Annual Statements Open main menu

INDEPENDENT BANK CORP - Quarter Report: 2020 September (Form 10-Q)

Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________ 
FORM 10-Q
___________________________________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:1-9047
___________________________________________________
Independent Bank Corp.
(Exact name of registrant as specified in its charter)
 ___________________________________________________
MA04-2870273
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Office Address:2036 Washington Street,Hanover,MA02339
Mailing Address:288 Union Street,Rockland,MA02370
(Address of principal executive offices, including zip code)
(781) 878-6100
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTrading SymbolName of each exchange on which registered
Common Stock, $0.01 par value per shareINDBThe 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  x    No  o


Table of Contents
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated FilerxAccelerated Filer
Non-accelerated FilerSmaller 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)YesNo
As of November 4, 2020, there were 32,965,121 shares of the issuer’s common stock outstanding, par value $0.01 per share.



Table of Contents


Table of Contents
 PAGE
Condensed Notes to Consolidated Financial Statements - September 30, 2020


Table of Contents
Table of Contents
Exhibit 31.1 – Certification 302
Exhibit 31.2 – Certification 302
Exhibit 32.1 – Certification 906
Exhibit 32.2 – Certification 906
4

Table of Contents
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT BANK CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited—Dollars in thousands)
 
September 30
2020
December 31
2019
Assets
Cash and due from banks$125,103 $114,686 
Interest-earning deposits with banks1,142,934 36,288 
Securities
Trading2,612 2,179 
Equity21,119 21,261 
Available for sale (amortized cost $404,159 and $420,703)
423,478 426,424 
Held to maturity (fair value $690,467 and $753,263)
659,573 740,806 
Total securities1,106,782 1,190,670 
Loans held for sale (at fair value)54,713 33,307 
Loans
Commercial and industrial2,062,345 1,395,036 
Commercial real estate4,125,464 4,002,359 
Commercial construction573,334 547,293 
Small business167,632 174,497 
Residential real estate1,352,305 1,590,569 
Home equity - first position643,187 649,255 
Home equity - subordinate positions457,867 484,543 
Other consumer23,059 30,087 
   Total loans9,405,193 8,873,639 
Less: allowance for credit losses(115,625)(67,740)
Net loans9,289,568 8,805,899 
Federal Home Loan Bank stock15,090 14,424 
Bank premises and equipment, net121,816 123,674 
Goodwill506,206 506,206 
Other intangible assets24,543 29,286 
Cash surrender value of life insurance policies199,453 197,372 
Other assets 587,457 343,353 
Total assets$13,173,665 $11,395,165 
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand deposits$3,715,528 $2,662,591 
Savings and interest checking accounts3,912,703 3,232,909 
Money market2,164,436 1,856,552 
Time certificates of deposit of $100,000 and over
570,068 663,645 
Other time certificates of deposits488,573 731,670 
Total deposits10,851,308 9,147,367 
Borrowings
Federal Home Loan Bank borrowings145,765 115,748 
Long-term borrowings (less unamortized debt issuance costs of $53 and $94)
37,447 74,906 
5

Table of Contents
Junior subordinated debentures (less unamortized debt issuance costs of $38and $40)
62,850 62,848 
Subordinated debentures (less unamortized debt issuance costs of $328 and $399)
49,672 49,601 
Total borrowings295,734 303,103 
Other liabilities336,899 236,552 
Total liabilities11,483,941 9,687,022 
Commitments and contingencies— — 
Stockholders' equity
Preferred stock, $0.01 par value, authorized: 1,000,000 shares, outstanding: none
— — 
Common stock, $0.01 par value, authorized: 75,000,000 shares,
issued and outstanding: 32,955,547 shares at September 30, 2020 and 34,377,388 shares at December 31, 2019 (includes 137,457 and 147,184 shares of unvested participating restricted stock awards, respectively)
328 342 
Value of shares held in rabbi trust at cost: 135,111 shares at September 30, 2020 and 143,820 shares at December 31, 2019
(4,712)(4,735)
Deferred compensation and other retirement benefit obligations4,712 4,735 
Additional paid in capital944,218 1,035,450 
Retained earnings696,546 654,182 
Accumulated other comprehensive income, net of tax48,632 18,169 
Total stockholders’ equity1,689,724 1,708,143 
Total liabilities and stockholders' equity$13,173,665 $11,395,165 
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.

6

Table of Contents
INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited—Dollars in thousands, except per share data)
Three Months EndedNine Months Ended
September 30September 30
 2020201920202019
Interest income
Interest and fees on loans$90,112 $110,205 $280,768 $306,736 
Taxable interest and dividends on securities7,218 8,269 23,006 24,255 
Nontaxable interest and dividends on securities14 27 40 
Interest on loans held for sale326 456 917 527 
Interest on federal funds sold and short-term investments254 680 546 1,753 
Total interest and dividend income97,919 119,624 305,264 333,311 
Interest expense
Interest on deposits5,432 11,846 23,351 30,052 
Interest on borrowings1,604 3,180 5,628 10,117 
Total interest expense7,036 15,026 28,979 40,169 
Net interest income90,883 104,598 276,285 293,142 
Provision for credit losses7,500 — 52,500 2,000 
Net interest income after provision for credit losses83,383 104,598 223,785 291,142 
Noninterest income
Deposit account fees3,428 5,299 11,227 14,785 
Interchange and ATM fees3,044 6,137 13,154 16,447 
Investment management7,571 7,188 21,696 21,089 
Mortgage banking income7,704 3,968 13,570 8,184 
Increase in cash surrender value of life insurance policies1,314 1,304 3,902 3,572 
Gain on life insurance benefits— 434 692 434 
Loan level derivative income2,457 2,739 8,918 4,312 
Other noninterest income3,829 4,747 10,813 13,174 
Total noninterest income29,347 31,816 83,972 81,997 
Noninterest expenses
Salaries and employee benefits38,409 39,432 113,027 111,401 
Occupancy and equipment expenses9,273 8,555 27,863 24,109 
Data processing and facilities management1,567 1,515 4,684 4,883 
FDIC assessment1,034 — 1,537 1,394 
Advertising expense1,215 1,417 3,107 3,912 
Consulting expense1,305 1,338 4,244 3,486 
Core deposit amortization1,428 1,567 4,392 3,996 
Loss on sale of securities— — — 1,462 
Loss on termination of derivatives684 — 684 — 
Merger and acquisition expense— 705 — 26,433 
Software maintenance1,753 1,385 5,218 3,913 
Other noninterest expenses9,990 11,619 35,349 31,887 
Total noninterest expenses66,658 67,533 200,105 216,876 
Income before income taxes46,072 68,881 107,652 156,263 
Provision for income taxes11,199 17,036 21,126 38,565 
Net income$34,873 $51,845 $86,526 $117,698 
Basic earnings per share$1.06 $1.51 $2.59 $3.65 
Diluted earnings per share$1.06 $1.51 $2.59 $3.64 
Weighted average common shares (basic)32,951,918 34,361,176 33,358,879 32,283,196 
Common share equivalents24,758 39,390 27,871 45,416 
Weighted average common shares (diluted)32,976,676 34,400,566 33,386,750 32,328,612 
Cash dividends declared per common share$0.46 $0.44 $1.38 $1.32 
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
7

Table of Contents
INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited—Dollars in thousands)
 
 Three Months EndedNine Months Ended
September 30September 30
 2020201920202019
Net income$34,873 $51,845 $86,526 $117,698 
Other comprehensive income (loss), net of tax
Net change in fair value of securities available for sale(709)2,175 10,333 12,349 
Net change in fair value of cash flow hedges(2,729)3,030 20,452 14,905 
Net change in other comprehensive income for defined benefit postretirement plans225 41 (322)121 
Total other comprehensive income (loss)(3,213)5,246 30,463 27,375 
Total comprehensive income $31,660 $57,091 $116,989 $145,073 
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.

8

Table of Contents
INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended September 30, 2020 and 2019
(Unaudited—Dollars in thousands, except per share data)
Common Stock OutstandingCommon StockValue of Shares Held in Rabbi Trust at CostDeferred Compensation ObligationAdditional Paid in CapitalRetained EarningsAccumulated Other
Comprehensive Income (Loss)
Total
Balance June 30, 202032,942,110$328 $(4,649)$4,649 $942,685 $676,834 $51,845 $1,671,692 
Net income— — — — — 34,873 — 34,873 
Other comprehensive loss— — — — — — (3,213)(3,213)
Common dividend declared ($0.46 per share)— — — — — (15,161)— (15,161)
Proceeds from exercise of stock options, net of cash paid5,000 — — — 140 — — 140 
Stock based compensation— — — — 868 — — 868 
Restricted stock awards issued, net of awards surrendered(43)— — — (3)— — (3)
Shares issued under direct stock purchase plan8,480 — — — 528 — — 528 
Deferred compensation and other retirement benefit obligations— — (63)63 — — — — 
Balance September 30, 202032,955,547 $328 $(4,712)$4,712 $944,218 $696,546 $48,632 $1,689,724 
Balance June 30, 201934,321,061 $342 $(4,648)$4,648 $1,029,594 $585,111 $20,956 $1,636,003 
Net income— — — — — 51,845 — 51,845 
Other comprehensive income— — — — — — 5,246 5,246 
Common dividend declared ($0.44 per share)— — — — — (15,125)— (15,125)
Common stock issued for acquisition— — — — — — — — 
Proceeds from exercise of stock options, net of cash paid— — — — — — — — 
Stock based compensation— — — — 981 — — 981 
Restricted stock awards issued, net of awards surrendered(43)(1)— — (3)— — (4)
Shares issued under direct stock purchase plan45,763 — — 3,377 — — 3,378 
Deferred compensation and other retirement benefit obligations— — (65)65 — — — — 
Balance September 30, 201934,366,781 $342 $(4,713)$4,713 $1,033,949 $621,831 $26,202 $1,682,324 




















9

Table of Contents

INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2020 and 2019
(Unaudited—Dollars in thousands, except per share data)
Common Stock OutstandingCommon StockValue of Shares Held in Rabbi Trust at CostDeferred Compensation ObligationAdditional Paid in CapitalRetained EarningsAccumulated Other
Comprehensive Income (Loss)
Total
Balance December 31, 201934,377,388$342 $(4,735)$4,735 $1,035,450 $654,182 $18,169 $1,708,143 
Cumulative effect accounting adjustment (1)— — — — — 1,553 — 1,553 
Net income— — — — — 86,526 — 86,526 
Other comprehensive income— — — — — — 30,463 30,463 
Common dividend declared ($1.38 per share)— — — — — (45,715)— (45,715)
Proceeds from exercise of stock options, net of cash paid5,873 — — — 114 — — 114 
Stock based compensation— — — — 3,297 — — 3,297 
Restricted stock awards issued, net of awards surrendered49,249 — — (1,187)— — (1,186)
Shares issued under direct stock purchase plan23,037 — — — 1,620 — — 1,620 
Shares repurchased under share repurchase program(1,500,000)(15)— — (95,076)— — (95,091)
Deferred compensation and other retirement benefit obligations— — 23 (23)— — — — 
Balance September 30, 202032,955,547 $328 $(4,712)$4,712 $944,218 $696,546 $48,632 $1,689,724 
Balance December 31, 201828,080,408 $279 $(4,718)$4,718 $527,648 $546,736 $(1,173)$1,073,490 
Net income— — — — — 117,698 — 117,698 
Other comprehensive income— — — — — — 27,375 27,375 
Common dividend declared ($1.32 per share)— — — — — (42,603)— (42,603)
Common stock issued for acquisition6,166,010 61 — — 499,632 — — 499,693 
Proceeds from exercise of stock options, net of cash paid11,000 — — — 281 — — 281 
Stock based compensation— — — — 3,413 — — 3,413 
Restricted stock awards issued, net of awards surrendered50,431 — — (1,436)— — (1,435)
Shares issued under direct stock purchase plan58,932 — — 4,411 — — 4,412 
Deferred compensation and other retirement benefit obligations— — (5)— — — — 
Balance September 30, 201934,366,781 $342 $(4,713)$4,713 $1,033,949 $621,831 $26,202 $1,682,324 
(1)     Represents adjustment needed to reflect the cumulative impact on retained earnings pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment presented includes $1.1 million ($817,000, net of tax) attributable to the change in accounting methodology for estimating the allowance for credit losses and $1.0 million ($736,000, net of tax) related to the reserve for unfunded commitments resulting from the Company's adoption of the standard. Amount shown in the table above is presented net of tax.
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
10

Table of Contents
INDEPENDENT BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited—Dollars in thousands)
 
 Nine Months Ended
September 30
20202019
Cash flow from operating activities
Net income$86,526 $117,698 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization21,071 13,919 
Change in unamortized net loan costs and premiums(9,406)(7,262)
Provision for credit losses52,500 2,000 
Deferred income tax expense2,802 171 
Net (gain) loss on equity securities107 (1,562)
Net loss on sale of securities— 1,462 
Net loss on bank premises and equipment363 180 
Loss on termination of derivatives684 — 
Net loss on other real estate owned and foreclosed assets— 389 
Realized gain on sale leaseback transaction(433)(433)
Stock based compensation3,297 3,413 
Increase in cash surrender value of life insurance policies(3,902)(3,572)
Gain on life insurance benefits(692)(434)
Operating lease payments(8,899)(7,798)
Change in fair value on loans held for sale(1,252)(1,192)
Net change in:
Trading assets(433)(459)
Loans held for sale(20,154)37,672 
Other assets(200,520)(57,624)
Other liabilities89,164 40,668 
Total adjustments(75,703)19,538 
Net cash provided by operating activities10,823 137,236 
Cash flows used in investing activities
Proceeds from sales of equity securities — 1,461 
Purchases of equity securities(331)(356)
Proceeds from sales of securities available for sale— 45,863 
Proceeds from maturities and principal repayments of securities available for sale74,898 35,770 
Purchases of securities available for sale(58,704)(16,230)
Proceeds from maturities and principal repayments of securities held to maturity176,841 87,313 
Purchases of securities held to maturity(95,017)(56,937)
Net redemption (purchases) of Federal Home Loan Bank stock(666)18,344 
Investments in low income housing projects(15,586)(3,549)
Purchases of life insurance policies(116)(115)
Proceeds from life insurance policies2,629 3,162 
Net increase in loans(525,626)(11,668)
Net cash paid in business combinations— (105,264)
Purchases of bank premises and equipment(8,283)(11,753)
Proceeds from the sale of bank premises and equipment283 17 
11

Table of Contents
Payments on early termination of hedging relationship(684)— 
Net cash used in investing activities(450,362)(13,942)
Cash flows provided by (used in) financing activities
Net increase (decrease) in time deposits(336,289)28,113 
Net increase (decrease) in other deposits2,040,615 (56,714)
Net advances (repayments) of short-term Federal Home Loan Bank borrowings55,000 (177,046)
Repayments of long-term Federal Home Loan Bank borrowings(25,000)(25,000)
Proceeds from line of credit, net of issuance costs— 49,980 
Repayment of line of credit, net of issuance costs— (49,980)
Proceeds from (repayments of) long-term debt, net of issuance costs(37,500)74,867 
Repayments of junior subordinated debentures, net of issuance costs— (13,329)
Proceeds from subordinated debentures, net of issuance costs— 49,526 
Net proceeds from exercise of stock options114 281 
Restricted stock awards issued, net of awards surrendered(1,186)(1,435)
Proceeds from shares issued under direct stock purchase plan1,620 4,412 
Payments for shares repurchased under share repurchase program(95,091)— 
Common dividends paid(45,681)(38,152)
Net cash provided by (used in) financing activities1,556,602 (154,477)
Net increase (decrease) in cash and cash equivalents1,117,063 (31,183)
Cash and cash equivalents at beginning of year150,974 250,455 
Cash and cash equivalents at end of period$1,268,037 $219,272 
Supplemental schedule of noncash activities
Net increase in capital commitments relating to low income housing project investments$28,027 $15,740 
Initial recognition of operating leases upon adoption of Accounting Standards Update 2016-02 (1)$— $32,777 
Right-of-use assets obtained in exchange for new lease obligations$7,693 $7,593 
In conjunction with the Company's acquisitions, assets were acquired and liabilities were assumed as follows:
Common stock issued for acquisition$— $499,693 
Fair value of assets acquired, net of cash acquired$— $2,711,067 
Fair value of liabilities assumed$— $2,106,110 
(1)Represents adjustment needed to reflect the opening balance of the Company's Right of Use ("ROU") assets and lease liabilities pursuant to the adoption of Accounting Standards Update 2016-02 effective January 1, 2019. Upon adoption, the Company recognized on its balance sheet ROU assets of approximately $32.8 million, with a corresponding operating lease liability of approximately $34.1 million, with an adjustment to remove the Company's existing deferred rent liability of approximately $1.3 million.
The accompanying condensed notes are an integral part of these unaudited consolidated financial statements.
12

Table of Contents
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION
Independent Bank Corp. (the “Company”) is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder of Rockland Trust Company (“Rockland Trust” or the “Bank”), a Massachusetts trust company chartered in 1907.
All material intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the current year’s presentation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. Results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or any other interim period.
For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission.

NOTE 2 - RECENT ACCOUNTING STANDARDS UPDATES
    
    Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 326 "Financial Instruments - Credit Losses" Update No. 2016-13. The standard was issued in June 2016 and has been amended three times by the FASB (collectively, the "updates"). The purpose of the updates is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, these updates replace the incurred loss impairment methodology in current GAAP with a methodology, referred to as the current expected credit losses ("CECL") methodology, which reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The updates affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The Company adopted the CECL standard effective January 1, 2020.
The Company adopted the standard using the modified retrospective method for all financial assets measured at amortized cost, net investment in leases and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2020 are presented under the CECL standard, while prior period results are presented under standards previously applicable under GAAP. The cumulative effect of the Company's adoption resulted in an immaterial increase to retained earnings as of the January 1, 2020 adoption date. This transition adjustment was a result of the change in allowance methodology, including the impact to the reserve on unfunded commitments resulting from the application of new guidance under CECL, as well as the day one gross-up of purchased credit deteriorated ("PCD") assets. The standard was adopted using the prospective transition approach for PCD assets that were previously classified as purchased credit impaired ("PCI") assets. As prescribed by the standard, management did not reassess whether PCI assets met the criteria of PCD assets at the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect estimated credit losses, with the remaining non-credit related discount, calculated based on the adjusted amortized cost, and will be accreted into interest income on a straight line basis over the remaining contractual term of the asset. See Note 3 - "Securities" and Note 4 - "Loans, Allowance for Credit Losses and Credit Quality" for further details surrounding the Company's adoption of CECL, related accounting policy updates and full disclosures required under the standard.

    FASB ASC Topic 848 "Reference Rate Reform" Update No. 2020-04. Update No. 2020-04 was issued in March 2020 to provide 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 amendments in this update apply 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 amendments will not apply to contract modifications made and hedging relationship entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022 for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022 and do not apply to contract modifications made after December 31, 2022. The Company has not yet adopted the
13

Table of Contents
amendments in this update 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.
NOTE 3 - SECURITIES
    
Investment securities are classified at the time of purchase as available for sale, held to maturity, trading, or equity. Classification is constantly re-evaluated for consistency with corporate goals and objectives. Trading and equity securities are recorded at fair value with subsequent changes in fair value recorded in earnings. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Securities not classified as held to maturity or trading are classified as available for sale and recorded at fair value, with changes in fair value excluded from earnings and reported in other comprehensive income, net of related tax. Purchase premiums and discounts are recognized in interest income, using the interest method, to arrive at periodic interest income at a constant effective yield, thereby reflecting the securities market yield. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Accrued interest receivable balances are excluded from the amortized cost of held to maturity securities and the fair value of available for sale securities and are included within other assets on the consolidated balance sheet. Management has elected not to measure an allowance for credit losses on these balances as the Company employs a timely write-off policy. It is the Company's policy that a security is placed on nonaccrual status at the time any principal or interest payments become 90 days delinquent, and interest earned but not collected for a security placed on non-accrual is reversed against interest income.
Allowance for Credit Losses - Available for Sale Securities
The Company's available for sale securities are carried at fair value. For available for sale securities in an unrealized loss position, management will first evaluate whether there is intent to sell, or if it is more likely than not that the Company will be required to sell a security prior to anticipated recovery of its amortized cost basis. If either of these criteria are met, the Company will record a write-down of the security's amortized cost basis to fair value through income. For those available for sale securities which do not meet the intent or requirement to sell criteria, management will evaluate whether the decline in fair value is a result of credit related matters or other factors. In performing this assessment, management considers the creditworthiness of the issuer including whether the security is guaranteed by the U.S. Federal Government or other government agency, the extent to which fair value is less than amortized cost, and changes in credit rating during the period, among other factors. If this assessment indicates the existence of credit losses, the security will be written down to fair value, as determined by a discounted cash flow analysis. To the extent the estimated cash flows do not support the amortized cost, the deficiency is considered to be due to credit loss and is recognized in earnings.
Changes in the allowance for credit losses are recorded as a provision for (or reversal of) credit loss expense. Losses are charged against the allowance when the uncollectibility of a security is confirmed, or when either of the aforementioned criteria surrounding intent or requirement to sell have been met.
Allowance for Credit Losses - Held to Maturity Securities
The Company measures expected credit losses on held to maturity securities on a collective basis by major security type. Management classifies the held to maturity portfolio into the following major security types: U.S. Government Agency, U.S. Treasury, Agency Mortgage-Backed Securities, Agency Collateralized Mortgage Obligations, Small Business Administration Pooled Securities, and Single Issuer Trust Preferred Securities. Securities in the Company's held to maturity portfolio are primarily guaranteed by either the U.S. Federal Government or other government sponsored agencies with a long history of no credit losses. As a result, management has determined these securities to have a zero loss expectation and therefore does not estimate an allowance for credit losses on these securities.
Trading Securities
The Company had trading securities of $2.6 million and $2.2 million as of September 30, 2020 and December 31, 2019, respectively. These securities are held in a rabbi trust and will be used for future payments associated with the Company’s nonqualified 401(k) Restoration Plan and Nonqualified Deferred Compensation Plan.
Equity Securities
The Company had equity securities of $21.1 million and $21.3 million as of September 30, 2020 and December 31, 2019, respectively. These securities consist primarily of mutual funds held in a rabbi trust and will be used for future payments associated with the Company’s supplemental executive retirement plans.
14

Table of Contents
The following table represents a summary of the gains and losses that relate to equity securities for the periods indicated:
Three Months EndedNine Months Ended
September 30September 30
2020201920202019
Dollars in thousands
Net gains (losses) recognized during the period on equity securities$308 $211 (107)1,562 
Less: net gains recognized during the period on equity securities sold during the period— — 
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date$308 $211 $(113)$1,556 
Available for Sale Securities
The following table summarizes the amortized cost, allowance for credit losses, and fair value of available for sale securities and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated:
 September 30, 2020December 31, 2019
 Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized
Losses
Allowance for credit lossesFair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
 (Dollars in thousands)
U.S. government agency securities$22,475 $1,798 $— $— $24,273 $32,473 $642 $— $33,115 
Agency mortgage-backed securities220,150 10,471 (1)— 230,620 243,548 3,456 (4)247,000 
Agency collateralized mortgage obligations98,657 3,539 (119)— 102,077 87,305 1,225 (19)88,511 
State, county, and municipal securities1,125 20 — — 1,145 1,377 19 — 1,396 
Single issuer trust preferred securities issued by banks489 — (20)— 469 488 — 493 
Pooled trust preferred securities issued by banks and insurers 1,433 — (412)— 1,021 1,488 — (374)1,114 
Small business administration pooled securities59,830 4,043 — — 63,873 54,024 771 — 54,795 
Total available for sale securities$404,159 $19,871 $(552)$— $423,478 $420,703 $6,118 $(397)$426,424 

The Company did not record an allowance for estimated credit losses on any available for sale securities during the three and nine months ended September 30, 2020. Excluded from the table above is accrued interest on available for sale securities of $1.4 million as of September 30, 2020, which is included within other assets on the consolidated balance sheet. Additionally, the Company did not record any write-offs of accrued interest income on available for sale securities during the three and nine months ended September 30, 2020. No securities held by the Company were delinquent on contractual payments as of September 30, 2020, nor were any securities placed on non-accrual status during the three or nine months then ended.

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company had no sales of securities available for sale during the three or nine months ended September 30, 2020, and therefore no gains or losses were realized during the periods presented. The Company had no sales of securities available for sale during the three months ended September 30, 2019 and recorded realized losses of $1.5 million on sales of securities available for sale during the nine months ended September 30, 2019.
15

Table of Contents
The following table shows the gross unrealized losses and fair value of the Company’s available for sale securities which are in an unrealized loss position, and for which the Company has not recorded an allowance for credit losses as of September 30, 2020. These available for sale securities are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position:
 September 30, 2020
  Less than 12 months12 months or longerTotal
 # of 
holdings
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
 (Dollars in thousands)
Agency mortgage-backed securities399 (1)— — 399 (1)
Agency collateralized mortgage obligations27,269 (119)— — 27,269 (119)
Single issuer trust preferred securities issued by banks and insurers469 (20)— — 469 (20)
Pooled trust preferred securities issued by banks and insurers— — 1,021 (412)1,021 (412)
Total impaired available for sale securities$28,137 $(140)$1,021 $(412)$29,158 $(552)
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 recovery of its amortized cost basis. As a result, the Company did not recognize an allowance for credit losses on these investments during the three or nine months ended September 30, 2020. 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, volatility of earnings, and current analysts’ evaluations.
As a result of the Company’s review of these qualitative and quantitative factors, the causes of the impairments listed in the table above by category were as follows at September 30, 2020:
Agency Mortgage-Backed Securities and Agency Collateralized Mortgage Obligations: These portfolios have contractual terms that generally do not permit the issuer to settle the securities at a price less than the current par value of the investment. The decline in market value of these securities 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.
Single Issuer Trust Preferred Securities: This portfolio consists of one security, which is investment grade. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic environment. Management evaluates various financial metrics for the issuer, including regulatory capital ratios of the issuer.
Pooled Trust Preferred Securities: This portfolio consists of one below investment grade security which is performing. The unrealized loss on this security is attributable to the illiquid nature of the trust preferred market in the current economic and regulatory environment. Management evaluates collateral credit and instrument structure, including current and expected deferral and default rates and timing. In addition, discount rates are determined by evaluating comparable spreads observed currently in the market for similar instruments.



16

Table of Contents
Held to Maturity Securities

The following table summarizes the amortized cost, fair value and allowance for credit losses of held to maturity securities and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) as of the dates indicated:
 September 30, 2020December 31, 2019
 Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized
Losses
Allowance for credit lossesFair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross Unrealized
Losses
Fair
Value
 (Dollars in thousands)
U.S. government agency securities$— $— $— $— $— $12,874 $123 $— $12,997 
U.S. Treasury securities4,021 79 — — 4,100 4,032 21 — 4,053 
Agency mortgage-backed securities388,106 19,687 — — 407,793 397,414 8,445 (57)405,802 
Agency collateralized mortgage obligations237,380 9,557 — — 246,937 293,662 4,501 (849)297,314 
Single issuer trust preferred securities issued by banks1,500 — (2)— 1,498 1,500 — (10)1,490 
Small business administration pooled securities28,566 1,573 — — 30,139 31,324 338 (55)31,607 
Total held to maturity securities$659,573 $30,896 $(2)$— $690,467 $740,806 $13,428 $(971)$753,263 
The Company did not record an allowance for estimated credit losses on any held to maturity securities during the three and nine months ended September 30, 2020. Excluded from the table above is accrued interest on held to maturity securities of $1.7 million as of September 30, 2020, which is included within other assets on the consolidated balance sheet. Additionally, the Company did not record any write-offs of accrued interest income on held to maturity securities during the three and nine months ended September 30, 2020. No securities held by the Company were delinquent on contractual payments as of September 30, 2020, nor were any securities placed on non-accrual status during the three and nine months then ended.

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The Company had no sales of held to maturity securities during the three and nine months ended September 30, 2020 and 2019, and therefore no gains or losses were realized during the periods presented.

The Company monitors the credit quality of held to maturity securities through the use of credit ratings. Credit ratings are monitored by the Company on at least a quarterly basis. As of September 30, 2020, all held to maturity securities held by the Company were rated investment grade or higher.
17

Table of Contents
The actual maturities of certain available for sale or held to maturity securities may differ from the contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. A schedule of the contractual maturities of available for sale and held to maturity securities as of September 30, 2020 is presented below:
Due in one year or lessDue after one year to five yearsDue after five to ten yearsDue after ten yearsTotal
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(Dollars in thousands)
Available for sale securities
U.S. government agency securities$— $— $10,001 $10,288 $12,474 $13,985 $— $— $22,475 $24,273 
Agency mortgage-backed securities— — 71,624 73,773 38,956 41,956 109,570 114,891 220,150 230,620 
Agency collateralized mortgage obligations— — — — — — 98,657 102,077 98,657 102,077 
State, county, and municipal securities515 516 420 422 190 207 — — 1,125 1,145 
Single issuer trust preferred securities issued by banks— — — — — — 489 469 489 469 
Pooled trust preferred securities issued by banks and insurers — — — — — — 1,433 1,021 1,433 1,021 
Small business administration pooled securities— — — — — — 59,830 63,873 59,830 63,873 
Total available for sale securities$515 $516 $82,045 $84,483 $51,620 $56,148 $269,979 $282,331 $404,159 $423,478 
Held to maturity securities
U.S. Treasury securities$1,001 $1,019 $3,020 $3,081 $— $— $— $— $4,021 $4,100 
Agency mortgage-backed securities8,510 8,574 1,458 1,509 53,530 56,289 324,608 341,421 388,106 407,793 
Agency collateralized mortgage obligations— — — — — — 237,380 246,937 237,380 246,937 
Single issuer trust preferred securities issued by banks— — — — 1,500 1,498 — — 1,500 1,498 
Small business administration pooled securities— — — — — — 28,566 30,139 28,566 30,139 
Total held to maturity securities$9,511 $9,593 $4,478 $4,590 $55,030 $57,787 $590,554 $618,497 $659,573 $690,467 
Total$10,026 $10,109 $86,523 $89,073 $106,650 $113,935 $860,533 $900,828 $1,063,732 $1,113,945 
Included in the table above are $3.9 million of callable securities at September 30, 2020.
The carrying value of securities pledged to secure public funds, trust deposits, and for other purposes, as required or permitted by law, was $417.1 million and $375.5 million at September 30, 2020 and December 31, 2019, respectively.
At September 30, 2020 and December 31, 2019, the Company had no investments in obligations of individual states, counties, or municipalities which exceeded 10% of consolidated stockholders’ equity.








18

Table of Contents
Under previous accounting guidance, the Company reviewed both available for sale and held to maturity securities for other-than-temporary-impairment ("OTTI"). However, in accordance with the newly adopted CECL standard, the Company now utilizes separate impairment models for held to maturity and available for sale securities for purposes of estimating credit losses. The following table shows the gross unrealized losses and fair value of the Company’s investments in an unrealized loss position, which the Company had not deemed to be OTTI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2019:
 December 31, 2019
  Less than 12 months12 months or longerTotal
 # of 
holdings
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
 (Dollars in thousands)
Agency mortgage-backed securities12 34,009 (59)243 (2)34,252 (61)
Agency collateralized mortgage obligations17 48,476 (215)37,382 (653)85,858 (868)
Single issuer trust preferred securities issued by banks and insurers— — 1,490 (10)1,490 (10)
Pooled trust preferred securities issued by banks and insurers— — 1,114 (374)1,114 (374)
Small business administration pooled securities7,349 (55)— — 7,349 (55)
Total temporarily impaired securities32 $89,834 $(329)$40,229 $(1,039)$130,063 $(1,368)
The Company did not intend to sell these investments and therefore determined, based upon available evidence, that it was more likely than not that the Company would not be required to sell each security before the recovery of its amortized cost basis. As a result, the Company did not consider these investments to be OTTI and accordingly, there was no OTTI recorded and no cumulative credit related component of OTTI for the year ended December 31, 2019.

NOTE 4 - LOANS, ALLOWANCE FOR CREDIT LOSSES AND CREDIT QUALITY
Loans Held for Sale
The Bank primarily classifies new residential real estate mortgage loans as held for sale based on intent, which is determined when loans are underwritten. Residential real estate mortgage loans not designated as held for sale are retained based upon available liquidity, for interest rate risk management and other business purposes.
The Company has elected the fair value option to account for originated closed loans intended for sale. Accordingly, changes in fair value relating to loans intended for sale are recorded in earnings and are offset by changes in fair value relating to interest rate lock commitments and forward sales commitments. Gains and losses on residential loan sales (sales proceeds minus carrying amount) are recorded in mortgage banking income. Upfront costs and fees related to items for which the fair value option is elected are recognized in earnings as incurred and are not deferred.
Loans    
Loans that the Company has the intent and ability to hold until maturity or payoff are carried at amortized cost (net of the allowance for credit losses). Amortized cost is the principal amount outstanding, adjusted by partial charge-offs and net of deferred loan costs or fees. For originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the expected term of the loan using the level-yield method.  When a loan is paid off, the unamortized portion is recognized in interest income. Interest income on loans is accrued based upon the daily principal amount outstanding except for loans on nonaccrual status.
 As a general rule, loans 90 days or more past due with respect to principal or interest are classified as nonaccrual loans, or sooner if management considers such action to be prudent. However, loans that are 90 days or more past due may be kept on an accruing status if the loan is well secured and in the process of collection. The Company may also put a junior lien mortgage on nonaccrual status as a result of delinquency with respect to the first position, which is held by the Bank or by another financial institution, while the junior lien is currently performing. Income accruals are suspended on all nonaccrual loans in a timely manner and all previously accrued and uncollected interest is reversed against current income. A loan remains on nonaccrual status until it becomes current with respect to principal and interest (and in certain instances remains current for up to six months), the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for credit losses. When doubt exists as to the collectability of a loan, any payments received are applied to reduce
19

Table of Contents
the amortized cost of the loan to the extent necessary to eliminate such doubt. For all loan portfolios, a charge-off occurs when the Company determines that a specific loan, or portion thereof, is uncollectible.  This determination is made based on management's review of specific facts and circumstances of the individual loan, including assessing the viability of the customer’s business or project as a going concern, the expected cash flows to repay the loan, the value of the collateral and the ability and willingness of any guarantors to perform. 
Allowance for Credit Losses - Loans Held for Investment
The allowance for credit losses is established based upon the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. Subsequent recoveries, if any, are credited to the allowance.
Under the CECL methodology, the Company estimates credit losses for financial assets on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The quantitative model utilizes a factor based approach to estimate expected credit losses using Probability of Default ("PD"), Loss Given Default ("LGD") and Exposure at Default ("EAD"), which are derived from internal historical default and loss experience. The model estimates expected credit losses using loan level data over the estimated life of the exposure, considering the effect of prepayments. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the Company's historical long-run average. Management has determined a reasonable and supportable period of 12 months, and a straight line reversion period of 6 months, to be appropriate for purposes of estimating expected credit losses. The qualitative risk factors impacting the expected risk of loss within the portfolio include the following:
Lending policies and procedures
Economic and business conditions
Nature and volume of loans
Changes in management
Changes in credit quality
Changes in loan review system
Changes to underlying collateral values
Concentrations of credit risk
Other external factors
Loans that do not share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that are individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable.
Accrued interest receivable amounts are excluded from balances of loans held at amortized cost and are included within other assets on the consolidated balance sheet. Management has elected not to measure an allowance for credit losses on these amounts as the Company employs a timely write-off policy. Consistent with the Company's policy for nonaccrual loans, accrued interest receivable is typically written off when loans reach 90 days past due and are placed on nonaccrual status.
In the ordinary course of business, the Company enters into commitments to extend credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for credit losses. The reserve for unfunded lending commitments is included in other liabilities on the consolidated balance sheet.


20

Table of Contents
Acquired Loans

Prior to its adoption of CECL, and under legacy GAAP, the Company maintained a portfolio of acquired loans, which, at acquisition, were recorded at fair value with no carryover of the allowance for loan losses. Acquired loans were also reviewed to determine if the loan had evidence of deterioration in credit quality and also if it was probable, at acquisition, that all contractually required payments would not be collected. Loans meeting such criteria were deemed to be purchased credit impaired ("PCI") loans. Under the accounting model for PCI loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the "accretable yield", was accreted into interest income over the life of the loans using the effective yield method. Accordingly, PCI loans were not subject to classification as nonaccrual in the same manner as originated loans. Rather, acquired PCI loans were generally considered to be accruing loans because their interest income related to the accretable yield recognized and not to contractual interest payments at the loan level. The difference between contractually required principal and interest payments and the cash flows expected to be collected, referred to as the "nonaccretable difference", included estimates of both the impact of prepayments and future credit losses expected to be incurred over the life of the loans.
Under the CECL standard, the concept of PCI assets was effectively replaced with purchased credit deteriorated ("PCD") assets, the balances of which should be treated in a manner consistent with loans held for investment for purposes of estimating an allowance for credit losses. As a result, upon the Company's adoption of CECL on January 1, 2020, loan balances previously classified as PCI assets were re-classified as PCD assets and have been prospectively accounted for in accordance with the standard. See Note 2 - Recent Accounting Standards Updates for further discussion surrounding the day one impact associated with adoption of CECL as it relates to PCI assets.
21

Table of Contents
Loans Held for Investment and Allowance for Credit Losses
The following table summarizes the change in allowance for credit losses by loan category, and bifurcates the amount of loans allocated to each loan category for the period indicated:
 Three Months Ended September 30, 2020
 (Dollars in thousands)
 Commercial and
Industrial
Commercial
Real Estate
Commercial
Construction
Small
Business
Residential
Real Estate
      
Home  Equity
Other ConsumerTotal
Allowance for credit losses
Beginning balance$25,662 $36,956 $4,501 $4,561 $15,046 $24,860 $590 $112,176 
Charge-offs(185)(3,885)— (49)— — (185)(4,304)
Recoveries— 21 219 253 
Provision for credit loss expense2,741 6,306 709 79 (884)(1,309)(142)7,500 
Ending balance (1)$28,219 $39,386 $5,210 $4,593 $14,163 $23,572 $482 $115,625 
 Nine Months Ended September 30, 2020
 (Dollars in thousands)
 Commercial and
Industrial
Commercial
Real Estate
Commercial
Construction
Small
Business
Residential
Real Estate
      
Home  Equity
Other ConsumerTotal
Allowance for credit losses
Beginning balance, pre adoption of Topic 326 $17,594 $32,935 $6,053 $1,746 $3,440 $5,576 $396 $67,740 
Cumulative effect accounting adjustment (2)(1,984)(13,048)(3,652)495 9,828 7,012 212 (1,137)
Cumulative effect accounting adjustment (3)49 337 — — 423 319 29 1,157 
Charge-offs(185)(3,885)— (194)— (142)(1,342)(5,748)
Recoveries47 — 174 873 1,113 
Provision for credit loss expense12,698 23,038 2,809 2,538 470 10,633 314 52,500 
Ending balance (1)$28,219 $39,386 $5,210 $4,593 $14,163 $23,572 $482 $115,625 
(1)Balances of accrued interest receivable excluded from amortized cost and the calculation of allowance for credit losses amounted to $36.7 million as of September 30, 2020.
(2)Represents adjustment needed to reflect the cumulative day one impact pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment represents a $1.1 million decrease to the allowance attributable to the change in accounting methodology for estimating the allowance for credit losses resulting from the Company's adoption of the standard.
(3)Represents adjustment needed to reflect the day one reclassification of the Company's PCI loan balances to PCD and the associated gross-up, pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment represents a $1.2 million increase to the allowance resulting from the day one reclassification.
The balance of allowance for credit losses of $115.6 million as of September 30, 2020 represents an increase of $47.9 million, or 70.6%, in comparison to the implementation balances at January 1, 2020, and an increase of $3.4 million, or 3.1% compared to June 30, 2020. These increases in the allowance were primarily driven by anticipated credit deterioration caused by the COVID-19 pandemic. During the third quarter, conditions surrounding the credit environment and expectations for future loss estimates did not change significantly in comparison to the previous quarter. As a result, the third quarter provision for credit losses of $7.5 million reflects a decrease from the $25.0 million and $20.0 million recorded during the first and second quarters, respectively. While management is unable to know with certainty the direct, indirect, and future impacts of the COVID-19 pandemic, it is expected that the pandemic will have a material adverse impact on future losses across a broad range of loan segments.  As such, the provision for credit loss recognized in 2020 reflects increased reserve allocations to loan segments that are considered to have elevated loss exposure associated with the COVID-19 pandemic.  These loan segments primarily include commercial relationships within industries that are subject to mandated closures and capacity limits that will potentially impede the borrowers’ ability to make loan payments, including loans in the following industry sections: Accommodations, Food Services, Retail Trade, Recreation and Entertainment, and Other Services (excluding Public Administration).  In addition to these industry exposures, additional risk of loss was attributable to non-owner occupied real estate borrowers with significant retail tenant exposure, as well as home equity loans within a junior lien position.  Leveraging
22

Table of Contents
actual historical loss given default (LGD) rates combined with stressing of assumptions over probability of default rates over these higher risk segments, qualitative adjustments were made to the initially model-driven calculated loss reserves. Additionally, the forecast used by the model was adjusted to use a more severe outlook at each quarter end throughout 2020, as compared to the baseline forecast that was used to calculate opening balances on January 1, 2020 as a result of the uncertainty in the outlook due to the ongoing pandemic.
   
    For the purpose of estimating the allowance for credit losses, management segregated the loan portfolio into the portfolio segments detailed in the above tables.  Each of these loan categories possesses unique risk characteristics that are considered when determining the appropriate level of allowance for each segment.  Some of the characteristics unique to each loan category include:


Commercial Portfolio
Commercial and Industrial: Loans in this category consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment.  Collateral generally consists of pledges of business assets including, but not limited to: accounts receivable, inventory, plant and equipment, or real estate, if applicable. Repayment sources consist of primarily, operating cash flow, and secondarily, liquidation of assets.
Commercial Real Estate: Loans in this category consist of mortgage loans to finance investment in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties.  Loans are typically written with amortizing payment structures.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy and regulatory guidelines. Repayment sources consist of, primarily, cash flow from operating leases and rents and, secondarily, liquidation of assets.
Commercial Construction: Loans in this category consist of short-term construction loans, revolving and nonrevolving credit lines and construction/permanent loans to finance the acquisition, development and construction or rehabilitation of real property.  Project types include residential land development, 1-4 family, condominium, and multi-family home construction, commercial/retail, office, industrial, hotels, educational and healthcare facilities and other specific use properties.  Loans may be written with nonamortizing or hybrid payment structures depending upon the type of project.  Collateral values are determined based upon third party appraisals and evaluations.  Loan to value ratios at origination are governed by established policy and regulatory guidelines.  Repayment sources vary depending upon the type of project and may consist of sale or lease of units, operating cash flows or liquidation of other assets.
Small Business: Loans in this category consist of revolving, term loan and mortgage obligations extended to sole proprietors and small businesses for purposes of financing working capital and/or capital investment.  Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, or real estate if applicable.  Repayment sources consist primarily of operating cash flows and, secondarily, liquidation of assets.
For the commercial portfolio it is the Company’s policy to obtain personal guarantees for payment from individuals holding material ownership interests in the borrowing entities.
Consumer Portfolio
Residential Real Estate: Residential mortgage loans held in the Company’s portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors such as current and expected income, employment status, current assets, other financial resources, credit history and the value of the collateral.  Collateral consists of mortgage liens on 1-4 family residential properties.  Residential mortgage loans also include loans to construct owner-occupied 1-4 family residential properties.
Home Equity: Home equity loans and credit lines are made to qualified individuals and are primarily secured by senior or junior mortgage liens on owner-occupied 1-4 family homes, condominiums or vacation homes. Each home equity loan has a fixed rate and is billed in equal payments comprised of principal and interest. The majority of home equity lines of credit have a variable rate and are billed in interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the then outstanding principal balance plus all accrued interest over a predetermined repayment period, as set forth in the note. Additionally, the Company has the option of renewing each line of credit for additional draw periods.  Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan to value ratios within established policy guidelines.
23

Table of Contents
Other Consumer: Other consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, debt consolidation, personal expenses or overdraft protection.  Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines.  These loans may be secured or unsecured.
Credit Quality
The Company continually monitors the asset quality of the loan portfolio using all available information. Based on this information, loans demonstrating certain payment issues or other weaknesses may be categorized as adversely risk-rated, delinquent, nonperforming and/or put on nonaccrual status. Additionally, in the course of resolving such loans, the Company may choose to restructure the contractual terms of certain loans to match the borrower’s ability to repay the loan based on their current financial condition.
The Company reviews numerous credit quality indicators when assessing the risk in its loan portfolio. For the commercial portfolio, the Company utilizes a 10-point credit risk-rating system, which assigns a risk-grade to each loan obligation based on a number of quantitative and qualitative factors associated with a commercial or small business loan transaction. Factors considered 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 risk-rating categories for the commercial portfolio are defined as follows:
Pass: Risk-rating “1” through “6” comprises of loans ranging from ‘Substantially Risk Free’ which indicates borrowers are of unquestioned credit standing and the pinnacle of credit quality, well established companies with a very strong financial condition, and loans fully secured by cash collateral, through ‘Acceptable Risk’, which indicates borrowers may exhibit declining earnings, strained cash flow, increasing or above average leverage and/or weakening market fundamentals that indicate below average asset quality, margins and market share. Collateral coverage is protective.
Potential Weakness: Borrowers exhibit potential credit weaknesses or downward trends deserving management’s close attention. If not checked or corrected, these trends will weaken the Company’s asset and position. While potentially weak, currently these borrowers are marginally acceptable; no loss of principal or interest is envisioned.
Definite Weakness Loss Unlikely: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. Loans may be inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. However, there is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Collateral coverage may be inadequate to cover the principal obligation.
Partial Loss Probable: Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt with the added provision that the weaknesses make collection of the debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Serious problems exist to the point where partial loss of principal is likely.
Definite Loss: Borrowers deemed incapable of repayment. Loans to such borrowers are considered uncollectible and of such little value that continuation as active assets of the Company is not warranted.
The Company utilizes a comprehensive, continuous strategy for evaluating and monitoring commercial credit quality. Initially, credit quality is determined at loan origination and is re-evaluated when subsequent actions, such as renewals, modifications or reviews, occur. Actively managed commercial borrowers are required to provide updated financial information at least annually which is carefully evaluated for any changes in credit quality. Larger loan relationships are subject to a full annual credit review by experienced credit professionals, while continuous portfolio monitoring techniques are employed to evaluate changes in credit quality for smaller loan relationships. Any changes in credit quality are reflected in risk-rating changes. Additionally, the Company retains an independent loan review firm to evaluate the credit quality of the commercial loan portfolio. The independent loan review process achieves significant penetration into the commercial loan portfolio and reports the results of these reviews to the Audit Committee of the Board of Directors on a quarterly basis. Commercial loan modifications granted by the Company allowing payment deferrals for qualifying borrowers in accordance with the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") have been assessed for downgrades of risk ratings.
For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. As a result, for this portfolio the Company utilizes a pass/default risk-rating system, based on an age
24

Table of Contents
analysis (i.e., days past due) associated with each consumer loan. Under this structure, consumer loans less than 90 days past due are assigned a "pass" rating, while any consumer loans 90 days or more past due are assigned a "default" rating. Consumer loan modifications granted by the Company allowing payment deferrals for qualifying borrowers in accordance with the CARES Act have not been reflected as delinquent loans.
The following table details the amortized cost balances of the Company's loan portfolios, presented by credit quality indicator and origination year as of the date indicated below:
 September 30, 2020
20202019201820172016PriorRevolving LoansRevolving converted to TermTotal
 (Dollars in thousands)
Commercial and
industrial
Pass$1,012,974 (1)$153,137 $107,318 $34,826 $23,065 $22,334 $601,937 $2,577 $1,958,168 
Potential weakness2,560 2,302 7,833 4,573 1,219 318 15,248 50 34,103 
Definite weakness - loss unlikely2,732 1,553 22,748 5,500 2,483 1,419 33,496 — 69,931 
Partial loss probable— — — — — 143 — — 143 
Definite loss— — — — — — — — — 
Total commercial and industrial$1,018,266 $156,992 $137,899 $44,899 $26,767 $24,214 $650,681 $2,627 $2,062,345 
Commercial real estate
Pass$753,415 $859,548 $512,371 $587,345 $399,442 $751,629 $39,998 $16,341 $3,920,089 
Potential weakness20,639 15,957 20,313 7,941 27,253 47,875 — — 139,978 
Definite weakness - loss unlikely4,261 2,265 10,092 21,081 2,170 6,605 — — 46,474 
Partial loss probable— — 18,923 — — — — — 18,923 
Definite loss— — — — — — — — — 
Total commercial real estate$778,315 $877,770 $561,699 $616,367 $428,865 $806,109 $39,998 $16,341 $4,125,464 
Commercial construction
Pass$182,291 $196,420 $73,298 $66,406 $— $6,750 $31,372 $1,077 $557,614 
Potential weakness— 9,352 5,037 — — — 328 — 14,717 
Definite weakness - loss unlikely— — 1,003 — — — — — 1,003 
Partial loss probable— — — — — — — — — 
Definite loss— — — — — — — — — 
Total commercial construction$182,291 $205,772 $79,338 $66,406 $— $6,750 $31,700 $1,077 $573,334 
Small business
Pass$27,457 $28,766 $20,806 $14,627 $14,528 $22,644 $34,569 $— $163,397 
Potential weakness— 10 16 10 755 232 736 — 1,759 
Definite weakness - loss unlikely184 408 78 170 98 723 786 — 2,447 
Partial loss probable— — — — — — 29 — 29 
Definite loss— — — — — — — — — 
Total small business$27,641 $29,184 $20,900 $14,807 $15,381 $23,599 $36,120 $— $167,632 
Residential real estate
Pass$131,691 $167,901 $187,194 $168,048 $241,638 $449,219 $— $— $1,345,691 
Default728 — 760 235 167 4,724 — — 6,614 
Total residential real estate$132,419 $167,901 $187,954 $168,283 $241,805 $453,943 $— $— $1,352,305 
Home equity
Pass$60,274 $66,238 $59,534 $59,387 $44,817 $122,397 $681,784 $4,057 $1,098,488 
25

Table of Contents
Default— — — — — 455 2,044 67 2,566 
Total home equity$60,274 $66,238 $59,534 $59,387 $44,817 $122,852 $683,828 $4,124 $1,101,054 
Other consumer
Pass$679 $450 $209 $739 $696 $7,737 $12,493 $— $23,003 
Default— — — 20 — 34 — 56 
Total other consumer$679 $450 $209 $759 $696 $7,771 $12,495 $— $23,059 
Total$2,199,885 $1,504,307 $1,047,533 $970,908 $758,331 $1,445,238 $1,454,822 $24,169 $9,405,193 
(1)Loans originated as part of the Paycheck Protection Program ("PPP") program established by the CARES Act are included within commercial and industrial under the 2020 vintage year and "pass" category as these loans are 100% guaranteed by the U.S. Government. Funded PPP loans totaled $811.7 million as of September 30, 2020.
    For the Company’s consumer portfolio, the quality of the loan is best indicated by the repayment performance of an individual borrower. However, the Company does supplement performance data with current Fair Isaac Corporation (“FICO”) scores and Loan to Value (“LTV”) estimates. Current FICO data is purchased and appended to all consumer loans on a regular basis. In addition, automated valuation services and broker opinions of value are used to supplement original value data for the residential and home equity portfolios, periodically. The following table shows the weighted average FICO scores and the weighted average combined LTV ratios at the dates indicated below:
September 30
2020
December 31
2019
Residential portfolio
FICO score (re-scored)(1)749 749 
LTV (re-valued)(2)57.7 %59.0 %
Home equity portfolio
FICO score (re-scored)(1)770 767 
LTV (re-valued)(2)(3)46.6 %46.6 %
(1)The average FICO scores at September 30, 2020 are based upon rescores available from August 2020 and origination score data for loans booked in September 2020.  The average FICO scores at December 31, 2019 were based upon rescores available from November 2019 and origination score data for loans booked in December 2019.
(2)The combined LTV ratios for September 30, 2020 are based upon updated automated valuations as of August 2020, when available, and/or the most current valuation data available.  The combined LTV ratios for December 31, 2019 were based upon updated automated valuations as of November 2019, when available, and/or the most current valuation data available as of such date.  The updated automated valuations provide new information on loans that may be available since the previous valuation was obtained.  If no new information is available, the valuation will default to the previously obtained data or most recent appraisal.
(3)For home equity loans and lines in a subordinate lien, the LTV data represents a combined LTV, taking into account the senior lien data for loans and lines.
Unfunded Commitments
Management evaluates the need for a reserve on unfunded lending commitments in a manner consistent with loans held for investment. At September 30, 2020, the Company's estimated reserve for unfunded commitments amounted to $1.0 million.
Asset Quality
The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. Delinquent loans are managed by a team of collection specialists and the Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.  As a general rule, loans 90 days or more past due with respect to principal or interest are classified as nonaccrual loans. The Company also may use discretion regarding other loans 90 days or more delinquent if the loan is well secured and/or in process of collection.
26

Table of Contents
In response to the COVID-19 pandemic, the Company has granted loan modifications to allow deferral of payments for borrowers negatively impacted by the pandemic. The amount of loans with active deferrals as of September 30, 2020 was $583.8 million. The majority of these loans with active deferrals continue to be characterized as current loans. In accordance with regulatory guidance, these modifications are not considered to be troubled debt restructures ("TDRs") if they were performing prior to December 31, 2019. Additionally, a majority of these are characterized as current and therefore are not impacting nonaccrual or delinquency totals as of September 30, 2020. The Company does, however, consider all active deferrals when estimating loss reserves. As loans reach their deferral maturity date, consideration of TDR and delinquency status will resume in accordance with the Company's accounting policy.
The following table shows information regarding nonaccrual loans as of the dates indicated:
Nonaccrual Balances
September 30, 2020December 31, 2019
With Allowance for Credit LossesWithout Allowance for Credit LossesTotalTotal
 (Dollars in thousands)
Commercial and industrial$17,816 $19,035 $36,851 $22,574 
Commercial real estate17,501 20,663 38,164 3,016 
Small business542 — 542 311 
Residential real estate13,379 2,850 16,229 13,360 
Home equity6,052 107 6,159 6,570 
Other consumer79 — 79 61 
Total nonaccrual loans (1)$55,369 $42,655 $98,024 $45,892 
(1)Included in these amounts were $23.8 million and $24.8 million of nonaccruing TDRs at September 30, 2020 and December 31, 2019, respectively.
    It is the Company's policy to reverse any accrued interest when a loan is put on nonaccrual status, and, as such, the Company did not record any interest income on nonaccrual loans during the three and nine months ended September 30, 2020.
    The following table shows information regarding foreclosed residential real estate property at the dates indicated:
September 30, 2020December 31, 2019
(Dollars in thousands)
Foreclosed residential real estate property held by the creditor$— $— 
Recorded investment in mortgage loans collateralized by residential real estate property that are in the process of foreclosure$2,113 $3,294 
    The following tables show the age analysis of past due financing receivables as of the dates indicated:
 September 30, 2020
 30-59 days60-89 days90 days or moreTotal Past Due Total
Financing
Receivables
Amortized Cost
>90 Days
and  Accruing
 Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
Current
 (Dollars in thousands)
Loan Portfolio
Commercial and industrial$52 $3,608 $930 12 $4,590 $2,057,755 $2,062,345 $— 
Commercial real estate99 8,269 1,355 9,723 4,115,741 4,125,464 — 
Commercial construction— — — — — — — — 573,334 573,334 — 
Small business514 455 12 124 22 1,093 166,539 167,632 — 
Residential real estate11 1,792 1,631 37 5,870 55 9,293 1,343,012 1,352,305 — 
Home equity18 1,581 468 36 2,566 62 4,615 1,096,439 1,101,054 — 
Other consumer (1)237 217 12 57 252 275 22,784 23,059 
Total274 $4,255 30 $14,432 107 $10,902 411 $29,589 $9,375,604 $9,405,193 $
27

Table of Contents
 December 31, 2019
 30-59 days60-89 days90 days or moreTotal Past Due Total
Financing
Receivables
Recorded
Investment
>90 Days
and  Accruing
 Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
Number
of Loans
Principal
Balance
Current
 (Dollars in thousands)
Loan Portfolio
Commercial and industrial$253 $323 $760 $1,336 $1,393,700 $1,395,036 $— 
Commercial real estate1,690 194 2,038 16 3,922 3,998,437 4,002,359 218 (2)
Commercial construction560 — — — — 560 546,733 547,293 — 
Small business11 837 15 115 20 967 173,530 174,497 — 
Residential real estate17 2,237 17 3,055 38 7,020 72 12,312 1,578,257 1,590,569 1,652 (2)
Home equity23 1,689 524 40 3,854 71 6,067 1,127,731 1,133,798 265 (2)
Other consumer (1)387 245 12 44 16 32 415 321 29,766 30,087 22 
Total447 $7,511 43 $4,155 113 $13,819 603 $25,485 $8,848,154 $8,873,639 $2,157 
(1)Other consumer portfolio is inclusive of deposit account overdrafts recorded as loan balances.
(2)Represents purchased credit impaired ("PCI") loans that were accruing interest due to expectations of future cash collections.
Troubled Debt Restructurings
In the course of resolving nonperforming loans, the Bank may choose to restructure the contractual terms of certain loans. The Bank attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Bank to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include the transfer of assets from the borrower to satisfy the debt, a modification of loan terms, or a combination of the two.
The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated:
September 30, 2020December 31, 2019
 (Dollars in thousands)
TDRs on accrual status$17,521 $19,599 
TDRs on nonaccrual23,810 24,766 
Total TDRs$41,331 $44,365 
Amount of specific reserves associated with TDRsn/a$855 
Additional commitments to lend to a borrower who has been a party to a TDR$158 $63 
The Company’s policy is to have any restructured loan which is on nonaccrual status prior to being modified remain on nonaccrual status for six months subsequent to being modified before management considers its return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Additionally, loans classified as TDRs are adjusted to reflect the changes in value of the recorded investment in the loan, if any, resulting from the granting of a concession. For all residential loan modifications, the borrower must perform during a 90 day trial period before the modification is finalized.
28

Table of Contents

The following table shows the troubled debt restructurings which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring:
 Three Months EndedNine Months Ended
September 30, 2020September 30, 2020
 Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
 (Dollars in thousands)
Troubled debt restructurings
Commercial and industrial$83 $83 $391 $391 
Commercial real estate744 744 2,518 2,518 
Small business— — — 112 88 
Residential real estate— — — 559 642 
Total$827 $827 17 $3,580 $3,639 
 Three Months EndedNine Months Ended
September 30, 2019September 30, 2019
 Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
 (Dollars in thousands)
Troubled debt restructurings
Commercial and industrial$87 $87 $184 $184 
Commercial real estate133 133 283 283 
Small business19 19 33 33 
Residential real estate163 168 163 168 
Home equity46 46 121 121 
Total$448 $453 $784 $789 
The following table shows the Company’s post-modification balance of TDRs listed by type of modification for the periods indicated:
Three Months EndedNine Months Ended
 September 30September 30
 2020201920202019
 (Dollars in thousands)
Adjusted interest rate218 — $822 $150 
Court ordered concession— — 25 75 
Extended maturity609 453 2,792 606 
Total827 453 $3,639 $831 
The Company considers a loan to have defaulted when it reaches 90 days past due. During the three and nine months ended September 30, 2020 and September 30, 2019 there were no loans modified during the prior twelve months that subsequently defaulted.
29

Table of Contents
NOTE 5 - LOANS AND ALLOWANCE FOR LOAN LOSSES
As disclosed in Note 2 - "Recent Accounting Standards Updates" and Note 4 - "Loans, Allowance for Credit Losses and Credit Quality," the Company adopted the CECL standard, effective January 1, 2020. As required by disclosure guidance, the Company has included relevant disclosures from the prior year and prior to the adoption of CECL within this footnote, as it relates to loans and allowance for loan losses.
The following table bifurcates the amount of loans and the allowance allocated to each loan category based on the type of impairment analysis as of December 31, 2019:
 December 31, 2019 
Commercial
and
Industrial
Commercial
Real Estate
Commercial
Construction
Small
Business
Residential
Real
Estate
Home
Equity
Other ConsumerTotal 
(Dollars in thousands)
Financing receivables ending balance:
Collectively evaluated for impairment$1,370,580 $3,987,848 $547,293 $173,960 $1,571,848 $1,127,963 $29,663 $8,809,155 
Individually evaluated for impairment24,456 8,337 — 537 11,228 4,948 122 49,628   
Purchased credit impaired loans— 6,174 — — 7,493 887 302 14,856 
Total loans by group$1,395,036 $4,002,359 $547,293 $174,497 $1,590,569 $1,133,798 $30,087 $8,873,639 (1)
(1)The amount of net deferred costs on originated loans included in the ending balance was $7.1 million at December 31, 2019. Net unamortized discounts on acquired loans not deemed to be purchased credit impaired ("PCI") included in the ending balance was $21.6 million at December 31, 2019.
    At December 31, 2019, the reserve for unfunded loan commitments was $2.1 million.
    The following table summarizes changes in allowance for loan losses by loan category for the periods indicated:
Three Months Ended September 30, 2019
(Dollars in thousands)
Commercial and
Industrial
Commercial
Real Estate
Commercial
Construction
Small
Business
Residential
Real Estate

Home Equity
Other ConsumerTotal
Allowance for loan losses
Beginning balance$16,857 $32,660 $5,593 $1,768 $3,296 $5,547 $239 $65,960 
Charge-offs— (82)— (125)— (28)(472)(707)
Recoveries1,003 106 — 61 140 194 185 1,689 
Provision (benefit)(528)(33)240 48 (88)36 325 — 
Ending balance$17,332 $32,651 $5,833 $1,752 $3,348 $5,749 $277 $66,942 
Nine Months Ended September 30, 2019
(Dollars in thousands)
Commercial and
Industrial
Commercial
Real Estate
Commercial
Construction
Small
Business
Residential
Real Estate

Home Equity
Other ConsumerTotal
Allowance for loan losses
Beginning balance$15,760 $32,370 $5,158 $1,756 $3,219 $5,608 $422 $64,293 
Charge-offs— (82)— (319)— (212)(1,125)(1,738)
Recoveries1,127 152 — 108 141 278 581 2,387 
Provision (benefit)445 211 675 207 (12)75 399 2,000 
Ending balance$17,332 $32,651 $5,833 $1,752 $3,348 $5,749 $277 $66,942 
Ending balance: collectively evaluated for impairment$17,326 $32,610 $5,833 $1,741 $2,729 $5,594 $272 $66,105 
Ending balance: individually evaluated for impairment$$41 $— $11 $619 $155 $$837 
30

Table of Contents
The Company's historical approach to loan portfolio segmentation by risk characteristics and monitoring of credit quality for commercial loans under previous accounting guidance was consistent with that applied under the newly adopted CECL standard. See Note 4 - "Loans, Allowance for Credit Losses and Credit Quality" further discussion surrounding the Company's policies for loan segmentation and credit quality monitoring.
The following tables detail the amount of outstanding principal balances relative to each of the risk-rating categories for the Company’s loan portfolio as of December 31, 2019:
  December 31, 2019
CategoryRisk
Rating
Commercial  and
Industrial
Commercial
Real Estate
Commercial
Construction
Small BusinessTotal
  (Dollars in thousands)
Pass1 - 6$1,274,155 $3,860,555 $542,608 $171,213 $5,848,531 
Potential weakness763,485 97,268 2,247 1,416 164,416 
Definite weakness-loss unlikely857,396 44,536 2,438 1,868 106,238 
Partial loss probable9— — — — — 
Definite loss10— — — — — 
Total$1,395,036 $4,002,359 $547,293 $174,497 $6,119,185 
Impaired Loans
    Under previous accounting guidance, a loan was considered impaired when, based on current information and events, it was probable that the Company would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The table below sets forth information regarding the Company’s impaired loans by loan portfolio at the date indicated:
 December 31, 2019
 Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
 (Dollars in thousands)
With no related allowance recorded
Commercial and industrial$23,786 $34,970 $— 
Commercial real estate6,213 12,101 — 
Small business469 484 — 
Residential real estate4,976 5,123 — 
Home equity3,764 3,893 — 
Other consumer34 34 — 
Subtotal39,242 56,605 — 
With an allowance recorded
Commercial and industrial$670 $670 $126 
Commercial real estate2,124 2,124 48 
Small business68 105 
Residential real estate6,252 7,163 637 
Home equity1,184 1,382 156 
Other consumer88 91 
Subtotal10,386 11,535 980 
Total$49,628 $68,140 $980 
31

Table of Contents
The following table sets forth information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated:
 Three Months EndedNine Months Ended
September 30, 2019September 30, 2019
 Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
 (Dollars in thousands)
With no related allowance recorded
Commercial and industrial$25,694 $35 $27,937 $108 
Commercial real estate12,987 149 13,261 478 
Small business235 266 10 
Residential real estate5,031 57 5,061 175 
Home equity4,417 50 4,479 151 
Other consumer39 43 
Subtotal48,403 295 51,047 924 
With an allowance recorded
Commercial and industrial$353 $$360 $13 
Commercial real estate1,402 20 1,415 60 
Small business92 — 95 
Residential real estate6,047 61 6,115 179 
Home equity959 11 972 33 
Other consumer107 116 
Subtotal8,960 97 9,073 290 
Total$57,363 $392 $60,120 $1,214 

Purchased Credit Impaired Loans

    Under previous accounting guidance, certain loans acquired by the Company may have shown evidence of deterioration of credit quality since origination at purchase date, and it was therefore deemed unlikely that the Company would be able to collect all contractually required payments. As such, these loans were deemed to be PCI loans and the carrying value and prospective income recognition were predicated upon future cash flows expected to be collected. The following table displays certain information pertaining to PCI loans at the date indicated:
December 31, 2019
(Dollars in thousands)
Outstanding balance$18,358 
Carrying amount$14,856 
    
The following table summarizes activity in the accretable yield for the PCI loan portfolio for the periods indicated:
Three Months Ended September 30Nine Months Ended September 30
20192019
(Dollars in thousands)
Beginning balance$2,238 $1,191 
Acquisition— 1,464 
Accretion(412)(1,215)
Other change in expected cash flows (1)237 623 
Reclassification from nonaccretable difference for loans which have paid off227 227 
Ending balance$2,290 $2,290 

32

Table of Contents
(1) Represents changes in cash flows expected to be collected and resulting in increased interest income as a prospective yield adjustment over the remaining life of the loan(s).

NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS

    The following table sets forth the carrying value of goodwill and other intangible assets, net of accumulated amortization, at the dates indicated below:
September 30, 2020December 31, 2019
 (Dollars in thousands)
Balances not subject to amortization
Goodwill$506,206 $506,206 
Balances subject to amortization
Core deposit intangibles23,625 28,016 
Other intangible assets918 1,270 
Total other intangible assets24,543 29,286 
Total goodwill and other intangible assets$530,749 $535,492 
 
    The Company typically performs its goodwill impairment test during the third quarter of the year, unless certain indicators suggest earlier testing to be warranted. The COVID-19 pandemic has resulted in significant levels of ongoing volatility in the capital markets and presents heightened uncertainty surrounding the future impact to operations of the Company and its customers. Given these conditions, the Company identified this impact from the pandemic as a triggering event warranting interim tests for impairment as of March 31, June 30, and again as of September 30, 2020. Accordingly, the Company performed impairment tests and determined that there was no impairment of its goodwill, as the fair value of the Company's single reporting unit remained in excess of its carrying value. Although the Company utilizes quoted market prices when estimating fair value of the reporting unit for purposes of the quantitative impairment test, it also considers certain qualitative factors, including the concept of a control premium, which increases the fair value as compared to market capitalization. Other intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company also considered the impact of the COVID-19 pandemic as it pertains to other intangible assets, and determined that there was no indication of impairment related to other intangible assets as of September 30, 2020.

NOTE 7 -EARNINGS PER SHARE
Earnings per share consisted of the following components for the periods indicated:

 Three Months EndedNine Months Ended
September 30September 30
 2020201920202019
 (Dollars in thousands, except per share data)
Net income$34,873 $51,845 $86,526 $117,698 
Weighted Average Shares
Basic shares32,951,918 34,361,176 33,358,879 32,283,196 
Effect of dilutive securities24,758 39,390 27,871 45,416 
Diluted shares32,976,676 34,400,566 33,386,750 32,328,612 
Net income per share
Basic EPS$1.06 $1.51 $2.59 $3.65 
Effect of dilutive securities— — — (0.01)
Diluted EPS$1.06 $1.51 $2.59 $3.64 

33

Table of Contents
    The diluted earnings per share computations do not assume the conversion, exercise, or contingent issuance of the following shares for the following periods because the result would have been anti-dilutive for the periods indicated. As a result of the anti-dilution, the potential common shares excluded from the calculation of diluted earnings per share are as follows:
 Three Months EndedNine Months Ended
September 30September 30
 2020201920202019
Stock options10,000 5,000 10,000 — 
Performance-based restricted stock— — 11,080 — 

NOTE 8 - STOCK BASED COMPENSATION
Time Vested Restricted Stock Awards
During the nine months ended September 30, 2020, the Company made the following awards of time vested restricted stock:
DateShares GrantedPlanGrant Date Fair Value Per Share Vesting Period
2/27/202046,550 2005 Employee Stock Plan$70.24 Ratably over 5 years from grant date
4/15/2020880 2005 Employee Stock Plan$68.14 Ratably over 5 years from grant date
5/27/20209,438 2018 Non-Employee Director Stock Plan$72.86 Shares vested immediately
The fair value of the restricted stock awards is based upon the average of the high and low price at which the Company’s common stock traded on the date of grant. The holders of restricted stock awards are entitled to receive dividends and to vote from and as of the date of grant.
Performance-Based Restricted Stock Awards
    On February 27, 2020, the Company granted 17,100 performance-based restricted stock awards to certain executive level employees. These performance-based restricted stock awards were issued from the 2005 Employee Stock Plan and were determined to have a grant date fair value per share of $70.24, determined by the average of the high and low price at which the Company's common stock traded on the date of grant. The number of shares to be vested is contingent upon the Company's attainment of certain performance measures outlined in the award agreement and will be measured as of the end of the three year performance period, January 1, 2020 through December 31, 2022. The awards will vest upon the earlier of the date on which it is determined if the performance goal is achieved subsequent to the performance period or March 31, 2023. These awards are accounted for as equity awards due to the nature of these awards and the fact that these shares will not be settled in cash. The holders of these awards are not entitled to receive dividends or vote until the shares are vested.
    On March 3, 2020, the performance-based restricted stock awards that were awarded on February 16, 2017 vested at 100% of the maximum target shares awarded, or 14,400 shares.
Stock Options
The Company did not grant any awards of options to purchase shares of common stock during the nine months ended September 30, 2020.

34

Table of Contents
NOTE 9 - DERIVATIVE AND HEDGING ACTIVITIES
The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives, foreign exchange contracts and risk participation agreements to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer related positions by entering into similar offsetting positions with broker-dealers. 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 it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.
The Company does not enter into proprietary trading positions for any derivatives.
The Company is subject to over-the-counter derivative clearing requirements which require certain derivatives to be cleared through central clearing houses. Accordingly, the Company clears certain derivative transactions through the Chicago Mercantile Exchange Clearing House ("CME"). This clearing house requires the Company to post initial and variation margin to mitigate the risk of non-payment, the latter of which is received or paid daily based on the net asset or liability position of the contracts.
Interest Rate Positions
The Company may utilize various interest rate derivatives as hedging instruments against interest rate risk associated with the Company’s borrowings and loan portfolios. An interest rate derivative 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.

35

Table of Contents
The following tables reflect the Company's derivative positions as of the dates indicated below for interest rate derivatives which qualify as cash flow hedges for accounting purposes:
September 30, 2020
Weighted Average Rate
Notional AmountAverage MaturityCurrent
Rate
Received
Pay Fixed
Swap Rate
Fair Value (1)
(in thousands)(in years)(in thousands)
Interest rate swaps on borrowings$75,000 1.430.26 %1.53 %$(1,561)
Current Rate PaidReceive Fixed
Swap Rate
Interest rate swaps on loans 450,000 2.910.15 %2.37 %29,878 
Current Rate PaidReceive Fixed Swap Rate
Cap - Floor
Interest rate collars on loans 400,000 2.910.15 %2.73% - 2.20%24,169 
Total$925,000 $52,486 
December 31, 2019
Weighted Average Rate
Notional AmountAverage MaturityCurrent
Rate
Received
Pay Fixed
Swap Rate
Fair Value (1)
(in thousands)(in years)(in thousands)
Interest rate swaps on borrowings$75,000 2.181.90 %1.53 %$140 
Current Rate PaidReceive Fixed
Swap Rate
Interest rate swaps on loans 450,000 3.661.76 %2.37 %12,907 
Current Rate PaidReceive Fixed Swap Rate
Cap - Floor
Interest rate collars on loans 400,000 3.661.76 %2.73% - 2.20%9,896 
Total$925,000 $22,943 

(1)Beginning in 2020, the Company made an election to include accrued interest within fair value balances.
The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is 4.1 years.
For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of the gains or losses is reported as a component of other comprehensive income ("OCI"), and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.  The Company expects approximately $18.5 million (pre-tax) to be reclassified as an increase to interest income and $999,000 (pre-tax) to be reclassified as an increase to interest expense, from OCI related to the Company’s cash flow hedges in the next twelve months.  This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of September 30, 2020.
36

Table of Contents
During the quarter ended September 30, 2020, the Company accelerated the reclassification of a loss of approximately $684,000 from OCI to earnings as a result of the termination of one of its cash flow hedges. The Company subsequently exited the associated borrowing early in the fourth quarter.
The Company had no fair value hedges as of September 30, 2020 or December 31, 2019.
Customer Related Positions
Loan level derivatives, primarily interest rate swaps, offered to commercial borrowers through the Company’s loan level derivative program do not qualify as hedges for accounting purposes. The Company believes that its exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an offsetting dealer transaction. Derivatives with dealer counterparties are then either cleared through a clearinghouse or settled directly with a single counterparty. The commercial customer derivative program allows the Company to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap. The amounts relating to the notional principal amount are not actually exchanged.
Foreign exchange contracts offered to commercial borrowers through the Company’s derivative program do not qualify as hedges for accounting purposes. The Company acts as a seller and buyer of foreign exchange contracts to accommodate its customers. To mitigate the market and liquidity risk associated with these derivatives, the Company enters into similar offsetting positions. The amounts relating to the notional principal amount are exchanged.
The Company has entered into risk participation agreements with other dealer banks in commercial loan agreements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. These derivatives are not designated as hedges and, therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank.

37

Table of Contents
The following table reflects the Company’s customer related derivative positions as of the dates indicated below for those derivatives not designated as hedging:
  Notional Amount Maturing 
 Number of  Positions 
(1)
Less than 1 yearLess than 2 yearsLess than 3 yearsLess than 4 yearsThereafterTotalFair Value (2)
September 30, 2020
 (Dollars in thousands)
Loan level swaps
Receive fixed, pay variable331 $135,993 $34,017 $158,477 $138,314 $1,260,159 $1,726,960 $145,517 
Pay fixed, receive variable322 $135,993 $34,017 $158,477 $138,314 $1,260,159 $1,726,960 $(145,501)
Foreign exchange contracts
Buys foreign currency, sells U.S. currency33 $81,207 $— $— $— $— $81,207 $(3,125)
Buys U.S. currency, sells foreign currency33 $81,207 $— $— $— $— $81,207 $3,151 
Risk participation agreements
Participation out13 $6,800 $— $7,282 $— $112,487 $126,569 $745 
Participation in10 $— $18,978 $23,925 $36,836 $18,295 $98,034 $(269)
Notional Amount Maturing
Number of  Positions 
(1)
Less than 1 yearLess than 2 yearsLess than 3 yearsLess than 4 yearsThereafterTotalFair Value (2)
December 31, 2019
 (Dollars in thousands)
Loan level swaps
Receive fixed, pay variable299 $156,690 $125,203 $85,603 $165,599 $1,044,315 $1,577,410 $48,596 
Pay fixed, receive variable290 $156,690 $125,203 $85,603 $165,599 $1,044,315 $1,577,410 $(48,591)
Foreign exchange contracts
Buys foreign currency, sells U.S. currency40 $91,434 $— $— $— $— $91,434 $(81)
Buys U.S. currency, sells foreign currency40 $91,434 $— $— $— $— $91,434 $123 

(1)The Company may enter into one dealer swap agreement which offsets multiple commercial borrower swap agreements.
(2)Beginning in 2020, the Company made an election to include accrued interest within fair value balances.
38

Table of Contents
Mortgage Derivatives
The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that loans will likely be sold subsequently in the secondary market. Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. These commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded within mortgage banking income. In addition, the Company has elected the fair value option to carry loans held for sale at fair value. The change in fair value of loans held for sale is recorded in current period earnings as a component of mortgage banking income in accordance with the Company's fair value election. The fair value of loans held for sale increased by $413,000 and $272,000 for the three month periods ended September 30, 2020 and 2019, respectively. The fair value of loans held for sale increased by $1.3 million and $1.2 million for the nine month periods ended September 30, 2020 and 2019, respectively. These amounts were offset in earnings by the change in the fair value of mortgage derivatives.
Outstanding loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might change from inception of the rate lock to funding of the loan due to changes in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. To protect against the price risk inherent in derivative loan commitments, the Company utilizes both "mandatory delivery" and "best efforts" forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Included in the mandatory delivery forward commitments are To Be Announced securities ("TBAs"). Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The accuracy of underlying assumptions will impact the ultimate effectiveness of any hedging strategies.
With mandatory delivery contracts, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a "pair-off" fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Generally the Company makes this type of commitment once mortgage loans have been funded and are held for sale, in order to minimize the risk of failure to deliver the requisite volume of loans to the investor and paying pair-off fees as a result. The Company also sells TBA securities to offset potential changes in the fair value of derivative loan commitments. Generally the Company sells TBA securities by entering into derivative loan commitments for settlement in 30 to 90 days. The Company expects that mandatory delivery contracts, including TBA securities, will experience changes in fair value opposite to the changes in the fair value of derivative loan commitments.
With best effort contracts, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally best efforts cash contracts have no pair off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these best efforts forward loan sale commitments will experience a net neutral shift in fair value with related derivative loan commitments.
The aggregate amount of net realized gains or losses on sales of such loans included within mortgage banking income was $10.0 million and $5.5 million for the three months ended September 30, 2020 and 2019, respectively, and $20.7 million and $9.5 million for the nine months ended September 30, 2020 and 2019, respectively.
Balance Sheet Offsetting
The Company does not offset fair value amounts recognized for derivative instruments. The Company does net 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.
A daily settlement occurs through the CME for changes in the fair value of centrally cleared derivatives. Not all of the derivatives are required to be cleared through the daily clearing agent. As a result, the total fair values of loan level derivative assets and liabilities recognized on the Company's financial statements are not equal and offsetting.

39

Table of Contents
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet and the potential effect of netting arrangements on its financial position, at the dates indicated:
 Asset Derivatives (1)Liability Derivatives (2)
Fair Value atFair Value atFair Value atFair Value at
 September 30
2020
December 31
2019
September 30
2020
December 31
2019
 (Dollars in thousands)
Derivatives designated as hedges
Interest rate derivatives$54,047 (3)$23,140 (3)$1,561 (4)$197 (4)
Derivatives not designated as hedges
Customer Related Positions
Loan level derivatives145,517 (3)52,374 (3)145,501 (4)52,369 (4)
Foreign exchange contracts3,785 1,191 3,759 1,149 
Risk participation agreements745 — 269 — 
Mortgage Derivatives
Interest rate lock commitments6,587 1,680 — — 
Forward sale loan commitments61 — — 12 
Forward sale hedge commitments— — 523 196 
Total derivatives not designated as hedges156,695 55,245 150,052 53,726 
Total210,742 78,385 151,613 53,923 
Netting Adjustments (5)12 — 18,988 — 
Net Derivatives on the Balance Sheet210,754 78,385 132,625 53,923 
Financial instruments (6)54,047 24,882 54,047 24,882 
Cash collateral pledged (received)— — 73,094 25,493 
Net Derivative Amounts$156,707 $53,503 $5,484 $3,548 
(1)All asset derivatives are located in other assets on the balance sheet.
(2)All liability derivatives are located in other liabilities on the balance sheet.
(3)Approximately $1.2 million and $1.9 million of accrued interest receivable is included in the fair value of the interest rate and loan level asset derivatives, respectively, as of September 30, 2020. Accrued interest receivable of approximately and $350,000 and $569,000 was excluded from the fair value of the interest rate and loan level asset derivatives, respectively, as of December 31, 2019.
(4)Approximately $75,000 and $1.9 million of accrued interest payable is included in the fair value of the interest rate and loan level liability derivatives, respectively, as of September 30, 2020. Accrued interest payable of approximately $4,000 and $569,000 was excluded from the fair value of the interest rate and loan level derivative liabilities, respectively, as of December 31, 2019.
(5)Netting adjustments represent the amounts recorded to convert derivative assets and liabilities cleared through CME from a gross basis to a net basis, inclusive of the variation margin payments, in accordance with applicable accounting guidance. As displayed in the table above, derivatives that cleared through the CME were either in a net asset position or a net liability position as of September 30, 2020.
(6)Reflects offsetting derivative positions with the same counterparty that are not netted on the balance sheet.



40

Table of Contents
The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:
Three Months EndedNine Months Ended
September 30September 30
 2020201920202019
 (Dollars in thousands)
Derivatives designated as hedges
Gain (loss) in OCI on derivatives (effective portion), net of tax$(2,729)$3,030 $20,452 $14,905 
Gain reclassified from OCI into interest income or interest expense (effective portion)$4,339 $352 $9,901 $1,170 
Loss reclassified from OCI into noninterest expense (loss on termination)$(684)$— $(684)$— 
Interest expense$— $— $— $— 
Other expense— — — — 
Total$— $— $— $— 
Derivatives not designated as hedges
Changes in fair value of customer related positions
Other income$21 $10 $46 $37 
Other expense(28)(2)(52)(13)
Changes in fair value of mortgage derivatives
Mortgage banking income 2,027 366 4,653 1,913 
Total$2,020 $374 $4,647 $1,937 

    The Company's derivative agreements with institutional counterparties contain various credit-risk related contingent provisions, such as requiring the Company to maintain a well-capitalized capital position. If the Company fails to meet these conditions, the counterparties could request the Company make immediate payment or demand that the Company provide immediate and ongoing full collateralization on derivative positions in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was $93.0 million and $26.0 million at September 30, 2020 and December 31, 2019, respectively. Although none of the contingency provisions have applied as of September 30, 2020 and December 31, 2019, the Company has posted collateral to offset the net liability exposure with institutional counterparties.

    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. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company's Board of Directors. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote. The Company's exposure relating to institutional counterparties was $54.0 million and $25.4 million at September 30, 2020 and December 31, 2019, respectively. The Company’s exposure relating to customer counterparties was approximately $145.5 million and $51.0 million at September 30, 2020 and December 31, 2019, respectively. Credit exposure may be reduced by the value of collateral pledged by the counterparty.

41

Table of Contents
NOTE 10 - INCOME TAXES

     The following table sets forth information regarding the Company’s tax provision and applicable tax rates for the periods indicated:
Three Months EndedNine Months Ended
 September 30September 30
 2020201920202019
 (Dollars in thousands)
Combined federal and state income tax provision$11,199 $17,036 $21,126 $38,565 
Effective income tax rate24.31 %24.73 %19.62 %24.68 %

    The Company's provision for income taxes was $11.2 million and $17.0 million for the three months ended September 30, 2020 and 2019, respectively, and $21.1 million and $38.6 million for the nine months ended September 30, 2020 and 2019, respectively. The lower tax provisions in the current year periods are due to lower net income as well as the nine month period being impacted by a discrete tax benefit recognized in the first quarter of 2020. This discrete benefit was associated with revised net operating loss (NOL) carryback provisions included in the CARES Act, signed into law on March 27, 2020.

NOTE 11 - FAIR VALUE MEASUREMENTS
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 assumptions applied by the Company when determining fair value reflect those that the Company determines market participants would use to price the asset or liability at the measurement date. If there has been a significant decrease in the volume and level of activity for the asset or liability, regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received if the asset were to be sold or that would be or paid if the liability were to be transferred in an orderly market transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When determining fair value, the Company considers pricing information and other inputs that are current as of the measurement date. In periods of market dislocation, the observability of prices and other inputs may be reduced for certain instruments, or not available at all. The unavailability or reduced availability of pricing or other input information could cause an instrument to be reclassified from one level to another.
The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value and establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under the Fair Value Measurements and Disclosures Topic of the FASB ASC are described below:
Level 1 – Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 – Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation Techniques
There have been no changes in the valuation techniques used during the three and nine months ended September 30, 2020.
42

Table of Contents
Securities
Trading and Equity Securities
These equity securities are valued based on market quoted prices. These securities are categorized in Level 1 as they are actively traded and no valuation adjustments have been applied.
U.S. Government Agency Securities
Fair value is estimated using either multi-dimensional spread tables or benchmarks. The inputs used include benchmark yields, reported trades, and broker/dealer quotes. These securities are classified as Level 2.
Agency Mortgage-Backed Securities
Fair value is estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities are categorized as Level 2.
Agency Collateralized Mortgage Obligations and Small Business Administration Pooled Securities
The valuation model for these securities is volatility-driven and ratings based, and uses multi-dimensional spread tables. The inputs used include benchmark yields, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are categorized as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.
State, County, and Municipal Securities
The fair value is estimated using a valuation matrix with inputs including bond interest rate tables, recent transactions, and yield relationships. These securities are categorized as Level 2.
Single and Pooled Issuer Trust Preferred Securities
The fair value of trust preferred securities, including pooled and single issuer preferred securities, is estimated using external pricing models, discounted cash flow methodologies or similar techniques. The inputs used in these valuations include benchmark yields, reported trades, new issue data, broker dealer quotes, and collateral performance. If there is at least one significant model assumption or input that is not observable, these securities are classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.
Loans Held for Sale
The Company has elected the fair value option to account for originated closed loans intended for sale. The fair value is measured on an individual loan basis using quoted market prices and when not available, comparable market value or discounted cash flow analysis may be utilized. These assets are typically classified as Level 2.
Derivative Instruments
Derivatives
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings. Additionally, in conjunction with fair value measurement guidance, the Company has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Although the Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its interest rate derivatives and risk participation agreements may also utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of September 30, 2020 and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are properly classified as Level 2.
Mortgage Derivatives
The fair value of mortgage derivatives is determined based on current market prices for similar assets in the secondary market and, therefore, classified as Level 2 within the fair value hierarchy.
43

Table of Contents
Individually Assessed Collateral Dependent Loans
In accordance with the CECL standard, expected credit losses on individually assessed loans deemed to be collateral dependent are valued based upon the lower of amortized cost or fair value of the underlying collateral less costs to sell.  The inputs used in the appraisals of the collateral are not always observable, and in such cases the loans may be classified as Level 3 within the fair value hierarchy; otherwise, they are classified as Level 2.
Other Real Estate Owned and Other Foreclosed Assets
Other Real Estate Owned ("OREO") and Other Foreclosed Assets are valued at the lower of cost or fair value of the property, less estimated costs to sell. The fair values are generally estimated based upon recent appraisal values of the property less costs to sell the property. Certain inputs used in appraisals are not always observable, and therefore OREO and Other Foreclosed Assets may be classified as Level 3 within the fair value hierarchy.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets are subject to impairment testing. The Company conducts an annual impairment test of goodwill in the third quarter of each year, or more frequently if necessary. 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. To estimate the fair value of goodwill and, if necessary, other intangible assets, the Company utilizes both a comparable analysis of relevant price multiples in recent market transactions and a discounted cash flow analysis. Both valuation models require a significant degree of management judgment. In the event the fair value as determined by the valuation model is less than the carrying value, the intangibles may be impaired. If the impairment testing resulted in impairment, the Company would classify the impaired goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

44

Table of Contents
Assets and liabilities measured at fair value on a recurring and nonrecurring basis were as follows as of the dates indicated:
  Fair Value Measurements at Reporting Date Using
BalanceQuoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
 September 30, 2020
 (Dollars in thousands)
Recurring fair value measurements
Assets
Trading securities$2,612 $2,612 $— $— 
Equity securities21,119 21,119 — — 
Securities available for sale
U.S. government agency securities24,273 — 24,273 — 
Agency mortgage-backed securities230,620 — 230,620 — 
Agency collateralized mortgage obligations102,077 — 102,077 — 
State, county, and municipal securities1,145 — 1,145 — 
Single issuer trust preferred securities issued by banks and insurers469 — 469 — 
Pooled trust preferred securities issued by banks and insurers1,021 — — 1,021 
Small business administration pooled securities63,873 — 63,873 — 
Loans held for sale54,713 — 54,713 — 
Derivative instruments210,742 — 210,742 — 
Liabilities
Derivative instruments151,613 — 151,613 — 
Total recurring fair value measurements$561,051 $23,731 $536,299 $1,021 
Nonrecurring fair value measurements
Assets
Individually assessed collateral dependent loans$56,660 $— $— $56,660 
Total nonrecurring fair value measurements$56,660 $— $— $56,660 
45

Table of Contents
  Fair Value Measurements at Reporting Date Using
BalanceQuoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
 December 31, 2019
 (Dollars in thousands)
Recurring fair value measurements
Assets
Trading securities$2,179 $2,179 $— $— 
Equity securities21,261 21,261 — — 
Securities available for sale
U.S. government agency securities33,115 — 33,115 — 
Agency mortgage-backed securities247,000 — 247,000 — 
Agency collateralized mortgage obligations88,511 — 88,511 — 
State, county, and municipal securities1,396 — 1,396 — 
Single issuer trust preferred securities issued by banks and insurers493 — 493 — 
Pooled trust preferred securities issued by banks and insurers1,114 — — 1,114 
Small business administration pooled securities54,795 — 54,795 — 
Loans held for sale33,307 — 33,307 — 
Derivative instruments78,385 — 78,385 — 
Liabilities
Derivative instruments53,923 — 53,923 — 
Total recurring fair value measurements$507,633 $23,440 $483,079 $1,114 
Nonrecurring fair value measurements:
Assets
Collateral dependent impaired loans$25,515 $— $— $25,515 
Total nonrecurring fair value measurements$25,515 $— $— $25,515 
46

Table of Contents
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), which were valued using pricing models and discounted cash flow methodologies, for the periods indicated:
Three Months Ended
September 30
20202019
(Dollars in thousands)
Pooled Trust Preferred Securities
Beginning balance$986 $1,281 
Gain and (losses) (realized/unrealized)
Included in other comprehensive income41 (14)
Settlements(6)(161)
Ending balance$1,021 $1,106 
Nine Months Ended
September 30
20202019
(Dollars in thousands)
Pooled Trust Preferred Securities
Beginning balance$1,114 $1,329 
Losses (realized/unrealized)
Included in other comprehensive income(38)(38)
Settlements(55)(185)
Ending balance$1,021 $1,106 

47

Table of Contents
The following table sets forth certain unobservable inputs regarding the Company’s financial instruments that are classified as Level 3 as of the dates indicated:
September 30
2020
December 31
2019
September 30
2020
December 31
2019
September 30
2020
December 31
2019
Valuation TechniqueFair ValueUnobservable InputsRangeWeighted Average
(Dollars in thousands)
Discounted cash flow methodology
Pooled trust preferred securities$1,021 $1,114 Cumulative prepayment0% - 56%0% - 57%2.6%2.6%
Cumulative default4% - 100%2% - 100%11.9%13.5%
Loss given default85% - 100%85% - 100%94.0%93.6%
Cure given default0% - 75%0% - 75%60.9%60.9%
Appraisals of collateral(1)
Individually assessed collateral dependent loans$56,660 n/a
Collateral dependent impaired loansn/a$25,515 
(1)Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. Appraisals may be adjusted by management for qualitative factors such as economic factors and estimated liquidation expenses. The range of these possible adjustments may vary.
The significant unobservable inputs used in the fair value measurement of the Company’s pooled trust preferred securities are cumulative prepayment rates, cumulative default rates, loss given default rates and cure given default rates. Significant increases (decreases) in deferrals or defaults, in isolation, would result in a significantly lower (higher) fair value measurement. Alternatively, significant increases (decreases) in cure rates, in isolation, would result in a significantly higher (lower) fair value measurement.

48

Table of Contents
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
Fair
Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
  
September 30, 2020
 (Dollars in thousands)
Financial assets
Securities held to maturity(a)
U.S. Treasury securities$4,021 $4,100 $— $4,100 $— 
Agency mortgage-backed securities388,106 407,793 — 407,793 — 
Agency collateralized mortgage obligations237,380 246,937 — 246,937 — 
Single issuer trust preferred securities issued by banks1,500 1,498 — 1,498 — 
Small business administration pooled securities28,566 30,139 — 30,139 — 
Loans, net of allowance for credit losses(b)9,232,908 9,185,023 — — 9,185,023 
Federal Home Loan Bank stock(c)15,090 15,090 — 15,090 — 
Cash surrender value of life insurance policies(d)199,453 199,453 — 199,453 — 
Financial liabilities
Deposit liabilities, other than time deposits(e)$9,792,667 $9,792,667 $— $9,792,667 $— 
Time certificates of deposits(f)1,058,641 1,065,818 — 1,065,818 — 
Federal Home Loan Bank borrowings(f)145,765 145,975 — 145,975 — 
Long-term borrowings(f)37,447 36,448 — 36,448 — 
Junior subordinated debentures(g)62,850 67,883 — 67,883 — 
Subordinated debentures(f)49,672 47,173 — — 47,173 
 
49

Table of Contents
   Fair Value Measurements at Reporting Date Using
 Carrying
Value
Fair
Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
  
December 31, 2019
 (Dollars in thousands)
Financial assets
Securities held to maturity(a)
U.S. government agency securities$12,874 $12,997 $— $12,997 $— 
U.S. Treasury securities4,032 4,053 $— 4,053 — 
Agency mortgage-backed securities397,414 405,802 — 405,802 — 
Agency collateralized mortgage obligations293,662 297,314 — 297,314 — 
Single issuer trust preferred securities issued by banks1,500 1,490 — 1,490 — 
Small business administration pooled securities31,324 31,607 — 31,607 — 
Loans, net of allowance for credit losses(b)8,780,384 8,613,635 — — 8,613,635 
Federal Home Loan Bank stock(c)14,424 14,424 — 14,424 — 
Cash surrender value of life insurance policies(d)197,372 197,372 — 197,372 — 
Financial liabilities
Deposit liabilities, other than time deposits(e)$7,752,052 $7,752,052 $— $7,752,052 $— 
Time certificates of deposits(f)1,395,315 1,396,760 — 1,396,760 — 
Federal Home Loan Bank borrowings(f)115,748 115,881 — 115,881 — 
Long-term borrowings (f)74,906 72,219 — 72,219 — 
Junior subordinated debentures(g)62,848 65,603 — 65,603 — 
Subordinated debentures(f)49,601 52,870 — — 52,870 
(a)The fair values presented are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analysis.
(b)Fair value of loans is measured using the exit price valuation method, determined primarily by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities or cash flows, while incorporating liquidity and credit assumptions. Additionally, this amount excludes individually assessed collateral dependent loans, which are deemed to be marked to fair value on a nonrecurring basis.
(c)Federal Home Loan Bank stock has no quoted market value and is carried at cost; therefore the carrying amount approximates fair value.
(d)Cash surrender value of life insurance policies is recorded at its cash surrender value (or the amount that can be realized upon surrender of the policy), therefore, carrying amount approximates fair value.
(e)Fair value of demand deposits, savings and interest checking accounts and money market deposits is the amount payable on demand at the reporting date.
(f)Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities.
(g)Fair value was determined based upon market prices of securities with similar terms and maturities.
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.
The Company considers its current use of financial instruments to be the highest and best use of the instruments.

50

Table of Contents
NOTE 12 - REVENUE RECOGNITION

A portion of the Company's noninterest income is derived from contracts with customers, and as such, the revenue recognized depicts the transfer of promised goods or services to customers 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. To ensure its alignment with this core principle, the Company measures revenue and the 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 has disaggregated its revenue from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The following table presents the revenue streams that the Company has disaggregated as of the periods indicated:
Three Months EndedNine Months Ended
September 30
2020
September 30
2019
September 30
2020
September 30
2019
(Dollars in thousands)
Deposit account fees (inclusive of cash management fees)$3,428 $5,299 $11,227 $14,785 
Interchange fees2,025 4,913 10,665 13,473 
ATM fees708 939 1,872 2,461 
Investment management - wealth management and advisory services6,997 6,635 20,113 19,127 
Investment management - retail investments and insurance revenue574 553 1,583 1,962 
Merchant processing income 330 230 1,000 834 
Credit card income216 — 550 — 
Other noninterest income905 1,487 2,651 4,068 
Total noninterest income in-scope of ASC 60615,183 20,056 49,661 56,710 
Total noninterest income out-of-scope of ASC 60614,164 11,760 34,311 25,287 
Total noninterest income$29,347 $31,816 $83,972 $81,997 

In each of the revenue streams identified above, there were no significant judgments made in determining or allocating the transaction price, as the consideration and service requirements are generally explicitly identified in the associated contracts. Additional information related to each of the revenue streams is further noted below.

Deposit Account Fees

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. Revenue is recognized in conjunction with the various services being provided. For example, the Company may assess monthly fixed service fees associated with the customer having access to a deposit account, which can vary depending on the account type and daily account balance. In addition, the Company may also assess separate fixed fees associated with and at the time specific transactions are entered into by the customer. As such, the Company considers its performance obligations to be met concurrently with providing the account access or completing the requested deposit transaction.

51

Table of Contents
Cash Management
        
Cash management services are a subset of the deposit account fees revenue stream. These services primarily include ACH transaction processing, positive pay and remote deposit services. These services are also governed by separate agreements entered into with the customer. The fee arrangement for these services is structured to assess fees under one of two scenarios, either a per transaction fee arrangement or an earnings credit analysis arrangement. Under the per transaction fee arrangement, fixed fees are assessed concurrently with customers executing the transactions, and as such, the Company considers its performance obligations to be met concurrently with completing the requested transaction. Under the earnings credit analysis arrangement, the Company provides a monthly earnings credit to the customer that is negotiated and determined based on various factors. The credit is then available to absorb the per transaction fees that are assessed on the customer's deposit account activity for the month. Any amount of the transactional fees in excess of the earnings credit is recognized as revenue in that month.

Interchange Fees

The Company earns interchange revenue from its issuance of credit and debit cards granted through its membership in various card payment networks. The Company provides credit cards and debit cards to its customers which are authorized and settled through these payment networks, and in exchange, the Company earns revenue as determined by each payment network's interchange program. The revenue is recognized concurrently with the settlement of card transactions within each network.

ATM Fees

The Company deploys automated teller machines (ATMs) as part of its overall branch network. Certain transactions performed at the ATMs require customers to acknowledge and pay a fee for the requested service. Certain ATM fees are disclosed in the deposit account agreement fee schedules, whereas those assessed to non-Rockland Trust deposit holders are solely determined during the transaction at the machine.

The ATM fee is a fixed dollar per transaction amount, and as such, is recognized concurrently with the overall daily processing and settlement of the ATM activity.

Investment Management - Wealth Management and Advisory Services

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 client's request.

The asset management and/or custody fees are based upon a percentage of the monthly valuation of the principal assets in the customer's account, whereas fees for additional or special services are fixed in nature and are charged as services are rendered. As the fees are dependent on assets under management, which are susceptible to market factors outside of the Company's control, this variable consideration is constrained and therefore no revenue is estimated at contract initiation. As such, all revenue is recognized in correlation to the monthly management fee determinations or as transactional services are provided. Due to the fact that payments are primarily made subsequent to the valuation period, the Company records a receivable for revenue earned but not received. The following table provides the amount of investment management revenue earned but not received as of the dates indicated:
September 30, 2020December 31, 2019
(Dollars in thousands)
Receivables, included in other assets $4,383 $2,341 

Investment Management - Retail Investments and Insurance Revenue

The Company offers the sale of mutual fund shares, unit investment trust shares, general securities, fixed and variable annuities and life insurance products through registered representatives who are both employed by the Company and licensed and contracted with various broker general agents to offer these products to the Company’s customer base. As such, the Company performs these services as an agent and earns a fixed commission on the sales of these products and services. To a lesser degree, production bonus commissions can also be earned based upon the Company meeting certain volume thresholds.
52

Table of Contents

In general, the Company recognizes commission revenue at the point of sale, and for certain insurance products, may also earn and recognize annual residual commissions commensurate with annual premiums being paid.

Merchant Processing Income
    
The Company refers customers to third party merchant processing partners in exchange for commission and fee income. The income earned is comprised of multiple components, including a fixed referral fee per each referred customer, a rebate amount determined primarily as a percentage of net revenue earned by the third party from services provided to each referred customer, and overall production bonus commissions if certain new account production thresholds are met. Merchant processing income is recognized in conjunction with either completing the referral to earn the fixed fee amount or as the merchant activity is processed to derive the Company's rebate and/or production bonus amounts.

Credit Card Income

The Company provides consumer and business credit card solutions to its customers by soliciting new accounts on behalf of a third party credit card provider in exchange for a fee. The income earned is comprised of new account incentive payments as well as a percentage of interchange income earned by the third party provider offering the consumer and business purpose revolving credit accounts. The credit card income is recognized in conjunction with the establishment of each new credit card member or as the interchange is earned by the third party in connection with net purchase transactions made by the credit card member.
    
Other Noninterest Income

The Company earns various types of other noninterest income that fall within the scope of the new revenue recognition rules, and have been aggregated into one general revenue stream in the table noted above. This amount includes, but is not limited to, the following types of revenue with customers:

Safe Deposit Rent

    The Company rents out the use of safe deposit boxes to its customers, which can be accessed when the bank is open for business. The safe deposit box rental fee is paid upfront and is recognized as revenue ratably over the annual term of the contract.

1031 Exchange Fee Revenue

    The Company provides like-kind exchange services pursuant to Section 1031 of the Internal Revenue Code. Fee income is recognized in conjunction with completing the exchange transactions.

Foreign Currency

    The Company earns fee income associated with various transactions related to foreign currency product offerings, including foreign currency bank notes and drafts and foreign currency wires. The majority of this income is derived from commissions earned related to customers executing the above mentioned foreign currency transactions through arrangements with third party correspondents.
53

Table of Contents

NOTE 13 - OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present a reconciliation of the changes in the components of other comprehensive income (loss) for the periods indicated, including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss):
Three Months Ended
September 30, 2020
Nine Months Ended
September 30, 2020
Pre Tax
Amount
Tax (Expense)
Benefit
After Tax
Amount
Pre Tax
Amount
Tax (Expense)
Benefit
After Tax
Amount
 (Dollars in thousands)
Change in fair value of securities available for sale$(857)$148 $(709)$13,598 $(3,265)$10,333 
Less: net security losses reclassified into other noninterest expense— — — — — — 
Net change in fair value of securities available for sale(857)148 (709)13,598 (3,265)10,333 
Change in fair value of cash flow hedges(143)41 (102)37,674 (10,597)27,077 
Less: net cash flow hedge gains reclassified into interest income or interest expense 4,339 (1,220)3,119 9,901 (2,784)7,117 
Less: Loss on termination of hedge reclassified into noninterest expense(684)192 (492)(684)192 (492)
Net change in fair value of cash flow hedges(3,798)1,069 (2,729)28,457 (8,005)20,452 
Net unamortized loss related to defined benefit pension and other postretirement adjustments arising during the period(2)(1)(1,392)392 (1,000)
Amortization of net actuarial losses245 (69)176 736 (207)529 
Amortization of net prior service costs69 (19)50 207 (58)149 
Net change in other comprehensive income for defined benefit postretirement plans (1)312 (87)225 (449)127 (322)
Total other comprehensive income (loss)$(4,343)$1,130 $(3,213)$41,606 $(11,143)$30,463 
54

Table of Contents
 Three Months Ended
September 30, 2019
Nine Months Ended
September 30, 2019
 Pre Tax
Amount
Tax (Expense)
Benefit
After Tax
Amount
Pre Tax
Amount
Tax (Expense)
Benefit
After Tax
Amount
 (Dollars in thousands)
Change in fair value of securities available for sale$2,858 $(683)$2,175 $14,699 $(3,401)$11,298 
Less: net security losses reclassified into other noninterest expense— — — (1,462)411 (1,051)
Net change in fair value of securities available for sale2,858 (683)2,175 16,161 (3,812)12,349 
Change in fair value of cash flow hedges4,568 (1,285)3,283 21,913 (6,167)15,746 
Less: net cash flow hedge gains reclassified into interest income or interest expense 352 (99)253 1,170 (329)841 
Net change in fair value of cash flow hedges4,216 (1,186)3,030 20,743 (5,838)14,905 
Net unamortized loss related to defined benefit pension and other postretirement adjustments arising during the period(11)(8)(33)(24)
Amortization of net actuarial gains(2)(1)(6)(4)
Amortization of net prior service costs69 (19)50 207 (58)149 
Net change in other comprehensive income for defined benefit postretirement plans (1)56 (15)41 168 (47)121 
Total other comprehensive income$7,130 $(1,884)$5,246 $37,072 $(9,697)$27,375 

(1)The amortization of prior service costs is included in the computation of net periodic pension cost as disclosed in the Employee Benefit Plans footnote in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission.
Information on the Company’s accumulated other comprehensive income (loss), net of tax, is comprised of the following components as of the dates indicated:
Unrealized Gain (Loss)
on Securities
Unrealized Gain on Cash Flow HedgeDefined Benefit Postretirement PlansAccumulated Other Comprehensive Income (Loss)
(Dollars in thousands)
2020
Beginning balance: January 1, 2020$4,398 $16,479 $(2,708)$18,169 
Net change in other comprehensive income (loss)10,333 20,452 (322)30,463 
Ending balance: September 30, 2020$14,731 $36,931 $(3,030)$48,632 
 2019
Beginning balance: January 1, 2019$(5,947)$6,148 $(1,374)$(1,173)
Net change in other comprehensive income (loss)12,349 14,905 121 27,375 
Ending balance: September 30, 2019$6,402 $21,053 $(1,253)$26,202 


NOTE 14 - COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
    In the normal course of business, the Company enters into various transactions to meet the financing needs of its customers, which, in accordance with GAAP, are not included in its consolidated balance sheets. These transactions include commitments to extend credit and standby letters of credit, and loan exposures with recourse, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
55

Table of Contents
    The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of these commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding.
The Company has certain loan exposures for which there is recourse. These loan relationships could require the Company to repurchase or cover certain losses per agreements for certain loans that are either sold or referred to third parties.
    Standby letters of credit are written conditional commitments issued 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 the 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. If the commitment were funded, the Company would be entitled to seek recovery from the customer. The Company’s policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
    The fees collected in connection with the issuance of standby letters of credit are representative of the fair value of the Company's obligation undertaken in issuing the guarantee. In accordance with applicable accounting standards related to guarantees, fees collected in connection with the issuance of standby letters of credit are deferred. The fees are then recognized in income proportionately over the life of the standby letter of credit agreement. The deferred standby letter of credit fees represent the fair value of the Company's potential obligations under the standby letter of credit guarantees.
    The following table summarizes the above financial instruments at the dates indicated:
September 30, 2020December 31, 2019
 (Dollars in thousands)
Commitments to extend credit$3,258,341 $3,337,930 
Standby letters of credit20,902 21,565 
Deferred standby letter of credit fees191 158 
Loan exposures with recourse343,314 404,532 
Lease Commitments
The Company leases office space, space for ATM locations, and certain branch locations under noncancelable operating leases. Several of these leases contain renewal options to extend lease terms for a period of 1 to 10 years.
There has been no significant change in the future minimum lease payments payable by the Company since December 31, 2019. See the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 for information regarding leases and other commitments.
Other Contingencies
At September 30, 2020, the Bank was involved in pending lawsuits that arose in the ordinary course of business. Management has reviewed these pending lawsuits with legal counsel and has taken into consideration the view of counsel as to their outcome. In the opinion of management, the final disposition of pending lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.
Historically, the Bank was required to maintain certain reserve requirements of vault cash and/or deposits with the Federal Reserve Bank of Boston, however the reserve requirement was reduced to zero by the Federal Reserve during the first quarter of 2020 in response to the COVID-19 pandemic, and as such, there was no reserve requirement at September 30, 2020. There was also no reserve requirement balance necessary at December 31, 2019 due to cash balances held at the Federal Reserve that were in excess of reserve requirements.

56

Table of Contents

NOTE 15 - LOW INCOME HOUSING PROJECT INVESTMENTS
The Company has invested in low income housing projects that generate Low Income Housing Tax Credits (“LIHTC”) which provide the Company with tax credits and operating loss tax benefits over a period of approximately 15 years. None of the original investment is expected to be repaid.
The following table presents certain information related to the Company's investments in low income housing projects as of the dates indicated:
September 30
2020
December 31
2019
(Dollars in thousands)
Original investment value$124,302 $96,275 
Current recorded investment94,097 72,510 
Unfunded liability obligation47,408 34,967 
Tax credits and benefits 10,671 (1)7,342 
Amortization of investments 8,676 (2)5,645 
Net income tax benefit 1,995 (3)1,696 
(1) This amount reflects anticipated tax credits and tax benefits for the full year ended December 31, 2020.
(2) The amortization amount reduces the tax credits and benefits anticipated for the full year ended December 31, 2020.
(3) This amount represents the net tax benefit expected to be realized for the full year ended December 31, 2020 in determining the Company's effective tax rate.


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (the "2019 Form 10-K")..

Cautionary Statement Regarding Forward-Looking Statements

    This Quarterly Report on Form 10-Q (this "Report"), in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s confidence and strategies and management’s expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by forward-looking terminology such as “should,” “expect,” “believe,” “view,” “opportunity,” “allow,” “continues,” “reflects,” “typically,” “usually,” “anticipate,” or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements, in addition to those risk factors listed under the “Risk Factors” section of the 2019 Form 10-K include, but are not limited to:

further weakening in the United States economy in general and the regional and local economies within the New England region and the Company’s market area, including future weakening caused by the COVID-19 pandemic;
the length and extent of economic contraction as a result of the COVID-19 pandemic;
unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, pandemics or other external events;
adverse changes or volatility in the local real estate market;
adverse changes in asset quality and any unanticipated credit deterioration in our loan portfolio including those related to one or more large commercial relationships;
acquisitions may not produce results at levels or within time frames originally anticipated and may result in unforeseen integration issues or impairment of goodwill and/or other intangibles;
additional regulatory oversight and related compliance costs, including the additional costs associated with the Company's increase in assets to over $10 billion;
57

Table of Contents
changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
higher than expected tax expense, resulting from failure to comply with general tax laws, changes in tax laws, or failure to comply with requirements of the federal New Markets Tax Credit program;
changes in market interest rates for interest earning assets and/or interest bearing liabilities and changes related to the phase-out of LIBOR;
increased competition in the Company’s market areas;
adverse weather, changes in climate, natural disasters, the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic, other public health crises or man-made events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations;
a deterioration in the conditions of the securities markets;
a deterioration of the credit rating for U.S. long-term sovereign debt;
inability to adapt to changes in information technology, including changes to industry accepted delivery models driven by a migration to the internet as a means of service delivery;
electronic fraudulent activity within the financial services industry, especially in the commercial banking sector;
adverse changes in consumer spending and savings habits;
the effect of laws and regulations regarding the financial services industry;
changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) generally applicable to the Company’s business;
the Company's potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory and government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic;
changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters including, but not limited to , changes to how the Company accounts for credit losses;
cyber security attacks or intrusions that could adversely impact our businesses; and
other unexpected material adverse changes in our operations or earnings.

Further, the foregoing factors may be exacerbated by the ultimate impact of the COVID-19 pandemic, which is unknown at this time. Statements about the COVID-19 pandemic and its potential impact on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that actual results may differ, possibly materially, from what is reflected in such statements due to factors and future developments that are uncertain, unpredictable and, in many cases, beyond our control, including the scope, duration and extent of the pandemic and any resurgences, actions taken by governmental authorities in response to the pandemic and the direct and indirect impact on the Company’s employees, customers, business and third-parties with which the Company conducts business.

    Except as required by law, the Company disclaims any intent or obligation to update publicly any such forward-looking statements, whether in response to new information, future events or otherwise. Any public statements or disclosures by the Company following this Report which modify or impact any of the forward-looking statements contained in this Report will be deemed to modify or supersede such statements in this Report.
58

Table of Contents

Selected Quarterly Financial Data
The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related notes, appearing elsewhere in this Report.
Three Months Ended
September 30
2020
June 30
2020
March 31
2020
December 31
2019
September 30
2019
 (Dollars in thousands, except per share data)
Financial condition data
Securities$1,106,782 $1,174,894 $1,236,780 $1,190,670 $1,192,229 
Loans9,405,193 9,359,648 8,916,430 8,873,639 8,913,501 
Allowance for credit losses(115,625)(112,176)(92,376)(67,740)(66,942)
Goodwill and other intangible assets530,749 532,202 533,672 535,492 535,869 
Total assets13,173,665 13,022,500 11,980,240 11,395,165 11,538,639 
Total deposits10,851,308 10,716,821 9,416,198 9,147,367 9,326,091 
Total borrowings295,734 295,701 545,985 303,103 292,791 
Stockholders’ equity1,689,724 1,671,692 1,679,656 1,708,143 1,682,324 
Nonperforming loans98,025 48,814 48,040 48,049 45,702 
Nonperforming assets98,025 48,814 48,040 48,049 48,202 
Income statement
Interest income$97,919 $99,965 $107,380 $113,703 $119,624 
Interest expense7,036 8,867 13,076 13,710 15,026 
Net interest income90,883 91,098 94,304 99,993 104,598 
Provision for loan losses7,500 20,000 25,000 4,000 — 
Noninterest income29,347 28,190 26,435 33,297 31,816 
Noninterest expenses66,658 66,607 66,840 67,445 67,533 
Net income34,873 24,902 26,751 47,477 51,845 
Per share data
Net income—basic$1.06 $0.76 $0.78 $1.38 $1.51 
Net income—diluted1.06 0.76 0.78 1.38 1.51 
Cash dividends declared0.46 0.46 0.46 0.44 0.44 
Book value per share51.27 50.75 50.50 49.69 48.95 
Tangible book value per share (1)35.17 34.59 34.46 34.11 33.36 
Performance ratios
Return on average assets1.07 %0.79 %0.94 %1.64 %1.78 %
Return on average common equity8.21 %5.97 %6.22 %11.06 %12.33 %
Net interest margin (on a fully tax equivalent basis)3.13 %3.25 %3.74 %3.90 %4.03 %
Equity to assets12.83 %12.84 %14.02 %14.99 %14.58 %
Dividend payout ratio43.45 %61.85 %56.54 %31.85 %29.13 %
Asset Quality Ratios
Nonperforming loans as a percent of gross loans1.04 %0.52 %0.54 %0.54 %0.51 %
Nonperforming assets as a percent of total assets0.74 %0.37 %0.40 %0.42 %0.42 %
Allowance for credit losses as a percent of total loans1.23 %1.20 %1.04 %0.76 %0.75 %
Allowance for credit losses as a percent of nonperforming loans117.95 %229.80 %192.29 %140.98 %146.47 %
59

Table of Contents
Capital ratios
Tier 1 leverage capital ratio9.52 %9.57 %10.74 %11.28 %10.83 %
Common equity tier 1 capital ratio12.41 %12.26 %11.95 %12.86 %12.52 %
Tier 1 risk-based capital ratio13.08 %12.94 %12.60 %13.53 %13.19 %
Total risk-based capital ratio14.87 %14.73 %14.13 %14.83 %14.88 %

(1)     Represents a non-GAAP measure. For reconciliation to GAAP book value per share, see Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Level Overview - Non-GAAP Measures" below.


60

Table of Contents

Executive Level Overview

    Management evaluates the Company's operating results and financial condition using measures that include net income, earnings per share, return on assets and equity, return on tangible common equity, net interest margin, tangible book value per share, asset quality indicators, and many others. These metrics are used by management to make key decisions regarding the Company's balance sheet, liquidity, interest rate sensitivity, and capital resources and assist with identifying opportunities for improving the Company's financial position or operating results. Results for the nine months ended September 30, 2020 were significantly impacted by $52.5 million of loan provision expense. Assumptions regarding the potential impact of the COVID-19 pandemic were the primary driver of the elevated provision levels. The full macroeconomic impacts of the pandemic remain unknown and are continuing to unfold; however, the social distancing restrictions that have been put in place for public safety have led to a decline in consumer spending and historically high levels of unemployment as workplaces have been forced to shut down or severely limit operations. The duration of these restrictions has varied, and restrictions have been and may continue to be tightened or re-instituted in light of resurgences of COVID-19 in particular areas. As a result, the Company is not able to provide any assurances that the Company’s earnings, asset quality, regulatory capital ratios and economic condition will not be materially adversely impacted on a short term or long term basis.

    The Company has been and continues to remain committed to supporting and working with its customers as they navigate these unprecedented times. The Company has abided by a state issued mandate requiring a temporary moratorium on foreclosures and has offered a variety of relief measures to its customers consistent with prudent banking principles and regulatory guidance. These relief measures have included: temporary deferrals of loan payments, waiving certain fees and permitting customers easier access to their deposits. The Company’s charitable foundations have engaged and will continue to engage in outreach to local communities during this difficult time and have committed funds to be made available to key nonprofits with urgent needs, such as local food banks. The Company has been an active participant in the government-sponsored Paycheck Protection Program ("PPP") designed to help deploy stimulus funds in the form of loans to businesses within the community, funding over 6,100 loans for a total of $811.7 million through the third quarter of 2020. The Company received fee revenue of $27.1 million for the origination of these PPP loans, which is deferred and amortized over the life of the loan. As of September 30, 2020, $5.4 million in fee revenue has been amortized into income, with the remaining amount to be amortized over the remaining loan maturity.


Interest-Earning Assets

    Management’s asset strategy typically emphasizes loan growth, primarily in the commercial and home equity portfolios. The results depicted in the following table reflect the trend of the Company's interest-earning assets over the past five quarters. For the third quarter of 2020, the increase in interest-earning assets was driven primarily by an increase in commercial loan balances, reflecting the PPP's loan funding activity, as well as growth in cash balances attributable to elevated deposits from PPP fundings and government stimulus payments, partially offset by decreases in residential and home equity portfolios.
indb-20200930_g1.jpg

61

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

Funding and Net Interest Margin

    The Company's overall sources of funding reflect strong business and retail deposit growth with a management emphasis on core deposit growth to fund loans. During the third quarter of 2020, the Company realized growth in deposits, which increased $134.5 million, or 1.3%, to $10.9 billion, which was attributable to a combination of PPP loan fundings, government stimulus programs and an overall customer focus on retaining liquidity. The following chart shows the sources of funding and the percentage of core deposits to total deposits for the trailing five quarters:

indb-20200930_g2.jpg

    The cost of deposits for the third quarter of 2020 was 0.20%, an 8 basis point decrease when compared to the second quarter of 2020 due primarily to deposit rate reductions across all products. The Company's net interest margin was 3.13% for the third quarter of 2020 reflecting a 12 basis point decrease from the second quarter of 2020. The table below illustrates the factors that contributed to this decline in the net interest margin for the third quarter:
Net Interest margin as of June 30, 2020
3.25 %
Decreased loan yields(0.08)%
Nonaccrual interest reversal(0.05)%
Excess liquidity (cash) levels(0.07)%
PPP loan activity at 1% interest rate(0.04)%
PPP loan fee amortization0.03 %
Loan purchase accounting (fair value mark amortization/accretion)0.03 %
Decreased cost of funds0.08 %
Other (0.02)%
Net interest margin as of September 30, 2020
3.13 %

62

Table of Contents
    The following table shows the net interest margin and cost of deposits trends for the trailing five quarters, noting a continued decline through the third quarter of 2020.

indb-20200930_g3.jpg

Noninterest Income

    Noninterest income is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees and mortgage banking income. The following chart shows the components of noninterest income over the past five quarters:

indb-20200930_g4.jpg












63

Table of Contents



Expense Control

    Management seeks to take a balanced approach to noninterest expense control by monitoring ongoing operating expenses while making needed capital expenditures and prudently investing in growth initiatives. The Company’s primary expenses arise from Rockland Trust’s employee salaries and benefits, as well as expenses associated with buildings and equipment. The following chart depicts the Company's efficiency ratio on a GAAP basis (calculated by dividing noninterest expense by the sum of noninterest income and net interest income), as well as the Company's efficiency ratio on a non-GAAP operating basis, if applicable (calculated by dividing noninterest expense, excluding certain noncore items, by the sum of noninterest income, excluding certain noncore items, and net interest income), over the past five quarters:

indb-20200930_g5.jpg
*See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures.
64

Table of Contents
Capital

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

indb-20200930_g6.jpg
*See "Non-GAAP Measures" below for a reconciliation to GAAP financial measures.

    The Company declared quarterly cash dividends of $0.46 per share for each of the three quarters in 2020, representing an increase of 4.5% from the 2019 quarterly dividend rate of $0.44 per share.

Third Quarter 2020 Results

    Net income for the third quarter of 2020 was $34.9 million, or $1.06 on a diluted earnings per share basis, and decreased 32.7% and 29.8%, respectively, as compared to $51.8 million, or $1.51 on a diluted earnings per share basis, for the prior year third quarter. Results for the third quarter of 2020 reflected elevated levels of provision for credit losses due to assumptions and expectations surrounding the potential future impact of the COVID-19 pandemic, as well as a lower net interest margin as a result of the lower interest rate environment. The third quarter of 2020 included a loss on the termination of a derivative contract and the third quarter of 2019 included merger and acquisition costs which the Company deems to be noncore. Excluding these noncore items, third quarter 2020 and 2019 operating net income was $35.4 million and $51.7 million, respectively. See "Non-GAAP Measures" below for a reconciliation of non-GAAP measures.

2020 Outlook

Due to the impacts and uncertainties associated with the COVID-19 pandemic, the Company has not provided an updated 2020 Outlook as of September 30, 2020. The Company's prior Outlooks for 2020 as set forth under the heading "2020 Outlook" in the Company's 2019 year-end earnings release issued on January 16, 2020, its Form 10-K and its 2020 Quarterly Reports on Form 10-Q for both the first and second quarter of 2020, have been withdrawn and should not be relied upon.


65

Table of Contents

Non-GAAP Measures
    When management assesses the Company’s financial performance for purposes of making day-to-day and strategic decisions, it does so based upon the performance of its core banking business, which is primarily derived from the combination of net interest income and noninterest or fee income, reduced by operating expenses, the provision for credit losses, and the impact of income taxes and other noncore items shown in the tables that follow. There are items that impact the Company's results that management believes are unrelated to its core banking business such as merger and acquisition expenses and other items. Management, therefore, computes certain non-GAAP measures including net operating earnings and operating EPS, noninterest income on an operating basis and efficiency ratio on an operating basis, which exclude items management considers to be noncore. Management believes excluding these items facilitates greater visibility into the Company’s core banking business and underlying trends that may, to some extent, be obscured by inclusion of such items.
    Management also supplements its evaluation of financial performance with analyses of tangible book value per share (which is computed by dividing stockholders' equity less goodwill and identifiable intangible assets, or "tangible common equity", by common shares outstanding) and the tangible common equity ratio (which is computed by dividing tangible common equity by "tangible assets", defined as total assets less goodwill and other intangibles). The Company has included information on tangible book value per share and the tangible common equity ratio because management believes that investors may find it useful to have access to the same analytical tools used by management.  As a result of merger and acquisition activity, the Company has recognized goodwill and other intangible assets in conjunction with business combination accounting principles.  Excluding the impact of goodwill and other intangibles in measuring asset and capital values for the ratios provided, along with other bank standard capital ratios, provides a framework to compare the capital adequacy of the Company to other companies in the financial services industry.
    These non-GAAP measures should not be viewed as a substitute for operating results and other financial measures determined in accordance with GAAP. An item which management deems to be noncore and excludes when computing these non-GAAP measures can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP performance measures, including operating earnings, operating EPS, operating return on average assets, operating return on average equity, tangible book value per share and the tangible common equity ratio, are not necessarily comparable to non-GAAP performance measures which may be presented by other companies.
    
66

Table of Contents
    The following tables summarize adjustments for noncore items for the periods indicated below and reconcile non-GAAP measures:
 Three Months Ended September 30
 Net IncomeDiluted
Earnings Per Share
 2020201920202019
 (Dollars in thousands, except per share data)
Net income available to common shareholders (GAAP)$34,873 $51,845 $1.06 $1.51 
Non-GAAP adjustments
Noninterest income components
Less: gain on sale of loans— 951 — 0.03 
Noninterest expense components
Add: loss on termination of derivatives684 — 0.02 — 
Add: merger and acquisition expenses— 705 — 0.02 
Noncore increases (decreases) to income before taxes684 (246)0.02 (0.01)
Net tax (benefit) expense associated with noncore items (1)(192)72 (0.01)— 
Total tax impact(192)72 (0.01)— 
Noncore increases (decreases) to net income492 (174)0.01 (0.01)
Operating net income (Non-GAAP)$35,365 $51,671 $1.07 $1.50 
 Nine Months Ended September 30
 Net IncomeDiluted
Earnings Per Share
 2020201920202019
 (Dollars in thousands, except per share data)
Net income available to common shareholders (GAAP)$86,526 $117,698 $2.59 $3.64 
Non-GAAP adjustments
Noninterest income components
Less: gain on sale of loans— 951 — 0.03 
Noninterest expense components
Add: loss on termination of derivatives684 — 0.02 — 
Add: merger and acquisition expenses— 26,433 — 0.82 
Noncore increases to income before taxes684 25,482 0.02 0.79 
Net tax benefit associated with noncore items (1)(192)(6,686)(0.01)(0.21)
Add: adjustment for tax effect of previously incurred merger and acquisition expenses— 650 — 0.02 
Noncore increases to net income492 19,446 0.01 0.60 
Operating net income (Non-GAAP) $87,018 $137,144 $2.61 $4.24 
(1)The net tax benefit associated with noncore items is determined by assessing whether each noncore item is included or excluded from net taxable income and applying the Company's combined marginal tax rate to only those items included in net taxable income.

67

Table of Contents
Three Months Ended
September 30
2020
June 30
2020
March 31
2020
December 31
2019
September 30
2019
(Dollars in thousands)
Net interest income (GAAP)$90,883 $91,098 $94,304 $99,993 $104,598 (a)
Noninterest income (GAAP) $29,347 $28,190 $26,435 $33,297 $31,816 (b)
Less:
Gain on sale of loans— — — — 951 
Noninterest income on an operating basis (Non-GAAP)$29,347 $28,190 $26,435 $33,297 $30,865 (c)
Noninterest expense (GAAP)$66,658 $66,607 $66,840 $67,445 $67,533 (d)
Less:
Merger and acquisition expense— — — — 705 
Loss on termination of derivative684 — — — — 
Noninterest expense on an operating basis (Non-GAAP)$65,974 $66,607 $66,840 $67,445 $66,828 (e)
Total revenue (GAAP)$120,230 $119,288 $120,739 $133,290 $136,414 (a+b)
Total operating revenue (Non-GAAP)*$120,230 $119,288 $120,739 $133,290 $135,463 (a+c)
Ratios
Noninterest income as a % of revenue (GAAP based)24.41 %23.63 %21.89 %24.98 %23.32 %(b/(a+b))
Noninterest income as a % of revenue on an operating basis (Non-GAAP)*24.41 %23.63 %21.89 %24.98 %22.78 %(c/(a+c))
  Efficiency ratio (GAAP based)55.44 %55.84 %55.36 %50.60 %49.51 %(d/(a+b))
Efficiency ratio on an operating basis (Non-GAAP)54.87 %55.84 %55.36 %50.60 %49.33 %(e/(a+c))


68

Table of Contents
    The following table summarizes the calculation of the Company's tangible common equity ratio and tangible book value per share as of the dates indicated:
September 30
2020
June 30
2020
March 31
2020
December 31
2019
September 30
2019
(Dollars in thousands, except per share data)
Tangible common equity
Stockholders' equity (GAAP)$1,689,724 $1,671,692 $1,679,656 $1,708,143 $1,682,324 (a)
Less: Goodwill and other intangibles530,749 532,202 533,672 535,492 535,869 
Tangible common equity (Non-GAAP)1,158,975 1,139,490 1,145,984 1,172,651 1,146,455 (b)
Tangible assets
Assets (GAAP)13,173,665 13,022,500 11,980,240 11,395,165 11,538,639 (c)
Less: Goodwill and other intangibles530,749 532,202 533,672 535,492 535,869 
Tangible assets (Non-GAAP)$12,642,916 $12,490,298 $11,446,568 $10,859,673 $11,002,770 (d)
Common shares32,955,547 32,942,110 33,260,005 34,377,388 34,366,781 (e)
Common equity to assets ratio (GAAP)12.83 %12.84 %14.02 %14.99 %14.58 %(a/c)
Tangible common equity to tangible assets ratio (Non-GAAP)9.17 %9.12 %10.01 %10.80 %10.42 %(b/d)
Book value per share (GAAP)$51.27 $50.75 $50.50 $49.69 $48.95 (a/e)
Tangible book value per share (Non-GAAP)$35.17 $34.59 $34.46 $34.11 $33.36 (b/e)

Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the most critical accounting policies are those which the Company’s financial condition depends upon, and which involve the most complex or subjective decisions or assessments.
There have been no material changes in critical accounting policies during the first nine months of 2020 aside from the adoption of the CECL accounting standard effective January 1, 2020. The Company's critical accounting policy for the Allowance for Credit Losses is as follows:
Allowance for Credit Losses    The Company’s allowance for credit losses provides for probable losses based upon current expected credit losses within the loan and securities portfolios. Arriving at an appropriate amount of allowance for credit losses involves a high degree of judgment.
For loans, the Company estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The quantitative model utilizes a factor based approach to estimate expected credit losses using a Probability of Default ("PD"), Loss Given Default ("LGD") and Exposure at Default ("EAD"), which are derived from internal historical default and loss experience. Management’s judgment is based upon its assessment of PD, LGD, and EAD. Changes in these estimates could be due to a number of circumstances which may have a direct impact on the provision for credit losses and may result in changes to the amount of allowance. The allowance is determined based upon the application of the Company’s methodology for assessing the adequacy of the allowance for credit losses, which considers historical and expected loss factors, loan portfolio composition and other relevant indicators. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the Company's historical long-run average. This methodology involves management’s judgment regarding the application and use of such factors, including the effects of changes to the prevailing economic environment in its estimate of the required amounts of allowance. Additionally, the model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of prepayments, which is subject to management's judgment based on analysis to determine the appropriate level of assumed prepayments.
Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that are individually assessed, the
69

Table of Contents
Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable. The allowance is increased by provisions for credit losses and by recoveries of loans previously charged-off and is reduced by loans charged-off. For additional discussion of the Company’s methodology of assessing the adequacy of the allowance for credit losses, see Note 4, "Loans, Allowance for Credit Losses and Credit Quality" to the Consolidated Financial Statements included in Part I. Item 1 of this Report.
For held to maturity securities, the Company measures expected credit losses on a collective basis by major security type. Management classifies the held-to-maturity portfolio into the following major security types: U.S. Government Agency, U.S. Treasury, Agency Mortgage-Backed Securities, Agency Collateralized Mortgage Obligations, Small Business Administration Pooled Securities, and Single Issuer Trust Preferred Securities. Securities in the Company's held to maturity portfolio are guaranteed by either the U.S. Federal Government or other government sponsored agencies with a long history of no credit losses. As a result, management has determined these securities to have a zero loss expectation and therefore does not estimate an allowance for credit losses on these securities.
For available for sale securities, the Company reviews any holdings in an unrealized loss position, management will first evaluate whether there is intent to sell, or if it is more likely than not that the Company will be required to sell a security prior to anticipated recovery of its amortized cost basis. If either of these criteria are met, the Company will record a write-down of the security's amortized cost basis to fair value through income. For those available for sale securities which do not meet the intent or requirement to sell criteria, management will evaluate whether the decline in fair value is a result of credit related matters or other factors. In performing this assessment, Management considers the creditworthiness of the issuer including whether the security is guaranteed by the U.S. Federal Government or other government agency, the extent to which fair value is less than amortized cost, and changes in credit rating during the period, among other factors. If this assessment indicates the existence of credit losses, the security will be written down to fair value, as determined by a discounted cash flow analysis. To the extent the estimated cash flows do not support the amortized cost, the deficiency is considered to be due to credit loss and is recognized in earnings.
For additional discussion of the Company’s methodology of assessing the adequacy of the allowance for credit losses for its security portfolios, see Note 3, "Securities" to the Consolidated Financial Statements included in Part I. Item 1 of this Report.
Refer to the 2019 Form 10-K for a complete listing of critical accounting policies.

FINANCIAL POSITION
Securities Portfolio The Company’s securities portfolio consists of trading securities, equity securities, securities available for sale, and securities which management intends to hold until maturity. Securities decreased by $83.9 million, or 7.0%, at September 30, 2020 as compared to December 31, 2019, reflecting paydowns, called securities, and maturities offset by $153.7 million of purchases. The ratio of securities to total assets was 8.40% and 10.45% at September 30, 2020 and December 31, 2019, respectively. Further details regarding the Company's analysis of expected credit losses on securities can be found in Note 3 “Securities” to the Consolidated Financial Statements included in Part I. Item 1 of this Report.
70

Table of Contents

    Residential Mortgage Loan Sales The Company’s primary loan sale activity arises from the sale of government sponsored enterprise eligible residential mortgage loans. The Company originates residential loans with the intention of selling them in the secondary market or to hold in the Company's residential portfolio. When a loan is sold, the Company enters into agreements that contain representations and warranties about the characteristics of the loans sold and their origination. The Company may be required to either repurchase mortgage loans or to indemnify the purchaser from losses if representations and warranties are breached. The Company incurred no material losses related to mortgage repurchases during the three and nine months ended September 30, 2020 and 2019, respectively.

    The following table shows the total residential loans that were closed and whether the amounts were held in the portfolio or sold/held for sale in the secondary market during the periods indicated:
Table 1 - Closed Residential Real Estate Loans
 Three Months Ended September 30Nine Months Ended September 30
 2020201920202019
 (Dollars in thousands)
Held in portfolio$54,826 $43,098 $125,392 $133,111 
Sold or held for sale in the secondary market262,323 232,129 654,772 450,203 
Total closed loans$317,149 $275,227 $780,164 $583,314 


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

Table 2 - Residential Mortgage Loan Sales
Three Months Ended September 30Nine Months Ended September 30
2020201920202019
(Dollars in thousands)
Sold with servicing rights released$252,907 $169,532 $581,206 $334,426 
Sold with servicing rights retained (1)— 45,829 45,394 69,465 
Total loans sold$252,907 $215,361 $626,600 $403,891 
    
(1)The Company had recourse on all loans sold with servicing rights retained as of September 30, 2020 and 2019, respectively.

    When a loan is sold, the Company may decide to also sell the servicing of sold loans for a servicing release premium, simultaneous with the sale of the loan, or the Company may opt to sell the loan and retain the servicing. In the event of a sale with servicing rights retained, a mortgage servicing asset is established, which represents the then current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets in the consolidated balance sheets, are amortized in proportion to and over the period of estimated net servicing income, and are assessed for impairment based on fair value at each reporting date. Impairment is determined by stratifying the rights based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance, to the extent that fair value is less than the capitalized amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to income. The principal balance of loans serviced by the Bank on behalf of investors was $508.7 million, $656.4 million and $649.4 million at September 30, 2020, December 31, 2019, and September 30, 2019, respectively.
71

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

Table 3 - Mortgage Servicing Asset
 Three Months Ended September 30Nine Months Ended September 30
 2020201920202019
 (Dollars in thousands)
Balance at beginning of period$3,321 $4,587 $5,116 $1,445 
Additions— 419 424 632 
Acquired portfolio— — — 3,198 
Amortization(316)(215)(927)(483)
Change in valuation allowance(250)(34)(1,858)(35)
Balance at end of period $2,755 $4,757 $2,755 $4,757 
See Note 9, “Derivative and Hedging Activities” to the Consolidated Financial Statements included in Part I. Item 1 of this Report for more information on mortgage activity and mortgage related derivatives.
Loan Portfolio The Company’s loan portfolio increased by $531.6 million during the first nine months of 2020. The overall increase is primarily attributable to the Company's participation in the PPP, which resulted in aggregate program specific loan fundings of $811.7 million during the second and third quarters of 2020. When excluding PPP activity, loans declined by $280.2 million, or 3.16%, compared to December 31, 2019. The majority of this decline occurred in the commercial and industrial and residential portfolios, as commercial and industrial balances reflect reduced line utilization across multiple products, while residential declines continue to reflect the lower rate environment driving the majority of production to be sold into the secondary market.
72

Table of Contents
    The Company's commercial loan portfolio is comprised primarily of commercial and industrial loans as well as commercial real estate loans. Management considers the Company’s commercial and industrial portfolio to be well-diversified with loans to various types of industries. As previously stated, the Company's participation in the PPP resulted in significant loan fundings within the commercial and industrial portfolio and totaled $811.7 million at September 30, 2020, comprising 39.4% of the total portfolio. Accordingly, the composition of the portfolio by sector is skewed as compared to periods prior to commencement of the PPP, as the PPP loans are reflected within the various sectors below. The following pie chart shows the diversification of the commercial and industrial portfolio as of September 30, 2020: indb-20200930_g7.jpg
(Dollars in thousands)
Average loan size (excluding floor plan tranches) $203 
Largest individual commercial and industrial loan outstanding $22,801 
Commercial and industrial nonperforming loans/commercial and industrial loans1.79 %
The Company’s commercial real estate loan portfolio, inclusive of commercial construction, is the Company’s largest loan type concentration. The Company believes that this portfolio is also well-diversified with loans secured by a variety of property types, such as owner-occupied and nonowner-occupied commercial, retail, office, industrial, warehouse, and other special purpose properties, such as hotels, motels, nursing homes, restaurants, churches, recreational facilities, marinas, and golf courses. Commercial real estate also includes loans secured by certain residential-related property types including multi-family apartment buildings, residential development tracts and condominiums. The following pie chart shows the diversification of the commercial real estate loan portfolio as of September 30, 2020:

73

Table of Contents
indb-20200930_g8.jpg
(Dollars in thousands)
Average loan size$1,115 
Largest individual commercial real estate mortgage outstanding$32,000 
Commercial real estate nonperforming loans/commercial real estate loans0.81 %
Owner occupied commercial real estate loans/commercial real estate loans14.3 %

74

Table of Contents
    The Company's consumer portfolio consists of both fixed-rate and adjustable-rate residential real estate loans as well as residential construction lending related to single-home residential development within the Company's market area. The Company also provides home equity loans and lines that may be made as a fixed rate term loan or under a variable rate revolving line of credit secured by a first or junior mortgage on the borrower's residence or second home. Additionally, the Company makes loans for a wide variety of other personal needs. Other consumer loans primarily consist of installment loans and overdraft protections. The residential, home equity and other consumer portfolios totaled $2.5 billion at September 30, 2020, as noted below:
indb-20200930_g9.jpg


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

Delinquency    The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations.  The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame.  Generally, the Company requires that a delinquency notice be mailed to a borrower upon expiration of a grace period (typically no longer than 15 days beyond the due date).  Reminder notices may be sent and telephone calls may be made prior to the expiration of the grace period. If the delinquent status is not resolved within a reasonable time frame following the mailing of a delinquency notice, the Bank’s personnel charged with managing its loan portfolios contacts the borrower to ascertain the reasons for delinquency and the prospects for payment.  Any subsequent actions taken to resolve the delinquency will depend upon the nature of the loan and the length of time that the loan has been delinquent. The borrower’s needs are considered as much as reasonably possible without jeopardizing the Bank’s position. A late charge is usually assessed on loans upon expiration of the grace period.
Nonaccrual Loans    As a general rule, loans 90 days or more past due with respect to principal or interest are classified as nonaccrual loans. However, certain loans that are 90 days or more past due may be kept on an accruing status if the loans are well secured and in the process of collection. The Company may also put a junior lien mortgage on nonaccrual status as a result of delinquency with respect to the first position, which is held by another financial institution, while the junior lien is currently
75


performing. Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. A loan remains on nonaccrual status until it becomes current with respect to principal and interest (and in certain instances remains current for up to six months), the loan is liquidated, or when the loan is determined to be uncollectible and is charged-off against the allowance for credit losses.
Troubled Debt Restructurings      In the course of resolving problem loans, the Company may choose to restructure the contractual terms of certain loans. The Company attempts to work out an alternative payment schedule with the borrower in order to avoid or cure a default. Loans that are modified are reviewed by the Company to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and the restructuring of the loan may include adjustments to interest rates, extensions of maturity, consumer loans where the borrower's obligations have been effectively discharged through Chapter 7 Bankruptcy and the borrower has not reaffirmed the debt to the Bank, and other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. If such efforts by the Bank do not result in satisfactory performance, the loan is referred to legal counsel, at which time foreclosure proceedings are initiated. At any time prior to a sale of the property at foreclosure, the Bank may terminate foreclosure proceedings if the borrower is able to work out a satisfactory payment plan.
    It is the Company’s policy to have any restructured loans which are on nonaccrual status prior to being modified remain on nonaccrual status for six months, subsequent to being modified, before management considers their return to accrual status. If the restructured loan is on accrual status prior to being modified, it is reviewed to determine if the modified loan should remain on accrual status. Loans that are considered TDRs are classified as performing, unless they are on nonaccrual status or greater than 90 days delinquent. Loans classified as TDRs remain classified as such for the life of the loan, except in limited circumstances, when it may be determined that the borrower is performing under modified terms and the restructuring agreement specified an interest rate greater than or equal to an acceptable market rate for a comparable new loan at the time of the restructuring.
    Purchased Credit Deteriorated Loans    Purchased Credit Deteriorated ("PCD") loans are acquired loans which have shown a more-than-insignificant deterioration in credit quality since origination. PCD loans are recorded at amortized cost with an allowance for credit losses recorded upon purchase, as appropriate. PCD loans are not subject to the same classification as nonaccrual as originated loans.
Nonperforming Assets     Nonperforming assets are typically comprised of nonperforming loans and other real estate owned. Nonperforming loans consist of nonaccrual loans and loans that are more than 90 days past due but still accruing interest.
    

76

Table of Contents

The following table sets forth information regarding nonperforming assets held by the Company at the dates indicated:
Table 4 - Nonperforming Assets
September 30
2020
December 31
2019
September 30
2019
 (Dollars in thousands)
Loans accounted for on a nonaccrual basis
Commercial and industrial $36,851 $22,574 $23,507 
Commercial real estate38,164 3,016 1,666 
Small business542 311 112 
Residential real estate16,229 13,360 11,281 
Home equity6,159 6,570 6,720 
Other consumer79 61 74 
Total (1)$98,024 $45,892 $43,360 
Loans past due 90 days or more but still accruing
Commercial real estate (2)— 218 — 
Residential real estate (2)— 1,652 1,807 
Home equity (2)— 265 511 
Other consumer22 24 
Total$$2,157 $2,342 
Total nonperforming loans$98,025 $48,049 $45,702 
Other real estate owned— — 2,500 
Total nonperforming assets$98,025 $48,049 $48,202 
Nonperforming loans as a percent of gross loans1.04 %0.54 %0.51 %
Nonperforming assets as a percent of total assets0.74 %0.42 %0.42 %

(1)Inclusive of TDRs on nonaccrual status of $23.8 million, $24.8 million, and $26.2 million at September 30, 2020, December 31, 2019, and September 30, 2019, respectively.
(2)Represents purchased credit impaired ("PCI") loans that were accruing interest due to expectation of future cash collections. Under CECL guidance, the concept of PCI loans was eliminated and therefore not applicable for periods subsequent to the Company's adoption on January 1, 2020.
77

Table of Contents
    The following table summarizes the changes in nonperforming assets for the periods indicated:
Table 5 - Activity in Nonperforming Assets
Three Months EndedNine Months Ended
September 30
2020
September 30
2019
September 30
2020
September 30
2019
(Dollars in thousands)
Nonperforming assets beginning balance$48,814 $48,183 $48,049 $45,418 
New to nonperforming (1)60,850 4,946 75,580 11,604 
Acquired nonperforming loans— — — 2,317 
Loans charged-off(4,304)(707)(5,748)(1,738)
Loans paid-off(5,050)(3,041)(12,339)(9,501)
Loans restored to performing status(2,229)(714)(7,319)(2,212)
Acquired other real estate owned— — — 2,818 
Valuation write down— (389)— (389)
Other(56)(76)(198)(115)
Nonperforming assets ending balance$98,025 $48,202 $98,025 $48,202 
(1)The increase in the September 30, 2020 balance reflects the migration of three large commercial relationships, all related to industries previously identified as being highly impacted by the COVID-19 pandemic.
78

Table of Contents

The following table sets forth information regarding troubled debt restructured loans as of the dates indicated:
Table 6 - Troubled Debt Restructurings
September 30
2020
December 31
2019
September 30
2019
 (Dollars in thousands)
Performing troubled debt restructurings$17,521 $19,599 $20,182 
Nonaccrual troubled debt restructurings23,810 24,766 26,232 
Total$41,331 $44,365 $46,414 
Performing troubled debt restructurings as a % of total loans0.19 %0.22 %0.23 %
Nonaccrual troubled debt restructurings as a % of total loans0.25 %0.28 %0.29 %
Total troubled debt restructurings as a % of total loans0.44 %0.50 %0.52 %
The following table summarizes changes in TDRs for the periods indicated:
Table 7 - Activity in Troubled Debt Restructurings
Three Months EndedNine Months Ended
September 30
2020
September 30
2019
September 30
2020
September 30
2019
 (Dollars in thousands)
TDRs beginning balance$41,839 $50,264 $44,365 $53,197 
New to TDR status625 290 1,874 622 
Paydowns(1,133)(4,131)(4,930)(7,396)
Charge-offs— (9)22 (9)
TDRs ending balance$41,331 $46,414 $41,331 $46,414 
    As previously noted, the Company has been offering needs based payment relief options for its customers in response to the COVID-19 pandemic. These modifications will not be accounted for as TDRs if the borrower was in compliance with their loan terms as of December 31, 2019. The following table summarizes active deferrals by modification type as of September 30, 2020:
Table 8 - Deferrals by Modification Type
Deferral of Principal and InterestDeferral of Principal OnlyDeferral of Interest OnlyTotal DeferralsTotal Portfolio% Deferral
(Dollars in thousands)
Commercial and industrial$5,658 $33,032 $582 $39,272 $2,062,345 1.9 %
Commercial real estate (1)230,873 228,521 26,561 485,955 4,698,798 10.3 %
Business Banking1,047 4,339 236 5,622 167,632 3.4 %
Residential real estate37,173 2,515 — 39,688 1,352,305 2.9 %
Home equity6,667 — 6,482 13,149 1,101,054 1.2 %
Consumer94 — — 94 23,059 0.4 %
Total active deferrals as of September 30, 2020
$281,512 $268,407 $33,861 $583,780 $9,405,193 6.2 %
(1) Balances include commercial construction deferrals.

79

Table of Contents
    
    Income accruals are suspended on all nonaccrual loans and all previously accrued and uncollected interest is reversed against current income. The table below shows interest income that was recognized or collected on all nonaccrual loans and TDRs for the periods indicated:
Table 9 - Interest Income - Nonaccrual Loans and Troubled Debt Restructurings
 
Three Months EndedNine Months Ended
 September 30
2020
September 30
2019
September 30
2020
September 30
2019
 (Dollars in thousands)
The amount of incremental gross interest income that would have been recorded if nonaccrual loans had been current in accordance with their original terms $744 $705 $1,909 $1,997 
The amount of interest income on nonaccrual loans and performing TDRs that was included in net income$861 $1,047 $2,258 $3,155 
Potential problem loans are any loans which are not included in nonaccrual or nonperforming loans, where known information about possible credit problems of the borrowers causes management to have concerns as to the ability of such borrowers to comply with present loan repayment terms. At September 30, 2020, there were 99 relationships, with an aggregate balance of $176.0 million, deemed to be potential problem loans. These potential problem loans continued to perform with respect to payments. Management actively monitors these loans and strives to minimize any possible adverse impact to the Company.

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


The table below provides total outstanding balances of commercial loans as of the dates indicated within industries that management has deemed to be highly impacted by the COVID-19 pandemic:

Table 10 - Highly Impacted COVID-19 Industries - Details
September 30, 2020
(Dollars in thousands)
Accommodations
Balance$420,099 
Average borrower loan size$4,194 
% secured by real estate99.7 %
Weighted average loan to value52.2 %
Other information:
The accommodation portfolio consists of 71 properties representing a combination of flagged (61%) and non-flagged (39%) hotels, motels and inns.
Properties deemed to be located in areas of leisure comprise $169.8 million, or 41% of the total accommodation portfolio.
Approximately 90% of the balances outstanding are secured by properties located within New England states with the largest concentration in Massachusetts (60%).
80

Table of Contents
Food Services
Balance$154,846 
Average borrower loan size$417 
% secured by real estate61.5 %
Weighted average loan to value50.3 %
Other information:
The food services portfolio includes full-service restaurants (65%), limited service restaurants and fast food (33%), and other types of food service (caterers, bars, mobile food service 2%).
Retail Trade
Balance$493,270 
Average borrower loan size$485 
% secured by real estate43.8 %
Weighted average loan to value55.4 %
Other information:
The retail trade portfolio consists broadly of food and beverage stores (42%), motor vehicle and parts dealers (26%), gasoline stations (14%), and all other retailers account for (18%).
Collateral for these loans varies and may consist of real estate, motor vehicles inventories, other types of inventories and general business assets.
Other Services (except Public Administration)
Balance$147,984 
Average borrower loan size$258 
% secured by real estate51.2 %
Weighted average loan to value48.4 %
Other information:
The other services portfolio consists of various for-profit and not-for-profit services diversified across religious, civic and social service organizations (42%), repair and maintenance business (30%) and personal services, including car washes, beauty salons, laundry services, funeral homes, pet care and other types of services (28%).
Arts, Entertainment, and Recreation
Balance$97,962 
Average borrower loan size$769 
% secured by real estate83.8 %
Weighted average loan to value50.8 %
Other information:
Amusement, gambling and recreational industries make up a majority of this category (95%) and include amusement/theme parks, bowling centers, fitness centers, golf courses, marinas, and other recreational industries. Other industries including museums, performing arts, and spectator sports account for the remaining outstanding balances (5%).

Allowance for Credit Losses  The allowance for credit losses is maintained at a level that management considers appropriate to provide for the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. The allowance is increased by providing for credit losses through a charge to expense and by credits for recoveries of loans previously charged-off and is reduced by loans being charged-off.
In accordance with the CECL methodology, adopted January 1, 2020, the Company estimates credit losses for financial assets on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of prepayments. Economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period of one
81

Table of Contents
year, beyond which is a reversion to the Company's historical long-run average for a period of 6 months. The Company's qualitative assessment is structured based upon nine environmental factors impacting the expected risk of loss within the loan portfolio. Loans that do not share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that will be individually assessed, the Company uses either a discounted cash flow (“DCF”) approach or a fair value of collateral approach. The latter approach is used for loans deemed to be collateral dependent or when foreclosure is probable. The Company's adoption of CECL had a minimal impact to the allowance as compared to the previous incurred loss methodology.
The balance of allowance for credit losses of $115.6 million as of September 30, 2020 represents an increase of $47.9 million, or 70.6%, in comparison to the implementation balances at January 1, 2020, and an increase of $3.4 million, or 3.1% compared to June 30, 2020. This increase in the allowance during the first three quarters of 2020 was primarily driven by anticipated credit deterioration due to the ongoing COVID-19 pandemic, which resulted in the Company recording a $52.5 million provision for credit losses for the nine months ended September 30, 2020. During the third quarter, conditions surrounding the credit environment and expectations for future loss estimates did not change significantly in comparison to the previous quarter, and as a result the Company recorded a $7.5 million credit loss provision, reflecting a decrease from the $25 million and $20 million recorded during the first and second quarters of 2020, respectively.
The Company utilizes forecasted data to run its quantitative model and continued to use a more severe outlook at September 30, 2020 as compared to the baseline forecast that was used to calculate opening balances on January 1, 2020. In determining the Company's allowance for credit losses as of September 30, 2020, the economic outlook included certain assumptions related to the COVID-19 pandemic as it has had a meaningful impact to the economy. The underlying assumptions related to the Company's economic forecast included items such as, unemployment increasing through mid-2022, federal funds rates holding steady near 0% until 2022 and an expectation that no sustained economic recovery will occur until 2022.
The provision for credit losses was qualitatively adjusted upward during the nine months ended September 30, 2020 in order to ensure coverage for highly impacted relationships as management performed detailed analysis consisting of a review of maximum levels of historic loss given default ("LGD") and stressed probability of default ("PD") scenarios for loans that were deemed to be more at risk within the industries that are highly impacted by the COVID-19 pandemic. As a result of this review and analysis, the qualitative overlay was adjusted upward slightly during the three months ended September 30, 2020, but to a lesser extent than the previous two quarters, as conditions related to the COVID-19 environment did not change significantly during the quarter. Refer to Note 4, "Loans, Allowance for Credit Losses and Credit Quality" to the Consolidated Financial Statements included in Part I. Item 1 of this Report for further details surrounding the Company's adoption of CECL, related accounting policy updates and full disclosures under the new standard.


82

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

Table 11 - Summary of Changes in the Allowance for Credit Losses
Three Months Ended
September 30
2020
June 30
2020
March 31
2020
December 31
2019
September 30
2019
 (Dollars in thousands)
Average total loans$9,375,522 $9,311,877 $8,871,346 $8,877,072 $8,897,794 
Allowance for credit losses, beginning of period$112,176 $92,376 $67,740 $66,942 $65,960 
Cumulative effect accounting adjustment (1)— — (1,137)— — 
Cumulative effect accounting adjustment (2)— — 1,157 — — 
Charged-off loans
Commercial and industrial185 — — 244 — 
Commercial real estate3,885 — — 2,532 82 
Small business49 36 109 190 125 
Home equity— 138 28 28 
Other consumer185 670 487 473 472 
Total charged-off loans4,304 710 734 3,467 707 
Recoveries on loans previously charged-off
Commercial and industrial42 1,003 
Commercial real estate— — — 106 
Small business14 61 
Residential real estate— 140 
Home equity21 95 58 40 194 
Other consumer219 408 246 206 185 
Total recoveries253 510 350 265 1,689 
Net loans charged-off (recovered)
Commercial and industrial184 (4)(42)240 (1,003)
Commercial real estate3,876 — — 2,532 (24)
Small business47 33 106 176 64 
Residential real estate(1)— (1)(1)(140)
Home equity(21)(91)80 (12)(166)
Other consumer(34)262 241 267 287 
Total net loans charged-off (recovered)4,051 200 384 3,202 (982)
Provision for credit losses7,500 20,000 25,000 4,000 — 
Total allowance for credit losses, end of period$115,625 $112,176 $92,376 $67,740 $66,942 
Net loans charged-off/(recovered) as a percent of average total loans (annualized)0.17 %0.01 %0.02 %0.14 %(0.04)%
Allowance for credit losses as a percent of total loans1.23 %1.20 %1.04 %0.76 %0.75 %
Allowance for credit losses as a percent of nonperforming loans117.95 %229.80 %192.29 %140.98 %146.47 %
(1)Represents adjustment needed to reflect the cumulative day one impact pursuant to the Company's adoption of Accounting Standards Update 2016-13. The adjustment represents a $1.1 million decrease to the allowance attributable to the change in accounting methodology for estimating the allowance for credit losses resulting from the Company's adoption of the standard.
83

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

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

The following table sets forth the allocation of the allowance for credit losses by loan category at the dates indicated:
Table 12 - Summary of Allocation of Allowance for Credit Losses
 
 September 30
2020
January 1
2020
December 31
2019
 Allowance
Amount
Percent of
Loans
In  Category
To Total Loans
Allowance
Amount
Percent of
Loans
In  Category
To Total Loans
Allowance
Amount
Percent of
Loans
In  Category
To Total Loans
(Dollars in thousands)
Commercial and industrial (1)$28,219 21.9 %$15,659 15.7 %$17,594 15.7 %
Commercial real estate39,386 43.9 %20,224 45.1 %32,935 45.1 %
Commercial construction5,210 6.1 %2,401 6.2 %6,053 6.2 %
Small business4,593 1.8 %2,241 2.0 %1,746 2.0 %
Residential real estate14,163 14.4 %13,691 17.9 %3,440 17.9 %
Home equity23,572 11.7 %12,907 12.8 %5,576 12.8 %
Other consumer482 0.2 %637 0.3 %396 0.3 %
Total allowance for credit losses$115,625 100.0 %$67,760 100.0 %$67,740 100.0 %
(1)Loans originated as part of the PPP established by the CARES Act and included within the commercial and industrial category have been excluded from the credit loss calculations as these loans are 100% guaranteed by the U.S. Government.
As a result of the initial adoption of CECL on January 1, 2020, the total allowance amount did not change materially, although allocation of these amounts by category did change. These changes are due to the new model that incorporates estimates of loss for the life of the loan, which requires higher reserves for loans with longer anticipated lives. The increase from adoption to September 30, 2020 is largely driven by the downturn of the economy in response to the impact of the COVID-19 pandemic and the resulting changes to the model inputs, as well as additional qualitative adjustments required for relationships in industries that are highly impacted by social distancing business closures and other mandated government requirements in response to the COVID-19 pandemic.
To determine if a loan should be charged-off, all possible sources of repayment are analyzed. Possible sources of repayment include the potential for future cash flows, the value of the Bank’s collateral, and the strength of co-makers or guarantors. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are promptly charged-off against the allowance for credit losses and any recoveries of such previously charged-off amounts are credited to the allowance.
Regardless of whether a loan is unsecured or collateralized, the Company charges off the amount of any confirmed loan loss in the period when the loans, or portions of loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss-confirming events may include an appraisal or other valuation that reflects a shortfall between the value of the collateral and the carrying value of the loan or receivable, or a deficiency balance following the sale of the collateral.
84

Table of Contents
For additional information regarding the Company’s allowance for credit losses, see Note 4 "Loans, Allowance for Credit Losses and Credit Quality" and Note 5, “Loans and Allowance for Loan Losses” to the Consolidated Financial Statements included in Part I.Item 1 of this Report.
Federal Home Loan Bank Stock The Bank held an investment in FHLB stock of $15.1 million and $14.4 million at September 30, 2020 and December 31, 2019, respectively. The FHLB is a cooperative that provides services to its member banking institutions. The primary reason for the FHLB of Boston membership is to gain access to a reliable source of wholesale funding as a tool to manage liquidity and interest rate risk. The purchase of stock in the FHLB is a requirement for a member to gain access to funding. The Company either purchases additional FHLB stock or is subject to redemption of FHLB stock proportional to the volume of funding received. The Company views the holdings as a necessary long-term investment for the purpose of balance sheet liquidity and not for investment return.
    Goodwill and Other Intangible Assets Goodwill and other intangible assets were $530.7 million and $535.5 million at September 30, 2020 and December 31, 2019, respectively. The decrease was primarily due to amortization of definite-lived intangibles.
The Company typically performs its annual goodwill impairment testing during the third quarter of the year, unless certain indicators suggest earlier testing to be warranted. The COVID-19 pandemic has resulted in significant levels of volatility in the capital markets and presents heightened uncertainty surrounding the future impact to operations of the Company and its customers. Given these conditions, the Company identified this impact from the pandemic as a triggering event warranting interim tests for impairment as of March 31, June 30, and again as of September 30, 2020. Accordingly, the Company performed impairment tests as of each date and determined that there was no impairment of its goodwill. Although the Company utilizes quoted market prices when estimating fair value of the reporting unit for purposes of the quantitative impairment test, it also considers certain qualitative factors, including the concept of a control premium, which increases the fair value as compared to market capitalization. Other intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company also considered the impact of the COVID-19 pandemic as it pertains to these intangible assets, and determined that there was no indication of impairment related to other intangible assets as of September 30, 2020.
Cash Surrender Value of Life Insurance Policies The Bank holds life insurance policies for the purpose of offsetting its future obligations to its employees under its retirement and benefits plans. The cash surrender value of life insurance policies was $199.5 million and $197.4 million at September 30, 2020 and December 31, 2019, respectively. The Company recorded tax exempt income from life insurance policies of $1.3 million for each of the three month periods ended September 30, 2020 and 2019, respectively, and $3.9 million and $3.6 million for the nine month periods ended September 30, 2020 and 2019, respectively. Also during the nine months ended September 30, 2020, the Company recorded gains on life insurance benefits of $692,000, all of which were recorded during the first half of 2020, as compared to $434,000 of gains on life insurance benefits recorded during the three and nine months ended September 30, 2019.
Deposits As of September 30, 2020, total deposits were $10.9 billion, representing a $1.7 billion, or 18.6%, increase from December 31, 2019, primarily due to a combination of PPP loan fundings, government stimulus programs and a customer focus on retaining liquidity, which continued to fuel strong growth during the nine months ended September 30, 2020. The total cost of deposits was 0.20% and 0.50% for the three months ended September 30, 2020 and 2019, respectively, and 0.31% and 0.46% for the nine months ended September 30, 2020 and 2019, respectively. Core deposits represented 88.01% of total deposits as of September 30, 2020.
    The Company also participates in the Promontory Interfinancial Network, allowing the Bank to provide easy access to multi-million dollar Federal Deposit Insurance Corporation ("FDIC") deposit insurance protection on certificate of deposit and money market investments for consumers, businesses and public entities. This channel allows the Company to seek additional funding in potentially large quantities by attracting deposits from outside the Bank’s core market, and amounted to $232.4 million and $211.2 million at September 30, 2020 and December 31, 2019, respectively. In addition, the Company may occasionally raise funds through the use of brokered deposits outside of the Promontory Interfinancial Network, which amounted to $58.1 million and $281.6 million at September 30, 2020 and December 31, 2019, respectively.
85

Table of Contents
Borrowings The Company’s borrowings consist of both short-term and long-term borrowings and provide the Bank with one of its primary sources of funding. Maintaining available borrowing capacity provides the Bank with a contingent source of liquidity. Borrowings decreased by $7.4 million, or 2.4%, at September 30, 2020, as compared to December 31, 2019. During the first quarter of 2020, the Company entered into $300.0 million in short-term advances from the Federal Home Loan Bank ("FHLB"). Subsequently, during the second quarter the Company made a $200.0 million prepayment on these FHLB borrowings, resulting in a prepayment penalty of $389,000. Also, during the second quarter, the Company paid down $37.5 million of its long-term line of credit. In relation to its funding strategy, in light of the steady buildup of its liquidity position, the Company decided to exit its $100.0 million hedge against the FHLB borrowings during the third quarter and subsequently exited the remaining $100.0 million FHLB borrowing early in the fourth quarter.
The following table presents the components of borrowings as of the dates indicated:
Table 13 - Borrowings
September 30
2020
December 31
2019
Federal Home Loan Bank borrowings$145,765 $115,748 
Long-term borrowings 37,447 74,906 
Junior subordinated debentures62,850 62,848 
Subordinated debentures 49,672 49,601 
Total borrowings$295,734 $303,103 
Additionally, the Bank had $4.1 billion and $4.0 billion of assets pledged as collateral against borrowings at September 30, 2020 and December 31, 2019, respectively. These assets are primarily pledged to the FHLB of Boston and the Federal Reserve Bank of Boston.

86

Table of Contents
Capital Resources On September 17, 2020, the Company’s Board of Directors declared a cash dividend of $0.46 per share to stockholders of record as of the close of business on September 28, 2020. This dividend was paid on October 9, 2020.
    The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 Capital and Common Equity Tier 1 Capital (as defined for regulatory purposes) to risk weighted assets (as defined for regulatory purposes) and Tier 1 Capital to average assets (as defined for regulatory purposes). At September 30, 2020 and December 31, 2019, the Company and the Bank exceeded the minimum requirements for all applicable ratios that were in effect during the respective periods. The Company’s and the Bank’s capital amounts and ratios are presented in the following table, along with the applicable minimum requirements as of each date indicated:

Table 14 - Company and Bank's Capital Amounts and Ratios 
 ActualFor Capital Adequacy PurposesTo Be Well Capitalized Under Prompt
Corrective Action Provisions
 AmountRatioAmount RatioAmount Ratio
 September 30, 2020
 (Dollars in thousands)
Company (consolidated)
Total capital (to risk weighted assets)$1,352,497 14.87 %$727,486 8.0 %N/AN/A
Common equity tier 1 capital
(to risk weighted assets)
1,128,182 12.41 %409,211 4.5 %N/AN/A
Tier 1 capital (to risk weighted assets)1,189,182 13.08 %545,614 6.0 %N/AN/A
Tier 1 capital (to average assets)1,189,182 9.52 %499,613 4.0 %N/AN/A
Bank
Total capital (to risk weighted assets)$1,278,819 14.09 %$725,884 8.0 %$907,355 10.0 %
Common equity tier 1 capital
(to risk weighted assets)
1,165,370 12.84 %408,310 4.5 %589,781 6.5 %
Tier 1 capital (to risk weighted assets)1,165,370 12.84 %544,413 6.0 %725,884 8.0 %
Tier 1 capital (to average assets)1,165,370 9.34 %498,917 4.0 %623,646 5.0 %
 December 31, 2019
(Dollars in thousands)
Company (consolidated)
Total capital (to risk weighted assets)$1,352,341 14.83 %$729,291 8.0 %N/AN/A
Common equity tier 1 capital
(to risk weighted assets)
1,171,963 12.86 %410,226 4.5 %N/AN/A
Tier 1 capital (to risk weighted assets)1,232,963 13.53 %546,969 6.0 %N/AN/A
Tier 1 capital (to average assets)1,232,963 11.28 %437,271 4.0 %N/AN/A
Bank
Total capital (to risk weighted assets)$1,275,611 14.00 %$728,868 8.0 %$911,085 10.0 %
Common equity tier 1 capital
(to risk weighted assets)
1,205,740 13.23 %409,988 4.5 %592,205 6.5 %
Tier 1 capital (to risk weighted assets)1,205,740 13.23 %546,651 6.0 %728,868 8.0 %
Tier 1 capital (to average assets)1,205,740 11.06 %435,886 4.0 %544,857 5.0 %
87

Table of Contents

    In addition to the minimum risk-based capital requirements outlined in the table above, the Company is required to maintain a minimum capital conservation buffer, in the form of common equity, in order to avoid restrictions on capital distributions and discretionary bonuses. The required amount of the capital conservation buffer is 2.5%. At September 30, 2020, the Company's capital levels exceeded the buffer.
Dividend Restrictions In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. Under the foregoing dividend restrictions and while maintaining its "well capitalized" status, dividends paid by the Bank to the Company totaled $16.2 million and $32.6 million for the three months ended September 30, 2020 and 2019, respectively, and totaled $139.8 million and $90.3 million for the nine months ended September 30, 2020 and 2019, respectively. The total dividends paid for the nine months ended September 30, 2019 included $16.5 million that was used for funding the April 1, 2019 Blue Hills Bancorp. Inc. ("BHB") acquisition.
Trust Preferred Securities In accordance with the applicable accounting standard related to variable interest entities, the common stock of trusts which have issued trust preferred securities has not been included in the consolidated financial statements of the Company. At both September 30, 2020 and December 31, 2019 there was $61.0 million in trust preferred securities which have been included in the Tier 1 capital of the Company for regulatory reporting purposes pursuant to the Federal Reserve's capital adequacy guidelines.
    Common Stock Repurchase Program On October 17, 2019, the Company put into place a share repurchase program with the ability to repurchase up to 1.5 million shares of the Company's common stock. The program allowed for repurchases to be made from time to time on the open market and in privately negotiated transactions, including through the use of trading plans intended to qualify under Rule 10b5-1 under the Exchange Act. During the first half of 2020, the full 1.5 million shares were repurchased at a total cost of $95.1 million, or an average cost per share of $63.39.
Investment Management As of September 30, 2020, the Rockland Trust Investment Management Group had assets under administration of $4.5 billion, representing 6,140 trust, fiduciary, and agency accounts. At December 31, 2019, assets under administration were $4.6 billion, representing approximately 6,108 trust, fiduciary, and agency accounts. The decline in value reflects the overall market decline driven primarily by investor response to the COVID-19 pandemic during the year, including a sharp decline in the U.S. stock market during the first quarter, followed by a period of market recovery during the second and third quarters, along with an outflow of custody accounts which also contributed to the decrease in value. Included in these amounts as of September 30, 2020 and December 31, 2019 are assets under administration of $339.1 million and $342.2 million, respectively, relating to the Company’s registered investment advisor, Bright Rock Capital Management, LLC, which provides institutional quality investment management services to institutional and high net worth clients. Revenue from the Investment Management Group was $7.0 million and $6.6 million for the three months ended September 30, 2020 and 2019, respectively, and $20.1 million and $19.1 million for the nine months ended September 30, 2020 and 2019, respectively.
Retail investments and insurance revenue were $573,000 and $554,000 for the three months ended September 30, 2020 and 2019, respectively, and $1.6 million and $2.0 million for the nine months ended September 30, 2020 and 2019, respectively.
Retail investments and insurance revenue include commission revenue from LPL Financial (“LPL”) and its affiliates and their insurance subsidiary, LPL Insurance Associates, Inc., which offers the sale of mutual fund shares, unit investment trust shares, general securities, fixed and variable annuities and life insurance. Registered representatives who are both employed by the Bank and licensed and contracted with LPL are onsite to offer these products to the Bank’s customer base. These same agents are also approved and appointed with various other broker general agents for the purpose of processing insurance solutions for clients.
88

Table of Contents

RESULTS OF OPERATIONS
    The following table provides a summary of results of operations for the three and nine months ended September 30, 2020 and 2019:
Table 15 - Summary of Results of Operations
 
 Three Months Ended September 30Nine Months Ended September 30
 2020201920202019
 (Dollars in thousands, except per share data)
Net income$34,873 $51,845 $86,526 $117,698 
Diluted earnings per share$1.06 $1.51 $2.59 $3.64 
Return on average assets1.07 %1.78 %0.93 %1.47 %
Return on average equity8.21 %12.33 %6.80 %10.77 %
Net interest margin3.13 %4.03 %3.36 %4.08 %

    The Company's results of operations were impacted by a compressed net interest margin, along with elevated provision for credit losses recognized during the nine months ended September 30, 2020. The provision of $52.5 million recorded during the nine months ended September 30, 2020 was primarily driven by assumptions regarding future losses that contemplate the impact of the COVID-19 pandemic.
Net Interest Income The amount of net interest income is affected by changes in interest rates and by the volume, mix, and interest rate sensitivity of interest-earning assets and interest-bearing liabilities.
On a fully tax equivalent basis ("FTE"), net interest income for the third quarter of 2020 was $91.1 million, representing a decrease of $13.7 million, or 13.1%, when compared to the third quarter of 2019, primarily due to the negative impact of a lower interest rate environment and mix of interest earnings assets. For the nine months ended September 30, 2020, the net interest income on a FTE basis was $277.0 million, representing a decrease of $16.8 million, or 5.7%, when compared to the nine months ended September 30, 2019, primarily due to the negative impact of a lower interest rate environment and mix of interest earning assets, partially offset by the year-to-date impact of the BHB acquisition, which closed in the second quarter of 2019.
89

Table of Contents

The following tables present the Company’s average balances, net interest income, interest rate spread, and net interest margin for the three and nine months ending September 30, 2020 and 2019. Nontaxable income from loans and securities is presented on a FTE basis by adjusting tax-exempt income upward by an amount equivalent to the prevailing income taxes that would have been paid if the income had been fully taxable.
Table 16 - Average Balance, Interest Earned/Paid & Average Yields Quarter-to-Date
 Three Months Ended September 30
 20202019
 Average
Balance
Interest
Earned/
Paid
Yield/RateAverage
Balance
Interest
Earned/
Paid
Yield/Rate
 (Dollars in thousands)
Interest-earning assets
Interest-earning deposits with banks, federal funds sold, and short term investments$997,921 $254 0.10 %$115,255 $680 2.34 %
Securities
Securities - trading2,607 — — %1,947 — — %
Securities - taxable investments1,139,843 7,218 2.52 %1,204,314 8,269 2.72 %
Securities - nontaxable investments (1)1,146 11 3.82 %1,739 18 4.11 %
Total securities$1,143,596 $7,229 2.51 %$1,208,000 $8,287 2.72 %
Loans held for sale50,709 326 2.56 %102,065 456 1.77 %
Loans (2)
Commercial and industrial (1)2,033,385 17,724 3.47 %1,380,007 20,274 5.83 %
Commercial real estate (1)4,086,594 41,578 4.05 %4,017,670 49,139 4.85 %
Commercial construction568,007 5,126 3.59 %510,277 7,155 5.56 %
Small business168,662 2,303 5.43 %172,942 2,626 6.02 %
Total commercial6,856,648 66,731 3.87 %6,080,896 79,194 5.17 %
Residential real estate1,387,055 13,436 3.85 %1,644,467 17,329 4.18 %
Home equity1,107,685 9,658 3.47 %1,142,137 13,309 4.62 %
Total consumer real estate2,494,740 23,094 3.68 %2,786,604 30,638 4.36 %
Other consumer24,134 515 8.49 %30,294 627 8.21 %
Total loans$9,375,522 $90,340 3.83 %$8,897,794 $110,459 4.93 %
Total interest-earning assets$11,567,748 $98,149 3.38 %$10,323,114 $119,882 4.61 %
Cash and due from banks124,482 121,515 
Federal Home Loan Bank stock15,090 15,781 
Other assets1,313,194 1,119,388 
Total assets$13,020,514 $11,579,798 
Interest-bearing liabilities
Deposits
Savings and interest checking accounts$3,836,488 $838 0.09 %$3,157,870 $2,120 0.27 %
Money market2,087,822 945 0.18 %1,942,932 4,220 0.86 %
Time deposits1,076,546 3,649 1.35 %1,471,749 5,506 1.48 %
Total interest-bearing deposits$7,000,856 $5,432 0.31 %$6,572,551 $11,846 0.72 %
Borrowings
Federal Home Loan Bank borrowings$145,766 $408 1.11 %$156,054 $945 2.40 %
Long-term borrowings37,439 141 1.50 %74,885 684 3.62 %
Junior subordinated debentures62,850 438 2.77 %62,848 506 3.19 %
Subordinated debentures49,659 617 4.94 %84,319 1,045 4.92 %
Total borrowings$295,714 $1,604 2.16 %$378,106 $3,180 3.34 %
90

Table of Contents
Total interest-bearing liabilities$7,296,570 $7,036 0.38 %$6,950,657 $15,026 0.86 %
Noninterest bearing demand deposits3,700,902 2,753,596 
Other liabilities332,937 207,924 
Total liabilities$11,330,409 $9,912,177 
Stockholders' equity1,690,105 1,667,621 
Total liabilities and stockholders' equity$13,020,514 $11,579,798 
Net interest income (1)$91,113 $104,856 
Interest rate spread (3)3.00 %3.75 %
Net interest margin (4)3.13 %4.03 %
Supplemental information
Total deposits, including demand deposits$10,701,758 $5,432 $9,326,147 $11,846 
Cost of total deposits0.20 %0.50 %
Total funding liabilities, including demand deposits$10,997,472 $7,036 $9,704,253 $15,026 
Cost of total funding liabilities0.25 %0.61 %

(1)The total amount of adjustment to present interest income and yield on a FTE basis was $230,000 and $258,000 for the three months ended September 30, 2020 and 2019, respectively. The FTE adjustment relates to tax exempt income relating to securities with average balances of $1.1 million and $1.7 million and tax exempt income relating to loans with average balances of $81.6 million and $84.5 million, for the three months ended September 30, 2020 and 2019, respectively.
(2)Includes average nonaccruing loans.
(3)Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

91

Table of Contents
Table 17 - Average Balance, Interest Earned/Paid & Average Yields Year-to-Date
 Nine Months Ended September 30
 20202019
 Average
Balance
Interest
Earned/
Paid
Yield/
Rate
Average
Balance
Interest
Earned/
Paid
Yield/
Rate
 (Dollars in thousands)
Interest-earning assets
Interest-earning deposits with banks, federal funds sold, and short-term investments$599,827 $546 0.12 %$96,305 $1,753 2.43 %
Securities
Securities - trading2,421 — — %1,820 — — %
Securities - taxable investments1,178,671 23,006 2.61 %1,176,961 24,255 2.76 %
Securities - nontaxable investments (1)1,176 34 3.86 %1,739 52 4.00 %
Total securities$1,182,268 $23,040 2.60 %$1,180,520 $24,307 2.75 %
Loans held for sale43,150 917 2.84 %40,768 527 1.73 %
Loans (2)
Commercial and industrial (1)1,784,715 52,027 3.89 %1,300,815 55,674 5.72 %
Commercial real estate (1)4,050,154 129,800 4.28 %3,785,964 139,229 4.92 %
Commercial construction554,222 17,341 4.18 %453,097 20,037 5.91 %
Small business172,575 7,253 5.61 %168,280 7,720 6.13 %
Total commercial6,561,666 206,421 4.20 %5,708,156 222,660 5.22 %
Residential real estate1,473,812 41,856 3.79 %1,442,007 44,351 4.11 %
Home equity1,125,817 31,617 3.75 %1,125,144 38,797 4.61 %
Total consumer real estate2,599,629 73,473 3.78 %2,567,151 83,148 4.33 %
Other consumer25,643 1,587 8.27 %25,317 1,623 8.57 %
Total loans$9,186,938 $281,481 4.09 %$8,300,624 $307,431 4.95 %
Total interest-earning assets$11,012,183 $305,984 3.71 %$9,618,217 $334,018 4.64 %
Cash and due from banks122,302 117,465 
Federal Home Loan Bank stock17,645 16,561 
Other assets1,256,074 927,837 
Total assets$12,408,204 $10,680,080 
Interest-bearing liabilities
Deposits
Savings and interest checking accounts$3,592,069 $3,873 0.14 %$3,085,974 $6,249 0.27 %
Money market1,978,006 5,495 0.37 %1,796,081 11,379 0.85 %
Time deposits1,202,746 13,983 1.55 %1,190,950 12,424 1.39 %
Total interest-bearing deposits$6,772,821 $23,351 0.46 %$6,073,005 $30,052 0.66 %
Borrowings
Federal Home Loan Bank borrowings$205,244 $1,369 0.89 %$213,896 $4,028 2.52 %
Line of credit— — — %3,595 104 3.87 %
Long-term borrowings61,240 1,045 2.28 %51,327 1,461 3.81 %
Junior subordinated debentures62,849 1,362 2.89 %69,176 1,891 3.65 %
Subordinated debentures49,635 1,852 4.98 %71,242 2,633 4.94 %
Total borrowings$378,968 $5,628 1.98 %$409,236 $10,117 3.31 %
Total interest-bearing liabilities$7,151,789 $28,979 0.54 %$6,482,241 $40,169 0.83 %
Noninterest bearing demand deposits3,257,058 2,572,357 
Other liabilities300,248 164,783 
92

Table of Contents
Total liabilities$10,709,095 $9,219,381 
Stockholders' equity1,699,109 1,460,699 
Total liabilities and stockholders' equity$12,408,204 $10,680,080 
Net interest income (1)$277,005 $293,849 
Interest rate spread (3)3.17 %3.81 %
Net interest margin (4)3.36 %4.08 %
Supplemental information
Total deposit, including demand deposits$10,029,879 $23,351 $8,645,362 $30,052 
Cost of total deposits0.31 %0.46 %
Total funding liabilities, including demand deposits$10,408,847 $28,979 $9,054,598 $40,169 
Cost of total funding liabilities0.37 %0.59 %
(1)The total amount of adjustment to present interest income and yield on a FTE basis was $720,000 and $707,000 for the nine months ended September 30, 2020 and 2019, respectively. The FTE adjustment relates to nontaxable investment securities with average balances of $1.2 million and $1.7 million and tax exempt income relating to loans with average balances of $83.0 million and $78.4 million for the nine months ended September 30, 2020 and 2019, respectively.
(2)Includes average nonaccruing loans.
(3)Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)Net interest margin represents annualized net interest income as a percentage of average interest-earning assets.

93

Table of Contents
The following table presents certain information on a FTE basis regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to: (1) changes in rate (change in rate multiplied by prior period volume), (2) changes in volume (change in volume multiplied by old rate), and (3) changes in volume/rate (change in volume multiplied by change in rate) which is allocated to the change due to rate column:
94

Table of Contents
Table 18 - Volume Rate Analysis
Three Months Ended September 30Nine Months Ended September 30
2020 Compared To 20192020 Compared To 2019
Change
Due to
Rate
Change
Due to
Volume
Total ChangeChange
Due to
Rate
Change
Due to
Volume
Total Change
 (Dollars in thousands)
Income on interest-earning assets
Interest earning deposits, federal funds sold and short term investments$(5,634)$5,208 $(426)$(10,372)$9,165 $(1,207)
Securities
Securities - taxable investments(608)(443)(1,051)(1,284)35 (1,249)
Securities - nontaxable investments (1)(1)(6)(7)(1)(17)(18)
Total securities(1,058)(1,267)
Loans held for sale99 (229)(130)359 31 390 
Loans
Commercial and industrial (1)(12,149)9,599 (2,550)(24,358)20,711 (3,647)
Commercial real estate (1)(8,404)843 (7,561)(19,145)9,716 (9,429)
Commercial construction(2,838)809 (2,029)(7,168)4,472 (2,696)
Small business(258)(65)(323)(664)197 (467)
Total commercial(12,463)(16,239)
Residential real estate(1,180)(2,713)(3,893)(3,473)978 (2,495)
Home equity(3,250)(401)(3,651)(7,203)23 (7,180)
Total consumer real estate(7,544)(9,675)
Other consumer15 (127)(112)(57)21 (36)
Total loans (1)(2)(20,119)(25,950)
Total income of interest-earning assets$(21,733)$(28,034)
Expense of interest-bearing liabilities
Deposits
Savings and interest checking accounts$(1,738)$456 $(1,282)$(3,401)$1,025 $(2,376)
Money market(3,590)315 (3,275)(7,037)1,153 (5,884)
Time certificates of deposits(378)(1,479)(1,857)1,436 123 1,559 
Total interest bearing deposits(6,414)(6,701)
Borrowings
Federal Home Loan Bank borrowings(475)(62)(537)(2,496)(163)(2,659)
Line of Credit— — — — (104)(104)
Long-term borrowings(201)(342)(543)(698)282 (416)
Junior subordinated debentures(68)— (68)(356)(173)(529)
Subordinated debentures(430)(428)18 (799)(781)
Total borrowings(1,576)(4,489)
Total expense of interest-bearing liabilities(7,990)(11,190)
Change in net interest income$(13,743)$(16,844)
 
(1)The table above reflects income determined on a FTE basis. See footnote (1) to tables 16 and 17 for the related adjustments.
(2)Loans include portfolio loans and nonaccrual loans; however, unpaid interest on nonaccrual loans has not been included for purposes of determining interest income.

95

Table of Contents
    Provision For Credit Losses The provision for credit losses represents the charge to expense that is required to maintain an appropriate level of allowance for credit losses. The provision for credit losses was $7.5 million and $52.5 million for the three and nine months ended September 30, 2020, respectively, as compared to no provision for the third quarter of 2019 and $2.0 million for the nine months ended September 30, 2019. The elevated provision for credit losses for the three and nine months ended September 30, 2020 was calculated under the newly adopted CECL methodology, which became effective as of January 1, 2020, and was driven primarily by anticipated loan losses related to the COVID-19 pandemic. The Company’s allowance for credit losses, as a percentage of total loans, was 1.23% at September 30, 2020, 0.76% at December 31, 2019, and 0.75% at September 30, 2019. The Company recorded net charge-offs of $4.1 million and $4.6 million for the three and nine months ended September 30, 2020, respectively, as compared to net recoveries of $982,000 and $649,000 for the three and nine months ended September 30, 2019, respectively. The increase in net charge-offs during the third quarter of 2020 was due primarily to a $3.8 million charge-off recorded on a commercial relationship within one of the industries deemed by management to be highly impacted by the COVID-19 pandemic. Refer to Note 4 "Loans, Allowance for Credit Losses and Credit Quality" to the Consolidated Financial Statements included in Part I. Item 1 of this Report, for further details surrounding the Company's accounting policies under the CECL standard and primary drivers of the provision for credit losses for the periods.

Noninterest Income The following table sets forth information regarding noninterest income for the periods shown:
Table 19 - Noninterest Income
Three Months Ended
 September 30Change
 20202019Amount%
 (Dollars in thousands)
Deposit account fees$3,428 $5,299 $(1,871)(35.31)%
Interchange and ATM fees3,044 6,137 (3,093)(50.40)%
Investment management7,571 7,188 383 5.33 %
Mortgage banking income7,704 3,968 3,736 94.15 %
Gain on life insurance benefits— 434 (434)(100.00)%
Increase in cash surrender value of life insurance policies1,314 1,304 10 0.77 %
Loan level derivative income2,457 2,739 (282)(10.30)%
Other noninterest income3,829 4,747 (918)(19.34)%
Total$29,347 $31,816 $(2,469)(7.76)%
Nine Months Ended
 September 30Change
 20202019Amount%
(Dollars in thousands) 
Deposit account fees$11,227 $14,785 $(3,558)(24.06)%
Interchange and ATM fees13,154 16,447 (3,293)(20.02)%
Investment management21,696 21,089 607 2.88 %
Mortgage banking income13,570 8,184 5,386 65.81 %
Gain on life insurance benefits692 434 258 59.45 %
Increase in cash surrender value of life insurance policies3,902 3,572 330 9.24 %
Loan level derivative income8,918 4,312 4,606 106.82 %
Other noninterest income10,813 13,174 (2,361)(17.92)%
Total$83,972 $81,997 $1,975 2.41 %

The primary reasons for the variances in the noninterest income categories shown in the preceding table include:
96

Table of Contents
Deposit account fees decreased for the three and nine months ended September 30, 2020 in comparison to the year ago periods, driven by reductions in overdraft fees, as customers benefited from government stimulus payments during the first half of 2020.
Interchange and ATM fees have decreased for the three and nine months ended September 30, 2020 in comparison to the year ago periods, reflecting an overall decrease in consumer spending as customers focus on retaining liquidity during the COVID-19 pandemic. In addition, interchange income for the third quarter of 2020 reflects the negative impact of the Durbin Amendment, which the Company became subject to effective July 1, 2020 as a result of crossing the $10 billion asset threshold.
Investment management income increased for the three and nine months ended September 30, 2020 in comparison to the year ago periods. Assets under administration were $4.5 billion at both September 30, 2020 and 2019, respectively, however current year asset values were subject to significant general stock market volatility associated with the COVID-19 pandemic.
Mortgage banking income increased for the three and nine months ended September 30, 2020 in comparison to the year ago periods primarily due to increased volume and continued strong demand largely driven by the low rate environment.
The Company received proceeds on life insurance policies during the first half of 2020 resulting in gains of $692,000 for the nine months ended September 30, 2020. There were $434,000 of such gains during the three and nine months ended September 30, 2019.
The increase in cash surrender value of life insurance policies for the nine months ended September 30, 2020 and September 30, 2019 was primarily due to policies obtained from the BHB acquisition, which closed in the second quarter of 2019.
Loan level derivative income increased during the nine months ended September 30, 2020 primarily as a result of higher customer demand. Although remaining at an elevated level, loan level derivative income during the three months ended September 30, 2020 decreased slightly in comparison to the year ago comparable period.
Other noninterest income decreased during the three months ended September 30, 2020, mainly due to a decrease from a gain recognized on the sale of loans in 2019, along with reductions in foreign currency exchange fees, checkbook fees and FHLB dividend income. The decline in noninterest income during the nine months ended September 30, 2020 is also due to the decrease from a gain on sale of loans in 2019, decreases in FHLB dividend income and service fee income partially offset by increases in income on called securities and 1031 exchange income.
97

Table of Contents

Noninterest Expense The following table sets forth information regarding non-interest expense for the periods shown:
Table 20 - Noninterest Expense
 Three Months Ended
September 30Change
 20202019Amount%
 (Dollars in thousands) 
Salaries and employee benefits$38,409 $39,432 $(1,023)(2.59)%
Occupancy and equipment expenses9,273 8,555 718 8.39 %
Data processing & facilities management1,567 1,515 52 3.43 %
FDIC assessment1,034 — 1,034 100.00%
Advertising expense1,215 1,417 (202)(14.26)%
Consulting expense1,305 1,338 (33)(2.47)%
Core deposit amortization1,428 1,567 (139)(8.87)%
Loss on termination of derivatives684 — 684 100.00%
Merger and acquisition expenses— 705 (705)(100.00)%
Software maintenance1,753 1,385 368 26.57 %
Other noninterest expenses9,990 11,619 (1,629)(14.02)%
Total$66,658 $67,533 $(875)(1.30)%
Nine Months Ended
 September 30Change
 20202019Amount%
 (Dollars in thousands) 
Salaries and employee benefits$113,027 $111,401 $1,626 1.46 %
Occupancy and equipment expenses27,863 24,109 3,754 15.57 %
Data processing & facilities management4,684 4,883 (199)(4.08)%
FDIC assessment1,537 1,394 143 10.26 %
Advertising expense3,107 3,912 (805)(20.58)%
Consulting expense4,244 3,486 758 21.74 %
Core deposit amortization4,392 3,996 396 9.91 %
Loss on termination of derivatives684 — 684 100.00%
Loss on sale of securities— 1,462 (1,462)(100.00)%
Merger and acquisition expenses— 26,433 (26,433)(100.00)%
Software maintenance5,218 3,913 1,305 33.35 %
Other noninterest expenses35,349 31,887 3,462 10.86 %
Total$200,105 $216,876 $(16,771)(7.73)%

The primary reasons for the variances in the noninterest expense categories shown in the preceding table include:
The decrease in salaries and employee benefits for the three months ended September 30, 2020 is due primarily to reductions in incentive compensation programs costs, partially offset by increases in general salary costs and payroll taxes. The increase for the nine months ended September 30, 2020 reflects overall increases in the employee base, primarily due to the BHB acquisition which occurred on April 1, 2019, along with increases in retirement benefit costs and medical insurance costs offset somewhat by decreases in incentive compensation.
98

Table of Contents
Occupancy and equipment expenses increased for the three and nine months ended September 30, 2020 primarily due to the full nine month impact of the acquired BHB branch network and costs attributable to the Company's infrastructure expenses in response to the COVID-19 pandemic.
Data processing and facilities management costs increased slightly for the three months ended September 30, 2020 and decreased for the nine months ended September 30, 2020 in comparison to prior year periods due to timing of certain initiatives and system upgrades.
Advertising expense decreased during the three and nine months ended September 30, 2020, as compared to the prior year periods, due primarily to the timing and scope of various marketing campaigns.
FDIC assessment increased for both the three and nine months ended September 30, 2020, in comparison to the same periods in 2019. The Company has previously benefited from small bank assessment credit, which resulted in reduced expenses during 2019 and throughout the first quarter of 2020. In addition, the Company's assessment base increased resulting in an increase in over assessment fee.
Consulting expense increased during the nine months ended September 30, 2020 in conjunction with the Company's overall growth, implementation of strategic initiatives and COVID-19 related projects. These costs decreased during the three months ended September 30, 2020 in comparison to the prior year period due to mainly to the timing of certain strategic initiatives.
The core deposit amortization increased during the nine months ended September 30, 2020 primarily due to additional core deposit intangibles associated with the BHB acquisition.
Merger and acquisition expense in 2019 is attributable to the BHB acquisition. The majority of these costs include legal, professional fees, and integration costs. There were no merger and acquisition costs during the first three quarters of 2020.
Software maintenance increased during 2020 due to the Company's continued investment in its technology infrastructure.
The decrease in other noninterest expense for the three months ended September 30, 2020 is primarily due to a decrease in loan workout costs, sponsorships, contributions, recruitment, legal fees and card issuance costs. For the nine months ended September 30, 2020, other noninterest expense increased mainly due to software maintenance, retail branch traffic control, recruitment expenses, prepayment on borrowings, investment management systems, loss on the sale of fixed assets, COVID-19 related supplies, appraisals, directors fees and other miscellaneous expenses.

Income Taxes The tax effect of all income and expense transactions is recognized by the Company in each year’s consolidated statements of income, regardless of the year in which the transactions are reported for income tax purposes. The following table sets forth information regarding the Company’s tax provision and applicable tax rates for the periods indicated:
Table 21 - Tax Provision and Applicable Tax Rates
Three Months EndedNine Months Ended
 September 30September 30
 2020201920202019
 (Dollars in thousands)
Combined federal and state income tax provision$11,199 $17,036 $21,126 $38,565 
Effective income tax rate24.31 %24.73 %19.62 %24.68 %
Blended statutory tax rate27.89 %28.24 %27.89 %28.24 %

    The Company’s effective tax rate in 2020 is lower as compared to the year ago period primarily due to lower net income, as well as the impact of discrete items, which are subject to fluctuation year over year.  The discrete tax amounts for the nine months ended September 30, 2020 include a benefit of $4.7 million associated with the net operating loss (NOL) carryback provision of the CARES Act.  The NOL was generated in relation to the BHB acquisition.  Additionally, the Company fully realized tax credit benefits from the New Market Tax Credit program as of December 31, 2019. Therefore, the effective tax rate for the nine months ended September 30, 2020 reflects no benefit from these particular credits.  The effective tax rates in the table above are lower than the blended statutory tax rates due to the aforementioned discrete items as well as
99

Table of Contents
certain tax preference assets such as life insurance policies, tax exempt bonds, and federal tax credits. The Company’s blended statutory tax rate for the three months ended September 30, 2020 is comparable to the year ago period.


The Company invests in various low income housing projects, which are real estate limited partnerships that acquire, develop, own and operate low and moderate-income housing developments. As a limited partner in these operating partnerships, the Company will receive tax credits and tax deductions for losses incurred by the underlying properties. The investments are accounted for using the proportional amortization method and will be amortized over various periods through 2037, which represents the period that the tax credits and other tax benefits will be utilized. The total committed investment in these partnerships is $124.3 million, of which $76.9 million has been funded as of September 30, 2020. It is expected that the limited partnership investments will generate a net tax benefit of approximately $2.0 million for the full calendar year of 2020 and a total of $15.8 million over the remaining life of the investments from the combination of the tax credits and operating losses.
Risk Management
    
    The Board of Directors and management have identified significant risks which affect the Company, including credit risk, market risk, liquidity risk, price risk, operations risk, cybersecurity risk, consumer compliance risk, reputation risk, and strategic risk. The Board of Directors has approved an Enterprise Risk Management Policy, and management has adopted a Risk Appetite Statement that addresses each risk category.  Management reviews key risks and their mitigation on an ongoing basis and provides regular enterprise risk management reports to the Board of Directors. The Board of Directors, with the assistance of the Board’s Risk Committee, oversees management’s enterprise risk assessment and management.
Credit Risk   Credit risk is the possibility that customers or other counterparties may not repay loans or other contractual obligations according to their terms. While the collateral securing loans may be sufficient in some cases to recover the amount due, in other cases the Company may experience significant credit losses which could have an adverse effect on its operating results. The Company makes assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and counterparties and the value of collateral for the repayment of loans. For further discussion regarding the credit risk and the credit quality of the Company’s loan portfolio, see Note 4, “Loans, Allowance for Credit Losses and Credit Quality” to the Consolidated Financial Statements included in Part I. Item 1 of this Report.
Operations Risk    Operations risk is the risk of loss from the Company’s operations due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, natural disasters, and security risks. Potential operational risk exposure exists throughout the Company. The continued effectiveness of colleagues, technical systems, operational infrastructure, and relationships with key third party service providers are integral to mitigating operations risk, and any shortcomings subject the Company to risks that vary in size, scale and scope. Operations risks include, but are not limited to, operational or technical failures, unlawful tampering with technical systems, cyber security, terrorist activities, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or failure on the part of the key individuals to perform properly. Management maintains an Operations Risk Committee to assess and mitigate operations risk which contributes to periodic enterprise risk management reporting to the Board of Directors.
Compliance Risk    Compliance risk is the risk of regulatory sanctions or financial loss resulting from the failure to comply with rules and regulations issued by the various banking agencies, the U.S. Securities and Exchange Commission, the NASDAQ Stock Market, and good banking practices. Activities which may expose the Company to compliance risk include money laundering, privacy and data protection, adherence to laws and regulations, community reinvestment initiatives, and employment and tax matters. Compliance risk is mitigated through the use of written policies and procedures, staff training, and continuous monitoring of activities for adherence to policies and procedures. Management maintains a Compliance Committee to assess and mitigate compliance risk that contributes to periodic enterprise risk management reporting to the Board of Directors.
Strategic and Reputation Risk  Strategic and reputation risk is the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, and failure to assess current and new opportunities and threats in business, markets, and products. Management seeks to mitigate strategic and reputational risk through annual strategic planning, frequent executive review of strategic plan progress, ongoing competitive and technological observation, assessment processes of new products, new branches, and new business initiatives, adherence to ethical standards, a philosophy of customer advocacy, a structured process of customer complaint resolution, and ongoing reputational monitoring, crisis management planning, and management tools.
    
100

Table of Contents
    Market Risk Market risk is the sensitivity of income to changes in interest rates, equity prices, foreign exchange rates, commodity prices, and other market-driven rates or prices. The Company’s most significant market risk exposure is interest rate risk.
Interest rate risk is the sensitivity of income due to changes in interest rates. Interest rate changes, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, the Company’s primary source of revenue. Interest rate risk arises directly from the Company’s core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of securities and derivatives, and have other effects.
Management maintains an Asset Liability Committee to manage interest rate risk, which strives to control interest rate risk within limits approved by the Board of Directors that reflect the Company’s tolerance for interest rate risk over short-term and long-term horizons. The Company attempts to manage interest rate risk by identifying, quantifying, and, where appropriate, hedging exposure. If assets and liabilities do not re-price simultaneously and in equal volume, the potential for interest rate exposure exists. It is the Company's objective to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary, within limits management determines to be prudent, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors, and caps.
The Company quantifies its interest rate exposures using net interest income simulation models, as well as simpler gap analysis, and an Economic Value of Equity analysis. Key assumptions in these simulation analyses relate to behavior of interest rates and behavior of the Company’s deposit and loan customers. The most material assumptions relate to the prepayment of mortgage assets (including mortgage loans and mortgage-backed securities) and the life and sensitivity of non-maturity deposits (e.g., demand deposit, negotiable order of withdrawal, savings, and money market accounts). In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, interest rate sensitivity of loans cannot be determined exactly and actual behavior may differ from assumption.
Based upon the net interest income simulation models, the Company currently forecasts that the Bank’s assets re-price faster than the liabilities. As a result, the net interest income of the Bank will benefit as market rates increase, and contract if market rates decrease. The Company runs several scenarios to quantify and effectively assist in managing this position. These scenarios include instantaneous parallel shifts in market rates as well as gradual (12-24 months) shifts in market rates, and may also include other alternative scenarios as management deems necessary, given the interest rate environment.
The results of all scenarios and the impact to net interest income are outlined in the table below:
Table 22 - Interest Rate Sensitivity
 September 30
 20202019
Year 1(1)Year 2Year 1Year 2
Parallel rate shocks (basis points)
-100(0.8)%(9.9)%(3.2)%(7.3)%
+1006.0 %1.6 %3.2 %4.1 %
+20012.5 %11.0 %5.9 %8.8 %
+30019.4 %20.5 %8.4 %13.3 %
+40025.9 %29.5 %10.9 %17.6 %
Gradual rate shifts (basis points)
-100 over 12 months0.1 %(9.3)%(1.2)%(6.3)%
+200 over 12 months5.8 %8.5 %2.7 %7.3 %
+400 over 24 months5.8 %15.4 %2.7 %9.5 %
Alternative scenarios
Yield Curve Twist1.6 %2.9 %1.0 %4.7 %
(1)Baseline scenarios assume approximately 50% of PPP loans will be completely amortized or paid off during year 1.
101

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

    The most significant factors affecting market risk exposure of the Company’s net interest income during the nine months ended September 30, 2020 were the shape of the U.S. Government securities and interest rate swap yield curve, the U.S. prime interest rate and LIBOR rates, and the interest rates being offered on long-term fixed rate loans. Additionally, the full economic impact of the COVID-19 pandemic on these factors remains uncertain.

    The Company manages the interest rate risk inherent in both its loan and borrowing portfolios by using interest rate swap agreements and interest rate caps and floors. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount for a predetermined period of time from the other party. Interest rate caps and floors are agreements where one party agrees to pay a floating rate of interest on a notional principal amount for a predetermined period of time to a second party if certain market interest rate thresholds are realized. The amounts relating to the notional principal amount are not actually exchanged. Additionally, the Company may manage the interest rate risk inherent in its mortgage banking operations by entering into forward sales contracts. In an effort to mitigate that risk, forward delivery sales commitments are executed, under which the Company agrees to deliver whole mortgage loans to various investors. See Note 9, “Derivative and Hedging Activities” to the Consolidated Financial Statements included in Part I. Item 1 of this Report for additional information regarding the Company’s Derivative Financial Instruments.

    The Company’s earnings are not directly or materially impacted by movements in foreign currency rates or commodity prices. Movements in equity prices may have a modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related business lines. See Note 3, “Securities” to the Consolidated Financial Statements included in Part I. Item 1.
    
    Liquidity Risk    Liquidity risk is the risk that the Company will not have the ability to generate adequate amounts of cash in the most economical way to meet its ongoing obligations to pay deposit withdrawals, repay borrowings, and fund loans. The Company’s primary sources of funds are deposits, borrowings, and the amortization, prepayment, and maturities of loans and securities. The Bank utilizes its extensive branch network to access retail customers who provide a base of in-market core deposits. These funds are principally comprised of demand deposits, interest checking accounts, savings accounts, and money market accounts. Deposit levels are greatly influenced by interest rates, economic conditions, and competitive factors.
Management maintains an Asset Liability Committee to manage liquidity risk. The Company’s primary measure of short-term liquidity is the Total Basic Surplus/Deficit as a percentage of assets. This ratio, which is an analysis of the relationship between liquid assets plus available funding at the FHLB, less short-term liabilities relative to total assets, was within policy limits at September 30, 2020. The Total Basic Surplus/Deficit measure is affected primarily by changes in deposits, securities and short-term investments, loans, and borrowings. An increase in deposits, without a corresponding increase in nonliquid assets, will improve the Total Basic Surplus/Deficit measure, whereas, an increase in loans, with no increase in deposits, will decrease the measure. Other factors affecting the Total Basic Surplus/Deficit measure include collateral requirements at the FHLB, changes in the securities portfolio, and the mix of deposits.
The Bank seeks to increase deposits without adversely impacting the weighted average cost of those funds. As part of a prudent liquidity risk management practice, the Company maintains various liquidity sources, some of which are only accessed on a contingency basis. Accordingly, Management has implemented funding strategies that include FHLB advances, Federal Reserve Bank borrowing capacity, and repurchase agreement lines. These funding sources are a contingent source of liquidity and, when profitable lending and investment opportunities exist, access to them provides a means to grow the balance sheet.
Borrowing capacity at the FHLB and the Federal Reserve is impacted by the amount and type of assets available to be pledged. For example, a prime, one-to-four family, residential loan, may provide 75 cents of borrowing capacity for every $1.00 pledged, whereas, a commercial loan may provide a lower amount. As a result, the Company’s lending decisions can also affect its liquidity position.
The Company can raise additional funds through the issuance of equity or unsecured debt privately or publicly and has done so in the past. Additionally, the Company is able to enter into repurchase agreements or acquire brokered deposits at its discretion. The availability and cost of equity or debt on an unsecured basis is dependent on many factors. Some factors that
102

Table of Contents
will impact this source of liquidity are the Company’s financial position, the market environment, and the Company’s credit rating. The Company monitors the factors that could impact its ability to raise liquidity through these channels.
103

Table of Contents
As a result of PPP loan funding, government stimulus programs and a customer focus on retaining liquidity, the Company experienced significant growth in deposits and a buildup of liquidity through these sources. In addition to this excess liquidity as of September 30, 2020, the Company also maintains sufficient alternative sources of funding from which it may draw, if necessary. The table below shows current and unused liquidity capacity from various sources as of the dates indicated:
Table 23 - Sources of Liquidity
 September 30, 2020December 31, 2019
 OutstandingAdditional
Borrowing
Capacity
OutstandingAdditional
Borrowing  Capacity
 (Dollars in thousands)
Federal Home Loan Bank of Boston (1)$145,765 $1,302,139 $115,748 $1,557,559 
Federal Reserve Bank of Boston (2)— 1,371,686 — 954,748 
Unpledged Securities — 664,799 — 790,304 
Line of Credit — 50,000 — 50,000 
Long-term borrowing (3)37,447 — 74,906 — 
Junior subordinated debentures (3)62,850 — 62,848 — 
Subordinated debt (3)49,672 — 49,601 — 
Reciprocal deposits (3)232,443 — 211,213 — 
Brokered deposits (3)58,104 — 281,773 — 
$586,281 $3,388,624 $796,089 $3,352,611 
 
(1)Loans with a carrying value of $2.2 billion and $2.5 billion at September 30, 2020 and December 31, 2019, respectively, have been pledged to the Federal Home Loan Bank of Boston resulting in this additional unused borrowing capacity.
(2)Loans with a carrying value of $2.0 billion and $1.5 billion at September 30, 2020 and December 31, 2019, respectively, have been pledged to the Federal Reserve Bank of Boston resulting in this additional unused borrowing capacity.
(3)The additional borrowing capacity has not been assessed for these categories.
In addition to policies used for managing operational liquidity, the Board of Directors and management recognize the need to establish reasonable guidelines for managing through an environment of heightened liquidity risk. Catalysts for elevated liquidity risk can be Bank-specific issues and/or systemic industry-wide events. It is therefore the responsibility of management to institute systems and controls to provide advanced detection of potentially significant funding shortages, establish methods for assessing and monitoring risk levels, and institute prompt responses that may alleviate or circumvent a potential liquidity crisis. Management has established a Liquidity Contingency Plan to provide a framework for the Bank to help detect liquidity problems promptly and appropriately address potential liquidity problems in a timely manner. In a period of perceived heightened liquidity risk, the Liquidity Contingency Plan provides for the establishment of a Liquidity Crisis Task Force. The Liquidity Crisis Task Force is responsible for monitoring the potential for a liquidity crisis and for establishing and executing an appropriate response.
Off-Balance Sheet Arrangements There were no material changes in off-balance sheet financial instruments during the three months ended September 30, 2020.
See Note 9, "Derivative and Hedging Activities" and Note 14, "Commitments and Contingencies" to the Consolidated Financial Statements included in Part I. Item 1 for more information relating to the Company's other off-balance sheet financial instruments.
Contractual Obligations, Commitments, and Contingencies There were no material changes in contractual obligations, commitments, or contingencies during the three months ended September 30, 2020.
Refer to the 2019 Form 10-K for a complete table of contractual obligations, commitments and contingencies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information required by this Item 3 is included in the "Risk Management" section of Part I, Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations of this Report and is incorporated herein by reference.
104

Table of Contents
Item 4. Controls and Procedures
Conclusion Regarding the 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(e) promulgated under the Securities Exchange Act of 1934, as amended. 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 the end of the period covered by this quarterly report.
Changes in Internal Control over Financial Reporting. There were no changes in the Company's internal control over financial reporting that occurred during the third quarter of 2020 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. The Company has not experienced any material impact to the Company’s internal control 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 control over financial reporting to minimize any impact on the design and operating effectiveness.

PART II. OTHER INFORMATION

Item  1. Legal Proceedings
At September 30, 2020, the Bank was involved in pending lawsuits that arose in the ordinary course of business. Management has reviewed these pending lawsuits with legal counsel and has taken into consideration the view of counsel as to their outcome. In the opinion of management, the final disposition of pending lawsuits is not expected to have a material adverse effect on the Company’s financial position or results of operations.


Item 1A. Risk Factors

    The section titled Risk Factors in Part I, Item 1A of the 2019 Form 10-K includes a discussion of the many risks and uncertainties the Company faces, any one or more of which could have a material adverse effect on the Company's business, results of operations, or financial condition (including capital and liquidity). The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in the 2019 Form 10-K as well as any updated to our risk factors included in subsequent Quarterly Reports on Form 10-Q.
    Except as presented below, there have been no material changes to the risk factors described in the 2019 Form 10-K.
    The COVID-19 pandemic is adversely affecting the Company and its customers, counterparties, employees, and third-party service providers, and the full extent of the adverse impacts on the Company's business, financial position, results of operations, and prospects could be significant.
    The spread of COVID-19 has created a global public-health crisis that has resulted in widespread volatility and deteriorations in business, economic, and market conditions and household incomes, including in the Commonwealth of Massachusetts where the Company conducts nearly all of its business. The extent of the impact of the COVID-19 pandemic on the Company's capital and liquidity, and on its business, results of operations, financial position and prospects generally will depend on a number of evolving factors, including:
The duration, extent, and severity of the pandemic and any resurgences. COVID-19 has not yet been contained and could affect significantly more households and businesses. The duration and severity of the pandemic, including recent resurgences and the potential for seasonal or other resurgences after any containment, as well as the timing of any vaccine continue to be impossible to predict. Following any containment, there is also substantial uncertainty surrounding the pace of economic recovery and the return of business and consumer confidence.
The response of governmental and nongovernmental authorities. Many of the actions intended to contain the spread of COVID-19 have been directed toward curtailing household and business activity while simultaneously deploying fiscal- and monetary-policy measures to partially mitigate the adverse effects on individual households and businesses. These actions are not always coordinated or consistent across jurisdictions and, in general, have changed rapidly in scope and intensity, contributing to substantial market volatility.
The effect on the Company's customers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and uncertainties, including increased unemployment rates, are affecting individuals, households,
105

Table of Contents
and businesses differently and unevenly. Many, however, have changed their behavior in response to governmental mandates and advisories to sharply restrain commercial and social interactions and discretionary spending. As a result, in the near term, the Company's credit, operational, and other risks have generally increased and, for the foreseeable future, are expected to remain elevated or increase further.
The effect on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional, and local economies (including the local economies in the markets areas which the Company serves) and markets could suffer disruptions that are lasting. Governmental actions are meaningfully influencing the interest-rate environment and financial-market activity, which could adversely affect the Company's results of operations and financial condition.
    During the first nine months of 2020, the most notable impact to the Company's results of operations was a higher provision expense for credit losses. The Company's provision expense was $52.5 million for the nine months ended September 30, 2020, compared to $2.0 million in the comparable year ago period. With the continued spread of COVID-19 in the United States, the Company's forecast of macroeconomic conditions and operating results including expected lifetime credit losses on the Company's loan portfolio, is subject to meaningful uncertainty.
    Governments have taken unprecedented steps to partially mitigate the adverse effects of their containment measures. For example, on March 27, 2020, the CARES Act was enacted to inject more than $2 trillion of financial assistance into the U.S. economy. The FRB has taken decisive and sweeping actions as well. Since March 15, 2020, these have included a reduction in the target range for the federal funds rate to 0 to 25 basis points, a program to purchase an indeterminate amount of Treasury securities and agency mortgage-backed securities, and numerous facilities to support the flow of credit to households and businesses.
    The degree to which the Company's actions and those of governments and others will directly or indirectly assist the Company's customers, counterparties, and third-party service providers and advance the Company's business and the economy generally is not yet clear. For example, while the Company's loan-deferral programs may better position customers to resume their regular payments to the Company in the future and enhance the Company's brand and customer loyalty, these programs may negatively impact the Company's revenue and other results of operations at least in the near term, may produce a higher degree of enrollment and other requests for extensions and rewrites than the Company anticipated, and the Company may not be as successful as expected in managing credit risk. In addition, while the FRB’s accommodative monetary policy may benefit the Company to some degree by supporting economic activity among its customers, this policy and sudden shifts in it may inhibit the Company's ability to grow or sustain net interest income and effectively manage interest-rate risk.
    The Company is unable to estimate the near-term and ultimate impacts of COVID-19 on the Company's business and operations at this time. The pandemic could cause the Company to experience higher credit losses in its lending portfolio, additional increases in the allowance for credit losses, impairment of goodwill and other financial assets, diminished access to capital markets and other funding sources, further reduced demand for the Company's products and services, and other negative impacts on the Company's financial position, results of operations, and prospects. In addition, while the Company continues to anticipate that its capital and liquidity positions will be sufficient, sustained adverse effects may impair these positions, prevent the Company from satisfying its minimum regulatory capital ratios and other supervisory requirements, and result in downgrades in its credit ratings.
    The COVID-19 pandemic and related governmental mandates and advisories also have necessitated changes in the way the Company and its third party service providers continue operations, and the length of time that it may be required to operate under these circumstances, as well as the potential for conditions to worsen or for significant disruptions to occur, remains unpredictable. All of these risks and uncertainties can be expected to persist at least until the pandemic is demonstrably and sustainably contained, authorities cease curbing household and business activity, and consumer and business confidence recover. COVID-19 and the volatile economic conditions stemming from it could also precipitate or contribute to the other risk factors identified in the 2019 Form 10-K, which in turn could materially adversely affect the Company's business, financial position, results of operations, prospects, and its stock price, and may also affect the Company's business in a manner that is not presently known to it or that the Company currently does not consider to present significant risks to its business, financial position, results of operations or prospects.
    As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company is subject to additional risks of litigation from its customers or other parties regarding the processing of loans for the PPP and risks that the U.S. Small Business Administration (“SBA”) may not fund some or all PPP loan guaranties, which could have a significant adverse impact on the Company's business, financial position, results of operations, and prospects.

    The CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved
106

Table of Contents
regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. On April 16, 2020, the SBA notified lenders that the original $349.0 billion of funding under the PPP was exhausted, and on April 24, 2020, Congress allocated an additional $310.0 billion to the program. The Company participated as a lender in both rounds of the PPP. Through the third quarter of 2020, the Company has made over 6,100 PPP loans for a total of $811.7 million. In part because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was and continues to be some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company may be exposed to the risk of litigation, from both clients and non-clients that approached us regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company and is not resolved in a manner favorable to the Company, it may result in significant financial liability or adversely affect the Company's reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on the Company's business, financial position, results of operations and prospects.

    The Company may have a credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Company, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company, which could adversely impact the Company's business, financial position, results of operations and prospects.

107

Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) The following table sets forth information regarding the Company’s repurchases of its common stock during the three months ended September 30, 2020:
 Issuer Purchases of Equity Securities
 Total Number of Shares Purchased (1)Average Price Paid Per ShareTotal Number of
Shares Purchased as
Part of Publicly
Announced Plan or
Program (2)
Maximum Number of Shares That May Yet Be Purchased Under the Plan or Program (2)
Period
July 1 to July 31, 2020— $— — — 
August 1 to August 31, 2020— $— — — 
September 1 to September 30, 202043 $54.28 — — 
Total43 $54.28 — 
 
(1)Reflects shares withheld in connection with the exercise and/or vesting of equity compensation grants to satisfy related tax withholding obligations.
(2)On October 17, 2019, the Company announced that its Board of Directors authorized a share repurchase program of up to 1.5 million shares of the Company's common stock. All 1.5 million shares were repurchased under the program between January and April of 2020. Accordingly, the October 2019 share repurchase program is no longer in effect.

Item  3. Defaults Upon Senior Securities - None.

Item 4. Mine Safety Disclosures - Not Applicable.

Item 5. Other Information - None.

108

Table of Contents
Item 6. Exhibits

Exhibit Index
 
No.Exhibit
31.1
31.2
32.1
32.2
101The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
104Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101).

*Filed herewith
+Furnished herewith


109

Table of Contents
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.
INDEPENDENT BANK CORP.
(registrant)
 
November 5, 2020 /s/ Christopher Oddleifson
 Christopher Oddleifson
President and
Chief Executive Officer
(Principal Executive Officer)
 
November 5, 2020 /s/ Mark J. Ruggiero
 Mark J. Ruggiero
Chief Financial Officer
(Principal Financial Officer)

110