EASTERN BANKSHARES, INC. This section is intended to assist in the understanding of the financial performance of the Company and its subsidiaries through a discussion of our financial condition atMarch 31, 2021 , and our results of operations for the three months endedMarch 31, 2021 and 2020. This section should be read in conjunction with the unaudited interim condensed consolidated financial statements and notes thereto of the Company appearing in Part I, Item 1 of this Quarterly Report and the Company's 2020 Form 10-K. Forward-Looking Statements When we use the terms "we", "us", "our," and the "Company," we meanEastern Bankshares, Inc. , aMassachusetts corporation, and its consolidated subsidiaries, taken as a whole, unless the context otherwise indicates. Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions. Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company's actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors: •the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; •the length and extent of the economic contraction as a result of the COVID-19 pandemic; continued deterioration in employment levels and other general business and economic conditions on a national basis and in the local markets in which the Company operates; •changes in customer behavior; •the possibility that future credit losses, loan defaults and charge-off rates are higher than expected due to changes in economic assumptions or adverse economic developments; •turbulence in the capital and debt markets; •changes in interest rates; •decreases in the value of securities and other assets; •decreases in deposit levels necessitating increased borrowing to fund loans and investments; •competitive pressures from other financial institutions; •operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; •changes in regulation; •reputational risks relating to the Company's participation in the PPP and other pandemic-related legislative and regulatory initiatives and programs; •changes in accounting standards and practices; •the risk that goodwill and intangibles recorded in our financial statements will become impaired; •risks related to the implementation of acquisitions, dispositions, and restructurings, including the risk that acquisitions may not produce results at levels or within time frames originally anticipated; •the risk that we may not be successful in the implementation of our business strategy; •changes in assumptions used in making such forward-looking statements; and •other risks and uncertainties detailed in Part I, Item 1A of our 2020 Form 10-K, as updated by Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q, and as may be further updated in our filings with theSEC from time to time. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made. 49
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Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results could differ from these estimates. Our significant accounting policies are discussed in detail in our 2020 Form 10-K. There have been no material changes in critical accounting policies during the three months endedMarch 31, 2021 . Selected Financial Data The selected consolidated financial and other data of the Company set forth below should be read in conjunction with more detailed information, including the Consolidated Financial Statements and related notes, appearing elsewhere in this Quarterly Report on Form 10-Q. As ofMarch 31 , As ofDecember 2021 31, 2020 (Dollars in
thousands, except per share
data)
Selected Financial Position Data: Total assets$ 16,726,795 $ 15,964,190 Cash and cash equivalents 1,860,332 2,054,070 Securities available for sale 3,986,253 3,183,861
Loans, net of allowance for loan losses and unamortized premiums, net of unearned discounts and deferred fees
9,772,722 9,593,958
Federal Home Loan Bank stock, at cost 8,805 8,805
Goodwill and other intangibles, net 376,002 376,534
Total liabilities 13,339,750 12,536,138
Total deposits 12,980,875 12,155,784
Total borrowings 29,351 28,049
Total shareholders' equity 3,387,045 3,428,052
Nonperforming loans 43,954 43,252
Nonperforming assets 43,954 43,252
Per Share Data:
Book value $ 18.14 $ 18.36
Tangible book value (1) $ 16.12 $ 16.34 (1)Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" in this Part 1, Item 2.
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For the Three Months Ended March 31,
2021 2020
(Dollars in thousands, except per share
data)
Selected Operating Data:
Interest and dividend income $ 101,133 $ 106,159
Interest expense 1,042 6,013
Net interest income 100,091 100,146
(Release of) provision for loan losses (580) 28,600
Net interest income after provision for loan losses 100,671 71,546
Noninterest income 55,212 33,369
Noninterest expense 94,049 95,172
Income before income taxes 61,834 9,743
Provision for income taxes 14,171 1,298
Net income $ 47,663 $ 8,445
Per Share Data:
Basic earnings per share $ 0.28 $ -
Diluted earnings per share 0.28 -
As
of and for the Three Months Ended
2021 2020
Performance Ratios:
Return on average assets (1) (6) 1.19 % 0.29 %
Return on average equity (2) (6) 5.66 % 2.08 %
Interest rate spread (FTE) (3) (6) 2.67 % 3.64 %
Net interest margin (FTE) (4) (6) 2.71 % 3.80 %
Noninterest expenses to average assets (6) 2.34 % 3.25 %
Efficiency ratio (5) 60.56 % 71.28 %
Average interest-earning assets to average interest-bearing liabilities
205.03 % 169.37 %
Capital Ratios:
Average equity to average assets 20.95 % 13.86 %
Total capital to risk weighted assets 29.80 % 13.57 %
Tier 1 capital to risk weighted assets 28.67 % 12.42 %
Common equity tier 1 capital to risk weighted assets 28.67 % 12.42 %
Tier 1 capital to average assets 19.18 % 11.28 %
Asset Quality Ratios:
Allowance for loan losses as a percentage of total loans 1.12 % 1.20 %
Allowance for loan losses as a percentage of nonperforming loans 252.72 % 222.34 %
Net charge-offs (recoveries) to average outstanding loans during the period
0.01 % 0.02 %
Nonperforming loans as a percentage of total loans 0.44 % 0.54 %
Nonperforming loans as a percentage of total assets 0.26 % 0.40 %
Total nonperforming assets as a percentage of total assets 0.26 % 0.40 %
(1)Represents net income divided by average total assets.
(2)Represents net income divided by average equity.
(3)Represents the difference between average yield on average interest-earning
assets and the average cost of interest-bearing liabilities for the periods on a
fully tax-equivalent ("FTE") basis.
(4)Represents net interest income as a percentage of average interest-earning
assets adjusted on a FTE basis.
(5)Represents noninterest expenses divided by the sum of net interest income and
noninterest income.
(6)Ratios have been annualized.
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Overview
We are a bank holding company, and our principal subsidiary, Eastern Bank, is aMassachusetts -chartered bank that has served the banking needs of our customers since 1818. Our business philosophy is to operate as a diversified financial services enterprise providing a broad array of banking and other financial services primarily to retail, commercial and small business customers. We had total assets of$16.7 billion and$16.0 billion atMarch 31, 2021 andDecember 31, 2020 , respectively. We are subject to comprehensive regulation and examination by theMassachusetts Commissioner of Banks, theFederal Deposit Insurance Corporation ("FDIC"), theFederal Reserve Board and theConsumer Financial Protection Bureau . We manage our business under two business segments: our banking business, which contributed$127.1 million , or 81.8%, of our total income (pre-provision net interest and dividend income and noninterest income) for the three months endedMarch 31, 2021 , and our insurance agency business, which contributed$28.3 million , or 18.2%, of our total income for the three months endedMarch 31, 2021 . Our banking business consists of a full range of banking, lending (commercial, residential and consumer), savings and small business offerings, including our wealth management and trust operations that we conduct through our Eastern Wealth Management division. Our insurance agency business consists of insurance-related activities, acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients. Net income for the three months endedMarch 31, 2021 computed in accordance with GAAP was$47.7 million , as compared to$8.4 million for the three months endedMarch 31, 2020 , representing a 464.4% increase. This increase was largely driven by a decrease in the provision for the allowance for loan losses of$29.2 million as we released reserves of$0.6 million for the three months endedMarch 31, 2021 . In addition, interest rate swap income and income from investments held in rabbi trusts increased by$11.4 million and$8.6 million , respectively, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . These items are discussed further in the "Results of Operations" section below. Net income for the three months endedMarch 31, 2021 and 2020 included items that our management considers noncore, which management excludes for purposes of assessing our operating net income, a non-GAAP financial measure. Operating net income for the three months endedMarch 31, 2021 was$46.5 million compared to operating net income of$10.9 million for the three months endedMarch 31, 2020 , representing a 328.6% increase. This increase was largely driven by the aforementioned change in the provision for the allowance for loan losses. See "Non-GAAP Financial Measures" below for a reconciliation of operating net income to GAAP net income. Banking Business Our banking business offers a range of commercial, retail, wealth management and banking services, and consists primarily of attracting deposits from the general public, including municipalities, and investing those deposits, together with borrowings and funds generated from operations, to originate loans in a variety of sectors and to invest in securities. The financial condition and results of operations of our banking business depend primarily on (i) attracting and retaining low cost, stable deposits, (ii) using those deposits to originate and acquire loans and earn net interest income and (iii) operating expenses incurred. Lending Activities We use funds obtained from deposits, as well as funds obtained from theFederal Home Loan Bank ("FHLB") ofBoston ("FHLBB") advances and federal funds, primarily to originate loans and to invest in securities. Our lending focuses on the following categories of loans: Commercial Lending •Commercial and industrial: Loans in this category consist of revolving and term loans extended to businesses and corporate enterprises for the purpose of financing working capital, facilitating equipment purchases and facilitating acquisitions. As ofMarch 31, 2021 andDecember 31, 2020 , we had total commercial and industrial loans of$2.0 billion , representing 20.1% and 20.6%, respectively, of our total loans. The primary risk associated with commercial and industrial loans is the ability of borrowers to achieve business results consistent with those projected at origination. Our primary focus for commercial and industrial loans is middle-market companies located in the markets we serve. In addition, we participate in the syndicated loan market and the Shared National Credit Program ("SNC Program"). As ofMarch 31, 2021 andDecember 31, 2020 , our SNC Program portfolio totaled$402.6 million and$425.1 million , or 20.3% and 21.3%, respectively, of our commercial and industrial portfolio, and 42.0% and 46.4%, respectively, of our SNC Program portfolio were loans to borrowers headquartered in our primary lending market. Our commercial and 52
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industrial portfolio also includes our Asset Based Lending Portfolio ("ABL
Portfolio"). As of March 31, 2021 and December 31, 2020 , our ABL Portfolio
totaled $142.8 million and $134.5 million , or 7.2% and 6.7%, respectively, of
our commercial and industrial portfolio.
•Commercial real estate: Loans in this category include mortgage loans on
commercial real estate, both investment and owner occupied. As of March 31, 2021
and December 31, 2020 , we had total commercial real estate loans of $3.7 billion
and $3.6 billion , representing 37.2% and 36.8%, respectively, of our total
loans. As of March 31, 2021 , and December 31, 2020 , owner-occupied loans totaled
$696.7 million and $694.6 million , representing 18.9% and 19.4%, respectively,
of our commercial real estate loans. Collateral values are established by
independent third-party appraisals and evaluations. The primary repayment
sources include operating income generated by the real estate, permanent debt
refinancing and/or the sale of the real estate.
•Commercial construction: Loans in this category include construction project
financing and are comprised of commercial real estate, business banking and
residential loans for the purpose of constructing and developing real estate. As
of March 31, 2021 and December 31, 2020 , we had total commercial construction
loans of $249.4 million and $305.7 million , representing 2.5% and 3.1%,
respectively, of our total loans.
•Business banking: Loans in this category are comprised of loans to small
businesses with exposures of under $1 million and small investment real estate
projects with exposures of under $3 million . These loans are separate and
distinct from our commercial and industrial and commercial real estate
portfolios described above due to the size of the loans. As of March 31, 2021
and December 31, 2020 , we had total business banking loans of $1.5 billion and
$1.3 billion , respectively, representing 15.3% and 13.8% of our total loans for
each period end, respectively. In this category, commercial and industrial loans
and commercial real estate loans totaled $833.8 million and $679.2 million ,
respectively, as of March 31, 2021 , and $675.1 million and $664.1 million ,
respectively, as of December 31, 2020 . Business banking originations include
traditionally underwritten loans as well as partially automated scored loans.
Our proprietary decision matrix, which includes a number of quantitative factors
including, but not limited to, a guarantor's credit score, industry risk, and
time in business, is used to determine whether to make business banking loans.
We also engage in Small Business Association ("SBA") lending. SBA guarantees
reduce our risk of loss when default occurs and are considered a credit
enhancement to the loan structure.
Residential Lending
•Residential real estate: Loans in this category consist of mortgage loans on
residential real estate. As of March 31, 2021 and December 31, 2020 , we had
total residential loans of $1.4 billion , representing 14.2% and 14.1%,
respectively, of our total loans. Underwriting considerations include, among
others, income sources and their reliability, willingness to repay as evidenced
by credit repayment history, financial resources including cash reserves and the
value of the collateral. We maintain policy standards for minimum credit score
and cash reserves and maximum loan to value consistent with a "prime" portfolio.
Collateral consists of mortgage liens on residential dwellings. We do not
originate or purchase sub-prime or other high-risk loans. Residential loans are
originated either for sale to investors or to retain in our loan portfolio.
Decisions about whether to sell or retain residential loans are made based on
the interest rate characteristics, pricing for loans in the secondary mortgage
market, competitive factors and our capital needs. During the three months ended
March 31, 2021 and the three months ended March 31, 2020 , residential real
estate mortgage originations were $260.1 million and $60.8 million ,
respectively, of which $57.2 million and $49.7 million , respectively, were sold
on the secondary markets. We generally do not continue to service residential
loans that we sell in the secondary market.
Consumer Lending
•Consumer home equity: Loans in this category consist of home equity lines of
credit and home equity loans. As of March 31, 2021 and December 31, 2020 , we had
total consumer home equity loans of $832.5 million and $868.3 million ,
representing 8.4% and 8.9%, respectively, of our total loans. Home equity lines
of credit are granted for ten years with monthly interest-only repayment
requirements. Home equity lines of credit can be converted to term loans that
are fully amortized. Underwriting considerations are materially consistent with
those utilized in the residential real estate category. Collateral consists of a
senior or subordinate lien on owner-occupied residential property.
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•Other consumer: Loans in this category consist of unsecured personal lines of credit, overdraft protection, automobile and aircraft loans, and other personal loans. As ofMarch 31, 2021 andDecember 31, 2020 , we had total other consumer loans of$251.7 million and$277.8 million , representing 2.5% and 2.9%, respectively, of our total loans. Our policy and underwriting in this category include the following factors, among others: income sources and reliability, credit histories, term of repayment and collateral value, as applicable. Included in this category are$103.4 million and$126.7 million of automobile loans, respectively, atMarch 31, 2021 andDecember 31, 2020 . Other Banking Products and Services In addition to our lending activities, which are the core part of our banking business, we offer other banking products and services primarily related to (i) other commercial banking products, (ii) other consumer deposit products and (iii) wealth management services. Other Commercial Banking Products •We offer a variety of deposit, treasury management, electronic banking, interest rate protection and foreign exchange products to our customers. Deposit products include checking products, both interest-bearing and noninterest-bearing, as well as money market deposits, savings deposits and certificates of deposits. Our treasury management products include a variety of cash management and payment products. Our interest rate protection and foreign exchange products include interest rate swaps and currency related transactions. As ofMarch 31, 2021 andDecember 31, 2020 , our total commercial deposits were$4.7 billion and$4.4 billion , respectively, and our commercial noninterest income during the three months endedMarch 31, 2021 and the three months endedMarch 31, 2020 was$5.1 million and$4.9 million , respectively. Other Consumer Deposit Products •We offer a wide variety of deposit products and services to our consumer customers. We service these customers through our 88 branches located in easternMassachusetts andNew Hampshire , through our call center in our facility inLynn, MA and through our online and mobile banking applications. Wealth Management Services •Through our Eastern Wealth Management division, we provide a wide range of trust services, including (i) managing customer investments, (ii) serving as custodian for customer assets and (iii) providing other fiduciary services, including serving as the trustee and personal representative of estates. As ofMarch 31, 2021 andDecember 31, 2020 , we held$3.0 billion and$2.9 billion , respectively, of assets in a fiduciary, custodial or agency capacity for customers, which are not our assets and therefore not included on the consolidated balance sheets included in this Quarterly Report on Form 10-Q. For the three months endedMarch 31, 2021 and the three months endedMarch 31, 2020 , we had noninterest income of$5.7 million and$5.1 million , respectively, from providing these services. Insurance Agency Business Our insurance agency business consists of insurance-related activities such as acting as an independent agent in offering commercial, personal and employee benefits insurance products to individual and commercial clients through our wholly owned agency,Eastern Insurance Group LLC ("Eastern Insurance Group "). Our insurance products include commercial property and liability, workers compensation, life, accident and health and automobile insurance. We also offer a wide range of employee benefits products and services, including professional advice related to health care cost management, employee engagement and retirement and executive services. As an agency business, we do not assume any underwriting or insurance risk. The commissions we earn on the sale of these insurance products and services is the most significant portion of our noninterest income, representing$28.1 million and$27.5 million , or 51.0% and 82.3%, respectively, of our noninterest income during the three months endedMarch 31, 2021 and the three months endedMarch 31, 2020 . Our insurance business operates through 24 non-branch offices located primarily in easternMassachusetts and had 405 full-time equivalent employees as ofMarch 31, 2021 . Acquisitions Proposed Acquisition 54
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OnApril 7, 2021 , we entered into a definitive merger agreement with Century Bancorp, Inc. under which we will acquire Century for$641.9 million in cash (the "Merger Agreement"). Century is the stock holding company ofCentury Bank and Trust Company , aMassachusetts -chartered stock bank headquartered inMedford, Massachusetts with$6.4 billion in assets,$5.4 billion in deposits and 27 full-service branches inMassachusetts as ofDecember 31, 2020 . Pursuant to the terms of the Merger Agreement,Century Bank and Trust Company will merge with and into Eastern Bank, our wholly-owned subsidiary, upon completion of the transaction. The transaction is subject to customary closing conditions, including the receipt of regulatory approval and Century shareholder approval. We currently expect the merger to be completed during the fourth quarter of 2021. For additional information about the Merger Agreement and the proposed transaction, please see our Current Report on Form 8-K filed with theSEC onApril 8, 2021 . See also "Risk Factors" included in Part II, Item 1A of this Quarterly Report on Form 10-Q. Outlook and Trends COVID-19 Pandemic The COVID-19 pandemic has had and continues to have an adverse effect on our business and the markets in which we operate. We expect the short-term and long-term economic consequences of the COVID-19 pandemic to our customers will continue to be significant, and that the continuing health and safety concerns relating to the ongoing pandemic will change the way we conduct our business and interact with our customers. COVID-19 Modifications. In light of the COVID-19 pandemic, we implemented loan modification programs for our borrowers that allowed for either full payment deferrals (both interest and principal) or deferral of principal only. These modifications met the criteria of either Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") or the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) and therefore are not deemed troubled debt restructurings ("TDRs"). We have deemed these modified loans, "COVID-19 modifications." The Consolidated Appropriations Act (the "Appropriations Act"), which was enacted onDecember 27, 2020 , extends certain expiring tax provisions related to the COVID-19 pandemic inthe United States and provides additional emergency relief to individuals and businesses. Included within the provisions of the Appropriations Act is the extension of Section 4013 of the CARES Act toJanuary 1, 2022 . As such, we intend to apply CARES Act TDR relief to any qualifying loan modifications executed during the allowable time period. As ofMarch 31, 2021 , the balance of loans that had received a COVID-19 modification since the inception of the modification programs in 2020 was$985.7 million , of which$20.0 million were executed during the three months endedMarch 31, 2021 . Approximately 47% of the aggregate$985.7 million balance of modified loans atMarch 31, 2021 were modified to permit for full payment deferrals (both interest and principal) and 53% were modified to permit for deferral of principal payments. Modified loans atMarch 31, 2021 included$625.0 million of commercial real estate loans, including construction loans,$118.7 million of commercial and industrial loans,$127.2 million of business banking loans,$88.5 million of residential real estate loans and$26.3 million of consumer loans, including home equity loans. As ofMarch 31, 2021 ,$807.3 million , or 82%, of the balance of total modified loans had resumed payments and were not 30 days or more past due. The loans remaining in a modified status as ofMarch 31, 2021 compared to remaining modifications executed throughDecember 31, 2020 are presented by portfolio below. Remaining COVID-19 Modifications Remaining COVID-19 Modifications as of March 31, 2021 (1) as of December 31, 2020 (1) Balance % of Total Portfolio Balance % of Total Portfolio (Dollars in thousands) Commercial and industrial$ 22,776 1.1 %$ 34,076 1.7 % Commercial real estate 127,683 3.5 % 231,794 6.5 % Commercial construction - - % 10,987 3.6 % Business banking 11,681 0.8 % 23,434 1.7 % Residential real estate 13,754 1.0 % 26,772 2.0 % Consumer home equity 1,274 0.2 % 3,432 0.4 % Other consumer 1,262 0.5 % 2,187 0.8 % Total$ 178,430 1.8 %$ 332,682 3.4 % 55
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(1)Remaining COVID-19 modifications reflect only those loans which underwent a modification and have not yet resumed payment. We define a modified loan to have resumed payment if it is one month past the modification end date and not more than 30 days past due.High Risk Industries . As of the date of this Quarterly Report on Form 10-Q, we are unable to reasonably estimate the aggregate amount of loans that will likely become delinquent after the respective deferral period. The following table shows certain data, as ofMarch 31, 2021 , related to loans to our borrowers in industry categories that we believe have experienced and will likely continue to experience the most adverse effects of the COVID-19 pandemic. Loans included in the table that had been modified as ofMarch 31, 2021 represented approximately 1.8% of our aggregate outstanding loan balances as ofMarch 31, 2021 . COVID-19 Loan Balance Balance (%) Modification % (1) (Dollars in thousands)High Risk Industries Retail (2)$ 491,210 5.0 % 1.0 % Restaurants 199,239 2.0 % 10.7 % Hotels 178,094 1.8 % 51.6 % Construction contractors financing 83,112 0.8 % 0.9 % Auto dealerships 77,658 0.8 % - % Other high risk 81,529 0.8 % 0.8 % All impacted industries total 1,110,842 11.2 % 10.8 % Remaining commercial and business banking 6,314,932 63.7 % 0.7 % Total commercial and business banking 7,425,774 74.9 % 2.2 % All other loans 2,490,701 25.1 % 0.7 % Total$ 9,916,475 100.0 % 1.8 % (1)The percentage of loans in each category, calculated as a percentage of aggregate outstanding loan balances for each such category as ofMarch 31, 2021 , that we modified primarily due to the effects on borrowers of the COVID-19 pandemic and related economic slowdown beginning in lateMarch 2020 . (2)The retail segment includes all retail commercial real estate loans and non-essential commercial and industrial retail loans. Paycheck Protection Program Loans. We are a participating lender in the SBA's Paycheck Protection Program ("PPP"). The vast majority of our PPP borrowers are existing commercial and small business borrowers, non-profit customers, retail banking customers and clients ofEastern Wealth Management andEastern Insurance Group LLC . •During the three months endedMarch 31, 2021 , we originated approximately 4,700 PPP loans totaling$452.6 million . These loans have a maturity of five years. Fees received from the SBA and direct loan origination costs are being deferred over the five-year term. ThroughMarch 31, 2021 , we had received$19.9 million in fees from the SBA and had deferred$2.8 million in direct loan origination costs related to 2021 originations. •During the year endedDecember 31, 2020 , we originated approximately 8,900 PPP loans totaling$1.2 billion . The majority of these loans have a maturity of two years. Fees received from the SBA and direct loan origination costs are being deferred over the loan term, which is generally two years. During the year endedDecember 31, 2020 , we received$37.1 million in fees from the SBA and deferred$4.6 million in direct loan origination costs. During the three months endedMarch 31, 2021 , certain 2020 originations were modified and we received a nominal amount of additional fees from the SBA. We anticipate that the vast majority of the remaining 2020 originations will be forgiven during the year endedDecember 31, 2021 . •Net PPP fee accretion (fee accretion less cost amortization) for all PPP loans for the three months endedMarch 31, 2021 was$8.3 million . 56
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The following table shows certain data related to PPP originations by period:
PPP Loans Originated During the
Three Months Year ended
Ended March 31, December 31,
2021 2020 Total
(Dollars in thousands)
Number of loans originated 4,693 8,902 13,595
Original balance of loans originated $ 452,596 $ 1,167,137 $ 1,619,733
Current balance of loans originated in respective
periods(1) 452,619 785,434 1,238,053
Total SBA fees received(2) 19,942 37,180 57,122
SBA fees recognized in interest income related to
loans originated in respective periods(3) 686 24,672 25,358
Unaccreted SBA fees related to loans originated in respective periods
19,256 12,508 31,764
(1)Current loan balance for 2021 originations exceeds the original balance of
loans originated in 2021 as certain loans had additional funds advanced
subsequent to origination.
(2)Total SBA fees received on 2020 originations includes additional fees
received from the SBA in 2021 for originations that were modified in 2021.
(3)Reflects life-to-date accretion.
The following table shows certain data related to our remaining PPP loans as of
March 31, 2021 :
Loan Size Loan Balance Number of Loans
(Dollars in thousands)
$0 to $50 thousand $ 126,812 6,992
$50 thousand to $150 thousand 190,590 2,212
$150 thousand to $1 million 471,623 1,409
$1 million to $2 million 169,582 119
$2 million to $5 million 213,143 76
Over $5 million 66,303 11
Total $ 1,238,053 10,819
The following table shows the balance of our PPP loans by industry as of
March 31, 2021 :
Industry Loan Balance Number of Loans
(Dollars in thousands)
Construction $ 200,670 1,432
Professional, scientific, & technical services 170,461 1,749
Health care & social assistance 166,199
961
Accommodation & food services 153,197 1,130 Other services 108,471 1,568 Manufacturing 91,184 458 Administrative & support 82,669 577 Wholesale trade 66,734 307 Retail trade 55,742 988 Transportation & warehousing 32,123
319
Real estate, rental, & leasing 30,672 434 All other 79,931 896 Total$ 1,238,053 10,819 Non-GAAP Financial Measures 57
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We present certain non-GAAP financial measures, which management uses to
evaluate our performance and which exclude the effects of certain transactions,
non-cash items and GAAP adjustments that we believe are unrelated to our core
business and are therefore not necessarily indicative of our current performance
or financial position. Management believes excluding these items facilitates
greater visibility for investors into our core businesses as well as underlying
trends that may, to some extent, be obscured by inclusion of such items in the
corresponding GAAP financial measures.
There are items in our financial statements that impact our results but which we
believe are unrelated to our core business. Accordingly, we present operating
net income, noninterest income on an operating basis, noninterest expense on an
operating basis, total operating revenue, operating earnings per share, and the
operating efficiency ratio, each of which excludes the impact of such items
because we believe such exclusion can provide greater visibility into our core
business and underlying trends. Such items that we do not consider to be core to
our business include (i) income and expenses from investments held in rabbi
trusts, (ii) gains and losses on sales of securities available for sale, net,
(iii) gains and losses on the sale of other assets, (iv) rabbi trust employee
benefits, (v) impairment charges on tax credit investments and associated tax
credit benefits, (vi) expenses indirectly associated with our initial public
offering ("IPO"), (vii) other real estate owned ("OREO") gains, (viii) merger
and acquisition expenses, and (ix) the stock donation to the Eastern Bank
Charitable Foundation (the "Foundation") in connection with our mutual-to-stock
conversion and IPO. There were no impairment charges on tax credit investments,
other real estate owned gains, or stock donations to the Foundation during the
periods presented in this Quarterly Report on Form 10-Q.
We also present tangible shareholders' equity, tangible assets, the ratio of
tangible shareholders' equity to tangible assets, and tangible book value per
share, each of which excludes the impact of goodwill and other intangible
assets, as we believe these financial measures provide investors with the
ability to further assess our performance, identify trends in our core business
and provide a comparison of our capital adequacy to other companies. We have
included the tangible ratios because management believes that investors may find
it useful to have access to the same analytical tools used by management to
assess performance and identify trends.
Our non-GAAP financial measures should not be considered as an alternative or
substitute to GAAP net income, or as an indication of our cash flows from
operating activities, a measure of our liquidity or an indication of funds
available for our cash needs. An item which we consider to be non-core and
exclude when computing these non-GAAP financial measures can be of substantial
importance to our results for any particular period. In addition, our
methodology for calculating non-GAAP financial measures may differ from the
methodologies employed by other companies to calculate the same or similar
performance measures and, accordingly, our reported non-GAAP financial measures
may not be comparable to the same or similar performance measures reported by
other companies.
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The following table summarizes the impact of non-core items recorded for the
time periods indicated below and reconciles them to the most directly comparable
GAAP financial measure:
For the Three Months Ended March 31,
2021 2020
(Dollars in thousands, except per share
data)
Net income (GAAP) $ 47,663 $ 8,445
Non-GAAP adjustments:
Add:
Noninterest income components:
(Income) loss from investments held in rabbi trusts (1,846) 6,743
(Gain) loss on sales of securities available for sale, net (1,164) (122)
(Gain) loss on sale of other assets (18) (29)
Noninterest expense components:
Rabbi trust employee benefit expenses (income) 986 (3,479)
Indirect initial public offering costs (1) - 270
Merger and acquisition expenses 589 -
Total impact of non-GAAP adjustments (1,453) 3,383
Less net tax (expense) benefit associated with non-GAAP adjustment (2)
(327) 970
Non-GAAP adjustments, net of tax $ (1,126) $ 2,413
Operating net income (non-GAAP) $
46,537
Weighted average common shares outstanding during the
period:
Basic 172,049,044 n.a
Diluted 172,049,044 n.a
Earnings per share, basic $ 0.28 n.a
Earnings per share, diluted $ 0.28 n.a
Operating earnings per share, basic (non-GAAP) $ 0.27 n.a
Operating earnings per share, diluted (non-GAAP) $ 0.27 n.a
(1)Reflects costs associated with the IPO that are indirectly related to the IPO
and were not recorded as a reduction of capital.
(2)The net tax (expense) benefit associated with these items is determined by
assessing whether each item is included or excluded from net taxable income and
applying our combined statutory tax rate only to those items included in net
taxable income.
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The following table summarizes the impact of non-core items with respect to our
total income, noninterest income, noninterest expense and the efficiency ratio,
which reconciles to the most directly comparable respective GAAP financial
measure, for the periods indicated:
For the Three Months Ended March
31,
2021 2020
(Dollars in thousands)
Net interest income (GAAP) $ 100,091 $ 100,146
Add:
Tax-equivalent adjustment (non-GAAP) 1,297 1,368
Fully-taxable equivalent net interest income (non-GAAP) 101,388 101,514
Noninterest income (GAAP) 55,212 33,369
Less:
Income (losses) from investments held in rabbi trusts 1,846 (6,743)
Gains (losses) on sales of securities available for sale, net 1,164
122
Gains (losses) on sale of other assets 18 29
Noninterest income on an operating basis (non-GAAP) 52,184 39,961
Noninterest expense (GAAP) $ 94,049 $ 95,172 Less:
Rabbi trust benefit expense (income) 986 (3,479) Merger and acquisition expenses 589 - Indirect IPO costs (1) - 270 Noninterest expense on an operating basis (non-GAAP)$ 92,474 $ 98,381 Total revenue (GAAP)$ 155,303 $ 133,515 Total operating revenue (non-GAAP)$ 153,572 $ 141,475
Ratios
Efficiency ratio (GAAP) 60.56 % 71.28 % Operating efficiency ratio (non-GAAP) 60.22 % 69.54 %
(1)Reflects costs associated with the IPO that are indirectly related to the IPO and were not recorded as a reduction of capital.
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The following table summarizes the calculation of our tangible shareholders'
equity, tangible assets, the ratio of tangible shareholders' equity to tangible
assets, and tangible book value per share, which reconciles to the most directly
comparable respective GAAP measure, as of the dates indicated:
As of March 31, As of As of December 31,
2021 2020
(Dollars in thousands)
Tangible shareholders' equity:
Total shareholders' equity (GAAP) $ 3,387,045 $ 3,428,052
Less: Goodwill and other intangibles 376,002 376,534
Tangible shareholders' equity (non-GAAP) 3,011,043 3,051,518
Tangible assets:
Total assets (GAAP) 16,726,795 15,964,190
Less: Goodwill and other intangibles 376,002 376,534
Tangible assets (non-GAAP) $ 16,350,793 $ 15,587,656
Shareholders' equity to assets ratio (GAAP) 20.2 % 21.5 %
Tangible shareholders' equity to tangible assets ratio (non-GAAP)
18.4 % 19.6 %
Book value per share:
Common shares issued and outstanding 186,758,154 186,758,154
Book value per share (GAAP) $ 18.14 $ 18.36
Tangible book value per share (non-GAAP) $ 16.12 $ 16.34
Financial Position
Summary of Financial Position
Change
As of March 31, As of As of December 31,
2021 2020 Amount ($) Percentage (%)
(Dollars in thousands)
Cash and cash equivalents $ 1,860,332 $ 2,054,070 $ (193,738) (9.4) %
Securities available for sale 3,986,253 3,183,861 802,392 25.2 %
Loans, net of allowance for credit
losses 9,772,722 9,593,958 178,764 1.9 %
Federal Home Loan Bank Stock 8,805 8,805 - - %
Goodwill and other intangible
assets 376,002 376,534 (532) (0.1) %
Deposits 12,980,875 12,155,784 825,091 6.8 %
Borrowed funds 29,351 28,049 1,302 4.6 %
Cash and cash equivalents
Total cash and cash equivalents decreased by $193.7 million , or 9.4%, to
$1.9 billion at March 31, 2021 from $2.1 billion at December 31, 2020 . This
decrease was primarily due to available for sale security purchases and funding
of new loan originations.
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Securities
Our current investment policy authorizes us to invest in various types of investment securities and liquid assets, includingU.S. Treasury obligations, securities of government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, corporate notes, asset-backed securities and municipal securities. We do not engage in any investment hedging activities or trading activities, nor do we purchase any high-risk investment products. We typically invest in the following types of securities:U.S. government securities: AtMarch 31, 2021 andDecember 31, 2020 ourU.S. government securities consisted ofU.S. Agency bonds andU.S. Treasury securities. We maintain these investments, to the extent appropriate, for liquidity purposes, at zero risk weighting for capital purposes, and as collateral for interest rate derivative positions.U.S. Agency bonds include securities issued by Fannie Mae, Freddie Mac, the FHLB, and theFederal Farm Credit Bureau . Mortgage-backed securities: We invest in residential and commercial mortgage-backed securities insured or guaranteed by Freddie Mac or Fannie Mae. We have not purchased any privately-issued mortgage-backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense, and to lower our credit risk as a result of the guarantees provided by Freddie Mac or Fannie Mae. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates. State and municipal securities: We invest in fixed rate investment grade bonds issued primarily by municipalities in our local communities withinMassachusetts and by theCommonwealth of Massachusetts . The market value of these securities may be affected by call options, long dated maturities, general market liquidity and credit factors. The Risk Management Committee of our Board of Directors is responsible for approving and overseeing our investment policy, which it reviews at least annually. This policy dictates that investment decisions be made based on the safety of the investment, liquidity requirements, potential returns and market risk considerations. The following table shows the fair value of our securities by investment category as of the dates indicated: Securities Portfolio Composition As of March 31, As of As of December 31, 2021 2020 (In thousands) Available for sale securities: Government-sponsored residential mortgage-backed securities$ 2,691,702 $ 2,148,800 Government-sponsored commercial mortgage-backed securities 116,271 17,081 U.S. Agency bonds 831,672 666,709 U.S. Treasury securities 69,090 70,369 State and municipal bonds and obligations 277,518 280,902 Total$ 3,986,253 $ 3,183,861 Our securities portfolio has increased year-to-date. Available for sale securities increased$802.4 million , or 25.2%, to$4.0 billion atMarch 31, 2021 from$3.2 billion atDecember 31, 2020 . This increase is due to investment purchases during three months endedMarch 31, 2021 . In addition, atMarch 31, 2021 the unrealized loss was$37.5 million compared to an unrealized gain of$58.7 million atDecember 31, 2020 , representing a$96.1 million decrease. We did not have trading securities or held-to-maturity investments atMarch 31, 2021 orDecember 31, 2020 . A portion of our securities portfolio continues to be tax-exempt. Investments in federally tax-exempt securities totaled$277.5 million atMarch 31, 2021 compared to$280.9 million atDecember 31, 2020 . 62
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Our available for sale securities are carried at fair value and are categorized within the fair value hierarchy based on the observability of model inputs. Securities which require inputs that are both significant to the fair value measurement and unobservable are classified as Level 3 within the fair value hierarchy. As of bothMarch 31, 2021 andDecember 31, 2020 , we had no securities categorized as Level 3 within the fair value hierarchy. Maturities of our securities portfolio are based on the final contractual payment dates, and do not reflect the effect of scheduled principal repayments, prepayments, or early redemptions that may occur. The following tables show contractual maturities of our available for sale securities and weighted average yields at and for the periods endedMarch 31, 2021 andDecember 31, 2020 . Weighted average yields in the table below have been calculated based on the amortized cost of the security: Securities Portfolio, Amounts Maturing
Securities Maturing as of
After One
Year But After Five
Within One Within Five Years But After Ten
Year Years Within Ten Years Years Total
(Dollars in thousands)
Available for sale securities:
Government-sponsored residential
mortgage-backed securities $ - $ 21,777 $ 91,340 $ 2,578,585 $ 2,691,702
Government-sponsored commercial
mortgage-backed securities - 23,771 92,500 - 116,271
U.S. Agency bonds - 98,111 733,561 - 831,672
U.S. Treasury securities 10,095 58,995 - - 69,090
State and municipal bonds and obligations 406 26,220 76,077 174,815 277,518
Total $ 10,501 $ 228,874 $ 993,478 $ 2,753,400 $ 3,986,253
Weighted-average yield 0.46 % 0.96 % 1.07 % 1.61 % 1.43 %
Securities Maturing as of
After Five Years
Within One After One Year But But Within Ten
Year Within Five Years Years After Ten Years Total
(Dollars in thousands)
Available for sale securities:
Government-sponsored residential
mortgage-backed securities $ - $ 48,925 $ 100,278 $ 1,999,597 $ 2,148,800
Government-sponsored commercial 17,081
mortgage-backed securities - - - 17,081
U.S. Agency bonds - 99,834 566,875 - 666,709
U.S. Treasury securities 50,251 20,118 - - 70,369
State and municipal bonds and obligations 408 21,431 79,635 179,428 280,902
Total $ 50,659 $ 190,308 $ 763,869 $ 2,179,025 $ 3,183,861
Weighted-average yield 2.05 % 1.34 % 1.15 % 1.50 % 1.41 %
The yield on tax-exempt obligations of states and political subdivisions has
been adjusted to a FTE basis by adjusting tax-exempt income upward by an amount
equivalent to the prevailing federal income taxes that would have been paid if
the income had been fully taxable.
Net unrealized (losses) gains on available for sale securities as of March 31,
2021 and December 31, 2020 totaled $(37.5) million and $58.7 million ,
respectively. The change from December 31, 2020 to March 31, 2021 is primarily
rate driven.
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Loans
We consider our loan portfolio to be relatively diversified by borrower and industry. Our loans increased$186.0 million , or 1.9%, to$9.9 billion atMarch 31, 2021 from$9.7 billion atDecember 31, 2020 . The increase as ofMarch 31, 2021 was primarily due to an increase in business banking and commercial real estate loan balances. •The$173.9 million increase in our business banking loans fromDecember 31, 2020 toMarch 31, 2021 was primarily a result of an increase of$170.8 million in PPP loans during the three months endedMarch 31, 2021 . •The$103.3 million increase in our commercial real estate loans was primarily a result of an increase of$87.6 million in the investment commercial real estate category during the three months endedMarch 31, 2021 . •The$26.3 million decrease in our retail portfolio was primarily a result of a decrease in the auto lending portfolio of$23.3 million during the three months endedMarch 31, 2021 . The following table shows the composition of our loan portfolio, by category, as of the dates indicated: Loan Portfolio Composition As of December 31, As of March 31, 2021 2020 (In thousands) Commercial and industrial $ 1,986,366$ 1,995,016 Commercial real estate 3,676,941 3,573,630 Commercial construction 249,416 305,708 Business banking 1,513,051 1,339,164 Residential real estate 1,406,510 1,370,957 Consumer home equity 832,466 868,270 Other consumer 251,725 277,780 Total loans 9,916,475 9,730,525 Less: Allowance for loan losses (111,080) (113,031)
Unamortized premiums, net of unearned discounts and deferred fees
(32,673) (23,536)
Total loans receivable, net $ 9,772,722 We believe that our commercial loan portfolio composition is relatively diversified in terms of industry sectors, property types and various lending specialties, and is concentrated in theNew England geographical area, with 90.9% of our loans inMassachusetts andNew Hampshire as ofMarch 31, 2021 . Asset quality. We continually monitor the asset quality of our loan portfolio utilizing portfolio scorecards and various credit quality indicators. Based on this process, loans meeting certain criteria are categorized as delinquent, impaired, or non-performing and further assessed to determine if nonaccrual status is appropriate. For the commercial portfolio, which includes our commercial and industrial, commercial real estate, commercial construction and business banking loans, we monitor credit quality using a risk rating scale, which assigns a risk-grade to each borrower based on a number of quantitative and qualitative factors associated with a commercial loan transaction. EffectiveDecember 2020 , management implemented an enhanced loan risk rating methodology based on a 15-point scale and adopted new risk rating scorecard tools. The rating scale expanded from the prior 12-point scale to provide more refinement in the pass grade categories; new pass grades are 0-10. There are no changes to non-pass categories, which continue to align with regulatory guidelines and are found in ratings: special mention (11), substandard (12), doubtful (13) and loss (14). Risk rating assignment is determined using one of 14 separate scorecards developed for distinctive portfolio segments based on common attributes. Key factors include: industry and market conditions, position within the industry, earnings trends, operating cash flow, asset/liability values, debt capacity, guarantor strength, management and controls, financial reporting, collateral and other considerations. The new risk rating methodology, inclusive of the expanded grade levels and the scorecard tools, has increased, and is expected to continue to increase, the granularity and distribution of risk rating assignment with more precision and effectiveness; provide customized and enhanced templates to incorporate more risk factors 64
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and attributes applicable to loan and collateral types; increase precision and effectiveness of credit risk identification; and provide a foundation for enhanced reporting, including migration of risk rating analysis. Special mention, substandard and doubtful loans totaled 7.4% and 7.7% of total commercial loans outstanding atMarch 31, 2021 andDecember 31, 2020 , respectively. This decrease was driven by risk rating upgrades in the construction and commercial and industrial portfolios. Our philosophy toward managing our loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. We seek to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. The delinquency rate of our total loan portfolio increased to 0.58% atMarch 31, 2021 from 0.49% atDecember 31, 2020 , primarily due to an increase in our commercial and industrial and commercial real estate portfolios. The following table provides details regarding our delinquency rates as of the dates indicated: Loan Delinquency Rates Delinquency Rate as of (1) March 31, 2021 December 31, 2020 Commercial and industrial 0.54 % 0.11 % Commercial real estate 0.13 % 0.06 % Commercial construction - % - % Business banking 1.53 % 1.40 % Residential real estate 0.91 % 1.21 % Consumer home equity 0.59 % 0.60 % Other consumer 0.69 % 0.98 % Total 0.58 % 0.49 % (1)In the calculation of the delinquency rate as ofMarch 31, 2021 andDecember 31, 2020 , the total amount of loans outstanding includes$1.2 billion and$1.0 billion , respectively, of PPP loans. The following table provides details regarding the age analysis of past due loans as of the dates indicated: Age Analysis of Past Due Loans As of March 31, 2021 As of December 31, 2020 30-59 Days Past 60-89 Days 90 Days or 30-59 Days 60-89 Days 90 Days or Due Past Due More Past Due Past Due Past Due More Past Due (In thousands) Commercial and industrial$ 9,460 $ 3 $ 1,174 $ 4 $ 268 $ 1,924 Commercial real estate 3,225 - 1,403 - 556 1,545 Commercial construction - - - - - - Business banking 13,299 1,404 8,513 5,279 3,311 10,196 Residential real estate 5,738 857 6,271 9,184 2,517 4,904 Consumer home equity 1,416 496 3,006 1,806 364 3,035 Other Consumer 975 419 349 1,978 234 517 Total$ 34,113 $ 3,179 $ 20,716 $ 18,251 $ 7,250 $ 22,121 As a general rule, loans more than 90 days past due with respect to principal or interest are classified as non-accrual loans. However, based on our assessment of collateral and/or payment prospects, certain loans that are more than 90 days past due may be kept on an accruing status. Income accruals are suspended on all non-accrual loans and all previously accrued and uncollected interest is reversed against current income. A loan is expected to remain on non-accrual status until it becomes current with respect to principal and interest, the loan is liquidated, or the loan is determined to be uncollectible and is charged-off against the allowance for loan losses. 65
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Non-performing assets ("NPAs") are comprised of non-performing loans ("NPLs"),
OREO and non-performing securities. NPLs consist of nonaccrual loans and loans
that are more than 90 days past due but still accruing interest. OREO consists
of real estate properties, which primarily serve as collateral to secure our
loans, that we control due to foreclosure or acceptance of a deed in lieu of
foreclosure. These properties are recorded at the lower of cost or fair value
less estimated costs to sell on the date we obtain control.
The following table sets forth information regarding NPAs held as of the dates
indicated:
Non-performing Assets
As of March 31, 2021 As of December 31, 2020
(In thousands)
Non-accrual loans:
Commercial $ 30,275 $ 30,059
Residential 8,127 6,815
Consumer 3,873 4,131
Total non-accrual loans 42,275 41,005
Accruing loans past due 90 days or more:
Commercial 1,390 1,959
Residential 280 279
Consumer 9 9
Total accruing loans past due 90 days or more 1,679 2,247
Total non-performing loans 43,954 43,252
Other real estate owned - -
Other non-performing assets: - -
Total non-performing assets $ 43,954 $ 43,252
Total accruing troubled debt restructured loans $ 39,367 $ 41,095
Total non-performing loans to total loans 0.44 % 0.45 %
Total non-performing assets to total assets 0.26 % 0.27 %
NPLs increased $0.7 million , or 1.6%, to $44.0 million at March 31, 2021 from
$43.3 million at December 31, 2020 . NPLs as a percentage of total loans
decreased to 0.44% at March 31, 2021 from 0.45% at December 31, 2020 as a result
of an increase in performing loans driven by PPP loans, slightly offset by an
increase in NPLs in our residential portfolio.
Non-accrual loans increased $1.3 million , or 3.1%, to $42.3 million at March 31,
2021 from $41.0 million at December 31, 2020 , primarily due to increases in our
residential real estate and commercial and industrial portfolios, partially
offset by a decline in the consumer portfolio.
The total amount of interest recorded on NPLs was $0.1 million for the three
months ended March 31, 2021 . The gross interest income that would have been
recorded under the original terms of those loans if they had been performing
amounted to $0.8 million for the three months ended March 31, 2021 . The total
amount of interest recorded on NPLs was $0.1 million for the three months ended
March 31, 2020 . The gross interest income that would have been recorded under
the original terms of those loans if they had been performing amounted to $0.9
million for the three months ended March 31, 2020 .
In the course of resolving NPLs, we may choose to restructure the contractual
terms of certain loans. We attempt to work-out alternative payment schedules
with the borrowers in order to avoid foreclosure actions. We review any loans
that are modified to identify whether a TDR has occurred. TDRs involve
situations in which, for economic or legal reasons related to the borrower's
financial difficulties, we grant a concession to the borrower that we would not
otherwise consider. As noted previously, loan modifications made in response to
the COVID-19 pandemic met the criteria of either Section 4013 of the CARES Act
or the Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus (Revised) and
therefore are not deemed TDRs.
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All TDR loans are considered impaired and therefore are subject to a specific review for impairment loss. The impairment analysis discounts the present value of the anticipated cash flows by the loan's contractual rate of interest in effect prior to the loan's modification or the fair value of collateral if the loan is collateral dependent. The amount of impairment loss, if any, is recorded as a specific reserve to each individual loan in the allowance for loan losses. Commercial loans (commercial and industrial, commercial real estate, commercial construction, and business banking) and residential loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. TDR loans modified during the three months endedMarch 31, 2021 and 2020 were$0.3 million (post modification balance) and$0.7 million , respectively. The overall decrease in TDR loans consisted of a decrease of$0.3 million in commercial loan TDRs and a decrease of$0.1 million in consumer loan TDRs. Two loans totaling$0.5 million were modified during the preceding 12 months, which subsequently defaulted during the three months endedMarch 31, 2021 . It is our policy to have any restructured loans, which are on non-accrual status prior to being modified, remain on non-accrual status for approximately six months subsequent to being modified before we consider its return to accrual status. If the restructured loan is on accrual status prior to being modified, we review it to determine if the modified loan should remain on accrual status. Purchase credit impaired ("PCI") loans are loans we acquired that have shown evidence of deterioration of credit quality since origination and, therefore, it was deemed unlikely that all contractually required payments would be collected upon the acquisition date. We consider factors such as payment history, collateral values and accrual status when determining whether there was evidence of deterioration at the acquisition date. The carrying value and prospective income recognition of PCI loans are predicated on future cash flows expected to be collected. As ofMarch 31, 2021 andDecember 31, 2020 the carrying amount of PCI loans was$7.6 million and$9.3 million , respectively. The following table provides additional details related to our loan portfolio and the distribution of NPLs as of the dates indicated: Distribution of Nonperforming Loans
As of
Gross Loans 90+ Days Due Non-accruing TDR Loans, NPLs as a % of Gross
Outstanding (1) Still Accruing Loans but Accruing NPLs Loans Outstanding
(Dollars in thousands)
Loans:
Commercial $ 7,425,774 $ 1,390 $ 30,275 $ 13,169 $ 31,665 0.43 %
Residential 1,406,510 280 8,127 22,565 8,407 0.60 %
Consumer 1,084,191 9 3,873 3,633 3,882 0.36 %
Total $ 9,916,475 $ 1,679 $ 42,275 $ 39,367 $ 43,954 0.44 %
(1) Total loans outstanding includes
As of
Gross Loans 90+ Days Due Non-accruing TDR Loans, but NPLs as a % of Gross
Outstanding (1) Still Accruing Loans Accruing NPLs Loans Outstanding
(Dollars in thousands)
Loans:
Commercial $ 7,213,518 $ 1,959 $ 30,059 $ 13,620 $ 32,018 0.44 %
Residential 1,370,957 279 6,815 23,416 7,094 0.52 %
Consumer 1,146,050 9 4,131 4,059 4,140 0.36 %
Total $ 9,730,525 $ 2,247 $ 41,005 $ 41,095 $ 43,252 0.45 %
(1) Total loans outstanding includes
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In the normal course of business, we become aware of possible credit problems in which borrowers exhibit potential for the inability to comply with the contractual terms of their loans, but which currently do not yet meet the criteria for classification as NPLs. In response to the COVID-19 pandemic, we reviewed all of our credit exposures in industries that were expected to experience significant problems due to the pandemic and resulting economic contraction. As part of that review, we downgraded our hotel loans, restaurant loans and other loans that we expected to have associated challenges as a result of the economic impact of the COVID-19 pandemic. These loans were neither delinquent nor on non-accrual status. AtMarch 31, 2021 andDecember 31, 2020 , our potential problem loans (including these COVID-19-related loans), or loans with potential weaknesses that were not included in the non-accrual loans or in the loans 90 days or more past due categories, totaled$551.6 million and$563.3 million , respectively. Allowance for loan losses. Due to our emerging growth company status under the JOBS Act, we still follow the incurred loss allowance GAAP accounting model. For additional information, see "Risk Factors-We may be required to increase our allowance for loan losses as a result of our adoption as ofJanuary 1, 2022 of the new accounting standard for determining the amount of the allowance for loan losses" in Part I, Item 1A of our 2020 Form 10-K. For the purpose of estimating our allowance for loan losses, we segregate the loan portfolio into homogenous loan pools that possess unique risk characteristics such as loan purpose, repayment source, and collateral that are considered when determining the appropriate level of the allowance for loan losses for each category. While we use available information to recognize losses on loans, future additions or subtractions to/from the allowance for loan losses may be necessary based on changes in NPLs, changes in economic conditions, or other reasons. Additionally, various regulatory agencies, as an integral part of our examination process, periodically assess the adequacy of the allowance for loan losses to assess whether the allowance for loan losses was determined in accordance with GAAP and applicable guidance. We perform an evaluation of our allowance for loan losses on a regular basis (at least quarterly), and establish the allowance for loan losses based upon an evaluation of our loan categories, as each possess unique risk characteristics that are considered when determining the appropriate level of allowance for loan losses, including: •estimated probable loss in all impaired loans in each category; •known increases in concentrations within each category; •certain higher risk classes of loans, or pledged collateral; •historical loan loss experience within each category; •results of any independent review and evaluation of the category's credit quality; •trends in volume, maturity and composition of each category; •volume and trends in delinquencies and non-accruals; •national and local economic conditions and downturns in specific local industries; •corporate goals and objectives; •expertise of our lending staff; •lending policy and practices; and •current and forecasted banking industry conditions, as well as regulatory environment. Loans are periodically evaluated using changes in asset quality, historical losses, and other loss allocation factors, which form our basis for estimating incurred losses. For risk rated loans, our risk-rating system takes into consideration a number of quantitative and qualitative factors, such as the borrower's financial capacity, cash flow, liquidity, leverage, adequacy of collateral, tangible net worth, management team, industry, sales and supplier concentration, credit history, additional support and the impact of outside factors on repayment ability. Homogenous populations of loans that are not risk rated loans, are analyzed by loan category, taking into account delinquency ratios and historical loss experience. The allowance for loan losses is allocated to loan categories using both a formula-based approach and an analysis of certain individual loans for impairment. We use a methodology to systematically estimate the amount of credit loss incurred in the loan portfolio. Under our current methodology, the allowance for loan losses contains specific, general and other components. 68
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The specific component consists of reserves for impaired loans (defined as those where we determine it is probable we will not collect all payments when due, typically classified as either doubtful or substandard). All commercial, residential and consumer loan portfolios are periodically reviewed to identify the loans with deteriorating performance. The reports used to identify those loans include, but are not limited to, delinquency reports, risk rating migration (for risk rated loans), asset quality reports, watch loan list and other credit risk management reports. When a loan is determined to be impaired, the measurement will be based on the present value of expected future cash flows, except for collateral-dependent loans, where the impairment is based on the fair value of the collateral. The general loss reserves methodology, which is applied to categories of loans with similar characteristics, covers all non-impaired loans and is based on our portfolio's segment historical loss experience adjusted for qualitative factors. The general loss reserve methodology considers multiple qualitative factors that may impact the loss experience during the incurred loss horizon period, including internal infrastructure factors, external macroeconomic factors, internal credit quality factors and external industry data, tailored to the specific loan category. For additional discussion of our risk rating methodology, see Note 4, "Loans and Allowance for Loan Losses" within the Notes to the Consolidated Financial Statements included in Part I, Item 1 in this Quarterly Report on Form 10-Q. The allowance for loan losses decreased by$1.9 million , or 1.7%, to$111.1 million , or 1.12% of total loans, atMarch 31, 2021 from$113.0 million , or 1.16% of total loans atDecember 31, 2020 . The decrease in the allowance for loan losses was primarily a result of improved macroeconomic conditions and risk rating upgrades in the commercial portfolios. The current environment is being assisted by government stimulus and the impacts of the loan deferral programs. This, along with other factors, resulted in a release in the allowance for loan loss of$0.6 million for the three months endedMarch 31, 2021 . 69
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The following table summarizes changes in the allowance for loan losses and other selected statistics for the periods presented:
Summary of Changes in the Allowance for Loan Losses
For the Three Months Ended March 31,
2021 2020
(Dollars in thousands)
Average total loans $ 9,816,788 $ 9,016,223
Allowance for loan losses, beginning of the period $ 113,031 $ 82,297
Charged-off loans:
Commercial and industrial - -
Commercial real estate 234 -
Commercial construction - -
Business banking 1,384 1,337
Residential real estate - -
Consumer home equity - 473
Other consumer 364 533
Total charged-off loans 1,982 2,343
Recoveries on loans previously charged-off:
Commercial and industrial 9 322
Commercial real estate - 1
Commercial construction - -
Business banking 365 127
Residential real estate 10 60
Consumer home equity 71 14
Other consumer 156 60
Total recoveries 611 584
Net loans charged-off (recoveries):
Commercial and industrial (9) (322)
Commercial real estate 234 (1)
Commercial construction - -
Business banking 1,019 1,210
Residential real estate (10) (60)
Consumer home equity (71) 459
Other consumer 208 473
Total net loans charged-off 1,371 1,759
(Release of) provision for loan losses (580) 28,600
Total allowance for loan losses, end of period $ 111,080 $ 109,138 Net charge-offs to average total loans outstanding during this period
0.01 % 0.02 %
Allowance for loan losses as a percent of total loans 1.12 % 1.20 %
Allowance for loan losses as a percent of nonperforming loans 252.72 % 222.34 %
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The following table sets forth the allocation of the allowance for loan losses
by loan categories listed in loan portfolio composition as of the dates
indicated:
Summary of Allocation of Allowance for Loan Losses
As of March 31, 2021 As of December 31, 2020
Percent of
Allowance in
Category to Total Percent of Loans in Allowance Percent of Allowance Percent of Loans in
Allowance for Allocated Category to for Loan in Category to Total Category to
Loan Losses Allowance Total Loans Losses Allocated Allowance Total Loans
(Dollars in thousands)
Commercial and industrial
(1) $ 25,406 22.87 % 20.03 % $ 26,617 23.54 % 20.51 %
Commercial real estate 55,138 49.64 % 37.08 % 54,569 48.28 % 36.73 %
Commercial construction 3,350 3.02 % 2.52 % 4,553 4.03 % 3.14 %
Business banking (1) 13,504 12.16 % 15.26 % 13,152 11.64 % 13.76 %
Residential real estate 6,235 5.61 % 14.18 % 6,435 5.69 % 14.09 %
Consumer home equity 3,576 3.22 % 8.39 % 3,744 3.31 % 8.92 %
Other consumer 3,498 3.15 % 2.54 % 3,467 3.07 % 2.85 %
Other 373 0.33 % - % 494 0.44 % - %
Total $ 111,080 100.00 % 100.00 % $ 113,031 100.00 % 100.00 %
(1)PPP loans are included within these portfolios as of March 31, 2021 and
December 31, 2020 ; however, as of March 31, 2021 and December 31, 2020 , no
allowance for loan losses have been recorded on these loans due to the SBA
guarantee of 100% of the loans.
To determine if a loan should be charged-off, all possible sources of repayment
are analyzed. Possible sources of repayment include the potential for future
cash flows, liquidation of the collateral and the strength of co-makers or
guarantors. When available information confirms that specific loans or portions
thereof are uncollectible, these amounts are promptly charged-off against the
allowance for loan losses and any recoveries of such previously charged-off
amounts are credited to the allowance for loan losses.
Regardless of whether a loan is unsecured or collateralized, we charge off the
amount of any confirmed loan loss in the period when the loans, or portions of
loans, are deemed uncollectible. For troubled, collateral-dependent loans, loss
confirming events may include an appraisal or other valuation that reflects a
shortfall between the value of the collateral and the carrying value of the loan
or receivable, or a deficiency balance following the sale of the collateral.
For additional information regarding our allowance for loan losses, see Note 4,
"Loans and Allowance for Loan Losses" within the Notes to the Consolidated
Financial Statements included in Part I, Item 1 in this Quarterly Report on Form
10-Q.
Federal Home Loan Bank stock
The FHLBB is a cooperative that provides services to its member banking
institutions. The primary reason for our membership in the FHLBB is to gain
access to a reliable source of wholesale funding and as a tool to manage
interest rate risk. The purchase of stock in the FHLB is a requirement for a
member to gain access to funding. We purchase and/or are subject to redemption
of FHLBB stock proportional to the volume of funding received and view the
holdings as a necessary long-term investment for the purpose of balance sheet
liquidity and not for investment return.
We held an investment in the FHLBB of $8.8 million at both March 31, 2021 and
December 31, 2020 , respectively.
Goodwill and other intangible assets
Goodwill and other intangible assets were $376.0 million and $376.5 million at
March 31, 2021 and December 31, 2020 , respectively. The decrease in goodwill and
other intangibles assets was due to the amortization of definite-lived
intangibles during the three months ended March 31, 2021 . We did not record any
impairment to our goodwill or other intangible assets during the three months
ended March 31, 2021 . We will continue to assess our goodwill and other
intangible assets to determine if impairments are necessary as it relates to the
COVID-19 pandemic.
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Deposits and other interest-bearing liabilities
Deposits originating within the markets we serve continue to be our primary
source of funding our earning assets. We have been able to compete effectively
for deposits in our primary market areas. The distribution and market share of
deposits by type of deposit and by type of depositor are important
considerations in our assessment of the stability of our fund sources and our
access to additional funds. Furthermore, we shift the mix and maturity of the
deposits depending on economic conditions and loan and investment policies in an
attempt, within set policies, to minimize cost and maximize net interest margin.
We do not, and in recent years have not, obtained deposit funding through
brokered deposits.
The following table presents our deposits as of the dates presented:
Components of Deposits
Change
As of March 31, As of December 31,
2021 2020 Amount ($) Percentage (%)
(Dollars in thousands)
Demand $ 5,369,164 $ 4,910,794 $ 458,370 9.3 %
Interest checking 2,482,731 2,380,497 102,234 4.3 %
Savings 1,362,463 1,256,736 105,727 8.4 %
Money market investments 3,522,990 3,348,898 174,092 5.2 %
Certificate of deposits 243,527 258,859 (15,332) (5.9) %
Total deposits $ 12,980,875 $ 12,155,784 $ 825,091 6.8 %
Deposits increased by $825.1 million , or 6.8%, to $13.0 billion at March 31,
2021 from $12.2 billion at December 31, 2020 . This increase was primarily the
result of an increase in demand deposits of $458.4 million , an increase in money
market deposits of $174.1 million , an increase in savings deposits of $105.7
million , and a increase in interest checking deposits of $102.2 million .
The following table presents the classification of deposits on an average basis
for the periods below:
Classification of Deposits on an Average Basis
For the Three Months Ended March 31, 2021 For the Year Ended December 31, 2020
Average Average Average Average
Amount Rate Amount Rate
(Dollars in thousands)
Demand $ 5,125,831 - % $ 4,535,066 - %
Interest checking 2,391,025 0.04 % 2,227,185 0.09 %
Savings 1,300,057 0.02 % 1,123,584 0.02 %
Money market investments 3,440,214 0.07 % 3,212,752 0.23 %
Certificate of deposits 251,115 0.19 % 300,381 0.52 %
Total deposits $ 12,508,242 0.03 % $ 11,398,968 0.10 %
Other time deposits of
Maturities of Time Certificates of Deposits $100,000 and over
As of December 31,
As of March 31, 2021 2020
Maturing in (In thousands)
Three months or less $ 42,818 $ 49,740
Over three months through six months 27,954 24,608
Over six months through 12 months 23,659 31,009
Over 12 months 9,989 9,956
Total $ 104,420 $ 115,313
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Borrowings
Our borrowings consist of both short-term and long-term borrowings and provide us with sources of funding. Maintaining available borrowing capacity provides us with a contingent source of liquidity. Our total borrowings increased by$1.3 million , or 4.6%, to$29.4 million atMarch 31, 2021 compared to$28.0 million atDecember 31, 2020 . The increase was primarily due to an increase in escrow deposits of our borrowers. The following table sets forth information concerning balances on our borrowings as of the dates and for the periods indicated: Borrowings by Category Change As of March 31, As of December 31, 2021 2020 Amount ($) Percentage (%) (Dollars in thousands)Federal Home Loan Bank advances$ 14,473 $ 14,624 $ (151) (1.0) % Escrow deposits of borrowers 14,878 13,425 1,453 10.8 % Total$ 29,351 $ 28,049 $ 1,302 4.6 % Results of Operations Summary of Results of Operations For the Three Months Ended March 31, Change 2021 2020 Amount ($) Percentage (%) (Dollars in thousands) Interest and dividend income$ 101,133 $ 106,159 (5,026) (4.7) % Interest expense 1,042 6,013 (4,971) (82.7) % Net interest income 100,091 100,146 (55) (0.1) % (Release of) provision for loan losses (580) 28,600 (29,180) (102.0) % Noninterest income 55,212 33,369 21,843 65.5 % Noninterest expense 94,049 95,172 (1,123) (1.2) % Income tax expense 14,171 1,298 12,873 991.8 % Net income 47,663 8,445 39,218 464.4 % Comparison of the three months endedMarch 31, 2021 and 2020 Interest and Dividend Income Interest and dividend income decreased by$5.0 million , or 4.7%, to$101.1 million during the three months endedMarch 31, 2021 from$106.2 million during the three months endedMarch 31, 2020 . The decrease was a result of the negative impact of a lower interest rate environment. •Interest income on loans decreased by$6.9 million , or 7.2%, to$88.6 million during the three months endedMarch 31, 2021 from$95.5 million during the three months endedMarch 31, 2020 . The decrease in interest income on our loans was primarily due to the decrease in the yield on average loans which was driven by the downward adjustment of the interest rates on our existing adjustable-rate loans as a result of lower interest rates. The average balance of loans increased primarily due to PPP loan originations, partially offsetting the decline in interest rates. The FTE yield on average loans decrease 61 basis points to 3.7% during the three months endedMarch 31, 2021 . The average balance of our loans increased by$800.6 million , or 8.9%, to$9.8 billion as ofMarch 31, 2021 compared to$9.0 billion as ofMarch 31, 2020 . 73
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•Partially offsetting the negative impact of the downward adjustment of the interest rates on our existing adjustable-rate loans was the recognition of net PPP loan fee accretion. During the three months endedMarch 31, 2021 we recognized$8.3 million in net PPP loan fee accretion. We did not begin originating PPP loans until the second quarter of 2020, therefore, we did not recognize any net PPP loan fee accretion during the three months endedMarch 31, 2020 . •Interest income on securities increased$1.9 million , or 17.6% to$12.5 million for the three months endedMarch 31, 2021 compared to$10.6 million for the three months endedMarch 31, 2020 . The increase in interest income on securities was due to security purchases betweenMarch 31, 2020 andMarch 31, 2021 , partially offset by lower overall market rates. The FTE yield on average securities and other interest-earning assets decreased 160 basis points to 0.98% during the three months endedMarch 31, 2021 . The average balance of securities and other-interest earning assets increased by$3.6 billion , or 208.6%, to$5.4 billion as ofMarch 31, 2021 compared to$1.7 billion as ofMarch 31, 2020 . The overall decrease in interest and dividend income was primarily a result of lower yields on both our loans and securities, partially offset by an increase in investment security volume. Our yields on loans and securities are generally presented on an FTE basis where the embedded tax benefit on loans or securities are calculated and added to the yield. This presentation allows for better comparability between institutions with different tax structures. The yield on average interest-earning assets decreased 129 basis points to 2.73% during the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Our average interest-earning assets increased by$4.4 billion , or 41.2%, to$15.2 billion as ofMarch 31, 2021 compared to$10.8 billion as ofMarch 31, 2020 . Interest Expense Interest expense decreased$5.0 million , or 82.7%, to$1.0 million during the three months endedMarch 31, 2021 from$6.0 million during the three months endedMarch 31, 2020 . The decrease was a result of lower funding costs associated with the decline in market interest rates. •Interest expense on our interest-bearing deposits decreased by$4.4 million , or 81.5%, to$1.0 million during the three months endedMarch 31, 2021 from$5.4 million during the three months endedMarch 31, 2020 . •Interest expense on borrowed funds decreased by$0.6 million , or 93.3%, to less than$0.1 million during the three months endedMarch 31, 2021 from$0.6 million during the three months endedMarch 31, 2020 . Average interest-bearing deposits increased$1.2 billion , or 19.3%, atMarch 31, 2021 compared toMarch 31, 2020 . The increase in deposit costs associated with the increase in average deposits was more than offset by the reduction in rates paid on deposits during the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Net Interest Income Net interest income was$100.1 million for both the three months endedMarch 31, 2021 and the three months endedMarch 31, 2020 . Net interest income remained stable between the two periods as the reduction in interest income resulting from the lower interest rate environment was offset by a corresponding reduction in interest expense coupled with a substantial increase in average balances of interest-earning assets during the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Net interest margin is determined by dividing FTE net interest income by average-earning assets. For purposes of the following discussion, income from tax-exempt loans and investment securities has been adjusted to an FTE basis, using a marginal tax rate of 21.2% for the three months endedMarch 31, 2021 and 2020. Net interest margin decreased 109 basis points to 2.71% during the three months endedMarch 31, 2021 , from 3.80% during the three months endedMarch 31, 2020 . 74
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The following table sets forth average balance sheet items, annualized average
yields and costs, and certain other information for the periods indicated. All
average balances in the table reflect daily average balances. Non-accrual loans
were included in the computation of average balances but have been reflected in
the table as loans carrying a zero yield. The yields set forth below include the
effect of deferred fees, discounts and premiums that are amortized or accreted
to interest income or expense.
Average Balances, Interest Earned/Paid, & Average Yields
As of and for the Three Months Ended March 31,
2021 2020
Average Average Average Average
Outstanding Yield/Cost Outstanding Yield /Cost
Balance Interest (5) Balance Interest (5)
(Dollars in thousands)
Interest-earning assets:
Loans (1)
Residential $ 1,393,139 $ 11,274 3.28 % $ 1,429,994 $ 13,303 3.74 %
Commercial 7,317,951 69,210 3.84 % 6,275,057 69,615 4.46 %
Consumer 1,105,698 8,937 3.28 % 1,311,172 13,407 4.11 %
Total loans 9,816,788 89,421 3.69 % 9,016,223 96,325 4.30 %
Investment securities 3,631,530 12,577 1.40 % 1,500,413 10,685 2.86 %
Federal funds sold and other
short-term investments 1,740,561 432 0.10 % 240,440 517 0.86 %
Total interest-earning assets 15,188,879 102,430 2.73 % 10,757,076 107,527 4.02 %
Non-interest-earning assets 1,120,603 1,022,216
Total assets $ 16,309,482 $ 11,779,292
Interest-bearing liabilities:
Deposits:
Savings accounts $ 1,300,057 $ 64 0.02 % $ 976,881 $ 54 0.02 %
Interest checking accounts 2,391,025 234 0.04 % 1,902,128 819 0.17 %
Money market 3,440,214 587 0.07 % 2,981,427 3,904 0.53 %
Time deposits 251,115 117 0.19 % 327,144 638 0.78 %
Total interest-bearing deposits 7,382,411 1,002 0.06 % 6,187,580 5,415 0.35 %
Borrowings 25,625 40 0.63 % 163,463 599 1.47 %
Total interest-bearing liabilities 7,408,036 1,042 0.06 % 6,351,043 6,014 0.38 %
Demand accounts 5,125,831 3,477,377
Other noninterest-bearing
liabilities 358,087 318,656
Total liabilities 12,891,954 10,147,076
Total net worth 3,417,528 1,632,216
Total liabilities and retained
earnings $ 16,309,482 $ 11,779,292
Net interest income - FTE $ 101,388 $ 101,513
Net interest rate spread (2) 2.67 % 3.64 %
Net interest-earning assets (3) $ 7,780,843 $ 4,406,033
Net interest margin - FTE (4) 2.71 % 3.80 %
Average interest-earning assets to
interest-bearing liabilities 205.03 % 169.37 %
(1)Non-accrual loans are included in loans.
(2)Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total
interest-earning assets.
(5)Presented on an annualized basis.
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Provision for Loan Losses The provision for loan losses represents the charge to expense that is required to maintain an appropriate level of allowance for loan losses. We currently follow the incurred loss model for determining the provision for loan losses and anticipate adopting what is commonly referred to as the "CECL model" onJanuary 1, 2022 . We recorded a release of provision for loan losses of$0.6 million for the three months endedMarch 31, 2021 , compared to a provision of$28.6 million for the three months endedMarch 31, 2020 . Given improved economic and credit conditions during the three months endedMarch 31, 2021 , we determined that a release of the provision was necessary. InMarch 2020 , in response to the COVID-19 pandemic, we downgraded the risk ratings for all commercial loans we expected to be significantly impacted by the pandemic, including our hotel and restaurant loan portfolios. Along with other activity during the three months endedMarch 31, 2020 , these adjustments resulted in the provision for loan losses of$28.6 million . Our periodic evaluation of the appropriate allowance for loan losses considers the risk characteristics of the loan portfolio, current economic conditions, and trends in loan delinquencies and charge-offs. Noninterest Income The following table sets forth information regarding noninterest income for the periods shown: Noninterest Income For the Three Months Ended March 31, Change 2021 2020 Amount ($) Percentage (%) (Dollars in thousands) Insurance commissions$ 28,147 $ 27,477 $ 670 2.4 % Service charges on deposit accounts 5,367 6,098 (731) (12.0) % Trust and investment advisory fees 5,663 5,095 568 11.1 % Debit card processing fees 2,749 2,470 279 11.3 % Interest swap income (losses) 5,405 (6,009) 11,414 (189.9) % Income (losses) from investments held in rabbi trusts 1,846 (6,743) 8,589 (127.4) % Losses on trading securities, net - (2) 2 (100.0) % Gains on sales of mortgage loans held for sale, net 1,479 93 1,386 1,490.3 % Gains on sales of securities available for sale, net 1,164 122 1,042 854.1 % Other 3,392 4,768 (1,376) (28.9) % Total noninterest income$ 55,212 $ 33,369 $ 21,843 65.5 % Noninterest income increased by$21.8 million , or 65.5%, to$55.2 million for the three months endedMarch 31, 2021 from$33.4 million for the three months endedMarch 31, 2020 . This increase was primarily due to an$11.4 million increase in interest rate swap income, an$8.6 million increase in income from investments held in rabbi trusts, a$1.4 million increase in net gains on sales of mortgage loans held for sale, and a$1.0 million increase in net gains on sales of securities available for sale. These items were partially offset by a decrease in other noninterest income of$1.4 million and a decrease in service charges on deposit accounts of$0.7 million . •Loan-level interest rate swap income increased primarily as a result of a favorable mark-to-market adjustment on these transactions due to higher longer term interest rates. We recognized an unfavorable mark-to-market adjustment for the three months endedMarch 31, 2020 primarily as a result of the decline in longer term interest rates resulting from the initial economic impacts of the COVID-19 pandemic. •Income from investments held in rabbi trust accounts increased primarily as a result of a favorable mark-to-market adjustment on equity securities held in these accounts. We recognized an unfavorable mark-to-market adjustment for the three months endedMarch 31, 2020 primarily as a result of the decline in asset values resulting from the initial economic impacts of the COVID-19 pandemic. •Net gains on sales of mortgage loans held for sale increased primarily due to the low interest rate environment which resulted in increased volume for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . This increase was partially offset by a decrease in the mark-to-market adjustment on mortgage loan-related derivatives, which is included within other noninterest income. 76
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•Net gains on securities available for sale increased primarily due to volume and the composition of security sales. During the three months endedMarch 31, 2021 we sold certain government-sponsored residential mortgage backed securities. During the three months endedMarch 31, 2020 we sold some municipal bonds. •Deposit service charges decreased primarily as a result of reduced overdraft charges due to reduced transactional volume during the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Noninterest Expense The following table sets forth information regarding noninterest expense for the periods shown: Noninterest Expense For the Three Months Ended March 31, Change 2021 2020 Amount ($) Percentage (%) (Dollars in thousands) Salaries and employee benefits $ 64,040$ 61,589 $ 2,451 4.0 % Office occupancy and equipment 8,217 8,689 (472) (5.4) % Data processing 12,129 10,004 2,125 21.2 % Professional services 4,148 3,689 459 12.4 % Charitable contributions - 1,187 (1,187) (100.0) % Marketing 1,691 2,468 (777) (31.5) % Loan expenses 1,847 1,112 735 66.1 % FDIC insurance 948 906 42 4.6 % Amortization of intangible assets 532 702 (170) (24.2) % Other 497 4,826 (4,329) (89.7) % Total noninterest expense $ 94,049$ 95,172 $ (1,123) (1.2) % Noninterest expense decreased by$1.1 million , or 1.2%, to$94.0 million during the three months endedMarch 31, 2021 from$95.2 million during the three months endedMarch 31, 2020 . This decrease was primarily due to a$4.3 million decrease in other noninterest expenses as well as a reduction in charitable contributions of$1.2 million . Partially offsetting these favorable items were increases in salaries and employee benefits and data processing expenses of$2.5 million and$2.1 million , respectively. •Other noninterest expenses decreased primarily due to the conversion of our Defined Benefit Plan and BEP from a traditional final average earnings plan design to a cash balance plan design. Non-service cost expenses for the defined benefit plan and the benefit equalization plan decreased by$3.2 million and$0.6 million , respectively, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . •Salaries and employee benefits increased due to an increase in rabbi trust employee benefits of$4.5 million primarily as a result of the favorable equity securities valuations, ESOP expense of$2.1 million , an increase in salaries and wages of$2.1 million , and an increase in pension service cost of$2.0 million . Partially offsetting these unfavorable items were a$5.0 million decrease in incentive compensation expense that was, in part, due to the decline in total shareholders' equity due to higher market interest rates, and an increase in salary expense deferrals of$4.1 million primarily due to PPP loan originations. We established the ESOP inOctober 2020 when we completed our IPO. Accordingly, we did not have any ESOP expense during the three months endedMarch 31, 2020 . •Data processing expenses increased due to an increase in software service and support expenses (including depreciation expense) of$1.5 million and an increase in core data processing expenses of$0.7 million . Core data processing expenses increased primarily as a result of increased costs due to PPP loan originations. 77
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Income Taxes
We recognize the tax effect of all income and expense transactions in each
year's consolidated statements of income, regardless of the year in which the
transactions are reported for income tax purposes. The following table sets
forth information regarding our tax provision and applicable tax rates for the
periods indicated:
Tax Provision and Applicable Tax Rates
For the Three Months Ended March 31,
2021 2020
(Dollars in thousands)
Combined federal and state income tax provisions $ 14,171 $ 1,298
Effective income tax rates 22.9 % 13.3 %
Blended statutory tax rate 28.1 % 28.1 %
Income tax expense increased by $12.9 million , or 991.8%, to $14.2 million in
the three months ended March 31, 2021 from $1.3 million in the three months
ended March 31, 2020 . The increase in income tax expense was due primarily to
higher pre-tax income during the three months ended March 31, 2021 compared to
the three months ended March 31, 2020 , decreasing the impact on the effective
rate related to favorable permanent differences, including investment tax
credits and tax exempt income. For additional information related to the
Company's income taxes see Note 8, "Income Taxes" and Note 9, "Low Income
Housing Tax Credits and Other Tax Credit Investments" within the Notes to the
Consolidated Financial Statements included in Part I, Item 1 in this Quarterly
Report on Form 10-Q.
Financial Position and Results of Operations of our Business Segments
Comparison of the Three Months Ended March 31, 2021 and 2020
As of and for the Three Months Ended March 31,
2021 2020
Insurance Insurance
Banking Agency Other/ Banking Agency Other/
Business Business Eliminations Total Business Business Eliminations Total
(Dollars In Thousands)
Net interest income
-
$ -$ 100,146 (Release of) provision for loan losses (580) - - (580) 28,600 - - 28,600 Net interest income after provision for loan losses 100,671 - - 100,671 71,546 - - 71,546 Noninterest income 26,960 28,284 (32) 55,212 6,868 26,523 (22) 33,369 Noninterest expense 75,274 19,811 (1,036) 94,049 78,465 17,642 (935) 95,172 Income before provision for income taxes 52,357 8,473 1,004 61,834 (51) 8,881 913 9,743 Income tax provision (benefit) 11,793 2,378 - 14,171 (1,214) 2,512 - 1,298 Net income$ 40,564 $ 6,095 $ 1,004 $ 47,663 $ 1,163 $ 6,369 $ 913$ 8,445 Total assets$ 16,595,311 $ 194,664 $
(63,180)
Banking Segment •Average interest-earning assets grew$4.4 billion , or 41.2%, to$15.2 billion as ofMarch 31, 2021 from$10.8 billion as ofMarch 31, 2020 , with average total loans, our largest category of average interest-earning assets, growing$800.6 million , or 8.9%, to$9.8 billion as ofMarch 31, 2021 compared to$9.0 billion as ofMarch 31, 2020 . •Average interest-bearing liabilities grew$1.1 billion , or 16.6%, to$7.4 billion as ofMarch 31, 2021 from$6.4 billion as ofMarch 31, 2020 , with average total deposits, our largest category of average interest-bearing liabilities, growing$1.2 billion , or 19.3%, to$7.4 billion as ofMarch 31, 2021 compared to$6.2 billion as ofMarch 31, 2020 . 78
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•As noted above: •Loan-level interest rate swap income increased$11.4 million primarily as a result of a favorable mark-to-market adjustment on these transactions due to higher longer term interest rates. •Net gains on sales of mortgage loans held for sale increased$1.4 million primarily due to the low interest rate environment which resulted in increased volume for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . This increase was partially offset by a decrease in the mark-to-market adjustment on mortgage loan-related derivatives, which is included within other noninterest income. •Net gains on securities available for sale increased$1.0 million primarily due to volume and the composition of security sales. •Deposit service charges decreased$0.7 million primarily as a result of reduced overdraft charges due to reduced transactional volume during the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . •In addition, income from investments held in rabbi trust accounts increased$7.5 million primarily as a result of a favorable mark-to-market adjustment on equity securities held in these accounts. Insurance Agency Segment •Noninterest income related to our insurance agency business increased by$1.8 million , or 6.6%, to$28.3 million during the three months endedMarch 31, 2021 from$26.5 million during the three months endedMarch 31, 2020 . The increase was driven primarily by an increase in income from investments held in rabbi trusts of$1.1 million primarily as a result of a favorable mark-to-market adjustment on equity securities held in these accounts. In addition, profit sharing revenues and recurring commissions increased by$0.4 million and$0.3 million , respectively. Off-Balance Sheet Arrangements We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. The financial instruments include commitments to originate loans, unused lines of credit, unadvanced portions of construction loans and standby letters of credit, all of which involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Our exposure to credit loss is represented by the contractual amount of the instruments. We use the same credit policies in making commitments as we do for on-balance sheet instruments. AtMarch 31, 2021 , we had$4.0 billion of commitments to originate loans, comprised of$2.3 billion of commitments under commercial loans and lines of credit (including$284.1 million of unadvanced portions of construction loans),$1.3 billion of commitments under home equity loans and lines of credit,$179.1 million in standard overdraft coverage commitments,$96.9 million of unfunded commitments related to residential real estate loans and$60.8 million in other consumer loans and lines of credit. In addition, atMarch 31, 2021 , we had$64.0 million in standby letters of credit outstanding. We also had$35.6 million in forward commitments to sell loans. Management of Market Risk General. Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. Interest rate sensitivity is the most significant market risk to which we are exposed. Interest rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, our primary source of income. Interest rate risk arises directly from our core banking activities. In addition to directly impacting net interest income, changes in the level of interest rates can also affect the amount of loans originated, the timing of cash flows on loans and securities, and the fair value of securities and derivatives, as well as other effects. The primary goal of interest rate risk management is to control this risk within limits approved by the Risk Management Committee of our Board of Directors. These limits reflect our tolerance for interest rate risk over both short-term and long-term horizons. We attempt to manage interest rate risk by identifying, quantifying, and where appropriate, hedging its exposure. If assets and liabilities do not 79
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re-price simultaneously and in equal volume, the potential for interest rate exposure exists. Our objective is to maintain stability in the growth of net interest income through the maintenance of an appropriate mix of interest-earning assets and interest-bearing liabilities and, when necessary and, within limits that management determines to be prudent, through the use of off-balance sheet hedging instruments such as interest rate swaps, floors and caps. Net Interest Income. We analyze our sensitivity to changes in interest rates through a net interest income model. We estimate what our net interest income would be for a 12-month period assuming no changes in interest rates. We then calculate what the net interest income would be for the same period under the assumption that theU.S. Treasury yield curve increases or decreases instantaneously by +200, +300, +400 and -100 basis point increments, with changes in interest rates representing immediate and permanent, parallel shifts in the yield curve. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the "Changes in Interest Rates" column below. The model requires that interest rates remain positive for all points along the yield curve for each rate scenario which may preclude the modeling of certain falling rate scenarios during periods of lower market interest rates. The relatively low level of interest rates prevalent atMarch 31, 2021 precluded the modeling of certain falling rate scenarios. We do not model negative interest rate scenarios. The tables below set forth, as ofMarch 31, 2021 andDecember 31, 2020 , the calculation of the estimated changes in our net interest income on an FTE basis that would result from the designated immediate changes in theU.S. Treasury yield curve: Interest Rate Sensitivity As of March 31, 2021 Change in Net Interest Year 1 Interest Rates Income Year 1 Change from (basis points) (1) Forecast Level (Dollars in thousands) 400 $ 568,519 44.1 % 300 524,891 33.0 % 200 481,564 22.1 % Flat 394,511 - % (100) 375,522 (4.8) % As of December 31, 2020 Change in Net Interest Year 1 Interest Rates Income Year 1 Change from (basis points) (1) Forecast Level (Dollars in thousands) 400 $ 571,842 50.0 % 300 524,847 37.7 % 200 478,307 25.5 % Flat 381,259 - % (100) 362,186 (5.0) % (1)Assumes an immediate uniform change in interest rates at all maturities, except in the down 100 basis points scenario, where rates are floored at zero at all maturities. The tables above indicate that atMarch 31, 2021 andDecember 31, 2020 , in the event of an instantaneous parallel 200 basis points increase in rates, we would have experienced a 22.1% and 25.5% increase, respectively, in net interest income on an FTE basis, and in the event of an instantaneous 100 basis points decrease in interest rates, we would have experienced a 4.8% and a 5.0% decrease atMarch 31, 2021 andDecember 31, 2020 , respectively, in net interest income, on an FTE basis. Management may use interest rate derivative financial instruments, within internal policy guidelines, to manage interest rate risk as part of our asset/liability strategy. These derivatives provide significant protection against falling interest rates. 80
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Economic Value of Equity Analysis. We also analyze the sensitivity of our
financial condition in interest rates through our economic value of equity
("EVE") model. This analysis calculates the difference between the present value
of expected cash flows from assets and liabilities assuming various changes in
current interest rates.
The table below represents an analysis of our interest rate risk (excluding the
effect of our pension plans) as measured by the estimated changes in our EVE,
resulting from an instantaneous and sustained parallel shift in the yield curve
(+200, +300, +400 basis points and -100 basis points) at March 31, 2021 and
December 31, 2020 . The model requires that interest rates remain positive for
all points along the yield curve for each rate scenario which may preclude the
modeling of certain falling rate scenarios during periods of lower market
interest rates. The relatively low level of interest rates prevalent at
March 31, 2021 precluded the modeling of certain falling rate scenarios,
including negative interest rates.
Our earnings are not directly or materially impacted by movements in foreign
currency rates or commodity prices. Movements in equity prices may have a modest
impact on earnings by affecting the volume of activity or the amount of fees
from investment-related business lines.
EVE Interest Rate Sensitivity
As of March 31, 2021 EVE as a
Change in Interest Estimated Increase (Decrease) in EVE from Level Percentage of
Rate (basis points) (1) Estimated EVE (2) Amount Percent Total Assets (3)
(Dollars in thousands)
400 $ 4,477,682 $ 349,568 8.5 % 28.68 %
300 4,402,223 274,109 6.6 % 27.74 %
200 4,324,403 196,289 4.8 % 26.77 %
Flat 4,128,114 - - 24.60 %
(100) 3,919,926 (208,188) (5.0) % 23.05 %
As of December 31, 2020 EVE as a
Change in Interest Estimated Increase (Decrease) in EVE from Level Percentage of
Rate (basis points) (1) Estimated EVE (2) Amount Percent Total Assets (3)
(Dollars in thousands)
400 $ 4,385,795 $ 452,022 11.5 % 29.09 %
300 4,297,682 363,909 9.3 % 28.06 %
200 4,205,867 272,094 6.9 % 27.00 %
Flat 3,933,773 - - 24.38 %
(100) 3,663,432 (270,341) (6.9) % 22.65 %
(1)Assumes an immediate uniform change in interest rates at all maturities,
except in the down 100 basis points scenario, where rates are floored at zero at
all maturities.
(2)EVE is the discounted present value of expected cash flows from assets,
liabilities and off-balance sheet contracts.
(3)Present value of assets represents the discounted present value of incoming
cash flows on interest-earning assets.
Liquidity and Capital Resources
Liquidity. Liquidity describes our ability to meet the financial obligations
that arise in the normal course of business. Liquidity is primarily needed to
meet deposit withdrawals and anticipated loan fundings, as well as current and
planned expenditures. We seek to maintain sources of liquidity that are deep and
diversified and that may be used during the normal course of business as well as
on a contingency basis.
The net proceeds from our IPO significantly increased our liquidity and capital
resources at both Eastern Bankshares, Inc. and Eastern Bank. Over time, the
initial level of liquidity will be reduced as net proceeds from the IPO are used
for general corporate purposes, including the funding of loans. Our financial
condition and results of operations will be enhanced by the net proceeds from
the IPO, resulting in increased net interest-earning assets and net interest and
dividend income. However, due to the increase in equity resulting form the net
proceeds raised in our IPO, our return on equity has been and will continue to
be adversely affected until we can effectively employ the proceeds of the IPO.
Our primary sources of funds are deposits, principal and interest payments on
loans and securities, and proceeds from calls, maturities and sales of
securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions, and competition. Our
most liquid assets are cash and due from banks and securities classified as
available for sale. In the future, our
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liquidity position will be affected by the level of customer deposits and payments, as well as acquisitions, dividends, and stock repurchases in which we may engage. We believe that our existing resources will be sufficient to meet the liquidity and capital requirements of our operations for the foreseeable future. We participate in the IntraFi Network (formerly "Promontory"), which allows us to provide access to multi-million dollarFDIC deposit insurance protection on customer deposits for consumers, businesses and public entities. We can elect to sell or repurchase this funding as reciprocal deposits from other IntraFi Network banks depending on our funding needs. AtMarch 31, 2021 andDecember 31, 2020 , we had a total of$384.7 million and$364.8 million of IntraFi Network one-way sell deposits, respectively. These deposits could have been repurchased as reciprocal deposits and should be considered a source of liquidity. Although customer deposits remain our preferred source of funds, maintaining additional back up sources of liquidity is part of our prudent liquidity risk management practices. We have the ability to borrow from the FHLBB. AtMarch 31, 2021 , we had$14.5 million in outstanding advances and the ability to borrow up to an additional$1.5 billion . We also have the ability to borrow from the FRBB as well as the Paycheck Protection Program Liquidity Facility. AtMarch 31, 2021 , we had a$492.3 million collateralized line of credit from the FRBB with no outstanding balance. Additionally, we had$1.2 billion in PPP loans that could have been pledged to the Paycheck Protection Program Liquidity Facility. We had a total of$770.0 million of discretionary lines of credit atMarch 31, 2021 . Sources of Liquidity As of March 31, 2021 As of December 31, 2020 Additional Additional Outstanding Capacity Outstanding Capacity (Dollars in thousands) IntraFi Network deposits $ -$ 384,730 $ -$ 364,794 Federal Home Loan Bank (1) 14,473 1,533,364 14,624 1,581,016 Federal Reserve Bank of Boston (2) - 492,333 - 503,512 Federal Reserve Paycheck Protection Program Liquidity Facility - 1,238,053 - 1,026,117 Unsecured lines of credit - 770,000 - 620,000 Total deposits$ 14,473 $ 4,418,480 $ 14,624 $ 4,095,439 (1)As of bothMarch 31, 2021 andDecember 31, 2020 , loans have been pledged to the FHLBB with a carrying value of$2.4 billion to secure additional borrowing capacity. (2)Loans with a carrying value of$832.4 million and$884.1 million atMarch 31, 2021 andDecember 31, 2020 , respectively, have been pledged to the FRBB resulting in this additional unused borrowing capacity We believe that advanced preparation, early detection, and prompt responses can avoid, minimize, or shorten potential liquidity crises. Our Board of Directors and our Asset Liability Committee have put a Liquidity Contingency Plan in place to establish methods for assessing and monitoring risk levels, as well as potential responses during unanticipated stress events. As part of its risk management framework, we perform periodic liquidity stress testing to assess its need for liquid assets as well as backup sources of liquidity. Capital Resources. We are subject to various regulatory capital requirements administered by theMassachusetts Commissioner of Banks, theFDIC and theFederal Reserve (with respect to our consolidated capital requirements). AtMarch 31, 2021 andDecember 31, 2020 , we exceeded all applicable regulatory capital requirements, and were considered "well capitalized" under regulatory guidelines. Contractual Obligations, Commitments and Contingencies In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities. AtMarch 31, 2021 there were no material changes in our contractual obligations, other commitments and contingencies from those disclosed in our 2020 Form 10-K.
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