Eastern Bankshares, Inc. - Quarter Report: 2021 June (Form 10-Q)
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, 2021
Or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-39610
___________________________
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
(Registrant’s telephone number, including area code)
__________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of exchange on which registered | ||||||
Common Stock | EBC | Nasdaq Global Select Market |
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 | ☒ |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
186,758,154 shares of the Registrant’s common stock, par value $0.01 per share, were issued and outstanding as of August 12, 2021.
Index
2
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PART I — FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, 2021 | December 31, 2020 | ||||||||||
(In thousands, except share data) | |||||||||||
ASSETS | |||||||||||
Cash and due from banks | $ | 58,490 | $ | 116,591 | |||||||
Short-term investments | 1,505,757 | 1,937,479 | |||||||||
Cash and cash equivalents | 1,564,247 | 2,054,070 | |||||||||
Available for sale securities | 4,848,781 | 3,183,861 | |||||||||
Loans held for sale | 2,734 | 1,140 | |||||||||
Loans: | |||||||||||
Commercial and industrial | 1,740,679 | 1,995,016 | |||||||||
Commercial real estate | 3,775,771 | 3,573,630 | |||||||||
Commercial construction | 237,927 | 305,708 | |||||||||
Business banking | 1,339,852 | 1,339,164 | |||||||||
Residential real estate | 1,457,498 | 1,370,957 | |||||||||
Consumer home equity | 834,938 | 868,270 | |||||||||
Other consumer | 234,410 | 277,780 | |||||||||
Total loans | 9,621,075 | 9,730,525 | |||||||||
Less: allowance for loan losses | (105,637) | (113,031) | |||||||||
Less: unamortized premiums, net of unearned discounts and deferred fees | (29,739) | (23,536) | |||||||||
Net loans | 9,485,699 | 9,593,958 | |||||||||
Federal Home Loan Bank stock, at cost | 10,601 | 8,805 | |||||||||
Premises and equipment | 44,733 | 49,398 | |||||||||
Bank-owned life insurance | 79,634 | 78,561 | |||||||||
Goodwill and other intangibles, net | 380,402 | 376,534 | |||||||||
Deferred income taxes, net | 26,161 | 13,229 | |||||||||
Prepaid expenses | 145,941 | 148,680 | |||||||||
Other assets | 458,520 | 455,954 | |||||||||
Total assets | $ | 17,047,453 | $ | 15,964,190 | |||||||
LIABILITIES AND EQUITY | |||||||||||
Deposits: | |||||||||||
Demand | $ | 5,399,297 | $ | 4,910,794 | |||||||
Interest checking accounts | 2,656,610 | 2,380,497 | |||||||||
Savings accounts | 1,403,472 | 1,256,736 | |||||||||
Money market investment | 3,544,897 | 3,348,898 | |||||||||
Certificates of deposit | 246,157 | 258,859 | |||||||||
Total deposits | 13,250,433 | 12,155,784 | |||||||||
Borrowed funds: | |||||||||||
Federal Home Loan Bank advances | 14,323 | 14,624 | |||||||||
Escrow deposits of borrowers | 14,119 | 13,425 | |||||||||
Total borrowed funds | 28,442 | 28,049 | |||||||||
Other liabilities | 337,956 | 352,305 | |||||||||
Total liabilities | 13,616,831 | 12,536,138 | |||||||||
Commitments and contingencies (see footnote 10) | |||||||||||
Shareholders’ equity | |||||||||||
Common shares, $0.01 par value, 1,000,000,000 shares authorized, 186,758,154 shares issued and outstanding at both June 30, 2021 and December 31, 2020 | 1,868 | 1,868 | |||||||||
Additional paid in capital | 1,856,241 | 1,854,068 | |||||||||
Unallocated common shares held by the Employee Stock Ownership Plan | (145,219) | (147,725) | |||||||||
Retained earnings | 1,723,979 | 1,665,607 | |||||||||
Accumulated other comprehensive income, net of tax | (6,247) | 54,234 | |||||||||
Total shareholders’ equity | 3,430,622 | 3,428,052 | |||||||||
Total liabilities and shareholders’ equity | $ | 17,047,453 | $ | 15,964,190 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||||||
Interest and dividend income: | |||||||||||||||||||||||
Interest and fees on loans | $ | 90,936 | $ | 92,143 | $ | 179,575 | $ | 187,681 | |||||||||||||||
Taxable interest and dividends on available for sale securities | 12,457 | 7,600 | 22,663 | 15,778 | |||||||||||||||||||
Non-taxable interest and dividends on available for sale securities | 1,857 | 1,905 | 3,713 | 3,826 | |||||||||||||||||||
Interest on federal funds sold and other short-term investments | 431 | 284 | 863 | 801 | |||||||||||||||||||
Interest and dividends on trading securities | — | 1 | — | 6 | |||||||||||||||||||
Total interest and dividend income | 105,681 | 101,933 | 206,814 | 208,092 | |||||||||||||||||||
Interest expense: | |||||||||||||||||||||||
Interest on deposits | 1,031 | 3,104 | 2,033 | 8,518 | |||||||||||||||||||
Interest on borrowings | 42 | 74 | 82 | 673 | |||||||||||||||||||
Total interest expense | 1,073 | 3,178 | 2,115 | 9,191 | |||||||||||||||||||
Net interest income | 104,608 | 98,755 | 204,699 | 198,901 | |||||||||||||||||||
(Release of) provision for allowance for loan losses | (3,300) | 8,600 | (3,880) | 37,200 | |||||||||||||||||||
Net interest income after provision for loan losses | 107,908 | 90,155 | 208,579 | 161,701 | |||||||||||||||||||
Noninterest income: | |||||||||||||||||||||||
Insurance commissions | 23,664 | 22,697 | 51,811 | 50,174 | |||||||||||||||||||
Service charges on deposit accounts | 5,708 | 4,364 | 11,075 | 10,462 | |||||||||||||||||||
Trust and investment advisory fees | 6,074 | 5,194 | 11,737 | 10,289 | |||||||||||||||||||
Debit card processing fees | 3,170 | 2,337 | 5,919 | 4,807 | |||||||||||||||||||
Interest rate swap (losses) income | (1,164) | 771 | 4,241 | (5,238) | |||||||||||||||||||
Income from investments held in rabbi trusts | 4,216 | 7,745 | 6,062 | 1,002 | |||||||||||||||||||
Losses on trading securities, net | — | (1) | — | (3) | |||||||||||||||||||
Gains on sales of mortgage loans held for sale, net | 848 | 1,420 | 2,327 | 1,513 | |||||||||||||||||||
Gains on sales of securities available for sale, net | 1 | 163 | 1,165 | 285 | |||||||||||||||||||
Other | 3,216 | 2,967 | 6,608 | 7,735 | |||||||||||||||||||
Total noninterest income | 45,733 | 47,657 | 100,945 | 81,026 | |||||||||||||||||||
Noninterest expense: | |||||||||||||||||||||||
Salaries and employee benefits | 69,276 | 63,335 | 133,316 | 124,924 | |||||||||||||||||||
Office occupancy and equipment | 8,094 | 8,615 | 16,311 | 17,304 | |||||||||||||||||||
Data processing | 13,572 | 12,180 | 25,701 | 22,184 | |||||||||||||||||||
Professional services | 6,439 | 4,396 | 10,587 | 8,085 | |||||||||||||||||||
Charitable contributions | — | 2,797 | — | 3,984 | |||||||||||||||||||
Marketing | 3,497 | 1,645 | 5,188 | 4,113 | |||||||||||||||||||
Loan expenses | 1,854 | 2,036 | 3,701 | 3,148 | |||||||||||||||||||
FDIC insurance | 985 | 944 | 1,933 | 1,850 | |||||||||||||||||||
Amortization of intangible assets | 625 | 701 | 1,157 | 1,403 | |||||||||||||||||||
Other | 2,993 | 4,116 | 3,490 | 8,942 | |||||||||||||||||||
Total noninterest expense | 107,335 | 100,765 | 201,384 | 195,937 | |||||||||||||||||||
Income before income tax expense | 46,306 | 37,047 | 108,140 | 46,790 | |||||||||||||||||||
Income tax expense | 11,497 | 7,197 | 25,668 | 8,495 | |||||||||||||||||||
Net income | $ | 34,809 | $ | 29,850 | $ | 82,472 | $ | 38,295 | |||||||||||||||
Basic earnings per share | $ | 0.20 | $ | — | $ | 0.48 | $ | — | |||||||||||||||
Diluted earnings per share | $ | 0.20 | $ | — | $ | 0.48 | $ | — |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Net income | $ | 34,809 | $ | 29,850 | $ | 82,472 | $ | 38,295 | |||||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Net change in fair value of securities available for sale | 25,428 | 287 | (49,476) | 26,479 | |||||||||||||||||||
Net change in fair value of cash flow hedges | (5,909) | (2,645) | (11,857) | 26,430 | |||||||||||||||||||
Net change in other comprehensive income for defined benefit postretirement plans | 426 | 3,404 | 852 | 3,404 | |||||||||||||||||||
Total other comprehensive income (loss) | 19,945 | 1,046 | (60,481) | 56,313 | |||||||||||||||||||
Total comprehensive income | $ | 54,754 | $ | 30,896 | $ | 21,991 | $ | 94,608 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
6
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended June 30, 2021 and 2020
Shares of Common Stock Outstanding | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Unallocated Common Stock Held by ESOP | Total | |||||||||||||||||||||||||||||||||||
(In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | — | $ | — | $ | — | $ | 1,651,314 | $ | 11,420 | $ | — | $ | 1,662,734 | ||||||||||||||||||||||||||||
Net income | — | — | — | 29,850 | — | — | 29,850 | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 1,046 | — | 1,046 | ||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | — | $ | — | $ | — | $ | 1,681,164 | $ | 12,466 | $ | — | $ | 1,693,630 | ||||||||||||||||||||||||||||
Balance at March 31, 2021 | 186,758,154 | $ | 1,868 | $ | 1,854,895 | $ | 1,702,946 | $ | (26,192) | $ | (146,472) | $ | 3,387,045 | ||||||||||||||||||||||||||||
Dividends to common shareholders (1) | — | — | — | (13,776) | — | — | (13,776) | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | 34,809 | — | — | 34,809 | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 19,945 | — | 19,945 | ||||||||||||||||||||||||||||||||||
ESOP shares committed to be released | — | — | 1,346 | — | — | 1,253 | 2,599 | ||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 186,758,154 | $ | 1,868 | $ | 1,856,241 | $ | 1,723,979 | $ | (6,247) | $ | (145,219) | $ | 3,430,622 |
(1)The Company declared and paid a quarterly cash dividend of $0.08 per share of common stock during the three months ended June 30, 2021.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
7
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Six Months Ended June 30, 2021 and 2020
Shares of Common Stock Outstanding | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Unallocated Common Stock Held by ESOP | Total | |||||||||||||||||||||||||||||||||||
(In thousands, except share data) | |||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | — | $ | — | $ | — | $ | 1,644,000 | $ | (43,847) | $ | — | $ | 1,600,153 | ||||||||||||||||||||||||||||
— | — | — | (1,131) | — | — | (1,131) | |||||||||||||||||||||||||||||||||||
Net income | — | — | — | 38,295 | — | — | 38,295 | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 56,313 | — | 56,313 | ||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | — | $ | — | $ | — | $ | 1,681,164 | $ | 12,466 | $ | — | $ | 1,693,630 | ||||||||||||||||||||||||||||
Balance at December 31, 2020 | 186,758,154 | $ | 1,868 | $ | 1,854,068 | $ | 1,665,607 | $ | 54,234 | $ | (147,725) | $ | 3,428,052 | ||||||||||||||||||||||||||||
Dividends to common shareholders (2) | — | — | — | (24,100) | — | — | (24,100) | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | 82,472 | — | — | 82,472 | ||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | (60,481) | — | (60,481) | ||||||||||||||||||||||||||||||||||
ESOP shares committed to be released | — | — | 2,173 | — | — | 2,506 | 4,679 | ||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 186,758,154 | $ | 1,868 | $ | 1,856,241 | $ | 1,723,979 | $ | (6,247) | $ | (145,219) | $ | 3,430,622 |
(1)Represents cumulative impact on retained earnings pursuant to the Company’s (as defined herein) 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.
(2)The Company declared and paid quarterly cash dividends of $0.06 and $0.08 per share of common stock during the three months ended March 31, 2021 and June 30, 2021, respectively.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
8
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, | |||||||||||
(In thousands) | 2021 | 2020 | |||||||||
Operating activities | |||||||||||
Net income | $ | 82,472 | $ | 38,295 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
(Release of) provision for loan losses | (3,880) | 37,200 | |||||||||
Depreciation and amortization | 6,636 | 8,471 | |||||||||
Accretion of deferred loan fees and premiums, net | (14,767) | (3,155) | |||||||||
Deferred income tax expense | 5,407 | 1,773 | |||||||||
Amortization of investment security premiums and discounts | 6,397 | 1,656 | |||||||||
Right-of-use asset amortization | 6,130 | 6,042 | |||||||||
Increase in cash surrender value of bank-owned life insurance | (1,073) | (1,155) | |||||||||
Gain on sale of securities available for sale, net | (1,165) | (285) | |||||||||
Amortization of gains from terminated interest rate swaps | (16,493) | (373) | |||||||||
Employee Stock Ownership Plan expense | 4,679 | — | |||||||||
Other | 248 | (128) | |||||||||
Change in: | |||||||||||
Trading securities | — | 961 | |||||||||
Loans held for sale | (1,583) | (2,965) | |||||||||
Prepaid pension expense | 1,676 | (28,432) | |||||||||
Other assets | 9,746 | (133,413) | |||||||||
Other liabilities | (24,794) | 77,509 | |||||||||
Net cash provided by operating activities | 59,636 | 2,001 | |||||||||
Investing activities | |||||||||||
Proceeds from sales of securities available for sale | 23,237 | 9,098 | |||||||||
Proceeds from maturities and principal paydowns of securities available for sale | 381,123 | 153,542 | |||||||||
Purchases of securities available for sale | (2,138,024) | (171,226) | |||||||||
Proceeds from sale of Federal Home Loan Bank stock | — | 749 | |||||||||
Purchases of Federal Home Loan Bank stock | (1,796) | (527) | |||||||||
Contributions to low income housing tax credit investments | (4,553) | (7,435) | |||||||||
Contributions to other equity investments | (1,920) | (1,092) | |||||||||
Distributions from other equity investments | 170 | 54 | |||||||||
Net decrease (increase) in outstanding loans | 126,868 | (997,881) | |||||||||
Acquisitions, net of cash and cash equivalents acquired | (4,354) | — | |||||||||
Purchased banking premises and equipment, net | (1,809) | (2,146) | |||||||||
Proceeds from sale of premises held for sale | 736 | — | |||||||||
Net cash used in investing activities | (1,620,322) | (1,016,864) | |||||||||
Financing activities | |||||||||||
Net increase in demand, savings, interest checking, and money market investment deposit accounts | 1,107,351 | 2,315,592 | |||||||||
Net decrease in time deposits | (12,702) | (20,219) | |||||||||
Net increase (decrease) in borrowed funds | 393 | (206,240) | |||||||||
Contingent consideration paid | (79) | (158) | |||||||||
Payment of deferred offering costs | — | (4,153) | |||||||||
Dividends declared and paid to common shareholders | (24,100) | — | |||||||||
Net cash provided by financing activities | 1,070,863 | 2,084,822 | |||||||||
Net (decrease) increase in cash, cash equivalents, and restricted cash | (489,823) | 1,069,959 | |||||||||
Cash, cash equivalents, and restricted cash at beginning of period | 2,054,070 | 362,602 | |||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 1,564,247 | $ | 1,432,561 |
9
Supplemental disclosure of cash flow information | |||||||||||
Cash paid during the period for: | |||||||||||
Interest paid | $ | 2,127 | $ | 10,533 | |||||||
Income taxes | $ | 35,122 | 14,976 | ||||||||
Non-cash activities | |||||||||||
Net increase in capital commitments relating to low income housing tax credit projects | $ | 14,446 | $ | 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.
10
EASTERN BANKSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Structure and Nature of Operations; Basis of Presentation
Corporate Structure and Nature of Operations
Eastern Bankshares, Inc., a Massachusetts corporation (the “Company”), is a bank holding company. Through its wholly-owned subsidiaries, Eastern Bank (the “Bank”) and Eastern Insurance Group LLC (“Eastern Insurance Group”), the Company provides a variety of banking, trust and investment, 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. Eastern Insurance Group LLC is a wholly-owned subsidiary of the Bank.
The activities of the Company are subject to the regulatory supervision of the Board of Governors of the Federal Reserve System (“Federal Reserve”). The activities of the Bank are subject to the regulatory supervision of the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation (“FDIC”) and the Consumer Financial Protection Bureau. The Company and the activities of the Bank and Eastern Insurance Group are also subject to various Massachusetts, New Hampshire and Rhode Island business and banking regulations.
Basis of Presentation
The Company’s 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 (“ASC”) and Accounting Standards Updates (“ASU”) as well as the rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws.
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.
Certain previously reported amounts have been reclassified to conform to the current period’s presentation.
The accompanying consolidated balance sheet as of June 30, 2021, the consolidated statements of income and comprehensive income and of changes in equity for the three and six months ended June 30, 2021 and 2020 and statement of cash flows for the six months ended June 30, 2021 and 2020 are unaudited. The consolidated balance sheet as of December 31, 2020 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (“2020 Form 10-K”), as filed with the SEC. In the opinion of management, the Company’s 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, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period.
2. Summary of Significant Accounting Policies
The following describes the Company’s use of estimates as well as relevant accounting pronouncements that were recently issued but not yet adopted as of June 30, 2021 and those that were adopted during the six months ended June 30, 2021. For a full discussion of significant accounting policies, refer to the notes included within the Company’s 2020 Form 10-K.
Use of Estimates
In preparing the Consolidated Financial Statements in conformity with GAAP, 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.
11
Recent Accounting Pronouncements
The Company qualifies as an emerging growth company under the Jumpstart Our Business Act of 2012 (“JOBS Act”) and has elected to defer the adoption of new or revised accounting standards until the nonpublic company effective dates.
Relevant standards that were recently issued but not yet adopted as of June 30, 2021:
In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). 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 does not apply to contract modifications made after December 31, 2022. 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, the FASB issued ASU 2016-13, Financial Instruments–Credit 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 (“ASU 2018-19”). The amendments in ASU 2018-19 were 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, the 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic in the United States. to provide economic relief measures including the option to defer adoption of ASU 2016-13 to the earlier of the ending of the national emergency declaration related to the COVID-19 crisis or December 31, 2020. On December 27, 2020, the Consolidated Appropriations Act (the “Appropriations Act”) was enacted to fund the federal government through their fiscal year, extend certain expiring tax provisions and provide additional emergency relief to individuals and businesses related to the COVID-19 pandemic in the United States. Included within the provisions of the Appropriations Act is an extension of the adoption date for ASU 2016-13 from December 31, 2020 to the earlier of January 1, 2022 or 60 days after the date on which the COVID-19 national emergency terminates. The Company anticipates deferring adoption of this standard to January 1, 2022.
To address the impact of ASU 2016-13, the Company has formed a committee, which members include the Chief Credit Officer, the Chief Financial Officer, and Chief Information Officer, to assist in identifying, implementing, and evaluating the impact of the required changes to loan loss estimation models and processes. The Company is evaluating portfolio segmentation, methodologies and other assumptions and has initiated model validation efforts. Third parties have been engaged to assist the Company in project management, documentation, model governance, model validation and related internal controls implementation. The Company is currently assessing the impact of the new standard on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20) Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). This update modifies the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost
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beneficial and requires new ones that the FASB considers pertinent. For public companies, ASU 2018-14 is effective for fiscal years ending after December 15, 2020. For nonpublic companies, ASU 2018-14 is effective for fiscal years ending after December 15, 2021. Early adoption is permitted. The Company will adopt this standard on the nonpublic company effective date. The Company expects the adoption of this standard will not have a material impact on its consolidated financial statements.
Relevant standards that were adopted during the six months ended June 30, 2021:
In August 2018, the FASB issued ASU 2018-15, Intangibles–Goodwill and Other–Internal-use software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”). This update addresses accounting for fees paid by a customer for implementation, set-up and other upfront costs incurred in a cloud computing arrangement that is hosted by the vendor (i.e., a service contract). The new guidance aligns treatment for capitalization of implementation costs with guidance on internal-use software. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2019. For nonpublic entities, the guidance is effective for annual reporting periods beginning after December 15, 2020, and for all interim periods beginning after December 15, 2021. The adoption of this standard on January 1, 2021 did not have a material impact on the Company’s consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848) (“ASU 2021-01”) which expands the scope of guidance in ASC 848 so that companies can apply the optional expedients to derivative instruments affected by the clearing house changes. ASU 2021-01 also clarifies and updates several items in ASU 2020-04 as part of the Board’s monitoring of global reference rate reform activities. ASU 2021-01 permits entities to elect certain optional expedients and exceptions to modifications of interest rate indexes used for computing when accounting derivative contracts and certain hedging relationships impacted by changes in interest rates used for discounting, margining, or contract price alignment. ASU 2021-01 clarifies other aspects of the guidance in ASC 848 and provides new guidance on how to address the effects of the cash compensation adjustment that is provided as part of the above change on certain aspects of hedge accounting. The guidance was effective upon issuance and allows for retrospective or prospective application with certain conditions. The Company did not elect retrospective application. The adoption of this update did not have a material impact on the Company’s consolidated financial statements.
3. Securities
Available for Sale Securities
The amortized cost, gross unrealized gains and losses, and fair value of available for sale securities as of June 30, 2021 and December 31, 2020 were as follows:
As of June 30, 2021 | |||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities | $ | 3,480,643 | $ | 22,240 | $ | (24,354) | $ | 3,478,529 | |||||||||||||||
Government-sponsored commercial mortgage-backed securities | 183,062 | 66 | (1,333) | 181,795 | |||||||||||||||||||
U.S. Agency bonds | 860,575 | — | (19,570) | 841,005 | |||||||||||||||||||
U.S. Treasury securities | 69,401 | 23 | (93) | 69,331 | |||||||||||||||||||
State and municipal bonds and obligations | 259,935 | 18,186 | — | 278,121 | |||||||||||||||||||
$ | 4,853,616 | $ | 40,515 | $ | (45,350) | $ | 4,848,781 |
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As of December 31, 2020 | |||||||||||||||||||||||
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities | $ | 2,106,658 | $ | 42,142 | $ | — | $ | 2,148,800 | |||||||||||||||
Government-sponsored commercial mortgage-backed securities | 17,054 | 27 | — | 17,081 | |||||||||||||||||||
U.S. Agency bonds | 670,468 | 113 | (3,872) | 666,709 | |||||||||||||||||||
U.S. Treasury securities | 70,106 | 263 | — | 70,369 | |||||||||||||||||||
State and municipal bonds and obligations | 260,898 | 20,004 | — | 280,902 | |||||||||||||||||||
$ | 3,125,184 | $ | 62,549 | $ | (3,872) | $ | 3,183,861 |
The amortized cost and estimated fair value of available for sale securities by contractual maturities as of June 30, 2021 and December 31, 2020 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, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities | $ | — | $ | — | $ | 18,156 | $ | 19,323 | $ | 593,853 | $ | 597,546 | $ | 2,868,634 | $ | 2,861,660 | $ | 3,480,643 | $ | 3,478,529 | |||||||||||||||||||||||||||||||||||||||
Government-sponsored commercial mortgage-backed securities | — | — | 24,038 | 23,781 | 159,024 | 158,014 | — | — | 183,062 | 181,795 | |||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Agency bonds | — | — | 199,796 | 196,383 | 660,779 | 644,622 | — | — | 860,575 | 841,005 | |||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | 10,048 | 10,071 | 59,353 | 59,260 | — | — | — | — | 69,401 | 69,331 | |||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal bonds and obligations | 485 | 486 | 28,682 | 29,781 | 72,515 | 76,046 | 158,253 | 171,808 | 259,935 | 278,121 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 10,533 | $ | 10,557 | $ | 330,025 | $ | 328,528 | $ | 1,486,171 | $ | 1,476,228 | $ | 3,026,887 | $ | 3,033,468 | $ | 4,853,616 | $ | 4,848,781 |
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As of December 31, 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 Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities | $ | — | $ | — | $ | 46,293 | $ | 48,925 | $ | 96,338 | $ | 100,278 | $ | 1,964,027 | $ | 1,999,597 | $ | 2,106,658 | $ | 2,148,800 | |||||||||||||||||||||||||||||||||||||||
Government-sponsored commercial mortgage-backed securities | — | — | — | — | 17,054 | 17,081 | — | — | 17,054 | 17,081 | |||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Agency bonds | — | — | 99,772 | 99,834 | 570,696 | 566,875 | — | — | 670,468 | 666,709 | |||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury securities | 50,023 | 50,251 | 20,083 | 20,118 | — | — | — | — | 70,106 | 70,369 | |||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal bonds and obligations | 406 | 408 | 20,511 | 21,431 | 74,980 | 79,635 | 165,001 | 179,428 | 260,898 | 280,902 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 50,429 | $ | 50,659 | $ | 186,659 | $ | 190,308 | $ | 759,068 | $ | 763,869 | $ | 2,129,028 | $ | 2,179,025 | $ | 3,125,184 | $ | 3,183,861 |
Gross realized gains from sales of available for sale securities during the three months ended June 30, 2021 and 2020 were less than $0.1 million and $0.2 million, respectively, and $1.2 million and $0.3 million during the six months ended June 30, 2021 and 2020, respectively. The Company had no significant gross realized losses from sales of securities available for sale during both the six months ended June 30, 2021 and 2020. There was no other-than-temporary impairment (“OTTI”) recorded during the six months ended June 30, 2021 and 2020.
Management prepares an estimate of the expected cash flows for investment securities available for sale that potentially may be deemed to have been an 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.
Information pertaining to available for sale securities with gross unrealized losses as of June 30, 2021 and December 31, 2020, 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:
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As of June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
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 | 20 | $ | 24,354 | $ | 2,178,499 | $ | — | $ | — | $ | 24,354 | $ | 2,178,499 | ||||||||||||||||||||||||||||
Government-sponsored commercial mortgage-backed securities | 8 | 1,333 | 161,684 | — | — | 1,333 | 161,684 | ||||||||||||||||||||||||||||||||||
U.S. Agency bonds | 13 | 19,570 | 841,005 | — | — | 19,570 | 841,005 | ||||||||||||||||||||||||||||||||||
U.S. Treasury securities | 2 | 93 | 59,262 | — | — | 93 | 59,262 | ||||||||||||||||||||||||||||||||||
43 | $ | 45,350 | $ | 3,240,450 | $ | — | $ | — | $ | 45,350 | $ | 3,240,450 |
As of December 31, 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) | |||||||||||||||||||||||||||||||||||||||||
U.S. Agency bonds | 6 | $ | 3,872 | $ | 416,824 | $ | — | $ | — | $ | 3,872 | $ | 416,824 | ||||||||||||||||||||||||||||
6 | $ | 3,872 | $ | 416,824 | $ | — | $ | — | $ | 3,872 | $ | 416,824 |
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 with gross unrealized losses 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 Company’s 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, 2021 and December 31, 2020:
•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. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•Government-sponsored commercial 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. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•U.S. Agency bonds – 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. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
•U.S. Treasury 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. Additionally, these securities are implicitly guaranteed by the U.S. government or one of its agencies.
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4. Loans and Allowance for Loan Losses
Loans
The following table provides a summary of the Company’s loan portfolio as of the dates indicated:
At June 30, | At December 31, | ||||||||||
2021 | 2020 | ||||||||||
(In thousands) | |||||||||||
Commercial and industrial | $ | 1,740,679 | $ | 1,995,016 | |||||||
Commercial real estate | 3,775,771 | 3,573,630 | |||||||||
Commercial construction | 237,927 | 305,708 | |||||||||
Business banking | 1,339,852 | 1,339,164 | |||||||||
Residential real estate | 1,457,498 | 1,370,957 | |||||||||
Consumer home equity | 834,938 | 868,270 | |||||||||
Other consumer (1) | 234,410 | 277,780 | |||||||||
Gross loans before unamortized premiums, unearned discounts and deferred fees | 9,621,075 | 9,730,525 | |||||||||
Allowance for loan losses | (105,637) | (113,031) | |||||||||
Unamortized premiums, net of unearned discounts and deferred fees | (29,739) | (23,536) | |||||||||
Loans after the allowance for credit losses, unamortized premiums, unearned discounts and deferred fees | $ | 9,485,699 | $ | 9,593,958 |
(1) Automobile loans are included in the other consumer portfolio above and amounted to $83.7 million and $126.7 million at June 30, 2021 and December 31, 2020, respectively.
There are no other loan categories that exceed 10% of total loans not already reflected in the preceding table.
The Company’s 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 its industry and geographical diversification. The SNC Program portfolio is included in the Company’s 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.
Loans Pledged as Collateral
The carrying value of loans pledged to secure advances from the Federal Home Loan Bank (“FHLB”) of Boston (“FHLBB”) were $2.3 billion and $2.4 billion at June 30, 2021 and December 31, 2020, respectively. The balance of funds borrowed from the FHLBB were $14.3 million and $14.6 million at June 30, 2021 and December 31, 2020, respectively.
The carrying value of loans pledged to secure advances from the Federal Reserve Bank (“FRB”) were $812.6 million and $884.1 million at June 30, 2021 and December 31, 2020, respectively. There were no funds borrowed from the FRB outstanding at June 30, 2021 and December 31, 2020.
Serviced Loans
At June 30, 2021 and December 31, 2020, mortgage loans partially or wholly-owned by others and serviced by the Company amounted to approximately $12.1 million and $13.5 million, respectively.
Allowance for Loan Losses
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The allowance for loan losses is established to provide for probable losses incurred in the Company’s 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 tables summarize the changes in the allowance for loan losses by loan category for the periods indicated:
For the Three Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | $ | 25,406 | $ | 55,138 | $ | 3,350 | $ | 13,504 | $ | 6,235 | $ | 3,576 | $ | 3,498 | $ | 373 | $ | 111,080 | |||||||||||||||||||||||||||||||||||
Charge-offs | (550) | — | — | (1,838) | — | — | (275) | — | (2,663) | ||||||||||||||||||||||||||||||||||||||||||||
Recoveries | 13 | 4 | — | 291 | 17 | 3 | 192 | — | 520 | ||||||||||||||||||||||||||||||||||||||||||||
(Release of) provision | (2,273) | (2,383) | 96 | 748 | 226 | 9 | 211 | 66 | (3,300) | ||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 22,596 | $ | 52,759 | $ | 3,446 | $ | 12,705 | $ | 6,478 | $ | 3,588 | $ | 3,626 | $ | 439 | $ | 105,637 |
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: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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 (release of) | 2,667 | 5,020 | 104 | 795 | 328 | (46) | (293) | 25 | 8,600 | ||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 33,229 | $ | 54,228 | $ | 4,816 | $ | 9,805 | $ | 6,569 | $ | 3,875 | $ | 3,762 | $ | 352 | $ | 116,636 |
For the Six Months Ended June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | $ | 26,617 | $ | 54,569 | $ | 4,553 | $ | 13,152 | $ | 6,435 | $ | 3,744 | $ | 3,467 | $ | 494 | $ | 113,031 | |||||||||||||||||||||||||||||||||||
Charge-offs | (550) | (234) | — | (3,222) | — | — | (639) | — | (4,645) | ||||||||||||||||||||||||||||||||||||||||||||
Recoveries | 22 | 4 | — | 656 | 27 | 74 | 348 | — | 1,131 | ||||||||||||||||||||||||||||||||||||||||||||
(Release of) provision | (3,493) | (1,580) | (1,107) | 2,119 | 16 | (230) | 450 | (55) | (3,880) | ||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 22,596 | $ | 52,759 | $ | 3,446 | $ | 12,705 | $ | 6,478 | $ | 3,588 | $ | 3,626 | $ | 439 | $ | 105,637 |
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For the Six 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: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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 (release of) | 11,957 | 19,516 | 1,392 | 3,926 | 116 | 299 | 26 | (32) | 37,200 | ||||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 33,229 | $ | 54,228 | $ | 4,816 | $ | 9,805 | $ | 6,569 | $ | 3,875 | $ | 3,762 | $ | 352 | $ | 116,636 |
The following tables bifurcate the amount of loans and the allowance allocated to each loan category based on the type of impairment analysis as of the periods indicated:
As of June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
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 ending balance: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 4,544 | $ | — | $ | — | $ | 937 | $ | 1,624 | $ | 263 | $ | — | $ | — | $ | 7,368 | |||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | — | 249 | — | — | 293 | — | — | — | 542 | ||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 18,052 | 52,510 | 3,446 | 11,768 | 4,561 | 3,325 | 3,626 | 439 | 97,727 | ||||||||||||||||||||||||||||||||||||||||||||
Total allowance for loan losses by group | $ | 22,596 | $ | 52,759 | $ | 3,446 | $ | 12,705 | $ | 6,478 | $ | 3,588 | $ | 3,626 | $ | 439 | $ | 105,637 | |||||||||||||||||||||||||||||||||||
Loans ending balance: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 20,266 | $ | 4,051 | $ | — | $ | 18,179 | $ | 25,091 | $ | 3,954 | $ | 24 | $ | — | $ | 71,565 | |||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 1,397 | 249 | — | — | 2,880 | — | — | — | 4,526 | ||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 1,719,016 | 3,771,471 | 237,927 | 1,321,673 | 1,429,527 | 830,984 | 234,386 | — | 9,544,984 | ||||||||||||||||||||||||||||||||||||||||||||
Total loans by group | $ | 1,740,679 | $ | 3,775,771 | $ | 237,927 | $ | 1,339,852 | $ | 1,457,498 | $ | 834,938 | $ | 234,410 | $ | — | $ | 9,621,075 |
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As of December 31, 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 ending balance: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 4,555 | $ | 210 | $ | — | $ | 1,435 | $ | 1,565 | $ | 289 | $ | — | $ | — | $ | 8,054 | |||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 1,283 | 822 | — | — | 327 | — | — | — | 2,432 | ||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 20,779 | 53,537 | 4,553 | 11,717 | 4,543 | 3,455 | 3,467 | 494 | 102,545 | ||||||||||||||||||||||||||||||||||||||||||||
Total allowance for loan losses by group | $ | 26,617 | $ | 54,569 | $ | 4,553 | $ | 13,152 | $ | 6,435 | $ | 3,744 | $ | 3,467 | $ | 494 | $ | 113,031 | |||||||||||||||||||||||||||||||||||
Loans ending balance: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 17,343 | $ | 4,435 | $ | — | $ | 21,901 | $ | 27,056 | $ | 4,845 | $ | 29 | $ | — | $ | 75,609 | |||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 3,432 | 2,749 | — | — | 3,116 | — | — | — | 9,297 | ||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 1,974,241 | 3,566,446 | 305,708 | 1,317,263 | 1,340,785 | 863,425 | 277,751 | — | 9,645,619 | ||||||||||||||||||||||||||||||||||||||||||||
Total loans by group | $ | 1,995,016 | $ | 3,573,630 | $ | 305,708 | $ | 1,339,164 | $ | 1,370,957 | $ | 868,270 | $ | 277,780 | $ | — | $ | 9,730,525 |
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 possesses 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.
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, liquidation of the collateral. The Company often obtains personal guarantees from individuals holding material ownership in the borrowing entity.
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 borrower’s 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.
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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 Company’s proprietary decision matrix that has a number of quantitative factors including, but not limited to, a guarantor’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s policy and underwriting in this category, which is comprised primarily of home improvement 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 15-point credit risk-rating system to manage risk and identify potential problem loans.
Prior to December 31, 2020, the Company utilized a 12-point credit risk-rating system to manage risk and identify potential problem loans. In the fourth quarter of 2020, the Company realigned its credit risk-rating system, transitioning to a 15-point credit risk-rating system. The Company believes that the expansion from the prior 12-point scale provides more refinement in the pass grade categories; new pass grades are 0-10. There are no changes to non-pass categories, which continue to align with regulatory guidelines and are found in ratings: special mention (11), substandard (12), doubtful (13) and loss (14). The Company believes that increasing granularity of the risk rating system allows for more robust portfolio management and increased precision and effectiveness of credit risk identification.
Under both point systems, 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 under the new 15-point credit risk-rating system 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 business credit scores for the business banking portfolio on a quarterly basis. Unrated commercial and business banking loans are generally restricted to commercial exposure of less than $1 million. Loans
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included in this category have qualification requirements that include a risk rating of 10 or better at the time of recommendation for unrated status, acceptable management of deposit accounts, and no known negative changes in management, operations or financial performance.
For purposes of estimating the allowance for loan losses, unrated loans are considered in the same manner as pass rated loans.
1-10 Risk Rating – Pass
Loans with a risk rating of 1-10 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 policy conforming cash levels, through “low pass” which indicates acceptable rated loans that may be experiencing weak cash flow, impending lease rollover or minor liquidity concerns.
11 Risk Rating – Special Mention (Potential Weakness)
Loans to borrowers in this category exhibit potential weaknesses or downward trends deserving management’s 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. 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.
12 Risk Rating – Substandard (Well-Defined Weakness)
Loans with a risk-rating of 12 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. Non-accrual is possible, but not mandatory, in this class.
13 Risk Rating – Doubtful (Loss Probable)
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 a partial loss of principal is likely. The probability of loss exists, however, because of reasonable specific pending factors that may work to strengthen the credit, estimated losses are deferred until a more exact status can be determined. Specific reserves will be the amount identified after specific review. Non-accrual is mandatory in this class.
14 Risk Rating – Loss
Loans to borrowers in this category are deemed incapable of repayment. Loans to such borrowers are considered uncollectible 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 experienced officers for individual attention.
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The following tables detail the internal risk-rating categories for the Company’s commercial and industrial, commercial real estate, commercial construction and business banking portfolios:
As of June 30, 2021 | ||||||||||||||||||||||||||||||||
Category | Commercial and Industrial | Commercial Real Estate | Commercial Construction | Business Banking | Total | |||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Unrated | $ | 434,766 | $ | 5,105 | $ | 61 | $ | 913,151 | $ | 1,353,083 | ||||||||||||||||||||||
Pass | 1,201,952 | 3,492,582 | 218,073 | 346,198 | 5,258,805 | |||||||||||||||||||||||||||
Special mention | 48,853 | 127,856 | 13,703 | 53,920 | 244,332 | |||||||||||||||||||||||||||
Substandard | 39,751 | 150,177 | 6,090 | 25,299 | 221,317 | |||||||||||||||||||||||||||
Doubtful | 15,357 | 51 | — | 1,284 | 16,692 | |||||||||||||||||||||||||||
Loss | — | — | — | — | — | |||||||||||||||||||||||||||
Total | $ | 1,740,679 | $ | 3,775,771 | $ | 237,927 | $ | 1,339,852 | $ | 7,094,229 |
As of December 31, 2020 | ||||||||||||||||||||||||||||||||
Category | Commercial and Industrial | Commercial Real Estate | Commercial Construction | Business Banking | Total | |||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Unrated | $ | 655,346 | $ | 6,585 | $ | — | $ | 918,921 | $ | 1,580,852 | ||||||||||||||||||||||
Pass | 1,199,522 | 3,256,697 | 280,792 | 336,657 | 5,073,668 | |||||||||||||||||||||||||||
Special mention | 78,117 | 134,562 | 10,330 | 57,092 | 280,101 | |||||||||||||||||||||||||||
Substandard | 47,525 | 173,308 | 14,586 | 24,788 | 260,207 | |||||||||||||||||||||||||||
Doubtful | 14,506 | 2,478 | — | 1,706 | 18,690 | |||||||||||||||||||||||||||
Loss | — | — | — | — | — | |||||||||||||||||||||||||||
Total | $ | 1,995,016 | $ | 3,573,630 | $ | 305,708 | $ | 1,339,164 | $ | 7,213,518 |
Paycheck Protection Program (“PPP”) loans are included within the unrated category of the commercial and industrial and business banking portfolios in the tables above. Commercial and industrial PPP loans and business banking PPP loans amounted to $366.1 million and $459.7 million, respectively, at June 30, 2021 and $568.8 million and $457.4 million respectively, at December 31, 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 Company’s 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
In response to the novel coronavirus (“COVID-19”) pandemic, the Company has granted loan modifications to allow deferral of payments for borrowers negatively impacted by the COVID-19 pandemic. Modifications granted to customers allowed for full payment deferrals (principal and interest) or deferral of only principal payments. The balance of loans which underwent a modification and have not yet resumed payment as of June 30, 2021 and December 31, 2020 was $149.8 million and $332.7 million, respectively. The Company defines a modified loan to have resumed payment if it is one month past the modification end date and not more than 30 days past due. These modifications with active deferrals met the criteria of either Section 4013 of the CARES Act or the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) and therefore are not deemed TDRs (as defined herein). Additionally, loans that are performing in accordance with the contractual terms of the modification are not reflected as being
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past due and therefore are not impacting non-accrual or delinquency totals as of June 30, 2021 and December 31, 2020. The Company continued to accrue interest on these COVID-19 modified loans and evaluated the deferred interest for collectability as of June 30, 2021 and December 31, 2020.
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 non-accrual 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 purchased credit impaired (“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. Non-accrual loans and loans that are more than 90 days past due but still accruing interest are considered non-performing loans.
Non-accrual 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.
A loan is expected to remain on non-accrual status until it becomes current with respect to principal and interest, the loan is liquidated, or the loan is determined to be uncollectible and is charged-off against the allowance for loan losses.
The following is a summary pertaining to the breakdown of the Company’s non-accrual loans:
As of June 30, | As of December 31, | ||||||||||
2021 | 2020 | ||||||||||
(In thousands) | |||||||||||
Commercial and industrial | $ | 14,591 | $ | 11,714 | |||||||
Commercial real estate | 531 | 915 | |||||||||
Business banking | 14,234 | 17,430 | |||||||||
Residential real estate | 6,445 | 6,815 | |||||||||
Consumer home equity | 3,592 | 3,602 | |||||||||
Other consumer | 514 | 529 | |||||||||
Total non-accrual loans | $ | 39,907 | $ | 41,005 |
The following tables show the age analysis of past due loans as of the dates indicated:
As of June 30, 2021 | |||||||||||||||||||||||||||||||||||||||||
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 | $ | — | $ | 267 | $ | 647 | $ | 914 | $ | 1,739,765 | $ | 1,740,679 | $ | 275 | |||||||||||||||||||||||||||
Commercial real estate | 1,896 | — | 1,414 | 3,310 | 3,772,461 | 3,775,771 | 1,164 | ||||||||||||||||||||||||||||||||||
Commercial construction | — | — | — | — | 237,927 | 237,927 | — | ||||||||||||||||||||||||||||||||||
Business banking | 4,004 | 1,902 | 6,609 | 12,515 | 1,327,337 | 1,339,852 | — | ||||||||||||||||||||||||||||||||||
Residential real estate | 11,706 | 1,330 | 4,631 | 17,667 | 1,439,831 | 1,457,498 | 277 | ||||||||||||||||||||||||||||||||||
Consumer home equity | 610 | 403 | 3,408 | 4,421 | 830,517 | 834,938 | 9 | ||||||||||||||||||||||||||||||||||
Other consumer | 1,074 | 438 | 513 | 2,025 | 232,385 | 234,410 | — | ||||||||||||||||||||||||||||||||||
Total | $ | 19,290 | $ | 4,340 | $ | 17,222 | $ | 40,852 | $ | 9,580,223 | $ | 9,621,075 | $ | 1,725 |
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As of December 31, 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 | $ | 4 | $ | 268 | $ | 1,924 | $ | 2,196 | $ | 1,992,820 | $ | 1,995,016 | $ | 848 | |||||||||||||||||||||||||||
Commercial real estate | — | 556 | 1,545 | 2,101 | 3,571,529 | 3,573,630 | 1,111 | ||||||||||||||||||||||||||||||||||
Commercial construction | — | — | — | — | 305,708 | 305,708 | — | ||||||||||||||||||||||||||||||||||
Business banking | 5,279 | 3,311 | 10,196 | 18,786 | 1,320,378 | 1,339,164 | — | ||||||||||||||||||||||||||||||||||
Residential real estate | 9,184 | 2,517 | 4,904 | 16,605 | 1,354,352 | 1,370,957 | 279 | ||||||||||||||||||||||||||||||||||
Consumer home equity | 1,806 | 364 | 3,035 | 5,205 | 863,065 | 868,270 | 9 | ||||||||||||||||||||||||||||||||||
Other consumer | 1,978 | 234 | 517 | 2,729 | 275,051 | 277,780 | — | ||||||||||||||||||||||||||||||||||
Total | $ | 18,251 | $ | 7,250 | $ | 22,121 | $ | 47,622 | $ | 9,682,903 | $ | 9,730,525 | $ | 2,247 |
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 non-performing loans. However, based upon the Company’s 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 non-performing 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 Company’s policy is to have any TDR loans which are on non-accrual status prior to being modified remain on non-accrual 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.
The following tables show the TDR loans on accrual and non-accrual status as of the dates indicated:
As of June 30, 2021 | |||||||||||||||||||||||||||||||||||
TDRs on Accrual Status | TDRs on Non-Accrual Status | Total TDRs | |||||||||||||||||||||||||||||||||
Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 1 | $ | 5,675 | 6 | $ | 9,607 | 7 | $ | 15,282 | ||||||||||||||||||||||||||
Commercial real estate | 1 | 3,520 | — | — | 1 | 3,520 | |||||||||||||||||||||||||||||
Business banking | 5 | 3,945 | 7 | 1,507 | 12 | 5,452 | |||||||||||||||||||||||||||||
Residential real estate | 135 | 21,677 | 26 | 3,129 | 161 | 24,806 | |||||||||||||||||||||||||||||
Consumer home equity | 77 | 3,494 | 12 | 460 | 89 | 3,954 | |||||||||||||||||||||||||||||
Other consumer | 2 | 5 | 1 | 19 | 3 | 24 | |||||||||||||||||||||||||||||
Total | 221 | $ | 38,316 | 52 | $ | 14,722 | 273 | $ | 53,038 |
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As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
TDRs on Accrual Status | TDRs on Non-Accrual Status | Total TDRs | |||||||||||||||||||||||||||||||||
Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 1 | $ | 5,628 | 7 | $ | 6,819 | 8 | $ | 12,447 | ||||||||||||||||||||||||||
Commercial real estate | 1 | 3,521 | 1 | 480 | 2 | 4,001 | |||||||||||||||||||||||||||||
Business banking | 6 | 4,471 | 6 | 722 | 12 | 5,193 | |||||||||||||||||||||||||||||
Residential real estate | 146 | 23,416 | 27 | 3,273 | 173 | 26,689 | |||||||||||||||||||||||||||||
Consumer home equity | 91 | 4,030 | 12 | 815 | 103 | 4,845 | |||||||||||||||||||||||||||||
Other consumer | 3 | 29 | — | — | 3 | 29 | |||||||||||||||||||||||||||||
Total | 248 | $ | 41,095 | 53 | $ | 12,109 | 301 | $ | 53,204 |
The amount of specific reserve associated with the TDRs was $4.0 million and $3.5 million at June 30, 2021 and December 31, 2020, respectively. There were no additional commitments to lend to borrowers who have been a party to a TDR as of both June 30, 2021 and December 31, 2020.
The following tables show 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, 2021 | For the Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||
Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment (1) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post- Modification Outstanding Recorded Investment (1) | ||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Business banking | 1 | $ | 462 | $ | 462 | 1 | $ | 462 | $ | 462 | |||||||||||||||||||||||||
Residential real estate | — | — | — | 1 | 295 | 295 | |||||||||||||||||||||||||||||
Total | 1 | $ | 462 | $ | 462 | 2 | $ | 757 | $ | 757 |
(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.
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 Outstanding Recorded Investment (1) | Number of Contracts | Pre-Modification Outstanding Recorded Investment | Post- 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 |
(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, 2021 and December 31, 2020, the outstanding recorded investment of loans that were new TDR loans during the six months ended June 30, 2021 and the year ended December 31, 2020 was $0.8 million and $3.9 million, respectively.
26
The following table shows the Company’s 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, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Interest only/principal deferred | $ | — | $ | 1,305 | $ | — | $ | 1,305 | |||||||||||||||
Extended maturity | — | 35 | — | 35 | |||||||||||||||||||
Extended maturity and interest only/principal deferred | — | 381 | — | 427 | |||||||||||||||||||
Court-ordered concession | — | 359 | 295 | 999 | |||||||||||||||||||
Principal and interest deferred | 462 | — | 462 | — | |||||||||||||||||||
Total | $ | 462 | $ | 2,080 | $ | 757 | $ | 2,766 |
The following table shows the number of loans and the recorded investment amount of those loans, as of the respective date, 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 non-accrual:
For the Six Months Ended June 30, | |||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||
Number of Contracts | Recorded Investment | Number of Contracts | Recorded Investment | ||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||
Troubled debt restructurings that subsequently defaulted (1): | |||||||||||||||||||||||
Business banking | 1 | $ | 411 | — | $ | — | |||||||||||||||||
Consumer home equity | 1 | 57 | 1 | 1,317 | |||||||||||||||||||
Total | 2 | $ | 468 | 1 | $ | 1,317 |
(1)This table does not reflect any TDRs which were fully charged off, paid off, or otherwise settled during the period. In addition, there were no TDRs modified during the prior 12 months which subsequently defaulted during the three months ended June 30, 2021 and June 30, 2020.
During the three and six months ended June 30, 2021, no amounts were charged-off on TDRs modified in the prior 12 months. During the three and six months ended June 30, 2020, there were $0 and $0.4 million in charge-offs on TDRs modified in the prior 12 months.
Impaired Loans
Impaired loans consist of all loans for which management has determined it is probable that 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 loan’s 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 non-accrual loans, TDR loans, and residential and home equity loans that have been partially charged off.
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The following table summarizes the Company’s impaired loans by loan portfolio as of the dates indicated:
As of June 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
With no related allowance recorded: | |||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 12,433 | $ | 13,752 | $ | — | $ | 9,182 | $ | 11,212 | $ | — | |||||||||||||||||||||||
Commercial real estate | 4,051 | 4,101 | — | 3,955 | 3,974 | — | |||||||||||||||||||||||||||||
Business banking | 4,725 | 6,079 | — | 5,250 | 7,659 | — | |||||||||||||||||||||||||||||
Residential real estate | 13,676 | 15,186 | — | 14,730 | 17,010 | — | |||||||||||||||||||||||||||||
Consumer home equity | 2,105 | 2,105 | — | 2,571 | 2,571 | — | |||||||||||||||||||||||||||||
Other consumer | 24 | 24 | — | 29 | 29 | — | |||||||||||||||||||||||||||||
Sub-total | 37,014 | 41,247 | — | 35,717 | 42,455 | — | |||||||||||||||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||||||||||||||
Commercial and industrial | 7,833 | 8,209 | 4,544 | 8,161 | 8,432 | 4,555 | |||||||||||||||||||||||||||||
Commercial real estate | — | — | — | 480 | 497 | 210 | |||||||||||||||||||||||||||||
Business banking | 13,454 | 19,172 | 937 | 16,651 | 21,146 | 1,435 | |||||||||||||||||||||||||||||
Residential real estate | 11,415 | 11,415 | 1,624 | 12,326 | 12,326 | 1,565 | |||||||||||||||||||||||||||||
Consumer home equity | 1,849 | 1,849 | 263 | 2,274 | 2,274 | 289 | |||||||||||||||||||||||||||||
Sub-total | 34,551 | 40,645 | 7,368 | 39,892 | 44,675 | 8,054 | |||||||||||||||||||||||||||||
Total | $ | 71,565 | $ | 81,892 | $ | 7,368 | $ | 75,609 | $ | 87,130 | $ | 8,054 |
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, 2021 | June 30, 2021 | ||||||||||||||||||||||
Average Recorded Investment | Total Interest Recognized | Average Recorded Investment | Total Interest Recognized | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
With no related allowance recorded: | |||||||||||||||||||||||
Commercial and industrial | $ | 11,800 | $ | 47 | $ | 10,849 | $ | 92 | |||||||||||||||
Commercial real estate | 4,057 | 44 | 4,116 | 89 | |||||||||||||||||||
Business banking | 4,748 | 25 | 4,886 | 51 | |||||||||||||||||||
Residential real estate | 13,942 | 138 | 14,311 | 277 | |||||||||||||||||||
Consumer home equity | 2,176 | 16 | 2,309 | 35 | |||||||||||||||||||
Other consumer | 24 | — | 26 | — | |||||||||||||||||||
Sub-total | 36,747 | 270 | 36,497 | 544 | |||||||||||||||||||
With an allowance recorded: | |||||||||||||||||||||||
Commercial and industrial | 7,774 | — | 7,870 | — | |||||||||||||||||||
Commercial real estate | 155 | — | 405 | — | |||||||||||||||||||
Business banking | 14,714 | 14 | 15,519 | 29 | |||||||||||||||||||
Residential real estate | 11,638 | 121 | 11,927 | 243 | |||||||||||||||||||
Consumer home equity | 1,910 | 14 | 2,028 | 31 | |||||||||||||||||||
Sub-total | 36,191 | 149 | 37,749 | 303 | |||||||||||||||||||
Total | $ | 72,938 | $ | 419 | $ | 74,246 | $ | 847 |
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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 |
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, | ||||||||||
2021 | 2020 | ||||||||||
(In thousands) | |||||||||||
Outstanding balance | $ | 5,000 | $ | 9,982 | |||||||
Carrying amount | 4,526 | 9,297 |
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 table 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, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Balance at beginning of period | $ | 2,031 | $ | 3,346 | $ | 2,495 | $ | 3,923 | |||||||||||||||
Accretion | (416) | (338) | (632) | (760) | |||||||||||||||||||
Other change in expected cash flows | 39 | (10) | (209) | (165) | |||||||||||||||||||
Reclassification from (to) non-accretable difference for loans with improved (deteriorated) cash flows | 1,327 | (4) | 1,327 | (4) | |||||||||||||||||||
Balance at end of period | $ | 2,981 | $ | 2,994 | $ | 2,981 | $ | 2,994 |
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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 non-accretable 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, or participates in syndications through the SNC Program. These participations meet the same underwriting, credit and portfolio management standards as the Company’s other loans and are applied against the same criteria to determine the allowance for loan losses as other loans. As of both June 30, 2021 and December 31, 2020, the Company held commercial loan participation interests totaling $1.0 billion.
The following table summarizes the Company’s loan participations:
As of and for the six months ended June 30, 2021 | As of and for the year ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance | Non-performing Loan Rate (%) | Impaired (%) | Gross Charge-offs | Balance | Non-performing Loan Rate (%) | Impaired (%) | Gross Charge-offs | ||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 584,540 | 1.64 | % | 1.64 | % | $ | — | $ | 598,873 | 1.11 | % | 1.11 | % | $ | — | |||||||||||||||||||||||||||||||
Commercial real estate | 358,558 | 0.00 | % | 0.00 | % | — | 306,202 | 0.00 | % | 0.00 | % | — | |||||||||||||||||||||||||||||||||||
Commercial construction | 85,790 | 0.00 | % | 0.00 | % | — | 119,600 | 0.00 | % | 0.00 | % | — | |||||||||||||||||||||||||||||||||||
Business banking | 28 | 0.00 | % | 0.00 | % | — | 34 | 0.00 | % | 0.00 | % | 15 | |||||||||||||||||||||||||||||||||||
Total loan participations | $ | 1,028,916 | 0.93 | % | 0.93 | % | $ | — | $ | 1,024,709 | 0.65 | % | 0.65 | % | $ | 15 |
5. Leases
The Company leases certain office space and equipment under various non-cancelable 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 upon 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 Company’s consolidated balance sheet.
As of the dates indicated, the Company had the following related to operating leases:
As of June 30, 2021 | As of December 31, 2020 | |||||||
(In thousands) | ||||||||
Right-of-use assets | $ | 76,678 | $ | 81,596 | ||||
Lease liabilities | $ | 80,653 | $ | 85,330 |
Finance leases are not material. Finance lease liabilities are recorded within other liabilities and finance ROU assets are recorded within other assets in the Company’s consolidated balance sheet.
The following tables are a summary of the Company’s components of net lease cost for the periods indicated:
Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | ||||||||||
(In thousands) | |||||||||||
Operating lease cost | $ | 3,521 | $ | 7,082 | |||||||
Finance lease cost | 35 | 66 | |||||||||
Variable lease cost | 457 | 947 | |||||||||
Total lease cost | $ | 4,013 | $ | 8,095 |
30
Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | ||||||||||
(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 |
During the three and six months ended June 30, 2021 the Company made $3.5 million and $7.1 million respectively, in cash payments for operating and finance lease payments. 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.
Supplemental balance sheet information related to operating leases are as follows:
As of June 30, 2021 | As of December 31, 2020 | ||||||||||
Weighted-average remaining lease term (in years) | 8.15 | 8.50 | |||||||||
Weighted-average discount rate | 2.63 | % | 2.65 | % |
6. Goodwill and Other Intangibles
The following tables set forth the carrying amount of goodwill and other intangible assets, net of accumulated amortization by reporting unit at the dates indicated below:
As of June 30, 2021 | |||||||||||||||||
Banking Business | Insurance Agency Business | Net Carrying Amount | |||||||||||||||
(In thousands) | |||||||||||||||||
Balances not subject to amortization | |||||||||||||||||
Goodwill | $ | 298,611 | $ | 73,861 | $ | 372,472 | |||||||||||
Balances subject to amortization | |||||||||||||||||
Insurance agency | — | 7,833 | 7,833 | ||||||||||||||
Core deposits | 97 | — | 97 | ||||||||||||||
Total other intangible assets | 97 | 7,833 | 7,930 | ||||||||||||||
Total goodwill and other intangible assets | $ | 298,708 | $ | 81,694 | $ | 380,402 |
As of December 31, 2020 | |||||||||||||||||
Banking Business | Insurance Agency Business | Net Carrying Amount | |||||||||||||||
(In thousands) | |||||||||||||||||
Balances not subject to amortization | |||||||||||||||||
Goodwill | $ | 298,611 | $ | 70,866 | $ | 369,477 | |||||||||||
Balances subject to amortization | |||||||||||||||||
Insurance agency | — | 6,899 | 6,899 | ||||||||||||||
Core deposits | 158 | — | 158 | ||||||||||||||
Total other intangible assets | 158 | 6,899 | 7,057 | ||||||||||||||
Total goodwill and other intangible assets | $ | 298,769 | $ | 77,765 | $ | 376,534 |
The Company acquired two insurance agencies during the three months ended June 30, 2021. The aggregate purchase price and goodwill recorded as a result of the acquisitions were not material.
31
The Company quantitatively 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 quantitative assessment was most recently performed as of September 30, 2020. During the three months ended December 31, 2020 and the three and six months ended June 30, 2021 there were no events or changes in circumstances not already considered in the Company's annual assessment. The Company considered the economic conditions for the period 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, 2021 or December 31, 2020.
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 the COVID-19 pandemic 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, 2021 or December 31, 2020.
7. Earnings Per Share (“EPS”)
Basic EPS represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common shares (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the entity. Diluted EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period, plus the effect of potential dilutive common share equivalents computed using the treasury stock method. There were no securities that had a dilutive effect during the three and six months ended June 30, 2021, and therefore the weighted-average common shares outstanding used to calculate both basic and diluted EPS are the same. Shares held by the Employee Stock Ownership Plan (“ESOP”) that have not been allocated to employees in accordance with the terms of the ESOP, referred to as “unallocated ESOP shares,” are not deemed outstanding for earnings per share calculations. Earnings per share data is not applicable for the three and six months ended June 30, 2020 as the Company had no shares outstanding.
For the Three Months Ended June 30, 2021 | For the Six Months Ended June 30, 2021 | ||||||||||
(Dollars in thousands, except per share data) | |||||||||||
Net income applicable to common shares | $ | 34,809 | $ | 82,472 | |||||||
Average number of common shares outstanding | 186,758,154 | 186,758,154 | |||||||||
Less: Average unallocated ESOP shares | (14,584,447) | (14,646,782) | |||||||||
Average number of common shares outstanding used to calculate basic earnings per common share | 172,173,707 | 172,111,372 | |||||||||
Common stock equivalents | — | — | |||||||||
Average number of common shares outstanding used to calculate diluted earnings per common share | 172,173,707 | 172,111,372 | |||||||||
Earnings per common share | |||||||||||
Basic and diluted | $ | 0.20 | $ | 0.48 |
All unallocated ESOP shares have been excluded from the calculation of basic and diluted EPS.
8. Low Income Housing Tax Credits and Other Tax Credit Investments
The Community Reinvestment Act (“CRA”) encourages banks to meet the credit needs of their communities for housing and other purposes, particularly in neighborhoods with low or moderate income. The Company has primarily invested in 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. The return on these investments is generally generated through tax credits and tax losses. In addition to LIHTC projects, the Company invests in new markets tax credit projects that qualify for CRA credits and eligible projects that qualify for renewable energy and historic tax credits.
As of June 30, 2021 and December 31, 2020, the Company had $74.4 million and $59.8 million, respectively, in tax credit investments that were included in other assets in the consolidated balance sheets.
32
When permissible, 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 that amortization as a component of income tax expense. The net investment in the housing projects is included in other assets. The Company will continue to use the proportional amortization method on any new qualifying LIHTC investments.
The following table presents the Company’s investments in low income housing projects accounted for using the proportional amortization method for the periods indicated:
As of June 30, 2021 | As of December 31, 2020 | ||||||||||
(In thousands) | |||||||||||
Current recorded investment included in other assets | $ | 70,184 | $ | 58,504 | |||||||
Commitments to fund qualified affordable housing projects included in recorded investment noted above | 41,380 | 31,487 |
The following table presents additional information related to the Company's investments in LIHTC projects for the period indicated:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Tax credits and benefits recognized | $ | 1,523 | $ | 1,539 | $ | 2,987 | $ | 3,058 | |||||||||||||||
Amortization expense included in income tax expense | 1,495 | 1,261 | 2,759 | 2,452 |
The Company accounts for certain other investments in renewable energy projects using the equity method of accounting. These investments in renewable energy projects are included in other assets on the consolidated balance sheet and totaled $4.2 million and $1.2 million as of June 30, 2021 and December 31, 2020, respectively. There were no outstanding commitments related to these investments as of June 30, 2021. There was $1.7 million in outstanding commitments related to these investments as of December 31, 2020.
9. Employee Benefits
Conversion of Defined Benefit Pension Plan and Benefit Equalization Plan to Cash Balance Plan Design
Effective November 1, 2020, the Qualified Defined Benefit Pension Plan (“Defined Benefit Plan”) and the Non-Qualified Benefit Equalization Plan (“BEP”) sponsored by the Company were amended to convert the plans from a traditional final average earnings plan design to a cash balance plan design. Benefits earned under the final average earnings plan design were frozen at October 31, 2020. Starting November 1, 2020, future benefits are earned under the cash balance plan design. Under the cash balance plan design, hypothetical account balances are established for each participant and pension benefits are generally stated as the lump sum amount in that hypothetical account. Contribution credits equal to a percentage of a participant’s annual compensation (if the participant works at least 1,000 hours during the year) and interest credits equal to the greater of the 30-Year Treasury rate for September preceding the current plan year or 3.5% are added to a participant’s account each year. For employees hired prior to November 1, 2020, annual contribution credits generally increase as the participant remains employed with the Company. Employees hired on and after November 1, 2020 receive annual contribution credits equal to 5% of annual compensation, with no future increases. Notwithstanding the preceding sentence, since a cash balance plan is a defined benefit plan, the annual retirement benefit payable at normal retirement (age 65) is an annuity, which is the actuarial equivalent of the participant’s account balance under the cash balance plan design, plus their frozen benefit under the final average earnings plan design. However, under the Defined Benefit Plan, participants may elect, with the consent of their spouses if they are married, to have the benefits distributed as a lump sum rather than an annuity. The lump sum is equal to the sum of the actuarial equivalent of their frozen benefit under the final average earnings plan design, plus their cash balance account. Under the BEP, benefits are generally only payable as a lump sum, which is equal to the sum of the actuarial equivalent of their frozen benefit under the final average earnings plan design, plus their cash balance account.
Pension Plans
The Company provides pension benefits for its employees through membership in the Savings Banks Employees’ Retirement Association. The plan through which benefits are provided is a noncontributory, qualified defined benefit plan. The Company’s annual contribution to the Defined Benefit Plan is based upon standards established by the Pension Protection Act.
33
The contribution is based on an actuarial method intended to provide not only for benefits attributable to service to date, but also for those expected to be earned in the future. The Defined Benefit Plan has a plan year end of October 31.
The Company has an unfunded Defined Benefit Supplemental Executive Retirement Plan (“DB SERP”) that provides certain retired and currently employed officers with defined pension benefits in excess of qualified plan limits imposed by U.S. federal tax law. The DB SERP has a plan year end of December 31.
In addition, the Company has an unfunded Benefit Equalization Plan, the aforementioned BEP, to provide retirement benefits to certain employees whose retirement benefits under the qualified pension plan are limited per the Internal Revenue Code. The BEP has a plan year end of October 31.
The Company also has an unfunded Outside Directors’ Retainer Continuance Plan (“ODRCP”) that provides pension benefits to outside directors who retire from service. The ODRCP has a plan year end of December 31. Effective December 31, 2020, the Company closed the ODRCP to new participants and froze benefit accruals for active participants.
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, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||||||||||
Service cost | $ | 7,898 | $ | 6,231 | $ | 15,794 | $ | 12,463 | |||||||||||||||
Interest cost | 1,267 | 2,615 | 2,536 | 5,232 | |||||||||||||||||||
Expected return on plan assets | (8,141) | (7,425) | (16,283) | (14,850) | |||||||||||||||||||
Past service cost | (2,945) | 6 | (5,890) | 12 | |||||||||||||||||||
Recognized net actuarial loss | 3,538 | 2,361 | 7,075 | 4,721 | |||||||||||||||||||
Net periodic benefit cost | $ | 1,617 | $ | 3,788 | $ | 3,232 | $ | 7,578 |
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 ODRCP are recognized within professional services in the statement of income. The remaining components of net periodic benefit cost are recognized in other noninterest expense in the statement of income. The Company’s non-service cost expenses for the Defined Benefit Plan and the BEP decreased by $3.8 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 and decreased by $7.7 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This was primarily due to the conversion of the Company's Defined Benefit Plan and BEP from a traditional final average earnings plan design to a cash balance plan design.
In accordance with the Pension Protection Act, the Company was not required to make any contributions to the Defined Benefit Plan for the plan year beginning November 1, 2020, and did not make any contributions to the Defined Benefit Plan during the six months ended June 30, 2021. During the six months ended June 30, 2020, the Company made contributions to the Defined Benefit Plan of $32.5 million.
Rabbi Trust Variable Interest Entity
The Company established a rabbi trust to meet its obligations under certain executive non-qualified retirement benefits and deferred compensation plans and to mitigate the expense volatility of the aforementioned retirement plans. The rabbi trust is considered a variable interest entity (“VIE”) as the equity investment at risk is insufficient to permit the trust to finance its activities without additional subordinated financial support from the Company. The Company is considered the primary beneficiary of the rabbi trust as it has the power to direct the activities of the rabbi trust that significantly affect the rabbi trust’s economic performance and it has the obligation to absorb losses of the rabbi trust that could potentially be significant to the rabbi trust by virtue of its contingent call options on the rabbi trust’s assets in the event of the Company’s bankruptcy. As the primary beneficiary of this VIE, the Company consolidates the rabbi trust investments. In general, the rabbi trust investments and any earnings received thereon are accumulated, reinvested and used exclusively for trust purposes. These rabbi trust investments consist primarily of cash and cash equivalents, U.S. government agency obligations, equity securities, mutual funds and other exchange-traded funds, and are recorded at fair value in other assets in the Company's consolidated balance sheet. Changes in fair value are recorded in noninterest income. At June 30, 2021 and December 31, 2020 the amount of rabbi trust investments at fair value were $98.9 million and $91.7 million, respectively.
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Investments in rabbi trust accounts are recorded at fair value within the Company's consolidated balance sheet with changes in fair value recorded through noninterest income. The following table presents the book value, mark-to-market, and fair value of assets held in rabbi trust accounts by asset type:
As of June 30, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||
Book Value | Mark-to-Market | Fair Value | Book Value | Mark-to-Market | Fair Value | ||||||||||||||||||||||||||||||
Asset Type | (In thousands) | ||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 5,462 | $ | — | $ | 5,462 | $ | 5,157 | $ | — | $ | 5,157 | |||||||||||||||||||||||
Equities | 64,878 | 20,847 | 85,725 | 59,235 | 19,492 | 78,727 | |||||||||||||||||||||||||||||
Fixed income | 7,499 | 214 | 7,713 | 7,441 | 358 | 7,799 | |||||||||||||||||||||||||||||
Total assets | $ | 77,839 | $ | 21,061 | $ | 98,900 | $ | 71,833 | $ | 19,850 | $ | 91,683 |
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 Company’s 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 the 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:
As of June 30, 2021 | As of December 31, 2020 | ||||||||||
(In thousands) | |||||||||||
Commitments to extend credit | $ | 4,129,771 | $ | 3,818,952 | |||||||
Standby letters of credit | 61,762 | 60,221 | |||||||||
Forward commitments to sell loans | 45,339 | 41,160 |
Other Contingencies
The Company has been named a defendant in various legal proceedings arising in the normal course of business. Set out below are descriptions of significant legal matters involving the Company and its subsidiaries. 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 Company’s consolidated financial statements.
In the second quarter of 2021, the Company entered into a preliminary settlement of two purported class action matters concerning overdraft and nonsufficient funds fees. The matters were filed in the Massachusetts Superior Court in November 2019 and April 2021, respectively, and are expected to be consolidated into one matter for final settlement purposes. As of June 30, 2021, the Company estimated the settlement expense, including related costs, to be $3.3 million.
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 (the “FRBB”). However, in response to the COVID-19 pandemic, the
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Federal Reserve temporarily eliminated reserve requirements and therefore there was no minimum reserve requirement as of either June 30, 2021 or December 31, 2020.
11. Derivative Financial Instruments
The Company uses derivative financial instruments to manage its 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 Company’s 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 Company’s 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 may enter into interest rate swaps in which it pays floating and receives fixed interest in order to manage its interest rate risk exposure to the variability in interest cash flows on certain floating-rate commercial loans. For interest rate swaps that are accounted for as cash flow hedges, 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. As of June 30, 2021 and December 31, 2020, the Company does not have any active interest rate swaps which qualify as cash flow hedges for accounting purposes.
Due to the phase-out, and eventual discontinuation, of the LIBOR, central clearinghouses have begun to transition to alternative rates for valuation purposes. As of October 16, 2020, the Company changed its valuation methodology to reflect changes made by the Chicago Mercantile Exchange (“CME”), through which the Company clears derivative financial instruments that are eligible for clearing. The changes from the CME changed the discounting methodology and interest calculation of cash margin from overnight index swap to secured overnight financing rate (also known as SOFR) for U.S. dollar cleared interest rate swaps. The Company believes that its improvements to its valuation methodology will result in valuations for cleared interest rate swaps that better reflect prices obtainable in the markets in which the Company transacts. The changes in valuation methodology were applied prospectively as a change in accounting estimate and are immaterial to the Company’s financial statements.
The following table presents the pre-tax impact of terminated cash flow hedges on accumulated other comprehensive income (“AOCI”) for the three and six months ended June 30, 2021 and June 30, 2020:
For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Unrealized gains on terminated hedges included in AOCI – beginning of respective period | $ | 33,199 | $ | — | $ | 41,473 | $ | — | |||||||||||||||
Unrealized gains on terminated hedges arising during the period | — | 30,952 | — | 30,952 | |||||||||||||||||||
Reclassification adjustments for amortization of unrealized (gains) into net income | (8,219) | (373) | (16,493) | (373) | |||||||||||||||||||
Unrealized gains on terminated hedges included in AOCI – June 30 | $ | 24,980 | $ | 30,579 | $ | 24,980 | $ | 30,579 |
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The balance of terminated cash flow hedges in AOCI will be amortized into earnings through January 2023. The Company expects approximately $23.1 million to be reclassified into interest income from other comprehensive income related to the Company’s terminated cash flow hedges in the next 12 months as of June 30, 2021.
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.
Foreign exchange contracts consist of those offered to commercial customers and those entered into to hedge the Company’s 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 tables present the Company’s customer-related derivative positions as of the dates indicated below for those derivatives not designated as hedging.
June 30, 2021 | |||||||||||
Number of Positions | Total Notional | ||||||||||
(Dollars in thousands) | |||||||||||
Interest rate swaps | 536 | $ | 3,406,954 | ||||||||
Risk participation agreements | 68 | 277,452 | |||||||||
Foreign exchange contracts: | |||||||||||
Matched commercial customer book | 72 | 9,467 | |||||||||
Foreign currency loan | 5 | 6,886 |
December 31, 2020 | |||||||||||
Number of Positions | Total Notional | ||||||||||
(Dollars in thousands) | |||||||||||
Interest rate swaps | 576 | $ | 3,652,385 | ||||||||
Risk participation agreements | 70 | 287,732 | |||||||||
Foreign exchange contracts: | |||||||||||
Matched commercial customer book | 40 | 4,242 | |||||||||
Foreign currency loan | 3 | 10,798 |
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.
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The table below presents the fair value of the Company’s derivative financial instruments, as well as their classification on the balance sheet for the periods indicated. There were no derivatives designated as hedging instruments at June 30, 2021 or December 31, 2020.
Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||
Balance Sheet Location | Fair Value at June 30, 2021 | Fair Value at December 31, 2020 | Balance Sheet Location | Fair Value at June 30, 2021 | Fair Value at December 31, 2020 | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
Customer-related positions: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | Other assets | $ | 92,980 | $ | 141,822 | Other liabilities | $ | 28,498 | $ | 42,600 | |||||||||||||||||||||||||
Risk participation agreements | Other assets | 432 | 722 | Other liabilities | 675 | 1,230 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts - matched customer book | Other assets | 94 | 90 | Other liabilities | 89 | 77 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts - foreign currency loan | Other assets | 48 | 9 | Other liabilities | — | 69 | |||||||||||||||||||||||||||||
Total | $ | 93,554 | $ | 142,643 | $ | 29,262 | $ | 43,976 |
The table below presents the net effect of the Company’s derivative financial instruments on the consolidated income statements as well as the effect of the Company’s derivative financial instruments included in other comprehensive income (“OCI”) as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Derivatives designated as hedges: | |||||||||||||||||||||||
Gain in OCI on derivatives | $ | — | $ | 3,455 | $ | — | $ | 47,011 | |||||||||||||||
Gain reclassified from OCI into interest income (effective portion) | $ | 8,219 | $ | 7,134 | $ | 16,493 | $ | 10,246 | |||||||||||||||
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) gain recognized in interest rate swap income | $ | (1,087) | $ | (687) | $ | 3,764 | $ | (6,967) | |||||||||||||||
(Loss) gain recognized in interest rate swap income for risk participation agreements | (105) | (80) | 264 | (381) | |||||||||||||||||||
(Loss) gain recognized in other income for foreign currency exchange contracts: | |||||||||||||||||||||||
Matched commercial customer book | (14) | 96 | (8) | 69 | |||||||||||||||||||
Foreign currency loan | 36 | (367) | 109 | 30 | |||||||||||||||||||
Total gain (loss) for derivatives not designated as hedges | $ | (1,170) | $ | (1,038) | $ | 4,129 | $ | (7,249) |
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.
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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 Company’s exposure related to its customer-related interest rate swap derivative consists of exposure on cleared derivative transactions and exposure on non-cleared derivative transactions.
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, 2021 and December 31, 2020, the Company’s exposure to CME for settled variation margin in excess of the customer-related interest rate swap termination values was $0.5 million, and less than $0.1 million, respectively. In addition, at June 30, 2021 and December 31, 2020, the Company had posted initial-margin collateral in the form of a U.S. Treasury note amounting to $49.5 million and $60.4 million, respectively, to CME for these derivatives. The U.S. Treasury note was considered a restricted asset and was included in available for sale securities within the Company's consolidated balance sheets.
At June 30, 2021 and December 31, 2020 the fair value of all customer-related interest rate swap derivatives with credit-risk related contingent features that were in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, totaled $26.1 million and $42.6 million, respectively. The Company has minimum collateral posting thresholds with its 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, 2021 and December 31, 2020, the Company had posted collateral in the form of cash amounting to $35.0 million and $49.2 million, respectively, which was considered to be a restricted asset and was included in other short-term investments within the Company's consolidated balance sheets. If the Company had breached any of these provisions at June 30, 2021 or December 31, 2020, 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 Company’s 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, 2021 and December 31, 2020, it was determined that no additional collateral would have to be posted to immediately settle these instruments.
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The following tables present the Company’s 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:
As of June 30, 2021 | |||||||||||||||||||||||||||||||||||
Gross Amounts Recognized | Gross Amounts Offset in the Statement of Financial Position | Net Amounts Presented in the Statement of Financial Position | Gross Amounts Not Offset in the Statement of Financial Position | Net Amount | |||||||||||||||||||||||||||||||
Description | Financial Instruments | Collateral Pledged (Received) | |||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Derivative Assets | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
Customer-related positions: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | 92,980 | — | 92,980 | 1,057 | — | 91,923 | |||||||||||||||||||||||||||||
Risk participation agreements | 432 | — | 432 | — | — | 432 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts – matched customer book | 94 | — | 94 | — | — | 94 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts – foreign currency loan | 48 | — | 48 | — | — | 48 | |||||||||||||||||||||||||||||
$ | 93,554 | $ | — | $ | 93,554 | $ | 1,057 | $ | — | $ | 92,497 | ||||||||||||||||||||||||
Derivative Liabilities | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
Customer-related positions: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | 28,498 | — | 28,498 | 1,057 | 27,441 | — | |||||||||||||||||||||||||||||
Risk participation agreements | 675 | — | 675 | — | — | 675 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts – matched customer book | 89 | — | 89 | — | — | 89 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts – foreign currency loan | — | — | — | — | — | — | |||||||||||||||||||||||||||||
$ | 29,262 | $ | — | $ | 29,262 | $ | 1,057 | $ | 27,441 | $ | 764 |
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As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
Gross Amounts Recognized | Gross Amounts Offset in the Statement of Financial Position | Net Amounts Presented in the Statement of Financial Position | Gross Amounts Not Offset in the Statement of Financial Position | Net Amount | |||||||||||||||||||||||||||||||
Description | Financial Instruments | Collateral Pledged (Received) | |||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Derivative Assets | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
Customer-related positions: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | 141,822 | — | 141,822 | 48 | — | 141,774 | |||||||||||||||||||||||||||||
Risk participation agreements | 722 | — | 722 | — | — | 722 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts – matched customer book | 90 | — | 90 | — | (1) | 89 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts – foreign currency loan | 9 | — | 9 | — | — | 9 | |||||||||||||||||||||||||||||
$ | 142,643 | $ | — | $ | 142,643 | $ | 48 | $ | (1) | $ | 142,594 | ||||||||||||||||||||||||
Derivative Liabilities | |||||||||||||||||||||||||||||||||||
Interest rate swaps | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
Customer-related positions: | |||||||||||||||||||||||||||||||||||
Interest rate swaps | 42,600 | — | 42,600 | 48 | 42,552 | — | |||||||||||||||||||||||||||||
Risk participation agreements | 1,230 | — | 1,230 | — | — | 1,230 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts – matched customer book | 77 | — | 77 | — | — | 77 | |||||||||||||||||||||||||||||
Foreign currency exchange contracts – foreign currency loan | 69 | — | 69 | — | — | 69 | |||||||||||||||||||||||||||||
$ | 43,976 | $ | — | $ | 43,976 | $ | 48 | $ | 42,552 | $ | 1,376 |
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 Company’s 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 Company’s 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.
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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 Company’s entire holdings of a particular financial instrument. Because no active market exists for a portion of the Company’s 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.
Available for Sale Securities
Available for sale securities recorded at fair value consisted of U.S. Treasury securities, U.S. government-sponsored residential and commercial mortgage-backed securities, U.S. Agency bonds, and state and municipal bonds.
The Company’s U.S. Treasury securities are traded on active markets and therefore these securities were classified as Level 1.
The fair value of U.S. Agency bonds are evaluated using relevant trade data, benchmark quotes and spreads obtained from publicly available trade data, and generated on a price, yield or spread basis as determined by the observed market data. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
The fair value of U.S. government-sponsored residential and commercial mortgage-backed securities were estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
The fair value of state and municipal bonds 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. Therefore, these securities were categorized as Level 2 given the use of observable inputs.
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 Company’s securities available for sale, by type, is disclosed in the Securities footnote.
Loans Held for Sale
The 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. These assets were classified as Level 2 given the use of observable inputs.
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.
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 loan’s effective interest rate.
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Loans are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs.
FHLB Stock
The fair value of FHLB stock approximates the carrying amount based on the redemption provisions of the FHLB. These assets were classified as Level 2.
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 given the use of observable inputs. The equity securities, mutual funds 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 as they were valued based upon quoted prices from the market. Mutual funds at net asset value amounted to $54.5 million at June 30, 2021 and $53.9 million at December 31, 2020. There were no redemption restrictions on these mutual funds at the end of any period presented.
Bank-Owned Life Insurance
The fair value of bank-owned life insurance was based upon quotations received from bank-owned life insurance dealers. These assets were classified as Level 2 given the use of observable inputs.
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. Deposits were classified as Level 2 given the use of observable market inputs.
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).
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. FHLB advances were classified as Level 2.
Escrow Deposits of Borrowers
The fair value of escrow deposits of borrowers, which have no stated maturity, approximates the carrying amount. Escrow deposits of borrowers were classified as Level 2.
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 volatility. In addition, for customer-related interest rate swaps, the analysis reflects a credit valuation adjustment to reflect the Company’s own non-performance risk and the respective counterparty’s non-performance 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, 2021 and December 31, 2020, the impact of
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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 were therefore 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.
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Fair Value of Assets and Liabilities Measured on a Recurring Basis
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020:
Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
Balance as of June 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
Description | |||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Assets | |||||||||||||||||||||||
Securities available for sale | |||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities | $ | 3,478,529 | $ | — | $ | 3,478,529 | $ | — | |||||||||||||||
Government-sponsored commercial mortgage-backed securities | 181,795 | — | 181,795 | — | |||||||||||||||||||
U.S. Agency bonds | 841,005 | — | 841,005 | — | |||||||||||||||||||
U.S. Treasury securities | 69,331 | 69,331 | — | — | |||||||||||||||||||
State and municipal bonds and obligations | 278,121 | — | 278,121 | — | |||||||||||||||||||
Rabbi trust investments | 98,900 | 91,187 | 7,713 | — | |||||||||||||||||||
Loans held for sale | 2,734 | — | 2,734 | — | |||||||||||||||||||
Interest rate swap contracts | |||||||||||||||||||||||
Customer-related positions | 92,980 | — | 92,980 | — | |||||||||||||||||||
Risk participation agreements | 432 | — | 432 | — | |||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||
Matched customer book | 94 | — | 94 | — | |||||||||||||||||||
Foreign currency loan | 48 | — | 48 | — | |||||||||||||||||||
Total | $ | 5,043,969 | $ | 160,518 | $ | 4,883,451 | $ | — | |||||||||||||||
Liabilities | |||||||||||||||||||||||
Interest rate swap contracts | |||||||||||||||||||||||
Customer-related positions | $ | 28,498 | $ | — | $ | 28,498 | $ | — | |||||||||||||||
Risk participation agreements | 675 | — | 675 | — | |||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||
Matched customer book | 89 | — | 89 | — | |||||||||||||||||||
Foreign currency loan | — | — | — | — | |||||||||||||||||||
Total | $ | 29,262 | $ | — | $ | 29,262 | $ | — |
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Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
Description | Balance as of December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Assets | |||||||||||||||||||||||
Securities available for sale | |||||||||||||||||||||||
Government-sponsored residential mortgage-backed securities | $ | 2,148,800 | $ | — | $ | 2,148,800 | $ | — | |||||||||||||||
Government-sponsored commercial mortgage-backed securities | 17,081 | — | 17,081 | — | |||||||||||||||||||
U.S. Agency bonds | 666,709 | — | 666,709 | — | |||||||||||||||||||
U.S. Treasury securities | 70,369 | 70,369 | — | — | |||||||||||||||||||
State and municipal bonds and obligations | 280,902 | — | 280,902 | — | |||||||||||||||||||
Rabbi trust investments | 91,683 | 83,884 | 7,799 | — | |||||||||||||||||||
Loans held for sale | 1,140 | — | 1,140 | — | |||||||||||||||||||
Interest rate swap contracts | |||||||||||||||||||||||
Customer-related positions | 141,822 | — | 141,822 | — | |||||||||||||||||||
Risk participation agreements | 722 | — | 722 | — | |||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||
Matched customer book | 90 | — | 90 | — | |||||||||||||||||||
Foreign currency loan | 9 | — | 9 | — | |||||||||||||||||||
Total | $ | 3,419,327 | $ | 154,253 | $ | 3,265,074 | $ | — | |||||||||||||||
Liabilities | |||||||||||||||||||||||
Interest rate swap contracts | |||||||||||||||||||||||
Customer-related positions | $ | 42,600 | $ | — | $ | 42,600 | $ | — | |||||||||||||||
Risk participation agreements | 1,230 | — | 1,230 | — | |||||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||
Matched customer book | 77 | — | 77 | — | |||||||||||||||||||
Foreign currency loan | 69 | — | 69 | — | |||||||||||||||||||
Total | $ | 43,976 | $ | — | $ | 43,976 | $ | — |
There were no transfers to or from Level 1, 2 and 3 during the six months ended June 30, 2021 and year ended December 31, 2020.
The Company held no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2021 or December 31, 2020.
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis
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, 2021 and December 31, 2020.
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Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
Description | Balance as of June 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Assets | |||||||||||||||||||||||
Collateral-dependent impaired loans whose fair value is based upon appraisals | $ | 13,109 | $ | — | $ | — | $ | 13,109 |
Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
Description | Balance as of December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Assets | |||||||||||||||||||||||
Collateral-dependent impaired loans whose fair value is based upon appraisals | $ | 11,036 | $ | — | $ | — | 11,036 |
For the valuation of the 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 a reserve was established based upon expected cash flows discounted at the loan’s effective interest rate are not deemed to be measured at fair value.
Disclosures about Fair Value of Financial Instruments
The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the dates indicated:
Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||
Description | Carrying Value as of June 30, 2021 | Fair Value as of June 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||
Loans, net of allowance for loan losses | $ | 9,485,699 | $ | 9,632,348 | $ | — | $ | — | $ | 9,632,348 | |||||||||||||||||||
FHLB stock | 10,601 | 10,601 | — | 10,601 | — | ||||||||||||||||||||||||
Bank-owned life insurance | 79,634 | 79,634 | — | 79,634 | — | ||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||
Deposits | $ | 13,250,433 | $ | 13,250,334 | $ | — | $ | 13,250,334 | $ | — | |||||||||||||||||||
FHLB advances | 14,323 | 14,072 | — | 14,072 | — | ||||||||||||||||||||||||
Escrow deposits from borrowers | 14,119 | 14,119 | — | 14,119 | — |
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Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||
Description | Carrying Value as of December 31, 2020 | Fair Value as of December 31, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||||
Loans, net of allowance for loan losses | $ | 9,593,958 | $ | 9,779,195 | $ | — | $ | — | $ | 9,779,195 | |||||||||||||||||||
FHLB stock | 8,805 | 8,805 | — | 8,805 | — | ||||||||||||||||||||||||
Bank-owned life insurance | 78,561 | 78,561 | — | 78,561 | — | ||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||
Deposits | $ | 12,155,784 | $ | 12,155,843 | $ | — | $ | 12,155,843 | $ | — | |||||||||||||||||||
FHLB advances | 14,624 | 14,434 | — | 14,434 | — | ||||||||||||||||||||||||
Escrow deposits from borrowers | 13,425 | 13,425 | — | 13,425 | — |
This summary excludes certain financial assets and liabilities for which the carrying value approximates fair value. For financial assets, these may include cash and due from banks, federal funds sold and short-term investments. For financial liabilities, these may include federal funds purchased. These instruments would all be considered to be classified as Level 1 within the fair value hierarchy. Also excluded from the summary are financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.
14. Revenue from Contracts with Customers
Revenue from contracts with customers within the scope of ASC, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) 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.
Performance obligations
The Company’s 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 Company’s consolidated financial statements.
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A portion of the Company's noninterest income is derived from contracts with customers within the scope of ASC 606. The Company has disaggregated such revenues 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, | ||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Insurance commissions | $ | 23,664 | $ | 22,697 | $ | 51,811 | $ | 50,174 | |||||||||||||||
Service charges on deposit accounts | 5,708 | 4,364 | 11,075 | 10,462 | |||||||||||||||||||
Trust and investment advisory fees | 6,074 | 5,194 | 11,737 | 10,289 | |||||||||||||||||||
Debit card processing fees | 3,170 | 2,337 | 5,919 | 4,807 | |||||||||||||||||||
Other non-interest income | 2,123 | 1,485 | 3,915 | 3,537 | |||||||||||||||||||
Total noninterest income in-scope of ASC 606 | 40,739 | 36,077 | 84,457 | 79,269 | |||||||||||||||||||
Total noninterest income out-of-scope of ASC 606 | 4,994 | 11,580 | 16,488 | 1,757 | |||||||||||||||||||
Total noninterest income | $ | 45,733 | $ | 47,657 | $ | 100,945 | $ | 81,026 |
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. 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 Company’s 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 $14.4 million as of June 30, 2021, and $15.8 million as of December 31, 2020, 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.
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Cash management services are a subset of the deposit service charges revenue stream. These services include automated clearing house, or 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 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 month’s 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 $0.9 million and $1.0 million as of June 30, 2021 and December 31, 2020 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 customer’s request.
The asset management and/or custody fees are primarily based upon a percentage of the monthly valuation of the principal assets in the customer’s account. Customers are also charged a base fee which is prorated over a 12-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.
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 network’s 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, 2021 and December 31, 2020 and were included in other assets.
Other Noninterest Income
The Company earns various types of other noninterest income that have been aggregated into one general revenue stream in the table noted above. Noninterest income includes, but is not limited to, the following types of revenue with customers: safe deposit rent, ATM surcharge fees and customer checkbook fees. Individually, these sources of noninterest income are immaterial.
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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, 2021 | Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||
Pre Tax Amount | Tax (Expense) Benefit | After Tax Amount | Pre Tax Amount | Tax (Expense) Benefit | After Tax Amount | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Unrealized gains (losses) on securities available for sale: | |||||||||||||||||||||||||||||||||||
Change in fair value of securities available for sale | $ | 32,632 | $ | (7,203) | $ | 25,429 | $ | (62,347) | $ | 13,779 | $ | (48,568) | |||||||||||||||||||||||
Less: reclassification adjustment for gains included in net income | 1 | — | 1 | 1,165 | (257) | 908 | |||||||||||||||||||||||||||||
Net change in fair value of securities available for sale | 32,631 | (7,203) | 25,428 | (63,512) | 14,036 | (49,476) | |||||||||||||||||||||||||||||
Unrealized gains (losses) on cash flow hedges: | |||||||||||||||||||||||||||||||||||
Change in fair value of cash flow hedges | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Less: net cash flow hedge gains reclassified into interest income(1) | 8,219 | (2,310) | 5,909 | 16,493 | (4,636) | 11,857 | |||||||||||||||||||||||||||||
Net change in fair value of cash flow hedges | (8,219) | 2,310 | (5,909) | (16,493) | 4,636 | (11,857) | |||||||||||||||||||||||||||||
Defined benefit pension plans: | |||||||||||||||||||||||||||||||||||
Change in actuarial net loss | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Less: amortization of actuarial net loss | (3,538) | 995 | (2,543) | (7,075) | 1,989 | (5,086) | |||||||||||||||||||||||||||||
Less: amortization of prior service cost | 2,945 | (828) | 2,117 | 5,890 | (1,656) | 4,234 | |||||||||||||||||||||||||||||
Net change in other comprehensive income for defined benefit postretirement plans | 593 | (167) | 426 | 1,185 | (333) | 852 | |||||||||||||||||||||||||||||
Total other comprehensive income (loss) | $ | 25,005 | $ | (5,060) | $ | 19,945 | $ | (78,820) | $ | 18,339 | $ | (60,481) |
(1)Represents amortization of realized gains on terminated cash flow hedges for the three and six months ended June 30, 2021. The total realized gain of $41.2 million, net of tax, will be recognized in earnings through January 2023. The balance of this gain had amortized to $18.0 million, net of tax, at June 30, 2021.
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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 | ||||||||||||||||||||||||||||||
(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 | |||||||||||||||||||||||||||||
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 gains reclassified into interest income(1) | 7,134 | (2,005) | 5,129 | 10,246 | (2,880) | 7,366 | |||||||||||||||||||||||||||||
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: | |||||||||||||||||||||||||||||||||||
Change in actuarial net loss | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Less: amortization of actuarial net loss | (4,721) | 1,326 | (3,395) | (4,721) | 1,326 | (3,395) | |||||||||||||||||||||||||||||
Less: amortization of prior service cost | (12) | 3 | (9) | (12) | 3 | (9) | |||||||||||||||||||||||||||||
Net change in other comprehensive income for defined benefit postretirement plans | 4,733 | (1,329) | 3,404 | 4,733 | (1,329) | 3,404 | |||||||||||||||||||||||||||||
Total other comprehensive income | $ | 1,402 | $ | (356) | $ | 1,046 | $ | 75,526 | $ | (19,213) | $ | 56,313 |
(1)Includes amortization of $0.3 million of the remaining balance of realized but unrecognized gains, net of tax, on terminated cash flow hedges for the three and six months ended June 30, 2020. The original realized 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.
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, 2021 | $ | 45,672 | $ | 29,815 | $ | (21,253) | $ | 54,234 | |||||||||||||||
Other comprehensive loss before reclassifications | (48,568) | — | — | (48,568) | |||||||||||||||||||
Less: Amounts reclassified from accumulated other comprehensive income | 908 | 11,857 | (852) | 11,913 | |||||||||||||||||||
Net current-period other comprehensive (loss) income | (49,476) | (11,857) | 852 | (60,481) | |||||||||||||||||||
Ending Balance: June 30, 2021 | $ | (3,804) | $ | 17,958 | $ | (20,401) | $ | (6,247) | |||||||||||||||
Beginning Balance: January 1, 2020 | $ | 21,798 | $ | 15,624 | $ | (81,269) | $ | (43,847) | |||||||||||||||
Other comprehensive income before reclassifications | 26,701 | 33,796 | — | 60,497 | |||||||||||||||||||
Less: Amounts reclassified from accumulated other comprehensive income (loss) | 222 | 7,366 | (3,404) | 4,184 | |||||||||||||||||||
Net current-period other comprehensive income | 26,479 | 26,430 | 3,404 | 56,313 | |||||||||||||||||||
Ending Balance: June 30, 2020 | $ | 48,277 | $ | 42,054 | $ | (77,865) | $ | 12,466 |
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16. Segment Reporting
The Company’s 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.
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, 2021 and 2020, and for the six months ended June 30, 2021 and 2020, was as follows:
As of and for the three months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
Banking Business | Insurance Agency Business | Other / Eliminations | Total | Banking Business | Insurance Agency Business | Other / Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 104,608 | $ | — | $ | — | $ | 104,608 | $ | 98,755 | $ | — | $ | — | $ | 98,755 | |||||||||||||||||||||||||||||||
(Release of) provision for loan losses | (3,300) | — | — | (3,300) | 8,600 | — | — | 8,600 | |||||||||||||||||||||||||||||||||||||||
Net interest income after provision for loan losses | 107,908 | — | — | 107,908 | 90,155 | — | — | 90,155 | |||||||||||||||||||||||||||||||||||||||
Noninterest income | 21,567 | 24,166 | — | 45,733 | 23,779 | 23,886 | (8) | 47,657 | |||||||||||||||||||||||||||||||||||||||
Noninterest expense | 87,799 | 20,496 | (960) | 107,335 | 81,713 | 20,084 | (1,032) | 100,765 | |||||||||||||||||||||||||||||||||||||||
Income before provision for income taxes | 41,676 | 3,670 | 960 | 46,306 | 32,221 | 3,802 | 1,024 | 37,047 | |||||||||||||||||||||||||||||||||||||||
Income tax provision | 10,464 | 1,033 | — | 11,497 | 6,121 | 1,076 | — | 7,197 | |||||||||||||||||||||||||||||||||||||||
Net income | $ | 31,212 | $ | 2,637 | $ | 960 | $ | 34,809 | $ | 26,100 | $ | 2,726 | $ | 1,024 | $ | 29,850 | |||||||||||||||||||||||||||||||
Total assets | $ | 16,905,267 | $ | 209,416 | $ | (67,230) | $ | 17,047,453 | $ | 13,867,746 | $ | 193,320 | $ | (64,543) | $ | 13,996,523 | |||||||||||||||||||||||||||||||
Total liabilities | $ | 13,628,092 | $ | 55,969 | $ | (67,230) | $ | 13,616,831 | $ | 12,314,286 | $ | 53,150 | $ | (64,543) | $ | 12,302,893 |
For the six months ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
Banking Business | Insurance Agency Business | Other / Eliminations | Total | Banking Business | Insurance Agency Business | Other / Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 204,699 | $ | — | $ | — | $ | 204,699 | $ | 198,901 | $ | — | $ | — | $ | 198,901 | |||||||||||||||||||||||||||||||
(Release of) provision for loan losses | (3,880) | — | — | (3,880) | 37,200 | — | — | 37,200 | |||||||||||||||||||||||||||||||||||||||
Net interest income after provision for loan losses | 208,579 | — | — | 208,579 | 161,701 | — | — | 161,701 | |||||||||||||||||||||||||||||||||||||||
Noninterest income | 48,527 | 52,450 | (32) | 100,945 | 30,647 | 50,408 | (29) | 81,026 | |||||||||||||||||||||||||||||||||||||||
Noninterest expense | 163,074 | 40,307 | (1,997) | 201,384 | 160,178 | 37,725 | (1,966) | 195,937 | |||||||||||||||||||||||||||||||||||||||
Income before provision for income taxes | 94,032 | 12,143 | 1,965 | 108,140 | 32,170 | 12,683 | 1,937 | 46,790 | |||||||||||||||||||||||||||||||||||||||
Income tax provision | 22,257 | 3,411 | — | 25,668 | 4,906 | 3,589 | — | 8,495 | |||||||||||||||||||||||||||||||||||||||
Net income | $ | 71,775 | $ | 8,732 | $ | 1,965 | $ | 82,472 | $ | 27,264 | $ | 9,094 | $ | 1,937 | $ | 38,295 |
ITEM 2. MANAGEMENT’S 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, 2021, and our results of operations for the three and six months ended June 30, 2021 and 2020. 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 on Form 10-Q and the Company’s 2020 Form 10-K.
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Forward-Looking Statements
When we use the terms “we,” “us,” “our,” and the “Company,” we mean Eastern Bankshares, Inc., a Massachusetts corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates.
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 Company’s 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 the rate of inflation of prices of goods and services in our market and nationally and changes in expectations regarding future inflation rates;
•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 Company’s participation in the PPP 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
•other risks and uncertainties detailed in Part I, Item 1A of our 2020 Form 10-K, as updated by Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q for the three months ended March 31, 2021 (“Q1 Form 10-Q”), and as may be further updated in our filings with the SEC from time to time.
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 GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities
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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 our 2020 Form 10-K. There have been no material changes in critical accounting policies during the three and six months ended June 30, 2021.
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.
As of June 30, 2021 | As of December 31, 2020 | ||||||||||
(In thousands, except per share data) | |||||||||||
Selected Financial Position Data: | |||||||||||
Total assets | $ | 17,047,453 | $ | 15,964,190 | |||||||
Cash and cash equivalents | 1,564,247 | 2,054,070 | |||||||||
Securities available for sale | 4,848,781 | 3,183,861 | |||||||||
Loans, net of allowance for loan losses and unamortized premiums, net of unearned discounts and deferred fees | 9,485,699 | 9,593,958 | |||||||||
FHLB stock, at cost | 10,601 | 8,805 | |||||||||
Goodwill and other intangibles, net | 380,402 | 376,534 | |||||||||
Total liabilities | 13,616,831 | 12,536,138 | |||||||||
Total deposits | 13,250,433 | 12,155,784 | |||||||||
Total borrowings | 28,442 | 28,049 | |||||||||
Total shareholders’ equity | 3,430,622 | 3,428,052 | |||||||||
Nonperforming loans | 41,632 | 43,252 | |||||||||
Nonperforming assets | 41,670 | 43,252 | |||||||||
Per Share Data: | |||||||||||
Book value | $ | 18.37 | $ | 18.36 | |||||||
Tangible book value (1) | $ | 16.33 | $ | 16.34 |
(1)Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” in this Part I, Item 2.
Six Months Ended June 30, | |||||||||||
2021 | 2020 | ||||||||||
(In thousands, except per share data) | |||||||||||
Selected Operating Data: | |||||||||||
Interest and dividend income | $ | 206,814 | $ | 208,092 | |||||||
Interest expense | 2,115 | 9,191 | |||||||||
Net interest income | 204,699 | 198,901 | |||||||||
(Release of) provision for loan losses | (3,880) | 37,200 | |||||||||
Net interest income after provision for loan losses | 208,579 | 161,701 | |||||||||
Noninterest income | 100,945 | 81,026 | |||||||||
Noninterest expense | 201,384 | 195,937 | |||||||||
Income before income taxes | 108,140 | 46,790 | |||||||||
Provision for income taxes | 25,668 | 8,495 | |||||||||
Net income | $ | 82,472 | $ | 38,295 | |||||||
Per Share Data: | |||||||||||
Basic earnings per share | $ | 0.48 | $ | — | |||||||
Diluted earnings per share | $ | 0.48 | $ | — |
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As of and for the Six Months Ended June 30, | |||||||||||
2021 | 2020 | ||||||||||
Performance Ratios: | |||||||||||
Return on average assets (1) (6) | 1.00 | % | 0.61 | % | |||||||
Return on average equity (2) (6) | 4.87 | % | 4.64 | % | |||||||
Interest rate spread (FTE) (3) (6) | 2.67 | % | 3.38 | % | |||||||
Net interest margin (FTE) (4) (6) | 2.70 | % | 3.49 | % | |||||||
Noninterest expenses to average assets (6) | 2.45 | % | 3.11 | % | |||||||
Efficiency ratio (5) | 65.89 | % | 70.00 | % | |||||||
Average interest-earning assets to average interest-bearing liabilities | 204.53 | % | 172.86 | % | |||||||
Capital Ratios: | |||||||||||
Average equity to average assets | 20.60 | % | 13.09 | % | |||||||
Total capital to risk weighted assets | 29.13 | % | 14.00 | % | |||||||
Tier 1 capital to risk weighted assets | 28.08 | % | 12.77 | % | |||||||
Common equity tier 1 capital to risk weighted assets | 28.08 | % | 12.77 | % | |||||||
Tier 1 capital to average assets | 18.66 | % | 9.99 | % | |||||||
Asset Quality Ratios: | |||||||||||
Allowance for loan losses as a percentage of total loans | 1.10 | % | 1.17 | % | |||||||
Allowance for loan losses as a percentage of nonperforming loans | 253.74 | % | 210.55 | % | |||||||
Net charge-offs to average outstanding loans during the period (6) | 0.07 | % | 0.06 | % | |||||||
Nonperforming loans as a percentage of total loans | 0.43 | % | 0.56 | % | |||||||
Nonperforming loans as a percentage of total assets | 0.24 | % | 0.40 | % | |||||||
Total nonperforming assets as a percentage of total assets | 0.24 | % | 0.40 | % |
(1)Represents net income divided by average total assets.
(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 bank holding company, and our principal subsidiary, Eastern Bank, is a Massachusetts-chartered bank that has served the banking needs of our customers since 1818. Our business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services primarily to retail, commercial and small business customers. We had total assets of $17.0 billion and $16.0 billion at June 30, 2021 and December 31, 2020, respectively. We are subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board and the Consumer Financial Protection Bureau.
We manage our business under two business segments: our banking business, which contributed $126.2 million, or 83.9%, of our total income (pre-provision net interest and dividend income and noninterest income) for the three months ended June 30, 2021 and $253.2 million, or 82.8%, of our total income for the six months ended June 30, 2021, and our insurance agency business, which contributed $24.2 million, or 16.1%, of our total income for the three months ended June 30, 2021 and $52.5 million, or 17.2%, of our total income for the six months ended June 30, 2021. Our banking business consists of a full range of banking, lending (commercial, residential and consumer), savings and small business offerings, including our wealth management and trust operations that we conduct through our Eastern Wealth Management division. Our insurance agency business consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients.
Net income for the three and six months ended June 30, 2021 computed in accordance with GAAP was $34.8 million and $82.5 million, respectively, as compared to $29.9 million and $38.3 million for the three and six months ended
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June 30, 2020, respectively, representing an increase of 16.6% and 115.4%, respectively. This increase was largely driven by a decrease in the provision for the allowance for loan losses of $11.9 million and $41.1 million for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, respectively, which is attributable to greater prior period provisions that resulted from the impact of the COVID-19 pandemic on the Bank’s borrowers during such periods, and current period releases of provisions for loans losses of $3.3 million and $3.9 million for the three and six months ended June 30, 2021, respectively. These items are discussed further in the “Results of Operations” section below. Net income for the three and six months ended June 30, 2021 and 2020 included items that our management considers non-core, which management excludes for purposes of assessing our operating net income, a non-GAAP financial measure. Operating net income for the three and six months ended June 30, 2021 was $37.1 million and $83.6 million compared to operating net income for the three and six months ended June 30, 2020 of $27.3 million and $38.2 million, respectively, representing a respective increase of 35.9% and increase of 119.2%. These increases were largely driven by the aforementioned change in the provision for the allowance for loan losses. See “Non-GAAP Financial Measures” below for a reconciliation of operating net income to GAAP net income.
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 securi