to the most directly comparable GAAP measure.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income (GAAP) |
$ | 29,850 | $ | 35,053 | $ | 38,295 | $ | 68,018 | ||||||||
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|
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Non-GAAP adjustments: |
||||||||||||||||
Noninterest income components: |
||||||||||||||||
(Income) from investments held in rabbi trusts |
(7,745 | ) | (1,822 | ) | (1,002 | ) | (5,969 | ) | ||||||||
(Gain) on sales of securities available for sale, net |
(163 | ) | (1,966 | ) | (285 | ) | (2,016 | ) | ||||||||
(Gains) losses on sale of other assets |
27 | 102 | (2 | ) | 73 | |||||||||||
Noninterest expense components: |
||||||||||||||||
Rabbi trust employee benefit |
3,985 | 808 | 506 | 2,754 | ||||||||||||
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|
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|
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Total impact of Non-GAAP adjustments |
(3,896 | ) | (2,878 | ) | (783 | ) | (5,158 | ) | ||||||||
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|
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|
|
|||||||||
Less net tax benefit associated with Non-GAAP adjustment (l) |
1,073 | 675 | 179 | 1,301 | ||||||||||||
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|
|
|
|||||||||
Non-GAAP adjustments, net of tax |
$ | (2,823 | ) | $ | (2,203 | ) | $ | (604 | ) | $ | (3,857 | ) | ||||
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Net operating earnings (Non-GAAP) |
$ | 27,027 | $ | 32,850 | $ | 37,691 | $ | 64,161 | ||||||||
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|
|
|
|
|
(1) | The net tax (expense) benefit associated with these items is determined by assessing whether each item is included or excluded from net taxable income and applying our combined statutory tax rate only to those items included in net taxable income. |
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The following table summarizes the impact of noncore items with respect to our total income, noninterest income, noninterest expense and the efficiency ratio, which reconciles to the most directly comparable respective GAAP measure, for the periods indicated:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net interest income (GAAP) |
$ | 98,755 | $ | 103,523 | $ | 198,901 | $ | 206,195 | ||||||||
Add: |
||||||||||||||||
Tax-equivalent adjustment (non-GAAP) |
1,378 | 1,269 | 2,746 | 2,649 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Net interest income (non-GAAP) |
100,133 | 104,792 | 201,647 | 208,844 | ||||||||||||
Noninterest income (GAAP) |
47,657 | 45,632 | 81,026 | 93,432 | ||||||||||||
Less: |
||||||||||||||||
Income from investments held in rabbi trusts |
7,745 | 1,822 | 1,002 | 5,969 | ||||||||||||
Gains on sales of securities available for sale, net |
163 | 1,966 | 285 | 2,016 | ||||||||||||
Gains (losses) on sale of other assets |
(27 | ) | (102 | ) | 2 | (73 | ) | |||||||||
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Noninterest income on an operating basis (non-GAAP) |
39,776 | 41,946 | 79,737 | 85,520 | ||||||||||||
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Noninterest expense (GAAP) |
$ | 100,765 | $ | 101,570 | $ | 195,937 | $ | 206,399 | ||||||||
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|
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Plus: |
||||||||||||||||
Rabbi trust benefit expense (income) |
3,985 | 808 | 506 | 2,754 | ||||||||||||
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|
|
|
|
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Noninterest expense on an operating basis (non- GAAP) |
$ | 104,750 | $ | 102,378 | $ | 196,443 | $ | 209,153 | ||||||||
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|
|
|
|
|
|
|||||||||
Total income (GAAP) |
$ | 146,412 | $ | 149,155 | $ | 279,927 | $ | 299,627 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating income (non-GAAP) |
$ | 139,909 | $ | 146,738 | $ | 281,384 | $ | 294,364 | ||||||||
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|
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Ratios |
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Efficiency ratio (GAAP) |
68.82 | % | 68.10 | % | 70.00 | % | 68.89 | % | ||||||||
Efficiency ratio on an operating basis (non-GAAP) |
74.87 | % | 69.77 | % | 69.81 | % | 71.05 | % |
The following table summarizes the calculation of our tangible equity, tangible assets and tangible equity to tangible assets ratio, which reconciles to the most directly comparable respective GAAP measure, as of the dates indicated:
As of June 30, | As of December 31, | |||||||
2020 | 2019 | |||||||
(Dollars in Thousands) | ||||||||
Tangible equity: |
||||||||
Total equity |
$ | 1,693,630 | $ | 1,600,153 | ||||
Less: Goodwill and other intangibles |
376,331 | 377,734 | ||||||
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|
|||||
Tangible equity (Non-GAAP) |
1,317,299 | 1,222,419 | ||||||
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|
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Tangible assets: |
||||||||
Total assets (GAAP) |
13,996,523 | 11,628,775 | ||||||
Less: Goodwill and other intangibles |
376,331 | 377,734 | ||||||
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Tangible assets (Non-GAAP) |
$ | 13,620,192 | $ | 11,251,041 | ||||
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|
|||||
Equity to assets ratio (GAAP) |
12.1 | % | 13.8 | % | ||||
Tangible equity to tangible assets ratio (Non-GAAP) |
9.7 | % | 10.9 | % |
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Financial Position
Summary of Financial Position
As of June 30, 2020 |
As of December 31, 2019 |
Change | ||||||||||||||
Amount ($) | Percentage (%) | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cash and cash equivalents |
$ | 1,432,561 | $ | 362,602 | $ | 1,069,959 | 295.1 | % | ||||||||
Securities available for sale |
1,600,354 | 1,508,236 | 92,118 | 6.1 | % | |||||||||||
Loans, net of allowance for credit losses |
9,862,980 | 8,899,184 | 963,796 | 10.8 | % | |||||||||||
Federal Home Loan Bank Stock |
8,805 | 9,027 | (222 | ) | (2.5 | )% | ||||||||||
Goodwill and other intangible assets |
376,331 | 377,734 | (1,403 | ) | (0.4 | )% | ||||||||||
Deposits |
11,846,765 | 9,551,392 | 2,295,373 | 24.0 | % | |||||||||||
Borrowed funds |
29,155 | 235,395 | (206,240 | ) | (87.6 | )% |
Cash and cash equivalents
Total cash and cash equivalents increased by $1.1 billion, or 295.1%, to $1.4 billion at June 30, 2020 from $362.6 million at December 31, 2019. This increase resulted primarily from customer deposit growth, which exceeded our funding needs for new lending activities.
Securities
Our current investment policy authorizes us to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate notes, asset-backed securities and municipal securities. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk investment products. We typically invest in the following types of securities:
U.S. Government securities: We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes and as collateral for interest rate derivative positions. At June 30, 2020 and December 31, 2019, our U.S. Government securities consisted solely of U.S. Treasury securities.
Mortgage-backed securities: We invest in mortgage-backed securities insured or guaranteed by Freddie Mac or Fannie Mae. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac or Fannie Mae.
Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.
State and municipal securities: We invest in fixed rate investment grade bonds issued primarily by municipalities in our local communities within Massachusetts and the Commonwealth of Massachusetts. The market value of these securities may be affected by call options, long dated maturities, general market liquidity and credit factors.
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The following table shows the fair value of our securities by investment category as of the dates indicated:
Securities Portfolio Composition
As of June 30, 2020 |
As of December 31, 2019 |
|||||||
(Dollars in thousands) | ||||||||
Available for sale securities: |
||||||||
Government-sponsored residential mortgage-backed securities |
$ | 1,251,799 | $ | 1,167,968 | ||||
U.S. treasury securities |
60,936 | 50,420 | ||||||
State and municipal bonds and obligations |
281,340 | 283,538 | ||||||
Other |
6,279 | 6,310 | ||||||
Trading Securities: |
||||||||
Municipal bonds and obligations |
| 961 | ||||||
|
|
|
|
|||||
Total |
$ | 1,600,354 | $ | 1,509,197 | ||||
|
|
|
|
Our securities portfolio has grown year-to-date. Available for sale securities increased $92.0 million, or 6.1%, to $1.6 billion at June 30, 2020 from $1.5 billion at December 31, 2019. This increase is due to investment purchases, as well as an increase in unrealized gains during the six months ended June 30, 2020. Trading securities totaled $1.0 million at December 31, 2019, and all securities have matured as of June 30, 2020.
We did not have held-to-maturity investments at June 30, 2020 or December 31, 2019.
A portion of our securities portfolio continues to be tax-exempt. Investments in tax-exempt securities totaled $281.3 million at June 30, 2020 compared to $284.5 million at December 31, 2019.
Our available for sale securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as level 3 within the fair value hierarchy. As of both June 30, 2020 and December 31, 2019, we had $6.3 million of securities categorized as level 3 within the fair value hierarchy.
Maturities of our securities portfolio are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur.
The following tables show contractual maturities of our available for sale securities and weighted average yields at and for the periods ended June 30, 2020 and December 31, 2019. Weighted average yields in the table below have been calculated based on the amortized cost of the security:
Securities Portfolio, Amounts Maturing
Securities Maturing as of June 30, 2020 | ||||||||||||||||||||
Within One Year |
After One Year But Within Five Years |
After Five Years But Within Ten Years |
After Ten Years |
Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Available for sale securities: |
||||||||||||||||||||
Government-sponsored residential mortgage-backed securities |
$ | | $ | 25,733 | $ | 157,290 | $ | 1,068,776 | $ | 1,251,799 | ||||||||||
U.S. Treasury securities |
50,778 | 10,158 | | | 60,936 | |||||||||||||||
State and municipal bonds and obligations |
411 | 18,966 | 77,868 | 184,095 | 281,340 | |||||||||||||||
Other |
6,279 | | | | 6,279 | |||||||||||||||
Trading securities: |
||||||||||||||||||||
Municipal bonds and obligations |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 57,468 | $ | 54,857 | $ | 235,158 | $ | 1,252,871 | $ | 1,600,354 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted-average yield |
2.50 | % | 2.69 | % | 2.80 | % | 2.49 | % | 2.54 | % |
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Securities Maturing as of December 31, 2019 | ||||||||||||||||||||
Within One Year |
After One Year But Within Five Years |
After Five Years But Within Ten Years |
After Ten Years |
Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Available for sale securities: |
||||||||||||||||||||
Government-sponsored residential mortgage-backed securities |
$ | | $ | 8,464 | $ | 203,706 | $ | 955,798 | $ | 1,167,968 | ||||||||||
U.S. Treasury securities |
40 | 50,380 | | | 50,420 | |||||||||||||||
State and municipal bonds and obligations |
381 | 9,109 | 79,504 | 194,544 | 283,538 | |||||||||||||||
Other |
6,310 | | | | 6,310 | |||||||||||||||
Trading securities: |
| |||||||||||||||||||
Municipal bonds and obligations |
961 | | | | 961 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 7,692 | $ | 67,953 | $ | 283,210 | $ | 1,150,342 | $ | 1,509,197 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Weighted-average yield |
5.44 | % | 2.38 | % | 2.95 | % | 2.92 | % | 2.90 | % |
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a fully taxable equivalent basis (FTE) by adjusting tax-exempt income upward by an amount equivalent to the prevailing federal income taxes that would have been paid if the income had been fully taxable.
Net unrealized gains on available for sale securities as of June 30, 2020 and December 31, 2019 totaled $62.1 million and $28.0 million, respectively.
Loans
We consider our loans to be relatively diversified by borrower and industry. Our loans increased $1.0 billion, or 11.4%, to $10.0 billion at June 30, 2020 from $9.0 billion at December 31, 2019. The increase as of June 30, 2020 was primarily due to $1.1 billion PPP loan originations, partially offset by a decrease in other consumer loans of $67.7 million.
| The increase in our commercial and industrial loans from December 31, 2019 to June 30, 2020 was primarily a result of the $633.2 million PPP loan originations during the six months ended June 30, 2020. |
| The increase in our business banking loans from December 31, 2019 to June 30, 2020 was primarily a result of $467.0 million in PPP loan originations during the six months ended June 30, 2020. |
| The decrease in other consumer loans from December 31, 2019 to June 30, 2020 was primarily a result of a decrease of $62.6 million in our automobile portfolio during the six months ended June 30, 2020 due to our exit from our indirect automobile lending business, which commenced during the year ended December 31, 2018. |
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The following table shows the composition of our loan portfolio, by category, as of the dates indicated:
Loan Portfolio Composition
June 30, 2020 |
December 31, 2019 |
|||||||
Amount | Amount | |||||||
(In thousands) | ||||||||
Commercial and industrial |
$ | 2,271,700 | $ | 1,642,184 | ||||
Commercial real estate |
3,584,358 | 3,535,441 | ||||||
Commercial construction |
282,246 | 273,774 | ||||||
Business banking |
1,234,961 | 771,498 | ||||||
Residential real estate |
1,400,855 | 1,428,630 | ||||||
Consumer home equity |
905,484 | 933,088 | ||||||
Other consumer |
334,734 | 402,431 | ||||||
|
|
|
|
|||||
Total loans |