EDGAR 10-K Filing

Company CIK: 1049782
Filing Year: 2021
Filename: 1049782_10-K_2021_0001049782-21-000014.json

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ITEM 1. BUSINESS
Item 1. Business
General
Brookline Bancorp, Inc. (the "Company"), a Delaware corporation, is the holding company for Brookline Bank and its subsidiaries, Bank Rhode Island ("BankRI") and its subsidiaries, and Brookline Securities Corp.
Brookline Bank, headquartered in Boston, Massachusetts, has three wholly-owned subsidiaries, Longwood Securities Corp. ("LSC"), First Ipswich Insurance Agency, and Eastern Funding LLC ("Eastern Funding"), and operates 30 full-service banking offices and two lending offices in the greater Boston metropolitan area. As of July 21, 2020, two of Brookline Bank's subsidiaries, BBS Investment Corp. and First Ipswich Securities II Corp were merged with and into LSC. On February 15, 2020, First Ipswich Bank ("First Ipswich"), formerly a wholly-owned subsidiary of the Company, was merged with and into Brookline Bank.
BankRI, headquartered in Providence, Rhode Island, has four direct subsidiaries, Acorn Insurance Agency, BRI Realty Corp., Macrolease Corporation ("Macrolease"), and BRI Investment Corp. and its wholly-owned subsidiary, BRI MSC Corp., and operates 20 full-service banking offices in the greater Providence, Rhode Island area.
The Company, through Brookline Bank and BankRI (the "Banks"), offers a wide range of commercial, business and retail banking services, including a full complement of cash management products, on-line banking services, consumer and residential loans and investment services, designed to meet the financial needs of small- to mid-sized businesses and individuals throughout central New England. Specialty lending activities, including equipment financing, are focused in the New York and New Jersey metropolitan area, with services offered throughout the United States. As full-service financial institutions, the
Banks and their subsidiaries focus on the continued addition of well-qualified customers, the deepening of long-term banking relationships through a full complement of products and excellent customer service, and strong risk management.
The Company's headquarters and executive management are located at 131 Clarendon Street, Boston, Massachusetts 02116, and its telephone number is 617-425-4600.
Overview of Results
The loan and lease portfolio grew $531.7 million, or 7.9%, to $7.3 billion at December 31, 2020 from $6.7 billion at December 31, 2019. The Company's commercial loan portfolios, which are comprised of commercial real estate loans and commercial loans and leases, continued to exhibit growth. The Company's commercial loan portfolios, which totaled $6.1 billion, or 83.9% of total loans and leases, as of December 31, 2020, increased $590.8 million, or 10.7%, from $5.5 billion, or 81.7% of total loans and leases, as of December 31, 2019.
Total deposits increased $1.1 billion, or 18.5%, to $6.9 billion at December 31, 2020 from $5.8 billion as of December 31, 2019. Core deposits, which include demand checking, NOW, money market and savings accounts, increased 26.7% to $4.8 billion as of December 31, 2020 from $3.8 billion at December 31, 2019. The Company's core deposits were 69.8% of total deposits at December 31, 2020, an increase from 65.3% at December 31, 2019.
The allowance for loan and lease losses increased $53.3 million, or 87.3%, to $114.4 million as of December 31, 2020 from $61.1 million as of December 31, 2019. The ratio of the allowance for loan and lease losses to total loans and leases was 1.57% as of December 31, 2020 compared to 0.91% as of December 31, 2019. Nonperforming assets as of December 31, 2020 were $45.0 million, up from $22.1 million at the end of 2019. Nonperforming assets were 0.50% and 0.28% of total assets as of December 31, 2020 and December 31, 2019, respectively. The Company's credit quality compares favorably to its peers, and remains a top priority within the Company.
Net interest income increased $6.9 million, or 2.7%, to $260.2 million in 2020 compared to $253.3 million in 2019. Net interest margin decreased 34 basis points to 3.17% in 2020 from 3.51% in 2019. Net income for 2020 decreased $40.1 million, or 45.7%, to $47.6 million from $87.7 million for 2019. Basic and fully diluted earnings per common share ("EPS") decreased to $0.60 for 2020 from $1.10 for 2019. See Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations.”
Competition
The Company provides banking services in the greater Boston, Massachusetts, and Providence, Rhode Island, metropolitan marketplaces, each of which is dominated by several large national banking institutions. The Company faces considerable competition from banking and non-banking organizations, including traditional banks, digital banks, financial technology companies and others, in its market area for all aspects of banking and related service activities. Competitive factors considered for loan generation include product offerings, interest rates, terms offered, services provided and geographic locations. Competitive factors considered in attracting and retaining deposits include product offerings and rate of return, convenient branch locations and automated teller machines and online access to accounts.
Market Area and Credit Risk Concentration
As of December 31, 2020, the Company, through its Banks, operated 50 full-service banking offices in greater Boston, Massachusetts, and greater Providence, Rhode Island. The Banks' deposits are gathered from the general public, primarily in the communities in which the banking offices are located. The deposit market in Massachusetts and Rhode Island is highly concentrated in several banks. Based on June 30, 2020 Federal Deposit Insurance Corporation ("FDIC") statistics, the five largest banks in Massachusetts have an aggregate market share of approximately 67%, and the three largest banks in Rhode Island have an aggregate deposit market share of approximately 72%. The Banks' lending activities are concentrated primarily in the greater Boston, Massachusetts, and Providence, Rhode Island, metropolitan areas, eastern Massachusetts, southern New Hampshire and other Rhode Island areas. In addition, the Company, through its subsidiaries of Brookline Bank and BankRI, conducts equipment financing activities in the greater New York and New Jersey metropolitan area and elsewhere in the United States.
Commercial real estate loans. Multi-family and commercial real estate mortgage loans typically generate higher yields, but also involve greater credit risk. In addition, many of the Banks' borrowers have more than one multi-family or commercial real estate loan outstanding. The Banks manage this credit risk by prudent underwriting with conservative debt service coverage and Loan -to-value ratios at origination; lending to seasoned real estate owners/managers; frequently with personal guarantees of repayment; using reasonable appraisal practices; cross-collateralizing loans to one borrower when deemed prudent; and limiting the amount and types of construction lending. As of December 31, 2020, the largest commercial real estate relationship in the Company’s portfolio was $56.1 million.
Commercial loans and equipment leasing. Brookline Bank originates commercial loans and leases for working capital and other business-related purposes, and concentrate such lending to companies located primarily in Massachusetts, and, in the case of Eastern Funding, in New York and New Jersey. BankRI originates commercial loans and lines of credit for various business-related purposes, for businesses located primarily in Rhode Island, and engages in equipment financing through its wholly-owned subsidiary, Macrolease, in the greater New York and New Jersey metropolitan area and elsewhere in the United States.
Because commercial loans are typically made on the basis of the borrower's ability to repay from the cash flow of the business, the availability of funds for the repayment of commercial and industrial loans may be significantly dependent on the success of the business itself. Further, the collateral securing the loans may be difficult to value, may fluctuate in value based on the success of the business and may deteriorate over time. For this reason, these loans and leases involve greater credit risk. Loans and leases originated by Eastern Funding generally earn higher yields because the borrowers are typically small businesses with limited capital such as laundries, dry cleaners, fitness centers, convenience stores and tow truck operators. The Macrolease equipment financing portfolio is comprised of small- to medium-sized businesses such as fitness centers, restaurants and other commercial equipment. The Banks manage the credit risk inherent in commercial lending by requiring strong debt service coverage ratios; limiting loan-to-value ratios; securing personal guarantees from borrowers; and limiting industry concentrations, franchisee concentrations and the duration of loan maturities. As of December 31, 2020, the largest commercial relationship in the Company’s portfolio was $58.4 million.
Consumer loans. Retail customers of Brookline Bank typically live and work in the Boston metropolitan area and eastern Massachusetts, are financially active and value personalized service and easy branch access. Retail customers of BankRI typically live and work throughout Rhode Island and value easy branch access, personalized service, and knowledge of local communities. The Banks' consumer loan portfolios, which include residential mortgage loans, home equity loans and lines of credit, and other consumer loans, cater to the borrowing needs of this customer base. Credit risk in these portfolios is managed by limiting loan-to-value ratios at loan origination and by requiring borrowers to demonstrate strong credit histories. As of December 31, 2020, the largest consumer relationship in the Company’s portfolio was $40.5 million.
Economic Conditions and Governmental Policies
Repayment of multi-family and commercial real estate loans are generally dependent on the properties generating sufficient income to cover operating expenses and debt service. Repayment of commercial loans and equipment financing loans and leases generally are dependent on the demand for the borrowers' products or services and the ability of borrowers to compete and operate on a profitable basis. Repayment of residential mortgage loans, home equity loans and indirect automobile loans generally are dependent on the financial well-being of the borrowers and their capacity to service their debt levels. The asset quality of the Company's loan and lease portfolio, therefore, is greatly affected by the economy. Should there be any setback in the economy or increase in the unemployment rates in the Boston, Massachusetts, or Providence, Rhode Island, metropolitan areas, the resulting negative consequences could affect occupancy rates in the properties financed by the Company and cause certain individual and business borrowers to be unable to service their debt obligations.
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 COVID-19 pandemic, legislation has been enacted, such as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to address the economic effects of the COVID-19 pandemic. The CARES Act established the Small Business Administration’s (the “SBA”) Paycheck Protection Program (the “PPP”). Additionally, on December 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 an additional round of PPP loan funding. For further information on government policies enacted to address the COVID-19 pandemic, see Part I. Item 1. “Business - Supervision and Regulation” below.
Personnel and Human Capital Resources
As of December 31, 2020, the Company had 780 full-time employees and 33 part-time employees. The employees are not represented by a collective bargaining unit and the Company considers its relationship with its employees to be good.
We encourage and support the growth and development of our employees. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs, customized corporate training engagements and educational reimbursement programs.
The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, we were able to transition, over a short period of time, 45% of our employees to effectively working from remote locations and ensure a safely-distanced working environment for employees performing customer facing activities
at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided additional paid time off to cover compensation during such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, keeping the employee portion of health care premiums to a minimum and sponsoring various wellness programs.
We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing employees.
Access to Information
As a public company, Brookline Bancorp, Inc. is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance therewith, files reports, proxy and information statements and other information with the Securities and Exchange Commission (the “SEC”). The Company makes available on or through its internet website, www.brooklinebancorp.com, without charge, its annual reports on Form 10-K, proxy, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov. Press releases are also maintained on the Company’s website. Additional information for Brookline Bank and BankRI can be found at www.brooklinebank.com, and www.bankri.com, respectively. Information on the Company’s and any subsidiary's website is not incorporated by reference into this document and should not be considered part of this Report.
The Company’s common stock is traded on the Nasdaq Global Select MarketSM under the symbol “BRKL”.
Supervision and Regulation
The following discussion addresses elements of the regulatory framework applicable to bank holding companies and their subsidiaries. This regulatory framework is intended primarily for the protection of the safety and soundness of depository institutions, the federal deposit insurance system, and depositors, rather than for the protection of shareholders of a bank holding company such as the Company.
As a bank holding company, the Company is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System ( the "FRB") under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and by the Massachusetts Commissioner of Banks (the "Commissioner") under Massachusetts General Laws Chapter 167A. The FRB is also the primary federal regulator of the Banks. In addition, Brookline Bank is subject to regulation, supervision and examination by the Massachusetts Division of Banks ("MDOB"), and BankRI is subject to regulation, supervision and examination by the Banking Division of the Rhode Island Department of Business Regulation (the “RIBD”).
The following is a summary of certain aspects of various statutes and regulations applicable to the Company and its subsidiaries. This summary is not a comprehensive analysis of all applicable law, and is qualified by reference to the full text of the statutes and regulations referenced below.
Pandemic Response
Participation in the Paycheck Protection Program
The CARES Act appropriated $349 billion for “paycheck protection loans” through the SBA’s PPP. The amount appropriated for the PPP was subsequently increased to $659 billion (the “Original PPP”). Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances, and are 100% guaranteed by SBA. The Company funded 2,922 PPP loans totaling $581.7 million as of August 8, 2020 when the Original PPP closed, of which $489.2 million remains outstanding, net of deferred fees and costs at December 31, 2020. All PPP loans have been funded. Additionally, the Economic Aid Act, enacted on December 27, 2020, provides for a second round of PPP loans (the “PPP-2”). The Banks are participating in the PPP-2 as of January 27, 2021. PPP loans are fully guaranteed by the U.S. government, have an initial term of up to five years and earn interest at a rate of 1%. We currently expect a significant portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. In conjunction with the PPP, the FRB has created a lending facility for qualified financial institutions. The FRB's Paycheck Protection Program Liquidity Facility ("PPPLF") extends 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. The Company is participating in the PPPLF program.
Troubled Debt Restructuring Relief
The Coronavirus Aid, Relief and Economic Security ("CARES") Act and regulatory guidance issued by the Federal banking agencies provides that certain short-term loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by the COVID-19 pandemic are not required to be treated as TDRs under GAAP. As such, the Company suspended TDR accounting for COVID-19 pandemic related loan modifications meeting the loan modification criteria set forth under the CARES Act or as specified in the regulatory guidance. Further, loans granted payment deferrals related to the COVID-19 pandemic are not required to be reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). As of December 31, 2020, the Company granted 4,989 short-term deferments on loan and lease balances of $1.1 billion. Of these modifications, 4,691 loans and leases with total balances of $1.0 billion have returned to the payment status and 298 loans and leases with total balances of $90.4 million remain on the deferral status.which represent 1.2% of total loan and leases balances.
Regulation of the Company
The Company is subject to regulation, supervision and examination by the FRB, which has the authority, among other things, to order bank holding companies to cease and desist from unsafe or unsound banking practices; to assess civil money penalties; and to order termination of non-banking activities or termination of ownership and control of a non-banking subsidiary by a bank holding company.
Source of Strength
Under the BHCA, as amended by the Dodd-Frank Act, the Company is required to serve as a source of financial strength for the Banks in the event of the financial distress of the Banks. This provision of the Dodd-Frank Act codifies the longstanding policy of the FRB. This support may be required at times when the bank holding company may not have the resources to provide the additional financial support required by its subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment.
Acquisitions and Activities
The BHCA prohibits a bank holding company, without prior approval of the FRB, from acquiring all or substantially all the assets of a bank, acquiring control of a bank, merging or consolidating with another bank holding company, or acquiring direct or indirect ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, the acquiring bank holding company would control more than 5% of any class of the voting shares of such other bank or bank holding company. Further, as a Massachusetts bank holding company, the Company generally must obtain the prior approval of the Massachusetts Board of Bank Incorporation to acquire ownership or control of more than 5% of any voting stock in any other banking institution, acquire substantially all the assets of a bank, or merge with another bank holding company. However, there is an exemption from this approval requirement in certain cases in which the banking institution to be acquired, simultaneously with the acquisition, merges with a banking institution subsidiary of the Company in a transaction approved by the Commissioner.
The BHCA also generally prohibits a bank holding company from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks. However, among other permitted activities, a bank holding company may engage in and may own shares of companies engaged in certain activities that the FRB has determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto, subject to certain notification requirements.
Limitations on Acquisitions of Company Common Stock
The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the FRB has been notified and has not objected to the transaction. Under rebuttable presumptions of control established by the FRB, the acquisition of control of voting securities of a bank holding company constitutes an acquisition of control under the Change in Bank Control Act, requiring prior notice to the FRB, if, immediately after the transaction, the acquiring person (or persons acting in concert) will own, control, or hold with power to vote 10% or more of any class of voting securities of the bank holding company, and if either (i) the bank holding company has registered securities under Section 12 of the Securities Exchange Act of 1934, or (ii) no other person will own, control, or hold the power to vote a greater percentage of that class of voting securities immediately after the transaction.
In addition, the BHCA prohibits any company from acquiring control of a bank or bank holding company without first having obtained the approval of the FRB. Among other circumstances, under the BHCA, a company has control of a bank or bank holding company if the company owns, controls or holds with power to vote 25% or more of a class of voting securities of the bank or bank holding company; controls in any manner the election of a majority of directors or trustees of the bank or bank holding company; or the FRB has determined, after notice and opportunity for hearing, that the company has the power to exercise a controlling influence over the management or policies of the bank or bank holding company. The FRB has established presumptions of control under which the acquisition of control of 5% or more of a class of voting securities of a bank holding company, together with other factors enumerated by the FRB, could constitute the acquisition of control of a bank holding company for purposes of the BHCA.
Regulation of the Banks
Brookline Bank is subject to regulation, supervision and examination by the MDOB and the FRB. BankRI is subject to regulation, supervision and examination by the RIBD and the FRB. The enforcement powers available to federal and state banking regulators include, among other things, the ability to issue cease and desist or removal orders to terminate insurance of deposits; to assess civil money penalties; to issue directives to increase capital; to place the bank into receivership; and to initiate injunctive actions against banking organizations and institution-affiliated parties.
Deposit Insurance
Deposit obligations of the Banks are insured by the FDIC’s Deposit Insurance Fund up to $250,000 per separately insured depositor for deposits held in the same right and capacity.
In 2016, as mandated by the Federal Deposit Insurance Act (the “FDIA”), the FDIC’s Board of Directors approved a final rule to increase the DIF's reserve ratio to the statutorily required minimum ratio of 1.35% of estimated insured deposits. On September 30, 2018, the DIF reserve ratio reached 1.36%. Small banks, which are generally banks with less than $10 billion in assets, were awarded assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from 1.15 percent to 1.35 percent.
Deposit insurance premiums are based on assets. In 2016, the FDIC’s Board of Directors adopted a final rule that changed the manner in which deposit insurance assessment rates are calculated for established small banks, generally those banks with less than $10 billion of assets that have been insured for at least five years. Under this method, each of seven financial ratios and a weighted average of CAMELS composite ratings are multiplied by a corresponding pricing multiplier. The sum of these products is added to a uniform amount, with the resulting sum being an institution’s initial base assessment rate (subject to minimum or maximum assessment rates based on a bank’s CAMELS composite rating). This method takes into account various measures, including an institution’s leverage ratio, brokered deposit ratio, one year asset growth, the ratio of net income before taxes to total assets, and considerations related to asset quality. For the year ending December 31, 2020, the Banks’ FDIC insurance assessments costs were $4.2 million.
The FDIC has the authority to adjust deposit insurance assessment rates at any time. In addition, under the FDIA, the FDIC may terminate deposit insurance, among other circumstances, upon a finding that the institution has engaged in unsafe and unsound practices; is in an unsafe or unsound condition to continue operations; or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Until July 31, 2019, Brookline Bank was a member bank of the Depositors Insurance Fund (the “DIF”), a private, industry-sponsored insurance fund that insures all deposits above FDIC limits for Massachusetts-chartered savings banks. Brookline Bank converted its charter from a Massachusetts-chartered savings bank to a Massachusetts-chartered trust company and ended its membership in the DIF on July 31, 2019. Term deposits in excess of the FDIC insurance coverage will continue to be insured by the DIF until they reach maturity.
Cross-Guarantee
Similar to the source of strength doctrine discussed above in “Regulation of the Company-Source of Strength,” under the cross-guarantee provisions of the FDIA, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (i) the “default” of a commonly controlled FDIC-insured depository institution; or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default.”
Acquisitions and Branching
The Banks must seek prior approval from the FRB to acquire another bank or establish a new branch office. Brookline Bank must also seek prior approval from the MDOB to acquire another bank or establish a new branch office and BankRI must also seek prior approval from the RIBD to acquire another bank or establish a new branch office. Well capitalized and well managed banks may acquire other banks in any state, subject to certain deposit concentration limits and other conditions, pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended by the Dodd-Frank Act. In addition, the Dodd-Frank Act authorizes a state-chartered bank to establish new branches on an interstate basis to the same extent a bank chartered by the host state may establish branches.
Activities and Investments of Insured State-Chartered Banks
The FDIA generally limits the types of equity investments that FDIC-insured state-chartered member banks, such as the Banks, may make and the kinds of activities in which such banks may engage, as a principal, to those that are permissible for national banks. Further, the Gramm-Leach-Bliley Act of 1999 (the “GLBA”) permits state banks, to the extent permitted under state law, to engage through “financial subsidiaries” in certain activities which are permissible for subsidiaries of a financial holding company. In order to form a financial subsidiary, a state-chartered bank must be well capitalized, and must comply with certain capital deduction, risk management and affiliate transaction rules, among other requirements. In addition, the Federal Reserve Act provides that state member banks are subject to the same restrictions with respect to purchasing, selling, underwriting, and holding of investment securities as national banks.
Brokered Deposits
The FDIA and federal regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with regulatory approval, “adequately capitalized.” Depository institutions that have brokered deposits in excess of 10% of total assets will be subject to increased FDIC deposit insurance premium assessments. Additionally, depository institutions considered “adequately capitalized” that need regulatory approval to accept, renew or roll over any brokered deposits are subject to additional restrictions on the interest rate they may pay on deposits. As of December 31, 2020, neither of the Banks had brokered deposits in excess of 10% of total assets.
Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act"), which was enacted in 2018, amends the FDIA to exempt a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions.
The Community Reinvestment Act
The Community Reinvestment Act (“CRA”) requires the FRB to evaluate each of the Banks with regard to their performance in helping to meet the credit needs of the communities each of the Banks serve, including low and moderate-income neighborhoods, consistent with safe and sound banking operations, and to take this record into consideration when evaluating certain applications. The FRB’s CRA regulations are generally based upon objective criteria of the performance of institutions under three key assessment tests: (i) a lending test, to evaluate the institution’s record of making loans in its service areas; (ii) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and businesses; and (iii) a service test, to evaluate the institution’s delivery of services through its branches, ATMs, and other offices. Failure of an institution to receive at least a “satisfactory” rating could inhibit the Banks or the Company from undertaking certain activities, including engaging in activities permitted as a financial holding company under GLBA and acquisitions of other financial institutions. Each Bank has achieved a rating of “satisfactory” on its most recent CRA examination. Both Massachusetts and Rhode Island have adopted specific community reinvestment requirements which are substantially similar to those of the FRB.
Lending Restrictions
Federal law limits a bank’s authority to extend credit to directors and executive officers of the bank or its affiliates and persons or companies that own, control or have power to vote more than 10% of any class of securities of a bank or an affiliate of a bank, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital.
Capital Adequacy and Safety and Soundness
Regulatory Capital Requirements
The FRB has issued risk-based and leverage capital rules applicable to U.S. banking organizations such as the Company and the Banks. These rules are intended to reflect the relationship between the banking organization’s capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet items. The FRB may from time to time require that a banking organization maintain capital above the minimum levels discussed below, due to the banking organization’s financial condition or actual or anticipated growth.
The capital adequacy rules define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets that banking organizations are required to maintain. Common equity Tier 1 capital generally includes common stock and related surplus, retained earnings and, in certain cases and subject to certain limitations, minority interest in consolidated subsidiaries, less goodwill, other non-qualifying intangible assets and certain other deductions. Tier 1 capital for banks and bank holding companies generally consists of the sum of common equity Tier 1 elements, non-cumulative perpetual preferred stock, and related surplus in certain cases and subject to limitations, minority interests in consolidated subsidiaries that do not qualify as common equity Tier 1 capital, less certain deductions. Tier 2 capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred stock, and, subject to limitations, allowances for loan losses. The sum of Tier 1 and Tier 2 capital less certain required deductions represents qualifying total risk-based capital. Prior to the effectiveness of certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred securities and cumulative perpetual preferred stock in Tier 1 capital, subject to limitations. However, the FRB’s capital rule applicable to bank holding companies permanently grandfathers nonqualifying capital instruments, including trust preferred securities, issued before May 19, 2010 by depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, subject to a limit of 25% of Tier 1 capital. In addition, under rules that became effective January 1, 2015, accumulated other comprehensive income (positive or negative) must be reflected in Tier 1 capital; however, the Company was permitted to make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. The Company has made this election.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under the FRB's rules, the Company and the Banks are each required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6.0%, a minimum total capital requirement of 8.0% and a minimum leverage ratio requirement of 4.0%. Additionally, these rules require an institution to 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 of more than 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engaged in share repurchases.
A bank holding company, such as the Company, is considered "well capitalized" if the bank holding company (i) has a total risk based capital ratio of at least 10.0%, (ii) has a Tier 1 risk-based capital ratio of at least 6.0%, and (iii) 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. In addition, under the FRB's prompt corrective action rules, a state member bank is considered “well capitalized” if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of at least 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (v) 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 FRB also considers: (i) concentrations of credit risk; (ii) interest rate risk; and (iii) risks from non-traditional activities, as well as an institution’s ability to manage those risks. When determining the adequacy of an institution’s capital, this evaluation is a part of the institution’s regular safety and soundness examination. Each of the Banks is currently considered well-capitalized under all regulatory definitions.
Generally, a bank, upon receiving notice that it is not adequately capitalized (i.e., that it is “undercapitalized”), becomes subject to the prompt corrective action provisions of Section 38 of FDIA that, for example, (i) restrict payment of capital distributions and management fees, (ii) require that its federal bank regulator monitor the condition of the institution and its efforts to restore its capital, (iii) require submission of a capital restoration plan, (iv) restrict the growth of the institution’s assets, and (v) require prior regulatory approval of certain expansion proposals. A bank that is required to submit a capital restoration plan must concurrently submit a performance guarantee by each company that controls the bank. A bank that is “critically undercapitalized” (i.e., has a ratio of tangible equity to total assets that is equal to or less than 2.0%) will be subject to further restrictions, and generally will be placed in conservatorship or receivership within 90 days.
The Banks are considered “well capitalized” under the FRB's prompt corrective action rules and the Company is considered “well capitalized” under the FRB's rules applicable to bank holding companies.
Section 201 of the Economic Growth Act directs the federal bank regulatory agencies to establish a community bank leverage ratio (“CBLR”) of tangible capital to average total consolidated assets of not less than 8.0% or more than 10.0%. Under the final rule issued by federal banking agencies, effective January 1, 2020, depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to Tier 1 capital divided by average total consolidated assets) of greater than 9.0%, will be eligible to opt into the community bank leverage ratio framework. A community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9.0% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act. The final rule includes a two-quarter grace period during which a qualifying banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9.0% leverage ratio requirement, generally would still be deemed well-capitalized so long as the banking organization maintains a leverage ratio greater than 8.0%. At the end of the grace period, the banking organization must meet all qualifying criteria to remain in the community bank leverage ratio framework or otherwise must comply with and report under the generally applicable rule. As required by Section 4012 the CARES Act, the federal banking agencies temporarily lowered the community bank leverage ratio, issuing two interim final rules to set the community bank leverage ratio at 8.0% and then gradually re-establish it at 9.0%. Under the interim final rules, the community bank leverage ratio was set at 8.0% beginning in the second quarter of 2020 through the end of the year. Community banks that have a leverage ratio of 8.0% or greater and meet certain other criteria may elect to use the community bank leverage ratio framework. Beginning in 2021, the community bank leverage ratio will increase to 8.5% for the calendar year. Community banks will have until January 1, 2022, before the leverage ratio requirement to use the CBLR framework will return to 9.0%. At this time, the Company does not anticipate opting in to the CBLR.
Safety and Soundness Standards
Guidelines adopted by the federal bank regulatory agencies pursuant to the FDIA establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal banking agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order restricting asset growth, requiring an institution to increase its ratio of tangible equity to assets or directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDIA. See “- Regulatory Capital Requirements” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Dividend Restrictions
The Company is a legal entity separate and distinct from the Banks. The revenue of the Company (on a parent company only basis) is derived primarily from dividends paid to it by the Banks. The right of the Company, and consequently the right of shareholders of the Company, to participate in any distribution of the assets or earnings of the Banks through the payment of such dividends or otherwise is subject to the prior claims of creditors of the Banks (including depositors), except to the extent that certain claims of the Company in a creditor capacity may be recognized.
Restrictions on Bank Holding Company Dividends
The FRB has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The FRB has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company’s net income for the prior year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition. Further, under the FRBs capital rules, the Company's ability to pay dividends will be restricted if it does not maintain the required capital conservation buffer. See “Capital Adequacy and Safety and Soundness-Regulatory Capital Requirements” above.
Restrictions on Bank Dividends
The FRB has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. In addition, a state member bank may not declare or pay a dividend: (i) if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the bank's net income during the current calendar year and the retained net income of the prior two calendar years; or (ii) that would exceed its undivided profits; in either case, unless the dividend has been approved by the FRB. Payment of dividends by a bank is also restricted pursuant to various state regulatory limitations.
Certain Transactions by Bank Holding Companies with their Affiliates
There are various statutory restrictions on the extent to which bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in “covered transactions” with their insured depository institution subsidiaries. An insured depository institution (and its subsidiaries) may not lend money to, or engage in covered transactions with, its non-depository institution affiliates if the aggregate amount of covered transactions outstanding involving the bank, plus the proposed transaction, exceeds the following limits: (i) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and (ii) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. For this purpose, “covered transactions” are defined by statute to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the FRB, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, securities borrowing or lending transactions with an affiliate that creates a credit exposure to such affiliate, or a derivatives transaction with an affiliate that creates a credit exposure to such affiliate. Covered transactions are also subject to certain collateral security requirements. Covered transactions as well as other types of transactions between a bank and a bank holding company must be conducted under terms and conditions, including credit standards, that are at least as favorable to the bank as prevailing market terms. If a banking organization elects to use the community bank leverage ratio framework described in “Capital Adequacy and Safety and Soundness - Regulatory Capital Requirements” above, the banking organization would be required to measure the amount of covered transactions as a percentage of Tier 1 capital, subject to certain adjustments. Moreover, Section 106 of the Bank Holding Company Act Amendment of 1970 provides that, to further competition, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or the furnishing of any service. As of and for the year ending December 31, 2020, there were no such transactions.
Consumer Protection Regulation
The Company and the Banks are subject to a number of federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices. These laws include the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), GLBA, Truth in Lending Act ("TILA"), the CRA, the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services. Further, the Consumer Financial Protection Bureau ("CFPB") also has a broad mandate to prohibit unfair, deceptive or abusive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The FRB examines the Banks for compliance with CFPB rules and enforces CFPB rules with respect to the Banks.
Mortgage Reform
The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of the TILA as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, and in each billing statement, and for negative amortization loans and hybrid adjustable rate mortgages. Additionally, the CFPB’s qualified mortgage rule requires creditors, such as the Banks, to make a reasonable good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling prior to making the loan. The Economic Growth Act included provisions that ease certain requirements related to mortgage transactions for certain institutions with less than $10 billion in total consolidated assets.
Privacy and Customer Information Security
The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the Banks must provide their customers with an annual disclosure that explains their policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required or permitted by law, the Banks are prohibited from disclosing such information except as provided in such policies and procedures. If the financial institution only discloses information under exceptions from the GLBA that do not require an opt out to be provided and if there has been no change in the financial institutions privacy policies and procedures since its most recent disclosures provide to customers, an annual disclosure is not required to be provided by the financial institution. The GLBA also requires that the Banks develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information (as defined under GLBA), to protect against anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Banks are also required to send a notice to customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible.” Most of the states, including the states where the Banks operate, have enacted legislation concerning breaches of data security and the duties of the Banks in response to a data breach. Congress continues to consider federal legislation that would require consumer notice of data security breaches. Pursuant to the FACT Act, the Banks must also develop and implement a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and method to opt out of the making of such solicitations.
Anti-Money Laundering
The Bank Secrecy Act
Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report to the United States Treasury any cash transactions involving at least $10,000. In addition, financial institutions are required to file suspicious activity reports for any transaction or series of transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system. The USA PATRIOT Act has significant implications for financial institutions and businesses of other types involved in the transfer of money. The USA PATRIOT Act, together with the implementing regulations of various federal regulatory agencies, has caused financial institutions, such as the Banks, to adopt and implement additional policies or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis. In evaluating an application to acquire a bank or to merge banks or effect a purchase of assets and assumption of deposits and other liabilities, the applicable federal banking regulator must consider the anti-money laundering compliance record of both the applicant and the target. In addition, under the USA PATRIOT Act, financial institutions are required to take steps to monitor their correspondent banking and private banking relationships as well as, if applicable, their relationships with “shell banks.”
Office of Foreign Assets Control
The U.S. has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”), take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial or other transactions relating to a sanctioned country or with certain designated persons and entities; (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons); and (iii) restrictions on transactions with or involving certain persons or entities. Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for the Company. As of December 31, 2020, the Company did not have any transactions with sanctioned countries, nationals, and others.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Before deciding to invest in us or deciding to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occur, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose your investment.
RISKS RELATED TO THE COVID-19 PANDEMIC
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. Actions taken by the FRB 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 social distancing, shelter in place and stay home orders in the states and communities we serve, have reduced business activity and financial transactions. 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. 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 short-term loan payment deferments, 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. 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, increase the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses. Similarly, because of adverse economic and market conditions affecting issuers, we may be required to recognize further impairments on the securities we hold, goodwill, intangible assets, and deferred tax assets, as well as reductions in other comprehensive income. 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 certainty 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.
The Company funded 2,922 PPP loans totaling $581.7 million as of August 8, 2020 when the Original PPP closed, of which $489.2 million remains outstanding, net of deferred fees and costs at December 31, 2020. As of January 27, 2020, the Company’s banks are participating in the PPP-2. 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 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.
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
Our business may be adversely affected by changes in economic and market conditions.
A worsening of economic and market conditions, downside shocks, or a return to recessionary economic conditions could adversely affect us and others in the financial services industry. We primarily serve individuals and businesses located in the greater Boston metropolitan area, eastern Massachusetts, New York, New Jersey, and Rhode Island. Our success is largely dependent on local and regional economic conditions. Recessionary economic conditions, increased unemployment, inflation, a decline in real estate values or other factors beyond our control may adversely affect the ability of our borrowers to repay their loans, and could result in higher loan and lease losses and lower net income for us.
In addition, deterioration or defaults made by issuers of the underlying collateral of our investment securities may cause additional credit-related other-than-temporary impairment charges to our income statement. Our ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.
Changes to interest rates could adversely affect our results of operations and financial condition.
Our consolidated results of operations depend, on a large part, on net interest income, which is the difference between (i) interest income on interest-earning assets, such as loans, leases and securities, and (ii) interest expense on interest-bearing liabilities, such as deposits and borrowed funds. As a result, our earnings and growth are significantly affected by interest rates, which are subject to the influence of economic conditions generally, both domestic and foreign, to events in the capital markets and also to the monetary and fiscal policies of the United States and its agencies, particularly the FRB. The nature and timing of any changes in such policies or general economic conditions and their effect on us cannot be controlled and are extremely difficult to predict. An increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to our allowances for loan losses. A decrease in interest rates may trigger loan prepayments, which may serve to reduce net interest income if we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates.
We face significant and increasing competition in the financial services industry.
We operate in a highly competitive environment that includes financial and non-financial services firms, including traditional banks, online banks, financial technology companies and others. These companies compete on the basis of, among other factors, size, quality and type of products and services offered, price, technology and reputation. Emerging technologies have the potential to intensify competition and accelerate disruption in the financial services industry. In recent years, non-financial services firms, such as financial technology companies, have begun to offer services traditionally provided by financial institutions. These firms attempt to use technology and mobile platforms to enhance the ability of companies and individuals to borrow money, save and invest. Our ability to compete successfully depends on a number of factors, including our ability to develop and execute strategic plans and initiatives; to develop competitive products and technologies; and to attract, retain and develop a highly skilled employee workforce. If we are not able to compete successfully, we could be placed at a competitive disadvantage, which could result in the loss of customers and market share, and our business, results of operations and financial condition could suffer.
Our business may be adversely affected if we fail to adapt our products and services to evolving industry standards and consumer preferences.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology driven products and services. The widespread adoption of new technologies, including internet services, cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we grow and develop our internet banking and mobile banking channel strategies in addition to remote connectivity solutions. We might not be successful in developing or introducing new products and services, integrating new products or services into our existing offerings, responding or adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits, achieving market acceptance of our products and services, reducing costs in response to pressures to deliver products and services at lower prices or sufficiently developing and maintaining loyal customers.
If our allowance for credit losses is not sufficient to cover actual loan and lease losses, our earnings may decrease.
We periodically make a determination of an allowance for credit losses based on available information, including, but not limited to, the quality of the loan and lease portfolio as indicated by trends in loan risk ratings, payment performance, economic conditions, the value of the underlying collateral and the level of nonaccruing and criticized loans and leases. Management relies on its loan officers and credit quality reviews, its experience and its evaluation of economic conditions, among other factors, in determining the amount of provision required for the allowance for credit losses. Provisions to this allowance result in an expense for the period. If, as a result of general economic conditions, previously incorrect assumptions, or an increase in defaulted loans or leases, we determine that additional increases in the allowance for credit losses are necessary, additional expenses may be incurred.
Determining the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and trends, all of which may undergo material changes. We cannot be sure that we will be able to identify deteriorating credits before they become nonperforming assets or that we will be able to limit losses on those loans and leases that are identified. We have in the past been, and in the future may be, required to increase our allowance for credit losses for any of several reasons. State and federal regulators, in reviewing our loan and lease portfolio as part of a regulatory examination, may request that we increase the allowance for credit losses. Changes in economic conditions or individual business or personal circumstances affecting borrowers, new information regarding existing loans and leases, identification of additional problem loans and leases and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. Any increases in the allowance for credit losses may result in a decrease in our net income and, possibly, our capital, and could have an adverse effect on our financial condition and results of operations.
Our loan and lease portfolios include commercial real estate mortgage loans and commercial loans and leases, which are generally riskier than other types of loans.
Our commercial real estate and commercial loan and lease portfolios currently comprise 83.9% of total loans and leases. Commercial loans and leases generally carry larger balances and involve a higher risk of nonpayment or late payment than residential mortgage loans. Most of the commercial loans and leases are secured by borrower business assets such as accounts receivable, inventory, equipment and other fixed assets. Compared to real estate, these types of collateral are more difficult to monitor, harder to value, may depreciate more rapidly and may not be as readily saleable if repossessed. Repayment of commercial loans and leases is largely dependent on the business and financial condition of borrowers. Business cash flows are dependent on the demand for the products and services offered by the borrower's business. Such demand may be reduced when economic conditions are weak or when the products and services offered are viewed as less valuable than those offered by competitors. Because of the risks associated with commercial loans and leases, we may experience higher rates of default than if the portfolio were more heavily weighted toward residential mortgage loans. Higher rates of default could have an adverse effect on our financial condition and results of operations.
Environmental liability associated with our lending activities could result in losses.
In the course of business, we may acquire, through foreclosure, properties securing loans originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered on these properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our financial condition and results of operations.
Our securities portfolio performance in difficult market conditions could have adverse effects on our results of operations.
Unrealized losses on investment securities result from changes in credit spreads and liquidity issues in the marketplace, along with changes in the credit profile of individual securities issuers. Under GAAP, we are required to review our investment portfolio periodically for the presence of impairment of our securities, taking into consideration current and future market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts' evaluations, our ability and intent to hold investments until a recovery of fair value, as well as other factors. Adverse developments with respect to one or more of the foregoing factors may require us to deem particular securities to be impaired, with the credit-related portion of the reduction in the value recognized as a charge to our earnings through an allowance. Subsequent valuations, in light of factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require us to recognize further impairments in the value of our securities portfolio, which may have an adverse effect on our results of operations in future periods.
Potential downgrades of U.S. government securities by one or more of the credit ratings agencies could have a material adverse effect on our operations, earnings and financial condition.
A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could impact our ability to obtain funding that is collateralized by affected instruments, as well as affect the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact on us. Among other things, a downgrade in the U.S. government’s credit rating could adversely impact the value of our securities portfolio and may trigger requirements that the Company post additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which we are subject and any related adverse effects on the business, financial condition and results of operations.
Uncertainty about the future of LIBOR may adversely affect our business.
LIBOR is used extensively in the United States as a benchmark for various commercial and financial contracts, including funding sources, adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which will stop reporting such information after 2021. It is uncertain at this time whether LIBOR will change or cease to exist or the extent to which those entering into financial contracts will transition to any other particular benchmark. Other benchmarks may perform differently than LIBOR or may have other consequences that cannot currently be anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which of those instruments may remain outstanding or be renegotiated if LIBOR ceases to exist. The uncertainty regarding the future of LIBOR as well as the transition from LIBOR to another benchmark rate or rates could have adverse impacts on our funding costs or net interest margins, as well as any floating-rate obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and, ultimately, adversely affect our financial condition and results of operations.
We are subject to liquidity risk, which could negatively affect our funding levels.
Market conditions or other events could negatively affect our access to or the cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, or fund asset growth and new business initiatives at a reasonable cost, in a timely manner and without adverse consequences.
Although we maintain a liquid asset portfolio and have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a material adverse effect on us. If the cost effectiveness or the availability of supply in these credit markets is reduced for a prolonged period of time, our funding needs may require us to access funding and manage liquidity by other means. These alternatives may include generating client deposits, securitizing or selling loans, extending the maturity of wholesale borrowings, borrowing under certain secured borrowing arrangements, using relationships developed with a variety of fixed income investors, and further managing loan growth and investment opportunities. These alternative means of funding may result in an increase to the overall cost of funds and may not be available under stressed conditions, which would cause us to liquidate a portion of our liquid asset portfolio to meet any funding needs.
Loss of deposits or a change in deposit mix could increase our cost of funding.
Deposits are a low cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if clients shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest margin, net interest income and net income.
Wholesale funding sources may prove insufficient to replace deposits at maturity and support our operations and future growth.
We and our banking subsidiaries must maintain sufficient funds to respond to the needs of depositors and borrowers. To manage liquidity, we draw upon a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include Federal Home Loan Bank advances, proceeds from the sale of investments and loans, and liquidity resources at the holding company. Our ability to manage liquidity will be severely constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, operating margins and profitability would be adversely affected. Turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.
Potential deterioration in the performance or financial position of the FHLBB might restrict our funding needs and may adversely impact our financial condition and results of operations.
Significant components of our liquidity needs are met through our access to funding pursuant to our membership in the FHLBB. The FHLBB is a cooperative that provides services to its member banking institutions. The primary reason for joining the FHLBB is to obtain funding. The purchase of stock in the FHLBB is a requirement for a member to gain access to funding. Any deterioration in the FHLBB’s performance or financial condition may affect our ability to access funding and/or require the Company to deem the required investment in FHLBB stock to be impaired. If we are not able to access funding through the FHLBB, we may not be able to meet our liquidity needs, which could have an adverse effect on our results of operations or financial condition. Similarly, if we deem all or part of our investment in FHLBB stock impaired, such action could have an adverse effect on our financial condition or results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other institutions and organizations. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations.
Damage to our reputation could significantly harm our business, including our competitive position and business prospects.
We are dependent on our reputation within our market area, as a trusted and responsible financial company, for all aspects of our relationships with customers, employees, vendors, third-party service providers, and others, with whom we conduct business or potential future business. Our ability to attract and retain customers and employees could be adversely affected if our reputation is damaged. Our actual or perceived failure to address various issues could give rise to reputational risk that could cause harm to us and our business prospects. These issues also include, but are not limited to, legal and regulatory requirements; properly maintaining customer and employee personal information; record keeping; money-laundering; sales and trading practices; ethical issues; appropriately addressing potential conflicts of interest; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions and legal risks, which could, among other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and incur related costs and expenses. In addition, our businesses are dependent on the integrity of our employees. If an employee were to misappropriate any client funds or client information, our reputation could be negatively affected, which may result in the loss of accounts and have an adverse effect on our results of operations and financial condition.
We may be unable to attract and retain qualified key employees, which could adversely affect our business prospects, including our competitive position and results of operations.
Our success is dependent upon our ability to attract and retain highly skilled individuals. There is significant competition for those individuals with the experience and skills required to conduct many of our business activities. We may not be able to hire or retain the key personnel that we depend upon for success. The unexpected loss of services of one or more of these or other key personnel could have a material adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of industry experience and the difficulty of promptly finding qualified replacement personnel. Frequently, we compete in the market for talent with entities that are not subject to comprehensive regulation, including with respect to the structure of incentive compensation. Our inability to attract new employees and retain and motivate our existing employees could adversely impact our business.
Our ability to service our debt and pay dividends is dependent on capital distributions from our subsidiary banks, and these distributions are subject to regulatory limits and other restrictions.
We are a legal entity that is separate and distinct from the Banks. Our revenue (on a parent company only basis) is derived primarily from dividends paid to us by the Banks. Our right, and consequently the right of our shareholders, to participate in any distribution of the assets or earnings of the Banks through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Banks (including depositors), except to the extent that certain claims of ours in a creditor capacity may be recognized. It is possible, depending upon the financial condition of our subsidiary banks and other factors, that applicable regulatory authorities could assert that payment of dividends or other payments is an unsafe or unsound practice. If one or more of our subsidiary banks is unable to pay dividends to us, we may not be able to service our debt or pay dividends on our common stock. Further, as a result of the capital conservation buffer requirement of the Final Capital Rule, our ability to pay dividends on our common stock or service our debt could be restricted if we do not maintain a capital conservation buffer. A reduction or elimination of dividends could adversely affect the market price of our common stock and would adversely affect our business, financial condition, results of operations and prospects. See Item 1, “Business-Supervision and Regulation-Dividend Restrictions” and “Business-Supervision and Regulation-Capital Adequacy and Safety and Soundness-Regulatory Capital Requirements.”
We face continuing and growing security risks to our information base, including the information we maintain relating to our customers.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our business and to store sensitive data, including financial information regarding customers. Our electronic communications and information systems infrastructure, as well as the systems infrastructures of the vendors we use to meet our data processing and communication needs, could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions. Hacking and identity theft risks, in particular, could cause serious reputational harm. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. No matter how well designed or implemented our controls are, we will not be able to anticipate all security breaches of these types, and we may not be able to implement effective preventive measures against such security breaches in a timely manner. A failure or circumvention of our security systems could have a material adverse effect on our business operations and financial condition.
We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cyber-security and the continued enhancement of our controls and processes to protect our systems, data and networks from attacks, unauthorized access or significant damage remain a priority. Accordingly, we may be required to expend additional resources to enhance our protective measures or to investigate and remediate any information security vulnerabilities or exposures. Any breach of our system security could result in disruption of our operations, unauthorized access to confidential customer information, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or losses could exceed the amount of available insurance coverage, if any, and would adversely affect our earnings. Also, any failure to prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence, damaging our reputation and undermining our ability to attract and keep customers.
We may not be able to successfully implement future information technology system enhancements, which could adversely affect our business operations and profitability.
We invest significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. We may not be able to successfully implement and integrate future system enhancements, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in our stock, among others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact our financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
We rely on other companies to provide key components of our business infrastructure.
Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third party vendors could also entail significant delay and expense.
We may incur significant losses as a result of ineffective risk management processes and strategies.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance, and legal reporting systems; internal controls; management review processes; and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes.
Our internal controls, procedures and policies may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well-designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
Natural disasters, acts of terrorism, pandemics and other external events could harm our business.
Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest or pandemics could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.
Our financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.
Pursuant to U.S. GAAP, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining loan loss and litigation reserves, goodwill impairment and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material losses. See the "Critical Accounting Policies" section in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board, or "FASB", changes the financial accounting and reporting principles that govern the preparation of our financial statements. These changes can be hard to anticipate and implement, and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. Additionally, significant changes to accounting standards may require costly technology changes, additional training and personnel, and other expense that will negatively impact our results of operations.
As a result of the adoption of ASU 2016-13 effective January 1, 2020, the Company updated its critical accounting policy to the allowance for credit losses. The updates in this standard replace the incurred loss impairment methodology GAAP with the CECL methodology. The CECL methodology incorporates current condition, and "reasonable and supportable" forecasts, as well as prepayments, to estimate loan losses over the life of the loan. See Note 7, "Allowance for Credit Losses" for further discussion on the new policy and processes.
Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may adversely impact our financial statements.
From time to time, local, state or federal tax authorities change tax laws and regulations, which may result in a decrease or increase to our net deferred tax assets. Local, state or federal tax authorities may interpret tax laws and regulations differently than we do and challenge tax positions that we have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties that could have a material adverse effect on our results.
Future capital offerings may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources or, if our banking subsidiaries' capital ratios fall below required minimums, we could be forced to raise additional capital by making additional offerings of debt, common or preferred stock, trust preferred securities, and senior or subordinated notes. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Moreover, we cannot assure you that such capital will be available to us on acceptable terms or at all. Our inability to raise sufficient additional capital on acceptable terms when needed could adversely affect our businesses, financial condition and results of operations.
The market price and trading volume of our common stock may be volatile.
The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
•quarterly variations in our operating results or the quality of our assets;
•operating results that vary from the expectations of management, securities analysts and investors;
•changes in expectations as to our future financial performance;
•announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by us or our competitors;
•the operating and securities price performance of other companies that investors believe are comparable to us;
•our past and future dividend practices;
•future sales of our equity or equity-related securities; and
•changes in global financial markets and global economies and general market conditions, such as interest rates, stock, commodity or real estate valuations or volatility.
Anti-takeover provisions could negatively impact our stockholders.
Provisions of Delaware law and provisions of our certificate of incorporation and by-laws could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us, even if a merge might be in the best interest of our stockholders. Our articles of organization authorize our Board of Directors to issue preferred stock without stockholder approval and such preferred stock could be issued as a defensive measure in response to a takeover proposal. These and other provisions could make it more difficult for a third party to acquire us.
If we acquire or seek to acquire other companies, our business may be negatively impacted by certain risks inherent with such acquisitions.
We have acquired and will continue to consider the acquisition of other financial services companies. To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. Some of these risks include the following:
•We may incur substantial expenses in pursuing potential acquisitions;
•Management may divert its attention from other aspects of our business;
•We may assume potential and unknown liabilities of the acquired company as a result of an acquisition;
•The acquired business will not perform in accordance with management's expectations, including because we may lose key clients or employees of the acquired business as a result of the change in ownership;
•Difficulties may arise in connection with the integration of the operations of the acquired business with the operations of our businesses; and
•We may lose key employees of the combined business.
We may be required to write down goodwill and other acquisition-related identifiable intangible assets.
When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired determines the amount of the purchase price that is allocated to goodwill acquired. As of December 31, 2020, goodwill and other identifiable intangible assets were $163.6 million. Under current accounting guidance, if we determine that goodwill or intangible assets are impaired, we would be required to write down the value of these assets. We conduct an annual review to determine whether goodwill and other identifiable intangible assets are impaired. We conduct a quarterly review for indicators of impairment of goodwill and other identifiable intangible assets. Our management recently completed these reviews and concluded that no impairment charge was necessary for the year ended December 31, 2020. We cannot provide assurance whether we will be required to take an impairment charge in the future. Any impairment charge would have a negative effect on stockholders' equity and financial results and may cause a decline in our stock price.
RISKS RELATED TO OUR REGULATORY ENVIRONMENT
We operate in a highly regulated industry, and laws and regulations, or changes in them, could limit or restrict our activities and could have a material adverse effect on our operations.
We and our banking subsidiaries are subject to extensive state and federal regulation and supervision. Federal and state laws and regulations govern numerous matters affecting us, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits and restrictions on dividend payments. The FRB and the state banking regulators have the power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we and our banking subsidiaries may conduct business and obtain financing.
The laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change. Such changes could, among other things, subject us to additional costs, including costs of compliance; limit the types of financial services and products we may offer; and/or increase the ability of non-banks to offer competing financial services and products. Failure to comply with laws, regulations, policies, or supervisory guidance could result in enforcement and other legal actions by federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have a material adverse effect on our business, financial condition, and results of operations. See the "Supervision and Regulation" section of Item 1, "Business."
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
We may become subject to enforcements actions even though noncompliance was inadvertent or unintentional.
The financial services industry is subject to intense scrutiny from bank supervisors in the examination process and aggressive enforcement of federal and state regulations, particularly with respect to mortgage-related practices and other consumer compliance matters, and compliance with anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control regulations, and economic sanctions against certain foreign countries and nationals. Enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations; however, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance. Failure to comply with these and other regulations, and supervisory expectations related thereto, may result in fines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictions on our business.
We face significant legal risks, both from regulatory investigations and proceedings and from private actions brought against us.
From time to time we are named as a defendant or are otherwise involved in various legal proceedings, including class actions and other litigation or disputes with third parties. There is no assurance that litigation with private parties will not increase in the future. Actions against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us. As a participant in the financial services industry, it is likely that we could continue to experience a high level of litigation related to our businesses and operations.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
The Company’s executive administration offices are located at 131 Clarendon Street, Boston, Massachusetts, which is owned by Brookline Bank, as well as its corporate operations center in Lincoln, Rhode Island, which is owned by BankRI, with other administrative and operations functions performed at several different locations.
Brookline Bank conducts its business from 30 banking offices, 6 of which are owned, 23 of which are leased, and 1 of which is subleased. Brookline Bank's main banking office is leased and located in Brookline, Massachusetts. Brookline Bank also has 2 additional lending offices and 2 remote ATM locations, all of which are leased. Eastern Funding conducts its business from leased premises in New York City, New York and in Melville, New York.
BankRI conducts its business from 20 banking offices, 6 of which are owned and 14 of which are leased. BankRI's main banking office is leased and located in Providence, Rhode Island. BankRI also has 2 remote ATM locations, all of which are leased. Macrolease conducts its business from leased premises in Plainview, New York.
Refer to Note 13, "Commitments and Contingencies," to the consolidated financial statements for information regarding the Company's lease commitments as of December 31, 2020.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
During the fiscal year ended December 31, 2020, the Company was not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Management believes that those routine legal proceedings involve, in the aggregate, amounts that are immaterial to the Company's financial condition and results of operations.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a)The common stock of the Company is traded on NASDAQ under the symbol BRKL. The approximate number of registered holders of common stock as of February 26, 2021 was 1,682. The Company currently pays quarterly cash dividends in the amount of $0.115 per share. The Company expects comparable cash dividends will be paid in the future.
Equity Compensation Plan Information
Refer to Note 20, "Employee Benefit Plans" for a discussion of the Company's equity compensation plans.
Five-Year Performance Comparison
The following graph compares total shareholder return on the Company's common stock over the last five years with the S&P 500 Index, the Russell 2000 Index and the SNL Index of Banks with assets between $5 billion and $10 billion. Index values are as of December 31 of each of the indicated years.
At December 31,
Index 2015 2016 2017 2018 2019 2020
Brookline Bancorp, Inc. 100.00 147.24 144.42 130.17 159.57 121.83
Russell 2000 Index 100.00 121.31 139.08 123.76 155.35 186.31
SNL Bank $5B-$10B Index 100.00 143.27 142.73 129.17 160.06 122.43
S&P 500 Index 100.00 111.96 136.40 130.42 171.49 203.02
The graph assumes $100 invested on December 31, 2015 in each of the Company's common stock, the S&P 500 Index, the Russell 2000 Index and the SNL Index of Banks with assets between $5 billion and $10 billion. The graph also assumes reinvestment of all dividends.
(b)Not applicable.
(c) The following table presents a summary of the Company's share repurchases during the quarter ended December 31, 2020.
Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Programs (1)
Maximum Number of Shares that May Yet be Purchased Under the Programs (1)
October 28 through December 31, 2020 867,411 $ 11.06 867,411 -
______________________________________________________________________________________________________
(1) On December 4, 2019, the Company's Board of Directors approved a stock repurchase program (the "2020 Stock Repurchase Plan") authorizing management to repurchase up to $10.0 million of the Company’s common stock over a period of twelve months commencing on January 1, 2020. On March 9, 2020, the Board of Directors approved an increase in the repurchase amount of $10.0 million bringing the total authorized amount to $20.0 million. Effective March 24, 2020, the Company suspended the 2020 Stock Repurchase Plan. On October 28, 2020, the Board of Directors authorized the resumption of the 2020 Stock Repurchase Plan. As of December 31, 2020, the Company had completed the program.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
The selected financial and other data of the Company set forth below are derived in part from, and should be read in conjunction with, the Consolidated Financial Statements of the Company and Notes thereto presented elsewhere herein.
At or for the year ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands, Except Per Share Data)
FINANCIAL CONDITION DATA
Total assets $ 8,942,424 $ 7,856,853 $ 7,392,805 $ 6,780,249 $ 6,438,129
Total loans and leases 7,269,553 6,737,816 6,303,516 5,730,679 5,398,864
Allowance for loan and lease losses (6)
114,379 61,082 58,692 58,592 53,666
Investment securities available-for-sale 745,822 498,995 502,793 540,124 523,634
Investment securities held-to-maturity - 86,780 114,776 109,730 87,120
Equity securities held-for-trading 526 3,581 4,207 - -
Goodwill and identified intangible assets 163,579 164,850 166,513 143,934 146,023
Total deposits 6,910,696 5,830,072 5,454,044 4,871,343 4,611,076
Core deposits (1)
4,826,789 3,808,430 3,664,879 3,663,873 3,570,054
Certificates of deposit 1,389,998 1,671,738 1,438,478 932,725 837,630
Brokered deposits 693,909 349,904 350,687 274,745 203,392
Total borrowed funds 820,247 902,749 920,542 1,020,819 1,044,086
Stockholders' equity 941,778 945,606 900,140 803,830 695,544
Tangible stockholders' equity (*) 778,199 780,756 733,627 659,896 549,521
Nonperforming loans and leases (2)
38,448 19,461 24,097 27,272 40,077
Nonperforming assets (3)
44,963 22,092 28,116 31,691 41,476
EARNINGS DATA
Interest and dividend income $ 326,817 $ 347,626 $ 313,893 $ 263,050 $ 239,648
Interest expense 66,654 94,326 66,194 39,869 35,984
Net interest income 260,163 253,300 247,699 223,181 203,664
Provision for credit losses 61,886 9,583 4,951 18,988 10,353
Non-interest income 24,644 29,793 25,224 32,173 22,667
Non-interest expense 160,844 157,481 155,232 139,111 130,362
Provision for income taxes 14,442 28,269 26,189 43,636 30,392
Net income 47,635 87,717 83,062 50,518 52,362
Operating earnings (*) 46,124 88,184 85,796 52,444 52,362
PER COMMON SHARE DATA
Earnings per share - Basic $ 0.60 $ 1.10 $ 1.04 $ 0.68 $ 0.74
Earnings per share - Diluted 0.60 1.10 1.04 0.68 0.74
Operating earnings per share (*) 0.58 1.10 1.07 0.70 0.74
Dividends paid per common share 0.460 0.440 0.395 0.360 0.360
Book value per share (end of period) 12.05 11.87 11.30 10.49 9.88
Tangible book value per share (*) 9.96 9.80 9.21 8.61 7.81
Stock price (end of period) 12.04 16.46 13.82 15.70 16.40
PERFORMANCE RATIOS
Net interest margin 3.17 % 3.51 % 3.61 % 3.57 % 3.44 %
Return on average assets 0.55 % 1.15 % 1.15 % 0.76 % 0.83 %
Operating return on average assets (*) 0.53 % 1.15 % 1.19 % 0.79 % 0.83 %
Return on average tangible assets (*) 0.56 % 1.17 % 1.18 % 0.78 % 0.85 %
At or for the year ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands, Except Per Share Data)
Operating return on average tangible assets (*) 0.54 % 1.17 % 1.22 % 0.81 % 0.85 %
Return on average stockholders' equity 5.09 % 9.56 % 9.51 % 6.53 % 7.59 %
Operating return on average stockholders' equity (*) 4.93 % 9.61 % 9.82 % 6.78 % 7.59 %
Return on average tangible stockholders' equity (*) 6.17 % 11.67 % 11.70 % 8.04 % 9.66 %
Operating return on average tangible stockholders' equity (*) 5.97 % 11.73 % 12.09 % 8.35 % 9.66 %
Dividend payout ratio (*) 76.41 % 40.03 % 37.85 % 53.52 % 48.44 %
Efficiency ratio (4)
56.47 % 55.63 % 56.88 % 54.48 % 57.60 %
GROWTH RATIOS
Total loan and lease growth (5)
7.89 % 6.89 % 10.00 % 6.15 % 8.07 %
Total deposit growth (5)
18.54 % 6.89 % 11.96 % 5.64 % 7.08 %
ASSET QUALITY RATIOS
Net loan and lease charge-offs as a percentage of average loans and leases 0.18 % 0.11 % 0.08 % 0.25 % 0.25 %
Nonperforming loans and lease losses as a percentage of total loans and leases 0.53 % 0.29 % 0.38 % 0.48 % 0.74 %
Nonperforming assets as a percentage of total assets 0.50 % 0.28 % 0.38 % 0.47 % 0.64 %
Total allowance for loan and leases losses as a percentage of total loans and leases
1.57 % 0.91 % 0.93 % 1.02 % 0.99 %
CAPITAL RATIOS
Stockholders' equity to total assets 10.53 % 12.04 % 12.18 % 11.86 % 10.80 %
Tangible equity ratio (*) 8.86 % 10.15 % 10.15 % 9.94 % 8.73 %
Tier 1 leverage capital ratio 8.92 % 10.28 % 10.58 % 10.43 % 9.16 %
Common equity Tier 1 capital ratio (**) 11.04 % 11.44 % 11.94 % 12.02 % 10.48 %
Tier 1 risk-based capital ratio 11.18 % 11.58 % 12.26 % 12.34 % 10.79 %
Total risk-based capital ratio 13.51 % 13.59 % 14.42 % 14.75 % 13.20 %
_______________________________________________________________________________
(1) Core deposits consist of demand checking, NOW, money market and savings accounts.
(2) Nonperforming loans and leases consist of nonaccrual loans and leases.
(3) Nonperforming assets consist of nonperforming loans and leases, other real estate owned and other repossessed assets.
(4) The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income and non-interest income for the period.
(5) Total growth is calculated by dividing the change in the balance during the period by the balance at the beginning of the period.
(6) The allowance for loan and lease losses at December 31, 2020 reflects the adoption of CECL.
(*) Refer to Non-GAAP Financial Measures and Reconciliation to GAAP.
(**) Common equity tier 1 capital ratio is calculated by dividing common equity Tier 1 capital by risk-weighted assets. The ratio was established as part of the implementation of Basel III, effective January 1, 2015.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The Company, a Delaware corporation, operates as a multi-bank holding company for Brookline Bank and its subsidiaries; BankRI and its subsidiaries; and Brookline Securities Corp.
As a commercially-focused financial institution with 50 full-service banking offices throughout greater Boston, the north shore of Massachusetts and Rhode Island, the Company, through the Banks, offers a wide range of commercial, business and retail banking services, including a full complement of cash management products, foreign exchange services, on-line and mobile banking services, consumer and residential loans and investment advisory services, designed to meet the financial needs of small- to mid-sized businesses and individuals throughout central New England. Specialty lending activities including equipment financing, comprise 27.8% in the New York and New Jersey metropolitan area.
The Company focuses its business efforts on profitably growing its commercial lending businesses, both organically and through acquisitions. The Company’s customer focus, multi-bank structure, and risk management are integral to its organic growth strategy and serve to differentiate the Company from its competitors. As full-service financial institutions, the Banks and their subsidiaries focus their efforts on developing and deepening long-term banking relationships with qualified customers through a full complement of products and excellent customer service, and strong risk management.
The Company manages the Banks under uniform strategic objectives, with one set of uniform policies consistently applied by one executive management team. Within this environment, the Company believes that the ability to make customer decisions locally enhances management's motivation, service levels and, as a consequence, the Company's financial results. As such, while most back-office functions are consolidated at the holding company level, branding and decision-making, including credit decisions and pricing, remain largely local in order to better meet the needs of bank customers and further motivate the Banks’ commercial, business and retail bankers. These credit decisions, at the local level, are executed through corporate policies overseen by the Company's credit department.
The competition for loans and leases and deposits remains intense. The Company expects the operating environment to remain challenging. The volume of loan and lease originations and loan and lease losses will depend, to a large extent, on how the economy performs. Loan and lease growth and deposit growth are also greatly influenced by the rate-setting actions of the FRB. A sustained, low interest rate environment with a flat interest rate curve may negatively impact the Company's yields and net interest margin. While the Company is slightly asset sensitive and should benefit from rising rates, changes in interest rates could also precipitate a change in the mix and volume of the Company's deposits and loans. The future operating results of the Company will depend on its ability to maintain or increase the current net interest margin, while minimizing exposure to credit risk, along with increasing sources of non-interest income, while controlling the growth of non-interest expenses.
The Company and the Banks are supervised, examined and regulated by the FRB. As a Massachusetts-chartered trust company, Brookline Bank is also subject to regulation under the laws of the Commonwealth of Massachusetts and the jurisdiction of the Massachusetts Division of Banks. As a Rhode Island-chartered financial institution, BankRI is also subject to regulation under the laws of the State of Rhode Island and the jurisdiction of the Banking Division of the Rhode Island Department of Business Regulation. The FDIC continues to insure each of the Banks’ deposits up to $250,000 per depositor. Until July 31, 2019, Brookline Bank was a member bank of the Depositors Insurance Fund (the “DIF”), a private, industry-sponsored insurance fund that insures all deposits above FDIC limits for Massachusetts-chartered savings banks. Brookline Bank converted its charter from a Massachusetts-chartered savings bank to a Massachusetts-chartered trust company and ended its membership in the DIF on July 31, 2019. Term deposits in excess of the FDIC insurance coverage will continue to be insured by the DIF until they reach maturity.
The Company’s common stock is traded on the Nasdaq Global Select MarketSM under the symbol “BRKL.”
Executive Overview
Growth
Total assets of $8.9 billion as of December 31, 2020 increased $1.1 billion, or 13.8%, from December 31, 2019. The increase was primarily driven by increases in loans and leases, cash and cash equivalents and investment securities.
Total loans and leases of $7.3 billion as of December 31, 2020 increased $531.7 million, or 7.9%, from December 31, 2019. The Company's commercial loan portfolios, which are comprised of commercial real estate loans and commercial loans and leases, totaled $6.1 billion, or 83.9% of total loans and leases as of December 31, 2020, an increase of $590.8 million, or 10.7%, from $5.5 billion, or 81.7% of total loans and leases, as of December 31, 2019.
Total deposits of $6.9 billion as of December 31, 2020 increased $1.1 billion, or 18.5%, from $5.8 billion as of December 31, 2019. Core deposits, which include demand checking, NOW, money market and savings accounts, totaled $4.8 billion, or 69.8% of total deposits as of December 31, 2020, an increase of $1.0 billion, from $3.8 billion, or 65.3% of total deposits as of December 31, 2019. Certificate of deposit balances totaled $1.4 billion, or 20.1% of total deposits as of December 31, 2020, a decrease of $281.7 million, or 16.9% on an annualized basis from $1.7 billion, or 28.7% of total deposits, as of December 31, 2019. Brokered deposit balances totaled $693.9 million, or 10.0% of total deposits as of December 31, 2020, an increase of $344.0 million, or 98.3% on an annualized basis from $349.9 million, or 6.0% of total deposits, as of December 31, 2019.
Asset Quality
Nonperforming assets as of December 31, 2020 totaled $45.0 million, or 0.50% of total assets, compared to $22.1 million, or 0.28% of total assets, as of December 31, 2019. Net charge-offs for the year ended December 31, 2020 were $13.0 million, or 0.18% of average loans and leases, compared to $7.2 million, or 0.11% of average loans and leases, for the year ended December 31, 2019. The increase in nonperforming assets was primarily driven by the inclusion of one commercial relationship of $4.3 million, one construction relationship of $3.9 million, and one commercial relationship classified as OREO loan of $5.4 million during the year ending December 31, 2020.
The ratio of the allowance for loan and lease losses to total loans and leases was 1.57% as of December 31, 2020, compared to 0.91% as of December 31, 2019. On January 1, 2020, the Company implemented the CECL methodology to calculate the allowance for credit losses. Refer also to Note 7, "Allowance for Credit Losses."
Capital Strength
The Company is a "well-capitalized" bank holding company as defined in the FRB's Regulation Y. The Company's common equity Tier 1 Capital Ratio was 11.04% as of December 31, 2020, compared to 11.44% as of December 31, 2019. The Company's Tier 1 Leverage Ratio was 8.92% as of December 31, 2020, compared to 10.28% as of December 31, 2019. As of December 31, 2020, the Company's Tier 1 Risk-Based Ratio was 11.18%, compared to 11.58% as of December 31, 2019. The Company's Total Risk-Based Ratio was 13.51% as of December 31, 2020, compared to 13.59% as of December 31, 2019.
The Company's ratio of stockholders' equity to total assets was 10.53% and 12.04% as of December 31, 2020 and December 31, 2019, respectively. The Company's tangible equity ratio was 8.86% and 10.15% as of December 31, 2020 and December 31, 2019, respectively.
Net Income
For the year ended December 31, 2020, the Company reported net income of $47.6 million, or $0.60 per basic and diluted share, a decrease of $40.1 million, or 45.7%, from $87.7 million, or $1.10 per basic and diluted share for the year ended December 31, 2019. The decrease in net income is primarily the result of an increase in the provision for credit losses of $52.3 million, an increase in non-interest expense of $3.4 million and a decrease in non-interest income of $5.1 million, partially offset by an increase in net interest income of $6.9 million and a decrease in the provision for income taxes of $13.8 million.
The return on average assets was 0.55% for the year ended December 31, 2020, compared to 1.15% for the year ended December 31, 2019. The return on average stockholders' equity was 5.09% for the year ended December 31, 2020, compared to 9.56% for the year ended December 31, 2019.
The net interest margin was 3.17% for the year ended December 31, 2020 down from 3.51% for the year ended December 31, 2019. The decrease in the net interest margin is a result of a decrease in the yield on interest-earning assets of 82 basis points to 3.99% in 2020 from 4.81% in 2019, partially offset by a decrease of 54 basis points in the Company's overall cost of funds to 0.89% in 2020 from 1.43% in 2019.
Results for 2020 included a $61.9 million provision for credit losses, as discussed in the "Allowance for Credit Losses-Allowance for Loan and Lease Losses" section below.
Non-interest income decreased $5.1 million to $24.6 million for the year ended December 31, 2020 from $29.8 million for the year ended December 31, 2019. Several factors contributed to the year over year decrease, including decreases of $4.0 million in loan level derivative income, net, $1.6 million in deposit fees, $0.6 million in gain on sales of loans and leases and $0.4 million in other non-interest income, partially offset by an increase of $1.5 million in gain on sales of investment securities, net.
Non-interest expense increased $3.4 million to $160.8 million for the year ended December 31, 2020 from $157.5 million for the year ended December 31, 2019. The increase was largely attributable to increases of $4.4 million in compensation and employee benefits expense and $2.8 million in FDIC insurance expense, partially offset by decreases of $1.6 million in other
non-interest expense, $1.3 million in equipment and data processing expense, and $1.1 million in merger and acquisition expense.
Critical Accounting Policies
The accounting policies described below are considered critical to understanding the Company's financial condition and operating results. Such accounting policies are considered to be especially important because they involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about matters that are inherently uncertain. The use of different judgments, assumptions and estimates could result in material differences in the Company's operating results or financial condition.
Allowance for Credit Losses
The allowance for credit losses represents management's estimate of expected losses over the life of the loan and lease portfolio. The allowance for credit losses consists of the allowance for loan and lease losses and reserve for unfunded commitments, which are classified as a contra-asset and liability within other liabilities, respectively, on the Consolidated Balance Sheets. Additions to the allowance for credit losses are made by charges to the provision for credit losses. Losses on loans and leases are deducted from the allowance when all or a portion of a loan or lease is considered uncollectible. The determination of the loans on which full collectability is not reasonably assured, the estimates of the fair value of the underlying collateral, and the assessment of economic and other conditions are subject to assumptions and judgments by management. Valuation allowances could differ materially as a result of changes in, or different interpretations of, these assumptions and judgments.
Management evaluates the adequacy of the allowance on a quarterly basis and reviews its conclusion as to the amount to be established with the Audit Committee and the Board of Directors.
As a result of the adoption of ASU 2016-13 effective January 1, 2020, the Company updated its critical accounting policy for the allowance for credit losses. The updates in this standard replace the incurred loss impairment GAAP methodology with the CECL methodology. The CECL methodology incorporates current condition, and "reasonable and supportable" forecasts, as well as prepayments, to estimate credit losses over the life of the loan.
See Note 7, "Allowance for Credit Losses," to the consolidated financial statements for further discussion on the new policy and processes.
Impairment of Goodwill
Goodwill is presumed to have an indefinite useful life and is tested at least annually for impairment. Impairment exists when the carrying amount of goodwill exceeds its implied fair value. If fair value exceeds the carrying amount at the time of testing, goodwill is not considered impaired. Quoted market prices in active markets are the best evidence of fair value and are considered to be used as the basis for measurement, when available. Other acceptable valuation methods include present-value measurements based on multiples of earnings or revenues, or similar performance measures. Differences in valuation techniques could result in materially different evaluations of impairment. In September 2011, the FASB issued Accounting Standards Update ("ASU") 2011-08 which provides guidance for companies when testing goodwill for impairment. The objective of the ASU is to simplify how entities test goodwill for impairment. Pursuant to the ASU, entities may now assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the one-step goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50%.
To determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity should consider the extent to which each of the adverse events or circumstances identified could affect the comparison of a reporting unit's fair value with its carrying amount.
Pursuant to the ASU, an entity should place more weight on the events and circumstances that have the greatest impact on a reporting unit's fair value or the carrying amount of its net assets; and may affect its determination of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
In accordance with ASC 350-20-35-3B, an entity can bypass the qualitative assessment and perform the quantitative impairment test. Given the current economic environment, a quantitative analysis was performed where management selected a sample of comparable acquisitions and calculated the control premium associated with each sale. The Company’s market capitalization times the sampled control premium allowed management to compare the calculated market capitalization to the Company’s current book value to determine if an adjustment to goodwill is warranted. The Company did not have any impairment of Goodwill and other identified intangible assets as of December 31, 2020. Further analysis of the Company’s
goodwill can be found in Note 9 “Goodwill and Other Intangible Assets” within the notes to the consolidated financial statements.
Recent Accounting Developments
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)-Facilitation of the Effects of Reference Rate Reform on Financial Reporting" to provide optional expedients and exceptions for applying GAAP to certain contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients provided that those elections are retained through the end of the hedging relationship. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022 and do not apply to contract modifications made after December 31, 2022. The Company has not yet adopted the amendments in this update and is currently in the process of reviewing its contracts and existing processes in order to assess the risks and potential impact to the Company.
See Note 1, “Basis of Presentation” in the notes to the consolidated financial statements for additional information regarding recent accounting developments.
Non-GAAP Financial Measures and Reconciliation to GAAP
In addition to evaluating the Company’s results of operations in accordance with GAAP, management periodically supplements this evaluation with an analysis of certain non-GAAP financial measures, such as operating earnings metrics, the return on average tangible assets, return on average tangible equity, the tangible equity ratio, tangible book value per share and dividend payout ratio. Management believes that these non-GAAP financial measures provide information useful to investors in understanding the Company’s underlying operating performance and trends, and facilitates comparisons with the performance assessment of financial performance, including non-interest expense control, while the tangible equity ratio and tangible book value per share are used to analyze the relative strength of the Company’s capital position.
In light of diversity in presentation among financial institutions, the methodologies used by the Company for determining the non-GAAP financial measures discussed above may differ from those used by other financial institutions.
Operating Earnings
Operating earnings exclude the after-tax impact of securities gains and merger and acquisition expense as well as the impact of the Tax Cuts and Jobs Act (the "Tax Act"). By excluding such items, the Company's results can be measured and assessed on a more consistent basis from period to period. Items excluded from operating earnings are also excluded when calculating the operating return and operating efficiency ratios.
The following table summarizes the Company's operating earnings and operating earnings per share ("EPS") for the periods indicated:
Year Ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands, Except Per Share Data)
Net income, as reported $ 47,635 $ 87,717 $ 83,062 $ 50,518 $ 52,362
Less:
Security gains (after-tax) 1,511 384 174 7,303 -
Add:
Merger and acquisition expense (after-tax) (1)
- 851 2,908 264 -
Impact of Tax Act - - - 8,965 -
Operating earnings $ 46,124 $ 88,184 $ 85,796 $ 52,444 $ 52,362
Earnings per share, as reported $ 0.60 $ 1.10 $ 1.04 $ 0.68 $ 0.74
Less:
Security gains (after-tax) 0.02 - - 0.10 -
Add:
Merger and acquisition expense (after-tax) (1)
- - 0.03 - -
Impact of Tax Act - - - 0.12 -
Operating earnings per share $ 0.58 $ 1.10 $ 1.07 $ 0.70 $ 0.74
_________________________________________________________________________
(1) Merger and acquisition expense related to the acquisition of First Commons Bank in the first quarter of 2018 and the purchase of the remaining minority interest of Eastern Funding in the first quarter of 2019.
The following table summarizes the Company's operating return on average assets, operating return on average tangible assets, operating return on average stockholders' equity and operating return on average tangible stockholders' equity for the periods indicated:
Year Ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands)
Operating earnings $ 46,124 $ 88,184 $ 85,796 $ 52,444 $ 52,362
Average total assets $ 8,683,569 $ 7,654,634 $ 7,223,081 $ 6,607,234 $ 6,279,722
Less: Average goodwill and average identified intangible assets, net 164,227 165,697 163,712 145,000 147,308
Average tangible assets $ 8,519,342 $ 7,488,937 $ 7,059,369 $ 6,462,234 $ 6,132,414
Return on average assets 0.55 % 1.15 % 1.15 % 0.76 % 0.83 %
Less:
Security gains (after-tax) 0.02 % 0.01 % - % 0.11 % - %
Add:
Merger and acquisition expense (after-tax) - % 0.01 % 0.04 % - % - %
Impact of Tax Act - % - % - % 0.14 % - %
Operating return on average assets 0.53 % 1.15 % 1.19 % 0.79 % 0.83 %
Return on average tangible assets 0.56 % 1.17 % 1.18 % 0.78 % 0.85 %
Less:
Security gains (after-tax) 0.02 % 0.01 % - % 0.11 % - %
Add:
Merger and acquisition expense (after-tax) - % 0.01 % 0.04 % - % - %
Impact of Tax Act - % - % - % 0.14 % - %
Operating return on average tangible assets 0.54 % 1.17 % 1.22 % 0.81 % 0.85 %
Average total stockholders' equity $ 936,075 $ 917,286 $ 873,388 $ 773,244 $ 689,556
Less: Average goodwill and average identified intangible assets, net 164,227 165,697 163,712 145,000 147,308
Average tangible stockholders' equity $ 771,848 $ 751,589 $ 709,676 $ 628,244 $ 542,248
Return on average stockholders' equity 5.09 % 9.56 % 9.51 % 6.53 % 7.59 %
Less:
Security gains (after-tax) 0.16 % 0.04 % 0.02 % 0.94 % - %
Add:
Merger and acquisition expense (after-tax) - % 0.09 % 0.33 % 0.03 % - %
Impact of Tax Act - % - % - % 1.17 % - %
Operating return on average stockholders' equity 4.93 % 9.61 % 9.82 % 6.79 % 7.59 %
Return on average tangible stockholders' equity 6.17 % 11.67 % 11.70 % 8.04 % 9.66 %
Less:
Security gains (after-tax) 0.20 % 0.05 % 0.02 % 1.16 % - %
Add:
Merger and acquisition expense (after-tax) - % 0.11 % 0.41 % 0.04 % - %
Impact of Tax Act - % - % - % 1.43 % - %
Operating return on average tangible stockholders' equity 5.97 % 11.73 % 12.09 % 8.35 % 9.66 %
The following table summarizes the Company’s return on average tangible assets and return on average tangible stockholders’ equity for the periods indicated:
Year Ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands)
Net income, as reported $ 47,635 $ 87,717 $ 83,062 $ 50,518 $ 52,362
Average total assets $ 8,683,569 $ 7,654,634 $ 7,223,081 $ 6,607,234 $ 6,279,722
Less: Average goodwill and average identified intangible assets, net 164,227 165,697 163,712 145,000 147,308
Average tangible assets $ 8,519,342 $ 7,488,937 $ 7,059,369 $ 6,462,234 $ 6,132,414
Return on average tangible assets 0.56 % 1.17 % 1.18 % 0.78 % 0.85 %
Average total stockholders' equity $ 936,075 $ 917,286 $ 873,388 $ 773,244 $ 689,556
Less: Average goodwill and average identified intangible assets, net 164,227 165,697 163,712 145,000 147,308
Average tangible stockholders' equity $ 771,848 $ 751,589 $ 709,676 $ 628,244 $ 542,248
Return on average tangible stockholders' equity 6.17 % 11.67 % 11.70 % 8.04 % 9.66 %
The following table summarizes the Company's tangible equity ratio for the periods indicated:
At December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands)
Total stockholders' equity $ 941,778 $ 945,606 $ 900,140 $ 803,830 $ 695,544
Less: Goodwill and identified intangible assets, net 163,579 164,850 166,513 143,934 146,023
Tangible stockholders' equity $ 778,199 $ 780,756 $ 733,627 $ 659,896 $ 549,521
Total assets $ 8,942,424 $ 7,856,853 $ 7,392,805 $ 6,780,249 $ 6,438,129
Less: Goodwill and identified intangible assets, net 163,579 164,850 166,513 143,934 146,023
Tangible assets $ 8,778,845 $ 7,692,003 $ 7,226,292 $ 6,636,315 $ 6,292,106
Tangible equity ratio 8.86 % 10.15 % 10.15 % 9.94 % 8.73 %
The following table summarizes the Company's tangible book value per share for the periods indicated:
Year Ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands)
Tangible stockholders' equity $ 778,199 $ 780,756 $ 733,627 $ 659,896 $ 549,521
Common shares issued 85,177,172 85,177,172 85,177,172 81,695,695 75,744,445
Less:
Treasury shares 6,525,783 5,003,127 5,020,025 4,440,665 4,707,096
Unallocated ESOP 51,114 79,548 109,950 142,332 176,688
Unvested restricted stock 458,800 406,450 390,636 455,283 476,854
Common shares outstanding 78,141,475 79,688,047 79,656,561 76,657,415 70,383,807
Tangible book value per share $ 9.96 $ 9.80 $ 9.21 $ 8.61 $ 7.81
The following table summarizes the Company's dividend payout ratio for the periods indicated:
Year Ended December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands)
Dividends paid $ 36,396 $ 35,110 $ 31,441 $ 27,035 $ 25,366
Net income, as reported $ 47,635 $ 87,717 $ 83,062 $ 50,518 $ 52,362
Dividend payout ratio 76.41 % 40.03 % 37.85 % 53.52 % 48.44 %
The following table summarizes the Company’s allowance for loan and lease losses as a percentage of total loans and leases, excluding PPP loans, for the periods indicated:
Year Ended December 31,
2020 2019 2018 2017 2016
Allowance for loan and lease losses
$ 114,379 $ 61,082 $ 58,692 $ 58,592 $ 53,666
Total loans and leases $ 7,269,553 $ 6,737,816 $ 6,303,516 $ 5,730,679 $ 5,398,864
Less: Total PPP loans 489,216 - - - -
Total loans and leases, excluding PPP loans $ 6,780,337 $ 6,737,816 $ 6,303,516 $ 5,730,679 $ 5,398,864
Allowance for loan and lease losses as a percentage of total loans and leases, less PPP loans
1.69 % 0.91 % 0.93 % 1.02 % 0.99 %
Financial Condition
Loans and Leases
The following table summarizes the Company's portfolio of loans and leases receivables as of the dates indicated:
At December 31,
2020 2019 2018 2017 2016
Balance Percent
of Total Balance Percent
of Total Balance Percent
of Total Balance Percent
of Total Balance Percent
of Total
(Dollars in Thousands)
Commercial real estate loans:
Commercial real estate $ 2,578,773 35.4 % $ 2,491,011 37.0 % $ 2,330,725 37.0 % $ 2,174,969 38.0 % $ 2,050,382 38.1 %
Multi-family mortgage 1,013,432 13.9 % 932,163 13.8 % 847,711 13.4 % 760,670 13.3 % 731,186 13.5 %
Construction 231,621 3.2 % 246,048 3.7 % 173,300 2.7 % 140,138 2.4 % 136,999 2.5 %
Total commercial real estate loans 3,823,826 52.5 % 3,669,222 54.5 % 3,351,736 53.1 % 3,075,777 53.7 % 2,918,567 54.1 %
Commercial loans and leases:
Commercial 1,131,668 15.6 % 729,502 10.8 % 736,418 11.7 % 705,004 12.3 % 635,426 11.8 %
Equipment financing 1,092,461 15.0 % 1,052,408 15.6 % 982,089 15.6 % 866,488 15.1 % 799,860 14.8 %
Condominium association 50,770 0.7 % 56,838 0.8 % 50,451 0.8 % 52,619 0.9 % 60,122 1.1 %
Total commercial loans and leases 2,274,899 31.3 % 1,838,748 27.2 % 1,768,958 28.1 % 1,624,111 28.3 % 1,495,408 27.7 %
Consumer loans:
Residential mortgage 791,317 10.9 % 814,245 12.1 % 782,968 12.4 % 660,065 11.5 % 624,349 11.6 %
Home equity 346,652 4.8 % 376,819 5.6 % 376,484 6.0 % 355,954 6.2 % 342,241 6.3 %
Other consumer 32,859 0.5 % 38,782 0.6 % 23,370 0.4 % 14,772 0.3 % 18,299 0.3 %
Total consumer loans 1,170,828 16.2 % 1,229,846 18.3 % 1,182,822 18.8 % 1,030,791 18.0 % 984,889 18.2 %
Total loans and leases 7,269,553 100.0 % 6,737,816 100.0 % 6,303,516 100.0 % 5,730,679 100.0 % 5,398,864 100.0 %
Allowance for loan and lease losses
(114,379) (61,082) (58,692) (58,592) (53,666)
Net loans and leases $ 7,155,174 $ 6,676,734 $ 6,244,824 $ 5,672,087 $ 5,345,198
The following table sets forth the growth in the Company’s loan and lease portfolios during the year ending December 31, 2020
At December 31,
2020 At December 31,
2019 Dollar Change Percent Change
(Annualized)
(Dollars in Thousands)
Commercial real estate $ 3,823,826 $ 3,669,222 $ 154,604 4.2 %
Commercial $ 2,274,899 $ 1,838,748 436,151 23.7 %
Consumer $ 1,170,828 $ 1,229,846 (59,018) -4.8 %
Total loans and leases $ 7,269,553 $ 6,737,816 $ 531,737 7.9 %
The Company's loan portfolio consists primarily of first mortgage loans secured by commercial, multi-family and residential real estate properties located in the Company's primary lending area, loans to business entities, including commercial lines of credit, loans to condominium associations and loans and leases used to finance equipment used by small businesses. The Company also provides financing for construction and development projects, home equity and other consumer loans.
The Company employs seasoned commercial lenders and retail bankers who rely on community and business contacts as well as referrals from customers, attorneys and other professionals to generate loans and deposits. Existing borrowers are also an important source of business since many of them have more than one loan outstanding with the Company. The Company's ability to originate loans depends on the strength of the economy, trends in interest rates, and levels of customer demand and market competition.
The Company's current policy is that the total credit exposure to one obligor relationship may not exceed $50.0 million unless approved by the Board Credit Committee, a committee of the Company's Board of Directors. As of December 31, 2020, there were two borrowers with commitments over $50.0 million. The total of those commitments was $114.4 million or 1.3% of total loans and commitments as of December 31, 2020. As of December 31, 2019, there were three borrowers with loans and commitments over $50.0 million. The total of those loans and commitments was $194.3 million, or 2.4% of total loans and commitments, as of December 31, 2019.
The Company has written underwriting policies to control the inherent risks in loan origination. The policies address approval limits, loan-to-value ratios, appraisal requirements, debt service coverage ratios, loan concentration limits and other matters relevant to loan underwriting.
Commercial Real Estate Loans
The commercial real estate portfolio is comprised of commercial real estate loans, multi-family mortgage loans, and construction loans and is the largest component of the Company's overall loan portfolio, representing 52.5% of total loans and leases outstanding as of December 31, 2020.
Typically, commercial real estate loans are larger in size and involve a greater degree of risk than owner-occupied residential mortgage loans. Loan repayment is usually dependent on the successful operation and management of the properties and the value of the properties securing the loans. Economic conditions can greatly affect cash flows and property values.
A number of factors are considered in originating commercial real estate and multi-family mortgage loans. The qualifications and financial condition of the borrower (including credit history), as well as the potential income generation and the value and condition of the underlying property, are evaluated. When evaluating the qualifications of the borrower, the Company considers the financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with the Company and other financial institutions. Factors considered in evaluating the underlying property include the net operating income of the mortgaged premises before debt service and depreciation, the debt service coverage ratio (the ratio of cash flow before debt service to debt service), the use of conservative capitalization rates, and the ratio of the loan amount to the appraised value. Generally, personal guarantees are obtained from commercial real estate loan borrowers.
Commercial real estate and multi-family mortgage loans are typically originated for terms of five to fifteen years with amortization periods of 20 to 30 years. Many of the loans are priced at inception on a fixed-rate basis generally for periods ranging from two to five years with repricing periods for longer-term loans. When possible, prepayment penalties are included in loan covenants on these loans. For commercial customers who are interested in loans with terms longer than five years, the Company offers loan level derivatives to accommodate customer need.
The Company's urban and suburban market area is characterized by a large number of apartment buildings, condominiums and office buildings. As a result, commercial real estate and multi-family mortgage lending has been a significant part of the Company's activities for many years. These types of loans typically generate higher yields, but also involve greater credit risk. Many of the Company's borrowers have more than one multi-family or commercial real estate loan outstanding with the Company.
The commercial real estate portfolio was composed primarily of loans secured by apartment buildings ($927.0 million), office buildings ($668.4 million), retail stores ($606.3 million), industrial properties ($443.2 million), mixed-use properties ($329.1 million), lodging services ($149.2 million) and food services ($55.9 million) as of December 31, 2020. As of that date, approximately 96.6% of the commercial real estate loans outstanding were secured by properties located in New England.
Construction and development financing is generally considered to involve a higher degree of risk than long-term financing on improved, occupied real estate and thus has lower concentration limits than do other commercial credit classes. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of construction costs, the estimated time to sell or rent the completed property at an adequate price or rate of occupancy, and market conditions. If the estimates and projections prove to be inaccurate, the Company may be confronted with a project which, upon completion, has a value that is insufficient to assure full loan repayment.
Criteria applied in underwriting construction loans for which the primary source of repayment is the sale of the property is different from the criteria applied in underwriting construction loans for which the primary source of repayment is the stabilized cash flow from the completed project. For those loans where the primary source of repayment is from resale of the property, in addition to the normal credit analysis performed for other loans, the Company also analyzes project costs, the attractiveness of the property in relation to the market in which it is located and demand within the market area. For those construction loans where the source of repayment is the stabilized cash flow from the completed project, the Company analyzes not only project costs but also how long it might take to achieve satisfactory occupancy and the reasonableness of projected rental rates in relation to market rental rates.
Commercial Loans
The commercial loan and lease portfolio is comprised of commercial loans, equipment financing loans and leases and condominium association loans representing 31.3% of total loans outstanding as of December 31, 2020.
The commercial loan and lease portfolio is composed primarily of loans to small businesses ($680.2 million), transportation services ($386.8 million), food services ($214.4 million), recreation services ($160.0 million), rental and leasing services ($114.8 million), manufacturing ($141.2 million), and retail ($98.0 million) as of December 31, 2020.
The Company provides commercial banking services to companies in its market area. Approximately 54.0% of the commercial loans outstanding as of December 31, 2020 were made to borrowers located in New England. The remaining 46.0% of the commercial loans outstanding were made to borrowers in other areas in the United States of America, primarily by the Company's equipment financing divisions. Product offerings include lines of credit, term loans, letters of credit, deposit services and cash management. These types of credit facilities have as their primary source of repayment cash flows from the operations of a business. Interest rates offered are available on a floating basis tied to the prime rate or a similar index or on a fixed-rate basis referenced on the Federal Home Loan Bank of Boston ("FHLBB") index.
Credit extensions are made to established businesses on the basis of loan purpose and assessment of capacity to repay as determined by an analysis of their financial statements, the nature of collateral to secure the credit extension and, in most instances, the personal guarantee of the owner of the business as well as industry and general economic conditions. The Company also participates in U.S. Government programs such as the SBA in both the 7A program and as an SBA preferred lender. Included in the commercial loans balances are the PPP loans totaling $463.5 million as of December 31, 2020.
The Company’s equipment financing divisions focus on market niches in which its lenders have deep experience and industry contacts, and on making loans to customers with business experience. An important part of the Company’s equipment financing loan origination volume comes from equipment manufacturers and existing customers as they expand their operations. The equipment financing portfolio is composed primarily of loans to finance laundry, tow trucks, fitness, dry cleaning and convenience store equipment. Approximately 13.4% of the commercial loans outstanding were in the equipment financing divisions made to borrowers located primarily in the greater New York and New Jersey metropolitan area. Typically, the loans are priced at a fixed rate of interest and require monthly payments over their three- to seven-year life. The yields earned on equipment financing loans are higher than those earned on the commercial loans made by the Banks because they involve a higher degree of credit risk. Equipment financing customers are typically small-business owners who operate with limited financial resources and who face greater risks when the economy weakens or unforeseen adverse events arise. Because of these characteristics, personal guarantees of borrowers are usually obtained along with liens on available assets. The size of loan is determined by an analysis of cash flow and other characteristics pertaining to the business and the equipment to be financed, based on detailed revenue and profitability data of similar operations.
Loans to condominium associations are for the purpose of funding capital improvements, are made for five- to ten-year terms and are secured by a general assignment of condominium association revenues. Among the factors considered in the underwriting of such loans are the level of owner occupancy, the financial condition and history of the condominium association, the attractiveness of the property in relation to the market in which it is located and the reasonableness of estimates of the cost of capital improvements to be made. Depending on loan size, funds are advanced as capital improvements are made and, in more complex situations, after completion of engineering inspections.
Consumer Loans
The consumer loan portfolio is comprised of residential mortgage loans, home equity loans and lines of credit, and other consumer loans representing, 16.2% of total loans outstanding as of December 31, 2020. The Company focuses its mortgage and home equity lending on existing and new customers within its branch networks in its urban and suburban marketplaces in the greater Boston and Providence metropolitan areas.
The Company originates adjustable and fixed rate residential mortgage loans secured by one-to-four-family residences. Each residential mortgage loan granted is subject to a satisfactorily completed application, employment verification, credit
history and a demonstrated ability to repay the debt. Generally, loans are not made when the loan-to-value ratio exceeds 80% unless private mortgage insurance is obtained and/or there is a financially strong guarantor. Appraisals are performed by outside independent fee appraisers.
Underwriting guidelines for home equity loans and lines of credit are similar to those for residential mortgage loans. Home equity loans and lines of credit are limited to no more than 80% of the appraised value of the property securing the loan including the amount of any existing first mortgage liens.
Other consumer loans have historically been a modest part of the Company's loan originations. As of December 31, 2020, other consumer loans equaled $32.9 million, or 0.5% of total loans outstanding.
Asset Quality
Criticized and Classified Assets
The Company's management rates certain loans and leases as "other assets especially mentioned" ("OAEM"), "substandard" or "doubtful" based on criteria established under banking regulations. These loans and leases are collectively referred to as "criticized" assets. Loans and leases rated OAEM have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects of the loan or lease at some future date. Loans and leases rated as substandard are inadequately protected by the payment capacity of the obligor or of the collateral pledged, if any. Substandard loans and leases have a well-defined weakness or weaknesses that jeopardize the liquidation of debt and are characterized by the distinct possibility that the Company will sustain some loss if existing deficiencies are not corrected. Loans and leases rated as doubtful have well-defined weaknesses that jeopardize the orderly liquidation of debt and partial loss of principal is likely. As of December 31, 2020, the Company had $72.8 million of total assets that were designated as criticized. This compares to $67.2 million of assets designated as criticized as of December 31, 2019. The increase of $5.6 million in criticized assets was primarily due to two construction relationships totaling $7.6 million, six commercial real estate relationships totaling $7.5 million, and various equipment financing relationships totaling $7.0 million which become criticized during the year ending December 31, 2020, partially offset by the three commercial real estate relationships totaling $16.7 million paid off and charged off during the year ending December 31, 2020.
Nonperforming Assets
"Nonperforming assets" consist of nonaccrual loans and leases, other real estate owned ("OREO") and other repossessed assets. Under certain circumstances, the Company may restructure the terms of a loan or lease as a concession to a borrower, except for acquired loans and leases which are individually evaluated against expected performance on the date of acquisition. These restructured loans and leases are generally considered "nonperforming loans and leases" until a history of collection of at least six months on the restructured terms of the loan or lease has been established. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure. Other repossessed assets consist of assets that have been acquired through foreclosure that are not real estate and are included in other assets on the Company's consolidated balance sheets.
Accrual of interest on loans generally is discontinued when contractual payment of principal or interest becomes past due 90 days or, if in management's judgment, reasonable doubt exists as to the full timely collection of interest. Prior to the adoption of ASC 326, loans categorized as ASC 310-30 (purchased loans with deteriorating credit quality) accrued regardless of past due status. Exceptions may be made if the loan has matured and is in the process of renewal or is well-secured and in the process of collection. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current interest income. Interest payments on non-accrual loans are generally applied to principal. If collection of the principal is reasonably assured, interest payments are recognized as income on the cash basis. Loans are generally returned to accrual status when principal and interest payments are current, full collectability of principal and interest is reasonably assured and a consistent record of at least six months of performance has been achieved. The adoption of ASC 326 required purchase credit-impaired loans to be classified as non-accruing based on performance.
In cases where a borrower experiences financial difficulties and the Company makes or reasonably expects to make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructured loan. In determining whether a debtor is experiencing financial difficulties, the Company considers, among other factors, if the debtor is in payment default or is likely to be in payment default in the foreseeable future without the modification, the debtor declared or is in the process of declaring bankruptcy, there is substantial doubt that the debtor will continue as a going concern, the debtor's entity-specific projected cash flows will not be sufficient to service its debt, or the debtor cannot obtain funds from sources other than the existing creditors at market terms for debt with similar risk characteristics.
As of December 31, 2020, the Company had nonperforming assets of $45.0 million, representing 0.50% of total assets, compared to nonperforming assets of $22.1 million, or 0.28% of total assets as of December 31, 2019. The increase was primarily driven by the adoption of ASC 326 which required purchase credit-impaired loans to be classified as non-accruing based on performance. There were $9.0 million loans previously categorized as performing assets that are now classified as non-accruing. This amount includes one commercial relationship of $4.3 million and one construction relationship of $3.9 million. In addition, there was one commercial relationship classified as OREO in the amount of $5.4 million during the year ending December 31, 2020.
The Company evaluates the underlying collateral of each nonaccrual loan and lease and continues to pursue the collection of interest and principal. Management believes that the current level of nonperforming assets remains manageable relative to the size of the Company's loan and lease portfolio. If economic conditions were to worsen or if the marketplace were to experience prolonged economic stress, management believes it is likely that the level of nonperforming assets would increase, as would the level of charged-off loans.
Past Due and Accruing
From March 1, 2020 through the earlier of January 1, 2022 or 60 days after the termination date of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”), a financial institution may elect to suspend the requirements under U.S. GAAP for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a troubled debt restructured, including impairment accounting. This troubled debt restructuring relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019.
As of December 31, 2020, the Company had loans and leases greater than 90 days past due and accruing of $12.0 million, or 0.16% of total loans and leases, compared to $10.1 million, or 0.15% of total loans and leases, as of December 31, 2019, representing an increase of $1.9 million. The increase in 90 days past due and accruing loans was primarily due to three commercial relationships totaling $3.5 million, one construction relationship of $3.8 million and one commercial real estate relationship of $4.7 million 90 days past due and accruing, partially offset by $9.0 million of past due and accruing acquired loans previously accounted for under ASC 310-30, which are now disclosed as being on non-accrual status.
The following table sets forth information regarding nonperforming assets for the periods indicated:
At December 31,
2020 2019 2018 2017 2016
(Dollars in Thousands)
Nonperforming loans and leases:
Nonaccrual loans and leases:
Commercial real estate $ 3,300 $ 2,845 $ 3,928 $ 3,313 $ 5,340
Multi-family mortgage - 84 330 608 1,404
Construction 3,853 - 396 860 -
Total commercial real estate loans 7,153 2,929 4,654 4,781 6,744
Commercial 7,702 4,909 6,621 11,619 22,974
Equipment financing 16,757 9,822 9,500 8,106 6,758
Condominium association 112 151 265 - -
Total commercial loans and leases 24,571 14,882 16,386 19,725 29,732
Residential mortgage 5,587 753 2,132 1,979 2,501
Home equity 1,136 896 908 744 951
Other consumer 1 1 17 43 149
Total consumer loans 6,724 1,650 3,057 2,766 3,601
Total nonaccrual loans and leases 38,448 19,461 24,097 27,272 40,077
Other real estate owned 5,415 - 3,054 3,235 618
Other repossessed assets 1,100 2,631 965 1,184 781
Total nonperforming assets $ 44,963 $ 22,092 $ 28,116 $ 31,691 $ 41,476
Loans and leases past due greater than 90 days and accruing $ 11,975 $ 10,109 $ 13,482 $ 3,020 $ 7,077
Total delinquent loans and leases 61-90 days past due 16,129 4,978 3,308 7,376 7,350
Restructured loans and leases not included in nonperforming assets 11,483 17,076 12,257 16,241 13,883
Total nonaccrual loans and leases as a percentage of total loans and leases 0.53 % 0.29 % 0.38 % 0.48 % 0.74 %
Total nonperforming assets as a percentage of total assets 0.50 % 0.28 % 0.38 % 0.47 % 0.64 %
Total delinquent loans and leases 61-90 days past due as a percentage of total loans and leases 0.22 % 0.07 % 0.05 % 0.13 % 0.14 %
Troubled Debt Restructured Loans and Leases
Total TDR loans decreased by $4.2 million to $19.0 million at December 31, 2020 from $23.2 million at December 31, 2019. The decrease was driven primarily by the payments and payoffs of the commercial and construction TDRs during the year ending December 31, 2020.
The following table sets forth information regarding troubled debt restructured loans and leases at the dates indicated:
At December 31, 2020 At December 31, 2019
(Dollars in Thousands)
Troubled debt restructurings:
Commercial real estate mortgage $ 1,599 $ 1,674
Multi-family mortgage - 85
Construction - 2,942
Commercial 6,515 8,995
Equipment financing 6,699 5,555
Residential mortgage 2,054 2,067
Home equity 2,092 1,862
Total troubled debt restructurings $ 18,959 $ 23,180
The following table sets forth information regarding troubled debt restructured loans and leases at the dates indicated:
At December 31, 2020 At December 31, 2019
(Dollars in Thousands)
Troubled debt restructurings:
On accrual $ 11,483 $ 17,076
On nonaccrual 7,476 6,104
Total troubled debt restructurings $ 18,959 $ 23,180
Changes in troubled debt restructured loans and leases were as follows for the periods indicated:
Year ended December 31,
2020 2019
(Dollars in Thousands)
Balance at beginning of period $ 23,180 $ 20,941
Additions 2,940 16,484
Net charge-offs (830) (1,964)
Repayments (6,331) (12,281)
Balance at end of period $ 18,959 $ 23,180
The Coronavirus Aid, Relief and Economic Security ("CARES") Act and regulatory guidance issued by the Federal banking agencies provides that certain short-term loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by the COVID-19 pandemic are not required to be treated as TDRs under GAAP. As such, the Company suspended TDR accounting for COVID-19 pandemic related loan modifications meeting the loan modification criteria set forth under the CARES Act or as specified in the regulatory guidance. Further, loans granted payment deferrals related to the COVID-19 pandemic are not required to be reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). As of December 31, 2020, the Company granted 4,989 short-term deferments on loan and lease balances totaling $1.1 billion. Of these modifications, 4,691 loans and leases with total balances of $1.0 billion have returned to payment status and 298 loans and leases with total balances of $90.4 million remain on the deferral status, which represents 1.2% of total loan and leases balances.
Allowances for Credit Losses
The allowance for credit losses consists of general and specific allowances and reflects management's estimate of expected loan and lease losses over the life of loan or lease. Management uses a consistent and systematic process and methodology to evaluate the adequacy of the allowance for credit losses on a quarterly basis. Management continuously evaluates and challenges inputs and assumptions in the allowance for credit losses.
While management evaluates currently available information in establishing the allowance for credit losses, future adjustments to the allowance for loan and lease losses may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Management performs a comprehensive review of the allowance for credit losses on a quarterly basis. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institution's allowance for credit losses and carrying amounts of other real estate owned. Such agencies may require the financial institution to recognize additions or reductions to the allowance based on their judgments about information available to them at the time of their examination.
The Company’s allowance methodology provides a quantification of probable losses in the portfolio. Under the current methodology, management estimates losses over the life of the loan using reasonable and supportable forecasts. Forecasts, loan data, and model documentation are extensively analyzed and reviewed throughout the quarter to ensure estimated losses are accurate at quarter end. Qualitative adjustments are applied when model output does not align with management expectations. These adjustments are thoroughly reviewed and documented to provide clarity and a reasonable basis for any deviations from the model. For December 31, 2020, qualitative adjustments were applied to the CRE, C&I, and Retail portfolios resulting in a net addition in total reserves compared to modeled calculations.
The following tables present the changes in the allowance for loans and lease losses by portfolio category for the years ended December 31, 2020, 2019, 2018, 2017, and 2016, respectively.
Year Ended December 31, 2020
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2019 $ 30,285 $ 24,826 $ 5,971 $ 61,082
Adoption of ASU 2016-13 (CECL) 11,694 (2,672) (2,390) 6,632
Balance at beginning of period, adjusted 41,979 22,154 3,581 67,714
Charge-offs (3,514) (11,113) (36) (14,663)
Recoveries 94 1,407 201 1,702
Provision for loan and lease losses 41,573 17,050 1,003 59,626
Balance at December 31, 2020 $ 80,132 $ 29,498 $ 4,749 $ 114,379
Total loans and leases $ 3,823,826 $ 2,274,899 $ 1,170,828 $ 7,269,553
Total allowance for loan and lease losses as a percentage of total loans and leases 2.10 % 1.30 % 0.41 % 1.57 %
Year Ended December 31, 2019
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2018 $ 28,187 $ 25,283 $ 5,222 $ 58,692
Charge-offs - (8,911) (127) (9,038)
Recoveries - 1,688 179 1,867
Provision for loan and lease losses 2,098 6,766 697 9,561
Balance at December 31, 2019 $ 30,285 $ 24,826 $ 5,971 $ 61,082
Total loans and leases $ 3,669,222 $ 1,838,748 $ 1,229,846 $ 6,737,816
Total allowance for loan and lease losses as a percentage of total loans and leases 0.83 % 1.35 % 0.49 % 0.91 %
Year Ended December 31, 2018
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2017 $ 27,112 $ 26,333 $ 5,147 $ 58,592
Charge-offs (103) (6,585) (540) (7,228)
Recoveries - 2,287 290 2,577
Provision for loan and lease losses 1,178 3,248 325 4,751
Balance at December 31, 2018 $ 28,187 $ 25,283 $ 5,222 $ 58,692
Total loans and leases $ 3,351,736 $ 1,768,958 $ 1,182,822 $ 6,303,516
Allowance for loan and lease losses as a percentage of total loans and leases 0.84 % 1.43 % 0.44 % 0.93 %
Year Ended December 31, 2017
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2016 $ 27,645 $ 20,906 $ 5,115 $ 53,666
Charge-offs (494) (14,914) (403) (15,811)
Recoveries 476 1,158 319 1,953
Provision (credit) for loan and lease losses (515) 19,183 116 18,784
Balance at December 31, 2017 $ 27,112 $ 26,333 $ 5,147 $ 58,592
Total loans and leases $ 3,075,777 $ 1,624,111 $ 1,030,791 $ 5,730,679
Allowance for loan and lease losses as a percentage of total loans and leases 0.88 % 1.62 % 0.50 % 1.02 %
Year Ended December 31, 2016
Commercial
Real Estate Commercial Consumer Total
(In Thousands)
Balance at December 31, 2015 $ 30,151 $ 22,018 $ 4,570 $ 56,739
Charge-offs (2,169) (10,516) (1,982) (14,667)
Recoveries - 642 750 1,392
Provision (credit) for loan and lease losses (337) 8,762 1,777 10,202
Balance at December 31, 2016 $ 27,645 $ 20,906 $ 5,115 $ 53,666
Total loans and leases $ 2,918,567 $ 1,495,408 $ 984,889 $ 5,398,864
Allowance for loan and lease losses as a percentage of total loans and leases 0.95 % 1.40 % 0.52 % 0.99 %
Beginning January 1, 2020, the Company implemented the CECL methodology to calculate the allowance for credit losses. As of January 1, 2020, the Company increased the allowance for loan and lease losses by $6.6 million, and increased the allowances for the unfunded commitment by $8.9 million due to CECL which requires the inclusion of the credit losses over the expected life of the loans, as well as consideration of the risks based on the current conditions and reasonable and supportable forecasts about the future.
At December 31, 2020, the allowance for loan and lease losses increased to $114.4 million, or 1.57% of total loans and leases outstanding, as a result of the latest available forecast of the economic effects of the COVID-19 pandemic on the Company's loan and lease portfolios. This excluded PPP loans which are not subject to an allowance reserve since they are guaranteed by the SBA. This compared to an allowance for loan and lease losses of $61.1 million, or 0.91% of total loans and leases outstanding, as of December 31, 2019. Prior to January 1, 2020, the Company calculated the allowance for loan and lease losses using the incurred losses methodology.
Net charge-offs in the loans and leases for year ending December 31, 2020 and 2019 were $13.0 million and $7.2 million, respectively. The increase in the net charge-offs of $5.8 million was driven primarily by the charge-offs on four commercial real estate relationships of $3.6 million as well as the increase on the charge-offs on commercial loans by $1.9 million loans and equipment financing loans by $0.5 million.
Management believes that the allowance for loan and lease losses as of December 31, 2020 is appropriate based on the facts and circumstances discussed further below.
The following tables set forth the Company's percent of allowance for loan and lease losses to the total allowance for loan and lease losses and the percent of loans to total loans for each of the categories listed at the dates indicated.
At December 31,
2020 2019 2018
Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans
(Dollars in Thousands)
Commercial real estate $ 46,357 40.6 % 35.4 % $ 21,519 35.3 % 37.0 % $ 20,779 35.4 % 37.0 %
Multi-family mortgage 22,559 19.7 % 13.9 % 6,436 10.5 % 13.8 % 5,915 10.1 % 13.4 %
Construction 11,216 9.8 % 3.2 % 2,330 3.8 % 3.7 % 1,494 2.5 % 2.7 %
Total commercial real estate loans 80,132 70.1 % 52.5 % 30,285 49.6 % 54.5 % 28,188 48.0 % 53.1 %
Commercial 8,089 7.1 % 15.6 % 12,849 21.0 % 10.8 % 14,047 23.9 % 11.7 %
Equipment financing 21,292 18.6 % 15.0 % 11,595 19.0 % 15.6 % 10,888 18.6 % 15.6 %
Condominium association 117 0.1 % 0.7 % 382 0.6 % 0.8 % 347 0.6 % 0.8 %
Total commercial loans and leases 29,498 25.8 % 31.3 % 24,826 40.6 % 27.2 % 25,282 43.1 % 28.1 %
Residential mortgage 1,967 1.7 % 10.9 % 3,717 6.1 % 12.1 % 3,076 5.2 % 12.4 %
Home equity 2,504 2.2 % 4.8 % 2,132 3.5 % 5.6 % 2,047 3.5 % 6.0 %
Other consumer 278 0.2 % 0.5 % 122 0.2 % 0.6 % 99 0.2 % 0.4 %
Total consumer loans 4,749 4.1 % 16.2 % 5,971 9.8 % 18.3 % 5,222 8.9 % 18.8 %
Total $ 114,379 100.0 % 100.0 % $ 61,082 100.0 % 100.0 % $ 58,692 100.0 % 100.0 %
At December 31,
2017 2016
Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans Amount Percent of
Allowance
to Total
Allowance Percent of
Loans
in Each
Category to
Total
Loans
(Dollars in Thousands)
Commercial real estate $ 20,089 34.3 % 38.0 % $ 19,354 36.1 % 38.1 %
Multi-family mortgage 5,667 9.7 % 13.3 % 5,528 10.3 % 13.5 %
Construction 1,356 2.3 % 2.4 % 2,763 5.1 % 2.5 %
Total commercial real estate loans 27,112 46.3 % 53.7 % 27,645 51.5 % 54.1 %
Commercial 15,366 26.2 % 12.3 % 10,096 18.8 % 11.8 %
Equipment financing 10,586 18.1 % 15.1 % 10,345 19.3 % 14.8 %
Condominium association 381 0.7 % 0.9 % 465 0.9 % 1.1 %
Total commercial loans and leases 26,333 45.0 % 28.3 % 20,906 39.0 % 27.7 %
Residential mortgage 2,743 4.7 % 11.5 % 2,587 4.8 % 11.6 %
Home equity 2,219 3.8 % 6.2 % 2,356 4.4 % 6.3 %
Other consumer 185 0.2 % 0.3 % 172 0.3 % 0.3 %
Total consumer loans 5,147 8.7 % 18.0 % 5,115 9.5 % 18.2 %
Total $ 58,592 100.0 % 100.0 % $ 53,666 100.0 % 100.0 %
Investment Securities and Restricted Equity Securities
The investment portfolio exists primarily for liquidity purposes, and secondarily as sources of interest and dividend income, interest-rate risk management and tax planning as a counterbalance to loan and deposit flows. Investment securities are utilized as part of the Company's asset/liability management and may be sold in response to, or in anticipation of, factors such as changes in market conditions and interest rates, security prepayment rates, deposit outflows, liquidity concentrations and regulatory capital requirements.
The investment policy of the Company, which is reviewed and approved by the Board of Directors on an annual basis, specifies the types of investments that are acceptable, required investment ratings by at least one nationally recognized rating agency, concentration limits and duration guidelines. Compliance with the investment policy is monitored on a regular basis. In general, the Company seeks to maintain a high degree of liquidity and targets cash, cash equivalents and investment securities available-for-sale balances between 10% and 30% of total assets.
Cash, cash equivalents, and investment securities increased $514.1 million, or 77.1%, to $1.2 billion as of December 31, 2020 from $667.1 million as of December 31, 2019. The increase was primarily driven by growth in short-term investments and investment securities available-for-sale. Cash, cash equivalents, and investment securities were 13.21% of total assets as of December 31, 2020, compared to 8.49% of total assets at December 31, 2019.
The following table sets forth certain information regarding the amortized cost and market value of the Company's investment securities at the dates indicated:
At December 31,
2020 2019 2018
Amortized
Cost Fair Value Amortized
Cost Fair Value Amortized
Cost Fair Value
(In Thousands)
Investment securities available-for-sale:
GSE debentures $ 273,820 $ 278,645 $ 182,922 $ 185,803 $ 184,072 $ 181,079
GSE CMOs 44,937 46,028 87,001 85,932 107,363 103,130
GSE MBSs 312,658 323,609 153,049 153,343 169,334 165,089
SBA commercial loan asset- backed securities - - 34 34 51 51
Corporate debt obligations 22,299 23,467 28,484 28,986 40,618 39,708
U.S. Treasury bonds 70,339 73,577 44,675 44,897 13,812 13,736
Foreign government obligations 500 496 - - - -
Total investment securities available-for-sale $ 724,553 $ 745,822 $ 496,165 $ 498,995 $ 515,250 $ 502,793
Investment securities held-to-maturity:
GSE debentures $ - $ - $ 31,228 $ 31,290 $ 50,546 $ 49,601
GSE MBSs - - 9,360 9,279 11,426 11,131
Municipal obligations - - 45,692 46,514 52,304 51,598
Foreign government obligations - - 500 478 500 500
Total investment securities held-to-maturity $ - $ - $ 86,780 $ 87,561 $ 114,776 $ 112,830
Equity securities held-for-trading $ - $ 526 $ - $ 3,581 $ - $ 4,207
Restricted equity securities:
FHLBB stock $ 31,293 $ 35,482 $ 43,655
FRB stock 18,241 18,084 17,995
Other 252 252 101
Total restricted equity securities $ 49,786 $ 53,818 $ 61,751
Total investment securities and restricted equity securities primarily consist of investment securities available-for-sale, investment securities held-to-maturity, stock in the FHLBB and stock in the FRB. The total securities portfolio increased $153.0 million, or 23.8% since December 31, 2019. As of December 31, 2020, total securities portfolio was 8.90% of total assets, compared to 8.19% of total assets as of December 31, 2019.
The fair value of investment securities is based principally on market prices and dealer quotes received from third-party, nationally-recognized pricing services for identical investment securities such as U.S. Treasury and agency securities. The Company's equity securities held-for-trading are priced this way and are included in Level 1. These prices are validated by comparing the primary pricing source with an alternative pricing source when available. When quoted market prices for identical securities are unavailable, the Company uses market prices provided by independent pricing services based on recent trading activity and other observable information, including but not limited to market interest-rate curves, referenced credit spreads and estimated prepayment speeds where applicable. These investments include certain U.S. and government agency debt securities, municipal and corporate debt securities, GSE residential MBSs and CMOs, trust preferred securities, and equity securities held-for-trading, all of which are included in Level 1 and 2.
Additionally, management reviews changes in fair value from period to period and performs testing to ensure that prices received from the third parties are consistent with their expectation of the market. Changes in the prices obtained from the pricing service are analyzed from month to month, taking into consideration changes in market conditions including changes in mortgage spreads, changes in U.S. Treasury security yields and changes in generic pricing of 15-year and 30-year securities.
Additional analysis may include a review of prices provided by other independent parties, a yield analysis, a review of average life changes using Bloomberg analytics and a review of historical pricing for the particular security.
As of December 31, 2020, the fair value of all investment securities available-for-sale was $745.8 million and carried a total of $21.3 million of net unrealized gains, compared to a fair value of $499.0 million and net unrealized gains of $2.8 million as of December 31, 2019. As of December 31, 2020, $86.9 million, or 11.7%, of the portfolio, had gross unrealized losses of $0.7 million. This compares to $205.6 million, or 41.2%, of the portfolio with gross unrealized losses of $1.8 million as of December 31, 2019. The Company's unrealized loss position decreased in 2020 driven by a change in the portfolio mix from shorter duration MBS to longer duration agency debentures. For additional discussion on investment securities available-for-sale by security type, see Note 4, "Investment Securities."
The Company reviews its debt securities portfolio on a quarterly basis in accordance with ASC 326. This analysis is done using probability of default ("PD") and loss given default ("LGD") assumptions where a model is created to determine current expected credit loss (CECL) for the remaining life of the securities. For the year ended December 31, 2020, the company did not recognize an amount as allowance or provision for credit loss. For additional discussion on how the Company validates fair values provided by the third-party pricing service, see Note 21, “Fair Value of Financial Instruments.”
Effective March 31, 2020, all investment securities classified as held-to-maturity were reclassified as available for sale to prudently reflect the ability and intent to not hold these assets to maturity due to the economic uncertainty created by the COVID-19 pandemic. As of December 31, 2019, the fair value of investment securities held-to-maturity was $87.6 million with net unrealized gains of $0.8 million. As of December 31, 2019, $22.3 million, or 25.5% of the portfolio had gross unrealized losses of $0.2 million.
Maturities, calls and principal repayments for investment securities available-for-sale totaled $214.6 million for the year ended December 31, 2020 compared to $68.2 million for the same period in 2019. For the year ended December 31, 2020, the Company sold $142.7 million of investment securities available for sale, compared to none for the same period in 2019. For the year ended December 31, 2020, the Company purchased $503.5 million of investment securities available-for-sale, compared to $50.4 million for the same period in 2019.
Maturities, calls and principal repayments for investment securities held-to-maturity totaled $6.3 million for the year ended December 31, 2020 compared to $28.9 million for the same period in 2019. There were no sales of investment securities held-to-maturity for the ended December 31, 2020 and 2019. For the year ended December 31, 2020, the Company did not purchase any investment securities held-to-maturity, compared to $1.4 million in purchases of investment securities held-to-maturity for the same period in 2019. During the three months ended September 30, 2020, all held-to-maturity securities were transferred to the available-for-sale portfolio.
Restricted Equity Securities
FHLBB Stock-The Company invests in the stock of the FHLBB as one of the requirements to borrow. The Company maintains an excess balance of capital stock, which allows for additional borrowing capacity at each of the Banks. As of December 31, 2020, the excess balance of capital stock is $1.0 million, as compared to $0.7 million at December 31, 2019.
As of December 31, 2020, the Company owned stock in the FHLBB with a carrying value of $31.3 million, a decrease of $4.2 million from $35.5 million as of December 31, 2019. As of December 31, 2020, the FHLBB had total assets of $38.5 billion and total capital of $2.8 billion, of which $1.5 billion was retained earnings. The FHLBB stated that it remained in compliance with all regulatory capital ratios as of December 31, 2020 and was classified as "adequately capitalized" by its regulator, based on the FHLBB's financial information as of September 30, 2020. See Note 5, "Restricted Equity Securities" to the consolidated financial statements for further information about the FHLBB.
Federal Reserve Bank Stock-The Company invests in the stock of the Federal Reserve Bank of Boston, as a condition of the membership for the Banks in the Federal Reserve System. In 2020, the Company maintained its investment in the stock of the Federal Reserve Bank of Boston to adjust for deposit growth. The FRB is the primary federal regulator for the Company and the Banks.
Carrying Value, Weighted Average Yields, and Contractual Maturities of Investment and Restricted Equity Securities
The table below sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Company's investment and restricted equity securities portfolio at the date indicated.
Balance at December 31, 2020
One Year or Less After One Year
Through Five Years After Five Years
Through Ten Years After Ten Years Total
Carrying
Value Weighted
Average
Yield (1) Carrying
Value Weighted
Average
Yield (1) Carrying
Value Weighted
Average
Yield (1) Carrying
Value Weighted
Average
Yield (1) Carrying
Value Weighted
Average
Yield (1)
(Dollars in Thousands)
Investment securities available-for-sale:
GSE debentures $ 30,365 1.97 % $ 103,133 2.17 % $ 135,342 1.32 % $ 9,805 2.00 % $ 278,645 1.73 %
GSE CMOs - - % - - % 1,779 1.47 % 44,249 1.72 % 46,028 1.71 %
GSE MBSs 1,648 2.96 % 6,307 1.78 % 34,730 1.93 % 280,924 1.87 % 323,609 1.88 %
Corporate debt obligations - - % 23,467 2.53 % - - % - - % 23,467 2.53 %
U.S. Treasury bonds - - % 19,860 2.19 % 53,717 1.39 % - - % 73,577 1.60 %
Foreign government obligations - - % 496 3.25 % - - % - - % 496 3.25 %
Total investment securities available-for-sale $ 32,013 2.02 % $ 153,263 2.22 % $ 225,568 1.43 % $ 334,978 1.86 % $ 746,348 1.81 %
Equity securities held-for-trading (2) 526 3.87 %
Restricted equity
securities (2):
FHLBB stock $ - - % $ - - % $ - - % $ 31,293 4.64 % $ 31,293 4.64 %
FRB stock - - % - - % - - % 18,241 6.00 % 18,241 6.00 %
Other stock - - % - - % - - % 252 - % 252 - %
Total restricted equity securities $ - - % $ - - % $ - - % $ 49,786 5.14 % $ 49,786 5.14 %
_______________________________________________________________________________
(1) Yields have been calculated on a tax-equivalent basis.
(2) Equity securities have no contractual maturity, therefore they are reported above in the over ten year maturity column.
Deposits
The following table presents the Company's deposit mix at the dates indicated.
At December 31,
2020 2019 2018
Amount Percent
of Total Weighted
Average
Rate Amount Percent
of Total Weighted
Average
Rate Amount Percent
of Total Weighted
Average
Rate
(Dollars in Thousands)
Non-interest-bearing deposits:
Demand checking accounts $ 1,592,205 23.0 % - % $ 1,141,578 19.6 % - % $ 1,033,551 19.0 % - %
Interest-bearing deposits:
NOW accounts 513,948 7.4 % 0.09 % 371,380 6.4 % 0.11 % 336,317 6.2 % 0.10 %
Savings accounts 701,659 10.2 % 0.13 % 613,467 10.5 % 0.46 % 619,961 11.4 % 0.32 %
Money market accounts 2,018,977 29.2 % 0.31 % 1,682,005 28.9 % 1.15 % 1,675,050 30.7 % 1.18 %
Certificate of deposit accounts 1,389,998 20.1 % 1.44 % 1,671,738 28.7 % 2.28 % 1,438,478 26.3 % 2.07 %
Brokered deposit accounts 693,909 10.0 % 0.39 % 349,904 6.0 % 2.18 % 350,687 6.4 % 2.33 %
Total interest-bearing deposits 5,318,491 77.0 % 0.57 % 4,688,494 80.4 % 1.46 % 4,420,493 81.0 % 1.14 %
Total deposits $ 6,910,696 100.0 % 0.44 % $ 5,830,072 100.0 % 1.17 % $ 5,454,044 100.0 % 0.92 %
The Company seeks to increase its core (non-certificate of deposit) deposits and decrease its loan-to-deposit ratio over time, while continuing to increase deposits as a percentage of total funding sources. The Company's loan-to-deposit ratio was 105.2% as of December 31, 2020, compared to 115.6% as of December 31, 2019.
Total deposits increased $1.1 billion, or 18.5%, to $6.9 billion as of December 31, 2020, compared to $5.8 billion as of December 31, 2019. Deposits as a percentage of total assets increased from 74.2% as of December 31, 2019 to 77.3% as of December 31, 2020. The increase in deposits as a percentage of total assets is primarily due to the growth in the core deposit accounts. The decrease in certificate of deposit accounts was offset by the increase in brokered deposit accounts.
In 2020, core deposits increased $1.0 billion. The ratio of core deposits to total deposits increased from 65.3% as of December 31, 2019 to 69.8% as of December 31, 2020, due to an increase in all core deposit accounts.
Certificate of deposit accounts decreased $0.3 billion to $1.4 billion as of December 31, 2020, compared to $1.7 billion as of December 31, 2019. Certificate of deposit accounts have decreased as a percentage of total deposits to 20.1% as of December 31, 2020 from 28.7% as of December 31, 2019.
Brokered deposits increased $344.0 million to $693.9 million as of December 31, 2020, compared to $349.9 as of December 31, 2019. Brokered deposits have increased as a percentage of total deposits to 10.0% as of December 31, 2020 from 6.0% as of December 31, 2019. The increase in Brokered deposits was driven by two new product offerings. Brokered deposits allow the Company to seek additional funding by attracting deposits from outside the Company's core market. The Company's investment policy limits the amount of brokered deposits to 15% of total assets.
The Company's growth in deposits and the shift in the mix of deposits in 2020 and 2019 were due in part to expansion of the Company's cash management services and increased efforts in seeking deposits from existing customer relationships. A rise in interest rates could cause a shift from core deposit accounts to certificate of deposit accounts with longer maturities. Generally, the rates paid on certificates of deposit are higher than those paid on core deposit accounts.
The following table sets forth the distribution of the average balances of the Company's deposit accounts for the years indicated and the weighted average interest rates on each category of deposits presented. Averages for the years presented are based on daily balances.
Year Ended December 31,
2020 2019 2018
Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate Average
Balance Percent
of Total
Average
Deposits Weighted
Average
Rate
(Dollars in Thousands)
Core deposits:
Non-interest-bearing demand checking accounts $ 1,451,556 22.5 % - % $ 1,070,859 18.9 % - % $ 997,179 19.3 % - %
NOW accounts 408,374 6.3 % 0.12 % 339,275 6.0 % 0.13 % 340,194 6.6 % 0.08 %
Savings accounts 670,217 10.4 % 0.22 % 608,022 10.7 % 0.48 % 618,674 12.0 % 0.29 %
Money market accounts 1,817,085 28.2 % 0.52 % 1,682,676 29.7 % 1.26 % 1,715,057 33.1 % 0.90 %
Total core deposits 4,347,232 67.5 % 0.40 % 3,700,832 65.4 % 0.66 % 3,671,104 71.0 % 0.48 %
Certificate of deposit accounts 1,577,104 24.5 % 1.92 % 1,611,389 28.5 % 2.25 % 1,191,970 23.1 % 1.60 %
Brokered deposit accounts $ 512,803 8.0 % 1.28 % $ 344,961 6.1 % 2.54 % $ 305,503 5.9 % 1.80 %
Total deposits $ 6,437,139 100.0 % 0.75 % $ 5,657,182 100.0 % 1.23 % $ 5,168,577 100.0 % 0.81 %
As of December 31, 2020 and 2019, the Company had outstanding certificate of deposit of $100,000 or more, maturing as follows:
At December 31,
2020 2019
Amount Weighted
Average Rate Amount Weighted
Average Rate
(Dollars in Thousands)
Maturity period:
Six months or less $ 459,828 1.63 % $ 410,973 2.25 %
Over six months through 12 months 302,576 1.15 % 338,578 2.36 %
Over 12 months 154,343 1.83 % 373,632 2.48 %
Total certificate of deposit of $100,000 or more $ 916,747 1.51 % $ 1,123,183 2.36 %
Borrowed Funds
The following table sets forth certain information regarding FHLBB advances, subordinated debentures and notes and other borrowed funds for the periods indicated:
Year Ended December 31,
2020 2019 2018
(Dollars in Thousands)
Borrowed funds:
Average balance outstanding $ 1,033,643 $ 920,385 $ 1,075,446
Maximum amount outstanding at any month end during the year 1,406,669 987,835 1,208,920
Balance outstanding at end of year 820,247 902,749 920,542
Weighted average interest rate for the period 1.73 % 2.65 % 2.22 %
Weighted average interest rate at end of period 1.51 % 2.53 % 2.55 %
Advances from the FHLBB
On a long-term basis, the Company intends to continue to increase its core deposits. The Company also uses FHLBB borrowings and other wholesale borrowings as part of the Company's overall strategy to fund loan growth and manage interest-rate risk and liquidity. The advances are secured by a blanket security agreement which requires the Banks to maintain certain qualifying assets as collateral, principally mortgage loans and securities in an aggregate amount at least equal to outstanding advances. The maximum amount that the FHLBB will advance to member institutions, including the Company, fluctuates from
time to time in accordance with the policies of the FHLBB. The Company may also borrow from the FRB's "discount window" as necessary.
FHLBB borrowings decreased by $109.6 million to $648.8 million as of December 31, 2020 from the December 31, 2019 balance of $758.5 million. The decrease in FHLBB borrowings was primarily due to maturing advances from the FHLBB.
Other Borrowed Funds
In addition to advances from the FHLBB and subordinated debentures and notes, the Company utilizes other funding
sources as part of the overall liquidity strategy. Those funding sources include repurchase agreements, committed and uncommitted lines of credit with several financial institutions.
The Company periodically enters into repurchase agreements with its larger deposit and commercial customers as part of its cash management services which are typically overnight borrowings. Repurchase agreements with customers increased
$15.0 million to $57.7 million as of December 31, 2020 from $42.7 million as of December 31, 2019.
The Company has access to a $12.0 million committed line of credit as of December 31, 2020. As of December 31, 2020 and December 31, 2019, the Company did not have any borrowings on this committed line of credit outstanding.
The Banks also have access to funding through several uncommitted lines of credit of $865.0 million. As of
December 31, 2020, the Company had $30.0 million in borrowings on outstanding uncommitted lines as compared to December 31, 2019, when the Company had $18.0 million borrowings on outstanding uncommitted lines.
Subordinated Debentures and Notes
In connection with the acquisition of Bancorp Rhode Island, Inc., the Company assumed three subordinated debentures issued by a subsidiary of Bancorp Rhode Island, Inc.
On September 15, 2014, the Company offered $75.0 million of 6.0% fixed-to-floating subordinated notes due September
15, 2029. The Company is obligated to pay 6.0% interest semiannually between September 2014 and September 2024. Subsequently, the Company is obligated to pay 3-month LIBOR plus 3.315% quarterly until the notes mature in September 2029. As of December 31, 2020, the Company had capitalized costs of $0.9 million in relation to the issuance of these subordinated notes.
The following table summarizes the Company's subordinated debentures and notes at the dates indicated.
Carrying Amount
Issue Date Rate Maturity Date Next Call Date December 31, 2020 December 31, 2019
(Dollars in Thousands)
June 26, 2003 Variable;
3-month LIBOR + 3.10% June 26, 2033 March 25, 2021 $ 4,848 $ 4,826
March 17, 2004 Variable;
3-month LIBOR + 2.79% March 17, 2034 March 16, 2021 4,772 4,739
September 15, 2014 6.0% Fixed-to-Variable;
3-month LIBOR + 3.315% September 15, 2029 September 15, 2024 74,126 74,026
Total $ 83,746 $ 83,591
Derivative Financial Instruments
The Company has entered into loan level derivatives, risk participation agreements, and foreign exchange contracts with certain commercial customers and concurrently enters into offsetting swaps with third-party financial institutions. The Company may also, from time to time, enter into risk participation agreements. The Company uses interest rate futures that are designated and qualify as cash flow hedging instruments.
The following table summarizes certain information concerning the Company's loan level derivatives, risk participation agreements, and foreign exchange contracts at December 31, 2020 and 2019:
At December 31, 2020 At December 31, 2019
(Dollars in Thousands)
Loan level derivatives (Notional Amount):
Receive fixed, pay variable $ 1,214,146 $ 1,101,193
Pay fixed, receive variable 1,214,146 1,101,193
Risk participation-out agreements 252,655 235,693
Risk participation-in agreements 60,619 55,281
Foreign exchange contracts (Notional Amount)
Buys foreign currency, sells U.S. currency $ 1,266 $ 1,125
Sells foreign currency, buys U.S. currency 1,273 1,230
Fixed weighted average interest rate from the Company to counterparty 3.07 % 3.54 %
Floating weighted average interest rate from counterparty to the Company 0.99 % 2.88 %
Weighted average remaining term to maturity (in months) 85 91
Fair value:
Recognized as an asset:
Interest rate derivatives $ 8 $ -
Loan level derivatives 131,328 59,365
Risk participation-out agreements 1,843 1,229
Foreign exchange contracts 156 54
Recognized as a liability:
Loan level derivatives $ 131,328 $ 59,365
Risk participation-in agreements 361 283
Foreign exchange contracts 148 53
Stockholders' Equity and Dividends
The Company's total stockholders' equity was $941.8 million as of December 31, 2020, representing a $3.8 million decrease compared to $945.6 million at December 31, 2019. The decrease primarily reflects dividends paid by the Company of $36.4 million for the twelve months ended December 31, 2020, a reduction of $20.0 million due to repurchase shares of treasury stock, and $11.5 million due to the implementation of CECL, partially offset by net income attributable to the Company of $47.6 million, and unrealized gain on securities available-for-sale of $14.2 million.
For the year ended December 31, 2020, the dividend payout ratio was 76.4%, compared to 40.0% for the year ended December 31, 2019. The dividends paid in the fourth quarter of 2020 represented the Company's 87th consecutive quarter of dividend payments. The Company's quarterly dividend distribution was $0.115 per share for each quarter of 2020.
On December 4, 2019, the Company's Board of Directors approved a stock repurchase program (the "2020 Stock Repurchase Plan") authorizing management to repurchase up to $10.0 million of the Company’s common stock over a period of twelve months commencing on January 1, 2020. On March 9, 2020, the Board of Directors approved an increase in the repurchase amount of $10.0 million bringing the total authorized amount to $20.0 million. Effective March 24, 2020, the Company suspended the 2020 Stock Repurchase Plan. On October 28, 2020, the Board of Directors authorized the resumption of the 2020 Stock Repurchase Plan. As of December 31, 2020, the Company repurchased 1,715,730 shares at a weighted average price of $11.66.
Stockholders' equity represented 10.53% of total assets as of December 31, 2020 and 12.04% of total assets as of December 31, 2019. Tangible stockholders' equity (total stockholders' equity less goodwill and identified intangible assets, net) represented 8.86% of tangible assets (total assets less goodwill and identified intangible assets, net) as of December 31, 2020 and 10.15% as of December 31, 2019.
Results of Operations
The primary drivers of the Company's net income are net interest income, which is strongly affected by the net yield on and growth of interest-earning assets and liabilities ("net interest margin"), the quality of the Company's assets, its levels of non-interest income and non-interest expense, and its tax provision.
The Company's net interest income represents the difference between interest income earned on its investments, loans and leases, and its cost of funds. Interest income is dependent on the amount of interest-earning assets outstanding during the period and the yield earned thereon. Cost of funds is a function of the average amount of deposits and borrowed money outstanding during the year and the interest rates paid thereon. The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The increases or decreases, as applicable, in the components of interest income and interest expense, expressed in terms of fluctuation in average volume and rate, are summarized under "Rate/Volume Analysis" below. Information as to the components of interest income, interest expense and average rates is provided under "Average Balances, Net Interest Income, Interest-Rate Spread and Net Interest Margin" below.
Because the Company's assets and liabilities are not identical in duration and in repricing dates, the differential between the two is vulnerable to changes in market interest rates as well as the overall shape of the yield curve. These vulnerabilities are inherent to the business of banking and are commonly referred to as "interest-rate risk." How interest-rate risk is measured and, once measured, how much interest-rate risk is taken are based on numerous assumptions and other subjective judgments. See the discussion in the "Measuring Interest-Rate Risk" section of Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" below.
The quality of the Company's assets also influences its earnings. Loans and leases that are not paid on a timely basis and exhibit other weaknesses can result in the loss of principal and/or interest income. Additionally, the Company must make timely provisions to the allowance for loan and lease losses based on estimates of probable losses inherent in the loan and lease portfolio. These additions, which are charged against earnings, are necessarily greater when greater probable losses are expected. Further, the Company incurs expenses as a result of resolving troubled assets. These variables reflect the "credit risk" that the Company takes on in the ordinary course of business and are further discussed under "Financial Condition-Asset Quality" above.
Average Balances, Net Interest Income, Interest-Rate Spread and Net Interest Margin
The following table sets forth information about the Company's average balances, interest income and interest rates earned on average interest-earning assets, interest expense and interest rates paid on average interest-bearing liabilities, interest-rate spread and net interest margin for the years ended December 31, 2020, 2019 and 2018. Average balances are derived from daily average balances and yields include fees, costs and purchase-accounting-related premiums and discounts which are considered adjustments to coupon yields in accordance with GAAP. Certain amounts previously reported have been reclassified to conform to the current presentation.
Year Ended December 31,
2020 2019 2018
Average
Balance Interest (1) Average
Yield/
Cost Average
Balance Interest (1) Average
Yield/
Cost Average
Balance Interest (1) Average
Yield/
Cost
(Dollars in Thousands)
Assets:
Interest-earning assets:
Debt securities $ 750,689 $ 13,823 1.84 % $ 585,360 $ 12,483 2.13 % $ 653,652 $ 14,174 2.17 %
Marketable and restricted equity securities 61,873 2,862 4.63 % 59,751 3,516 5.88 % 67,640 3,973 5.88 %
Short-term investments 186,617 413 0.22 % 71,090 1,523 2.14 % 38,437 700 1.82 %
Total investments 999,179 17,098 1.71 % 716,201 17,522 2.45 % 759,729 18,847 2.48 %
Commercial real estate loans (2)
3,781,201 148,438 3.86 % 3,492,848 164,082 4.63 % 3,235,101 146,147 4.46 %
Commercial loans (2)
1,140,699 41,391 3.57 % 817,347 39,839 4.81 % 813,815 37,616 4.56 %
Equipment financing (2)
1,074,561 75,563 7.03 % 1,012,698 74,066 7.31 % 919,047 63,968 6.96 %
Residential mortgage loans (2)
810,855 31,392 3.87 % 783,556 32,926 4.20 % 746,372 29,773 3.99 %
Other consumer loans (2)
402,672 13,255 3.28 % 414,730 19,835 4.78 % 401,425 18,216 4.53 %
Total loans and leases 7,209,988 310,039 4.30 % 6,521,179 330,748 5.07 % 6,115,760 295,720 4.84 %
Total interest-earning assets 8,209,167 327,137 3.99 % 7,237,380 348,270 4.81 % 6,875,489 314,567 4.58 %
Allowance for loan and lease losses (105,824) (58,871) (59,154)
Non-interest-earning assets 580,226 476,125 406,746
Total assets $ 8,683,569 $ 7,654,634 $ 7,223,081
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW accounts $ 408,374 484 0.12 % $ 339,275 436 0.13 % $ 340,194 283 0.08 %
Savings accounts 670,217 1,503 0.22 % 608,022 2,900 0.48 % 618,674 1,804 0.29 %
Money market accounts 1,817,085 9,519 0.52 % 1,682,676 21,206 1.26 % 1,715,057 15,369 0.90 %
Certificate of deposit accounts 1,577,104 30,355 1.92 % 1,611,389 36,326 2.25 % 1,191,970 19,017 1.60 %
Brokered deposit accounts 512,803 6,565 1.28 % 344,961 8,747 2.54 % 305,503 5,505 1.80 %
Total interest-bearing deposits (3)
4,985,583 48,426 0.97 % 4,586,323 69,615 1.52 % 4,171,398 41,978 1.01 %
Advances from the FHLBB 859,389 12,842 1.47 % 757,598 18,701 2.43 % 946,017 18,650 1.94 %
Subordinated debentures and notes 83,667 5,038 6.02 % 83,511 5,206 6.23 % 83,350 5,181 6.22 %
Other borrowed funds 90,587 348 0.38 % 79,276 804 1.01 % 46,079 385 0.83 %
Total borrowed funds 1,033,643 18,228 1.73 % 920,385 24,711 2.65 % 1,075,446 24,216 2.22 %
Total interest-bearing liabilities 6,019,226 66,654 1.11 % 5,506,708 94,326 1.71 % 5,246,844 66,194 1.26 %
Non-interest-bearing liabilities:
Non-interest-bearing demand checking accounts (3)
1,451,556 1,070,859 997,179
Other non-interest-bearing liabilities 276,712 159,690 96,560
Total liabilities 7,747,494 6,737,257 6,340,583
Brookline Bancorp, Inc. stockholders' equity 936,075 917,286 873,388
Noncontrolling interest in subsidiary - 91 9,110
Total liabilities and equity $ 8,683,569 $ 7,654,634 $ 7,223,081
Net interest income (tax-equivalent basis) / Interest-rate spread (4)
260,483 2.88 % 253,944 3.10 % 248,373 3.32 %
Less adjustment of tax-exempt income 320 644 674
Net interest income $ 260,163 $ 253,300 $ 247,699
Net interest margin (5)
3.17 % 3.51 % 3.61 %
_________________________________________________________________________
(1) Tax-exempt income on debt securities, equity securities and industrial revenue bonds are included in commercial real estate loans on a tax-equivalent basis.
(2) Loans on nonaccrual status are included in the average balances.
(3) Including non-interest-bearing checking accounts, the average interest rate on total deposits was 0.75%, 1.23% and 0.81% in the years ended December 31, 2020, 2019 and 2018, respectively.
(4) Interest-rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income (tax equivalent basis) divided by average interest-earning assets.
See "Comparison of Years Ended December 31, 2020 and December 31, 2019" and "Comparison of Years Ended December 31, 2019 and December 31, 2018" below for a discussion of average assets and liabilities, net interest income, interest-rate spread and net interest margin.
Rate/Volume Analysis
The following table presents, on a tax-equivalent basis, the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
Year Ended
December 31, 2020
Compared to Year Ended
December 31, 2019 Year Ended
December 31, 2019
Compared to Year Ended
December 31, 2018
Increase
(Decrease) Due To Increase
(Decrease) Due To
Volume Rate Net Change Volume Rate Net Change
(In Thousands)
Interest and dividend income:
Investments:
Debt securities $ 3,195 $ (1,855) $ 1,340 $ (1,437) $ (254) $ (1,691)
Marketable and restricted equity securities 120 (774) (654) (457) - (457)
Short-term investments 1,044 (2,154) (1,110) 682 141 823
Total investments 4,359 (4,783) (424) (1,212) (113) (1,325)
Loans and leases:
Commercial real estate loans 12,654 (28,298) (15,644) 12,131 5,804 17,935
Commercial loans and leases 13,212 (11,660) 1,552 163 2,060 2,223
Equipment financing 4,406 (2,909) 1,497 6,761 3,337 10,098
Residential mortgage loans 1,117 (2,651) (1,534) 1,533 1,620 3,153
Other consumer loans (558) (6,022) (6,580) 607 1,012 1,619
Total loans 30,831 (51,540) (20,709) 21,195 13,833 35,028
Total change in interest and dividend income 35,190 (56,323) (21,133) 19,983 13,720 33,703
Interest expense:
Deposits:
NOW accounts 84 (36) 48 (1) 154 153
Savings accounts 280 (1,677) (1,397) (32) 1,128 1,096
Money market accounts 1,582 (13,269) (11,687) (293) 6,130 5,837
Certificate of deposit accounts (756) (5,215) (5,971) 8,034 9,275 17,309
Brokered deposit accounts 3,224 (5,406) (2,182) 775 2,467 3,242
Total deposits 4,414 (25,603) (21,189) 8,483 19,154 27,637
Borrowed funds:
Advances from the FHLBB 2,205 (8,064) (5,859) (4,065) 4,116 51
Subordinated debentures and notes 10 (178) (168) 14 11 25
Other borrowed funds 101 (557) (456) 322 97 419
Total borrowed funds 2,316 (8,799) (6,483) (3,729) 4,224 495
Total change in interest expense 6,730 (34,402) (27,672) 4,754 23,378 28,132
Change in tax-exempt income (324) - (324) (30) - (30)
Change in net interest income $ 28,784 $ (21,921) $ 6,863 $ 15,259 $ (9,658) $ 5,601
See "Comparison of Years Ended December 31, 2020 and December 31, 2019" and "Comparison of Years Ended December 31, 2019 and December 31, 2018" below for a discussion of changes in interest income, interest-rate spread and net interest margin resulting from changes in rates and volumes.
Comparison of Years Ended December 31, 2020 and December 31, 2019
Net Interest Income
Net interest income increased $6.9 million to $260.2 million for the year ended December 31, 2020 from $253.3 million for the year ended December 31, 2019. The increase year over year reflects a $20.5 million decrease in interest income on loans and leases, partially offset by a $1.5 million increase in interest income on debt securities and a $27.7 million decrease in interest expense on deposit and borrowings, which is reflective of the sustained, low interest rate environment being offset by balance sheet growth and income from participation in the Paycheck Protection Program.
Net interest margin decreased by 34 basis points to 3.17% in 2020 from 3.51% in 2019. The Company's weighted average interest rate on loans (prior to purchase accounting adjustments) decreased to 4.30% for the year ended December 31, 2020 from 5.07% for the year ended December 31, 2019. Interest amortization and accretion on acquired loans totaled $0.3 million and did not impact 2020 loan yields, compared to $0.6 million and 1 basis point in 2019. The decrease in net interest margin over the period is a result of the Company's asset sensitive positioning as interest rates fell to sustained, low levels.
The yield on interest-earning assets decreased to 3.99% for the year ended December 31, 2020 from 4.81% for the year ended December 31, 2019. This decrease is the result of lower yields on loans and leases. During the year ended December 31, 2020, the Company recorded $4.5 million in prepayment penalties and late charges, which contributed 5 basis points to yields on interest-earning assets in the year ended December 31, 2020 compared to $5.0 million, or 7 basis points, for the year ended December 31, 2019.
The overall cost of funds (including non-interest-bearing demand checking accounts) decreased 60 basis points to 1.11% for the year ended December 31, 2020 from 1.71% for the year ended December 31, 2019. Refer to "Financial Condition - Borrowed Funds" above for more details.
Management seeks to position the balance sheet to be neutral to asset sensitive to changes in interest rates. From 2017 through 2019, short term interest rates rose while at the same time net interest income, net interest spread, and net interest margin also increased. During 2020, interest rates declined sharply in response to the economic impact of the COVID-19 pandemic. In general, the Company's balance sheet position should respond positively in a rising interest rate environment and when the rate curves are steepening, which should result in a positive impact to net interest income, net interest spread, and the net interest margin. A declining interest rate or flattening yield curve environment is expected to have a negative impact on the Company's yields and net interest margin. Due to, among other things, ongoing pricing pressures in the loan and deposit portfolios, net interest income may also be negatively affected by changes in the amount of accretion on acquired loans and leases, deposits and borrowed funds, which is included in interest income and interest expense, respectively.
Interest Income-Loans and Leases
Year Ended
December 31, Dollar
Change Percent
Change
2020 2019
(Dollars in Thousands)
Interest income-loans and leases:
Commercial real estate loans $ 148,438 $ 164,082 $ (15,644) (9.5) %
Commercial loans 41,150 39,436 1,714 4.3 %
Equipment financing 75,563 74,066 1,497 2.0 %
Residential mortgage loans 31,392 32,926 (1,534) (4.7) %
Other consumer loans 13,255 19,835 (6,580) (33.2) %
Total interest income-loans and leases $ 309,798 $ 330,345 $ (20,547) (6.2) %
Interest income from loans and leases was $309.8 million for 2020, and represented a yield on total loans of 4.30%. This compares to $330.3 million of interest on loans and a yield of 5.07% for 2019. This $20.5 million decrease in interest income from loans and leases was attributable to an increase in the origination volume of $30.8 million and a decrease of $51.5 million due to the changes in interest rates.
Interest Income-Investments
Year Ended
December 31, Dollar
Change Percent
Change
2020 2019
(Dollars in Thousands)
Interest income-investments:
Debt securities $ 13,758 $ 12,281 $ 1,477 12.0 %
Marketable and restricted equity securities 2,848 3,477 (629) (18.1) %
Short-term investments 413 1,523 (1,110) (72.9) %
Total interest income-investments $ 17,019 $ 17,281 $ (262) (1.5) %
Total investment income was $17.0 million for the year ended December 31, 2020 compared to $17.3 million for the year ended December 31, 2019. As of December 31, 2020, the yield on total investments was 1.71% as compared to 2.45% as of December 31, 2019. This year over year decrease in total investment income of $0.3 million, or 1.5%, was driven by a $4.7 million decrease due to rates and a $4.4 million increase due to volume.
Interest Expense-Deposits and Borrowed Funds
Year Ended
December 31, Dollar
Change Percent
Change
2020 2019
(Dollars in Thousands)
Interest expense:
Deposits:
NOW accounts $ 484 $ 436 $ 48 11.0 %
Savings accounts 1,503 2,900 (1,397) (48.2) %
Money market accounts 9,519 21,206 (11,687) (55.1) %
Certificate of deposit accounts 30,355 36,326 (5,971) (16.4) %
Brokered deposit accounts 6,565 8,747 (2,182) (24.9) %
Total interest expense-deposits 48,426 69,615 (21,189) (30.4) %
Borrowed funds:
Advances from the FHLBB 12,842 18,701 (5,859) (31.3) %
Subordinated debentures and notes 5,038 5,206 (168) (3.2) %
Other borrowed funds 348 804 (456) (56.7) %
Total interest expense-borrowed funds 18,228 24,711 (6,483) (26.2) %
Total interest expense $ 66,654 $ 94,326 $ (27,672) (29.3) %
Deposits
In 2020, interest paid on deposits decreased $21.2 million, or 30.4%, as compared to 2019. The decrease in interest expense on deposits was driven by a decrease of $25.6 million due to lower in interest rates, partially offset by an increase of $4.4 million due to the growth in deposits. Purchase accounting amortization on acquired deposits for the year ended December 31, 2020 was $44.0 thousand, compared to $382.0 thousand for the year ended December 31, 2019. Purchase accounting amortization had no impact on the Company's net interest margin in 2020, compared to 1 basis point in 2019.
Borrowed Funds
As of December 31, 2020, the Company's borrowed funds include: $648.8 million in FHLBB advances, $83.7 million in subordinated debentures and notes, and $87.7 million in other borrowed funds. In 2020, the average balance of FHLBB advances increased $101.8 million, or 13.4%, while the average balance of subordinated debentures and notes increased $0.2 million, or 0.2%. The average balance of other borrowed funds, which includes repurchase agreements, increased $11.3 million, or 14.3%, for the year ended December 31, 2020.
During the year ended December 31, 2020, interest paid on borrowed funds decreased $6.5 million, or 26.2% year over year. The cost of borrowed funds decreased to 1.73% for the year ended December 31, 2020 from 2.65% for the year ended December 31, 2019. The decrease in interest expense was driven by a decrease of $8.8 million due to borrowing rates, partially offset by an increase of $2.3 million due to volume. For the years ended December 31, 2020, there was purchase accounting
accretion of $54.0 thousand compared to accretion of $58.0 thousand for the year ended December 31, 2019 . Purchase accounting accretion had no impact on the Company's net interest margin.
Provision for Credit Losses
The provisions for credit losses are set forth below:
Total
Year Ended
December 31,
2020 2019
(In Thousands)
Provision for credit losses:
Commercial real estate $ 41,573 $ 2,098
Commercial 17,050 6,766
Consumer 1,003 697
Total provision for loan and lease losses 59,626 9,561
Unfunded credit commitments 2,260 22
Total provision for credit losses $ 61,886 $ 9,583
For the year ended December 31, 2020, the provision for credit losses increased $52.3 million, to $61.9 million from $9.6 million for the year ended December 31, 2019. The increase in the provision for credit losses for the year ended December 31, 2020 was primarily driven by changes in macroeconomic forecasts surrounding the COVID-19 pandemic. The latest available economic forecasts were used in the loss models which reflected the immediate and longer term effects of the COVID-19 pandemic onto the Company's allowance for credit losses.
See management’s discussion of “Financial Condition - Allowance for Loan and Lease Losses” and Note 7, “Allowance for Credit Losses,” to the unaudited consolidated financial statements for a description of how management determined the allowance for loan and lease losses for each portfolio and class of loans.
Non-Interest Income
The following table sets forth the components of non-interest income:
Year Ended
December 31, Dollar
Change Percent
Change
2020 2019
(Dollars in Thousands)
Deposit fees $ 9,050 $ 10,623 $ (1,573) (14.8) %
Loan fees 2,048 2,097 (49) (2.3) %
Loan level derivative income, net 4,268 8,262 (3,994) (48.3) %
Gain on sales of investment securities, net 1,970 508 1,462 287.8 %
Gain on sales of loans and leases held-for-sale 1,118 1,709 (591) (34.6) %
Other 6,190 6,594 (404) (6.1) %
Total non-interest income $ 24,644 $ 29,793 $ (5,149) (17.3) %
For the year ended December 31, 2020, non-interest income decreased $5.1 million, or 17.3%, to $24.6 million as compared to $29.8 million for the same period in 2019. The decrease was primarily driven by decreases of $4.0 million in loan level derivative income, net, $1.6 million in deposit fees, $0.6 million in gain on sales of loans and leases, and $0.4 million in other income, partially offset by an increase of $1.5 million in gain on sales of investment securities.
Loan level derivative income decreased $4.0 million, or 48.3%, to $4.3 million for the year ended December 31, 2020 from $8.3 million for the same period in 2019, primarily driven by lower volume in loan level derivatives transactions completed in 2020.
Deposit fees decreased $1.6 million, or 14.8%, to $9.1 million for the year ended December 31, 2020 from $10.6 million for the same period in 2019, primarily driven by lower insufficient funds fees (NSF), account service fees, non-customer ATM income, debit card fees, as well as ATM fees.
Gain on sales of investment securities increased $1.5 million, or 287.8%, to $2.0 million for the year ended December 31, 2020 from $0.5 million for the same period in 2019, primarily driven by investment securities sold in 2020, partially offset by a change in market value on equity securities held for trading.
Gain on sales of loans and leases held-for-sale decreased $0.6 million, or 34.6%, to $1.1 million for the year ended December 31, 2020 from $1.7 million for the same period in 2019, primarily driven by a decrease in loan sale volume with servicing released and servicing retained.
Other income decreased $0.4 million, or 6.1%, to $6.2 million for the year ended December 31, 2020 from $6.6 million for the same period in 2019, primarily driven by lower gain on interest rate derivatives, other income, rental income and 1031 exchange income, offset by higher foreign exchange outgoing wire income.
Non-Interest Expense
The following table sets forth the components of non-interest expense:
Year Ended
December 31, Dollar
Change Percent
Change
2020 2019
(Dollars in Thousands)
Compensation and employee benefits $ 100,985 $ 96,554 $ 4,431 4.6 %
Occupancy 15,386 15,696 (310) (2.0) %
Equipment and data processing 17,345 18,652 (1,307) (7.0) %
Professional services 5,157 4,366 791 18.1 %
FDIC insurance 4,229 1,445 2,784 192.7 %
Advertising and marketing 4,126 4,044 82 2.0 %
Amortization of identified intangible assets 1,271 1,663 (392) (23.6) %
Merger and acquisition expense - 1,125 (1,125) (100.0) %
Other 12,345 13,936 (1,591) (11.4) %
Total non-interest expense $ 160,844 $ 157,481 $ 3,363 2.1 %
For the year ended December 31, 2020, non-interest expense increased $3.4 million, or 2.1%, to $160.8 million as compared to $157.5 million for the same period in 2019. The increase was primarily driven by increases of $4.4 million in compensation and employee benefits expense and $2.8 million in FDIC insurance, partially offset by decreases of $1.6 million in other expenses, $1.3 million in equipment and data processing, and $1.1 million in merger and acquisition expense.
The efficiency ratio increased to 56.47% for the year ended December 31, 2020 from 55.63% for the same period in 2019. The increase year over year was primarily driven by higher non- interest expense and net interest income, offset by lower non-interest income in 2020.
Compensation and employee benefits expense increased $4.4 million, or 4.6%, to $101.0 million for the year ended December 31, 2020 from $96.6 million for the same period in 2019. The increase was primarily driven by increases in employee headcount, annual merit increases and bonuses, and health care benefits.
FDIC insurance expense increased $2.8 million, or 192.7%, to $4.2 million for the year ended December 31, 2020 from $1.4 million for the same period in 2019. The increase was primarily driven by bank assessment fees from the FDIC.
Other expenses decreased $1.6 million, or 11.4%, to $12.3 million for the year ended December 31, 2020 from $13.9 million for the same period in 2019. The decrease was primarily driven by lower travel and accommodation expenses, other real estate owned (OREO) expenses, employee and business meal expenses, correspondent bank fees, entertainment expenses, and recording and filing fees, partially offset by higher customer losses and charge offs.
Equipment and data processing decreased $1.3 million, or 7.0%, to $17.3 million for the year ended December 31, 2020 from $18.7 million for the same period in 2019. The decrease was primarily driven by lower purchased software depreciation, data communication expenses, core processing, and ATM processing, partially offset by higher software licenses and subscriptions.
Merger and acquisition expense decreased $1.1 million, or 100.0%, to zero for the year ended December 31, 2020 from $1.1 million for the same period in 2019, due to the merger of First Ipswich Bank into Brookline Bank.
Provision for Income Taxes
Year Ended
December 31, Dollar
Change Percent
Change
2020 2019
(Dollars in Thousands)
Income before provision for income taxes $ 62,077 $ 116,029 $ (53,952) (46.5) %
Provision for income taxes 14,442 28,269 (13,827) (48.9) %
Net income, before non-controlling interest in subsidiary $ 47,635 $ 87,760 $ (40,125) (45.7) %
Effective tax rate 23.3 % 24.4 % N/A (4.5) %
The Company recorded income tax expense of $14.4 million for 2020, compared to $28.3 million for 2019. This represents an effective tax rate of 23.3% and 24.4% for 2020 and 2019, respectively. The decrease in the Company's income before provision for income taxes was primarily driven by impacts of the COVID-19 pandemic.
Comparison of Years Ended December 31, 2019 and December 31, 2018
Net Interest Income
Net interest income increased $5.6 million to $253.3 million for the year ended December 31, 2019 from $247.7 million for the year ended December 31, 2018. The increase year over year reflects a $35.1 million increase in interest income on loans and leases, partially offset by a $1.7 million decrease in interest income on debt securities and a $28.1 million increase in interest expense on deposit and borrowings, which is reflective of the various portfolios repricing and replacing balances into the current interest rate environment.
Net interest margin decreased by 10 basis points to 3.51% in 2019 from 3.61% in 2018. The Company's weighted average interest rate on loans (prior to purchase accounting adjustments) increased to 5.07% for the year ended December 31, 2019 from 4.84% for the year ended December 31, 2018. Interest amortization and accretion on acquired loans totaled $0.6 million and contributed 1 basis point to 2019 loan yields, compared to $0.7 million and 1 basis point in 2018. The decrease in net interest margin over the period is a result of most asset categories being fully repriced into the current rate environment, while deposit costs continue to rise due to market competition and shifting demand for non- maturity versus time deposits.
The yield on interest-earning assets increased to 4.81% for the year ended December 31, 2019 from 4.58% for the year ended December 31, 2018. This increase is the result of higher yields on loans and leases. During the year ended December 31, 2019, the Company recorded $5.0 million in prepayment penalties and late charges, which contributed 7 basis points to yields on interest-earning assets in the year ended December 31, 2019 compared to $3.5 million, or 5 basis points, for the year ended December 31, 2018.
The overall cost of funds (including non-interest-bearing demand checking accounts) increased 45 basis points to 1.71% for the year ended December 31, 2019 from 1.26% for the year ended December 31, 2018. Refer to "Financial Condition - Borrowed Funds" above for more details.
Management seeks to position the balance sheet to be neutral to asset sensitive to changes in interest rates. In general, the Company's balance sheet position should respond positively in a rising interest rate environment and when the rate curves are steepening which should result in a positive impact to net interest income, net interest spread, and the net interest margin. A declining interest rate or flattening yield curve environment is expected to have a negative impact on the Company's yields and net interest margin. Additional risk factors include, but are not limited to, ongoing pricing pressures in both the loan and deposit portfolios, the ability to increase the Company's core deposits, decrease its loan-to-deposit ratio, and decrease its reliance on FHLBB advances. Net interest income may also be negatively affected by changes in the amount of accretion on acquired loans and leases, deposits and borrowed funds, which are included in interest income and interest expense, respectively.
Interest Income-Loans and Leases
Year Ended
December 31, Dollar
Change Percent
Change
2019 2018
(Dollars in Thousands)
Interest income-loans and leases:
Commercial real estate loans $ 164,082 $ 146,146 $ 17,936 12.3 %
Commercial loans 39,436 37,166 $ 2,270 6.1 %
Equipment financing 74,066 63,968 $ 10,098 15.8 %
Residential mortgage loans 32,926 29,773 $ 3,153 10.6 %
Other consumer loans 19,835 18,216 1,619 8.9 %
Total interest income-loans and leases $ 330,345 $ 295,269 $ 35,076 11.9 %
Interest income from loans and leases was $330.3 million for 2019, and represented a yield on total loans of 5.07%. This compares to $295.3 million of interest on loans and a yield of 4.84% for 2018. This $35.1 million increase in interest income from loans and leases was attributable to an increased in the origination volume of $21.2 million and an increase of $13.8 million due to the changes in interest rates.
Interest Income-Investments
Year Ended
December 31, Dollar
Change Percent
Change
2019 2018
(Dollars in Thousands)
Interest income-investments:
Debt securities $ 12,281 $ 13,960 $ (1,679) (12.0) %
Held-for-trading and restricted equity securities 3,477 3,964 (487) (12.3) %
Short-term investments 1,523 700 823 117.6 %
Total interest income-investments $ 17,281 $ 18,624 $ (1,343) (7.2) %
Total investment income was $17.3 million for the year ended December 31, 2019 compared to $18.6 million for the year ended December 31, 2018. As of December 31, 2019, the yield on total investments was 2.45% as compared to 2.48% as of December 31, 2018. This year over year decrease in total investment income of $1.3 million, or 7.2%, was driven by a $0.1 million decrease due to rates and a $1.2 million decrease due to volume.
Interest Expense-Deposits and Borrowed Funds
Year Ended
December 31, Dollar
Change Percent
Change
2019 2018
(Dollars in Thousands)
Interest expense:
Deposits:
NOW accounts $ 436 $ 283 $ 153 54.1 %
Savings accounts 2,900 1,804 1,096 60.8 %
Money market accounts 21,206 15,369 5,837 38.0 %
Certificate of deposit accounts 36,326 19,017 17,309 91.0 %
Brokered deposit accounts 8,747 5,505 3,242 58.9 %
Total interest expense-deposits 69,615 41,978 27,637 65.8 %
Borrowed funds:
Advances from the FHLBB 18,701 18,650 51 0.3 %
Subordinated debentures and notes 5,206 5,181 25 0.5 %
Other borrowed funds 804 385 419 108.8 %
Total interest expense-borrowed funds 24,711 24,216 495 2.0 %
Total interest expense $ 94,326 $ 66,194 $ 28,132 42.5 %
Deposits
In 2019, interest paid on deposits increased $27.6 million, or 65.8%, as compared to 2018. Interest expense increased $19.1 million due to an increase in interest rates and $8.6 million due to the growth in deposits. Purchase accounting amortization on acquired deposits for the year ended December 31, 2019 was $0.4 million, compared to $0.8 million for the year ended December 31, 2018. Purchase accounting amortization impacted the Company's net interest margin by 1 basis point in 2019, compared to 1 basis point in 2018.
Borrowed Funds
As of December 31, 2019, the Company's borrowed funds include: $758.5 million in FHLBB advances, $83.6 million in subordinated debentures and notes, and $60.7 million in other borrowed funds. In 2019, the average balance of FHLBB advances decreased $188.4 million, or 19.9%, while the average balance of subordinated debentures and notes increased $0.2 million, or 0.2%. Other borrowed funds, which include repurchase agreements, increased $33.2 million, or 72.0%, for the year ended December 31, 2019.
During the year ended December 31, 2019, interest paid on borrowed funds increased $0.5 million, or 2.0% year over year, primarily driven by an increase in other borrowed funds. The cost of borrowed funds was 2.65% for the year ended December 31, 2019 as compared to 2.22% for the year ended December 31, 2018. This change was driven by an increase of $4.2 million due to borrowing rates, partially offset by a decrease of $3.7 million in interest expense due to volume. For the years ended December 31, 2019 and December 31, 2018, the purchase accounting accretion on acquired borrowed funds was $0.1 million which had no impact on the Company's net interest margin.
Provision for Credit Losses
The provisions for credit losses are set forth below:
Originated Acquired Total
Year Ended
December 31, Year Ended
December 31, Year Ended
December 31,
2019 2018 2019 2018 2019 2018
(Dollars in Thousands)
Provision for loan and lease losses:
Commercial real estate $ 1,798 $ 254 $ 300 $ 924 $ 2,098 $ 1,178
Commercial 6,539 3,699 227 (451) 6,766 3,248
Consumer 713 556 (16) (231) 697 325
Total provision for loan and
lease losses 9,050 4,509 511 242 9,561 4,751
Unfunded credit commitments 22 200 - - 22 200
Total provision for credit losses $ 9,072 $ 4,709 $ 511 $ 242 $ 269 $ 4,951,000
For the year ended December 31, 2019, the provision for credit losses increased $4.6 million, or 93.6%, to $9.6 million from $5.0 million for the year ended December 31, 2018. The increase in the provision for credit losses for the year ended December 31, 2019 was primarily driven by an increase in the net charge-offs in equipment financing loans and the increases in reserves for loan growth and acquired loans, partially offset by decreased reserves required due to changes in historical loss factors and the decrease in specific reserves. See management's discussion in "Allowances for Credit Losses-Allowance for Loan and Lease Losses" and Note 7, "Allowance for Credit Losses," to the consolidated financial statements for a description of how management determined the allowance for loan and lease losses for each portfolio and class of loans.
The liability for unfunded credit commitments, which is included in other liabilities, was $1.9 million as of December 31, 2019 and December 31, 2018. No credit commitments were charged off against the Company's liability account for the years ended December 31, 2019 and 2018.
Non-Interest Income
The following table sets forth the components of non-interest income:
Year Ended
December 31, Dollar
Change Percent
Change
2019 2018
(Dollars in Thousands)
Deposit fees $ 10,623 $ 10,400 $ 223 2.1 %
Loan fees 2,097 1,427 670 47.0 %
Loan level derivative income, net 8,262 5,440 2,822 51.9 %
Gain on sales of investment securities, net 508 227 281 123.8 %
Gain on sales of loans and leases held-for-sale 1,709 1,883 (174) (9.2) %
Other 6,594 5,847 747 12.8 %
Total non-interest income $ 29,793 $ 25,224 $ 4,569 18.1 %
For the year ended December 31, 2019, non-interest income increased $4.6 million, or 18.1%, to $29.8 million as compared to $25.2 million the same period in 2018. This increase is primarily due to a $2.8 million increase in loan level derivative income, a $0.7 million increase in other income, and a $0.7 million increase in loan fees.
Other income increased $0.7 million, or 12.8%, to $6.6 million for the year ended December 31, 2019 from $5.8 million for the same period of 2018, primarily driven by higher derivative activity.
Loan fees increased $0.7 million, or 47.0%, to $2.1 million for the year ended December 31, 2019 from $1.4 million for the same period of 2018, primarily driven by miscellaneous fees.
Non-Interest Expense
The following table sets forth the components of non-interest expense:
Year Ended
December 31, Dollar
Change Percent
Change
2019 2018
(Dollars in Thousands)
Compensation and employee benefits $ 96,554 $ 91,535 $ 5,019 5.5 %
Occupancy 15,696 14,991 705 4.7 %
Equipment and data processing 18,652 18,213 439 2.4 %
Professional services 4,366 4,404 (38) (0.9) %
FDIC insurance 1,445 2,722 (1,277) (46.9) %
Advertising and marketing 4,044 4,016 28 0.7 %
Amortization of identified intangible assets 1,663 2,080 (417) (20.0) %
Merger and acquisition expense 1,125 3,787 (2,662) (70.3) %
Other 13,936 13,484 452 3.4 %
Total non-interest expense $ 157,481 $ 155,232 $ 2,249 1.4 %
For the year ended December 31, 2019, non-interest expense increased $2.2 million, or 1.4%, to $157.5 million as compared to $155.2 million for the same period in 2018. This increase is primarily due to a $5.0 million increase in compensation and employee benefits expense, partially offset by a decrease of $2.7 million in merger and acquisition expense, and a $1.3 million decrease in FDIC insurance expense.
The efficiency ratio decreased to 55.63% for the year ended December 31, 2019 from 56.88% for the same period in 2018. The decrease year over year was primarily driven by higher net interest income and non-interest income in 2019.
Compensation and employee benefits expense increased $5.0 million, or 5.5%, to $96.6 million for the year ended December 31, 2019 from $91.5 million for the same period in 2018. The increase was primarily driven by an increase in employee headcount and annual salary increases.
Merger and acquisition expense decreased $2.7 million, or 70.3%, to $1.1 million for the year ended December 31, 2019 from $3.8 million for the same period in 2018, due to the closing of the First Commons Bank acquisition in 2018.
FDIC insurance expense decreased $1.3 million, or 46.9%, to $1.4 million for the year ended December 31, 2019 from $2.7 million for the same period in 2018. The decrease was primarily driven by bank assessment credits from the FDIC.
Provision for Income Taxes
Year Ended
December 31, Dollar
Change Percent
Change
2019 2018
(Dollars in Thousands)
Income before provision for income taxes $ 116,029 $ 112,740 $ 3,289 2.9 %
Provision for income taxes 28,269 26,189 2,080 7.9 %
Net income, before non-controlling interest in subsidiary $ 87,760 $ 86,551 $ 1,209 1.4 %
Effective tax rate 24.4 % 23.2 % N/A 5.2 %
The Company recorded income tax expense of $28.3 million for 2019, compared to $26.2 million for 2018. This represents an effective tax rate of 24.4% and 23.2% for 2019 and 2018, respectively. The increase in the Company's effective tax rate from 2018 was primarily driven by a $0.7 million adjustment as a result of the Tax Act. Due to the Tax Act, the Company took a one-time adjustment in 2018 that lowered the effective tax rate, which was not repeated in 2019. In addition, Brookline Bank completed the purchase of the remaining interest in Eastern Funding in 2019. Tax savings of approximately $0.9 million were recognized for this portion of Eastern Funding in 2018, but not in 2019.
The Tax Act represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act took effect on January 1, 2018. The Tax Act lowered the Company’s federal tax rate from 35% in 2017 to 21% in 2018 and 2019. The Tax Act also contained other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation,
accelerated expensing of depreciable property for assets placed in service after September 27, 2017 and before 2023, limited the deductibility of net interest expense, eliminated the corporate alternative minimum tax, limited net operating loss carryforwards to 80% of taxable income and a parking disallowance related to employee parking.
Liquidity and Capital Resources
Liquidity
Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The Company further defines liquidity as the ability to respond to the needs of depositors and borrowers, as well as to earnings enhancement opportunities, in a changing marketplace. Liquidity management is monitored by an Asset/Liability Committee ("ALCO"), consisting of members of management, which is responsible for establishing and monitoring liquidity targets as well as strategies and tactics to meet these targets.
The primary source of funds for the payment of dividends and expenses by the Company are dividends paid to it by the Banks and Brookline Securities Corp. The primary sources of liquidity for the Banks consist of deposit inflows, loan repayments, borrowed funds, and maturing investment securities.
Deposits, which are considered the most stable source of liquidity, totaled $6.9 billion as of December 31, 2020 and represented 89.4% of total funding (the sum of total deposits and total borrowings), compared to deposits of $5.8 billion, or 86.6% of total funding, as of December 31, 2019. Core deposits, which consist of demand checking, NOW, savings and money market accounts, totaled $4.8 billion as of December 31, 2020 and represented 69.8% of total deposits, compared to core deposits of $3.8 billion, or 65.3% of total deposits, as of December 31, 2019. Additionally, the Company had $693.9 million of brokered deposits as of December 31, 2020, which represented 10.0% of total deposits, compared to $349.9 million or 6.0% of total deposits, as of December 31, 2019. The Company offers attractive interest rates based on market conditions to increase deposits balances, while managing cost of funds.
Borrowings are used to diversify the Company's funding mix and to support asset growth. When profitable lending and investment opportunities exist, access to borrowings provides a means to grow the balance sheet. Borrowings totaled $820.2 million as of December 31, 2020, representing 10.6% of total funding, compared to $902.7 million, or 13.4% of total funding, as of December 31, 2019.
As members of the FHLBB, the Banks have access to both short- and long-term borrowings. As of December 31, 2020, the Company's total borrowing limit from the FHLBB for advances and repurchase agreements was $1.9 billion as compared to $2.1 billion as of December 31, 2019, based on the level of qualifying collateral available for these borrowings.
As of December 31, 2020, the Banks also have access to funding through certain uncommitted lines of credit of $746.0 million. The Company had a $12.0 million committed line of credit for contingent liquidity as of December 31, 2020.
The Company has access to the Federal Reserve Bank "discount window" to supplement its liquidity. The Company has $606.6 million of borrowing capacity at the Federal Reserve Bank as of December 31, 2020. As of December 31, 2020, the Company did not have any borrowings with the Federal Reserve Bank outstanding.
Additionally, the Banks have access to liquidity through repurchase agreements and brokered deposits.
In general, the Company seeks to maintain a high degree of liquidity and targets cash, cash equivalents and investment securities available-for-sale balances of between 10% and 15% of total assets. As of December 31, 2020, cash, cash equivalents and investment securities available-for-sale totaled $1.2 billion, or 13.2% of total assets. This compares to $576.8 million, or 7.3% of total assets as of December 31, 2019.
While management believes that the Company has adequate liquidity to meet its commitments, and to fund the Banks' lending and investment activities, the availabilities of these funding sources are subject to broad economic conditions and could be restricted in the future. Such restrictions would impact the Company's immediate liquidity and/or additional liquidity needs.
Capital Resources
As of December 31, 2020 and 2019, the Company and the Banks were under the primary regulation of and required to comply with the capital requirements of the FRB. At those dates, the Company and the Banks exceeded all regulatory capital requirements and the banks were considered "well-capitalized." See details in "Supervision and Regulation" in Item 1. Refer to Note 19, "Regulatory Capital Requirements", for the Company's and the Banks' actual and required capital amounts and ratios.
Off-Balance-Sheet Arrangements
The Company is party to off-balance sheet financial instruments in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include loan commitments, standby and commercial letters of credit and loan level derivatives. According to GAAP, these financial instruments are not recorded in the financial statements until they are funded or related fees are incurred or received. The effect of such activity on the Company's financial condition and results of operations, such as recorded liability for unfunded credit commitment, is immaterial. See Note 13, "Commitments and Contingencies," to the consolidated financial statements for a description of off-balance-sheet financial instruments.
Contractual Obligations
A summary of contractual obligations by the expected payment period for the date indicated follows.
Payment Due by Period
Less Than
One Year One to
Three Years More than Three Years to
Five Years Over Five
Years Total
(In Thousands)
At December 31, 2020:
Advances from the FHLBB $ 623,611 $ 8,805 $ 5,342 $ 11,091 $ 648,849
Subordinated debentures and notes - - - 83,746 83,746
Other borrowed funds 87,652 - - - 87,652
Loan commitments (1)
1,693,999 - - - 1,693,999
Occupancy lease commitments (2)
6,077 10,066 5,557 5,064 26,764
Service provider contracts (3)
28,300 86,077 50,323 25,735 190,435
Postretirement benefit obligations (4)
515 1,778 1,721 14,925 18,939
$ 2,440,154 $ 106,726 $ 62,943 $ 140,561 $ 2,750,384
_______________________________________________________________________________
(1) These amounts represent commitments made by the Company to extend credit to borrowers as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
(2) The Company leases certain office space under various noncancellable operating leases. These leases have original terms ranging from 3 years to over 25 years. Certain leases contain renewal options and escalation clauses for real estate taxes and other expenditures which can increase rental expenses based principally on the consumer price index and fair market rental value provisions.
(3) Payments to service providers under most of the existing contracts are based on the volume of accounts served or transactions processed. Some contracts also call for higher required payments when there are increases in the Consumer Price Index. The expected payments shown in this table are based on an estimate of the number of accounts to be served or transactions to be processed, but do not include any projection of the effect of changes in the Consumer Price Index.
(4) These amounts represent commitments made by the Company for a Supplemental Executive Retirement Plan as part of the acquisition of BankRI and a Postretirement Benefits Plan, at Brookline Bank, that provides part of the annual expense of health insurance premiums for retired employees and their dependents.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Market risk is the risk that the market value or estimated fair value of the Company's assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that the Company's net income will be significantly reduced by interest-rate changes.
Interest-Rate Risk
The principal market risk facing the Company is interest-rate risk, which can occur in a variety of forms, including repricing risk, yield-curve risk, basis risk, and prepayment risk. Repricing risk occurs when the change in the average yield of either interest-earning assets or interest-bearing liabilities is more sensitive than the other to changes in market interest rates. Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of the Company's assets and liabilities. Yield-curve risk reflects the possibility that changes in the shape of the yield curve could have different effects on the Company's assets and liabilities. Basis risk occurs when different parts of the balance sheet are subject to varying base rates reflecting the possibility that the spread from those base rates will deviate. Prepayment risk is associated with financial instruments with an option to prepay before the stated maturity, often a disadvantage to person selling the option; this risk is most often associated with the prepayment of loans, callable investments, and callable borrowings.
Asset/Liability Management
Market risk and interest-rate risk management is governed by the Company's Asset/Liability Committee ("ALCO"). The ALCO establishes exposure limits that define the Company's tolerance for interest-rate risk. The ALCO and the Company's Treasury Group measure and manage the composition of the balance sheet over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The ALCO monitors current exposures versus limits and reports those results to the Board of Directors. The policy limits and guidelines serve as benchmarks for measuring interest-rate risk and for providing a framework for evaluation and interest-rate risk-management decision-making. The Company measures its interest-rate risk by using an asset/liability simulation model. The model considers several factors to determine the Company's potential exposure to interest-rate risk, including measurement of repricing gaps, duration, convexity, value-at-risk, market value of portfolio equity under assumed changes in the level of interest rates, the shape of yield curves, and general market volatility.
Management controls the Company's interest-rate exposure using several strategies, which include adjusting the maturities of securities in the Company's investment portfolio, limiting or expanding the terms of loans originated, limiting fixed-rate deposits with terms of more than five years, and adjusting maturities of FHLBB advances. The Company limits this risk by restricting the types of MBSs it invests into those with limited average life changes under certain interest-rate-shock scenarios, or securities with embedded prepayment penalties. The Company also places limits on holdings of fixed-rate mortgage loans with maturities greater than five years. The Company enters into interest rate swaps as part of its interest rate risk management strategy. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed payments.
Measuring Interest-Rate Risk
As noted above, interest-rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest-rate sensitivity gap. An asset or liability is said to be interest-rate sensitive within a specific period if it will mature or reprice within that period. The interest-rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest-rate-sensitive assets exceeds the amount of interest-rate-sensitive liabilities. A gap is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. During a period of falling interest rates, therefore, a positive gap would tend to adversely affect net interest income. Conversely, during a period of rising interest rates, a positive gap position would tend to result in an increase in net interest income.
The Company's interest-rate risk position is measured using both income simulation and interest-rate sensitivity "gap" analysis. Income simulation is the primary tool for measuring the interest-rate risk inherent in the Company's balance sheet at a given point in time by showing the effect on net interest income, over a twelve-month period, of a variety of interest-rate shocks. These simulations take into account repricing, maturity, and prepayment characteristics of individual products. The ALCO reviews simulation results to determine whether exposure resulting from changes in market interest rates remains within established tolerance levels over a twelve-month horizon, and develops appropriate strategies to manage this exposure. The Company's interest-rate risk analysis remains modestly asset-sensitive as of December 31, 2020.
The assumptions used in the Company’s interest-rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates.
As of December 31, 2020, net interest income simulation indicated that the Company's exposure to changing interest rates was within tolerance. The ALCO reviews the methodology utilized for calculating interest-rate risk exposure and may periodically adopt modifications to this methodology. The following table presents the estimated impact of interest-rate changes on the Company's estimated net interest income over the twelve-month periods indicated:
Estimated Exposure to Net Interest Income
over Twelve-Month Horizon Beginning
December 31, 2020 December 31, 2019
Gradual Change in Interest Rate Levels Dollar
Change Percent
Change Dollar
Change Percent
Change
(Dollars in Thousands)
Up 300 basis points $ 19,249 7.1 % $ 29,795 11.5 %
Up 200 basis points 10,698 3.9 % 12,478 4.8 %
Up 100 basis points 5,193 1.9 % 6,265 2.4 %
Down 100 basis points (5,999) (2.2) % (11,100) (4.3) %
The estimated impact of a 300 basis points increase in market interest rates on the Company's estimated net interest income over a twelve-month horizon was a positive 7.1% as of December 31, 2020, compared to a positive 11.5% as of December 31, 2019. The decrease in net interest income asset sensitivity was due a shift from term deposits to MMDA deposits as well as a shortening of the borrowing portfolio and brokered deposits.
Economic Value of Equity ("EVE") at Risk Simulation is conducted in tandem with net interest income simulations to ascertain a longer term view of the Company’s interest-rate risk position by capturing longer-term repricing risk and options risk embedded in the balance sheet. It measures the sensitivity of the economic value of equity to changes in interest rates. The EVE at Risk Simulation values only the current balance sheet and does not incorporate growth assumptions. As with the net interest income simulation, this simulation captures product characteristics such as loan resets, repricing terms, maturity dates, and rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity, and non-maturity deposit attrition rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. The Company conducts non-maturity deposit behavior studies on a periodic basis to support deposit assumptions used in the valuation process. All key assumptions are subject to a periodic review.
EVE at Risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates as well as parallel shocks to the current interest-rate environment. The following table sets forth the estimated percentage change in the Company’s EVE at Risk, assuming various shifts in interest rates. Given the interest rate environment as of December 31, 2020, simulations for interest rate declines of more than 100 basis points were not deemed to be meaningful.
Estimated Percent Change in Economic Value of Equity
Parallel Shock in Interest Rate Levels At December 31, 2020 At December 31, 2019
Up 300 basis points 11.2 % 6.0 %
Up 200 basis points 8.3 % 5.1 %
Up 100 basis points 5.4 % 3.3 %
Down 100 basis points (13.6) % (7.2) %
The Company's EVE asset sensitivity increased from December 31, 2019 to December 31, 2020 as short term cash and securities balance increased funded by less interest rate sensitive non maturity deposits.
The Company also uses interest-rate sensitivity "gap" analysis to provide a more general overview of its interest-rate risk profile. The interest-rate sensitivity gap is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or repricing within a given time period. The table below shows the Company's interest-rate sensitivity gap position as of December 31, 2020.
One Year
or Less More than
One Year to
Two Years More than
Two Years
to Three
Years More than
Three Years
to Five Years More than
Five Years Total
(Dollars in Thousands)
Interest-earning assets (1):
Short-term investments $ 398,848 $ - $ - $ - $ - $ 398,848
Weighted average rate 0.09 % - % - % - % - % 0.09 %
Investment securities (1) (3)
167,704 162,898 116,370 116,363 182,486 745,821
Weighted average rate 2.58 % 2.63 % 2.79 % 2.61 % 2.67 % 2.65 %
Commercial real estate loans (1)
2,103,116 505,143 417,010 541,151 257,406 3,823,826
Weighted average rate 2.93 % 4.42 % 4.56 % 4.20 % 3.56 % 3.53 %
Commercial loans and leases (1)
912,092 835,142 241,968 230,137 55,562 2,274,901
Weighted average rate 5.39 % 3.37 % 6.56 % 5.87 % 4.81 % 4.81 %
Consumer loans (1)
663,047 152,919 114,777 142,760 97,326 1,170,829
Weighted average rate 3.33 % 3.95 % 3.97 % 3.92 % 3.58 % 3.56 %
Total interest-earning assets 4,244,807 1,656,102 890,125 1,030,411 592,780 8,414,225
Weighted average rate 3.24 % 3.67 % 4.80 % 4.36 % 3.40 % 3.64 %
Interest-bearing liabilities (1):
NOW accounts $ - $ - $ - $ - $ 513,948 $ 513,948
Weighted average rate - % - % - % - % 0.09 % 0.09 %
Savings accounts - - - - 701,659 701,659
Weighted average rate - % - % - % - % 0.13 % 0.13 %
Money market savings accounts 2,018,977 - - - - 2,018,977
Weighted average rate 0.31 % - % - % - % - % 0.31 %
Certificates of deposit (1)
1,138,804 140,481 61,302 49,411 - 1,389,998
Weighted average rate 1.39 % 1.19 % 2.44 % 2.13 % - % 1.44 %
Brokered deposits 694,007 - - (98) - 693,909
Weighted average rate 0.43 % - % - % - % - % 0.43 %
Borrowed funds (1)
723,027 6,641 5,926 4,659 79,994 820,247
Weighted average rate 0.98 % 4.61 % 1.71 % 1.86 % 1.47 % 1.04 %
Total interest-bearing liabilities 4,574,815 147,122 67,228 53,972 1,295,601 6,138,738
Weighted average rate 0.70 % - % 2.38 % 2.12 % 0.20 % 0.64 %
Interest sensitivity gap (2)
$ (330,008) $ 1,508,980 $ 822,897 $ 976,439 $ (702,821) $ 2,275,487
Cumulative interest sensitivity gap $ (330,008) $ 1,178,972 $ 2,001,869 $ 2,978,308 $ 2,275,487
Cumulative interest sensitivity gap as a percentage of total assets (3.69) % 13.18 % 22.39 % 33.31 % 25.45 %
Cumulative interest sensitivity gap as a percentage of total interest-earning assets (3.92) % 14.01 % 23.79 % 35.40 % 27.04 %
_______________________________________________________________________________
(1) Interest-earning assets and interest-bearing liabilities are included in the period in which the balances are expected to be redeployed and/or repriced as a result of anticipated prepayments, scheduled rate adjustments and contractual maturities.
(2) Interest sensitivity gap represents the difference between interest-earning assets and interest-bearing liabilities.
(3) Investment securities include all debt, equity and restricted equity securities and unrealized gains and losses on investment securities.
As of December 31, 2020, interest-earning assets maturing or repricing within one year amounted to $4.2 billion and interest-bearing liabilities maturing or repricing within one year amounted to $4.6 billion, resulting in a cumulative one-year negative gap position of $330.0 million or (3.9)% of total interest-earning assets. As of December 31, 2019, the Company had a cumulative one-year negative gap position of $29.0 million, or (0.39)% of total interest-earning assets. The change in the cumulative one-year gap position from December 31, 2019 was due to shortening of deposits and funding profile offset by an increase in short term investments.
Interest rates paid on NOW accounts, savings accounts and money market accounts are subject to change at any time and such deposits are available for immediate withdrawal. A review of rates paid on these deposit categories over the last several years indicated that the amount and timing of rate changes did not coincide with the amount and timing of rate changes on other deposits when the FRB adjusted its benchmark federal funds rate.
Management views NOW and savings accounts to be less sensitive to interest rates than money market accounts and these accounts are therefore characterized as stable long-term funding sensitive beyond five years. Management views money market accounts to be more volatile deposits and these accounts are therefore characterized as sensitive to changes in interest rates within the first year.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The following financial statements and supplementary data required by this item are presented on the following pages which appear elsewhere herein:
Pages
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2020, 2019, and 2018
-
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018
-
Notes to Consolidated Financial Statements
-

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), the Company has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and (ii) accumulated and communicated to the Company's management, including its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in the Company's internal control over financial reporting identified in connection with the quarterly evaluation that occurred during the Company's last fiscal quarter that has materially and detrimentally affected, or is reasonably likely to materially and detrimentally affect, the Company's internal control over financial reporting.
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). The Company's internal control system was designed to provide reasonable assurance to its management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company's management assessed the effectiveness of its internal control over financial reporting as of the end of the period covered by this report. In addition, the effectiveness of the Company's internal control over financial reporting as of the end of the period covered by this report has been audited by KPMG LLP, an independent registered public accounting firm as stated in its report which is included in Item 8 of this Annual Report on Form 10-K.
Management's Report on Internal Control Over Financial Reporting as of December 31, 2020 appears on page herein and the related Report of Independent Registered Public Accounting Firm thereon appears on page herein.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated herein by reference to the Company's Proxy Statement to be filed in connection with the Annual Meeting of Stockholders ("Proxy Statement").

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to Proxy Statement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated herein by reference to Proxy Statement.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated herein by reference to Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
(a)Financial Statements
All financial statements are included in Item 8 of Part II of this Annual Report on Form 10-K.
(2)Financial Statement Schedules
All financial statement schedules have been omitted because they are not required, not applicable or are included in the consolidated financial statements or related notes.
(3)Exhibits
The exhibits listed in paragraph (b) below are filed herewith or incorporated herein by reference to other filings.
(b)Exhibits
EXHIBIT INDEX
Exhibit Description
3.1 Certificate of Incorporation of Brookline Bancorp, Inc.
3.2 Amended and Restated Bylaws of Brookline Bancorp, Inc. (incorporated by reference to Exhibit 3.02 of the Company's Current Report on Form 8-K filed on January 10, 2013)
4 Form of Common Stock Certificate of the Company (incorporated by reference to Exhibit 4 of the Registration Statement on Form S-1 filed by the Company on April 10, 2002 (Registration No. 333-85980))
4.1 Subordinated Indenture, dated as of September 16, 2014, between Brookline Bancorp, Inc. and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on September 17, 2014)
4.2 First Supplemental Indenture, dated as of September 16, 2014, between Brookline Bancorp, Inc. and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on September 17, 2014)
4.3 Form of Global Note to represent the 6.000% Fixed-to-Floating Rate Subordinated Notes due September 15, 2029 (contained in the First Supplemental Indenture included as Exhibit 4.2)
4.4 Description of Registrant’s Securities
10.1+ Brookline Bancorp, Inc. Deferred Compensation Plan effective January 1, 2011 (incorporated by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K filed on September 16, 2010)
10.2+ Brookline Bancorp, Inc. 2003 Stock Option Plan
10.4+ Brookline Bancorp, Inc. 2011 Restricted Stock Plan
10.5+ Brookline Bancorp, Inc. 2014 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on May 9, 2014)
10.5.1+ Form of Restricted Stock Award Agreement under the Brookline Bancorp, Inc. 2014 Equity Incentive Plan
10.6+ Employment Agreement, dated as of April 11, 2011, by and among Brookline Bancorp, Inc., Brookline Bank and Paul A. Perrault (incorporated by reference to Exhibit 10.10 of the Company's Current Report on Form 8-K filed on April 15, 2011)
10.6.1 Amendment to the Employment Agreement, dated July 25, 2018, by and among the Brookline Bancorp, Inc., Brookline Bank and Paul Perrault.
10.8+ Employment Letter Agreement, dated as of April 19, 2011, by and between Brookline Bancorp, Inc. and Mark J. Meiklejohn (incorporated by reference to Exhibit 10.3 of Pre-effective Amendment No. 2 of the Registration Statement on Form S-4 filed by the Company on July 25, 2011 (Registration Number 333-174731))
10.9+ Form of Amended Change in Control Agreement (incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q filed May 9, 2014)
21 Subsidiaries of the Registrant (incorporated by reference in Part I, Item 1. "Business-General" of this Annual Report on Form 10-K)
23* Consent of Independent Registered Public Accounting Firm
31.1* Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1** Rule 13a-14(b) Certifications of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2** Rule 13a-14(b) Certifications of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)
_______________________________________________________________________________
* Filed herewith
** Furnished herewith
+ Management contract or compensatory plan or agreement
(c)Other Required Financial Statements and Schedules
Not applicable.