The following analysis discusses the changes in financial condition and results of operation ofCambridge Bancorp (together with its bank subsidiary, unless the context otherwise requires, the "Company") and should be read in conjunction with Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , (the "2019 Form 10-K"), filed with theSecurities and Exchange Commission (the "SEC") onMarch 17, 2020
Forward-Looking Statements
This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements about the Company and its industry involve substantial risks and uncertainties. Statements other than statements of current or historical fact, including statements regarding the Company's future financial condition, results of operations, business plans, liquidity, cash flows, projected costs, and the impact of any laws or regulations applicable to the Company, are forward-looking statements. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "plans," "projects," "may," "will," "should," and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:
• national, regional and local economic conditions may be less favorable than
expected, resulting in, among other things, increased charge-offs of loans,
higher provisions for credit losses and/or reduced demand for the Company's
services;
• disruptions to the credit and financial markets, either nationally or
globally;
• the duration and scope of the coronavirus disease 2019 ("COVID-19") pandemic
and its impact on levels of consumer confidence;
• actions governments, businesses and individuals take in response to the
COVID-19 pandemic;
• the impact of the COVID-19 pandemic and actions taken in response to the
pandemic on global and regional economies and economic activity; • the pace of recovery when the COVID-19 pandemic subsides;
• weakness in the real estate market, including the secondary residential
mortgage market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, and profits on sales of mortgage loans;
• legislative, regulatory or accounting changes, including changes resulting
from the adoption and implementation of the Dodd-Frank Act, which may
adversely affect our business and/or competitive position, impose additional
costs on the Company or cause us to change our business practices;
• the Dodd-Frank Act's consumer protection regulations which could adversely
affect the Company's business, financial condition or results of operations;
• disruptions in the Company's ability to access capital markets which may
adversely affect its capital resources and liquidity;
• the Company's heavy reliance on communications and information systems to
conduct its business and reliance on third parties and affiliates to provide
key components of its business infrastructure, any disruptions of which
could interrupt the Company's operations or increase the costs of doing
business;
• that the Company's financial reporting controls and procedures may not
prevent or detect all errors or fraud;
• the Company's dependence on the accuracy and completeness of information
about clients and counterparties;
• the fiscal and monetary policies of the federal government and its agencies;
• the failure to satisfy capital adequacy and liquidity guidelines applicable
to the Company; • downgrades in the Company's credit rating;
• changes in interest rates which could affect interest rate spreads and net
interest income;
• costs and effects of litigation, regulatory investigations or similar
matters;
• the inability to realize expected cost savings or implement integration
plans and other adverse consequences associated with the merger with Optima
• the inability to realize expected cost savings or to implement integration
plans and other adverse consequences associated with the merger withWellesley Bancorp, Inc. ("Wellesley"); 39
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• a failure by the Company to effectively manage the risks the Company faces,
including credit, operational and cyber security risks;
• increased pressures from competitors (both banks and non-banks) and/or an
inability of the Company to remain competitive in the financial services
industry, particularly in the markets which the Company serves, and keep pace with technological changes;
• unpredictable natural or other disasters, which could adversely impact the
Company's customers or operations;
• a loss of customer deposits, which could increase the Company's funding
costs;
• the disparate impact that can result from having loans concentrated by loan
type, industry segment, borrower type or location of the borrower or collateral; • changes in the creditworthiness of customers;
• increased credit losses or impairment of goodwill and other intangibles;
• negative public opinion which could damage the Company's reputation and
adversely impact business and revenues; • the Company depends on the expertise of key personnel, and if these
individuals leave or change their roles without effective replacements,
operations may suffer; • the Company may not be able to hire or retain additional qualified
personnel, including those acquired in previous acquisitions, and recruiting
and compensation costs may increase as a result of turnover, both of which
may increase costs and reduce profitability and may adversely impact the Company's ability to implement the Company's business strategies; and
• changes in the Company's accounting policies or in accounting standards
which could materially affect how the Company reports financial results and
condition.
Except as required by law, the Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. You are cautioned not to place undue reliance on these forward-looking statements.
OVERVIEW
Cambridge Bancorp (together with its bank subsidiary, unless the context otherwise requires, the "Company") is aMassachusetts state-chartered, federally registered bank holding company headquartered inCambridge, Massachusetts . The Company is aMassachusetts corporation formed in 1983 and has one bank subsidiary:Cambridge Trust Company (the "Bank"), formed in 1890. As ofJune 30, 2020 , the Company had total assets of approximately$4.0 billion . The Bank operates 22 full-service banking offices in 14 cities and towns inEastern Massachusetts andSoutheastern New Hampshire . As a private bank, we focus on four core services that center around client needs. Our core services include Wealth Management, Commercial Banking, Residential Lending, and Personal Banking. The Bank's customers consist primarily of consumers and small- and medium-sized businesses in these communities and surrounding areas throughoutMassachusetts andNew Hampshire . The Company'sWealth Management Group has six offices, one inWellesley , two inBoston, Massachusetts and three inNew Hampshire inConcord ,Manchester , andPortsmouth . As ofJune 30, 2020 , the Company had Assets under Management and Administration of approximately$3.7 billion .The Wealth Management Group offers comprehensive investment management, as well as trust administration, estate settlement, and financial planning services. Our wealth management clients value personal service and depend on the commitment and expertise of our experienced banking, investment, and fiduciary professionals.The Wealth Management Group customizes its investment portfolios to help its clients meet their long-term financial goals while moderating short-term stock market volatility. Through careful monitoring of asset allocation and disciplined security selection, the Bank's in-house investment team provides clients with long-term capital growth while minimizing risk. Our internally developed, research-driven process is managed by our team of portfolio managers and analysts. We build discretionary portfolios consisting of our best investment ideas, focusing on individual global equities, fixed income securities, exchange-traded funds, and mutual funds. Our team-oriented approach fosters spirited discussion and rigorous evaluation of investments. The Company offers a wide range of services to commercial enterprises, non-profit organizations, and individuals. The Company emphasizes service to consumers and small- and medium-sized businesses in its market area. The Company makes commercial loans, commercial real estate loans, construction loans, consumer loans, and real estate loans (including one-to-four family and home equity lines of credit), and accepts savings, money market, time, and demand deposits. In addition, the Company offers a wide range of commercial and personal banking services which include cash management, online banking, mobile banking, and global payments. 40
-------------------------------------------------------------------------------- The Company's results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings, and non-interest income largely from its wealth management services. The results of operations are affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for credit losses, the impact of federal and state income taxes, the relative levels of interest rates, and local and national economic activity. Through the Bank, the Company focuses on wealth management, the commercial banking business, and private banking for clients, including residential lending and personal banking. Within the commercial loan portfolio, the Company has traditionally been a commercial real estate lender and in recent years has diversified commercial operations within the areas of commercial and industrial lending to include Innovation Banking, which specializes in working withNew England -based entrepreneurs, and asset-based lending that helps companies throughoutNew England andNew York grow by borrowing against existing assets. The Innovation Banking group has a narrow client focus for lending and provides a local banking option for technology and entrepreneurial companies within our market area that are primarily serviced by out-of-market institutions. Personal banking focuses on providing exceptional service to clients and in deepening relationships. Merger withWellesley OnJune 1, 2020 , the Company completed its merger withWellesley , adding 6 banking offices inMassachusetts . The Company paid total consideration of$88.8 million , which consisted of 1,502,814 shares ofCambridge Bancorp common stock issued toWellesley shareholders. The transaction included the acquisition of$870.0 million loans and the assumption of$760.9 million in deposits, each at fair value.
Critical Accounting Policies
Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. The Company considers allowance for credit losses and income taxes to be its critical accounting policies. Allowance for Credit Losses. The Company adopted ASU-2016-13 - Financial Instruments - Credit Losses ("Topic 326"): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") during the first quarter of 2020. ASU 2016-13, which has been codified under Topic 326, replaced the previous GAAP method of calculating loan losses. Previously, GAAP required the use of the incurred loss methodology versus ASU 2016-13 which utilizes expected loss methodology. The use of an expected loss methodology, referred to as the current expected credit loss ("CECL") methodology, requires institutions to account for potential losses that previously would not have been part of the calculation. The CECL methodology incorporates forecasting in addition to historical and current measures utilized in the prior incurred loss methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables, held to maturity and available for sale debt securities. Under the CECL methodology, the allowance for credit losses ("ACL") consists of quantitative and qualitative components. The quantitative component of the ACL is model based and utilizes a forward-looking macroeconomic forecast, complemented by a qualitative component in estimating expected credit losses. The qualitative component of the ACL considers (i) the uncertainty of forward-looking scenarios; (ii) certain portfolio characteristics, such as portfolio concentrations, real estate values, changes in the number and amount of nonaccrual and past due loans; and (iii) model limitations; among other factors. ASU 2016-13 also applies to off-balance sheet credit exposure not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees and other similar investment) and net investments in leases recognized by a lessor in accordance with ASU 2016-02-Leases (Topic 842). Losses on loan receivables are estimated and recognized upon origination of the loan, based on expected credit losses for the life of the loan balance as of the period end date. The Company uses a discounted cash flow method incorporating probability of default and loss given default forecasted based on statistically derived economic variable loss drivers combined with qualitative factors to estimate expected credit losses. This process includes estimates which involve modeling loss projections attributable to existing loan balances, considering historical experience, current conditions and future expectations for homogeneous pools of loans over the reasonable and supportable forecast period. 41
-------------------------------------------------------------------------------- We also perform a qualitative assessment beyond model estimates, and apply qualitative adjustments as management deems necessary. The reasonable and supportable forecast period is determined based upon the accuracy level of historical loss forecast estimates, the specific loan level models and methodology utilized, and considers material changes in growth and credit strategy, and business changes which may not be applicable within the current environment. For periods beyond a reasonable and supportable forecast interval, we revert to historical information over a period for which comparable data is available. The historical information either experienced by the Company or by a selection of peer banks when appropriate, is derived from a combination of recessionary and non-recessionary performance periods for which data is available. Similar to the reasonable and supportable forecast period, we reassess the reversion period at the segment level, considering any required adjustments for differences in underwriting standards, portfolio mix, and other relevant data shifts over time. We evaluate the loan allowance for credit losses quarterly. We regularly review our collection experience (including delinquencies and net charge-offs) in determining our allowance for credit losses. We also consider our historical loss experience to date based on actual defaulted loans and overall portfolio indicators including delinquent and non-accrual loans, trends in loan volume and lending terms, credit policies and other observable environmental factors such as unemployment and interest rate changes. The underlying assumptions, estimates and assessments we use to estimate the allowance for credit losses reflect management's best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the allowance and provision for credit losses. It is possible and likely that we will experience credit losses that are different from our current estimates. Charge-offs are deducted from the allowance for credit losses when we judge the principal to be uncollectible, and subsequent recoveries are added to the allowance, generally at the time cash is received on a charged-off account. The expected credit losses for unfunded commitments are measured over the contractual period of the Company's exposure to credit risk. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, for the risk of loss, and current conditions and expectations. Management periodically reviews and updates its assumptions for estimated funding rates based on historical rates, and factors such as portfolio growth, changes to organizational structure, economic conditions, borrowing habits, or any other factor which could impact the likelihood that funding will occur. The Company does not reserve for unfunded commitments which are unconditionally cancellable.
See "Management's Discussion and Analysis-Critical Accounting Policies" in our 2019 Form 10-K, for a detailed discussion of the Company's other critical accounting estimates and policies.
There have been no other significant changes to the Company's critical accounting policies and estimates from those disclosed in the 2019 Form 10-K.
Recent Accounting Developments
See Note 5 to the Unaudited Consolidated Financial Statements for details of recently issued and adopted accounting pronouncements and their expected impact on the Company's financial statements.
COVID-19
During the first and second quarters of 2020, the Company announced a range of initiatives to help clients, communities, and employees navigate the many financial challenges caused by the COVID-19 pandemic. As a result of the COVID-19 crisis, the Company has taken the following steps to provide support to any client experiencing a hardship during this uncertain time.
For Banking Clients:
• Enhanced safety measures in all banking office lobbies and while all offices
are now open, services are only available by appointment if requested
• Increased telephone banking support through the Client Resource Calling
Center • Waived penalties for early certificate of deposit withdrawals • Increased ATM withdrawal limits and debit card spending • Convenient and secure digital platforms for remote banking 42
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For Consumer Loan Clients:
• Postponement of residential loan foreclosures • Payment deferrals on mortgages and home equity loans • Forgiving late charges for consumer loan payments
For Business and Commercial Banking Clients:
• Participating in the
Protection Program ("PPP") lending program. The Company has processed and
obtained SBA approval for 892 loan applications totaling
ofJune 30, 2020 . • Increased remote deposit limits
• Implemented payment relief options for commercial loans, based on need
• Providing assistance with access to government support and lending programs
•Treasury management services to support business continuity • Secure online and mobile banking platforms
For Wealth Management Clients:
The Company's wealth management team is closely monitoring the economy and financial markets and continues to actively manage clients' portfolios through the current volatility. We have urged clients to reach out to their Relationship Manager directly with any questions or concerns.
For Communities:
In addition to the 270 plus organizations the Company supports through its
annual charitable giving, the Company donated an additional
For Employees:
The Company is taking precautions to protect the health and safety of its staff, while continuing to provide uninterrupted service to clients. Efforts include:
• Enhanced safety measures for all banking office lobbies in connection with
state guidelines • Increased cleaning of all office locations
• 90%+ of staff working remotely with the exception of essential banking
office employees • Teleconferencing for meetings Forbearance/Modifications. The Company has instituted payment deferral programs to aid existing borrowers with payment forbearance. For commercial and consumer borrowers, we have endeavored to provide payment relief for borrowers who have been impacted by COVID-19 and have requested payment assistance. We expect to continue to accrue interest on these loans during the payment deferral period. Detailed information on client deferrals is included within the financial section of this report. OnApril 20, 2020 , the governor ofMassachusetts signed into law Chapter 65 of the Acts of 2020, An Act Providing for a Moratorium on Evictions and Foreclosures During the COVID-19 Emergency ("Chapter 65"). Chapter 65, which will remain in effect until the earlier ofAugust 18, 2020 or forty-five (45) days after theMassachusetts' governor's COVID-19 emergency declaration has been lifted, provides for, among other things, the right of residential mortgage borrowers that have experienced a financial impact from COVID-19 to obtain a forbearance on their mortgage payments for up to 180 days if requested by the borrower. The moratorium has been extended through at leastOctober 17, 2020 amid the COVID-19 pandemic. Subsequent guidance provided by theMassachusetts Division of Banks onMay 1, 2020 provided information regarding the length of the forbearance period. The Company is currently evaluating the impact of Chapter 65 but expects to grant 180 day forbearances to eligible borrowers who request a forbearance and to extend the forbearance period to 180 total days for any eligible borrowers previously granted forbearances who request it. 43 --------------------------------------------------------------------------------
For a further discussion of the risks and uncertainties relating to COVID-19 for our results of operations and business condition, see Item 1A. Risk Factors.
Results of Operations
Results of Operations for the three months ended
General. Net income decreased$6.0 million , or 140.2%, to a loss of$1.7 million for the quarter endedJune 30, 2020 , as compared to net income of$4.3 million for the quarter endedJune 30, 2019 . The diluted loss per share was$0.29 for the second quarter of 2020, representing a 132.2% decrease over diluted earnings per share of$0.90 for the second quarter of 2019. The results for the second quarter include the merger withWellesley and the corresponding impact to the provision for credit losses, merger expenses, and other non-operating items. Excluding these items, operating net income was$7.8 million for the quarter endedJune 30, 2020 , an increase of$833,000 , or 12.0%, compared to operating net income of$7.0 million for the quarter endedJune 30, 2019 . Operating diluted earnings per share were$1.32 for the second quarter of 2020, representing a 10.2% decrease over operating diluted earnings per share of$1.47 for the same quarter last year. Net Interest and Dividend Income. Net interest and dividend income before the provision for credit losses increased by$9.0 million , or 45.6%, to$28.8 million , as compared to$19.8 million for the quarter endedJune 30, 2019 , primarily due to loan growth (both organic and as a result of theWellesley and Optima mergers), lower costs of funds, higher levels of interest earning assets and loan accretion associated with merger accounting.
• Interest on loans increased by
result of net loan growth, both organic and due to the merger with Optima
and
• Interest on deposits decreased by
lower cost of funds.
Total average interest earning assets increased by$615.5 million , or 24.9%, to$3.1 billion for the three months endedJune 30, 2020 , from$2.5 billion for the same period endedJune 30, 2019 , primarily due to the mergers with Optima andWellesley and organic loan growth. Average interest-bearing liabilities increased by$312.7 million or 17.5%, to$2.1 billion for the three months endedJune 30, 2020 , from$1.8 billion for the same period endedJune 30, 2019 . The Company's net interest margin, on a fully taxable equivalent basis, increased 54 basis points to 3.77% for the quarter endedJune 30, 2020 , as compared to 3.23% for the quarter endedJune 30, 2019 . Interest and Dividend Income. Total interest and dividend income increased$6.1 million , or 24.8%, to$30.5 million for the quarter endedJune 30, 2020 , as compared to$24.5 million for the quarter endedJune 30, 2019 , primarily due to a$6.9 million increase in interest income from loans, partially offset by a$569,000 decrease in interest on investment securities. Interest Expense. Interest expense decreased$3.0 million , or 62.9%, to$1.7 million for the quarter endedJune 30, 2020 , as compared to$4.7 million for the quarter endedJune 30, 2019 , primarily due to lower cost of funds. Average interest-bearing liabilities increased$312.7 million to$2.1 billion atJune 30, 2020 from$1.8 billion as ofJune 30, 2019 , primarily due to higher savings balances of$89.1 million , a$114.8 million increase in average checking accounts balances, an increase in average money market accounts of$69.8 million , and an increase in average other borrowed funds of$87.6 million , partially offset by a decrease in average certificates of deposit balances of$51.8 million . The aforementioned increases were primarily due to the mergers with Optima andWellesley and organic core deposit growth. Provision for Credit Losses. The Company recorded$14.4 million in provision for credit losses for the quarter endedJune 30, 2020 , as compared to$596,000 for the quarter endedJune 30, 2019 . The provision for credit losses during the quarter endedJune 30, 2020 includes the impact of theWellesley merger on the Company's allowance for credit losses under the CECL accounting standard. CECL requires the removal ofWellesley's prior allowance for loan loss through the balance sheet as goodwill and re-establishment of a new allowance for credit loss through the income statement within the provision for credit loss. Total provision expense for the second quarter of 2020 included the impact of the CECL merger accounting onJune 1, 2020 of$8.6 million , inclusive of unfunded commitments, and is considered by the Company to be a non-operating expense. During the second quarter of 2020, the Company increased its reserve for credit loss levels by recording$5.7 million in additional provision for credit losses due to anticipated losses associated with the COVID-19 pandemic, as well as changes in loan balances. 44
-------------------------------------------------------------------------------- The Company recorded net charge-offs of$135,000 for the quarter endedJune 30, 2020 , as compared to net charge-offs of$148,000 for the quarter endedJune 30, 2019 . The allowance for credit losses was$34.0 million , or 1.08% of total loans (excluding the SBA's PPP loans), atJune 30, 2020 , as compared to$18.2 million , or 0.82% of total loans, atDecember 31, 2019 . Noninterest Income. Inclusive of theWellesley merger, total noninterest income increased by$827,000 , or 10.2%, to$9.0 million for the quarter endedJune 30, 2020 , as compared to$8.1 million for the quarter endedJune 30, 2019 , primarily as a result of increases in Wealth Management revenue, loan related derivative income, and higher gains on loans sold. Noninterest income was 23.8% of total revenue for the quarter endedJune 30, 2020 .
• Wealth Management revenue increased by
for the second quarter of 2020, as compared to
quarter of 2019. Wealth Management Assets under Management and
Administration were
million, or 8.1%, fromDecember 31, 2019 , primarily as a result of theWellesley merger.
• Loan related derivative income increased by
second quarter of 2020, as compared to$5,000 for the second quarter of 2019, due to increased loan volume and the associated derivative transactions executed during the second quarter 2020.
• Gain on loans sold increased by
ended
30, 2019, due to increased sales of residential mortgages.
The categories of Wealth Management revenues are shown in the following table: For the Three Months Ended June 30, 2020 2019 (dollars in thousands) Wealth Management revenues: Trust and investment advisory fees $ 6,786 $ 6,302 Asset-based revenues 6,786 6,302 Financial planning fees and other service fees 249 117 Total wealth management revenues $ 7,035 $ 6,419 The following table presents the changes in Wealth Management Assets under Management: For the Three Months Ended June 30, 2020 2019 (dollars in thousands) Wealth Management Assets under Management Balance at the beginning of the period$ 2,932,393 $
2,990,375
Acquired wealth management assets 338,676 - Gross client asset inflows 55,817 89,126 Gross client asset outflows (94,433 ) (96,634 ) Net market impact 339,833 96,903 Balance at the end of the period$ 3,572,286 $
3,079,770
Weighted average management fee 0.84 % 0.84 %
There were no significant changes to the average fee rates and fee structure
during the three months ended
Noninterest Expense. Total noninterest expense increased by$4.1 million , or 18.9%, to$25.6 million for the quarter endedJune 30, 2020 , as compared to$21.5 million for the quarter endedJune 30, 2019 , primarily driven by merger related expenses, increases in salaries and employee benefits expense, occupancy and equipment expense, and data processing expense. • Merger expenses were$4.4 million during the second quarter of 2020.
• Salaries and employee benefits expense increased
driven by increased staffing related to the mergers with Optima in 2019 and
initiatives, and higher employee benefit costs. 45
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• Occupancy and equipment expense increased
to additional branches and office space as a result of the
that was not reflected within the second quarter of 2019.
• Data processing expense increased
of the merger withWellesley and investments made in technology. During the second quarter of 2020, the Company reduced the value of its other real estate loan ("REO") holdings through other expense by$486,000 primarily as a result of revaluation due to the COVID-19 pandemic. Income Tax Expense. The Company recorded an income tax benefit of$540,000 for the quarter endedJune 30, 2020 , as compared to income tax expense of$1.5 million for the same quarter in 2019. The Company's effective tax rate was a credit of 23.9% for the quarter endedJune 30, 2020 , as compared to 26.5% for the quarter endedJune 30, 2019 .
Results of Operations for the six months ended
General. Net income decreased$5.0 million , or 47.3%, to$5.5 million for the six months endedJune 30, 2020 , as compared to net income of$10.5 million for the six months endedJune 30, 2019 . Diluted earnings per share were$0.97 for the first six months of 2020, representing a 58.7% decrease from diluted earnings per share of$2.35 for the same first six months of 2019. The results for the six months endedJune 30, 2020 also include the merger accounting impact of the CECL accounting standard within the provision for credit losses, merger expenses, and other non-operating items. Excluding these items, operating net income was$15.2 million for the six months endedJune 30, 2020 , an increase of$1.9 million , or 14.5%, compared to operating net income of$13.3 million for the six months endedJune 30, 2019 . Operating diluted earnings per share were$2.68 for the first six months of 2020, representing a 10.4% decrease from operating diluted earnings per share of$2.99 for the first six months of 2019. Net Interest and Dividend Income. Inclusive of theWellesley merger, net interest and dividend income before provision for loan losses, increased by$15.2 million , or 42.0%, to$51.2 million , as compared to$36.0 million for the six months endedJune 30, 2019 , primarily due to loan growth (both organic and as a result of the Optima andWellesley mergers), lower cost of funds, higher levels of interest-earning assets, and loan accretion associated with merger accounting.
• Interest on loans increased by
merger related loan growth.
• Interest on deposits decreased by
efforts in lowering the cost of deposits. Average interest earning assets increased by$626.7 million , or 27.8%, to$2.9 billion during the six months endedJune 30, 2020 , from$2.3 billion during the six months endedJune 30, 2019 . Average interest-bearing liabilities increased by$373.1 million , or 23.3%, to$2.0 billion during the six months endedJune 30, 2020 from$1.6 billion for the same period endedJune 30, 2019 . The Company's net interest margin, on a fully taxable equivalent basis, increased 35 basis points to 3.59% for the six months endedJune 30, 2020 , as compared to 3.24% for the six months endedJune 30, 2019 . Interest and Dividend Income. Total interest and dividend income increased$13.0 million , or 29.9%, to$56.6 million for the six months endedJune 30, 2020 , as compared to$43.6 million for the six months endedJune 30, 2019 , primarily due to loan growth, both organic and as a result of the Optima andWellesley merger. Interest Expense. Interest expense decreased$2.1 million , or 28.0%, to$5.4 million for the six months endedJune 30, 2020 , as compared to$7.6 million for the six months endedJune 30, 2019 , primarily driven by a decrease in cost of deposits. Average interest-bearing liabilities increased by$373.1 million , or 23.3%, primarily driven by an increase in average checking account balances of$89.9 million , an increase in average savings account balances of$144.2 million , and an increase in average money market account balances of$66.1 million primarily due to the merger withWellesley and organic core deposit growth. Provision for Credit Losses. The Company recorded a provision for credit losses of$16.4 million for the six months endedJune 30, 2020 , as compared to$503,000 for the six months endedJune 30, 2019 , primarily due to the impact of theWellesley merger on the Company's allowance for credit losses under the CECL accounting standard, and additional provision for credit losses due to anticipated losses associated with the COVID-19 pandemic, as well as changes in loan balances. The Company recorded net charge-offs of$400,000 for the six months endedJune 30, 2020 , as compared to net charge-offs of$172,000 for the six months endedJune 30, 2019 . The allowance for credit losses was$34.0 million , or 1.08%, of total loans, excluding PPP loans, atJune 30, 2020 , as compared to$17.1 million , or 0.82%, of total loans atJune 30, 2019 . 46 -------------------------------------------------------------------------------- Noninterest Income. Inclusive of theWellesley merger, total noninterest income increased by$1.7 million , or 10.5%, to$17.8 million for the six months endedJune 30, 2020 , as compared to$16.1 million for the six months endedJune 30, 2019 , primarily as a result of increases in wealth management revenue, loan related derivative income, and higher gains on loans sold. Noninterest income was 25.8% of total revenue for the six months endedJune 30, 2020 .
• Wealth management revenue increased by
million for the six months ended
for the six months ended
• Loan related derivative income increased by
for the six months ended
months ended
derivative transactions executed during the first six months of 2020.
• Gain on loans sold increased by
endedJune 30, 2020 , as compared to$31,000 for the six months endedJune 30, 2019 , due to increased sales of residential mortgages. The categories of Wealth Management revenues are shown in the following table: For the Six Months Ended June 30, 2020 2019 (dollars in thousands) Wealth Management revenues: Trust and investment advisory fees $ 13,216 $ 12,307 Asset-based revenues 13,216 12,307 Financial planning fees and other service fees 446 236 Total wealth management revenues $ 13,662 $ 12,543 The following table presents the changes in Wealth Management Assets under Management: For the Six Months Ended June 30, 2020 2019 (dollars in thousands) Wealth Management Assets under Management Balance at the beginning of the period$ 3,287,371 $ 2,759,547 Acquired wealth management assets 338,676 - Gross client asset inflows 155,064 149,439 Gross client asset outflows (167,488 ) (169,452 ) Net market impact (41,338 ) 340,236 Balance at the end of the period$ 3,572,285 $
3,079,770
Weighted average management fee 0.83 % 0.84 %
There were no significant changes to the average fee rates and fee structure for
the six months ended
Noninterest Expense. Inclusive of theWellesley merger, total noninterest expense increased by$7.6 million , or 20.1%, to$45.5 million for the six months endedJune 30, 2020 , as compared to$37.9 million for the six months endedJune 30, 2019 , primarily driven by merger related expenses, increases in salaries and employee benefits expense, occupancy and equipment expense, and data processing expense as a result of our mergers with Optima in 2019 andWellesley in 2020. • Merger expenses were$4.6 million .
• Salaries and employee benefits expense increased
primarily as a result of increased staffing related to the mergers with
Optima and
business initiatives, normal merit increases and higher employee benefit
costs.
• Occupancy and equipment expense increased
result of additional branches and office space as a result of the mergers
with Optima and
• Data processing expense increased
of the mergers with Optima and
technology. 47
-------------------------------------------------------------------------------- Income Tax Expense. The Company recorded a provision for income taxes of$1.5 million for the six months endedJune 30, 2020 , as compared to$3.3 million for the six months endedJune 30, 2019 . The effective tax rate was 21.6% for the six months endedJune 30, 2020 , as compared to 23.9% for the same period in 2019.
Changes in Financial Condition
Total Assets. Total assets increased$1.2 billion , or 40.9%, fromDecember 31, 2019 , inclusive of theWellesley merger, and were$4.0 billion as ofJune 30, 2020 .Investment Securities . The Company's total investment securities portfolio decreased by$19.7 million , or 4.9%, from$398.5 million atDecember 31, 2019 to$378.8 million atJune 30, 2020 as the Company used investment cash flow to pay down wholesale funding. Loans. Total loans increased by$1.1 billion , or 49.7%, fromDecember 31, 2019 , inclusive of theWellesley merger, and were at$3.3 billion as ofJune 30, 2020 . The increase in total loans was due to a combination of the merger withWellesley and organic growth during 2020. See the Organic Loan and Deposit Growth table below for detail.
Inclusive of
• Residential real estate loans increased by
million at
• Commercial real estate loans increased by
at
• Commercial & industrial loans increased by
million at
• Loans under the SBA's PPP amounted to
loans are included in commercial and industrial loans.
Excluding
Bank-Owned Life Insurance. The Company invests in bank-owned life insurance to help offset the costs of employee benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. AtJune 30, 2020 , our investment in bank-owned life insurance was$45.7 million , representing an increase of$8.4 million , or 22.6% from$37.3 million atDecember 31, 2019 , primarily due to new policies acquired as a result of theWellesley merger. Other assets. Other assets increased$51.5 million , or 121.8%, to$93.8 million , from$42.3 million atDecember 31, 2019 , primarily due to valuation adjustments associated with loan level interest rate derivatives of($39.8) million due to changes in interest rates and additional loan level derivatives acquired in connection with theWellesley merger.
Deposits. Inclusive of the
• Core deposits, which the Company defines as all deposits other than
certificates of deposit, increased by$740.6 million , or 34.0%, to$2.9 billion atJune 30, 2020 , inclusive of theWellesley merger.
• Excluding the impact of the
deposits was
• Inclusive of the
quarter ended
ended
interest rates during 2020. The cost of total deposits for the six months
ended
rates during 2020. At
48
-------------------------------------------------------------------------------- Certificates of deposit totaled$358.6 million atJune 30, 2020 , an increase of$176.3 million from$182.3 million atDecember 31, 2019 , primarily due to an increase in short-term brokered certificates of deposit. Total brokered certificates of deposit, which are included within certificates of deposit, were$87.4 million and$7.1 million atJune 30, 2020 andDecember 31, 2019 , respectively. Borrowings. AtJune 30, 2020 , borrowings consisted of advances from theFederal Home Loan Bank ("FHLB") ofBoston and theFederal Reserve Bank of Boston ("FRBBoston "). Borrowings were$237.9 million as ofJune 30, 2020 , representing a$102.2 million , or 75.3%, increase from$135.7 million atDecember 31, 2019 , primarily due to theWellesley merger. Shareholders' Equity. Total shareholders' equity increased$96.5 million , or 33.7%, to$383.1 million atJune 30, 2020 , from$286.6 million atDecember 31, 2019 , primarily due to$87.2 million of equity issued as a result of theWellesley merger, net income of$5.5 million , increases in the value of the Company's interest rate derivative positions of$4.5 million , and increases in unrealized gains on the available for sale investment portfolio of$3.3 million , partially offset by regular dividend payments of$5.7 million . The Company's total shareholders' equity to total assets ratio decrease 52 basis points to 9.52% as ofJune 30, 2020 , as compared to 10.04% as ofDecember 31, 2019 . Book value per share grew by$2.23 , or 4.2%, to$55.29 as ofJune 30, 2020 , as compared to$53.06 as ofDecember 31, 2019 . The Company's ratio of tangible common equity to tangible assets decreased 7.4%, to 8.27%, atJune 30, 2020 , from 8.93% atDecember 31, 2019 , primarily due to the impact of goodwill recorded as a result of theWellesley merger. Tangible book value per share grew by$0.68 , or 1.5%, to$47.34 as ofJune 30, 2020 , as compared to 46.66% as ofDecember 31, 2019 .
Organic Loan and Deposit Growth (dollars in thousands)
June 2020 vs December 2019 Organic Organic Balance Growth/(Decline) Growth/(Decline) June 30, 2020 March 31, 2020 December 31, 2019 Acquired $ % Loans Residential mortgage$ 1,351,308 917,103 $ 917,566$ 403,855 $ 29,887 3.3% Commercial mortgage 1,413,427 1,089,796 1,060,574 290,909 61,944 5.8% Home equity 116,067 83,066 80,675 36,213 (821 ) (1.0%) Commercial & Industrial 414,243 127,648 133,236 138,953 142,054 106.6% Consumer 37,839 38,189 34,677 103 3,059 8.8% Total loans$ 3,332,884 $ 2,255,802 $ 2,226,728$ 870,033 $ 236,123 10.6% PPP Loans (157,017 ) - - - (157,017 ) -
Total Loans excluding PPP*
2,226,728$ 870,033 $ 79,106 3.6%
Deposits
Demand$ 929,846 $ 608,240 $ 630,593 175,912 $ 123,341 19.6% Interest bearing checking 606,999 506,654 450,098 49,944 106,957 23.8% Money market 419,537 175,158 181,406 250,226 (12,095 ) (6.7%) Savings 960,847 880,944 914,499 72,700 (26,352 ) (2.9%) Core deposits 2,917,229 2,170,996 2,176,596 548,782 191,851 8.8% Certificates of deposit 358,614 219,363 182,282 212,096 (35,764 ) (19.6%) Total deposits$ 3,275,843 $ 2,390,359 $ 2,358,878$ 760,878 $ 156,087 6.6%
*PPP loans are included within Commercial and Industrial and does not include
PPP loans acquired due to the merger with
49 --------------------------------------------------------------------------------
GAAP to Non-GAAP Reconciliations (dollars in thousands except per share data)
Statement on Non-GAAP Measures: The Company believes the presentation of the following non-GAAP financial measures provides useful supplemental information that is essential to an investor's proper understanding of the results of operations and financial condition of the Company. Management uses non-GAAP financial measures in its analysis of the Company's performance. These non-GAAP measures should not be viewed as substitutes for the financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, Operating Net Income / Operating Diluted Earnings Per Share 2020 2019 2020 2019 (in thousands, except share data)
Net (Loss) Income (a GAAP measure)
Add: Merger and Capital issuance expenses (Pretax) 4,366 3,450 4,619 3,541 Add: (Gain) Loss on disposition of investment securities (69 ) (6 ) (69 ) 81 Provision established for acquired Wellesley loans 8,638 - 8,638 - Tax effect of non-operating adjustments(1) (3,431 ) (761 ) (3,494 ) (805 ) Operating Net Income (a non-GAAP measure)$ 7,788 $ 6,955 $ 15,210 $ 13,287 Less: Dividends and Undistributed Earnings Allocated to Participating Securities (GAAP) (4 ) (35 ) (26 ) (94 ) Operating Income Applicable to Common Shareholders (a non-GAAP measure)$ 7,784 $ 6,920 $ 15,184 $ 13,193 Weighted Average Diluted Shares 5,912,889 4,715,724
5,670,438 4,412,239
Operating Diluted Earnings Per Share (a non-GAAP measure)$ 1.32 $ 1.47 $ 2.68 $ 2.99
(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. June 30, 2020 December 31, 2019 June 30, 2019 (in thousands, except share data) Tangible Common Equity: Shareholders' equity (GAAP)$ 383,060 $ 286,561$ 237,094 Less: Goodwill and acquisition related (55,070 ) (34,544 ) (34,725 ) intangibles (GAAP) Tangible Common Equity (a non-GAAP measure) 327,990 252,017 202,369 Total assets (GAAP) 4,022,750 2,855,563 2,741,308 Less: Goodwill and acquisition related (55,070 ) (34,544 ) (34,725 ) intangibles (GAAP) Tangible assets (a non-GAAP measure)$ 3,967,680 $ 2,821,019$ 2,706,583 Tangible Common Equity Ratio (a non-GAAP 8.27 % 8.93 % 7.48 %
measure)
Tangible Book Value Per Share: Tangible Common Equity (a non-GAAP measure)$ 327,990 $ 252,017$ 202,369 Common shares outstanding 6,927,699 5,400,868 4,850,230
Tangible Book Value Per Share (a non-GAAP $ 47.34 $
46.66 $ 41.72 measure)Investment Securities The Company's securities portfolio consists of securities available for sale and securities held to maturity. The largest component of the securities portfolio is mortgage-backed securities, all of which are issued byU.S. government agencies orU.S. government-sponsored enterprises.
Securities available for sale consist of certain
The fair value of securities available for sale totaled$134.2 million and included gross unrealized gains of$3.5 million and gross unrealized losses of$11,000 atJune 30, 2020 . AtDecember 31, 2019 , the fair value of securities available for sale totaled$140.3 million and included gross unrealized gains of$231,000 and gross unrealized losses of$1.0 million . 50 -------------------------------------------------------------------------------- Securities classified as held to maturity consist of certainU.S. GSE andU.S. GSE mortgage-backed securities, corporate debt securities, and state, county, and municipal securities. Securities held to maturity as ofJune 30, 2020 are carried at their amortized cost of$244.6 million . AtDecember 31, 2019 , securities held to maturity totaled$258.2 million . The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity investment securities, and the percentage distribution at the dates indicated: June 30, December 31, 2020 2019 Amount Percent Amount Percent (dollars in thousands) Available for sale securities U.S. GSE obligations$ 13,734 10 %$ 37,848 27 % Mortgage-backed securities 117,739 88 % 102,482 73 % Corporate debt securities 2,754 2 % - 0 % Total securities available for sale$ 134,227 100 %$ 140,330 100 % Held to maturity securities U.S. GSE obligations $ - 0 %$ 5,000 2 % Mortgage-backed securities 146,398 60 % 161,759 63 % Corporate debt securities 6,984 3 % 6,980 3 % Municipal securities 91,169 37 % 84,433 32 % Total securities held to maturity$ 244,551 100 %$ 258,172 100 % Total$ 378,778 100 %$ 398,502 100 % The following tables set forth the composition and maturities of debt investment securities. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. After One, But After Five, But Within One Year Within Five Years Within Ten Years After Ten Years Total Weighted Weighted Weighted Weighted Weighted Average Average Average Average Amortized Average Amortized Cost Yield (1) Amortized Cost Yield (1) Amortized Cost Yield (1) Amortized Cost Yield (1) Cost Yield (1) At June 30, 2020 (dollars in thousands) Available for sale securitiesU.S. GSE obligations $ - 0.0 % $ - 0.0 % $ 5,000 2.3 % $ 8,000 2.6 %$ 13,000 2.5 % Mortgage-backed securities - - 975 1.4 % 35,702 1.9 % 78,343 1.4 % 115,020 1.6 % Corporate debt securities 1,001 2.5 % 1,740 2.4 % - 0.0 % - 0.0 % 2,741 2.4 % Total available for sale securities $ 1,001 2.5 % $ 2,715 2.0 % $ 40,702 1.9 % $ 86,343 1.5 %$ 130,761 1.7 % Held to maturity securitiesU.S. GSE obligations $ - 0.0 % $ - - $ - - $ - - $ - 0.0 % Mortgage-backed securities - - 2 5.6 % 49,686 2.7 % 96,710 2.3 % 146,398 2.4 % Corporate debt securities - - 6,984 2.6 % - - - - 6,984 2.6 % Municipal securities 1,878 4.1 % 15,379 3.6 % 47,944 3.5 % 25,968 3.2 % 91,169 3.4 % Total held to maturity securities $ 1,878 4.1 % $ 22,365 3.3 % $ 97,630 3.1 %$ 122,678 2.4 %$ 244,551 2.8 % Total $ 2,879 3.5 % $ 25,080 3.1 %$ 138,332 2.8 %$ 209,021 2.1 %$ 375,312 2.4 % 51
--------------------------------------------------------------------------------
After One, But After Five, But Within One Year Within Five Years Within Ten Years After Ten Years Total Weighted Weighted Weighted Weighted Weighted Average Average Average Average Amortized Average Amortized Cost Yield (1)
Amortized Cost Yield (1) Amortized Cost Yield (1) Amortized Cost Yield (1) Cost Yield (1)
At
(dollars in thousands) Available for sale securitiesU.S. GSE obligations $ 5,000 1.4 % $ 20,000 1.5 % $ 5,000 2.3 % $ 8,000 2.6 %$ 38,000 1.8 % Mortgage-backed securities - - 37 5.4 % 36,393 1.9 % 66,679 2.1 % 103,109 2.0 % Total available for sale securities $ 5,000 1.4 % $ 20,037 1.5 % $ 41,393 1.9 % $ 74,679 2.1 %$ 141,109 2.0 % Held to maturity securitiesU.S. GSE obligations $ 5,000 1.6 % $ - - $ - - $ - -$ 5,000 1.6 % Mortgage-backed securities - - 2 5.6 % 48,088 2.7 % 113,669 2.6 % 161,759 2.6 % Corporate debt securities - - 6,980 2.6 % - - - - 6,980 2.6 % Municipal securities 3,270 4.6 % 10,606 4.2 % 45,201 3.7 % 25,356 3.4 % 84,433 3.7 % Total held to maturity securities $ 8,270 2.8 % $ 17,588 3.6 % $ 93,289 3.2 %$ 139,025 2.8 %$ 258,172 3.0 % Total $ 13,270 2.3 % $ 37,625 2.4 %$ 134,682 2.8 %$ 213,704 2.5 %$ 399,281 2.6 %
(1) Weighted Average Yield is shown on a fully taxable equivalent basis using a
federal tax rate of 21% at
Management evaluates securities for credit loss on at least a quarterly basis and more frequently when economic or market conditions warrant such evaluation. Consideration is given to: (1) whether the fair value is less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
Loans
The Company's lending activities are conducted principally inEastern Massachusetts andSouthern New Hampshire . The Company grants single- and multi-family residential loans, commercial & industrial ("C&I"), commercial real estate ("CRE"), construction loans, and a variety of consumer loans. Most of the loans granted by the Company are secured by real estate collateral. Repayment of the Company's residential loans are generally dependent on the health of the employment market in the borrowers' geographic areas and that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default. The repayment of C&I loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. As borrower cash flow may be difficult to predict, liquidation of the underlying collateral securing these loans is typically viewed as the primary source of repayment in the event of borrower default. However, collateral typically consists of equipment, inventory, accounts receivable, or other business assets that may fluctuate in value, so the liquidation of collateral in the event of default is often an insufficient source of repayment. The Company's CRE loans are primarily made based on the cash flow from the collateral property and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral typically being viewed as the primary source of repayment in the event of borrower default. The Company's construction loans are primarily made based on the borrower's expected ability to execute and the future completed value of the collateral property, with sale of the underlying real estate collateral typically being viewed as the primary source of repayment. 52 -------------------------------------------------------------------------------- The following table shows the composition of the loan portfolio at the dates indicated: June 30, 2020 December 31, 2019 % of % of Amount Total Amount Total (dollars in thousands) Residential mortgage Mortgages - fixed rate$ 535,633 16 %$ 430,877 19 % Mortgages - adjustable rate 775,475 24 % 467,139 21 % Construction 37,366 1 % 17,374 1 % Deferred costs net of unearned fees 2,834 0 % 2,176 0 % Total residential mortgages 1,351,308 41 % 917,566 41 % Commercial mortgage Mortgages - non-owner occupied 1,073,856 31 % 870,047 40 % Mortgages - owner occupied 150,040 5 % 114,095 5 % Construction 188,433 6 % 76,288 3 % Deferred costs net of unearned fees 1,098 0 % 144 0 % Total commercial mortgages 1,413,427 42 % 1,060,574 48 % Home equity Home equity - lines of credit 110,014 3 % 73,880 3 % Home equity - term loans 5,806 0 % 6,555 1 % Deferred costs net of unearned fees 247 0 % 240 0 % Total home equity 116,067 3 % 80,675 4 % Commercial & industrial Commercial & industrial 418,455 13 % 133,337 6 % Deferred costs net of unearned fees (4,212 ) 0 % (101 ) 0 % Total commercial & industrial 414,243 13 % 133,236 6 % Consumer Secured 36,941 1 % 33,453 1 % Unsecured 877 0 % 1,199 0 % Unearned fees net of deferred costs 21 0 % 25 0 % Total consumer 37,839 1 % 34,677 1 % Total loans$ 3,332,884 100 %$ 2,226,728 100 % Residential Mortgage. Residential real estate loans held in portfolio amounted to$1.4 billion atJune 30, 2020 , representing an increase of$433.7 million , or 47.3%, from$917.6 million atDecember 31, 2019 , and consisted of one-to-four family residential mortgage loans. The residential mortgage portfolio represented 41% of total loans atJune 30, 2020 andDecember 31, 2019 .
The average loan balance outstanding in the residential portfolio was
The Bank offers fixed and adjustable rate residential mortgage loans with maturities up to 30 years. One-to-four family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as "conforming loans." The Bank generally originates both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits as established by theFederal Housing Finance Agency , which increased to$510,400 in 2020 from$484,350 , for one-unit properties. In addition, the Bank also offers loans above conforming lending limits typically referred to as "jumbo" loans. These loans are typically underwritten to jumbo conforming guidelines, however, the Bank may choose to hold a jumbo loan within its portfolio with underwriting criteria that does not exactly match conforming guidelines. The Bank may also, from time to time, purchase residential loans that are either jumbo, conforming, or meet our Community Reinvestment Act ("CRA") requirements. Purchases have historically been made to satisfy CRA requirements for lending to low- and moderate-income borrowers within the Bank's CRA Assessment Area. Generally, our residential construction loans are based on complete value per plans and specifications, with loan proceeds used to construct the house for single family primary and secondary residences. Loans are provided for terms up to 12 months during the construction phase, with loan-to-values that generally do not exceed 80% on as complete basis. The loans then convert to permanent financing at terms up to 360 months. 53 -------------------------------------------------------------------------------- The Company does not offer reverse mortgages, nor do we offer loans that provide for negative amortization of principal, such as "Option ARM" loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer "subprime loans" (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation). Residential real estate loans are originated both for sale to the secondary market, as well as for retention in the Bank's loan portfolio. The decision to sell a loan to the secondary market or retain within the portfolio is determined based on a variety of factors including but not limited to the Bank's asset/liability position, the current interest rate environment, and customer preference.
The Company is servicing mortgage loans sold to others without recourse of
approximately
The table below presents residential real estate loan origination activity for the periods indicated: For the Six Months Ended June 30, 2020 2019 (dollars in thousands) Originations for retention in portfolio $ 264,887$ 78,448 Originations for sale to the secondary market 21,592 3,822 Total $ 286,479$ 82,270
Loans are sold with servicing retained or released. The table below presents residential real estate loan sale activity for the periods indicated:
For the Six Months Ended June 30, 2020 2019 (dollars in thousands) Loans sold with servicing rights retained $ 9,482 $
867
Loans sold with servicing rights released 11,627 2,570 Total $ 21,109 $ 3,437 Loans sold with the retention of servicing typically result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to other income over the estimated period of servicing. The net balance of capitalized servicing rights amounted to$1.1 million and$1.3 million as ofJune 30, 2020 andDecember 31, 2019 , respectively. Commercial Mortgage. Commercial real estate loans were$1.4 billion as ofJune 30, 2020 , an increase of$352.9 million , or 33.3%, from$1.1 billion atDecember 31, 2019 . The commercial real estate loans portfolio represented 42% and 48% of total loans atJune 30, 2020 andDecember 31, 2019 , respectively. The average loan balance outstanding in this portfolio was$1.5 million , and the largest individual commercial real estate loan outstanding was$26.1 million as ofJune 30, 2020 . AtJune 30, 2020 , this commercial mortgage was performing in accordance with its original terms. Commercial real estate loans are secured by a variety of property types, with approximately 89.3% of the total atJune 30, 2020 composed of multi-family dwellings, retail facilities, office buildings, commercial mixed use, lodging, and industrial and warehouse properties. Generally, our commercial real estate loans are for terms of up to ten years, with loan-to-values that generally do not exceed 75%. Amortization schedules are long-term, and thus, a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. Generally, our commercial construction loans are speculative in nature, with loan proceeds used to acquire and develop real estate property for sale or rental. Loans are provided for terms up to 36 months during the construction phase, with loan-to-values that generally do not exceed 75% on both an "as is" and 'as complete and stabilized' basis. Construction projects are primarily for the development of residential property types, inclusive of one-to-four family and multifamily properties. 54
-------------------------------------------------------------------------------- Home Equity. The home equity portfolio totaled$116.1 million and$80.7 million atJune 30, 2020 andDecember 31, 2019 , respectively. The home equity portfolio represented 3% and 4% of total loans atJune 30, 2020 andDecember 31, 2019 , respectively. AtJune 30, 2020 , the largest home equity line of credit was$3.5 million and had an outstanding balance of$2.6 million . AtJune 30, 2020 , this line of credit was performing in accordance with its original terms. Home equity lines of credit are extended as both first and second mortgages on owner-occupied residential and one-to-four family investment properties in the Bank's market area. Home equity lines of credit are generally underwritten with the same criteria that we use to underwrite one-to-four family residential mortgage loans. Our home equity lines of credit are revolving lines of credit, which generally have a term between 15 and 20 years, with draws available for the first 10 years. Our 15-year lines of credit are interest only during the first 10 years and amortize on a five-year basis thereafter. Our 20-year lines of credit are interest only during the first 10 years and amortize on a 10-year basis thereafter. We generally originate home equity lines of credit with loan-to-value ratios of up to 80% when combined with the principal balance of the existing first mortgage loan, although loan-to-value ratios may occasionally exceed 80% on a case-by-case basis. Maximum combined loan-to-values are determined based on an applicant's loan/line amount and the estimated property value. Lines of credit above$1.0 million generally will not exceed combined loan-to-value of 75%. Rates are adjusted monthly based on changes in a designated market index. We also offer home equity term loans, which are extended as second mortgages on owner-occupied residential properties in our market area. Our home equity term loans are fixed-rate second mortgage loans, which generally have a term between five and 20 years. Commercial & Industrial (C&I). The commercial and industrial portfolio totaled$414.2 million and$133.2 million atJune 30, 2020 andDecember 31, 2019 , respectively. The C&I portfolio represented 13% and 6% of total loans atJune 30, 2020 andDecember 31, 2019 , respectively. The average loan balance outstanding in this portfolio was$277,000 and the largest individual commercial and industrial loan outstanding was$10.0 million as ofJune 30, 2020 . AtJune 30, 2020 , this loan was performing in accordance with its original terms.
Loans under the SBA's PPP program totaled
The Company's Innovation Banking and asset-based loans are reported within the C&I portfolio.
• At
average loan balance outstanding in this portfolio was$1.3 million . The largest individual loan outstanding was$10.0 million , and this loan was performing in accordance with its original terms.
• At
loan balance outstanding in this portfolio was
individual loan outstanding was
in accordance with its original terms.
• AtJune 30, 2020 , commercial solar loans totaled$63.9 million and the average loan balance outstanding in this portfolio was$2.7 million . The largest individual loan outstanding was$9.0 million , and this loan was performing in accordance with its original terms. The Company's C&I loan customers represent various small- and middle-market established businesses involved in professional services, accommodation and food services, health care, wholesale trade, manufacturing, distribution, retailing, and non-profits. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The Company also makes loans to entrepreneurial and technology businesses, as well as commercial solar projects. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers. Consumer Loans. The consumer loan portfolio totaled$37.8 million atJune 30, 2020 , an increase of$3.1 million , or 8.9%, from$34.7 million atDecember 31, 2019 . Consumer loans represented 1% of the total loan portfolio atJune 30, 2020 andDecember 31, 2019 . Consumer loans include secured and unsecured loans, lines of credit, and personal installment loans. Unsecured consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets. The secured consumer loans and lines portfolio are generally fully secured by pledged assets such as bank accounts or investments. 55 -------------------------------------------------------------------------------- Loan Portfolio Maturities. The following table summarizes the dollar amount of loans maturing in the portfolio based on their loan type and contractual terms to maturity atJune 30, 2020 . The table does not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. June 30, 2020 One Year One to Over Five or Less Five Years Years Total (dollars in thousands) Residential mortgage$ 15,135 $ 12,855 $ 1,323,318 $ 1,351,308 Commercial mortgage 172,682 302,234 938,511 1,413,427 Home equity 1,287 6,317 108,463 116,067 Commercial & Industrial 50,702 273,773 89,768 414,243 Consumer 37,600 89 150 37,839 Total$ 277,406 $ 595,268 $ 2,460,210 $ 3,332,884 Loan Portfolio by Interest Rate Type. The following table summarizes the dollar amount of loans in our portfolio based on whether the loan has a fixed, adjustable, or floating rate of interest atJune 30, 2020 . Floating rate loans are tied to a market index while adjustable rate loans are adjusted based on the contractual terms of the loan. June 30, 2020 Fixed Adjustable Floating Total (dollars in thousands) Residential mortgage$ 551,232 $ 793,355 $ 6,721 $ 1,351,308 Commercial mortgage 454,431 412,181 546,815 1,413,427 Home equity 9,889 4,366 101,812 116,067 Commercial & Industrial 245,778 57,002 111,463 414,243 Consumer 474 504 36,861 37,839 Total$ 1,261,804 $ 1,267,408 $ 803,672 $ 3,332,884
Nonperforming Loans and TROUBLED DEBT RESTRUCTURINGS (TDRs)
The composition of nonperforming assets is as follows:
June 30, December 31, 2020 2019 (dollars in thousands) Nonaccruals$ 8,100 $ 4,160 Loans past due > 90 days, but still accruing 1,889
1,264
Troubled debt restructurings 262
227
Total nonperforming loans$ 10,251 $
5,651
Accruing troubled debt restructured loans $ - $
-
Nonperforming loans as a percentage of total loans 0.31 %
0.25 % Nonperforming loans as a percentage of total assets 0.25 % 0.20 % Nonaccrual Loans. Loans are typically placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to the monitoring and review of loan performance internally, the Company has contracted with an independent organization to review the Company's commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management. 56 -------------------------------------------------------------------------------- Troubled Debt Restructurings. Loans are considered restructured in a troubled debt restructuring when the Company has granted concessions to a borrower due to the borrower's financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection. Restructured loans are classified as accruing or non-accruing based on management's assessment of the collectability of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months or longer before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.
Troubled debt restructurings are individually evaluated for credit losses.
Total nonperforming loans increased$4.6 million during the six months endedJune 30, 2020 as compared toDecember 31, 2019 , primarily due to the merger withWellesley . The Company continues to closely monitor the portfolio of nonperforming loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances atJune 30, 2020 andDecember 31, 2019 , although such values may fluctuate with changes in the economy and the real estate market.
Allowance for Credit Losses
We evaluate the loan portfolio on a quarterly basis and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, will periodically review the allowance for credit losses. Such agencies may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.
Actual loan losses may be significantly more than the allowance for credit losses we have established, which could have a material negative effect on our financial results.
Losses on loan receivables are estimated and recognized upon origination of the loan, based on expected credit losses for the life of the loan balance as of the period end date. The Company uses a discounted cash flow method incorporating probability of default and loss given default forecasted based on statistically derived economic variable loss drivers combined with qualitative factors to estimate expected credit losses. This process includes estimates which involve modeling loss projections attributable to existing loan balances, considering historical experience, current conditions and future expectations for homogeneous pools of loans over the reasonable and supportable forecast period. We also perform a qualitative assessment beyond model estimates, and apply qualitative adjustments as management deems necessary. The reasonable and supportable forecast period is determined based upon the accuracy level of historical loss forecast estimates, the specific loan level models and methodology utilized, and considers material changes in growth and credit strategy, and business changes which may not be applicable within the current environment. For periods beyond a reasonable and supportable forecast interval, we revert to historical information over a period for which comparable data is available. The historical information either experienced by the Company or by a selection of peer banks when appropriate, is derived from a combination of recessionary and non-recessionary performance periods for which data is available. Similar to the reasonable and supportable forecast period, we reassess the reversion period at the segment level, considering any required adjustments for differences in underwriting standards, portfolio mix, and other relevant data shifts over time. See additional discussion regarding the allowance for loan losses, in Item 7 under the caption "Critical Accounting Policies" of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and in Note 7 to the Unaudited Consolidated Financial Statements. 57 --------------------------------------------------------------------------------
The following table summarizes the changes in the Company's allowance for credit losses on loans for the periods indicated:
June 30 ,December 31, 2020 2019 (dollars in thousands)
Period-end loans outstanding (net of unearned discount and deferred loan fees)
$ 3,332,884
$ 2,454,977 $ 1,969,696 Balance of allowance for credit losses at the beginning of year - loans$ 18,180 $ 16,768 Loans charged-off: Commercial and industrial (154 ) (338 ) Commercial mortgage (264 ) (1,270 ) Residential mortgage - - Home Equity - - Consumer (30 ) (48 ) Total loans charged-off$ (448 ) $ (1,656 ) Recovery of loans previously charged-off: Commercial and industrial 34 53 Commercial mortgage - - Residential mortgage - - Home Equity - - Consumer 14 11 Total recoveries of loans previously charged-off: 48 64 Net loan (charge-offs) recoveries$ (400 ) $ (1,592 ) Adoption of accounting standard - loans 205 - Provision for acquired loans 8,282 - Initial allowance for PCD 437 - Provision 7,310 3,004 Balance at end of period$ 34,014
(0.02 )% (0.08 )% Ratio of allowance for credit losses to loans outstanding 1.02 % 0.82 %
The allowance for credit losses to loans outstanding excluding PPP loans was
1.08% at
The level of charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. Management believes that the allowance for credit losses is adequate. Sources of Funds General. Deposits traditionally have been our primary source of funds for our investment and lending activities. The Company also borrows from the FHLB ofBoston and the FRB Boston to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes, and to manage our cost of funds. Our additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities and fee income and proceeds from the sales of loans and securities. Deposits. The Company accepts deposits primarily from customers in the communities in which our branches and offices are located, as well as from small- and medium-sized businesses and other customers throughout our lending area. We rely on our competitive pricing and products, convenient locations, and client service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of relationship checking for consumers and businesses, statement savings accounts, certificates of deposit, money market accounts, interest on lawyer trust accounts, commercial and regular checking accounts, and individual retirement accounts. Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements, and our deposit growth goals. The Bank may also access the brokered deposit market for funding. 58
-------------------------------------------------------------------------------- The following table set forth the balances of the Bank's deposits for the periods indicated: June 30, December 31, 2020 2019 Amount Percent Amount Percent (dollars in thousands) Demand deposits (non-interest bearing)$ 929,846 28.4 %$ 630,593 26.7 % Interest bearing checking 606,999 18.5 % 450,098 19.1 % Money Market 419,537 12.8 % 181,406 7.7 % Savings 960,847 29.3 % 914,499 38.8 % Retail certificates of deposit under$100,000 182,928 5.6 % 56,401 2.4 % Retail certificates of deposit of$100,000 or greater 88,309 2.7 % 118,596 5.0 % Wholesale certificates of deposit 87,377 2.7 % 7,285 0.3 % Total$ 3,275,843 100 %$ 2,358,878 100.00 % AtJune 30, 2020 , the Company had a total of$271.2 million in certificates of deposit, excluding brokered deposits, of which$218.6 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity. As ofJune 30, 2020 , we had a total of$87.4 million of brokered deposits and$7.1 million of brokered deposits atDecember 31, 2019 . Borrowings. Total borrowings were$237.9 million and$135.7 million atJune 30, 2020 andDecember 31, 2019 , respectively. The Company's borrowings consisted of advances from the FHLB ofBoston and from the FRB Boston's Discount Window and Paycheck Protection Program Liquidity Facility ("PPPLF"). FHLB ofBoston advances are collateralized by a blanket pledge agreement on the Company's FHLB ofBoston stock and residential mortgages held in the Bank's portfolios. FRBBoston advances are collateralized by pledged commercial loans, pledged PPP loans, and pledged investment securities. The Company is required to pay down PPPLF borrowings when PPP loans pledged for these borrowings are paid down either by the borrower or the SBA.
• The Company's borrowings with the FHLB of
remaining borrowing capacity at the FHLB of
approximately
line of credit with the FHLB of
• The Company's borrowings with FRB Boston totaled
2020. The Company did not have any outstanding borrowings at FRB Boston at
December 31, 2019 . The Company's remaining borrowing capacity at the FRBBoston atJune 30, 2020 was approximately$554.9 million .
Net Interest Margin
Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. Net interest margin is the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable equivalent interest income expressed as a percentage of average earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities. 59
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The following table sets forth the distribution of the Company's average assets, liabilities and shareholders' equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated:
Three Months Ended June 30, 2020 March 31, 2020 June 30, 2019 Average Interest Rate Average Interest Rate Average Interest Rate Balance Income/ Earned/ Balance Income/ Earned/ Balance Income/ Earned/ Expenses (1) Paid (1) Expenses (1) Paid (1) Expenses (1) Paid (1) (dollars in thousands) ASSETS Interest-earning assets Loans (2) Taxable$ 2,660,482 $ 28,130 4.25 %$ 2,204,862 $ 23,338 4.26 %$ 1,951,133 $ 21,355 4.39 % Tax-exempt 21,004 267 5.11 23,605 250 4.26 14,567 157 4.32 Securities available for sale (3) Taxable 115,875 557 1.93 133,402 660 1.99 155,762 748 1.93 Securities held to maturity Taxable 158,431 964 2.45 169,433 1,063 2.52 218,672 1,368 2.51 Tax-exempt 84,885 760 3.60 83,193 754 3.65 75,423 728 3.87 Cash and cash equivalents 45,437 16 0.14 59,845 140 0.94 55,015 219 1.60 Total interest-earning assets (4) 3,086,114 30,694 4.00 % 2,674,340 26,205 3.94 % 2,470,572 24,575 3.99 % Non interest-earning assets 233,240 192,184
161,855
Allowance for credit losses (23,272 ) (18,423 ) (16,908 ) Total assets$ 3,296,082 $ 2,848,101 $
2,615,519
LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits Checking accounts$ 541,482 $ 209 0.16 %$ 457,189 $ 159 0.14 %$ 426,725 $ 120 0.11 % Savings accounts 915,835 462 0.20 888,973 1,772 0.80 826,726 2,212 1.07 Money market accounts 270,951 140 0.21 193,048 449 0.94 201,164 679 1.35 Certificates of deposit 230,798 585 1.02 187,318 749 1.61 282,579 1,368 1.94 Total interest-bearing deposits 1,959,066 1,396 0.29 1,726,528 3,129 0.73 1,737,194 4,379 1.01 Subordinated debt 3,266 64 7.88 - - - - - - Other borrowed funds 138,052 282 0.82 127,389 566 1.79 50,447 315 2.50 Total interest-bearing liabilities 2,100,384 1,742 0.33 % 1,853,917 3,695 0.80 % 1,787,641 4,694 1.05 % Non-interest-bearing liabilities Demand deposits 770,202 622,892 541,380 Other liabilities 97,431 80,089 64,182 Total liabilities 2,968,017 2,556,898 2,393,203 Shareholders' equity 328,065 291,203 222,316 Total liabilities & shareholders' equity$ 3,296,082 $ 2,848,101 $
2,615,519
Net interest income on a fully taxable equivalent basis 28,952 22,510 19,881 Less taxable equivalent adjustment (215 ) (211 ) (186 ) Net interest income$ 28,737 $ 22,299 $ 19,695 Net interest spread (5) 3.67 % 3.14 % 2.94 % Net interest margin (6) 3.77 % 3.39 % 3.23 %
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax
rate of 21%.
(2) Non-accrual loans are included in average amounts outstanding.
(3) Average balances of securities available for sale calculated utilizing
amortized cost.
(4)
interest-earning assets.
(5) Net interest spread represents the difference between the weighted average
yield on interest-earning assets, inclusive of PPP loans originated during
2020, and the weighted average cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income on a fully tax equivalent
basis as a percentage of average interest-earning assets, inclusive of PPP
loans originated during 2020. 60
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Six Months Ended June 30, 2020 June 30, 2019 Average Interest Rate Average Interest Rate Balance Income/ Earned/ Balance Income/ Earned/ Expenses (1) Paid (1) Expenses (1) Paid (1) (dollars in thousands) ASSETS Interest-earning assets Loans (2) Taxable$ 2,432,672 $ 51,468 4.25 %$ 1,748,485 $ 37,639 4.34 % Tax-exempt 22,305 518 4.67 12,168 269 4.46 Securities available for sale (3) Taxable 124,651 1,218 1.96 160,160 1,460 1.84 Securities held to maturity Taxable 163,932 2,026 2.49 214,035 2,636 2.48 Tax-exempt 84,039 1,514 3.62 74,641 1,451 3.92 Cash and cash equivalents 52,627 156 0.60 44,081 337 1.54 Total interest-earning assets (4) 2,880,226 56,900 3.97 % 2,253,570 43,792 3.92 % Non interest-earning assets 212,712 138,310 Allowance for loan losses (20,848 ) (16,799 ) Total assets$ 3,072,090 $ 2,375,081 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits Checking accounts$ 499,335 $ 368 0.15 %$ 409,390 $ 202 0.10 % Savings accounts 902,404 2,232 0.50 758,219 3,697 0.98 Money market accounts 231,999 589 0.51 165,891 1,060 1.29 Certificates of deposit 209,058 1,336 1.29 218,275 1,921 1.77 Total interest-bearing deposits 1,842,796 4,525 0.49 % 1,551,775 6,880 0.89 % Subordinated debt 1,633 64 7.88 - - - Other borrowed funds 132,720 848 1.28 52,275 671 2.59 Total interest-bearing liabilities 1,977,149 5,437 0.55 % 1,604,050 7,551 0.95 % Non-interest-bearing liabilities Demand deposits 696,547 512,882 Other liabilities 88,760 62,505 Total liabilities 2,762,456 2,179,437 Shareholders' equity 309,634 195,644 Total liabilities & shareholders' equity$ 3,072,090 $ 2,375,081 Net interest income on a fully taxable equivalent basis 51,463 36,241 Less taxable equivalent adjustment (427 ) (361 ) Net interest income$ 51,036 $ 35,880 Net interest spread (5) 3.42 % 2.97 % Net interest margin (6) 3.59 % 3.24 %
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax
rate of 21%.
(2) Non-accrual loans are included in average amounts outstanding.
(3) Average balances of securities available for sale calculated utilizing
amortized cost.
(4)
interest-earning assets.
(5) Net interest spread represents the difference between the weighted average
yield on interest-earning assets, inclusive of PPP loans originated during
2020, and the weighted average cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income on a fully tax equivalent
basis as a percentage of average interest-earning assets, inclusive of PPP
loans originated during 2020. 61
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Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volumes (changes in average balance multiplied by prior year average rate) and (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average balance), while (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate volume and rate categories. Three Months Ended June 30, 2020 Six Months Ended June 30, 2020 Compared with Compared with Three Months Ended June 30, 2019 Six Months Ended June 30, 2019 Increase/(Decrease) Increase/(Decrease) Due to Change in Due to Change in Volume Rate Total Volume Rate Total (dollars in thousands) Interest income Loans Taxable$ 7,466 $ (691 ) $ 6,775 $ 14,589 $ (760 ) $ 13,829 Tax-exempt 78 32 110 236 13 249 Securities available for sale Taxable (194 ) 3 (191 ) (339 ) 97 (242 ) Securities held to maturity Taxable (371 ) (33 ) (404 ) (612 ) 2 (610 ) Tax-exempt 86 (54 ) 32 177 (114 ) 63 Cash and cash equivalents (33 ) (170 ) (203 ) 56 (237 ) (181 )
Total interest income
14,107$ (999 ) $ 13,108 Interest expense Deposits Checking accounts 37 52 89 51 115 166 Savings accounts 214 (1,964 ) (1,750 ) 611 (2,076 ) (1,465 ) Money market accounts 177 (716 ) (539 ) 323 (794 ) (471 ) Certificates of deposit (218 ) (565 ) (783 ) (78 ) (507 ) (585 ) Total interest-bearing deposits 210 (3,193 ) (2,983 ) 907 (3,262 ) (2,355 ) Subordinated debt 64 - 64 64 - 64 Other borrowed funds 281 (314 ) (33 ) 644 (467 ) 177
Total interest expense
1,615$ (3,729 ) $ (2,114 ) Change in net interest income$ 6,477 $ 2,594 $ 9,071 $
12,492
Market Risk and Asset Liability Management
Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. 62 -------------------------------------------------------------------------------- Interest Rate Sensitivity. The Company actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. The Company's Asset Liability Committee ("ALCO"), using policies and procedures approved by the Company's Board of Directors, is responsible for the management of the Company's interest rate sensitivity position. The Company manages interest rate sensitivity by changing the mix, pricing, and re-pricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offerings of loan and selected deposit terms, and through wholesale funding. Wholesale funding consists of, but is not limited to, multiple sources including borrowings with the FHLB ofBoston , the FRB Boston's discount window and the PPPLF, and certificates of deposit from institutional brokers. The Company uses several tools to manage its interest rate risk including interest rate sensitivity analysis, or gap analysis, market value of portfolio equity analysis, interest rate simulations under various rate scenarios, and net interest margin reports. The results of these reports are compared to limits established by the Company's ALCO policies and appropriate adjustments may be made if the results are outside the established limits. The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or "shock," in the yield curve and subjective adjustments in deposit pricing might have on the Company's projected net interest income over the next 12 months. As ofJune 30, 2020 : Year 1 Percentage Change Change in Interest in Net Interest Rates (in Basis Points) Income Parallel rate shocks +400 2.4 +300 1.4 +200 0.3 +100 0.2 -100 (1.2)
The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a gradual interest rate shift in the yield curve and subjective adjustments in deposit pricing might have on the Company's projected net interest income over the next 12 months.
As ofJune 30, 2020 : Year 1 Percentage Change Change in Interest in Net Interest
Rates (in Basis Points) Income Gradual rate shifts +200 (0.8) -100 0.6
These simulations assume that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 months. The changes to net interest income shown above are in compliance with the Company's policy guidelines.
Economic Value of Equity Analysis. The Company also analyzes the sensitivity of the Bank's financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between estimated changes in the present value of the Bank's assets and estimated changes in the present value of the Bank's liabilities assuming various changes in current interest rates. The Bank's economic value of equity analysis as ofJune 30, 2020 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 9.7% decrease in the economic value of equity for the next 12 months, and a 8.8% increase in the economic value of equity for the next 24 months. 63
-------------------------------------------------------------------------------- Also as ofJune 30, 2020 , our analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Bank would experience a 7.4% increase in the economic value of equity over the next 12 months, and a 9.9% increase in the economic value of equity for the next 24 months. The estimates within the economic value of equity calculation are significantly impacted by management's assumption that the value of non-maturity deposits do not fall below their stated balance as ofJune 30, 2020 . This assumption has the impact of increasing the Bank's economic value of equity in the falling rate scenario as lower market rates increase the value of the loan and investment portfolios while the value of the non-maturity deposit base remains static. The Company believes retaining customer relationships is the most desirable strategy over the long term. The estimates of changes in the economic value of our equity require us to make certain assumptions including loan- and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of our equity and will differ from actual results.
LIQUIDITY AND CAPITAL RESOURCES
Impact of Inflation and Changing Prices. Our Unaudited Consolidated Financial Statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation. Liquidity. Liquidity is defined as the Company's ability to generate adequate cash to meet its needs for day-to-day operations and material long- and short-term commitments. Liquidity risk is the risk of potential loss if the Company were unable to meet its funding requirements at a reasonable cost. The Company manages its liquidity based on demand and specific events and uncertainties to meet current and future financial obligations of a short-term nature. The Company's objective in managing liquidity is to respond to the needs of depositors and borrowers, as well as increase to earnings enhancement opportunities in a changing marketplace. The Company's liquidity position is managed on a daily basis as part of the daily settlement function and continuously as part of the formal asset liability management process. The Bank's liquidity is maintained by managing its core deposits as the primary source, selling investment securities, selling loans in the secondary market, borrowing from the FHLB ofBoston and FRB Boston, and purchasing wholesale certificates of deposit as its secondary sources. AtJune 30, 2020 , the Company had access to funds totaling$1.8 billion . The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.
Quarterly, the ALCO reviews the Company's liquidity needs and reports any findings (if required) to the Company's Board of Directors.
Capital Adequacy. Total shareholders' equity was$383.1 million atJune 30, 2020 , as compared to$286.6 million atDecember 31, 2019 , primarily due to theWellesley merger, increase in earnings, increases in the value of the Company's interest rate derivative positions, and increases in unrealized gains of the available for sale investment portfolio. The ratio of total equity to total assets amounted to 9.52% atJune 30, 2020 and 10.04% atDecember 31, 2019 . Book value per share atJune 30, 2020 andDecember 31, 2019 amounted to$55.29 and$53.06 , respectively. The Company and the Bank are subject to various regulatory capital requirements. As ofJune 30, 2020 , the Company and the Bank exceeded the regulatory minimum levels to be considered "well-capitalized." See Note 15 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements. 64
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Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit, and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Off-Balance-Sheet Arrangements. Our significant off-balance-sheet arrangements consist of the following:
• commitments to originate and sell loans, • standby and commercial letters of credit, • unused lines of credit, • unadvanced portions of construction loans, • unadvanced portions of other loans, • loan related derivatives, and • risk participation agreements.
Off-balance-sheet arrangements are more fully discussed within Note 13 - Financial Instruments with Off-Balance-Sheet Risk.
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