BOSTON PRIVATE FINANCIAL HOLDINGS, INC. As of and for the three months endedMarch 31, 2021 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, 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; evaluations of interest rate trends and future liquidity; expectations as to changes in assets, deposits and results of operations; the impact of the COVID-19 pandemic; future operations, market position and financial 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 other factors, the negative impacts and disruptions of the COVID-19 pandemic and measures taken to contain its spread on our employees, customers, business operations, credit quality, financial position, liquidity and results of operations; the risk that a condition to closing of the proposed merger may not be satisfied; the risk that a regulatory approval that may be required for the proposed merger is not obtained or is obtained subject to conditions that are not anticipated; the effect of the announcement of the proposed merger on our ability to maintain relationships with our key partners, customers and employees, and on our operating results and business generally; the occurrence of any event, change or other circumstance that could give rise to the right of one or both parties to terminate the Merger Agreement providing for our proposed merger with SVB Financial Group; changes in customer behavior; the possibility that future credits 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 loss reserves; decreases in deposit levels necessitating increased borrowing to fund loans and investments; competitive pressures from other financial institutions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; changes in regulation; reputational risk relating to the Company'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 asset 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, as well as the other risks and uncertainties detailed in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and other filings submitted to theSecurities 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. 41 -------------------------------------------------------------------------------- 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 the Company's operating segments and operations in the first quarter of 2021. 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 March 31, 2021 2020 $ Change % Change (In thousands, except per share data and percentages) Total revenue$ 85,647 $ 78,778 $ 6,869 9 % Provision/(credit) for loan losses (7,004) 16,962 (23,966) nm Total operating expense 75,923 60,908 15,015 25 % Net income before attribution to noncontrolling interests 10,652 806 9,846 nm Net income attributable to noncontrolling interests - 6 (6) (100) % Net income attributable to the Company 10,652 800 9,852 nm Diluted earnings per share attributable to common shareholders$ 0.13 $ 0.01 $ 0.12 nm ASSETS UNDER MANAGEMENT AND ADVISORY ("AUM"): Wealth Management and Trust$ 17,002,000 $ 13,497,000 $ 3,505,000 26 % Other (1) 196,000 1,016,000 (820,000) (81) % Total AUM$ 17,198,000 $ 14,513,000 $ 2,685,000 19 %
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nm = not meaningful (1) Includes results fromDalton, Greiner, Hartman, Maher & Co., LLC ("DGHM") Net income attributable to the Company was$10.7 million and$0.8 million for the three months endedMarch 31, 2021 andMarch 31, 2020 , respectively. The Company recognized Diluted earnings per share attributable to common shareholders of$0.13 and$0.01 for the three months endedMarch 31, 2021 andMarch 31, 2020 , respectively. Key items that affected the Company's results in the first quarter of 2021 compared to the same period of 2020 include: ?The provision for loan losses was a credit of$7.0 million for the three months endedMarch 31, 2021 , compared to an expense of$17.0 million for the same period of 2020. During the first quarter of 2021, the Company recognized a total provision credit of$9.0 million , which included a Provision credit for loan losses of$7.0 million , and separately, a reserve credit of$2.0 million for unfunded loan commitments, recognized as Other expense within Operating expense. •The decrease in the Allowance for loan losses for the three months endedMarch 31, 2021 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated improving economic conditions from the prior quarter, as well as a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts. These improvements were partially offset by the net impact of the change in the composition and volume of the loan portfolio. ?Total revenue increased$6.9 million to$85.6 million for the three months endedMarch 31, 2021 , compared to the same period of 2020 as described below. •Total fees and other income increased$4.6 million , or 22%, to$26.2 million for the three months endedMarch 31, 2021 , compared to the same period of 2020. The increase was primarily driven by higher Other income as a result of a gain related to the revaluation of a receivable from the divestiture of former affiliateBingham, Osborn & Scarborough, LLC ("BOS"), the impact of mark-to-market on derivatives and deferred compensation securities, and higher gain on sale of secondary loans. Total fees and other income represents 31% of Total revenue for the three months endedMarch 31, 2021 , compared to 27% of Total revenue for the same period of 2020. •Net interest income increased$2.2 million , or 4%, to$59.5 million for the three months endedMarch 31, 2021 , compared to the same period of 2020. The increase in Net interest income was primarily driven by the addition of income related to the Paycheck Protection Program ("PPP") and lower funding costs, partially offset by lower interest on interest-earning assets. Net interest margin ("NIM") was 2.45% for the three months endedMarch 31, 2021 , a decrease of 31 basis points compared to the same period in 2020. Although Net interest income increased, the decrease in NIM was primarily driven by excess cash balances held at lower yields. 42 -------------------------------------------------------------------------------- ?Total operating expense increased$15.0 million , or 25%, to$75.9 million for the three months endedMarch 31, 2021 , compared to the same period of 2020. The increase was primarily driven by costs related to the proposed merger with SVB Financial Group ("SVB"), increases in Salaries and employee benefits expense due to increases in variable compensation, and Information systems expense as a result of new IT initiatives being placed in service, partially offset by lower Other expense driven by the off-balance sheet provision credit. ?For the three months endedMarch 31, 2021 , total loans increased$112.0 million , or 2%, while total deposits increased$552.3 million , or 6%, fromDecember 31, 2020 . The increase in loans was primarily driven by higher Commercial and industrial loans, as well as higher PPP loans, while the increase in deposits was primarily driven by new and existing clients maintaining additional cash liquidity. The Company's loan-to-deposit ratio decreased from 83% as ofDecember 31, 2020 to 79% as ofMarch 31, 2021 , driven by strong deposit inflows. Deposits are the Company's primary source of funds to originate loans. If the Company has excess deposits, the Company may seek to earn a better yield by investing excess cash in loan growth, purchasing investment securities or other cash management strategies. ?Income tax expense for the three months endedMarch 31, 2021 was$6.1 million , compared to$0.1 million for the same period in 2020. The effective tax rate for the three months endedMarch 31, 2021 was 36.3%, compared to an effective tax rate of 11.2% for the same period of 2020. The effective tax rate is more than the statutory rate of 21% due primarily to Merger costs related to the proposed merger with SVB, state and local income taxes, and the accounting for investments in affordable housing projects. These items were partially offset by earnings from tax-exempt investments and income tax credits. During the first quarter of 2021, the Company recorded a tax expense of approximately$3.0 million due to certain Merger costs related to the proposed merger with SVB that are expected to be non-deductible. The Company's Private Banking segment reported Net income attributable to the Company of$21.8 million in the first quarter of 2021, compared to$0.6 million for the same period of 2020. Net income attributable to the Company increased$21.3 million from the same period in 2020, primarily driven by a decrease in Provision for loan losses of$24.0 million , as well as an increase in Total revenue of$4.8 million . These items were partially offset by an increase in Income tax expense of$5.7 million , as well as an increase of$1.9 million in Operating expense primarily due to increases in Salaries and employee benefits expense, and Information systems expense as a result of new IT initiatives being placed in service. The Company'sWealth Management and Trust segment reported Net income attributable to the Company of$1.2 million in the first quarter of 2021, compared to$2.0 million for the same period of 2020. The decrease of$0.8 million , or 40%, was primarily driven by an increase of$2.0 million in Operating expense, partially offset by an increase of$0.6 million in Total revenue. The increase in Operating expense was primarily driven by increases in Salaries and employee benefits expense, and Information systems expense as a result of new IT initiatives being placed in service to support the Company's strategic objectives. The increase in Total revenue was driven by the impact of higher AUM on fee revenues. Wealth Management and Trust AUM increased$3.5 billion , or 26%, to$17.0 billion atMarch 31, 2021 from$13.5 billion atMarch 31, 2020 . The increase in AUM was primarily driven by favorable market returns of$3.6 billion , partially offset by total net outflows of$0.1 billion for the twelve months endedMarch 31, 2021 . Announced Merger OnJanuary 4, 2021 , the Company announced that it entered into an Agreement and Plan of Merger (the "Merger Agreement") with SVB, pursuant to which SVB will acquire the Company. OnMay 4, 2021 , the shareholders of the Company approved the Merger Agreement. The transaction is expected to close mid-2021, subject to the satisfaction of customary closing conditions, including the receipt of regulatory approvals. 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 theSmall Business Administration's (the "SBA") 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 Coronavirus Aid, Relief, and Economic Security Act (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 43 -------------------------------------------------------------------------------- 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 onJune 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. Additionally, onDecember 27, 2020 , the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the "Economic Aid Act") was enacted which, among other items, provides for a second round of PPP loans. 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, theBoard of Governors of theFederal 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 ofMarch 31, 2021 , the Bank has not participated in the PPPLF. As ofMarch 31, 2021 , the Bank processed 1,594 loans totaling$511.1 million under the PPP program, primarily in the second quarter of 2020 and the first quarter of 2021. The Bank has received$15.5 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 ofMarch 31, 2021 , the balance of PPP loans was$351.2 million , and$8.2 million was accreted through net interest income. OnMay 5, 2021 , the SBA stopped accepting PPP loan applications from most lenders, including the Company, because PPP funding has been exhausted. 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 365 residential and home equity loans totaling approximately$220.0 million have been processed under the program. As ofMarch 31, 2021 , approximately 47 loans totaling approximately$20.0 million remain in deferral under the program. Approximately 13 loans totaling$1.5 million are delinquent on payment terms as ofMarch 31, 2021 after the deferral expired, primarily First Time Home Buyer loans as defined by theU.S. Department of Housing and Urban Development , while the remainder have expired with the loans returning to payment. Commercial and industrial loan deferment program Also 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 85 Commercial and industrial loans totaling approximately$125.0 million have been processed under the program. As ofMarch 31, 2021 , approximately four loans totaling approximately$5.7 million remain in deferral under the program, while the remainder have expired with the loans returning to payment. Of the loans that came off deferral, no loans are delinquent on payment terms as ofMarch 31, 2021 . 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 ofMarch 31, 2021 , the borrowers associated with the$1.3 billion of existing loans received approximately$69.9 million in additional funding under this program. The Company does not anticipate a material increase in the$69.9 million balance of new loans in the future, and the principal balance will amortize down over the life of the loan, generally five years. The 12 month coverage period for debt service reserve balances will elapse in the second quarter of 2021. 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 ten Commercial real estate borrowers with loans totaling approximately$55.0 million accepted this accommodation. As ofMarch 31, 2021 , one borrower with loans totaling$4.7 million remains in deferral. Of the loans that came off deferral, no loans are delinquent on payment terms as ofMarch 31, 2021 . 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 44 -------------------------------------------------------------------------------- The Company continues to monitor and evaluate the impact of the COVID-19 pandemic on the credit quality of our assets. Total criticized and classified loans as ofMarch 31, 2021 was$314.4 million , an increase of$3.6 million , or 1%, linked quarter. During the first quarter of 2021, the Company recognized a total net provision credit of$9.0 million . The decrease in the Allowance for loan losses for the three months endedMarch 31, 2021 was primarily driven by the latest current reasonable and supportable economic forecasts, which indicated improving economic conditions from the prior quarter, as well as a change in the weighting of the forecast scenarios used to account for risks and assumptions not incorporated in the forecasts. These improvements were partially offset by the net impact of the change in the composition and volume of the loan 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 will continue to monitor the fair value of 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 policy upon which its financial condition depends, which involves the most complex or subjective decisions or assessments, is the Allowance for loan losses. This policy is 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 endedDecember 31, 2020 . Upon the adoption of ASU 2016-13, Financial Instruments (Topic 326) ("ASU 2016-13") onJanuary 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 the Company's policies through the filing of this Quarterly Report on Form 10-Q. Results of operations for the three months endedMarch 31, 2021 versusMarch 31, 2020 Net income. The Company recorded Net income attributable to the Company for the three months endedMarch 31, 2021 of$10.7 million , compared to Net income attributable to the Company of$0.8 million for the same respective period in 2020. The Company recognized Diluted earnings per share attributable to common shareholders for the three months endedMarch 31, 2021 of$0.13 per share, compared to Diluted earnings per share attributable to common shareholders of$0.01 per share for the same respective period in 2020. See Part I. Item 1. "Notes to Unaudited Consolidated Financial Statements - Note 2: Earnings Per Share" for further detail on adjustments made to arrive at income available to common shareholders. The following table presents selected financial highlights: Three months ended March 31, $ % 2021 2020 Change Change (In thousands, except percentages) Net interest income$ 59,477 $ 57,257 $ 2,220 4 % Fees and other income 26,170 21,521 4,649 22 % Total revenue 85,647 78,778 6,869 9 % Provision/(credit) for loan losses (7,004) 16,962 (23,966) nm Operating expense 75,923 60,908 15,015 25 % Income tax expense 6,076 102 5,974 nm Net income before attribution to noncontrolling interests 10,652 806 9,846 nm Less: Net income attributable to noncontrolling interests - 6 (6) (100) % Net income attributable to the Company$ 10,652 $ 800 $ 9,852 nm _____________________ 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 45 -------------------------------------------------------------------------------- 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$136.1 million atMarch 31, 2021 and could be placed on nonaccrual status if their credit quality declines further. Net interest income for the three months endedMarch 31, 2021 was$59.5 million , an increase of$2.2 million , or 4%, compared to the same period in 2020. The increase was primarily driven by the addition of PPP-related income and lower funding costs, partially offset by lower interest earned on interest-earning assets. NIM was 2.45% for the three months endedMarch 31, 2021 , a decrease of 31 basis points compared to the same period in 2020. Although Net interest income increased, the decrease in NIM was primarily driven by excess cash balances held at lower yields. 46 --------------------------------------------------------------------------------
The following tables present the composition of the Company's NIM for the three
months ended
Average Balance Interest Income/Expense Average Yield/Rate (1)
As of and for the three months ended March 31,
AVERAGE BALANCE SHEET: 2021 2020 2021 2020 2021 2020
AVERAGE ASSETS (In thousands)
Interest-earning assets:
Cash and investments: (2)
Taxable investment securities $ 203,856 $ 201,174 $ 782 $ 868 1.54 % 1.73 %
Non-taxable investment securities 322,057 315,681 2,045 1,998 2.54 % 2.53 %
Mortgage-backed securities 810,754 520,629 3,437 2,787 1.70 % 2.14 %
Short-term investments and other 1,238,677 147,482 593 1,071 0.19 % 2.89 %
Total cash and investments 2,575,344 1,184,966 6,857 6,724 1.07 % 2.27 %
Loans: (3)
Commercial and industrial 1,034,369 1,148,986 8,352 10,724 3.23 % 3.69 %
Paycheck Protection Program 326,695 - 3,629 - 4.44 % - %
Commercial real estate 2,723,249 2,582,305 23,187 27,482 3.41 % 4.21 %
Construction and land 165,350 233,324 1,605 2,572 3.88 % 4.36 %
Residential 2,667,440 2,850,833 20,226 23,468 3.03 % 3.29 %
Home equity 76,336 86,048 551 952 2.93 % 4.45 %
Consumer and other 121,900 132,237 486 1,160 1.62 % 3.53 %
Total loans 7,115,339 7,033,733 58,036 66,358 3.26 % 3.75 %
Total earning assets 9,690,683 8,218,699 64,893 73,082 2.68 % 3.54 %
Less: Allowance for loan losses 81,125 51,730
Cash and due from banks (non-interest
bearing) 38,897 49,571
Other assets 631,970 562,851
TOTAL AVERAGE ASSETS $ 10,280,425 $ 8,779,391
AVERAGE LIABILITIES, RNCI, AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits:
Savings and NOW $ 877,100 $ 638,926 $ 180 $ 232 0.08 % 0.15 %
Money market 4,911,146 3,753,045 3,831 9,657 0.32 % 1.03 %
Certificates of deposit 489,037 668,818 680 2,907 0.56 % 1.75 %
Total interest-bearing deposits 6,277,283 5,060,789 4,691 12,796 0.30 % 1.02 %
Junior subordinated debentures 106,363 106,363 481 917 1.81 % 3.41 %
FHLB borrowings and other 180,234 455,813 244 2,112 0.54 % 1.83 %
Total interest-bearing liabilities 6,563,880 5,622,965 5,416 15,825 0.33 % 1.13 %
Noninterest bearing demand deposits 2,551,651 2,046,102
Payables and other liabilities 285,453 270,371
Total average liabilities 9,400,984 7,939,438
Redeemable noncontrolling interests - 1,018
Average shareholders' equity 879,441 838,935
TOTAL AVERAGE LIABILITIES, RNCI, AND
SHAREHOLDERS' EQUITY $ 10,280,425 $ 8,779,391
Net interest income $ 59,477 $ 57,257
Interest rate spread 2.35 % 2.41 %
NIM 2.45 % 2.76 %
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(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.
Interest and dividend income. Total interest and dividend income for the three
months ended March 31, 2021 was $64.9 million , a decrease of $8.2 million , or
11%, compared to the same period in 2020. The decrease was primarily driven by
lower yields on loans and investments, partially offset by 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
47
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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 Commercial and industrial loans (including Commercial loans
and Commercial tax-exempt loans) for the three months ended March 31, 2021 was
$8.4 million , a decrease of $2.4 million , or 22%, compared to the same period in
2020, as a result of a 46 basis point decrease in the average yield and a 10%
decrease in the average balance. The decrease in the average yield was 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 decrease
in the average balance was related primarily to lower revolving line of credit
usage.
Interest income on PPP loans for the three months ended March 31, 2021 was $3.6
million . The Company began earning interest income on PPP loans in the second
quarter of 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. As of March 31, 2021 , approximately
$151.4 million of loans were forgiven by the SBA and a total of $8.2 million was
accreted through Net interest income.
Interest income on Commercial real estate loans for the three months ended
March 31, 2021 was $23.2 million , a decrease of $4.3 million , or 16%, compared
to the same period in 2020, as a result of a 80 basis point decrease in the
average yield, partially offset by a 5% increase in the average balance. The
decrease in the average yield was 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 increase in the average balance was
related primarily to the addition of approximately $80.0 million of loans under
the Commercial real estate second loan program as part of relief measures
provided to clients as a result of the COVID-19 pandemic, and the conversion of
two loans from construction to permanent financing during the fourth quarter of
2020.
Interest income on Construction and land loans for the three months ended
March 31, 2021 was $1.6 million , a decrease of $1.0 million , or 38%, compared to
the same period in 2020, as a result of a 48 basis point decrease in the average
yield, and a 29% decrease in the average balance. The overall yields on
Construction 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 Construction and land loans, a large drawdown or paydown 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 decrease in the average
yield was primarily the result of decreases to the interest rate benchmarks to
which the variable rate loans are tied. The decrease in the average balance was
related primarily to payoffs in New England and Southern California , as well as
the conversion of two loans from construction to permanent financing during the
fourth quarter of 2020.
Interest income on Residential mortgage loans for the three months ended
March 31, 2021 was $20.2 million , a decrease of $3.2 million , or 14%, from the
same period in 2020, as a result of a 26 basis point decrease in the average
yield and a 6% decrease in the average balance. The decrease in the average
yield was 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 decrease in the average balance was primarily driven by the
sale of approximately $72.0 million of Residential loans in the third quarter of
2020 and slowed originations throughout 2020 and the first quarter of 2021.
Interest income on Home equity loans for the three months ended March 31, 2021
was $0.6 million , a decrease of $0.4 million , or 42%, compared to the same
period in 2020, as a result of a 152 basis point decrease in the average yield
and an 11% decrease in the average balance. The decrease in the average yield
was primarily the result of decreases to the interest rate benchmarks to which
the variable rate loans are tied. The decrease in the average balance was
primarily driven by reduced demand as a result of economic uncertainty related
to the COVID-19 pandemic.
Interest income on Other consumer loans for the three months ended March 31,
2021 was $0.5 million , a decrease of $0.7 million , or 58%, compared to the same
period in 2020, as a result of a 191 basis point decrease in the average yield
and an 8% decrease in the average balance. The decrease in the average yield was
primarily the result of decreases to the interest rate benchmarks to which the
variable rate loans are tied. The decrease in the average balance was primarily
driven by strategic decisions to slow new consumer loan growth.
Investment income for the three months ended March 31, 2021 was $6.9 million , an
increase of $0.1 million , or 2%, compared to the same period in 2020, as a
result of a 117% increase in the average balance, partially offset by a 120
basis point decrease in the average yield. The increase in the average balance
was primarily due to investing additional cash from higher client deposit
balances. The decrease in the average yield was primarily due to the lower
interest rate environment.
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Interest expense. Total interest expense for the three months ended March 31,
2021 was $5.4 million , a decrease of $10.4 million , or 66%, compared to the same
period in 2020. The decrease in interest expense was primarily driven by the
impact of lower rates on interest-bearing deposits and borrowings, as well as a
decrease in the average volume of borrowings due to higher deposits, partially
offset by an increase in the volume of interest-bearing deposits.
Interest expense on interest-bearing deposits for the three months ended
March 31, 2021 was $4.7 million , a decrease of $8.1 million , or 63%, compared to
the same period in 2020, as a result of a 72 basis point decrease in the average
rate, partially offset by a 24% increase in the average balance. The decrease in
the average rate paid on deposits was driven primarily by wholesale reductions
in rates paid for deposit accounts given decreases in interest rates. The
increase in the average balance for interest-bearing deposits was primarily
driven by increases in deposits as clients hold additional cash deposit
balances.
Interest expense paid on non-deposit interest-bearing liabilities for the three
months ended March 31, 2021 was $0.7 million , a decrease of $2.3 million , or
76%, compared to the same period in 2020, as a result of a 129 basis point
decrease in the average rate paid on FHLB borrowings and other borrowings, a 60%
decrease in the average balance of FHLB borrowings and other borrowings, and a
160 basis point decrease in the average rate on Junior subordinated debentures.
The decreases in the average rates paid were primarily driven by the decreases
in benchmark interest rates to which the instruments are tied. The decrease in
the average balance was primarily driven by the increase in client deposits
reducing the need for higher-cost borrowings.
Provision/(credit) for loan losses. The Company recorded a Provision credit of
$7.0 million for the three months ended March 31, 2021 , compared to a Provision
for loan losses of $17.0 million for the same period in 2020. The decrease in
the Allowance for loan losses for the three months ended March 31, 2021 was
primarily driven by the latest current reasonable and supportable economic
forecasts, which indicated improving economic conditions from the prior quarter,
as well as a change in the weighting of the forecast scenarios used to account
for risks and assumptions not incorporated in the forecasts. These improvements
were partially offset by the net impact of the change in the composition and
volume of the loan portfolio. Under the CECL methodology, the Provision for loan
losses required may be significantly affected by reasonable and supportable
economic forecasts.
The 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 Company 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
model 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 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 prepayments and curtailments. Economic
forecasts are incorporated into the estimate over a reasonable and supportable
forecast period, beyond which is a reversion to the Company's historical
long-run average. Qualitative factors are estimated by management and include
trends in problem loans, strength of management, concentration risk and
underwriting standards. For further details, see "Loan Portfolio and Credit
Quality" below.
Fees and other income
Three months ended March
31, $ %
2021 2020 Change Change
(In thousands, except percentages)
Wealth management and trust fees $ 19,136 $ 18,371 $ 765 4 %
Investment management fees 489 1,925 (1,436) (75) %
Other banking fee income 2,411 2,490 (79) (3) %
Gain on sale of loans, net 747 100 647 nm
Total core fees and income 22,783 22,886 (103) - %
Total other income 3,387 (1,365) 4,752 nm
Total fees and other income $ 26,170 $ 21,521 $ 4,649 22 %
_____________________
nm = not meaningful
Total fees and other income for the three months ended March 31, 2021 increased
$4.6 million , or 22%, compared to the same period in 2020, primarily driven by
higher Total other income, Wealth Management and trust fees, and Gain on sale of
loans, net, partially offset by lower Investment management fees.
•Total other income for the three months ended March 31, 2021 increased $4.8
million , compared to the same period in 2020, driven primarily by a gain related
to the revaluation of a receivable from the divestiture of former affiliate,
BOS, and the impact of mark-to-market adjustments on derivatives and deferred
compensation securities.
49
--------------------------------------------------------------------------------
•Wealth management and trust fees for the three months ended March 31, 2021
increased $0.8 million , or 4%, compared to the same period in 2020, driven
primarily by higher AUM. Wealth Management and Trust AUM was $17.0 billion at
March 31, 2021 , an increase of $3.5 billion , or 26%, compared to the same period
in 2020. The increase in AUM was primarily driven by favorable market returns of
$3.6 billion , partially offset by net outflows of $0.1 billion for the twelve
months ended March 31, 2021 .
•Gain on sale of loans, net, for the three months ended March 31, 2021 increased
$0.6 million , compared to the same period in 2020, primarily driven by increased
volume in the sale of secondary loans.
•Investment management fees for the three months ended March 31, 2021 decreased
$1.4 million , or 75%, compared to the same period in 2020, driven primarily by
lower AUM at DGHM. DGHM AUM was $0.2 billion at March 31, 2021 , a decrease of
$0.8 billion , or 81%, compared to the same period in 2020. The decrease in AUM
was primarily driven by net outflows of $1.2 billion , partially offset by
favorable market returns of $0.3 billion for the twelve months ended March 31,
2021 .
Operating expense
Three months ended March
31, $ %
2021 2020 Change Change
(In thousands, except percentages)
Salaries and employee benefits $ 40,904 $ 35,096 $ 5,808 17 %
Occupancy and equipment 8,205 7,646 559 7 %
Information systems 9,719 6,725 2,994 45 %
Professional services 3,302 3,601 (299) (8) %
Merger costs 10,665 - 10,665 nm
Marketing and business development 624 1,890 (1,266) (67) %
Amortization of intangibles 667 715 (48) (7) %
FDIC insurance 967 - 967 nm
Other 870 5,235 (4,365) (83) %
Total operating expense $ 75,923 $ 60,908 $ 15,015 25 %
_____________________
nm = not meaningful
Total operating expense for the three months ended March 31, 2021 increased
$15.0 million , or 25%, to $75.9 million , compared to the same period in 2020,
driven by increases in Merger costs expense related to the proposed merger with
SVB, Salaries and employee benefits expense, Information systems expense, and
FDIC insurance expense, partially offset by decreases in Other expense and
Marketing and business development.
•Merger costs expense for the three months ended March 31, 2021 was $10.7
million , and consisted primarily of legal and advisory fees related to the
proposed merger with SVB that was announced in the first quarter of 2021.
•Salaries and employee benefits expense increased $5.8 million , or 17%, for the
three months ended March 31, 2021 , compared to the same period in 2020. The
increase was primarily driven by increased variable compensation, the
mark-to-market adjustment on deferred compensation securities, vacation
accruals, and severance.
•Information systems expense increased $3.0 million , or 45%, for the three
months ended March 31, 2021 , compared to the same period in 2020. The increase
was primarily driven by information technology initiatives placed into service
to support the Company's strategic objectives.
•FDIC insurance expense increased $1.0 million for the three months ended March
31, 2021 , compared to the same period in 2020. The increase was driven by an
FDIC insurance assessment credit received in the third quarter of 2019, as the
FDIC's Deposit Insurance Fund reserve ratio exceeded the target level. The
credit was utilized in full by the end of the first quarter of 2020, and the
Bank has resumed paying FDIC insurance.
•Other expense decreased $4.4 million , or 83%, for the three months ended March
31, 2021 , compared to the same period in 2020. The decrease was primarily driven
by a decrease to the reserve for unfunded loan commitments of $3.8 million for
the three months ended March 31, 2021 , compared to the same period in 2020. The
change in the reserve was driven by the latest current reasonable and
supportable economic forecasts, which indicated improving economic conditions
from the prior quarter, as well as a change in the weighting of the forecast
scenarios used to account for risks and assumptions not incorporated in the
forecasts.
Income tax expense. Income tax expense for the three months ended March 31, 2021
was $6.1 million , compared to $0.1 million for the same period in 2020. The
effective tax rate for the three months ended March 31, 2021 was 36.3%, compared
to an effective tax rate of 11.2% for the same period of 2020. The effective tax
rate is more than the statutory rate of 21% due primarily to Merger costs
related to the proposed merger with SVB, state and local income taxes, and the
accounting for investments in affordable housing projects. These items were
partially offset by earnings from tax-exempt investments and income tax credits.
During the first quarter of 2021, the Company recorded a tax expense of
approximately $3.0 million due to
50--------------------------------------------------------------------------------
certain Merger costs related to the proposed merger with SVB that are expected to be non-deductible. 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 Discussion
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