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 the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , (the "2021 Annual Report"), filed with theSecurities and Exchange Commission (the "SEC") onMarch 14, 2022 .
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:
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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;
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disruptions to the credit and financial markets, either nationally or globally;
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the duration and scope of the COVID-19 pandemic and its impact on levels of consumer confidence;
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actions that governments, businesses and individuals take in response to the COVID-19 pandemic;
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the impact of the COVID-19 pandemic and actions taken in response to the pandemic on global and regional economies and economic activity;
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a prolonged resurgence in the severity of the COVID-19 pandemic due to variants and mutations of the virus;
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the pace of recovery when the COVID-19 pandemic subsides;
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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;
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legislative, regulatory, or accounting changes, including changes resulting from the adoption and implementation of the Dodd-Frank Act, which may adversely affect the Company's business and/or competitive position, impose additional costs on the Company or cause it to change its business practices;
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the Dodd-Frank Act's consumer protection regulations which could adversely affect the Company's business, financial condition, or results of operations;
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disruptions in the Company's ability to access capital markets which may adversely affect its capital resources and liquidity;
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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;
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the failure of the Company's financial reporting controls and procedures to prevent or detect all errors or fraud;
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the Company's dependence on the accuracy and completeness of information about clients and counterparties;
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the fiscal and monetary policies of the federal government and its agencies;
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the failure to satisfy capital adequacy and liquidity guidelines applicable to the Company;
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downgrades in the Company's credit rating;
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changes in interest rates which could affect interest rate spreads and net interest income;
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costs and effects of litigation, regulatory investigations, or similar matters;
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inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the Company's merger (the "Northmark Merger") withNorthmark Bank ("Northmark").
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a failure by the Company to effectively manage the risks the Company faces, including credit, operational and cyber security risks;
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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;
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unpredictable natural or other disasters, which could adversely impact the Company's customers or operations;
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a loss of customer deposits, which could increase the Company's funding costs;
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the disparate impact that can result from having loans concentrated by loan type, industry segment, borrower type or location of the borrower or collateral;
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changes in the creditworthiness of customers;
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increased credit losses or impairment of goodwill and other intangibles;
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negative public opinion which could damage the Company's reputation and adversely impact business and revenues;
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the Company depends on the expertise of key personnel, and if these individuals leave or change their roles without effective replacements, operations may suffer;
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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
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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, 2022 , the Company had total assets of approximately$5.1 billion . The Bank operates 22 full-service banking offices inEastern Massachusetts andNew Hampshire . As a private bank, we focus on four core services that center around client needs. The Company's core services include Wealth Management, Commercial Banking, Consumer Lending, and Personal Banking. The Bank's customers consist primarily of consumers and small- and medium-sized businesses in the communities and surrounding areas throughoutMassachusetts andNew Hampshire . The Company'sWealth Management Group has five offices, two inMassachusetts inBoston andWellesley , and three inNew Hampshire inConcord ,Manchester , andPortsmouth . As ofSeptember 30, 2022 , the Company had Assets under Management and Administration of approximately$3.8 billion .The Wealth Management Group offers comprehensive investment management, as well as trust administration, estate settlement, and financial planning services. The Company's wealth management clients value personal service and depend on the commitment and expertise of the Company's experienced banking, investment, and fiduciary professionals.The Wealth Management Group customizes its investment portfolios to help clients meet their long-term financial goals. Through development of an appropriate asset allocation and disciplined security and fund selection, the Bank's in-house investment team targets long-term capital growth while seeking to minimize downside risk. The Company's internally developed, research-driven process is managed by a skilled team of portfolio managers and analysts. The Company builds portfolios consisting of the best investment ideas, focusing on individual global equities, fixed income securities, exchange-traded funds, and mutual funds. 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 originates commercial and industrial ("C&I") loans, commercial real estate ("CRE") loans, construction loans, consumer loans, and residential 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. 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 (release of) credit losses, the impact of federal and state income taxes, the relative levels of interest rates, and local and national economic activity. 33 -------------------------------------------------------------------------------- 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 CRE lender. However, in recent years the Company has diversified commercial operations within the areas of C&I lending to include Renewable Energy, and Innovation Banking, which works with primarilyNew England -based entrepreneurs, and asset-based lending that helps companies throughoutNew England andNew York grow by borrowing against existing assets. Through its renewable energy lending efforts, the Company provides financing for the developers and operators of commercial renewable energy projects.
MERGER WITH NORTHMARK
OnOctober 1, 2022 , the Company completed the Northmark Merger, which added three banking offices inMassachusetts . The Company paid total consideration of$62.8 million , which consisted of 788,137 shares ofCambridge Bancorp common stock issued to Northmark shareholders. The transaction included the assumption of$316.5 million in loans and the acquisition of$373.0 million in deposits, excluding fair value adjustments.
Critical Accounting estimates
Estimates and assumptions are necessary in the application of certain accounting policies and can be susceptible to significant change. Critical accounting estimates are defined as those that involve a significant level of estimation uncertainty and have had, or could have a material impact on the Company's financial condition of results of operation. The Company considers the allowance for credit losses and income taxes to be its critical accounting estimates.
See "Management's Discussion and Analysis-Critical Accounting Estimates" in the Company's 2021 Annual Report, for a detailed discussion of the Company's critical accounting estimates.
Recent Accounting Developments
See Note 4 - Recently Issued Accounting Guidance to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Company's consolidated financial statements. COVID-19 InDecember 2019 , a novel strain of coronavirus ("COVID-19") was reported inWuhan, China . TheWorld Health Organization has declared the outbreak to constitute a "Public Health Emergency of International Concern." The COVID-19 pandemic and countermeasures taken to contain its spread have caused economic and financial disruptions globally. The impact of the pandemic on the Company's business, financial condition, results of operations, and its customers had not fully manifested in 2020 or 2021. The fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to the Company. Once these stimulus programs have been exhausted, loan credit metrics may worsen, and credit losses may ultimately materialize. The magnitude of future credit losses may be affected by the impact of COVID-19 on individuals and businesses in the long and short term. However, the COVID-19 situation remains dynamic, and the duration and severity of its impact on the Company's business and results of operations in future periods remains uncertain. The extent of the continued impact of COVID-19 on the operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, actions taken in response to the pandemic, the speed and effectiveness of vaccine and treatment developments and their deployment, including public adoption rates of COVID-19 vaccines and booster shots, and their effectiveness against emerging variants of COVID-19, such as BA.4 and BA.5 subvariants, a potential resurgence following a decline in the outbreak, and impact on the Company's customers, employees, and vendors, all of which are uncertain and cannot be predicted. If the COVID-19 pandemic or its adverse effects become more severe or prevalent or are prolonged in the locations where the Company conducts business, or the Company experiences more pronounced disruptions in its business or operations, or in economic activity and demand for its products and services generally, the Company's business and results of operations in future periods could be materially adversely affected. 34 --------------------------------------------------------------------------------
Results of Operations
Results of Operations for the three months ended
General. Net income increased by$1.3 million , or 9.7%, to$14.6 million for the quarter endedSeptember 30, 2022 , as compared to net income of$13.3 million for the quarter endedSeptember 30, 2021 . The increase was primarily due to higher net interest and dividend income before the provision of credit losses of$3.9 million , partially offset by an increase in noninterest expense of$817,000 , an increase in income tax expense of$545,000 , an increase in the provision for credit losses of$526,000 , and a decrease in noninterest income of$672,000 . Diluted earnings per share were$2.07 for the quarter endedSeptember 30, 2022 , as compared to a diluted earnings per share of$1.89 for the quarter endedSeptember 30, 2021 . Net Interest and Dividend Income. Net interest and dividend income before the provision for credit losses for the quarter endedSeptember 30, 2022 increased by$3.9 million , or 11.9%, to$36.3 million , as compared to$32.4 million for the quarter endedSeptember 30, 2021 , primarily due to an increase in average interest earning assets and higher asset yields, partially offset by lower Paycheck Protection Program ("PPP") fee income recognized on PPP loans forgiven by theSmall Business Administration ("SBA"), lower loan accretion associated with merger accounting and higher costs of interest bearing liabilities.
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Interest on loans increased by$4.0 million , or 13.1%, for the quarter endedSeptember 30, 2022 , as compared to the quarter endedSeptember 30, 2021 , primarily due to higher average loan balances and higher yields, partially offset by lower PPP loan related income and lower loan accretion associated with merger accounting.
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Interest on investment securities increased by$2.5 million , or 79.7%, for the quarter endedSeptember 30, 2022 , as compared to the quarter endedSeptember 30, 2021 , primarily due to growth in the investment portfolio.
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Interest on deposits increased by
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Interest on borrowed funds increased by$1.0 million , or 681.0%, for the quarter endedSeptember 30, 2022 , as compared to the quarter endedSeptember 30, 2021 , primarily due to higher average borrowings. Total average interest-earning assets increased by$714.2 million , or 17.1%, to$4.89 billion during the quarter endedSeptember 30, 2022 , from$4.18 billion for the quarter endedSeptember 30, 2021 , primarily due to growth in both the loan and investment securities portfolios. The Company's net interest margin, on a fully taxable equivalent basis, decreased by 15 basis points to 2.95% for the quarter endedSeptember 30, 2022 , as compared to 3.10% for the quarter endedSeptember 30, 2021 , primarily due to lower PPP fee income, lower fair value accretion, combined with higher average interest bearing deposits, and higher average borrowings. Interest and Dividend Income. Total interest and dividend income increased by$6.6 million , or 19.7%, to$40.3 million for the quarter endedSeptember 30, 2022 , as compared to$33.7 million for the quarter endedSeptember 30, 2021 , primarily due to growth in both the loan and investment securities portfolios and higher asset yields, partially offset by lower PPP fee income and lower loan accretion associated with merger accounting. Interest Expense. Interest expense increased by$2.8 million , or 223.9%, to$4.0 million for the quarter endedSeptember 30, 2022 , as compared to$1.2 million for the quarter endedSeptember 30, 2021 , primarily driven by deposit growth, higher costs of deposits, combined with higher average borrowings. Average interest-bearing liabilities increased by$473.1 million to$3.12 billion during the quarter endedSeptember 30, 2022 , from$2.65 billion for the quarter endedSeptember 30, 2021 . The increase in interest-bearing liabilities was primarily driven by an increase in average money market accounts of$390.0 million and an increase in average checking account balances of$16.0 million , partially offset by a decrease in average certificates of deposit balances of$44.3 million , and a decrease in the average savings account balances of$62.1 million . The average cost of deposits increased to 0.26% for the quarter endedSeptember 30, 2022 , from 0.11% for the quarter endedSeptember 30, 2021 . Total average borrowings increased by$173.5 million to$190.5 million during the quarter endedSeptember 30, 2022 from$17.0 million for the quarter endedSeptember 30, 2021 . Provision for (Release of) Credit Losses. The Company recorded a provision for credit losses of$612,000 for the quarter endedSeptember 30, 2022 , as compared to a provision for credit losses of$86,000 for the quarter endedSeptember 30, 2021 primarily due to loan growth. The Company's asset quality remains strong. The Company recorded net loan recoveries of$10,000 and$76,000 for the quarters endedSeptember 30, 2022 andSeptember 30, 2021 , respectively. Noninterest Income. Total noninterest income decreased by$672,000 , or 6.0%, to$10.4 million for the quarter endedSeptember 30, 2022 , as compared to$11.1 million for the quarter endedSeptember 30, 2021 , primarily as a result of lower Wealth management revenue 35 -------------------------------------------------------------------------------- and loan related derivative income, partially offset by higher deposit account fees and higher other income. Noninterest income was 22.4% of total revenues for the quarter endedSeptember 30, 2022 .
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Wealth management revenue decreased by$1.0 million , or 10.8%, to$8.2 million for the quarter endedSeptember 30, 2022 , as compared to$9.2 million for the quarter endedSeptember 30, 2021 . Wealth Management Assets under Management and Administration were$3.84 billion as ofSeptember 30, 2022 , a decrease of$669.1 million , or 14.8%, from$4.51 billion atSeptember 30, 2021 , primarily due to declines in the equity and bond markets and net outflows. • Loan-related derivative income decreased by$177,000 , or 45.4%, to$213,000 for the quarter endedSeptember 30, 2022 , as compared to$390,000 for the quarter endedSeptember 30, 2021 , as a result of lower loan swap volume combined with fair value adjustment. • Deposit account fees increased by$379,000 , or 82.0%, to$841,000 for the quarter endedSeptember 30, 2022 , as compared to$462,000 for the quarter endedSeptember 30, 2021 , primarily due to fee revenue from commercial deposit sweep products resulting from higher interest rates. • Other income increased by$218,000 , or 58.1%, to$593,000 for the quarter endedSeptember 30, 2022 , as compared to$375,000 for the quarter endedSeptember 30, 2021 , primarily due to success fees associated with Innovation Banking loans. The categories of Wealth management revenues are shown in the following table: Three Months Ended September 30, 2022 September 30, 2021 (dollars in thousands) Wealth management revenues: Trust and investment advisory fees $ 7,716 $ 8,719 Financial planning fees and other service fees 523 519 Total wealth management revenues $ 8,239 $ 9,238 The following table presents the changes in Wealth Management Assets under Management: Three Months Ended September 30, September 30, 2022 2021 (dollars in thousands) Wealth Management Assets under Management Balance at the beginning of the period$ 3,844,993 $ 4,282,204 Gross client asset inflows 155,061 117,204 Gross client asset outflows (189,622 ) (88,670 ) Net market impact (147,398 ) 13,662 Balance at the end of the period$ 3,663,034 $ 4,324,400 Weighted average management fee 0.78 % 0.79 % There were no significant changes to the wealth management average fee rates and fee structure for the three months endedSeptember 30, 2022 andSeptember 30, 2021 . Noninterest Expense. Total noninterest expense increased by$817,000 , or 3.2%, to$26.3 million for the quarter endedSeptember 30, 2022 , as compared to$25.5 million for the quarter endedSeptember 30, 2021 , primarily driven by increases in salaries and employee benefits expense, data processing, occupancy and equipment, andFDIC insurance, partially offset by decreases in professional services and non-operating expenses.
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Salaries and employee benefits expense increased by$937,000 , or 5.7%, primarily due to staffing additions to support business initiatives, normal merit increases, and increases in employee benefit costs. • Data processing expense increased by$540,000 , or 26.3%, primarily as a result of higher data processing fees associated with the Company's wealth management systems. • Occupancy and equipment expense increased by$208,000 , or 6.3%, primarily due to higher rent and maintenance costs. •FDIC insurance expense increased by$148,000 , or 48.5%, primarily due to balance sheet growth. • Non-operating expenses decreased by$637,000 , or 80.9%, primarily due to branch closure and relocation expenses incurred during the third quarter of 2021, while no such expenses were incurred during the quarter endedSeptember 30, 2022 . • Professional services decreased by$719,000 , or 49.0%, primarily due to lower consulting fees and lower temporary help expenses. 36 -------------------------------------------------------------------------------- Income Tax Expense. The Company recorded a provision for income taxes of$5.2 million for the quarter endedSeptember 30, 2022 , as compared to$4.6 million for the quarter endedSeptember 30, 2021 . The Company's effective tax rate was 26.1% for the quarter endedSeptember 30, 2022 , as compared to 25.7% for the quarter endedSeptember 30, 2021 .
Results of Operations for the nine months ended
General. Net income increased by$828,000 , or 2.0%, to$41.6 million for the nine months endedSeptember 30, 2022 , as compared to net income of$40.8 million for the nine months endedSeptember 30, 2021 , primarily due to an increase in net interest and dividend income before the provision for (release of) credit losses of$6.1 million , partially offset by an increase in the provision for credit losses of$1.2 million and an increase in noninterest expense of$3.5 million . Diluted earnings per share were$5.90 for the nine months endedSeptember 30, 2022 , as compared to a diluted earnings per share of$5.80 for the nine months endedSeptember 30, 2021 . Net Interest and Dividend Income. Net interest and dividend income, before the provision for (release of) credit losses for the nine months endedSeptember 30, 2022 increased by$6.1 million , or 6.4%, to$102.3 million , as compared to$96.2 million for the nine months endedSeptember 30, 2021 . This increase was primarily due to an increase in average earning assets and higher asset yields, partially offset by lower PPP loan income, lower loan accretion associated with merger accounting, combined with higher interest expense on deposits and borrowed funds.
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Interest on loans increased by$1.9 million , or 2.1%, for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , primarily due to higher average loan balances and higher yields, partially offset by lower PPP loan related income, and lower loan accretion associated with merger accounting.
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Interest on investment securities increased by
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Interest on deposits increased by$3.2 million , or 95.6%, for the nine months endedSeptember 30, 2022 , as compared to the nine months endedSeptember 30, 2021 , primarily due to average deposit growth and higher costs of deposits.
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Interest on borrowed funds increased by$1.1 million , or 258.6%, for the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 , primarily due to higher average borrowings. Total average interest-earning assets increased by$809.7 million , or 20.2%, to$4.82 billion during the nine months endedSeptember 30, 2022 , from$4.01 billion for the nine months endedSeptember 30, 2021 , primarily due to growth in both the loan and investment securities portfolios. The Company's net interest margin, on a fully taxable equivalent basis, decreased by 38 basis points to 2.85% for the nine months endedSeptember 30, 2022 , as compared to 3.23% for the nine months endedSeptember 30, 2021 . Interest and Dividend Income. Total interest and dividend income increased by$10.4 million , or 10.4%, to$110.4 million for the nine months endedSeptember 30, 2022 , as compared to$100.0 million for the nine months endedSeptember 30, 2021 , primarily due to growth in both the loan and investment portfolios, partially offset by lower PPP fee-related income, and lower loan accretion associated with merger accounting. Interest Expense. Interest expense increased by$4.3 million , or 114.0%, to$8.1 million during the nine months endedSeptember 30, 2022 , as compared to$3.8 million during the nine months endedSeptember 30, 2021 , primarily driven by deposit growth, higher costs of deposits, combined with higher average borrowings. Average interest-bearing liabilities increased by$502.4 million , or 19.6%, to$3.06 billion during the nine months endedSeptember 30, 2022 , from$2.56 billion for the nine months endedSeptember 30, 2021 . The increase in interest-bearing liabilities was primarily driven by an increase in average money market accounts of$495.2 million , and an increase in average checking account balances of$72.8 million , partially offset by a decrease in average certificate of deposit balances of$76.2 million and average savings account balances of$58.7 million . The average cost of deposits increased to 0.20% for the nine months endedSeptember 30, 2022 , from 0.12% for the nine months endedSeptember 30, 2021 . Total average borrowings increased by$69.4 million to$88.5 million for the nine months endedSeptember 30, 2022 from$19.1 million nine months endedSeptember 30, 2021 . Provision for (Release of) Credit Losses. The Company recorded a provision for credit losses of$200,000 for the nine months endedSeptember 30, 2022 , as compared to a release of credit losses of$1.0 million for the nine months endedSeptember 30, 2021 , primarily due to loan growth and the changing economic environment and its effect on the Company's allowance for credit losses. The Company's credit quality remains strong. The Company recorded net recoveries of$37,000 for the nine months endedSeptember 30, 2022 , as compared to net recoveries of$142,000 for the nine months endedSeptember 30, 2021 . 37 -------------------------------------------------------------------------------- Noninterest Income. Total noninterest income remained relatively unchanged and totaled$32.9 million for both the nine months endedSeptember 30, 2022 and 2021. This was primarily the result of higher bank-owned life insurance ("BOLI") income, higher other income, and higher deposit account fees, partially offset by lower loan related derivative income, lower wealth management revenue, and lower gains on loans sold. Noninterest income was 24.4% of total revenue for the nine months endedSeptember 30, 2022 .
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BOLI income increased by$1.1 million , or 177.2%, to$1.7 million for the nine months endedSeptember 30, 2022 , as compared to$604,000 for the nine months endedSeptember 30, 2021 , primarily due to a$1.2 million income increase related to a death benefit claim and policy surrender. • Other income increased by$1.1 million , or 86.0%, to$2.4 million for the nine months endedSeptember 30, 2022 , as compared to$1.3 million for the nine months endedSeptember 30, 2021 , primarily due to equity warrant revenue and success fees associated with Innovation Banking loans in addition to gains recognized on a community development fund investment. • Deposit account fees increased by$659,000 , or 46.4%, to$2.1 million for the nine months endedSeptember 30, 2022 , as compared to$1.4 million for the nine months endedSeptember 30, 2021 , primarily due to fee revenue from commercial deposit sweep products resulting from higher interest rates. • Loan related derivative income decreased by$1.1 million , or 66.0% to$554,000 for the nine months endedSeptember 30, 2022 , as compared to$1.6 million for the nine months endedSeptember 30, 2021 , primarily as a result of lower floating rate loan volume. • Wealth management revenue decreased by$1.1 million , or 4.1%, to$24.9 million for the nine months endedSeptember 30, 2022 , as compared to$26.0 million for the nine months endedSeptember 30, 2021 , primarily due to decline in the equity and bond markets and net client outflows. • Gain on loans sold decreased by$681,000 , or 87.4%, to$98,000 for the nine months endedSeptember 30, 2022 , as compared to$779,000 for the nine months endedSeptember 30, 2021 , due to lower refinance activity and the corresponding lower sale of residential mortgages. The categories of Wealth management revenues are shown in the following table: Nine Months Ended September 30, September 30, 2022 2021 (dollars in thousands) Wealth management revenues: Trust and investment advisory fees $ 24,209$ 25,170 Financial planning fees and other service fees 726 842 Total wealth management revenues $ 24,935$ 26,012 The following table presents the changes in Wealth Management Assets under Management: Nine Months Ended September 30, September 30, 2022 2021 (dollars in thousands) Wealth Management Assets under Management Balance at the beginning of the period$ 4,656,183 $ 3,994,152 Gross client asset inflows 571,787 355,297 Gross client asset outflows (772,460 ) (322,761 ) Net market impact (792,476 ) 297,712 Balance at the end of the period$ 3,663,034 $
4,324,400
Weighted average management fee 0.78 % 0.80 %
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$3.5 million , or 4.7%, to$78.5 million for the nine months endedSeptember 30, 2022 , as compared to$75.0 million for the nine months endedSeptember 30, 2021 , primarily driven by increases in salaries and employee benefits expense, data processing, andFDIC insurance, partially offset by decreases in professional services and marketing expenses. • Salaries and employee benefits expense increased by$2.9 million , or 5.9%, to$51.8 million , primarily due to staffing additions to support business initiatives, normal merit increases, and increases in employee benefit costs. 38 --------------------------------------------------------------------------------
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Data processing increased by$1.6 million , or 25.1%, to$7.8 million , primarily as a result of higher data processing fees associated with the Company's wealth management systems. •FDIC insurance increased by$478,000 , or 53.0%, to$1.4 million , primarily due to balance sheet growth. • Professional services decreased by$1.2 million , or 28.6%, to$2.9 million , primarily due to lower consulting fees, lower temporary help expenses, and lower recruiting expense. • Marketing expense decreased by$851,000 , or 42.0%, to$1.2 million , primarily due to the timing of marketing spend. Income Tax Expense. The Company recorded a provision for income taxes of$15.0 million for the nine months endedSeptember 30, 2022 , as compared to$14.3 million for the nine months endedSeptember 30, 2021 . The effective tax rate was 26.5% for the nine months endedSeptember 30, 2022 , as compared to 26.0% for the nine months endedSeptember 30, 2021 , primarily due to the tax effects of a BOLI policy surrender and death benefit claim during the second quarter of 2022.
changes in Financial Condition
Total Assets. Total assets increased by
Cash and Cash Equivalents. Cash and cash equivalents decreased by
Loans. Total loans increased by
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Residential real estate loans increased by$101.0 million , or 7.1%, from$1.42 billion atDecember 31, 2021 to$1.52 billion atSeptember 30, 2022 . • Commercial real estate loans increased by$170.1 million , or 11.3%, from$1.51 billion atDecember 31, 2021 to$1.68 billion atSeptember 30, 2022 . • Commercial and industrial loans increased by$26.4 million , or 10.7%, from$269.4 million atDecember 31, 2021 to$295.9 million atSeptember 30, 2022 . Bank-Owned Life Insurance (BOLI). The Company invests in BOLI to help offset the costs of its employee benefit plan obligations. BOLI also generally provides noninterest income that is nontaxable. AtSeptember 30, 2022 , the Company's investment in BOLI was$33.8 million , representing a decrease of$13.2 million from$47.0 million atDecember 31, 2021 , primarily due to the surrender of a policy and a death benefit claim during the second quarter of 2022.
Deposits. Total deposits decreased by
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Core deposits, which the Company defines as all deposits other than certificates of deposit, decreased by$105.6 million , or 2.5%, to$4.06 billion atSeptember 30, 2022 , from$4.17 billion atDecember 31, 2021 . Core deposits decreased during the third quarter of 2022 by$74.8 million , or 1.8%, as clients used funds for investment opportunities combined with fluctuations in liquidity. • Certificates of deposit totaled$217.9 million atSeptember 30, 2022 , an increase of$55.9 million from$162.1 million atDecember 31, 2021 . • Total brokered certificates of deposit, which are included within certificates of deposit, were$100.7 million and$2.7 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. • The cost of total deposits for the nine months endedSeptember 30, 2022 , was 0.20%, as compared to 0.12% for the nine months endedSeptember 30, 2021 , an increase of eight basis points. The cost of total deposits excluding brokered certificates of deposit was 0.19% for the nine months endedSeptember 30, 2022 and 0.12% for the nine months endedSeptember 30, 2021 , an increase of seven basis points. AtSeptember 30, 2022 , the spot cost of deposits was 0.34% (0.28% excluding brokered certificate of deposits). Borrowings. AtSeptember 30, 2022 andDecember 31, 2021 , borrowings consisted solely of advances from theFederal Home Loan Bank of Boston ("FHLB ofBoston "). Total borrowings increased to$294.5 million atSeptember 30, 2022 , from$16.5 million atDecember 31, 2021 , due to fluctuations in liquidity. 39 -------------------------------------------------------------------------------- Shareholders' Equity. Total shareholders' equity increased by$8.5 million , or 1.9%, to$446.3 million atSeptember 30, 2022 , from$437.8 million atDecember 31, 2021 . The Company's equity increased primarily due to net income of$41.6 million , partially offset by an increase in net unrealized losses on the available for sale investment portfolio of$18.8 million and dividend payments of$13.4 million . The Company's ratio of tangible common equity to tangible assets decreased by 22 basis points to 7.70% atSeptember 30, 2022 , from 7.92% atDecember 31, 2021 , primarily due to asset growth combined with increases in unrealized losses within the Company's available for sale investment securities portfolio during the nine months endedSeptember 30, 2022 . Tangible book value per share increased by$0.94 , or 1.7%, to$55.95 atSeptember 30, 2022 , as compared to$55.01 atDecember 31, 2021 .
Generally Accepted Accounting Principles in
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
Operating Net Income /
Operating Diluted Earnings Per September 30, June 30, September 30, September 30, September 30,
Share
2022 2022 2021 2022 2021
(dollars inthousands, except share data)
Net Income (a GAAP measure)
13,319 $ 41,590 $ 40,762
Add: Merger expenses 150 246 - 396 -
Add: Branch and office closure
expenses - - 787 - 787
Less: Tax effect of merger and
branch and office closure
expenses (1) ` (38 ) (63 ) (219 ) (101 ) (219 )
Less: Death benefit on bank
owned life insurance ("BOLI")
and policy surrender - (1,157 ) - (1,157 ) -
Add: Tax effect of BOLI policy
surrender (1) - 736 - 736 -
Operating Net Income (a
non-GAAP
measure) $ 14,728 $ 13,420 $ 13,887 $ 41,464 $ 41,330
Less: Dividends and
Undistributed Earnings
Allocated to Participating
Securities (a non-GAAP measure) (74 ) (42 ) (65 ) (206 ) (186 )
Operating Net Income Applicable
to Common
Shareholders (a non-GAAP
measure) $ 14,654 $ 13,378 $
13,822
7,010,197 6,991,175
Operating Diluted Earnings Per
Share
(a non-GAAP measure) $ 2.09 $ 1.90 $ 1.97 $ 5.89 $ 5.89
(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.
40
--------------------------------------------------------------------------------The following tables summarize the calculation of the Company's tangible common equity ratio and tangible book value per share for the periods indicated:
September December 31, September
30, 2022 June 30, 2022 2021 30, 2021
(dollars in thousands)
Tangible Common Equity:
Shareholders' equity (GAAP) $ 446,290 $ 442,051 $ 437,837 $ 427,577
Less: Goodwill and acquisition
related intangibles (GAAP) (54,258 ) (54,348 ) (54,529 ) (54,619 )
Tangible Common Equity (a
non-GAAP measure) $ 392,032 $ 387,703 $ 383,308 $ 372,958
Total assets (GAAP) $ 5,143,359 $ 5,057,935 $ 4,891,544 $ 4,483,567
Less: Goodwill and acquisition
related intangibles (GAAP) (54,258 ) (54,348 ) (54,529 ) (54,619 )
Tangible assets (a non-GAAP
measure) $ 5,089,101 $ 5,003,587 $ 4,837,015 $ 4,428,948
Tangible Common Equity Ratio (a
non-GAAP
measure) 7.70 % 7.75 % 7.92 % 8.42 %
Tangible Book Value Per Share:
Tangible Common Equity (a
non-GAAP measure) $ 392,032 $ 387,703 $ 383,308 $ 372,958
Common shares outstanding 7,007,113 7,007,063 6,968,192 6,965,871
Tangible Book Value Per Share (a
non-GAAP measure) $ 55.95 $ 55.33 $ 55.01 $ 53.54
Investment Securities
The Company's securities portfolio consists of securities available for sale
("AFS") and securities held to maturity ("HTM"). The largest component of the
securities portfolio is mortgage-backed securities, all of which are issued by
U.S. government agencies or U.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 mortgage-backed securities, corporate debt securities, and state, county, and municipal securities. Securities held to maturity as ofSeptember 30, 2022 are carried at their amortized cost of$1.07 billion . AtDecember 31, 2021 , the amortized cost of securities held to maturity totaled$977.1 million . The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity investment securities, and the percentage distribution at the dates indicated: September 30, December 31, 2022 2021 Amount Percent Amount Percent (dollars in thousands) Available for sale securities U.S. GSE obligations$ 19,655 12 %$ 23,011 12 % Mortgage-backed securities 137,646 87 % 173,028 87 % Corporate debt securities 1,000 1 % 1,764 1 % Total securities available for sale$ 158,301 100 %$ 197,803 100 % Held to maturity securities Mortgage-backed securities$ 976,664 91 %$ 864,983 88 % Corporate debt securities 250 - % 6,997 1 % Municipal securities 96,990 9 % 105,081 11 % Total securities held to maturity$ 1,073,904 100 %$ 977,061 100 % Total$ 1,232,205 $ 1,174,864 41
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The following table sets forth the composition and maturities of 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.
September 30, 2022
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 Average
Amortized Cost Yield (1) Amortized Cost Yield (1) Amortized Cost Yield (1) Amortized Cost Yield (1) Amortized Cost Yield (1)
(dollars in thousands)
Available for sale
securities
U.S. GSE
obligations $ - - $ 9,997 0.5 % $ 5,000 2.3 % $ 8,000 2.6 % $ 22,997 1.6 %
Mortgage-backed
securities - - 8,881 2.0 % 44,378 1.5 % 109,690 1.5 % 162,949 1.5 %
Corporate debt
securities 992 5.1 % - - - - - - 992 5.1 %
Total available
for sale
securities $ 992 5.1 % $ 18,878 1.2 % $ 49,378 1.6 % $ 117,690 1.5 % $ 186,938 1.5 %
Held to maturity
securities
Mortgage-backed
securities $ - - $ 22,061 2.5 % $ 46,110 1.9 % $ 908,493 1.8 % $ 976,664 1.8 %
Corporate debt
securities - - 250 2.0 % - - - - 250 2.0 %
Municipal
securities 6,048 3.9 % 18,103 3.5 % 28,490 3.3 % 44,349 2.7 % 96,990 3.1 %
Total held to
maturity
securities $ 6,048 3.9 % $ 40,414 2.9 % $ 74,600 2.4 % $ 952,842 1.8 % $ 1,073,904 1.9 %
Total $ 7,040 4.1 % $ 59,292 2.4 % $ 123,978 2.1 % $ 1,070,532 1.8 % $ 1,260,842 1.9 %
(1) Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21%.
The Company did not record an allowance for credit losses on its investment securities as ofSeptember 30, 2022 orDecember 31, 2021 . The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary based on the composition of the portfolio at period end. 42 --------------------------------------------------------------------------------
Loans
The Company's lending activities are conducted principally inEastern Massachusetts andSouthern New Hampshire . The Company grants single- and multi-family residential loans, C&I loans, CRE loans, 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 is 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. For renewable energy loans, cash flow is generally dependent on energy output and is generated from the contracted sale of energy credits or wholesale energy sales as well as state mandated incentive programs. For PPP loans, the SBA generally guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower's PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount subject to program requirements. 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 sets forth the composition of the loan portfolio at the dates indicated: September 30, 2022 December 31, 2021 % of % of Amount Total Amount Total (dollars in thousands) Residential mortgage Mortgages - fixed rate$ 788,741 22 %$ 716,456 22 % Mortgages - adjustable rate 692,985 19 % 679,675 21 % Construction 27,234 1 % 13,012 0 % Deferred costs, net of unearned fees 7,069 0 % 5,936 0 % Total residential mortgages 1,516,029 42 % 1,415,079 43 % Commercial mortgage Mortgages - non-owner occupied 1,439,020 40 % 1,272,135 38 % Mortgages - owner occupied 151,937 4 % 150,632 4 % Construction 87,743 2 % 86,246 3 % Deferred costs, net of unearned fees 2,353 0 % 1,989 0 % Total commercial mortgages 1,681,053 46 % 1,511,002 45 % Home equity Home equity - lines of credit 92,288 3 % 85,639 3 % Home equity - term loans 2,114 0 % 2,017 0 % Deferred costs, net of unearned fees 295 0 % 304 0 % Total home equity 94,697 3 % 87,960 3 % Commercial and industrial Commercial and industrial 294,173 8 % 247,024 7 % PPP loans 1,541 0 % 22,856 1 % Unearned fees, net of deferred costs 179 0 % (434 ) 0 % Total commercial and industrial 295,893 8 % 269,446 8 % Consumer Secured 40,085 1 % 34,308 1 % Unsecured 831 0 % 1,303 0 % Deferred costs, net of unearned fees 20 0 % 8 0 % Total consumer 40,936 1 % 35,619 1 % Total loans$ 3,628,608 100 %$ 3,319,106 100 %
Residential Mortgage. Residential real estate loans held in portfolio were
43
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the construction thereof. The residential mortgage portfolio represented 42% and
43% of total loans at
The average loan balance outstanding in the residential portfolio was
The Bank offers fixed and adjustable-rate residential mortgage and construction
loans with maturities up to 30 years. One-to-four family residential mortgage
loans are generally underwritten according to Federal National Mortgage
Association ("Fannie Mae") or Federal Home Loan Mortgage Corporation ("Freddie
Mac") guidelines and refer to loans that conform to such guidelines as
"conforming loans." The Bank generally originates and purchases 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
$647,200 in 2022 from $548,250 in 2021, for one-unit properties. In addition,
the Bank also offers loans above conforming lending limits typically referred to
as "jumbo" loans and interest only 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 its 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, residential construction loans are based on complete value per plans
and specifications, with loan proceeds used to construct the house for single
family primary residence. 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 does it 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. The Company does 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.
Indemnification. In general, the Company does not sell loans with recourse,
except to the extent that it arises from standard loan-sale contract provisions.
These provisions cover violations of representations and warranties and, under
certain circumstances, first payment default by borrowers. These
indemnifications may include the repurchase of loans by the Company and are
considered customary provisions in the secondary market for conforming mortgage
loan sales. Repurchases and losses have been rare, and no provision is made for
losses at the time of sale. There were no such repurchases for the three and
nine months ended September 30, 2022 .
The Company was servicing mortgage loans sold to others without recourse of
approximately
The table below presents residential real estate loan origination activity for
the periods indicated:
Nine Months Ended September 30,
2022 2021
(dollars in thousands)
Originations for retention in portfolio $ 351,890 $ 436,316
Originations for sale to the secondary market 4,515 33,627
Total $ 356,405 $ 469,943
44--------------------------------------------------------------------------------
Loans are sold with servicing retained or released. The table below presents residential real estate loan sale activity for the periods indicated:
Nine Months Ended September 30,
2022 2021
(dollars in thousands)Loans sold with servicing rights retained $ 5,834 $
23,204
Loans sold with servicing rights released - 2,466 Total $ 5,834 $ 25,670 Loans sold with the retention of servicing typically result in the capitalization of servicing rights. Loan servicing rights are included in other assets and subsequently amortized as an offset to other income over the estimated period of servicing. The net balance of capitalized servicing rights totaled$964,000 and$1.1 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. Commercial Mortgage ("CRE"). CRE loans were$1.68 billion as ofSeptember 30, 2022 , an increase of$170.1 million , or 11.3%, from$1.51 billion atDecember 31, 2021 . The CRE loan portfolio represented 46% and 45% of total loans atSeptember 30, 2022 andDecember 31, 2021 , respectively. The average loan balance outstanding in this portfolio was$2.2 million , and the largest individual CRE loan outstanding was$29.2 million as ofSeptember 30, 2022 . AtSeptember 30, 2022 , this commercial mortgage was performing in accordance with its original terms. CRE loans are secured by a variety of property types, inclusive of multi-family dwellings, retail facilities, office buildings, commercial mixed use, lodging, industrial and warehouse properties, and other specialized properties. Generally, CRE loans are for terms of up to 10 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, commercial construction loans are speculative in nature, with loan proceeds used to acquire and develop real estate property for sale or rental. Loans are typically 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$94.7 million and$88.0 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The home equity portfolio represented 3% of total loans atSeptember 30, 2022 andDecember 31, 2021 . AtSeptember 30, 2022 , the largest home equity line of credit was$3.5 million and had an outstanding balance of$2.8 million . AtSeptember 30, 2022 , 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 properties in the Bank's market area. Home equity lines of credit are generally underwritten with the same criteria that the Company uses to underwrite one-to-four family residential mortgage loans. 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. The 15-year lines of credit are interest only during the first 10 years and amortize on a five-year basis thereafter. The 20-year lines of credit are interest only during the first 10 years and amortize on a 10-year basis thereafter. The Company generally originates 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. The Company also offers home equity term loans, which are extended as second mortgages on owner-occupied residential properties in its market area. Home equity term loans are fixed rate second mortgage loans, which generally have a term between five and 20 years. 45 -------------------------------------------------------------------------------- Commercial and Industrial ("C&I"). The C&I portfolio totaled$295.9 million and$269.4 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The C&I portfolio represented 8% of total loans at bothSeptember 30, 2022 andDecember 31, 2021 . The average loan balance outstanding in this portfolio was$685,000 , and the largest individual C&I loan outstanding was$18.0 million as ofSeptember 30, 2022 . AtSeptember 30, 2022 , 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 and financial services, accommodation and food services, utilities, health care, wholesale trade, manufacturing, distribution, retailing, and non-profits. Most clients are privately owned businesses 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, where regional economic strength or weakness impacts the relative risks in this loan category, in addition to renewable energy lending which is more specialized in nature. The Company has expanded its exposure within renewable energy lending but otherwise there are no significant concentrations in any one business sector, and loan risks are generally diversified among many borrowers. AtSeptember 30, 2022 , commercial renewable energy loans totaled$109.3 million and the average loan balance outstanding in this portfolio was$2.3 million . The largest individual loan outstanding was$7.7 million and was performing in accordance with its original terms atSeptember 30, 2022 . Consumer Loans. The consumer loan portfolio totaled$40.9 million atSeptember 30, 2022 and$35.6 million atDecember 31, 2021 . Consumer loans represented 1% of the total loan portfolio at bothSeptember 30, 2022 andDecember 31, 2021 . The average loan balance outstanding in this portfolio was$14,000 and the largest individual consumer loan outstanding was$2.5 million as ofSeptember 30, 2022 . AtSeptember 30, 2022 , this loan was performing in accordance with its original terms. Consumer loans include secured and unsecured loans, lines of credit, and personal installment loans. Unsecured consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets. The secured consumer loans and lines portfolio are generally fully secured by pledged assets, such as bank accounts or investments. Loan Portfolio Maturities. The following table summarizes the dollar amount of loans maturing in the Company's portfolio based on their loan type and contractual terms to maturity atSeptember 30, 2022 . The table does not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause the actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. September 30, 2022 After Five After One Year One to Years through Fifteen or Less Five Years Fifteen Years Years Total (dollars in thousands) Residential mortgage$ 4,885 $ 6,444 $ 125,668 $ 1,379,032 $ 1,516,029 Commercial mortgage 9,626 342,374 1,231,289 97,764 1,681,053 Home equity 167 4,922 72,311 17,297 94,697 Commercial and industrial 21,155 89,798 156,645 28,295 295,893 Consumer 40,851 27 58 - 40,936 Total$ 76,684 $ 443,565 $ 1,585,971 $ 1,522,388 $ 3,628,608 Loan Portfolio by Interest Rate Type. The following table summarizes the dollar amount of loans in the portfolio based on whether the loan has a fixed, adjustable, or floating rate of interest atSeptember 30, 2022 . 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, 2022 Fixed Adjustable Floating Total (dollars in thousands) Residential mortgage$ 813,412 $ 702,602 $ 15 $ 1,516,029 Commercial mortgage 662,025 442,973 576,055 1,681,053 Home equity 2,301 - 92,396 94,697 Commercial and industrial 45,977 31,318 218,598 295,893 Consumer 240 - 40,696 40,936 Total$ 1,523,955 $ 1,176,893 $ 927,760 $ 3,628,608 46
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Nonperforming Loans and TROUBLED DEBT RESTRUCTURINGS ("TDRs")
The composition of nonperforming loans is as follows:
September 30, December 31,
2022 2021
(dollars in thousands)
Non-accrual loans $ 5,644 $ 4,628
Loans past due > 90 days, but still accruing 13 -
Troubled debt restructurings 726 758
Total non-performing loans $ 6,383$ 5,386 Nonperforming loans as a percentage of gross loans 0.18 % 0.16 % Nonperforming loans as a percentage of total assets 0.12 % 0.11 %
Total non-performing loans increased by
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, 2022 andDecember 31, 2021 , 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 C&I 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 nonaccrual 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. Pursuant to Section 4013 of the CARES Act, financial institutions could suspend the requirements underU.S. GAAP related to TDRs for modifications made beforeDecember 31, 2020 to loans that were current as ofDecember 31, 2019 . As a result of the enactment of the Consolidated Appropriations Act, 2021 inJanuary 2021 , the suspension of TDR accounting was extended to and expired onJanuary 1, 2022 . The requirement that a loan be not more than 30 days past due as ofDecember 31, 2019 was still applicable. In response to the COVID-19 pandemic and its economic impact to customers, a short-term modification program that complied with the CARES Act was implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Under issued guidance, provided that these loans were current as of either year end or the date of the modification, these loans were not considered TDR loans atSeptember 30, 2022 and will not be reported as past due during the deferral period. As ofSeptember 30, 2022 , the Company had no loans in deferral. 47 --------------------------------------------------------------------------------
Allowance for Credit Losses
The following table summarizes the changes in the Company's allowance for credit losses on loans for the periods indicated:
At and For the Nine At and For the
Months Ended Year Ended
September 30, December 31,
2022 2021
(dollars in thousands)
Period-end loans outstanding (net of unearned
fees and deferred costs) $ 3,628,608 $ 3,319,106
Average loans outstanding (net of unearned fees and deferred costs) $ 3,468,630 $
3,240,876
Loans on non-accrual $ 5,644 $
4,628
Allowance for credit losses at end of period $ 34,748 $
34,496
Net (charge-offs) recoveries to average loans outstanding - Total 0.00 % 0.00 % Non-accrual loans to loans outstanding at period end 0.16 % 0.16 % Allowance for credit losses to total loans (ex. PPP loans) 0.96 % 1.05 % Ratio of allowance for credit losses on loans to loans on non-accrual 615.66 % 745.38 % Ratio of allowance for credit losses to loans outstanding 0.96 % 1.04 % 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.
The following table presents the allocation of the allowance for credit losses for loans by loan category:
September 30, 2022 December 31, 2021
Allowance % of Total Allowance % of Total
Amount % of Allowance Loans Amount % of Allowance Loans
(dollars in thousands)
Residential
mortgages $ 13,243 39 % 43 % $ 13,383 39 % 43 %
Commercial
mortgages 17,229 50 46 17,133 49 46
Home equity 448 1 2 406 1 2
Commercial and
industrial 3,411 9 8 2,989 9 8
Consumer 417 1 1 585 2 1
Total Allowance $ 34,748 100 % 100 % $ 34,496 100 % 100 %
Sources of Funds
General. Deposits traditionally have been the Company's primary source of funds
for its investment and lending activities. The Company also borrows from the
FHLB of Boston or the Federal Reserve Bank of Boston ("FRB of Boston ") and
utilizes brokered deposits to supplement cash flow needs, to lengthen the
maturities of liabilities for interest rate risk management purposes, and to
manage its cost of funds. The Company's additional sources of funds are
scheduled payments and prepayments of principal and interest on loans and
investment securities, fee income, and proceeds from the sales of loans and
securities.
Deposits. The Company accepts deposits primarily from customers in the
communities in which its branches and offices are located, as well as from
small- and medium-sized businesses and other customers throughout its lending
area. The Company relies on its competitive pricing and products, convenient
locations, and client service to attract and retain deposits. The Company offers
a variety of deposit accounts with a range of interest rates and terms. 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
the Company's deposit growth goals. The Company may also access the brokered
deposit market for funding.
48
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The following table sets forth the Company's deposits for the periods indicated:
September 30, 2022 December 31, 2021
Amount Percent Amount Percent
(dollars in thousands)
Demand deposits (non-interest bearing) $ 1,444,765 33.7 % $ 1,393,935 32.1 %
Interest-bearing checking 688,862 16.1 % 763,188 17.6 %
Money market 1,070,758 25.0 % 1,104,238 25.5 %
Savings 859,102 20.1 % 907,722 21.0 %
Retail certificates of deposit under
$250,000 81,254 1.9 % 99,196 2.3 %
Retail certificates of deposit of
$250,000 or greater 36,018 0.8 % 60,171 1.4 %
Wholesale certificates of deposit 100,663 2.4 % 2,702 0.1 %
Total $ 4,281,422 100.0 % $ 4,331,152 100.0 %
At September 30, 2022 , the Company had a total of $117.3 million in certificates
of deposit, excluding brokered deposits, of which $96.0 million had remaining
maturities of one year or less. As of September 30, 2022 and December 31, 2021 ,
the Company had a total of $100.7 million and $2.7 million of brokered deposits,
respectively.
Borrowings. Total borrowings were $294.5 million at September 30, 2022 , an
increase of $277.9 million , as compared to $16.5 million at December 31, 2021 .
The Company's borrowings consisted of advances from the FHLB of Boston . FHLB of
Boston advances are collateralized by a blanket pledge agreement on the
Company's FHLB of Boston stock and residential mortgages held in the Bank's
portfolios.
The Company's remaining borrowing capacity at the FHLB of Boston at September
30, 2022 was approximately $386.0 million . In addition, the Company has a $10.0
million line of credit with the FHLB of Boston .
The Company had no borrowings outstanding with the FRB of Boston at September
30, 2022 . The Company's borrowing capacity at the FRB of Boston at September 30,
2022 was approximately $458.2 million .
49
--------------------------------------------------------------------------------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.
The following table sets forth the distribution of the Company's daily 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, 2022 June 30, 2022 September 30, 2021
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 $ 3,537,808 $ 34,056 3.82 % $ 3,409,819 $ 30,235 3.56 % $ 3,242,476 $ 30,093 3.68 %
Tax-exempt 48,235 464 3.82 46,771 448 3.84 45,228 448 3.93
Securities available
for
sale (3)
Taxable 191,050 677 1.41 198,985 671 1.35 213,542 660 1.23
Securities held to
maturity
Taxable 994,790 4,424 1.76 1,012,604 4,318 1.71 459,940 1,842 1.59
Tax-exempt 97,618 760 3.09 101,029 794 3.15 105,672 850 3.19
Cash and cash
equivalents 25,095 41 0.65 48,197 42 0.35 113,511 28 0.10
Total
interest-earning
assets (4) 4,894,596 40,422 3.28 % 4,817,405 36,508 3.04 % 4,180,369 33,921 3.22 %
Non-interest-earning
assets 237,087 232,165 252,201
Allowance for credit
losses (34,517 ) (34,368 ) (35,302 )
Total assets $ 5,097,166 $ 5,015,202 $ 4,397,268
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
deposits
Checking accounts $ 701,729 $ 141 0.08 % $ 743,030 $ 50 0.03 % $ 685,731 $ 63 0.04 %
Savings accounts 887,404 385 0.17 899,820 181 0.08 949,487 198 0.08
Money market
accounts 1,184,081 2,003 0.67 1,203,020 1,531 0.51 794,081 613 0.31
Certificates of
deposit 157,622 317 0.80 129,060 82 0.25 201,944 212 0.42
Total
interest-bearing
deposits 2,930,836 2,846 0.39 2,974,930 1,844 0.25 2,631,243 1,086 0.16
Other borrowed funds 190,543 1,148 2.39 56,734 254 1.80 17,005 147 3.43
Total
interest-bearing
liabilities 3,121,379 3,994 0.51 % 3,031,664 2,098 0.28 % 2,648,248 1,233 0.18 %
Non-interest-bearing
liabilities Demand deposits 1,429,649 1,452,911 1,219,288 Other liabilities 100,651 93,966 105,846 Total liabilities 4,651,679 4,578,541 3,973,382 Shareholders' equity 445,487 436,661 423,886 Total liabilities &
shareholders'
equity$ 5,097,166 $ 5,015,202 $ 4,397,268 Net interest income on a fully taxable equivalent basis 36,428 34,410 32,688 Less taxable equivalent adjustment (256 ) (261 ) (274 ) Net interest income$ 36,172 $ 34,149 $ 32,414 Net interest spread (5) 2.77 % 2.76 % 3.03 % Net interest margin (6) 2.95 % 2.86 % 3.10 % 50
--------------------------------------------------------------------------------
Nine Months Ended
September 30, 2022 September 30, 2021
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 $ 3,421,389 $ 92,695 3.62 % $ 3,193,657 $ 90,975 3.81 %
Tax-exempt 47,241 1,356 3.84 34,918 1,077 4.12
Securities available for
sale (3)
Taxable 197,698 1,998 1.35 220,429 2,004 1.22
Securities held to
maturity
Taxable 981,692 12,503 1.70 330,011 4,106 1.66
Tax-exempt 101,135 2,383 3.15 103,569 2,484 3.21
Cash and cash
equivalents 73,306 137 0.25 130,221 87 0.09
Total interest-earning
assets (4) 4,822,461 111,072 3.08 % 4,012,805 100,733 3.36 %
Non-interest-earning
assets 236,034 254,351
Allowance for credit
losses (34,554 ) (35,822 )
Total assets $ 5,023,941 $ 4,231,334
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-bearing
deposits
Checking accounts $ 736,257 $ 234 0.04 % $ 663,497 $ 198 0.04 %
Savings accounts 903,333 744 0.11 962,067 644 0.09
Money market accounts 1,191,414 5,104 0.57 696,203 1,617 0.31
Certificates of deposit 143,648 504 0.47 219,876 908 0.55
Total interest-bearing
deposits 2,974,652 6,586 0.30 % 2,541,643 3,367 0.18 %
Other borrowed funds 88,520 1,535 2.32 19,082 428 3.00
Total interest-bearing
liabilities 3,063,172 8,121 0.35 % 2,560,725 3,795 0.20 %
Non-interest-bearing
liabilities
Demand deposits 1,423,808 1,154,222
Other liabilities 97,350 102,705
Total liabilities 4,584,330 3,817,652
Shareholders' equity 439,611 413,682
Total liabilities &
shareholders' equity $ 5,023,941 $ 4,231,334
Net interest income on a
fully taxable equivalent
basis 102,951 96,938
Less taxable equivalent
adjustment (786 ) (749 )
Net interest income $ 102,165 $ 96,189
Net interest spread (5) 2.72 % 3.16 %
Net interest margin (6) 2.85 % 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)
FHLB of Boston stock balance is excluded from interest-earning assets and
dividend income is excluded from interest income.
(5)
Net interest rate spread represents the difference between the weighted average
yield on interest-earning assets, inclusive of PPP loans outstanding during 2022
and 2021, 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
outstanding during 2022 and 2021.
51
--------------------------------------------------------------------------------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, 2022 Nine Months Ended September 30, 2022
Compared with Compared with
Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021
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 $ 2,813 $ 1,150 $ 3,963 $ 6,299 $ (4,579 ) $ 1,720
Tax-exempt 29 (13 ) 16 358 (79 ) 279
Securities available for
sale
Taxable (74 ) 91 17 (218 ) 212 (6 )
Securities held to
maturity
Taxable 2,358 224 2,582 8,298 99 8,397
Tax-exempt (63 ) (27 ) (90 ) (58 ) (43 ) (101 )
Cash and cash equivalents (37 ) 50 13 (51 ) 101 50
Total interest income $ 5,026 $ 1,475 $ 6,501 $ 14,628 $ (4,289 ) $ 10,339
Interest expense
Deposits
Checking accounts $ 2 $ 76 $
78 $ 23 $ 13
(14 ) 201 187 (41 ) 141 100
Money market accounts 406 984 1,390 1,594 1,893 3,487
Certificates of deposit (55 ) 160 105 (282 ) (122 ) (404 )
Total interest-bearing
deposits 339 1,421 1,760 1,294 1,925 3,219
Other borrowed funds 1,059 (58 ) 1,001 1,225 (118 ) 1,107
Total interest expense
$ 3,628 $ 112 $ 3,740 $ 12,109 $ (6,096 ) $ 6,013
Excluding the impact of merger-related loan accretion and the impact of PPP
loans, the adjusted net interest margin for the quarter ended
Three Months Ended
September 30, 2022
Average Interest Rate
Balance Income/ Earned/
Expenses Paid
(dollars in thousands)
Total interest-earning assets (GAAP) $ 4,894,596
Net interest income on a fully taxable
equivalent basis (GAAP) $ 36,428
Net interest margin on a fully taxable equivalent basis (GAAP) 2.95 %
Less: Paycheck Protection Program loan impact (1,884 ) (62 )
0.00 %
Less: Accretion of loan fair value adjustments (236 ) -0.02 %
Adjusted net interest margin on a fully
taxable equivalent basis $ 4,892,712 $ 36,130 2.93 %
52-------------------------------------------------------------------------------- Excluding the impact of merger-related loan accretion and the impact of PPP loans, the adjusted net interest margin for the nine months endedSeptember 30, 2022 was 2.80%, representing a 22 basis points decrease from the adjusted net interest margin of 3.02% for the nine months endedSeptember 30, 2021 . Nine Months Ended September 30, 2022 Average Interest Rate Balance Income/ Earned/ Expenses Paid (dollars in thousands) Total interest-earning assets (GAAP)$ 4,822,461 Net interest income on a fully taxable equivalent basis (GAAP)$ 102,951 Net interest margin on a fully taxable equivalent basis (GAAP) 2.85 %
Less: Paycheck Protection Program loan impact (9,437 ) (670 ) -0.01 % Less: Accretion of loan fair value adjustments
(1,344 ) -0.04 %
Adjusted net interest margin on a fully
taxable equivalent basis $ 4,813,024 $ 100,937 2.80 %
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 investment, borrowing, lending and deposit gathering activities, and within the Company's wealth management operations. 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. 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. Responsibility for the management of the Company's interest rate sensitivity position falls under the authority of the Company's Board of Directors (the "Board") which, in turn, has assigned authority for its formulation, revision and administration to the Risk Committee of the Boardwho reviews, approves and reports on information provided by the Investment andAsset/Liability Committee (the "ALCO"). 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 ofBoston's discount window, 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 (excluding purchase accounting adjustments and PPP fee income) and the estimated effect that a parallel interest rate shift, or "instantaneous shock," in the yield curve and subjective adjustments in deposit pricing might have on the Company's projected net interest income over the next 24 months. As ofSeptember 30, 2022 : Year 1 Year 2 Percentage Change Percentage Change Change in Interest in Net Interest in Net Interest Rates (in Basis Points) Income Income Parallel rate shocks +300 0.6 19.4 +200 0.4 15.8 +100 0.4 12.8 -100 (0.9) 4.0 53
-------------------------------------------------------------------------------- The following table demonstrates the annualized result of an interest rate simulation (excluding purchase accounting adjustments and PPP fee income) 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 24 months.
As of
Year 1 Year 2
Percentage Change Percentage Change
Change in Interest in Net Interest in Net Interest
Rates (in Basis Points) Income Income
Gradual rate shifts
+200 1.6 15.1
-100 (0.2) 5.2
These simulations assume that there is no growth in interest-earning assets or
interest-bearing liabilities over the next 12 and 24 months. The changes to net
interest income shown above are in compliance with the Company's policy
guidelines.
These estimates of changes in the Company's net interest income 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, the Company cannot
precisely predict the impact of changes in interest rates on net interest
income. Although the analysis provides an indication of the Company's 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 and will differ from actual results.
Economic Value of Equity Analysis. The Company also analyzes the sensitivity of
the Bank's financial condition to changes in interest rates through its 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 September 30, 2022 , estimated
that, in the event of an instantaneous 200 basis point increase in interest
rates, the Bank would experience a 1.3% decrease in the economic value of equity
for the next 12 months, resulting in an economic value of equity ratio of 14.1%.
At the same date, the analysis estimated that, in the event of an instantaneous
100 basis point decrease in interest rates, the Bank would experience a 3.6
decrease in the economic value of equity, resulting in an economic value of
equity ratio of 12.6%. 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, 2022 . 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 the Company's 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, the Company cannot
precisely predict the impact of changes in interest rates on the economic value
of its equity. Although the economic value of equity analysis provides an
indication of the Company's 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 the
Company's equity and will differ from actual results.
LIQUIDITY AND CAPITAL RESOURCES
Impact of Inflation and Changing Prices. The Company's 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 operations. Unlike industrial companies, the
Company's assets and liabilities are primarily monetary in nature. As a result,
generally speaking, 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 and contractual 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.
54
--------------------------------------------------------------------------------
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 of Boston and FRB of Boston , and
purchasing wholesale certificates of deposit as its secondary sources. At
September 30, 2022 , the Company had access to funds totaling $1.28 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 Risk Committee reviews the Company's liquidity needs and reports any findings (if required) to the Board.
Capital Adequacy. Total shareholders' equity was$446.3 million atSeptember 30, 2022 , as compared to$437.8 million atDecember 31, 2021 . The Company's equity increased primarily due to net income of$41.6 million , partially offset by unrealized losses on the available for sale investment portfolio of$18.8 million and dividend payments of$13.4 million . Book value per share atSeptember 30, 2022 andDecember 31, 2021 amounted to$63.69 and$62.83 , respectively. The Company and the Bank are subject to various regulatory capital requirements. As ofSeptember 30, 2022 , the Company and the Bank exceeded the regulatory minimum levels to be considered "well-capitalized." See Note 13 - Shareholders' equity to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements.
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. The Company's 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 11 - Financial Instruments with Off-Balance-Sheet Risk. to the Unaudited Consolidated Financial Statements.
55--------------------------------------------------------------------------------
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