CAMBRIDGE BANCORP 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 with
Wellesley Bancorp, Inc. ("Wellesley");
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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 theseindividuals leave or change their roles without effective replacements,
operations may suffer;
• the Company may not be able to hire or retain additional qualifiedpersonnel, 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 ofSeptember 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 ofSeptember 30, 2020 , the Company had Assets under Management and Administration of approximately$3.9 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. 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.
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 non-accrual 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.
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.
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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
The Company announced a range of initiatives to help clients, communities, and employees navigate the many financial challenges caused by the COVID-19 pandemic.
Forbearance/Modifications The Company has instituted payment deferral programs to aid existing borrowers with payment forbearance. For commercial and consumer borrowers, the Company has endeavored to provide payment relief for borrowers who have been impacted by the COVID-19 pandemic and have requested payment assistance. Detailed information on payment deferrals is included within the supplemental earning release information that can be found at ir.cambridgetrust.com.
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 increased$5.8 million , or 74.9%, to$13.4 million for the quarter endedSeptember 30, 2020 , as compared to net income of$7.7 million for the quarter endedSeptember 30, 2019 . Diluted earnings per share were$1.93 for the third quarter of 2020, representing a 22.9% increase over diluted earnings per share of$1.57 for the third quarter of 2019.
Excluding merger expenses, operating net income was
Net Interest and Dividend Income. Net interest and dividend income before the provision for credit losses increased by$13.9 million , or 66.1%, to$35.0 million , as compared to$21.1 million for the quarter endedSeptember 30, 2019 . This change was primarily due to 42 --------------------------------------------------------------------------------
loan growth (both organic and as a result of the
• Interest on loans increased by
a result of net loan growth, both organic and due to the merger with
Wellesley .
• Interest on deposits decreased by
lower cost of deposits.
Total average interest earning assets increased by$1.1 billion , or 43.5%, to$3.7 billion for the three months endedSeptember 30, 2020 , from$2.6 billion for the same period endedSeptember 30, 2019 , primarily due to the merger withWellesley and organic loan growth. Average interest-bearing liabilities increased by$630.8 million , or 33.8%, to$2.5 billion for the three months endedSeptember 30, 2020 , from$1.9 billion for the same period endedSeptember 30, 2019 . The Company's net interest margin, on a fully taxable equivalent basis, increased 52 basis points to 3.73% for the quarter endedSeptember 30, 2020 , as compared to 3.21% for the quarter endedSeptember 30, 2019 . Interest and Dividend Income. Total interest and dividend income increased$10.5 million , or 40.0%, to$36.9 million for the quarter endedSeptember 30, 2020 , as compared to$26.3 million for the quarter endedSeptember 30, 2019 , primarily due to a$11.3 million increase in interest income from loans, partially offset by a$506,000 decrease in interest on investment securities. Interest Expense. Interest expense decreased$3.4 million , or 63.7%, to$1.9 million for the quarter endedSeptember 30, 2020 , as compared to$5.3 million for the quarter endedSeptember 30, 2019 , primarily due to lower cost of deposits. Average interest-bearing liabilities increased$630.8 million to$2.5 billion for the three months endedSeptember 30, 2020 from$1.9 billion for the same period endedSeptember 30, 2019 , primarily due to an increase in average money market accounts of$225.5 million , a$154.9 million increase in average checking accounts balances, higher savings balances of$89.4 million , and an increase in average other borrowed funds of$61.6 million . The aforementioned increases were primarily due to theWellesley merger and organic core deposit growth.
Provision for Credit Losses. The Company recorded
The Company recorded net charge-offs of$213,000 for the quarter endedSeptember 30, 2020 , as compared to net charge-offs of$1.2 million for the quarter endedSeptember 30, 2019 . The allowance for loan credit losses was$35.9 million , or 1.16% of total loans (excluding theSmall Business Administration's ("SBA") Paycheck Protection Program ("PPP") loans), atSeptember 30, 2020 , as compared to$18.2 million , or 0.82% of total loans, atDecember 31, 2019 . The Company's current level of allowance for credit losses takes into account changes in assumptions associated with estimated losses as a result of COVID-19 pandemic both qualitatively and quantitatively. 43 -------------------------------------------------------------------------------- Noninterest Income. Total noninterest income increased by$567,000 , or 5.5%, to$10.9 million for the quarter endedSeptember 30, 2020 , as compared to$10.4 million for the quarter endedSeptember 30, 2019 , primarily as a result of increases in wealth management revenue and increases in gains on loans sold. Noninterest income was 23.8% of total revenue for the quarter endedSeptember 30, 2020 .
• Wealth management revenue increased by
for the third quarter of 2020, as compared to
quarter of 2019. Wealth Management Assets under Management and
Administration were
the
• Gain on loans sold increased by
of 2020, as compared to $460,000 for the third quarter of 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 September 30,
2020 2019
(dollars in thousands)
Wealth Management revenues:
Trust and investment advisory fees
Asset-based revenues $ 7,479 $ 6,456
Financial planning fees and other service fees 546 577
Total wealth management revenues $ 8,025 $ 7,033
The following table presents the changes in Wealth Management Assets under
Management:
For the Three Months Ended September 30,
2020 2019
(dollars in thousands)
Wealth Management Assets under Management
Balance at the beginning of the period 3,572,286 $ 3,079,770
Acquired wealth management assets - - Gross client asset inflows 90,606 95,770 Gross client asset outflows (95,243 ) (81,619 ) Net market impact 223,415 25,120 Balance at the end of the period $ 3,791,064 $
3,119,041
Weighted average management fee 0.79 % 0.83 %
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$6.6 million , or 34.9%, to$25.4 million for the quarter endedSeptember 30, 2020 , as compared to$18.9 million for the quarter endedSeptember 30, 2019 , primarily driven by increases in salaries and employee benefits expense, occupancy and equipment expense, data processing expense, and one-time merger-related expenses as described below.
• Salaries and employee benefits expense increased
driven by increased staffing related to the merger with Wellesley in the
second quarter of 2020, additions to support business initiatives, and
higher employee benefit costs.
• Occupancy and equipment expense increased
result of additional banking locations and office space as a result of the
mergers with Optima and
• Data processing expense increased
of the merger with
• Merger expenses increased
same period a year ago, primarily due to one-time non-operating costs
associated with the Wellesley merger.
44
-------------------------------------------------------------------------------- Income Tax Expense. The Company recorded an income tax expense of$5.0 million for the quarter endedSeptember 30, 2020 , as compared to income tax expense of$2.7 million for the for the quarter endedSeptember 30, 2019 . The Company's effective tax rate was 27.2% for the quarter endedSeptember 30, 2020 , as compared to 26.1% for the quarter endedSeptember 30, 2019 .
Results of Operations for the nine months ended
General. Net income increased$798,000 , or 4.4%, to$18.9 million for the nine months endedSeptember 30, 2020 , as compared to net income of$18.1 million for the nine months endedSeptember 30, 2019 . Diluted earnings per share were$3.09 for the first nine months of 2020, representing a 21.8% decrease from diluted earnings per share of$3.95 for the same nine months of 2019. The results for the nine months endedSeptember 30, 2020 include the merger accounting impact of CECL within the provision for credit losses, merger expenses, and other non-operating items. Excluding these items, operating net income was$29.5 million for the nine months endedSeptember 30, 2020 , an increase of$8.3 million , or 39.1%, compared to operating net income of$21.2 million for the nine months endedSeptember 30, 2019 . Operating diluted earnings per share were$4.83 for the first nine months of 2020, representing a 4.5% increase from operating diluted earnings per share of$4.62 for the first nine months of 2019. Net Interest and Dividend Income. Inclusive of theWellesley merger, net interest and dividend income before provision for credit losses, increased by$29.1 million , or 50.9%, to$86.2 million , atSeptember 30, 2020 , as compared to$57.1 million for the nine months endedSeptember 30, 2019 , primarily due to loan growth (both organic and as a result of theWellesley merger), lower cost of funds, 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 $796.5 million , or 33.6%, to $3.2
billion during the nine months ended September 30, 2020 , from $2.4 billion
during the nine months ended September 30, 2019 . Average interest-bearing
liabilities increased by $459.3 million , or 27.1%, to $2.2 billion during the
nine months ended September 30, 2020 from $1.7 billion for the same period ended
September 30, 2019 . The Company's net interest margin, on a fully taxable
equivalent basis, increased 42 basis points to 3.65% for the nine months ended
September 30, 2020 , as compared to 3.23% for the nine months ended September 30,
2019 .
Interest and Dividend Income. Total interest and dividend income increased $23.6
million , or 33.7%, to $93.5 million for the nine months ended September 30,
2020 , as compared to $69.9 million for the nine months ended September 30, 2019 ,
primarily due to loan growth, both organic and as a result of the mergers with
Optima and Wellesley .
Interest Expense. Interest expense decreased
Average interest-bearing liabilities increased by$459.3 million , or 27.1%, primarily driven by an increase in average savings account balances of$125.6 million , an increase in average money market account balances of$119.6 million , and an increase in average checking account balances of$111.7 million , primarily due to the mergers with Optima andWellesley and organic core deposit growth. Provision for Credit Losses. For the nine months endedSeptember 30, 2020 , the Company recorded a total provision for credit losses of$18.4 million , which includes$9.3 million associated with the expected impact of the COVID-19 pandemic on future loan losses and$8.6 million for the recognition of the non-operating impact of the merger related CECL accounting.
The Company recorded net charge-offs of
45
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Noninterest Income. Inclusive of the Wellesley merger, total noninterest income
increased by $2.3 million , or 8.5%, to $28.7 million for the nine months ended
September 30, 2020 , as compared to $26.5 million for the nine months ended
September 30, 2019 , primarily as a result of increases in wealth management
revenue and an increase in gains on loans sold. Noninterest income was 25.0% of
total revenue for the nine months ended September 30, 2020 .
• Wealth management revenue increased by
million for the nine months ended
million for the nine months ended
• Gain on loans sold increased by
months ended
ended
The categories of Wealth Management revenues are shown in the following table:
For the Nine Months Ended September 30,
2020 2019
(dollars in thousands)
Wealth Management revenues:
Trust and investment advisory fees
Asset-based revenues $ 20,693 $ 18,763
Financial planning fees and other service fees 993 813
Total wealth management revenues $ 21,686 $ 19,576
The following table presents the changes in Wealth Management Assets under
Management:
For the Nine Months Ended September 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 245,670 245,209 Gross client asset outflows (262,731 ) (251,071 ) Net market impact 182,078 365,356 Balance at the end of the period $ 3,791,064 $
3,119,041
Weighted average management fee 0.81 % 0.83 %
There were no significant changes to the average fee rates and fee structure for
the nine months ended
Noninterest Expense. Total noninterest expense increased by$14.2 million , or 25.0%, to$71.0 million for the nine months endedSeptember 30, 2020 , as compared to$56.7 million for the nine months endedSeptember 30, 2019 . This increase was primarily driven by increases in salaries and employee benefits expense, merger related expenses, occupancy and equipment expense, and data processing expense as a result of our mergers with Optima in 2019 andWellesley in 2020 as described below.
• 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.
• Merger expenses increased
primarily due to one-time non-operating costs associated with the
merger.
• Occupancy and equipment expense increased
as a result of additional branches and office space as a result of the
mergers with Optima and Wellesley .
• Data processing expense increased
result of the mergers with Optima and Wellesley .
Income Tax Expense. The Company recorded a provision for income taxes of $6.5
million for the nine months ended September 30, 2020 , as compared to $6.0
million for the nine months ended September 30, 2019 . The effective tax rate was
25.7% for the nine months ended September 30, 2020 , as compared to 24.8% for the
same period in 2019.
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Changes in Financial Condition
Total Assets. Total assets increased
Loans. Total loans increased by$1.1 billion , or 47.5%, fromDecember 31, 2019 , inclusive of theWellesley merger, and were$3.3 billion as ofSeptember 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
PPP loans are included in Commercial & 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. AtSeptember 30, 2020 , our investment in bank-owned life insurance was$45.9 million , representing an increase of$8.6 million , or 23.1%, from$37.3 million atDecember 31, 2019 , primarily due to new policies acquired as a result of theWellesley merger. Deposits. Inclusive of theWellesley merger, total deposits grew by$973.1 million , or 41.3%, to$3.3 billion atSeptember 30, 2020 , primarily driven by a combination of the impact of theWellesley merger, organic deposit growth, and funds from the PPP program.
• Core deposits, which the Company defines as all deposits other than
certificates of deposit, increased by $838.8 million , or 38.5%, to $3.0
billion at September 30, 2020 from $2.2 billion at December 31, 2019 ,
inclusive of the Wellesley merger.
• Excluding the impact of the
deposits was $290.0 million , or 13.3%.
Certificates of deposit totaled $316.5 million at September 30, 2020 , an
increase of $134.2 million from $182.3 million at December 31, 2019 , primarily
due to the Wellesley merger. Total brokered certificates of deposit, which are
included within certificates of deposit, were $77.8 million and $7.1 million at
September 30, 2020 and December 31, 2019 , respectively.
Borrowings. At September 30, 2020 , borrowings consisted of advances from the
Federal Home Loan Bank ("FHLB") of Boston and the Federal Reserve Bank of Boston
("FRB Boston"). Borrowings were $135.8 million as of September 30, 2020 , and
remained relatively unchanged from $135.7 million at December 31, 2019 .
Shareholders' Equity. Total shareholders' equity increased $106.5 million , or
37.2%, to $393.1 million at September 30, 2020 , from $286.6 million at
December 31, 2019 , primarily due to $87.2 million of equity issued as a result
of the Wellesley merger, net income of $18.9 million , increases in the value of
the Company's interest rate derivative positions of $5.5 million , and increases
in unrealized gains on the available for sale investment portfolio of $4.2
million , partially offset by regular dividend payments of $9.4 million .
The Company's total shareholders' equity to total assets ratio was 9.86% as of
September 30, 2020 , as compared to 10.04% as of December 31, 2019 . Book value
per share grew by $3.67 to $56.73 as of September 30, 2020 , as compared to
$53.06 as of December 31, 2019 .
The Company's ratio of tangible common equity to tangible assets decreased to
8.60%, at September 30, 2020 , from 8.93% at December 31, 2019 , primarily due to
the impact of goodwill recorded as a result of the Wellesley merger. Tangible
book value per share grew by $2.14 to $48.80 as of September 30, 2020 , as
compared to $46.66 as of December 31, 2019 .
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--------------------------------------------------------------------------------Organic Loan and Deposit Growth (dollars in thousands)
September 2020 vs December 2019
Balance Organic
September 30, 2020 June 30, 2020 December 31, 2019 Acquired Growth/(Decline) $ Organic Growth/(Decline) % Loans Residential mortgage $ 1,343,815 1,351,308 $ 917,566$ 403,855 $ 22,394 2.4% Commercial mortgage 1,364,387 1,413,427 1,060,574 290,909 12,904 1.2% Home equity 108,343 116,067 80,675 36,213 (8,545 ) (10.6%) Commercial & Industrial 428,024 414,243 133,236 138,953 155,835 117.0% Consumer 39,717 37,839 34,677 103 4,937 14.2% Total loans $ 3,284,286$ 3,332,884 $ 2,226,728$ 870,033 $ 187,525 8.4% PPP Loans (1) (189,916 ) (189,306 ) - (32,289 ) (157,627 ) - Total Loans excluding PPP $ 3,094,370$ 3,143,578 $ 2,226,728$ 837,744 $ 29,898 1.3% Deposits Demand $ 1,011,382$ 929,846 $ 630,593 175,912 $ 204,877 32.5% Interest bearing checking 592,113 606,999 450,098 49,944 92,071 20.5% Money market 436,120 419,537 181,406 250,226 4,488 2.5% Savings 975,811 960,847 914,499 72,700 (11,388 ) (1.2%) Core deposits 3,015,426 2,917,229 2,176,596 548,782 290,048 13.3% Certificates of deposit 316,516 358,614 182,282 212,096 (77,862 ) (42.7%) Total deposits $ 3,331,942$ 3,275,843 $ 2,358,878$ 760,878 $ 212,186 9.0%
(1) PPP loans are included within Commercial & Industrial.
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 Nine Months Ended
September 30 , June 30 ,
2020 2020 2019 2020 2019
(in thousands, except share data)
Net (Loss) Income (a GAAP measure)
Add: Merger and Capital issuance expenses 1,168 4,366 339 5,787 3,880 Add: (Gain) Loss on disposition of investment securities - (69 ) (2 ) (69 ) 79 Add: Provision established for acquired Wellesley loans - 8,638 - 8,638 - Tax effect of non-operating adjustments(1) (278 ) (3,431 ) (74 ) (3,772 ) (873 ) Operating Net Income (a non-GAAP measure)$ 14,319 $ 7,788 $ 7,939$ 29,528 $ 21,232 Less: Dividends and Undistributed Earnings Allocated to Participating Securities (GAAP) (13 ) (4 ) (59 ) (22 ) (183 ) Operating Income Applicable to Common Shareholders (a non-GAAP measure)$ 14,306 $ 7,784
$ 7,880
6,954,324 5,912,889 4,842,965 6,113,828 4,552,092
Operating Diluted Earnings Per Share
(a non-GAAP measure) $ 2.06 $ 1.32 $ 1.63 $ 4.83 $ 4.62
(1) The net tax benefit associated with non-operating items is determined by
assessing whether each non-operating 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.
48
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September 30, 2020 June 30, 2020 December 31, 2019 September 30, 2019
(in thousands, except share data)
Tangible Common Equity:
Shareholders' equity (GAAP) $ 393,073 $ 383,060 $ 286,561 $ 243,345
Less: Goodwill and acquisition related (54,980 ) (55,070 ) (34,544 ) (34,635 )
intangibles (GAAP)
Tangible Common Equity (a non-GAAP 338,093 327,990 252,017 208,710
measure)
Total assets (GAAP) 3,987,109 4,022,750 2,855,563 2,841,868 Less: Goodwill and acquisition related (54,980 ) (55,070 ) (34,544 ) (34,635 )
intangibles (GAAP)
Tangible assets (a non-GAAP measure) $ 3,932,129
8.60 % 8.27 % 8.93 % 7.43 %
non-GAAP measure)
Tangible Book Value Per Share:
Tangible Common Equity (a non-GAAP $ 338,093 $ 327,990 $ 252,017 $ 208,710
measure)
Common shares outstanding 6,928,288 6,927,699 5,400,868 4,849,988 Tangible Book Value Per Share (a $ 48.80 $ 47.34 $ 46.66 $ 43.03 non-GAAP 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
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 ofSeptember 30, 2020 are carried at their amortized cost of$240.0 million . AtDecember 31, 2019 , securities held to maturity totaled$258.2 million . The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity investment securities, and the percentage distribution at the dates indicated: September 30, December 31, 2020 2019 Amount Percent Amount Percent (dollars in thousands) Available for sale securities U.S. GSE obligations$ 23,771 16 %$ 37,848 27 % Mortgage-backed securities 125,559 83 % 102,482 73 % Corporate debt securities 2,775 1 % - 0 % Total securities available for sale$ 152,105 100 %$ 140,330 100 % Held to maturity securities U.S. GSE obligations $ - 0 %$ 5,000 2 % Mortgage-backed securities 132,629 55 % 161,759 63 % Corporate debt securities 6,987 3 % 6,980 3 % Municipal securities 100,399 42 % 84,433 32 % Total securities held to maturity$ 240,015 100 %$ 258,172 100 % Total$ 392,120 100 %$ 398,502 100 % 49
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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 September 30, 2020 (dollars in thousands)
Available for sale securities
U.S. GSE obligations $ - - $ 9,995 0.5 % $ 5,000 2.3 % $ 8,000 2.6 % $ 22,995 1.6 %
Mortgage-backed securities - - 3,511 1.4 % 32,906 1.9 % 86,482 1.5 % 122,899 1.6 %
Corporate debt securities 1,001 1.1 % 1,740 1.8 % - - - - 2,741 1.6 %
Total available for sale securities $ 1,001 1.1 % $ 15,246 0.9 % $ 37,906 1.9 % $ 94,482 1.6 % $ 148,635 1.6 %
Held to maturity securities
U.S. GSE obligations $ - - $ - - $ - - $ - - $ - -
Mortgage-backed securities - - 2 5.6 % 50,333 2.7 % 82,294 2.2 % 132,629 2.4 %
Corporate debt securities - - 6,987 2.6 % - - - - 6,987 2.6 %
Municipal securities 1,885 4.2 % 16,828 3.7 % 45,277 3.5 % 36,409 2.8 % 100,399 3.3 %
Total held to maturity securities $ 1,885 4.2 % $ 23,817 3.3 % $ 95,610 3.1 % $ 118,703 2.4 % $ 240,015 2.8 %
Total $ 2,886 3.1 % $ 39,063 2.4 % $ 133,516 2.7 % $ 213,185 2.0 % $ 388,650 2.3 %
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 securities
U.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 securities
U.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 50 -------------------------------------------------------------------------------- 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. The following table shows the composition of the loan portfolio at the dates indicated: September 30, 2020 December 31, 2019 % of % of Amount Total Amount Total (dollars in thousands) Residential mortgage Mortgages - fixed rate$ 549,228 17 %$ 430,877 19 % Mortgages - adjustable rate 771,978 23 % 467,139 21 % Construction 21,326 1 % 17,374 1 % Deferred costs net of unearned fees 1,283 0 % 2,176 0 % Total residential mortgages 1,343,815 41 % 917,566 41 % Commercial mortgage Mortgages - non-owner occupied 1,047,919 32 % 870,047 40 % Mortgages - owner occupied 151,661 5 % 114,095 5 % Construction 163,202 5 % 76,288 3 % Deferred costs net of unearned fees 1,605 0 % 144 0 % Total commercial mortgages 1,364,387 42 % 1,060,574 48 % Home equity Home equity - lines of credit 103,499 3 % 73,880 3 % Home equity - term loans 4,611 0 % 6,555 1 % Deferred costs net of unearned fees 233 0 % 240 0 % Total home equity 108,343 3 % 80,675 4 % Commercial & industrial Commercial & industrial 431,614 13 % 133,337 6 % Unearned fees net of deferred costs (3,590 ) 0 % (101 ) 0 % Total commercial & industrial 428,024 13 % 133,236 6 % Consumer Secured 37,990 1 % 33,453 1 % Unsecured 1,707 0 % 1,199 0 % Unearned fees net of deferred costs 20 0 % 25 0 % Total consumer 39,717 1 % 34,677 1 % Total loans$ 3,284,286 100 %$ 2,226,728 100 % Residential Mortgage. Residential real estate loans held in portfolio amounted to$1.3 billion atSeptember 30, 2020 , representing an increase of$426.2 million , or 46.5%, 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 atSeptember 30, 2020 andDecember 31, 2019 .
The average loan balance outstanding in the residential portfolio was
51
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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 the Federal
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.
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 Nine Months Ended
September 30,
2020 2019
(dollars in thousands)
Originations for retention in portfolio $ 401,808 $ 133,213
Originations for sale to the secondary market 58,878 10,624
Total $ 460,686 $ 143,837 Loans are sold with servicing retained or released. The table below presents residential real estate loan sale activity for the periods indicated:
For the Nine Months Ended September 30,
2020 2019
(dollars in thousands)
Loans sold with servicing rights retained $ 35,802 $ 41,956
Loans sold with servicing rights released 18,024 3,557
Total $ 53,826 $ 45,513
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 $1.3 million as of September 30, 2020 and December 31, 2019 .
52
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Commercial Mortgage. CRE loans were $1.4 billion as of September 30, 2020 , an
increase of $303.8 million , or 28.6%, from $1.1 billion at December 31, 2019 .
The CRE loans portfolio represented 42% and 48% of total loans at September 30,
2020 and December 31, 2019 , respectively. The average loan balance outstanding
in this portfolio was $1.5 million , and the largest individual CRE outstanding
was $27.0 million as of September 30, 2020 . At September 30, 2020 , this
commercial mortgage was performing in accordance with its original terms.
CRE loans are secured by a variety of property types, with approximately 88.6%
of the total at September 30, 2020 composed of multi-family dwellings, retail
facilities, office buildings, commercial mixed use, lodging, and industrial and
warehouse properties.
Generally, our CRE 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.
Home Equity. The home equity portfolio totaled $108.3 million and $80.7 million
at September 30, 2020 and December 31, 2019 , respectively. The home equity
portfolio represented 3% and 4% of total loans at September 30, 2020 and
December 31, 2019 , respectively. At September 30, 2020 , the largest home equity
line of credit was $3.5 million and had an outstanding balance of $3.2 million .
At September 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 C&I portfolio totaled $428.0 million and
$133.2 million at September 30, 2020 and December 31, 2019 , respectively. The
C&I portfolio represented 13% and 6% of total loans at September 30, 2020 and
December 31, 2019 , respectively. The average loan balance outstanding in this
portfolio was $298,000 and the largest individual C&I loan outstanding was $9.2
million as of September 30, 2020 . At September 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, solar, and asset-based loans are reported within the C&I portfolio.
• At
the average loan balance outstanding in this portfolio was
largest individual loan outstanding was $6.9 million , and this loan was
performing in accordance with its original terms.
• At September 30, 2020 , asset-based loans totaled $28.7 million and the
average loan balance outstanding in this portfolio was $2.1 million . The
largest individual loan outstanding was $8.5 million , and this loan was
performing in accordance with its original terms.
• At
average loan balance outstanding in this portfolio was $2.9 million . The
largest individual loan outstanding was $9.2 million , and this loan was
performing in accordance with its original terms.
53
-------------------------------------------------------------------------------- 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 no significant concentration in any one business sector, and loan risks are generally diversified among many borrowers. Consumer Loans. The consumer loan portfolio totaled$39.7 million atSeptember 30, 2020 , an increase of$5.0 million , or 14.4%, from$34.7 million atDecember 31, 2019 . Consumer loans represented 1% of the total loan portfolio atSeptember 30, 2020 andDecember 31, 2019 . Consumer loans include secured and unsecured loans, lines of credit, and personal installment loans. Unsecured consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets. The secured consumer loans and lines portfolio are generally fully secured by pledged assets such as bank accounts or investments. Loan Portfolio Maturities. The following table summarizes the dollar amount of loans maturing in the portfolio based on their loan type and contractual terms to maturity atSeptember 30, 2020 . The table does not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. September 30, 2020 One Year One to Over Five or Less Five Years Years Total (dollars in thousands) Residential mortgage$ 5,797 $ 14,014 $ 1,324,004 $ 1,343,815 Commercial mortgage 149,082 313,918 901,387 1,364,387 Home equity 511 4,206 103,626 108,343 Commercial & Industrial 44,032 278,317 105,675 428,024 Consumer 39,494 77 146 39,717 Total$ 238,916 $ 610,532 $ 2,434,838 $ 3,284,286 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 atSeptember 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. September 30, 2020 Fixed Adjustable Floating Total (dollars in thousands) Residential mortgage$ 554,577 $ 782,724 $ 6,514 $ 1,343,815 Commercial mortgage 426,202 417,186 520,999 1,364,387 Home equity 5,256 4,717 98,370 108,343 Commercial & Industrial 241,934 15,927 170,163 428,024 Consumer 432 529 38,756 39,717 Total$ 1,228,401 $ 1,221,083 $ 834,802 $ 3,284,286 54
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Non-performing Loans and TROUBLED DEBT RESTRUCTURINGS (TDRs)
The composition of non-performing assets is as follows:
September 30, December 31,
2020 2019
(dollars in thousands)
Non-accrual loans $ 7,717 $ 4,160
Loans past due > 90 days, but still accruing 660 1,264
Troubled debt restructurings 812
227
Total nonperforming loans $ 9,189$ 5,651 Accruing troubled debt restructured loans $ - $ - Nonperforming loans as a percentage of total loans 0.28 % 0.25 % Nonperforming loans as a percentage of total assets 0.23 % 0.20 %
Total non-performing loans increased
The Company continues to closely monitor the portfolio of non-performing 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 atSeptember 30, 2020 andDecember 31, 2019 , although such values may fluctuate with changes in the economy and the real estate market. 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 CRE loan portfolios. This independent review was performed in each of the past five years. Non-accrual Loans. Loans are typically placed on non-accrual 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. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by management. 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 non-accrual status at the time of the restructuring generally remain on non-accrual status for approximately six months or longer before management considers such loans for return to accruing status. Accruing restructured loans are placed into non-accrual 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.
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.
55
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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 2019 Form 10-K and in
Note 8 to the Unaudited Consolidated Financial Statements.
The following table summarizes the changes in the Company's allowance for credit losses on loans for the periods indicated:
Nine Months ended Year ended
September 30, December 31,
2020 2019
(dollars in thousands)
Period-end loans outstanding (net of unearned
discount and deferred loan fees) $ 3,284,286 $ 2,226,728
Average loans outstanding (net of unearned
discount and deferred loan fees) $ 2,741,140 $ 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 (387 ) (338 )
Commercial mortgage (264 ) (1,270 )
Residential mortgage - -
Home Equity - -
Consumer (33 ) (48 )
Total loans charged-off $ (684 ) $ (1,656 )
Recovery of loans previously charged-off:
Commercial and industrial 57 53
Commercial mortgage - -
Residential mortgage - -
Home Equity - -
Consumer 14 11Total recoveries of loans previously
charged-off: 71 64 Net loan (charge-offs) recoveries $ (613 )$ (1,592 ) Adoption of accounting standard - loans 205 - Provision for credit losses - acquired loans 8,282 - Initial allowance for PCD 437 - Provision for credit losses - loans 9,429 3,004 Balance at end of period $ 35,920
(0.02 )% (0.08 )%
Ratio of allowance for credit losses to loans
Outstanding 1.09 % 0.82 %
The allowance for credit losses to loans outstanding excluding PPP loans was
1.16% 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.
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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. The following table set forth the balances of the Bank's deposits for the periods indicated: September 30, December 31, 2020 2019 Amount Percent Amount Percent (dollars in thousands) Demand deposits (non-interest bearing)$ 1,011,382 30.3 %$ 630,593 26.7 % Interest bearing checking 592,113 17.8 % 450,098 19.1 % Money market 436,120 13.1 % 181,406 7.7 % Savings 975,811 29.3 % 914,499 38.8 %
Retail certificates of deposit under
$100,000 162,176 4.9 % 56,602 2.4 %
Retail certificates of deposit of
$100,000 or greater 76,515 2.3 % 118,596 5.0 % Wholesale certificates of deposit 77,825 2.3 % 7,084 0.3 % Total$ 3,331,942 100.0 %$ 2,358,878 100 .0% AtSeptember 30, 2020 , the Company had a total of$238.7 million in certificates of deposit, excluding brokered deposits, of which$191.0 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 ofSeptember 30, 2020 , we had a total of$77.8 million of brokered deposits and$7.1 million of brokered deposits atDecember 31, 2019 . Borrowings. Total borrowings were$135.8 million and$135.7 million atSeptember 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. FRB Boston 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 ofBoston totaled$50.4 million atSeptember 30, 2020 and$135.7 million atDecember 31, 2019 , respectively. The Company's remaining borrowing capacity at the FHLB ofBoston atSeptember 30, 2020 was approximately$639.1 million . In addition, the Company has a$10.0 million line of credit with the FHLB ofBoston . The Company's borrowings with FRB Boston totaled$85.4 million atSeptember 30, 2020 . There were no borrowings outstanding with the FRB Boston atDecember 31, 2019 . The Company's remaining borrowing capacity at the FRB Boston atSeptember 30, 2020 was approximately$587.5 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.
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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
September 30, 2020 June 30, 2020 September 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 $ 3,288,304 $ 34,468 4.17 % $ 2,660,482 $ 28,130 4.25 % $ 2,103,892 $ 23,280 4.39 %
Tax-exempt 18,940 307 6.45 21,004 267 5.11 19,441 218 4.45
Securities available for sale (3)
Taxable 129,957 524 1.60 115,875 557 1.93 149,045 704 1.87
Securities held to maturity
Taxable 147,771 880 2.37 158,431 964 2.45 204,279 1,274 2.47
Tax-exempt 90,698 799 3.50 84,885 760 3.60 74,246 713 3.81
Cash and cash equivalents 67,056 8 0.05 45,437 16 0.14 57,937 219 1.50
Total interest-earning assets (4) 3,742,726 36,986 3.93 % 3,086,114 30,694 4.00 % 2,608,840 26,408 4.02 %
Non interest-earning assets 281,910 233,240 184,151
Allowance for credit losses (33,872 ) (23,272 ) (17,392 ) Total assets$ 3,990,764 $ 3,296,082 $ 2,775,599 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits Checking accounts$ 577,294 $ 164 0.11 %$ 541,482 $ 209 0.16 %$ 422,395 $ 117 0.11 % Savings accounts 963,253 565 0.23 915,835 462 0.20 873,853 2,591 1.18 Money market accounts 435,417 245 0.22 270,951 140 0.21 209,922 743 1.40 Certificates of deposit 333,366 380 0.45 230,798 585 1.02 243,892 1,158 1.88 Total interest-bearing deposits 2,309,330 1,354 0.23 1,959,066 1,396 0.29 1,750,062 4,609 1.04 Subordinated debt 9,936 189 7.57 3,266 64 7.88 - - - Other borrowed funds 177,423 376 0.84 138,052 282 0.82 115,809 676 2.32 Total interest-bearing liabilities 2,496,689 1,919 0.31 % 2,100,384 1,742 0.33 % 1,865,871 5,285 1.12 % Non-interest-bearing liabilities Demand deposits 986,590 770,202 596,646 Other liabilities 119,762 97,431 73,293 Total liabilities 3,603,041 2,968,017 2,535,810 Shareholders' equity 387,723 328,065 239,789 Total liabilities & shareholders' equity$ 3,990,764 $ 3,296,082 $
2,775,599
Net interest income on a fully taxable equivalent basis 35,067 28,952 21,123 Less taxable equivalent adjustment (232 ) (215 ) (196 ) Net interest income$ 34,835 $ 28,737 $ 20,927 Net interest spread (5) 3.63 % 3.67 % 2.89 % Net interest margin (6) % 3.73 % 3.77 % 3.21
(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)
and associated dividend income is excluded from interest income.
(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.
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Nine Months Ended
September 30, 2020 September 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 $ 2,719,965 $ 85,936 4.22 % $ 1,868,256 $ 60,919 4.36 %
Tax-exempt 21,175 825 5.20 14,619 487 4.45
Securities available for sale (3)
Taxable 126,433 1,742 1.84 156,414 2,164 1.85
Securities held to maturity
Taxable 158,506 2,906 2.45 210,747 3,910 2.48
Tax-exempt 86,275 2,313 3.58 74,508 2,163 3.88
Cash and cash equivalents 57,472 163 0.38 48,750 556 1.52
Total interest-earning assets (4) 3,169,826 93,885 3.96 % 2,373,294 70,199 3.95 %
Non interest-earning assets 236,346 153,760
Allowance for loan losses (25,221 ) (16,999 )
Total assets $ 3,380,951 $ 2,510,055
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Checking accounts $ 525,511 $ 532 0.14 % $ 413,773 $ 319 0.10 %
Savings accounts 922,835 2,797 0.40 797,187 6,288 1.05
Money market accounts 300,300 834 0.37 180,729 1,803 1.33
Certificates of deposit 250,796 1,716 0.91 226,908 3,079 1.81
Total interest-bearing deposits 1,999,442 5,879 0.39 % 1,618,597 11,489 0.95 %
Subordinated debt 4,421 253 7.64 - - -
Other borrowed funds 147,730 1,223 1.11 73,686 1,347 2.44
Total interest-bearing liabilities 2,151,593 7,355 0.46 % 1,692,283 12,836 1.01 %
Non-interest-bearing liabilities
Demand deposits 793,934 541,110
Other liabilities 99,168 66,141
Total liabilities 3,044,695 2,299,534
Shareholders' equity 336,256 210,521
Total liabilities & shareholders'
equity $ 3,380,951 $ 2,510,055
Net interest income on a fully
taxable equivalent basis 86,530 57,363
Less taxable equivalent adjustment (659 ) (556 )
Net interest income $ 85,871 $ 56,807
Net interest spread (5) 3.50 % 2.94 %
Net interest margin (6) 3.65 % 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)
and associated dividend income is excluded from interest income.
(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.
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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 September 30, 2020 Nine Months Ended September 30, 2020
Compared with Compared with
Three Months Ended September 30, 2019 Nine Months Ended September 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 $ 12,410 $ (1,222 ) $ 11,188 $ 27,020 $ (2,003 ) $ 25,017
Tax-exempt (6 ) 95 89 246 92 338
Securities available for
sale
Taxable (85 ) (95 ) (180 ) (411 ) (11 ) (422 )
Securities held to
maturity
Taxable (342 ) (52 ) (394 ) (955 ) (49 ) (1,004 )
Tax-exempt 147 (61 ) 86 326 (176 ) 150
Cash and cash equivalents 30 (241 ) (211 ) 85 (478 ) (393 )
Total interest income $ 12,154 $ (1,576 ) $ 10,578 $ 26,311 $ (2,625 ) $ 23,686
Interest expense
Deposits
Checking accounts $ 44 $ 3 $ 47 $ 99 $ 114 $ 213
Savings accounts 240 (2,266 ) (2,026 ) 869 (4,360 ) (3,491 )
Money market accounts 419 (917 ) (498 ) 783 (1,752 ) (969 )
Certificates of deposit 318 (1,096 ) (778 ) 297 (1,660 ) (1,363 )
Total interest-bearing
deposits 1,021 (4,276 ) (3,255 ) 2,048 (7,658 ) (5,610 )
Subordinated debt 189 - 189 253 - 253
Other borrowed funds 254 (554 ) (300 ) 875 (999 ) (124 )
Total interest expense $ 1,464 $ (4,830 ) $ (3,366 ) $ 3,176 $ (8,657 ) $ (5,481 )
Change in net interest
income $ 10,690 $ 3,254 $ 13,944 $ 23,135 $ 6,032 $ 29,167 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.
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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 of Boston , 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 ofSeptember 30, 2020 : Year 1 Percentage Change Change in Interest in Net Interest Rates (in Basis Points) Income Parallel rate shocks +400 2.0 +300 1.0 +200 (0.2) +100 0 -100 (2.1)
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 ofSeptember 30, 2020 : Year 1 Percentage Change Change in Interest in Net Interest
Rates (in Basis Points) Income
Gradual rate shifts
+200 (1.3)
-100 0.1
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 of
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Also as of September 30, 2020 , our analysis estimated that, in the event of an
instantaneous 100 basis point decrease in interest rates, the Bank would
experience a 6.8% increase in the economic value of equity over the next 12
months, and a 10.7% 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 of September 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. AtSeptember 30, 2020 , the Company had access to funds totaling$1.6 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$393.1 million atSeptember 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 9.86% atSeptember 30, 2020 and 10.04% atDecember 31, 2019 . Book value per share atSeptember 30, 2020 andDecember 31, 2019 amounted to$56.73 and$53.06 , respectively. The Company and the Bank are subject to various regulatory capital requirements. As ofSeptember 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. 62
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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 non-performance 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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