Eastern Bankshares, Inc. - Quarter Report: 2021 March (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 March 31, 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 May 13, 2021.
Index
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PART I — FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
| March 31, 2021 | December 31, 2020 | ||||||||||
| (In thousands, except share data) | |||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | 79,497 | $ | 116,591 | |||||||
| Short-term investments | 1,780,835 | 1,937,479 | |||||||||
| Cash and cash equivalents | 1,860,332 | 2,054,070 | |||||||||
| Available for sale securities | 3,986,253 | 3,183,861 | |||||||||
| Loans held for sale | 2,022 | 1,140 | |||||||||
| Loans: | |||||||||||
| Commercial and industrial | 1,986,366 | 1,995,016 | |||||||||
| Commercial real estate | 3,676,941 | 3,573,630 | |||||||||
| Commercial construction | 249,416 | 305,708 | |||||||||
| Business banking | 1,513,051 | 1,339,164 | |||||||||
| Residential real estate | 1,406,510 | 1,370,957 | |||||||||
| Consumer home equity | 832,466 | 868,270 | |||||||||
| Other consumer | 251,725 | 277,780 | |||||||||
| Total loans | 9,916,475 | 9,730,525 | |||||||||
| Less: allowance for loan losses | (111,080) | (113,031) | |||||||||
| Less: unamortized premiums, net of unearned discounts and deferred fees | (32,673) | (23,536) | |||||||||
| Net loans | 9,772,722 | 9,593,958 | |||||||||
| Federal Home Loan Bank stock, at cost | 8,805 | 8,805 | |||||||||
| Premises and equipment | 46,619 | 49,398 | |||||||||
| Bank-owned life insurance | 79,110 | 78,561 | |||||||||
| Goodwill and other intangibles, net | 376,002 | 376,534 | |||||||||
| Deferred income taxes, net | 31,508 | 13,229 | |||||||||
| Prepaid expenses | 150,453 | 148,680 | |||||||||
| Other assets | 412,969 | 455,954 | |||||||||
| Total assets | $ | 16,726,795 | $ | 15,964,190 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Deposits: | |||||||||||
| Demand | $ | 5,369,164 | $ | 4,910,794 | |||||||
| Interest checking accounts | 2,482,731 | 2,380,497 | |||||||||
| Savings accounts | 1,362,463 | 1,256,736 | |||||||||
| Money market investment | 3,522,990 | 3,348,898 | |||||||||
| Certificates of deposit | 243,527 | 258,859 | |||||||||
| Total deposits | 12,980,875 | 12,155,784 | |||||||||
| Borrowed funds: | |||||||||||
| Federal Home Loan Bank advances | 14,473 | 14,624 | |||||||||
| Escrow deposits of borrowers | 14,878 | 13,425 | |||||||||
| Total borrowed funds | 29,351 | 28,049 | |||||||||
| Other liabilities | 329,524 | 352,305 | |||||||||
| Total liabilities | 13,339,750 | 12,536,138 | |||||||||
| Commitments and contingencies (see footnote 11) | — | — | |||||||||
| Shareholders’ equity | |||||||||||
Common shares, $0.01 par value, 1,000,000,000 shares authorized, 186,758,154 and 186,758,154 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 1,868 | 1,868 | |||||||||
| Additional paid in capital | 1,854,895 | 1,854,068 | |||||||||
| Unallocated common shares held by the Employee Stock Ownership Plan | (146,472) | (147,725) | |||||||||
| Retained earnings | 1,702,946 | 1,665,607 | |||||||||
| Accumulated other comprehensive income, net of tax | (26,192) | 54,234 | |||||||||
| Total shareholders’ equity | 3,387,045 | 3,428,052 | |||||||||
| Total liabilities and shareholders’ equity | $ | 16,726,795 | $ | 15,964,190 | |||||||
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Interest and dividend income: | |||||||||||
| Interest and fees on loans | $ | 88,639 | $ | 95,538 | |||||||
| Taxable interest and dividends on available for sale securities | 10,206 | 8,178 | |||||||||
| Non-taxable interest and dividends on available for sale securities | 1,856 | 1,921 | |||||||||
| Interest on federal funds sold and other short-term investments | 432 | 517 | |||||||||
| Interest and dividends on trading securities | — | 5 | |||||||||
| Total interest and dividend income | 101,133 | 106,159 | |||||||||
| Interest expense: | |||||||||||
| Interest on deposits | 1,002 | 5,414 | |||||||||
| Interest on borrowings | 40 | 599 | |||||||||
| Total interest expense | 1,042 | 6,013 | |||||||||
| Net interest income | 100,091 | 100,146 | |||||||||
| (Release of) provision for allowance for loan losses | (580) | 28,600 | |||||||||
| Net interest income after provision for loan losses | 100,671 | 71,546 | |||||||||
| Noninterest income: | |||||||||||
| Insurance commissions | 28,147 | 27,477 | |||||||||
| Service charges on deposit accounts | 5,367 | 6,098 | |||||||||
| Trust and investment advisory fees | 5,663 | 5,095 | |||||||||
| Debit card processing fees | 2,749 | 2,470 | |||||||||
| Interest rate swap income (losses) | 5,405 | (6,009) | |||||||||
| Income (losses) from investments held in rabbi trusts | 1,846 | (6,743) | |||||||||
| Losses on trading securities, net | — | (2) | |||||||||
| Gains on sales of mortgage loans held for sale, net | 1,479 | 93 | |||||||||
| Gains on sales of securities available for sale, net | 1,164 | 122 | |||||||||
| Other | 3,392 | 4,768 | |||||||||
| Total noninterest income | 55,212 | 33,369 | |||||||||
| Noninterest expense: | |||||||||||
| Salaries and employee benefits | 64,040 | 61,589 | |||||||||
| Office occupancy and equipment | 8,217 | 8,689 | |||||||||
| Data processing | 12,129 | 10,004 | |||||||||
| Professional services | 4,148 | 3,689 | |||||||||
| Charitable contributions | — | 1,187 | |||||||||
| Marketing | 1,691 | 2,468 | |||||||||
| Loan expenses | 1,847 | 1,112 | |||||||||
| FDIC insurance | 948 | 906 | |||||||||
| Amortization of intangible assets | 532 | 702 | |||||||||
| Other | 497 | 4,826 | |||||||||
| Total noninterest expense | 94,049 | 95,172 | |||||||||
| Income before income tax expense | 61,834 | 9,743 | |||||||||
| Income tax expense | 14,171 | 1,298 | |||||||||
| Net income | $ | 47,663 | $ | 8,445 | |||||||
| Basic earnings per share | $ | 0.28 | $ | — | |||||||
| Diluted earnings per share | $ | 0.28 | $ | — | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Net income | $ | 47,663 | $ | 8,445 | |||||||
| Other comprehensive income, net of tax: | |||||||||||
| Net change in fair value of securities available for sale | (74,904) | 26,192 | |||||||||
| Net change in fair value of cash flow hedges | (5,948) | 29,075 | |||||||||
Net change in other comprehensive income for defined benefit postretirement plans | 426 | — | |||||||||
| Total other comprehensive (loss) income | (80,426) | 55,267 | |||||||||
| Total comprehensive (loss) income | $ | (32,763) | $ | 63,712 | |||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Shares of Common Stock Outstanding | Common Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income | 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 | — | — | — | 8,445 | — | — | 8,445 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | 55,267 | — | 55,267 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | — | $ | — | $ | — | $ | 1,651,314 | $ | 11,420 | $ | — | $ | 1,662,734 | ||||||||||||||||||||||||||||
| 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) | — | — | — | (10,324) | — | — | (10,324) | ||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 47,663 | — | — | 47,663 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | (80,426) | — | (80,426) | ||||||||||||||||||||||||||||||||||
| ESOP shares committed to be released | — | — | 827 | — | — | 1,253 | 2,080 | ||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | 186,758,154 | $ | 1,868 | $ | 1,854,895 | $ | 1,702,946 | $ | (26,192) | $ | (146,472) | $ | 3,387,045 | ||||||||||||||||||||||||||||
(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 a quarterly cash dividend of $0.06 per share of common stock during the three months ended March 31, 2021.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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EASTERN BANKSHARES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Three Months Ended March 31, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | 47,663 | $ | 8,445 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| (Release of) provision for loan losses | (580) | 28,600 | |||||||||
| Depreciation and amortization | 3,283 | 4,318 | |||||||||
| (Accretion) amortization of net loan costs and premiums, net | (6,859) | 795 | |||||||||
| Deferred income tax expense | 5,118 | 4,641 | |||||||||
| Amortization of investment security premiums and discounts | 3,277 | 791 | |||||||||
| Right-of-use asset amortization | 2,862 | 3,615 | |||||||||
| Net gain on sale of securities available for sale | (1,164) | (122) | |||||||||
| Amortization of gains from terminated interest rate swaps | (8,274) | — | |||||||||
| Employee Stock Ownership Plan expense | 2,080 | — | |||||||||
| Other | (557) | (576) | |||||||||
| Change in: | |||||||||||
| Trading securities | — | 309 | |||||||||
| Loans held for sale | (863) | (2,866) | |||||||||
| Prepaid pension expense | 838 | (30,473) | |||||||||
| Other assets | 43,683 | (61,071) | |||||||||
| Other liabilities | (25,597) | 12,043 | |||||||||
| Net cash provided by (used in) operating activities | 64,910 | (31,551) | |||||||||
| Investing activities | |||||||||||
| Proceeds from sales of securities available for sale | 23,236 | 5,600 | |||||||||
| Proceeds from maturities and principal paydowns of securities available for sale | 214,085 | 56,021 | |||||||||
| Purchases of securities available for sale | (1,137,969) | (70,301) | |||||||||
| Proceeds from sale of Federal Home Loan Bank stock | — | 749 | |||||||||
| Purchases of Federal Home Loan Bank stock | — | (527) | |||||||||
| Contributions to low income housing tax credit investments | (2,727) | (5,177) | |||||||||
| Contributions to other equity investments | — | (137) | |||||||||
| Distributions from equity investments | 7 | 13 | |||||||||
| Net increase in outstanding loans | (171,325) | (101,856) | |||||||||
| Purchased banking premises and equipment, net | (719) | (1,029) | |||||||||
| Proceeds from sale of premises held for sale | 736 | — | |||||||||
| Net cash used in investing activities | (1,074,676) | (116,644) | |||||||||
| Financing activities | |||||||||||
| Net increase in demand, savings, interest checking, and money market investment deposit accounts | 840,423 | 762,049 | |||||||||
| Net decrease in time deposits | (15,332) | (4,430) | |||||||||
| Net decrease (increase) in borrowed funds | 1,302 | (203,968) | |||||||||
| Contingent consideration paid | (41) | (92) | |||||||||
| Payment of initial public offering costs | — | (1,517) | |||||||||
| Dividends declared and paid to common shareholders | (10,324) | — | |||||||||
| Net cash provided by financing activities | 816,028 | 552,042 | |||||||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | (193,738) | 403,847 | |||||||||
| 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 | $ | 1,860,332 | $ | 766,449 | |||||||
| Supplemental disclosure of cash flow information | |||||||||||
| Cash paid during the period for: | |||||||||||
| Interest paid | $ | 1,049 | $ | 6,908 | |||||||
| Income taxes | $ | 4,858 | $ | 5,361 | |||||||
| Non-cash activities | |||||||||||
| Net increase in capital commitments relating to low income housing tax credit projects | $ | 2,943 | $ | 5,000 | |||||||
| 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.
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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 services, and insurance services, through its full-service bank branches and insurance offices, located primarily in Eastern Massachusetts, southern and coastal New Hampshire and Rhode Island. Eastern Insurance Group 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 Update (“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 year's presentation.
The accompanying consolidated balance sheet as of March 31, 2021, the consolidated statements of income and comprehensive income and of changes in shareholders’ equity for the three months ended March 31, 2021 and 2020 and statement of cash flows for the three months ended March 31, 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 months ended March 31, 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 March 31, 2021 and those that were adopted during the three months ended March 31, 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.
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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 March 31, 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, including 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 has evaluated portfolio segmentation, methodologies and economic forecasting inputs to the process and continues to design the control environment under the new standard. A third party has been engaged to assist the Company in project management, documentation, model governance 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
7
postretirement benefit plans. The guidance eliminates requirements for certain disclosures that are no longer considered cost 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 period ended March 31, 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 March 31, 2021 and December 31, 2020 were as follows:
| As of March 31, 2021 | |||||||||||||||||||||||
| Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 2,713,898 | $ | 23,199 | $ | (45,395) | $ | 2,691,702 | |||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 119,064 | — | (2,793) | 116,271 | |||||||||||||||||||
| U.S. Agency bonds | 860,554 | — | (28,882) | 831,672 | |||||||||||||||||||
| U.S. Treasury securities | 69,385 | 30 | (325) | 69,090 | |||||||||||||||||||
| State and municipal bonds and obligations | 260,818 | 16,700 | — | 277,518 | |||||||||||||||||||
| $ | 4,023,719 | $ | 39,929 | $ | (77,395) | $ | 3,986,253 | ||||||||||||||||
8
| 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 March 31, 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 March 31, 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 | $ | — | $ | — | $ | 20,503 | $ | 21,777 | $ | 87,383 | $ | 91,340 | $ | 2,606,012 | $ | 2,578,585 | $ | 2,713,898 | $ | 2,691,702 | |||||||||||||||||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | — | 24,090 | 23,771 | 94,974 | 92,500 | — | — | 119,064 | 116,271 | |||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Agency bonds | — | — | 99,784 | 98,111 | 760,770 | 733,561 | — | — | 860,554 | 831,672 | |||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 10,065 | 10,095 | 59,320 | 58,995 | — | — | — | — | 69,385 | 69,090 | |||||||||||||||||||||||||||||||||||||||||||||||||
| State and municipal bonds and obligations | 405 | 406 | 25,244 | 26,220 | 72,587 | 76,077 | 162,582 | 174,815 | 260,818 | 277,518 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 10,470 | $ | 10,501 | $ | 228,941 | $ | 228,874 | $ | 1,015,714 | $ | 993,478 | $ | 2,768,594 | $ | 2,753,400 | $ | 4,023,719 | $ | 3,986,253 | |||||||||||||||||||||||||||||||||||||||
9
| 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 March 31, 2021 and 2020 were $1.2 million and $0.1 million, respectively. There were no significant gross realized losses from sales of securities available for sale during the three months ended March 31, 2021 and 2020. There was no other-than-temporary impairment (“OTTI”) recorded during the three months ended March 31, 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 March 31, 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:
10
| As of March 31, 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 | 18 | $ | 45,395 | $ | 2,004,883 | $ | — | $ | — | $ | 45,395 | $ | 2,004,883 | ||||||||||||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 7 | 2,793 | 116,271 | — | — | 2,793 | 116,271 | ||||||||||||||||||||||||||||||||||
| U.S. Agency bonds | 13 | 28,882 | 831,672 | — | — | 28,882 | 831,672 | ||||||||||||||||||||||||||||||||||
| U.S. Treasury securities | 2 | 325 | 58,995 | — | — | 325 | 58,995 | ||||||||||||||||||||||||||||||||||
| 40 | $ | 77,395 | $ | 3,011,821 | $ | — | $ | — | $ | 77,395 | $ | 3,011,821 | |||||||||||||||||||||||||||||
| 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 March 31, 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. The securities in a loss position as of December 31, 2020 remain in a loss position as of March 31, 2021 but have not yet been held for a period of 12 months or longer as of March 31, 2021. 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 securities at a price less than the current par value of the investments. 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:
| As of March 31, | As of December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Commercial and industrial | $ | 1,986,366 | $ | 1,995,016 | |||||||
| Commercial real estate | 3,676,941 | 3,573,630 | |||||||||
| Commercial construction | 249,416 | 305,708 | |||||||||
| Business banking | 1,513,051 | 1,339,164 | |||||||||
| Residential real estate | 1,406,510 | 1,370,957 | |||||||||
| Consumer home equity | 832,466 | 868,270 | |||||||||
| Other consumer | 251,725 | 277,780 | |||||||||
| Gross loans before unamortized premiums, unearned discounts and deferred fees | 9,916,475 | 9,730,525 | |||||||||
| Allowance for credit losses | (111,080) | (113,031) | |||||||||
| Unamortized premiums, net of unearned discounts and deferred fees | (32,673) | (23,536) | |||||||||
Loans after the allowance for credit losses, unamortized premiums, unearned discounts and deferred fees | $ | 9,772,722 | $ | 9,593,958 | |||||||
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 $2.4 billion at both March 31, 2021 and December 31, 2020. The balance of funds borrowed from the FHLBB were $14.5 million and $14.6 million at March 31, 2021 and December 31, 2020, respectively.
The carrying value of loans pledged to secure advances from the Federal Reserve Bank (“FRB”) were $832.4 million and $884.1 million at March 31, 2021 and December 31, 2020, respectively. There were no funds borrowed from the FRB outstanding at March 31, 2021 and December 31, 2020.
Serviced Loans
At March 31, 2021 and December 31, 2020, mortgage loans partially or wholly-owned by others and serviced by the Company amounted to approximately $12.9 million and $13.5 million, respectively.
12
Allowance for Loan Losses
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 table summarizes the changes in the allowance for loan losses for the periods indicated:
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Balance at the beginning of period | $ | 113,031 | $ | 82,297 | |||||||
| Loans charged off | (1,982) | (2,343) | |||||||||
| Recoveries | 611 | 584 | |||||||||
| (Release of) provision for loan losses | (580) | 28,600 | |||||||||
| Balance at end of period | $ | 111,080 | $ | 109,138 | |||||||
The following tables summarize changes in the allowance for loan losses by loan category and bifurcates the amount of allowance allocated to each loan category based on collective impairment analysis and loans evaluated individually for impairment:
| For the Three Months Ended March 31, 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 | — | (234) | — | (1,384) | — | — | (364) | — | (1,982) | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 9 | — | — | 365 | 10 | 71 | 156 | — | 611 | ||||||||||||||||||||||||||||||||||||||||||||
| (Release of) provision | (1,220) | 803 | (1,203) | 1,371 | (210) | (239) | 239 | (121) | (580) | ||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 25,406 | $ | 55,138 | $ | 3,350 | $ | 13,504 | $ | 6,235 | $ | 3,576 | $ | 3,498 | $ | 373 | $ | 111,080 | |||||||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 4,761 | $ | 210 | $ | — | $ | 1,387 | $ | 1,516 | $ | 263 | $ | — | $ | — | $ | 8,137 | |||||||||||||||||||||||||||||||||||
Ending balance: acquired with deteriorated credit quality | $ | 1,283 | $ | 822 | $ | — | $ | — | $ | 327 | $ | — | $ | — | $ | — | $ | 2,432 | |||||||||||||||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 19,362 | $ | 54,106 | $ | 3,350 | $ | 12,117 | $ | 4,392 | $ | 3,313 | $ | 3,498 | $ | 373 | $ | 100,511 | |||||||||||||||||||||||||||||||||||
| Loans ending balance: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 17,907 | $ | 4,536 | $ | — | $ | 21,001 | $ | 26,459 | $ | 4,461 | $ | 26 | $ | — | $ | 74,390 | |||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 2,944 | 1,554 | — | — | 3,119 | — | — | — | 7,617 | ||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 1,965,515 | 3,670,851 | 249,416 | 1,492,050 | 1,376,932 | 828,005 | 251,699 | — | 9,834,468 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans by group | $ | 1,986,366 | $ | 3,676,941 | $ | 249,416 | $ | 1,513,051 | $ | 1,406,510 | $ | 832,466 | $ | 251,725 | $ | — | $ | 9,916,475 | |||||||||||||||||||||||||||||||||||
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| For the Three Months Ended March 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: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance | $ | 20,919 | $ | 34,730 | $ | 3,424 | $ | 8,260 | $ | 6,380 | $ | 4,027 | $ | 4,173 | $ | 384 | $ | 82,297 | |||||||||||||||||||||||||||||||||||
| Charge-offs | — | — | — | (1,337) | — | (473) | (533) | — | (2,343) | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 322 | 1 | — | 127 | 60 | 14 | 60 | — | 584 | ||||||||||||||||||||||||||||||||||||||||||||
| Provision (release of) | 9,290 | 14,496 | 1,288 | 3,131 | (212) | 345 | 319 | (57) | 28,600 | ||||||||||||||||||||||||||||||||||||||||||||
| Ending balance | $ | 30,531 | $ | 49,227 | $ | 4,712 | $ | 10,181 | $ | 6,228 | $ | 3,913 | $ | 4,019 | $ | 327 | $ | 109,138 | |||||||||||||||||||||||||||||||||||
Ending balance: individually evaluated for impairment | $ | 4,037 | $ | 270 | $ | — | $ | 453 | $ | 1,275 | $ | 221 | $ | — | $ | — | $ | 6,256 | |||||||||||||||||||||||||||||||||||
Ending balance: acquired with deteriorated credit quality | $ | — | $ | 936 | $ | — | $ | — | $ | 256 | $ | — | $ | — | $ | — | $ | 1,192 | |||||||||||||||||||||||||||||||||||
Ending balance: collectively evaluated for impairment | $ | 26,494 | $ | 48,021 | $ | 4,712 | $ | 9,728 | $ | 4,697 | $ | 3,692 | $ | 4,019 | $ | 327 | $ | 101,690 | |||||||||||||||||||||||||||||||||||
| Loans ending balance: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 32,423 | $ | 8,054 | $ | — | $ | 10,258 | $ | 29,393 | $ | 6,280 | $ | 23 | $ | — | $ | 86,431 | |||||||||||||||||||||||||||||||||||
Acquired with deteriorated credit quality | 3,939 | 5,780 | — | — | 3,424 | — | — | — | 13,143 | ||||||||||||||||||||||||||||||||||||||||||||
Collectively evaluated for impairment | 1,734,760 | 3,509,887 | 293,135 | 769,658 | 1,387,186 | 923,274 | 369,629 | — | 8,987,529 | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans by group | $ | 1,771,122 | $ | 3,523,721 | $ | 293,135 | $ | 779,916 | $ | 1,420,003 | $ | 929,554 | $ | 369,652 | $ | — | $ | 9,087,103 | |||||||||||||||||||||||||||||||||||
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.
14
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.
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 airplane and automobile loans, include the following factors, among others: income sources and reliability, credit histories, term of repayment, and collateral value, as applicable. These are typically granted on an unsecured basis, with the exception of airplane and automobile loans.
Credit Quality
Commercial Lending Credit Quality
The Company monitors credit quality indicators and utilizes portfolio scorecards to assess the risk of its commercial portfolio. Specifically, the Company utilizes a 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 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:
15
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 less than $1 million. Loans included in this category have qualification requirements that include risk rating of 10 or better at time of recommendation for unrated status, acceptable management of deposit accounts, and no known negative changes in management, operations or financial performance.
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.
16
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.
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 March 31, 2021 | ||||||||||||||||||||||||||||||||
| Category | Commercial and Industrial | Commercial Real Estate | Commercial Construction | Business Banking | Total | |||||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Unrated | $ | 684,938 | $ | 6,318 | $ | — | $ | 1,079,605 | $ | 1,770,861 | ||||||||||||||||||||||
| Pass | 1,171,994 | 3,353,758 | 232,981 | 347,867 | 5,106,600 | |||||||||||||||||||||||||||
| Special mention | 68,826 | 127,751 | 10,345 | 57,387 | 264,309 | |||||||||||||||||||||||||||
| Substandard | 45,573 | 186,707 | 6,090 | 26,492 | 264,862 | |||||||||||||||||||||||||||
| Doubtful | 15,035 | 2,407 | — | 1,700 | 19,142 | |||||||||||||||||||||||||||
| Loss | — | — | — | — | — | |||||||||||||||||||||||||||
| Total | $ | 1,986,366 | $ | 3,676,941 | $ | 249,416 | $ | 1,513,051 | $ | 7,425,774 | ||||||||||||||||||||||
| 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 and business banking PPP loans amounted to $609.9 million and $628.2 million, respectively, at March 31, 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.
17
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 March 31, 2021 and December 31, 2020 was $178.4 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 past due and therefore are not impacting non-accrual or delinquency totals as of March 31, 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 March 31, 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. Specifically, non-accrual residential loans that have been restructured must perform for a period of six months before being considered for accrual status.
A loan is expected to remain on 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 March 31, | As of December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| (In Thousands) | |||||||||||
| Commercial and industrial | $ | 12,266 | $ | 11,714 | |||||||
| Commercial real estate | 1,016 | 915 | |||||||||
| Business banking | 16,993 | 17,430 | |||||||||
| Residential real estate | 8,127 | 6,815 | |||||||||
| Consumer home equity | 3,524 | 3,602 | |||||||||
| Other consumer | 349 | 529 | |||||||||
| Total non-accrual loans | $ | 42,275 | $ | 41,005 | |||||||
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The following tables show the age analysis of past due loans as of the dates indicated:
| As of March 31, 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 | $ | 9,460 | $ | 3 | $ | 1,174 | $ | 10,637 | $ | 1,975,729 | $ | 1,986,366 | $ | 252 | |||||||||||||||||||||||||||
| Commercial real estate | 3,225 | — | 1,403 | 4,628 | 3,672,313 | 3,676,941 | 1,138 | ||||||||||||||||||||||||||||||||||
| Commercial construction | — | — | — | — | 249,416 | 249,416 | — | ||||||||||||||||||||||||||||||||||
| Business banking | 13,299 | 1,404 | 8,513 | 23,216 | 1,489,835 | 1,513,051 | — | ||||||||||||||||||||||||||||||||||
| Residential real estate | 5,738 | 857 | 6,271 | 12,866 | 1,393,644 | 1,406,510 | 280 | ||||||||||||||||||||||||||||||||||
| Consumer home equity | 1,416 | 496 | 3,006 | 4,918 | 827,548 | 832,466 | 9 | ||||||||||||||||||||||||||||||||||
| Other consumer | 975 | 419 | 349 | 1,743 | 249,982 | 251,725 | — | ||||||||||||||||||||||||||||||||||
| Total | $ | 34,113 | $ | 3,179 | $ | 20,716 | $ | 58,008 | $ | 9,858,467 | $ | 9,916,475 | $ | 1,679 | |||||||||||||||||||||||||||
| 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.
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The following table shows the TDR loans on accrual and nonaccrual status as of the dates indicated:
| As of March 31, 2021 | |||||||||||||||||||||||||||||||||||
| TDRs on Accrual Status | TDRs on Nonaccrual 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 | $ | 5,641 | 6 | $ | 7,583 | 7 | $ | 13,224 | ||||||||||||||||||||||||||
| Commercial real estate | 1 | 3,520 | 1 | 468 | 2 | 3,988 | |||||||||||||||||||||||||||||
| Business banking | 5 | 4,008 | 6 | 1,075 | 11 | 5,083 | |||||||||||||||||||||||||||||
| Residential real estate | 140 | 22,565 | 30 | 3,557 | 170 | 26,122 | |||||||||||||||||||||||||||||
| Consumer home equity | 79 | 3,607 | 14 | 854 | 93 | 4,461 | |||||||||||||||||||||||||||||
| Other consumer | 3 | 26 | — | — | 3 | 26 | |||||||||||||||||||||||||||||
| Total | 229 | $ | 39,367 | 57 | $ | 13,537 | 286 | $ | 52,904 | ||||||||||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
| TDRs on Accrual Status | TDRs on Nonaccrual Status | Total TDRs | |||||||||||||||||||||||||||||||||
| Number of Loans | Balance of Loans | Number of Loans | Balance of Loans | 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 reserves associated with the TDRs was $4.1 million and $3.5 million at March 31, 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 March 31, 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 March 31, 2021 | For the Three Months Ended March 31, 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) | |||||||||||||||||||||||||||||||||||
| Business banking | — | $ | — | $ | — | 1 | $ | 244 | $ | 244 | |||||||||||||||||||||||||
| Residential real estate | 1 | 295 | 295 | 8 | 414 | 419 | |||||||||||||||||||||||||||||
| Consumer home equity | — | — | — | 1 | 24 | 24 | |||||||||||||||||||||||||||||
| Total | 1 | $ | 295 | $ | 295 | 10 | $ | 682 | $ | 687 | |||||||||||||||||||||||||
(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 March 31, 2021 and December 31, 2020, the outstanding recorded investment of loans that were new TDRs were $0.3 million and $3.9 million, respectively.
20
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 March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Extended maturity and interest only/principal deferred | $ | — | $ | 46 | |||||||
| Court-ordered concession | 295 | — | |||||||||
| Other | — | 641 | |||||||||
| Total | $ | 295 | $ | 687 | |||||||
The following table shows the loans that have been modified during the prior 12 months which have subsequently defaulted during the periods indicated. The Company considers a loan to have defaulted when it reaches 90 days past due or is transferred to nonaccrual:
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Number of Contracts | Recorded Investment | Number of Contracts | Recorded Investment | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
Troubled debt restructurings that subsequently defaulted (1): | |||||||||||||||||||||||
Commercial and industrial | — | $ | — | 2 | $ | 4,613 | |||||||||||||||||
| Business banking | 1 | 419 | — | — | |||||||||||||||||||
| Consumer home equity | 1 | 59 | 1 | 1,335 | |||||||||||||||||||
| Total | 2 | $ | 478 | 3 | $ | 5,948 | |||||||||||||||||
(1)This table does not reflect any TDRs which were fully charged off, paid off, or otherwise settled during the period.
During the three months ended March 31, 2021 and 2020 the amounts charged-off on TDRs modified in the prior 12 months were $0 and $0.4 million, respectively.
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.
21
The following table summarizes the Company’s impaired loans by loan portfolio as of the dates indicated:
| As of March 31, 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 | $ | 10,071 | $ | 11,312 | $ | — | $ | 9,182 | $ | 11,212 | $ | — | |||||||||||||||||||||||
| Commercial real estate | 4,068 | 4,113 | — | 3,955 | 3,974 | — | |||||||||||||||||||||||||||||
| Business banking | 4,961 | 7,260 | — | 5,250 | 7,659 | — | |||||||||||||||||||||||||||||
| Residential real estate | 14,408 | 16,714 | — | 14,730 | 17,010 | — | |||||||||||||||||||||||||||||
| Consumer home equity | 2,370 | 2,370 | — | 2,571 | 2,571 | — | |||||||||||||||||||||||||||||
| Other consumer | 26 | 26 | — | 29 | 29 | — | |||||||||||||||||||||||||||||
| Sub-total | 35,904 | 41,795 | — | 35,717 | 42,455 | — | |||||||||||||||||||||||||||||
| With an allowance recorded: | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | 7,836 | 8,147 | 4,761 | 8,161 | 8,432 | 4,555 | |||||||||||||||||||||||||||||
| Commercial real estate | 468 | 489 | 210 | 480 | 497 | 210 | |||||||||||||||||||||||||||||
| Business banking | 16,040 | 20,925 | 1,387 | 16,651 | 21,146 | 1,435 | |||||||||||||||||||||||||||||
| Residential real estate | 12,051 | 12,051 | 1,516 | 12,326 | 12,326 | 1,565 | |||||||||||||||||||||||||||||
| Consumer home equity | 2,091 | 2,091 | 263 | 2,274 | 2,274 | 289 | |||||||||||||||||||||||||||||
| Sub-total | 38,486 | 43,703 | 8,137 | 39,892 | 44,675 | 8,054 | |||||||||||||||||||||||||||||
| Total | $ | 74,390 | $ | 85,498 | $ | 8,137 | $ | 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 March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Average Recorded Investment | Total Interest Recognized | Average Recorded Investment | Total Interest Recognized | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| With no related allowance recorded: | |||||||||||||||||||||||
| Commercial and industrial | $ | 9,899 | $ | 46 | $ | 20,880 | $ | 70 | |||||||||||||||
| Commercial real estate | 4,176 | 44 | 7,491 | 44 | |||||||||||||||||||
| Business banking | 5,024 | 26 | 2,286 | 17 | |||||||||||||||||||
| Residential real estate | 14,648 | 144 | 14,801 | 173 | |||||||||||||||||||
| Consumer home equity | 2,438 | 20 | 3,606 | 40 | |||||||||||||||||||
| Other consumer | 27 | — | 23 | — | |||||||||||||||||||
| Sub-total | 36,212 | 280 | 49,087 | 344 | |||||||||||||||||||
| With an allowance recorded: | |||||||||||||||||||||||
| Commercial and industrial | 7,965 | — | 11,730 | — | |||||||||||||||||||
| Commercial real estate | 657 | — | 348 | — | |||||||||||||||||||
| Business banking | 16,325 | 14 | 8,782 | 15 | |||||||||||||||||||
| Residential real estate | 12,248 | 127 | 11,727 | 137 | |||||||||||||||||||
| Consumer home equity | 2,150 | 18 | 2,857 | 31 | |||||||||||||||||||
| Sub-total | 39,345 | 159 | 35,444 | 183 | |||||||||||||||||||
| Total | $ | 75,557 | $ | 439 | $ | 84,531 | $ | 527 | |||||||||||||||
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Purchased Credit Impaired Loans
The following table displays the outstanding and carrying amounts of PCI loans as of the dates indicated:
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| (In Thousands) | |||||||||||
| Outstanding balance | $ | 8,662 | $ | 9,982 | |||||||
| Carrying amount | 7,617 | $ | 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 March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Balance at beginning of period | $ | 2,495 | $ | 3,923 | |||||||
| Accretion | (216) | (422) | |||||||||
| Other change in expected cash flows | (248) | (155) | |||||||||
| Balance at end of period | $ | 2,031 | $ | 3,346 | |||||||
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 March 31, 2021 and December 31, 2020, the Company held commercial loan participation interests totaling $1.0 billion and $1.0 billion, respectively.
The following table summarizes the Company’s loan participations:
| As of and for the three months ended March 31, 2021 | As of and for the year ended December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance | Nonperforming Loan Rate (%) | Impaired (%) | Gross Charge-offs | Balance | Nonperforming Loan Rate (%) | Impaired (%) | Gross Charge-offs | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | $ | 579,812 | 1.31 | % | 1.31 | % | $ | — | $ | 598,873 | 1.11 | % | 1.11 | % | $ | — | |||||||||||||||||||||||||||||||
| Commercial real estate | 345,261 | 0.00 | % | 0.00 | % | — | 306,202 | 0.00 | % | 0.00 | % | — | |||||||||||||||||||||||||||||||||||
| Commercial construction | 86,447 | 0.00 | % | 0.00 | % | — | 119,600 | 0.00 | % | 0.00 | % | — | |||||||||||||||||||||||||||||||||||
| Business banking | 31 | 0.00 | % | 0.00 | % | — | 34 | 0.00 | % | 0.00 | % | — | |||||||||||||||||||||||||||||||||||
| Total loan participations | $ | 1,011,551 | 0.75 | % | 0.75 | % | $ | — | $ | 1,024,709 | 0.65 | % | 0.65 | % | $ | — | |||||||||||||||||||||||||||||||
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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 March 31, 2021 | As of December 31, 2020 | ||||||||||
| (In thousands) | |||||||||||
| Right-of-use assets | $ | 79,163 | $ | 81,596 | |||||||
| Lease liabilities | 82,910 | 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 table is a summary of the Company’s components of net lease cost for the periods indicated:
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Operating lease cost | $ | 3,561 | $ | 3,613 | |||||||
| Finance lease cost | 31 | 2 | |||||||||
| Variable lease cost | 490 | 522 | |||||||||
| Total lease cost | $ | 4,082 | $ | 4,137 | |||||||
During the three months ended March 31, 2021 and 2020, the Company made $3.6 million and $3.5 million, respectively, in cash payments for operating and finance lease payments.
Supplemental balance sheet information related to operating leases are as follows:
| As of March 31, 2021 | As of | As of December 31, 2020 | |||||||||
| Weighted-average remaining lease term (in years) | 8.33 | 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 March 31, 2021 | |||||||||||||||||
| 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 | — | 6,398 | 6,398 | ||||||||||||||
| Core deposits | 127 | — | 127 | ||||||||||||||
| Total other intangible assets | 127 | 6,398 | 6,525 | ||||||||||||||
| Total goodwill and other intangible assets | $ | 298,738 | $ | 77,264 | $ | 376,002 | |||||||||||
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| 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 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 months ended March 31, 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 March 31, 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 March 31, 2021 or December 31, 2020.
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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 quarter ended March 31, 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 quarter ended March 31, 2020 as the Company had no shares outstanding.
| For the Three Months Ended March 31, 2021 | |||||
| (Dollars in thousands, except per share data) | |||||
| Net income applicable to common shares | $ | 47,663 | |||
| Average number of common shares outstanding | 186,758,154 | ||||
| Less: Average unallocated ESOP shares | (14,709,110) | ||||
| Average number of common shares outstanding used to calculate basic earnings per common share | 172,049,044 | ||||
| Common stock equivalents | — | ||||
| Average number of common shares outstanding used to calculate diluted earnings per common share | 172,049,044 | ||||
| Earnings per common share | |||||
| Basic and diluted | $ | 0.28 | |||
All unallocated ESOP shares have been excluded from the calculation of basic and diluted EPS.
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8. Income Taxes
The following table sets forth information regarding the Company’s tax provision and applicable tax rates for the periods indicated:
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Combined federal and state income tax provisions | $ | 14,171 | $ | 1,298 | |||||||
| Effective income tax rates | 22.9 | % | 13.3 | % | |||||||
The Company’s provision for income taxes was $14.2 million and $1.3 million for the three months ended March 31, 2021 and 2020, respectively. The increase in income tax expense was due primarily to higher pre-tax income during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, decreasing the impact on the effective rate related to net favorable permanent differences, including investment tax credits and tax exempt income.
The Company assesses the realizability of deferred tax assets and whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The Company considers projections of future taxable income during the periods in which deferred tax assets and liabilities are scheduled to reverse. Additionally, in determining the availability of operating loss carrybacks and other tax attributes, both projected future taxable income and tax planning strategies are considered in making this assessment. As of March 31, 2021 and December 31, 2020, the Company had a valuation allowance of $12.0 million related to the 2020 stock donation of $91.3 million and cash contribution of $3.7 million to the Eastern Bank Charitable Foundation (the “Foundation”). Based upon the level of available historical taxable income and projections for future taxable income over the periods which the deferred tax assets are realizable, the Company believes it is more likely than not that the Company will realize the remainder of the net deferred tax assets as of March 31, 2021.
The Company files tax returns in the U.S. federal jurisdiction and various states. As of March 31, 2021, the Company is no longer subject to exam for tax years before 2017 by the Internal Revenue Service (“IRS”) and state tax authorities. The Company believes that its income tax returns have been filed based upon applicable statutes, regulations and case law in effect at the time of filing, however the IRS and/or state jurisdiction, upon examination, could disagree with the Company’s interpretation.
Management has performed an evaluation of the Company’s tax positions and determined that a reserve for unrecognized tax benefits at March 31, 2021 and December 31, 2020 was not needed.
9. 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 March 31, 2021 and December 31, 2020, the Company had $64.1 million and $59.8 million, respectively, in tax credit investments that were included in other assets in the consolidated balance sheets.
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.
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The following table presents the Company’s investments in LIHTC projects using the proportional amortization method for the periods indicated:
| Three Months Ended March 31, 2021 | Year Ended December 31, 2020 | ||||||||||
| (In thousands) | |||||||||||
| Current recorded investment included in other assets | $ | 62,904 | $ | 58,504 | |||||||
Commitments to fund qualified affordable housing projects included in recorded investment noted above | 34,430 | 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 March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Tax credits and benefits recognized | $ | 1,464 | $ | 1,519 | |||||||
| Amortization expense included in income tax expense | 1,264 | 1,191 | |||||||||
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 $1.2 million as of both March 31, 2021 and December 31, 2020. There was $1.7 million in outstanding commitments relating to these investments as of both March 31, 2021 and December 31, 2020.
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10. 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 will generally increase as the participant remains employed with the Company. Employees hired on and after November 1, 2020 will 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. 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 (“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:
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In Thousands) | |||||||||||
| Components of net periodic benefit cost: | |||||||||||
| Service cost | $ | 7,896 | $ | 6,232 | |||||||
| Interest cost | 1,269 | 2,616 | |||||||||
| Expected return on plan assets | (8,141) | (7,425) | |||||||||
| Prior service (credit) cost | (2,946) | 6 | |||||||||
| Recognized net actuarial loss | 3,538 | 2,361 | |||||||||
| Net periodic benefit cost | $ | 1,616 | $ | 3,790 | |||||||
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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 March 31, 2021 compared to the three months ended March 31, 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 three months ended March 31, 2021. During the three months ended March 31, 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 on the Company's consolidated balance sheet. Changes in fair value are recorded in noninterest income. At March 31, 2021 and December 31, 2020 the amount of rabbi trust investments at fair value were $94.0 million and $91.7 million, respectively.
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 March 31, 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 | $ | 5,230 | $ | — | $ | 5,230 | $ | 5,157 | $ | — | $ | 5,157 | |||||||||||||||||||||||
| Equities | 61,662 | 18,828 | 80,490 | 59,235 | 19,492 | 78,727 | |||||||||||||||||||||||||||||
| Fixed income | 8,110 | 175 | 8,285 | 7,441 | 358 | 7,799 | |||||||||||||||||||||||||||||
| Total assets | $ | 75,002 | $ | 19,003 | $ | 94,005 | $ | 71,833 | $ | 19,850 | $ | 91,683 | |||||||||||||||||||||||
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11. 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 March 31, 2021 | As of December 31, 2020 | ||||||||||
| (In Thousands) | |||||||||||
| Commitments to extend credit | $ | 3,959,011 | $ | 3,818,952 | |||||||
| Standby letters of credit | 63,986 | 60,221 | |||||||||
| Forward commitments to sell loans | 35,564 | 41,160 | |||||||||
Other Contingencies
The Company has been named a defendant in various legal proceedings arising in the normal course of business. In the opinion of management, based on the advice of legal counsel, the ultimate resolution of these proceedings will not have a material effect on the Company’s consolidated financial statements.
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 Federal Reserve temporarily eliminated reserve requirements and therefore there was no minimum reserve requirement as of either March 31, 2021 or December 31, 2020.
12. Derivative Financial Instruments
The Company uses derivative financial instruments to manage the Company’s 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.
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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 they pay floating and receive fixed interest in order to manage its interest rate risk exposure to the variability in interest cash flows on certain floating-rate commercial loans. 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 March 31, 2021 and December 31, 2020, the Company did 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 months ended March 31, 2021:
| For the Three Months Ended March 31, 2021 | |||||
| (In thousands) | |||||
| Unrealized gains on terminated hedges included in AOCI - January 1 | $ | 41,473 | |||
| Unrealized gains on terminated hedges arising during the period | — | ||||
| Reclassification adjustments for amortization of unrealized (gains) into net income | (8,274) | ||||
| Unrealized gains on terminated hedges included in AOCI - March 31 | $ | 33,199 | |||
There were no unrealized gains or losses on terminated hedges during the three months ended March 31, 2020.
The balance of terminated cash flow hedges in AOCI will be amortized into earnings through January 2023. The Company expects approximately $28.3 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 March 31, 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 non-performance 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 allows the Company to participate-out (fee paid) or participate-in (fee received) the risk associated with certain derivative positions executed with the borrower by the lead bank in a customer-related interest rate swap derivative.
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Foreign exchange contracts consist of those offered to commercial customers and those entered into to hedge the 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 non-performance 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:
| As of March 31, 2021 | |||||||||||
| Number of Positions | Total Notional | ||||||||||
| (Dollars in Thousands) | |||||||||||
| Interest rate swaps | 562 | $ | 3,571,918 | ||||||||
| Risk participation agreements | 70 | 288,803 | |||||||||
| Foreign exchange contracts: | |||||||||||
| Matched commercial customer book | 74 | 8,428 | |||||||||
| Foreign currency loan | 3 | 7,988 | |||||||||
| As of 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.
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 March 31, 2021 or December 31, 2020.
| Asset Derivatives | Liability Derivatives | ||||||||||||||||||||||||||||||||||
| Balance Sheet Location | Fair Value at March 31, 2021 | Fair Value at December 31, 2020 | Balance Sheet Location | Fair Value at March 31, 2021 | Fair Value at December 31, 2020 | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||||||||||||||
| Customer-related positions: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | 90,748 | $ | 141,822 | Other liabilities | $ | 33,620 | $ | 42,600 | |||||||||||||||||||||||||
| Risk participation agreements | Other assets | 391 | 722 | Other liabilities | 530 | 1,230 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts - matched customer book | Other assets | 81 | 90 | Other liabilities | 61 | 77 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts - foreign currency loan | Other assets | 18 | 9 | Other liabilities | 5 | 69 | |||||||||||||||||||||||||||||
| Total | $ | 91,238 | $ | 142,643 | $ | 34,216 | $ | 43,976 | |||||||||||||||||||||||||||
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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:
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in Thousands) | |||||||||||
| Derivatives designated as hedges: | |||||||||||
| Gain in OCI on derivatives | $ | — | $ | 43,556 | |||||||
| Gain reclassified from OCI into interest income (effective portion) | $ | 8,274 | $ | 3,112 | |||||||
| 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: | |||||||||||
| Gain (loss) recognized in interest rate swap income | $ | 4,851 | $ | (6,280) | |||||||
| Gain (loss) recognized in interest rate swap income for risk participation agreements | 369 | (301) | |||||||||
| Gain (loss) recognized in other income for foreign currency exchange contracts: | |||||||||||
| Matched commercial customer book | 6 | (26) | |||||||||
| Foreign currency loan | 73 | 397 | |||||||||
| Total gain (loss) for derivatives not designated as hedges | $ | 5,299 | $ | (6,210) | |||||||
The Company has agreements with its customer-related interest rate swap derivative counterparties that contain a provision whereby if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.
The Company also has agreements with certain of its customer-related interest rate swap derivative correspondent-bank counterparties that contain a provision whereby if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.
The 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 March 31, 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, and less than $0.1 million, respectively. In addition, at March 31, 2021 and December 31, 2020, the Company had posted initial-margin collateral in the form of a U.S. Treasury note amounting to $49.3 million and $60.4 million, respectively, to CME for these derivatives. The cash and U.S. Treasury note were considered restricted assets and were included in cash and due from banks and in available for sale securities, respectively.
At March 31, 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 non-performance risk, totaled $28.3 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 March 31, 2021 and December 31, 2020, the Company had posted collateral in the form of cash amounting to $35.9 million and $49.2 million, respectively, which was considered to be a restricted asset and was included in short-term investments. If the Company had breached any of these provisions at March 31, 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.
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13. 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 March 31, 2021 and December 31, 2020, it was determined that no additional collateral would have to be posted to immediately settle these instruments.
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 March 31, 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 | 90,748 | — | 90,748 | 1,426 | — | 89,322 | |||||||||||||||||||||||||||||
| Risk participation agreements | 391 | — | 391 | — | — | 391 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – matched customer book | 81 | — | 81 | — | — | 81 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – foreign currency loan | 18 | — | 18 | — | — | 18 | |||||||||||||||||||||||||||||
| $ | 91,238 | $ | — | $ | 91,238 | $ | 1,426 | $ | — | $ | 89,812 | ||||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Customer-related positions: | |||||||||||||||||||||||||||||||||||
| Interest rate swaps | 33,620 | — | 33,620 | 1,426 | 32,194 | — | |||||||||||||||||||||||||||||
| Risk participation agreements | 530 | — | 530 | — | — | 530 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – matched customer book | 61 | — | 61 | — | — | 61 | |||||||||||||||||||||||||||||
| Foreign currency exchange contracts – foreign currency loan | 5 | — | 5 | — | — | 5 | |||||||||||||||||||||||||||||
| $ | 34,216 | $ | — | $ | 34,216 | $ | 1,426 | $ | 32,194 | $ | 596 | ||||||||||||||||||||||||
35
| 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 | ||||||||||||||||||||||||
14. 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.
36
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.
37
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 equity securities, mutual funds and exchange-traded funds are traded in an active market and therefore were categorized as Level 1. Mutual funds at net asset value amounted to $52.0 million at March 31, 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 March 31, 2021 and December 31, 2020, the impact
38
of the Level 3 inputs on the overall valuation of the interest rate swaps was deemed insignificant to the overall valuation. As a result, the interest rate swaps were categorized as Level 2 within the fair value hierarchy.
Risk Participations
The fair value of risk participations was determined based upon the total expected exposure of the derivative which considers the present value of cash flows discounted using market-based inputs and 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.
39
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 March 31, 2021 and December 31, 2020:
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Balance as of March 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| Description | |||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Securities available for sale | |||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 2,691,702 | $ | — | $ | 2,691,702 | $ | — | |||||||||||||||
| Government-sponsored commercial mortgage-backed securities | 116,271 | — | 116,271 | — | |||||||||||||||||||
| U.S. Agency bonds | 831,672 | — | 831,672 | — | |||||||||||||||||||
| U.S. Treasury securities | 69,090 | 69,090 | — | — | |||||||||||||||||||
| State and municipal bonds and obligations | 277,518 | — | 277,518 | — | |||||||||||||||||||
| Rabbi trust investments | 94,005 | 85,720 | 8,285 | — | |||||||||||||||||||
| Loans held for sale | 2,022 | — | 2,022 | — | |||||||||||||||||||
| Interest rate swap contracts | |||||||||||||||||||||||
| Customer-related positions | 90,748 | — | 90,748 | — | |||||||||||||||||||
| Risk participation agreements | 391 | — | 391 | — | |||||||||||||||||||
| Foreign currency forward contracts | |||||||||||||||||||||||
| Matched customer book | 81 | — | 81 | — | |||||||||||||||||||
| Foreign currency loan | 18 | — | 18 | — | |||||||||||||||||||
| Total | $ | 4,173,518 | $ | 154,810 | $ | 4,018,708 | $ | — | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Interest rate swap contracts | |||||||||||||||||||||||
| Customer-related positions | $ | 33,620 | $ | — | $ | 33,620 | $ | — | |||||||||||||||
| Risk participation agreements | 530 | — | 530 | — | |||||||||||||||||||
| Foreign currency forward contracts | |||||||||||||||||||||||
| Matched customer book | 61 | — | 61 | — | |||||||||||||||||||
| Foreign currency loan | 5 | — | 5 | — | |||||||||||||||||||
| Total | $ | 34,216 | $ | — | $ | 34,216 | $ | — | |||||||||||||||
40
| 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 three months ended March 31, 2021 and year ended December 31, 2020.
For the fair value measurements which are classified as Level 3 within the fair value hierarchy, the Company’s Treasury and Finance groups determine the valuation policies and procedures. For the valuation of the qualified zone academy bond, the Company uses third-party valuation information. Management determined that no changes to the quantitative unobservable inputs were necessary. Management employs various techniques to analyze the valuation it receives from third parties, such as analyzing changes in market yields. Management reviews changes in fair value from period to period to ensure that values received from the third parties are consistent with their expectation of the market. The Company held no assets or liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2021.
41
The table below presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2020:
| Securities Available for Sale | |||||
| Qualified Zone Academy Bond | (In thousands) | ||||
| Balance at January 1, 2020: | $ | 6,310 | |||
| Gains and losses (realized/unrealized): | |||||
| Included in net income | 27 | ||||
| Included in other comprehensive income | (88) | ||||
| Balance at March 31, 2020 | $ | 6,249 | |||
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 March 31, 2021 and December 31, 2020.
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||
| Description | Balance as of March 31, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Collateral-dependent impaired loans whose fair value is based upon appraisals | $ | 11,685 | $ | — | $ | — | $ | 11,685 | |||||||||||||||
| 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) | |||||||||||||||||||
| (Dollars 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.
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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 | |||||||||||||||||||||||||||||
| Carrying Value as of March 31, 2021 | Fair Value as of March 31, 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 | $ | 9,772,722 | $ | 9,870,710 | $ | — | $ | — | $ | 9,870,710 | |||||||||||||||||||
| FHLB stock | 8,805 | 8,805 | — | 8,805 | — | ||||||||||||||||||||||||
| Bank-owned life insurance | 79,110 | 79,110 | — | 79,110 | — | ||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||
| Deposits | $ | 12,980,875 | $ | 12,980,753 | $ | — | $ | 12,980,753 | $ | — | |||||||||||||||||||
| FHLB advances | 14,473 | 14,299 | — | 14,299 | — | ||||||||||||||||||||||||
| Escrow deposits from borrowers | 14,878 | 14,878 | — | 14,878 | — | ||||||||||||||||||||||||
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||
| 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.
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15. 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 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.
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.
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars In Thousands) | |||||||||||
| Insurance commissions | $ | 28,147 | $ | 27,477 | |||||||
| Service charges on deposit accounts | 5,367 | 6,098 | |||||||||
| Trust and investment advisory fees | 5,663 | 5,095 | |||||||||
| Debit card processing fees | 2,749 | 2,470 | |||||||||
| Other non-interest income | 1,792 | 2,052 | |||||||||
| Total noninterest income in-scope of ASC 606 | 43,718 | 43,192 | |||||||||
| Total noninterest income out-of-scope of ASC 606 | 11,494 | (9,823) | |||||||||
| Total noninterest income | $ | 55,212 | $ | 33,369 | |||||||
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.
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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 $12.9 million as of March 31, 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.
Cash management services are a subset of the deposit service charges revenue stream. These services include ACH transaction processing, positive pay, lockbox, and remote deposit services. These services are also governed by separate agreements entered into by the customer. The fee arrangement for these services is structured as a fixed fee per transaction which may be offset by earnings credits. An earnings credit is a discount that a customer receives based upon the investable balance in the applicable covered 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 March 31, 2021 and December 31, 2020, respectively, 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 and are settled within each network. Debit card processing fees earned but not yet received amounted to $0.3 million as of both March 31, 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.
45
16. 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 March 31, 2021 | Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||
| Pre-Tax Amount | Tax (Expense) Benefit | After Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After Tax Amount | ||||||||||||||||||||||||||||||
| (Dollars In Thousands) | |||||||||||||||||||||||||||||||||||
| Unrealized (losses) gains on securities available for sale: | |||||||||||||||||||||||||||||||||||
| Change in fair value of securities available for sale | $ | (94,979) | $ | 20,982 | $ | (73,997) | $ | 33,802 | $ | (7,515) | $ | 26,287 | |||||||||||||||||||||||
| Less: reclassification adjustment for gains included in net income | 1,164 | (257) | 907 | 122 | (27) | 95 | |||||||||||||||||||||||||||||
| Net change in fair value of securities available for sale | (96,143) | 21,239 | (74,904) | 33,680 | (7,488) | 26,192 | |||||||||||||||||||||||||||||
| Unrealized gains (losses) on cash flow hedges: | |||||||||||||||||||||||||||||||||||
| Change in fair value of cash flow hedges | — | — | — | 43,556 | (12,244) | 31,312 | |||||||||||||||||||||||||||||
Less: net cash flow hedge losses reclassified into interest income(1) | 8,274 | (2,326) | 5,948 | 3,112 | (875) | 2,237 | |||||||||||||||||||||||||||||
| Net change in fair value of cash flow hedges | (8,274) | 2,326 | (5,948) | 40,444 | (11,369) | 29,075 | |||||||||||||||||||||||||||||
| Defined benefit pension plans: | |||||||||||||||||||||||||||||||||||
| Change in actuarial net loss | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Less: amortization of actuarial net loss | (3,537) | 994 | (2,543) | — | — | — | |||||||||||||||||||||||||||||
| Less: net accretion of prior service cost | 2,945 | (828) | 2,117 | — | — | — | |||||||||||||||||||||||||||||
| Net change in other comprehensive income for defined benefit postretirement plans | 592 | (166) | 426 | — | — | — | |||||||||||||||||||||||||||||
| Total other comprehensive income | $ | (103,825) | $ | 23,399 | $ | (80,426) | $ | 74,124 | $ | (18,857) | $ | 55,267 | |||||||||||||||||||||||
(1)Represents amortization of realized gains on terminated cash flow hedges for the three months ended March 31, 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 $23.9 million, net of tax, at March 31, 2021.
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The following table illustrates the changes in the balances of each component of accumulated other comprehensive income (loss), net of tax:
| Unrealized Gains and (Losses) on Available for Sale Securities | Unrealized Gains and (Losses) on Cash Flow Hedges | Defined Benefit Pension Plans | Total | ||||||||||||||||||||
| (In Thousands) | |||||||||||||||||||||||
| Beginning Balance: January 1, 2021 | $ | 45,672 | $ | 29,815 | $ | (21,253) | $ | 54,234 | |||||||||||||||
| Other comprehensive (loss) income before reclassifications | (73,997) | — | — | (73,997) | |||||||||||||||||||
Less: Amounts reclassified from accumulated other comprehensive income | 907 | 5,948 | (426) | 6,429 | |||||||||||||||||||
Net current-period other comprehensive income | (74,904) | (5,948) | 426 | (80,426) | |||||||||||||||||||
| Ending Balance: March 31, 2021 | $ | (29,232) | $ | 23,867 | $ | (20,827) | $ | (26,192) | |||||||||||||||
| Beginning Balance: January 1, 2020 | $ | 21,798 | $ | 15,624 | $ | (81,269) | $ | (43,847) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 26,287 | 31,312 | — | 57,599 | |||||||||||||||||||
Less: Amounts reclassified from accumulated other comprehensive income | 95 | 2,237 | — | 2,332 | |||||||||||||||||||
Net current-period other comprehensive income | 26,192 | 29,075 | — | 55,267 | |||||||||||||||||||
| Ending Balance: March 31, 2020 | $ | 47,990 | $ | 44,699 | $ | (81,269) | $ | 11,420 | |||||||||||||||
17. 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 March 31, 2021 and 2020, was as follows:
| As of and for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Banking Business | Insurance Agency Business | Other / Eliminations | Total | Banking Business | Insurance Agency Business | Other / Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 100,091 | $ | — | $ | — | $ | 100,091 | $ | 100,146 | $ | — | $ | — | $ | 100,146 | |||||||||||||||||||||||||||||||
| (Release of) provision for allowance for loan losses | (580) | — | — | (580) | 28,600 | — | — | 28,600 | |||||||||||||||||||||||||||||||||||||||
Net interest income after provision for loan losses | 100,671 | — | — | 100,671 | 71,546 | — | — | 71,546 | |||||||||||||||||||||||||||||||||||||||
Noninterest income | 26,960 | 28,284 | (32) | 55,212 | 6,868 | 26,523 | (22) | 33,369 | |||||||||||||||||||||||||||||||||||||||
Noninterest expense | 75,274 | 19,811 | (1,036) | 94,049 | 78,465 | 17,642 | (935) | 95,172 | |||||||||||||||||||||||||||||||||||||||
Income before provision for income taxes | 52,357 | 8,473 | 1,004 | 61,834 | (51) | 8,881 | 913 | 9,743 | |||||||||||||||||||||||||||||||||||||||
Income tax provision | 11,793 | 2,378 | — | 14,171 | (1,214) | 2,512 | — | 1,298 | |||||||||||||||||||||||||||||||||||||||
Net income | $ | 40,564 | $ | 6,095 | $ | 1,004 | $ | 47,663 | $ | 1,163 | $ | 6,369 | $ | 913 | $ | 8,445 | |||||||||||||||||||||||||||||||
Total assets | $ | 16,595,311 | $ | 194,664 | $ | (63,180) | $ | 16,726,795 | $ | 12,221,799 | $ | 182,564 | $ | (60,609) | $ | 12,343,754 | |||||||||||||||||||||||||||||||
Total liabilities | $ | 13,359,075 | $ | 43,855 | $ | (63,180) | $ | 13,339,750 | $ | 10,696,509 | $ | 45,120 | $ | (60,609) | $ | 10,681,020 | |||||||||||||||||||||||||||||||
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18. Subsequent Events
On April 7, 2021, the Company entered into a definitive merger agreement with Century Bancorp, Inc. (“Century”) under which the Company will acquire Century for $641.9 million in cash (the “Merger Agreement”). Century is the stock holding company of Century Bank and Trust Company, a Massachusetts-chartered stock bank headquartered in Medford, Massachusetts with $6.4 billion in assets, $5.4 billion in deposits and 27 full-service branches in Massachusetts as of December 31, 2020. Pursuant to the terms of the Merger Agreement, Century Bank and Trust Company will merge with and into the Bank upon completion of the transaction. The transaction is subject to customary closing conditions, including the receipt of regulatory approval and Century shareholder approval. The Company currently expects the merger to be completed during the fourth quarter of 2021. The Merger Agreement has been unanimously approved by the Boards of Directors of each of the Company and Century.
Under the terms of the Merger Agreement, at the effective time of the merger, each holder of Century Class A and Class B common stock will receive a cash payment of $115.28 per share.
Additional information about the Merger Agreement and the merger can be found in the Company's Current Report on Form 8-K filed with the SEC on April 8, 2021. The merger is subject to certain risks and uncertainties, and there can be no assurance that the Company will be able to complete the merger on the expected timeline or at all. See “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q.
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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 March 31, 2021, and our results of operations for the three months ended March 31, 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 and the Company’s 2020 Form 10-K.
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 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, 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.
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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 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 months ended March 31, 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 March 31, 2021 | As of December 31, 2020 | ||||||||||
| (Dollars in thousands, except per share data) | |||||||||||
| Selected Financial Position Data: | |||||||||||
| Total assets | $ | 16,726,795 | $ | 15,964,190 | |||||||
| Cash and cash equivalents | 1,860,332 | 2,054,070 | |||||||||
| Securities available for sale | 3,986,253 | 3,183,861 | |||||||||
Loans, net of allowance for loan losses and unamortized premiums, net of unearned discounts and deferred fees | 9,772,722 | 9,593,958 | |||||||||
| Federal Home Loan Bank stock, at cost | 8,805 | 8,805 | |||||||||
| Goodwill and other intangibles, net | 376,002 | 376,534 | |||||||||
| Total liabilities | 13,339,750 | 12,536,138 | |||||||||
| Total deposits | 12,980,875 | 12,155,784 | |||||||||
| Total borrowings | 29,351 | 28,049 | |||||||||
| Total shareholders' equity | 3,387,045 | 3,428,052 | |||||||||
| Nonperforming loans | 43,954 | 43,252 | |||||||||
| Nonperforming assets | 43,954 | 43,252 | |||||||||
| Per Share Data: | |||||||||||
| Book value | $ | 18.14 | $ | 18.36 | |||||||
Tangible book value (1) | $ | 16.12 | $ | 16.34 | |||||||
(1)Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” in this Part 1, Item 2.
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| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in thousands, except per share data) | |||||||||||
| Selected Operating Data: | |||||||||||
| Interest and dividend income | $ | 101,133 | $ | 106,159 | |||||||
| Interest expense | 1,042 | 6,013 | |||||||||
| Net interest income | 100,091 | 100,146 | |||||||||
| (Release of) provision for loan losses | (580) | 28,600 | |||||||||
| Net interest income after provision for loan losses | 100,671 | 71,546 | |||||||||
| Noninterest income | 55,212 | 33,369 | |||||||||
| Noninterest expense | 94,049 | 95,172 | |||||||||
| Income before income taxes | 61,834 | 9,743 | |||||||||
| Provision for income taxes | 14,171 | 1,298 | |||||||||
| Net income | $ | 47,663 | $ | 8,445 | |||||||
| Per Share Data: | |||||||||||
| Basic earnings per share | $ | 0.28 | $ | — | |||||||
| Diluted earnings per share | 0.28 | — | |||||||||
| As of and for the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Performance Ratios: | |||||||||||
Return on average assets (1) (6) | 1.19 | % | 0.29 | % | |||||||
Return on average equity (2) (6) | 5.66 | % | 2.08 | % | |||||||
Interest rate spread (FTE) (3) (6) | 2.67 | % | 3.64 | % | |||||||
Net interest margin (FTE) (4) (6) | 2.71 | % | 3.80 | % | |||||||
Noninterest expenses to average assets (6) | 2.34 | % | 3.25 | % | |||||||
Efficiency ratio (5) | 60.56 | % | 71.28 | % | |||||||
| Average interest-earning assets to average interest-bearing liabilities | 205.03 | % | 169.37 | % | |||||||
| Capital Ratios: | |||||||||||
| Average equity to average assets | 20.95 | % | 13.86 | % | |||||||
| Total capital to risk weighted assets | 29.80 | % | 13.57 | % | |||||||
| Tier 1 capital to risk weighted assets | 28.67 | % | 12.42 | % | |||||||
| Common equity tier 1 capital to risk weighted assets | 28.67 | % | 12.42 | % | |||||||
| Tier 1 capital to average assets | 19.18 | % | 11.28 | % | |||||||
| Asset Quality Ratios: | |||||||||||
| Allowance for loan losses as a percentage of total loans | 1.12 | % | 1.20 | % | |||||||
| Allowance for loan losses as a percentage of nonperforming loans | 252.72 | % | 222.34 | % | |||||||
| Net charge-offs (recoveries) to average outstanding loans during the period | 0.01 | % | 0.02 | % | |||||||
| Nonperforming loans as a percentage of total loans | 0.44 | % | 0.54 | % | |||||||
| Nonperforming loans as a percentage of total assets | 0.26 | % | 0.40 | % | |||||||
| Total nonperforming assets as a percentage of total assets | 0.26 | % | 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.
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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 $16.7 billion and $16.0 billion at March 31, 2021 and December 31, 2020, respectively. We are subject to comprehensive regulation and examination by the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve Board and the Consumer Financial Protection Bureau.
We manage our business under two business segments: our banking business, which contributed $127.1 million, or 81.8%, of our total income (pre-provision net interest and dividend income and noninterest income) for the three months ended March 31, 2021, and our insurance agency business, which contributed $28.3 million, or 18.2%, of our total income for the three months ended March 31, 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 months ended March 31, 2021 computed in accordance with GAAP was $47.7 million, as compared to $8.4 million for the three months ended March 31, 2020, representing a 464.4% increase. This increase was largely driven by a decrease in the provision for the allowance for loan losses of $29.2 million as we released reserves of $0.6 million for the three months ended March 31, 2021. In addition, interest rate swap income and income from investments held in rabbi trusts increased by $11.4 million and $8.6 million, respectively, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. These items are discussed further in the “Results of Operations” section below. Net income for the three months ended March 31, 2021 and 2020 included items that our management considers noncore, which management excludes for purposes of assessing our operating net income, a non-GAAP financial measure. Operating net income for the three months ended March 31, 2021 was $46.5 million compared to operating net income of $10.9 million for the three months ended March 31, 2020, representing a 328.6% increase. This increase was 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 securities. The financial condition and results of operations of our banking business depend primarily on (i) attracting and retaining low cost, stable deposits, (ii) using those deposits to originate and acquire loans and earn net interest income and (iii) operating expenses incurred.
Lending Activities
We use funds obtained from deposits, as well as funds obtained from the Federal Home Loan Bank (“FHLB”) of Boston (“FHLBB”) advances and federal funds, primarily to originate loans and to invest in securities. Our lending focuses on the following categories of loans:
Commercial Lending
•Commercial and industrial: Loans in this category consist of revolving and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As of March 31, 2021 and December 31, 2020, we had total commercial and industrial loans of $2.0 billion, representing 20.1% and 20.6%, respectively, of our total loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Our primary focus for commercial and industrial loans is middle-market companies located in the markets we serve. In addition, we participate in the syndicated loan market and the Shared National Credit Program (“SNC Program”). As of March 31, 2021 and December 31, 2020, our SNC Program portfolio totaled $402.6 million and $425.1 million, or 20.3% and 21.3%, respectively, of our commercial and industrial portfolio, and 42.0% and 46.4%, respectively, of our SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial and
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industrial portfolio also includes our Asset Based Lending Portfolio (“ABL Portfolio”). As of March 31, 2021 and December 31, 2020, our ABL Portfolio totaled $142.8 million and $134.5 million, or 7.2% and 6.7%, respectively, of our commercial and industrial portfolio.
•Commercial real estate: Loans in this category include mortgage loans on commercial real estate, both investment and owner occupied. As of March 31, 2021 and December 31, 2020, we had total commercial real estate loans of $3.7 billion and $3.6 billion, representing 37.2% and 36.8%, respectively, of our total loans. As of March 31, 2021, and December 31, 2020, owner-occupied loans totaled $696.7 million and $694.6 million, representing 18.9% and 19.4%, respectively, of our commercial real estate loans. Collateral values are established by independent third-party appraisals and evaluations. The primary repayment sources include operating income generated by the real estate, permanent debt refinancing and/or the sale of the real estate.
•Commercial construction: Loans in this category include construction project financing and are comprised of commercial real estate, business banking and residential loans for the purpose of constructing and developing real estate. As of March 31, 2021 and December 31, 2020, we had total commercial construction loans of $249.4 million and $305.7 million, representing 2.5% and 3.1%, respectively, of our total loans.
•Business banking: Loans in this category are comprised of loans to small businesses with exposures of under $1 million and small investment real estate projects with exposures of under $3 million. These loans are separate and distinct from our commercial and industrial and commercial real estate portfolios described above due to the size of the loans. As of March 31, 2021 and December 31, 2020, we had total business banking loans of $1.5 billion and $1.3 billion, respectively, representing 15.3% and 13.8% of our total loans for each period end, respectively. In this category, commercial and industrial loans and commercial real estate loans totaled $833.8 million and $679.2 million, respectively, as of March 31, 2021, and $675.1 million and $664.1 million, respectively, as of December 31, 2020. Business banking originations include traditionally underwritten loans as well as partially automated scored loans. Our proprietary decision matrix, which includes a number of quantitative factors including, but not limited to, a guarantor’s credit score, industry risk, and time in business, is used to determine whether to make business banking loans. We also engage in Small Business Association (“SBA”) lending. SBA guarantees reduce our risk of loss when default occurs and are considered a credit enhancement to the loan structure.
Residential Lending
•Residential real estate: Loans in this category consist of mortgage loans on residential real estate. As of March 31, 2021 and December 31, 2020, we had total residential loans of $1.4 billion, representing 14.2% and 14.1%, respectively, of our total loans. Underwriting considerations include, among others, income sources and their reliability, willingness to repay as evidenced by credit repayment history, financial resources including cash reserves and the value of the collateral. We maintain policy standards for minimum credit score and cash reserves and maximum loan to value consistent with a “prime” portfolio. Collateral consists of mortgage liens on residential dwellings. We do not originate or purchase sub-prime or other high-risk loans. Residential loans are originated either for sale to investors or to retain in our loan portfolio. Decisions about whether to sell or retain residential loans are made based on the interest rate characteristics, pricing for loans in the secondary mortgage market, competitive factors and our capital needs. During the three months ended March 31, 2021 and the three months ended March 31, 2020, residential real estate mortgage originations were $260.1 million and $60.8 million, respectively, of which $57.2 million and $49.7 million, respectively, were sold on the secondary markets. We generally do not continue to service residential loans that we sell in the secondary market.
Consumer Lending
•Consumer home equity: Loans in this category consist of home equity lines of credit and home equity loans. As of March 31, 2021 and December 31, 2020, we had total consumer home equity loans of $832.5 million and $868.3 million, representing 8.4% and 8.9%, respectively, of our total loans. Home equity lines of credit are granted for ten years with monthly interest-only repayment requirements. Home equity lines of credit can be converted to term loans that are fully amortized. Underwriting considerations are materially consistent with those utilized in the residential real estate category. Collateral consists of a senior or subordinate lien on owner-occupied residential property.
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•Other consumer: Loans in this category consist of unsecured personal lines of credit, overdraft protection, automobile and aircraft loans, and other personal loans. As of March 31, 2021 and December 31, 2020, we had total other consumer loans of $251.7 million and $277.8 million, representing 2.5% and 2.9%, respectively, of our total loans. Our policy and underwriting in this category include the following factors, among others: income sources and reliability, credit histories, term of repayment and collateral value, as applicable. Included in this category are $103.4 million and $126.7 million of automobile loans, respectively, at March 31, 2021 and December 31, 2020.
Other Banking Products and Services
In addition to our lending activities, which are the core part of our banking business, we offer other banking products and services primarily related to (i) other commercial banking products, (ii) other consumer deposit products and (iii) wealth management services.
Other Commercial Banking Products
•We offer a variety of deposit, treasury management, electronic banking, interest rate protection and foreign exchange products to our customers. Deposit products include checking products, both interest-bearing and noninterest-bearing, as well as money market deposits, savings deposits and certificates of deposits. Our treasury management products include a variety of cash management and payment products. Our interest rate protection and foreign exchange products include interest rate swaps and currency related transactions. As of March 31, 2021 and December 31, 2020, our total commercial deposits were $4.7 billion and $4.4 billion, respectively, and our commercial noninterest income during the three months ended March 31, 2021 and the three months ended March 31, 2020 was $5.1 million and $4.9 million, respectively.
Other Consumer Deposit Products
•We offer a wide variety of deposit products and services to our consumer customers. We service these customers through our 88 branches located in eastern Massachusetts and New Hampshire, through our call center in our facility in Lynn, MA and through our online and mobile banking applications.
Wealth Management Services
•Through our Eastern Wealth Management division, we provide a wide range of trust services, including (i) managing customer investments, (ii) serving as custodian for customer assets and (iii) providing other fiduciary services, including serving as the trustee and personal representative of estates. As of March 31, 2021 and December 31, 2020, we held $3.0 billion and $2.9 billion, respectively, of assets in a fiduciary, custodial or agency capacity for customers, which are not our assets and therefore not included on the consolidated balance sheets included in this Quarterly Report on Form 10-Q. For the three months ended March 31, 2021 and the three months ended March 31, 2020, we had noninterest income of $5.7 million and $5.1 million, respectively, from providing these services.
Insurance Agency Business
Our insurance agency business consists of insurance-related activities such as acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients through our wholly owned agency, Eastern Insurance Group LLC (“Eastern Insurance Group”). Our insurance products include commercial property and liability, workers compensation, life, accident and health and automobile insurance. We also offer a wide range of employee benefits products and services, including professional advice related to health care cost management, employee engagement and retirement and executive services. As an agency business, we do not assume any underwriting or insurance risk. The commissions we earn on the sale of these insurance products and services is the most significant portion of our noninterest income, representing $28.1 million and $27.5 million, or 51.0% and 82.3%, respectively, of our noninterest income during the three months ended March 31, 2021 and the three months ended March 31, 2020. Our insurance business operates through 24 non-branch offices located primarily in eastern Massachusetts and had 405 full-time equivalent employees as of March 31, 2021.
Acquisitions
Proposed Acquisition
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On April 7, 2021, we entered into a definitive merger agreement with Century Bancorp, Inc. under which we will acquire Century for $641.9 million in cash (the “Merger Agreement”). Century is the stock holding company of Century Bank and Trust Company, a Massachusetts-chartered stock bank headquartered in Medford, Massachusetts with $6.4 billion in assets, $5.4 billion in deposits and 27 full-service branches in Massachusetts as of December 31, 2020. Pursuant to the terms of the Merger Agreement, Century Bank and Trust Company will merge with and into Eastern Bank, our wholly-owned subsidiary, upon completion of the transaction. The transaction is subject to customary closing conditions, including the receipt of regulatory approval and Century shareholder approval. We currently expect the merger to be completed during the fourth quarter of 2021. For additional information about the Merger Agreement and the proposed transaction, please see our Current Report on Form 8-K filed with the SEC on April 8, 2021. See also “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Outlook and Trends
COVID-19 Pandemic
The COVID-19 pandemic has had and continues to have an adverse effect on our business and the markets in which we operate. We expect the short-term and long-term economic consequences of the COVID-19 pandemic to our customers will continue to be significant, and that the continuing health and safety concerns relating to the ongoing pandemic will change the way we conduct our business and interact with our customers.
COVID-19 Modifications. In light of the COVID-19 pandemic, we implemented loan modification programs for our borrowers that allowed for either full payment deferrals (both interest and principal) or deferral of principal only. These modifications met the criteria of either Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“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 troubled debt restructurings (“TDRs”). We have deemed these modified loans, “COVID-19 modifications.”
The Consolidated Appropriations Act (the “Appropriations Act”), which was enacted on December 27, 2020, extends certain expiring tax provisions related to the COVID-19 pandemic in the United States and provides additional emergency relief to individuals and businesses. Included within the provisions of the Appropriations Act is the extension of Section 4013 of the CARES Act to January 1, 2022. As such, we intend to apply CARES Act TDR relief to any qualifying loan modifications executed during the allowable time period.
As of March 31, 2021, the balance of loans that had received a COVID-19 modification since the inception of the modification programs in 2020 was $985.7 million, of which $20.0 million were executed during the three months ended March 31, 2021. Approximately 47% of the aggregate $985.7 million balance of modified loans at March 31, 2021 were modified to permit for full payment deferrals (both interest and principal) and 53% were modified to permit for deferral of principal payments. Modified loans at March 31, 2021 included $625.0 million of commercial real estate loans, including construction loans, $118.7 million of commercial and industrial loans, $127.2 million of business banking loans, $88.5 million of residential real estate loans and $26.3 million of consumer loans, including home equity loans. As of March 31, 2021, $807.3 million, or 82%, of the balance of total modified loans had resumed payments and were not 30 days or more past due. The loans remaining in a modified status as of March 31, 2021 compared to remaining modifications executed through December 31, 2020 are presented by portfolio below.
Remaining COVID-19 Modifications as of March 31, 2021 (1) | Remaining COVID-19 Modifications as of December 31, 2020 (1) | ||||||||||||||||||||||
| Balance | % of Total Portfolio | Balance | % of Total Portfolio | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Commercial and industrial | $ | 22,776 | 1.1 | % | $ | 34,076 | 1.7 | % | |||||||||||||||
| Commercial real estate | 127,683 | 3.5 | % | 231,794 | 6.5 | % | |||||||||||||||||
| Commercial construction | — | — | % | 10,987 | 3.6 | % | |||||||||||||||||
| Business banking | 11,681 | 0.8 | % | 23,434 | 1.7 | % | |||||||||||||||||
| Residential real estate | 13,754 | 1.0 | % | 26,772 | 2.0 | % | |||||||||||||||||
| Consumer home equity | 1,274 | 0.2 | % | 3,432 | 0.4 | % | |||||||||||||||||
| Other consumer | 1,262 | 0.5 | % | 2,187 | 0.8 | % | |||||||||||||||||
| Total | $ | 178,430 | 1.8 | % | $ | 332,682 | 3.4 | % | |||||||||||||||
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(1)Remaining COVID-19 modifications reflect only those loans which underwent a modification and have not yet resumed payment. We define 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.
High Risk Industries. As of the date of this Quarterly Report on Form 10-Q, we are unable to reasonably estimate the aggregate amount of loans that will likely become delinquent after the respective deferral period. The following table shows certain data, as of March 31, 2021, related to loans to our borrowers in industry categories that we believe have experienced and will likely continue to experience the most adverse effects of the COVID-19 pandemic. Loans included in the table that had been modified as of March 31, 2021 represented approximately 1.8% of our aggregate outstanding loan balances as of March 31, 2021.
| Loan Balance | Balance (%) | COVID-19 Modification % (1) | |||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| High Risk Industries | |||||||||||||||||
Retail (2) | $ | 491,210 | 5.0 | % | 1.0 | % | |||||||||||
| Restaurants | 199,239 | 2.0 | % | 10.7 | % | ||||||||||||
| Hotels | 178,094 | 1.8 | % | 51.6 | % | ||||||||||||
| Construction contractors financing | 83,112 | 0.8 | % | 0.9 | % | ||||||||||||
| Auto dealerships | 77,658 | 0.8 | % | — | % | ||||||||||||
| Other high risk | 81,529 | 0.8 | % | 0.8 | % | ||||||||||||
| All impacted industries total | 1,110,842 | 11.2 | % | 10.8 | % | ||||||||||||
| Remaining commercial and business banking | 6,314,932 | 63.7 | % | 0.7 | % | ||||||||||||
| Total commercial and business banking | 7,425,774 | 74.9 | % | 2.2 | % | ||||||||||||
| All other loans | 2,490,701 | 25.1 | % | 0.7 | % | ||||||||||||
| Total | $ | 9,916,475 | 100.0 | % | 1.8 | % | |||||||||||
(1)The percentage of loans in each category, calculated as a percentage of aggregate outstanding loan balances for each such category as of March 31, 2021, that we modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in late March 2020.
(2)The retail segment includes all retail commercial real estate loans and non-essential commercial and industrial retail loans.
Paycheck Protection Program Loans. We are a participating lender in the SBA’s Paycheck Protection Program (“PPP”). The vast majority of our PPP borrowers are existing commercial and small business borrowers, non-profit customers, retail banking customers and clients of Eastern Wealth Management and Eastern Insurance Group LLC.
•During the three months ended March 31, 2021, we originated approximately 4,700 PPP loans totaling $452.6 million. These loans have a maturity of five years. Fees received from the SBA and direct loan origination costs are being deferred over the five-year term. Through March 31, 2021, we had received $19.9 million in fees from the SBA and had deferred $2.8 million in direct loan origination costs related to 2021 originations.
•During the year ended December 31, 2020, we originated approximately 8,900 PPP loans totaling $1.2 billion. The majority of these loans have a maturity of two years. Fees received from the SBA and direct loan origination costs are being deferred over the loan term, which is generally two years. During the year ended December 31, 2020, we received $37.1 million in fees from the SBA and deferred $4.6 million in direct loan origination costs. During the three months ended March 31, 2021, certain 2020 originations were modified and we received a nominal amount of additional fees from the SBA. We anticipate that the vast majority of the remaining 2020 originations will be forgiven during the year ended December 31, 2021.
•Net PPP fee accretion (fee accretion less cost amortization) for all PPP loans for the three months ended March 31, 2021 was $8.3 million.
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The following table shows certain data related to PPP originations by period:
| PPP Loans Originated During the | Total | ||||||||||||||||
| Three Months Ended March 31, 2021 | Year ended December 31, 2020 | ||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Number of loans originated | 4,693 | 8,902 | 13,595 | ||||||||||||||
| Original balance of loans originated | $ | 452,596 | $ | 1,167,137 | $ | 1,619,733 | |||||||||||
Current balance of loans originated in respective periods(1) | 452,619 | 785,434 | 1,238,053 | ||||||||||||||
Total SBA fees received(2) | 19,942 | 37,180 | 57,122 | ||||||||||||||
SBA fees recognized in interest income related to loans originated in respective periods(3) | 686 | 24,672 | 25,358 | ||||||||||||||
| Unaccreted SBA fees related to loans originated in respective periods | 19,256 | 12,508 | 31,764 | ||||||||||||||
(1)Current loan balance for 2021 originations exceeds the original balance of loans originated in 2021 as certain loans had additional funds advanced subsequent to origination.
(2)Total SBA fees received on 2020 originations includes additional fees received from the SBA in 2021 for originations that were modified in 2021.
(3)Reflects life-to-date accretion.
The following table shows certain data related to our remaining PPP loans as of March 31, 2021:
| Loan Size | Loan Balance | Number of Loans | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| $0 to $50 thousand | $ | 126,812 | 6,992 | |||||||||||
| $50 thousand to $150 thousand | 190,590 | 2,212 | ||||||||||||
| $150 thousand to $1 million | 471,623 | 1,409 | ||||||||||||
| $1 million to $2 million | 169,582 | 119 | ||||||||||||
| $2 million to $5 million | 213,143 | 76 | ||||||||||||
| Over $5 million | 66,303 | 11 | ||||||||||||
| Total | $ | 1,238,053 | 10,819 | |||||||||||
The following table shows the balance of our PPP loans by industry as of March 31, 2021:
| Industry | Loan Balance | Number of Loans | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| Construction | $ | 200,670 | 1,432 | |||||||||||
| Professional, scientific, & technical services | 170,461 | 1,749 | ||||||||||||
| Health care & social assistance | 166,199 | 961 | ||||||||||||
| Accommodation & food services | 153,197 | 1,130 | ||||||||||||
| Other services | 108,471 | 1,568 | ||||||||||||
| Manufacturing | 91,184 | 458 | ||||||||||||
| Administrative & support | 82,669 | 577 | ||||||||||||
| Wholesale trade | 66,734 | 307 | ||||||||||||
| Retail trade | 55,742 | 988 | ||||||||||||
| Transportation & warehousing | 32,123 | 319 | ||||||||||||
| Real estate, rental, & leasing | 30,672 | 434 | ||||||||||||
| All other | 79,931 | 896 | ||||||||||||
| Total | $ | 1,238,053 | 10,819 | |||||||||||
Non-GAAP Financial Measures
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We present certain non-GAAP financial measures, which management uses to evaluate our performance and which exclude the effects of certain transactions, non-cash items and GAAP adjustments that we believe are unrelated to our core business and are therefore not necessarily indicative of our current performance or financial position. Management believes excluding these items facilitates greater visibility for investors into our core businesses as well as underlying trends that may, to some extent, be obscured by inclusion of such items in the corresponding GAAP financial measures.
There are items in our financial statements that impact our results but which we believe are unrelated to our core business. Accordingly, we present operating net income, noninterest income on an operating basis, noninterest expense on an operating basis, total operating revenue, operating earnings per share, and the operating efficiency ratio, each of which excludes the impact of such items because we believe such exclusion can provide greater visibility into our core business and underlying trends. Such items that we do not consider to be core to our business include (i) income and expenses from investments held in rabbi trusts, (ii) gains and losses on sales of securities available for sale, net, (iii) gains and losses on the sale of other assets, (iv) rabbi trust employee benefits, (v) impairment charges on tax credit investments and associated tax credit benefits, (vi) expenses indirectly associated with our initial public offering (“IPO”), (vii) other real estate owned (“OREO”) gains, (viii) merger and acquisition expenses, and (ix) the stock donation to the Eastern Bank Charitable Foundation (the “Foundation”) in connection with our mutual-to-stock conversion and IPO. There were no impairment charges on tax credit investments, other real estate owned gains, or stock donations to the Foundation during the periods presented in this Quarterly Report on Form 10-Q.
We also present tangible shareholders’ equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, and tangible book value per share, each of which excludes the impact of goodwill and other intangible assets, as we believe these financial measures provide investors with the ability to further assess our performance, identify trends in our core business and provide a comparison of our capital adequacy to other companies. We have included the tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends.
Our non-GAAP financial measures should not be considered as an alternative or substitute to GAAP net income, or as an indication of our cash flows from operating activities, a measure of our liquidity or an indication of funds available for our cash needs. An item which we consider to be non-core and exclude when computing these non-GAAP financial measures can be of substantial importance to our results for any particular period. In addition, our methodology for calculating non-GAAP financial measures may differ from the methodologies employed by other companies to calculate the same or similar performance measures and, accordingly, our reported non-GAAP financial measures may not be comparable to the same or similar performance measures reported by other companies.
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The following table summarizes the impact of non-core items recorded for the time periods indicated below and reconciles them to the most directly comparable GAAP financial measure:
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in thousands, except per share data) | |||||||||||
| Net income (GAAP) | $ | 47,663 | $ | 8,445 | |||||||
| Non-GAAP adjustments: | |||||||||||
| Add: | |||||||||||
| Noninterest income components: | |||||||||||
| (Income) loss from investments held in rabbi trusts | (1,846) | 6,743 | |||||||||
| (Gain) loss on sales of securities available for sale, net | (1,164) | (122) | |||||||||
| (Gain) loss on sale of other assets | (18) | (29) | |||||||||
| Noninterest expense components: | |||||||||||
| Rabbi trust employee benefit expenses (income) | 986 | (3,479) | |||||||||
| Indirect initial public offering costs (1) | — | 270 | |||||||||
| Merger and acquisition expenses | 589 | — | |||||||||
| Total impact of non-GAAP adjustments | (1,453) | 3,383 | |||||||||
Less net tax (expense) benefit associated with non-GAAP adjustment (2) | (327) | 970 | |||||||||
| Non-GAAP adjustments, net of tax | $ | (1,126) | $ | 2,413 | |||||||
| Operating net income (non-GAAP) | $ | 46,537 | $ | 10,858 | |||||||
| Weighted average common shares outstanding during the period: | |||||||||||
| Basic | 172,049,044 | n.a | |||||||||
| Diluted | 172,049,044 | n.a | |||||||||
| Earnings per share, basic | $ | 0.28 | n.a | ||||||||
| Earnings per share, diluted | $ | 0.28 | n.a | ||||||||
| Operating earnings per share, basic (non-GAAP) | $ | 0.27 | n.a | ||||||||
| Operating earnings per share, diluted (non-GAAP) | $ | 0.27 | n.a | ||||||||
(1)Reflects costs associated with the IPO that are indirectly related to the IPO and were not recorded as a reduction of capital.
(2)The net tax (expense) benefit associated with these items is determined by assessing whether each item is included or excluded from net taxable income and applying our combined statutory tax rate only to those items included in net taxable income.
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The following table summarizes the impact of non-core items with respect to our total income, noninterest income, noninterest expense and the efficiency ratio, which reconciles to the most directly comparable respective GAAP financial measure, for the periods indicated:
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Net interest income (GAAP) | $ | 100,091 | $ | 100,146 | |||||||
| Add: | |||||||||||
Tax-equivalent adjustment (non-GAAP) | 1,297 | 1,368 | |||||||||
| Fully-taxable equivalent net interest income (non-GAAP) | 101,388 | 101,514 | |||||||||
| Noninterest income (GAAP) | 55,212 | 33,369 | |||||||||
| Less: | |||||||||||
| Income (losses) from investments held in rabbi trusts | 1,846 | (6,743) | |||||||||
| Gains (losses) on sales of securities available for sale, net | 1,164 | 122 | |||||||||
| Gains (losses) on sale of other assets | 18 | 29 | |||||||||
| Noninterest income on an operating basis (non-GAAP) | 52,184 | 39,961 | |||||||||
| Noninterest expense (GAAP) | $ | 94,049 | $ | 95,172 | |||||||
| Less: | |||||||||||
| Rabbi trust benefit expense (income) | 986 | (3,479) | |||||||||
| Merger and acquisition expenses | 589 | — | |||||||||
| Indirect IPO costs (1) | — | 270 | |||||||||
| Noninterest expense on an operating basis (non-GAAP) | $ | 92,474 | $ | 98,381 | |||||||
| Total revenue (GAAP) | $ | 155,303 | $ | 133,515 | |||||||
| Total operating revenue (non-GAAP) | $ | 153,572 | $ | 141,475 | |||||||
| Ratios | |||||||||||
| Efficiency ratio (GAAP) | 60.56 | % | 71.28 | % | |||||||
| Operating efficiency ratio (non-GAAP) | 60.22 | % | 69.54 | % | |||||||
(1)Reflects costs associated with the IPO that are indirectly related to the IPO and were not recorded as a reduction of capital.
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The following table summarizes the calculation of our tangible shareholders’ equity, tangible assets, the ratio of tangible shareholders’ equity to tangible assets, and tangible book value per share, which reconciles to the most directly comparable respective GAAP measure, as of the dates indicated:
| As of March 31, 2021 | As of | As of December 31, 2020 | |||||||||
| (Dollars in thousands) | |||||||||||
| Tangible shareholders’ equity: | |||||||||||
| Total shareholders’ equity (GAAP) | $ | 3,387,045 | $ | 3,428,052 | |||||||
| Less: Goodwill and other intangibles | 376,002 | 376,534 | |||||||||
| Tangible shareholders’ equity (non-GAAP) | 3,011,043 | 3,051,518 | |||||||||
| Tangible assets: | |||||||||||
| Total assets (GAAP) | 16,726,795 | 15,964,190 | |||||||||
| Less: Goodwill and other intangibles | 376,002 | 376,534 | |||||||||
| Tangible assets (non-GAAP) | $ | 16,350,793 | $ | 15,587,656 | |||||||
| Shareholders’ equity to assets ratio (GAAP) | 20.2 | % | 21.5 | % | |||||||
| Tangible shareholders’ equity to tangible assets ratio (non-GAAP) | 18.4 | % | 19.6 | % | |||||||
| Book value per share: | |||||||||||
| Common shares issued and outstanding | 186,758,154 | 186,758,154 | |||||||||
| Book value per share (GAAP) | $ | 18.14 | $ | 18.36 | |||||||
| Tangible book value per share (non-GAAP) | $ | 16.12 | $ | 16.34 | |||||||
Financial Position
Summary of Financial Position
| Change | |||||||||||||||||||||||
| As of March 31, 2021 | As of | As of December 31, 2020 | Amount ($) | Percentage (%) | |||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cash and cash equivalents | $ | 1,860,332 | $ | 2,054,070 | $ | (193,738) | (9.4) | % | |||||||||||||||
| Securities available for sale | 3,986,253 | 3,183,861 | 802,392 | 25.2 | % | ||||||||||||||||||
| Loans, net of allowance for credit losses | 9,772,722 | 9,593,958 | 178,764 | 1.9 | % | ||||||||||||||||||
| Federal Home Loan Bank Stock | 8,805 | 8,805 | — | — | % | ||||||||||||||||||
| Goodwill and other intangible assets | 376,002 | 376,534 | (532) | (0.1) | % | ||||||||||||||||||
| Deposits | 12,980,875 | 12,155,784 | 825,091 | 6.8 | % | ||||||||||||||||||
| Borrowed funds | 29,351 | 28,049 | 1,302 | 4.6 | % | ||||||||||||||||||
Cash and cash equivalents
Total cash and cash equivalents decreased by $193.7 million, or 9.4%, to $1.9 billion at March 31, 2021 from $2.1 billion at December 31, 2020. This decrease was primarily due to available for sale security purchases and funding of new loan originations.
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Securities
Our current investment policy authorizes us to invest in various types of investment securities and liquid assets, including U.S. Treasury obligations, securities of government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate notes, asset-backed securities and municipal securities. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk investment products. We typically invest in the following types of securities:
U.S. government securities: At March 31, 2021 and December 31, 2020 our U.S. government securities consisted of U.S. Agency bonds and U.S. Treasury securities. We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes, and as collateral for interest rate derivative positions. U.S. Agency bonds include securities issued by Fannie Mae, Freddie Mac, the FHLB, and the Federal Farm Credit Bureau.
Mortgage-backed securities: We invest in residential and commercial mortgage-backed securities insured or guaranteed by Freddie Mac or Fannie Mae. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac or Fannie Mae.
Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.
State and municipal securities: We invest in fixed rate investment grade bonds issued primarily by municipalities in our local communities within Massachusetts and by the Commonwealth of Massachusetts. The market value of these securities may be affected by call options, long dated maturities, general market liquidity and credit factors.
The Risk Management Committee of our Board of Directors is responsible for approving and overseeing our investment policy, which it reviews at least annually. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns and market risk considerations.
The following table shows the fair value of our securities by investment category as of the dates indicated:
Securities Portfolio Composition
| As of March 31, 2021 | As of | As of December 31, 2020 | |||||||||
| (In thousands) | |||||||||||
| Available for sale securities: | |||||||||||
| Government-sponsored residential mortgage-backed securities | $ | 2,691,702 | $ | 2,148,800 | |||||||
| Government-sponsored commercial mortgage-backed securities | 116,271 | 17,081 | |||||||||
| U.S. Agency bonds | 831,672 | 666,709 | |||||||||
| U.S. Treasury securities | 69,090 | 70,369 | |||||||||
| State and municipal bonds and obligations | 277,518 | 280,902 | |||||||||
| Total | $ | 3,986,253 | $ | 3,183,861 | |||||||
Our securities portfolio has increased year-to-date. Available for sale securities increased $802.4 million, or 25.2%, to $4.0 billion at March 31, 2021 from $3.2 billion at December 31, 2020. This increase is due to investment purchases during three months ended March 31, 2021. In addition, at March 31, 2021 the unrealized loss was $37.5 million compared to an unrealized gain of $58.7 million at December 31, 2020, representing a $96.1 million decrease.
We did not have trading securities or held-to-maturity investments at March 31, 2021 or December 31, 2020.
A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled $277.5 million at March 31, 2021 compared to $280.9 million at December 31, 2020.
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Our available for sale securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as Level 3 within the fair value hierarchy. As of both March 31, 2021 and December 31, 2020, we had no securities categorized as Level 3 within the fair value hierarchy.
Maturities of our securities portfolio are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur.
The following tables show contractual maturities of our available for sale securities and weighted average yields at and for the periods ended March 31, 2021 and December 31, 2020. Weighted average yields in the table below have been calculated based on the amortized cost of the security:
Securities Portfolio, Amounts Maturing
| Securities Maturing as of March 31, 2021 | |||||||||||||||||||||||||||||
| Within One Year | After One Year But Within Five Years | After Five Years But Within Ten Years | After Ten Years | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | — | $ | 21,777 | $ | 91,340 | $ | 2,578,585 | $ | 2,691,702 | |||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | 23,771 | 92,500 | — | 116,271 | ||||||||||||||||||||||||
| U.S. Agency bonds | — | 98,111 | 733,561 | — | 831,672 | ||||||||||||||||||||||||
| U.S. Treasury securities | 10,095 | 58,995 | — | — | 69,090 | ||||||||||||||||||||||||
| State and municipal bonds and obligations | 406 | 26,220 | 76,077 | 174,815 | 277,518 | ||||||||||||||||||||||||
| Total | $ | 10,501 | $ | 228,874 | $ | 993,478 | $ | 2,753,400 | $ | 3,986,253 | |||||||||||||||||||
| Weighted-average yield | 0.46 | % | 0.96 | % | 1.07 | % | 1.61 | % | 1.43 | % | |||||||||||||||||||
| Securities Maturing as of December 31, 2020 | |||||||||||||||||||||||||||||
| Within One Year | After One Year But Within Five Years | After Five Years But Within Ten Years | After Ten Years | Total | |||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||
| Available for sale securities: | |||||||||||||||||||||||||||||
| Government-sponsored residential mortgage-backed securities | $ | — | $ | 48,925 | $ | 100,278 | $ | 1,999,597 | $ | 2,148,800 | |||||||||||||||||||
| Government-sponsored commercial mortgage-backed securities | — | — | 17,081 | — | 17,081 | ||||||||||||||||||||||||
| U.S. Agency bonds | — | 99,834 | 566,875 | — | 666,709 | ||||||||||||||||||||||||
| U.S. Treasury securities | 50,251 | 20,118 | — | — | 70,369 | ||||||||||||||||||||||||
| State and municipal bonds and obligations | 408 | 21,431 | 79,635 | 179,428 | 280,902 | ||||||||||||||||||||||||
| Total | $ | 50,659 | $ | 190,308 | $ | 763,869 | $ | 2,179,025 | $ | 3,183,861 | |||||||||||||||||||
| Weighted-average yield | 2.05 | % | 1.34 | % | 1.15 | % | 1.50 | % | 1.41 | % | |||||||||||||||||||
The yield on tax-exempt obligations of states and political subdivisions has been adjusted to a FTE basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing federal income taxes that would have been paid if the income had been fully taxable.
Net unrealized (losses) gains on available for sale securities as of March 31, 2021 and December 31, 2020 totaled $(37.5) million and $58.7 million, respectively. The change from December 31, 2020 to March 31, 2021 is primarily rate driven.
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Loans
We consider our loan portfolio to be relatively diversified by borrower and industry. Our loans increased $186.0 million, or 1.9%, to $9.9 billion at March 31, 2021 from $9.7 billion at December 31, 2020. The increase as of March 31, 2021 was primarily due to an increase in business banking and commercial real estate loan balances.
•The $173.9 million increase in our business banking loans from December 31, 2020 to March 31, 2021 was primarily a result of an increase of $170.8 million in PPP loans during the three months ended March 31, 2021.
•The $103.3 million increase in our commercial real estate loans was primarily a result of an increase of $87.6 million in the investment commercial real estate category during the three months ended March 31, 2021.
•The $26.3 million decrease in our retail portfolio was primarily a result of a decrease in the auto lending portfolio of $23.3 million during the three months ended March 31, 2021.
The following table shows the composition of our loan portfolio, by category, as of the dates indicated:
Loan Portfolio Composition
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| (In thousands) | |||||||||||
| Commercial and industrial | $ | 1,986,366 | $ | 1,995,016 | |||||||
| Commercial real estate | 3,676,941 | 3,573,630 | |||||||||
| Commercial construction | 249,416 | 305,708 | |||||||||
| Business banking | 1,513,051 | 1,339,164 | |||||||||
| Residential real estate | 1,406,510 | 1,370,957 | |||||||||
| Consumer home equity | 832,466 | 868,270 | |||||||||
| Other consumer | 251,725 | 277,780 | |||||||||
| Total loans | 9,916,475 | 9,730,525 | |||||||||
| Less: | |||||||||||
| Allowance for loan losses | (111,080) | (113,031) | |||||||||
| Unamortized premiums, net of unearned discounts and deferred fees | (32,673) | (23,536) | |||||||||
| Total loans receivable, net | $ | 9,772,722 | $ | 9,593,958 | |||||||
We believe that our commercial loan portfolio composition is relatively diversified in terms of industry sectors, property types and various lending specialties, and is concentrated in the New England geographical area, with 90.9% of our loans in Massachusetts and New Hampshire as of March 31, 2021.
Asset quality. We continually monitor the asset quality of our loan portfolio utilizing portfolio scorecards and various credit quality indicators. Based on this process, loans meeting certain criteria are categorized as delinquent, impaired, or non-performing and further assessed to determine if nonaccrual status is appropriate.
For the commercial portfolio, which includes our commercial and industrial, commercial real estate, commercial construction and business banking loans, we monitor credit quality using a risk rating scale, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. Effective December 2020, management implemented an enhanced loan risk rating methodology based on a 15-point scale and adopted new risk rating scorecard tools. The rating scale expanded from the prior 12-point scale to provide 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).
Risk rating assignment is determined using one of 14 separate scorecards developed for distinctive portfolio segments based on common attributes. Key factors include: industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral and other considerations. The new risk rating methodology, inclusive of the expanded grade levels and the scorecard tools, has increased, and is expected to continue to increase, the granularity and distribution of risk rating assignment with more precision and effectiveness; provide customized and enhanced templates to incorporate more risk factors
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and attributes applicable to loan and collateral types; increase precision and effectiveness of credit risk identification; and provide a foundation for enhanced reporting, including migration of risk rating analysis.
Special mention, substandard and doubtful loans totaled 7.4% and 7.7% of total commercial loans outstanding at March 31, 2021 and December 31, 2020, respectively. This decrease was driven by risk rating upgrades in the construction and commercial and industrial portfolios.
Our philosophy toward managing our loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. We seek to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.
The delinquency rate of our total loan portfolio increased to 0.58% at March 31, 2021 from 0.49% at December 31, 2020, primarily due to an increase in our commercial and industrial and commercial real estate portfolios.
The following table provides details regarding our delinquency rates as of the dates indicated:
Loan Delinquency Rates
Delinquency Rate as of (1) | |||||||||||
| March 31, 2021 | December 31, 2020 | ||||||||||
| Commercial and industrial | 0.54 | % | 0.11 | % | |||||||
| Commercial real estate | 0.13 | % | 0.06 | % | |||||||
| Commercial construction | — | % | — | % | |||||||
| Business banking | 1.53 | % | 1.40 | % | |||||||
| Residential real estate | 0.91 | % | 1.21 | % | |||||||
| Consumer home equity | 0.59 | % | 0.60 | % | |||||||
| Other consumer | 0.69 | % | 0.98 | % | |||||||
| Total | 0.58 | % | 0.49 | % | |||||||
(1)In the calculation of the delinquency rate as of March 31, 2021 and December 31, 2020, the total amount of loans outstanding includes $1.2 billion and $1.0 billion, respectively, of PPP loans.
The following table provides details regarding the age analysis of past due loans as of the dates indicated:
Age Analysis of Past Due Loans
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||
| 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | 30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 9,460 | $ | 3 | $ | 1,174 | $ | 4 | $ | 268 | $ | 1,924 | |||||||||||||||||||||||
| Commercial real estate | 3,225 | — | 1,403 | — | 556 | 1,545 | |||||||||||||||||||||||||||||
| Commercial construction | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Business banking | 13,299 | 1,404 | 8,513 | 5,279 | 3,311 | 10,196 | |||||||||||||||||||||||||||||
| Residential real estate | 5,738 | 857 | 6,271 | 9,184 | 2,517 | 4,904 | |||||||||||||||||||||||||||||
| Consumer home equity | 1,416 | 496 | 3,006 | 1,806 | 364 | 3,035 | |||||||||||||||||||||||||||||
| Other Consumer | 975 | 419 | 349 | 1,978 | 234 | 517 | |||||||||||||||||||||||||||||
| Total | $ | 34,113 | $ | 3,179 | $ | 20,716 | $ | 18,251 | $ | 7,250 | $ | 22,121 | |||||||||||||||||||||||
As a general rule, loans more than 90 days past due with respect to principal or interest are classified as non-accrual loans. However, based on our assessment of collateral and/or payment prospects, certain loans that are more than 90 days past due may be kept on an accruing status. Income accruals are suspended on all non-accrual loans and all previously accrued and uncollected interest is reversed against current income. 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.
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Non-performing assets (“NPAs”) are comprised of non-performing loans (“NPLs”), OREO and non-performing securities. NPLs consist of nonaccrual loans and loans that are more than 90 days past due but still accruing interest. OREO consists of real estate properties, which primarily serve as collateral to secure our loans, that we control due to foreclosure or acceptance of a deed in lieu of foreclosure. These properties are recorded at the lower of cost or fair value less estimated costs to sell on the date we obtain control.
The following table sets forth information regarding NPAs held as of the dates indicated:
Non-performing Assets
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| (In thousands) | |||||||||||
| Non-accrual loans: | |||||||||||
| Commercial | $ | 30,275 | $ | 30,059 | |||||||
| Residential | 8,127 | 6,815 | |||||||||
| Consumer | 3,873 | 4,131 | |||||||||
| Total non-accrual loans | 42,275 | 41,005 | |||||||||
| Accruing loans past due 90 days or more: | |||||||||||
| Commercial | 1,390 | 1,959 | |||||||||
| Residential | 280 | 279 | |||||||||
| Consumer | 9 | 9 | |||||||||
| Total accruing loans past due 90 days or more | 1,679 | 2,247 | |||||||||
| Total non-performing loans | 43,954 | 43,252 | |||||||||
| Other real estate owned | — | — | |||||||||
| Other non-performing assets: | — | — | |||||||||
| Total non-performing assets | $ | 43,954 | $ | 43,252 | |||||||
| Total accruing troubled debt restructured loans | $ | 39,367 | $ | 41,095 | |||||||
| Total non-performing loans to total loans | 0.44 | % | 0.45 | % | |||||||
| Total non-performing assets to total assets | 0.26 | % | 0.27 | % | |||||||
NPLs increased $0.7 million, or 1.6%, to $44.0 million at March 31, 2021 from $43.3 million at December 31, 2020. NPLs as a percentage of total loans decreased to 0.44% at March 31, 2021 from 0.45% at December 31, 2020 as a result of an increase in performing loans driven by PPP loans, slightly offset by an increase in NPLs in our residential portfolio.
Non-accrual loans increased $1.3 million, or 3.1%, to $42.3 million at March 31, 2021 from $41.0 million at December 31, 2020, primarily due to increases in our residential real estate and commercial and industrial portfolios, partially offset by a decline in the consumer portfolio.
The total amount of interest recorded on NPLs was $0.1 million for the three months ended March 31, 2021. The gross interest income that would have been recorded under the original terms of those loans if they had been performing amounted to $0.8 million for the three months ended March 31, 2021. The total amount of interest recorded on NPLs was $0.1 million for the three months ended March 31, 2020. The gross interest income that would have been recorded under the original terms of those loans if they had been performing amounted to $0.9 million for the three months ended March 31, 2020.
In the course of resolving NPLs, we may choose to restructure the contractual terms of certain loans. We attempt to work-out alternative payment schedules with the borrowers in order to avoid foreclosure actions. We review any loans that are modified to identify whether a TDR has occurred. TDRs involve situations in which, for economic or legal reasons related to the borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider. As noted previously, loan modifications made in response to the COVID-19 pandemic 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.
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All TDR loans are considered impaired and therefore are subject to a specific review for impairment loss. The impairment analysis discounts the present value of the anticipated cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification or the fair value of collateral if the loan is collateral dependent. The amount of impairment loss, if any, is recorded as a specific reserve to each individual loan in the allowance for loan losses. Commercial loans (commercial and industrial, commercial real estate, commercial construction, and business banking) 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.
TDR loans modified during the three months ended March 31, 2021 and 2020 were $0.3 million (post modification balance) and $0.7 million, respectively. The overall decrease in TDR loans consisted of a decrease of $0.3 million in commercial loan TDRs and a decrease of $0.1 million in consumer loan TDRs. Two loans totaling $0.5 million were modified during the preceding 12 months, which subsequently defaulted during the three months ended March 31, 2021.
It is our policy to have any restructured 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 we consider its return to accrual status. If the restructured loan is on accrual status prior to being modified, we review it to determine if the modified loan should remain on accrual status.
Purchase credit impaired (“PCI”) loans are loans we acquired that have shown evidence of deterioration of credit quality since origination and, therefore, it was deemed unlikely that all contractually required payments would be collected upon the acquisition date. We consider factors such as payment history, collateral values and accrual status when determining whether there was evidence of deterioration at the acquisition date. The carrying value and prospective income recognition of PCI loans are predicated on future cash flows expected to be collected. As of March 31, 2021 and December 31, 2020 the carrying amount of PCI loans was $7.6 million and $9.3 million, respectively.
The following table provides additional details related to our loan portfolio and the distribution of NPLs as of the dates indicated:
Distribution of Nonperforming Loans
| As of March 31, 2021 | |||||||||||||||||||||||||||||||||||
| Gross Loans Outstanding (1) | 90+ Days Due Still Accruing | Non-accruing Loans | TDR Loans, but Accruing | NPLs | NPLs as a % of Gross Loans Outstanding | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||
| Commercial | $ | 7,425,774 | $ | 1,390 | $ | 30,275 | $ | 13,169 | $ | 31,665 | 0.43 | % | |||||||||||||||||||||||
| Residential | 1,406,510 | 280 | 8,127 | 22,565 | 8,407 | 0.60 | % | ||||||||||||||||||||||||||||
| Consumer | 1,084,191 | 9 | 3,873 | 3,633 | 3,882 | 0.36 | % | ||||||||||||||||||||||||||||
| Total | $ | 9,916,475 | $ | 1,679 | $ | 42,275 | $ | 39,367 | $ | 43,954 | 0.44 | % | |||||||||||||||||||||||
(1) Total loans outstanding includes $1.2 billion of PPP loans.
| As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
| Gross Loans Outstanding (1) | 90+ Days Due Still Accruing | Non-accruing Loans | TDR Loans, but Accruing | NPLs | NPLs as a % of Gross Loans Outstanding | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Loans: | |||||||||||||||||||||||||||||||||||
| Commercial | $ | 7,213,518 | $ | 1,959 | $ | 30,059 | $ | 13,620 | $ | 32,018 | 0.44 | % | |||||||||||||||||||||||
| Residential | 1,370,957 | 279 | 6,815 | 23,416 | 7,094 | 0.52 | % | ||||||||||||||||||||||||||||
| Consumer | 1,146,050 | 9 | 4,131 | 4,059 | 4,140 | 0.36 | % | ||||||||||||||||||||||||||||
| Total | $ | 9,730,525 | $ | 2,247 | $ | 41,005 | $ | 41,095 | $ | 43,252 | 0.45 | % | |||||||||||||||||||||||
(1) Total loans outstanding includes $1.0 billion of PPP loans.
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In the normal course of business, we 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 NPLs. In response to the COVID-19 pandemic, we reviewed all of our credit exposures in industries that were expected to experience significant problems due to the pandemic and resulting economic contraction. As part of that review, we downgraded our hotel loans, restaurant loans and other loans that we expected to have associated challenges as a result of the economic impact of the COVID-19 pandemic. These loans were neither delinquent nor on non-accrual status. At March 31, 2021 and December 31, 2020, our potential problem loans (including these COVID-19-related loans), or loans with potential weaknesses that were not included in the non-accrual loans or in the loans 90 days or more past due categories, totaled $551.6 million and $563.3 million, respectively.
Allowance for loan losses. Due to our emerging growth company status under the JOBS Act, we still follow the incurred loss allowance GAAP accounting model. For additional information, see “Risk Factors—We may be required to increase our allowance for loan losses as a result of our adoption as of January 1, 2022 of the new accounting standard for determining the amount of the allowance for loan losses” in Part I, Item 1A of our 2020 Form 10-K.
For the purpose of estimating our allowance for loan losses, we segregate the loan portfolio into homogenous loan pools that possess unique risk characteristics such as loan purpose, repayment source, and collateral that are considered when determining the appropriate level of the allowance for loan losses for each category.
While we use available information to recognize losses on loans, future additions or subtractions to/from the allowance for loan losses may be necessary based on changes in NPLs, changes in economic conditions, or other reasons. Additionally, various regulatory agencies, as an integral part of our examination process, periodically assess the adequacy of the allowance for loan losses to assess whether the allowance for loan losses was determined in accordance with GAAP and applicable guidance.
We perform an evaluation of our allowance for loan losses on a regular basis (at least quarterly), and establish the allowance for loan losses based upon an evaluation of our loan categories, as each possess unique risk characteristics that are considered when determining the appropriate level of allowance for loan losses, including:
•estimated probable loss in all impaired loans in each category;
•known increases in concentrations within each category;
•certain higher risk classes of loans, or pledged collateral;
•historical loan loss experience within each category;
•results of any independent review and evaluation of the category’s credit quality;
•trends in volume, maturity and composition of each category;
•volume and trends in delinquencies and non-accruals;
•national and local economic conditions and downturns in specific local industries;
•corporate goals and objectives;
•expertise of our lending staff;
•lending policy and practices; and
•current and forecasted banking industry conditions, as well as regulatory environment.
Loans are periodically evaluated using changes in asset quality, historical losses, and other loss allocation factors, which form our basis for estimating incurred losses. For risk rated loans, our risk-rating system takes into consideration a number of quantitative and qualitative factors, such as the borrower’s financial capacity, cash flow, liquidity, leverage, adequacy of collateral, tangible net worth, management team, industry, sales and supplier concentration, credit history, additional support and the impact of outside factors on repayment ability. Homogenous populations of loans that are not risk rated loans, are analyzed by loan category, taking into account delinquency ratios and historical loss experience.
The allowance for loan losses is allocated to loan categories using both a formula-based approach and an analysis of certain individual loans for impairment. We use a methodology to systematically estimate the amount of credit loss incurred in the loan portfolio. Under our current methodology, the allowance for loan losses contains specific, general and other components.
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The specific component consists of reserves for impaired loans (defined as those where we determine it is probable we will not collect all payments when due, typically classified as either doubtful or substandard). All commercial, residential and consumer loan portfolios are periodically reviewed to identify the loans with deteriorating performance. The reports used to identify those loans include, but are not limited to, delinquency reports, risk rating migration (for risk rated loans), asset quality reports, watch loan list and other credit risk management reports. When a loan is determined to be impaired, the measurement will be based on the present value of expected future cash flows, except for collateral-dependent loans, where the impairment is based on the fair value of the collateral.
The general loss reserves methodology, which is applied to categories of loans with similar characteristics, covers all non-impaired loans and is based on our portfolio’s segment historical loss experience adjusted for qualitative factors. The general loss reserve methodology considers multiple qualitative factors that may impact the loss experience during the incurred loss horizon period, including internal infrastructure factors, external macroeconomic factors, internal credit quality factors and external industry data, tailored to the specific loan category.
For additional discussion of our risk rating methodology, see Note 4, “Loans and Allowance for Loan Losses” within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
The allowance for loan losses decreased by $1.9 million, or 1.7%, to $111.1 million, or 1.12% of total loans, at March 31, 2021 from $113.0 million, or 1.16% of total loans at December 31, 2020. The decrease in the allowance for loan losses was primarily a result of improved macroeconomic conditions and risk rating upgrades in the commercial portfolios. The current environment is being assisted by government stimulus and the impacts of the loan deferral programs. This, along with other factors, resulted in a release in the allowance for loan loss of $0.6 million for the three months ended March 31, 2021.
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The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented:
Summary of Changes in the Allowance for Loan Losses
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Average total loans | $ | 9,816,788 | $ | 9,016,223 | |||||||
| Allowance for loan losses, beginning of the period | $ | 113,031 | $ | 82,297 | |||||||
| Charged-off loans: | |||||||||||
| Commercial and industrial | — | — | |||||||||
| Commercial real estate | 234 | — | |||||||||
| Commercial construction | — | — | |||||||||
| Business banking | 1,384 | 1,337 | |||||||||
| Residential real estate | — | — | |||||||||
| Consumer home equity | — | 473 | |||||||||
| Other consumer | 364 | 533 | |||||||||
| Total charged-off loans | 1,982 | 2,343 | |||||||||
| Recoveries on loans previously charged-off: | |||||||||||
| Commercial and industrial | 9 | 322 | |||||||||
| Commercial real estate | — | 1 | |||||||||
| Commercial construction | — | — | |||||||||
| Business banking | 365 | 127 | |||||||||
| Residential real estate | 10 | 60 | |||||||||
| Consumer home equity | 71 | 14 | |||||||||
| Other consumer | 156 | 60 | |||||||||
| Total recoveries | 611 | 584 | |||||||||
| Net loans charged-off (recoveries): | |||||||||||
| Commercial and industrial | (9) | (322) | |||||||||
| Commercial real estate | 234 | (1) | |||||||||
| Commercial construction | — | — | |||||||||
| Business banking | 1,019 | 1,210 | |||||||||
| Residential real estate | (10) | (60) | |||||||||
| Consumer home equity | (71) | 459 | |||||||||
| Other consumer | 208 | 473 | |||||||||
| Total net loans charged-off | 1,371 | 1,759 | |||||||||
| (Release of) provision for loan losses | (580) | 28,600 | |||||||||
| Total allowance for loan losses, end of period | $ | 111,080 | $ | 109,138 | |||||||
| Net charge-offs to average total loans outstanding during this period | 0.01 | % | 0.02 | % | |||||||
| Allowance for loan losses as a percent of total loans | 1.12 | % | 1.20 | % | |||||||
| Allowance for loan losses as a percent of nonperforming loans | 252.72 | % | 222.34 | % | |||||||
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The following table sets forth the allocation of the allowance for loan losses by loan categories listed in loan portfolio composition as of the dates indicated:
Summary of Allocation of Allowance for Loan Losses
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Allowance for Loan Losses | Percent of Allowance in Category to Total Allocated Allowance | Percent of Loans in Category to Total Loans | Allowance for Loan Losses | Percent of Allowance in Category to Total Allocated Allowance | Percent of Loans in Category to Total Loans | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
Commercial and industrial (1) | $ | 25,406 | 22.87 | % | 20.03 | % | $ | 26,617 | 23.54 | % | 20.51 | % | |||||||||||||||||||||||
| Commercial real estate | 55,138 | 49.64 | % | 37.08 | % | 54,569 | 48.28 | % | 36.73 | % | |||||||||||||||||||||||||
| Commercial construction | 3,350 | 3.02 | % | 2.52 | % | 4,553 | 4.03 | % | 3.14 | % | |||||||||||||||||||||||||
Business banking (1) | 13,504 | 12.16 | % | 15.26 | % | 13,152 | 11.64 | % | 13.76 | % | |||||||||||||||||||||||||
| Residential real estate | 6,235 | 5.61 | % | 14.18 | % | 6,435 | 5.69 | % | 14.09 | % | |||||||||||||||||||||||||
| Consumer home equity | 3,576 | 3.22 | % | 8.39 | % | 3,744 | 3.31 | % | 8.92 | % | |||||||||||||||||||||||||
| Other consumer | 3,498 | 3.15 | % | 2.54 | % | 3,467 | 3.07 | % | 2.85 | % | |||||||||||||||||||||||||
| Other | 373 | 0.33 | % | — | % | 494 | 0.44 | % | — | % | |||||||||||||||||||||||||
| Total | $ | 111,080 | 100.00 | % | 100.00 | % | $ | 113,031 | 100.00 | % | 100.00 | % | |||||||||||||||||||||||
(1)PPP loans are included within these portfolios as of March 31, 2021 and December 31, 2020; however, as of March 31, 2021 and December 31, 2020, no allowance for loan losses have been recorded on these loans due to the SBA guarantee of 100% of the loans.
To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, liquidation of the collateral and the strength of co-makers or guarantors. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for loan losses and any recoveries of such previously charged-off amounts are credited to the allowance for loan losses.
Regardless of whether a loan is unsecured or collateralized, we charge off the amount of any confirmed loan loss in the period when the loans, or portions of loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss confirming events may include an appraisal or other valuation that reflects a shortfall between the value of the collateral and the carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral.
For additional information regarding our allowance for loan losses, see Note 4, “Loans and Allowance for Loan Losses” within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Federal Home Loan Bank stock
The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for our membership in the FHLBB is to gain access to a reliable source of wholesale funding and as a tool to manage interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. We purchase and/or are subject to redemption of FHLBB stock proportional to the volume of funding received and view the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.
We held an investment in the FHLBB of $8.8 million at both March 31, 2021 and December 31, 2020, respectively.
Goodwill and other intangible assets
Goodwill and other intangible assets were $376.0 million and $376.5 million at March 31, 2021 and December 31, 2020, respectively. The decrease in goodwill and other intangibles assets was due to the amortization of definite-lived intangibles during the three months ended March 31, 2021. We did not record any impairment to our goodwill or other intangible assets during the three months ended March 31, 2021. We will continue to assess our goodwill and other intangible assets to determine if impairments are necessary as it relates to the COVID-19 pandemic.
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Deposits and other interest-bearing liabilities
Deposits originating within the markets we serve continue to be our primary source of funding our earning assets. We have been able to compete effectively for deposits in our primary market areas. The distribution and market share of deposits by type of deposit and by type of depositor are important considerations in our assessment of the stability of our fund sources and our access to additional funds. Furthermore, we shift the mix and maturity of the deposits depending on economic conditions and loan and investment policies in an attempt, within set policies, to minimize cost and maximize net interest margin. We do not, and in recent years have not, obtained deposit funding through brokered deposits.
The following table presents our deposits as of the dates presented:
Components of Deposits
| Change | |||||||||||||||||||||||
| As of March 31, 2021 | As of December 31, 2020 | Amount ($) | Percentage (%) | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Demand | $ | 5,369,164 | $ | 4,910,794 | $ | 458,370 | 9.3 | % | |||||||||||||||
| Interest checking | 2,482,731 | 2,380,497 | 102,234 | 4.3 | % | ||||||||||||||||||
| Savings | 1,362,463 | 1,256,736 | 105,727 | 8.4 | % | ||||||||||||||||||
| Money market investments | 3,522,990 | 3,348,898 | 174,092 | 5.2 | % | ||||||||||||||||||
| Certificate of deposits | 243,527 | 258,859 | (15,332) | (5.9) | % | ||||||||||||||||||
| Total deposits | $ | 12,980,875 | $ | 12,155,784 | $ | 825,091 | 6.8 | % | |||||||||||||||
Deposits increased by $825.1 million, or 6.8%, to $13.0 billion at March 31, 2021 from $12.2 billion at December 31, 2020. This increase was primarily the result of an increase in demand deposits of $458.4 million, an increase in money market deposits of $174.1 million, an increase in savings deposits of $105.7 million, and a increase in interest checking deposits of $102.2 million.
The following table presents the classification of deposits on an average basis for the periods below:
Classification of Deposits on an Average Basis
| For the Three Months Ended March 31, 2021 | For the Year Ended December 31, 2020 | ||||||||||||||||||||||
| Average Amount | Average Rate | Average Amount | Average Rate | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Demand | $ | 5,125,831 | — | % | $ | 4,535,066 | — | % | |||||||||||||||
| Interest checking | 2,391,025 | 0.04 | % | 2,227,185 | 0.09 | % | |||||||||||||||||
| Savings | 1,300,057 | 0.02 | % | 1,123,584 | 0.02 | % | |||||||||||||||||
| Money market investments | 3,440,214 | 0.07 | % | 3,212,752 | 0.23 | % | |||||||||||||||||
| Certificate of deposits | 251,115 | 0.19 | % | 300,381 | 0.52 | % | |||||||||||||||||
| Total deposits | $ | 12,508,242 | 0.03 | % | $ | 11,398,968 | 0.10 | % | |||||||||||||||
Other time deposits of $100,000 and greater, including certificates of deposits of $100,000 and greater, as of the dates indicated had maturities as follows:
Maturities of Time Certificates of Deposits $100,000 and over
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||
| Maturing in | (In thousands) | ||||||||||
| Three months or less | $ | 42,818 | $ | 49,740 | |||||||
| Over three months through six months | 27,954 | 24,608 | |||||||||
| Over six months through 12 months | 23,659 | 31,009 | |||||||||
| Over 12 months | 9,989 | 9,956 | |||||||||
| Total | $ | 104,420 | $ | 115,313 | |||||||
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Borrowings
Our borrowings consist of both short-term and long-term borrowings and provide us with sources of funding. Maintaining available borrowing capacity provides us with a contingent source of liquidity.
Our total borrowings increased by $1.3 million, or 4.6%, to $29.4 million at March 31, 2021 compared to $28.0 million at December 31, 2020. The increase was primarily due to an increase in escrow deposits of our borrowers.
The following table sets forth information concerning balances on our borrowings as of the dates and for the periods indicated:
Borrowings by Category
| Change | |||||||||||||||||||||||
| As of March 31, 2021 | As of December 31, 2020 | Amount ($) | Percentage (%) | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Federal Home Loan Bank advances | $ | 14,473 | $ | 14,624 | $ | (151) | (1.0) | % | |||||||||||||||
| Escrow deposits of borrowers | 14,878 | 13,425 | 1,453 | 10.8 | % | ||||||||||||||||||
| Total | $ | 29,351 | $ | 28,049 | $ | 1,302 | 4.6 | % | |||||||||||||||
Results of Operations
Summary of Results of Operations
| For the Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Amount ($) | Percentage (%) | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Interest and dividend income | $ | 101,133 | $ | 106,159 | (5,026) | (4.7) | % | ||||||||||||||||
| Interest expense | 1,042 | 6,013 | (4,971) | (82.7) | % | ||||||||||||||||||
| Net interest income | 100,091 | 100,146 | (55) | (0.1) | % | ||||||||||||||||||
| (Release of) provision for loan losses | (580) | 28,600 | (29,180) | (102.0) | % | ||||||||||||||||||
| Noninterest income | 55,212 | 33,369 | 21,843 | 65.5 | % | ||||||||||||||||||
| Noninterest expense | 94,049 | 95,172 | (1,123) | (1.2) | % | ||||||||||||||||||
| Income tax expense | 14,171 | 1,298 | 12,873 | 991.8 | % | ||||||||||||||||||
| Net income | 47,663 | 8,445 | 39,218 | 464.4 | % | ||||||||||||||||||
Comparison of the three months ended March 31, 2021 and 2020
Interest and Dividend Income
Interest and dividend income decreased by $5.0 million, or 4.7%, to $101.1 million during the three months ended March 31, 2021 from $106.2 million during the three months ended March 31, 2020. The decrease was a result of the negative impact of a lower interest rate environment.
•Interest income on loans decreased by $6.9 million, or 7.2%, to $88.6 million during the three months ended March 31, 2021 from $95.5 million during the three months ended March 31, 2020. The decrease in interest income on our loans was primarily due to the decrease in the yield on average loans which was driven by the downward adjustment of the interest rates on our existing adjustable-rate loans as a result of lower interest rates. The average balance of loans increased primarily due to PPP loan originations, partially offsetting the decline in interest rates. The FTE yield on average loans decrease 61 basis points to 3.7% during the three months ended March 31, 2021. The average balance of our loans increased by $800.6 million, or 8.9%, to $9.8 billion as of March 31, 2021 compared to $9.0 billion as of March 31, 2020.
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•Partially offsetting the negative impact of the downward adjustment of the interest rates on our existing adjustable-rate loans was the recognition of net PPP loan fee accretion. During the three months ended March 31, 2021 we recognized $8.3 million in net PPP loan fee accretion. We did not begin originating PPP loans until the second quarter of 2020, therefore, we did not recognize any net PPP loan fee accretion during the three months ended March 31, 2020.
•Interest income on securities increased $1.9 million, or 17.6% to $12.5 million for the three months ended March 31, 2021 compared to $10.6 million for the three months ended March 31, 2020. The increase in interest income on securities was due to security purchases between March 31, 2020 and March 31, 2021, partially offset by lower overall market rates. The FTE yield on average securities and other interest-earning assets decreased 160 basis points to 0.98% during the three months ended March 31, 2021. The average balance of securities and other-interest earning assets increased by $3.6 billion, or 208.6%, to $5.4 billion as of March 31, 2021 compared to $1.7 billion as of March 31, 2020.
The overall decrease in interest and dividend income was primarily a result of lower yields on both our loans and securities, partially offset by an increase in investment security volume. Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans or securities are calculated and added to the yield. This presentation allows for better comparability between institutions with different tax structures. The yield on average interest-earning assets decreased 129 basis points to 2.73% during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Our average interest-earning assets increased by $4.4 billion, or 41.2%, to $15.2 billion as of March 31, 2021 compared to $10.8 billion as of March 31, 2020.
Interest Expense
Interest expense decreased $5.0 million, or 82.7%, to $1.0 million during the three months ended March 31, 2021 from $6.0 million during the three months ended March 31, 2020. The decrease was a result of lower funding costs associated with the decline in market interest rates.
•Interest expense on our interest-bearing deposits decreased by $4.4 million, or 81.5%, to $1.0 million during the three months ended March 31, 2021 from $5.4 million during the three months ended March 31, 2020.
•Interest expense on borrowed funds decreased by $0.6 million, or 93.3%, to less than $0.1 million during the three months ended March 31, 2021 from $0.6 million during the three months ended March 31, 2020.
Average interest-bearing deposits increased $1.2 billion, or 19.3%, at March 31, 2021 compared to March 31, 2020. The increase in deposit costs associated with the increase in average deposits was more than offset by the reduction in rates paid on deposits during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Net Interest Income
Net interest income was $100.1 million for both the three months ended March 31, 2021 and the three months ended March 31, 2020. Net interest income remained stable between the two periods as the reduction in interest income resulting from the lower interest rate environment was offset by a corresponding reduction in interest expense coupled with a substantial increase in average balances of interest-earning assets during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Net interest margin is determined by dividing FTE net interest income by average-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using a marginal tax rate of 21.2% for the three months ended March 31, 2021 and 2020. Net interest margin decreased 109 basis points to 2.71% during the three months ended March 31, 2021, from 3.80% during the three months ended March 31, 2020.
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The following table sets forth average balance sheet items, annualized average yields and costs, and certain other information for the periods indicated. All average balances in the table reflect daily average balances. Non-accrual loans were included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
Average Balances, Interest Earned/Paid, & Average Yields
| As of and for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||
| Average Outstanding Balance | Interest | Average Yield/Cost (5) | Average Outstanding Balance | Interest | Average Yield /Cost (5) | ||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||
| Loans (1) | |||||||||||||||||||||||||||||||||||
| Residential | $ | 1,393,139 | $ | 11,274 | 3.28 | % | $ | 1,429,994 | $ | 13,303 | 3.74 | % | |||||||||||||||||||||||
| Commercial | 7,317,951 | 69,210 | 3.84 | % | 6,275,057 | 69,615 | 4.46 | % | |||||||||||||||||||||||||||
| Consumer | 1,105,698 | 8,937 | 3.28 | % | 1,311,172 | 13,407 | 4.11 | % | |||||||||||||||||||||||||||
| Total loans | 9,816,788 | 89,421 | 3.69 | % | 9,016,223 | 96,325 | 4.30 | % | |||||||||||||||||||||||||||
| Investment securities | 3,631,530 | 12,577 | 1.40 | % | 1,500,413 | 10,685 | 2.86 | % | |||||||||||||||||||||||||||
| Federal funds sold and other short-term investments | 1,740,561 | 432 | 0.10 | % | 240,440 | 517 | 0.86 | % | |||||||||||||||||||||||||||
| Total interest-earning assets | 15,188,879 | 102,430 | 2.73 | % | 10,757,076 | 107,527 | 4.02 | % | |||||||||||||||||||||||||||
| Non-interest-earning assets | 1,120,603 | 1,022,216 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 16,309,482 | $ | 11,779,292 | |||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Deposits: | |||||||||||||||||||||||||||||||||||
| Savings accounts | $ | 1,300,057 | $ | 64 | 0.02 | % | $ | 976,881 | $ | 54 | 0.02 | % | |||||||||||||||||||||||
| Interest checking accounts | 2,391,025 | 234 | 0.04 | % | 1,902,128 | 819 | 0.17 | % | |||||||||||||||||||||||||||
| Money market | 3,440,214 | 587 | 0.07 | % | 2,981,427 | 3,904 | 0.53 | % | |||||||||||||||||||||||||||
| Time deposits | 251,115 | 117 | 0.19 | % | 327,144 | 638 | 0.78 | % | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 7,382,411 | 1,002 | 0.06 | % | 6,187,580 | 5,415 | 0.35 | % | |||||||||||||||||||||||||||
| Borrowings | 25,625 | 40 | 0.63 | % | 163,463 | 599 | 1.47 | % | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 7,408,036 | 1,042 | 0.06 | % | 6,351,043 | 6,014 | 0.38 | % | |||||||||||||||||||||||||||
| Demand accounts | 5,125,831 | 3,477,377 | |||||||||||||||||||||||||||||||||
| Other noninterest-bearing liabilities | 358,087 | 318,656 | |||||||||||||||||||||||||||||||||
| Total liabilities | 12,891,954 | 10,147,076 | |||||||||||||||||||||||||||||||||
| Total net worth | 3,417,528 | 1,632,216 | |||||||||||||||||||||||||||||||||
| Total liabilities and retained earnings | $ | 16,309,482 | $ | 11,779,292 | |||||||||||||||||||||||||||||||
| Net interest income – FTE | $ | 101,388 | $ | 101,513 | |||||||||||||||||||||||||||||||
| Net interest rate spread (2) | 2.67 | % | 3.64 | % | |||||||||||||||||||||||||||||||
| Net interest-earning assets (3) | $ | 7,780,843 | $ | 4,406,033 | |||||||||||||||||||||||||||||||
| Net interest margin – FTE (4) | 2.71 | % | 3.80 | % | |||||||||||||||||||||||||||||||
| Average interest-earning assets to interest-bearing liabilities | 205.03 | % | 169.37 | % | |||||||||||||||||||||||||||||||
(1)Non-accrual loans are included in loans.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets.
(5)Presented on an annualized basis.
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Provision for Loan Losses
The provision for loan losses represents the charge to expense that is required to maintain an appropriate level of allowance for loan losses. We currently follow the incurred loss model for determining the provision for loan losses and anticipate adopting what is commonly referred to as the “CECL model” on January 1, 2022.
We recorded a release of provision for loan losses of $0.6 million for the three months ended March 31, 2021, compared to a provision of $28.6 million for the three months ended March 31, 2020. Given improved economic and credit conditions during the three months ended March 31, 2021, we determined that a release of the provision was necessary. In March 2020, in response to the COVID-19 pandemic, we downgraded the risk ratings for all commercial loans we expected to be significantly impacted by the pandemic, including our hotel and restaurant loan portfolios. Along with other activity during the three months ended March 31, 2020, these adjustments resulted in the provision for loan losses of $28.6 million.
Our periodic evaluation of the appropriate allowance for loan losses considers the risk characteristics of the loan portfolio, current economic conditions, and trends in loan delinquencies and charge-offs.
Noninterest Income
The following table sets forth information regarding noninterest income for the periods shown:
Noninterest Income
| For the Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Amount ($) | Percentage (%) | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Insurance commissions | $ | 28,147 | $ | 27,477 | $ | 670 | 2.4 | % | |||||||||||||||
| Service charges on deposit accounts | 5,367 | 6,098 | (731) | (12.0) | % | ||||||||||||||||||
| Trust and investment advisory fees | 5,663 | 5,095 | 568 | 11.1 | % | ||||||||||||||||||
| Debit card processing fees | 2,749 | 2,470 | 279 | 11.3 | % | ||||||||||||||||||
| Interest swap income (losses) | 5,405 | (6,009) | 11,414 | (189.9) | % | ||||||||||||||||||
| Income (losses) from investments held in rabbi trusts | 1,846 | (6,743) | 8,589 | (127.4) | % | ||||||||||||||||||
| Losses on trading securities, net | — | (2) | 2 | (100.0) | % | ||||||||||||||||||
| Gains on sales of mortgage loans held for sale, net | 1,479 | 93 | 1,386 | 1,490.3 | % | ||||||||||||||||||
| Gains on sales of securities available for sale, net | 1,164 | 122 | 1,042 | 854.1 | % | ||||||||||||||||||
| Other | 3,392 | 4,768 | (1,376) | (28.9) | % | ||||||||||||||||||
| Total noninterest income | $ | 55,212 | $ | 33,369 | $ | 21,843 | 65.5 | % | |||||||||||||||
Noninterest income increased by $21.8 million, or 65.5%, to $55.2 million for the three months ended March 31, 2021 from $33.4 million for the three months ended March 31, 2020. This increase was primarily due to an $11.4 million increase in interest rate swap income, an $8.6 million increase in income from investments held in rabbi trusts, a $1.4 million increase in net gains on sales of mortgage loans held for sale, and a $1.0 million increase in net gains on sales of securities available for sale. These items were partially offset by a decrease in other noninterest income of $1.4 million and a decrease in service charges on deposit accounts of $0.7 million.
•Loan-level interest rate swap income increased primarily as a result of a favorable mark-to-market adjustment on these transactions due to higher longer term interest rates. We recognized an unfavorable mark-to-market adjustment for the three months ended March 31, 2020 primarily as a result of the decline in longer term interest rates resulting from the initial economic impacts of the COVID-19 pandemic.
•Income from investments held in rabbi trust accounts increased primarily as a result of a favorable mark-to-market adjustment on equity securities held in these accounts. We recognized an unfavorable mark-to-market adjustment for the three months ended March 31, 2020 primarily as a result of the decline in asset values resulting from the initial economic impacts of the COVID-19 pandemic.
•Net gains on sales of mortgage loans held for sale increased primarily due to the low interest rate environment which resulted in increased volume for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This increase was partially offset by a decrease in the mark-to-market adjustment on mortgage loan-related derivatives, which is included within other noninterest income.
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•Net gains on securities available for sale increased primarily due to volume and the composition of security sales. During the three months ended March 31, 2021 we sold certain government-sponsored residential mortgage backed securities. During the three months ended March 31, 2020 we sold some municipal bonds.
•Deposit service charges decreased primarily as a result of reduced overdraft charges due to reduced transactional volume during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
Noninterest Expense
The following table sets forth information regarding noninterest expense for the periods shown:
Noninterest Expense
| For the Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2021 | 2020 | Amount ($) | Percentage (%) | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Salaries and employee benefits | $ | 64,040 | $ | 61,589 | $ | 2,451 | 4.0 | % | |||||||||||||||
| Office occupancy and equipment | 8,217 | 8,689 | (472) | (5.4) | % | ||||||||||||||||||
| Data processing | 12,129 | 10,004 | 2,125 | 21.2 | % | ||||||||||||||||||
| Professional services | 4,148 | 3,689 | 459 | 12.4 | % | ||||||||||||||||||
| Charitable contributions | — | 1,187 | (1,187) | (100.0) | % | ||||||||||||||||||
| Marketing | 1,691 | 2,468 | (777) | (31.5) | % | ||||||||||||||||||
| Loan expenses | 1,847 | 1,112 | 735 | 66.1 | % | ||||||||||||||||||
| FDIC insurance | 948 | 906 | 42 | 4.6 | % | ||||||||||||||||||
| Amortization of intangible assets | 532 | 702 | (170) | (24.2) | % | ||||||||||||||||||
| Other | 497 | 4,826 | (4,329) | (89.7) | % | ||||||||||||||||||
| Total noninterest expense | $ | 94,049 | $ | 95,172 | $ | (1,123) | (1.2) | % | |||||||||||||||
Noninterest expense decreased by $1.1 million, or 1.2%, to $94.0 million during the three months ended March 31, 2021 from $95.2 million during the three months ended March 31, 2020. This decrease was primarily due to a $4.3 million decrease in other noninterest expenses as well as a reduction in charitable contributions of $1.2 million. Partially offsetting these favorable items were increases in salaries and employee benefits and data processing expenses of $2.5 million and $2.1 million, respectively.
•Other noninterest expenses decreased primarily due to the conversion of our Defined Benefit Plan and BEP from a traditional final average earnings plan design to a cash balance plan design. Non-service cost expenses for the defined benefit plan and the benefit equalization plan decreased by $3.2 million and $0.6 million, respectively, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
•Salaries and employee benefits increased due to an increase in rabbi trust employee benefits of $4.5 million primarily as a result of the favorable equity securities valuations, ESOP expense of $2.1 million, an increase in salaries and wages of $2.1 million, and an increase in pension service cost of $2.0 million. Partially offsetting these unfavorable items were a $5.0 million decrease in incentive compensation expense that was, in part, due to the decline in total shareholders’ equity due to higher market interest rates, and an increase in salary expense deferrals of $4.1 million primarily due to PPP loan originations. We established the ESOP in October 2020 when we completed our IPO. Accordingly, we did not have any ESOP expense during the three months ended March 31, 2020.
•Data processing expenses increased due to an increase in software service and support expenses (including depreciation expense) of $1.5 million and an increase in core data processing expenses of $0.7 million. Core data processing expenses increased primarily as a result of increased costs due to PPP loan originations.
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Income Taxes
We recognize the tax effect of all income and expense transactions in each year’s consolidated statements of income, regardless of the year in which the transactions are reported for income tax purposes. The following table sets forth information regarding our tax provision and applicable tax rates for the periods indicated:
Tax Provision and Applicable Tax Rates
| For the Three Months Ended March 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (Dollars in thousands) | |||||||||||
| Combined federal and state income tax provisions | $ | 14,171 | $ | 1,298 | |||||||
| Effective income tax rates | 22.9 | % | 13.3 | % | |||||||
| Blended statutory tax rate | 28.1 | % | 28.1 | % | |||||||
Income tax expense increased by $12.9 million, or 991.8%, to $14.2 million in the three months ended March 31, 2021 from $1.3 million in the three months ended March 31, 2020. The increase in income tax expense was due primarily to higher pre-tax income during the three months ended March 31, 2021 compared to the three months ended March 31, 2020, decreasing the impact on the effective rate related to favorable permanent differences, including investment tax credits and tax exempt income. For additional information related to the Company’s income taxes see Note 8, “Income Taxes” and Note 9, “Low Income Housing Tax Credits and Other Tax Credit Investments” within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q.
Financial Position and Results of Operations of our Business Segments
Comparison of the Three Months Ended March 31, 2021 and 2020
| As of and for the Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Banking Business | Insurance Agency Business | Other/ Eliminations | Total | Banking Business | Insurance Agency Business | Other/ Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||
| (Dollars In Thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 100,091 | $ | — | $ | — | $ | 100,091 | $ | 100,146 | $ | — | $ | — | $ | 100,146 | |||||||||||||||||||||||||||||||
| (Release of) provision for loan losses | (580) | — | — | (580) | 28,600 | — | — | 28,600 | |||||||||||||||||||||||||||||||||||||||
| Net interest income after provision for loan losses | 100,671 | — | — | 100,671 | 71,546 | — | — | 71,546 | |||||||||||||||||||||||||||||||||||||||
| Noninterest income | 26,960 | 28,284 | (32) | 55,212 | 6,868 | 26,523 | (22) | 33,369 | |||||||||||||||||||||||||||||||||||||||
| Noninterest expense | 75,274 | 19,811 | (1,036) | 94,049 | 78,465 | 17,642 | (935) | 95,172 | |||||||||||||||||||||||||||||||||||||||
| Income before provision for income taxes | 52,357 | 8,473 | 1,004 | 61,834 | (51) | 8,881 | 913 | 9,743 | |||||||||||||||||||||||||||||||||||||||
| Income tax provision (benefit) | 11,793 | 2,378 | — | 14,171 | (1,214) | 2,512 | — | 1,298 | |||||||||||||||||||||||||||||||||||||||
| Net income | $ | 40,564 | $ | 6,095 | $ | 1,004 | $ | 47,663 | $ | 1,163 | $ | 6,369 | $ | 913 | $ | 8,445 | |||||||||||||||||||||||||||||||
| Total assets | $ | 16,595,311 | $ | 194,664 | $ | (63,180) | $ | 16,726,795 | $ | 12,221,799 | $ | 182,564 | $ | (60,609) | $ | 12,343,754 | |||||||||||||||||||||||||||||||
| Total liabilities | $ | 13,359,075 | $ | 43,855 | $ | (63,180) | $ | 13,339,750 | $ | 10,696,509 | $ | 45,120 | $ | (60,609) | $ | 10,681,020 | |||||||||||||||||||||||||||||||
Banking Segment
•Average interest-earning assets grew $4.4 billion, or 41.2%, to $15.2 billion as of March 31, 2021 from $10.8 billion as of March 31, 2020, with average total loans, our largest category of average interest-earning assets, growing $800.6 million, or 8.9%, to $9.8 billion as of March 31, 2021 compared to $9.0 billion as of March 31, 2020.
•Average interest-bearing liabilities grew $1.1 billion, or 16.6%, to $7.4 billion as of March 31, 2021 from $6.4 billion as of March 31, 2020, with average total deposits, our largest category of average interest-bearing liabilities, growing $1.2 billion, or 19.3%, to $7.4 billion as of March 31, 2021 compared to $6.2 billion as of March 31, 2020.
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•As noted above:
◦Loan-level interest rate swap income increased $11.4 million primarily as a result of a favorable mark-to-market adjustment on these transactions due to higher longer term interest rates.
◦Net gains on sales of mortgage loans held for sale increased $1.4 million primarily due to the low interest rate environment which resulted in increased volume for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. This increase was partially offset by a decrease in the mark-to-market adjustment on mortgage loan-related derivatives, which is included within other noninterest income.
◦Net gains on securities available for sale increased $1.0 million primarily due to volume and the composition of security sales.
◦Deposit service charges decreased $0.7 million primarily as a result of reduced overdraft charges due to reduced transactional volume during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.
•In addition, income from investments held in rabbi trust accounts increased $7.5 million primarily as a result of a favorable mark-to-market adjustment on equity securities held in these accounts.
Insurance Agency Segment
•Noninterest income related to our insurance agency business increased by $1.8 million, or 6.6%, to $28.3 million during the three months ended March 31, 2021 from $26.5 million during the three months ended March 31, 2020. The increase was driven primarily by an increase in income from investments held in rabbi trusts of $1.1 million primarily as a result of a favorable mark-to-market adjustment on equity securities held in these accounts. In addition, profit sharing revenues and recurring commissions increased by $0.4 million and $0.3 million, respectively.
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit, unadvanced portions of construction loans and standby letters of credit, all of which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments.
At March 31, 2021, we had $4.0 billion of commitments to originate loans, comprised of $2.3 billion of commitments under commercial loans and lines of credit (including $284.1 million of unadvanced portions of construction loans), $1.3 billion of commitments under home equity loans and lines of credit, $179.1 million in standard overdraft coverage commitments, $96.9 million of unfunded commitments related to residential real estate loans and $60.8 million in other consumer loans and lines of credit. In addition, at March 31, 2021, we had $64.0 million in standby letters of credit outstanding. We also had $35.6 million in forward commitments to sell loans.
Management of Market Risk
General. Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. Interest rate sensitivity is the most significant market risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, our primary source of income. Interest rate risk arises directly from our core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of securities and derivatives, as well as other effects. The primary goal of interest rate risk management is to control this risk within limits approved by the Risk Management Committee of our Board of Directors.
These limits reflect our tolerance for interest rate risk over both short-term and long-term horizons. We attempt to manage interest rate risk by identifying, quantifying, and where appropriate, hedging its exposure. If assets and liabilities do not
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re-price simultaneously and in equal volume, the potential for interest rate exposure exists. Our objective is to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary and, within limits that management determines to be prudent, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors and caps.
Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. We estimate what our net interest income would be for a 12-month period assuming no changes in interest rates. We then calculate what the net interest income would be for the same period under the assumption that the U.S. Treasury yield curve increases or decreases instantaneously by +200, +300, +400 and -100 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Changes in Interest Rates” column below. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent at March 31, 2021 precluded the modeling of certain falling rate scenarios. We do not model negative interest rate scenarios.
The tables below set forth, as of March 31, 2021 and December 31, 2020, the calculation of the estimated changes in our net interest income on an FTE basis that would result from the designated immediate changes in the U.S. Treasury yield curve:
Interest Rate Sensitivity
| As of March 31, 2021 | ||||||||||||||
| Change in Interest Rates (basis points) (1) | Net Interest Income Year 1 Forecast | Year 1 Change from Level | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| 400 | $ | 568,519 | 44.1 | % | ||||||||||
| 300 | 524,891 | 33.0 | % | |||||||||||
| 200 | 481,564 | 22.1 | % | |||||||||||
| Flat | 394,511 | — | % | |||||||||||
| (100) | 375,522 | (4.8) | % | |||||||||||
| As of December 31, 2020 | ||||||||||||||
| Change in Interest Rates (basis points) (1) | Net Interest Income Year 1 Forecast | Year 1 Change from Level | ||||||||||||
| (Dollars in thousands) | ||||||||||||||
| 400 | $ | 571,842 | 50.0 | % | ||||||||||
| 300 | 524,847 | 37.7 | % | |||||||||||
| 200 | 478,307 | 25.5 | % | |||||||||||
| Flat | 381,259 | — | % | |||||||||||
| (100) | 362,186 | (5.0) | % | |||||||||||
(1)Assumes an immediate uniform change in interest rates at all maturities, except in the down 100 basis points scenario, where rates are floored at zero at all maturities.
The tables above indicate that at March 31, 2021 and December 31, 2020, in the event of an instantaneous parallel 200 basis points increase in rates, we would have experienced a 22.1% and 25.5% increase, respectively, in net interest income on an FTE basis, and in the event of an instantaneous 100 basis points decrease in interest rates, we would have experienced a 4.8% and a 5.0% decrease at March 31, 2021 and December 31, 2020, respectively, in net interest income, on an FTE basis. Management may use interest rate derivative financial instruments, within internal policy guidelines, to manage interest rate risk as part of our asset/liability strategy. These derivatives provide significant protection against falling interest rates.
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Economic Value of Equity Analysis. We also analyze the sensitivity of our financial condition in interest rates through our economic value of equity (“EVE”) model. This analysis calculates the difference between the present value of expected cash flows from assets and liabilities assuming various changes in current interest rates.
The table below represents an analysis of our interest rate risk (excluding the effect of our pension plans) as measured by the estimated changes in our EVE, resulting from an instantaneous and sustained parallel shift in the yield curve (+200, +300, +400 basis points and -100 basis points) at March 31, 2021 and December 31, 2020. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent at March 31, 2021 precluded the modeling of certain falling rate scenarios, including negative interest rates.
Our earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines.
EVE Interest Rate Sensitivity
| Change in Interest Rate (basis points) (1) | Estimated EVE (2) | As of March 31, 2021 | EVE as a Percentage of Total Assets (3) | |||||||||||||||||||||||
| Estimated Increase (Decrease) in EVE from Level | ||||||||||||||||||||||||||
| Amount | Percent | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
| 400 | $ | 4,477,682 | $ | 349,568 | 8.5 | % | 28.68 | % | ||||||||||||||||||
| 300 | 4,402,223 | 274,109 | 6.6 | % | 27.74 | % | ||||||||||||||||||||
| 200 | 4,324,403 | 196,289 | 4.8 | % | 26.77 | % | ||||||||||||||||||||
| Flat | 4,128,114 | — | — | 24.60 | % | |||||||||||||||||||||
| (100) | 3,919,926 | (208,188) | (5.0) | % | 23.05 | % | ||||||||||||||||||||
| Change in Interest Rate (basis points) (1) | Estimated EVE (2) | As of December 31, 2020 | EVE as a Percentage of Total Assets (3) | |||||||||||||||||||||||
| Estimated Increase (Decrease) in EVE from Level | ||||||||||||||||||||||||||
| Amount | Percent | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||
| 400 | $ | 4,385,795 | $ | 452,022 | 11.5 | % | 29.09 | % | ||||||||||||||||||
| 300 | 4,297,682 | 363,909 | 9.3 | % | 28.06 | % | ||||||||||||||||||||
| 200 | 4,205,867 | 272,094 | 6.9 | % | 27.00 | % | ||||||||||||||||||||
| Flat | 3,933,773 | — | — | 24.38 | % | |||||||||||||||||||||
| (100) | 3,663,432 | (270,341) | (6.9) | % | 22.65 | % | ||||||||||||||||||||
(1)Assumes an immediate uniform change in interest rates at all maturities, except in the down 100 basis points scenario, where rates are floored at zero at all maturities.
(2)EVE is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
Liquidity and Capital Resources
Liquidity. Liquidity describes our ability to meet the financial obligations that arise in the normal course of business. Liquidity is primarily needed to meet deposit withdrawals and anticipated loan fundings, as well as current and planned expenditures. We seek to maintain sources of liquidity that are deep and diversified and that may be used during the normal course of business as well as on a contingency basis.
The net proceeds from our IPO significantly increased our liquidity and capital resources at both Eastern Bankshares, Inc. and Eastern Bank. Over time, the initial level of liquidity will be reduced as net proceeds from the IPO are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations will be enhanced by the net proceeds from the IPO, resulting in increased net interest-earning assets and net interest and dividend income. However, due to the increase in equity resulting form the net proceeds raised in our IPO, our return on equity has been and will continue to be adversely affected until we can effectively employ the proceeds of the IPO.
Our primary sources of funds are deposits, principal and interest payments on loans and securities, and proceeds from calls, maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and due from banks and securities classified as available for sale. In the future, our
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liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and stock repurchases in which we may engage. We believe that our existing resources will be sufficient to meet the liquidity and capital requirements of our operations for the foreseeable future.
We participate in the IntraFi Network (formerly “Promontory”), which allows us to provide access to multi-million dollar FDIC deposit insurance protection on customer deposits for consumers, businesses and public entities. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. At March 31, 2021 and December 31, 2020, we had a total of $384.7 million and $364.8 million of IntraFi Network one-way sell deposits, respectively. These deposits could have been repurchased as reciprocal deposits and should be considered a source of liquidity.
Although customer deposits remain our preferred source of funds, maintaining additional back up sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. At March 31, 2021, we had $14.5 million in outstanding advances and the ability to borrow up to an additional $1.5 billion. We also have the ability to borrow from the FRBB as well as the Paycheck Protection Program Liquidity Facility. At March 31, 2021, we had a $492.3 million collateralized line of credit from the FRBB with no outstanding balance. Additionally, we had $1.2 billion in PPP loans that could have been pledged to the Paycheck Protection Program Liquidity Facility. We had a total of $770.0 million of discretionary lines of credit at March 31, 2021.
Sources of Liquidity
| As of March 31, 2021 | As of December 31, 2020 | ||||||||||||||||||||||
| Outstanding | Additional Capacity | Outstanding | Additional Capacity | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| IntraFi Network deposits | $ | — | $ | 384,730 | $ | — | $ | 364,794 | |||||||||||||||
| Federal Home Loan Bank (1) | 14,473 | 1,533,364 | 14,624 | 1,581,016 | |||||||||||||||||||
| Federal Reserve Bank of Boston (2) | — | 492,333 | — | 503,512 | |||||||||||||||||||
| Federal Reserve Paycheck Protection Program Liquidity Facility | — | 1,238,053 | — | 1,026,117 | |||||||||||||||||||
| Unsecured lines of credit | — | 770,000 | — | 620,000 | |||||||||||||||||||
| Total deposits | $ | 14,473 | $ | 4,418,480 | $ | 14,624 | $ | 4,095,439 | |||||||||||||||
(1)As of both March 31, 2021 and December 31, 2020, loans have been pledged to the FHLBB with a carrying value of $2.4 billion to secure additional borrowing capacity.
(2)Loans with a carrying value of $832.4 million and $884.1 million at March 31, 2021 and December 31, 2020, respectively, have been pledged to the FRBB resulting in this additional unused borrowing capacity
We believe that advanced preparation, early detection, and prompt responses can avoid, minimize, or shorten potential liquidity crises. Our Board of Directors and our Asset Liability Committee have put a Liquidity Contingency Plan in place to establish methods for assessing and monitoring risk levels, as well as potential responses during unanticipated stress events. As part of its risk management framework, we perform periodic liquidity stress testing to assess its need for liquid assets as well as backup sources of liquidity.
Capital Resources. We are subject to various regulatory capital requirements administered by the Massachusetts Commissioner of Banks, the FDIC and the Federal Reserve (with respect to our consolidated capital requirements). At March 31, 2021 and December 31, 2020, we exceeded all applicable regulatory capital requirements, and were considered “well capitalized” under regulatory guidelines.
Contractual Obligations, Commitments and Contingencies
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. At March 31, 2021 there were no material changes in our contractual obligations, other commitments and contingencies from those disclosed in our 2020 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
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The information required by this Item is included in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Management of Market Risk.”
ITEM 4. CONTROLS AND PROCEDURES
Effectiveness of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(c) promulgated under the Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021, the end of the period covered by this Quarterly Report on Form 10-Q.
Internal Controls over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2021 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting. The Company has not experienced any material impact to the Company’s internal controls over financial reporting due to the fact that most of the Company’s employees responsible for financial reporting are working remotely during the COVID-19 pandemic. The Company is continually monitoring and assessing the impact of the COVID-19 pandemic on the Company’s internal controls to minimize the impact to their design and operating effectiveness.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We operate in a legal and regulatory environment that exposes us to potentially significant risks. For more information regarding the Company’s exposure generally to legal and regulatory risks, see “Business—Legal and Regulatory Proceedings” in Part I, Item 1 of the 2020 Form 10-K.
As of the date of this Quarterly Report on Form 10-Q, we are not involved in any pending legal proceeding as a plaintiff or a defendant other than routine legal proceedings occurring in the ordinary course of business, and we are not involved in any legal proceeding the outcome of which we believe would be material to our financial condition or results of operations.
ITEM 1A. RISK FACTORS
For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in our 2020 Form 10-K. Other than the Risks Related to Our Acquisition Strategy set forth below, including the revised risk factors below regarding “To the extent that we acquire other companies, our business may be negatively impacted by certain risks inherent with such acquisitions,” as of the date of this Quarterly Report on Form 10-Q, the risk factors of the Company have not changed materially from those disclosed in our 2020 Form 10-K. The COVID-19 pandemic has led to general uncertainty and adverse changes in economic conditions and has heightened, and in some cases manifested, certain of the risks we normally face in operating our business, including those disclosed in our 2020 Form 10-K. The risk factors disclosure in our 2020 Form 10-K is therefore qualified by the information relating to COVID-19 that is described in this Quarterly Report on Form 10-Q.
To the extent that we acquire other companies, our business may be negatively impacted by certain risks inherent with such acquisitions.
We have acquired and will continue to consider the acquisition of other financial services companies. A significant component of our business strategy is to grow through acquisitions of other financial institutions, including banks and insurance agencies, or business lines as opportunities arise. Although we have been successful with this strategy in the past, we may not be able to grow our business in the future through acquisitions for a number of reasons, including:
•Competition with other prospective buyers resulting in our inability to complete an acquisition or in our paying a substantial premium over the fair value of the net assets of the acquired business;
•Inability to obtain regulatory approvals or to obtain such approvals on a timely basis;
•Potential difficulties and/or unexpected expenses relating to the integration of the operations, technologies, products and the key employees of the acquired business, resulting in the diversion of resources from the operation of our existing business;
•Acquisitions of new lines of business may present risks that are different in kind or degree compared to those that we are accustomed to managing, requiring us to implement new or enhance existing procedures and controls and diverting resources from the operation of our existing business;
•Inability to maintain existing customers of the acquired business or to sell the products and services of the acquired business to our existing customers;
•Inability to retain key management of the acquired business;
•Assumption of or potential exposure to significant liabilities of the acquired business, some of which may be unknown or contingent at the time of acquisition, including, without limitation, liabilities for regulatory and compliance issues;
•Exposure to potential asset quality issues of the acquired business;
•Failure to mitigate deposit erosion or loan quality deterioration at the acquired business;
•Potential changes in banking or tax laws or regulations that may affect the acquired business;
•Inability to improve the revenues and profitability or realize the cost savings and synergies expected of the acquired business;
•Potential future impairment of the value of goodwill and intangible assets acquired; and
•Identification of internal control deficiencies of the acquired business.
All of these and other potential risks may serve as a diversion of our management’s attention from other business concerns, and any of these factors could have a material adverse effect on our business. Acquisitions typically involve the
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payment of a premium over book and market values, and therefore, some dilution of our tangible book value and net income per share may occur in connection with any future transaction.
Our business may be negatively impacted by certain risks inherent with our pending acquisition of Century Bancorp, Inc.
In April 2021, we entered into a definitive merger agreement with Century Bancorp, Inc. under which we will acquire Century for $641.9 million in cash (the “Century Merger”). Century is the stock holding company of Century Bank and Trust Company, a Massachusetts-chartered stock bank headquartered in Medford, Massachusetts with $6.4 billion in assets, $5.4 billion in deposits and 27 full-service branches in Massachusetts as of December 31, 2020. Pursuant to the terms of the Merger Agreement, Century Bank and Trust Company will merge with and into Eastern Bank, our wholly-owned subsidiary, upon completion of the transaction. The transaction is subject to customary closing conditions, including the receipt of regulatory approval and Century shareholder approval. We currently expect the Century Merger to be completed during the fourth quarter of 2021.
The consummation of the Century Merger is contingent upon the satisfaction of a number of conditions, including regulatory approval, that may be outside of our or Century’s control and that we and Century may be unable to satisfy or obtain or which may delay the consummation of the Century Merger or result in the imposition of conditions that could reduce the anticipated benefits from the Century Merger or cause the parties to abandon the Century Merger.
Consummation of the Century Merger is contingent upon the satisfaction of a number of conditions, some of which are beyond our and Century’s control, including, among others, the receipt of required regulatory approval and approval of Century’s shareholders.
These conditions to the closing of the Century Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Century Merger may be delayed substantially or may not be completed. In addition, the parties can mutually decide to terminate the Merger Agreement at any time, or we or Century may elect to terminate the Merger Agreement in certain other circumstances.
As a condition to granting required regulatory approvals, governmental entities may impose conditions, limitations or costs, require divestitures or place restrictions on our conduct after the closing of the Century Merger. Such conditions or changes and the process of obtaining regulatory approvals could, among other things, have the effect of delaying completion of the Century Merger or of imposing additional costs or limitations on us following the Century Merger, any of which may have an adverse effect on us following the Century Merger.
Our acquisition of new lines of business at Century may present risks that are different in kind or degree compared to those that we are accustomed to managing, requiring us to implement new or enhance existing procedures and controls and diverting resources from the operation of our existing business.
Our acquisition of new lines of business at Century will present risks that are different in kind or degree compared to those that we are accustomed to managing, requiring us to implement new or enhance existing procedures and controls.
Century Bank’s lines of business include two categories of cash-based businesses that are new to us and will necessitate robust compliance policies and procedures in order to comply with various laws and regulations. Century provides depository services to marijuana-related businesses, including marijuana retailers and marijuana dispensaries. Century also provides loans to various marijuana-related businesses that in the aggregate are not material to Century. We understand Century's customer due diligence process confirms each new marijuana-related customer is appropriately licensed under Massachusetts law and monitors that such customers continue to be licensed. Century also provides depository services to check cashers and other businesses, sometimes generally referred to as a “money services business,” that regularly engage in the transfer of funds domestically and internationally.
We expect that after the closing of the Century Merger, these lines of business will require proportionately greater compliance and risk management resources than our current businesses in order for us to comply with laws and regulations related to the prevention of financial crimes and combating terrorism, including the U.S. Patriot Act of 2001. These laws and regulations require us to, among other things, implement policies and procedures related to anti-money laundering, anti-bribery and corruption, fraud, compliance, suspicious activities, currency transaction reporting, and due diligence on new and existing customers.
With respect to marijuana-related businesses, the Controlled Substances Act makes it illegal under federal law to manufacture, distribute, or dispense marijuana, and therefore federal law, including the money laundering statutes and the Bank Secrecy Act, apply to marijuana-related conduct. Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under the money laundering statutes. Financial institutions must report currency
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transactions and conduct suspicious activity monitoring and reporting in connection with marijuana-related businesses to the Financial Crimes Enforcement Network (“FinCEN”).
Our ability to comply with anti-money laundering laws and our reporting obligations to FinCEN will depend on our ability to maintain robust customer due diligence, surveillance, detection, reporting and analytic capabilities. Although we believe that we will have policies and procedures designed to comply with these laws and regulations, to the extent our policies or procedures are not fully effective or do not meet heightened regulatory standards or expectations, we may be subject to fines, penalties, restrictions on certain activities including future acquisitions, reputational harm, or other adverse consequences from our federal bank regulators, the Department of Justice or FinCEN.
We intend to continue to evaluate, both prior to and after the closing of the Century Merger, the banking services that Century provides to marijuana-related businesses and money services businesses and to assess our competencies to manage those businesses in a manner that provides appropriate risk-adjusted returns.
We may fail to realize all of the anticipated benefits of the Century Merger, or those benefits may take longer to realize than expected. We may also encounter significant difficulties in integrating with Century.
We and Century have operated and, until the completion of the Century Merger, will continue to operate, independently. The success of the Century Merger, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully integrate Century’s operations in a manner that results in various benefits and that does not materially disrupt existing customer relationships or result in decreased revenues due to loss of customers. The process of integrating operations could result in a loss of key personnel or cause an interruption of, or loss of momentum in, the activities of one or more of the combined company's businesses. Inconsistencies in standards, controls, procedures and policies could adversely affect the combined company. The diversion of management's attention and any delays or difficulties encountered in connection with the Century Merger and the integration of Century’s operations could have an adverse effect on the business, financial condition, operating results and prospects of the combined company.
If we experience difficulties in the integration process, including those listed above, we may fail to realize the anticipated benefits and synergies of the Century Merger in a timely manner or at all.
While the Century Merger is pending, we will be subject to business uncertainties and contractual restrictions that could adversely affect our business and operations.
Uncertainty about the effect of the Century Merger on employees, customers and other persons with whom we or Century have a business relationship may have an adverse effect on our business, operations and stock price. Our existing customers or existing customers of Century could decide to no longer do business with us, Century or the combined company, reducing the anticipated benefits of the Century Merger. In addition, Century is subject to certain restrictions on the conduct of its business while the Century Merger is pending. As a result, certain other projects may be delayed or abandoned, and business decisions could be deferred. Employee retention at our Company and Century may be challenging before or after completion of the Century Merger, as certain employees may experience uncertainty about their future roles with the combined company, and these retention challenges may require us to incur additional expenses in order to retain or replace key employees. If key officers or employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, Century or the combined company, the benefits of the Century Merger could be materially diminished and we could encounter difficulties in replacing them and successfully managing new lines of business with which we do not have management experience or expertise.
We expect to incur substantial expenses related to the Century Merger and the integration with Century.
We and Century will incur substantial expenses in connection with the Century Merger and integration. There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated. While we have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses and the realization of economies of scale. We anticipated that some of the expenses we incur will not be deductible due to the application of Section 162(m) of the Internal Revenue Code of 1986, as amended, as discussed in Part I, Item 1A of our 2020 Form 10-K. See “—Due to Section 162(m) of the Internal Revenue Code, we may not be able to deduct all of the compensation of some executives, including executives of companies we may acquire in the future.”
Our future results will suffer if we do not effectively manage our expanded operations following the Century Merger.
Following the Century Merger, the size and operational scope of our business will increase significantly beyond its current size and scope. The Century Merger will increase our asset size and will further increase the breadth and complexity
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of our business with the addition of new business lines in which we have not previously engaged and with which we lack familiarity, and exposure to industry sectors, such as higher education, which we have not historically served. We expect that the size and scope of our commercial loan and lease portfolio will also increase in size as a result of the Century Merger. Century’s commercial loan portfolio includes loans that are concentrated in industry sectors (such as higher education and nonprofit organizations) that will be relatively new to us. Some such loans are of greater size than the typical size of commercial loans that we have made in recent years.
Our future success depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges for our management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. There can be no assurances that we will be successful in this regard or that we will realize the expected operating efficiencies, cost savings and other benefits currently anticipated from the Century Merger.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.OTHER INFORMATION
None.
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ITEM 6.EXHIBITS
The exhibits listed in the Exhibit Index (following the signatures section of this report) are included in, or incorporated by reference into, this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (and are numbered in accordance with Item 601 of Regulation S-K):
Exhibit No. | Description | |||||||
| 2.1 | Agreement and Plan of Merger by and among Eastern Bankshares, Inc., Clarion Acquisition Corp., Century Bancorp, Inc. and Century Bank and Trust Company, dated as of April 7, 2021 (incorporated by reference to exhibit 2.1 to Form 8-K filed with the Securities and Exchange Commission on April 8, 2021) | |||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1+ | ||||||||
| 32.2+ | ||||||||
| 101* | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Unaudited Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, (ii) the Unaudited Consolidated Statements of Income for the three months ended March 31, and 2020 (iii) the Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020, (iv) the Unaudited Consolidated Statements of Changes in Equity for the three months ended March 31, 2021 and 2020, (v) the Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, and 2020, and (vi) the Notes to the Unaudited Consolidated Financial Statements. | |||||||
| 104 | Cover page interactive data file (formatted as inline XBRL with applicable taxonomy extension information) contained in Exhibit 101 to this report+ | |||||||
*Filed herewith
+ Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| EASTERN BANKSHARES, INC. | |||||||||||
| Date: May 14, 2021 | /s/ Robert F. Rivers | ||||||||||
| By: | Robert F. Rivers | ||||||||||
| Chief Executive Officer and Chair of the Board | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Date: May 14, 2021 | /s/ James B. Fitzgerald | ||||||||||
| By: | James B. Fitzgerald | ||||||||||
| Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
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