What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-04 compared with 2020-08-07 · 142 added, 124 removed, 393 unchanged (40% of the section changed)

26 unchanged sentences

A significant degree of uncertainty still exists concerning the duration and magnitude of the COVID-19 pandemic.

Even after the pandemic subsides, the U.S.

economy may continue to experience a recession.

For the three and six months ended June 30, 2020, we increased the provision for loan losses and added liquidity to the balance sheet due to the impact of COVID-19, both of which adversely impacted our earnings and performance metrics.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business.

The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated.

For the nine months ended September 30, 2020, we increased the provision for loan losses and added liquidity to the balance sheet due to the impact of COVID-19, both of which adversely impacted our earnings and performance metrics.

Critical Accounting Policies and Estimates

4 unchanged sentences

Earnings and Performance Overview

For the three months ended June 30, 2020, we had net interest income of $13.6 million, which remained flat when compared to the same period in 2019.

For the six months ended June 30, 2020, we had net interest income of $26.9 million, a decrease of $0.9 million, or 3.4%, over the six months ended June 30, 2019.

The decrease in net interest income was attributable to a decline in income from loan prepayments and lower loan yields as loans are re-priced in the current low interest rate environment.

For the three months ended September 30, 2020, we had net interest income of $13.6 million, an increase of $0.6 million or 4.6% when compared to the same period in 2019.

The increase in net interest income was due to a decline in interest expense, driven by lower interest rates when compared to the same period in 2019.

For the nine months ended September 30, 2020, we had net interest income of $40.5 million, a decrease of $0.3 million, or 0.9%, over the nine months ended September 30, 2019.

The decrease in net interest income for the nine months ended September 30, 2020 was attributable to a decline in income from loan prepayments and lower loan yields as loans are re-priced in the current low interest rate environment.

The decrease in net interest income was partially offset by a decline in interest expense, driven by lower interest rates when compared to the same period in 2019.

Noninterest income decreased $0.8 million to $0.6 million for the three months ended June 30, 2020 compared to the same period in 2019.

Noninterest income decreased $1.0 million to $1.6 million for the six months ended June 30, 2020 compared to the same period in 2019.

The decrease in noninterest income for the three and six months ended June 30, 2020, when compared to the same periods in 2019, was primarily a result of the absence of gains and fees from sales of loans, and to a lesser degree, a decrease in service charges and fees.

Net income available to common shareholders was $1.2 million, or $0.16 per diluted share, and $5.6 million, or $0.71 per diluted share, for the three months ended June 30, 2020 and 2019, respectively.

Net income available to common shareholders was $2.6 million, or $0.33 per diluted share, and $10.7 million, or $1.35 per diluted share, for the six months ended June 30, 2020 and 2019, respectively.

The decrease in net income for the three and six month periods ended June 30, 2020 when compared to the same periods in 2019 was largely driven by an increase in the provision for loan losses due to COVID-19 related loan loss reserves, an increase in noninterest expense and the aforementioned decline in noninterest income.

The provision for loan losses, including COVID-19 related reserves, totaled $3.0 million and $6.2 million for the three and six months ended June 30, 2020, respectively.

Returns on average stockholders' equity and average assets for the three months ended June 30, 2020 were 2.82% and 0.23%, respectively, compared to 12.48% and 1.20%, respectively, for the three months ended June 30, 2019.

Returns on average stockholders' equity and average assets for the six months ended June 30, 2020 were 2.92% and 0.26%, respectively, compared to 12.05% and 1.15%, respectively, for the six months ended June 30, 2019.

Returns were negatively impacted due to the increase in the provision for loan losses.

The return on average assets was also negatively impacted by higher average asset balances, primarily due to additional liquidity maintained on the balance sheet.

Noninterest income decreased $0.9 million to $0.6 million for the three months ended September 30, 2020 compared to the same period in 2019.

Noninterest income decreased $1.9 million to $2.3 million for the nine months ended September 30, 2020 compared to the same period in 2019.

The decrease in noninterest income for the three and nine months ended September 30, 2020, when compared to the same periods in 2019, was primarily a result of the absence of gains and fees from the sales of SBA loans, and to a lesser degree, a decrease in service charges and fees.

Net income available to common shareholders was $3.0 million, or $0.38 per diluted share, and $4.1 million, or $0.52 per diluted share, for the three months ended September 30, 2020 and 2019, respectively.

Net income available to common shareholders was $5.6 million, or $0.71 per diluted share, and $14.7 million, or $1.87 per diluted share, for the nine months ended September 30, 2020 and 2019, respectively.

The decrease in net income for the three month period ended September 30, 2020 when compared to the same period in 2019 was driven by an increase in noninterest expense.

The decrease in net income for the nine months ended September 30, 2020 when compared to the same period in 2019 was due to an increase in the provision for loan losses due to the COVID-19 pandemic and, to a lesser degree, an increase in noninterest expense.

The provision for loan losses related to COVID-19 totaled $7.9 million for the nine months ended September 30, 2020.

Returns on average stockholders' equity and average assets for the three months ended September 30, 2020 were 6.87% and 0.55%, respectively, compared to 9.12% and 0.87%, respectively, for the three months ended September 30, 2019.

Returns on average stockholders' equity and average assets for the nine months ended September 30, 2020 were 4.23% and 0.36%, respectively, compared to 11.06% and 1.05%, respectively, for the nine months ended September 30, 2019.

For the nine months ended September 30, 2020, returns were negatively impacted due to the increase in the provision for loan losses.

The return on average assets was negatively impacted by higher average asset balances, primarily due to additional liquidity maintained on the balance sheet.

Results of Operations

7 unchanged sentences

Premium amortization and discount accretion are included in the respective interest income and interest expense amounts.

FTE net interest income for the three months ended June 30, 2020 and 2019 was $13.7 million.

FTE interest income for the three months ended June 30, 2020 decreased by $1.7 million, or 8.2%, to $19.4 million, compared to FTE interest income for the three months ended June 30, 2019.

FTE net interest income for the six months ended June 30, 2020 and 2019 was $27.0 million and $28.0 million, respectively.

FTE interest income for the six months ended June 30, 2020 decreased by $3.1 million,

or 7.4%, to 39.5 million, compared to FTE interest income for the six months ended June 30, 2019 The decrease in net interest income was primarily a result of a decline in income from loan prepayments and lower loan yields as loans are re-priced in the current low interest rate environment.

FTE net interest income for the three months ended September 30, 2020 and 2019 was $13.7 million and $13.1 million, respectively.

FTE interest income for the three months ended September 30, 2020 decreased by $1.6 million, or 7.7%, to $19.0 million, compared to FTE interest income for the three months ended September 30, 2019.

The decrease in net interest income was primarily a result of lower loan yields as loans are re-priced in the current low interest rate environment.

The decrease in net interest income was partially offset by a decrease in interest expense driven by lower interest rates on deposits.

The net interest margin decreased by 26 basis points to 2.81% for the three months ended June 30, 2020, compared to the three months ended June 30, 2019 and the net interest margin decreased by 24 basis points to 2.89% for the six months ended June 30, 2020, compared to the six months ended June 30, 2019.

FTE net interest income for the nine months ended September 30, 2020 and 2019 was $40.7 million and $41.1 million, respectively.

FTE interest income for the nine months ended September 30, 2020 decreased by $4.7 million, or 7.5%, to 58.5 million, compared to FTE interest income for the nine months ended September 30, 2019 The decrease in net interest income was primarily a result of a decline in income from loan prepayments and lower loan yields as loans are re-priced in the current low interest rate environment.

The decrease in net interest income was partially offset by a decrease in interest expense driven by lower interest rates on deposits.

The net interest margin decreased by 29 basis points to 2.67% for the three months ended September 30, 2020, compared to the three months ended September 30, 2019 and the net interest margin decreased by 26 basis points to 2.81% for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

The decline in the net interest margin was primarily due to excess cash held at low interest rates to maintain a higher level of liquidity during the COVID-19 pandemic.

Interest expense for the three months ended June 30, 2020 decreased by $1.8 million, or 23.7%, compared to interest expense for the three months ended June 30, 2019.

Interest expense for the six months ended June 30, 2020 decreased by $2.2 million, or 14.7%, compared to interest expense for the six months ended June 30, 2019.

This decrease is due to lower interest rates on deposits for the three and six months ended June 30, 2020 when compared to the same periods in 2019.

Interest expense for the three months ended September 30, 2020 decreased by $2.2 million, or 29.0%, compared to interest expense for the three months ended September 30, 2019.

Interest expense for the nine months ended September 30, 2020 decreased by $4.3 million, or 19.5%, compared to interest expense for the nine months ended September 30, 2019.

This decrease is due to lower interest rates on deposits for the three and nine months ended September 30, 2020 when compared to the same periods in 2019.

Distribution of Assets, Liabilities and Stockholders’ Equity;

Interest Rates and Interest Differential

The following tables present the average balances and yields earned on interest earning assets and average balances and weighted average rates paid on our funding liabilities for the three and six months ended June 30, 2020 and 2019.

Three Months Ended June 30,

Three Months Ended September 30,

(Dollars in thousands) Average Balance Interest Yield / Rate (5)

35 unchanged sentences

(2) Includes commercial and residential real estate construction.

(3) The adjustment for securities and loans taxable equivalency amounted to $52 thousand and $69 thousand for the three months ended June 30, 2020 and 2019, respectively.

(3) The adjustment for securities and loans taxable equivalency amounted to $54 thousand and $55 thousand for the three months ended September 30, 2020 and 2019, respectively.

(4) Annualized net interest income as a percentage of earning assets.

(5) Yields are calculated using the contractual day count convention for each respective product type.

Six Months Ended June 30,

(Dollars in thousands) Average Balance Interest Yield / Rate (5) Average Balance Interest Yield / Rate (5)

Nine Months Ended September 30,

(Dollars in thousands) Average Balance Interest Yield / Rate (5)

Average Balance Interest Yield / Rate (5)

Cash and Fed funds sold $ 207,058 $ 468 0.30 % $ 84,212 $ 1,432 2.27 %

Securities (1)

96,761 2,289 3.15 115,586 2,722 3.14

Commercial real estate 1,094,956 38,460 4.61 1,061,536 38,176 4.74

1 unchanged sentence

Construction (2)

98,539 3,350 4.47 84,487 3,412 5.33

Commercial business 289,959 10,017 4.54 259,154 12,198 6.21

20 unchanged sentences

Net interest income (3)

$ 40,690 $ 41,074

Interest rate spread 2.52 % 2.71 %

Net interest margin (4)

2.81 % 3.07 %

(1) Average balances and yields for securities are based on amortized cost.

(2) Includes commercial and residential real estate construction.

(3) The adjustment for securities and loans taxable equivalency amounted to $105 thousand and $141 thousand for the six months ended June 30, 2020 and 2019, respectively.

(3) The adjustment for securities and loans taxable equivalency amounted to $159 thousand and $195 thousand for the nine months ended September 30, 2020 and 2019, respectively.

(4) Annualized net interest income as a percentage of earning assets.

7 unchanged sentences

Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each.

Three Months Ended June 30, 2020 vs 2019

Increase (Decrease) Six Months Ended June 30, 2020 vs 2019

Three Months Ended September 30, 2020 vs 2019

Increase (Decrease) Nine Months Ended September 30, 2020 vs 2019

Increase (Decrease)

23 unchanged sentences

The provision for loan losses is charged against earnings in order to maintain our allowance for loan losses and reflects management’s best estimate of probable losses inherent in our loan portfolio as of the balance sheet date.

The provision for loan losses for the three months ended June 30, 2020 was $3.0 million compared to a credit for loan losses of $0.8 million for the three months ended June 30, 2019.

The provision for loan losses for the six months ended June 30, 2020 was $6.2 million compared to a credit for loan losses of $0.6 million for the six months ended June 30, 2019.

The increase in the provision for loan losses was due to management’s assessment of increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

The provision for loan losses for the three months ended September 30, 2020 was $0.7 million compared to a provision for loan losses of $0.8 million for the three months ended September 30, 2019.

The provision for loan losses for the nine months ended September 30, 2020 was $6.9 million compared to a provision for loan losses of $0.1 million for the nine months ended September 30, 2019.

The increase in the provision for loan losses for the nine months ended September 30, 2020, was due to management’s assessment of increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

For further information, see sections titled Asset Quality and Allowance for Loan Losses.

1 unchanged sentence

Noninterest income is a component of our revenue and is comprised primarily of fees generated from loan and deposit relationships with our customers, fees generated from sales and referrals of loans, income earned on bank-owned life insurance and gains on sales of investment securities.

The following tables compare noninterest income for the three and six months ended June 30, 2020 and 2019:

The following tables compare noninterest income for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

June 30, Change

September 30, Change

(Dollars in thousands) 2020 2019 $ %

2 unchanged sentences

Gains and fees from sales of loans 27 703 (676) (96.2)

Net gain on sale of available for sale securities — 76 (76) (100.0)

Gain (loss) on sale of other real estate owned, net 19 (102) 121 (118.6)

Other 136 432 (296) (68.5)

Total noninterest income $ 614 $ 1,552 $ (938) (60.4) %

Six Months Ended June 30, Change

Nine Months Ended

September 30, Change

(Dollars in thousands) 2020 2019 $ %

2 unchanged sentences

Gains and fees from sales of loans 27 1,409 (1,382) (98.1)

Gain (loss) on sale of other real estate owned, net 19 (102) 121 (118.6)

Net gain on sale of available for sale securities — 76 (76) (100.0)

1 unchanged sentence

Total noninterest income $ 2,263 $ 4,196 $ (1,933) (46.1) %

Noninterest income decreased by $0.8 million, or 57%, to $0.6 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Noninterest income decreased by $1.0 million, or 38%, to $1.6 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The decrease in noninterest income was primarily a result of the absence of gains and fees from the sales of loans for the three and six months ended June 30, 2020 compared to the same periods in 2019.

In addition, the decrease in noninterest income was also driven by certain waived service charges and fees on depository accounts as a courtesy to customers during the COVID-19 pandemic.

Noninterest income decreased by $0.9 million, or 60%, to $0.6 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Noninterest income decreased by $1.9 million, or 46%, to $2.3 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The decrease in noninterest income was primarily a result of the absence of gains and fees from the sales of SBA loans for the three and nine months ended September 30, 2020 compared to the same periods in 2019.

To a lesser degree, the decrease in noninterest income was also driven by certain waived service charges and fees on depository accounts as a courtesy to customers during the COVID-19 pandemic.

The decrease in other noninterest income was primarily a result of loan related interest rate swap fees recognized in 2019.

Noninterest Expense

The following tables compare noninterest expense for the three and six months ended June 30, 2020 and 2019:

The following tables compare noninterest expense for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

June 30, Change

September 30, Change

(Dollars in thousands) 2020 2019 $ %

9 unchanged sentences

Total noninterest expense $ 9,729 $ 8,672 $ 1,057 12.2 %

Six Months Ended June 30, Change

Nine Months Ended

September 30, Change

(Dollars in thousands) 2020 2019 $ %

1 unchanged sentence

Occupancy and equipment 6,410 5,666 744 13.1

Professional services 1,145 1,109 36 3.2

Data processing 1,558 1,568 (10) (0.6)

Professional services 1,519 1,455 64 4.4

Director fees 883 639 244 38.2

Marketing 361 541 (180) (33.3)

FDIC insurance 529 74 455 614.9

Marketing 512 751 (239) (31.8)

Amortization of intangibles 54 57 (3) (5.3)

1 unchanged sentence

Total noninterest expense $ 29,110 $ 26,402 $ 2,708 10.3 %

Noninterest expense increased by $1.0 million, or 11%, to $9.7 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Noninterest expense increased by $1.7 million or 9.3%, to $19.4 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits and occupancy and equipment expense.

Salaries and employee benefits totaled $5.2 million for the three months ended June 30, 2020, an increase of $0.7 million when compared to the same period in 2019.

Salaries and employee benefits totaled $10.6 million for the six months ended June 30, 2020, an increase in of $1.2 million when compared to the same period in 2019.

The increase in salaries and employee benefits was primarily driven by an increase in full time equivalent employees.

Full time equivalent employees totaled 152 at June 30, 2020 compared to 144 for the same period in 2019.

Average full time equivalent employees totaled 154 for the six months ended June 30, 2020, compared to 141 for the same period in 2019.

Occupancy and equipment expense totaled $2.2 million for the three months ended June 30, 2020, an increase of $0.4 million when compared to the same period in 2019.

Occupancy and equipment expense totaled $4.1 million for the six months ended June 30, 2020, an increase of $0.4 million when compared to the same period in 2019.

Noninterest expense increased by $1.1 million, or 12.2%, to $9.7 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Noninterest expense increased by $2.7 million or 10.3%, to $29.1 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits, occupancy and equipment expense and FDIC insurance expense.

Salaries and employee benefits totaled $5.3 million for the three months ended September 30, 2020, an increase of $0.4 million when compared to the same period in 2019.

Salaries and employee benefits totaled $15.9 million for the nine months ended September 30, 2020, an increase of $1.6 million when compared to the same period in 2019.

The increase in salaries and employee benefits was primarily driven by normal annual salary increases, additional hires in support of growth initiatives and expanded employee benefits to assist employees impacted by the COVID-19 pandemic.

Occupancy and equipment expense totaled $2.3 million for the three months ended September 30, 2020, an increase of $0.3 million when compared to the same period in 2019.

Occupancy and equipment expense totaled $6.4 million for the nine months ended September 30, 2020, an increase of $0.7 million when compared to the same period in 2019.

The increase in occupancy and equipment expense was primarily due to additional cleaning costs associated with precautions taken to prevent the spread of COVID-19.

Income tax expense for the three months ended June 30, 2020 and 2019 totaled $0.3 million and $1.4 million, respectively.

The effective tax rates for the three months ended June 30, 2020 and 2019 were 18.7% and 20.5%, respectively.

Income tax expense for the six months ended June 30, 2020 and 2019 totaled $0.4 million and $2.8 million, respectively.

The effective tax rates for the six months ended June 30, 2020 and 2019 were 14.3% and 20.6%, respectively.

The decline in the effective tax rate was primarily attributable to a discrete benefit recognized in the first quarter of 2020, and to a lesser extent, other permanent differences.

FDIC insurance expense totaled $0.2 million for the three months ended September 30, 2020, an increase of $0.3 million when compared to the same period in 2019.

FDIC insurance expense totaled $0.5 million for the nine months ended September 30,

2020, an increase of $0.5 million when compared to the same period in 2019.

The increase in FDIC insurance expense was primarily driven by a credit received during the three months ended September 30, 2019, that was not repeated during the three months ended September 30, 2020.

Income tax expense for the three months ended September 30, 2020 and 2019 totaled $0.8 million and $1.0 million, respectively.

The effective tax rates for the three months ended September 30, 2020 and 2019 were 20.9% and 20.1%, respectively.

Income tax expense for the nine months ended September 30, 2020 and 2019 totaled $1.2 million and $3.8 million, respectively.

The effective tax rates for the nine months ended September 30, 2020 and 2019 were 18.0% and 20.5%, respectively.

For the nine months ended September 30, 2020, the decline in the effective tax rate was primarily attributable to a discrete benefit recognized in the first quarter of 2020, and to a lesser extent, other permanent differences.

The impact of these items on the effective tax rate varies with changes in pre-tax income.

Financial Condition

At June 30, 2020 total assets were $2.0 billion, a $161.5 million, or an 8.6%, increase compared to December 31, 2019.

At September 30, 2020 total assets were $2.2 billion, a $310.8 million, or a 16.5%, increase compared to December 31, 2019.

The increase in assets is primarily driven by an increase in cash and cash equivalents in order to maintain a higher level of liquidity during the COVID-19 pandemic.

Gross loans totaled $1.6 billion at June 30, 2020, an increase of $10.2 million compared to December 31, 2019.

Deposits totaled $1.6 billion at June 30, 2020, compared to $1.5 billion at December 31, 2019.

The increase in deposits was a result of an increase in short term time deposits to expand on-balance sheet liquidity as well as an increase in noninterest bearing deposits reflecting our ongoing treasury management efforts.

Total shareholders’ equity at June 30, 2020 and December 31, 2019 was $170.4 million and $182.4 million, respectively.

The decrease in shareholders' equity was primarily driven by a $12.2 million unfavorable impact to accumulated other comprehensive income, driven by fair value marks related to hedge positions involving interest rate swaps, as well as dividends paid of $2.2 million and common stock repurchases of $1.0 million.

The decrease was partially offset by net income for the six months ended June 30, 2020 of $2.6 million.

Gross loans totaled $1.6 billion at September 30, 2020, an increase of $20.2 million compared to December 31, 2019.

Excluding PPP loans, gross loans decreased by $36.5 million at September 30, 2020 when compared to December 31, 2019.

Deposits totaled $1.8 billion at September 30, 2020, compared to $1.5 billion at December 31, 2019.

The increase in deposits was a result of successful commercial core deposit gathering efforts, as well as a temporary increase in short term time deposits to expand on-balance sheet liquidity during the COVID-19 pandemic.

Total shareholders’ equity at September 30, 2020 and December 31, 2019 was $174.3 million and $182.4 million, respectively.

The decrease in shareholders' equity was primarily driven by a $10.7 million unfavorable impact to accumulated other comprehensive loss, driven by fair value marks related to hedge positions involving interest rate swaps, as well as $3.3 million in dividends paid and common stock repurchases of $1.0 million.

The decrease was partially offset by net income for the nine months ended September 30, 2020 of $5.6 million.

The marks on the interest rate swaps are driven by lower long term market interest rates in 2020 when compared to 2019.

The Company's interest rate swaps are primarily used to hedge interest rate risk.

The Company's interest rate swaps are used to hedge interest rate risk.

The Company's current interest rate swap positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment.

Tangible book value was $21.70 per share outstanding at June 30, 2020 compared to $23.15 per share outstanding at December 31, 2019.

Tangible book value was $22.20 per share outstanding at September 30, 2020 compared to $23.15 per share outstanding at December 31, 2019.

Loan Portfolio

2 unchanged sentences

Our loan portfolio is the largest category of our earning assets.

Total loans before deferred loan fees and the allowance for loan losses were $1.61 billion at June 30, 2020 and $1.60 billion at December 31, 2019.

Total gross loans increased $10.2 million as of June 30, 2020 compared to the year ended December 31, 2019.

Total loans before deferred loan fees and the allowance for loan losses were $1.62 billion at September 30, 2020 and $1.60 billion at December 31, 2019.

Total gross loans increased $20.2 million as of September 30, 2020 compared to the year ended December 31, 2019.

The following table compares the composition of our loan portfolio for the dates indicated:

(In thousands) At June 30, 2020 At December 31, 2019 Change

(In thousands) At September 30, 2020 At December 31, 2019 Change

Real estate loans:

31 unchanged sentences

The following table presents nonperforming assets and additional asset quality data for the dates indicated:

(In thousands) At June 30, 2020 At December 31, 2019

(In thousands) At September 30, 2020 At December 31, 2019

Nonaccrual loans:

9 unchanged sentences

Total past due loans to total gross loans 0.46 % 0.77 %

Nonperforming assets totaled $10.8 million and represented 0.53% of total assets at June 30, 2020, compared to $10.6 million and 0.56% of total assets at December 31, 2019.

Nonaccrual loans totaled $10.6 million at June 30, 2020, of which $4.6 million

is guaranteed by the Small Business Administration (SBA).

There was $0.2 million of other real estate owned at June 30, 2020.

There was no other real estate owned at December 31, 2019.

Nonperforming assets totaled $10.2 million and represented 0.46% of total assets at September 30, 2020, compared to $10.6 million and 0.56% of total assets at December 31, 2019.

Nonaccrual loans totaled $10.2 million at September 30, 2020, of which $4.5 million is guaranteed by the Small Business Administration (SBA).

There was no other real estate owned at September 30, 2020 or December 31, 2019.

Allowance for Loan Losses

8 unchanged sentences

The following table presents the activity in our allowance for loan losses and related ratios for the dates indicated:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in thousands) 2020 2019 2020 2019

1 unchanged sentence

Residential real estate — (78) — (875)

Commercial real estate — (594) — (594)

Commercial business — (748) (7) (884)

5 unchanged sentences

Net charge-offs (2) (1,451) (33) (2,377)

Provision (credit) charged to earnings 2,999 (841) 6,184 (646)

Provision charged to earnings 712 773 6,896 127

Balance at end of period $ 20,372 $ 13,212 $ 20,372 $ 13,212

1 unchanged sentence

Allowance for loan losses to total gross loans 1.25 % 0.84 % 1.25 % 0.84 %

At June 30, 2020, our allowance for loan losses was $19.7 million and represented 1.22% of total gross loans, compared to $13.5 million, or 0.84% of total gross loans, at December 31, 2019.

The $6.2 million increase in the allowance for loan losses at June 30, 2020 when compared to December 31, 2019 was primarily due to incremental loan loss reserves recognized for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

At September 30, 2020, our allowance for loan losses was $20.4 million and represented 1.25% of total gross loans, compared to $13.5 million, or 0.84% of total gross loans, at December 31, 2019.

The $6.9 million increase in the allowance for loan losses at September 30, 2020 when compared to December 31, 2019 was primarily due to incremental loan loss reserves recognized for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

The following table presents the allocation of the allowance for loan losses and the percentage of these loans to total loans for the dates indicated:

At June 30, 2020 At December 31, 2019

At September 30, 2020 At December 31, 2019

(Dollars in thousands) Amount Percent of Loan Portfolio Amount Percent of Loan Portfolio

5 unchanged sentences

Total allowance for loan losses $ 20,372 100.00 % $ 13,509 100.00 %

The allocation of the allowance for loan losses at June 30, 2020 reflects our assessment of credit risk and probable loss within each portfolio.

We believe that the level of the allowance for loan losses at June 30, 2020 is appropriate to cover probable losses.

The allocation of the allowance for loan losses at September 30, 2020 reflects our assessment of credit risk and probable loss within each portfolio.

We believe that the level of the allowance for loan losses at September 30, 2020 is appropriate to cover probable losses.

Section 4013 of the CARES Act allows financial institutions to grant short term payment relief to borrowers impacted by COVID-19 and permits a financial institution to elect to suspend troubled debt restructuring accounting for relief granted under the Act.

As of June 30, 2020, the Company granted COVID-19 related deferrals on 159 loans (excluding SBA loans, which are paid for 6 months by the SBA on behalf of borrowers) totaling $339.9 million.

The Company has thoroughly evaluated these deferral requests and granted initial payment deferrals of no more than three months in duration, except for SBA loans which are mandated to receive an automatic six month deferral.

As of September 30, 2020, the Company has active COVID-19 related deferrals on 12 loans (excluding SBA loans, which are paid for 6 months by the SBA on behalf of borrowers) totaling $32.7 million.

In addition, the Company was evaluating 10 loans, totaling $31.3 million, for a second COVID-19 deferral term.

The Company has thoroughly evaluated these deferral requests, granting initial three month payment deferral periods and, in some instances, a second three month payment deferral period.

This excludes SBA loans, which are mandated to receive an automatic six month deferral.

These deferrals are not considered troubled debt restructurings based on Section 4013 of the CARES Act and interagency guidance issued in March of 2020.

Also, the FASB has determined that the TDR guidance in the interagency statement is an appropriate application of ASC 310-40.

Also, the FASB has determined that the TDR guidance in the interagency statement is an appropriate

application of ASC 310-40.

As such, all of the Company’s deferrals under the CARES Act are also considered in conformity with US GAAP as to their non-TDR classification.

The following table details these deferral by loan category and type as of June 30, 2020:

At June 30, 2020

The following table details these deferral by loan category and type as of September 30, 2020:

At September 30, 2020

(Dollars in thousands) Amount Number

Residential real estate $ 11,410 19

Commercial real estate $ 23,207 8

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Total $ 32,685 12

Subsequent to June 30, 2020, the Company has received indication that the deferral population is expected to shrink to less than 10% of gross loans (excluding PPP loans) during the third quarter of 2020, compared to approximately 22% as of June 30, 2020.

Reserve for Unfunded Commitments

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Investment Securities

At June 30, 2020, the carrying value of our investment securities portfolio totaled $100.6 million and represented 4.9% of total assets, compared to $100.9 million, or 5.4% of total assets, at December 31, 2019.

The net unrealized gain position on our investment portfolio at June 30, 2020 was $7.5 million and included gross unrealized losses of $9.0 thousand.

At September 30, 2020, the carrying value of our investment securities portfolio totaled $108.9 million and represented 5.0% of total assets, compared to $100.9 million, or 5.4% of total assets, at December 31, 2019.

The net unrealized gain position on our investment portfolio at September 30, 2020 was $7.5 million and included no gross unrealized losses.

The net unrealized gain position on our investment portfolio at December 31, 2019 was $3.2 million and included gross unrealized losses of $2.0 thousand.

Deposit Activities and Other Sources of Funds

Six Months Ended June 30, 2020 Twelve Months Ended December 31, 2019

Nine Months Ended September 30, 2020 Twelve Months Ended December 31, 2019

(Dollars in thousands) Amount Percent Weighted Average Rate Amount Percent Weighted Average Rate

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Total deposits $ 1,767,528 100.00 % 1.36 % $ 1,491,903 100.00 % 1.87 %

Total deposits were $1.6 billion at June 30, 2020, an increase of $128.1 million, from the balance at December 31, 2019.

The increase in total deposits was a result of an increase in short term time deposits to expand on-balance sheet liquidity as well as an increase in noninterest bearing deposits due to our ongoing treasury management efforts.

Brokered certificates of deposits totaled $214.2 million and $179.8 million at June 30, 2020 and December 31, 2019, respectively.

Brokered money market accounts totaled $71.9 million and $39.9 million at June 30, 2020 and December 31, 2019, respectively.

Brokered deposits represent brokered certificates of deposit, brokered money market accounts and one way Certificate of Deposit Account Registry Service (CDARS) and Insured Cash Sweep (ICS).

Total deposits were $1.8 billion at September 30, 2020, an increase of $275.6 million, from the balance at December 31, 2019.

The increase in total deposits was a result of successful commercial core deposit gathering efforts, as well as a temporary increase in short term time deposits to expand on-balance sheet liquidity during the COVID-19 pandemic.

Brokered certificates of deposits totaled $296.0 million and $179.8 million at September 30, 2020 and December 31, 2019, respectively.

Brokered money market accounts totaled $28.7 million and $39.9 million at September 30, 2020 and December 31, 2019, respectively.

Brokered deposits represent brokered certificates of deposit, brokered money market accounts and one way buy Certificate of Deposit Account Registry Service (CDARS), and one way buy Insured Cash Sweep (ICS).

Brokered deposits are utilized as an additional source of funding.

At June 30, 2020 and December 31, 2019, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $552.7 million and $502.8 million, respectively, maturing during the periods indicated in the table below:

(Dollars in thousands) June 30, 2020 December 31, 2019

At September 30, 2020 and December 31, 2019, time deposits with a denomination of $100 thousand or more, including CDARS and brokered deposits, totaled $601.6 million and $502.8 million, respectively, maturing during the periods indicated in the table below:

(Dollars in thousands) September 30, 2020 December 31, 2019

Within 3 months $ 155,675 $ 114,636

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We utilize advances from the Federal Home Loan Bank of Boston, or FHLB, as part of our overall funding strategy and to meet short-term liquidity needs, and to a lesser degree, manage interest rate risk arising from the difference in asset and liability maturities.

Total FHLB advances were $175.0 million and $150.0 million at June 30, 2020 and December 31, 2019, respectively.

Total FHLB advances were $175.0 million and $150.0 million at September 30, 2020 and December 31, 2019, respectively.

The increase of $25.0 million, or 16.7%, reflects normal operating fluctuation in our borrowings.

The Bank has additional borrowing capacity at the FHLB up to a certain percentage of the value of qualified collateral.

In accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances.

At June 30, 2020, the Bank had pledged $910.0 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of June 30, 2020, the Bank had immediate availability to borrow an additional $397.9 million based on qualified collateral.

At September 30, 2020, the Bank had pledged $858.7 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of September 30, 2020, the Bank had immediate availability to borrow an additional $355.8 million based on qualified collateral.

Liquidity and Capital Resources

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The Company anticipates that it will have sufficient funds available to meet its current loan and other commitments.

As of June 30, 2020, the Company had cash and cash equivalents of $207.3 million and available-for-sale securities of $82.2 million.

At June 30, 2020, outstanding commitments to originate loans totaled $10.8 million and undisbursed funds from approved lines of credit, home equity lines of credit and secured commercial lines of credit totaled $151.3 million.

As of September 30, 2020, the Company had cash and cash equivalents of $339.5 million and available-for-sale securities of $90.6 million.

At September 30, 2020, outstanding commitments to originate loans totaled $23.3 million and undisbursed funds from approved lines of credit, home equity lines of credit and secured commercial lines of credit totaled $153.2 million.

Capital Resources

Shareholders’ equity totaled $170.4 million as of June 30, 2020, a decrease of $12.0 million compared to December 31, 2019, primarily a result of an $12.2 million unfavorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps, as well as dividends paid of $2.2 million and common stock repurchases of $1.0 million.

The decrease was partially offset by net income for the six months ended June 30, 2020 of $2.6 million.

Shareholders’ equity totaled $174.3 million as of September 30, 2020, a decrease of $8.1 million compared to December 31, 2019, primarily a result of an $10.7 million unfavorable impact to accumulated other comprehensive loss driven by fair value marks related to hedge positions involving interest rate swaps, as well as $3.3 million in dividends paid and common stock

repurchases of $1.0 million.

The decrease was partially offset by net income for the nine months ended September 30, 2020 of $5.6 million.

The marks on the interest rate swaps are driven by lower long term market interest rates in 2020 when compared to 2019.

The Company's interest rate swaps are primarily used to hedge interest rate risk.

The Company's interest rate swaps are used to hedge interest rate risk.

The Company's current interest rate swap positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment.

As of June 30, 2020, the tangible common equity ratio and tangible book value per share were 8.21% and $21.70, respectively.

As of September 30, 2020, the tangible common equity ratio and tangible book value per share were 7.83% and $22.20, respectively.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

At June 30, 2020, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action.

At June 30, 2020, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 12.44%, total capital to risk-weighted assets was 13.63%, Tier 1 capital to risk-weighted assets was 12.44% and Tier 1 capital to average assets was 9.93%.

At September 30, 2020, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action.

At September 30, 2020, the Bank’s ratio of Common Equity Tier 1 capital to risk-weighted assets was 12.36%, total capital to risk-weighted assets was 13.57%, Tier 1 capital to risk-weighted assets was 12.36% and Tier 1 capital to average assets was 9.58%.

In July 2013, the Federal Reserve published Basel III rules establishing a new comprehensive capital framework of U.S.

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As of January 1, 2019, the “capital conservation buffer” increased from 1.875% to 2.5%.

As of September 30, 2020, the capital conservation buffer was 5.6% and 5.3% at the Bank and the Company, respectively.

Asset/Liability Management and Interest Rate Risk

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Per Company policy, the Bank should not be outside these limits for twelve consecutive months unless the Bank's forecasted capital ratios are considered to be "well capitalized".

As of June 30, 2020, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized", reference footnote 7 to the consolidated financial statements for more detail.

The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning June 30, 2020 and December 31, 2019:

As of September 30, 2020, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized", reference footnote 7 to the consolidated financial statements for more detail.

The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning September 30, 2020 and December 31, 2019:

Parallel Ramp Estimated Percent Change in Net Interest Income

Rate Changes (basis points) June 30, 2020 December 31, 2019

Rate Changes (basis points) September 30, 2020 December 31, 2019

-100 0.30 % 3.00 %

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Parallel Shock Estimated Percent Change in Net Interest Income

Rate Changes (basis points) June 30, 2020 December 31, 2019

Rate Changes (basis points) September 30, 2020 December 31, 2019

-100 — % 5.00 %

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+300 (2.00) (19.50)

The net interest income at risk simulation results indicate that, as of June 30, 2020, we remain liability sensitive.

The net interest income at risk simulation results indicate that, as of September 30, 2020, we remain liability sensitive.

The liability sensitivity is due to the fact that there are more liabilities than assets subject to repricing as market rates change.

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Estimated Percent Change in Economic Value of Equity

Rate Changes (basis points) June 30, 2020 December 31, 2019

Rate Changes (basis points) September 30, 2020 December 31, 2019

-100 (41.90) % (2.00) %

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis