UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
Or
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-35070
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.INC.
(Exact name of registrant as specified in its charter)
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| | | | | | | | | | | | | |
Massachusetts | | 04-2976299 | |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification Number) | |
| |
Ten Post Office Square |
| 02109 | |
Boston, | Massachusetts | | | |
(Address of Principal Executive Offices) | | (Zip Code) | |
Registrant's telephone number, including area code: (617)(617) 912-1900
Securities registered pursuant to Section 12(b) of the Act: |
| | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange which registered |
Common Stock | BPFH | NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | | Smaller reporting company | ☐ |
| | | | | Emerging growth company | ☐ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2019:30, 2020:
|
| | | | |
Common Stock, Par Value $1.00 Per Share | 83,242,00182,254,594 |
(class) | (outstanding) |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
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PART I—FINANCIAL INFORMATION |
Item 1 | | | |
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Item 2 | | | |
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Item 3 | | | |
Item 4 | | | |
PART II—OTHER INFORMATION |
Item 1 | | | |
Item 1A | | | |
Item 2 | | | |
Item 3 | | | |
Item 4 | | | |
Item 5 | | | |
Item 6 | | | |
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| | Certifications | |
PART I. FINANCIAL INFORMATION, ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
| | BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
| BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
| BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) |
| September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| (In thousands, except share and per share data) | | (In thousands, except share and per share data) |
Assets: | | | | Assets: | |
Cash and cash equivalents | $ | 78,010 |
| | $ | 127,259 |
| Cash and cash equivalents | $ | 546,263 | | | $ | 292,479 | |
Investment securities available-for-sale (amortized cost of $922,112 and $1,018,774 at September 30, 2019 and December 31, 2018, respectively) | 935,538 |
| | 994,065 |
| |
Investment securities held-to-maturity (fair value of $51,015 and $68,595 at September 30, 2019 and December 31, 2018, respectively) | 51,379 |
| | 70,438 |
| |
Investment securities available-for-sale (amortized cost of $967,730 and $966,900 at September 30, 2020 and December 31, 2019, respectively) | | Investment securities available-for-sale (amortized cost of $967,730 and $966,900 at September 30, 2020 and December 31, 2019, respectively) | 1,011,327 | | | 978,284 | |
Investment securities held-to-maturity (fair value of $39,348 and $47,949 at September 30, 2020 and December 31, 2019, respectively) | | Investment securities held-to-maturity (fair value of $39,348 and $47,949 at September 30, 2020 and December 31, 2019, respectively) | 38,600 | | | 48,212 | |
Equity securities at fair value | 21,780 |
| | 14,228 |
| Equity securities at fair value | 32,818 | | | 18,810 | |
Stock in Federal Home Loan Bank and Federal Reserve Bank | 47,756 |
| | 49,263 |
| Stock in Federal Home Loan Bank and Federal Reserve Bank | 36,618 | | | 39,078 | |
Loans held for sale | 6,658 |
| | 2,812 |
| Loans held for sale | 15,074 | | | 7,386 | |
Total loans | 7,067,151 |
| | 6,893,158 |
| Total loans | 7,222,569 | | | 6,976,704 | |
Less: Allowance for loan losses | 75,359 |
| | 75,312 |
| Less: Allowance for loan losses | 84,551 | | | 71,982 | |
Net loans | 6,991,792 |
| | 6,817,846 |
| Net loans | 7,138,018 | | | 6,904,722 | |
Other real estate owned (“OREO”) | — |
| | 401 |
| |
| Premises and equipment, net | 42,658 |
| | 45,412 |
| Premises and equipment, net | 42,907 | | | 44,527 | |
Goodwill | 57,607 |
| | 57,607 |
| Goodwill | 57,607 | | | 57,607 | |
Intangible assets, net | 10,622 |
| | 12,227 |
| Intangible assets, net | 8,898 | | | 10,352 | |
Fees receivable | 5,007 |
| | 5,101 |
| Fees receivable | 3,259 | | | 4,095 | |
Accrued interest receivable | 24,851 |
| | 24,366 |
| Accrued interest receivable | 25,935 | | | 24,175 | |
Deferred income taxes, net | 15,704 |
| | 26,638 |
| Deferred income taxes, net | 8,250 | | | 11,383 | |
Right-of-use assets | 107,045 |
| | — |
| Right-of-use assets | 94,879 | | | 102,075 | |
Other assets | 294,537 |
| | 246,962 |
| Other assets | 370,852 | | | 287,316 | |
Total assets | $ | 8,690,944 |
| | $ | 8,494,625 |
| Total assets | $ | 9,431,305 | | | $ | 8,830,501 | |
Liabilities: | | | | Liabilities: | | | |
Deposits | $ | 6,658,242 |
| | $ | 6,781,170 |
| Deposits | $ | 7,827,719 | | | $ | 7,241,476 | |
Securities sold under agreements to repurchase | 48,860 |
| | 36,928 |
| Securities sold under agreements to repurchase | 42,544 | | | 53,398 | |
Federal funds purchased | 230,000 |
| | 250,000 |
| |
| Federal Home Loan Bank borrowings | 570,904 |
| | 420,144 |
| Federal Home Loan Bank borrowings | 296,236 | | | 350,829 | |
Junior subordinated debentures | 106,363 |
| | 106,363 |
| Junior subordinated debentures | 106,363 | | | 106,363 | |
Lease liabilities | 122,799 |
| | — |
| Lease liabilities | 108,932 | | | 117,214 | |
Other liabilities | 143,607 |
| | 143,540 |
| Other liabilities | 203,342 | | | 140,820 | |
Total liabilities | 7,880,775 |
| | 7,738,145 |
| Total liabilities | 8,585,136 | | | 8,010,100 | |
Redeemable Noncontrolling Interests | 1,481 |
| | 2,526 |
| Redeemable Noncontrolling Interests | 0 | | | 1,383 | |
Shareholders’ Equity: | | | | Shareholders’ Equity: | |
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 83,241,952 shares at September 30, 2019 and 83,655,651 shares at December 31, 2018 | 83,242 |
| | 83,656 |
| |
| Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 82,254,594 shares at September 30, 2020 and 83,265,674 shares at December 31, 2019 | | Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 82,254,594 shares at September 30, 2020 and 83,265,674 shares at December 31, 2019 | 82,255 | | | 83,266 | |
Additional paid-in capital | 599,877 |
| | 600,196 |
| Additional paid-in capital | 597,113 | | | 600,708 | |
Retained earnings | 116,210 |
| | 87,821 |
| Retained earnings | 136,394 | | | 127,469 | |
Accumulated other comprehensive income/ (loss) | 9,359 |
| | (17,719 | ) | |
Accumulated other comprehensive income | | Accumulated other comprehensive income | 30,407 | | | 7,575 | |
| Total shareholders’ equity | 808,688 |
| | 753,954 |
| Total shareholders’ equity | 846,169 | | | 819,018 | |
Total liabilities, redeemable noncontrolling interests and shareholders’ equity | $ | 8,690,944 |
| | $ | 8,494,625 |
| Total liabilities, redeemable noncontrolling interests and shareholders’ equity | $ | 9,431,305 | | | $ | 8,830,501 | |
See accompanying notes to consolidated financial statements.
Unaudited Consolidated Financial Statements.
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands, except share and per share data) |
Interest and dividend income: | | | | | | | |
Loans | $ | 71,036 |
| | $ | 68,254 |
| | $ | 212,912 |
| | $ | 193,231 |
|
Taxable investment securities | 938 |
| | 1,510 |
| | 3,244 |
| | 4,521 |
|
Non-taxable investment securities | 1,924 |
| | 1,779 |
| | 5,726 |
| | 5,261 |
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Mortgage-backed securities | 2,622 |
| | 2,941 |
| | 8,225 |
| | 9,168 |
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Short-term investments and other | 1,084 |
| | 1,617 |
| | 3,049 |
| | 3,831 |
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Total interest and dividend income | 77,604 |
| | 76,101 |
| | 233,156 |
| | 216,012 |
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Interest expense: | | | | | | | |
Deposits | 15,487 |
| | 11,487 |
| | 44,060 |
| | 26,376 |
|
Federal Home Loan Bank borrowings | 4,337 |
| | 3,877 |
| | 12,144 |
| | 11,668 |
|
Junior subordinated debentures | 1,022 |
| | 1,028 |
| | 3,223 |
| | 2,882 |
|
Repurchase agreements and other short-term borrowings | 605 |
| | 68 |
| | 1,778 |
| | 517 |
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Total interest expense | 21,451 |
| | 16,460 |
| | 61,205 |
| | 41,443 |
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Net interest income | 56,153 |
| | 59,641 |
| | 171,951 |
| | 174,569 |
|
Provision/ (credit) for loan losses | 167 |
| | (949 | ) | | 104 |
| | (2,291 | ) |
Net interest income after provision/ (credit) for loan losses | 55,986 |
| | 60,590 |
| | 171,847 |
| | 176,860 |
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Fees and other income: | | | | | | | |
Wealth management and trust fees | 19,067 |
| | 25,505 |
| | 57,037 |
| | 76,030 |
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Investment management fees | 2,496 |
| | 3,245 |
| | 7,601 |
| | 18,897 |
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Other banking fee income | 2,658 |
| | 2,775 |
| | 8,024 |
| | 7,793 |
|
Gain on sale of loans, net | 934 |
| | 67 |
| | 1,065 |
| | 204 |
|
Gain/ (loss) on sale of investments, net | — |
| | — |
| | — |
| | (17 | ) |
Gain/ (loss) on OREO, net | — |
| | — |
| | 91 |
| | — |
|
Other | (29 | ) | | 722 |
| | 936 |
| | 1,245 |
|
Total fees and other income | 25,126 |
| | 32,314 |
| | 74,754 |
| | 104,152 |
|
Operating expense: | | | | | | | |
Salaries and employee benefits | 31,684 |
| | 38,944 |
| | 100,116 |
| | 125,461 |
|
Occupancy and equipment | 8,260 |
| | 8,164 |
| | 24,460 |
| | 24,141 |
|
Information systems | 5,169 |
| | 6,233 |
| | 16,166 |
| | 18,889 |
|
Professional services | 4,435 |
| | 2,877 |
| | 11,308 |
| | 8,926 |
|
Marketing and business development | 1,403 |
| | 1,710 |
| | 4,422 |
| | 5,373 |
|
Amortization of intangibles | 671 |
| | 750 |
| | 2,015 |
| | 2,249 |
|
FDIC insurance | 59 |
| | 674 |
| | 1,304 |
| | 2,126 |
|
Restructuring | — |
| | 5,763 |
| | 1,646 |
| | 5,763 |
|
Other | 3,856 |
| | 3,442 |
| | 10,312 |
| | 10,870 |
|
Total operating expense | 55,537 |
| | 68,557 |
| | 171,749 |
| | 203,798 |
|
Income before income taxes | 25,575 |
| | 24,347 |
| | 74,852 |
| | 77,214 |
|
Income tax expense | 5,517 |
| | 5,461 |
| | 15,803 |
| | 28,886 |
|
Net income from continuing operations | 20,058 |
| | 18,886 |
| | 59,049 |
| | 48,328 |
|
Net income from discontinued operations | — |
| | — |
| | — |
| | 1,696 |
|
Net income before attribution to noncontrolling interests | 20,058 |
| | 18,886 |
| | 59,049 |
| | 50,024 |
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(Continued) | | | | | | | |
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands, except share and per share data) |
Interest and dividend income: | | | | | | | |
Loans | $ | 59,618 | | | $ | 71,036 | | | $ | 188,783 | | | $ | 212,912 | |
Taxable investment securities | 853 | | | 938 | | | 2,580 | | | 3,244 | |
Non-taxable investment securities | 1,974 | | | 1,924 | | | 5,977 | | | 5,726 | |
Mortgage-backed securities | 2,354 | | | 2,622 | | | 7,707 | | | 8,225 | |
Short-term investments and other | 654 | | | 1,084 | | | 2,307 | | | 3,049 | |
Total interest and dividend income | 65,453 | | | 77,604 | | | 207,354 | | | 233,156 | |
Interest expense: | | | | | | | |
Deposits | 6,434 | | | 15,487 | | | 26,565 | | | 44,060 | |
Federal Home Loan Bank borrowings | 664 | | | 4,337 | | | 4,453 | | | 12,144 | |
Junior subordinated debentures | 508 | | | 1,022 | | | 2,189 | | | 3,223 | |
Repurchase agreements and other short-term borrowings | 23 | | | 605 | | | 128 | | | 1,778 | |
Total interest expense | 7,629 | | | 21,451 | | | 33,335 | | | 61,205 | |
Net interest income | 57,824 | | | 56,153 | | | 174,019 | | | 171,951 | |
Provision/(credit) for loan losses | (4,569) | | | 167 | | | 34,997 | | | 104 | |
Net interest income after provision/(credit) for loan losses | 62,393 | | | 55,986 | | | 139,022 | | | 171,847 | |
Fees and other income: | | | | | | | |
Wealth management and trust fees | 18,240 | | | 19,067 | | | 53,872 | | | 57,037 | |
Investment management fees | 1,393 | | | 2,496 | | | 5,088 | | | 7,601 | |
| | | | | | | |
| | | | | | | |
Other banking fee income | 1,320 | | | 2,658 | | | 6,205 | | | 8,024 | |
Gain on sale of loans, net | 1,006 | | | 934 | | | 1,310 | | | 1,065 | |
| | | | | | | |
| | | | | | | |
Gain on OREO, net | 0 | | | 0 | | | 0 | | | 91 | |
| | | | | | | |
Other | 1,086 | | | (29) | | | 753 | | | 936 | |
Total fees and other income | 23,045 | | | 25,126 | | | 67,228 | | | 74,754 | |
Operating expense: | | | | | | | |
Salaries and employee benefits | 34,671 | | | 31,684 | | | 103,704 | | | 100,116 | |
Occupancy and equipment | 8,150 | | | 8,260 | | | 23,356 | | | 24,460 | |
Information systems | 7,096 | | | 5,169 | | | 20,934 | | | 16,166 | |
Professional services | 4,025 | | | 4,435 | | | 11,072 | | | 11,308 | |
Marketing and business development | 935 | | | 1,403 | | | 5,138 | | | 4,422 | |
Amortization of intangibles | 714 | | | 671 | | | 2,131 | | | 2,015 | |
| | | | | | | |
FDIC insurance | 960 | | | 59 | | | 1,727 | | | 1,304 | |
Restructuring | 0 | | | 0 | | | 0 | | | 1,646 | |
Other | 4,386 | | | 3,856 | | | 15,236 | | | 10,312 | |
Total operating expense | 60,937 | | | 55,537 | | | 183,298 | | | 171,749 | |
Income before income taxes | 24,501 | | | 25,575 | | | 22,952 | | | 74,852 | |
Income tax expense | 1,821 | | | 5,517 | | | 2,764 | | | 15,803 | |
| | | | | | | |
| | | | | | | |
Net income before attribution to noncontrolling interests | 22,680 | | | 20,058 | | | 20,188 | | | 59,049 | |
(Continued) | | | | | | | |
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Less: Net income attributable to noncontrolling interests | 96 |
| | 924 |
| | 265 |
| | 2,942 |
|
Net income attributable to the Company | $ | 19,962 |
| | $ | 17,962 |
| | $ | 58,784 |
| | $ | 47,082 |
|
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders | 304 |
| | (829 | ) | | 1,045 |
| | (4,376 | ) |
Net income attributable to common shareholders for earnings per share calculation | $ | 20,266 |
| | $ | 17,133 |
| | $ | 59,829 |
| | $ | 42,706 |
|
Basic earnings per share attributable to common shareholders: | | | | | | | |
From continuing operations: | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.72 |
| | $ | 0.49 |
|
From discontinued operations: | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.02 |
|
Total attributable to common shareholders: | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.72 |
| | $ | 0.51 |
|
Weighted average basic common shares outstanding | 83,631,403 |
| | 84,017,284 |
| | 83,495,361 |
| | 83,544,754 |
|
Diluted earnings per share attributable to common shareholders: | | | | | | | |
From continuing operations: | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.71 |
| | $ | 0.48 |
|
From discontinued operations: | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.02 |
|
Total attributable to common shareholders: | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.71 |
| | $ | 0.50 |
|
Weighted average diluted common shares outstanding | 83,956,708 |
| | 85,498,568 |
| | 84,003,281 |
| | 85,254,295 |
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Less: Net income attributable to noncontrolling interests | 0 | | | 96 | | | 6 | | | 265 | |
Net income attributable to the Company | $ | 22,680 | | | $ | 19,962 | | | $ | 20,182 | | | $ | 58,784 | |
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders | 0 | | | 304 | | | 414 | | | 1,045 | |
Net income attributable to common shareholders | $ | 22,680 | | | $ | 20,266 | | | $ | 20,596 | | | $ | 59,829 | |
Basic earnings per share attributable to common shareholders: | | | | | | | |
| | | | | | | |
| | | | | | | |
Total attributable to common shareholders: | $ | 0.28 | | | $ | 0.24 | | | $ | 0.25 | | | $ | 0.72 | |
Weighted average basic common shares outstanding | 82,221,705 | | | 83,631,403 | | | 82,382,050 | | | 83,495,361 | |
Diluted earnings per share attributable to common shareholders: | | | | | | | |
| | | | | | | |
| | | | | | | |
Total attributable to common shareholders: | $ | 0.28 | | | $ | 0.24 | | | $ | 0.25 | | | $ | 0.71 | |
Weighted average diluted common shares outstanding | 82,362,338 | | | 83,956,708 | | | 82,746,866 | | | 84,003,281 | |
See accompanying notes to consolidated financial statements.Unaudited Consolidated Financial Statements.
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BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands) |
Net income attributable to the Company | $ | 19,962 |
| | $ | 17,962 |
| | $ | 58,784 |
| | $ | 47,082 |
|
Other comprehensive income/ (loss), net of tax: | | | | | | | |
Net unrealized gain/ (loss) on securities available-for-sale | 5,236 |
| | (4,040 | ) | | 27,469 |
| | (18,888 | ) |
Unrealized gain/ (loss) on cash flow hedges | 2 |
| | (138 | ) | | (31 | ) | | 574 |
|
Reclassification adjustment for net realized (gain)/ loss included in net income | (4 | ) | | (72 | ) | | (360 | ) | | (273 | ) |
Net unrealized gain/ (loss) on cash flow hedges | (2 | ) | | (210 | ) | | (391 | ) | | 301 |
|
Net unrealized gain/ (loss) on other | — |
| | — |
| | — |
| | 1 |
|
Other comprehensive income/ (loss), net of tax | 5,234 |
| | (4,250 | ) | | 27,078 |
| | (18,586 | ) |
Total comprehensive income attributable to the Company, net | $ | 25,196 |
| | $ | 13,712 |
| | $ | 85,862 |
| | $ | 28,496 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) |
Net income attributable to the Company | $ | 22,680 | | | $ | 19,962 | | | $ | 20,182 | | | $ | 58,784 | |
Other comprehensive income/(loss), net of tax: | | | | | | | |
Net unrealized gain on securities available-for-sale | 368 | | | 5,236 | | | 23,055 | | | 27,469 | |
| | | | | | | |
| | | | | | | |
Unrealized gain/(loss) on cash flow hedges | 202 | | | 2 | | | (100) | | | (31) | |
Reclassification adjustment for net realized (gain)/loss included in net income | (200) | | | (4) | | | (93) | | | (360) | |
Net unrealized gain/(loss) on cash flow hedges | 2 | | | (2) | | | (193) | | | (391) | |
Net unrealized gain/(loss) on other | 0 | | | 0 | | | (30) | | | 0 | |
Other comprehensive income, net of tax | 370 | | | 5,234 | | | 22,832 | | | 27,078 | |
Total comprehensive income attributable to the Company, net of tax | $ | 23,050 | | | $ | 25,196 | | | $ | 43,014 | | | $ | 85,862 | |
See accompanying notes to consolidated financial statements.Unaudited Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
|
| Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/ (Loss) | | Non- controlling Interests | | Total |
| (In thousands, except share data) |
Balance, December 31, 2017 | $ | 47,753 |
| | $ | 84,208 |
| | $ | 607,929 |
| | $ | 49,526 |
| | $ | (8,658 | ) | | $ | 5,186 |
| | $ | 785,944 |
|
Reclassification due to change in accounting principles (1) | — |
| | — |
| | — |
| | 334 |
| | (334 | ) | | — |
| | — |
|
Net income attributable to the Company | — |
| | — |
| | — |
| | 47,082 |
| | — |
| | — |
| | 47,082 |
|
Other comprehensive income/ (loss), net | — |
| | — |
| | — |
| | — |
| | (18,586 | ) | | — |
| | (18,586 | ) |
Dividends paid to common shareholders: $0.36 per share | — |
| | — |
| | — |
| | (30,586 | ) | | — |
| | — |
| | (30,586 | ) |
Dividends paid to preferred shareholders | — |
| | — |
| | — |
| | (1,738 | ) | | — |
| | — |
| | (1,738 | ) |
Net change in noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (2,977 | ) | | (2,977 | ) |
Redemption of Series D preferred stock | (47,753 | ) | | — |
| | (2,247 | ) | | — |
| | — |
| | — |
| | (50,000 | ) |
Repurchase of 137,114 shares of common stock | — |
| | (137 | ) | | (1,768 | ) | | — |
| | — |
| | — |
| | (1,905 | ) |
Net proceeds from issuance of: | | | | | | | | | | | | | |
142,738 shares of common stock | — |
| | 143 |
| | 1,722 |
| | — |
| | — |
| | — |
| | 1,865 |
|
7,355 shares of incentive stock grants, net of 132,964 incentive stock grant shares canceled or forfeited and 127,894 shares withheld for employee taxes | — |
| | (253 | ) | | (1,699 | ) | | — |
| | — |
| | — |
| | (1,952 | ) |
Exercise of warrants | — |
| | 438 |
| | (277 | ) | | — |
| | — |
| | — |
| | 161 |
|
Amortization of stock compensation and employee stock purchase plan | — |
| | — |
| | 5,131 |
| | — |
| | — |
| | — |
| | 5,131 |
|
Stock options exercised | — |
| | 204 |
| | 1,457 |
| | — |
| | — |
| | — |
| | 1,661 |
|
Other equity adjustments | — |
| | — |
| | 3,909 |
| | — |
| | — |
| | — |
| | 3,909 |
|
Balance at September 30, 2018 | $ | — |
| | $ | 84,603 |
| | $ | 614,157 |
| | $ | 64,618 |
| | $ | (27,578 | ) | | $ | 2,209 |
| | $ | 738,009 |
|
| | | | | | | | | | | | | |
Balance, December 31, 2018 | $ | — |
| | $ | 83,656 |
| | $ | 600,196 |
| | $ | 87,821 |
| | $ | (17,719 | ) | | $ | — |
| | $ | 753,954 |
|
Net income attributable to the Company | — |
| | — |
| | — |
| | 58,784 |
| | — |
| | — |
| | 58,784 |
|
Other comprehensive income/ (loss), net | — |
| | — |
| | — |
| | — |
| | 27,078 |
| | — |
| | 27,078 |
|
Dividends paid to common shareholders: $0.36 per share | — |
| | — |
| | — |
| | (30,395 | ) | | — |
| | — |
| | (30,395 | ) |
Repurchase of 678,165 shares of common stock | — |
| | (678 | ) | | (6,515 | ) | | — |
| | — |
| | — |
| | (7,193 | ) |
Net proceeds from issuance of: | | | | | | | | | | | | | |
265,937 shares of common stock | — |
| | 266 |
| | 2,008 |
| | — |
| | — |
| | — |
| | 2,274 |
|
42,004 shares of incentive stock grants, net of 9,377 shares canceled or forfeited and 115,173 shares withheld for employee taxes | — |
| | (83 | ) | | (522 | ) | | — |
| | — |
| | — |
| | (605 | ) |
Amortization of stock compensation and employee stock purchase plan | — |
| | — |
| | 3,359 |
| | — |
| | — |
| | — |
| | 3,359 |
|
Stock options exercised | — |
| | 81 |
| | 464 |
| | — |
| | — |
| | — |
| | 545 |
|
Other equity adjustments | — |
| | — |
| | 887 |
| | — |
| | — |
| | — |
| | 887 |
|
Balance at September 30, 2019 | $ | — |
| | $ | 83,242 |
| | $ | 599,877 |
| | $ | 116,210 |
| | $ | 9,359 |
| | $ | — |
| | $ | 808,688 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Nine months ended September 30, 2020 and 2019
|
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | | | Total |
| | (In thousands, except share data) |
Balance at December 31, 2018 | | | $ | 83,656 | | | $ | 600,196 | | | $ | 87,821 | | | $ | (17,719) | | | | | $ | 753,954 | |
| | | | | | | | | | | | | |
Net income attributable to the Company | | | — | | | — | | | 58,784 | | | — | | | | | 58,784 | |
Other comprehensive income/(loss), net | | | — | | | — | | | — | | | 27,078 | | | | | 27,078 | |
Dividends paid to common shareholders: $0.36 per share | | | — | | | — | | | (30,395) | | | — | | | | | (30,395) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Repurchase of 678,165 shares of common stock | | | (678) | | | (6,515) | | | — | | | — | | | | | (7,193) | |
Net proceeds from issuance of: | | | | | | | | | | | | | |
265,937 shares of common stock | | | 266 | | | 2,008 | | | — | | | — | | | | | 2,274 | |
42,004 shares of incentive stock grants, net of 9,377 shares canceled or forfeited and 115,173 shares withheld for employee taxes | | | (83) | | | (522) | | | — | | | — | | | | | (605) | |
| | | | | | | | | | | | | |
Amortization of stock compensation and employee stock purchase plan | | | — | | | 3,359 | | | — | | | — | | | | | 3,359 | |
Stock options exercised | | | 81 | | | 464 | | | — | | | — | | | | | 545 | |
Other equity adjustments | | | — | | | 887 | | | — | | | — | | | | | 887 | |
Balance at September 30, 2019 | | | $ | 83,242 | | | $ | 599,877 | | | $ | 116,210 | | | $ | 9,359 | | | | | $ | 808,688 | |
| | | | | | | | | | | | | |
Balance at December 31, 2019 | | | $ | 83,266 | | | $ | 600,708 | | | $ | 127,469 | | | $ | 7,575 | | | | | $ | 819,018 | |
| | | | | | | | | | | | | |
Impact due to change in accounting principle (1) | | | — | | | — | | | 13,492 | | | — | | | | | 13,492 | |
Net income attributable to the Company | | | — | | | — | | | 20,182 | | | — | | | | | 20,182 | |
Other comprehensive income/(loss), net | | | — | | | — | | | — | | | 22,832 | | | | | 22,832 | |
Dividends paid to common shareholders: $0.30 per share | | | — | | | — | | | (24,748) | | | — | | | | | (24,748) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Repurchase of 1,565,060 shares of common stock | | | (1,565) | | | (11,242) | | | — | | | — | | | | | (12,807) | |
Net proceeds from issuance of: | | | | | | | | | | | | | |
278,961 shares of common stock | | | 279 | | | 1,777 | | | — | | | — | | | | | 2,056 | |
309,416 shares of incentive stock grants, net of 41,366 shares withheld for employee taxes | | | 268 | | | 3,747 | | | — | | | — | | | | | 4,015 | |
| | | | | | | | | | | | | |
Amortization of stock compensation and employee stock purchase plan | | | — | | | 607 | | | — | | | — | | | | | 607 | |
Stock options exercised | | | 7 | | | 48 | | | — | | | — | | | | | 55 | |
Other equity adjustments | | | 0 | | | 1,468 | | | (1) | | | — | | | | | 1,467 | |
Balance at September 30, 2020 | | | $ | 82,255 | | | $ | 597,113 | | | $ | 136,394 | | | $ | 30,407 | | | | | $ | 846,169 | |
_____________________
(1) ReclassificationImpact due to the adoption of ASU 2016-01 and 2016-13, Financial Instruments (Topic 326) (“ASU 2017-12.2016-13”). See Part I. Item 1. “Financial“Notes to Unaudited Consolidated Financial Statements and Supplementary Data - Note 15: Recent Accounting Pronouncements.”
See accompanying notes to consolidated financial statements.
Unaudited Consolidated Financial Statements.
|
| | | | | | | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
| Nine months ended September 30, |
| 2019 | | 2018 |
| (In thousands) |
Cash flows from operating activities: | | | |
Net income attributable to the Company | $ | 58,784 |
| | $ | 47,082 |
|
Adjustments to arrive at net income from continuing operations | | | |
Net income attributable to noncontrolling interests | 265 |
| | 2,942 |
|
Less: Net income from discontinued operations | — |
| | (1,696 | ) |
Net income from continuing operations | 59,049 |
| | 48,328 |
|
Adjustments to reconcile net income from continuing operations to net cash provided by/ (used in) operating activities: | | | |
Depreciation and amortization | 17,726 |
| | 17,192 |
|
Net income attributable to noncontrolling interests | (265 | ) | | (2,942 | ) |
Stock compensation, net of cancellations | 4,022 |
| | 5,232 |
|
Provision/ (credit) for loan losses | 104 |
| | (2,291 | ) |
Loans originated for sale | (32,796 | ) | | (32,364 | ) |
Proceeds from sale of loans held for sale | 29,176 |
| | 33,935 |
|
Deferred income tax expense/ (benefit) | 432 |
| | 8,548 |
|
Increase in right-of-use assets | 1,416 |
| | — |
|
Increase in operating lease liabilities | (1,465 | ) | | — |
|
Net decrease/ (increase) in other operating activities | (36,916 | ) | | (14,348 | ) |
Net cash provided by/ (used in) operating activities of continuing operations | 40,483 |
| | 61,290 |
|
Net cash provided by/ (used in) operating activities of discontinued operations | — |
| | 1,696 |
|
Net cash provided by/ (used in) operating activities | 40,483 |
| | 62,986 |
|
Cash flows from investing activities: | | | |
Investment securities available-for-sale: | | | |
Purchases | (24,977 | ) | | (25,204 | ) |
Sales | — |
| | 24 |
|
Maturities, calls, redemptions, and principal payments | 115,857 |
| | 86,085 |
|
Investment securities held-to-maturity: | | | |
Purchases | — |
| | (11,876 | ) |
Maturities, calls, and principal payments | 18,880 |
| | 10,726 |
|
Equity securities at fair value: | | | |
Purchases | (44,537 | ) | | (38,042 | ) |
Sales | 36,985 |
| | 51,757 |
|
(Investments)/ distributions in trusts, net | 357 |
| | 1,252 |
|
Contingent considerations from divestitures | 3,254 |
| | — |
|
(Purchase)/ redemption of Federal Home Loan Bank and Federal Reserve Bank stock | 1,507 |
| | 11,246 |
|
Net increase in portfolio loans | (268,238 | ) | | (217,317 | ) |
Proceeds from recoveries of loans previously charged-off | 887 |
| | 1,578 |
|
Proceeds from sale of OREO | 492 |
| | — |
|
Proceeds from sale of portfolio loans | 92,304 |
| | — |
|
Capital expenditures | (5,795 | ) | | (18,349 | ) |
Proceeds from sale of affiliate | — |
| | 34,120 |
|
Net cash provided by/ (used in) investing activities | (73,024 | ) | | (114,000 | ) |
(Continued) | | | |
|
| | | | | | | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
| Nine months ended September 30, |
| 2019 | | 2018 |
| (In thousands) |
Cash flows from financing activities: | | | |
Net increase/ (decrease) in deposits | (122,928 | ) | | 258,477 |
|
Net increase/ (decrease) in securities sold under agreements to repurchase | 11,932 |
| | 7,284 |
|
Net increase/ (decrease) in federal funds purchased | (20,000 | ) | | 90,000 |
|
Net increase/ (decrease) in short-term Federal Home Loan Bank borrowings | 110,000 |
| | (230,000 | ) |
Advances of long-term Federal Home Loan Bank borrowings | 340,000 |
| | 91,444 |
|
Repayments of long-term Federal Home Loan Bank borrowings | (299,240 | ) | | (113,289 | ) |
Redemption of Series D preferred stock | — |
| | (50,000 | ) |
Dividends paid to common shareholders | (30,395 | ) | | (30,586 | ) |
Dividends paid to preferred shareholders | — |
| | (1,738 | ) |
Proceeds from warrant exercises | — |
| | 161 |
|
Repurchase of common stock | (7,193 | ) | | (1,905 | ) |
Proceeds from stock option exercises | 545 |
| | 1,661 |
|
Proceeds from issuance of common stock | 2,274 |
| | 1,865 |
|
Tax withholding for share based compensation awards | (1,268 | ) | | (2,053 | ) |
Distributions paid to noncontrolling interests | (265 | ) | | (2,848 | ) |
Other equity adjustments | (170 | ) | | 4,634 |
|
Net cash provided by/ (used in) financing activities | (16,708 | ) | | 23,107 |
|
Net increase/ (decrease) in cash and cash equivalents | (49,249 | ) | | (27,907 | ) |
Cash and cash equivalents at beginning of year | 127,259 |
| | 120,541 |
|
Cash and cash equivalents at end of period | $ | 78,010 |
| | $ | 92,634 |
|
Supplemental disclosure of cash flow items: | | | |
Cash paid for interest | $ | 60,489 |
| | $ | 40,703 |
|
Cash paid for income taxes, (net of refunds received) | 18,122 |
| | 18,898 |
|
Change in unrealized gain/ (loss) on available-for-sale securities, net of tax | 27,469 |
| | (18,888 | ) |
Change in unrealized gain/ (loss) on cash flow hedges, net of tax | (391 | ) | | 301 |
|
Change in unrealized gain/ (loss) on other, net of tax | — |
| | 1 |
|
Non-cash transactions: | | | |
Loans transferred into other real estate owned from loan portfolio | — |
| | 108 |
|
Loans charged-off | (944 | ) | | (529 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Three months ended September 30, 2020 and 2019
| | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | | | Total | | |
| | (In thousands, except share data) | | |
Balance at June 30, 2019 | | | $ | 83,774 | | | $ | 603,869 | | | $ | 106,443 | | | $ | 4,125 | | | | | $ | 798,211 | | | |
| | | | | | | | | | | | | | | |
Net income attributable to the Company | | | — | | | — | | | 19,962 | | | — | | | | | 19,962 | | | |
Other comprehensive income/(loss), net | | | — | | | — | | | — | | | 5,234 | | | | | 5,234 | | | |
Dividends paid to common shareholders: $0.12 per share | | | — | | | — | | | (10,195) | | | — | | | | | (10,195) | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Repurchase of 678,165 shares of common stock | | | (678) | | | (6,515) | | | — | | | — | | | | | (7,193) | | | |
Net proceeds from issuance of: | | | | | | | | | | | | | | | |
122,790 shares of common stock | | | 123 | | | 1,018 | | | — | | | — | | | | | 1,141 | | | |
4,493 shares of incentive stock grants | | | 5 | | | 65 | | | — | | | — | | | | | 70 | | | |
| | | | | | | | | | | | | | | |
Amortization of stock compensation and employee stock purchase plan | | | — | | | 1,019 | | | — | | | — | | | | | 1,019 | | | |
Stock options exercised | | | 18 | | | 92 | | | — | | | — | | | | | 110 | | | |
Other equity adjustments | | | — | | | 329 | | | — | | | — | | | | | 329 | | | |
Balance at September 30, 2019 | | | $ | 83,242 | | | $ | 599,877 | | | $ | 116,210 | | | $ | 9,359 | | | | | $ | 808,688 | | | |
| | | | | | | | | | | | | | | |
Balance at June 30, 2020 | | | $ | 82,058 | | | $ | 594,463 | | | $ | 118,647 | | | $ | 30,037 | | | | | $ | 825,205 | | | |
| | | | | | | | | | | | | | | |
Net income attributable to the Company | | | — | | | — | | | 22,680 | | | — | | | | | 22,680 | | | |
Other comprehensive income/(loss), net | | | — | | | — | | | — | | | 370 | | | | | 370 | | | |
Dividends paid to common shareholders: $0.06 per share | | | — | | | — | | | (4,932) | | | — | | | | | (4,932) | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Net proceeds from issuance of: | | | | | | | | | | | | | | | |
167,906 shares of common stock | | | 168 | | | 828 | | | — | | | — | | | | | 996 | | | |
38,412 shares of incentive stock grants, net of 10,207 shares withheld for employee taxes | | | 28 | | | 311 | | | — | | | — | | | | | 339 | | | |
| | | | | | | | | | | | | | | |
Amortization of stock compensation and employee stock purchase plan | | | — | | | 1,486 | | | — | | | — | | | | | 1,486 | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other equity adjustments | | | 1 | | | 25 | | | (1) | | | — | | | | | 25 | | | |
Balance at September 30, 2020 | | | $ | 82,255 | | | $ | 597,113 | | | $ | 136,394 | | | $ | 30,407 | | | | | $ | 846,169 | | | |
See accompanying notes to consolidated financial statements.Unaudited Consolidated Financial Statements.
| | | | | | | | | | | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
| Nine months ended September 30, |
| 2020 | | 2019 |
| (In thousands) |
Cash flows from operating activities: | | | |
Net income attributable to the Company | $ | 20,182 | | | $ | 58,784 | |
Adjustments to arrive at net income: | | | |
Net income attributable to noncontrolling interests | 6 | | | 265 | |
| | | |
Net income before attribution to noncontrolling interests | 20,188 | | | 59,049 | |
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | | | |
Depreciation and amortization | 17,202 | | | 17,726 | |
Net income attributable to noncontrolling interests | (6) | | | (265) | |
Stock compensation, net of cancellations | 4,886 | | | 4,022 | |
Provision/(credit) for loan losses | 34,997 | | | 104 | |
Loans originated for sale | (89,510) | | | (32,796) | |
Proceeds from sale of loans held for sale | 82,582 | | | 29,176 | |
| | | |
Deferred income tax expense/(benefit) | (11,476) | | | 432 | |
Decrease/(increase) in right-of-use assets | 7,196 | | | 1,416 | |
Increase/(decrease) in operating lease liabilities | (8,282) | | | (1,465) | |
Net decrease/(increase) in other operating activities | (28,948) | | | (36,916) | |
| | | |
| | | |
Net cash provided by/(used in) operating activities | 28,829 | | | 40,483 | |
Cash flows from investing activities: | | | |
Investment securities available-for-sale: | | | |
Purchases | (71,634) | | | (24,977) | |
| | | |
Maturities, calls, redemptions, and principal payments | 64,457 | | | 115,857 | |
Investment securities held-to-maturity: | | | |
| | | |
Principal payments | 9,316 | | | 18,880 | |
Equity securities at fair value: | | | |
Transfers out | (36,463) | | | (44,537) | |
Transfers in | 22,455 | | | 36,985 | |
(Investments)/distributions in trusts, net | (625) | | | 357 | |
| | | |
Contingent considerations from divestitures | 3,648 | | | 3,254 | |
(Purchase)/redemption of Federal Home Loan Bank and Federal Reserve Bank stock | 2,460 | | | 1,507 | |
Net increase in portfolio loans | (319,627) | | | (268,238) | |
Proceeds from recoveries of loans previously charged-off | 276 | | | 887 | |
Proceeds from sale of OREO | 0 | | | 492 | |
Proceeds from sale of portfolio loans | 71,992 | | | 92,304 | |
Capital expenditures | (6,531) | | | (5,795) | |
| | | |
| | | |
| | | |
Net cash provided by/(used in) investing activities | (260,276) | | | (73,024) | |
(Continued) | | | |
| | | | | | | | | | | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
| Nine months ended September 30, |
| 2020 | | 2019 |
| (In thousands) |
Cash flows from financing activities: | | | |
Net increase/(decrease) in deposits | 586,243 | | | (122,928) | |
Net increase/(decrease) in securities sold under agreements to repurchase | (10,854) | | | 11,932 | |
Net increase/(decrease) in federal funds purchased | 0 | | | (20,000) | |
Net increase/(decrease) in short-term Federal Home Loan Bank borrowings | (75,000) | | | 110,000 | |
Advances of long-term Federal Home Loan Bank borrowings | 525,000 | | | 340,000 | |
Repayments of long-term Federal Home Loan Bank borrowings | (504,593) | | | (299,240) | |
| | | |
| | | |
Dividends paid to common shareholders | (24,748) | | | (30,395) | |
| | | |
| | | |
Repurchase of common stock | (12,807) | | | (7,193) | |
Proceeds from stock option exercises | 55 | | | 545 | |
Proceeds from issuance of common stock | 2,056 | | | 2,274 | |
Tax withholding for share based compensation awards | (264) | | | (1,268) | |
Distributions paid to noncontrolling interests | (6) | | | (265) | |
Other equity adjustments | 149 | | | (170) | |
| | | |
Net cash provided by/(used in) financing activities | 485,231 | | | (16,708) | |
Net increase/(decrease) in cash and cash equivalents | 253,784 | | | (49,249) | |
Cash and cash equivalents at beginning of year | 292,479 | | | 127,259 | |
Cash and cash equivalents at end of period | $ | 546,263 | | | $ | 78,010 | |
| | | |
Supplemental disclosure of cash flow items: | | | |
Cash paid for interest | $ | 33,104 | | | $ | 60,489 | |
Cash paid for income taxes, (net of refunds received) | $ | 5,948 | | | $ | 18,122 | |
| | | |
Change in unrealized gain/(loss) on available-for-sale securities, net of tax | $ | 23,055 | | | $ | 27,469 | |
Change in unrealized gain/(loss) on cash flow hedges, net of tax | $ | (193) | | | $ | (391) | |
Change in unrealized gain/(loss) on other, net of tax | $ | (30) | | | $ | 0 | |
Non-cash transactions: | | | |
| | | |
| | | |
Loans charged-off | $ | (2,319) | | | $ | (944) | |
| | | |
| | | |
See accompanying notes to Unaudited Consolidated Financial Statements.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting Policies
Boston Private Financial Holdings, Inc. (the “Company” or “BPFH”), is a bank holding company (the “Holding Company”) with 2 reportable segments: (i) Private Banking and (ii) Wealth Management and Trust.
The Private Banking segment is comprised of the banking operations of Boston Private Bank & Trust Company (the “Bank” or “Boston Private Bank”), a trust company chartered by the Commonwealth of Massachusetts, whose deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”), and a wholly-owned subsidiary of the Company. Boston Private Bank is a member of the Federal Reserve Bank of Boston. Boston Private Bankand primarily operates in 3 geographic markets: New England, the San Francisco Bay Area,Northern California, and Southern California. The Private Banking segment is principally engaged in providing private banking services to high net worth individuals, privately-owned businesses and partnerships, and nonprofit organizations. In addition, the Private Banking segment is an active provider of financing for affordable housing, first-time homebuyers, economic development, social services, community revitalization and small businesses.
The Wealth Management and Trust segment is comprised of Boston Private Wealth LLC (“Boston Private Wealth”), a registered investment adviser (“RIA”) and wholly-owned subsidiary of the Bank, andas well as the trust operations of Boston Private Bank. The Wealth Management and Trust segment offers planning-based financial strategies, wealth management, family office, financial planning, tax planning, and trust services to individuals, families, institutions, and nonprofit institutions. On September 1, 2019, KLS Professional Advisors Group, LLC ("KLS"(“KLS”) merged with and into Boston Private Wealth. ThePrior to the merger, the results of KLS were reported in a third reportable segment, "Affiliate Partners"“Affiliate Partners”, as further discussed below. The Wealth Management and Trust segment operates in New England, New York, Southeast Florida, the San Francisco Bay Area,Northern California, and Southern California.
Prior to the third quarter of 2019, the Company had 3 reportable segments: Affiliate Partners, Private Banking, and Wealth Management and Trust. For the first two quarters of 2019, theThe Affiliate Partners segment was comprised of 2 affiliates: KLS and Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”), each of which are RIAs. Prior to the first quarter of 2019, the Affiliate Partners segment also included Anchor Capital Advisors, LLC (“Anchor”) and Bingham, Osborn & Scarborough, LLC (“BOS”). On April 13, 2018, the Company completed the sale of its ownership interest in Anchor. On December 3, 2018, the Company completed the sale of its ownership interest in BOS.
With the integration of KLS into Boston Private Wealth in September of 2019, the Company reorganized theits segment reporting structure to align with how the Company'sits financial performance and strategy isare reviewed and managed. The results of KLS are now included in the results of Boston Private Wealth within the Wealth Management and Trust segment, and the results of DGHM are now included within the Holding Company and Eliminations for all periods presented. The results of Anchor and BOS for the periods owned are included in the Holding Company and Eliminations. See Part II. Item 8. “Financial Statements and Supplementary Data - Note 3: Asset Sales and Divestitures” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 for additional information.
The Company conducts substantially all of its business through its 2 reportable segments. All significant intercompany accounts and transactions have been eliminated in consolidation, and the portion of income allocated to the owners of DGHM, Anchor, and BOS other than the Company is included in “Net income attributable to noncontrolling interests”, if any, in the Consolidated StatementStatements of Operations for the periods owned. Redeemable noncontrolling interests, if any, in the Consolidated Balance Sheets reflect the maximum redemption value of agreements with other owners.the owners of DGHM.
The unaudited interim consolidated financial statementsConsolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include all necessary adjustments of a normal recurring nature, which, in the opinion of management, are required for a fair presentation of the results of operations and financial condition of the Company. The interim results of consolidated operations are not necessarily indicative of the results for the entire year.
The information in this report should be read in conjunction with the consolidated financial statementsConsolidated Financial Statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the Securities and Exchange Commission (“SEC”). Prior period amounts are reclassified whenever necessary to conform to the current period presentation. With the integration of KLS into Boston Private Wealth and the related change to reportable segments, fee revenue from KLS is reported in Wealth management and trust fees for all periods on the Consolidated StatementStatements of Operations, which was previously presented as Wealth advisory fees in prior periods. The Company identified an immaterial change relating to the presentation of equity securities at fair value in the Consolidated Statement of Cash Flows. The impact
was a change in the presentation of cash flows relating to $38.0 million of purchases and $51.8 million of sales for the nine months ended September 30, 2018, which were previously presented as investment securities available-for-sale but should have been presented as equity securities at fair value, within investing activities in the Consolidated Statement of Cash Flows.
The Company’s significant accounting policies are described in Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies, except for the following new accounting pronouncements from the Financial Accounting Standards Board (the “FASB”) that were adopted effective January 1, 2019:
| |
• | In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This update and the related amendments to Topic 842 require lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”); ASU No. 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”); and ASU No. 2019-01, Leases (Topic 842), Codification Improvements (“ASU 2019-01”). The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The new standard was effective on January 1, 2019 and the Company adopted these provisions on January 1, 2019. The most significant effects relate to the recognition of new ROU assets and lease liabilities on the balance sheet for real estate operating leases, providing significant new disclosures about leasing activities, and the impact of additional assets on certain financial measures such as capital ratios and return on average asset ratios. Additionally, the Company elected the package of practical expedients, as prescribed by ASU 2016-02. The Company elected not to reassess whether any expired or existing contracts are or contain leases nor the lease classification of those leases. The Company also elected not to reassess any initial direct costs for any existing leases. On adoption, the Company recognized $124.1 million of lease liabilities and $108.5 million of ROU assets.
|
| |
• | In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”). The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in ASU 2018-15. This update is effective on a retrospective basis for the Company beginning January 1, 2021. The Company early adopted this update on January 1, 2019. The adoption of this update did not have a material impact on the consolidated financial statements.
|
| |
• | In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting (“ASU 2018-16”). ASU 2018-16 introduces OIS Rate based on the SOFR as an acceptable US benchmark interest rate for purposes of applying hedge accounting under Topic 815. This update is effective for interim and annual reporting periods beginning after December 15, 2018 because the Company has already adopted ASU 2017-12. The Company adopted this update on January 1, 2019. The adoption of this update did not have a material impact on the consolidated financial statements.
|
•In June 2016, the FASB issued ASU 2016-13. In 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”); ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”); ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 942)—Effective Dates (“ASU 2019-10”); and ASU 2019-11, Codification Improvements
to Topic 326, Financial Instruments—Credit Losses (“ASU 2019-11”). This update and related amendments to Topic 326 are intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology with a current expected credit losses (“CECL”) model methodology that reflects expected credit losses and requires consideration of a reasonable and supportable forecast to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019. The Company adopted this update on January 1, 2020 utilizing a modified retrospective approach. On adoption of ASU 2016-13 on January 1, 2020, the Company recognized a decrease in the Allowance for loan losses of $20.4 million and an increase in the reserve for unfunded loan commitments of $1.4 million. The net, after-tax impact of the decrease in the Allowance for loan losses and the increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million as shown in the Consolidated Statements of Changes in Shareholders’ Equity.
2. Earnings Per Share
The treasury stock method of calculating earnings per share (“EPS”) is presented below for the three and nine months ended September 30, 2020 and 2019. The following tables present the computations of basic and diluted EPS:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands, except share and per share data) |
Basic earnings per share - Numerator: | | | | | | | |
Net income before attribution to noncontrolling interests | $ | 22,680 | | | $ | 20,058 | | | $ | 20,188 | | | $ | 59,049 | |
Less: Net income attributable to noncontrolling interests | 0 | | | 96 | | | 6 | | | 265 | |
Net income attributable to the Company | 22,680 | | | 19,962 | | | 20,182 | | | 58,784 | |
Decrease in noncontrolling interests’ redemption values (1) | 0 | | | 304 | | | 414 | | | 1,045 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to common shareholders, treasury stock method | $ | 22,680 | | | $ | 20,266 | | | $ | 20,596 | | | $ | 59,829 | |
| | | | | | | |
Basic earnings per share - Denominator: | | | | | | | |
Weighted average basic common shares outstanding | 82,221,705 | | | 83,631,403 | | | 82,382,050 | | | 83,495,361 | |
Per share data - Basic earnings per share: | | | | | | | |
| | | | | | | |
| | | | | | | |
Total attributable to common shareholders | $ | 0.28 | | | $ | 0.24 | | | $ | 0.25 | | | $ | 0.72 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands, except share and per share data) |
Diluted earnings per share - Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to common shareholders, after assumed dilution | $ | 22,680 | | | $ | 20,266 | | | $ | 20,596 | | | $ | 59,829 | |
Diluted earnings per share - Denominator: | | | | | | | |
Weighted average basic common shares outstanding | 82,221,705 | | | 83,631,403 | | | 82,382,050 | | | 83,495,361 | |
| | | | | | | |
Dilutive effect of: Time-based and market-based stock options, performance-based and time-based restricted stock, and performance-based and time-based restricted stock units, and other dilutive securities (2) | 140,633 | | | 325,305 | | | 364,816 | | | 507,920 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average diluted common shares outstanding (2) | 82,362,338 | | | 83,956,708 | | | 82,746,866 | | | 84,003,281 | |
Per share data - Diluted earnings per share: | | | | | | | |
| | | | | | | |
| | | | | | | |
Total attributable to common shareholders | $ | 0.28 | | | $ | 0.24 | | | $ | 0.25 | | | $ | 0.71 | |
Dividends per share declared and paid on common stock | $ | 0.06 | | | $ | 0.12 | | | $ | 0.30 | | | $ | 0.36 | |
_____________________
(1)See Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with the FASB Accounting Standards Codification Distinguishing Liabilities from Equity (“ASC 480”), an increase in redemption value from period to period reduces income attributable to common shareholders. A decrease in redemption value from period to period increases income attributable to common shareholders, but only to the extent that the cumulative change in redemption value remains a cumulative increase since adoption of this standard in the first quarter of 2009.
(2)The diluted EPS computations for the three and nine months ended September 30, 2020 and 2019 do not assume the conversion, exercise, or contingent issuance of the following shares for the following periods because the result would have been anti-dilutive for the periods indicated. This includes shares excluded from the computation of diluted EPS because the
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
effect would have been anti-dilutive and out-of-the money options, where the exercise prices were greater than the average market price of common shares for the period, because their inclusion would have been anti-dilutive As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows:
2. Earnings Per Share | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Anti-dilutive shares excluded from computation of average dilutive EPS | (In thousands) |
| | | | | | | |
Potential common shares from: options, restricted stock, or other dilutive securities | 2,655 | | | 808 | | | 1,901 | | | 760 | |
Total anti-dilutive shares excluded from computation of average dilutive EPS | 2,655 | | | 808 | | | 1,901 | | | 760 | |
The treasury stock method of calculating earnings per share (“EPS”) is presented below for the three and nine months ended September 30, 2019 and 2018. The following tables present the computations of basic and diluted EPS:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands, except share and per share data) |
Basic earnings per share - Numerator: | | | | | | | |
Net income from continuing operations | $ | 20,058 |
| | $ | 18,886 |
| | $ | 59,049 |
| | $ | 48,328 |
|
Less: Net income attributable to noncontrolling interests | 96 |
| | 924 |
| | 265 |
| | 2,942 |
|
Net income from continuing operations attributable to the Company | 19,962 |
| | 17,962 |
| | 58,784 |
| | 45,386 |
|
Decrease/ (increase) in noncontrolling interests’ redemption values (1) | 304 |
| | (829 | ) | | 1,045 |
| | (391 | ) |
Dividends on preferred stock | — |
| | — |
| | — |
| | (3,985 | ) |
Total adjustments to income attributable to common shareholders | 304 |
| | (829 | ) | | 1,045 |
| | (4,376 | ) |
Net income from continuing operations attributable to common shareholders, treasury stock method | 20,266 |
| | 17,133 |
| | 59,829 |
| | 41,010 |
|
Net income from discontinued operations | — |
| | — |
| | — |
| | 1,696 |
|
Net income attributable to common shareholders, treasury stock method | $ | 20,266 |
| | $ | 17,133 |
| | $ | 59,829 |
| | $ | 42,706 |
|
| | | | | | | |
Basic earnings per share - Denominator: | | | | | | | |
Weighted average basic common shares outstanding | 83,631,403 |
| | 84,017,284 |
| | 83,495,361 |
| | 83,544,754 |
|
Per share data - Basic earnings per share from: | | | | | | | |
Continuing operations | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.72 |
| | $ | 0.49 |
|
Discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.02 |
|
Total attributable to common shareholders | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.72 |
| | $ | 0.51 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands, except share and per share data) |
Diluted earnings per share - Numerator: | | | | | | | |
Net income from continuing operations attributable to common shareholders, after assumed dilution | $ | 20,266 |
| | $ | 17,133 |
| | $ | 59,829 |
| | $ | 41,010 |
|
Net income from discontinued operations | — |
| | — |
| | — |
| | 1,696 |
|
Net income attributable to common shareholders, after assumed dilution | $ | 20,266 |
| | $ | 17,133 |
| | $ | 59,829 |
| | $ | 42,706 |
|
Diluted earnings per share - Denominator: | | | | | | | |
Weighted average basic common shares outstanding | 83,631,403 |
| | 84,017,284 |
| | 83,495,361 |
| | 83,544,754 |
|
Dilutive effect of: | | | | | | | |
Time-based and market-based stock options, performance-based and time-based restricted stock, and performance-based and time-based restricted stock units, and other dilutive securities (2) | 325,305 |
| | 853,906 |
| | 507,920 |
| | 1,052,855 |
|
Warrants to purchase common stock | — |
| | 627,378 |
| | — |
| | 656,686 |
|
Dilutive common shares | 325,305 |
| | 1,481,284 |
| | 507,920 |
| | 1,709,541 |
|
Weighted average diluted common shares outstanding (2) | 83,956,708 |
| | 85,498,568 |
| | 84,003,281 |
| | 85,254,295 |
|
Per share data - Diluted earnings per share from: | | | | | | | |
Continuing operations | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.71 |
| | $ | 0.48 |
|
Discontinued operations | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.02 |
|
Total attributable to common shareholders | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.71 |
| | $ | 0.50 |
|
Dividends per share declared and paid on common stock | $ | 0.12 |
| | $ | 0.12 |
| | $ | 0.36 |
| | $ | 0.36 |
|
_____________________
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| |
(1) | See Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with the FASB Accounting Standards Codification Distinguishing Liabilities from Equity (“ASC 480”), an increase in redemption value from period to period reduces income attributable to common shareholders. Decreases in redemption value from period to period increase income attributable to common shareholders, but only to the extent that the cumulative change in redemption value remains a cumulative increase since adoption of this standard in the first quarter of 2009.
|
| |
(2) | The diluted EPS computations for the three and nine months ended September 30, 2019 and 2018 do not assume the conversion, exercise, or contingent issuance of the following shares for the following periods because the result would have been anti-dilutive for the periods indicated. As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows: |
|
| | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Shares excluded due to exercise price exceeding the average market price of common shares during the period (total outstanding): | (In thousands) |
Potential common shares from: | | | | | | | |
Options, restricted stock, or other dilutive securities | 808 |
| | 408 |
| | 760 |
| | 226 |
|
Total shares excluded due to exercise price exceeding the average market price of common shares during the period | 808 |
| | 408 |
| | 760 |
| | 226 |
|
3. Reportable Segments
Management Reportingreporting
The Company has 2 reportable segments: (i) Private Banking and (ii) Wealth Management and Trust, as well as the Parent Company (BostonBoston Private Financial Holdings, Inc., the (the “Holding Company”) within Holding Company and Eliminations. The financial performance of the Company is managed and evaluated according to these 2 segments. Each segment is managed by a segment leader (“Segment Leader”) who has full authority and responsibility for the performance and the allocation of resources within their segment. The Company’s Chief Executive Officer (“CEO”) is the Company’s Chief Operating Decision Maker (“CODM”).
The Segment Leader for Private Banking is the CEO of Boston Private Bank, who is also the Company’s CEO. The Bank’s banking operations are reported in the Private Banking segment. The Segment Leader for Wealth Management and Trust is the President of Private Banking, Wealth and Trust. The Segment Leader of Wealth Management and Trust reports to the CEO of the Company. The Segment Leaders have authority with respect to the allocation of capital within their respective segments, management oversight responsibility, performance assessments, and overall authority and accountability within their respective segment. The Company’s CODM communicates with the President of Private Banking, Wealth and Trust regarding profit and loss responsibility, strategic planning, priority setting and other matters. The Company’s Chief Financial Officer reviews all financial detail with the CODM on a monthly basis.
Description of Reportable Segmentsreportable segments
Private Banking
The Private Banking segment operates primarily in 3three geographic markets: New England, the San Francisco Bay Area,Northern California and Southern California.
The Bank currently conducts business under the name of Boston Private Bank & Trust Company in all markets. The Bank is chartered by the Commonwealth of Massachusetts and is insured by the FDIC. The Bank is principally engaged in providing private banking services to high net worth individuals, privately ownedprivately-owned businesses and partnerships, and nonprofit organizations. In addition, the Bank is an active provider of financing for affordable housing, first-time homebuyers, economic development, social services, community revitalization and small businesses.
Wealth Management and Trust
The Wealth Management and Trust segment is comprised of the trust operations of the Bank and the operations of Boston Private Wealth. On September 1, 2019, KLS merged into Boston Private Wealth. As a result, the results of KLS are included in the results of Boston Private Wealth within the Wealth Management and Trust segment for all periods presented. The Wealth Management and Trust segment offers planning-based financial strategies, wealth management, family office,
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
financial planning, tax planning, and trust services to individuals, families, institutions, and nonprofit institutions. The Wealth Management and Trust segment operates in New England, New York, Southeast Florida, the San Francisco Bay Area,Northern California and Southern California.
Changes to Segment Reporting
The 2018 segment results have been adjusted for comparability to the 2019 segment results for the following changes. Prior to the third quarter of 2019, the Company had 3 reportable segments: Affiliate Partners, Private Banking, and Wealth Management and Trust. For the first two quarters of 2019, the Affiliate Partners segment was comprised of 2 affiliates: KLS and DGHM, each of which are RIAs. Prior to the first quarter of 2019, the Affiliate Partners segment also included Anchor and BOS for the periods owned. On April 13, 2018, the Company completed the sale of its ownership interest in Anchor. On December 3, 2018, the Company completed the sale of its ownership interest in BOS.
reporting
With the integration of KLS into Boston Private Wealth in the third quarter of 2019, the Company reorganized the segment reporting structure to align with how the Company's financial performance and strategy is reviewed and managed. The results of KLS are now included in the results of Boston Private Wealth within the Wealth Management and Trust segment, and the results of DGHM are now included in Holding Company and Eliminations for all periods presented. The results of Anchor and BOS for the periods owned are included in Holding Company and Eliminations. See Part II. Item 8. “Financial Statements and Supplementary Data - Note 3: Asset Sales and Divestitures” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for additional information.
Measurement of Segment Profitsegment profit and Assetsassets
The accounting policies of the segments are the same as those described in Part II.I. Item 8. “Financial1. "Notes to Unaudited Consolidated Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies.”"
Reconciliation of Reportable Segment Items
The following tables present a reconciliation of the revenues, profits, assets, and other significant items of reportable segments as of and for the three and nine months ended September 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Private Banking | (In thousands) |
Net interest income | $ | 57,058 |
| | $ | 60,551 |
| | $ | 174,814 |
| | $ | 177,129 |
|
Fees and other income | 3,403 |
| | 3,337 |
| | 9,465 |
| | 8,637 |
|
Total revenue | 60,461 |
| | 63,888 |
| | 184,279 |
| | 185,766 |
|
Provision/ (credit) for loan losses | 167 |
| | (949 | ) | | 104 |
| | (2,291 | ) |
Operating expense (1) | 38,134 |
| | 44,706 |
| | 117,256 |
| | 124,003 |
|
Income before income taxes | 22,160 |
| | 20,131 |
| | 66,919 |
| | 64,054 |
|
Income tax expense | 4,212 |
| | 4,469 |
| | 13,520 |
| | 13,063 |
|
Net income from continuing operations | 17,948 |
| | 15,662 |
| | 53,399 |
| | 50,991 |
|
Net income attributable to the Company | $ | 17,948 |
| | $ | 15,662 |
| | $ | 53,399 |
| | $ | 50,991 |
|
| | | | | | | |
Assets | $ | 8,617,207 |
| | $ | 8,292,901 |
| | $ | 8,617,207 |
| | $ | 8,292,901 |
|
Depreciation | $ | 2,229 |
| | $ | 2,398 |
| | $ | 7,271 |
| | $ | 6,013 |
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Reconciliation of reportable segment items
The following tables present a reconciliation of the revenues, expenses, assets, and other significant items of the reportable segments as of and for the three and nine months ended September 30, 2020 and 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Private Banking (1) | (In thousands) |
Net interest income | $ | 58,325 | | | $ | 57,058 | | | $ | 176,105 | | | $ | 174,814 | |
Fees and other income | 2,487 | | | 3,403 | | | 7,192 | | | 9,465 | |
Total revenue | 60,812 | | | 60,461 | | | 183,297 | | | 184,279 | |
Provision/(credit) for loan losses | (4,569) | | | 167 | | | 34,997 | | | 104 | |
Operating expense (2) | 43,128 | | | 38,134 | | | 128,630 | | | 117,256 | |
Income before income taxes | 22,253 | | | 22,160 | | | 19,670 | | | 66,919 | |
Income tax expense | 2,946 | | | 4,212 | | | 760 | | | 13,520 | |
Net income before attribution to noncontrolling interests | 19,307 | | | 17,948 | | | 18,910 | | | 53,399 | |
| | | | | | | |
| | | | | | | |
Net income attributable to the Company | $ | 19,307 | | | $ | 17,948 | | | $ | 18,910 | | | $ | 53,399 | |
| | | | | | | |
Assets | $ | 9,366,642 | | | $ | 8,617,207 | | | $ | 9,366,642 | | | $ | 8,617,207 | |
Amortization of intangibles | $ | 76 | | | $ | 0 | | | $ | 217 | | | $ | 0 | |
Depreciation | $ | 2,684 | | | $ | 2,229 | | | $ | 7,921 | | | $ | 7,271 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Wealth Management and Trust (1) | (In thousands) |
Net interest income | $ | 1 | | | $ | 99 | | | $ | 80 | | | $ | 309 | |
Fees and other income | 18,272 | | | 19,106 | | | 54,049 | | | 57,188 | |
Total revenue | 18,273 | | | 19,205 | | | 54,129 | | | 57,497 | |
| | | | | | | |
Operating expense (2) | 15,540 | | | 13,888 | | | 45,640 | | | 43,864 | |
Income before income taxes | 2,733 | | | 5,317 | | | 8,489 | | | 13,633 | |
Income tax expense | 808 | | | 1,751 | | | 2,780 | | | 4,465 | |
Net income before attribution to noncontrolling interests | 1,925 | | | 3,566 | | | 5,709 | | | 9,168 | |
| | | | | | | |
| | | | | | | |
Net income attributable to the Company | $ | 1,925 | | | $ | 3,566 | | | $ | 5,709 | | | $ | 9,168 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Assets | $ | 149,105 | | | $ | 143,326 | | | $ | 149,105 | | | $ | 143,326 | |
Amortization of intangibles | $ | 638 | | | $ | 671 | | | $ | 1,914 | | | $ | 2,015 | |
Depreciation | $ | 282 | | | $ | 290 | | | $ | 862 | | | $ | 991 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Holding Company and Eliminations (1) | (In thousands) |
Net interest income (3) | $ | (502) | | | $ | (1,004) | | | $ | (2,166) | | | $ | (3,172) | |
Fees and other income | 2,286 | | | 2,617 | | | 5,987 | | | 8,101 | |
Total revenue | 1,784 | | | 1,613 | | | 3,821 | | | 4,929 | |
| | | | | | | |
Operating expense | 2,269 | | | 3,515 | | | 9,028 | | | 10,629 | |
Income/(loss) before income taxes | (485) | | | (1,902) | | | (5,207) | | | (5,700) | |
Income tax expense/(benefit) | (1,933) | | | (446) | | | (776) | | | (2,182) | |
Net income/(loss) before attribution to noncontrolling interests | 1,448 | | | (1,456) | | | (4,431) | | | $ | (3,518) | |
Noncontrolling interests | 0 | | | 96 | | | 6 | | | 265 | |
| | | | | | | |
Net income/(loss) attributable to the Company | $ | 1,448 | | | $ | (1,552) | | | $ | (4,437) | | | $ | (3,783) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Assets (including eliminations) | $ | (84,442) | | | $ | (69,589) | | | $ | (84,442) | | | $ | (69,589) | |
| | | | | | | |
Depreciation | $ | 36 | | | $ | 51 | | | $ | 113 | | | $ | 147 | |
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Wealth Management and Trust | (In thousands) |
Net interest income | $ | 99 |
| | $ | 98 |
| | $ | 309 |
| | $ | 222 |
|
Fees and other income | 19,106 |
| | 19,769 |
| | 57,188 |
| | 59,108 |
|
Total revenue | 19,205 |
| | 19,867 |
| | 57,497 |
| | 59,330 |
|
Operating expense (1) | 13,888 |
| | 16,434 |
| | 43,864 |
| | 49,981 |
|
Income before income taxes | 5,317 |
| | 3,433 |
| | 13,633 |
| | 9,349 |
|
Income tax expense | 1,751 |
| | 1,130 |
| | 4,465 |
| | 3,019 |
|
Net income from continuing operations | 3,566 |
| | 2,303 |
| | 9,168 |
| | 6,330 |
|
Net income attributable to the Company | $ | 3,566 |
| | $ | 2,303 |
| | $ | 9,168 |
| | $ | 6,330 |
|
| | | | | | | |
Assets | $ | 143,326 |
| | $ | 127,229 |
| | $ | 143,326 |
| | $ | 127,229 |
|
Amortization of intangibles | $ | 671 |
| | $ | 701 |
| | $ | 2,015 |
| | $ | 2,103 |
|
Depreciation | $ | 290 |
| | $ | 409 |
| | $ | 991 |
| | $ | 1,230 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Holding Company and Eliminations (2) | (In thousands) |
Net interest income (3) | $ | (1,004 | ) | | $ | (1,008 | ) | | $ | (3,172 | ) | | $ | (2,782 | ) |
Fees and other income | 2,617 |
| | 9,208 |
| | 8,101 |
| | 36,407 |
|
Total revenue | 1,613 |
| | 8,200 |
| | 4,929 |
| | 33,625 |
|
Operating expense | 3,515 |
| | 7,417 |
| | 10,629 |
| | 29,814 |
|
Income/ (loss) before income taxes | (1,902 | ) | | 783 |
| | (5,700 | ) | | 3,811 |
|
Income tax expense/ (benefit) | (446 | ) | | (138 | ) | | (2,182 | ) | | 12,804 |
|
Net income/ (loss) from continuing operations | (1,456 | ) | | 921 |
| | (3,518 | ) | | (8,993 | ) |
Noncontrolling interests | 96 |
| | 924 |
| | 265 |
| | 2,942 |
|
Discontinued operations (4) | — |
| | — |
| | — |
| | 1,696 |
|
Net income/ (loss) attributable to the Company | $ | (1,552 | ) | | $ | (3 | ) | | $ | (3,783 | ) | | $ | (10,239 | ) |
| | | | | | | |
Assets (including eliminations) | $ | (69,589 | ) | | $ | (44,290 | ) | | $ | (69,589 | ) | | $ | (44,290 | ) |
Amortization of intangibles | $ | — |
| | $ | 49 |
| | $ | — |
| | $ | 146 |
|
Depreciation | $ | 51 |
| | $ | 109 |
| | $ | 147 |
| | $ | 336 |
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Total Company (2) | (In thousands) |
Net interest income | $ | 56,153 |
| | $ | 59,641 |
| | $ | 171,951 |
| | $ | 174,569 |
|
Fees and other income | 25,126 |
| | 32,314 |
| | 74,754 |
| | 104,152 |
|
Total revenue | 81,279 |
| | 91,955 |
| | 246,705 |
| | 278,721 |
|
Provision/ (credit) for loan losses | 167 |
| | (949 | ) | | 104 |
| | (2,291 | ) |
Operating expense | 55,537 |
| | 68,557 |
| | 171,749 |
| | 203,798 |
|
Income before income taxes | 25,575 |
| | 24,347 |
| | 74,852 |
| | 77,214 |
|
Income tax expense | 5,517 |
| | 5,461 |
| | 15,803 |
| | 28,886 |
|
Net income from continuing operations | 20,058 |
| | 18,886 |
| | 59,049 |
| | 48,328 |
|
Noncontrolling interests | 96 |
| | 924 |
| | 265 |
| | 2,942 |
|
Discontinued operations (4) | — |
| | — |
| | — |
| | 1,696 |
|
Net income attributable to the Company | $ | 19,962 |
| | $ | 17,962 |
| | $ | 58,784 |
| | $ | 47,082 |
|
| | | | | | | |
Assets | $ | 8,690,944 |
| | $ | 8,375,840 |
| | $ | 8,690,944 |
| | $ | 8,375,840 |
|
Amortization of intangibles | $ | 671 |
| | $ | 750 |
| | $ | 2,015 |
| | $ | 2,249 |
|
Depreciation | $ | 2,570 |
| | $ | 2,916 |
| | $ | 8,409 |
| | $ | 7,579 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Total Company (1) | (In thousands) |
Net interest income | $ | 57,824 | | | $ | 56,153 | | | $ | 174,019 | | | $ | 171,951 | |
Fees and other income | 23,045 | | | 25,126 | | | 67,228 | | | 74,754 | |
Total revenue | 80,869 | | | 81,279 | | | 241,247 | | | 246,705 | |
Provision/(credit) for loan losses | (4,569) | | | 167 | | | 34,997 | | | 104 | |
Operating expense | 60,937 | | | 55,537 | | | 183,298 | | | 171,749 | |
Income before income taxes | 24,501 | | | 25,575 | | | 22,952 | | | 74,852 | |
Income tax expense | 1,821 | | | 5,517 | | | 2,764 | | | 15,803 | |
Net income before attribution to noncontrolling interests | 22,680 | | | 20,058 | | | 20,188 | | | 59,049 | |
Noncontrolling interests | 0 | | | 96 | | | 6 | | | 265 | |
| | | | | | | |
Net income attributable to the Company | $ | 22,680 | | | $ | 19,962 | | | $ | 20,182 | | | $ | 58,784 | |
| | | | | | | |
Assets | $ | 9,431,305 | | | $ | 8,690,944 | | | $ | 9,431,305 | | | $ | 8,690,944 | |
Amortization of intangibles | $ | 714 | | | $ | 671 | | | $ | 2,131 | | | $ | 2,015 | |
Depreciation | $ | 3,002 | | | $ | 2,570 | | | $ | 8,896 | | | $ | 8,409 | |
_____________________
| |
(1) | Operating expense includes restructuring expense of $1.3 million and $0.4 million for the nine months ended September 30, 2019 related to the Private Banking and Wealth Management and Trust segments, respectively. Operating expense includes restructuring expense of $5.2 million and $0.6 million for the nine months ended September 30, 2018 related to the Private Banking and Wealth Management & Trust segments, respectively. |
| |
(2) | The results of Anchor and BOS for the periods owned in 2018 are included in Holding Company and Eliminations and the Total Company. |
| |
(3) | Interest expense on junior subordinated debentures is included in Holding Company and Eliminations. |
| |
(4) | The Holding Company and Eliminations calculation of net income attributable to the Company includes net income from discontinued operations of 0 and $1.7 million for the nine months ended September 30, 2019 and 2018, respectively. The Company received the final payment related to a revenue sharing agreement with Westfield Capital Management Company, LLC (“Westfield”) in the first quarter of 2018. The Company will not receive additional income from Westfield now that the final payment has been received. |
(1)Due to rounding, the sum of individual segment results may not add up to the Total Company results. (2)Operating expense related to the Private Banking and Wealth Management and Trust segments includes restructuring expense of $1.3 million and $0.4 million, respectively, for the nine months ended September 30, 2019. There were no other restructuring expenses in other periods presented.
(3)Interest expense on junior subordinated debentures is included in Holding Company and Eliminations.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
4. Investments
The following table presents a summary of investment securities at September 30, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | Amortized Cost | | Unrealized | | Fair Value |
| Amortized Cost | | Unrealized | | Fair Value | Gains | | Losses | |
Gains | | Losses | | (In thousands) |
(In thousands) | |
At September 30, 2019 | | | | | | | | |
At September 30, 2020 | | At September 30, 2020 | |
Available-for-sale securities at fair value: | | | | | | | | Available-for-sale securities at fair value: | |
U.S. government and agencies | $ | 19,953 |
| | $ | 104 |
| | $ | — |
| | $ | 20,057 |
| U.S. government and agencies | $ | 19,960 | | | $ | 1,130 | | | $ | 0 | | | $ | 21,090 | |
Government-sponsored entities | 155,081 |
| | 1,483 |
| | (8 | ) | | 156,556 |
| Government-sponsored entities | 153,105 | | | 5,432 | | | 0 | | | 158,537 | |
Municipal bonds | 314,970 |
| | 13,055 |
| | (10 | ) | | 328,015 |
| Municipal bonds | 319,749 | | | 20,026 | | | (119) | | | 339,656 | |
Mortgage-backed securities (1) | 432,108 |
| | 1,847 |
| | (3,045 | ) | | 430,910 |
| Mortgage-backed securities (1) | 474,916 | | | 17,344 | | | (216) | | | 492,044 | |
Total | $ | 922,112 |
| | $ | 16,489 |
| | $ | (3,063 | ) | | $ | 935,538 |
| Total | $ | 967,730 | | | $ | 43,932 | | | $ | (335) | | | $ | 1,011,327 | |
| | | | | | | | | | | | | | | |
Held-to-maturity securities at amortized cost: | | | | | | | | Held-to-maturity securities at amortized cost: | |
| Mortgage-backed securities (1) | $ | 51,379 |
| | $ | 33 |
| | $ | (397 | ) | | $ | 51,015 |
| Mortgage-backed securities (1) | $ | 38,600 | | | $ | 748 | | | $ | 0 | | | $ | 39,348 | |
Total | $ | 51,379 |
| | $ | 33 |
| | $ | (397 | ) | | $ | 51,015 |
| Total | $ | 38,600 | | | $ | 748 | | | $ | 0 | | | $ | 39,348 | |
| | | | | | | | | | | | | | | |
Equity securities at fair value: | | | | | | | | Equity securities at fair value: | |
Money market mutual funds (2) | $ | 21,780 |
| | $ | — |
| | $ | — |
| | $ | 21,780 |
| Money market mutual funds (2) | $ | 32,818 | | | $ | — | | | $ | — | | | $ | 32,818 | |
Total | $ | 21,780 |
| | $ | — |
| | $ | — |
| | $ | 21,780 |
| Total | $ | 32,818 | | | $ | — | | | $ | — | | | $ | 32,818 | |
| | | | | | | | | | | | | | | |
At December 31, 2018 | | | | | | | | |
At December 31, 2019 | | At December 31, 2019 | |
Available-for-sale securities at fair value: | | | | | | | | Available-for-sale securities at fair value: | |
U.S. government and agencies | $ | 30,043 |
| | $ | — |
| | $ | (929 | ) | | $ | 29,114 |
| U.S. government and agencies | $ | 19,955 | | | $ | 42 | | | $ | (57) | | | $ | 19,940 | |
Government-sponsored entities | 211,655 |
| | — |
| | (3,952 | ) | | 207,703 |
| Government-sponsored entities | 154,963 | | | 1,292 | | | 0 | | | 156,255 | |
Municipal bonds | 309,837 |
| | 2,223 |
| | (3,101 | ) | | 308,959 |
| Municipal bonds | 312,977 | | | 12,551 | | | (73) | | | 325,455 | |
Mortgage-backed securities (1) | 467,239 |
| | 214 |
| | (19,164 | ) | | 448,289 |
| Mortgage-backed securities (1) | 479,005 | | | 1,117 | | | (3,488) | | | 476,634 | |
Total | $ | 1,018,774 |
| | $ | 2,437 |
| | $ | (27,146 | ) | | $ | 994,065 |
| Total | $ | 966,900 | | | $ | 15,002 | | | $ | (3,618) | | | $ | 978,284 | |
| | | | | | | | | | | | | | | |
Held-to-maturity securities at amortized cost: | | | | | | | | Held-to-maturity securities at amortized cost: | |
U.S. government and agencies | $ | 9,898 |
| | $ | 2 |
| | $ | — |
| | $ | 9,900 |
| |
| Mortgage-backed securities (1) | 60,540 |
| | — |
| | (1,845 | ) | | 58,695 |
| Mortgage-backed securities (1) | $ | 48,212 | | | $ | 53 | | | $ | (316) | | | $ | 47,949 | |
Total | $ | 70,438 |
| | $ | 2 |
| | $ | (1,845 | ) | | $ | 68,595 |
| Total | $ | 48,212 | | | $ | 53 | | | $ | (316) | | | $ | 47,949 | |
| | | | | | | | | | | | | | | |
Equity securities at fair value: | | | | | | | | Equity securities at fair value: | |
Money market mutual funds (2) | $ | 14,228 |
| | $ | — |
| | $ | — |
| | $ | 14,228 |
| Money market mutual funds (2) | $ | 18,810 | | | $ | — | | | $ | — | | | $ | 18,810 | |
Total | $ | 14,228 |
| | $ | — |
| | $ | — |
| | $ | 14,228 |
| Total | $ | 18,810 | | | $ | — | | | $ | — | | | $ | 18,810 | |
_____________________
| |
(1) | All mortgage-backed securities are guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities. |
| |
(2) | Money market mutual funds maintain a constant net asset value of $1.00 and therefore have no unrealized gain or loss. |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES(1)All Mortgage-backed securities are guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities.
Notes(2)Money market mutual funds maintain a constant net asset value of $1.00 and therefore have no unrealized gain or loss.
The Company adopted ASU 2016-13 as of January 1, 2020. Under ASU 2016-13, the Company is required to assess the investment portfolio for credit impairment. The Company considers the Held-to-maturity portfolio to meet the "zero loss" expectation requirements. All Held-to-maturity securities owned by the Company are AAA rated mortgage-backed securities that are backed by the guarantees of the U.S. government, U.S. government agencies or government-sponsored entities. The Company has experienced 0 losses for these securities. In addition, as of September 30, 2020, 0 Held-to-maturity securities were past due. Therefore, 0 credit allowance was recorded on the Held-to-maturity investment portfolio. The Company evaluated the Available-for-sale investment securities on a security by security basis and identified 0 security with impairment. Therefore, 0 credit allowance was booked on the Available-for-sale investment portfolio. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - (Continued)
Note 15: Recent Accounting Pronouncements” for additional information on ASU 2016-13.
The following table presents the maturities of available-for-saleAvailable-for-sale investment securities, based on contractual maturity, as of September 30, 2019.2020. Certain securities are callable before their final maturity. Additionally, certain securities (such as mortgage-backedMortgage-backed securities) are shown within the table below based on their final (contractual) maturity, but due to prepayments and amortization are expected to have shorter lives.
|
| | | | | | | |
| Available-for-sale Securities |
Amortized Cost | | Fair Value |
(In thousands) |
Within one year | $ | 12,614 |
| | $ | 12,647 |
|
After one, but within five years | 290,921 |
| | 292,357 |
|
After five, but within ten years | 250,045 |
| | 253,765 |
|
Greater than ten years | 368,532 |
| | 376,769 |
|
Total | $ | 922,112 |
| | $ | 935,538 |
|
14
The following table presents the maturities of held-to-maturity investment securities, based on contractual maturity, as of September 30, 2019.
|
| | | | | | | |
| Held-to-maturity Securities |
Amortized Cost | | Fair Value |
(In thousands) |
After five, but within ten years | $ | 41,912 |
| | $ | 41,593 |
|
Greater than ten years | 9,467 |
| | 9,422 |
|
Total | $ | 51,379 |
| | $ | 51,015 |
|
The following table presents the proceeds from sales, gross realized gains and gross realized losses for available-for-sale securities that were sold or called during the following periods as well as changes in the fair value of equity securities as prescribed by ASC 321, Investment - Equity Securities. ASU 2016-01, Recognition and Measurements of Financial Assets and Financial Liabilities was adopted on January 1, 2018, at which time a cumulative effect adjustment of $339 thousand was recorded to reclassify the amount of accumulated unrealized gains related to equity securities from accumulated other comprehensive income to retained earnings.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
2019 | | 2018 | | 2019 | | 2018 |
(In thousands) |
Proceeds from sales | $ | — |
| | $ | 16,231 |
| | $ | — |
| | $ | 51,781 |
|
Realized gains | — |
| | — |
| | — |
| | 7 |
|
Realized losses | — |
| | — |
| | — |
| | (1 | ) |
Change in unrealized gain/ (loss) on equity securities reflected in the Consolidated Statement of Operations | — |
| | — |
| | — |
| | (23 | ) |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | | | | | | | | | |
| Available-for-sale Securities |
Amortized Cost | | Fair Value |
(In thousands) |
Within one year | $ | 52,777 | | | $ | 53,205 | |
After one, but within five years | 305,620 | | | 318,668 | |
After five, but within ten years | 222,230 | | | 235,564 | |
Greater than ten years | 387,103 | | | 403,890 | |
Total | $ | 967,730 | | | $ | 1,011,327 | |
The following table presents the maturities of Held-to-maturity investment securities, based on contractual maturity, as of September 30, 2020.
| | | | | | | | | | | |
| Held-to-maturity Securities |
Amortized Cost | | Fair Value |
(In thousands) |
| | | |
| | | |
After five, but within ten years | $ | 31,527 | | | $ | 32,123 | |
Greater than ten years | 7,073 | | | 7,225 | |
Total | $ | 38,600 | | | $ | 39,348 | |
The following table presents the maturities of Equity securities, based on contractual maturity, as of September 30, 2020.
| | | | | | | | | | | |
| Equity Securities |
Amortized Cost | | Fair Value |
(In thousands) |
Within one year | $ | 32,818 | | | $ | 32,818 | |
| | | |
| | | |
| | | |
Total | $ | 32,818 | | | $ | 32,818 | |
During the three and nine months ended September 30, 2020 and 2019, there were 0 sales of Available-for-sale, held-to- maturity, or Equity securities.
The following tables present information regarding securities at September 30, 20192020 and December 31, 20182019 having temporary impairment, due to the fair values having declined below the amortized cost of the individual securities, and the time period that the investments have been temporarily impaired. As of September 30, 2020, there were no Held-to-maturity securities having temporary impairment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of Securities |
| (In thousands, except number of securities) |
September 30, 2020 | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Municipal bonds | $ | 10,740 | | | $ | (119) | | | $ | 0 | | | $ | 0 | | | $ | 10,740 | | | $ | (119) | | | 4 | |
Mortgage-backed securities (1) | 25,864 | | | (103) | | | 6,376 | | | (113) | | | 32,240 | | | (216) | | | 29 | |
| | | | | | | | | | | | | |
Total | $ | 36,604 | | | $ | (222) | | | $ | 6,376 | | | $ | (113) | | | $ | 42,980 | | | $ | (335) | | | 33 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or longer | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of Securities |
| (In thousands, except number of securities) |
September 30, 2019 | | | | | | | | | | | | | |
Available-for-sale securities | | | | | | | | | | | | | |
U.S. government and agencies | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
|
Government-sponsored entities | 6,735 |
| | (8 | ) | | — |
| | — |
| | 6,735 |
| | (8 | ) | | 4 |
|
Municipal bonds | 8,506 |
| | (10 | ) | | — |
| | — |
| | 8,506 |
| | (10 | ) | | 3 |
|
Mortgage-backed securities (1) | 63,489 |
| | (226 | ) | | 206,795 |
| | (2,819 | ) | | 270,284 |
| | (3,045 | ) | | 79 |
|
Total | $ | 78,730 |
| | $ | (244 | ) | | $ | 206,795 |
| | $ | (2,819 | ) | | $ | 285,525 |
| | $ | (3,063 | ) | | 86 |
|
| | | | | | | | | | | | | |
Held-to-maturity securities | | | | | | | | | | | | | |
Mortgage-backed securities (1) | $ | 5,608 |
| | $ | (21 | ) | | $ | 32,425 |
| | $ | (376 | ) | | $ | 38,033 |
| | $ | (397 | ) | | 13 |
|
Total | $ | 5,608 |
| | $ | (21 | ) | | $ | 32,425 |
| | $ | (376 | ) | | $ | 38,033 |
| | $ | (397 | ) | | 13 |
|
15
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | | | | | Less than 12 months | | 12 months or longer | | Total |
| Less than 12 months | | 12 months or longer | | Total | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of Securities |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of Securities | | (In thousands, except number of securities) |
| (In thousands, except number of securities) | |
December 31, 2018 | | | | | | | | | | | | | | |
December 31, 2019 | | December 31, 2019 | |
Available-for-sale securities | | | | | | | | | | | | | | Available-for-sale securities | |
U.S. government and agencies | $ | — |
| | $ | — |
| | $ | 29,114 |
| | $ | (929 | ) | | $ | 29,114 |
| | $ | (929 | ) | | 5 |
| U.S. government and agencies | $ | 9,899 | | | $ | (57) | | | $ | 0 | | | $ | 0 | | | $ | 9,899 | | | $ | (57) | | | 1 | |
Government-sponsored entities | — |
| | — |
| | 207,703 |
| | (3,952 | ) | | 207,703 |
| | (3,952 | ) | | 32 |
| Government-sponsored entities | 1,725 | | | 0 | | | 0 | | | 0 | | | 1,725 | | | 0 | | | 1 | |
Municipal bonds | 25,394 |
| | (128 | ) | | 130,209 |
| | (2,973 | ) | | 155,603 |
| | (3,101 | ) | | 85 |
| Municipal bonds | 9,149 | | | (73) | | | 0 | | | 0 | | | 9,149 | | | (73) | | | 4 | |
Mortgage-backed securities (1) | 2,469 |
| | (11 | ) | | 433,888 |
| | (19,153 | ) | | 436,357 |
| | (19,164 | ) | | 110 |
| Mortgage-backed securities (1) | 140,723 | | | (1,016) | | | 187,043 | | | (2,472) | | | 327,766 | | | (3,488) | | | 85 | |
| Total | $ | 27,863 |
| | $ | (139 | ) | | $ | 800,914 |
| | $ | (27,007 | ) | | $ | 828,777 |
| | $ | (27,146 | ) | | 232 |
| Total | $ | 161,496 | | | $ | (1,146) | | | $ | 187,043 | | | $ | (2,472) | | | $ | 348,539 | | | $ | (3,618) | | | 91 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Held-to-maturity securities | | | | | | | | | | | | | | Held-to-maturity securities | |
Mortgage-backed securities (1) | $ | — |
| | $ | — |
| | $ | 58,695 |
| | $ | (1,845 | ) | | $ | 58,695 |
| | $ | (1,845 | ) | | 16 |
| Mortgage-backed securities (1) | $ | 10,328 | | | $ | (11) | | | $ | 30,451 | | | $ | (305) | | | $ | 40,779 | | | $ | (316) | | | 14 | |
Total | $ | — |
| | $ | — |
| | $ | 58,695 |
| | $ | (1,845 | ) | | $ | 58,695 |
| | $ | (1,845 | ) | | 16 |
| Total | $ | 10,328 | | | $ | (11) | | | $ | 30,451 | | | $ | (305) | | | $ | 40,779 | | | $ | (316) | | | 14 | |
_____________________
| |
(1) | All mortgage-backed securities are guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities. |
(1)All Mortgage-backed securities are guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities.
As of September 30, 2019,2020, the government-sponsored entities securities and mortgage-backedMortgage-backed securities in the first table above had current Standard and Poor’s credit rating of at least AAA. TheOne municipal bondssecurity in the first table above had a current Standard and Poor’sPoor's credit rating of at least AA.AA+; the remaining had a rating of AAA. As of September 30, 2019,2020, the Company does not consider thesedetermined that the unrealized losses on investments, other-than-temporarily impaired as the decline in fair value on investmentssince their purchase, is primarily attributed to changes in interest rates and not as a result of the deterioration of credit quality. As of September 30, 2019,2020, the Company had no intent to sell any securities in an unrealized loss position, and it is not more likely than not that the Company would be forced to sell any of these securities prior to the full recovery of all unrealized loss amounts.
Other investments
The Company invests in low-income housing tax credits, which are included in otherOther assets, to encourage private capital investment in the construction and rehabilitation of low-income housing. The Company makes these investments as an indirect subsidy that allows investors, such as the Company, in a flow-through limited liability entity, such as limited partnerships or limited liability companies that manage or invest in qualified affordable housing projects, to receive the benefits
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
of the tax credits allocated to the entity that owns the qualified affordable housing project. The Company also holds partnership interests in venture capital funds formed to provide financing to small businesses and to promote community development.
Other investments, which are included in otherOther assets, can be temporarily impaired when the fair values decline below the amortized costs of the individual investments. There were no0 other investments with unrealized losses as of September 30, 20192020 or December 31, 2018.2019. The Company’s other investments primarily include low incomelow-income housing partnerships which generate tax credits. The Company also holds partnership interests in venture capital fundssmall business investment companies formed to provide financing to small businesses and to promote community development. The CompanyCompany had $65.4$79.9 million and $54.4$65.5 million in other investments included in otherOther assets as of September 30, 20192020 and December 31, 2018,2019, respectively.
5. Fair Value Measurements
Fair value is defined under GAAP as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company determines the fair values of its financial instruments based on the fair value hierarchy established in ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value. Financial instruments are considered Level 1 when valuation can be based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 20192020 and December 31, 2018,2019, aggregated by the level in the fair value hierarchy within which those measurements fall:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2020 | | Fair value measurements at reporting date using: |
Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(In thousands) |
Assets: | | | | | | | |
Available-for-sale securities: | | | | | | | |
U.S. government and agencies | $ | 21,090 | | | $ | 0 | | | $ | 21,090 | | | $ | 0 | |
Government-sponsored entities | 158,537 | | | 0 | | | 158,537 | | | 0 | |
Municipal bonds | 339,656 | | | 0 | | | 339,656 | | | 0 | |
Mortgage-backed securities | 492,044 | | | 0 | | | 492,044 | | | 0 | |
| | | | | | | |
Total available-for-sale securities | 1,011,327 | | | 0 | | | 1,011,327 | | | 0 | |
Equity securities | 32,818 | | | 32,818 | | | 0 | | | 0 | |
Derivatives - interest rate customer swaps | 91,399 | | | 0 | | | 91,399 | | | 0 | |
| | | | | | | |
Derivatives - risk participation agreement | 64 | | | 0 | | | 64 | | | 0 | |
| | | | | | | |
Trading securities held in the “rabbi trust” (1) | 6,744 | | | 6,744 | | | 0 | | | 0 | |
| | | | | | | |
Liabilities: | | | | | | | |
Derivatives - interest rate customer swaps | $ | 92,758 | | | $ | 0 | | | $ | 92,758 | | | $ | 0 | |
Derivatives - interest rate swaps | 272 | | | 0 | | | 272 | | | 0 | |
Derivatives - risk participation agreement | 444 | | | 0 | | | 444 | | | 0 | |
| | | | | | | |
Deferred compensation “rabbi trust” (1) | 6,744 | | | 6,744 | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair value measurements at reporting date using: |
As of December 31, 2019 | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(In thousands) |
Assets: | | | | | | | |
Available-for-sale securities: | | | | | | | |
U.S. government and agencies | $ | 19,940 | | | $ | 0 | | | $ | 19,940 | | | $ | 0 | |
Government-sponsored entities | 156,255 | | | 0 | | | 156,255 | | | 0 | |
Municipal bonds | 325,455 | | | 0 | | | 325,455 | | | 0 | |
Mortgage-backed securities | 476,634 | | | 0 | | | 476,634 | | | 0 | |
| | | | | | | |
Total available-for-sale securities | 978,284 | | | 0 | | | 978,284 | | | 0 | |
Equity securities | 18,810 | | | 18,810 | | | 0 | | | 0 | |
Derivatives - interest rate customer swaps | 36,089 | | | 0 | | | 36,089 | | | 0 | |
| | | | | | | |
Derivatives - risk participation agreements | 10 | | | 0 | | | 10 | | | 0 | |
| | | | | | | |
Trading securities held in the “rabbi trust” (1) | 6,119 | | | 6,119 | | | 0 | | | 0 | |
| | | | | | | |
Liabilities: | | | | | | | |
Derivatives - interest rate customer swaps | $ | 36,580 | | | $ | 0 | | | $ | 36,580 | | | $ | 0 | |
| | | | | | | |
Derivatives - risk participation agreements | 242 | | | 0 | | | 242 | | | 0 | |
| | | | | | | |
Deferred compensation “rabbi trust” (1) | 6,112 | | | 6,112 | | | 0 | | | 0 | |
_____________________
(1) The Company has adopted a special trust for the Deferred Compensation Plan called a “rabbi trust.” The rabbi trust is an arrangement that is used to accumulate assets that may be used to fund the Company’s obligation to pay benefits under the Deferred Compensation Plan. To prevent immediate taxation to the executives who participate in the Deferred Compensation Plan, the amounts placed in the rabbi trust must remain subject to the claims of the Company’s creditors. The investments chosen by the participants in the Deferred Compensation Plan are mirrored by the rabbi trust as a way to minimize the earnings volatility of the Deferred Compensation Plan.
As of September 30, 2020 and December 31, 2019, Available-for-sale securities consisted of U.S. government and agencies securities, government-sponsored entities securities, municipal bonds, and mortgage-backed securities. Available-for-
|
| | | | | | | | | | | | | | | |
| As of September 30, 2019 | | Fair value measurements at reporting date using: |
Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(In thousands) |
Assets: | | | | | | | |
Available-for-sale securities: | | | | | | | |
U.S. government and agencies | $ | 20,057 |
| | $ | — |
| | $ | 20,057 |
| | $ | — |
|
Government-sponsored entities | 156,556 |
| | — |
| | 156,556 |
| | — |
|
Municipal bonds | 328,015 |
| | — |
| | 328,015 |
| | — |
|
Mortgage-backed securities | 430,910 |
| | — |
| | 430,910 |
| | — |
|
Total available-for-sale securities | 935,538 |
| | — |
| | 935,538 |
| | — |
|
Equity securities | 21,780 |
| | 21,780 |
| | — |
| | — |
|
Derivatives - interest rate customer swaps | 47,851 |
| | — |
| | 47,851 |
| | — |
|
Derivatives - risk participation agreement | 74 |
| | — |
| | 74 |
| | — |
|
Trading securities held in the “rabbi trust” (1) | 6,482 |
| | 6,482 |
| | — |
| | — |
|
| | | | | | | |
Liabilities: | | | | | | | |
Derivatives - interest rate customer swaps | $ | 48,891 |
| | $ | — |
| | $ | 48,891 |
| | $ | — |
|
Derivatives - risk participation agreement | 344 |
| | — |
| | 344 |
| | — |
|
Deferred compensation “rabbi trust” (1) | 6,482 |
| | 6,482 |
| | — |
| | — |
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | |
| | | Fair value measurements at reporting date using: |
As of December 31, 2018 | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(In thousands) |
Assets: | | | | | | | |
Available-for-sale securities: | | | | | | | |
U.S. government and agencies | $ | 29,114 |
| | $ | — |
| | $ | 29,114 |
| | $ | — |
|
Government-sponsored entities | 207,703 |
| | — |
| | 207,703 |
| | — |
|
Municipal bonds | 308,959 |
| | — |
| | 308,959 |
| | — |
|
Mortgage-backed securities | 448,289 |
| | — |
| | 448,289 |
| | — |
|
Total available-for-sale securities | 994,065 |
| | — |
| | 994,065 |
| | — |
|
Equity securities | 14,228 |
| | 14,228 |
| | — |
| | — |
|
Derivatives - interest rate customer swaps | 21,889 |
| | — |
| | 21,889 |
| | — |
|
Derivatives - interest rate swaps | 553 |
| | — |
| | 553 |
| | — |
|
Derivatives - risk participation agreements | 2 |
| | — |
| | 2 |
| | — |
|
Trading securities held in the “rabbi trust” (1) | 6,839 |
| | 6,839 |
| | — |
| | — |
|
| | | | | | | |
Liabilities: | | | | | | | |
Derivatives - interest rate customer swaps | $ | 22,385 |
| | $ | — |
| | $ | 22,385 |
| | $ | — |
|
Derivatives - risk participation agreements | 152 |
| | — |
| | 152 |
| | — |
|
Deferred compensation “rabbi trust” (1) | 6,839 |
| | 6,839 |
| | — |
| | — |
|
_____________________
| |
(1) | The Company has adopted a special trust for the Deferred Compensation Plan called a “rabbi trust”. The rabbi trust is an arrangement that is used to accumulate assets that may be used to fund the Company’s obligation to pay benefits under the Deferred Compensation Plan. To prevent immediate taxation to the executives who participate in the Deferred Compensation Plan, the amounts placed in the rabbi trust must remain subject to the claims of the Company’s creditors. The investments chosen by the participants in the Deferred Compensation Plan are mirrored by the rabbi trust as a way to minimize the earnings volatility of the Deferred Compensation Plan. |
As of September 30, 2019 and December 31, 2018, available-for-sale securities consisted of U.S. government and agencies securities, government-sponsored entities securities, municipal bonds, and mortgage-backed securities. Available-for-salesale Level 2 securities generally have quoted prices but are traded less frequently than exchange-traded securities and can be priced using market data from similar assets and include government-sponsoredGovernment-sponsored entities securities, municipalMunicipal bonds, mortgage-backedMortgage-backed securities, “off-the-run” U.S. Treasury securities, and certain investments in SBAthe Small Business Administration's (the "SBA") loans (which are categorized as U.S. government and agencies securities). “Off-the-run” U.S. Treasury securities are Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity. When Treasuries move to the secondary over-the-counter market, they become less frequently traded, therefore, they are considered “off-the-run”.“off-the-run.” NaN investments held as of September 30, 20192020 or December 31, 20182019 were categorized as Level 3.
As of September 30, 20192020 and December 31, 2018, equity2019, Equity securities consisted of Level 1 money market mutual funds that are valued with prices quoted in active markets.
In managing its interest rate and credit risk, the Company utilizesmay utilize derivative instruments including interest rate customer swaps, interest rate swaps, and risk participation agreements. As a service to its customers, the Company may utilize derivative instruments including customer foreign exchange forward contracts to manage its foreign exchange risk, if any. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities, and therefore, they have been categorized as a Level 2 measurement as of September 30, 20192020 and December 31, 2018.2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 8: Derivatives and Hedging Activities” for further details.
To comply with the provisions of ASC 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of collateral securing the position.
The Company has determined that the majority of inputs used to value its derivatives are within Level 2. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy as of September 30, 20192020 and December 31, 2018.2019.
Trading securities held in the rabbi trust consist of publicly traded mutual fund investments that are valued at prices quoted in active markets. Therefore, they have been categorized as Level 1 as of September 30, 20192020 and December 31, 2018.2019.
The Company accounts for its investments held in the rabbi trust in accordance with ASC 320, Investments - Debt and Equity Securities. The investments held in the rabbi trust are classified as trading securities. The assets of the rabbi trust are carried at their fair value within otherOther assets on the consolidated balance sheet.Consolidated Balance Sheets. Changes in the fair value of the securities are recorded as an increase or decrease in otherOther income each quarter. The deferred compensation liability reflects the market value of the securities selected by the participants and is included within otherOther liabilities on the consolidated balance sheet.Consolidated Balance Sheets. Changes in the fair value of the liability are recorded as an increase or decrease in salariesSalaries and employee benefits expense each quarter.
There were no transfers for assets or liabilities recorded at fair value on a recurring basis as of September 30, 2019. During the year ended2020 and December 31, 2018, 5 U.S. Treasury securities totaling $33.4 million transferred from Level 1 to Level 2 as the securities were determined to be “off-the-run”. There were no other transfers for assets or liabilities recorded at fair value on a recurring basis for the year ended December 31, 2018.
2019. There were 0 Level 3 assets valued on a recurring basis at September 30, 20192020 or December 31, 2018.
2019. There were no changes in the valuation techniques used for measuring the fair value.
The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis during the periods ended September 30, 20192020 and 2018, respectively,September 30, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall.
| | | As of September 30, 2019 | | Fair value measurements at reporting date using: | | Gain (losses) from fair value changes | | As of September 30, 2020 | | Fair value measurements at reporting date using: | | Gain (losses) from fair value changes |
Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Three months ended September 30, 2020 | | Nine months ended September 30, 2020 |
(In thousands) | (In thousands) |
Assets: | | | | | | | | | | | | Assets: | |
Impaired loans (1) | $ | 729 |
| | $ | — |
| | $ | — |
| | $ | 729 |
| | $ | (388 | ) | | $ | 204 |
| Impaired loans (1) | $ | 102 | | | $ | 0 | | | $ | 0 | | | $ | 102 | | | $ | 30 | | | $ | (1,168) | |
_____________________
| |
(1) | Collateral-dependent impaired loans held as of September 30, 2019 that had write-downs or recoveries in fair value or whose specific reserve changed during the nine months ended September 30, 2019. |
(1)Collateral-dependent impaired loans held as of September 30, 2020 that had write-downs or recoveries in fair value or whose specific reserve changed during the nine months ended September 30, 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2018 | | Fair value measurements at reporting date using: | | Gain (losses) from fair value changes |
Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Three months ended September 30, 2018 | | Nine months ended September 30, 2018 |
(In thousands) |
Assets: | | | | | | | | | | | |
Impaired loans (1) | $ | 2,005 |
| | $ | — |
| | $ | — |
| | $ | 2,005 |
| | $ | (440 | ) | | $ | (1,367 | ) |
_____________________
| |
(1) | Collateral-dependent impaired loans held as of September 30, 2018 that had write-downs or recoveries in fair value or whose specific reserve changed during the nine months ended September 30, 2018. |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2019 | | Fair value measurements at reporting date using: | | Gain (losses) from fair value changes |
Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) | | Three months ended September 30, 2019 | | Nine months ended September 30, 2019 |
(In thousands) |
Assets: | | | | | | | | | | | |
Impaired loans (1) | $ | 729 | | | $ | 0 | | | $ | 0 | | | $ | 729 | | | $ | (388) | | | $ | 204 | |
_____________________
(1)Collateral-dependent impaired loans held as of September 30, 2019 that had write-downs or recoveries in fair value or whose specific reserve changed during the nine months ended September 30, 2019.
The following tables present additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2020 |
| Fair Value | | Valuation Technique | | Unobservable Input | | Range of Inputs Utilized | | Weighted Average of Inputs Utilized |
| (In thousands) | | |
Impaired Loans | $ | 102 | | | Appraisals of Collateral | | Discount for costs to sell | | 10% - 10% | | 10% |
Appraisal adjustments | | 0% | | 0% |
|
| | | | | | | | | | | |
| As of September 30, 2019 |
| Fair Value | | Valuation Technique | | Unobservable Input | | Range of Inputs Utilized | | Weighted Average of Inputs Utilized |
| (In thousands) | | |
Impaired Loans | $ | 729 |
| | Appraisals of Collateral | | Discount for costs to sell | | 0% - 6% | | 6% |
Appraisal adjustments | | —% | | —% |
|
| | | | | | | | | | | |
| As of September 30, 2018 |
| Fair Value | | Valuation Technique | | Unobservable Input | | Range of Inputs Utilized | | Weighted Average of Inputs Utilized |
| (In thousands) | | |
Impaired Loans | $ | 2,005 |
| | Appraisals of Collateral | | Discount for costs to sell | | 0% - 23% | | 6% |
Appraisal adjustments | | —% | | —% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| As of September 30, 2019 |
| Fair Value | | Valuation Technique | | Unobservable Input | | Range of Inputs Utilized | | Weighted Average of Inputs Utilized |
| (In thousands) | | |
Impaired Loans | $ | 729 | | | Appraisals of Collateral | | Discount for costs to sell | | 0% - 6% | | 6% |
Appraisal adjustments | | 0% | | 0% |
Impaired loans include those loans that were adjusted to the fair value of underlying collateral as required under ASC 310, Receivables. The amount does not include impaired loans that are measured based on expected future cash flows discounted at the respective loan’s original effective interest rate, as that amount is not considered a fair value measurement. The Company uses appraisals, which management may adjust to reflect estimated fair value declines, or may apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property or consideration of broker quotes. The appraisers use a market, income, and/or a cost approach in determining the value of the collateral. Therefore, they have been categorized as a Level 3 measurement.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present the carrying values and fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2020 |
Book Value | | Fair Value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(In thousands) |
FINANCIAL ASSETS: | | | | | | | | | |
Cash and cash equivalents | $ | 546,263 | | | $ | 546,263 | | | $ | 546,263 | | | $ | 0 | | | $ | 0 | |
Investment securities held-to-maturity | 38,600 | | | 39,348 | | | 0 | | | 39,348 | | | 0 | |
Loans held for sale | 15,074 | | | 15,404 | | | 0 | | | 15,404 | | | 0 | |
Loans, net | 7,138,018 | | | 6,985,399 | | | 0 | | | 0 | | | 6,985,399 | |
Other financial assets | 65,812 | | | 65,812 | | | 0 | | | 65,812 | | | 0 | |
FINANCIAL LIABILITIES: | | | | | | | | | |
Deposits | 7,827,719 | | | 7,829,292 | | | 0 | | | 7,829,292 | | | 0 | |
| | | | | | | | | |
Securities sold under agreements to repurchase | 42,544 | | | 42,544 | | | 0 | | | 42,544 | | | 0 | |
| | | | | | | | | |
Federal Home Loan Bank borrowings | 296,236 | | | 297,641 | | | 0 | | | 297,641 | | | 0 | |
Junior subordinated debentures | 106,363 | | | 69,863 | | | 0 | | | 0 | | | 69,863 | |
Other financial liabilities | 2,189 | | | 2,189 | | | 0 | | | 2,189 | | | 0 | |
|
| | | | | | | | | | | | | | | | | | | |
| As of September 30, 2019 |
Book Value | | Fair Value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(In thousands) |
FINANCIAL ASSETS: | | | | | | | | | |
Cash and cash equivalents | $ | 78,010 |
| | $ | 78,010 |
| | $ | 78,010 |
| | $ | — |
| | $ | — |
|
Investment securities held-to-maturity | 51,379 |
| | 51,015 |
| | — |
| | 51,015 |
| | — |
|
Loans held for sale | 6,658 |
| | 6,708 |
| | — |
| | 6,708 |
| | — |
|
Loans, net | 6,991,792 |
| | 7,006,120 |
| | — |
| | — |
| | 7,006,120 |
|
Other financial assets | 77,614 |
| | 77,614 |
| | — |
| | 77,614 |
| | — |
|
FINANCIAL LIABILITIES: | | | | | | | | | |
Deposits | 6,658,242 |
| | 6,658,538 |
| | — |
| | 6,658,538 |
| | — |
|
Securities sold under agreements to repurchase | 48,860 |
| | 48,860 |
| | — |
| | 48,860 |
| | — |
|
Federal funds purchased | 230,000 |
| | 230,000 |
| | — |
| | 230,000 |
| | — |
|
Federal Home Loan Bank borrowings | 570,904 |
| | 571,606 |
| | — |
| | 571,606 |
| | — |
|
Junior subordinated debentures | 106,363 |
| | 96,363 |
| | — |
| | — |
| | 96,363 |
|
Other financial liabilities | 2,730 |
| | 2,730 |
| | — |
| | 2,730 |
| | — |
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| As of December 31, 2018 |
Book Value | | Fair Value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(In thousands) |
FINANCIAL ASSETS: | | | | | | | | | |
Cash and cash equivalents | $ | 127,259 |
| | $ | 127,259 |
| | $ | 127,259 |
| | $ | — |
| | $ | — |
|
Investment securities held-to-maturity | 70,438 |
| | 68,595 |
| | — |
| | 68,595 |
| | — |
|
Loans held for sale | 2,812 |
| | 2,837 |
| | — |
| | 2,837 |
| | — |
|
Loans, net | 6,817,846 |
| | 6,734,216 |
| | — |
| | — |
| | 6,734,216 |
|
Other financial assets | 78,730 |
| | 78,730 |
| | — |
| | 78,730 |
| | — |
|
FINANCIAL LIABILITIES: | | | | | | | | | |
Deposits | 6,781,170 |
| | 6,777,928 |
| | — |
| | 6,777,928 |
| | — |
|
Securities sold under agreements to repurchase | 36,928 |
| | 36,928 |
| | — |
| | 36,928 |
| | — |
|
Federal funds purchased | 250,000 |
| | 250,000 |
| | — |
| | 250,000 |
| | — |
|
Federal Home Loan Bank borrowings | 420,144 |
| | 417,092 |
| | — |
| | 417,092 |
| | — |
|
Junior subordinated debentures | 106,363 |
| | 96,363 |
| | — |
| | — |
| | 96,363 |
|
Other financial liabilities | 2,001 |
| | 2,001 |
| | — |
| | 2,001 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2019 |
Book Value | | Fair Value | | Quoted prices in active markets for identical assets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
(In thousands) |
FINANCIAL ASSETS: | | | | | | | | | |
Cash and cash equivalents | $ | 292,479 | | | $ | 292,479 | | | $ | 292,479 | | | $ | 0 | | | $ | 0 | |
Investment securities held-to-maturity | 48,212 | | | 47,949 | | | 0 | | | 47,949 | | | 0 | |
Loans held for sale | 7,386 | | | 7,475 | | | 0 | | | 7,475 | | | 0 | |
Loans, net | 6,904,722 | | | 6,883,360 | | | 0 | | | 0 | | | 6,883,360 | |
Other financial assets | 67,348 | | | 67,348 | | | 0 | | | 67,348 | | | 0 | |
FINANCIAL LIABILITIES: | | | | | | | | | |
Deposits | 7,241,476 | | | 7,241,739 | | | 0 | | | 7,241,739 | | | 0 | |
Securities sold under agreements to repurchase | 53,398 | | | 53,398 | | | 0 | | | 53,398 | | | 0 | |
| | | | | | | | | |
Federal Home Loan Bank borrowings | 350,829 | | | 351,233 | | | 0 | | | 351,233 | | | 0 | |
Junior subordinated debentures | 106,363 | | | 96,363 | | | 0 | | | 0 | | | 96,363 | |
Other financial liabilities | 1,957 | | | 1,957 | | | 0 | | | 1,957 | | | 0 | |
The estimated fair values have been determined by using available quoted market information or other appropriate valuation methodologies. The aggregate fair value amounts presented above do not represent the underlying value of the financial assets and liabilities of the Company taken as a whole as they do not reflect any premium or discount the Company might recognize if the assets were sold or the liabilities sold, settled, or redeemed. An excess of fair value over book value on financial assets represents a premium, or gain, the Company might recognize if the assets were sold, while an excess of book value over fair value on financial liabilities represents a premium, or gain, the Company might recognize if the liabilities were sold, settled, or redeemed prior to maturity. Conversely, losses would be recognized if assets were sold where the book value exceeded the fair value or liabilities were sold where the fair value exceeded the book value.
The fair value estimates provided are made at a specific point in time, based on relevant market information and the characteristics of the financial instrument. The estimates do not provide for any premiums or discounts that could result from concentrations of ownership of a financial instrument. Because no active market exists for some of the Company’s financial instruments, certain fair value estimates are based on subjective judgments regarding current economic conditions, risk characteristics of the financial instruments, future expected loss experience, prepayment assumptions, and other factors. The resulting estimates involve uncertainties and are considered best estimates. Changes made to any of the underlying assumptions could significantly affect the estimates.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Cash and cash equivalents
The carrying value reported in the balance sheetConsolidated Balance Sheets for cashCash and cash equivalents approximates fair value due to the short-term nature of their maturities, and these assets are classified as Level 1 measurements.
Investment securities held-to-maturity
Investment securities held-to-maturity currentlyHeld-to-maturity consist of mortgage-backed securities. AsMortgage-backed securities as of September 30, 2020 and December 31, 2018, investment securities held-to-maturity consisted of mortgage-backed securities and a U.S. Treasury security.2019. The U.S. Treasury security held as of December 31, 2018 is an “off-the-run” U.S. Treasury security and, therefore, it has been categorized as Level 2. The mortgage-backedMortgage-backed securities are fixed income instruments that are not quoted on an exchange but may be traded in active markets. The fair value of these securities is based on quoted market prices obtained from external pricing services. The principal market for our securities portfolio is the secondary institutional market, with an exit price that is predominantly reflective of bid level pricing in that market. Accordingly, held-to-maturity mortgage-backedHeld-to-maturity Mortgage-backed securities are classified as Level 2.
There were no transfers of the Company's financial instruments that are not measured at fair value on a recurring basis as of September 30, 20192020 and December 31, 2018.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
2019.
Loans held for sale
Loans held for sale are recorded at the lower of cost or fair value in the aggregate. Fair value estimates are based on actual commitments to sell the loans to investors at an agreed upon price or current market prices if rates have changed since the time the loan closed. Accordingly, loans held for sale are included in the Level 2 fair value category.
Loans, net
Fair value estimates are based on loans with similar financial characteristics. Following the adoption of ASU 2016-01 in 2018, theThe Company updated its process for estimating the fair value of loans, net of allowance for loan losses. The updated process estimates the fair value of loans using the exit price notion under ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which includes identifying an exit price using current market information for origination rates and making certain adjustments to incorporate credit risk, transaction costs and other adjustments utilizing publicly available rates and indexes. Loans, net are included in the Level 3 fair value category based upon the inputs and valuation techniques used. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Recent Accounting Pronouncements” for additional information on ASU 2016-01.
Other financial assets
Other financial assets consist of accrued interest and fees receivable, and stock in the Federal Home Loan Bank of Boston (“FHLB”) and the Federal Reserve Bank (“FRB”), for which the carrying amount approximates fair value, and these assets are classified as Level 2 measurements.
Deposits
The fair values reported for transaction accounts (demand, NOW, savings, and money market) equal their respective book values reported on the balance sheetConsolidated Balance Sheets, and these liabilities are classified as Level 2 measurements. The fair values disclosed are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on certificates of deposit with similar remaining maturities, and these liabilities are classified as Level 2 measurements.
Securities sold under agreements to repurchase
The fair values of securities sold under agreements to repurchase are estimated based on contractual cash flows discounted at the Bank’s incremental borrowing rate for FHLB borrowings with similar maturities, and these liabilities have been classified as Level 2 measurements.
Federal funds purchased, if any
The carrying amounts of federal funds purchased, if any, approximate fair value due to their short-term nature, and therefore, these funds have been classified as Level 2 measurements.
Federal Home Loan Bank borrowings
The fair values reported for FHLB borrowings are estimated based on the discounted value of contractual cash flows. The discount rate used is based on the Bank’s estimated current incremental borrowing rate for FHLB borrowings of similar maturities and therefore these borrowings have been classified as Level 2 measurements.
Junior subordinated debentures
The fair values of the juniorJunior subordinated debentures issued by Boston Private Capital Trust I and Boston Private Capital Trust II are estimated using Level 3 inputs such as the interest rates on these securities, current rates for similar debt, a consideration for illiquidity of trading in the debt, and regulatory changes that would result in an unfavorable change in the regulatory capital treatment of this type of debt.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Other financial liabilities
Other financial liabilities consistsconsist of accrued interest payable for which the carrying amount approximates fair value and is classified as Level 2 measurements.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Financial instruments with off-balance sheet risk, if any
The Bank’s commitments to originate loans and for unused lines and outstanding letters of credit are primarily at market interest rates, and therefore, the carrying amount approximates fair value.
6. Loan Portfolio and Credit Quality
The Bank’s lending activities are conducted principally in the regions of New England, the San Francisco Bay Area,Northern California, and Southern California. The Bank originates single and multi-family residential loans, commercial real estate loans, commercial and industrial loans, commercial tax-exempt loans, construction and land loans, and home equity and other consumer loans. Most loans are secured by borrowers’ personal or business assets. The ability of the Bank’s single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic conditions within the Bank’s lending areas. Commercial, construction, and land borrowers’ ability to repay is generally dependent upon the health of the economy and real estate values, including in particular, the performance of the construction sector. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changing conditions in the New England, San Francisco Bay Area,Northern California, and Southern California economies and real estate markets.
Beginning in the first quarter of 2020, the Company made a change to the loan portfolio segmentation in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given their different underlying risk characteristics. Beginning in the second quarter of 2020, the Company also added a segment for loans originated under the SBA's Paycheck Protection Program (the "PPP"). For the period ended December 31, 2019, there were no PPP loans as the SBA initiated the program in the second quarter of 2020 in response to the COVID-19 pandemic.
The following table presents a summary of the loan portfolio based on the portfolio segment as of the dates indicated:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (In thousands) |
Commercial and industrial | $ | 695,029 |
| | $ | 623,037 |
|
Commercial tax-exempt | 448,488 |
| | 451,671 |
|
Total commercial and industrial | 1,143,517 |
| | 1,074,708 |
|
Commercial real estate | 2,533,346 |
| | 2,395,692 |
|
Construction and land | 209,741 |
| | 240,306 |
|
Residential | 2,964,042 |
| | 2,948,973 |
|
Home equity | 84,432 |
| | 90,421 |
|
Consumer and other | 132,073 |
| | 143,058 |
|
Total | $ | 7,067,151 |
| | $ | 6,893,158 |
|
In the third quarter of 2019, the Bank sold $92.4 million of the residential loan portfolio for a $0.8 million net gain. | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (In thousands) |
Commercial and industrial | $ | 583,145 | | | $ | 694,034 | |
Paycheck Protection Program | 371,496 | | | 0 | |
Commercial tax-exempt | 472,342 | | | 447,927 | |
| | | |
Commercial real estate | 2,659,890 | | | 2,551,274 | |
Construction and land | 211,697 | | | 225,983 | |
Residential | 2,729,164 | | | 2,839,155 | |
Home equity | 81,797 | | | 83,657 | |
Consumer and other | 113,038 | | | 134,674 | |
Total | $ | 7,222,569 | | | $ | 6,976,704 | |
The following table presents nonaccrual loans receivable by class of receivable as of the dates indicated:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (In thousands) |
Commercial and industrial | $ | 800 |
| | $ | 2,554 |
|
Commercial tax-exempt | — |
| | — |
|
Total commercial and industrial | 800 |
| | 2,554 |
|
Commercial real estate | — |
| | 546 |
|
Residential | 14,219 |
| | 7,914 |
|
Home equity | 2,545 |
| | 3,031 |
|
Consumer and other | 1 |
| | 12 |
|
Total | $ | 17,565 |
| | $ | 14,057 |
|
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (In thousands) |
Commercial and industrial | $ | 15,418 | | | $ | 582 | |
| | | |
Commercial tax-exempt | 3,929 | | | 0 | |
| | | |
Commercial real estate | 5,261 | | | 0 | |
| | | |
Residential | 16,216 | | | 13,993 | |
Home equity | 438 | | | 1,525 | |
Consumer and other | 1 | | | 3 | |
Total | $ | 41,263 | | | $ | 16,103 | |
The Bank’s policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest is in doubt. In certain instances, although infrequent, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were 0no loans 90 days or more past due, but still accruing, as of both September 30, 20192020 and December 31, 2018.2019. The Bank’s policy for returning a loan to accrual status requires the loan to be brought current and for the client to show a history of making timely payments (generally six consecutive months). For troubled debt restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months in accordance with the restructured loan terms, along with meeting other criteria.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables show the payment status of loans receivable by class of receivable as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
| Accruing Past Due | | Nonaccrual Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | Total Accruing Past Due | | Current | | 30-89 Days Past Due | | 90 Days or Greater Past Due | | Total Non-Accrual Loans | | Current Accruing Loans | | Total Loans Receivable |
| (In thousands) |
Commercial and industrial | $ | 554 |
| | $ | 2,494 |
| | $ | 3,048 |
| | $ | 83 |
| | $ | 186 |
| | $ | 531 |
| | $ | 800 |
| | $ | 691,181 |
| | $ | 695,029 |
|
Commercial tax-exempt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 448,488 |
| | 448,488 |
|
Commercial real estate | 497 |
| | — |
| | 497 |
| | — |
| | — |
| | — |
| | — |
| | 2,532,849 |
| | 2,533,346 |
|
Construction and land | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 209,741 |
| | 209,741 |
|
Residential | — |
| | 266 |
| | 266 |
| | 9,084 |
| | 301 |
| | 4,834 |
| | 14,219 |
| | 2,949,557 |
| | 2,964,042 |
|
Home equity | 74 |
| | 279 |
| | 353 |
| | 991 |
| | — |
| | 1,554 |
| | 2,545 |
| | 81,534 |
| | 84,432 |
|
Consumer and other | 15 |
| | — |
| | 15 |
| | 1 |
| | — |
| | — |
| | 1 |
| | 132,057 |
| | 132,073 |
|
Total | $ | 1,140 |
| | $ | 3,039 |
| | $ | 4,179 |
| | $ | 10,159 |
| | $ | 487 |
| | $ | 6,919 |
| | $ | 17,565 |
| | $ | 7,045,407 |
| | $ | 7,067,151 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Accruing Past Due | | Nonaccrual Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | | | Total Accruing Past Due | | Current | | 30-89 Days Past Due | | 90 Days or Greater Past Due | | Total Non-Accrual Loans | | Current Accruing Loans | | Total Loans Receivable |
| (In thousands) |
Commercial and industrial | $ | 1,881 | | | $ | 175 | | | | | $ | 2,056 | | | $ | 12,203 | | | $ | 226 | | | $ | 2,989 | | | $ | 15,418 | | | $ | 565,671 | | | $ | 583,145 | |
Paycheck Protection Program | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 371,496 | | | 371,496 | |
Commercial tax-exempt | 0 | | | 0 | | | | | 0 | | | 3,929 | | | 0 | | | 0 | | | 3,929 | | | 468,413 | | | 472,342 | |
Commercial real estate | 688 | | | 1,535 | | | | | 2,223 | | | 5,212 | | | 0 | | | 49 | | | 5,261 | | | 2,652,406 | | | 2,659,890 | |
Construction and land | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 211,697 | | | 211,697 | |
Residential | 0 | | | 320 | | | | | 320 | | | 5,191 | | | 3,847 | | | 7,178 | | | 16,216 | | | 2,712,628 | | | 2,729,164 | |
Home equity | 1,036 | | | 0 | | | | | 1,036 | | | 0 | | | 0 | | | 438 | | | 438 | | | 80,323 | | | 81,797 | |
Consumer and other | 0 | | | 0 | | | | | 0 | | | 1 | | | 0 | | | 0 | | | 1 | | | 113,037 | | | 113,038 | |
Total | $ | 3,605 | | | $ | 2,030 | | | | | $ | 5,635 | | | $ | 26,536 | | | $ | 4,073 | | | $ | 10,654 | | | $ | 41,263 | | | $ | 7,175,671 | | | $ | 7,222,569 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Accruing Past Due | | Nonaccrual Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | Total Accruing Past Due | | Current | | 30-89 Days Past Due | | 90 Days or Greater Past Due | | Total Non-Accrual Loans | | Current Accruing Loans | | Total Loans Receivable |
| (In thousands) |
Commercial and industrial | $ | 9,794 |
| | $ | — |
| | $ | 9,794 |
| | $ | 979 |
| | $ | — |
| | $ | 1,575 |
| | $ | 2,554 |
| | $ | 610,689 |
| | $ | 623,037 |
|
Commercial tax-exempt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 451,671 |
| | 451,671 |
|
Commercial real estate | — |
| | — |
| | — |
| | — |
| | — |
| | 546 |
| | 546 |
| | 2,395,146 |
| | 2,395,692 |
|
Construction and land | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 240,306 |
| | 240,306 |
|
Residential | 6,477 |
| | 366 |
| | 6,843 |
| | 2,639 |
| | 716 |
| | 4,559 |
| | 7,914 |
| | 2,934,216 |
| | 2,948,973 |
|
Home equity | 252 |
| | 350 |
| | 602 |
| | — |
| | 48 |
| | 2,983 |
| | 3,031 |
| | 86,788 |
| | 90,421 |
|
Consumer and other | 17 |
| | 5,043 |
| | 5,060 |
| | 8 |
| | 4 |
| | — |
| | 12 |
| | 137,986 |
| | 143,058 |
|
Total | $ | 16,540 |
| | $ | 5,759 |
| | $ | 22,299 |
| | $ | 3,626 |
| | $ | 768 |
| | $ | 9,663 |
| | $ | 14,057 |
| | $ | 6,856,802 |
| | $ | 6,893,158 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Accruing Past Due | | Nonaccrual Loans | | | | |
| 30-59 Days Past Due | | 60-89 Days Past Due | | | | Total Accruing Past Due | | Current | | 30-89 Days Past Due | | 90 Days or Greater Past Due | | Total Non-Accrual Loans | | Current Accruing Loans | | Total Loans Receivable |
| (In thousands) |
Commercial and industrial | $ | 828 | | | $ | 0 | | | | | $ | 828 | | | $ | 0 | | | $ | 241 | | | $ | 341 | | | $ | 582 | | | $ | 692,624 | | | $ | 694,034 | |
Commercial tax-exempt | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 447,927 | | | 447,927 | |
Commercial real estate | 1,420 | | | 0 | | | | | 1,420 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,549,854 | | | 2,551,274 | |
Construction and land | 0 | | | 0 | | | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 225,983 | | | 225,983 | |
Residential | 19,133 | | | 1,038 | | | | | 20,171 | | | 9,593 | | | 759 | | | 3,641 | | | 13,993 | | | 2,804,991 | | | 2,839,155 | |
Home equity | 369 | | | 0 | | | | | 369 | | | 220 | | | 148 | | | 1,157 | | | 1,525 | | | 81,763 | | | 83,657 | |
Consumer and other | 1,008 | | | 2,149 | | | | | 3,157 | | | 1 | | | 0 | | | 2 | | | 3 | | | 131,514 | | | 134,674 | |
Total | $ | 22,758 | | | $ | 3,187 | | | | | $ | 25,945 | | | $ | 9,814 | | | $ | 1,148 | | | $ | 5,141 | | | $ | 16,103 | | | $ | 6,934,656 | | | $ | 6,976,704 | |
Nonaccrual and delinquent loans are affected by many factors, such as economic and business conditions, interest rates, unemployment levels, and real estate collateral values, among others. In periods of prolonged economic decline, borrowers may become more severely affected over time as liquidity levels decline and the borrower’s ability to continue to make payments deteriorates.
With respect to real estate collateral values, the declines from the peak, as well as the value of the real estate at the time of origination versus the current value, can impact the level of problem loans. For instance, if the loan to value ratio at the time of renewal has increased due to the decline in the real estate value since origination, the loan may no longer meet the Bank’s underwriting standards and may be considered for classification as a problem loan dependent upon a review of risk factors. There could be an increase in these situations as the economic conditions brought on by the COVID-19 pandemic could lead to a decline in collateral values.
Generally when a collateral dependent loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time, the Bank will continue to obtain updated appraisals as deemed necessary, especially during periods of declining property values. The COVID-19 pandemic has limited the Bank’s ability to obtain updated appraisals. In lieu of appraisals, the Bank may use other valuation techniques in the short-term. The Bank did not use any alternative valuation techniques in the third quarter of 2020.
The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more. Loans with modified terms under the CARES Act are not considered past due if they are complying with the modified terms.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Credit Quality Indicatorsquality indicators
The Bank uses a risk rating system to monitor the credit quality of its loan portfolio. Loan classifications are assessments made by the Bank of the status of the loans based on the facts and circumstances known to the Bank, including management’s judgment, at the time of assessment. Some or all of these classifications may change in the future if there are unexpected changes in the financial condition of the borrower, including but not limited to, changes resulting from continuing deterioration in employment levels, general business and economic conditions on a national basis or in the local markets in which the Bank operates adversely affecting, among other things, real estate values. Such conditions, as well as other factors which adversely affect borrowers’ ability to service or repay loans, typically result in changes in loan default and charge-off rates, and increased provisions for loan losses, which would adversely affect the Company’s financial performance and financial condition. These circumstances are not entirely foreseeable and, as a result, it may not be possible to accurately reflect them in the Company’s analysis of credit risk. Generally, only commercial loans, including commercial real estate, other commercial and industrial loans, commercial tax-exempt loans, and construction and land loans, are given a numerical grade.
A summary of the rating system used by the Bank is included here from Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, follows:
Pass - All loans graded as pass are considered acceptable credit quality by the Bank and are grouped for purposes of calculating the allowance for loan losses. For residential, home equity and consumer loans, the Bank classifies loans as pass unless there is known information such as delinquency or client requests for modifications which, due to financial difficulty, would then generally result in a risk rating such as special mention or more severe depending on the factors.
Special Mentionmention - Loans rated in this category are defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the credit or the Bank’s credit position. These loans are currently protected but have the potential to deteriorate to a substandard rating. For commercial loans, the borrower’s financial performance may be inconsistent or below forecast, creating the possibility of liquidity problems and shrinking debt service coverage. In loans having this rating, the primary source of repayment is still good, but there is increasing reliance on collateral or guarantor support. Collectability of the loan is not yet in jeopardy. In particular, loans in this category are considered more variable than other categories, since they will typically migrate through categories more quickly.
Substandard - Loans rated in this category are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard credit has a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans may be either still accruing or nonaccruing depending upon the severity of the risk and other factors such as the value of the collateral, if any, and past due status.
Doubtful - Loans rated in this category indicate that collection or liquidation in full on the basis of currently existing facts, conditions, and values, is highly questionable and improbable. Loans in this category are usually on nonaccrual and classified as impaired.
These above credit quality indicators are assigned upon origination with commercial loans reassessed on an annual basis while noncommercial loans are reassessed when the loan becomes past due greater than 90 days or when ad-hoc information becomes available to the loan officer. Further the commercial loan portfolio is subject for selection of an independent review, also on an annual basis. In addition, those loans not considered to be "Pass" rated, are subject to a Loan Committee review on a quarterly basis. Lastly, on an ad-hoc basis as new information becomes available to the loan officer on the credit quality of the borrower, the credit quality indicators are reassessed.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present the loan portfolio’s credit risk profile by internally assigned grade and class of receivable as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| By Loan Grade or Nonaccrual Status | | |
| Pass | | Special Mention | | Accruing Classified (1) | | Nonaccrual Loans | | Total |
| (In thousands) |
Commercial and industrial | $ | 531,922 | | | $ | 9,054 | | | $ | 26,751 | | | $ | 15,418 | | | $ | 583,145 | |
Paycheck Protection Program | 371,496 | | | 0 | | | 0 | | | 0 | | | 371,496 | |
Commercial tax-exempt | 458,681 | | | 5,229 | | | 4,503 | | | 3,929 | | | 472,342 | |
Commercial real estate | 2,426,786 | | | 182,526 | | | 45,317 | | | 5,261 | | | 2,659,890 | |
Construction and land | 209,297 | | | 2,400 | | | 0 | | | 0 | | | 211,697 | |
Residential | 2,708,733 | | | 0 | | | 4,215 | | | 16,216 | | | 2,729,164 | |
Home equity | 80,318 | | | 0 | | | 1,041 | | | 438 | | | 81,797 | |
Consumer and other | 112,737 | | | 300 | | | 0 | | | 1 | | | 113,038 | |
Total | $ | 6,899,970 | | | $ | 199,509 | | | $ | 81,827 | | | $ | 41,263 | | | $ | 7,222,569 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| By Loan Grade or Nonaccrual Status | | |
| Pass | | Special Mention | | Accruing Classified (1) | | Nonaccrual Loans | | Total |
| (In thousands) |
Commercial and industrial | $ | 656,364 | | | $ | 12,101 | | | $ | 24,987 | | | $ | 582 | | | $ | 694,034 | |
Commercial tax-exempt | 436,721 | | | 7,154 | | | 4,052 | | | 0 | | | 447,927 | |
Commercial real estate | 2,495,702 | | | 32,014 | | | 23,558 | | | 0 | | | 2,551,274 | |
Construction and land | 225,526 | | | 457 | | | 0 | | | 0 | | | 225,983 | |
Residential | 2,820,909 | | | 0 | | | 4,253 | | | 13,993 | | | 2,839,155 | |
Home equity | 81,060 | | | 0 | | | 1,072 | | | 1,525 | | | 83,657 | |
Consumer and other | 134,371 | | | 300 | | | 0 | | | 3 | | | 134,674 | |
Total | $ | 6,850,653 | | | $ | 52,026 | | | $ | 57,922 | | | $ | 16,103 | | | $ | 6,976,704 | |
______________________
(1) Accruing Classified may include both Substandard and Doubtful classifications.
The following table presents the loan portfolio’s credit risk profile by loan origination year and class of receivable as of the dates indicated:
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
| By Loan Grade or Nonaccrual Status | | |
| Pass | | Special Mention | | Accruing Classified (1) | | Nonaccrual Loans | | Total |
| (In thousands) |
Commercial and industrial | $ | 656,012 |
| | $ | 13,084 |
| | $ | 25,133 |
| | $ | 800 |
| | $ | 695,029 |
|
Commercial tax-exempt | 441,811 |
| | 2,625 |
| | 4,052 |
| | — |
| | 448,488 |
|
Commercial real estate | 2,460,408 |
| | 42,124 |
| | 30,814 |
| | — |
| | 2,533,346 |
|
Construction and land | 209,741 |
| | — |
| | — |
| | — |
| | 209,741 |
|
Residential | 2,946,823 |
| | — |
| | 3,000 |
| | 14,219 |
| | 2,964,042 |
|
Home equity | 81,308 |
| | 300 |
| | 279 |
| | 2,545 |
| | 84,432 |
|
Consumer and other | 132,072 |
| | — |
| | — |
| | 1 |
| | 132,073 |
|
Total | $ | 6,928,175 |
| | $ | 58,133 |
| | $ | 63,278 |
| | $ | 17,565 |
| | $ | 7,067,151 |
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Loan Origination Year By Loan Grade or Nonaccrual Status |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving | | Total |
| (In thousands) |
Commercial and industrial | | | | | | | | | | | | | | | |
Pass | $ | 73,081 | | | $ | 89,413 | | | $ | 79,047 | | | $ | 16,435 | | | $ | 24,449 | | | $ | 54,673 | | | $ | 194,824 | | | $ | 531,922 | |
Special Mention | 0 | | | 1,031 | | | 937 | | | 698 | | | 149 | | | 2,792 | | | 3,447 | | | 9,054 | |
Accruing Classified (1) | 1,042 | | | 6,313 | | | 7,172 | | | 2,500 | | | 771 | | | 269 | | | 8,684 | | | 26,751 | |
Nonaccrual | 0 | | | 151 | | | 0 | | | 12,053 | | | 0 | | | 12 | | | 3,202 | | | 15,418 | |
Total | $ | 74,123 | | | $ | 96,908 | | | $ | 87,156 | | | $ | 31,686 | | | $ | 25,369 | | | $ | 57,746 | | | $ | 210,157 | | | $ | 583,145 | |
Paycheck Protection Program | | | | | | | | | | | | | | |
Pass | $ | 371,496 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 371,496 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total | $ | 371,496 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 371,496 | |
Commercial tax-exempt | | | | | | | | | | | | | | | |
Pass | $ | 53,184 | | | $ | 18,508 | | | $ | 40,630 | | | $ | 24,417 | | | $ | 119,832 | | | $ | 202,110 | | | $ | 0 | | | $ | 458,681 | |
Special Mention | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 5,229 | | | 0 | | | 5,229 | |
Accruing Classified (1) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 4,503 | | | 0 | | | 4,503 | |
Nonaccrual | 0 | | | 0 | | | 0 | | | 3,929 | | | 0 | | | 0 | | | 0 | | | 3,929 | |
Total | $ | 53,184 | | | $ | 18,508 | | | $ | 40,630 | | | $ | 28,346 | | | $ | 119,832 | | | $ | 211,842 | | | $ | 0 | | | $ | 472,342 | |
Commercial real estate | | | | | | | | | | | | | | | |
Pass | $ | 207,359 | | | $ | 459,709 | | | $ | 261,796 | | | $ | 320,435 | | | $ | 380,271 | | | $ | 709,912 | | | $ | 87,304 | | | $ | 2,426,786 | |
Special Mention | 22,824 | | | 30,630 | | | 26,982 | | | 21,149 | | | 37,414 | | | 43,527 | | | 0 | | | 182,526 | |
Accruing Classified (1) | 1,598 | | | 31,694 | | | 0 | | | 0 | | | 0 | | | 12,025 | | | 0 | | | 45,317 | |
Nonaccrual | 0 | | | 5,212 | | | 0 | | | 0 | | | 0 | | | 0 | | | 49 | | | 5,261 | |
Total | $ | 231,781 | | | $ | 527,245 | | | $ | 288,778 | | | $ | 341,584 | | | $ | 417,685 | | | $ | 765,464 | | | $ | 87,353 | | | $ | 2,659,890 | |
Construction and land | | | | | | | | | | | | | | | |
Pass | $ | 28,297 | | | $ | 59,020 | | | $ | 48,402 | | | $ | 44,916 | | | $ | 2,232 | | | $ | 26,430 | | | $ | 0 | | | $ | 209,297 | |
Special Mention | 0 | | | 0 | | | 2,400 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2,400 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total | $ | 28,297 | | | $ | 59,020 | | | $ | 50,802 | | | $ | 44,916 | | | $ | 2,232 | | | $ | 26,430 | | | $ | 0 | | | $ | 211,697 | |
Residential | | | | | | | | | | | | | | | |
Pass | $ | 446,397 | | | $ | 519,995 | | | $ | 412,968 | | | $ | 421,348 | | | $ | 397,183 | | | $ | 510,842 | | | $ | 0 | | | $ | 2,708,733 | |
| | | | | | | | | | | | | | | |
Accruing Classified (1) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 4,215 | | | 0 | | | 4,215 | |
Nonaccrual | 0 | | | 261 | | | 272 | | | 2,373 | | | 0 | | | 13,310 | | | 0 | | | 16,216 | |
Total | $ | 446,397 | | | $ | 520,256 | | | $ | 413,240 | | | $ | 423,721 | | | $ | 397,183 | | | $ | 528,367 | | | $ | 0 | | | $ | 2,729,164 | |
Home equity | | | | | | | | | | | | | | | |
Pass | $ | 0 | | | $ | 0 | | | $ | 252 | | | $ | 0 | | | $ | 686 | | | $ | 10,721 | | | $ | 68,659 | | | $ | 80,318 | |
| | | | | | | | | | | | | | | |
Accruing Classified (1) | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1,041 | | | 0 | | | 1,041 | |
Nonaccrual | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 299 | | | 139 | | | 438 | |
Total | $ | 0 | | | $ | 0 | | | $ | 252 | | | $ | 0 | | | $ | 686 | | | $ | 12,061 | | | $ | 68,798 | | | $ | 81,797 | |
Consumer and other | | | | | | | | | | | | | | | |
Pass | $ | 539 | | | $ | 168 | | | $ | 31 | | | $ | 0 | | | $ | 84 | | | $ | 731 | | | $ | 111,184 | | | $ | 112,737 | |
Special Mention | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 300 | | | 300 | |
| | | | | | | | | | | | | | | |
Nonaccrual | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1 | | | 1 | |
Total | $ | 539 | | | $ | 168 | | | $ | 31 | | | $ | 0 | | | $ | 84 | | | $ | 731 | | | $ | 111,485 | | | $ | 113,038 | |
Total | | | | | | | | | | | | | | | |
Pass | $ | 1,180,353 | | | $ | 1,146,813 | | | $ | 843,126 | | | $ | 827,551 | | | $ | 924,737 | | | $ | 1,515,419 | | | $ | 461,971 | | | $ | 6,899,970 | |
Special Mention | 22,824 | | | 31,661 | | | 30,319 | | | 21,847 | | | 37,563 | | | 51,548 | | | 3,747 | | | 199,509 | |
Accruing Classified (1) | 2,640 | | | 38,007 | | | 7,172 | | | 2,500 | | | 771 | | | 22,053 | | | 8,684 | | | 81,827 | |
Nonaccrual | 0 | | | 5,624 | | | 272 | | | 18,355 | | | 0 | | | 13,621 | | | 3,391 | | | 41,263 | |
Total | $ | 1,205,817 | | | $ | 1,222,105 | | | $ | 880,889 | | | $ | 870,253 | | | $ | 963,071 | | | $ | 1,602,641 | | | $ | 477,793 | | | $ | 7,222,569 | |
______________________
(1) Accruing Classified may include both Substandard and Doubtful classifications.
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| By Loan Grade or Nonaccrual Status | | |
| Pass | | Special Mention | | Accruing Classified (1) | | Nonaccrual Loans | | Total |
| (In thousands) |
Commercial and industrial | $ | 581,278 |
| | $ | 16,213 |
| | $ | 22,992 |
| | $ | 2,554 |
| | $ | 623,037 |
|
Commercial tax-exempt | 444,835 |
| | 2,785 |
| | 4,051 |
| | — |
| | 451,671 |
|
Commercial real estate | 2,314,223 |
| | 53,871 |
| | 27,052 |
| | 546 |
| | 2,395,692 |
|
Construction and land | 234,647 |
| | 5,659 |
| | — |
| | — |
| | 240,306 |
|
Residential | 2,941,059 |
| | — |
| | — |
| | 7,914 |
| | 2,948,973 |
|
Home equity | 87,390 |
| | — |
| | — |
| | 3,031 |
| | 90,421 |
|
Consumer and other | 143,046 |
| | — |
| | — |
| | 12 |
| | 143,058 |
|
Total | $ | 6,746,478 |
| | $ | 78,528 |
| | $ | 54,095 |
| | $ | 14,057 |
| | $ | 6,893,158 |
|
26
______________________ | |
(1) | Accruing Classified includes both Substandard and Doubtful classifications. |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following tables present, by class of receivable, the balance of impaired loans with and without a related allowance, the associated allowance for those impaired loans with a related allowance, and the total unpaid principal on impaired loans:
| | | As of and for the three and nine months ended September 30, 2019 | | As of and for the three and nine months ended September 30, 2020 |
| Recorded Investment (1) | | Unpaid Principal Balance | | Related Allowance | | QTD Average Recorded Investment | | YTD Average Recorded Investment | | QTD Interest Income Recognized while Impaired | | YTD Interest Income Recognized while Impaired | | Recorded Investment (1) | | Unpaid Principal Balance | | Related Allowance | | QTD Average Recorded Investment | | YTD Average Recorded Investment | | QTD Interest Income Recognized while Impaired | | YTD Interest Income Recognized while Impaired |
| (In thousands) | | (In thousands) |
With no related allowance recorded: | | | | | | | | | | | | | | With no related allowance recorded: |
Commercial and industrial | $ | 479 |
| | $ | 788 |
| | n/a |
| | $ | 1,233 |
| | $ | 1,256 |
| | $ | 192 |
| | $ | 217 |
| Commercial and industrial | $ | 15,234 | | | $ | 15,287 | | | n/a | | $ | 6,420 | | | $ | 2,965 | | | $ | 1 | | | $ | 7 | |
Paycheck Protection Program | | Paycheck Protection Program | 0 | | | 0 | | | n/a | | 0 | | | 0 | | | 0 | | | 0 | |
Commercial tax-exempt | — |
| | — |
| | n/a |
| | — |
| | — |
| | — |
| | — |
| Commercial tax-exempt | 3,929 | | | 3,929 | | | n/a | | 982 | | | 393 | | | 0 | | | 0 | |
Commercial real estate | — |
| | — |
| | n/a |
| | — |
| | 55 |
| | — |
| | 256 |
| Commercial real estate | 5,928 | | | 6,100 | | | n/a | | 5,958 | | | 4,557 | | | 8 | | | 25 | |
Construction and land | — |
| | — |
| | n/a |
| | — |
| | — |
| | — |
| | — |
| Construction and land | 0 | | | 0 | | | n/a | | 0 | | | 0 | | | 0 | | | 0 | |
Residential | 14,879 |
| | 15,140 |
| | n/a |
| | 15,026 |
| | 13,321 |
| | 236 |
| | 476 |
| Residential | 16,229 | | | 16,489 | | | n/a | | 16,208 | | | 15,984 | | | 86 | | | 346 | |
Home equity | 2,313 |
| | 2,995 |
| | n/a |
| | 2,359 |
| | 2,106 |
| | 12 |
| | 13 |
| |
Home equity (2) | | Home equity (2) | 390 | | | 390 | | | n/a | | 390 | | | 1,086 | | | (3) | | | 7 | |
Consumer and other | — |
| | — |
| | n/a |
| | — |
| | — |
| | — |
| | — |
| Consumer and other | 0 | | | 0 | | | n/a | | 0 | | | 0 | | | 0 | | | 0 | |
Subtotal | $ | 17,671 |
| | $ | 18,923 |
| | n/a |
| | 18,618 |
| | $ | 16,738 |
| | 440 |
| | $ | 962 |
| Subtotal | $ | 41,710 | | | $ | 42,195 | | | n/a | | 29,958 | | | $ | 24,985 | | | 92 | | | $ | 385 | |
With an allowance recorded: | | | | | | | | | | | | | | With an allowance recorded: | | | | | | | | | | | | | |
Commercial and industrial | $ | 538 |
| | $ | 539 |
| | $ | 341 |
| | 491 |
| | $ | 877 |
| | 3 |
| | $ | 23 |
| Commercial and industrial | $ | 185 | | | $ | 199 | | | $ | 83 | | | 208 | | | $ | 248 | | | $ | 0 | | | $ | 1 | |
Paycheck Protection Program | | Paycheck Protection Program | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Commercial tax-exempt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Commercial tax-exempt | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Commercial real estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Commercial real estate | 49 | | | 50 | | | 49 | | | 37 | | | 15 | | | 0 | | | 0 | |
Construction and land | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Construction and land | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential | 2,059 |
| | 2,059 |
| | 712 |
| | 1,419 |
| | 1,017 |
| | 5 |
| | 18 |
| Residential | 427 | | | 427 | | | 56 | | | 502 | | | 521 | | | 3 | | | 9 | |
Home equity | 279 |
| | 279 |
| | 23 |
| | 276 |
| | 626 |
| | 1 |
| | 2 |
| Home equity | 260 | | | 260 | | | 17 | | | 261 | | | 266 | | | 2 | | | 6 | |
Consumer and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Subtotal | $ | 2,876 |
| | $ | 2,877 |
| | $ | 1,076 |
| | $ | 2,186 |
| | $ | 2,520 |
| | $ | 9 |
| | $ | 43 |
| Subtotal | $ | 921 | | | $ | 936 | | | $ | 205 | | | $ | 1,008 | | | $ | 1,050 | | | $ | 5 | | | $ | 16 | |
Total: | | | | | | | | | | | | | | Total: | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,017 |
| | $ | 1,327 |
| | $ | 341 |
| | $ | 1,724 |
| | $ | 2,133 |
| | $ | 195 |
| | $ | 240 |
| Commercial and industrial | $ | 15,419 | | | $ | 15,486 | | | $ | 83 | | | $ | 6,628 | | | $ | 3,213 | | | $ | 1 | | | $ | 8 | |
Paycheck Protection Program | | Paycheck Protection Program | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Commercial tax-exempt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Commercial tax-exempt | 3,929 | | | 3,929 | | | 0 | | | 982 | | | 393 | | | 0 | | | 0 | |
Commercial real estate | — |
| | — |
| | — |
| | — |
| | 55 |
| | — |
| | 256 |
| Commercial real estate | 5,977 | | | 6,150 | | | 49 | | | 5,995 | | | 4,572 | | | 8 | | | 25 | |
Construction and land | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Construction and land | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential | 16,938 |
| | 17,199 |
| | 712 |
| | 16,445 |
| | 14,338 |
| | 241 |
| | 494 |
| Residential | 16,656 | | | 16,916 | | | 56 | | | 16,710 | | | 16,505 | | | 89 | | | 355 | |
Home equity | 2,592 |
| | 3,274 |
| | 23 |
| | 2,635 |
| | 2,732 |
| | 13 |
| | 15 |
| |
Home equity (2) | | Home equity (2) | 650 | | | 650 | | | 17 | | | 651 | | | 1,352 | | | (1) | | | 13 | |
Consumer and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total | $ | 20,547 |
| | $ | 21,800 |
| | $ | 1,076 |
| | $ | 20,804 |
| | $ | 19,258 |
| | $ | 449 |
| | $ | 1,005 |
| Total | $ | 42,631 | | | $ | 43,131 | | | $ | 205 | | | $ | 30,966 | | | $ | 26,035 | | | $ | 97 | | | $ | 401 | |
_____________________
| |
(1) | Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, if applicable, which was applied to principal. |
(1)Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, if applicable, which was applied to principal.
(2)Negative quarterly income is due to reversal of income recognized in prior quarter.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | As of and for the three and nine months ended September 30, 2018 | | As of and for the three and nine months ended September 30, 2019 |
| Recorded Investment (1) | | Unpaid Principal Balance | | Related Allowance | | QTD Average Recorded Investment | | YTD Average Recorded Investment | | QTD Interest Income Recognized while Impaired | | YTD Interest Income Recognized while Impaired | | Recorded Investment (1) | | Unpaid Principal Balance | | Related Allowance | | QTD Average Recorded Investment | | YTD Average Recorded Investment | | QTD Interest Income Recognized while Impaired | | YTD Interest Income Recognized while Impaired |
| (In thousands) | | (In thousands) |
With no related allowance recorded: | | | | | | | | | | | | | | With no related allowance recorded: |
Commercial and industrial | $ | 1,150 |
| | $ | 2,083 |
| | n/a |
| | $ | 1,617 |
| | $ | 1,730 |
| | $ | 33 |
| | $ | 55 |
| Commercial and industrial | $ | 479 | | | $ | 788 | | | n/a | | $ | 1,233 | | | $ | 1,256 | | | $ | 192 | | | $ | 217 | |
Commercial tax-exempt | — |
| | — |
| | n/a |
| | — |
| | — |
| | — |
| | — |
| Commercial tax-exempt | 0 | | | 0 | | | n/a | | 0 | | | 0 | | | 0 | | | 0 | |
Commercial real estate | 1,625 |
| | 2,966 |
| | n/a |
| | 2,526 |
| | 2,439 |
| | 583 |
| | 633 |
| Commercial real estate | 0 | | | 0 | | | n/a | | 0 | | | 55 | | | 0 | | | 256 | |
Construction and land | — |
| | — |
| | n/a |
| | — |
| | 66 |
| | — |
| | 16 |
| Construction and land | 0 | | | 0 | | | n/a | | 0 | | | 0 | | | 0 | | | 0 | |
Residential | 7,097 |
| | 7,457 |
| | n/a |
| | 10,102 |
| | 10,002 |
| | 146 |
| | 335 |
| Residential | 14,879 | | | 15,140 | | | n/a | | 15,026 | | | 13,321 | | | 236 | | | 476 | |
Home equity | — |
| | — |
| | n/a |
| | — |
| | 1,056 |
| | — |
| | 24 |
| Home equity | 2,313 | | | 2,995 | | | n/a | | 2,359 | | | 2,106 | | | 12 | | | 13 | |
Consumer and other | — |
| | — |
| | n/a |
| | — |
| | — |
| | — |
| | — |
| Consumer and other | 0 | | | 0 | | | n/a | | 0 | | | 0 | | | 0 | | | 0 | |
Subtotal | $ | 9,872 |
| | $ | 12,506 |
| | n/a |
| | $ | 14,245 |
| | $ | 15,293 |
| | $ | 762 |
| | $ | 1,063 |
| Subtotal | $ | 17,671 | | | $ | 18,923 | | | n/a | | $ | 18,618 | | | $ | 16,738 | | | $ | 440 | | | $ | 962 | |
With an allowance recorded: | | | | | | | | | | | | | | With an allowance recorded: | | | | | | | | | | | | | |
Commercial and industrial | $ | 1,635 |
| | $ | 1,638 |
| | $ | 577 |
| | $ | 625 |
| | $ | 322 |
| | $ | 4 |
| | $ | 6 |
| Commercial and industrial | $ | 538 | | | $ | 539 | | | $ | 341 | | | $ | 491 | | | $ | 877 | | | $ | 3 | | | $ | 23 | |
Commercial tax-exempt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Commercial tax-exempt | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Commercial real estate | — |
| | — |
| | — |
| | 4,045 |
| | 5,314 |
| | 476 |
| | 704 |
| Commercial real estate | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Construction and land | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Construction and land | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential | 682 |
| | 681 |
| | 74 |
| | 734 |
| | 787 |
| | 5 |
| | 17 |
| Residential | 2,059 | | | 2,059 | | | 712 | | | 1,419 | | | 1,017 | | | 5 | | | 18 | |
Home equity | 1,769 |
| | 1,769 |
| | 596 |
| | 1,769 |
| | 729 |
| | 1 |
| | 1 |
| Home equity | 279 | | | 279 | | | 23 | | | 276 | | | 626 | | | 1 | | | 2 | |
Consumer and other | — |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | 3 |
| Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Subtotal | $ | 4,086 |
| | $ | 4,088 |
| | $ | 1,247 |
| | $ | 7,173 |
| | $ | 7,165 |
| | $ | 486 |
| | $ | 731 |
| Subtotal | $ | 2,876 | | | $ | 2,877 | | | $ | 1,076 | | | $ | 2,186 | | | $ | 2,520 | | | $ | 9 | | | $ | 43 | |
Total: | | | | | | | | | | | | | | Total: | | | | | | | | | | | | | |
Commercial and industrial | $ | 2,785 |
| | $ | 3,721 |
| | $ | 577 |
| | $ | 2,242 |
| | $ | 2,052 |
| | $ | 37 |
| | $ | 61 |
| Commercial and industrial | $ | 1,017 | | | $ | 1,327 | | | $ | 341 | | | $ | 1,724 | | | $ | 2,133 | | | $ | 195 | | | $ | 240 | |
Commercial tax-exempt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Commercial tax-exempt | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Commercial real estate | 1,625 |
| | 2,966 |
| | — |
| | 6,571 |
| | 7,753 |
| | 1,059 |
| | 1,337 |
| Commercial real estate | 0 | | | 0 | | | 0 | | | 0 | | | 55 | | | 0 | | | 256 | |
Construction and land | — |
| | — |
| | — |
| | — |
| | 66 |
| | — |
| | 16 |
| Construction and land | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential | 7,779 |
| | 8,138 |
| | 74 |
| | 10,836 |
| | 10,789 |
| | 151 |
| | 352 |
| Residential | 16,938 | | | 17,199 | | | 712 | | | 16,445 | | | 14,338 | | | 241 | | | 494 | |
Home equity | 1,769 |
| | 1,769 |
| | 596 |
| | 1,769 |
| | 1,785 |
| | 1 |
| | 25 |
| Home equity | 2,592 | | | 3,274 | | | 23 | | | 2,635 | | | 2,732 | | | 13 | | | 15 | |
Consumer and other | — |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | 3 |
| Consumer and other | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total | $ | 13,958 |
| | $ | 16,594 |
| | $ | 1,247 |
| | $ | 21,418 |
| | $ | 22,458 |
| | $ | 1,248 |
| | $ | 1,794 |
| Total | $ | 20,547 | | | $ | 21,800 | | | $ | 1,076 | | | $ | 20,804 | | | $ | 19,258 | | | $ | 449 | | | $ | 1,005 | |
_____________________
| |
(1) | Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, if applicable, which was applied to principal. |
(1)Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, if applicable, which was applied to principal.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | As of and for the year ended December 31, 2018 | | As of and for the year ended December 31, 2019 |
| Recorded Investment (1) | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized while Impaired | | Recorded Investment (1) | | Unpaid Principal Balance | | Related Allowance | | | Average Recorded Investment | | | Interest Income Recognized while Impaired |
| (In thousands) | | (In thousands) |
With no related allowance recorded: | | | | | | | | | | With no related allowance recorded: | | | | | |
Commercial and industrial | $ | 1,435 |
| | $ | 2,397 |
| | n/a |
| | $ | 1,614 |
| | $ | 69 |
| Commercial and industrial | $ | 470 | | | $ | 553 | | | n/a | | | $ | 1,062 | | | | $ | 268 | |
Commercial tax-exempt | — |
| | — |
| | n/a |
| | — |
| | — |
| Commercial tax-exempt | 0 | | | 0 | | | n/a | | | 0 | | | | 0 | |
Commercial real estate | 546 |
| | 900 |
| | n/a |
| | 2,002 |
| | 1,544 |
| Commercial real estate | 733 | | | 733 | | | n/a | | | 155 | | | | 262 | |
Construction and land | — |
| | — |
| | n/a |
| | 50 |
| | 16 |
| Construction and land | 0 | | | 0 | | | n/a | | | 0 | | | | 0 | |
Residential | 8,403 |
| | 8,764 |
| | n/a |
| | 9,638 |
| | 408 |
| Residential | 15,362 | | | 15,622 | | | n/a | | | 13,700 | | | | 636 | |
Home equity | 990 |
| | 990 |
| | n/a |
| | 1,041 |
| | 24 |
| Home equity | 1,557 | | | 2,119 | | | n/a | | | 2,095 | | | | 35 | |
Consumer and other | — |
| | — |
| | n/a |
| | — |
| | — |
| Consumer and other | 0 | | | 0 | | | n/a | | | 0 | | | | 0 | |
Subtotal | $ | 11,374 |
| | $ | 13,051 |
| | n/a |
| | $ | 14,345 |
| | $ | 2,061 |
| Subtotal | $ | 18,122 | | | $ | 19,027 | | | n/a | | | $ | 17,012 | | | | $ | 1,201 | |
With an allowance recorded: | | | | | | | | | | With an allowance recorded: | | | | | | | | | | | |
Commercial and industrial | $ | 1,770 |
| | $ | 1,972 |
| | $ | 598 |
| | $ | 631 |
| | $ | 15 |
| Commercial and industrial | $ | 254 | | | $ | 254 | | | $ | 146 | | | | $ | 736 | | | | $ | 33 | |
Commercial tax-exempt | — |
| | — |
| | — |
| | — |
| | — |
| Commercial tax-exempt | 0 | | | 0 | | | 0 | | | | 0 | | | | 0 | |
Commercial real estate | — |
| | — |
| | — |
| | 4,087 |
| | 705 |
| Commercial real estate | 0 | | | 0 | | | 0 | | | | 0 | | | | 0 | |
Construction and land | — |
| | — |
| | — |
| | — |
| | — |
| Construction and land | 0 | | | 0 | | | 0 | | | | 0 | | | | 0 | |
Residential | 780 |
| | 780 |
| | 75 |
| | 785 |
| | 22 |
| Residential | 538 | | | 538 | | | 67 | | | | 1,130 | | | | 23 | |
Home equity | 1,719 |
| | 1,719 |
| | 562 |
| | 959 |
| | 11 |
| Home equity | 273 | | | 273 | | | 22 | | | | 545 | | | | 4 | |
Consumer and other | — |
| | — |
| | — |
| | 10 |
| | 3 |
| Consumer and other | 0 | | | 0 | | | 0 | | | | 0 | | | | 0 | |
Subtotal | $ | 4,269 |
| | $ | 4,471 |
| | $ | 1,235 |
| | $ | 6,472 |
| | $ | 756 |
| Subtotal | $ | 1,065 | | | $ | 1,065 | | | $ | 235 | | | | $ | 2,411 | | | | $ | 60 | |
Total: | | | | | | | | | | Total: | | | | | | | | | | | |
Commercial and industrial | $ | 3,205 |
| | $ | 4,369 |
| | $ | 598 |
| | $ | 2,245 |
| | $ | 84 |
| Commercial and industrial | $ | 724 | | | $ | 807 | | | $ | 146 | | | | $ | 1,798 | | | | $ | 301 | |
Commercial tax-exempt | — |
| | — |
| | — |
| | — |
| | — |
| Commercial tax-exempt | 0 | | | 0 | | | 0 | | | | 0 | | | | 0 | |
Commercial real estate | 546 |
| | 900 |
| | — |
| | 6,089 |
| | 2,249 |
| Commercial real estate | 733 | | | 733 | | | 0 | | | | 155 | | | | 262 | |
Construction and land | — |
| | — |
| | — |
| | 50 |
| | 16 |
| Construction and land | 0 | | | 0 | | | 0 | | | | 0 | | | | 0 | |
Residential | 9,183 |
| | 9,544 |
| | 75 |
| | 10,423 |
| | 430 |
| Residential | 15,900 | | | 16,160 | | | 67 | | | | 14,830 | | | | 659 | |
Home equity | 2,709 |
| | 2,709 |
| | 562 |
| | 2,000 |
| | 35 |
| Home equity | 1,830 | | | 2,392 | | | 22 | | | | 2,640 | | | | 39 | |
Consumer and other | — |
| | — |
| | — |
| | 10 |
| | 3 |
| Consumer and other | 0 | | | 0 | | | 0 | | | | 0 | | | | 0 | |
Total | $ | 15,643 |
| | $ | 17,522 |
| | $ | 1,235 |
| | $ | 20,817 |
| | $ | 2,817 |
| Total | $ | 19,187 | | | $ | 20,092 | | | $ | 235 | | | | $ | 19,423 | | | | $ | 1,261 | |
_____________________
| |
(1) | Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, if applicable, which was applied to principal. |
(1)Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, if applicable, which was applied to principal.
When management determines that it is probable that the Bank will not collect all principal and interest on a loan in accordance with the original loan terms, the loan is designated as impaired.
On March 22, 2020, regulators issued an interagency statement encouraging financial institutions to work with borrowers affected by the COVID-19 pandemic. The interagency statement also provided additional information regarding loan modifications. The regulators indicated they will not criticize institutions for working with borrowers in a safe and sound manner and have indicated that related modifications will not automatically result in a TDR. The regulators also provided supervisory views that loans modified under this program would not be considered past due or nonaccrual.
The regulators view prudent loan modification programs offered to financial institution customers affected by the COVID-19 pandemic as positive and proactive actions that can manage adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk. The statement indicated that short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not TDRs.
Loans that are designated as impaired require an analysis to determine the amount of impairment, if any. Impairment would be indicated as a result of the carrying value of the loan exceeding either the estimated collateral value, less costs to sell, for collateral dependent loans or the net present value of the projected cash flow, discounted at the loan’s contractual effective interest rate, for loans not considered to be collateral dependent. Generally, shortfalls in the analysis on collateral dependent loans would result in the impairment amount being charged-off to the allowanceAllowance for loan losses. Shortfalls on cash flow dependent loans may be carried as specific allocations to the general reserve unless a known loss is determined to have occurred, in which case, such known loss is charged-off.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Loans in the held for sale category are carried at the lower of amortized cost or estimated fair value in the aggregate and are excluded from the allowanceAllowance for loan losses analysis.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
As of September 30, 2019,2020, the Bank has pledged $2.6$2.3 billion of loans in a blanket lien agreement with the FHLB. The Bank also has $437.2$360.5 million of loans pledged as collateral at the FRB for access to their discount window. As of December 31, 2018,2019, the Bank had pledged $2.6$2.5 billion of loans to the FHLB and $540.0$395.3 million of loans at the FRB.
The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. These loans are outside of the guidelines to not be considered a TDR by recent regulatory guidance. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Bank’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/or principal forgiveness. As of September 30, 20192020 and December 31, 2018,2019, TDRs totaled $9.5$14.5 million and $8.0$12.6 million, respectively. As of September 30, 2019, $6.92020, $7.8 million of the $9.5$14.5 million in TDRs were on accrual status. As of December 31, 2018, $3.82019, $7.1 million of the $8.0$12.6 million in TDRs were on accrual status.
Since all TDR loans are considered impaired loans, they are individually evaluated for impairment. The resulting impairment, if any, would have an impact on the allowanceAllowance for loan losses as a specific reserve or charge-off. If, prior to the classification as a TDR, the loan was not impaired, there would have been a general or allocated reserve on the particular loan. Therefore, depending uponPrior to the resultadoption of the impairment analysis, there could be an increaseASU 2016-13 on January 1, 2020, a general or decrease in the related allowance for loan losses.allocated reserve would have been applied. Many loans initially categorized as TDRs are already on nonaccrual status and are already considered impaired. Therefore, there is generally not a material change to the allowanceAllowance for loan losses when a nonaccruing loan is categorized as a TDR.
The following tables present the balance of TDRs that were restructured or defaulted during the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three months ended September 30, 2020 |
| Restructured Current Quarter | | TDRs that defaulted in the Current Quarter that were restructured in prior twelve months |
| # of Loans | | Pre- modification recorded investment | | Post- modification recorded investment | | # of Loans | | Post- modification recorded investment |
| (In thousands, except number of loans) |
Commercial and industrial | 0 | | | $ | 0 | | | $ | 0 | | | 1 | | | $ | 49 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Home equity | 0 | | | 0 | | | 0 | | | 1 | | | 251 | |
| | | | | | | | | |
Total | 0 | | | $ | 0 | | | $ | 0 | | | 2 | | | $ | 300 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the nine months ended September 30, 2020 |
| Restructured Year to Date | | TDRs that defaulted in the Year to Date that were restructured in prior twelve months |
| # of Loans | | Pre- modification recorded investment | | Post- modification recorded investment | | # of Loans | | Post- modification recorded investment |
| (In thousands, except number of loans) |
Commercial and industrial (1) | 1 | | | $ | 50 | | | $ | 50 | | | 1 | | | $ | 49 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Residential (2) | 1 | | | 2,373 | | | 2,373 | | | 1 | | | 1,562 | |
Home equity | 0 | | | 0 | | | 0 | | | 1 | | | 251 | |
| | | | | | | | | |
Total | 2 | | | $ | 2,423 | | | $ | 2,423 | | | 3 | | | $ | 1,862 | |
_____________________
(1)Represents the following type of concession: extension of maturity and reduction in interest rate.
(2)Represents the following type of concession: payment deferral.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the nine months ended September 30, 2019 |
| Restructured Year to Date | | TDRs that defaulted in the Year to Date that were restructured in prior twelve months |
| # of Loans | | Pre- modification recorded investment | | Post- modification recorded investment | | # of Loans | | Post- modification recorded investment |
| (In thousands, except number of loans) |
Commercial and industrial | 1 | | | $ | 179 | | | $ | 179 | | | 0 | | | $ | 0 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Residential | 2 | | | 3,222 | | | 3,227 | | | 0 | | | 0 | |
Home equity | 1 | | | 274 | | | 283 | | | 0 | | | 0 | |
| | | | | | | | | |
Total | 4 | | | $ | 3,675 | | | $ | 3,689 | | | 0 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | | |
| As of and for the nine months ended September 30, 2019 |
| Restructured Year to Date | | TDRs that defaulted in the Year to Date that were restructured in prior twelve months |
| # of Loans | | Pre- modification recorded investment | | Post- modification recorded investment | | # of Loans | | Post- modification recorded investment |
| (In thousands, except number of loans) |
Commercial and industrial | 1 |
| | $ | 179 |
| | $ | 179 |
| | — |
| | $ | — |
|
Commercial tax exempt | — |
| | — |
| | — |
| | — |
| | — |
|
Commercial real estate | — |
| | — |
| | — |
| | — |
| | — |
|
Construction and land | — |
| | — |
| | — |
| | — |
| | — |
|
Residential (1) | 2 |
| | 3,222 |
| | 3,227 |
| | — |
| | — |
|
Home equity (1) | 1 |
| | 274 |
| | 283 |
| | — |
| | — |
|
Consumer and other | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 4 |
| | $ | 3,675 |
| | $ | 3,689 |
| | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three and nine months ended September 30, 2019 |
| Extension of term | | Temporary rate reduction | | Payment deferral | | Combination of concessions (1) | | Total concessions |
| # of Loans | | Post- modifi- cation recorded invest- ment | | # of Loans | | Post- modifi- cation recorded invest- ment | | # of Loans | | Post- modifi- cation recorded invest- ment | | # of Loans | | Post- modifi- cation recorded invest- ment | | # of Loans | | Post- modifi- cation recorded invest- ment |
| (In thousands, except number of loans) |
Commercial and industrial | 1 |
| | $ | 179 |
| | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
| | 1 |
| | $ | 179 |
|
Commercial real estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Construction and land | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential | — |
| | — |
| | 2 |
| | 3,227 |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 3,227 |
|
Home equity | — |
| | — |
| | 1 |
| | 283 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 283 |
|
Consumer and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the nine months ended September 30, 2019 |
| Extension of term | | Temporary rate reduction | | Payment deferral | | Combination of concessions | | Total concessions |
| # of Loans | | Post- modifi- cation recorded invest- ment | | # of Loans | | Post- modifi- cation recorded invest- ment | | # of Loans | | Post- modifi- cation recorded invest- ment | | # of Loans | | Post- modifi- cation recorded invest- ment | | # of Loans | | Post- modifi- cation recorded invest- ment |
| (In thousands, except number of loans) |
Commercial and industrial | 1 | | | $ | 179 | | | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | 1 | | | $ | 179 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Residential | 0 | | | 0 | | | 2 | | | 3,227 | | | 0 | | | 0 | | | 0 | | | 0 | | | 2 | | | 3,227 | |
Home equity | 0 | | | 0 | | | 1 | | | 283 | | | 0 | | | 0 | | | 0 | | | 0 | | | 1 | | | 283 | |
| | | | | | | | | | | | | | | | | | | |
| 1 | | | $ | 179 | | | 3 | | | $ | 3,510 | | | 0 | | | $ | 0 | | | 0 | | | $ | 0 | | | 4 | | | $ | 3,689 | |
There were no loans that were restructured or defaulted during the three months ended September 30, 2019.
In response to the COVID-19 pandemic, the Bank initiated a mortgage deferment program under which principal and interest payments on qualifying loans are generally deferred for initially three months and the loan term is extended three months; if requested, the loan may be deferred for a subsequent three months. Loans that are deferred under the program are not considered TDRs or past due based on current regulatory guidance. In total, approximately 350 Residential and Home equity loans totaling approximately $220.0 million have been processed under the program. As of September 30, 2020, approximately 140 loans totaling approximately $100.0 million remain in deferral under the program.
Additionally, in response to the COVID-19 pandemic, the Bank initiated a program where it offered qualified Commercial and industrial borrowers principal payment deferrals for six months, with the deferred principal added to the last payment. In total, approximately 90 Commercial and industrial loans totaling approximately $125.0 million have been processed under the program. As of September 30, 2020, approximately 30 loans totaling approximately $50.0 million remain in deferral under the program.
Loan participations serviced for others and loans serviced for others are not included in the Company’s total loans.
The following table presents a summary of the loan participations serviced for others and loans serviced for others based on class of receivable as of the dates indicated:
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (In thousands) |
Commercial and industrial | $ | 14,358 |
| | $ | 8,024 |
|
Commercial tax-exempt | 18,711 |
| | 19,105 |
|
Commercial real estate | 34,816 |
| | 60,688 |
|
Construction and land | 23,133 |
| | 39,966 |
|
Total loan participations serviced for others | $ | 91,018 |
| | $ | 127,783 |
|
| | | |
Residential | $ | 119,389 |
| | $ | 33,168 |
|
Total loans serviced for others | $ | 119,389 |
| | $ | 33,168 |
|
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (In thousands) |
Commercial and industrial | $ | 42,759 | | | $ | 14,533 | |
| | | |
Commercial tax-exempt | 17,724 | | | 18,101 | |
Commercial real estate | 130,164 | | | 121,929 | |
Construction and land | 83,059 | | | 75,451 | |
Total loan participations serviced for others | $ | 273,706 | | | $ | 230,014 | |
| | | |
Residential | $ | 185,638 | | | $ | 204,696 | |
Total loans serviced for others | $ | 185,638 | | | $ | 204,696 | |
Total loans include deferred loan origination (fees)/costs, net, of $8.4$(1.1) million and $8.5$8.1 million as of September 30, 20192020 and December 31, 2018,2019, respectively. The change in the balance of loan origination (fees)/costs, net, from December 31, 2019 to September 30, 2020 was primarily driven by the addition of $10.9 million of PPP loan origination fees in the second quarter of 2020.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
7. Allowance for Loan Losses
The Allowance for loan losses is established based upon the Company's current estimate of expected lifetime credit losses on loans measured at amortized cost. Loan losses are charged against the allowance when management's assessments confirm that the Company will not collect the full amortized cost basis of a loan. Subsequent recoveries, if any, are credited to the allowance when collected.
Under the CECL methodology, which the Company adopted on January 1, 2020, the Company estimates credit losses on a collective basis per segment for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address risks not incorporated in the quantitative model output. The quantitative model utilizes a factor-based approach to estimate expected credit losses using probability of default and loss given default, which are derived from a selected peer group's historical default and loss experience. The model estimates expected credit losses using loan level data over the contractual life of the exposure, considering the effect of estimated prepayments and curtailments on the remaining portfolio segment balance over the life of the portfolio. Reasonable and supportable economic forecasts are incorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the historical long-run average of the macroeconomic variables. Management has determined a reasonable and supportable period of two years and a straight line reversion period of twelve months to be appropriate for purposes of estimating expected credit losses. Management also applies a weight to the various forecasts chosen to determine the reasonable and supportable economic forecasts. The Company's qualitative assessment is based on factors outlined in regulatory guidance and include the following:
• Volume and trend of past-due, nonaccrual, and adversely-graded loans
• Trends in volume and terms of loans
• Concentration risk
• Experience and depth of management
• Risk surrounding lending policy and underwriting standards
• Risk surrounding loan review
• Banking industry conditions, other external factors, and inherent model risk
Loans that no longer share similar risk characteristics with any pools of assets are subject to individual assessment and are removed from the collectively assessed pools to avoid double counting. For the loans that will be individually assessed, the Company will use either a discounted cash flow approach or a fair value of collateral approach. The latter approach will be used for loans deemed to be collateral dependent or when foreclosure is probable.
Accrued interest receivable amounts are excluded from balances of loans held at amortized cost and are included within Accrued interest receivable on the Consolidated Balance Sheets. Management has elected not to measure an allowance for credit losses on these amounts as the Company employs a timely write-off policy as generally any loan over 89 days past-due is put on non-accrual status and any associated accrued interest is reversed.
For periods disclosed prior to the adoption of ASU 2016-13 as of January 1, 2020, the Allowance for loan losses was determined under the incurred loss model. Refer to "Note 1: Basis of Presentation and Summary of Significant Account Policies" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the methodology.
The Allowance for loan losses, which is reported as a reduction of outstanding loan balances, totaled $75.4$84.6 million and $75.3$72.0 million as of September 30, 20192020 and December 31, 2018,2019, respectively.
The following tables present a summary of the changesBeginning in the first quarter of 2020, the Company made a change to the loan portfolio segmentation as it relates to the Allowance for loan losses in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given their different underlying risk characteristics. For the periods ended September 30, 2019, the Provision/(credit) for loan losses and related allowance balance in the Allowance for loan losses for tax-exempt Commercial and industrial loans is included with Commercial and industrial loans. Beginning in the second quarter of 2020, the Company made a change to the loan portfolio segmentation as it relates to the Allowance for loan losses, adding the segment Paycheck Protection Program. For the periods indicated:ended September 30, 2019, there were no loans in this segment as the SBA initiated the program in the second quarter of 2020 in response to the COVID-19 pandemic.
|
| | | | | | | | | | | | | | | |
| As of and for the three months ended September 30, | | As of and for the nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands) |
Allowance for loan losses, beginning of period: | | | | | | | |
Commercial and industrial | $ | 16,082 |
| | $ | 12,381 |
| | $ | 15,912 |
| | $ | 11,735 |
|
Commercial real estate | 43,741 |
| | 45,183 |
| | 41,934 |
| | 46,820 |
|
Construction and land | 4,780 |
| | 4,613 |
| | 6,022 |
| | 4,949 |
|
Residential | 9,555 |
| | 9,804 |
| | 10,026 |
| | 9,773 |
|
Home equity | 805 |
| | 1,336 |
| | 1,284 |
| | 835 |
|
Consumer and other | 104 |
| | 147 |
| | 134 |
| | 630 |
|
Total allowance for loan losses, beginning of period | 75,067 |
| | 73,464 |
| | 75,312 |
| | 74,742 |
|
Loans charged-off: | | | | | | | |
Commercial and industrial | (180 | ) | | — |
| | (375 | ) | | (339 | ) |
Commercial real estate | — |
| | — |
| | — |
| | (135 | ) |
Construction and land | — |
| | — |
| | — |
| | — |
|
Residential | — |
| | — |
| | — |
| | (16 | ) |
Home equity | — |
| | — |
| | (562 | ) | | — |
|
Consumer and other | (5 | ) | | — |
| | (7 | ) | | (39 | ) |
Total charge-offs | (185 | ) | | — |
| | (944 | ) | | (529 | ) |
| | | | | | | |
Recoveries on loans previously charged-off: | | | | | | | |
Commercial and industrial | 275 |
| | 153 |
| | 503 |
| | 387 |
|
Commercial real estate | 27 |
| | 820 |
| | 246 |
| | 995 |
|
Construction and land | — |
| | — |
| | — |
| | — |
|
Residential | — |
| | — |
| | 100 |
| | 27 |
|
Home equity | 6 |
| | — |
| | 6 |
| | 1 |
|
Consumer and other | 2 |
| | 12 |
| | 32 |
| | 168 |
|
Total recoveries | 310 |
| | 985 |
| | 887 |
| | 1,578 |
|
Provision/ (credit) for loan losses: | | | | | | | |
Commercial and industrial | 361 |
| | 1,921 |
| | 498 |
| | 2,672 |
|
Commercial real estate | (762 | ) | | (3,179 | ) | | 826 |
| | (4,856 | ) |
Construction and land | 6 |
| | 172 |
| | (1,236 | ) | | (164 | ) |
Residential | 617 |
| | 144 |
| | 46 |
| | 164 |
|
Home equity | (57 | ) | | 6 |
| | 26 |
| | 506 |
|
Consumer and other | 2 |
| | (13 | ) | | (56 | ) | | (613 | ) |
Total provision/(credit) for loan losses | 167 |
| | (949 | ) | | 104 |
| | (2,291 | ) |
32
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents a summary of the changes in the Allowance for loan losses for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three months ended September 30, | | As of and for the nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) |
Allowance for loan losses, beginning of period: | | | | | | | |
Commercial and industrial | $ | 9,559 | | | $ | 16,082 | | | $ | 10,048 | | | $ | 15,912 | |
Paycheck Protection Program | 190 | | | n/a | | 0 | | | n/a |
Commercial tax-exempt | 2,486 | | | n/a | | 6,016 | | | n/a |
Commercial real estate | 47,675 | | | 43,741 | | | 40,765 | | | 41,934 | |
Construction and land | 9,524 | | | 4,780 | | | 5,119 | | | 6,022 | |
Residential | 17,765 | | | 9,555 | | | 8,857 | | | 10,026 | |
Home equity | 439 | | | 805 | | | 778 | | | 1,284 | |
Consumer and other | 1,686 | | | 104 | | | 399 | | | 134 | |
Total allowance for loan losses, beginning of period | $ | 89,324 | | | $ | 75,067 | | | $ | 71,982 | | | $ | 75,312 | |
| | | | | | | |
| | | | | | | |
Impact of adopting ASU 2016-13: | | | | | | | |
Commercial and industrial | n/a | | n/a | | $ | (565) | | | n/a |
Paycheck Protection Program | n/a | | n/a | | 0 | | | n/a |
Commercial tax-exempt | n/a | | n/a | | (4,409) | | | n/a |
Commercial real estate | n/a | | n/a | | (14,455) | | | n/a |
Construction and land | n/a | | n/a | | (2,158) | | | n/a |
Residential | n/a | | n/a | | 685 | | | n/a |
Home equity | n/a | | n/a | | (535) | | | n/a |
Consumer and other | n/a | | n/a | | 1,052 | | | n/a |
Total impact of adopting ASU 2016-13 | n/a | | n/a | | $ | (20,385) | | | n/a |
| | | | | | | |
Allowance for loan losses, beginning of period, net | $ | 89,324 | | | $ | 75,067 | | | $ | 51,597 | | | $ | 75,312 | |
Provision/(credit) for loan losses: | | | | | | | |
Commercial and industrial | $ | (10) | | | $ | 361 | | | $ | 876 | | | $ | 498 | |
Paycheck Protection Program | 0 | | | n/a | | 190 | | | n/a |
Commercial tax-exempt | 398 | | | n/a | | 1,277 | | | n/a |
Commercial real estate | (374) | | | (762) | | | 20,991 | | | 826 | |
Construction and land | (1,166) | | | 6 | | | 5,397 | | | (1,236) | |
Residential | (3,026) | | | 617 | | | 5,197 | | | 46 | |
Home equity | 11 | | | (57) | | | 1,232 | | | 26 | |
Consumer and other | (402) | | | 2 | | | (163) | | | (56) | |
Total provision/(credit) for loan losses | $ | (4,569) | | | $ | 167 | | | $ | 34,997 | | | $ | 104 | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| As of and for the three months ended September 30, | | As of and for the nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands) |
Allowance for loan losses, end of period: | | | | | | | |
Commercial and industrial | 16,538 |
| | 14,455 |
| | 16,538 |
| | 14,455 |
|
Commercial real estate | 43,006 |
| | 42,824 |
| | 43,006 |
| | 42,824 |
|
Construction and land | 4,786 |
| | 4,785 |
| | 4,786 |
| | 4,785 |
|
Residential | 10,172 |
| | 9,948 |
| | 10,172 |
| | 9,948 |
|
Home equity | 754 |
| | 1,342 |
| | 754 |
| | 1,342 |
|
Consumer and other | 103 |
| | 146 |
| | 103 |
| | 146 |
|
Total allowance for loan losses, end of period | $ | 75,359 |
| | $ | 73,500 |
| | $ | 75,359 |
| | $ | 73,500 |
|
33
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three months ended September 30, | | As of and for the nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) |
Loans charged -off: | | | | | | | |
Commercial and industrial | $ | (172) | | | $ | (180) | | | $ | (1,079) | | | $ | (375) | |
Paycheck Protection Program | 0 | | | n/a | | 0 | | | n/a |
Commercial tax-exempt | 0 | | | n/a | | 0 | | | n/a |
Commercial real estate | 0 | | | 0 | | | 0 | | | 0 | |
Construction and land | 0 | | | 0 | | | 0 | | | 0 | |
Residential | 0 | | | 0 | | | 0 | | | 0 | |
Home equity | 0 | | | 0 | | | (1,157) | | | (562) | |
Consumer and other | (73) | | | (5) | | | (83) | | | (7) | |
Total charge-offs | $ | (245) | | | $ | (185) | | | $ | (2,319) | | | $ | (944) | |
| | | | | | | |
Recoveries on loans previously charged-off: | | | | | | | |
Commercial and industrial | $ | 36 | | | $ | 275 | | | $ | 133 | | | $ | 503 | |
Paycheck Protection Program | 0 | | | n/a | | 0 | | | n/a |
Commercial tax-exempt | 0 | | | n/a | | 0 | | | n/a |
Commercial real estate | 0 | | | 27 | | | 0 | | | 246 | |
Construction and land | 0 | | | 0 | | | 0 | | | 0 | |
Residential | 0 | | | 0 | | | 0 | | | 100 | |
Home equity | 0 | | | 6 | | | 132 | | | 6 | |
Consumer and other | 5 | | | 2 | | | 11 | | | 32 | |
Total recoveries | $ | 41 | | | $ | 310 | | | $ | 276 | | | $ | 887 | |
| | | | | | | |
Allowance for loan losses, end of period: | | | | | | | |
Commercial and industrial | $ | 9,413 | | | $ | 16,538 | | | $ | 9,413 | | | $ | 16,538 | |
Paycheck Protection Program | 190 | | | n/a | | 190 | | | n/a |
Commercial tax-exempt | 2,884 | | | n/a | | 2,884 | | | n/a |
Commercial real estate | 47,301 | | | 43,006 | | | 47,301 | | | 43,006 | |
Construction and land | 8,358 | | | 4,786 | | | 8,358 | | | 4,786 | |
Residential | 14,739 | | | 10,172 | | | 14,739 | | | 10,172 | |
Home equity | 450 | | | 754 | | | 450 | | | 754 | |
Consumer and other | 1,216 | | | 103 | | | 1,216 | | | 103 | |
Total allowance for loan losses, end of period | $ | 84,551 | | | $ | 75,359 | | | $ | 84,551 | | | $ | 75,359 | |
The balance of the Allowance for loan losses of $84.6 million as of September 30, 2020 represents an increase of $12.6 million from December 31, 2019. During the three and nine months ended September 30, 2020, the Company recognized a Provision credit of $4.6 million and a Provision expense of $35.0 million, respectively. The decrease in the Allowance for loan losses for the three months ended September 30, 2020 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter, as well as the net impact of the change in the composition and volume of the loan portfolio. These improvements were partially offset by the net impact in the changes of the qualitative factors, and a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts, including consideration for the significant uncertainty related to the duration and severity of economic impacts from the COVID-19 pandemic. The increase in Allowance for loan losses for the nine months ended September 30, 2020 was primarily driven by the change in allowance methodology from the incurred loss model to the current expected credit loss model, as well as the current reasonable and supportable economic forecast deterioration as a result of the COVID-19 pandemic, and the net change in qualitative factors to account for risks and assumptions related to our loan portfolio not incorporated in the forecasts.
The balance of reserve for unfunded loan commitments of $8.9 million as of September 30, 2020 represents an increase of $7.8 million from December 31, 2019. The change was driven by an increase in the reserve ratios as a result of the current reasonable and supportable economic forecasts due to the COVID-19 pandemic as well as an increase in the balance of loan commitments. Changes in the balance of reserve for unfunded loan commitments are recognized as Other expense within Total operating expense.
Upon the adoption of ASU 2016-13 on January 1, 2020, the Company recognized a decrease in the Allowance for loan losses of $20.4 million. The adoption amount was driven primarily by the portfolio composition, the short-term nature of many commercial loans, estimated prepayments and curtailments, a change to the loan portfolio segmentation in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given the different underlying risk characteristics, and reasonable and supportable economic forecasts at the time of adoption.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Upon the adoption of ASU 2016-13 on January 1, 2020, the Company recognized an increase in the reserve of $1.4 million in the unfunded loan commitments. The net, after-tax impact of the $20.4 million decrease in the Allowance for loan losses and the $1.4 million increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million.
The Allowance for loan losses is an estimate of the inherent risk of loss in the loan portfolio as of the consolidated balance sheet dates. Management estimates the level of the allowance based on all relevant information available. Changes to the required level in the allowance result in either a provision for loan loss expense, if an increase is required, or a credit to the provision, if a decrease is required. Loan losses are charged to the allowance when available information confirms that specific loans, or portions thereof, are uncollectible. Recoveries on loans previously charged-off are credited to the allowance when received in cash or when the Bank takes possession of other assets.
The provision/ (credit) for loan losses and related allowance balance in the allowance for loan losses for tax-exempt commercial and industrial loans is included with commercial and industrial loans. The provision/ (credit) for loan losses and related allowance balance in the allowance for loan losses for tax-exempt commercial real estate loans is included with commercial real estate loans. There were no charge-offs or recoveries, for any period presented, for both commercial and industrial and commercial real estate tax-exempt loans.
The following tables present the Company’s allowanceAllowance for loan losses and loan portfolio as of September 30, 20192020 and December 31, 20182019 by portfolio segment, disaggregated by method of impairment analysis. The Company had 0 loans acquired with deteriorated credit quality as of September 30, 20192020 or December 31, 2018.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 |
| Individually Evaluated for Impairment | | Collectively Evaluated for Impairment | | Total |
| Recorded investment (loan balance) | | Allowance for loan losses | | Recorded investment (loan balance) | | Allowance for loan losses | | Recorded investment (loan balance) | | Allowance for loan losses |
| (In thousands) |
Commercial and industrial | $ | 15,419 | | | $ | 83 | | | $ | 567,726 | | | $ | 9,330 | | | $ | 583,145 | | | $ | 9,413 | |
Paycheck Protection Program | 0 | | | 0 | | | 371,496 | | | 190 | | | 371,496 | | | 190 | |
Commercial tax-exempt | 3,929 | | | 0 | | | 468,413 | | | 2,884 | | | 472,342 | | | 2,884 | |
Commercial real estate | 5,977 | | | 49 | | | 2,653,913 | | | 47,252 | | | 2,659,890 | | | 47,301 | |
Construction and land | 0 | | | 0 | | | 211,697 | | | 8,358 | | | 211,697 | | | 8,358 | |
Residential | 16,656 | | | 56 | | | 2,712,508 | | | 14,683 | | | 2,729,164 | | | 14,739 | |
Home equity | 650 | | | 17 | | | 81,147 | | | 433 | | | 81,797 | | | 450 | |
Consumer and other | 0 | | | 0 | | | 113,038 | | | 1,216 | | | 113,038 | | | 1,216 | |
Total | $ | 42,631 | | | $ | 205 | | | $ | 7,179,938 | | | $ | 84,346 | | | $ | 7,222,569 | | | $ | 84,551 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Individually Evaluated for Impairment | | Collectively Evaluated for Impairment | | Total |
| Recorded investment (loan balance) | | Allowance for loan losses | | Recorded investment (loan balance) | | Allowance for loan losses | | Recorded investment (loan balance) | | Allowance for loan losses |
| (In thousands) |
Commercial and industrial | $ | 724 | | | $ | 146 | | | $ | 1,141,237 | | | $ | 15,918 | | | $ | 1,141,961 | | | $ | 16,064 | |
| | | | | | | | | | | |
Commercial real estate | 733 | | | 0 | | | 2,550,541 | | | 40,765 | | | 2,551,274 | | | 40,765 | |
Construction and land | 0 | | | 0 | | | 225,983 | | | 5,119 | | | 225,983 | | | 5,119 | |
Residential | 15,900 | | | 67 | | | 2,823,255 | | | 8,790 | | | 2,839,155 | | | 8,857 | |
Home equity | 1,830 | | | 22 | | | 81,827 | | | 756 | | | 83,657 | | | 778 | |
Consumer and other | 0 | | | 0 | | | 134,674 | | | 399 | | | 134,674 | | | 399 | |
Total | $ | 19,187 | | | $ | 235 | | | $ | 6,957,517 | | | $ | 71,747 | | | $ | 6,976,704 | | | $ | 71,982 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 |
| Individually Evaluated for Impairment | | Collectively Evaluated for Impairment | | Total |
| Recorded investment (loan balance) | | Allowance for loan losses | | Recorded investment (loan balance) | | Allowance for loan losses | | Recorded investment (loan balance) | | Allowance for loan losses |
| (In thousands) |
Commercial and industrial | $ | 1,017 |
| | $ | 341 |
| | $ | 1,142,500 |
| | $ | 16,197 |
| | $ | 1,143,517 |
| | $ | 16,538 |
|
Commercial real estate | — |
| | — |
| | 2,533,346 |
| | 43,006 |
| | 2,533,346 |
| | 43,006 |
|
Construction and land | — |
| | — |
| | 209,741 |
| | 4,786 |
| | 209,741 |
| | 4,786 |
|
Residential | 16,938 |
| | 712 |
| | 2,947,104 |
| | 9,460 |
| | 2,964,042 |
| | 10,172 |
|
Home equity | 2,592 |
| | 23 |
| | 81,840 |
| | 731 |
| | 84,432 |
| | 754 |
|
Consumer and other | — |
| | — |
| | 132,073 |
| | 103 |
| | 132,073 |
| | 103 |
|
Total | $ | 20,547 |
| | $ | 1,076 |
| | $ | 7,046,604 |
| | $ | 74,283 |
| | $ | 7,067,151 |
| | $ | 75,359 |
|
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Individually Evaluated for Impairment | | Collectively Evaluated for Impairment | | Total |
| Recorded investment (loan balance) | | Allowance for loan losses | | Recorded investment (loan balance) | | Allowance for loan losses | | Recorded investment (loan balance) | | Allowance for loan losses |
| (In thousands) |
Commercial and industrial | $ | 3,205 |
| | $ | 598 |
| | $ | 1,071,503 |
| | $ | 15,314 |
| | $ | 1,074,708 |
| | $ | 15,912 |
|
Commercial real estate | 546 |
| | — |
| | 2,395,146 |
| | 41,934 |
| | 2,395,692 |
| | 41,934 |
|
Construction and land | — |
| | — |
| | 240,306 |
| | 6,022 |
| | 240,306 |
| | 6,022 |
|
Residential | 9,183 |
| | 75 |
| | 2,939,790 |
| | 9,951 |
| | 2,948,973 |
| | 10,026 |
|
Home equity | 2,709 |
| | 562 |
| | 87,712 |
| | 722 |
| | 90,421 |
| | 1,284 |
|
Consumer and other | — |
| | — |
| | 143,058 |
| | 134 |
| | 143,058 |
| | 134 |
|
Total | $ | 15,643 |
| | $ | 1,235 |
| | $ | 6,877,515 |
| | $ | 74,077 |
| | $ | 6,893,158 |
| | $ | 75,312 |
|
8. Derivatives and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and, to a lesser extent, the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are generally determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain loans, deposits, and borrowings. As a service to its customers, the Company may utilize derivative instruments including customer foreign exchange forward contracts to manage its foreign exchange risk, if any.
The following table presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated balance sheetsConsolidated Balance Sheets as of September 30, 20192020 and December 31, 2018:2019:
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| Asset derivatives | | Liability derivatives | | Asset derivatives | | Liability derivatives | | Asset derivatives | | Liability derivatives | | Asset derivatives | | Liability derivatives |
| Balance sheet location | | Fair value (1) | | Balance sheet location | | Fair value (1) | | Balance sheet location | | Fair value (1) | | Balance sheet location | | Fair value (1) | | Balance sheet location | | Fair value (1) | | Balance sheet location | | Fair value (1) | | Balance sheet location | | Fair value (1) | | Balance sheet location | | Fair value (1) |
| (In thousands) | | (In thousands) |
Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: | Derivatives designated as hedging instruments: |
Interest rate swaps | Other assets | | $ | — |
| | Other liabilities | | $ | — |
| | Other assets | | $ | 553 |
| | Other liabilities | | $ | — |
| Interest rate swaps | Other assets | | $ | 0 | | | Other liabilities | | $ | 272 | | | Other assets | | $ | 0 | | | Other liabilities | | $ | 0 | |
Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: | Derivatives not designated as hedging instruments: |
Interest rate swaps | Other assets | | 47,851 |
| | Other liabilities | | 48,891 |
| | Other assets | | 21,889 |
| | Other liabilities | | 22,385 |
| |
Interest rate customer swaps | | Interest rate customer swaps | Other assets | | 91,399 | | | Other liabilities | | 92,758 | | | Other assets | | 36,089 | | | Other liabilities | | 36,580 | |
| Risk participation agreements | Other assets | | 74 |
| | Other liabilities | | 344 |
| | Other assets | | 2 |
| | Other liabilities | | 152 |
| Risk participation agreements | Other assets | | 64 | | | Other liabilities | | 444 | | | Other assets | | 10 | | | Other liabilities | | 242 | |
Total | | $ | 47,925 |
| | $ | 49,235 |
| | $ | 22,444 |
| | $ | 22,537 |
| Total | | $ | 91,463 | | | $ | 93,474 | | | $ | 36,099 | | | $ | 36,822 | |
_____________________
| |
(1) | For additional details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 5: Fair Value Measurements”. |
(1)For additional details, see Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 5: Fair Value Measurements.”
The following table presents the effect of the Company’s derivative financial instruments on Accumulated other comprehensive income for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in cash flow hedging relationships | | Amount of gain or (loss) recognized in OCI on derivatives | | Location of gain or (loss) reclassified from accumulated OCI into income | | Amount of gain or (loss) reclassified from accumulated OCI into income |
| Three months ended September 30, | | | Three months ended September 30, |
| 2020 | | 2019 | | | 2020 | | 2019 |
| | (In thousands) | | | | (In thousands) |
Interest rate swaps | | $ | 285 | | | $ | 1 | | | Interest income/(expense) | | $ | 284 | | | $ | 6 | |
Total | | $ | 285 | | | $ | 1 | | | | | $ | 284 | | | $ | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives in cash flow hedging relationships | | Amount of gain or (loss) recognized in OCI on derivatives | | Location of gain or (loss) reclassified from accumulated OCI into income | | Amount of gain or (loss) reclassified from accumulated OCI into income |
| Nine months ended September 30, | | | Nine months ended September 30, |
| 2020 | | 2019 | | | 2020 | | 2019 |
| | (In thousands) | | | | (In thousands) |
Interest rate swaps | | $ | (141) | | | $ | (46) | | | Interest income/(expense) | | $ | 132 | | | $ | 508 | |
Total | | $ | (141) | | | $ | (46) | | | | | $ | 132 | | | $ | 508 | |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents the effect of the Company’s derivative financial instruments on accumulated other comprehensive income for the three and nine months ended September 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | | | | |
Derivatives in cash flow hedging relationships | | Amount of gain or (loss) recognized in OCI on derivatives | | Location of gain or (loss) reclassified from accumulated OCI into income | | Amount of gain or (loss) reclassified from accumulated OCI into income |
| Three months ended September 30, | | | Three months ended September 30, |
| 2019 | | 2018 | | | 2019 | | 2018 |
| | (In thousands) | | | | (In thousands) |
Interest rate swaps | | $ | 1 |
| | $ | (193 | ) | | Interest expense | | $ | 6 |
| | $ | 101 |
|
Total | | $ | 1 |
| | $ | (193 | ) | | | | $ | 6 |
| | $ | 101 |
|
|
| | | | | | | | | | | | | | | | | | |
Derivatives in cash flow hedging relationships | | Amount of gain or (loss) recognized in OCI on derivatives (1) | | Location of gain or (loss) reclassified from accumulated OCI into income | | Amount of gain or (loss) reclassified from accumulated OCI into income |
| Nine months ended September 30, | | | Nine months ended September 30, |
| 2019 | | 2018 | | | 2019 | | 2018 |
| | (In thousands) | | | | (In thousands) |
Interest rate swaps | | $ | (46 | ) | | $ | 818 |
| | Interest expense | | $ | 508 |
| | $ | 385 |
|
Total | | $ | (46 | ) | | $ | 818 |
| | | | $ | 508 |
| | $ | 385 |
|
____________________
| |
(1) | The guidance in ASU 2017-12 requires that amounts in accumulated other comprehensive income that are included in the assessment of effectiveness should be reclassified into earnings in the same period in which the hedged forecasted transactions impact earnings. Transition guidance for this ASU further states that upon adoption, previously recorded cumulative ineffectiveness for cash flow hedges existing at the adoption date be eliminated by means of a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to the opening balance of retained earnings as of the initial application date. There was a $5 thousand reclassification related to the adoption of ASU 2017-12 effective January 1, 2018. |
The following table presents the effect of the Company’s derivative financial instruments in the Consolidated StatementStatements of Operations for the three and nine months ended September 30, 20192020 and 2018:2019:
|
| | | | | | | | | | | | | | | | |
| Location of gain or (loss) reclassified from accumulated OCI into income | Amount of gain or (loss) recognized in income on cash flow hedging relationships | | Amount of gain or (loss) recognized in income on cash flow hedging relationships |
Three months ended September 30, | | Nine months ended September 30, |
2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
Total amounts of income and (expense) line items presented in the statement of operations in which the effects of fair value or cash flow hedges are recorded | Interest expense | $ | 6 |
| | $ | 101 |
| | $ | 508 |
| | $ | 385 |
|
The effects of cash flow hedging: | | | | | | | | |
Gain or (loss) on cash flow hedging relationships in ASC 815 | | | | | | | | |
Interest contracts - amount of gain or (loss) reclassified from accumulated other comprehensive income into income | Interest expense | $ | 6 |
| | $ | 101 |
| | $ | 508 |
| | $ | 385 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location of gain or (loss) reclassified from accumulated OCI into income | Amount of gain or (loss) recognized in income on cash flow hedging relationships | | Amount of gain or (loss) recognized in income on cash flow hedging relationships |
Three months ended September 30, | | Nine months ended September 30, |
2020 | | 2019 | | 2020 | | 2019 |
| | (In thousands) |
Total amounts of income and (expense) line items presented in the Consolidated Statements of Operations in which the effects of fair value or cash flow hedges are recorded | Interest income/(expense) | $ | 284 | | | $ | 6 | | | $ | 132 | | | $ | 508 | |
The effects of cash flow hedging: | | | | | | | | |
Gain or (loss) on cash flow hedging relationships in ASC 815 | | | | | | | | |
Interest contracts - amount of gain or (loss) reclassified from Accumulated other comprehensive income into income | Interest income/(expense) | $ | 284 | | | $ | 6 | | | $ | 132 | | | $ | 508 | |
The Bank has agreements with its derivative counterparties that contain provisions where, if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations. The Bank was in compliance with these provisions as of September 30, 20192020 and December 31, 2018.2019.
The Bank also has agreements with certain of its derivative counterparties that contain provisions where, if the Bank fails to maintain its status as a well- or adequately-capitalized institution, then the counterparty could terminate the derivative positions and the Bank would be required to settle its obligations under the agreements. The Bank was in compliance with these provisions as of September 30, 20192020 and December 31, 2018.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
2019.
Certain of the Bank’s agreements with its derivative counterparties contain provisions where, if specified, events or conditions occur that materially change the Bank’s creditworthiness in an adverse manner, the Bank may be required to fully collateralize its obligations under the derivative instruments. The Bank was in compliance with these provisions as of September 30, 20192020 and December 31, 2018.2019.
As of September 30, 20192020 and December 31, 2018,2019, the termination amounts related to collateral determinations of derivatives in a liability position were $48.7$94.1 million and $2.2$35.7 million, respectively. The CompanyBank has minimum collateral posting thresholds with its derivative counterparties. As of September 30, 2020 and December 31, 2019,, the CompanyBank had pledged securities with a market value of $51.8$90.5 million and $40.0 million, respectively, against its obligations under these agreements. As of December 31, 2018, the Company had 0 pledged securities. The collateral posted is typically greater than the current liability position; however, due to timing of liability position changes at period end, the funding of a collateral shortfall may take place shortly following period end.
Cash Flow Hedgesflow hedges of Interest Rate Riskinterest rate risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. The Company
To accomplish this objective and strategy, the Bank has utilizedentered into one interest rate derivatives in the past, butswap during 2020 with an effective date of April 14, 2020. The interest rate swap is designated as of September 30, 2019, there were no activea cash flow hedges.hedge and involves the receipt of variable rate amounts from a counterparty in exchange for the Bank making fixed payments.
The one interest rate swap entered into during 2020 has a notional amount of $100 million and a term of eighteen months from its respective effective date. The interest rate swap will effectively fix the Bank's interest payments on $100 million of rolling three month FHLB advances at a rate of 0.48%.
Per ASU 2017-12, for derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulatedAccumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. For active cash flow hedges, a portion of the balance reported in accumulatedAccumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made or received on the Company’sBank’s interest rate swaps.
Non-designated Hedgeshedges
Derivatives not designated as hedges are not speculative and result from different services the Bank provides to qualified commercial clients. The Bank offers certain derivative products directly to such clients. The Bank economically hedges derivative transactions executed with commercial clients by entering into mirror-image, offsetting derivatives with third parties. Derivative transactions executed as part of these programs are not designated in ASC 815-qualifying hedging
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
relationships and are, therefore, marked-to-market through earnings each period. Because the derivatives have mirror-image contractual terms, the changes in fair value substantially offset through earnings. The net effect on earnings is primarily driven by changes in the credit valuation adjustment (“CVA”). The CVA represents the dollar amount of fair value adjustment related to nonperformance risk of both the Bank and its counterparties. Fees earned in connection with the execution of derivatives related to this program are recognized in the Consolidated StatementStatements of Operations in otherOther income. The Bank has interest rate swaps and caps related to this program with an aggregate notional amount of $1.5$1.7 billion as of September 30, 20192020 and $1.3$1.6 billion as of December 31, 2018.2019. As of September 30, 2020 and December 31, 2019, there were 0 foreign currency exchange contracts and as of December 31, 2018, there were foreign currency exchange contracts with an aggregate notional amount of $0.1 million related to this program.
In addition, as a participant lender, the Bank has guaranteed performance on the pro-rated portion of swaps executed by other financial institutions. As the participant lender, the Bank is providing a partial guarantee, but is not a direct party to the related swap transactions. The Bank has no obligations under the risk participation agreements unless the borrower defaults on their swap transaction with the lead bank and the swap is in a liability position to the borrower. In that instance, the Bank has agreed to pay the lead bank a portion of the swap’s termination value at the time of the default. The derivative transactions entered into as part of these agreements are not designated, as per ASC 815, as qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. As of September 30, 20192020 and December 31, 2018,2019, there were 7 of these risk participation transactions with an aggregate notional amount of $59.1$57.7 million and $59.8$58.8 million, respectively.
The Bank has also participated out to other financial institutions a pro-rated portion of swaps executed by the Bank. The other financial institution has no obligations under the risk participation agreements unless the borrowers default on their swap transactions with the Bank and the swaps are in liability positions to the borrower. In those instances, the other financial institution has agreed to pay the Bank a portion of the swap’s termination value at the time of the default. The derivative transactions entered into as part of these agreements are not designated, as per ASC 815, as qualifying hedging relationships and are, therefore, marked-to-market through earnings each period. As of September 30, 2019 and2020, there were 5 of these risk participation transactions with an aggregate notional amount of $30.3 million. As of December 31, 2018,2019, there were 4 of these risk participation transactions with an aggregate notional amount of $20.6 million and $20.7 million, respectively.$20.5 million.
The following table presents the effect of the Bank’s derivative financial instruments not designated as hedging instruments in the Consolidated StatementStatements of Operations for the three and nine months ended September 30, 20192020 and 2018.2019.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Amount of gain or (loss), net, recognized in income on derivatives |
Derivatives not designated as hedging instruments | | Location of gain or (loss) recognized in income on derivatives | | Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | (In thousands) |
Interest rate swaps | | Other income/(expense) | | $ | (568) | | | $ | (289) | | | $ | (869) | | | $ | (544) | |
Risk participation agreements | | Other income/(expense) | | 78 | | | (11) | | | (148) | | | (120) | |
| | | | | | | | | | |
Total | | | | $ | (490) | | | $ | (300) | | | $ | (1,017) | | | $ | (664) | |
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
| | | | | | | | | | | | | | | | | | |
| | | | Amount of gain or (loss), net, recognized in income on derivatives |
Derivatives not designated as hedging instruments | | Location of gain or (loss) recognized in income on derivatives | | Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| | | | (In thousands) |
Interest rate swaps | | Other income/ (expense) | | $ | (289 | ) | | $ | 8 |
| | $ | (544 | ) | | $ | (39 | ) |
Risk participation agreements | | Other income/ (expense) | | (11 | ) | | 18 |
| | (120 | ) | | 238 |
|
Total | | | | $ | (300 | ) | | $ | 26 |
| | $ | (664 | ) | | $ | 199 |
|
9. Income Taxes
The following table presents the components of incomeIncome tax expense and effective tax rates for continuing operations, discontinued operations, noncontrolling interests and the Company:periods indicated:
|
| | | | | | | |
| Nine months ended September 30, |
| 2019 | | 2018 |
| (In thousands) |
Income from continuing operations: | | | |
Income before income taxes | $ | 74,852 |
| | $ | 77,214 |
|
Income tax expense | 15,803 |
| | 28,886 |
|
Net income from continuing operations | $ | 59,049 |
| | $ | 48,328 |
|
Effective tax rate, continuing operations | 21.1 | % | | 37.4 | % |
| | | |
Income from discontinued operations: | | | |
Income before income taxes | $ | — |
| | $ | 2,388 |
|
Income tax expense | — |
| | 692 |
|
Net income from discontinued operations | $ | — |
| | $ | 1,696 |
|
Effective tax rate, discontinued operations | — | % | | 29.0 | % |
| | | |
Less: Income attributable to noncontrolling interests: | | | |
Income before income taxes | $ | 265 |
| | $ | 2,942 |
|
Income tax expense | — |
| | — |
|
Net income attributable to noncontrolling interests | $ | 265 |
| | $ | 2,942 |
|
Effective tax rate, noncontrolling interests | — | % | | — | % |
| | | |
Income attributable to the Company | | | |
Income before income taxes | $ | 74,587 |
| | $ | 76,660 |
|
Income tax expense | 15,803 |
| | 29,578 |
|
Net income attributable to the Company | $ | 58,784 |
| | $ | 47,082 |
|
Effective tax rate attributable to the Company | 21.2 | % | | 38.6 | % |
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2020 | | 2019 |
| (In thousands) |
| | | |
Income before income taxes | $ | 22,952 | | | $ | 74,852 | |
Income tax expense | 2,764 | | | 15,803 | |
Net income before attribution to noncontrolling interests | $ | 20,188 | | | $ | 59,049 | |
Effective tax rate | 12.0 | % | | 21.1 | % |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
The effective tax rate for continuing operationsthe nine months ended September 30, 2020 of 12.0%, with related tax expense of $2.8 million, was calculated based on a forecasted 2020 annual effective tax rate. The effective tax rate was less than the statutory rate of 21% due primarily to earnings from tax-exempt investments and income tax credits. These savings were partially offset by state and local income taxes, the accounting for investments in affordable housing projects, and tax expense from employee shared-based payments.
The effective tax rate for the nine months ended September 30, 2019 of 21.1%, with related tax expense of $15.8 million, was calculated based on a projectedforecasted 2019 annual effective tax rate. The effective tax rate was more than the statutory rate of 21% due primarily to state and local income taxes and the accounting for investments in affordable housing projects. These savingsexpenses were partially offset by earnings from tax-exempt investments and income tax credits.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The effective tax rate for continuing operations for the nine months ended September 30, 2018 of 37.4%, with related tax expense of $28.9 million, was calculated based on a projected 2018 annual effective tax rate. The effective tax rate was more than the statutory rate of 21% due primarily to the sale of Anchor and state and local income taxes. These items were partially offset by earnings from tax-exempt investments and income tax credits. The Company recorded tax expense of $12.7 million on the sale of Anchor in April 2018, which was primarily due to a book-to-tax basis difference associated with nondeductible goodwill.
The effective tax rate for continuing operations for the nine months ended September 30, 20192020 is less than the effective tax rate for the same period in 20182019 due primarily to the lower level of income in 2020 as compared to 2019. Earnings from tax-exempt investments have a result of the $12.7 million tax expense that was recordedlarger proportionate impact on the salelower level of Anchorincome in April 2018.2020 as compared to 2019.
10. Noncontrolling Interests
Noncontrolling interests consist of equity owned by management of the Company’s respective majority-owned affiliates, DGHM, BOS, and Anchor for the periods in which the Company had an ownership interest in them.affiliate, DGHM. Net income attributable to noncontrolling interests in the Consolidated StatementStatements of Operations, if any, represents the net income allocated to the noncontrolling interest owners of the affiliates.DGHM. Net income allocated to the noncontrolling interest owners was $0.1 million0 and $0.9 million$96 thousand for the three-month periods ended September 30, 20192020 and 2018,2019, respectively, and $0.3 million$6 thousand and $2.9 million$265 thousand for the nine-month periods ended September 30, 20192020 and 2018,2019, respectively.
On the consolidated balance sheets,Consolidated Balance Sheets, noncontrolling interests are included as the sum of the capital and undistributed profits allocated to the noncontrolling interest owners. Typically, this balance is included in a company’s permanent shareholders’ equity in the consolidated balance sheets.Consolidated Balance Sheets. When the noncontrolling interest owners’ rights include certain redemption features, as described in ASC 480, Distinguishing Liabilities from Equity, such redeemable noncontrolling interests are classified as mezzanine equity and are not included in permanent shareholders’ equity. Due to the redemption features of the noncontrolling interests of DGHM, the Company had redeemableRedeemable noncontrolling interests held in mezzanine equity in the accompanying consolidated balance sheetsConsolidated Balance Sheets of $1.5 million0 and $2.5$1.4 million as of September 30, 20192020 and December 31, 2018,2019, respectively. The aggregate amount of such redeemableRedeemable noncontrolling equity interests are recorded at the estimated maximum redemption values. The Company had 0 noncontrolling interests included in permanent shareholder’s equity at September 30, 20192020 and December 31, 2018.2019.
Each non-wholly owned affiliateThe DGHM operating agreement provides the Company and/or the noncontrolling interestsinterest holders with contingent call orand put redemption featuresoptions and mandatory repurchase obligations used for the orderly transfer of noncontrolling equity interests between the affiliate noncontrolling interest ownersholders and the Company at either a contractually predetermined fair value; multiple of earnings before interest, taxes, depreciation, and amortization (“EBITDA”); or fair value. The Company may liquidate these noncontrolling interests in cash, shares of the Company’s common stock, or other forms of consideration dependent on the operating agreement. These agreements arevalues. This agreement is discussed in Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Generally, these put and call redemption features refer to shareholder rights of both the Company and the noncontrolling interest owners of the Company’s majority-owned affiliate companies. The affiliate company noncontrolling interests generallyin DGHM take the form of limited liability company units, profits interests, or common stock (collectively, the “noncontrolling equity interests”). In most circumstances, the put and call redemption features generally relate to the Company’s right and, in some cases, obligation to purchase and the noncontrolling equity interests’ right to sell their equity interests.units. There are various events that could cause the putstrigger a put, call or calls to be exercised,mandatory repurchase, such as a change in control, death, disability, retirement, resignation or termination. The puts and calls are generally to be exercised at the then fair value or a contractually agreed upon approximation thereof. The terms of these rights vary and obligations are governed by the respective individual operating and legal documents.agreement of DGHM.
Redeemable noncontrolling interests recorded as of September 30, 2019 and December 31, 2018 were exclusively related to the rights of DGHM owners. The divestitures of BOS and Anchor in 2018 resulted in the Company no longer carrying noncontrolling interests within permanent shareholders' equity. The following tables presenttable presents a rollforward of the Company’s redeemable noncontrolling interests and noncontrolling interests for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2020 | | September 30, 2019 | | September 30, 2020 | | September 30, 2019 | |
| | | | | | | |
| (In thousands) |
Redeemable noncontrolling interests at beginning of period | $ | 0 | | | $ | 1,786 | | | $ | 1,383 | | | $ | 2,526 | | | |
Net income attributable to noncontrolling interests | 0 | | | 96 | | | 6 | | | 265 | | | |
Distributions | 0 | | | (96) | | | (6) | | | (265) | | | |
Purchases/(sales) of ownership interests | 0 | | | 0 | | | (64) | | | 12 | | | |
| | | | | | | | | |
Amortization of equity compensation | 8 | | | 10 | | | 24 | | | 36 | | | |
Adjustments to fair value | (8) | | | (315) | | | (1,343) | | | (1,093) | | | |
Redeemable noncontrolling interests at end of period | $ | 0 | | | $ | 1,481 | | | $ | 0 | | | $ | 1,481 | | | |
11. Accumulated Other Comprehensive Income
The following table presents a summary of the amounts reclassified from the Company's Accumulated other comprehensive income/(loss) for the three and nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Description of component of Accumulated other comprehensive income/(loss) | | Three months ended September 30, | | Nine months ended September 30, | | Affected line item in Statement of Operations |
| 2020 | | 2019 | | 2020 | | 2019 | |
| | (In thousands) | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Net realized gain/(loss) on cash flow hedges: | | | | | | | | | | |
Hedges related to deposits: | | | | | | | | | | |
Pre-tax gain/(loss) | | $ | 284 | | | $ | 6 | | | $ | 132 | | | $ | 508 | | | Interest income/(expense) |
| | | | | | | | | | |
Tax (expense)/ benefit | | (84) | | | (2) | | | (39) | | | (148) | | | Income tax (expense)/benefit |
| | | | | | | | | | |
Total reclassifications for the period, net of tax | | $ | 200 | | | $ | 4 | | | $ | 93 | | | $ | 360 | | | Net income/(loss) attributable to the Company |
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
| | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2019 | | September 30, 2019 |
| Redeemable noncontrolling interests | | Redeemable noncontrolling interests |
| (In thousands) |
Noncontrolling interests at beginning of period | $ | 1,786 |
| | $ | 2,526 |
|
Net income attributable to noncontrolling interests | 96 |
| | 265 |
|
Distributions | (96 | ) | | (265 | ) |
Purchases/ (sales) of ownership interests | — |
| | 12 |
|
Amortization of equity compensation | 10 |
| | 36 |
|
Adjustments to fair value | (315 | ) | | (1,093 | ) |
Noncontrolling interests at end of period | $ | 1,481 |
| | $ | 1,481 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended | | Nine months ended |
| September 30, 2018 | | September 30, 2018 |
| Redeemable noncontrolling interests | | Noncontrolling interests | | Redeemable noncontrolling interests | | Noncontrolling interests |
| (In thousands) |
Noncontrolling interests at beginning of period | $ | 10,747 |
| | $ | 1,996 |
| | $ | 17,461 |
| | $ | 5,186 |
|
Net income attributable to noncontrolling interests | 711 |
| | 213 |
| | 2,202 |
| | 740 |
|
Distributions | (687 | ) | | (203 | ) | | (2,136 | ) | | (712 | ) |
Purchases/ (sales) of ownership interests | — |
| | — |
| | (6,353 | ) | | (3,051 | ) |
Amortization of equity compensation | 125 |
| | — |
| | 373 |
| | 161 |
|
Adjustments to fair value | 790 |
| | 203 |
| | 139 |
| | (115 | ) |
Noncontrolling interests at end of period | $ | 11,686 |
| | $ | 2,209 |
| | $ | 11,686 |
| | $ | 2,209 |
|
11. Accumulated Other Comprehensive Income
The following table presents a summarytables present the after-tax changes in the components of the amounts reclassified from accumulatedCompany’s Accumulated other comprehensive income/(loss) for the three and nine months ended September 30, 20192020 and 2018:2019:
|
| | | | | | | | | | | | | | | | | | |
Description of component of accumulated other comprehensive income/ (loss) | | Three months ended September 30, | | Nine months ended September 30, | | Affected line item in Statement of Operations |
| 2019 | | 2018 | | 2019 | | 2018 | |
| | (In thousands) | | (In thousands) | | |
Net realized gain/ (loss) on cash flow hedges: | | | | | | | | | | |
Hedges related to deposits and borrowings: | | | | | | | | | | |
Pre-tax gain/ (loss) | | $ | 6 |
| | $ | 101 |
| | $ | 508 |
| | $ | 385 |
| | Interest (expense) |
Tax (expense)/ benefit | | (2 | ) | | (29 | ) | | (148 | ) | | (112 | ) | | Income tax (expense)/ benefit |
Net | | $ | 4 |
| | $ | 72 |
| | $ | 360 |
| | $ | 273 |
| | Net income/ (loss) attributable to the Company |
Total reclassifications for the period, net of tax | | $ | 4 |
| | $ | 72 |
| | $ | 360 |
| | $ | 273 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Components of Accumulated other comprehensive income/(loss) | | |
| Unrealized gain/(loss) on securities available-for-sale | | Unrealized gain/(loss) on cash flow hedges | | Unrealized gain/(loss) on other | | Accumulated other comprehensive income/(loss) |
| (In thousands) |
Balance at December 31, 2018 | $ | (17,556) | | | $ | 391 | | | $ | (554) | | | $ | (17,719) | |
Other comprehensive income/(loss) before reclassifications | 27,469 | | | (31) | | | 0 | | | 27,438 | |
Reclassified from other comprehensive income/(loss) | 0 | | | (360) | | | 0 | | | (360) | |
Other comprehensive income/(loss), net | 27,469 | | | (391) | | | 0 | | | 27,078 | |
| | | | | | | |
Balance at September 30, 2019 | $ | 9,913 | | | $ | 0 | | | $ | (554) | | | $ | 9,359 | |
| | | | | | | |
Balance at December 31, 2019 | $ | 8,435 | | | $ | 0 | | | $ | (860) | | | $ | 7,575 | |
Other comprehensive income/(loss) before reclassifications | 23,055 | | | (100) | | | (30) | | | 22,925 | |
Reclassified from other comprehensive income/(loss) | 0 | | | (93) | | | 0 | | | (93) | |
Other comprehensive income/(loss), net | 23,055 | | | (193) | | | (30) | | | 22,832 | |
| | | | | | | |
Balance at September 30, 2020 | $ | 31,490 | | | $ | (193) | | | $ | (890) | | | $ | 30,407 | |
On January 1, 2018, | | | | | | | | | | | | | | | | | | | | | | | |
| Components of Accumulated other comprehensive income/(loss) | | |
| Unrealized gain/(loss) on securities available-for-sale | | Unrealized gain/(loss) on cash flow hedges | | Unrealized gain/(loss) on other | | Accumulated other comprehensive income/(loss) |
| (In thousands) |
Balance at June 30, 2019 | $ | 4,677 | | | $ | 2 | | | $ | (554) | | | $ | 4,125 | |
Other comprehensive income/(loss) before reclassifications | 5,236 | | | 2 | | | 0 | | | 5,238 | |
Reclassified from other comprehensive income/(loss) | 0 | | | (4) | | | 0 | | | (4) | |
Other comprehensive income/(loss), net | 5,236 | | | (2) | | | 0 | | | 5,234 | |
| | | | | | | |
Balance at September 30, 2019 | $ | 9,913 | | | $ | 0 | | | $ | (554) | | | $ | 9,359 | |
| | | | | | | |
Balance at June 30, 2020 | $ | 31,122 | | | $ | (195) | | | $ | (890) | | | $ | 30,037 | |
Other comprehensive income/(loss) before reclassifications | 368 | | | 202 | | | 0 | | | 570 | |
Reclassified from other comprehensive income/(loss) | 0 | | | (200) | | | 0 | | | (200) | |
Other comprehensive income/(loss), net | 368 | | | 2 | | | 0 | | | 370 | |
| | | | | | | |
Balance at September 30, 2020 | $ | 31,490 | | | $ | (193) | | | $ | (890) | | | $ | 30,407 | |
12. Restructuring
There were 0 restructuring charges for the three and nine months ended September 30, 2020. In the first quarter of 2019, the Company electedincurred restructuring charges of $1.6 million. The charges were in connection with a previously announced reduction to early adopt ASU No. 2017-12. As a result, the Company reclassified unrealized losses on cash flow hedges of $5 thousand from accumulatedCompany’s workforce, which included executive transition changes as well as other comprehensive income/ (loss)employee benefit and technology related initiatives. The restructuring was intended to beginning retainedimprove the Company’s operating efficiency and enhance earnings.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
On January 1, 2018, the Company adopted ASU No. 2016-01. As a result, the Company reclassified unrealized gains on equity securities available-for-sale, net of tax, of $339 thousand from accumulated other comprehensive income/ (loss) to beginning retained earnings.
|
| | | | | | | | | | | | | | | |
| Components of accumulated other comprehensive income/ (loss) | | |
| Unrealized gain/ (loss) on securities available-for-sale | | Unrealized gain/ (loss) on cash flow hedges | | Unrealized gain/ (loss) on other | | Accumulated other comprehensive income/ (loss) |
| (In thousands) |
Balance at December 31, 2017 | $ | (8,140 | ) | | $ | 332 |
| | $ | (850 | ) | | $ | (8,658 | ) |
Other comprehensive income/ (loss) before reclassifications | (18,888 | ) | | 574 |
| | 1 |
| | (18,313 | ) |
Reclassified from other comprehensive income/ (loss) | — |
| | (273 | ) | | — |
| | (273 | ) |
Other comprehensive income/ (loss), net | (18,888 | ) | | 301 |
| | 1 |
| | (18,586 | ) |
Reclassification from the adoption of ASUs 2017-12 and 2016-01 | $ | (339 | ) | | $ | 5 |
| | $ | — |
| | $ | (334 | ) |
Balance at September 30, 2018 | $ | (27,367 | ) | | $ | 638 |
| | $ | (849 | ) | | $ | (27,578 | ) |
| | | | | | | |
Balance at December 31, 2018 | $ | (17,556 | ) | | $ | 391 |
| | $ | (554 | ) | | $ | (17,719 | ) |
Other comprehensive income/ (loss) before reclassifications | 27,469 |
| | (31 | ) | | — |
| | 27,438 |
|
Reclassified from other comprehensive income/ (loss) | — |
| | (360 | ) | | — |
| | (360 | ) |
Other comprehensive income/ (loss), net | 27,469 |
| | (391 | ) | | — |
| | 27,078 |
|
Balance at September 30, 2019 | $ | 9,913 |
| | $ | — |
| | $ | (554 | ) | | $ | 9,359 |
|
12. Restructuring
In the third and fourth quarters of 2018 and the first quarter of 2019, the Company incurred restructuring charges of $5.8 million, $2.1 million, and $1.6 million, respectively. The charges were in connection with a previously announced reduction to the Company’s workforce of approximately 7% of total staffing, which included executive transition changes as well as other employee benefit and technology related initiatives. The restructuring is intended to improve the Company’s operating efficiency and enhance earnings.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The following table presents a summary of the restructuring activity for the three and nine months ended September 30, 20192020 and 2018: |
| | | | | | | | | | | |
| Severance Charges | | Other Associated Costs | | Total |
| (In thousands) |
Accrued charges at December 31, 2018 | $ | 3,896 |
| | $ | 790 |
| | $ | 4,686 |
|
Cost incurred | 1,646 |
| | — |
| | 1,646 |
|
Costs paid | (1,986 | ) | | — |
| | (1,986 | ) |
Accrued charges at March 31, 2019 | 3,556 |
| | 790 |
| | 4,346 |
|
Costs paid | (1,364 | ) | | — |
| | (1,364 | ) |
Accrued charges at June 30, 2019 | 2,192 |
| | 790 |
| | 2,982 |
|
Costs paid | (1,156 | ) | | — |
| | (1,156 | ) |
Accrued charges at September 30, 2019 | $ | 1,036 |
| | $ | 790 |
| | $ | 1,826 |
|
| | | | | |
| | | | | |
| | | | | |
Accrued charges at December 31, 2017 | $ | 337 |
| | $ | — |
| | $ | 337 |
|
Costs paid | (254 | ) | | — |
| | (254 | ) |
Accrued charges at March 31, 2018 | 83 |
| | — |
| | 83 |
|
Costs paid | (83 | ) | | — |
| | (83 | ) |
Accrued charges at June 30, 2018 | — |
| | $ | — |
| | $ | — |
|
Costs incurred | 5,763 |
| | — |
| | 5,763 |
|
Accrued charges at September 30, 2018 | $ | 5,763 |
| | $ | — |
| | $ | 5,763 |
|
2019:
| | | | | | | | | | | | | | | | | | | | |
| Severance Charges | | Other Associated Costs | | | | | Total |
| (In thousands) |
Accrued charges at December 31, 2019 | $ | 526 | | | $ | 789 | | | | | | $ | 1,315 | |
| | | | | | | | |
Costs paid | (434) | | | 0 | | | | | | (434) | |
Accrued charges at March 31, 2020 | 92 | | | 789 | | | | | | 881 | |
| | | | | | | | |
Costs paid | (92) | | | 0 | | | | | | (92) | |
Accrued charges at June 30, 2020 | $ | 0 | | | $ | 789 | | | | | | $ | 789 | |
| | | | | | | | |
Costs paid | 0 | | | 0 | | | | | | 0 | |
Accrued charges at September 30, 2020 | $ | 0 | | | $ | 789 | | | | | | $ | 789 | |
| | | | | | | | |
Accrued charges at December 31, 2018 | $ | 3,896 | | | $ | 789 | | | | | | $ | 4,685 | |
Cost incurred | 1,646 | | | 0 | | | | | | 1,646 | |
Costs paid | (1,986) | | | 0 | | | | | | (1,986) | |
Accrued charges at March 31, 2019 | 3,556 | | | 789 | | | | | | 4,345 | |
| | | | | | | | |
Costs paid | (1,364) | | | 0 | | | | | | (1,364) | |
Accrued charges at June 30, 2019 | $ | 2,192 | | | $ | 789 | | | | | | $ | 2,981 | |
| | | | | | | | |
Costs paid | (1,156) | | | 0 | | | | | | (1,156) | |
Accrued charges at September 30, 2019 | $ | 1,036 | | | $ | 789 | | | | | | $ | 1,825 | |
13. Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09 et al. As stated in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Recent Accounting,” the implementation of the new standard did not have an impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented underIn accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), while prior period amounts were not adjusted and continuethe Company recognizes revenue when it transfers promised goods or services to be reportedcustomers in accordance with our historic accounting under ASC 605, Revenue Recognition.
an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. ASC 606 does not apply to revenue associated with financial instruments including interest income onsuch as loans and investment securities. In addition, certain noninterest income such as fees associated with mortgage servicing rights, late fees, BOLI income, and derivatives are also not in scope of the new guidance. ASC 606 is applicable to noninterest income such as investment management fees, wealth management and trust fees, and certain banking fees. However, the recognition of this revenue did not change upon adoption of ASC 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest income considered in-scope of ASC 606 is discussed below.
Investment management fees
Investment management fees are earned for the management of a series of accounts and funds in which clients invest directly, acting as a sub-advisor to larger investment management companies, or private client account management. The Company’s performance obligation is satisfied over time and the resulting fees are recognized monthly, based upon either the beginning-of-quarter (in advance) or quarter-end (in arrears) market value of the assets under management and advisory (“AUM”) and the applicable fee rate, depending on the terms of the contract. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company may earn performance-based incentives on certain contracts. Receivables are recorded on the consolidated balance sheet in the fees receivable line item.
All of the investment management fee income on the Consolidated Statement of Operations for the three and nine months ended September 30, 2019 and 2018 is considered in-scope of ASC 606.
Wealth management and trust fees
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
Wealth management and trust fees are earned for providing investment management, wealth management, retirement plan advisory, family office, financial planning, trust services, and other financial advisory services to clients. The Company’s performance obligation under these contracts is satisfied over time as the services are provided. Fees are recognized monthly based on the average monthly, beginning-of-quarter, or, for a small number of clients, end-of-quarter market value of the AUM and the applicable fee rate, depending on the terms of the contract.contracts. Fees are also recognized monthly based either on a fixed fee amount or are based on the quarter-end (in arrears) market value of the AUM and the applicable fee rate, (“asset based fees”), depending on the terms of the contract.contracts. No performance based incentives are earned onunder wealth management contracts. Receivables are recorded on the consolidated balance sheetConsolidated Balance Sheets in the feesFees receivable line item. Deferred revenues of $6.2$6.0 million and $6.9$6.5 million as of September 30, 20192020 and 2018,December 31, 2019, respectively, are recorded on the consolidated balance sheetConsolidated Balance Sheets within the other liabilities line item.Other liabilities.
Trust fees are earned when the Company is appointed as trustee for clients. As trustee, the Company administers the client’s trust and manages the assets of the trust, including investments and property. The Company’s performance obligation under these agreements is satisfied over time as the administration and management services are provided. Fees are recognized monthly or, in certain circumstances, quarterly based on a percentage of the market value of the account as outlined in the agreement. Payment frequency is defined in the individual contracts which primarily stipulate monthly in arrears. No performance based incentives are earned on trust fee contracts. Receivables are recorded on the consolidated balance sheetConsolidated Balance Sheets within Fees receivable.
Investment management fees
Investment management fees are earned for the management of a series of accounts and funds in which clients invest directly, acting as a sub-advisor to larger investment management companies, or private client account management. The Company’s performance obligation is satisfied over time and the resulting fees receivable line item.
Allare recognized monthly, based upon either the beginning-of-quarter (in advance) or quarter-end (in arrears) market value of the wealth managementAUM and trustthe applicable fee incomerate, depending on the terms of the contracts. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company may earn performance-based incentives on certain contracts. Receivables are recorded on the Consolidated Statement of Operations for the three and nine months ended September 30, 2019 and 2018 is considered in-scope of ASC 606.Balance Sheets within Fees receivable.
Other banking fee income
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
The Bank charges a variety of fees to its clients for services provided on the deposit and deposit management related accounts. Each fee is either transaction based or assessed monthly. The types of fees include service charges on accounts, overdraft fees, maintenance fees, ATM fee charges, and other miscellaneous charges related to the accounts. These fees are not governed by individual contracts with clients. They are charges to clients based on disclosures presented to clients upon opening these accounts along with updated disclosures when changes are made to the fee structures. The transaction-based fees are recognized in revenue when charged to the client based on specific activity on the client’s account. Monthly service/maintenance charges are recognized in the month they are earned and are charged directly to the client’s account.
The Bank also charges fees for treasury activities such as swap fees and foreign exchange fees for clients with a banking relationship. These fees are recorded when earned via completion of the transaction for the client. The completion of the transaction is deemed to be the performance obligation of the transaction. The related revenue is recorded through a direct charge to the client’s account. There are no individual agreements or contracts with clients as it relatesrelating to foreign exchange fees as they are governed by client disclosure statements and the Bank’s internal policies and procedures.
ForThe following table presents the three months ended September 30, 2019 and 2018, $0.7 million and $1.1 million, respectively, of other banking fee income as described above is considered in-scope forof ASC 606. For the nine months ended September 30, 2019 and 2018, $2.0 million and $3.1 million, respectively, of other banking fee income as described above is considered in-scope for ASC 606.606 by contracts with customers:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 | | |
| (In thousands) |
Fees and other income: | | | | | | | | | |
Wealth management and trust fees | $ | 18,240 | | | $ | 19,067 | | | $ | 53,872 | | | $ | 57,037 | | | |
Investment management fees | 1,393 | | | 2,496 | | | 5,088 | | | 7,601 | | | |
| | | | | | | | | |
| | | | | | | | | |
Other income | 812 | | | 700 | | | 2,166 | | | 2,029 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Revenue from contracts with customers | 20,445 | | | 22,263 | | | 61,126 | | | 66,667 | | | |
Other non-interest income not within the scope of ASC 606 | 2,600 | | | 2,863 | | | 6,102 | | | 8,087 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total non-interest income | $ | 23,045 | | | $ | 25,126 | | | $ | 67,228 | | | $ | 74,754 | | | |
14. Lease Accounting
On adoption of ASU 2016-02 on January 1, 2019, the Company adopted ASU 2016-02. As stated in Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies”, the implementation of the new standard had a material effect on the financial statements. The most significant effects relate to the recognition of new operating ROU assets and operating lease liabilities on the balance sheet for real estate operating leases, providing significant new disclosures about leasing activities, and the impact of additional assets on certain financial measures, such as capital ratios and return on average asset ratios. On adoption, the Company recognized $124.1 million of lease liabilities and $108.5 million of ROUright-of-use ("ROU") assets on the face of the balance sheet.Consolidated Balance Sheets. ROU assets obtained in exchange for lease liabilities are net of tenant improvement allowances and deferred rent. There was no impact to the Company’s Consolidated StatementStatements of Cash Flows upon adoption, since the net impact of all adjustments recorded upon transition represents non-cash activity. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Recent Accounting Pronouncements” for additional information on the Company's adoption of this standard.
The Company, as lessee, has 4136 real estate leases for office and ATM locations classified as operating leases. The Company determines if an arrangement is a lease or contains a lease at inception. The terms of the real estate leases generally have annual increases in payments based off of a fixed or variable rate, such as the Consumer Price Index rate, that is outlined within the respective contracts. Generally, the initial terms of the leases for our leased properties range from five to fifteen years. Most of the leases also include options to renew for periods of five to ten years at contractually agreed upon rates or at market
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
rates at the time of the extension. On a quarterly basis, the Company evaluates whether the renewal of each lease is reasonably certain. If the lease doesn’t provide the implicit interest rate, the Bank uses its incremental borrowing rate at the commencement date of the lease in determining the present value of lease payments. No other significant judgments or assumptions were made in applying the requirements of ASU 2016-02.
The Company recognized $2.0 million of lease liabilities and ROU assets on the Consolidated Balance Sheets related to equipment leases on September 30, 2020. The Company, as lessee, has 21 equipment leases classified as operating leases. The terms of the equipment leases are fixed payments outlined within the respective contracts and generally range from three to five years. The Bank uses its incremental borrowing rate at the commencement date of the lease in determining the present value of lease payments. No other significant judgments or assumptions were made in applying the requirements of ASU 2016-02.
The following table presents information about the Company's leases as of the dates indicated.
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
| | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | Nine months ended September 30, |
| 2019 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) | | (In thousands) |
Lease cost | | | | Lease cost | |
Operating lease cost | $ | 4,866 |
| | $ | 14,392 |
| Operating lease cost | $ | 4,562 | | | $ | 4,866 | | | $ | 13,656 | | $ | 14,392 | |
Short-term lease cost | 12 |
| | 41 |
| Short-term lease cost | 58 | | | 12 | | | 164 | | 41 | |
Variable lease cost | 143 |
| | 147 |
| Variable lease cost | 5 | | | 143 | | | (4) | | 147 | |
Less: Sublease income | (27 | ) | | (73 | ) | Less: Sublease income | 0 | | | (27) | | | (28) | | (73) | |
Total operating lease cost | $ | 4,994 |
| | $ | 14,507 |
| Total operating lease cost | $ | 4,625 | | | $ | 4,994 | | | $ | 13,788 | | $ | 14,507 | |
|
| | | | | | |
| | Nine months ended September 30, 2020 |
| | (In thousands, except years and percentages) |
Other information | | |
| | |
Cash paid for amounts included in the measurement of lease liabilities | | |
| | |
Operating cash flows from operating leases | | $ | 15,107 | |
| | |
| | |
ROU assets obtained in exchange for new operating lease liabilities (1) | | $ | 4,056 | |
| | |
Weighted-average remaining lease term for operating leases | | 7.6 years |
| | |
Weighted-average discount rate for operating leases | | 3.2 | % |
|
| | | |
| Nine months ended September 30, |
| (In thousands, except years and percentages) |
Other information | |
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash flows from operating leases | $ | 15,013 |
|
ROU assets obtained in exchange for new operating lease liabilities | $ | 10,510 |
|
Weighted-average remaining lease term for operating leases | 8.2 years |
|
Weighted-average discount rate for operating leases | 3.4 | % |
______________________
(1) Operating lease liabilities were impacted by the addition of real estate and equipment leases, partially offset by real estate lease modifications for the nine months ended September 30, 2020.
The Company is obligated for minimum payments under non-cancelable operating leases. In accordance with the
terms of these leases, the Company is currently committed to minimum annual payments as follows as of September 30, 2019:2020:
|
| | | |
| September 30, 2019 |
| (In thousands) |
Remainder of 2019 | $ | 5,084 |
|
2020 | 20,224 |
|
2021 | 20,406 |
|
2022 | 20,360 |
|
2023 | 19,575 |
|
Thereafter | 57,005 |
|
Total future minimum lease payments | 142,654 |
|
Less: Amounts representing interest | (19,855 | ) |
Present value of net future minimum lease payments | $ | 122,799 |
|
| | | | | | |
| | September 30, 2020 |
| | (In thousands) |
Remainder of 2020 | | $ | 5,136 | |
2021 | | 20,662 | |
2022 | | 20,575 | |
2023 | | 19,275 | |
2024 | | 13,113 | |
Thereafter | | 46,003 | |
Total future minimum lease payments | | 124,764 | |
Less: Amounts representing interest | | (15,832) | |
Present value of net future minimum lease payments | | $ | 108,932 | |
Prior to the adoption of ASC 842, the Company’s operating leases were not recognized on the balance sheet. The following table presents the undiscounted future minimum lease payments under the Company’s operating leases as of December 31, 2018:
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
|
| | | |
| December 31, 2018 |
(In thousands) |
2019 | $ | 20,053 |
|
2020 | 19,344 |
|
2021 | 19,064 |
|
2022 | 18,802 |
|
2023 | 16,552 |
|
Thereafter | 41,412 |
|
Total | $ | 135,227 |
|
Rent expense for the three and nine months ended September 30, 2018, prior to the adoption of ASU 2016-02, was $5.3 million and $16.1 million, respectively.
15. Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 replaces existing revenue recognition standards and expands the disclosure requirements for revenue agreements with customers. ASU 2014-09 has been subsequently amended by additional ASUs, including ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, collectively, “ASU 2014-09 et al.” Under the new standard, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration which the company expects to receive in exchange for those goods or services. ASU 2014-09 et al. does not apply to revenue associated with financial instruments such as loans and securities. ASU 2014-09 et al. was adopted using the modified retrospective transition method as of January 1, 2018, however no cumulative effect adjustment was required. This new guidance was applied to all revenue contracts in place at the date of adoption. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 13: Revenue Recognition” for further details.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This ASU requires equity investments to be measured at fair value with changes in fair value, net of tax, recognized in net income. As a result of implementing this standard, the Company reclassified $339 thousand in unrealized gains on available-for-sale equity investments, net of tax, from accumulated other comprehensive income to retained earnings as of January 1, 2018. Additionally, this amendment requires that entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. As a result of implementing this standard, the Company’s updated process includes identifying a fair value for loans using the exit price notion. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 5: Fair Value Measurements” for further details.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). This update and the related amendments to Topic 842 require lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”); ASU No. 2018-11, Leases (Topic 842), Targeted Improvements (“ASU 2018-11”); and ASU No. 2019-01, Leases (Topic 842), Codification Improvements (“ASU 2019-01”). The new standard establishes a right-of-usean ROU model ("ROU") that requires a lessee to recognize aan ROU asset and lease liability on the balance sheetConsolidated Balance Sheets for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classificationmethod of expense recognition in the income statement. The new standard was effective on January 1, 2019, with early adoption permitted.Consolidated Statements of Operations. The Company adopted these provisions on January 1, 2019. The most significant effects relate to the recognition of new ROU assets and lease liabilities on the balance sheet for real estate operating leases and providing significant new disclosures about leasing activities. Additionally, the Company elected the package of practical expedients, as prescribed by ASU 2016-02. The Company elected not to reassess whether any expired or existing contracts are or contain leases nor the lease classification of those leases. The Company also elected not to reassess any initial direct costs for any existing leases. On adoption, the Company recognized $124.1 million of lease liabilities and $108.5 million of ROU assets. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 14: Lease Accounting” for further details.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments (Topic 326)(“ (“ASU 2016-13”). This update is intendedIn 2019, the FASB issued ASU 2019-04, Codification Improvements to provide financial statement users with more decision-useful information about the expected credit losses onTopic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”); ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”); ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 942)—Effective Dates (“ASU 2019-10”); and ASU
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses (“ASU 2019-11”). This update and related amendments to Topic 326 are intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this update replace the incurred loss impairment methodology in current GAAP with a current expected credit losses (“CECL”)CECL model methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable informationeconomic forecast to inform credit loss estimates. This ASU will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15, 2018, but the Company does not plan on adopting early. The Company plans to adopt on January 1, 2020 utilizing a modified retrospective approach and is currently assessing the impact on the Company's consolidated financial statements and disclosures. Management assembled a project team that has developed an approach for implementation. The project team has selected a third-party software service provider and is implementing a probability of default/loss given default model where the project team has evaluated the use of both peer data and internal data to estimate the expected losses over the remaining life of the portfolio as required by the standard. Further, the team has identified the necessary data requirements and is in the process of testing the material data inputs, and assessing and validating potential model options. Within the Expected Loss model, the project team has determined to use a two factor regression based model identifying two economic factors per loan segment. In addition, we have determined both the forecast and reversion method to be used. The Company continues to develop accounting policies and establish internal controls relevant to the updated methodologies and models.
In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). This amendment requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. This ASU was effective for fiscal years beginning after December 15, 2017, and interim periods within those years. For the three and nine months ended September 30, 2019, $0.8 million and $1.4 million, respectively, are presented within other expense that would have been presented within salaries and employee benefits prior to adoption of ASU 2017-07. For the three and nine months ended September 30, 2018, $131 thousand and $411 thousand, respectively, are presented within other expense that would have been presented within salaries and employee benefits prior to adoption of ASU 2017-07.
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). The standard is intended to improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and to reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company early adopted this ASU as of January 1, 2018 with a modified retrospective transition. As a result of implementing this standard, the Company reclassified $5 thousand in unrealized losses on derivatives from accumulated other comprehensive income to retained earnings as of January 1, 2018. This ASU will provide more flexibility in the Company’s risk management activities and we believe it will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). This update was issued to address a narrow-scope financial reporting issue that arose as a consequence of the change in the tax law. On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (the “Tax Act”), which, among other significant changes, lowers the federal corporate tax rate from 35% to 21% effective January 1, 2018. This update requires a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of the Tax Act. ASC 740 requires that the tax effects of changes in tax rates be recognized in income tax expense/ (benefit) attributable to continuing operations in the period in which the law is enacted. As a result, the tax effect of accumulated other comprehensive income does not reflect the appropriate tax rate. The amendments in this ASU would eliminate the stranded tax effects associated with the change in the federal corporate income tax rate related to the Tax Act and would improve the usefulness of information reported to financial statement users. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted for public business entities for reporting periods for which financial statements have not yet been issued.2019. The Company adopted this update on January 1, 2020 utilizing a modified retrospective approach. On adoption of ASU on December 31, 20172016-13, the Company recognized a decrease in the allowance for loan losses of $20.4 million and made a one-time reclassificationan increase in the reserve for unfunded loan commitments of $1.5$1.4 million. The net, after-tax impact of the decrease in the allowance for loan losses and the increase in the reserve for unfunded loan commitments was an increase to Retained earnings of $13.5 million from accumulated other comprehensive income to retained earnings, which is reflectedas shown in the Consolidated StatementStatements of Changes in Shareholders’ Equity.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases (“ASU 2018-10”), and ASU 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). These updates clarify the guidance in ASU 2016-02 which introduced Topic 842 and add an additional transition method for leases. ASU 2018-11 allows entities to
BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements - (Continued)
initially apply the new lease standard at the adoption date (January 1, 2019 for the Company) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. This transition method is in addition to the initial modified retrospective transition method, which would require an entity to initially apply the new leases standard (subject to specific transition requirements and optional practical expedients) at the beginning of the earliest period presented in the financial statements. Lessees also must provide the new and enhanced disclosures in the period of adoption; ASU 2018-11 would not require the amended disclosures of Topic 842 for comparative periods. The Company adopted these provisions along with those of ASU 2016-02 as of January 1, 2019. The Company has elected to use the prospective transition method and has deemed a cumulative effect adjustment not necessary at adoption. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 14: Lease Accounting”4: Investments”, “Note 6 - Loan Portfolio and Credit Quality”, and “Note 7 - Allowance for Loan Losses” for further details.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. Among other changes, this update removes the requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. This update adds to required disclosures for changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted but the Company does not plan on adopting early.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in ASU 2018-14 remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. This update is effective on a retrospective basis for interim and annual reporting periods beginning January 1, 2021. The Company is still assessing the potential impact for this update and how it applies to the Company’s disclosures surrounding its two non-qualified supplemental executive retirement plans (“SERP”) and a long-term incentive plan (“LTIP”).plan.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) (“ASU 2018-15”). The amendments in ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in ASU 2018-15. This update is effective on a retrospective basis for interim and annual reporting periods beginning January 1, 2021. The Company early adopted this update on January 1, 2019. The adoption of this update did not have a material impact on the consolidated financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting (“ASU 2018-16”). ASU 2018-16 introduces OIS Rate based on the SOFR as an acceptable US benchmark interest rate for purposes of applying hedge accounting under Topic 815. This update is effective for interim and annual reporting periods beginning after December 15, 2018 because the Company has already adopted ASU 2017-12. The Company adopted this update on January 1, 2019. The adoption of this update did not have a material impact on the consolidated financial statements.
In April and May 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”) and ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (“ASU 2019-05”), respectively. These updates clarify the guidance in ASU 2016-13 which introduced Topic 326. ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement. ASU 2019-05 provides entities that have certain instruments within the scope of subtopic 326-20 with an option to irrevocably elect the fair value option. These ASUs will be effective for fiscal years beginning after December 15, 2019. Early adoption is available as of the fiscal year beginning after December 15, 2018, but the Company does not plan on adopting early. The Company is still assessing the potential disclosure impact for these amendments and will adopt on January 1, 2020 in conjunction with ASU 2016-13.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As of and for the three and nine months ended September 30, 20192020
Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” and similar expressions. These statements include, among others, statements regarding our strategy, effectiveness of our investment programs,strategy; evaluations of future interest rate trends and liquidity,future liquidity; expectations as to growthchanges in assets, deposits and results of operations, receiptoperations; the impact of regulatory approval for pending acquisitions, success of acquisitions,the COVID-19 pandemic; future operations, market position and financial position,position; and prospects, plans and objectives of management. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond the Company’s control.
Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned “Risk Factors”; adverse conditionsthe 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 the capitalemployment levels, general business and debt markets and the impact of such conditions on the Company’s business; changes in interest rates; competitive pressures from other financial institutions; the effects of weakness in general economic conditions on a national basis orand in the local markets in which the Company operates; changes in customer behavior; the possibility that future credit losses are higher than currently expected due to changes in economic assumptions, customer behavior or adverse economic developments; turbulence in the capital and debt markets; changes in interest rates; increases in loan defaults and charge-off rates; decreases in the value of securities and other assets; changes in loan default and charge-off rates; the adequacy of loan loss reserves, orreserves; 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 natural disasters;future pandemics; changes in government regulation; reputational risk relating to the riskCompany’s participation in the Paycheck Protection Program and other pandemic-related legislative and regulatory initiatives and programs; risks that goodwill and intangibles recorded in the Company’s financial statements will become impaired; the risk that the Company’s deferred tax assetsasset may not be realized; risks related to the identification and implementation of acquisitions, dispositions and restructurings; changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company’s Annual Report on Form 10-K and updated in the Company’s Quarterly Reports on Form 10-Q and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.
Executive Summary
The Company offers a wide range of private banking, wealth management, and trust services to high net worth individuals, families, businesses and select institutions through its two reportable segments: (i) Private Banking and (ii) Wealth Management and Trust. This Executive Summary provides an overview of the most significant aspects of ourthe Company's operating segments and the Company’s operations in the third quarter of 2019.2020. Details of the matters addressed in this summary are provided elsewhere in this document and, in particular, in the sections immediately following.
| | | As of and for the three months ended September 30, | | | | | | As of and for the three months ended September 30, | |
| 2019 | | 2018 | | $ Change | | % Change | | 2020 | | 2019 | | $ Change | | % Change |
| (In thousands, except per share data) | | | | (In thousands, except per share data and percentages) |
Total revenue | $ | 81,279 |
| | $ | 91,955 |
| | $ | (10,676 | ) | | (12 | )% | Total revenue | $ | 80,869 | | | $ | 81,279 | | | $ | (410) | | | (1) | % |
Provision/ (credit) for loan losses | 167 |
| | (949 | ) | | 1,116 |
| | nm |
| |
Provision/(credit) for loan losses | | Provision/(credit) for loan losses | (4,569) | | | 167 | | | (4,736) | | | nm |
Total operating expense | 55,537 |
| | 68,557 |
| | (13,020 | ) | | (19 | )% | Total operating expense | 60,937 | | | 55,537 | | | 5,400 | | | 10 | % |
Net income from continuing operations | 20,058 |
| | 18,886 |
| | 1,172 |
| | 6 | % | |
Net income before attribution to noncontrolling interests | | Net income before attribution to noncontrolling interests | 22,680 | | | 20,058 | | | 2,622 | | | 13 | % |
Net income attributable to noncontrolling interests | 96 |
| | 924 |
| | (828 | ) | | (90 | )% | Net income attributable to noncontrolling interests | — | | | 96 | | | (96) | | | (100) | % |
Net income attributable to the Company | 19,962 |
| | 17,962 |
| | 2,000 |
| | 11 | % | Net income attributable to the Company | 22,680 | | | 19,962 | | | 2,718 | | | 14 | % |
Diluted earnings per share: | | | | | | | | |
From continuing operations | $ | 0.24 |
| | $ | 0.20 |
| | $ | 0.04 |
| | 20 | % | |
Diluted earnings per share attributable to common shareholders | | Diluted earnings per share attributable to common shareholders | $ | 0.28 | | | $ | 0.24 | | | $ | 0.04 | | | 17 | % |
| | | | | | | | | |
ASSETS UNDER MANAGEMENT AND ADVISORY (“AUM”): | ASSETS UNDER MANAGEMENT AND ADVISORY (“AUM”): | | | | | | | ASSETS UNDER MANAGEMENT AND ADVISORY (“AUM”): | |
Wealth Management and Trust | $ | 14,695,000 |
| | $ | 15,598,000 |
| | (903,000 | ) | | (6 | )% | Wealth Management and Trust | $ | 15,581,000 | | | $ | 14,695,000 | | | $ | 886,000 | | | 6 | % |
| Other (1) | 1,533,000 |
| | 6,832,000 |
| | (5,299,000 | ) | | (78 | )% | Other (1) | 672,000 | | | 1,533,000 | | | (861,000) | | | (56) | % |
Total AUM | $ | 16,228,000 |
| | $ | 22,430,000 |
| | $ | (6,202,000 | ) | | (28 | )% | Total AUM | $ | 16,253,000 | | | $ | 16,228,000 | | | $ | 25,000 | | | — | % |
_____________________
nm = not meaningful
(1) Includes results from Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”)
| |
(1) | Includes the AUM at DGHM of $1.5 billion at September 30, 2019 and $2.1 billion at September 30, 2018, and the AUM at BOS of $4.7 billion at September 30, 2018. |
Net income attributable to the Company was $22.7 million and $20.0 million for the three months ended September 30, 2020 and September 30, 2019, and $18.0 million for the same period of 2018.respectively. The Company recognized total dilutedDiluted earnings per share attributable to common shareholders of $0.24$0.28 and $0.20$0.24 for the three months ended September 30, 2020 and September 30, 2019, and 2018, respectively.
Key items that affected the Company’s results in the third quarter of 20192020 compared to the same period of 20182019 include:
| |
▪ | Total revenue decreased 12%, or $10.7 million, to $81.3 million for the three months ended September 30, 2019, compared to $92.0 million for the same period of 2018 as described below. |
| |
▪ | Total fees and other income decreased 22%, or $7.2 million, to $25.1 million for the three months ended September 30, 2019, compared to $32.3 million for the same period of 2018. This▪Provision for loan losses decreased $4.7 million to a credit of $4.6 million for the three months ended September 30, 2020, compared to the same period of 2019. During the third quarter of 2020, the Company recognized a total provision credit of $2.8 million, which included a provision credit of $4.6 million, and separately, a reserve of $1.8 million for unfunded loan commitments, recognized as Other expense within Noninterest expense. •The decrease in the Allowance for loan losses for the three months ended September 30, 2020 was primarily driven by the divestiture of BOS in 2018, as well as lower AUM balances at September 30, 2019. Total fees and other income represents 31% of Total revenue for the three months ended September 30, 2019, compared to 35% of Total revenue for the same period of 2018. |
| |
▪ | Net interest income decreased 6%, or $3.5 million, to $56.2 million for the three months ended September 30, 2019, compared to $59.6 million for the same period of 2018. Net interest margin (“NIM”) was 2.72% for the three months ended September 30, 2019, representing a decrease of 18 basis points compared to the same period in 2018. The decreases in net interest income and NIM were primarily driven by higher funding costs, partially offset by higher asset yields on cash and investments. |
| |
▪ | Total operating expenses decreased 19%, or $13.0 million, to $55.5 million for the three months ended September 30, 2019, compared to $68.6 million for the same period of 2018. The decrease was primarily |
driven by the divestiture of BOS,latest current reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter, as well as realized savingsthe net impact of the change in the composition and volume of the loan portfolio. These improvements were partially offset by the net impact in the changes of the qualitative factors, and a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts, including consideration for the significant uncertainty related to the duration and severity of economic impacts from efficiencythe COVID-19 pandemic.
▪Total revenue decreased $0.4 million to $80.9 million for the three months ended September 30, 2020, compared to the same period of 2019 as described below.
•Total fees and other income decreased $2.1 million, or 8%, to $23.0 million for the three months ended September 30, 2020, compared to the same period of 2019. The decrease was primarily driven by lower Other banking fee income as a result of lower bank-owned life insurance revenue and lower swap fee income, as well as lower Investment management fees due to the impact of recent outflows of AUM at DGHM. Total fees and other income represents 28% of Total revenue for the three months ended September 30, 2020, compared to 31% of Total revenue for the same period of 2019.
•Net interest income increased $1.7 million, or 3%, to $57.8 million for the three months ended September 30, 2020, compared to the same period of 2019. The increase in Net interest income was primarily driven by the addition of PPP-related income and lower funding costs, partially offset by lower interest on interest-earning assets. Net interest margin (“NIM”) was 2.61% for the three months ended September 30, 2020, a decrease of 11 basis points compared to the same period in 2019. Although Net interest income increased, the decrease in NIM was driven by excess cash balances held at lower yields in the third quarter of 2020 and lower-yielding PPP loans.
▪Total operating expense increased $5.4 million, or 10%, to $60.9 million for the three months ended September 30, 2020, compared to the same period of 2019. The increase was primarily driven by increases in Salaries and employee benefits expense, Information systems expense as a result of new IT initiatives being placed in service, and restructuring chargesthe reserve for unfunded loan commitments within Other expense, partially offset by a decrease in Marketing and business development expense.
▪For the three months ended September 30, 2020, total loans decreased $110.4 million, or 2%, while total deposits increased $400.3 million, or 5%, from the second quarter of $5.92020. The decrease in loans was primarily driven by the sale of $72.0 million of residential mortgage loans in the third quarter of 2020, while the increase in deposits was primarily driven by clients maintaining additional cash liquidity. The Company’s loan-to-deposit ratio decreased from 99% as of June 30, 2020 to 92% as of September 30, 2020, driven by strong deposit inflows. Deposits are the Company’s primary source of funds to originate loans. When the Company’s loan-to-deposit ratio exceeds 100%, the Company relies on other funding sources, such as FHLB borrowings or federal funds, to fund loan growth. If the Company is unable to grow deposits in line with loan growth, it may evaluate other options such as slowing loan growth, selling a portion of portfolio loans, or originating mortgage loans as held-for-sale. Additionally if the Company has excess deposits, the Company may seek to to earn a better yield by investing excess cash in loan growth, purchasing investment securities or other cash management strategies.
The Company’s Private Banking segment reported Net income attributable to the Company of $19.3 million in the third quarter of 2018.
| |
▪ | For the three months ended September 30, 2019, total loans decreased slightly by $13.1 million, while total deposits increased $220.3 million, or 3%, from prior quarter. During the third quarter of 2019, the Company sold $92.4 million of residential mortgage loans. The Company’s loan-to-deposit ratio was 106% as of September 30, 2019. Deposits are the Company’s primary source of funds to originate loans. When the Company’s loan-to-deposit ratio exceeds 100%, we rely on other funding sources such as FHLB borrowings or federal funds to fund loan growth. If the Company is unable to grow deposits in line with loan growth, we will evaluate other options such as slowing loan growth, selling a portion of portfolio loans, or originating mortgage loans as held for sale. |
The Company’s Private Banking segment reported net income attributable to the Company of $17.9 million in the third quarter of 2019,2020, compared to $15.7$17.9 million for the same period of 2018.2019. Net income attributable to the Company increased $2.3$1.4 million or 15%, from the same period in 2018 largely2019, primarily driven by a decrease of $6.6$4.7 million to the Provision for loan losses and a decrease in operating expenses due to realized savings from efficiency initiatives, a $5.2 million restructuring charge in the third quarterIncome tax expense of 2018, and an FDIC insurance credit,$1.3 million. These items were partially offset by a decrease of $3.4 million in total revenue due to lower net interest income, and an increase of $1.1$5.0 million in Total operating expense primarily due to increases in Information systems expense as a result of new IT initiatives being placed in service, Salaries and employee benefits expense, and Other expense related to the provisionreserve for unfunded loan loss.commitments.
The Company’s Wealth Management and Trust segment reported netNet income attributable to the Company of $3.6$1.9 million in the third quarter of 2019,2020, compared to $2.3$3.6 million for the same period of 2018.2019. The increasedecrease of $1.3$1.6 million, or 46%, was primarily driven by an increase of $1.7 million in Total operating expense and a decrease of $2.5$0.9 million in total operating expenses due to realized savings from efficiency initiatives, and a $0.6 million restructuring charge in the third quarter of 2018, partially offset by a decrease of $0.7 million in totalTotal revenue due to the impact of lower AUM on accounts that are billed based on AUM levels.fee revenues as of fee billing dates and lower effective fee rates. The increase in Total operating expense was primarily driven by an increase in Salaries and employee benefits expense related to the hiring of additional advisors as part of the Company's strategic initiative to grow the Wealth Management and Trust business, as well as an increase in Information systems expense, partially offset by a decrease in Other expense. Wealth Management and Trust AUM decreasedincreased $0.9 billion, or 6%, to $15.6 billion at September 30, 2020 from $14.7 billion at September 30, 2019 from $15.6 billion at September 30, 2018.2019. The decreaseincrease in AUM was primarily driven by lost businessfavorable market returns of $1.3$0.8 billion and current clienttotal net outflowsflows of $0.5 billion, partially offset by new business of $0.7 billion and positive results of $0.2$0.1 billion for the twelve months ended September 30, 2019.2020.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic has caused, and continues to cause, substantial disruptions to the global economy and to the customers and communities that we serve. In response to the pandemic, the Company implemented business continuity contingency plans, including company-wide remote working arrangements. We are also focused on supporting our clients who may be experiencing a financial hardship due to the COVID-19 pandemic, including by participating in the Small Business Administration’s (the “SBA”) Paycheck Protection Program (the “PPP”) and offering loan deferrals and forbearance as needed, including our mortgage deferment program and Commercial and industrial loan deferment program, and creating the Commercial real estate second loan program. We will continue to evaluate this fluid situation and take additional actions as necessary.
Participation in the PPP
The CARES Act initially appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. The CARES Act provided funding to the SBA for use for the PPP. Under the terms of the PPP, certain businesses can apply for loans through qualified financial institutions, such as the Bank, based on eligibility criteria. The PPP provides loans to eligible businesses with an initial term of up to five years at an interest rate of 1.0%. Loans issued under the PPP will be forgiven if the borrower uses at least 60% of the proceeds on payroll costs and other eligible costs such as utilities or rent for a period of up to 24 weeks, following the loan funding date. This was changed from 75% and 8 weeks by the Paycheck Protection Program Flexibility Act signed into law on June 5, 2020. The SBA has issued an interim final rule in which it has provided that a lender may rely on certifications made by a borrower to determine the borrower’s eligibility for a PPP loan and use of loan proceeds, subject to a good faith review, and to determine the qualifying loan amount and eligibility for loan forgiveness.
Loans issued by participating financial institutions are 100% guaranteed by the SBA. Banks will receive a processing fee from the SBA from 1.0% to 5.0% based on the size of the loan. Loans up to $350 thousand will have a 5.0% fee, loans between $350 thousand and $2.0 million will have a 3.0% fee, and loans greater than $2.0 million will have a 1.0% fee.
In conjunction with the PPP, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has created a lending facility for qualified financial institutions. The Paycheck Protection Program Liquidity Facility (the “PPPLF”) will extend credit to depository institutions with a term of up to five years at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility. As of September 30, 2020, the Bank has not participated in the PPPLF.
As of September 30, 2020, the Bank processed 1,045 loans totaling $380.3 million under the PPP program, primarily in the second quarter of 2020. The Bank has received $10.9 million in processing fees from the SBA, which is netted against the principal balance on the Consolidated Balance Sheets and will be accreted through net interest income on a straight-line basis over the life of the loan. If a loan is forgiven or otherwise paid off, the remainder of the processing fee will be accreted through net interest income. As of September 30, 2020, the balance of PPP loans was $371.5 million, and $2.2 million was accreted through net interest income.
Mortgage deferment program
In response to the COVID-19 pandemic, the Bank initiated a mortgage deferment program under which principal and interest payments on qualifying loans are generally deferred for initially three months and the loan term is extended three months; if requested, the loan may be deferred for a subsequent three months. Loans that are deferred under the program are not considered TDRs or past due based on current regulatory guidance. In total, approximately 350 residential and home equity loans totaling approximately $220.0 million have been processed under the program. As of September 30, 2020, deferrals for approximately 200 loans totaling approximately $120.0 million have expired with the loans returning to payment, while approximately 140 loans totaling approximately $100.0 million remain in deferral under the program. Approximately 10 loans totaling less than $1.0 million are delinquent on payment terms as of September 30, 2020 after the deferral expired, primarily First Time Home Buyer loans.
Commercial and industrial loan deferment program
In response to the COVID-19 pandemic, the Bank initiated a program offering qualified Commercial and industrial borrowers principal payment deferral for six months, with the deferred principal added to the last payment. In total, approximately 90 Commercial and industrial loans totaling approximately $125.0 million have been processed under the program. As of September 30, 2020, deferrals for approximately 60 loans totaling approximately $75.0 million have expired with the loans returning to payment, while approximately 30 loans totaling approximately $50.0 million remain in deferral under the program. Of the loans that came off deferral, no loans are delinquent on payment terms as of September 30, 2020.
Commercial real estate second loan program
In response to the COVID-19 pandemic, the Bank also initiated a program to offer qualifying Commercial real estate borrowers a second mortgage to cover up to one year of principal and interest payments. In order to qualify for the loan, the total exposure after receiving the second mortgage for each borrower could not exceed a 75% loan-to-value ratio, and the loans were required to be current at the time of application, amongst other conditions. In total, borrowers with approximately 240 existing loans totaling $1.3 billion requested and were approved for these second mortgages, representing approximately 50% of the Commercial real estate loan balance. As of September 30, 2020, the borrowers associated with the $1.3 billion of existing loans received approximately $80.0 million in additional funding under this program. The Company does not anticipate a material increase in the $80.0 million balance of new loans in the future, and the principal balance will amortize down over the life of the loan, generally five years. In addition to, and outside of the Commercial real estate second loan program, the Bank offered qualified Commercial real estate borrowers principal payment deferral for up to twelve months, with the deferred principal added to the balance due at maturity. In total, approximately 10 Commercial real estate borrowers with loans totaling approximately $55.0 million accepted this accommodation. As of September 30, 2020, deferrals for approximately 5 borrowers with loans totaling approximately $15.0 million have expired with the loans returning to payment, while approximately 5 borrowers with loans totaling approximately $40.0 million remain in deferral. Of the loans that came off deferral, no loans are delinquent on payment terms as of September 30, 2020. The entire Commercial real estate portfolio will continue to be monitored for credit deterioration regardless of their participation in the plan.
Credit quality and Allowance for loan loss
The Company completedcontinues to monitor and evaluate the saleimpact of its ownership interestthe COVID-19 pandemic on the credit quality of our assets. Total criticized and classified loans as of September 30, 2020 was $322.6 million, an increase of $16.5 million, or 5%, linked quarter, primarily driven by the downgrade of $71.0 million of loans, partially offset by $54.0 million of payoffs, paydowns and upgrades. Of the $71.0 million in BOS on December 3, 2018. The results of BOS through its closing date remain consolidateddowngrades in the resultsthird quarter of 2020, $62.0 million were Commercial real estate loans across 16 relationships, primarily with hospitality and retail clients. During the third quarter of 2020, the Company recognized a total net provision credit of $2.8 million primarily driven by the latest reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter. Within the Commercial real estate portfolio, the impact of the improving current reasonable and supportable economic forecasts was partially offset by additional reserves needed to account for the increase in criticized and classified loans in the Commercial real estate portfolio.
Other accounting matters
There have been no significant changes to judgments in determining the fair value of assets or liabilities, and there have been no material impairments of financial assets. The Company through its closing date and in prior periods. Results afterwill continue to monitor the closefair value of the transaction do not include BOS operations.assets to determine if trigger events exist to warrant further impairment testing.
Critical Accounting Policies
Critical accounting policies reflect significant judgments and uncertainties, which could potentially result in materially different results under different assumptions and conditions. The Company believes that its most critical accounting policies upon which its financial condition depends, which involve the most complex or subjective decisions or assessments, are the allowance for loan losses, the valuation of goodwill and intangible assets and the analysis for impairment, and income tax estimates. These policies are discussed in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019.
Subsequent to the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, there was one change to the critical accounting policies. Upon the adoption of ASU 2016-13, .Financial Instruments (Topic 326) (“ASU 2016-13”) on January 1, 2020, management's policy and processes for the allowance for loan losses have changed. The updates in this standard replace the incurred loss impairment methodology with a CECL model methodology. The CECL model methodology incorporates current conditions, reasonable and supportable economic forecasts, and prepayments to estimate loan losses over the life of the loan. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses” for further discussion on the new policy and processes. There have been no other changes to thesethe Company's policies through the filing of this Quarterly Report on Form 10-Q.
Results of operations for the three and nine months ended September 30, 20192020 versus September 30, 20182019
Net Income.income. The Company recorded netNet income from continuing operationsattributable to the Company for the three and nine months ended September 30, 20192020 of $20.1$22.7 million and $59.0$20.2 million, respectively, compared to $18.9Net income attributable to the Company of $20.0 million and $48.3$58.8 million for the same respective periods in 2018. Net income2019.
The Company recognized Diluted earnings per share attributable to the Company, which includes income from both continuing and discontinued operations, if any, as well as net income attributable to noncontrolling interests,common shareholders for the three and nine months ended September 30, 2019 was $20.0 million2020 of $0.28 per share and $58.8 million,$0.25 per share, respectively, compared to $18.0 million and $47.1 million for the same respective periods in 2018.
The Company recorded no net income from discontinued operations for the nine months ended September 30, 2019, compared to $1.7 million for the same period in 2018, the majority of which was recorded in the first quarter of 2018. The Company received the final payment related to a revenue sharing agreement with Westfield Capital Management Company, LLC (“Westfield”) in the first quarter of 2018. The Company recognized a tax credit in the fourth quarter of 2018, recorded in discontinued operations, related to an adjustment to deferred taxes in connection with the Westfield revenue share. The Company will not receive additional income from Westfield now that the final payment has been received.
The Company recognized diluted EPSDiluted earnings per share attributable to common shareholders which includes both continuing and discontinued operations, if any, for the three and nine months ended September 30, 2019 of $0.24 per share and $0.71 per share respectively, compared to $0.20 per share and $0.50 per share for the same respective periods in 2018. Net income from continuing operations for 2019 and 2018 were partially offset by charges that reduce income available to common shareholders.2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 2: Earnings Per Share” for further detail on these chargesadjustments made to arrive at income available to common shareholders.
The following discussions are based on the Company’s continuing operations, unless otherwise stated. The following table presents selected financial highlights:
| | | Three months ended September 30, | | $ Change | | % Change | | Nine months ended September 30, | | $ Change | | % Change | | Three months ended September 30, | | $ Change | | % Change | | Nine months ended September 30, | | $ Change | | % Change |
| 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
| (In thousands) | | (In thousands, except percentages) |
Net interest income | $ | 56,153 |
| | $ | 59,641 |
| | (3,488 | ) | | (6 | )% | | $ | 171,951 |
| | $ | 174,569 |
| | $ | (2,618 | ) | | (1 | )% | Net interest income | $ | 57,824 | | | $ | 56,153 | | | 1,671 | | | 3 | % | | $ | 174,019 | | | $ | 171,951 | | | $ | 2,068 | | | 1 | % |
Fees and other income | 25,126 |
| | 32,314 |
| | (7,188 | ) | | (22 | )% | | 74,754 |
| | 104,152 |
| | (29,398 | ) | | (28 | )% | Fees and other income | 23,045 | | | 25,126 | | | (2,081) | | | (8) | % | | 67,228 | | | 74,754 | | | (7,526) | | | (10) | % |
Total revenue | 81,279 |
| | 91,955 |
| | (10,676 | ) | | (12 | )% | | 246,705 |
| | 278,721 |
| | (32,016 | ) | | (11 | )% | Total revenue | 80,869 | | | 81,279 | | | (410) | | | (1) | % | | 241,247 | | | 246,705 | | | (5,458) | | | (2) | % |
Provision/ (credit) for loan losses | 167 |
| | (949 | ) | | 1,116 |
| | nm |
| | 104 |
| | (2,291 | ) | | 2,395 |
| | nm |
| |
Provision/(credit) for loan losses | | Provision/(credit) for loan losses | (4,569) | | | 167 | | | (4,736) | | | nm | | 34,997 | | | 104 | | | 34,893 | | | nm |
Operating expense | 55,537 |
| | 68,557 |
| | (13,020 | ) | | (19 | )% | | 171,749 |
| | 203,798 |
| | (32,049 | ) | | (16 | )% | Operating expense | 60,937 | | | 55,537 | | | 5,400 | | | 10 | % | | 183,298 | | | 171,749 | | | 11,549 | | | 7 | % |
Income tax expense | 5,517 |
| | 5,461 |
| | 56 |
| | 1 | % | | 15,803 |
| | 28,886 |
| | (13,083 | ) | | (45 | )% | Income tax expense | 1,821 | | | 5,517 | | | (3,696) | | | (67) | % | | 2,764 | | | 15,803 | | | (13,039) | | | (83) | % |
Net income from continuing operations | 20,058 |
| | 18,886 |
| | 1,172 |
| | 6 | % | | 59,049 |
| | 48,328 |
| | 10,721 |
| | 22 | % | |
Net income from discontinued operations | — |
| | — |
| | — |
| | nm |
| | — |
| | 1,696 |
| | (1,696 | ) | | nm |
| |
Net income before attribution to noncontrolling interests | | Net income before attribution to noncontrolling interests | 22,680 | | | 20,058 | | | 2,622 | | | 13 | % | | 20,188 | | | 59,049 | | | (38,861) | | | (66) | % |
| Less: Net income attributable to noncontrolling interests | 96 |
| | 924 |
| | (828 | ) | | (90 | )% | | 265 |
| | 2,942 |
| | (2,677 | ) | | (91 | )% | Less: Net income attributable to noncontrolling interests | — | | | 96 | | | (96) | | | (100) | % | | 6 | | | 265 | | | (259) | | | (98) | % |
Net income attributable to the Company | $ | 19,962 |
| | $ | 17,962 |
| | $ | 2,000 |
| | 11 | % | | $ | 58,784 |
| | $ | 47,082 |
| | $ | 11,702 |
| | 25 | % | Net income attributable to the Company | $ | 22,680 | | | $ | 19,962 | | | $ | 2,718 | | | 14 | % | | $ | 20,182 | | | $ | 58,784 | | | $ | (38,602) | | | (66) | % |
_____________________
nm = not meaningful
Net interest income. Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. NIM is the amount of net interest income expressed as a percentage of average interest-earning assets. The average rate earned on interest-earning assets is the amount of annualized interest income expressed as a percentage of average interest-earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities. When credit quality declines and loans are placed on nonaccrual status, NIM can decrease because
the same assets are earning less income. Loans graded as substandard but still accruing interest income totaled $63.3$81.8 million at September 30, 20192020 and could be placed on nonaccrual status if their credit quality declines further.
Net interest income for the three months ended September 30, 20192020 was $56.2$57.8 million, a decreasean increase of $3.5$1.7 million, or 6%3%, compared to the same period in 2018. For2019. The increase was primarily driven by lower funding costs and the addition of PPP-related income in 2020, partially offset by lower interest on interest-earning assets. NIM was 2.61% for the three months ended September 30, 2020, a decrease of 11 basis points compared to the same period in 2019. Although Net interest income increased, the decrease in NIM was primarily driven by the addition of lower-yielding PPP loans in 2020 and the impact of excess cash balances earning a lower yield.
Net interest income for the nine months ended September 30, 2019, net interest income2020 was $172.0$174.0 million, a decreasean increase of $2.6$2.1 million, or 1%, compared to the same period in 2018.2019. The decreases for the three and nine months wereincrease was primarily driven by higherlower funding costs and the addition of PPP-related income in 2020, partially offset by higher asset yields and higher loan volumes. Thelower interest on interest-earning assets. NIM was 2.72%2.71% for the threenine months ended September 30, 2019,2020, a decrease of eighteen9 basis points compared to the same period in 2018. For2019. Although Net interest income increased, the nine months ended September 30, 2019, the NIM was 2.80%, a decrease of eight basis points compared to the same period in 2018. The decrease in NIM for the three and nine month periods ended September 30, 2019 is also primarilywas driven by higher funding costs, partially offset by higher asset yields and higher loan volumes.the addition of lower-yielding PPP loans in 2020.
Previously, the Company reported NIM on both a GAAP basis and on a fully taxable equivalent ("FTE") basis to enhance comparability. Currently, the FTE adjustment for interest income on non-taxable investments and loans is immaterial due to the decline in the federal tax rate in 2018 and the recent increases in interest expense. Therefore, FTE has not been applied, and for comparison purposes GAAP amounts are shown for all periods presented.
The following tables present the composition of the Company’s NIM for the three and nine months ended September 30, 20192020 and 2018.2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Average Balance | | Interest Income/Expense | | Average Yield/Rate (1) |
| As of and for the three months ended September 30, |
AVERAGE BALANCE SHEET: | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
AVERAGE ASSETS | (In thousands) | | | | |
Interest-earning assets: | | | | | | | | | | | |
Cash and investments: (2) | | | | | | | | | | | |
Taxable investment securities | $ | 201,515 | | | $ | 198,655 | | | $ | 853 | | | $ | 938 | | | 1.69 | % | | 1.95 | % |
Non-taxable investment securities | 313,130 | | | 305,108 | | | 1,974 | | | 1,924 | | | 2.52 | % | | 2.52 | % |
Mortgage-backed securities | 515,813 | | | 492,514 | | | 2,354 | | | 2,622 | | | 1.83 | % | | 2.13 | % |
Short-term investments and other | 432,117 | | | 101,958 | | | 654 | | | 1,084 | | | 0.59 | % | | 4.06 | % |
Total cash and investments | 1,462,575 | | | 1,098,235 | | | 5,835 | | | 6,568 | | | 1.59 | % | | 2.39 | % |
Loans: (3) | | | | | | | | | | | |
Commercial and industrial | 1,032,816 | | | 1,101,672 | | | 8,314 | | | 11,523 | | | 3.15 | % | | 4.09 | % |
Paycheck Protection Program | 373,047 | | | — | | | 2,390 | | | — | | | 2.51 | % | | — | % |
Commercial real estate | 2,652,770 | | | 2,518,048 | | | 23,546 | | | 29,118 | | | 3.47 | % | | 4.52 | % |
Construction and land | 218,211 | | | 195,843 | | | 2,109 | | | 2,410 | | | 3.78 | % | | 4.82 | % |
Residential | 2,809,871 | | | 3,016,265 | | | 22,089 | | | 25,567 | | | 3.14 | % | | 3.39 | % |
Home equity | 84,226 | | | 89,068 | | | 623 | | | 1,121 | | | 2.94 | % | | 4.99 | % |
Other consumer | 111,657 | | | 127,987 | | | 547 | | | 1,297 | | | 1.95 | % | | 4.02 | % |
Total loans | 7,282,598 | | | 7,048,883 | | | 59,618 | | | 71,036 | | | 3.23 | % | | 3.98 | % |
Total earning assets | 8,745,173 | | | 8,147,118 | | | 65,453 | | | 77,604 | | | 2.96 | % | | 3.76 | % |
LESS: Allowance for loan losses | 89,370 | | | 75,199 | | | | | | | | | |
Cash and due from banks (non-interest bearing) | 34,761 | | | 49,065 | | | | | | | | | |
Other assets | 655,999 | | | 544,368 | | | | | | | | | |
TOTAL AVERAGE ASSETS | $ | 9,346,563 | | | $ | 8,665,352 | | | | | | | | | |
AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Savings and NOW | $ | 722,742 | | | $ | 615,730 | | | $ | 197 | | | $ | 275 | | | 0.11 | % | | 0.18 | % |
Money market | 4,070,026 | | | 3,378,006 | | | 4,790 | | | 11,523 | | | 0.47 | % | | 1.35 | % |
Certificates of deposit | 585,729 | | | 711,299 | | | 1,447 | | | 3,689 | | | 0.98 | % | | 2.06 | % |
Total interest-bearing deposits | 5,378,497 | | | 4,705,035 | | | 6,434 | | | 15,487 | | | 0.48 | % | | 1.31 | % |
Junior subordinated debentures | 106,363 | | | 106,363 | | | 508 | | | 1,022 | | | 1.87 | % | | 3.76 | % |
FHLB borrowings and other | 388,412 | | | 833,535 | | | 687 | | | 4,942 | | | 0.69 | % | | 2.32 | % |
Total interest-bearing liabilities | 5,873,272 | | | 5,644,933 | | | 7,629 | | | 21,451 | | | 0.52 | % | | 1.50 | % |
Non-interest bearing demand deposits | 2,321,223 | | | 1,953,214 | | | | | | | | | |
Payables and other liabilities | 309,462 | | | 258,371 | | | | | | | | | |
Total average liabilities | 8,503,957 | | | 7,856,518 | | | | | | | | | |
Redeemable noncontrolling interests | — | | | 944 | | | | | | | | | |
Average shareholders’ equity | 842,606 | | | 807,890 | | | | | | | | | |
TOTAL AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY | $ | 9,346,563 | | | $ | 8,665,352 | | | | | | | | | |
Net interest income | | | | | $ | 57,824 | | | $ | 56,153 | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Interest rate spread | | | | | | | | | 2.44 | % | | 2.26 | % |
NIM | | | | | | | | | 2.61 | % | | 2.72 | % |
| | | Average Balance | | Interest Income/Expense | | Average Yield/Rate (1) | | Average Balance | | Interest Income/Expense | | Average Yield/Rate (1) |
| As of and for the three months ended September 30, | | As of and for the nine months ended September 30, |
AVERAGE BALANCE SHEET: | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | AVERAGE BALANCE SHEET: | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
AVERAGE ASSETS | (In thousands) | | | | | AVERAGE ASSETS | (In thousands) | | | | |
Interest-earning assets: | | | | | | | | | | | | Interest-earning assets: | |
Cash and investments: (2) | | | | | | | | | | | | Cash and investments: (2) | |
Taxable investment securities | $ | 198,655 |
| | $ | 324,583 |
| | $ | 938 |
| | $ | 1,510 |
| | 1.95 | % | | 1.86 | % | Taxable investment securities | $ | 200,346 | | | $ | 223,072 | | | $ | 2,580 | | | $ | 3,244 | | | 1.72 | % | | 1.94 | % |
Non-taxable investment securities | 305,108 |
| | 297,710 |
| | 1,924 |
| | 1,779 |
| | 2.52 | % | | 2.39 | % | Non-taxable investment securities | 315,101 | | | 305,422 | | | 5,977 | | | 5,726 | | | 2.53 | % | | 2.50 | % |
Mortgage-backed securities | 492,514 |
| | 552,820 |
| | 2,622 |
| | 2,941 |
| | 2.13 | % | | 2.13 | % | Mortgage-backed securities | 514,043 | | | 507,338 | | | 7,707 | | | 8,225 | | | 2.00 | % | | 2.16 | % |
Short-term investments and other | 101,958 |
| | 204,814 |
| | 1,084 |
| | 1,617 |
| | 4.06 | % | | 3.11 | % | Short-term investments and other | 256,143 | | | 104,225 | | | 2,307 | | | 3,049 | | | 1.19 | % | | 3.78 | % |
Total cash and investments | 1,098,235 |
| | 1,379,927 |
| | 6,568 |
| | 7,847 |
| | 2.39 | % | | 2.27 | % | Total cash and investments | 1,285,633 | | | 1,140,057 | | | 18,571 | | | 20,244 | | | 1.92 | % | | 2.36 | % |
Loans: (3) | | | | | | | | | | | | Loans: (3) | | | | | | | | | | | |
Commercial and industrial | 1,101,672 |
| | 998,817 |
| | 11,523 |
| | 9,894 |
| | 4.09 | % | | 3.88 | % | Commercial and industrial | 1,074,159 | | | 1,088,027 | | | 28,746 | | | 33,673 | | | 3.51 | % | | 4.08 | % |
Paycheck Protection Program | | Paycheck Protection Program | 218,175 | | | — | | | 3,963 | | | — | | | 2.41 | % | | — | % |
Commercial real estate | 2,518,048 |
| | 2,475,143 |
| | 29,118 |
| | 29,482 |
| | 4.52 | % | | 4.66 | % | Commercial real estate | 2,631,461 | | | 2,474,804 | | | 75,630 | | | 87,222 | | | 3.78 | % | | 4.65 | % |
Construction and land | 195,843 |
| | 179,248 |
| | 2,410 |
| | 2,193 |
| | 4.82 | % | | 4.79 | % | Construction and land | 228,243 | | | 203,211 | | | 6,932 | | | 7,610 | | | 3.99 | % | | 4.94 | % |
Residential | 3,016,265 |
| | 2,836,593 |
| | 25,567 |
| | 23,907 |
| | 3.39 | % | | 3.37 | % | Residential | 2,841,023 | | | 2,999,480 | | | 68,636 | | | 76,847 | | | 3.22 | % | | 3.42 | % |
Home equity | 89,068 |
| | 94,050 |
| | 1,121 |
| | 1,089 |
| | 4.99 | % | | 4.59 | % | Home equity | 86,186 | | | 90,361 | | | 2,225 | | | 3,388 | | | 3.44 | % | | 5.01 | % |
Other consumer | 127,987 |
| | 163,224 |
| | 1,297 |
| | 1,689 |
| | 4.02 | % | | 4.11 | % | Other consumer | 122,706 | | | 128,879 | | | 2,651 | | | 4,172 | | | 2.88 | % | | 4.33 | % |
Total loans | 7,048,883 |
| | 6,747,075 |
| | 71,036 |
| | 68,254 |
| | 3.98 | % | | 3.99 | % | Total loans | 7,201,953 | | | 6,984,762 | | | 188,783 | | | 212,912 | | | 3.46 | % | | 4.04 | % |
Total earning assets | 8,147,118 |
| | 8,127,002 |
| | 77,604 |
| | 76,101 |
| | 3.76 | % | | 3.70 | % | Total earning assets | 8,487,586 | | | 8,124,819 | | | 207,354 | | | 233,156 | | | 3.23 | % | | 3.80 | % |
LESS: Allowance for loan losses | 75,199 |
| | 73,861 |
| | | | | | | | | LESS: Allowance for loan losses | 69,929 | | | 74,863 | | | | | | | | | |
Cash and due from banks (non-interest bearing) | 49,065 |
| | 46,056 |
| | | | | | | | | Cash and due from banks (non-interest bearing) | 41,461 | | | 46,906 | | |
Other assets | 544,368 |
| | 392,757 |
| | | | | | | | | Other assets | 620,313 | | | 516,642 | | |
TOTAL AVERAGE ASSETS | $ | 8,665,352 |
| | $ | 8,491,954 |
| | | | | | | | | TOTAL AVERAGE ASSETS | $ | 9,079,431 | | | $ | 8,613,504 | | |
AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY | |
AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY | | AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY |
Interest-bearing liabilities: | | | | | | | | | | | | Interest-bearing liabilities: | |
Interest-bearing deposits: | | | | | | | | | | | | Interest-bearing deposits: | |
| Savings and NOW | $ | 615,730 |
| | $ | 693,419 |
| | $ | 275 |
| | $ | 301 |
| | 0.18 | % | | 0.17 | % | Savings and NOW | $ | 680,962 | | | $ | 658,154 | | | $ | 616 | | | $ | 847 | | | 0.12 | % | | 0.17 | % |
Money market | 3,378,006 |
| | 3,244,628 |
| | 11,523 |
| | 8,110 |
| | 1.35 | % | | 0.99 | % | Money market | 3,835,219 | | | 3,317,117 | | | 19,295 | | | 32,072 | | | 0.67 | % | | 1.29 | % |
Certificates of deposit | 711,299 |
| | 730,117 |
| | 3,689 |
| | 3,076 |
| | 2.06 | % | | 1.67 | % | Certificates of deposit | 641,800 | | | 746,453 | | | 6,654 | | | 11,141 | | | 1.38 | % | | 2.00 | % |
Total interest-bearing deposits | 4,705,035 |
| | 4,668,164 |
| | 15,487 |
| | 11,487 |
| | 1.31 | % | | 0.98 | % | Total interest-bearing deposits | 5,157,981 | | | 4,721,724 | | | 26,565 | | | 44,060 | | | 0.69 | % | | 1.25 | % |
Junior subordinated debentures | 106,363 |
| | 106,363 |
| | 1,022 |
| | 1,028 |
| | 3.76 | % | | 3.78 | % | Junior subordinated debentures | 106,363 | | | 106,363 | | | 2,189 | | | 3,223 | | | 2.74 | % | | 4.05 | % |
FHLB borrowings and other | 833,535 |
| | 768,015 |
| | 4,942 |
| | 3,945 |
| | 2.32 | % | | 2.01 | % | FHLB borrowings and other | 484,674 | | | 801,519 | | | 4,581 | | | 13,922 | | | 1.24 | % | | 2.29 | % |
Total interest-bearing liabilities | 5,644,933 |
| | 5,542,542 |
| | 21,451 |
| | 16,460 |
| | 1.50 | % | | 1.17 | % | Total interest-bearing liabilities | 5,749,018 | | | 5,629,606 | | | 33,335 | | | 61,205 | | | 0.77 | % | | 1.45 | % |
Non-interest bearing demand deposits | 1,953,214 |
| | 2,063,642 |
| | | | | | | | | Non-interest bearing demand deposits | 2,194,237 | | | 1,949,948 | | | | | | | | | |
Payables and other liabilities | 258,371 |
| | 135,508 |
| | | | | | | | | Payables and other liabilities | 295,327 | | | 243,370 | | |
Total average liabilities | 7,856,518 |
| | 7,741,692 |
| | | | | | | | | Total average liabilities | 8,238,582 | | | 7,822,924 | | |
Redeemable noncontrolling interests | 944 |
| | 13,074 |
| | | | | | | | | Redeemable noncontrolling interests | 400 | | | 1,642 | | |
Average shareholders’ equity | 807,890 |
| | 737,188 |
| | | | | | | | | Average shareholders’ equity | 840,449 | | | 788,938 | | |
TOTAL AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY | $ | 8,665,352 |
| | $ | 8,491,954 |
| | | | | | | | | |
TOTAL AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY | | TOTAL AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS’ EQUITY | $ | 9,079,431 | | | $ | 8,613,504 | | |
Net interest income | | | | | $ | 56,153 |
| | $ | 59,641 |
| | | | | Net interest income | | | | | $ | 174,019 | | | $ | 171,951 | | |
| Interest rate spread | | | | | | | | | 2.26 | % | | 2.53 | % | Interest rate spread | | | | | | 2.46 | % | | 2.35 | % |
Net interest margin | | | | | | | | | 2.72 | % | | 2.90 | % | |
NIM | | NIM | | 2.71 | % | | 2.80 | % |
__________________
| |
(2) | Investments classified as available-for-sale and held-to-maturity are shown in the average balance sheet at amortized cost. |
| |
(3) | (1) Annualized. (2) Investments classified as Available-for-sale and Held-to-maturity are shown in the average balance sheet at amortized cost. (3) Includes loans held for sale and nonaccrual loans. |
|
| | | | | | | | | | | | | | | | | | | | | |
| Average Balance | | Interest Income/Expense | | Average Yield/Rate (1) |
| As of and for the nine months ended September 30, |
AVERAGE BALANCE SHEET: | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
AVERAGE ASSETS | (In thousands) | | | | |
Interest-earning assets: | | | | | | | | | | | |
Cash and investments: (2) | | | | | | | | | | | |
Taxable investment securities | $ | 223,072 |
| | $ | 328,054 |
| | $ | 3,244 |
| | $ | 4,521 |
| | 1.94 | % | | 1.84 | % |
Non-taxable investment securities | 305,422 |
| | 297,509 |
| | 5,726 |
| | 5,261 |
| | 2.50 | % | | 2.36 | % |
Mortgage-backed securities | 507,338 |
| | 570,578 |
| | 8,225 |
| | 9,168 |
| | 2.16 | % | | 2.14 | % |
Short-term investments and other | 104,225 |
| | 174,736 |
| | 3,049 |
| | 3,831 |
| | 3.78 | % | | 2.91 | % |
Total cash and investments | 1,140,057 |
| | 1,370,877 |
| | 20,244 |
| | 22,781 |
| | 2.36 | % | | 2.21 | % |
Loans: (3) | | | | | | | | | | | |
Commercial and industrial | 1,088,027 |
| | 969,063 |
| | 33,673 |
| | 27,554 |
| | 4.08 | % | | 3.75 | % |
Commercial real estate | 2,474,804 |
| | 2,464,788 |
| | 87,222 |
| | 83,020 |
| | 4.65 | % | | 4.44 | % |
Construction and land | 203,211 |
| | 171,825 |
| | 7,610 |
| | 6,142 |
| | 4.94 | % | | 4.71 | % |
Residential | 2,999,480 |
| | 2,771,875 |
| | 76,847 |
| | 68,263 |
| | 3.42 | % | | 3.28 | % |
Home equity | 90,361 |
| | 95,217 |
| | 3,388 |
| | 3,172 |
| | 5.01 | % | | 4.45 | % |
Other consumer | 128,879 |
| | 176,086 |
| | 4,172 |
| | 5,080 |
| | 4.33 | % | | 3.86 | % |
Total loans | 6,984,762 |
| | 6,648,854 |
| | 212,912 |
| | 193,231 |
| | 4.04 | % | | 3.85 | % |
Total earning assets | 8,124,819 |
| | 8,019,731 |
| | 233,156 |
| | 216,012 |
| | 3.80 | % | | 3.57 | % |
LESS: Allowance for loan losses | 74,863 |
| | 73,894 |
| | | | | | | | |
Cash and due from banks (non-interest bearing) | 46,906 |
| | 47,859 |
| | | | | | | | |
Other assets | 516,642 |
| | 404,375 |
| | | | | | | | |
TOTAL AVERAGE ASSETS | $ | 8,613,504 |
| | $ | 8,398,071 |
| | | | | | | | |
AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY |
Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Savings and NOW | $ | 658,154 |
| | $ | 709,751 |
| | $ | 847 |
| | $ | 820 |
| | 0.17 | % | | 0.15 | % |
Money market | 3,317,117 |
| | 3,139,107 |
| | 32,072 |
| | 17,967 |
| | 1.29 | % | | 0.77 | % |
Certificates of deposit | 746,453 |
| | 691,670 |
| | 11,141 |
| | 7,589 |
| | 2.00 | % | | 1.47 | % |
Total interest-bearing deposits | 4,721,724 |
| | 4,540,528 |
| | 44,060 |
| | 26,376 |
| | 1.25 | % | | 0.78 | % |
Junior subordinated debentures | 106,363 |
| | 106,363 |
| | 3,223 |
| | 2,882 |
| | 4.05 | % | | 3.62 | % |
FHLB borrowings and other | 801,519 |
| | 889,178 |
| | 13,922 |
| | 12,185 |
| | 2.29 | % | | 1.81 | % |
Total interest-bearing liabilities | 5,629,606 |
| | 5,536,069 |
| | 61,205 |
| | 41,443 |
| | 1.45 | % | | 1.00 | % |
Non-interest bearing demand deposits | 1,949,948 |
| | 1,948,573 |
| | | | | | | | |
Payables and other liabilities | 243,370 |
| | 130,410 |
| | | | | | | | |
Total average liabilities | 7,822,924 |
| | 7,615,052 |
| | | | | | | | |
Redeemable noncontrolling interests | 1,642 |
| | 16,294 |
| | | | | | | | |
Average shareholders’ equity | 788,938 |
| | 766,725 |
| | | | | | | | |
TOTAL AVERAGE LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS, AND SHAREHOLDERS’ EQUITY | $ | 8,613,504 |
| | $ | 8,398,071 |
| | | | | | | | |
Net interest income | | | | | $ | 171,951 |
| | $ | 174,569 |
| | | | |
Interest rate spread | | | | | | | | | 2.35 | % | | 2.57 | % |
Net interest margin | | | | | | | | | 2.80 | % | | 2.88 | % |
__________________
| |
(2) | Investments classified as available-for-sale and held-to-maturity are shown in the average balance sheet at amortized cost. |
| |
(3) | Includes loans held for sale and nonaccrual loans. |
Interest and dividend income. Total interest and dividend income for the three months ended September 30, 20192020 was $77.6$65.5 million, an increasea decrease of $1.5$12.2 million, or 2%16%, compared to the same period in 2018. Interest2019. Total interest and dividend income for the nine months ended September 30, 2019 2020was $233.2$207.4 million, an increasea decrease of $17.1$25.8 million, or 8%11%, compared to the same period in 2018.2019. The increase for the three months isdecreases were primarily driven by higher volumes on loans, partially offset by lower yields on loans and lower investment security volumes. The increase for the nine months is primarily driven by higher yields and volumes on loans,investments, partially offset by lower investment security volumes.higher volumes of loans and investments.
The Bank generally has interest related to nonaccrual loans that is either collected or reversed each quarter. When a loan is placed on nonaccrual, the interest income previously accrued but uncollected, is reversed which will have a negative
effect on the related yield. Interest collected on loans while on nonaccrual status is generally applied to the principal balance. If a nonaccruing loan pays off, previously collected interest income that was applied to principal may be recorded as interest income if the principal balance was paid in full. Based on the net amount collected or reversed, the impact on interest income and related yields can be either positive or negative. In addition, the Bank collects prepayment penalties on certain commercial loans that pay off prior to maturity which could also impact interest income and related yields positively. The amount and timing of prepayment penalties varies from quarter to quarter.
Interest income on commercialCommercial and industrial loans (including Commercial loans and Commercial tax-exempt loans) for the three months ended September 30, 2020was $8.3 million, a decrease of $3.2 million, or 28%, compared to the same period in 2019, as a result of a 94 basis point decrease in the average yield and a 6% decrease in the average balance. For the nine months ended September 30, 2020, Commercial and industrial interest income was $28.7 million, a decrease of $4.9 million, or 15%, compared to the same period in 2019, as a result of a 57 basis point decrease in the average yield and a 1% decrease in the average balance. The decreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied and lower yields on recent loan originations. The decreases in the average balance for the three and nine month periods were related primarily to lower revolving line of credit usage.
Interest income on PPP loans for the three and nine months ended September 30, 2020 was $2.4 million and $4.0 million, respectively. The Company began earning interest income on PPP loans in the second quarter of 2020. Nearly all of the PPP loans originated remain outstanding as of September 30, 2020. Interest income on PPP loans includes interest earned on the loans and the accretion of origination fees over the life of the loans. If a loan is forgiven or otherwise paid off, the remainder of the processing fee will be accreted through net interest income.
Interest income on Commercial real estate loans for the three months ended September 30, 20192020 was $11.5$23.5 million, an increasea decrease of $1.6$5.6 million, or 16%19%, compared to the same period in 2018,2019, as a result of a 10%105 basis point decrease in the average yield, partially offset by a 5% increase in the average balance and a 21 basis point increase in the average yield.balance. For the nine months ended September 30, 2019, commercial and industrial2020, Commercial real estate interest income was $33.7$75.6 million, an increasea decrease of $6.1$11.6 million, or 22%13%, compared to the same period in 2018,2019, as a result of a 12%87 basis point decrease in the average yield, partially offset by a 6% increase in the average balance and a 33 basis point increasebalance. The decreases in the average yield.yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied and lower yields on recent loan originations. The increases in the average balance for the three and nine month periods arewere related primarily to growth in the New England region. The increases inaddition of approximately $80.0 million of loans under the average yield for the three and nine month periods are thecommercial real estate second loan program as part of relief measures provided to clients as a result of higher yields on recent loan originations and the timing of changes in interest rates, specifically changes to the interest rate benchmarks to which the variable rate loans are tied.COVID-19 pandemic.
Interest income on commercial real estateConstruction and land loans for the three months ended September 30, 20192020 was $29.1$2.1 million, a decrease of $0.4$0.3 million, or 1%12%, compared to the same period in 2018,2019, as a result of a 14104 basis point decrease in the average yield, partially offset by a 2%an 11% increase in the average balance. For the nine months ended September 30, 2019, commercial real estate2020, Construction and land interest income was $87.2$6.9 million, an increasea decrease of $4.2$0.7 million, or 5%9%, compared to the same period in 2018,2019, as a result of a 2195 basis point decrease in the average yield, partially offset by a 12% increase in the average yield and the average balance remaining flat. The increases in the average yield for the three and nine month periods are primarily driven by the higher yields on recent loan originations and timing of changes in interest rates, specifically changes to the interest rate benchmarks to which the variable rate loans are tied. The increase in the average balance for the three month period is primarily driven by increases in the New England and San Francisco Bay Area regions.
Interest income on construction and land loans for the three months ended September 30, 2019 was $2.4 million, an increase of $0.2 million, or 10%, compared to the same period in 2018, as a result of a 9% increase in the average balance and a 3 basis point increase in the average yield. For the nine months ended September 30, 2019, construction and land interest income was $7.6 million, an increase of $1.5 million, or 24%, compared to the same period in 2018, as a result of an 18% increase in the average balance and a 23 basis point increase in the average yield.balance. The overall yields on constructionConstruction and land loans fluctuate due to the short-term nature of the loans and the related impact of draws and payoffs. Due to the relatively low balances in constructionConstruction and land loans, a large draw-drawdown or pay-downpaydown can result in a significant change in the overall yield depending on the interest rate of the particular loans that caused the balance changes. The increases in the average balance for the three and nine month periods are driven primarily by increased utilization of existing loans in all regions in which the Bank operates. The increasedecreases in the average yield for the three and nine months ismonth periods were primarily driven by the timingresult of changesdecreases to the interest rate benchmarks to which the variable rate loans are tied.
Interest income on residential mortgage loans for the three months ended September 30, 2019 was $25.6 million, an increase of $1.7 million, or 7%, from the same period in 2018, as a result of a 6% increase in the average balance and a 2 basis point increase in the average yield. For the nine months ended September 30, 2019, residential mortgage interest income was $76.8 million, an increase of $8.6 million, or 13%, compared to the same period in 2018, as a result of an 8% increase in the average balance and a 14 basis point increase in the average yield. The increases in the average balance for the three and nine month periods arewere related primarily to line drawdowns, primarily in Southern California.
Interest income on Residential mortgage loans for the three months ended September 30, 2020 was $22.1 million, a decrease of $3.5 million, or 14%, from the same period in 2019, as a result of a 25 basis point decrease in the average yield and a 7% decrease in the average balance. For the nine months ended September 30, 2020, Residential mortgage interest income was $68.6 million, a decrease of $8.2 million, or 11%, compared to the organic growthsame period in 2019, as a result of the residential loan portfolio across all regions in which the Bank operates, partially offset by the sale of $92.4 million of residential mortgage loansa 20 basis point decrease in the New England region.average yield and a 5% decrease in the average balance. The increasesdecreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are related to highertied and lower yields on recent loan originations. The decrease in the average balance for the three month period was primarily driven by the sale of approximately $72.0 million of residential mortgage originations.loans in the third quarter of 2020. The decrease in the average balance for the nine month period was primarily driven by the sale of approximately $190.7 million of Residential loans in the third and fourth quarters of 2019, and the sale of approximately $72.0 million of Residential loans in the third quarter of 2020.
Interest income on homeHome equity loans for the three months ended September 30, 20192020 was $1.1$0.6 million, an increasea decrease of 3%$0.5 million, or 44%, compared to the same period in 2018,2019, as a result of a 40205 basis point increasedecrease in the average yield partially offset byand a 5% decrease in the average balance. For the nine months ended September 30, 2019, home2020, Home equity interest income was $3.4$2.2 million, an increasea decrease of 7%$1.2 million, or 34%, compared to the same period in 2018,2019, as a result of a 56157 basis point increasedecrease in the average yield partially
offset byand a 5% decrease in the average balance. The increasesdecreases in the average yield for the three and nine month periods arewere primarily the result of decreases to the timinginterest rate benchmarks to which the variable rate loans are tied. The decreases in
the average balance for the three and nine month periods were primarily driven by reduced demand as a result of changeseconomic uncertainty related to benchmarkthe COVID-19 pandemic.
Interest income on Other consumer loans for the three months ended September 30, 2020 was $0.5 million, a decrease of $0.8 million, or 58%, compared to the same period in 2019, as a result of a 207 basis point decrease in the average yield and a 13% decrease in the average balance. For the nine months ended September 30, 2020, Other consumer interest rates, whileincome was $2.7 million, a decrease of $1.5 million, or 36%, compared to the same period in 2019, as a result of a 145 basis point decrease in the average yield and a 5% decrease in the average balance. The decreases in the average yield for the three and nine month periods were primarily the result of decreases to the interest rate benchmarks to which the variable rate loans are tied. The decreases in the average balances for the three and nine month periods were primarily driven by strategic decisions to slow new consumer loan growth.
Investment income for the three months ended September 30, 2020 was $5.8 million, a decrease of $0.7 million, or 11%, compared to the same period in 2019, as a result of an 80 basis point decrease in the average yield, partially offset by a 33% increase in the average balance. For the nine months ended September 30, 2020, investment income was $18.6 million, a decrease of $1.7 million, or 8%, compared to the same period in 2019, as a result of a 44 basis point decrease in the average yield, partially offset by a 13% increase in the average balance. The decreases in the average yield for the three and nine month periods were primarily due to the lower interest rate environment. The increases in the average balance for the three and nine month periods are primarily driven by reduced demand.
Interest income on other consumer loans for the three months ended September 30, 2019 was $1.3 million, a decrease of $0.4 million, or 23%, compared to the same period in 2018, as a result of a 22% decrease in the average balance, and a 9 basis point decrease in the average yield. For the nine months ended September 30, 2019, other consumer interest income was $4.2 million, a decrease of $0.9 million, or 18%, compared to the same period in 2018, as a result of a 27% decrease in the average balance, partially offset by a 47 basis point increase in the average yield. The decreases in the average balance for the three and nine month periods are primarily driven by strategic decisions to run off non-core balances, while the changes in the average yield for the three and nine month periods are the result of the timing of changes in interest rate benchmarks to which loans are tied.
Investment income for the three months ended September 30, 2019 was $6.6 million, a decrease of $1.3 million, or 16%, from the same period in 2018, as a result of a 20% decrease in the average balance, partially offset by a 12 basis point increase in the average yield. For the nine months ended September 30, 2019, investment income was $20.2 million, a decrease of $2.5 million, or 11%, compared to the same period in 2018, as a result of a 17% decrease in the average balance, partially offset by a 15 basis point increase in the average yield. The decreases in the average balance for the three and nine month periods arewere primarily due to investing the proceedsadditional cash from maturing investment securities being utilized to pay down higher cost borrowings and to fund loan generation. The increases in the average yield for the three and nine month periods are primarily due to recent purchases made at higher interest rates.deposit balances.
Interest expense. Total interest expense for the three months ended September 30, 20192020 was $21.5$7.6 million, an increasea decrease of $5.0$13.8 million, or 30%64%, compared to the same period in 2018.2019. For the nine months ended September 30, 2019,2020, total interest expense was $61.2$33.3 million, an increasea decrease of $19.8$27.9 million, or 48%46%, compared to the same period in 2018.2019. The increasesdecreases in interest expense for the three and nine monthmonths periods arewere primarily driven by the impact of higher interestlower rates on interest-bearing deposits and borrowings and decreases in the average volume of borrowings due to higher deposits, partially offset by increases in the volume of interest-bearing deposits and borrowings.deposits.
Interest expense on interest-bearing deposits for the three months ended September 30, 20192020 was $15.5$6.4 million, an increasea decrease of $4.0$9.1 million, or 35%58%, compared to the same period in 2018,2019, as a result of an 83 basis point decrease in the average rate, partially offset by a 1%14% increase in the average balance and a 33 basis point increase in the average rate.balance. For the nine months ended September 30, 2019,2020, interest expense on interest-bearing deposits was $44.1$26.6 million, an increasea decrease of $17.7$17.5 million, or 67%40%, compared to the same period in 2018,2019, as a result of a 4756 basis point increasedecrease in the average rate, paid andpartially offset by a 4%9% increase in the average balance. The increasesdecreases in the average rate paid on deposits for the three and nine month periods in the average rate paid on deposits arewere driven primarily by increaseswholesale reductions in the rates paid for certificates of deposit and money market demand accounts due to market competition.given decreases in interest rates. The increases for the three and nine month periods in the average balance for interest-bearing deposits arewas primarily driven by an increaseincreases in savings, and money marketdeposit products in all regions in which the Bank operates as clients hold additional cash deposit balances ingiven the New England region.economic uncertainty surrounding the COVID-19 pandemic.
Interest expense paid on non-deposit interest-bearing liabilities for the three months ended September 30, 20192020 was $6.0$1.2 million, an increasea decrease of $1.0$4.8 million, or 20%80%, compared to the same period in 2018,2019, as a result of a 31163 basis point increasedecrease in the average rate paid on FHLB borrowings and other borrowings, and a 9% increase53% decrease in the average balance of FHLB borrowings and other borrowings, partially offset byand a 2189 basis point decrease in the average rate on junior subordinated debentures. For the nine months ended September 30, 2019,2020, interest paid on non-deposit interest-bearing liabilities was $17.1$6.8 million, an increasea decrease of $2.1$10.4 million, or 14%61%, compared to the same period in 2018,2019, as a result of a 48105 basis point increasedecrease in the average rate paid on FHLB borrowings and other borrowings, and a 43 basis point increase in the average rate paid on junior subordinated debentures, partially offset by a 10%40% decrease in the average balance of FHLB borrowings and other borrowings. The increases for the threeborrowings, and nine month periodsa 131 basis point decrease in the average rate on junior subordinated debentures. The decreases in the average rates paid on non-deposit interest-bearing liabilities arewere primarily driven by the timing of changes todecreases in benchmark interest rates to which the instruments are tied. The increase for the three month period and the decrease for the nine month perioddecreases in the average balance for non-deposit interest-bearing liabilities arewere primarily driven by changesincreases in FHLB borrowings, which are used to fund loan growth based on current deposit levels.deposits reducing the need for higher-cost borrowings.
Provision/(credit) for loan losses.losses. The Company recorded a provision credit of $4.6 million for the three months ended September 30, 2020, compared to a provision for loan losses of $0.2 million for the same period in 2019. The decrease in the Allowance for loan losses for the three months ended September 30, 2019, compared2020 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter, as well as the net impact of the change in the composition and volume of the loan portfolio. These improvements were partially offset by the net impact in the changes of the qualitative factors, and a change in the weighting of the forecast scenarios used to a creditaccount for risks and assumptions not incorporated in the forecasts, including consideration for the significant uncertainty related to the provision for loan lossesduration and severity of $0.9 million foreconomic impacts from the same period in 2018. COVID-19 pandemic.
For the nine months ended September 30, 2019,2020, the Company recorded a provision for loan losses of $0.1$35.0 million, compared to a credit to the provision for loan losses of $2.3$0.1 million for the same period in 2018.2019. The increase in Allowance for loan losses for the nine months ended September 30, 2020 was primarily driven by the change in allowance methodology from the incurred loss model to the current expected credit loss model, as well as the current reasonable and supportable economic forecast deterioration as a result of the COVID-19 pandemic, and the net change in qualitative factors to account for risks and
assumptions related to our loan portfolio not incorporated in the forecasts. Under the CECL methodology, the provision for loan losses in the third quarter of 2019 was primarily drivenrequired may be significantly affected by required reserves for criticizedreasonable and classified loans, and the mix of loans in the portfolio, partially offset by improved loss rates.supportable economic forecasts.
The provision/ Provision/(credit) for loan losses is determined as a result of the required level of the allowance for loan losses, estimated by management, which reflects the inherent risk of loss in the loan portfolio as of the balance sheet dates. The Bank
incorporates bothCompany estimates credit losses on a collective basis for loans sharing similar risk characteristics using a quantitative model combined with an assessment of certain qualitative factors designed to address forecast risk and qualitativemodel risk inherent in the quantitative model output. The quantitative model utilizes a factor-based approach to estimate expected credit losses using probability of default and loss factors to determinegiven default, which are derived from a selected peer group's historical default and loss experience. The model estimates expected credit losses using loan level data over the appropriate levelcontractual life of the allowance for loan losses. Quantitative loss factorsexposure, considering the effect of prepayments and curtailments. Economic forecasts are based onincorporated into the estimate over a reasonable and supportable forecast period, beyond which is a reversion to the Company's historical net charge-offs by loan portfolio.long-run average. Qualitative factors are estimated by management and include trends in problem loans, economic and business conditions, strength of management, real estate collateral values,concentration risk and underwriting standards. For further details, see “Loan Portfolio and Credit Quality” below. For periods disclosed prior to the adoption of ASU 2016-13 as of January 1, 2020, the Allowance for loan losses was determined under the incurred loss model. Refer to "Note 1: Basis of Presentation and Summary of Significant Account Policies" in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 for a description of the methodology.
Fees and other income
| | | Three months ended September 30, | | $ Change | | % Change | | Nine months ended September 30, | | $ Change | | % Change | | Three months ended September 30, | | $ Change | | % Change | | Nine months ended September 30, | | $ Change | | % Change |
| 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | |
| (In thousands) | | (In thousands, except percentages) |
Wealth management and trust fees | $ | 19,067 |
| | $ | 25,505 |
| | $ | (6,438 | ) | | (25 | )% | | $ | 57,037 |
| | $ | 76,030 |
| | $ | (18,993 | ) | | (25 | )% | Wealth management and trust fees | $ | 18,240 | | | $ | 19,067 | | | $ | (827) | | | (4) | % | | $ | 53,872 | | | $ | 57,037 | | | $ | (3,165) | | | (6) | % |
Investment management fees | 2,496 |
| | 3,245 |
| | (749 | ) | | (23 | )% | | 7,601 |
| | 18,897 |
| | (11,296 | ) | | (60 | )% | Investment management fees | 1,393 | | | 2,496 | | | (1,103) | | | (44) | % | | 5,088 | | | 7,601 | | | (2,513) | | | (33) | % |
| Other banking fee income | 2,658 |
| | 2,775 |
| | (117 | ) | | (4 | )% | | 8,024 |
| | 7,793 |
| | 231 |
| | 3 | % | Other banking fee income | 1,320 | | | 2,658 | | | (1,338) | | | (50) | % | | 6,205 | | | 8,024 | | | (1,819) | | | (23) | % |
Gain on sale of loans, net | 934 |
| | 67 |
| | 867 |
| | nm |
| | 1,065 |
| | 204 |
| | 861 |
| | nm |
| Gain on sale of loans, net | 1,006 | | | 934 | | | 72 | | | 8 | | | 1,310 | | | 1,065 | | | 245 | | | 23 | % |
Total core fees and income | 25,155 |
| | 31,592 |
| | (6,437 | ) | | (20 | )% | | 73,727 |
| | 102,924 |
| | (29,197 | ) | | (28 | )% | Total core fees and income | 21,959 | | | 25,155 | | | (3,196) | | | (13) | % | | 66,475 | | | 73,727 | | | (7,252) | | | (10) | % |
| Total other income | (29 | ) | | 722 |
| | (751 | ) | | nm |
| | 1,027 |
| | 1,228 |
| | (201 | ) | | (16 | )% | Total other income | 1,086 | | | (29) | | | 1,115 | | | nm | | 753 | | | 1,027 | | | (274) | | | (27) | % |
Total fees and other income | $ | 25,126 |
| | $ | 32,314 |
| | $ | (7,188 | ) | | (22 | )% | | $ | 74,754 |
| | $ | 104,152 |
| | $ | (29,398 | ) | | (28 | )% | Total fees and other income | $ | 23,045 | | | $ | 25,126 | | | $ | (2,081) | | | (8) | % | | $ | 67,228 | | | $ | 74,754 | | | $ | (7,526) | | | (10) | % |
_____________________
nm = not meaningful
Total fees and other income for the three months ended September 30, 20192020 decreased $7.2$2.1 million, or 22%8%, compared to the same period in 2018. 2019, driven by lower Other banking fee income, Investment management fees, and Wealth Management and trust fees, partially offset by higher Total other income. The decrease in Other banking fee income was driven primarily by lower bank-owned life insurance revenue and lower swap fee income due to slowing originations. The decrease in Wealth management and trust fees was driven by the impact of lower equity market values on AUM as of fee billing dates. The decrease in Investment management fees was driven primarily by negative net flows at DGHM during the third quarter of 2020, driven by poor historical performance and a change in senior leadership at DGHM. The increase in Total other income in the third quarter of 2020 was driven primarily by a gain related to the revaluation of a revenue sharing agreement from the divestiture of Bingham, Osborn & Scarborough, LLC (“BOS”).
Total fees and other income for the nine months ended September 30, 20192020 decreased $29.4$7.5 million, or 28%10%, compared to the same period in 2018.2019, driven by lower Wealth management and trust fees, Investment management fees, and Other baking fee income. The decreases for the three and nine month periods in total fees and other income are primarily driven by the decreases in wealthWealth management and trust fees and investmentInvestment management fees were driven by the impact of lower equity market values on AUM as a result of the divestiture of BOS in the fourth quarter of 2018,fee billing dates and the divestiture of Anchor in the second quarter of 2018.
negative net flows at DGHM. Total AUM managed or advised by the Company was $16.2remained flat at $16.3 billion at September 30, 2019, a decrease of $6.2 billion, or 28%,2020, compared to September 30, 2018.2019. The decrease was primarily driven by the divestiture of BOS in the fourth quarter of 2018. Excluding AUM at BOS as of September 30, 2018, AUM decreased $1.5 billion, or 8%, compared to September 30, 2018 driven by net outflows of $1.5 billion for the twelve months ended September 30, 2019.
Other banking fee income for the three months ended September 30, 2019 decreased $0.1 million, or 4%, compared to the same period in 2018. Other banking fee income for the nine months ended September 30, 2019 increased $0.2 million, or 3%, compared to the same period in 2018. The decrease for the three month period is2020 was driven primarily driven by lower foreign exchange fee income. The increase for the nine month period is primarily driven by swap fee income reflecting changesas a result of slowing originations in client demand for loan swap agreements.2020.
Gain on sale of loans, net for the three and nine months ended September 30, 2019 includes a $0.8 million gain on the sale of $92.4 million of residential mortgage loans from the New England region in the third quarter of 2019.
Operating Expenseexpense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | $ Change | | % Change | | Nine months ended September 30, | | $ Change | | % Change |
| 2020 | | 2019 | | | | 2020 | | 2019 | | |
| (In thousands, except percentages) |
Salaries and employee benefits | $ | 34,671 | | | $ | 31,684 | | | $ | 2,987 | | | 9 | % | | $ | 103,704 | | | $ | 100,116 | | | $ | 3,588 | | | 4 | % |
Occupancy and equipment | 8,150 | | | 8,260 | | | (110) | | | (1) | % | | 23,356 | | | 24,460 | | | (1,104) | | | (5) | % |
Information systems | 7,096 | | | 5,169 | | | 1,927 | | | 37 | % | | 20,934 | | | 16,166 | | | 4,768 | | | 29 | % |
Professional services | 4,025 | | | 4,435 | | | (410) | | | (9) | % | | 11,072 | | | 11,308 | | | (236) | | | (2) | % |
Marketing and business development | 935 | | | 1,403 | | | (468) | | | (33) | % | | 5,138 | | | 4,422 | | | 716 | | | 16 | % |
Amortization of intangibles | 714 | | | 671 | | | 43 | | | 6 | % | | 2,131 | | | 2,015 | | | 116 | | | 6 | % |
| | | | | | | | | | | | | | | |
FDIC insurance | 960 | | | 59 | | | 901 | | | nm | | 1,727 | | | 1,304 | | | 423 | | | 32 | % |
Restructuring | — | | | — | | | — | | | nm | | — | | | 1,646 | | | (1,646) | | | (100) | % |
Other | 4,386 | | | 3,856 | | | 530 | | | 14 | % | | 15,236 | | | 10,312 | | | 4,924 | | | 48 | % |
Total operating expense | $ | 60,937 | | | $ | 55,537 | | | $ | 5,400 | | | 10 | % | | $ | 183,298 | | | $ | 171,749 | | | $ | 11,549 | | | 7 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | $ Change | | % Change | | Nine months ended September 30, | | $ Change | | % Change |
| 2019 | | 2018 | | | | 2019 | | 2018 | | |
| (In thousands) |
Salaries and employee benefits | $ | 31,684 |
| | $ | 38,944 |
| | $ | (7,260 | ) | | (19 | )% | | $ | 100,116 |
| | $ | 125,461 |
| | $ | (25,345 | ) | | (20 | )% |
Occupancy and equipment | 8,260 |
| | 8,164 |
| | 96 |
| | 1 | % | | 24,460 |
| | 24,141 |
| | 319 |
| | 1 | % |
Information systems | 5,169 |
| | 6,233 |
| | (1,064 | ) | | (17 | )% | | 16,166 |
| | 18,889 |
| | (2,723 | ) | | (14 | )% |
Professional services | 4,435 |
| | 2,877 |
| | 1,558 |
| | 54 | % | | 11,308 |
| | 8,926 |
| | 2,382 |
| | 27 | % |
Marketing and business development | 1,403 |
| | 1,710 |
| | (307 | ) | | (18 | )% | | 4,422 |
| | 5,373 |
| | (951 | ) | | (18 | )% |
Amortization of intangibles | 671 |
| | 750 |
| | (79 | ) | | (11 | )% | | 2,015 |
| | 2,249 |
| | (234 | ) | | (10 | )% |
FDIC insurance | 59 |
| | 674 |
| | (615 | ) | | (91 | )% | | 1,304 |
| | 2,126 |
| | (822 | ) | | (39 | )% |
Restructuring | — |
| | 5,763 |
| | (5,763 | ) | | (100 | )% | | 1,646 |
| | 5,763 |
| | (4,117 | ) | | (71 | )% |
Other | 3,856 |
| | 3,442 |
| | 414 |
| | 12 | % | | 10,312 |
| | 10,870 |
| | (558 | ) | | (5 | )% |
Total operating expense | $ | 55,537 |
| | $ | 68,557 |
| | $ | (13,020 | ) | | (19 | )% | | $ | 171,749 |
| | $ | 203,798 |
| | $ | (32,049 | ) | | (16 | )% |
_____________________nm = not meaningful
Total operating expense for the three months ended September 30, 2019 decreased $13.02020 increased $5.4 million, or 19%10%, to $60.9 million, compared to the same period in 20182019, primarily due to increases in Salaries and totalemployee benefits expense, Information systems expense, and FDIC insurance expense. Total operating expense for the nine months ended September 30, 2019 decreased $32.02020 increased $11.5 million, or 16%7%, compared to the same period in 2018. The decrease for the three month period was2019, primarily due to the $5.8 million restructuringincreases in Other expense, in the third quarter of 2018Information systems expense, and the divestiture of BOS. The decrease for the nine month period was primarily due to the divestitures of Anchor and BOS, a $1.6 million restructuring expense in the first quarter of 2019 compared to a $5.8 million restructuring expense in the third quarter of 2018, as well as the impact of efficiency initiatives.
Salaries and employee benefits expense, decreasedpartially offset by decreases in Restructuring expense and Occupancy and equipment expense.
•Salaries and employee benefits expense increased $3.0 million, or 9%, and $3.6 million, or 4%, for the three and nine months ended September 30, 20192020, respectively, compared to the same periods of 2018.in 2019. The decrease for the three month period wasincreases were primarily driven by increases in salaries and variable/incentive compensation due to the divestiturenew hires as part of BOSstrategic objectives.
•Occupancy and lower variable compensation. The decrease for the nine month period was primarily due to the divestitures of Anchorequipment expense decreased $0.1 million, or 1%, and BOS, as well as lower variable compensation. The Company also realized further cost savings as a result of a previously announced efficiency program.
Restructuring expense decreased$1.1 million, or 5%, for the three and nine months ended September 30, 2019,2020, respectively, compared to the same periods in 2018, as the Company incurred a restructuring charge2019. The decreases were primarily driven by decreases in amortization expense on right of $1.6 millionuse assets and depreciation expense on leasehold improvements due to severance of executiveslease expirations that were not renewed in the first quarter of 2019, which is less than the $5.8 million of restructuring charges in the third quarter of 2018. There were no restructuring charges in the third quarter of 2019.2020.
•Information systems expense increased $1.9 million, or 37%, and $4.8 million, or 29%, for the three and nine months ended September 30, 2019 decreased2020, respectively, compared to the same periods in 2018.2019. The decrease for the three month period wasincreases were primarily driven by information technology initiatives placed into service during late 2019 and 2020, and an increase in costs related to building out remote working capabilities in 2020 due to the divestiture of BOSCOVID-19 pandemic.
•FDIC insurance increased $0.9 million and realized savings from telecommunication services and data processing contract renegotiations. The decrease for the nine month period was primarily due to the divestitures of Anchor and BOS, as well as realized savings from telecommunication services and data processing contract renegotiations.
Marketing and business development expense$0.4 million, or 32%, for the three and nine months ended September 30, 2019 decreased2020, compared to the same periodsperiod in 2018.2019. The decrease forincrease was driven by an FDIC insurance assessment credit received in the three month periodthird quarter of 2019, as the FDIC's Deposit Insurance Fund reserve ratio exceeded the target level. The credit was primarily due toutilized in full by the divestiturefirst quarter of BOS2020 and a decrease in business development expenses. The decreasethe Bank has resumed paying FDIC insurance.
•Restructuring expense decreased for the nine month period was primarily duemonths ended September 30, 2020, compared to the divestituressame period of Anchor2019. In the first quarter of 2019, there was a restructuring expense of $1.6 million related to executive departures.
•Other expense increased $0.5 million, or 14%, and BOS, as well as a decrease in business development expenses.
Professional services expense$4.9 million, or 48%, for the three and nine months ended September 30, 2019 increased2020, respectively, compared to the same periods in 2018,2019. The increases were primarily driven by increases to the reserve for unfunded loan commitments of $1.8 million and $6.5 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The change in the reserve was driven by differences in the CECL model as compared to the incurred loss model and an increase in the reserve ratios as a result of the current reasonable and supportable economic forecasts due to information technology consulting costs and recruiting expense,the COVID-19 pandemic as well as an increase in the balance of loan commitments. The change in the reserve was partially offset by the divestitures of Anchordecreases in non-service pension expense and BOS for the periods owned.other miscellaneous expense.
Income Tax Expense.tax expense. Income tax expense for continuing operations for the nine months ended September 30, 20192020 was $2.8 million, compared to $15.8 million.million for the same period in 2019. The effective tax rate for continuing operations for the nine months ended September 30, 20192020 was 21.1%12.0%, compared to an effective tax rate of 37.4%21.1% for the same period of 2018.2019. The effective tax rate for the nine months ended September 30, 2020 is less than the effective tax rate for the same period in 2019 due primarily to the lower level of income in 2020 as compared to 2019. Earnings from tax-exempt investments have a larger proportionate impact on the lower level of income in 2020 as compared to 2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 9: Income Taxes” for further detail.
Financial Condition
Condensed Consolidated Balance Sheets and Discussiondiscussion
| | | September 30, 2019 | | December 31, 2018 | | Increase/ (decrease) | | % Change | | September 30, 2020 | | December 31, 2019 | | Increase/ (decrease) | | % Change |
| (In thousands) | | (In thousands, except percentages) |
Assets: | | | | | | | | Assets: | |
Total cash and investments | $ | 1,134,463 |
| | $ | 1,255,253 |
| | $ | (120,790 | ) | | (10 | )% | Total cash and investments | $ | 1,665,626 | | | $ | 1,376,863 | | | $ | 288,763 | | | 21 | % |
Loans held for sale | 6,658 |
| | 2,812 |
| | 3,846 |
| | nm |
| Loans held for sale | 15,074 | | | 7,386 | | | 7,688 | | | nm |
Total loans | 7,067,151 |
| | 6,893,158 |
| | 173,993 |
| | 3 | % | Total loans | 7,222,569 | | | 6,976,704 | | | 245,865 | | | 4 | % |
Less: Allowance for loan losses | 75,359 |
| | 75,312 |
| | 47 |
| | — | % | Less: Allowance for loan losses | 84,551 | | | 71,982 | | | 12,569 | | | 17 | % |
Net loans | 6,991,792 |
| | 6,817,846 |
| | 173,946 |
| | 3 | % | Net loans | 7,138,018 | | | 6,904,722 | | | 233,296 | | | 3 | % |
Goodwill and intangible assets, net | 68,229 |
| | 69,834 |
| | (1,605 | ) | | (2 | )% | Goodwill and intangible assets, net | 66,505 | | | 67,959 | | | (1,454) | | | (2) | % |
Right-of-use assets | 107,045 |
| | — |
| | 107,045 |
| | nm |
| Right-of-use assets | 94,879 | | | 102,075 | | | (7,196) | | | (7) | % |
Total other assets | 382,757 |
| | 348,880 |
| | 33,877 |
| | 10 | % | Total other assets | 451,203 | | | 371,496 | | | 79,707 | | | 21 | % |
Total assets | $ | 8,690,944 |
| | $ | 8,494,625 |
| | $ | 196,319 |
| | 2 | % | Total assets | $ | 9,431,305 | | | $ | 8,830,501 | | | $ | 600,804 | | | 7 | % |
Liabilities and Equity: | | | | | | | | Liabilities and Equity: | | | | | | | |
Deposits | $ | 6,658,242 |
| | $ | 6,781,170 |
| | $ | (122,928 | ) | | (2 | )% | Deposits | $ | 7,827,719 | | | $ | 7,241,476 | | | $ | 586,243 | | | 8 | % |
Total borrowings | 956,127 |
| | 813,435 |
| | 142,692 |
| | 18 | % | Total borrowings | 445,143 | | | 510,590 | | | (65,447) | | | (13) | % |
Lease liabilities | 122,799 |
| | — |
| | 122,799 |
| | nm |
| Lease liabilities | 108,932 | | | 117,214 | | | (8,282) | | | (7) | % |
Total other liabilities | 143,607 |
| | 143,540 |
| | 67 |
| | — | % | Total other liabilities | 203,342 | | | 140,820 | | | 62,522 | | | 44 | % |
Total liabilities | 7,880,775 |
| | 7,738,145 |
| | 142,630 |
| | 2 | % | Total liabilities | 8,585,136 | | | 8,010,100 | | | 575,036 | | | 7 | % |
Redeemable noncontrolling interests (“RNCI”) | 1,481 |
| | 2,526 |
| | (1,045 | ) | | (41 | )% | Redeemable noncontrolling interests (“RNCI”) | — | | | 1,383 | | | (1,383) | | | (100) | % |
Total shareholders’ equity | 808,688 |
| | 753,954 |
| | 54,734 |
| | 7 | % | Total shareholders’ equity | 846,169 | | | 819,018 | | | 27,151 | | | 3 | % |
Total liabilities, RNCI and shareholders’ equity | $ | 8,690,944 |
| | $ | 8,494,625 |
| | $ | 196,319 |
| | 2 | % | Total liabilities, RNCI and shareholders’ equity | $ | 9,431,305 | | | $ | 8,830,501 | | | $ | 600,804 | | | 7 | % |
_____________________
nm = not meaningful
Total assets. Total assets increased $196.3$600.8 million, or 2%7%, to $8.7$9.4 billion at September 30, 20192020 from $8.5$8.8 billion at December 31, 2018,2019, primarily driven by increases in Total cash and investments and Net loans.
Total cash and investments. Total cash and investments (consisting of Cash and cash equivalents, Investment securities available-for-sale, Investment securities Held-to-maturity, Equity securities at fair value, and Stock in the Federal Home Loan Bank and Federal Reserve Bank) increased $288.8 million, or 21%, from December 31, 2019. The increase was primarily driven by increases of $253.8 million in Cash and cash equivalents and $47.1 million in Investment securities available-for-sale and Equity securities at fair value. The increase in Cash and cash equivalents was primarily driven by an increase in total loans and right-of-use assets, partially offset by a decrease in totaldeposits as clients maintained additional cash and investments.
Total cash and investments. Total cash and investments (consisting of cash and cash equivalents, investment securities available-for-sale, investment securities held-to-maturity, equity securities at fair value, and stock in the FHLB and Federal Reserve Bank) decreased $120.8 million, or 10%, from December 31, 2018. The decrease on a point-in-time basis was primarily driven by a decrease of $77.6 million in investment securities available-for-sale and held-to-maturity, and a decrease of $49.2 million in cash and cash equivalents, partially offset by an increase of $7.6 million in equity securities at fair value. The Company utilized cash and proceeds from maturing investment securities to fund loan growth.liquidity. Total cash and investments represent 13%18% of totalTotal assets at September 30, 20192020 and 15%16% of totalTotal assets at December 31, 2018.2019.
The majority of the investments held by the Company are held by the Bank. The Bank’s asset-liability management policy requires management to maintain a portfolio of securities which will provide liquidity necessary to facilitate funding of loans, to cover deposit fluctuations, and to mitigate the Bank’s overall balance sheet exposure to interest rate risk, while at the same time earning a satisfactory return on the funds invested. The securities in which the Bank may invest are subject to regulation and are generally limited to securities that are considered “investment grade”.grade.”
Investment maturities, redemptions, principal payments, and sales of securities, if any, net of purchases (includes investmentInvestment securities available-for-sale, investmentInvestment securities held-to-maturityHeld-to-maturity and equityEquity securities at fair value), provided $102.2used $11.9 million of cash proceeds during the nine months ended September 30, 2019,2020, compared to $73.5cash proceeds of $102.2 million in the same period in 2018. The Company used these cash proceeds primarily to fund loan growth.2019. The timing of sales and reinvestments is based on various factors, including management’s evaluation of interest rate trends, credit risk, and the Company’s liquidity. The Company’s available-for-sale investment portfolio carried a total of $16.5$43.9 million of unrealized gains and $3.1$0.3 million of
unrealized losses at September 30, 2019,2020, compared to $2.4$15.0 million of unrealized gains and $27.1$3.6 million of unrealized losses at December 31, 2018.2019. The increase in the total net unrealized gains was primarily driven by the decline in interest rate.
No impairment losses were recognized through earnings related to investment securities during the nine months ended September 30, 20192020 and 2018.2019. The Company does not consider these investments other-than-temporarilyto be credit impaired as the decline in fair value on investments is primarily attributed to changes in interest rates and not due to credit quality or other risk factors.
Additionally, at September 30, 20192020 and December 31, 2018,2019, the Company held $51.4$38.6 million and $70.4$48.2 million, respectively, of held-to-maturityInvestment securities Held-to-maturity at amortized cost. All of the held-to-maturityHeld-to-maturity securities held at September 30, 20192020 were mortgage-backed securities guaranteed by the U.S. government, U.S. government agencies, or
government-sponsored entities. Given the recent strong deposits and excess cash balances, the Company may consider building additional on-balance sheet liquidity and earning a better yield by investing in additional investment securities.
See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 4: Investments” for further details of the Company’s investment securities.
Loans held for sale. Loans held for sale at September 30, 20192020 increased $3.8$7.7 million, comparedor 104%, to $15.1 million from the balance at December 31, 2018.2019. The balance of loansLoans held for sale usually relates to the timing and volume of residential loans originated for sale and the ultimate sale transaction, which is typically executed within a short time following the loan origination. From time to time, the Company may also sell loans that have been held in the loan portfolio. The sale of such loans may improve the Bank’s liquidity and capital position or may provide the Bank additional flexibility for more profitable and strategic future lending opportunities.
Goodwill and intangible assets, net. Goodwill and intangible assets, net at September 30, 20192020 decreased $1.6$1.5 million, or 2%, compared to $66.5 million from the balance at December 31, 2018, primarily2019, due to amortizationAmortization of intangible assets,intangibles, partially offset by the addition of mortgage servicing rights from the sale, with servicing rights retained, of $92.4 million of residential mortgage loans in the third quarter of 2019.$0.7 million. There was no change to goodwillGoodwill during the nine months ended September 30, 2019.2020.
Goodwill and indefinite-lived intangible assets such as trade names, are subject to annual impairment tests, or more frequently, if there is indication of impairment, based on guidance in ASC 350, Intangibles-Goodwill and Other(“ASC 350”). Long-livedIndefinite-lived intangible assets such as advisory contracts are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable in accordance with ASC 360, Property, Plant, and Equipment(“ (“ASC 360”).
Management performed its annual goodwill and indefinite-lived intangible asset impairment testing during the fourth quarter of 2018.2019. The estimated fair value of Boston Private Wealth exceeded its carrying value. Management will perform the annual goodwill and indefinite-lived intangible asset impairment testing for this year duringin the fourth quarter of 2019.2020. Management determined that there was not a trigger event from the economic conditions related to the COVID-19 pandemic or any other factors, and will continually monitor for triggering events that would warrant testing.
Right-of-use assets. Total ROURight-of-use ("ROU") assets at September 30, 2019 increased $107.02020 decreased $7.2 million, or 7%, to $94.9 million compared to the balance at December 31, 2018.2019 due to amortization of ROU assets, lease expirations that were not renewed, and lease modifications, partially offset by the addition of real estate leases and equipment leases during the nine months ended September 30, 2020. Upon adoption of the new lease accounting standard, ASU 2016-02, the Company recognized $108.5 million of ROU assets on the face of the consolidated balance sheetConsolidated Balance Sheets as of January 1, 2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 14: Lease Accounting” for further details of the Company’s leases.details.
Total other assets. Total other assets, as presented in the table above, consistsconsist of the following line items from the consolidated balance sheet: OREO, if any; premisesConsolidated Balance Sheets: Premises and equipment, net; feesFees receivable; accruedAccrued interest receivable; deferredDeferred income taxes, net; and otherOther assets. Total other assets at September 30, 20192020 increased $33.9$79.7 million, or 10%21%, compared to $451.2 million from the balance at December 31, 2018.2019. These changes resulted from the following factors:
•Other assets, which consist primarily of BOLI,bank-owned life insurance, investment in partnerships, prepaid expenses, the fair value of interest rate derivatives, and other receivables increased $47.6$83.5 million, or 19%29%, to $294.5$370.9 million at September 30, 20192020 from $247.0$287.3 million at December 31, 2018.2019. The increase was primarily driven by an increase in the market value adjustment onof derivative assets.
•Deferred income taxes, net, decreased $10.9$3.1 million, or 41%28%, to $15.7$8.3 million at September 30, 20192020 from $26.6$11.4 million at December 31, 2018.2019. The decrease was primarily due to the current year tax effect of other comprehensive income of $9.1 million and the tax effect of unrealized gains on securities available-for-sale at September 30, 2019 compared to the adoption of ASU 2016-13 of $5.5 million, partially offset by the deferred tax effectbenefit of unrealized losses on securities available-for-sale at December 31, 2018.
Premises and equipment, net, decreased $2.8$11.5 million or 6%, to $42.7 million at September 30, 2019 from $45.4 million at December 31, 2018. The decrease is related to the timing of new purchases, primarily related to the Company's information technology initiatives, as well as leasehold improvements.additional allowance for loan losses.
Deposits. Deposits at September 30, 2019 decreased $122.92020 increased $586.2 million, or 2%8%, compared to the balance at December 31, 2018.2019. The increase in deposits was primarily due to an increase in demand deposits driven by clients maintaining additional cash liquidity, as well as deposits related to the funding of PPP loans in the second quarter of 2020 that have not yet been utilized. Average total deposits for the three months ended September 30, 2019 decreased 1%2020 increased 16% from the same period in 20182019 as shown in the average balance sheet.sheet driven by the same factors. For further details, see “Results of Operations” above.
Deposits are the principal source of the Bank’s funds for use in lending, investments, and liquidity. Deposit levels can fluctuate from quarter to quarter as a result of large short-term transactions by commercial clients. Seasonality can also affect the deposit balances.
As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures, or otherwise, the amount of deposits at the Bank decreases, the Bank may be limited in its ability to grow its loan portfolio or may have to rely more heavily on higher cost borrowings as a source of funds in the future.
The following table presents the composition of the Company’s deposits at September 30, 20192020 and December 31, 2018:2019:
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| Balance | | as a % of total | | Balance | | as a % of total | | Balance | | as a % of total | | Balance | | as a % of total |
| (In thousands) | | (In thousands, except percentages) |
Demand deposits (non-interest bearing) | $ | 1,947,363 |
| | 29 | % | | $ | 1,951,274 |
| | 29 | % | Demand deposits (non-interest bearing) | $ | 2,346,126 | | | 30 | % | | $ | 1,971,013 | | | 27 | % |
NOW (1) | 598,048 |
| | 9 | % | | 626,686 |
| | 9 | % | NOW (1) | 680,052 | | | 9 | % | | 578,527 | | | 8 | % |
Savings | 68,059 |
| | 1 | % | | 73,834 |
| | 1 | % | Savings | 76,745 | | | 1 | % | | 67,673 | | | 1 | % |
Money market (1) | 3,366,623 |
| | 51 | % | | 3,338,891 |
| | 49 | % | Money market (1) | 4,187,657 | | | 53 | % | | 3,969,330 | | | 55 | % |
Certificates of deposit less than $100,000 (1) | 155,267 |
| | 2 | % | | 265,883 |
| | 4 | % | Certificates of deposit less than $100,000 (1) | 76,427 | | | 1 | % | | 145,226 | | | 2 | % |
Certificates of deposit $100,000 to $250,000 | 102,138 |
| | 2 | % | | 98,120 |
| | 2 | % | Certificates of deposit $100,000 to $250,000 | 106,305 | | | 1 | % | | 94,095 | | | 1 | % |
Certificates of deposit more than $250,000 | 420,744 |
| | 6 | % | | 426,482 |
| | 6 | % | Certificates of deposit more than $250,000 | 354,407 | | | 5 | % | | 415,612 | | | 6 | % |
Total deposits | $ | 6,658,242 |
| | 100 | % | | $ | 6,781,170 |
| | 100 | % | Total deposits | $ | 7,827,719 | | | 100 | % | | $ | 7,241,476 | | | 100 | % |
_____________________
| |
(1) | Includes brokered deposits of $355.4 million and $541.1 million at September 30, 2019 and December 31, 2018, respectively. |
(1) Includes brokered deposits of $295.0 million and $258.7 million at September 30, 2020 and December 31, 2019, respectively. Funds in the sweep deposit program between the Bank and Boston Private Wealth are not considered brokered deposits.
Total borrowings. Total borrowings (consisting of securitiesSecurities sold under agreements to repurchase, federal funds purchased, FHLB borrowings, and juniorJunior subordinated debentures) at September 30, 2019 increased $142.72020 decreased $65.4 million, or 18%13%, compared to the balance at December 31, 2018, primarily2019, driven by an increasedecreases in FHLB borrowings partially offset by a decrease in federal funds purchased. As described below, total borrowings increased primarily to fund loans as deposit balances decreased during the same period.and repurchase agreements.
•FHLB borrowings increased $150.8decreased $54.6 million, or 36%16%, to $570.9$296.2 million at September 30, 20192020 from $420.1$350.8 million at December 31, 2018.2019. The increasedecrease was primarily due to asset liability management considerations to reduce the outstanding balance of brokeredincrease in client deposits, and overnight federal funds purchased with term FHLBwhich resulted in a reduced need for high cost borrowings. FHLB borrowings are generally used to provide additional funding for loan growth when it is in excess of deposit growth and to manage interest rate risk, but can also be used as an additional source of liquidity for the Bank.
•Repurchase agreements increased $11.9decreased $10.9 million, or 32%20%, to $48.9$42.5 million at September 30, 20192020 from $36.9$53.4 million at December 31, 2018.2019. Repurchase agreements are generally linked to commercial demand deposit accounts with an overnight sweep feature.
From time to time, the Bank purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position. At September 30, 2019, the Company had $230.0 million federal funds purchased outstanding compared to $250.0 million at December 31, 2018.
Lease liabilities. Lease liabilities decreased $8.3 million, or 7%, to $108.9 million at September 30, 2019 increased $122.8 million2020 compared to the balance at December 31, 2018.2019 due to lease payments, lease expirations that were not renewed, and lease modifications, partially offset by the addition of new or renewed real estate leases and new equipment leases during the nine months ended September 30, 2020. Upon adoption of the new lease accounting standard discussed above, the Company recognized $124.1
million of lease liabilities on the face of the consolidated balance sheetConsolidated Balance Sheet as of January 1, 2019. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 14: Lease Accounting” for further details of the Company’s leases.
Total other liabilities. Total other liabilities, which consist primarily of accrued interest, accrued employee benefits, interest rate derivatives, the unfunded portion of partnership investment commitments, deferred rent, and other accrued expenses, increased $62.5 million, or 44%, to $203.3 million at September 30, 2019 increased $0.1 million,2020, compared to the balance at December 31, 2018.2019. The increase was primarily driven by an increaseincreases in the market value adjustment on derivative liabilities partially offset by deferred rent and landlord allowance balances at December 31, 2018 that were moved to right-of-use assets when ASU 2016-12 was adopted on January 1, 2019, and the payment of accrued variable compensation, bonuses, and employee benefitsreserve for unfunded loan commitments in the first quarter of 2019 that had been accrued for at December 31, 2018.2020.
Loan Portfolio and Credit Quality
Loans.Total loans. Total loans increased $174.0$245.9 million, or 3%4%, to $7.1$7.2 billion, or 81%77% of total assets, as of September 30, 2019,2020, from $6.9$7.0 billion, or 81%79% of total assets, as of December 31, 2018.2019. The following table presents a summary of the loan portfolio based on the portfolio segment and changes in balances as of the dates indicated:
|
| | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 | | $ Change | | % Change |
| (In thousands) | | |
Commercial and industrial | $ | 695,029 |
| | $ | 623,037 |
| | $ | 71,992 |
| | 12 | % |
Commercial tax-exempt | 448,488 |
| | 451,671 |
| | (3,183 | ) | | (1 | )% |
Total commercial and industrial | 1,143,517 |
| | 1,074,708 |
| | 68,809 |
| | 6 | % |
Commercial real estate | 2,533,346 |
| | 2,395,692 |
| | 137,654 |
| | 6 | % |
Construction and land | 209,741 |
| | 240,306 |
| | (30,565 | ) | | (13 | )% |
Residential | 2,964,042 |
| | 2,948,973 |
| | 15,069 |
| | 1 | % |
Home equity | 84,432 |
| | 90,421 |
| | (5,989 | ) | | (7 | )% |
Consumer and other | 132,073 |
| | 143,058 |
| | (10,985 | ) | | (8 | )% |
Total loans | $ | 7,067,151 |
| | $ | 6,893,158 |
| | $ | 173,993 |
| | 3 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | $ Change | | % Change |
| (In thousands) | | |
Commercial and industrial | $ | 583,145 | | | $ | 694,034 | | | $ | (110,889) | | | (16) | % |
Paycheck Protection Program | 371,496 | | | — | | | 371,496 | | | n/a |
Commercial tax-exempt | 472,342 | | | 447,927 | | | 24,415 | | | 5 | % |
| | | | | | | |
Commercial real estate | 2,659,890 | | | 2,551,274 | | | 108,616 | | | 4 | % |
Construction and land | 211,697 | | | 225,983 | | | (14,286) | | | (6) | % |
Residential | 2,729,164 | | | 2,839,155 | | | (109,991) | | | (4) | % |
Home equity | 81,797 | | | 83,657 | | | (1,860) | | | (2) | % |
Consumer and other | 113,038 | | | 134,674 | | | (21,636) | | | (16) | % |
Total loans | $ | 7,222,569 | | | $ | 6,976,704 | | | $ | 245,865 | | | 4 | % |
The Bank specializes in lending to individuals, real estate investors, and middle market businesses, including corporations, partnerships, associations and nonprofit organizations. Loans made by the Bank to individuals may include residential mortgage loans and mortgage loans on investment or vacation properties, unsecured and secured personal lines of credit, home equity loans, and overdraft protection. Loans made by the Bank to businesses include commercial and mortgage loans, revolving lines of credit, working capital loans, equipment financing, community lending programs, and construction and land loans. The types and sizes of loans the Bank originates are limited by regulatory requirements.
Beginning in the first quarter of 2020, the Company made a change to the loan portfolio segmentation in which Commercial and industrial and Commercial tax-exempt loans were bifurcated given their different underlying risk characteristics. Beginning in the second quarter of 2020, the Company also added a segment for PPP loans originated. For the period ended December 31, 2019, there were no such loans as the SBA initiated the program in the first quarter of 2020 in response to the COVID-19 pandemic.
The Bank’s loans are affected by the economic and real estate markets in which they are located. Generally, commercial real estate, construction, and land loans are affected more than residential loans in an economic downturn. The ability to grow the loan portfolio is traditionally partially related to the Bank's ability to increase deposit levels. If, as a result of general economic conditions, market interest rates, competitive pressures, or otherwise, deposit levels at the Bank decrease relative to its overall banking operations, the Bank may be limited in its ability to grow its loan portfolio or may need to increase higher cost borrowings to fund growth in the loan portfolio.
The Bank’s commercial real estate loan portfolio, the largest portfolio segment after residential, includes loans secured by the following types of collateral as of the dates indicated:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (In thousands) |
Multifamily and residential investment | $ | 920,688 | | | $ | 899,583 | |
Retail | 594,649 | | | 631,796 | |
Office and medical | 549,922 | | | 487,133 | |
Manufacturing, industrial, and warehouse | 253,479 | | | 223,913 | |
Hospitality | 171,624 | | | 145,195 | |
Other | 169,528 | | | 163,654 | |
Total commercial real estate loans | $ | 2,659,890 | | | $ | 2,551,274 | |
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
| (In thousands) |
Multifamily and residential investment | $ | 901,163 |
| | $ | 687,395 |
|
Retail | 622,431 |
| | 635,222 |
|
Office and medical | 493,886 |
| | 543,697 |
|
Manufacturing, industrial, and warehouse | 208,428 |
| | 193,472 |
|
Hospitality | 136,119 |
| | 187,132 |
|
Other | 171,319 |
| | 148,774 |
|
Total commercial real estate loans | $ | 2,533,346 |
| | $ | 2,395,692 |
|
Geographic concentration. The following tables present the Company’s outstanding loan balance concentrations as of the dates indicated based on the location of the regional offices to which they are attributed.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2020 |
| New England | | Northern California | | Southern California | | Total |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| (In thousands, except percentages) |
Commercial and industrial | $ | 437,268 | | | 6 | % | | $ | 56,929 | | | 1 | % | | $ | 88,948 | | | 1 | % | | $ | 583,145 | | | 8 | % |
Paycheck Protection Program | 194,652 | | | 3 | % | | 119,590 | | | 1 | % | | 57,254 | | | 1 | % | | 371,496 | | | 5 | % |
Commercial tax-exempt | 312,948 | | | 4 | % | | 148,723 | | | 2 | % | | 10,671 | | | — | % | | 472,342 | | | 6 | % |
Commercial real estate | 1,085,875 | | | 15 | % | | 844,123 | | | 12 | % | | 729,892 | | | 10 | % | | 2,659,890 | | | 37 | % |
Construction and land | 124,539 | | | 2 | % | | 26,533 | | | — | % | | 60,625 | | | 1 | % | | 211,697 | | | 3 | % |
Residential | 1,390,309 | | | 19 | % | | 543,875 | | | 8 | % | | 794,980 | | | 11 | % | | 2,729,164 | | | 38 | % |
Home equity | 53,926 | | | 1 | % | | 18,748 | | | — | % | | 9,123 | | | — | % | | 81,797 | | | 1 | % |
Consumer and other | 70,229 | | | 1 | % | | 5,035 | | | — | % | | 37,774 | | | 1 | % | | 113,038 | | | 2 | % |
Total loans (1) | $ | 3,669,746 | | | 51 | % | | $ | 1,763,556 | | | 24 | % | | $ | 1,789,267 | | | 25 | % | | $ | 7,222,569 | | | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2019 |
| New England | | San Francisco Bay Area | | Southern California | | Total |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| (In thousands) |
Commercial and industrial | $ | 558,686 |
| | 8 | % | | $ | 49,075 |
| | 1 | % | | $ | 87,268 |
| | 1 | % | | $ | 695,029 |
| | 10 | % |
Commercial tax-exempt | 340,610 |
| | 5 | % | | 96,846 |
| | 1 | % | | 11,032 |
| | — | % | | 448,488 |
| | 6 | % |
Commercial real estate | 1,030,865 |
| | 14 | % | | 785,156 |
| | 12 | % | | 717,325 |
| | 10 | % | | 2,533,346 |
| | 36 | % |
Construction and land | 146,799 |
| | 2 | % | | 27,958 |
| | — | % | | 34,984 |
| | 1 | % | | 209,741 |
| | 3 | % |
Residential | 1,628,082 |
| | 23 | % | | 569,920 |
| | 8 | % | | 766,040 |
| | 11 | % | | 2,964,042 |
| | 42 | % |
Home equity | 56,732 |
| | 1 | % | | 18,068 |
| | — | % | | 9,632 |
| | — | % | | 84,432 |
| | 1 | % |
Consumer and other | 106,916 |
| | 2 | % | | 12,546 |
| | — | % | | 12,611 |
| | — | % | | 132,073 |
| | 2 | % |
Total loans (1) | $ | 3,868,690 |
| | 55 | % | | $ | 1,559,569 |
| | 22 | % | | $ | 1,638,892 |
| | 23 | % | | $ | 7,067,151 |
| | 100 | % |
| | | As of December 31, 2018 | | As of December 31, 2019 |
| New England | | San Francisco Bay Area | | Southern California | | Total | | New England | | Northern California | | Southern California | | Total |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| (In thousands) | | (In thousands, except percentages) |
Commercial and industrial | $ | 503,201 |
| | 7 | % | | $ | 43,702 |
| | 1 | % | | $ | 76,134 |
| | 1 | % | | $ | 623,037 |
| | 9 | % | Commercial and industrial | $ | 558,701 | | | 8 | % | | $ | 46,330 | | | 1 | % | | $ | 89,003 | | | 1 | % | | $ | 694,034 | | | 10 | % |
Commercial tax-exempt | 344,079 |
| | 5 | % | | 96,387 |
| | 2 | % | | 11,205 |
| | — | % | | 451,671 |
| | 7 | % | Commercial tax-exempt | 338,737 | | | 5 | % | | 98,266 | | | 1 | % | | 10,924 | | | — | % | | 447,927 | | | 6 | % |
Commercial real estate | 1,022,061 |
| | 15 | % | | 714,449 |
| | 10 | % | | 659,182 |
| | 10 | % | | 2,395,692 |
| | 35 | % | Commercial real estate | 1,027,133 | | | 15 | % | | 769,777 | | | 11 | % | | 754,364 | | | 11 | % | | 2,551,274 | | | 37 | % |
Construction and land | 153,929 |
| | 2 | % | | 41,516 |
| | — | % | | 44,861 |
| | 1 | % | | 240,306 |
| | 3 | % | Construction and land | 152,100 | | | 2 | % | | 31,484 | | | — | % | | 42,399 | | | 1 | % | | 225,983 | | | 3 | % |
Residential | 1,689,318 |
| | 25 | % | | 559,578 |
| | 8 | % | | 700,077 |
| | 10 | % | | 2,948,973 |
| | 43 | % | Residential | 1,540,592 | | | 22 | % | | 558,307 | | | 8 | % | | 740,256 | | | 11 | % | | 2,839,155 | | | 41 | % |
Home equity | 57,617 |
| | 1 | % | | 19,722 |
| | — | % | | 13,082 |
| | — | % | | 90,421 |
| | 1 | % | Home equity | 55,226 | | | 1 | % | | 17,357 | | | — | % | | 11,074 | | | — | % | | 83,657 | | | 1 | % |
Consumer and other | 120,402 |
| | 2 | % | | 12,663 |
| | — | % | | 9,993 |
| | — | % | | 143,058 |
| | 2 | % | Consumer and other | 104,258 | | | 2 | % | | 11,265 | | | — | % | | 19,151 | | | — | % | | 134,674 | | | 2 | % |
Total loans (1) | $ | 3,890,607 |
| | 57 | % | | $ | 1,488,017 |
| | 21 | % | | $ | 1,514,534 |
| | 22 | % | | $ | 6,893,158 |
| | 100 | % | Total loans (1) | $ | 3,776,747 | | | 55 | % | | $ | 1,532,786 | | | 21 | % | | $ | 1,667,171 | | | 24 | % | | $ | 6,976,704 | | | 100 | % |
________________________
| |
(1) | Regional percentage totals may not foot due to rounding. |
(1)Regional percentage totals may not foot due to rounding.
Allowance for loan losses. The allowanceAllowance for loan losses is reported as a reduction of outstanding loan balances and totaled $75.4$84.6 million and $75.3$72.0 million as of September 30, 20192020 and December 31, 2018,2019, respectively.
The allowance Allowance for loan losses increased $0.1$12.6 million to $75.4$84.6 million, or 1.07%1.17% of total loans, as of September 30, 20192020 from $75.3$72.0 million, or 1.09%1.03% of total loans, as of December 31, 2018.2019. The increase in the overall allowanceAllowance for loan losses for the nine months ended September 30, 2020 was primarily duedriven by the change in allowance methodology from the incurred loss model to loan growththe current expected credit loss model, as well as the current reasonable and supportable economic forecast deterioration as a result of the COVID-19 pandemic, and the net change in qualitative factors to account for risks and assumptions related mixto our loan portfolio not incorporated in the forecasts.
The Company recognized a Provision credit of $4.6 million during the three months ended September 30, 2020. The decrease in the Allowance for loan losses for the three months ended September 30, 2020 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated a modest improvement from the prior quarter, as well as the net impact of the change in the composition and volume of the loan portfolio. These improvements were partially offset by the net impact in the changes of the qualitative factors, and a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts, including consideration for the significant uncertainty related to the duration and severity of economic impacts from the COVID-19 pandemic.
The decrease in the Allowance for loan losses of $20.4 million on adoption of ASU 2016-13 was driven primarily by the portfolio composition including the short-term nature of Commercial real estate loans, estimated prepayments, a change to the loan portfolio partially offset by net changes to loss factorssegmentation in which Commercial and a decline in criticized loans.industrial and Commercial tax-exempt loans were bifurcated given the different underlying risk characteristics, and the economic projections at the time of adoption. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 7: Allowance for Loan Losses” for an analysis of the Company’s allowance for loan losses.
An analysisPrior to the adoption of ASU 2016-13, the risk in the loan portfolio as well as management judgment is used to determine the estimated appropriate amount of the allowance for loan losses. The Company’s allowance for loan losses iswas comprised of three primary components (general reserves, allocated reserves on non-impaired special mention and substandard loans, and allocated reserves on impaired loans). See Part II. Item 8. “NotesRefer to Unaudited Consolidated Financial Statements - Note 6: Allowance for Loan Losses”"Note 1: Basis of Presentation and Summary of Significant Account Policies" in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 for further information.details on that methodology.
The following table presents a summary of loans charged-off, net of recoveries, by geography for the periods indicated. The geography assigned to the data is based on the location of the regional offices to which the loans are attributed.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (In thousands) |
Net loans (charged-off)/ recovered: | | | | | | | |
New England | $ | 275 |
| | $ | 232 |
| | $ | 528 |
| | $ | (126 | ) |
San Francisco Bay Area | 6 |
| | 706 |
| | 44 |
| | 864 |
|
Southern California | (156 | ) | | 47 |
| | (629 | ) | | 311 |
|
Total net loans (charged-off)/ recovered | $ | 125 |
| | $ | 985 |
| | $ | (57 | ) | | $ | 1,049 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (In thousands) |
Net loans (charged-off)/recovered: | | | | | | | |
New England | $ | (111) | | | $ | 275 | | | $ | (89) | | | $ | 528 | |
Northern California | — | | | 6 | | | 125 | | | 44 | |
Southern California | (93) | | | (156) | | | (2,079) | | | (629) | |
Total net loans (charged-off)/recovered | $ | (204) | | | $ | 125 | | | $ | (2,043) | | | $ | (57) | |
There were $0.1$0.2 million in net recoveriescharge-offs recorded in the third quarter of 20192020 compared to $1.0$0.1 million of net recoveries for the same period of 2018.2019.
Nonperforming assets. The Company’s nonperforming assets include nonaccrual loans and OREO, if any. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of deeds in lieu of foreclosure. As of September 30, 2019,2020, nonperforming assets totaled $17.6$41.3 million, or 0.20%0.44% of total assets, an increase of $3.1$25.2 million, or 21%156%, compared to $14.5$16.1 million, or 0.17%0.18% of total assets, as of December 31, 2018.2019. The increase was primarily driven by one Commercial and industrial relationship in Northern California that is well-collateralized. This loan was paid off in October 2020 with no related loss.
The Bank’s policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest in accordance with the contractual terms of the loan agreement is in doubt. Despite a loan having a current payment status, if the Bank has reason to believe it may not collect all principal and interest on the loan in accordance with the related contractual terms, the Bank will generally discontinue the accrual of interest income and will apply any future interest payments received to principal. Of the $17.6$41.3 million of loans on nonaccrual status as of September 30, 2019, $10.22020, $26.5 million, or 58%64%, had a current payment status, $0.5$4.1 million, or 3%10%, were 30-89 days past due, and $6.9$10.7 million, or 39%26%, were 90 days or more past due. Of the $14.1$16.1 million of loans on nonaccrual status as of December 31, 2018, $3.62019, $9.8 million, or 26%61%, had a current payment status, $0.8$1.2 million, or 5%7%, were 30-89 days past due, and $9.7$5.1 million, or 69%32%, were 90 days or more past due.
The Bank continues to evaluate the underlying collateral of each nonperforming loan and pursue the collection of interest and principal. Where appropriate, the Bank obtains updated appraisals on collateral. Reductions in fair values of the collateral for nonaccrual loans, if they are collateral dependent, could result in additional future provision for loan losses depending on the timing and severity of the decline. See Part I. Item 1. “Financial Statements and Supplementary Data - Note 6: Loans Portfolio and Credit Quality” for further information on nonperforming loans.
Delinquencies. The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more. Loans 30-89 days past due decreased $18.1$20.3 million, or 81%78%, to $4.2$5.6 million as of September 30, 20192020 from $22.3$25.9 million as of December 31, 2018.2019. The decrease in loans 30-89 days past due is primarily due to September having 30 calendar days and December having 31 calendar days. The number of days in the calendar quarter can impact this metric and is not necessarily indicative of an underlying credit quality issue. Loan delinquencies can be attributed to many factors, such as continuing weakness in, or deteriorating, economic conditions in the region in which the collateral is located, the loss of a tenant or lower lease rates for commercial borrowers, or the loss of income for consumers and the resulting liquidity impacts on the borrowers. The economic conditions created by the COVID-19 pandemic represent an example of an event that could cause an increase in delinquencies in future quarters. The Bank has instituted programs such as deferment programs, forbearance programs, and the commercial real estate second mortgage program to help borrowers who have been impacted by the COVID-19 pandemic. Further deterioration in the credit condition of these delinquent loans could lead to the loans going to nonaccrual status and/or being downgraded. Downgrades would generally result in additional provisioncharge-offs or provisions for loan losses. Past due loans may be included with accruing substandard loans.
In certain instances, although very infrequently, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were no loans 90 days or more past due, but still accruing, as of both September 30, 20192020 and December 31, 2018.2019.
Impaired Loans.loans. Impaired loans individually evaluated for impairment in the allowanceAllowance for loan losses totaled $20.5$42.6 million as of September 30, 2019,2020, an increase of $4.9$23.4 million, or 31%122%, compared to $15.6$19.2 million as of December 31,
2018. 2019, primarily driven by the downgrade of one Commercial and industrial relationship in Northern California that is well-collateralized. This loan was paid off in October 2020 with no related loss. As of September 30, 2019, $2.92020, $0.9 million of the individually evaluated impaired loans had $1.1$0.2 million in specific reserve allocations. The remaining $17.6$41.7 million of individually evaluated impaired loans did not have specific reserve allocations due to the adequacy of collateral, prior charge-offs taken, interest collected and applied to principal, or a combination of these items. As of December 31, 2018, $4.22019, $1.1 million of individually evaluated impaired loans had $1.2$0.2 million in specific reserve allocations, and the remaining $11.4$18.1 million of individually evaluated impaired loans did not have specific reserve allocations.
The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Bank’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/or principal forgiveness. As of September 30, 20192020 and December 31, 2018,2019, TDRs totaled $9.5$14.5 million and $8.0$12.6 million, respectively. As of September 30, 2019, $6.92020, $7.8 million of the $9.5$14.5 million in TDRs were on accrual status. As of December 31, 2018, $3.82019, $7.1 million of the $8.0$12.6 million in TDRs were on accrual status.
In response to the COVID-19 pandemic, the Bank initiated a mortgage deferment program under which principal and interest payments on qualifying loans are generally deferred for initially three months and the loan term is extended three months; if requested, the loan may be deferred for a subsequent three months. Loans that are deferred under the program are not considered TDRs or past due based on current regulatory guidance. In total, approximately 350 residential and home equity loans totaling approximately $220.0 million were processed under the program. As of September 30, 2020, deferrals for approximately 200 loans totaling approximately $120.0 million have expired with the loans returning to payment, while approximately 140 loans totaling approximately $100.0 million remain in deferral under the program. Of the loans that came off deferral, less than 10 loans totaling less than $1.0 million are delinquent on payment terms.
Additionally, in response to the COVID-19 pandemic, the Bank initiated a program where it offered qualified commercial and industrial borrowers principal payment deferrals for six months, with the deferred principal added to the last payment. In total, approximately 90 commercial and industrial loans totaling approximately $125.0 million were processed under the program. As of September 30, 2020, deferrals for approximately 60 loans totaling approximately $75.0 million have expired with the loans returning to payment, while approximately 30 loans totaling approximately $50.0 million remain in deferral under the program. Of the loans that came off deferral, no loans are delinquent on payment terms.
Potential Problem Loans.problem loans. Loans that evidence weakness or potential weakness related to repayment history, the borrower’s financial condition, or other factors are reviewed by the Bank’s management to determine if the loan should be adversely classified. Delinquent loans may or may not be adversely classified depending upon management’s judgment with respect to each individual loan. The Bank classifies certain loans as “substandard,” “doubtful,” or “loss” based on criteria consistent with guidelines provided by banking regulators. Potential problem loans consist of accruing classified loans where known information about possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in classification of such loans as nonperforming at some time in the future. Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Triggering events for loan downgrades include updated appraisal information, inability of borrowers to cover debt service payments, loss of tenants, or notification by the tenant of non-renewal of lease or inability of tenants to pay rent, inability of borrowers to sell completed construction projects, and the inability of borrowers to sell properties. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, be restructured, or require increased allowance coverage and provision for loan losses.
As of September 30, 2019,2020, the Bank has identified $63.3$81.8 million in potential problem loans, an increase of $9.2$23.9 million, or 17%41%, compared to $54.1$57.9 million as of December 31, 2018.2019. The increase in potential problem loans during the first nine months of 2020 was driven by one Commercial real estate borrowing relationship in the New England region of $22.9 million. Numerous factors impact the level of potential problem loans, including economic conditions and real estate values. These factors affect the borrower’s liquidity and, in some cases, the borrower’s ability to comply with loan covenants, such as debt service coverage. For instance, when there is a loss of a major tenant in a commercial real estate building, the appraised value of the building generally declines. Loans may be downgraded when this occurs as a result of the additional risk to the borrower in obtaining a new tenant in a timely manner and negotiating a lease with similar or better terms than the previous tenant. In many cases, these loans are still current and paying as agreed, although future performance may be impacted.
The following table presents a rollforwardroll-forward of nonaccrual loans for the three and nine months ended September 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of and for the three months ended September 30, | | As of and for the nine months ended September 30, |
2020 | | 2019 | | 2020 | | 2019 |
(In thousands) |
Nonaccrual loans, beginning of period | $ | 25,604 | | | $ | 17,155 | | | $ | 16,103 | | | $ | 14,057 | |
Transfers in to nonaccrual status | 17,096 | | | 2,830 | | | 34,469 | | | 9,088 | |
| | | | | | | |
| | | | | | | |
Transfers out to accrual status | (980) | | | (642) | | | (6,215) | | | (846) | |
Charge-offs (1) | (245) | | | (185) | | | (2,319) | | | (944) | |
Paid off/paid down | (212) | | | (1,593) | | | (775) | | | (3,790) | |
Nonaccrual loans, end of period | $ | 41,263 | | | $ | 17,565 | | | $ | 41,263 | | | $ | 17,565 | |
|
| | | | | | | | | | | | | | | |
| As of and for the three months ended September 30, | | As of and for the nine months ended September 30, |
2019 | | 2018 | | 2019 | | 2018 |
(In thousands) |
Nonaccrual loans, beginning of period | $ | 17,155 |
| | $ | 15,651 |
| | $ | 14,057 |
| | $ | 14,295 |
|
Transfers in to nonaccrual status | 2,830 |
| | 3,901 |
| | 9,088 |
| | 8,819 |
|
Transfers out to OREO | — |
| | — |
| | — |
| | (108 | ) |
Transfers out to accrual status | (642 | ) | | (2,122 | ) | | (846 | ) | | (3,914 | ) |
Charge-offs | (185 | ) | | — |
| | (944 | ) | | (514 | ) |
Paid off/ paid down | (1,593 | ) | | (5,333 | ) | | (3,790 | ) | | (6,481 | ) |
Nonaccrual loans, end of period | $ | 17,565 |
| | $ | 12,097 |
| | $ | 17,565 |
| | $ | 12,097 |
|
___________________
(1) During the second quarter of 2020, one nonaccrual loan was charged-off and transferred to OREO with a value of zero. As of September 30, 2020 it represents the only asset in OREO.
The following table presents a summary of credit quality by geography, based on the location of the regional offices:
| | | September 30, 2019 | | December 31, 2018 | | September 30, 2020 | | December 31, 2019 |
| (In thousands) | | (In thousands) |
Nonaccrual loans: | | | | Nonaccrual loans: | |
New England | $ | 8,999 |
| | $ | 6,728 |
| New England | $ | 11,807 | | | $ | 9,764 | |
San Francisco Bay Area | 2,395 |
| | 2,488 |
| |
Northern California | | Northern California | 25,133 | | | 319 | |
Southern California | 6,171 |
| | 4,841 |
| Southern California | 4,323 | | | 6,020 | |
Total nonaccrual loans | $ | 17,565 |
| | $ | 14,057 |
| Total nonaccrual loans | $ | 41,263 | | | $ | 16,103 | |
Loans 30-89 days past due and accruing: | | | | Loans 30-89 days past due and accruing: | | | |
New England | $ | 1,404 |
| | $ | 15,961 |
| New England | $ | 1,926 | | | $ | 20,507 | |
San Francisco Bay Area | 15 |
| | 2,246 |
| |
Northern California | | Northern California | 1,535 | | | 2,593 | |
Southern California | 2,760 |
| | 4,092 |
| Southern California | 2,174 | | | 2,845 | |
Total loans 30-89 days past due | $ | 4,179 |
| | $ | 22,299 |
| Total loans 30-89 days past due | $ | 5,635 | | | $ | 25,945 | |
Accruing classified loans: (1) | | | | Accruing classified loans: (1) | | | |
New England | $ | 21,830 |
| | $ | 10,392 |
| New England | $ | 74,682 | | | $ | 20,428 | |
San Francisco Bay Area | 23,938 |
| | 24,584 |
| |
Northern California | | Northern California | 4,589 | | | 24,946 | |
Southern California | 17,510 |
| | 19,119 |
| Southern California | 2,556 | | | 12,548 | |
Total accruing classified loans | $ | 63,278 |
| | $ | 54,095 |
| Total accruing classified loans | $ | 81,827 | | | $ | 57,922 | |
___________________
| |
(1) | Accruing Classified includes(1) Accruing Classified may include both Substandard and Doubtful classifications. |
The following table presents a summary of credit quality by loan type. The loan type assigned to the credit quality data is based on the purpose of the loan.
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| (In thousands) |
Nonaccrual loans: | | | |
Commercial and industrial | $ | 15,418 | | | $ | 582 | |
Paycheck Protection Program | — | | | — | |
Commercial tax-exempt | 3,929 | | | — | |
Commercial real estate | 5,261 | | | — | |
Construction and land | — | | | — | |
Residential | 16,216 | | | 13,993 | |
Home equity | 438 | | | 1,525 | |
Consumer and other | 1 | | | 3 | |
Total nonaccrual loans | $ | 41,263 | | | $ | 16,103 | |
Loans 30-89 days past due and accruing: | | | |
Commercial and industrial | $ | 2,056 | | | $ | 828 | |
Paycheck Protection Program | — | | | — | |
Commercial tax-exempt | — | | | — | |
| | | September 30, 2019 | | December 31, 2018 | |
| (In thousands) | |
Nonaccrual loans: | | | | |
Commercial and industrial | $ | 800 |
| | $ | 2,554 |
| |
Commercial tax-exempt | — |
| | — |
| |
Commercial real estate | — |
| | 546 |
| |
Construction and land | — |
| | — |
| |
Residential | 14,219 |
| | 7,914 |
| |
Home equity | 2,545 |
| | 3,031 |
| |
Consumer and other | 1 |
| | 12 |
| |
Total nonaccrual loans | $ | 17,565 |
| | $ | 14,057 |
| |
Loans 30-89 days past due and accruing: | | | | |
Commercial and industrial | $ | 3,048 |
| | $ | 9,794 |
| |
Commercial tax-exempt | — |
| | — |
| |
Commercial real estate | 497 |
| | — |
| Commercial real estate | 2,223 | | | 1,420 | |
Construction and land | — |
| | — |
| Construction and land | — | | | — | |
Residential | 266 |
| | 6,843 |
| Residential | 320 | | | 20,171 | |
Home equity | 353 |
| | 602 |
| Home equity | 1,036 | | | 369 | |
Consumer and other | 15 |
| | 5,060 |
| Consumer and other | — | | | 3,157 | |
Total loans 30-89 days past due | $ | 4,179 |
| | $ | 22,299 |
| Total loans 30-89 days past due | $ | 5,635 | | | $ | 25,945 | |
Accruing classified loans: (1) | | | | Accruing classified loans: (1) | | | |
Commercial and industrial | $ | 25,133 |
| | $ | 22,992 |
| Commercial and industrial | $ | 26,751 | | | $ | 24,987 | |
Paycheck Protection Program | | Paycheck Protection Program | — | | | — | |
Commercial tax-exempt | 4,052 |
| | 4,051 |
| Commercial tax-exempt | 4,503 | | | 4,052 | |
Commercial real estate | 30,814 |
| | 27,052 |
| Commercial real estate | 45,317 | | | 23,558 | |
Construction and land | — |
| | — |
| Construction and land | — | | | — | |
Residential | 3,000 |
| | — |
| Residential | 4,215 | | | 4,253 | |
Home equity | 279 |
| | — |
| Home equity | 1,041 | | | 1,072 | |
Consumer and other | — |
| | — |
| Consumer and other | — | | | — | |
Total accruing classified loans | $ | 63,278 |
| | $ | 54,095 |
| Total accruing classified loans | $ | 81,827 | | | $ | 57,922 | |
___________________
| |
(1) | Accruing Classified includes(1) Accruing Classified may include both Substandard and Doubtful classifications. |
Liquidity
Liquidity is defined as the Company’s ability to generate adequate cash to meet its needs for day-to-day operations and material long and short-term commitments. Liquidity risk is the risk of potential loss if the Company were unable to meet its funding requirements at a reasonable cost. The Company manages its liquidity based on demand, commitments, specific events and uncertainties to meet current and future financial obligations of a short-term nature. The Company’s objective in managing liquidity is to respond to the needs of depositors and borrowers as well as earnings enhancement opportunities in a changing marketplace.
The following table presents certain liquidity measurements as of the dates indicated:
|
| | | | | | | | | | | | | | |
| September 30, 2019 | | December 31, 2018 | | $ Change | | % Change |
| (In thousands) |
Cash and cash equivalents | $ | 78,010 |
| | $ | 127,259 |
| | $ | (49,249 | ) | | (39 | )% |
Investment securities available-for-sale | 935,538 |
| | 994,065 |
| | (58,527 | ) | | (6 | )% |
Equity securities at fair value | 21,780 |
| | 14,228 |
| | 7,552 |
| | 53 | % |
LESS: Securities pledged against current borrowings and derivatives | (96,055 | ) | | (44,022 | ) | | (52,033 | ) | | nm |
|
Cash and investments | $ | 939,273 |
| | $ | 1,091,530 |
| | $ | (152,257 | ) | | (14 | )% |
As a percent of assets | 11 | % | | 13 | % | | | |
|
|
| | | | | | | |
Access to additional FHLB borrowings | 1,222,142 |
| | 1,405,083 |
| | (182,941 | ) | | (13 | )% |
Total liquidity | $ | 2,161,415 |
| | $ | 2,496,613 |
| | $ | (335,198 | ) | | (13 | )% |
As a percent of assets | 25 | % | | 29 | % | | | |
|
|
As a percent of deposits | 32 | % | | 37 | % | | | |
|
|
_____________________
nm = not meaningful | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | $ Change | | % Change |
| (In thousands, except percentages) |
Cash and cash equivalents | $ | 546,263 | | | $ | 292,479 | | | $ | 253,784 | | | 87 | % |
Investment securities available-for-sale | 1,011,327 | | | 978,284 | | | 33,043 | | | 3 | % |
Equity securities at fair value | 32,818 | | | 18,810 | | | 14,008 | | | 74 | % |
Less: Securities pledged against current borrowings and derivatives | (102,297) | | | (88,444) | | | (13,853) | | | (16) | % |
Cash and investments | $ | 1,488,111 | | | $ | 1,201,129 | | | $ | 286,982 | | | 24 | % |
As a percent of assets | 16 | % | | 14 | % | | | | |
| | | | | | | |
Access to additional FHLB borrowings | 1,337,727 | | | 1,432,603 | | | (94,876) | | | (7) | % |
Total liquidity | $ | 2,825,838 | | | $ | 2,633,732 | | | $ | 192,106 | | | 7 | % |
As a percent of assets | 30 | % | | 30 | % | | | | |
As a percent of deposits | 36 | % | | 36 | % | | | | |
At September 30, 2019,2020, the Company’s cashCash and cash equivalents amounted to $78.0$546.3 million. The Holding Company’s cashCash and cash equivalents amounted to $41.2$54.9 million at September 30, 2019.2020. Management believes that the Holding Company and its affiliates, including the Bank, havehas adequate liquidity to meet theirits commitments for the foreseeable future.
Management is responsible for establishing and monitoring liquidity targets as well as strategies to meet these targets. At September 30, 2019,2020, consolidated cashCash and cash equivalents, investmentInvestment securities available-for-sale and equityEquity securities at fair value less securitiesSecurities pledged against current borrowings and derivatives amounted to $0.9$1.5 billion, or 11%16% of total assets, compared to $1.1$1.2 billion, or 13%14% of total assets, at December 31, 2018. Future loan growth may depend upon2019. The Bank also has the Company’s ability to grow its core deposit levels.access additional borrowing under the PPPLF by pledging funded PPP loans if needed. In addition, the Company has access to available borrowings through the FHLB totaling $1.2$1.3 billion at September 30, 20192020 and $1.4 billion at December 31, 2018.2019. Combined, this liquidity totals $2.2$2.8 billion, or 25%30% of assets and 32%36% of deposits, as of September 30, 2019,2020, compared to $2.5$2.6 billion, or 29%30% of assets and 37%36% of deposits, at December 31, 2018.2019.
The Bank has various internal policies and guidelines regarding liquidity, both on- and off-balance sheet, loans to deposits ratio, and limits on the use of wholesale funds. These policies and/or guidelines require certain minimum or maximum balances or ratios be maintained at all times. In light of the provisions in the Bank’s internal liquidity policies and guidelines, the Bank will carefully manage the amount and timing of future loan growth along with its relevant liquidity policies and balance sheet guidelines. As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures, or otherwise, the balance of deposits at the Bank approaches or exceeds internal policies and/or guidelines, the Bank may be limited in its ability to grow its loan portfolio, may rely more heavily on higher cost borrowings as a source of funds, or consider loan sales in the future.
Holding Company Liquidity. liquidity. The Company and noncontrolling interest holders of the Company’s majority-owned affiliate, DGHM, holdhave contingent put andoptions, call options, and mandatory repurchase obligations that would require the Company to purchase (and the noncontrolling interest owners of the majority-owned affiliateDGHM to sell) the remaining noncontrolling interest in DGHM at either a contractually predetermined fair value, a multiple of EBITDA, or fair value,values as determined by the agreement.operating agreement of DGHM. At September 30, 2019,2020, the estimated maximum redemption value for DGHM related to outstanding put options was $1.5 million, all of which could be redeemed within the next 12 months, under certain circumstances, and is classifiedzero based on the consolidated balance sheets as redeemable noncontrolling interests.contractually predetermined calculation in the DGHM operating agreement. These put and call options are discussed in detail in Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Although not a primary source of funds, the Holding Company has generated liquidity from the sale of affiliates in the past. Additional funds were generated at the time of the sale of Anchor saleCapital Advisors LLC (“Anchor”) which closedoccurred in April 2018 and the sale of BOS sale which closed
occurred in December 2018. As part of the sale agreements for both Anchor and BOS, the Company expects to receive future contingent payments that have estimated present valuesfor the remaining three months of $12.52020 of approximately $0.6 million and $12.6$0.6 million at September 30, 2019,2020, respectively.
Dividends from the Bank are limited by various regulatory requirements relating to capital adequacy and retained earnings. See Part II. Item 5. “Market for Registrant’s Common Equity, Related Stockholders Matters, and Issuers Purchases of Equity Securities” in the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 for further details.
The Bank pays dividends to the Holding Company, subject to the approval of the Bank’s Board of Directors, depending on its profitability and asset growth. Dividends from the Bank to the Holding Company are limited to the sum of the Bank’s Net income during the current calendar year and the retained net income of the prior two calendar years unless approved by regulators. If regulatory agencies were to require banks to increase their capital ratios, or impose other restrictions, it may limit the ability of the Bank to pay dividends to the Holding Company and/or limit the amount that the Bank could grow.
Although the Bank’s capital currently exceeds regulatory requirements for capital, the Holding Company could downstream additional capital to increase the rate that the Bank could grow. Depending upon the amount of capital downstreamed by the Holding Company, the approval of the Holding Company’s Board of Directors may be required prior to the payment, if any.
The Company is required to pay interest quarterly on its junior subordinated debentures. The estimated cash outlay for the remaining three months of 20192020 for the interest payments is approximately $1.0$0.5 million based on the debt outstanding at September 30, 2019.2020. LIBOR is expected to be phased out as an index by the end of 2021, and $103.1 million of the Company's junior subordinated debentures are tied to LIBOR. The Company will need to negotiate an alternative benchmark rate to be used at the time.
The Company presently plans to paypays cash dividends on its common stock on a quarterly basis dependent upon a number of factors such as profitability, Holding Company liquidity, and the Company’s capital levels. However, the ultimate declaration of dividends by the Board of Directors of the Company will depend on consideration of, among other things, recent financial trends and internal forecasts, regulatory limitations, alternative uses of capital deployment, general economic conditions, and regulatory changes to capital requirements. Additionally, the Company is required to inform and consult with the Federal Reserve in advance of declaring a dividend that exceeds earnings for the period for which the dividend is being paid. Based on
Given the current quarterly dividend rate of $0.12 per share, as announced by the Company on October 24, 2019,economic conditions and estimated shares outstanding, the Company estimates that the amount to be paid out for dividends to common shareholders in the remaining three months of 2019 will be approximately $10.0 million. The estimated dividend payments in 2019 could increase or decrease iffuture forecasts, the Company’s Board of Directors voteswill evaluate the amount of future dividends, if any, to increasebe declared on a quarter by quarter basis. The Board of Directors could reduce or decrease, respectively,eliminate quarterly cash dividends based on the current dividend rate, and/or the number of shares outstanding changes significantly.forecasted conditions if deemed prudent.
Bank Liquidity.liquidity. The Bank has established various borrowing arrangements to provide additional sources of liquidity and funding. Management believes that the Bank currently has adequate liquidity available to respond to current demands. The Bank is a member of the FHLB of Boston, and as such, has access to short- and long-term borrowings from that institution. The FHLB can change the advance amounts that banks can utilize based on a bank’s current financial condition as obtained from publicly available data such as FDIC Call Reports. Decreases in the amount of FHLB borrowings available to the Bank would lower its liquidity and possibly limit the Bank’s ability to grow in the short-term. In addition, due to the elevated level of deposits in the third quarter of 2020, the Bank did not utilize any borrowings from the PPPLF, as originally anticipated. However, the Bank will continue to monitor its level of deposits and may utilize borrowings from the PPPLF in future quarters, if needed. Management believes that the Bank has adequate liquidity to meet its commitments for the foreseeable future.
In addition to the above liquidity, the Bank has access to the FRB discount window facility, which can provide short-term liquidity as “lender of last resort”. The use of non-core funding sources, including brokered deposits and borrowings, by the Bank may be limited by regulatory agencies. Generally, the regulatory agencies prefer that banks rely on core-funding sources for liquidity.
From time to time, the Bank purchases federal funds from the FHLB and other banking institutions to supplement its liquidity position. At September 30, 2019,2020, the Bank had unused federal fund lines of credit totaling $380.0$325.0 million, compared to $465.0$500.0 million at December 31, 2018,2019, with correspondent institutions to provide it with immediate access to overnight borrowings. At September 30, 2019, the Bank had $150.0 million outstanding borrowings under the federal funds lines with these correspondent institutions along with an additional $80.0 million of outstanding borrowings under federal funds lines with the FHLB. At December 31, 2018, the Bank had $100.0 million outstanding borrowings under the federal funds lines with these correspondent institutions along with an additional $150.0 million of outstanding borrowings under federal funds lines with the FHLB. Certain liquidity sources, such as federal funds lines, may be withdrawn by the correspondent bank at any time especiallytime. The decrease in the eventfederal funds availability in the third quarter of 2020 resulted from the withdrawal of certain lines of credit due to the Bank’s financial deteriorationresults as of June 30, 2020. At September 30, 2020 and December 31, 2019, the institution.
Bank did not have any outstanding borrowings under the federal funds lines with these correspondent institutions nor outstanding borrowings under federal funds lines with the FHLB.
The Bank has negotiated brokered deposit agreements with several institutions that have nationwide distribution capabilities. The Bank participates in deposit placement services that can be used to provide customers to expanded deposit insurance coverage. At September 30, 2019,2020, the Bank had $355.4$295.0 million of brokered deposits outstanding under these agreements, compared to $541.1$258.7 million at December 31, 2018.2019. Funds in the sweep deposit program between the Bank and Boston Private Wealth are not considered brokered deposits.
If the Bank is no longer able to utilize the FHLB for borrowing, collateral currently used for FHLB borrowings could be transferred to other facilities such as the FRB’s discount window. In addition, the Bank could increase its usage of brokered deposits. OtherThese other borrowing arrangements may have higher rates than the FHLB would typically charge.
Capital Resources
Total shareholders’ equity at September 30, 20192020 was $808.7$846.2 million compared to $754.0$819.0 million at December 31, 2018,2019, an increase of $54.7$27.2 million. The increase in shareholders’shareholders' equity was primarily the result of net income attributable to the Company and the change in accumulatedAccumulated other comprehensive income and the adoption of ASU 2016-13, partially offset by dividends paid to common shareholders and the repurchase of common shares.
TheUnder the Federal Reserve’s capital rules applicable to the Company and the Bank, are subject to capital rules issued by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Under these rules, the Company and the Bank are each required to maintain a minimum common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a minimum total Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0%, and a minimum Tier 1 leverage ratio of 4.0%. Additionally, Federal Reserve rules require the Company and the Bank to each establish a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk-weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.
A Federal Reserve-supervised institution, such as the Bank, is considered “well capitalized” if it (i) has a total capital to risk-weighted assets ratio of 10.0% or greater; (ii) a Tier 1 capital to risk-weighted assets ratio of 8.0% or greater; (iii) a common equity Tier 1 capital ratio to risk-weighted assets of 6.5% or greater; (iv) a Tier 1 leverage ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. The Bank is currently considered “well capitalized” under all regulatory definitions.
The following table presents the Company’s and the Bank’s regulatory capital and related ratios as of September 30, 20192020 and December 31, 2018.2019. Also presented are the minimum requirements established by the Federal Reserve and the FDIC as of those dates for the Company and the Bank, respectively, to meet applicable capital requirements and the requirements of the FDIC as of those dates for the Bank to be considered “well capitalized” under all regulatory definitions.the prompt corrective action provisions of the Federal Deposit Insurance Act. The Federal Reserve and the Massachusetts Division of Banks may impose higher capital ratios than those listed below based upon the results of regulatory exams.
| | | | | | | | | | | | | | | | | Actual | | For capital adequacy purposes (at least) | | To be well capitalized under prompt corrective action provisions (at least) | | Minimum capital ratio with capital conservation buffer (1) |
| Actual | | For capital adequacy purposes (at least) | | To be well capitalized under prompt corrective action provisions (at least) | | Minimum capital ratio with capital conservation buffer (1) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Ratio |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Ratio | | (In thousands, except percentages) | | |
| (In thousands) | | |
As of September 30, 2019 | | | | | | | | | | | |
As of September 30, 2020 | | As of September 30, 2020 | |
Common equity tier 1 risk-based capital | Common equity tier 1 risk-based capital | | | | | | | | | | Common equity tier 1 risk-based capital | |
Company | $ | 732,980 |
| | 11.22 | % | | $ | 294,025 |
| | 4.5 | % | | n/a |
| | n/a | | 7.0% | Company | $ | 752,492 | | | 11.30 | % | | $ | 299,689 | | | 4.5 | % | | n/a | | n/a | | 7.0% |
Boston Private Bank | 775,161 |
| | 11.91 |
| | 292,785 |
| | 4.5 |
| | $ | 422,912 |
| | 6.5% | | 7.0 | Boston Private Bank | 782,660 | | | 11.79 | % | | 298,847 | | | 4.5 | % | | $ | 431,668 | | | 6.5% | | 7.0% |
Tier 1 risk-based capital | | | | | | | | | | | Tier 1 risk-based capital | |
Company | 833,431 |
| | 12.76 |
| | 392,033 |
| | 6.0 |
| | n/a |
| | n/a | | 8.5 | Company | 852,514 | | | 12.80 | % | | 399,585 | | | 6.0 | % | | n/a | | n/a | | 8.5% |
Boston Private Bank | 775,161 |
| | 11.91 |
| | 390,380 |
| | 6.0 |
| | 520,507 |
| | 8.0 | | 8.5 | Boston Private Bank | 782,660 | | | 11.79 | % | | 398,463 | | | 6.0 | % | | 531,284 | | | 8.0% | | 8.5% |
Total risk-based capital | | | | | | | | | | | Total risk-based capital | |
Company | 910,076 |
| | 13.93 |
| | 522,711 |
| | 8.0 |
| | n/a |
| | n/a | | 10.5 | Company | 935,887 | | | 14.05 | % | | 532,780 | | | 8.0 | % | | n/a | | n/a | | 10.5% |
Boston Private Bank | 851,660 |
| | 13.09 |
| | 520,507 |
| | 8.0 |
| | 650,634 |
| | 10.0 | | 10.5 | Boston Private Bank | 865,802 | | | 13.04 | % | | 531,284 | | | 8.0 | % | | 664,105 | | | 10.0% | | 10.5% |
Tier 1 leverage capital | | | | | | | | | | | Tier 1 leverage capital | |
Company | 833,431 |
| | 9.70 |
| | 343,534 |
| | 4.0 |
| | n/a |
| | n/a | | 4.0 | Company | 852,514 | | | 9.23 | % | | 369,518 | | | 4.0 | % | | n/a | | n/a | | 4.0% |
Boston Private Bank | 775,161 |
| | 9.10 |
| | 340,674 |
| | 4.0 |
| | 425,843 |
| | 5.0 | | 4.0 | Boston Private Bank | 782,660 | | | 8.50 | % | | 368,236 | | | 4.0 | % | | 460,295 | | | 5.0% | | 4.0% |
| | | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | | | |
As of December 31, 2019 | | As of December 31, 2019 | |
Common equity tier 1 risk-based capital | Common equity tier 1 risk-based capital | | | | | | | | | | Common equity tier 1 risk-based capital | |
Company | $ | 702,728 |
| | 11.40 | % | | $ | 277,275 |
| | 4.5 | % | | n/a |
| | n/a | | 7.0% | Company | $ | 745,926 | | | 11.42 | % | | $ | 293,886 | | | 4.5 | % | | n/a | | n/a | | 7.0% |
Boston Private Bank | 745,051 |
| | 12.13 |
| | 276,352 |
| | 4.5 |
| | $ | 399,175 |
| | 6.5% | | 7.0 | Boston Private Bank | 778,635 | | | 11.97 | % | | 292,717 | | | 4.5 | % | | $ | 422,813 | | | 6.5% | | 7.0% |
Tier 1 risk-based capital | | | | | | | | | | | Tier 1 risk-based capital | |
Company | 803,311 |
| | 13.04 |
| | 369,701 |
| | 6.0 |
| | n/a |
| | n/a | | 8.5 | Company | 846,337 | | | 12.96 | % | | 391,848 | | | 6.0 | % | | n/a | | n/a | | 8.5% |
Boston Private Bank | 745,051 |
| | 12.13 |
| | 368,469 |
| | 6.0 |
| | 491,292 |
| | 8.0 | | 8.5 | Boston Private Bank | 778,635 | | | 11.97 | % | | 390,289 | | | 6.0 | % | | 520,386 | | | 8.0% | | 8.5% |
Total risk-based capital | | | | | | | | | | | Total risk-based capital | |
Company | 879,927 |
| | 14.28 |
| | 492,934 |
| | 8.0 |
| | n/a |
| | n/a | | 10.5 | Company | 919,573 | | | 14.08 | % | | 522,464 | | | 8.0 | % | | n/a | | n/a | | 10.5% |
Boston Private Bank | 821,584 |
| | 13.38 |
| | 491,292 |
| | 8.0 |
| | 614,115 |
| | 10.0 | | 10.5 | Boston Private Bank | 851,733 | | | 13.09�� | % | | 520,386 | | | 8.0 | % | | 650,482 | | | 10.0% | | 10.5% |
Tier 1 leverage capital | | | | | | | | | | | Tier 1 leverage capital | |
Company | 803,311 |
| | 9.54 |
| | 336,648 |
| | 4.0 |
| | n/a |
| | n/a | | 4.0 | Company | 846,337 | | | 9.77 | % | | 346,398 | | | 4.0 | % | | n/a | | n/a | | 4.0% |
Boston Private Bank | 745,051 |
| | 8.92 |
| | 334,029 |
| | 4.0 |
| | 417,537 |
| | 5.0 | | 4.0 | Boston Private Bank | 778,635 | | | 9.03 | % | | 344,958 | | | 4.0 | % | | 431,198 | | | 5.0% | | 4.0% |
____________________
| |
(1) | Required capital ratios with the fully phased-in capital conservation buffer added to the minimum risk-based capital ratios. The fully phased-in ratios are effective for 2019. |
(1) Required capital ratios with the capital conservation buffer added to the minimum risk-based capital ratios.
The Company has sponsored the creation of two statutory trusts for the sole purpose of issuing trust preferred securities and investing the proceeds in junior subordinated debentures of the Company. In accordance with ASC 810-10-55, Consolidation - Overall - Implementation Guidance and Illustrations - Variable Interest Entities, these statutory trusts are not consolidated into the Company’s financial statements; however, the Company reflects the amounts of junior subordinated debentures payable to the preferred stockholders of statutory trusts as debt in its financial statements. As of both September 30, 20192020 and December 31, 2018,2019, all $100.0 million of the net balance of these trust preferred securities qualified as Tier 1 capital.
Recent Accounting Pronouncements
See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Recent Accounting Pronouncements” for a description of upcoming changes to accounting principles generally accepted in the United States that may materially impact the Company.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Interest Rate Sensitivity and Market Risk as described in Part II. Item 7A. “Quantitative and Qualitative Disclosures about Market Risk – Interest Rate Sensitivity and Market Risk” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
As required by Rule 13a-15 under the Exchange Act, the Company has evaluated, with the participation of management, including the Company's Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives.
Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of September 30, 20192020 in ensuring that material information required to be disclosed by the Company, including its consolidated subsidiaries, was made known to the certifying officers by others within the Company and its consolidated subsidiaries in the reports that it files or submits under the Exchange Act and is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. On a quarterly basis, the Company evaluates theits disclosure controls and procedures, andprocedures; the Company may, from time to time, make changes aimed at enhancing theirto enhance the effectiveness of its disclosure controls and procedures and to ensure that the Company’sits systems evolve with its business.
(b) Change in internal controls over financial reporting.
There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended September 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
The Company is involved in various legal proceedings from time to time. In the opinion of management, the final disposition of these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company.
Item 1A. Risk Factors
Before deciding to invest in us or deciding to maintain or increase your investment, you should carefully considerThis section supplements and updates certain of the risks described ininformation found under Part I.I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 20182019 filed with the SEC on February 28, 2020 (“Annual Report”) and Part II. Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the SEC. ThereSEC on May 8, 2020 (the “First Quarter 10-Q”) and Part II. Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, as filed with the SEC on August 6, 2020 (the “Second Quarter 10-Q”), based on information currently known to us and recent developments since the date of the Second Quarter 10-Q filing. The matters discussed below should be read in conjunction with the risks described in Part I. Item 1A. “Risk Factors” of our Annual Report and Part II. Items 1A. “Risk Factors” of our First Quarter 10-Q and Second Quarter 10-Q. However, the risks and uncertainties that we face are not limited to those described below and those set forth in the Annual Report and First Quarter 10-Q and Second Quarter 10-Q. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business and the trading price of our securities, particularly in light of the fast-changing nature of the COVID-19 pandemic, responsive containment measures taken and the related impacts to economic and operating conditions.
The COVID-19 pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers, business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.
The COVID-19 pandemic has, and will likely continue to, severely impact the national economy and the regional and local markets in which we operate, lower equity market valuations, create significant volatility and disruption in capital and debt markets, and increase unemployment levels. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. We are subject to heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements that we have put in place for our employees. Federal Reserve actions to combat the economic contraction caused by the COVID-19 pandemic, including the reduction of the target federal funds rate and quantitative easing programs, could, if prolonged, adversely affect our net interest income and margins, and our profitability. The continued closures of many businesses and the institution of pandemic-related orders and directives in the states and communities we serve have reduced business activity and financial transactions, and may impact the execution of our strategic plan, such as by delaying strategic hiring. Government policies and directives relating to the pandemic response are subject to change as the effects and spread of the COVID-19 pandemic continue to evolve. It is unclear whether any COVID-19 pandemic-related businesses losses that we or our customers may suffer will be covered by existing insurance policies. Additionally, certain government directives and social distancing protocols may hinder our ability to conduct timely property appraisals, which could delay or impact the accuracy of the recognition of credit losses in our loan portfolios. Changes in customer behavior due to worsening business and economic conditions or legislative or regulatory initiatives may impact the demand for our products and services, which could adversely affect our revenue. Increases in deposit balances due, among other things, to government stimulus and relief programs could adversely affect our financial performance if we are unable to successfully lend or invest those funds. The measures we have taken to aid our customers, including the introduction of a mortgage deferment program, may be insufficient to help our customers who have been negatively impacted by the economic fallout from the COVID-19 pandemic. Loans that are currently in deferral status may become nonperforming loans. More generally, because of adverse economic and market conditions, our clients may be unable to repay their loans. A borrower’s default on its obligations under one or more Bank loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and external resources to the collection and workout of the loan. If there is an increase in borrower defaults, we may be required to increase the Bank’s provision for loan loss expense. Adverse economic or market conditions may cause us to recognize impairments on the securities we hold, goodwill, intangible assets, and right-of-use assets. The increase in market volatility and a corresponding increase in trading frequency means that our Wealth Management and Trust business is subject to an increased risk of trading errors, and the risk that any trading errors are of an increased magnitude. While the COVID-19 pandemic negatively impacted our results of operations for the first three calendar quarters of 2020, the extent to which the COVID-19 pandemic will continue to impact our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic, as well as further actions we may take as may be required by government authorities or that we determine is in the best interests of our employees and customers. There is no material changescertainty that such measures will be sufficient to mitigate the risks posed by the pandemic.
Our participation in the SBA’s PPP may expose us to reputational harm, increased litigation risk, as well as the risk that the SBA may not fund some or all of the guarantees associated with PPP loans, which could result in these risk factors sinceloans being charged-off.
We have approved approximately 1,045 loans aggregating approximately $380.3 million through the filingPPP. Lenders participating in the PPP have faced increased public scrutiny about their loan application process and procedures, and the nature and type of the borrowers receiving PPP loans. We depend on our reputation as a trusted and responsible financial services company to compete effectively in the communities that report. we serve, and any negative public or customer response to, or any litigation or claims that might arise out of, our participation in the PPP and any other legislative or regulatory initiatives and programs that may be enacted in response to the COVID-19 pandemic, could adversely impact our business. Other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP, and we may be subject to the same or similar litigation, in addition to litigation in connection with our processing of PPP loan forgiveness applications. In addition, if the SBA determines that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes repurchasesThere were no unregistered sales of equity securities of the Company’s outstanding common sharesCompany in the third quarter of 2019.2020.
|
| | | | | | | | | | | | | | |
| | Issuer Purchases of Equity Securities |
Period | | (a) Total number of shares purchased | | (b) Average price paid per share | | (c) Total number of shares purchased as part of publicly announced plans | | (d) Maximum approximate dollar value of shares that may yet be purchased under the plans |
July 1 - 31, 2019 | | — |
| | $ | — |
| | — |
| | $ | 20,000,000 |
|
August 1 - 31, 2019 | | 499,910 |
| | 10.58 |
| | 499,910 |
| | 14,710,315 |
|
September 1 - 30, 2019 | | 178,255 |
| | 10.68 |
| | 678,165 |
| | 12,807,043 |
|
Total | | 678,165 |
| | $ | 10.61 |
| | 678,165 |
| | $ | 12,807,043 |
|
On August 13, 2019, the Company received a notice of non-objection from the Federal Reserve Bank of Boston for a share repurchase program of up to $20.0 million of the Company’s outstanding common shares. Under the program, shares may be repurchased from time to time in the open market or in privately negotiated transactions in amounts and at prices the Company deems appropriate, subject to market conditions and other considerations, for a one-year period. The program does not obligate the Company to purchase any shares. The repurchases will be funded from cash on hand, available borrowings or proceeds from potential debt or other capital markets sources. The share repurchase program may be suspended or discontinued at any time without prior notice. The Company’s Board of Directors approved the program, subject to regulatory non-objection, on August 7, 2019.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit No. | | Description | | Incorporated by Reference | | Filed or Furnishedwith this 10-Q Form | | SEC Filing Date | | Exhibit Number | | 10.1 | | | | | | | | | | Filed | | | | | | | | | | | | | | | | | | | | | | | Exhibit No. | | Description | | Incorporated by Reference | | Filed or
Furnished
with this
10-Q
| | | | | Form | | SEC Filing
Date
| | Exhibit
Number
| | | | | | | 10.1 | | | | | | | | | | Filed | 14.1 | | | | | | | | | | Filed | 21.1 | | | | | | | | | | Filed | 31.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 31.1 | | | | | | | | | | Filed | 31.2 | | | | | | | | | | Filed | 32.1 | | | | | | | | | | Furnished | 32.2 | | | | | | | | | | Furnished | 101.INS | | XBRL Instance Document - theThe instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | Filed | 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | Filed | 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | Filed | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | Filed | 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | Filed | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | Filed | 104 | | Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101) | | | | | | | | Filed |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | BOSTON PRIVATE FINANCIAL HOLDINGS, INC. | | | | /s/ ANTHONY DECHELLIS | November 4, 20195, 2020 | Anthony DeChellis | | Chief Executive Officer, President and Director (Principal Executive Officer)
| | | | /s/ STEVEN M. GAVEN | November 4, 20195, 2020 | Steven M. Gaven | | Executive Vice President, Chief Financial Officer |
|