BOSTON PRIVATE FINANCIAL HOLDINGS, INC. As of and for the three months endedMarch 31, 2020 Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target," and similar expressions. These statements include, among others, statements regarding our strategy; evaluations of interest rate trends and future liquidity; expectations as to changes in assets, deposits and results of operations; the impact of the COVID-19 pandemic; future operations, market position and financial position; and prospects, plans and objectives of management. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond the Company's control. Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned "Risk Factors"; the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in general business and economic conditions on a national basis and in the local markets in which the Company operates; changes in customer behavior due to changing business and economic conditions or legislative or regulatory initiatives; continued turbulence in the capital and debt markets; changes in interest rates; increases in loan defaults and charge-off rates; decreases in the value of securities and other assets; changes in loan loss reserves; decreases in deposit levels necessitating increased borrowing to fund loans and investments; competitive pressures from other financial institutions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; changes in regulation; reputational risk relating to the Company's participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; risks that goodwill and intangibles recorded in the Company's financial statements will become impaired; the risk that the Company's deferred tax asset may not be realized; risks related to the identification and implementation of acquisitions, dispositions and restructurings; changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company's Annual Report on Form 10-K and updated in the Company's Quarterly Reports on Form 10-Q and other filings submitted to theSecurities and Exchange Commission . Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made 43 -------------------------------------------------------------------------------- Executive Summary The Company offers a wide range of private banking, wealth management, and trust services to high net worth individuals, families, businesses and select institutions through its two reportable segments: (i) Private Banking and (ii)Wealth Management and Trust . This Executive Summary provides an overview of the most significant aspects of the Company's operating segments and operations in the first quarter of 2020. Details of the matters addressed in this summary are provided elsewhere in this document and, in particular, in the sections immediately following. As of and for the three months ended March 31, 2020 2019 $ Change % Change (In thousands, except per share data) Total revenue$ 78,778 $ 83,586 $ (4,808) (6) % Provision/(credit) for loan losses 16,962 (1,426) 18,388 nm Total operating expense 60,908 60,553 355 1 % Net income before attribution to noncontrolling interests 806 19,542 (18,736) (96) % Net income attributable to noncontrolling interests 6 100 (94) (94) % Net income attributable to the Company 800 19,442 (18,642) (96) % Diluted earnings per share attributable to common shareholders$ 0.01 $ 0.25 $ (0.24) (96) % ASSETS UNDER MANAGEMENT AND ADVISORY ("AUM"): Wealth Management and Trust$ 13,497,000 $ 14,564,000 (1,067,000) (7) % Other 1,016,000 1,558,000 (542,000) (35) % Total AUM$ 14,513,000 $ 16,122,000 $ (1,609,000) (10) %
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nm = not meaningful Net income attributable to the Company was$0.8 million for the three months endedMarch 31, 2020 and$19.4 million for the same period of 2019. The Company recognized diluted earnings per share attributable to common shareholders of$0.01 and$0.25 for the three months endedMarch 31, 2020 and 2019, respectively. Key items that affected the Company's results in the first quarter of 2020 compared to the same period of 2019 include: ?Provision expense for loan losses increased$18.4 million to$17.0 million for the three months endedMarch 31, 2020 , compared to the same period of 2019. During the first quarter of 2020, the Company recognized a total provision for loan losses and unfunded loan commitments expense of$18.8 million , which includes a provision for loan loss expense of$17.0 million and$1.8 million for unfunded loan commitments, which is recognized as Other expense within Noninterest expense. The provision for loan losses in the first quarter of 2020 was primarily driven by changes in economic forecasts late in the first quarter of 2020 to reflect deteriorating economic conditions related to the COVID-19 pandemic. •Upon adoption of ASU 2016-13 onJanuary 1, 2020 , the Company recognized a decrease in the allowance for loan losses of$20.4 million , and an increase in the reserve for unfunded loan commitments of$1.4 million . The net, after-tax impact of the decrease in the allowance for loan losses and the increase in the reserve for unfunded loan commitments was an increase to Retained earnings of$13.5 million . ?Total revenue decreased$4.8 million , or 6%, to$78.8 million for the three months endedMarch 31, 2020 , compared to the same period of 2019 as described below. •Total fees and other income decreased$3.7 million , or 15%, to$21.5 million for the three months endedMarch 31, 2020 , compared to the same period of 2019. The decrease was primarily driven by lower Other income, Investment management fees, and Wealth management and trust fees. Total fees and other income represents 27% of Total revenue for the three months endedMarch 31, 2020 , compared to 30% of Total revenue for the same period of 2019. •Net interest income decreased$1.1 million , or 2%, to$57.3 million for the three months endedMarch 31, 2020 , compared to the same period of 2019. Net interest margin ("NIM") was 2.76% for the three months endedMarch 31, 2020 , a decrease of 14 basis points compared to the same period in 2019. The decreases in net interest income and NIM were primarily driven by the impact of recent rate cuts as lower interest on interest-earning assets was partially offset by lower funding costs. ?Total operating expenses increased$0.4 million , or 1%, to$60.9 million for the three months endedMarch 31, 2020 , compared to the same period of 2019. The increase was primarily driven by an increase in Other expense, Information systems, and Marketing and business development, partially offset by a restructuring charge of$1.6 million in the first 44 -------------------------------------------------------------------------------- quarter of 2019 as well as a decrease in Occupancy and equipment,FDIC insurance, and Salaries and employee benefits due to accrual adjustments. ?For the three months endedMarch 31, 2020 , total loans increased by$66.6 million , or 1%, while total deposits decreased$405.9 million , or 6%, from prior quarter. The Company's loan-to-deposit ratio was 103% as ofMarch 31, 2020 . Deposits are the Company's primary source of funds to originate loans. When the Company's loan-to-deposit ratio exceeds 100%, the Company relies on other funding sources such as FHLB borrowings or federal funds to fund loan growth. If the Company is unable to grow deposits in line with loan growth, we will evaluate other options such as slowing loan growth, selling a portion of portfolio loans, or originating mortgage loans as held-for-sale. The Company's Private Banking segment reported Net income attributable to the Company of$0.6 million in the first quarter of 2020, compared to$18.3 million for the same period of 2019. Net income attributable to the Company decreased$17.7 million , or 97%, from the same period in 2019 primarily driven by an increase of$18.4 million to the Provision for loan losses, a decrease of$3.4 million in Total revenue primarily due to lower Fees and other income, and an increase of$1.3 million in Operating expense primarily due to higher Other expense related to the reserve for unfunded loan commitments expense. The Company'sWealth Management and Trust segment reported Net income attributable to the Company of$2.0 million in the first quarter of 2020, compared to$2.5 million for the same period of 2019. The decrease of$0.4 million , or 18%, was primarily driven by a decrease of$0.7 million in Total revenue due to the impact of lower AUM on accounts that are billed based on AUM levels, partially offset by a decrease of$0.1 million in Total operating expense. The decrease in Total operating expense was primarily due to a$0.4 million restructuring charge in the first quarter of 2019, a decrease in Occupancy and equipment expense, and a decrease in Professional services expense, partially offset by an increase in Information systems expense and Salaries and employee benefits expense. Wealth Management and Trust AUM decreased$1.1 billion , or 7%, to$13.5 billion atMarch 31, 2020 from$14.6 billion atMarch 31, 2019 . The decrease in AUM was primarily driven by lost business of$1.2 billion and unfavorable market returns of$0.8 billion , partially offset by new business of$1.0 billion for the twelve months endedMarch 31, 2020 . Impact of the COVID-19 Pandemic The COVID-19 pandemic has caused substantial disruptions to the global economy and to the customers and communities that we serve. In response to the pandemic, we have implemented business continuity contingency plans, including company-wide remote working arrangements. We are also focused on supporting our clients who may be experiencing a financial hardship due to COVID-19, including participating in the SBA's PPP, offering loan deferrals and forbearance as needed, including our mortgage deferment program, and creating the Commercial real estate second loan program. We will continue to evaluate this fluid situation and take additional actions as necessary. See Part I. Item 1. "Notes to Unaudited Consolidated Financial Statements - Note 16: Subsequent events" for further details on the Company's participation in these programs. As ofMarch 31, 2020 , the COVID-19 pandemic did not have a material impact on the Company's financial condition, results of operations, or capital position other than the provision for loan loss expense discussed below. As described in Part II. Item 1A. "Risk Factors", the COVID-19 pandemic could have a material impact on the Company's financial condition, results of operations or capital position in the future. During the first quarter of 2020, the Company recognized a total provision for loan losses expense of$18.8 million for loans and off-balance sheet commitments driven by the changes in economic forecasts late in the first quarter of 2020 to reflect deteriorating economic conditions related to the COVID-19 pandemic. There have been no significant changes to judgments in determining the fair value of assets or liabilities, and there have been no material impairments of financial assets. The Company will continue to monitor the fair value of assets to determine if trigger events exist to warrant further impairment testing. Company-wide remote working arrangements have not adversely affected our ability to maintain operations, including financial reporting systems and internal controls over financial reporting. Regulatory Developments The CARES Act OnMarch 27, 2020 ,Congress passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to address the economic effects of the COVID-19 pandemic. •Paycheck Protection Program. The CARES Act appropriated$349 billion for "paycheck protection loans" through the PPP. The amount appropriated was subsequently increased to$659 billion . Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. As of the date of this filing, the Bank has initially approved approximately 1,100 PPP loans totaling approximately$425.0 million . In conjunction with the PPP, theBoard of Governors of theFederal Reserve System (the "Federal Reserve") has created a lending facility for qualified financial institutions. The Paycheck Protection Program Liquidity Facility (the "PPPLF") 45 -------------------------------------------------------------------------------- will extend credit to depository institutions with a term of up to two years at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility. •Troubled Debt Restructuring Relief. FromMarch 1, 2020 through the earlier ofDecember 31, 2020 or 60 days after the termination date of the national emergency declared by the President onMarch 13, 2020 concerning the COVID-19 outbreak (the "national emergency"), a financial institution may elect to suspend the requirements under accounting principles generally accepted in theU.S. for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a troubled debt restructured ("TDR"), including impairment accounting. The Company elected this accounting policy. This TDR relief is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as ofDecember 31, 2019 . Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable. In the first quarter of 2020, the Company initiated a mortgage loan deferment program in line with the preceding guidance. As ofMarch 31, 2020 , 10 loans totaling approximately$5.0 million were processed under this program. As of the date of this filing, the Bank has initially approved approximately 170 deferments for loans totaling approximately$90.0 million . •CECL Delay. Banks, savings associations, credit unions, bank holding companies and their affiliates are not required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016-13 ("Measurement of Credit Losses on Financial Instruments"), including the current expected credit losses methodology for estimating allowances for credit losses ("CECL"), from the date of the law's enactment until the earlier of the end of the national emergency orDecember 31, 2020 . OnMarch 27, 2020 , theFederal Reserve , theFederal Deposit Insurance Corporation (the "FDIC"), and theOffice of the Comptroller of the Currency issued an interim final rule that allows banking organizations that are required to adopt CECL this year to mitigate the estimated cumulative regulatory capital effects for up to two years. The relief afforded by the CARES Act and interim final rule is in addition to the three-year transition period already in place. The Company adopted CECL effectiveJanuary 1, 2020 . •Reduction of the Community Bank Leverage Ratio. The CARES Act reduced the community bank leverage ratio from 9% to 8% until the earlier of the end of the national emergency orDecember 31, 2020 . In response to the CARES Act, federal banking regulators set the community bank leverage ratio at 8% for the remainder of 2020, 8.5% for 2021 and 9% thereafter. •Revival of Bank Debt Guarantee Program. The CARES Act amends the Dodd-Frank Act to provide theFDIC with the authority to guarantee bank-issued debt and noninterest-bearing transaction accounts that exceed theFDIC's $250,000 limit throughDecember 31, 2020 . TheFDIC has discretion to determine whether and how to exercise this authority. •Forbearance. The CARES Act codifies in part recent guidance from state and federal regulators and government-sponsored enterprises, including the 60-day suspension of foreclosures on federally-backed mortgages and requirements that servicers grant forbearance to borrowers affected by COVID-19. •Moratorium on Negative Credit Reporting. Any furnisher of credit information that agrees to defer payments, forbear on any delinquent credit or account, or provide any other relief to consumers affected by the COVID-19 pandemic must report the credit obligation or account as current if the credit obligation or account was current before the accommodation. Massachusetts COVID-19 Emergency Legislation OnApril 20, 2020 , legislation enacted inMassachusetts in response to the COVID-19 emergency declared byGovernor Baker was signed into law by the Governor. The legislation establishes a temporary moratorium on foreclosures on one- to four-family, owner occupied residential real estate inMassachusetts . The legislation also requires a creditor to grant to a borrower of a mortgage loan secured by one- to four-family, owner occupied residential real estate inMassachusetts a forbearance of up to 180 days, if requested by the borrower, who must affirm that the borrower has experienced a financial impact from the COVID-19 pandemic. A borrower is entitled to request a forbearance while the legislation is in effect even if the borrower is already in default. In connection with a forbearance, a creditor may not charge fees, penalties or interest beyond the amounts scheduled and calculated as if the borrower made all contractual payments on time and in full under the terms of the relevant loan agreement. The legislation specifies that a payment subject to forbearance shall be added to the end of the term of the loan unless otherwise agreed by the parties. The legislation also prohibits a creditor from furnishing negative information to a consumer reporting agency related to mortgage payments subject to forbearance. Because the legislation was enacted on an emergency basis, it went into effect immediately upon being signed into law. The legislation provides that the temporary moratorium on foreclosures expires 120 days after the effective date of the legislation, which isAugust 18, 2020 , or 45 days after the COVID-19 emergency declaration has been lifted, whichever is sooner, but the Governor may extend the moratorium in increments of up 90 days as long as the moratorium ends not later than 45 days after the COVID-19 emergency declaration has been lifted. A borrower may request a forbearance under the legislation at any time while the foreclosure moratorium is in effect. Forbearances, if any, granted under theMassachusetts legislation to borrowers who are currently in default may not qualify for the reporting exclusion as a TDR or delinquency status as was provided under the national guidance from regulators. 46 -------------------------------------------------------------------------------- Critical Accounting Policies Critical accounting policies reflect significant judgments and uncertainties, which could potentially result in materially different results under different assumptions and conditions. The Company believes that its most critical accounting policies upon which its financial condition depends, which involve the most complex or subjective decisions or assessments, are the allowance for loan losses, the valuation of goodwill and intangible assets and the analysis for impairment, and income tax estimates. These policies are discussed in Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . There was one change to these policies through the filing of this Quarterly Report on Form 10-Q. Upon the adoption of ASU 2016-13, Financial Instruments (Topic 326) ("ASU 2016-13") onJanuary 1, 2020 , management's policy and processes for the allowance for loan losses has changed. The updates in this standard replace the incurred loss impairment methodology in current GAAP with a CECL model methodology. The CECL model methodology incorporates current conditions, and "reasonable and supportable" forecasts, as well as prepayments to estimate loan losses over the life of loan. See Part I. Item 1. "Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses" for further discussion on the new policy and processes. Results of operations for the three months endedMarch 31, 2020 versusMarch 31, 2019 Net Income. The Company recorded Net income before attribution to noncontrolling interests for the three months endedMarch 31, 2020 of$0.8 million , compared to$19.5 million for the same respective period in 2019. Net income attributable to the Company for the three months endedMarch 31, 2020 was$0.8 million , compared to$19.4 million for the same period in 2019. The Company recognized Diluted EPS attributable to common shareholders for the three months endedMarch 31, 2020 of$0.01 per share, compared to$0.25 per share for the same period in 2019. Net income attributable to the Company for 2020 and 2019 was positively impacted by decreases in the redemption value of certain redeemable noncontrolling interests, which increases Net income available to common shareholders. See Part I. Item 1. "Notes to Unaudited Consolidated Financial Statements - Note 2: Earnings Per Share" for further detail on these charges to income available to common shareholders. The following table presents selected financial highlights: Three months ended March 31, $ % 2020 2019 Change Change (In thousands) Net interest income$ 57,257 $ 58,338 $ (1,081) (2) % Fees and other income 21,521 25,248 (3,727) (15) % Total revenue 78,778 83,586 (4,808) (6) % Provision/(credit) for loan losses 16,962 (1,426) 18,388 nm Operating expense 60,908 60,553 355 1 % Income tax expense 102 4,917 (4,815) (98) % Net income before attribution to noncontrolling interests 806 19,542 (18,736)
(96) %
Less: Net income attributable to noncontrolling interests 6 100 (94) (94) % Net income attributable to the Company $ 800$ 19,442 $ (18,642) (96) % _____________________ nm = not meaningful Net interest income. Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. NIM is the amount of net interest income expressed as a percentage of average interest-earning assets. The average rate earned on interest-earning assets is the amount of annualized interest income expressed as a percentage of average interest-earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities. When credit quality declines and loans are placed on nonaccrual status, NIM can decrease because the same assets are earning less income. Loans graded as substandard but still accruing interest income totaled$87.9 million atMarch 31, 2020 and could be placed on nonaccrual status if their credit quality declines further. Net interest income for the three months endedMarch 31, 2020 was$57.3 million , a decrease of$1.1 million , or 2%, compared to the same period in 2019. The decrease was primarily driven by the impact of recent rate cuts as lower interest on interest-earning assets was partially offset by lower funding costs. NIM was 2.76% for the three months endedMarch 31, 2020 , a decrease of 14 basis points compared to the same period in 2019. The decrease in NIM was also primarily driven by the impact of recent rate cuts as lower interest on interest-earning assets was partially offset by lower funding costs. 47 --------------------------------------------------------------------------------
The following tables present the composition of the Company's NIM for the three
months ended
Average Balance Interest Income/Expense Average Yield/Rate (1)
As of and for the three months ended March 31,
AVERAGE BALANCE SHEET: 2020 2019 2020 2019 2020 2019
AVERAGE ASSETS (In thousands)
Interest-earning assets:
Cash and investments: (2)
Taxable investment securities $ 201,174 $ 244,230 $ 868 $ 1,185 1.73 % 1.94 %
Non-taxable investment securities 315,681 306,868 1,998 1,901 2.53 % 2.48 %
Mortgage-backed securities 520,629 521,788 2,787 2,897 2.14 % 2.22 %
Short-term investments and other 147,482 79,603 1,071 908 2.89 % 4.58 %
Total cash and investments 1,184,966 1,152,489 6,724 6,891 2.27 % 2.39 %
Loans: (3)
Commercial and industrial 1,148,986 1,070,161 10,724 10,979 3.69 % 4.10 %
Commercial real estate 2,582,305 2,398,413 27,482 28,151 4.21 % 4.69 %
Construction and land 233,324 211,351 2,572 2,641 4.36 % 5.00 %
Residential 2,850,833 2,972,945 23,468 25,545 3.29 % 3.44 %
Home equity 86,048 90,646 952 1,121 4.45 % 5.02 %
Other consumer 132,237 133,937 1,160 1,496 3.53 % 4.53 %
Total loans 7,033,733 6,877,453 66,358 69,933 3.75 % 4.07 %
Total earning assets 8,218,699 8,029,942 73,082 76,824 3.54 % 3.83 %
LESS: Allowance for loan losses 51,730 75,537
Cash and due from banks (non-interest
bearing) 49,571 46,172
Other assets 562,851 493,148
TOTAL AVERAGE ASSETS $ 8,779,391 $ 8,493,725
AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW $ 638,926 $ 674,872 $ 232 $ 296 0.15 % 0.18 %
Money market 3,753,045 3,341,397 9,657 10,072 1.03 % 1.22 %
Certificates of deposit 668,818 775,817 2,907 3,690 1.75 % 1.93 %
Total interest-bearing deposits 5,060,789 4,792,086 12,796 14,058 1.02 % 1.19 %
Junior subordinated debentures 106,363 106,363 917 1,121 3.41 % 4.22 %
FHLB borrowings and other 455,813 615,985 2,112 3,307 1.83 % 2.15 %
Total interest-bearing liabilities 5,622,965 5,514,434 15,825 18,486 1.13 % 1.36 %
Non-interest bearing demand deposits 2,046,102 1,974,526
Payables and other liabilities 270,371 236,426
Total average liabilities 7,939,438 7,725,386
Redeemable noncontrolling interests 1,018 2,056
Average shareholders' equity 838,935 766,283
TOTAL AVERAGE LIABILITIES, RNCI, AND
SHAREHOLDERS' EQUITY $ 8,779,391 $ 8,493,725
Net interest income $ 57,257 $ 58,338
Interest rate spread 2.41 % 2.47 %
NIM 2.76 % 2.90 %
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(1) Annualized.
(2) Investments classified as available-for-sale and held-to-maturity are shown
in the average balance sheet at amortized cost.
(3) Includes loans held for sale and nonaccrual loans.
Interest and dividend income. Total interest and dividend income for the three
months ended March 31, 2020 was $73.1 million , a decrease of $3.7 million , or
5%, compared to the same period in 2019. The decrease was primarily driven by
lower yields on loans and investments, partially offset by a higher volume of
loans and investments.
The Bank generally has interest related to nonaccrual loans that is either
collected or reversed each quarter. When a loan is placed on nonaccrual, the
interest income previously accrued but uncollected, is reversed which will have
a negative effect on the related yield. Interest collected on loans while on
nonaccrual status is generally applied to the principal balance. If
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a nonaccruing loan pays off, previously collected interest income that was
applied to principal may be recorded as interest income if the principal balance
was paid in full. Based on the net amount collected or reversed, the impact on
interest income and related yields can be either positive or negative. In
addition, the Bank collects prepayment penalties on certain commercial loans
that pay off prior to maturity which could also impact interest income and
related yields positively. The amount and timing of prepayment penalties varies
from quarter to quarter.
Interest income on commercial and industrial loans (including commercial loans
and commercial tax-exempt loans) for the three months ended March 31, 2020 was
$10.7 million , a decrease of $0.3 million , or 2%, compared to the same period in
2019, as a result of a 41 basis point decrease in the average yield, partially
offset by a 7% increase in the average balance. The decrease in the average
yield was the result of lower yields on recent loan originations and decreases
to the interest rate benchmarks to which the variable rate loans are tied. The
increase in the average balance was related primarily to growth in all regions
in which the Bank operates.
Interest income on commercial real estate loans for the three months ended
March 31, 2020 was $27.5 million , a decrease of $0.7 million , or 2%, compared to
the same period in 2019, as a result of a 48 basis point decrease in the average
yield, partially offset by an 8% increase in the average balance. The decrease
in the average yield was the result of lower yields on recent loan originations
and decreases to the interest rate benchmarks to which the variable rate loans
are tied. The increase in the average balance was primarily driven by organic
growth in the Southern California and Northern California regions.
Interest income on construction and land loans for the three months ended
March 31, 2020 was $2.6 million , a decrease of $0.1 million , or 3%, compared to
the same period in 2019, as a result of a 64 basis point decrease in the average
yield partially offset by a 10% increase in the average balance. The overall
yields on construction and land loans fluctuate due to the short-term nature of
the loans and the related impact of draws and payoffs. Due to the relatively low
balances in construction and land loans, a large draw- or pay-down can result in
a significant change in the overall yield depending on the interest rate of the
particular loans that caused the balance changes. The decrease in the average
yield was primarily driven by decreases to the interest rate benchmarks to which
the variable rate loans are tied. The increase in the average balance was driven
primarily by increased utilization of existing loans in the Southern California
and New England regions.
Interest income on residential mortgage loans for the three months ended
March 31, 2020 was $23.5 million , a decrease of $2.1 million , or 8%, from the
same period in 2019, as a result of a 15 basis point decrease in the average
yield and 4% decrease in the average balance. The decrease in the average yield
was the result of lower yields on recent loan originations and decreases to the
interest rate benchmarks to which the variable rate loans are tied. The decrease
in the average balance was primary driven by the sale of $190.7 million of
residential loans in the third and fourth quarters of 2019.
Interest income on home equity loans for the three months ended March 31, 2020
was $1.0 million , a decrease of 15% compared to the same period in 2019, as a
result of a 57 basis point decrease in the average yield and a 5% decrease in
the average balance. The decrease in the average yield was the result of the
timing of changes to benchmark interest rates, while the decrease in the average
balance was primarily driven by reduced demand.
Interest income on other consumer loans for the three months ended March 31,
2020 was $1.2 million , a decrease of $0.3 million , or 22%, compared to the same
period in 2019, as a result of a 100 basis point decrease in the average yield,
and a 1% decrease in the average balance. The decrease in the average yield was
the result of the timing of changes in interest rate benchmarks to which loans
are tied, while the decrease in the average balance was primarily driven by
strategic decisions to run off non-core balances.
Investment income for the three months ended March 31, 2020 was $6.7 million , a
decrease of $0.2 million , or 2%, from the same period in 2019, as a result of a
12 basis point decrease in the average yield, partially offset by a 3% increase
in the average balance. The decrease in the average yield is primarily due to
recent purchases made at lower interest rates. The increase in the average
balance was primarily due to short-term fluctuations in liquidity from deposits.
Interest expense. Total interest expense for the three months ended March 31,
2020 was $15.8 million , a decrease of $2.7 million , or 14%, compared to the same
period in 2019. The decrease was primarily driven by the impact of lower rates
on interest-bearing deposits and borrowings, and a decrease in the average
volume of borrowings, partially offset by an increase in the volume of
interest-bearing deposits.
Interest expense on interest-bearing deposits for the three months ended
March 31, 2020 was $12.8 million , a decrease of $1.3 million , or 9%, compared to
the same period in 2019, as a result of a 17 basis point decrease in the average
rate, partially offset by a 6% increase in the average balance. The decrease in
the average rate paid on deposits was driven primarily by wholesale reductions
in rates paid for deposit accounts given the recent decreases in interest rates.
The increase in the average balance for interest-bearing deposits was primarily
driven by an increase in money market balances in the New England region.
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Interest paid on non-deposit interest-bearing liabilities for the three months
ended March 31, 2020 was $3.0 million , a decrease of $1.4 million , or 32%,
compared to the same period in 2019, as a result of a 32 basis point decrease in
the average rate paid on FHLB borrowings and other borrowings, a 26% decrease in
the average balance of FHLB borrowings and other borrowings, and an 81 basis
point decrease in the average rate on junior subordinated debentures. The
decreases in the average rates paid were primarily driven by the decreases in
benchmark interest rates to which the instruments are tied. The decrease in the
average balance for non-deposit interest-bearing liabilities was primarily
driven by an increase in deposits, reducing the need for higher-cost borrowings.
Provision/(credit) for loan losses. The Company recorded a Provision for loan
losses of $17.0 million for the three months ended March 31, 2020 , compared to a
credit to the Provision for loan losses of $1.4 million for the same period in
2019. The provision for loan losses in the first quarter of 2020 was primarily
driven by changes in economic forecasts late in the first quarter of 2020 to
reflect deteriorating economic conditions due to the COVID-19 pandemic. Under
the CECL methodology, the provision for loan loss required may be significantly
affected by reasonable and supportable economic forecasts. Under the CECL
methodology, the provision for loan loss required may be significantly affected
by reasonable and supportable economic forecasts.
The provision/(credit) for loan losses is determined as a result of the required
level of the allowance for loan losses, estimated by management, which reflects
the inherent risk of loss in the loan portfolio as of the balance sheet dates.
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
probability of default and loss given default, which are derived from a selected
peer group's historical default and loss experience. The model estimates
expected credit losses using loan level data over the contractual life of the
exposure, considering the effect of prepayments and curtailments. 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. Qualitative factors are estimated by management and include
trends in problem loans, strength of management, concentration risk and
underwriting standards. For further details, see "Loan Portfolio and Credit
Quality" below. For periods disclosed prior to the adoption of ASU 2016-13 as of
January 1, 2020 , the Allowance for loan losses was determined under the incurred
loss model. Refer to "Note 1: Basis of Presentation and Summary of Significant
Account Policies" in the Company's Annual Report on Form 10-K for the year ended
December 31, 2019 for a description of the methodology.
Fees and other income
Three months ended March 31, $ %
2020 2019 Change Change
(In thousands)
Wealth management and trust fees $ 18,371 $ 19,058 $ (687) (4) %
Investment management fees 1,925 2,650 (725) (27) %
Other banking fee income 2,490 2,499 (9) - %
Gain on sale of loans, net 100 73 27 37 %
Total core fees and income 22,886 24,280 (1,394) (6) %
Total other income (1,365) 968 (2,333) nm
Total fees and other income $ 21,521 $ 25,248 $ (3,727) (15) %
_____________________
nm = not meaningful
Total fees and other income for the three months ended March 31, 2020 decreased
$3.7 million , or 15%, compared to the same period in 2019 driven by lower Total
other income, lower Wealth management and trust fees, and lower Investment
management fees. The decrease in Wealth management and trust fees and Investment
management fees was driven by the impact of lower AUM.
•Wealth management and trust fees for the three months ended March 31, 2020
decreased $0.7 million , or 4%, compared to the same period in 2019, while
Investment management fees decreased $0.7 million , or 27%, compared to the same
period in 2019. The decreases were primarily driven by the impact of lower AUM.
•Total AUM managed or advised by the Company was $14.5 billion at March 31,
2020 , a decrease of $1.6 billion , or 10%, compared to March 31, 2019 . The
decrease was primarily driven by the impact of negative market returns of $1.1
billion and net outflows of $0.5 billion for the twelve months ended March 31,
2020 .
•Total other income for the three months ended March 31, 2020 decreased $2.3
million compared to the same period in 2019 driven by the impact of unfavorable
mark-to-market adjustments of $0.8 million for derivatives and $0.8 million for
deferred compensation securities in the first quarter of 2020.
50
--------------------------------------------------------------------------------Operating Expense
Three months ended March 31, $ %
2020 2019 Change Change
(In thousands)
Salaries and employee benefits $ 35,096 $ 35,726 $ (630) (2) %
Occupancy and equipment 7,646 8,348 (702) (8) %
Information systems 6,725 5,860 865 15 %
Professional services 3,601 3,560 41 1 %
Marketing and business development 1,890 1,085 805 74 %
Amortization of intangibles 715 672 43 6 %
FDIC insurance - 660 (660) (100) %
Restructuring - 1,646 (1,646) (100) %
Other 5,235 2,996 2,239 75 %
Total operating expense $ 60,908 $ 60,553 $ 355 1 %
Total operating expense for the three months ended March 31, 2020 increased $0.4
million , or 1%, to $60.9 million compared to the same period in 2019. The
increase was primarily due to an increase in Other expense, Information systems
expense, and Marketing and business development expense, partially offset by a
decrease in Restructuring expense, Occupancy and equipment expense, FDIC
insurance expense, and Salaries and employee benefits expense.
•Other expense increased $2.2 million , or 75%, for the three months ended
March 31, 2020 , compared to the same period in 2019. The increase was primarily
driven by the reserve for unfunded loan commitments expense of $1.8 million in
the first quarter of 2020, and an increase in non-service pension costs.
•Information systems expense increased $0.9 million , or 15%, for the three
months ended March 31, 2020 , compared to the same period in 2019. The increase
was primarily driven by new information technology initiatives placed into
service during the fourth quarter of 2019.
•Marketing and business development expense increased $0.8 million , or 74%, for
the three months ended March 31, 2020 , compared to the same period in 2019. The
increase was primarily driven by new advertising campaigns and timing of spend.
•Restructuring expense decreased for the three months ended March 31, 2020 ,
compared to the same period of 2019. In the first quarter of 2019, there was a
restructuring expense of $1.6 million related to executive departures.
•Occupancy and equipment expense decreased $0.7 million , or 8%, for the three
months ended March 31, 2020 , compared to the same period in 2019. The decrease
was primarily driven by a decrease in depreciation expense on leasehold
improvements and a decrease in rent expense due to lease expirations.
•FDIC insurance decreased for the three months ended March 31, 2020 , compared to
the same period in 2019. The decrease was driven by an FDIC insurance assessment
credit received in the first quarter of 2020. In January 2019 , the Bank received
notification from the FDIC that it was eligible for small bank assessment
credits of $2.0 million because the FDIC's Deposit Insurance Fund reserve ratio
exceeded the target level. The full $2.0 million of credits have been utilized
as of March 31, 2020 .
•Salaries and employee benefits expense decreased $0.6 million , or 2%, for the
three months ended March 31, 2020 , compared to the same period in 2019. The
decrease was primarily driven by an unfavorable adjustment on deferred
compensation securities held in the rabbi trust, the effect of accrual
adjustments, and lower medical insurance premiums, partially offset by higher
salary expense in the first quarter of 2020.
Income Tax Expense. Income tax expense for the three months ended March 31, 2020
was $0.1 million , compared to $4.9 million for the same period in 2019. The
effective tax rate for the three months ended March 31, 2020 was 11.2%, compared
to an effective tax rate of 20.1% for the same period of 2019. See Part I. Item
1. "Notes to Unaudited Consolidated Financial Statements - Note 9: Income Taxes"
for further detail.
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