Appraisal of collateral (1)Appraisal of collateral (1)Appraisal adjustments (2)Appraisal adjustments (2)As of September 30, 2020, and as a result of COVID-19 loan modifications, the Company has modifications of 33 loans aggregating $37,987,000, primarily consisting of short-term payment deferrals. 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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020.
or
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number:
0-15752
 
 
CENTURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
 
 
COMMONWEALTH OF MASSACHUSETTS
  
04-2498617
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
400 MYSTIC AVENUE, MEDFORD, MA
  
02155
(Address of principal executive offices)
  
(Zip Code)
(781)
391-4000
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of class
  
Trading
Symbol(s)
  
Name of exchange
Class A Common Stock, $1.00 par value
  
CNBKA
  
Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
(Check one):
 
Large accelerated filer     ☐    Accelerated filer     ☒
Non-accelerated
filer		     ☐    Smaller reporting company     ☐
     Emerging growth company     ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    ☐  Yes    ☒
 
No
As of October 31, 2020, the Registrant had outstanding:
 
Class A Common Stock, $1.00 par value
   3,655,469 Shares
Class B Common Stock, $1.00 par value
   1,912,440 Shares
 
 
 
Table of Contents
Century Bancorp, Inc.
Index
 
        
Page
Number
  
Part I
        3  
Item 1.     
       4  
       5  
       6  
       7  
       8  
       9  
       10-33  
Item 2.        33-46  
Item 3.        47  
Item 4.        47  
Part II.
     
Item 1.       
48-49
  
Item 1A.       
48-49
  
Item 2.       
48-49
  
Item 3.       
48-49
  
Item 4.       
48-49
  
Item 5.       
48-49
  
Item 6.       
48-49
  
     50  
Exhibits
  
Ex-31.1
   
 
Ex-31.2
   
 
Ex-32.1
   
 
Ex-32.2
   
 
Ex-101
Instance Document
   
 
Ex-101
Schema Document
   
 
Ex-101
Calculation Linkbase Document
   
 
Ex-101
Labels Linkbase Document
   
 
Ex-101
Presentation Linkbase Document
   
 
Ex-101
Definition Linkbase Document
   
Table of Contents
Forward Looking Statements
Except for the historical information contained herein, this Quarterly Report on
Form 10-Q
may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, without limitation, (i) the fact that the Company’s success is dependent to a significant extent upon general economic conditions in New England, (ii) the fact that the Company’s earnings depend to a great extent upon the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings) generated by the Bank and thus the Bank’s results of operations may be adversely affected by increases or decreases in interest rates, (iii) the fact that the banking business is highly competitive and the profitability of the Company depends upon the Bank’s ability to attract loans and deposits within its market area, where the Bank competes with a variety of traditional banking and other institutions such as credit unions and finance companies, and (iv) the fact that a significant portion of the Company’s loan portfolio is comprised of commercial loans, exposing the Company to the risks inherent in loans based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans. Accordingly, the Company’s profitability may be negatively impacted by errors in risk analyses, and by loan defaults, and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions, (v) the fact that the Company’s business, financial condition and results of operation have been or may be negatively impacted by the extent and duration of the
COVID-19
pandemic. These factors, as well as general economic and market conditions, may materially and adversely affect the market price of shares of the Company’s common stock. Because of these and other factors, past financial performance should not be considered an indicator of future performance. The forward-looking statements contained herein represent the Company’s judgment as of the date of this
Form 10-Q,
and the Company cautions readers not to place undue reliance on such statements.
 
Page 3 of 50
Table of Contents
PART I – Item 1
Century Bancorp, Inc.
Consolidated Balance Sheets (unaudited)
(In thousands, except share data)
 
Assets
   
September 30,
2020
     December 31,
2019		  
Cash and due from banks
   
$
101,679
 
   $ 44,420  
Federal funds sold and interest-bearing deposits in other banks
   
 
310,901
 
     214,273  
  
 
 
    
 
 
  
Total cash and cash equivalents
   
 
412,580
 
     258,693  
Securities
available-for-sale,
amortized cost $291,440 and $260,924, respectively
   
 
291,632
 
     260,502  
Securities
held-to-maturity,
fair value $2,484,947 and $2,361,304, respectively
   
 
2,407,176
 
     2,351,120  
Federal Home Loan Bank of Boston, stock at cost
   
 
13,361
 
     19,471  
Equity securities, cost $1,635 and $1,635, respectively
   
 
1,645
 
     1,688  
Loans, net:
     
Construction and land development
   
 
9,116
 
     8,992  
Commercial and industrial
   
 
1,315,407
 
     812,417  
Municipal
   
 
130,047
 
     120,455  
Commercial real estate
   
 
784,895
 
     786,102  
Residential real estate
   
 
443,703
 
     371,897  
Consumer and overdrafts
   
 
19,866
 
     21,893  
Home equity
   
 
287,099
 
     304,363  
  
 
 
    
 
 
  
Total loans, net
   
 
2,990,133
 
     2,426,119  
Less: allowance for loan losses
   
 
33,394
 
     29,585  
  
 
 
    
 
 
  
Net loans
   
 
2,956,739
 
     2,396,534  
Bank premises and equipment
   
 
37,340
 
     33,952  
Accrued interest receivable
   
 
13,223
 
     13,110  
Goodwill
   
 
2,714
 
     2,714  
Other assets
   
 
159,016
 
     154,640  
  
 
 
    
 
 
  
Total assets
   
$
 6,295,426
 
   $  5,492,424  
  
 
 
    
 
 
  
Liabilities
             
Deposits:
     
Demand deposits
   
$
991,590
 
   $ 712,842  
Savings and NOW deposits
   
 
1,932,339
 
     1,678,250  
Money market accounts
   
 
1,906,676
 
     1,453,572  
Time deposits
   
 
581,866
 
     555,447  
  
 
 
    
 
 
  
Total deposits
   
 
5,412,471
 
     4,400,111  
Securities sold under agreements to repurchase
   
 
231,030
 
     266,045  
Other borrowed funds
   
 
152,248
 
     370,955  
Subordinated debentures
   
 
36,083
 
     36,083  
Due to broker
   
 
9,977
 
     —    
Other liabilities
   
 
90,183
 
     86,649  
  
 
 
    
 
 
  
Total liabilities
   
 
5,931,992
 
     5,159,843  
Stockholders’ Equity
             
Preferred Stock – $1.00 par value; 100,000 shares authorized; no shares issued and outstanding
   
 
—  
 
     —    
Common stock, Class A, $1.00 par value per share; authorized 10,000,000 shares; issued 3,655,469 shares and 3,650,949 shares, respectively
   
 
3,656
 
     3,651  
Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,912,440 shares and 1,916,960 shares respectively
   
 
1,912
 
     1,917  
Additional
paid-in
capital
   
 
12,292
 
     12,292  
Retained earnings
   
 
367,836
 
     338,980  
  
 
 
    
 
 
  
  
 
385,696
 
     356,840  
Unrealized gains(losses) on securities
available-for-sale,
net of taxes
   
 
137
 
     (308 ) 
Unrealized losses on securities transferred to
held-to-maturity,
net of taxes
   
 
(1,341
) 
     (1,812 ) 
Pension liability, net of taxes
   
 
(21,058
) 
     (22,139 ) 
  
 
 
    
 
 
  
Total accumulated other comprehensive loss, net of taxes
   
 
(22,262
) 
     (24,259 ) 
  
 
 
    
 
 
  
Total stockholders’ equity
   
 
363,434
 
     332,581  
  
 
 
    
 
 
  
Total liabilities and stockholders’ equity
   
$
6,295,426
 
   $ 5,492,424  
  
 
 
    
 
 
  
See accompanying notes to unaudited consolidated interim financial statements.
 
Page 4 of 50
Table of Contents
Century Bancorp, Inc.
Consolidated Statements of Income (unaudited)
(In thousands, except share data)
 
    
Three months ended
September 30,
     
Nine months ended
September 30,
  
    
2020
      2019     
2020
      2019  
Interest income
            
Loans
   
$
21,431
 
    $ 22,117     
$
63,478
 
    $ 65,106  
Securities
held-to-maturity
   
 
14,186
 
      14,623     
 
44,701
 
      43,006  
Securities
available-for-sale
   
 
818
 
      2,184     
 
3,493
 
      7,305  
Federal funds sold and interest-bearing deposits in other banks
   
 
69
 
      928     
 
747
 
      3,204  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total interest income
   
 
36,504
 
      39,852     
 
112,419
 
      118,621  
  
 
 
     
 
 
     
 
 
     
 
 
  
Interest expense
            
Savings and NOW deposits
   
 
1,726
 
      5,445     
 
7,569
 
      16,788  
Money market accounts
   
 
3,056
 
      5,050     
 
12,090
 
      15,805  
Time deposits
   
 
2,858
 
      3,038     
 
9,141
 
      8,724  
Securities sold under agreements to repurchase
   
 
241
 
      697     
 
1,176
 
      1,572  
Other borrowed funds and subordinated debentures
   
 
1,292
 
      1,852     
 
4,093
 
      5,274  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total interest expense
   
 
9,173
 
      16,082     
 
34,069
 
      48,163  
  
 
 
     
 
 
     
 
 
     
 
 
  
Net interest income
   
 
27,331
 
      23,770     
 
78,350
 
      70,458  
Provision for loan losses
     
900
        75       
3,675
        700  
  
 
 
     
 
 
     
 
 
     
 
 
  
Net interest income after provision for loan losses
   
 
26,431
 
      23,695     
 
74,675
 
      69,758  
Other operating income
            
Service charges on deposit accounts
   
 
2,239
 
      2,310     
 
6,558
 
      6,801  
Lockbox fees
   
 
996
 
      937     
 
2,850
 
      3,018  
Net gains on sales of securities
   
 
—
 
      53     
 
—
 
      61  
Gains on sales of mortgage loans
   
 
—
 
      —     
 
—
 
      154  
Other income
   
 
934
 
      986     
 
3,112
 
      3,676  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total other operating income
   
 
4,169
 
      4,286     
 
12,520
 
      13,710  
  
 
 
     
 
 
     
 
 
     
 
 
  
Operating expenses
            
Salaries and employee benefits
   
 
11,362
 
      10,670     
 
33,020
 
      32,621  
Occupancy
   
 
1,477
 
      1,463     
 
4,448
 
      4,686  
Equipment
   
 
809
 
      862     
 
2,608
 
      2,440  
FDIC assessments
   
 
410
 
      —     
 
720
 
      723  
Other
   
 
4,109
 
      4,467     
 
12,586
 
      13,447  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total operating expenses
   
 
18,167
 
      17,462     
 
53,382
 
      53,917  
  
 
 
     
 
 
     
 
 
     
 
 
  
Income before income taxes
   
 
12,433
 
      10,519     
 
33,813
 
      29,551  
Provision for income taxes
   
 
1,546
 
      435     
 
3,204
 
      584  
  
 
 
     
 
 
     
 
 
     
 
 
  
Net income
   
$
10,887
 
    $ 10,084     
$
30,609
 
    $ 28,967  
  
 
 
     
 
 
     
 
 
     
 
 
  
Share data:
            
Weighted average number of shares outstanding, basic
            
Class A
   
 
3,655,469
 
      3,650,449     
 
3,653,429
 
      3,627,076  
Class B
   
 
1,912,440
 
      1,917,460     
 
1,914,480
 
      1,940,833  
Weighted average number of shares outstanding, diluted
            
Class A
   
 
5,567,909
 
      5,567,909     
 
5,567,909
 
      5,567,909  
Class B
   
 
1,912,440
 
      1,917,460     
 
1,914,480
 
      1,940,833  
Basic earnings per share:
            
Class A
   
$
2.36
 
    $ 2.19     
$
6.64
 
    $ 6.30  
Class B
   
$
1.18
 
    $ 1.09     
$
3.32
 
    $ 3.15  
Diluted earnings per share
            
Class A
   
$
1.96
 
    $ 1.81     
$
5.50
 
    $ 5.20  
Class B
   
$
1.18
 
    $ 1.09     
$
3.32
 
    $ 3.15  
See accompanying notes to unaudited consolidated interim financial statements.
 
Page 5 of 50
Table of Contents
Century Bancorp, Inc.
Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
 
    
Three months ended September 30,
  
    
2020
      2019  
Net income
   
$
 10,887
 
    $  10,084  
Other comprehensive income, net of tax:
      
Unrealized gains on securities:
      
Unrealized gains arising during period
   
 
486
 
      113  
Less: reclassification adjustment for gains included in net income
   
 
—  
 
      (39 ) 
  
 
 
     
 
 
  
Total unrealized gains on securities
   
 
486
 
      74  
Accretion of net unrealized losses transferred
   
 
145
 
      155  
Defined benefit pension plans:
      
Amortization of prior service cost and loss included in net periodic benefit cost
   
 
360
 
      263  
  
 
 
     
 
 
  
Other comprehensive income
   
 
991
 
      492  
  
 
 
     
 
 
  
Comprehensive income
   
$
11,878
 
    $ 10,576  
  
 
 
     
 
 
  
    
Nine months ended September 30,
  
    
2020
      2019  
Net income
   
$
30,609
 
    $ 28,967  
Other comprehensive income (loss), net of tax:
      
Unrealized gains (losses) on securities:
      
Unrealized gains (losses) arising during period
   
 
445
 
      (112 ) 
Less: reclassification adjustment for gains included in net income
   
 
—  
 
      (44 ) 
  
 
 
     
 
 
  
Total unrealized gains (losses) on securities
   
 
445
 
      (156 ) 
Accretion of net unrealized losses transferred
   
 
471
 
      574  
Defined benefit pension plans:
      
Amortization of prior service cost and loss included in net periodic benefit cost
   
 
1,081
 
      790  
  
 
 
     
 
 
  
Other comprehensive income
   
 
1,997
 
      1,208  
  
 
 
     
 
 
  
Comprehensive income
   
$
32,606
 
    $ 30,175  
  
 
 
     
 
 
  
See accompanying notes to unaudited consolidated interim financial statements.
 
Page 6 of 50
Table of Contents
Century Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Three Months Ended September 30, 2020 and 2019
 
    
Class A
Common
Stock
     
Class B
Common
Stock
    
Additional
Paid-In

Capital
     
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
Stockholders’
Equity
  
    
(In thousands)
  
Balance at June 30, 2019
    $  3,620      $  1,948     $  12,292      $  319,270     $ (18,193 )    $  318,937  
Net income
      —          —         —          10,084       —         10,084  
Other comprehensive income, net of tax:
               
Unrealized holding (losses) gains arising during period, net of $23 in taxes and $53 in realized gains
      —          —         —          —         74       74  
Accretion of unrealized losses on securities transferred to
held-to-maturity,
net of $54 in taxes
      —          —         —          —         155       155  
Pension liability adjustment, net of $103 in taxes
      —          —         —          —         263       263  
Conversion of Class B Common Stock to Class A Common Stock, 30,000 shares
      30        (30 )      —          —         —         —    
Cash dividends paid, Class A common stock, $.12 per share
      —          —         —          (438 )      —         (438 ) 
Cash dividends paid, Class B common stock, $.06 per share
      —          —         —          (115 )      —         (115 ) 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Balance at September 30, 2019
    $ 3,650      $ 1,918     $ 12,292      $ 328,801     $ (17,701 )    $ 328,960  
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Balance at June 30, 2020
   
$
3,653
 
   
$
1,915
 
  
$
12,292
 
   
$
357,595
 
  
$
(23,253
) 
  
$
352,202
 
Net income
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
10,887
 
    
 
10,887
 
Other comprehensive income, net of tax:
               
Unrealized holding (losses) gains arising during period, net of $181 in taxes
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
486
 
  
 
486
 
Accretion of unrealized losses on securities transferred to
held-to-maturity,
net of $51 in taxes
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
145
 
  
 
145
 
Pension liability adjustment, net of $142 in taxes
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
360
 
  
 
360
 
Conversion of Class B Common Stock to Class A Common Stock, 3,000 shares
   
 
3
 
   
 
(3
) 
  
 
—  
 
   
 
—  
 
  
 
—  
 
  
 
—  
 
Cash dividends paid, Class A common stock, $0.14 per share
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
(512
) 
  
 
—  
 
  
 
(512
) 
Cash dividends paid, Class B common stock, $0.07 per share
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
(134
) 
  
 
—  
 
  
 
(134
) 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Balance at September 30, 2020
   
$
3,656
 
   
$
1,912
 
  
$
12,292
 
   
$
367,836
 
  
$
(22,262
) 
  
$
363,434
 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
See accompanying notes to unaudited consolidated interim financial statements.
 
Page 7 of 50
Table of Contents
Century Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Nine Months Ended September 30, 2020 and 2019
 
    
Class A
Common
Stock
     
Class B
Common
Stock
    
Additional
Paid-In

Capital
     
Retained
Earnings
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Total
Stockholders’
Equity
  
    
(In thousands)
  
Balance at December 31, 2018
    $  3,608      $  1,960     $  12,292      $  301,488     $ (18,909 )    $  300,439  
Net income
      —          —         —          28,967       —         28,967  
Other comprehensive income, net of tax:
               
Unrealized holding (losses) gains arising during period, net of $52 in taxes and $61 in realized gains
      —          —         —          —         (156 )      (156 ) 
Accretion of unrealized losses on securities transferred to
held-to-maturity,
net of $205 in taxes
      —          —         —          —         574       574  
Pension liability adjustment, net of $309 in taxes
      —          —         —          —         790       790  
Conversion of Class B Common Stock to Class A Common Stock, 42,120 shares
      42        (42 )      —          —         —         —    
Cash dividends paid, Class A common stock, $.36 per share
      —          —         —          (1,304 )      —         (1,304 ) 
Cash dividends paid, Class B common stock, $.18 per share
      —          —         —          (350 )      —         (350 ) 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Balance at September 30, 2019
    $ 3,650      $ 1,918     $ 12,292      $ 328,801     $ (17,701 )    $ 328,960  
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Balance at December 31, 2019
   
$
3,651
 
   
$
1,917
 
  
$
12,292
 
   
$
338,980
 
  
$
(24,259
) 
  
$
332,581
 
Net income
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
30,609
 
    
 
30,609
 
Other comprehensive income, net of tax:
               
Unrealized holding (losses) gains arising during period, net of $169 in taxes
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
445
 
  
 
445
 
Accretion of unrealized losses on securities transferred to
held-to-maturity,
net of $166 in taxes
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
471
 
  
 
471
 
Pension liability adjustment, net of $422 in taxes
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
—  
 
  
 
1,081
 
  
 
1,081
 
Conversion of Class B Common Stock to Class A Common Stock, 4,520 shares
   
 
5
 
   
 
(5
) 
  
 
—  
 
   
 
—  
 
  
 
—  
 
  
 
—  
 
Cash dividends paid, Class A common stock, $0.38 per share
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
(1,389
) 
  
 
—  
 
  
 
(1,389
) 
Cash dividends paid, Class B common stock, $0.19 per share
   
 
—  
 
   
 
—  
 
  
 
—  
 
   
 
(364
) 
  
 
—  
 
  
 
(364
) 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
Balance at September 30, 2020
   
$
3,656
 
   
$
1,912
 
  
$
12,292
 
   
$
367,836
 
  
$
(22,262
) 
  
$
363,434
 
  
 
 
     
 
 
    
 
 
     
 
 
    
 
 
    
 
 
  
See accompanying notes to unaudited consolidated interim financial statements.
 
Page 8 of 50
Table of Contents
Century Bancorp, Inc.
Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 2020 and 2019
 
    
Nine months ended
September 30,
  
    
2020
     2019  
CASH FLOWS FROM OPERATING ACTIVITIES:
     
Net income
   
$
30,609
 
   $ 28,967  
Adjustments to reconcile net income to net cash provided by operating activities:
     
Gain on sales of mortgage loans
   
 
—  
 
     (154 ) 
Net gains on sales of securities
   
 
—  
 
     (61 ) 
Net loss (gain) on equity securities
   
 
43
 
     (76 ) 
Provision for loan losses
   
 
3,675
 
     700  
Deferred income taxes
   
 
(1,487
) 
     (593 ) 
Net depreciation and amortization
   
 
(1,167
) 
     (1,693 ) 
(Increase) decrease in accrued interest receivable
   
 
(113
) 
     1,131  
Decrease (increase) in other assets
   
 
3,897
 
     (1,037 ) 
Increase in other liabilities
   
 
3,396
 
     2,029  
  
 
 
    
 
 
  
Net cash provided by operating activities
   
 
38,853
 
     29,213  
  
 
 
    
 
 
  
CASH FLOWS FROM INVESTING ACTIVITIES:
     
Proceeds from redemptions of Federal Home Loan Bank of Boston stock
   
 
10,836
 
     13,801  
Purchase of Federal Home Loan Bank of Boston stock
   
 
(4,726
) 
     (9,852 ) 
Proceeds from calls/maturities of securities
available-for-sale
   
 
57,493
 
     115,574  
Proceeds from sales of securities
available-for-sale
   
 
—  
 
     16,285  
Purchase of securities
available-for-sale
   
 
(87,751
) 
     (57,005 ) 
Proceeds from calls/maturities of securities
held-to-maturity
   
 
596,043
 
     313,358  
Purchase of securities
held-to-maturity
   
 
(638,023
) 
     (427,124 ) 
Proceeds from sales of securities
held-to-maturity
   
 
—  
 
     1,194  
(Purchases) proceeds from life insurance policies
   
 
(6,000
) 
     5,124  
Net increase in loans
   
 
(563,850
) 
     (98,915 ) 
Proceeds from sales of portfolio loans
   
 
—  
 
     8,871  
Capital expenditures
   
 
(5,873
) 
     (9,962 ) 
  
 
 
    
 
 
  
Net cash used in investing activities
   
 
(641,851
) 
     (128,651 ) 
  
 
 
    
 
 
  
CASH FLOWS FROM FINANCING ACTIVITIES:
     
Net increase (decrease) in time deposits
   
 
26,419
 
     (27,505 ) 
Net increase (decrease) in demand, savings, money market and NOW deposits
   
 
985,941
 
     (39,606 ) 
Cash dividends
   
 
(1,753
) 
     (1,654 ) 
Net (decrease) increase in securities sold under agreements to repurchase
   
 
(35,015
) 
     152,995  
Net (decrease) increase in other borrowed funds
   
 
(218,707
) 
     6,810  
  
 
 
    
 
 
  
Net cash provided by financing activities
   
 
756,885
 
     91,040  
  
 
 
    
 
 
  
Net increase (decrease) in cash and cash equivalents
   
 
153,887
 
     (8,398 ) 
Cash and cash equivalents at beginning of period
   
 
258,693
 
     342,503  
  
 
 
    
 
 
  
Cash and cash equivalents at end of period
   
$
412,580
 
   $ 334,105  
  
 
 
    
 
 
  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     
Cash paid (received) during the period for:
     
Interest
   
$
34,384
 
   $ 48,127  
Income taxes
   
 
1,750
 
     (6,604 ) 
Change in unrealized gains (losses) on securities
available-for-sale,
net of taxes
   
 
445
 
     (156 ) 
Change in unrealized gains (losses) on securities transferred to
held-to-maturity,
net of taxes
   
 
471
 
     574  
Pension liability adjustment, net of taxes
   
 
1,081
 
     790  
Change in due to broker
   
 
9,977
 
     —    
See accompanying notes to unaudited consolidated interim financial statements.
 
Page 9 of 50
Table of Contents
Century Bancorp, Inc.
Notes to Unaudited Consolidated Interim Financial Statements
Nine Months Ended September 30, 2020 and 2019
Note 1. Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly owned subsidiaries, Century Subsidiary Investments, Inc. (“CSII”), Century Subsidiary Investments, Inc. II (“CSII II”), Century Subsidiary Investments, Inc. III (“CSII III”) and Century Financial Services Inc. (“CFSI”). CSII, CSII II, and CSII III are engaged in buying, selling and holding investment securities. CFSI has the power to engage in financial agency, securities brokerage, and investment and financial advisory services and related securities credit. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”) and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company’s business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment.
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The Company’s quarterly report on Form
10-Q
should be read in conjunction with the Company’s Annual Report on Form
10-K
for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission and which provides a summary of the Company’s significant accounting principles. The interim results of consolidated operations are not necessarily indicative of the results for the entire year. Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act allows certain companies to delay FASB ASU
2016-13,
Measurement of Credit Losses on Financial Instruments (CECL), including the current expected credit losses methodology for estimating allowances for credit losses. The Company has elected to delay FASB ASU
2016-13.
This ASU will be delayed until the earlier of the date on which the national emergency concerning the COVID–19 outbreak declared by the President on March 15, 2020 terminates or December 31, 2020, with an effective retrospective implementation date of January 1, 2020.
Material estimates that are susceptible to change in the near term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on a review of factors, including historical
charge-off
rates with additional allocations based on qualitative risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. Certain risks and uncertainties remain in the allowance for loan losses as a result of the
COVID-19
pandemic that occurred during 2020. Future provision levels will be dependent upon the length of the economic disruption and the effectiveness of government programs to mitigate the economic impact. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.
 
Page 10 of 50
Table of Contents
Note 2. Securities
Available-for-Sale
 
    
September 30, 2020
      December 31, 2019  
    
Amortized
Cost
     
Gross
Unrealized
Gains
     
Gross
Unrealized
Losses
     
Fair
Value
      Amortized
Cost		      Gross
Unrealized
Gains		      Gross
Unrealized
Losses		      Fair
Value		  
     (in thousands)  
SBA Backed Securities
   
$
46,147
 
   
$
 —  
 
   
$
 282
 
   
$
45,865
 
    $ 54,331      $ 23      $  143      $ 54,211  
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
   
 
189,531
 
   
 
767
 
   
 
394
 
   
 
189,904
 
      184,580        139        532        184,187  
Privately Issued Residential
Mortgage-Backed Securities
   
 
347
 
   
 
1
 
   
 
7
 
   
 
341
 
      397        1        2        396  
Obligations Issued by States
and Political Subdivisions
   
 
48,815
 
   
 
—  
 
   
 
—  
 
   
 
48,815
 
      18,016        60        —          18,076  
Other Debt Securities
   
 
6,600
 
   
 
113
 
   
 
6
 
   
 
6,707
 
      3,600        51        19        3,632  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
 291,440
 
   
$
881
 
   
$
689
 
   
$
 291,632
 
    $  260,924      $  274      $ 696      $  260,502  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Included in SBA Backed Securities, and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $196,225,000 and $186,245,000 at September 30, 2020 and December 31, 2019, respectively. Also included in securities
available-for-sale
are securities at fair value pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $30,112,000 and $32,297,000 at September 30, 2020 and December 31, 2019, respectively. Also included in securities
available-for-sale
are securities at fair value pledged for borrowing at the Federal Reserve Bank discount window $9,433,000 and $0 at September 30, 2020 and December 31, 2019, respectively. There were no sales of
available-for-sale
securities for the nine months ended September 30, 2020. The Company realized gross gains of $13,000 from the proceeds of $16,285,000 from the sales of
available-for-sale
securities for the nine months ended September 30, 2019.
Debt securities of U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.
The following table shows the maturity distribution of the Company’s securities
available-for-sale
at September 30, 2020.
 
    
Amortized
Cost
     
Fair
Value
  
    
(in thousands)
  
Within one year
   
$
52,775
 
   
$
52,763
 
After one but within five years
   
 
124,574
 
   
 
125,000
 
After five but within ten years
   
 
97,505
 
   
 
97,430
 
More than 10 years
   
 
16,586
 
   
 
16,439
 
  
 
 
     
 
 
  
Total
   
$
 291,440
 
   
$
 291,632
 
  
 
 
     
 
 
  
The weighted average remaining life of investment securities
available-for-sale
at September 30, 2020 was 4.7 years. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations. Also $236,600,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of September 30, 2020 and December 31, 2019, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered that the principal and interest on these securities are from issuers that are investment grade.
The unrealized loss on SBA Backed Securities, U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2020 or December 31, 2019.
 
Page 11 of 50
Table of Contents
In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates of underlying loans.
The following table shows the temporarily impaired securities of the Company’s
available-for-sale
portfolio at September 30, 2020. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 14 and 20 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 148 holdings at September 30, 2020.
 
    
September 30, 2020
  
    
Less than 12 months
     
12 months or longer
     
Total
  
Temporarily Impaired Investments
   
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
  
    
(in thousands)
  
SBA Backed Securities
   
$
 16,625
 
   
$
50
 
   
$
 29,240
 
   
$
 232
 
   
$
45,865
 
   
$
 282
 
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
   
 
29,870
 
   
 
156
 
   
 
33,686
 
   
 
238
 
   
 
63,556
 
   
 
394
 
Privately Issued Residential Mortgage-Backed Securities
   
 
219
 
   
 
7
 
   
 
—  
 
   
 
—  
 
   
 
219
 
   
 
7
 
Obligations Issued by States and Political Subdivisions
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Other Debt Securities
   
 
—  
 
   
 
—  
 
   
 
1,294
 
   
 
6
 
   
 
1,294
 
   
 
6
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total temporarily impaired securities
   
$
46,714
 
   
$
 213
 
   
$
64,220
 
   
$
476
 
   
$
 110,934
 
   
$
689
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The following table shows the temporarily impaired securities of the Company’s
available-for-sale
portfolio at December 31, 2019. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 45 and 18 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 122 holdings at December 31, 2019.
 
     December 31, 2019  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair
Value		      Unrealized
Losses		      Fair
Value		      Unrealized
Losses		      Fair
Value		      Unrealized
Losses		  
     (in thousands)  
SBA Backed Securities
    $ 14,560      $ 30      $  22,092      $  113      $ 36,652      $  143  
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
      108,806        379        29,178        153        137,984        532  
Privately Issued Residential Mortgage-Backed Securities
      252        2        —          —          252        2  
Obligations Issued by States and Political Subdivisions
      —          —          —          —          —          —    
Other Debt Securities
      800        1        481        18        1,281        19  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total temporarily impaired securities
    $  124,418      $  412      $ 51,751      $ 284      $  176,169      $ 696  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
Page 12 of 50
Table of Contents
Note 3. Investment Securities
Held-to-Maturity
 
    
September 30, 2020
      December 31, 2019  
    
Amortized
Cost
     
Gross
Unrealized
Gains
     
Gross
Unrealized
Losses
     
Estimated
Fair Value
      Amortized
Cost		      Gross
Unrealized
Gains		      Gross
Unrealized
Losses		      Estimated Fair
Value		  
     (in thousands)  
U.S. Government Sponsored Enterprises
   
$
248,211
 
   
$
594
 
   
$
494
 
   
$
248,311
 
    $ 98,867      $ 527      $ 96      $ 99,298  
SBA Backed Securities
   
 
39,384
 
   
 
2,375
 
   
 
—  
 
   
 
41,759
 
      44,379        182        303        44,258  
U.S. Government Sponsored Enterprises Mortgage- Backed Securities
   
 
2,119,581
 
   
 
76,185
 
   
 
889
 
   
 
2,194,877
 
      2,207,874        20,720        10,846        2,217,748  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
 2,407,176
 
   
$
 79,154
 
   
$
 1,383
 
   
$
 2,484,947
 
    $  2,351,120      $  21,429      $  11,245      $  2,361,304  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Included in total investment securities
held-to-maturity
are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,722,363,000 and $1,776,399,000 at September 30, 2020 and December 31, 2019, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $597,810,000 and $399,646,000 at September 30, 2020 and December 31, 2019, respectively. Also included in investment securities
held-to-maturity
are securities at fair value pledged for borrowing at the Federal Reserve Bank discount window of $156,360,000 and $0 at September 30, 2020 and December 31, 2019, respectively. There were no sales of
held-to-maturity
securities for the nine months ended September 30, 2020. The Company realized gross gains of $48,000 from the proceeds of $1,194,000 from the sales of
held-to-maturity
securities for the nine months ended September 30, 2019. The sales of securities
held-to-maturity
relate to certain mortgage backed securities for which the company has previously collected a substantial portion of its principal investment.
At September 30, 2020 and December 31, 2019, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Debt securities of U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprises Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.
The following table shows the maturity distribution of the Company’s securities
held-to-maturity
at September 30, 2020.
 
    
Amortized
Cost
     
Fair
Value
  
    
(in thousands)
  
Within one year
   
$
64,436
 
   
$
64,929
 
After one but within five years
   
 
1,954,304
 
   
 
2,018,674
 
After five but within ten years
   
 
385,428
 
   
 
397,910
 
More than ten years
   
 
3,008
 
   
 
3,434
 
  
 
 
     
 
 
  
Total
   
$
 2,407,176
 
   
$
 2,484,947
 
  
 
 
     
 
 
  
The weighted average remaining life of investment securities
held-to-maturity
at September 30, 2020 was 3.6 years. Included in the weighted average remaining life calculation at September 30, 2020 were $207,730,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations. Also $89,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of September 30, 2020 and December 31, 2019, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.
The unrealized loss on U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not more likely than not that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2020 or December 31, 2019. In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary.
 
Page 13 of 50
Table of Contents
The following table shows the temporarily impaired securities of the Company’s
held-to-maturity
portfolio September 30, 2020. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months or longer. There are 30 and 3 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 576 holdings at September 30, 2020.
 
    
September 30, 2020
  
    
Less Than 12 Months
     
12 Months or Longer
     
Total
  
Temporarily Impaired Investments
   
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
     
Fair
Value
     
Unrealized
Losses
  
    
(in thousands)
  
SBA Backed Securities
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
 —  
 
   
$
—  
 
   
$
—  
 
US Government Sponsored Enterprises Mortgage-Backed Securities
   
 
128,240
 
   
 
494
 
   
 
—  
 
   
 
—  
 
   
 
128,240
 
   
 
494
 
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
   
 
129,158
 
   
 
840
 
   
 
4,176
 
   
 
49
 
   
 
133,334
 
   
 
889
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total temporarily impaired securities
   
$
 257,398
 
   
$
 1,334
 
   
$
 4,176
 
   
$
49
 
   
$
 261,574
 
   
$
 1,383
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
The following table shows the temporarily impaired securities of the Company’s
held-to-maturity
portfolio at December 31, 2019. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 114 and 103 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 531 holdings at December 31, 2019.
 
     December 31, 2019  
     Less Than 12 Months      12 Months or Longer      Total  
Temporarily Impaired Investments    Fair
Value		      Unrealized
Losses		      Fair
Value		      Unrealized
Losses		      Fair
Value		      Unrealized
Losses		  
     (in thousands)  
U.S. Treasury
    $ —        $ —        $ —        $ —        $ —        $ —    
U.S. Government Sponsored Enterprises
      24,420        72        9,976        24        34,396        96  
SBA Backed Securities
      25,251        303        —          —          25,251        303  
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
      613,905        3,949        389,919        6,897        1,003,824        10,846  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total temporarily impaired securities
    $  663,576      $  4,324      $  399,895      $  6,921      $  1,063,471      $  11,245  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
Page 14 of 50
Table of Contents
Note 4. Allowance for Loan Losses
The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors.
The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated.
 
     Three months ended      Nine months ended  
    
2020
      2019     
2020
      2019  
     (in thousands)  
Allowance for loan losses, beginning of period
   
$
 32,516
 
    $  29,070     
$
 29,585
 
    $  28,543  
Loans charged off
   
 
(41
) 
      (118 )    
 
(120
) 
      (336 ) 
Recoveries on loans previously
charged-off
   
 
19
 
      70     
 
254
 
      190  
  
 
 
     
 
 
     
 
 
     
 
 
  
Net recoveries (charge-offs)
   
 
(22
) 
      (48 )    
 
134
 
      (146 ) 
Provision charged to expense
   
 
900
 
      75     
 
3,675
 
      700  
  
 
 
     
 
 
     
 
 
     
 
 
  
Allowance for loan losses, end of period
   
$
33,394
 
    $ 29,097     
$
33,394
 
    $ 29,097  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
Page 15 of 50
Table of Contents
Further information pertaining to the allowance for loan losses for the three months ending September 30, 2020 is as follows:
 
   
Construction
and Land
Development
    
Commercial
and
Industrial
    
Municipal
    
Commercial
Real Estate
    
Residential
Real Estate
    
Consumer
    
Home
Equity
    
Unallocated
    
Total
  
Allowance for loan losses:
  
(in thousands)
  
Balance at June 30, 2020
  
$
289
 
  
$
13,121
 
  
$
2,868
 
  
$
11,303
 
  
$
3,094
 
  
$
289
 
  
$
1,465
 
  
$
87
 
  
$
32,516
 
Charge-offs
  
 
—  
 
  
 
(20
) 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(21
) 
  
 
—  
 
  
 
—  
 
  
 
(41
) 
Recoveries
  
 
—  
 
  
 
12
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
7
 
  
 
—  
 
  
 
—  
 
  
 
19
 
Provision
  
 
76
 
  
 
2,731
 
  
 
(300
) 
  
 
(522
) 
  
 
(958
) 
  
 
35
 
  
 
(200
) 
  
 
38
 
  
 
900
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance at September 30, 2020
  
$
365
 
  
$
15,844
 
  
$
2,568
 
  
$
10,781
 
  
$
2,136
 
  
$
310
 
  
$
1,265
 
  
$
125
 
  
$
33,394
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Amount of allowance for loan losses for loans deemed to be impaired
  
$
—  
 
  
$
12
 
  
$
—  
 
  
$
75
 
  
$
—  
 
  
$
—  
 
  
$
—  
 
  
$
—  
 
  
$
87
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Amount of allowance for loan losses for loans not deemed to be impaired
  
$
365
 
  
$
15,832
 
  
$
2,568
 
  
$
10,706
 
  
$
2,136
 
  
$
310
 
  
$
1,265
 
  
$
125
 
  
$
33,307
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans:
                  
Ending balance
  
$
 9,116
 
  
$
 1,315,407
 
  
$
 130,047
 
  
$
 784,895
 
  
$
 443,703
 
  
$
 19,866
 
  
$
 287,099
 
  
$
 —  
 
  
$
 2,990,133
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans deemed to be impaired
  
$
—  
 
  
$
160
 
  
$
—  
 
  
$
2,675
 
  
$
236
 
  
$
—  
 
  
$
—  
 
  
$
—  
 
  
$
3,071
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans not deemed to be impaired
  
$
9,116
 
  
$
1,315,247
 
  
$
130,047
 
  
$
782,220
 
  
$
443,467
 
  
$
19,866
 
  
$
287,099
 
  
$
—  
 
  
$
2,987,062
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2020 is as follows:
 
 
   
Construction
and Land
Development
    
Commercial
and
Industrial
    
Municipal
    
Commercial
Real Estate
    
Residential
Real Estate
    
Consumer
    
Home
Equity
    
Unallocated
    
Total
  
Allowance for loan losses:
  
(in thousands)
  
Balance at December 31, 2019
  
$
331
 
  
$
11,596
 
  
$
2,566
 
  
$
11,464
 
  
$
2,194
 
  
$
312
 
  
$
1,065
 
  
$
57
 
  
$
29,585
 
Charge-offs
  
 
—  
 
  
 
(31
) 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(89
) 
  
 
—  
 
  
 
—  
 
  
 
(120
) 
Recoveries
  
 
—  
 
  
 
182
 
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
67
 
  
 
5
 
  
 
—  
 
  
 
254
 
Provision
  
 
34
 
  
 
4,097
 
  
 
2
 
  
 
(683
) 
  
 
(58
) 
  
 
20
 
  
 
195
 
  
 
68
 
  
 
3,675
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance at September 30, 2020
  
$
365
 
  
$
15,844
 
  
$
2,568
 
  
$
10,781
 
  
$
2,136
 
  
$
310
 
  
$
1,265
 
  
$
125
 
  
$
33,394
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Amount of allowance for loan losses for loans deemed to be impaired
  
$
—  
 
  
$
12
 
  
$
—  
 
  
$
75
 
  
$
—  
 
  
$
—  
 
  
$
—  
 
  
$
—  
 
  
$
87
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Amount of allowance for loan losses for loans not deemed to be impaired
  
$
365
 
  
$
15,832
 
  
$
2,568
 
  
$
10,706
 
  
$
2,136
 
  
$
310
 
  
$
1,265
 
  
$
125
 
  
$
33,307
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans:
                  
Ending balance
  
$
9,116
 
  
$
1,315,407
 
  
$
130,047
 
  
$
784,895
 
  
$
443,703
 
  
$
19,866
 
  
$
287,099
 
  
$
—  
 
  
$
2,990,133
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans deemed to be impaired
  
$
—  
 
  
$
160
 
  
$
—  
 
  
$
2,675
 
  
$
236
 
  
$
—  
 
  
$
—  
 
  
$
—  
 
  
$
3,071
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans not deemed to be impaired
  
$
9,116
 
  
$
1,315,247
 
  
$
130,047
 
  
$
782,220
 
  
$
443,467
 
  
$
19,866
 
  
$
287,099
 
  
$
—  
 
  
$
2,987,062
 
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
The allocations for the provision for loan losses increased for the three and nine months ended September 30, 2020, primarily as a result of the economic uncertainties associated with the novel coronavirus disease (COVID–19) pandemic and increased loan balances. During the nine months ending September 30, 2020, the Company’s provision was primarily attributable to an increase in commercial and industrial, offset, somewhat, by a decrease in commercial real estate. During the three months ending September 30, 2020, the Company’s provision was primarily attributable to an increase in commercial and industrial, offset, somewhat, by a decrease in commercial real estate, residential real estate, and municipal balances. As of September 30, 2020, the Company’s U.S. Small Business Administration (SBA) Payroll Protection Program (PPP) loans totaled approximately 1,324 loans for approximately $232 million. These types of loans are categorized as commercial and industrial and are 100% guaranteed by the SBA and require no allowance for loan losses.
 
Page 16 of 50
Table of Contents
Further information pertaining to the allowance for loan losses for the three months ending September 30, 2019 is as follows:
 
    Construction
and Land
Development		     Commercial
and Industrial		     Municipal     Commercial
Real Estate		     Residential
Real Estate		     Consumer     Home
Equity		     Unallocated     Total  
Allowance for loan losses:
   (in thousands)  
Balance at June 30, 2019
   $  1,052     $ 11,338     $ 1,832     $ 10,848     $ 2,210     $ 380     $ 1,120     $  290     $ 29,070  
Charge-offs
     —         (57 )      —         —         —         (61 )      —         —         (118 ) 
Recoveries
     —         23       —         —         —         47       —         —         70  
Provision
     (752 )      9       751       53       (24 )      (84 )      (33 )      155       75  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance at September 30, 2019
   $ 300     $ 11,313     $ 2,583     $ 10,901     $ 2,186     $ 282     $ 1,087     $ 445     $ 29,097  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Amount of allowance for loan losses for loans deemed to be impaired
   $ —       $ 2     $ —       $ 86     $ —       $ —       $ —       $ —       $ 88  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Amount of allowance for loan losses for loans not deemed to be impaired
   $ 300     $ 11,311     $ 2,583     $ 10,815     $ 2,186     $ 282     $ 1,087     $ 445     $ 29,009  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans:
                  
Ending balance
   $ 7,824     $  783,950     $  121,802     $  765,385     $  364,317     $  21,748     $  310,635     $ —       $  2,375,661  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans deemed to be impaired
   $ —       $ 203     $ —       $ 2,373     $ —       $ —       $ —       $ —       $ 2,576  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans not deemed to be impaired
   $ 7,824     $ 783,747     $ 121,802     $ 763,012     $ 364,317     $ 21,748     $ 310,635     $ —       $ 2,373,085  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2019 is as follows:
 
 
    Construction
and Land
Development		     Commercial
and Industrial		     Municipal     Commercial
Real Estate		     Residential
Real Estate		     Consumer     Home
Equity		     Unallocated     Total  
Allowance for loan losses:
   (in thousands)  
Balance at December 31, 2018
   $ 1,092     $ 10,998     $ 1,838     $ 10,663     $ 2,190     $ 365     $ 1,111     $ 286     $ 28,543  
Charge-offs
     —         (108 )      —         —         —         (228 )      —         —         (336 ) 
Recoveries
     —         49       —         —         —         141       —         —         190  
Provision
     (792 )      374       745       238       (4 )      4       (24 )      159       700  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Ending balance at September 30, 2019
   $ 300     $ 11,313     $ 2,583     $ 10,901     $ 2,186     $ 282     $ 1,087     $ 445     $ 29,097  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Amount of allowance for loan losses for loans deemed to be impaired
   $ —       $ 2     $ —       $ 86     $ —       $ —       $ —       $ —       $ 88  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Amount of allowance for loan losses for loans not deemed to be impaired
   $ 300     $ 11,311     $ 2,583     $ 10,815     $ 2,186     $ 282     $ 1,087     $ 445     $ 29,009  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans:
                  
Ending balance
   $ 7,824     $ 783,950     $ 121,802     $ 765,385     $ 364,317     $ 21,748     $ 310,635     $ —       $ 2,375,661  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans deemed to be impaired
   $ —       $ 203     $ —       $ 2,373     $ —       $ —       $ —       $ —       $ 2,576  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Loans not deemed to be impaired
   $ 7,824     $ 783,747     $ 121,802     $ 763,012     $ 364,317     $ 21,748     $ 310,635     $ —       $ 2,373,085  
 
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
During the nine months ending September 30, 2019, the Company’s provision was primarily attributable to an increase in municipal, commercial and industrial, and commercial real estate balances offset, somewhat, by a decrease in construction and land development balances. During the three months ending September 30, 2019, the Company’s provision was primarily attributable to an increase in municipal balances offset, somewhat, by a decrease in construction and land development balances. The Company monitors the outlook for the industries in which our borrowers operate. Healthcare and higher education are two of the primary industries. In particular the Company utilizes outlooks and forecasts from various sources. The Company also monitors the volatility of the losses within the historical data. Overall, there were improvements in historical loss rates.
 
Page 17 of 50
Table of Contents
The Company utilizes a six grade internal loan rating system for commercial real estate, construction, commercial, and municipal loans as follows:
Loans rated
1-3
(Pass):
Loans in this category are considered “pass” rated loans with low to average risk.
Loans rated 4 (Monitor):
These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of September 30, 2020 and December 31, 2019.
Loans rated 5 (Substandard):
Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of September 30, 2020 and December 31, 2019.
Loans rated 6 (Doubtful):
Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of September 30, 2020 and December 31, 2019 and full collectability is doubtful.
Impaired:
Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.
The following table presents the Company’s loans by risk rating at September 30, 2020.
 
    
Construction
and Land
Development
     
Commercial
and
Industrial
     
Municipal
     
Commercial
Real Estate
  
Grade:
   
(in thousands)
  
1-3
(Pass)
   
$
 9,116
 
   
$
 1,308,693
 
   
$
 130,047
 
   
$
 757,953
 
4 (Monitor)
   
 
—  
 
   
 
6,554
 
   
 
—  
 
   
 
24,267
 
5 (Substandard)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
6 (Doubtful)
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Impaired
   
 
—  
 
   
 
160
 
   
 
—  
 
   
 
2,675
 
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
9,116
 
   
$
1,315,407
 
   
$
130,047
 
   
$
784,895
 
  
 
 
     
 
 
     
 
 
     
 
 
  
The following table presents the Company’s loans by risk rating at December 31, 2019.
 
     Construction
and Land
Development		      Commercial
and
Industrial		      Municipal      Commercial
Real Estate		  
Grade:    (in thousands)  
1-3
(Pass)
    $  8,992      $  807,486      $  120,455      $  759,402  
4 (Monitor)
      —          4,025        —          24,354  
5 (Substandard)
      —          —          —          —    
6 (Doubtful)
      —          —          —          —    
Impaired
      —          906        —          2,346  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 8,992      $ 812,417      $ 120,455      $ 786,102  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
Page 18 of 50
Table of Contents
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2020 and are included within the total loan portfolio.
 
    
Commercial
and
Industrial
     
Municipal
     
Commercial
Real
Estate
     
Total
  
Credit Rating:
   
(in thousands)
  
Aaa – Aa3
   
$
 647,056
 
   
$
64,806
 
   
$
38,365
 
   
$
750,227
 
A1 – A3
   
 
184,409
 
   
 
7,228
 
   
 
145,467
 
   
 
337,104
 
Baa1 – Baa3
   
 
50,000
 
   
 
51,133
 
   
 
140,486
 
   
 
241,619
 
Ba2
   
 
—  
 
   
 
5,080
 
   
 
—  
 
   
 
5,080
 
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
881,465
 
   
$
 128,247
 
   
$
 324,318
 
   
$
 1,334,030
 
  
 
 
     
 
 
     
 
 
     
 
 
  
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2019.
 
     Commercial
and
Industrial		      Municipal      Commercial
Real
Estate		      Total  
Credit Rating:    (in thousands)  
Aaa – Aa3
    $  523,644      $ 53,273      $ 40,437      $ 617,354  
A1 – A3
      186,044        7,354        148,346        341,744  
Baa1 – Baa3
      —          51,133        144,711        195,844  
Ba2
      —          5,895        —          5,895  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 709,688      $  117,655      $  333,494      $  1,160,837  
  
 
 
     
 
 
     
 
 
     
 
 
  
The Company utilized payment performance as credit quality indicators for the loan types listed below. The indicators are depicted in the table “aging of past due loans,” below.
Further information pertaining to the allowance for loan losses at September 30, 2020 follows:
 
    
Accruing
30-89 Days

Past Due
     
Non
Accrual
     
Accruing
Greater
than
90 Days
     
Total
Past
Due
     
Current
Loans
     
Total
  
    
(in thousands)
  
Construction and land development
   
$
—  
 
   
$
—  
 
   
$
 —  
 
   
$
—  
 
   
$
9,116
 
   
$
9,116
 
Commercial and industrial
   
 
623
 
   
 
3
 
   
 
—  
 
   
 
626
 
   
 
1,314,781
 
   
 
1,315,407
 
Municipal
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
130,047
 
   
 
130,047
 
Commercial real estate
   
 
3,596
 
   
 
593
 
   
 
49
 
   
 
4,238
 
   
 
780,657
 
   
 
784,895
 
Residential real estate
   
 
569
 
   
 
532
 
   
 
—  
 
   
 
1,101
 
   
 
442,602
 
   
 
443,703
 
Consumer and overdrafts
   
 
15
 
   
 
—  
 
   
 
—  
 
   
 
15
 
   
 
19,851
 
   
 
19,866
 
Home equity
   
 
1,206
 
   
 
291
 
   
 
—  
 
   
 
1,497
 
   
 
285,602
 
   
 
287,099
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
 6,009
 
   
$
 1,419
 
   
$
49
 
   
$
 7,477
 
   
$
2,982,656
 
   
$
2,990,133
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
Page 19 of 50
Table of Contents
Further information pertaining to the allowance for loan losses at December 31, 2019 follows:
 
     Accruing
30-89 Days

Past Due		      Non
Accrual		      Accruing
Greater
than
90 Days		      Total
Past
Due		      Current
Loans		      Total  
     (in thousands)  
Construction and land development
    $ —        $ —        $  —        $ —        $ 8,992      $ 8,992  
Commercial and industrial
      227        400        —          627        811,790        812,417  
Municipal
      —          —          —          —          120,455        120,455  
Commercial real estate
      840        492        —          1,332        784,770        786,102  
Residential real estate
      1,563        683        —          2,246        369,651        371,897  
Consumer and overdrafts
      18        4        —          22        21,871        21,893  
Home equity
      603        435        —          1,038        303,325        304,363  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  3,251      $  2,014      $ —        $  5,265      $  2,420,854      $  2,426,119  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Impaired loans
A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are
charged-off
when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include: the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is
charged-off
against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2019.
 
Page 20 of 50
Table of Contents
The following is information pertaining to impaired loans for September 30, 2020:
 
    
Carrying
Value
     
Unpaid
Principal
Balance
     
Required
Reserve
     
Average
Carrying
Value
for 3 Months
Ending
9/30/20
     
Interest
Income
Recognized
for 3 Months
Ending
9/30/20
     
Average
Carrying
Value
for 9 Months
Ending
9/30/20
     
Interest
Income
Recognized
for 9 Months
Ending
9/30/20
  
With no required reserve recorded:
   
 
(in thousands)
 
Construction and land development
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
Commercial and industrial
   
 
67
 
   
 
88
 
   
 
—  
 
   
 
73
 
   
 
—  
 
   
 
288
 
   
 
2
 
Municipal
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Commercial real estate
   
 
592
 
   
 
624
 
   
 
—  
 
   
 
601
 
   
 
—  
 
   
 
365
 
   
 
—  
 
Residential real estate
   
 
236
 
   
 
236
 
   
 
—  
 
   
 
236
 
   
 
—  
 
   
 
118
 
   
 
—  
 
Consumer
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Home equity
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
895
 
   
$
948
 
   
$
—  
 
   
$
910
 
   
$
—  
 
   
$
771
 
   
$
2
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With required reserve recorded:
                     
Construction and land development
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
Commercial and industrial
   
 
93
 
   
 
93
 
   
 
12
 
   
 
100
 
   
 
1
 
   
 
95
 
   
 
3
 
Municipal
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Commercial real estate
   
 
2,083
 
   
 
2,209
 
   
 
75
 
   
 
2,094
 
   
 
21
 
   
 
2,140
 
   
 
65
 
Residential real estate
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Consumer
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Home equity
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
2,176
 
   
$
2,302
 
   
$
87
 
   
$
2,194
 
   
$
22
 
   
$
2,235
 
   
$
68
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total:
                     
Construction and land development
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
   
$
—  
 
Commercial and industrial
   
 
160
 
   
 
181
 
   
 
12
 
   
 
173
 
   
 
1
 
   
 
383
 
   
 
5
 
Municipal
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Commercial real estate
   
 
2,675
 
   
 
2,833
 
   
 
75
 
   
 
2,695
 
   
 
21
 
   
 
2,505
 
   
 
65
 
Residential real estate
   
 
236
 
   
 
236
 
   
 
—  
 
   
 
236
 
   
 
—  
 
   
 
118
 
   
 
—  
 
Consumer
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Home equity
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
3,071
 
   
$
3,250
 
   
$
87
 
   
$
3,104
 
   
$
22
 
   
$
3,006
 
   
$
70
 
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
 
Page 21 of 50
Table of Contents
The following is information pertaining to impaired loans for September 30, 2019:
 
     Carrying
Value		      Unpaid
Principal
Balance		      Required
Reserve		      Average
Carrying
Value
for 3 Months
Ending
9/30/19		      Interest
Income
Recognized
for 3 Months
Ending
9/30/19		      Average
Carrying
Value
for 9 Months
Ending
9/30/19		      Interest
Income
Recognized
for 9 Months
Ending
9/30/19		  
With no required reserve recorded:
      (in thousands)  
Construction and land development
    $ —        $ —        $ —        $ —        $ —        $ —        $ —    
Commercial and industrial
      87        306        —          89        2        87        6  
Municipal
      —          —          —          —          —          —          —    
Commercial real estate
      167        194        —          729        —          529        —    
Residential real estate
      —          —          —          —          —          —          —    
Consumer
      —          —          —          —          —          —          —    
Home equity
      —          —          —          —          —          —          —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 254      $ 500      $ —        $ 818      $ 2      $ 616      $ 6  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
With required reserve recorded:
                     
Construction and land development
    $ —        $ —        $ —        $ —        $ —        $ —        $ —    
Commercial and industrial
      116        116        2        310        2        299        6  
Municipal
      —          —          —          —          —          —          —    
Commercial real estate
      2,206        2,326        86        2,140        23        2,350        67  
Residential real estate
      —          —          —          —          —          —          —    
Consumer
      —          —          —          —          —          —          —    
Home equity
      —          —          —          —          —          —          —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 2,322      $ 2,442      $ 88      $ 2,450      $ 25      $ 2,649      $ 73  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total:
                     
Construction and land development
    $ —        $ —        $ —        $ —        $ —        $ —        $ —    
Commercial and industrial
      203        422        2        399        4        386        12  
Municipal
      —          —          —          —          —          —          —    
Commercial real estate
      2,373        2,520        86        2,869        23        2,879        67  
Residential real estate
      —          —          —          —          —          —          —    
Consumer
      —          —          —          —          —          —          —    
Home equity
      —          —          —          —          —          —          —    
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 2,576      $ 2,942      $ 88      $ 3,268      $ 27      $ 3,265      $ 79  
  
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Troubled debt restructurings (“TDR”) are identified as modifications in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modifications did not result in an increase in the allowance for these loans beyond any previously established allocations.
There was no TDR that occurred during the nine-month period ended September 30, 2020. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during the first nine months of 2020.
Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for
COVID-19
modifications. The Company can then suspend the requirements under GAAP for loan modifications related to
COVID-19
that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of
COVID-19
as being a TDR, including the requirement to determine impairment for accounting purposes.
 
Page 22 of 50
Table of Contents
As of September 30, 2020, and as a result of
COVID-19
loan modifications, the Company has modifications of 33 loans aggregating $37,987,000, primarily consisting of short-term payment deferrals. Of these modifications, $37,987,000, or 100%, were performing in accordance with their modified terms.
There was no troubled debt restructuring that occurred during the nine-month period ended September 30, 2019. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during the first nine months of 2019.
Note 5. Reclassifications Out of Accumulated Other Comprehensive Income (a)
Amount Reclassified from Accumulated Other Comprehensive Income
 
Details about Accumulated Other
Comprehensive Income Components
   
Three
Months Ended
September 30, 2020
         Three
Months Ended
September 30, 2019		        
Affected Line Item in the Statement where Net
Income is Presented
(in thousands)
Unrealized gains and losses on
available-for-sale
securities
   
$
—  
 
     $ 54      
Net gains on sales of investments
  
 
—  
 
       (15 )     
Provision for income taxes
  
 
 
      
 
 
      
  
$
—  
 
     $ 39      
Net income
  
 
 
      
 
 
      
Accretion of unrealized losses transferred
   
$
(196
) 
     $ (209 )     
Interest on securities
held-to-maturity
  
 
51
 
       54      
Provision for income taxes
  
 
 
      
 
 
      
  
$
(145
) 
     $ (155 )     
Net income
  
 
 
      
 
 
      
Amortization of defined benefit
pension items
           
Prior-service costs
   
$
(29
) 
   (b)   $ (29 )    (b)  
Salaries and employee benefits
Actuarial gains (losses)
   
 
(472
) 
   (b)     (337 )    (b)  
Salaries and employee benefits
  
 
 
      
 
 
      
Total before tax
   
 
(501
) 
       (366 )     
Income before taxes
  
 
 
      
 
 
      
Tax (expense) or benefit
   
 
141
 
       103      
Provision for income taxes
  
 
 
      
 
 
      
Net of tax
   
$
(360
) 
     $ (263 )     
Net income
  
 
 
      
 
 
      
Details about Accumulated Other
Comprehensive Income Components
   
Nine
Months Ended
September 30, 2020
         Nine
Months Ended
September 30, 2019		        
Affected Line Item in the Statement where Net
Income is Presented
(in thousands)
Unrealized gains and losses on
available-for-sale
securities
   
$
—  
 
     $ 61      
Net gains on sales of investments
  
 
—  
 
       (17 )     
Provision for income taxes
  
 
 
      
 
 
      
  
$
—  
 
     $ 44      
Net income
  
 
 
      
 
 
      
Accretion of unrealized losses transferred
   
$
(637
) 
     $ (779 )     
Interest on securities
held-to-maturity
  
 
166
 
       205      
Provision for income taxes
  
 
 
      
 
 
      
  
$
(471
) 
     $ (574 )     
Net income
  
 
 
      
 
 
      
Amortization of defined benefit
pension items
           
Prior-service costs
   
$
(86
) 
   (b)   $ (86 )    (b)  
Salaries and employee benefits
Actuarial gains (losses)
   
 
(1,417
) 
   (b)     (1,013 )    (b)  
Salaries and employee benefits
  
 
 
      
 
 
      
Total before tax
   
 
(1,503
) 
       (1,099 )     
Income before taxes
  
 
 
      
 
 
      
Tax (expense) or benefit
   
 
422
 
       309      
Provision for income taxes
  
 
 
      
 
 
      
Net of tax
   
$
(1,081
) 
     $ (790 )     
Net income
  
 
 
      
 
 
      
 
(a)
Amount in parentheses indicates reductions to net income.
(b)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Employee Benefits footnote (Note 7) for additional details).
 
Page 23 of 50
Table of Contents
Note 6. Earnings per Share (“EPS”)
Class A and Class B shares participate equally in undistributed earnings. Under the Company’s Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.
Diluted EPS includes the dilutive effect of common stock equivalents and assumes the conversion of all Class B common stock; basic EPS excludes all common stock equivalents. The Company had no common stock equivalents outstanding for the periods ended September 30, 2020 and 2019.
The following table is a reconciliation of basic EPS and diluted EPS.
 
     Three Months Ended
September 30,		      Nine Months Ended
September 30,		  
(in thousands except share and per share data)   
2020
      2019     
2020
      2019  
Basic EPS Computation:
            
Numerator:
            
Net income, Class A
   
$
8,630
 
    $ 7,986     
$
24,254
 
    $ 22,853  
Net income, Class B
   
 
2,257
 
      2,098     
 
6,355
 
      6,114  
Denominator:
            
Weighted average shares outstanding, Class A
   
 
3,655,469
 
      3,650,449     
 
3,653,429
 
      3,627,076  
Weighted average shares outstanding, Class B
   
 
1,912,440
 
      1,917,460     
 
1,914,480
 
      1,940,833  
Basic EPS, Class A
   
$
2.36
 
    $ 2.19     
$
6.64
 
    $ 6.30  
Basic EPS, Class B
   
 
1.18
 
      1.09     
 
3.32
 
      3.15  
  
 
 
     
 
 
     
 
 
     
 
 
  
Diluted EPS Computation:
            
Numerator:
            
Net income, Class A
   
$
8,630
 
    $ 7,986     
$
24,254
 
    $ 22,853  
Net income, Class B
   
 
2,257
 
      2,098     
 
6,355
 
      6,114  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total net income, for diluted EPS, Class A computation
   
 
10,887
 
      10,084     
 
30,609
 
      28,967  
Denominator:
            
Weighted average shares outstanding, basic, Class A
   
 
3,655,469
 
      3,650,449     
 
3,653,429
 
      3,627,076  
Weighted average shares outstanding, Class B
   
 
1,912,440
 
      1,917,460     
 
1,914,480
 
      1,940,833  
  
 
 
     
 
 
     
 
 
     
 
 
  
Weighted average shares outstanding diluted, Class A
   
 
5,567,909
 
      5,567,909     
 
5,567,909
 
      5,567,909  
Weighted average shares outstanding, Class B
   
 
1,912,440
 
      1,917,460     
 
1,914,480
 
      1,940,833  
Diluted EPS, Class A
   
$
1.96
 
    $ 1.81     
$
5.50
 
    $ 5.20  
Diluted EPS, Class B
   
 
1.18
 
      1.09     
 
3.32
 
      3.15  
  
 
 
     
 
 
     
 
 
     
 
 
  
Note 7. Employee Benefits
The Company provides pension benefits to its employees under a noncontributory, defined benefit plan which is funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and recognizes costs over the estimated employee service period.
The Company also has a Supplemental Executive Insurance/Retirement Plan (the “Supplemental Plan”) which is limited to certain officers and employees of the Company. The Supplemental Plan is accrued on a current basis and recognizes costs over the estimated employee service period.
Executive officers of the Company and its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary, and participants are required to contribute to its cost. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.
 
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Components of Net Periodic Benefit Cost for the Three Months Ended September 30,
 
     Pension Benefits      Supplemental Insurance/
Retirement Plan		  
    
2020
      2019     
2020
      2019  
     (in thousands)  
Service cost
   
$
344
 
    $ 276     
$
353
 
    $ 256  
Interest
   
 
450
 
      473     
 
466
 
      482  
Expected return on plan assets
   
 
(952
) 
      (819 )    
 
—  
 
      —    
Recognized prior service cost (benefit)
   
 
—  
 
      —       
 
29
 
      28  
Recognized net actuarial losses
   
 
261
 
      229     
 
211
 
      109  
  
 
 
     
 
 
     
 
 
     
 
 
  
Net periodic benefit (credit) cost
   
$
103
 
    $ 159     
$
1,059
 
    $ 875  
  
 
 
     
 
 
     
 
 
     
 
 
  
Components of Net Periodic Benefit Cost for the Nine Months Ended September 30,
 
     Pension Benefits      Supplemental Insurance/
Retirement Plan		  
    
2020
      2019     
2020
      2019  
     (in thousands)  
Service cost
   
$
1,032
 
    $ 828     
$
1,059
 
    $ 768  
Interest
   
 
1,350
 
      1,419     
 
1,398
 
      1,445  
Expected return on plan assets
   
 
(2,856
) 
      (2,457 )    
 
—  
 
      —    
Recognized prior service cost (benefit)
   
 
—  
 
      —       
 
87
 
      86  
Recognized net actuarial losses
   
 
783
 
      687     
 
633
 
      326  
  
 
 
     
 
 
     
 
 
     
 
 
  
Net periodic benefit (credit) cost
   
$
309
 
    $ 477     
$
3,177
 
    $ 2,625  
  
 
 
     
 
 
     
 
 
     
 
 
  
Approximately $1,395,000 and $1,506,000 of costs other than service costs, from the table above, are included in other expenses with the remaining cost included in salaries and employee benefits, for the nine months ended September 30, 2020 and 2019, respectively.
Contributions
The Company does not intend to contribute to the Defined Benefit Pension Plan in 2020.
Note 8. Fair Value Measurements
The Company follows FASB ASC
820-10,
Fair Value Measurements and Disclosures and ASU
2016-1,
“Financial Instruments-Overall”
(Subtopic 825-10)
Recognition and Measurement of Financial Assets and Financial Liabilities
, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC
820-10
establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:
Level I – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as
G-7
government, agency securities, listed equities and money market securities, as well as listed derivative instruments.
Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds, and OTC derivatives.
 
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Level III – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have
two-way
markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include municipal securities with no observable fair value with an average life of one year or less. The securities are carried at cost which approximates fair value. A periodic review of underlying financial statements and credit ratings is performed to assess the appropriateness of these valuations.
The results of the fair value hierarchy as of September 30, 2020, are as follows:
 
    
Fair Value Measurements Using
  
    
Carrying
Value
    
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
     
Significant
Observable
Inputs
(Level 2)
     
Significant
Other
Unobservable
Inputs
(Level 3)
  
    
(in thousands)
  
Financial Instruments Measured at Fair Value on a Recurring Basis
           
Securities AFS
           
SBA Backed Securities
   
$
45,865
 
  
$
—  
 
   
$
45,865
 
   
$
—  
 
U.S. Government Agency and Sponsored
Mortgage-Backed Securities
   
 
189,904
 
  
 
—  
 
   
 
189,904
 
   
 
—  
 
Privately Issued Residential Mortgage-
Backed Securities
   
 
341
 
  
 
—  
 
   
 
341
 
   
 
—  
 
Obligations Issued by States and
Political Subdivisions
   
 
48,815
 
  
 
—  
 
   
 
—  
 
   
 
48,815
 
Other Debt Securities
   
 
6,707
 
  
 
—  
 
   
 
6,707
 
   
 
—  
 
  
 
 
    
 
 
     
 
 
     
 
 
  
Total
   
$
 291,632
 
  
$
—  
 
   
$
 242,817
 
   
$
 48,815
 
  
 
 
    
 
 
     
 
 
     
 
 
  
Equity Securities
   
$
1,645
 
  
$
 276
 
   
$
1,369
 
   
$
—  
 
Financial Instruments Measured at Fair Value
on a
Non-recurring
Basis
           
Impaired Loans
   
$
828
 
  
$
—  
 
   
$
—  
 
   
$
828
 
Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not observable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.
Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. All impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) related to impaired loans recognized for the three and nine month periods ended September 30, 2020 amounted to $0 and ($9,000), respectively.
There were no transfers between level 1, 2 and 3 for the nine months ended September 30, 2020. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine months ended September 30, 2020.
 
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The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the
assumptions used to value the assets listed below.
 
Asset
   
Fair Value
     
Valuation Technique
  
Unobservable Input
  
Unobservable Input
Value or Range
Securities AFS
   
$
 48,815
 
   
Discounted cash flow
  
Discount rate
  
0%-1% (3)
Impaired Loans
   
$
828
 
   
Appraisal of collateral (1)
  
Appraisal adjustments (2)
  
0%
 
 
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3)
Weighted averages.
The changes in Level 3 securities for the nine month period ended September 30, 2020 are shown in the table below:
 
    
Obligations
Issued by
States & Political
Subdivisions
  
Balance at December 31, 2019
   
$
13,301
 
Purchases
   
 
53,903
 
Maturities and calls
   
 
(18,357
) 
Amortization
   
 
(32
) 
  
 
 
  
Balance at September 30, 2020
   
$
48,815
 
  
 
 
  
The amortized cost of Level 3 securities was $48,815,000 at September 30, 2020 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.
The fair value of impaired loans decreased by $49,000, for the first nine months of 2020, mainly attributable to one loan that was paid down.
The changes in Level 3 securities for the nine month period ended September 30, 2019, are shown in the table below:
 
     Obligations
Issued by
States & Political
Subdivisions		  
Balance at December 31, 2018
    $ 88,728  
Purchases
      13,290  
Maturities and calls
      (78,196 ) 
Amortization
      (21 ) 
Changes in fair value
      —    
  
 
 
  
Balance at September 30, 2019
    $ 23,801  
  
 
 
  
The amortized cost of Level 3 securities was $23,801,000 at September 30, 2019 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.
The fair value of impaired loans decreased by $78,000, for the first nine months of 2019, mainly attributable to one loan that was removed from impaired loans. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2019.
 
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The results of the fair value hierarchy as of December 31, 2019, are as follows:
 
     Securities AFS Fair Value Measurements Using  
     Carrying
Value		      Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)		      Significant
Observable
Inputs
(Level 2)		      Significant
Other
Unobservable
Inputs
(Level 3)		  
     (in thousands)  
Financial Instruments Measured at Fair Value on a Recurring Basis:
 
  
      
  
      
  
      
 
 
 
SBA Backed Securities
    $ 54,211      $ —        $ 54,211      $ —    
U.S. Government Agency and Sponsored
Mortgage-Backed Securities
      184,187        —          184,187        —    
Privately Issued Residential Mortgage-
Backed Securities
      396        —          396        —    
Obligations Issued by States and
Political Subdivisions
      18,076        —          4,775        13,301  
Other Debt Securities
      3,632           3,632        —    
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $  260,502      $ —        $  247,201      $  13,301  
  
 
 
     
 
 
     
 
 
     
 
 
  
Financial Instruments Measured at Fair Value on a Recurring Basis Equity Securities
    $ 1,688      $  343      $ 1,345      $ —    
Financial Instruments Measured at Fair Value on a
Non-recurring
Basis Impaired Loans
    $ 877      $ —        $ —        $ 877  
Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.
Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for 2019 for the estimated credit loss amounted to $79,000.
There were no transfers between level 1, 2 and 3 for the year ended December 31, 2019. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2019.
The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the assumptions used to value the assets listed below.
 
Asset
    Fair Value     
Valuation Technique
   
Unobservable Input
   
Unobservable Input
Value or Range
Securities AFS
    $  13,301     
Discounted cash flow
   
Discount rate
   
1.5%-3.2% (3)
Impaired Loans
    $ 877     
Appraisal of collateral (1)
   
Appraisal adjustments (2)
   
0%-30% discount
 
 
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3)
Weighted averages.
 
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Note 9. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating fair values of its financial instruments. Excluded from this disclosure are all
non-financial
instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.
Securities
Held-to-Maturity
The fair values of these securities were based on quoted market prices, where available, as provided by third-party investment portfolio pricing vendors. If quoted market prices were not available, fair values provided by the vendors were based on quoted market prices of comparable instruments in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association’s standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Management regards the inputs and methods used by third party pricing vendors to be “Level 2 inputs and methods” as defined in the “fair value hierarchy” provided by FASB.
Loans
The fair value of loans is estimated using the exit price notion consistent with Topic 820, Fair Value Measurement. Fair value is determined based on a discounted cash flow analysis. The discounted cash flow analysis was based on the contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk. For certain
non-performing
assets, fair value of the underlying collateral is determined based on the estimated values of individual receipts.
Time Deposits
The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.
Other Borrowed Funds
The fair value of other borrowed funds is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other borrowed funds of similar remaining maturities.
Subordinated Debentures
The fair value of subordinated debentures is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other subordinated debentures of similar remaining maturities.
 
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The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2020 and December 31, 2019. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include
non-maturity
deposits, short-term borrowings and accrued interest payable.
 
September 30, 2020
  
Carrying Amount
    
Estimated
Fair Value
    
Fair Value Measurements
Level 1 Inputs
    
Level 2 Inputs
    
Level 3 Inputs
  
   
(in thousands)
  
Financial assets:
          
Securities
held-to-maturity
  
$
 2,407,176
 
  
$
 2,484,947
 
  
$
—  
 
  
$
 2,484,947
 
  
$
—  
 
Loans (1)
  
 
2,956,739
 
  
 
2,885,187
 
  
 
—  
 
  
 
—  
 
  
 
2,885,187
 
Financial liabilities:
          
Time deposits
  
 
581,866
 
  
 
596,675
 
  
 
—  
 
  
 
596,675
 
  
 
—  
 
Other borrowed funds
  
 
152,248
 
  
 
159,690
 
  
 
—  
 
  
 
159,690
 
  
 
—  
 
Subordinated debentures
  
 
36,083
 
  
 
36,083
 
  
 
—  
 
  
 
36,083
 
  
 
—  
 
December 31, 2019
          
Financial assets:
          
Securities
held-to-maturity
   $ 2,351,120     $ 2,361,304     $ —       $ 2,361,304     $ —    
Loans (1)
     2,396,534       2,424,770       —         —         2,424,770  
Financial liabilities:
          
Time deposits
     555,447       560,746       —         560,746       —    
Other borrowed funds
     370,955       374,531       —         374,531       —    
Subordinated debentures
     36,083       36,083       —         36,083       —    
 
 
(1)
Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered.
Note 10. Revenue from Contracts with Customers
Revenue from contracts with customers in the scope of ASC Topic 606 is measured based on the consideration specified in the contract with a customer, and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.
The Company’s performance obligations are typically satisfied as services are rendered, and our contracts do not include multiple performance obligations. Payment is generally collected at the time services are rendered, or monthly. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.
The Company pays sales commissions to its employees in accordance with certain incentive plans. The Company expenses sales commissions when incurred if we do not expect to recover these costs from the terms of the contract with the customer. Sales commissions are included in compensation expense.
In certain cases, other parties are involved with providing products and services to our customers. If the Company is a principal in the transaction (providing goods or services itself), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (arranging for another party to provide goods or services), the Company reports its net fee or commission retained as revenue.
 
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Waivers and reversals are recorded as a reduction of revenue either when the revenue is recognized by the Company or at the time the waiver or reversal is earned by the customer.
 
 
A.
Nature of goods and services
The vast majority of the Company’s revenue is specifically
out-of-scope
of Topic 606. For the revenue
in-scope,
the following is a description of principal activities, separated by the timing of revenue recognition, from which the Company generates its revenue from contracts with customers.
 
  a.
Revenue earned at a point in time – Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, NSF fees, credit and debit card interchange fees and foreign exchange transaction fees. Revenue is generally derived from transactional information accumulated by our systems and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is the principal in each of these contracts, with the exception of credit and debit card interchange fees, in which case we are acting as the agent and record revenue net of expenses paid to the principal.
 
  b.
Revenue earned over time – The Company earns revenue from contracts with customers in a variety of ways in which the revenue is earned over a period of time – generally monthly or quarterly. Examples of this type of revenue are deposit account service fees, lockbox fees, investment management fees, merchant referral services, and safe deposit box fees. Account service charges, management fees and referral fees are recognized on a monthly basis while any transaction based income is recorded as the activity occurs. Revenue is primarily based on the number and type of transactions or assets managed and is generally derived from transactional information accumulated by our systems. Revenue is recorded in the same period as the related transactions occur or services are rendered to the customer.
 
 
B.
Disaggregation of revenue
The following table presents total revenues as presented in the Consolidated Statements of Income and the related amounts which are from contracts with customers within the scope of Topic 606. As illustrated here, the vast majority of our revenues are specifically excluded from the scope of Topic 606.
 
    
Nine
Months
Ended

9/30/2020
     
Revenue from
Contracts in
Scope of
Topic 606
      Nine
Months
Ended
9/30/2019		      Revenue from
Contracts in
Scope of
Topic 606		  
     (dollars in thousands)  
Total net interest income
   
$
 78,350
 
   
$
—  
 
    $  70,458      $ —    
  
 
 
     
 
 
     
 
 
     
 
 
  
Noninterest income:
            
Service charges on deposit accounts
   
 
6,558
 
   
 
6,558
 
      6,801        6,801  
Lockbox fees
   
 
2,850
 
   
 
2,850
 
      3,018        3,018  
Net gains on sales of securities
   
 
—  
 
   
 
—  
 
      61        —    
Gains on sales of mortgage loans
   
 
—  
 
   
 
—  
 
      154        —    
Other income
   
 
3,112
 
   
 
1,738
 
      3,676        2,338  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total noninterest income
   
 
12,520
 
   
 
11,146
 
      13,710        12,157  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total revenues
   
$
90,870
 
   
$
 11,146
 
    $ 84,168      $  12,157  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
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Three
Months
Ended

9/30/2020
     
Revenue from
Contracts in
Scope of
Topic 606
      Three
Months
Ended
9/30/2019		      Revenue from
Contracts in
Scope of
Topic 606		  
     (dollars in thousands)  
Total interest income
   
$
 27,331
 
   
$
—  
 
    $  23,770      $ —    
  
 
 
     
 
 
     
 
 
     
 
 
  
Noninterest income:
            
Service charges on deposit accounts
   
 
2,239
 
   
 
2,239
 
      2,310        2,310  
Lockbox fees
   
 
996
 
   
 
996
 
      937        937  
Net gains on sales of securities
   
 
—  
 
   
 
—  
 
      53        —    
Gains on sales of mortgage loans
   
 
—  
 
   
 
—  
 
      —          —    
Other income
   
 
934
 
   
 
580
 
      986        728  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total noninterest income
   
 
4,169
 
   
 
3,815
 
      4,286        3,975  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total revenues
   
$
31,500
 
   
$
 3,815
 
    $ 28,056      $  3,975  
  
 
 
     
 
 
     
 
 
     
 
 
  
The following table provides information about receivables with customers.
 
    
September 30, 2020
      December 31, 2019  
(dollars in thousands)              
Receivables, which are included in “Other assets”
   
$
 1,362
 
    $  1,200  
Note 11. Leases
The Company has operating leases primarily for branch locations as well as data processing centers. The Company’s operating leases have remaining lease terms of 1 year to 32 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. The Company also has one sublease for part of a data processing center that the Company currently leases from a lessor. The sublease expires in 2022 with an option to terminate and no option to extend. Lease income, for the sublease, totaled approximately $30,000 for the nine months ended September 30, 2020. Variable lease costs include costs that are not included in the lease liability.
The components of lease expense were as follows:
 
    
Three
Months
Ended

9/30/2020
     
Nine
Months
Ended

9/30/2020
      Three
Months
Ended
9/30/2019		      Nine
Months
Ended
9/30/2019		  
(in thousands)                            
Operating lease cost
   
$
 546
 
   
$
 1,638
 
    $  550      $  1,676  
Variable lease cost
   
 
135
 
   
 
441
 
      121        405  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total lease cost
   
$
681
 
   
$
2,079
 
    $ 671      $ 2,081  
  
 
 
     
 
 
     
 
 
     
 
 
  
Supplemental cash flow information related to leases was as follows:
 
    
Three
Months
Ended

9/30/2020
     
Nine
Months
Ended

9/30/2020
      Three
Months
Ended
9/30/2019		      Nine
Months
Ended
9/30/2019		  
(in thousands)                            
Cash paid for amounts included in the measurement of lease liabilities:
            
Operating cash flows from operating leases
   
$
 529
 
   
$
 1,586
 
    $  528      $  1,605  
  
 
 
     
 
 
     
 
 
     
 
 
  
Right-of-use
assets obtained in exchange for lease obligations:
            
Operating leases
   
$
431
 
   
$
1,306
 
    $ 433      $ 1,318  
  
 
 
     
 
 
     
 
 
     
 
 
  
 
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Supplemental balance sheet information related to leases was as follows:
 
    
9/30/2020
    
12/31/2019
  
(in thousands, except lease term and discount rate)             
Operating Leases:
     
Operating lease
right-of-use
assets
   
$
 14,124
 
   $  12,521  
Operating lease liabilities
   
$
14,332
 
   $ 12,690  
Weighted Average Remaining Lease Term:
     
Operating Leases
     
11 Years  
       11 Years    
Weighted Average Discount Rate:
     
Operating Leases
     
3.1%
       3.5%  
A summary of future minimum rental payments under such leases as the dates indicated follows:
 
     Minimum Rental Payments  
    
September 30, 2020
      December 31, 2019  
     (in thousands)  
Year Ending December 31, 2020
   
$
397
 
    $ 2,030  
2021
   
 
2,127
 
      1,754  
2022
   
 
1,975
 
      1,603  
2023
   
 
1,920
 
      1,545  
2024
   
 
1,666
 
      1,277  
Thereafter
   
 
8,565
 
      7,312  
  
 
 
     
 
 
  
Total lease payments
   
$
 16,650
 
    $  15,521  
  
 
 
     
 
 
  
Less imputed interest
   
 
(2,318
) 
      (2,831 ) 
  
 
 
     
 
 
  
Present value of lease liability
   
$
14,332
 
    $ 12,690  
  
 
 
     
 
 
  
September 30, 2020 minimum rental payments represent three months of rental payments remaining in calendar year 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At September 30, 2020, the Company had total assets of $6.3 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and
medium-sized
businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher educational institutions primarily throughout Massachusetts, New Hampshire, Rhode Island, Connecticut and New York.
The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity. The Company offers a wide range of services to commercial enterprises, state and local governments and agencies,
non-profit
organizations and individuals. It emphasizes service to small and medium sized businesses and retail customers in its market area. In recent years, the Company has increased business to larger institutions, specifically, healthcare and higher education. The Company makes commercial loans, real estate and construction loans and consumerloans, and accepts savings, time, and demand deposits. In addition, the Company offers its corporate and institutional customers
 
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automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full-service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.
The Company has municipal cash management client engagements in Massachusetts, New Hampshire and Rhode Island composed of approximately 302 government entities.
Net income for the nine months ended September 30, 2020, was $30,609,000 or $5.50 per Class A share diluted, an increase of 5.7% compared to net income of $28,967,000, or $5.20 per Class A share diluted, for the same period a year ago.
Earnings per share (EPS) for each class of stock and time period is as follows:
 
     Three Months
Ended
September 30,		  
    
2020
      2019  
Basic EPS – Class A common
   
$
2.36
 
    $ 2.19  
Basic EPS – Class B common
   
$
1.18
 
    $ 1.09  
Diluted EPS – Class A common
   
$
1.96
 
    $ 1.81  
Diluted EPS – Class B common
   
$
1.18
 
    $ 1.09  
     Nine Months
Ended
September 30,		  
    
2020
      2019  
Basic EPS – Class A common
   
$
6.64
 
    $ 6.30  
Basic EPS – Class B common
   
$
3.32
 
    $ 3.15  
Diluted EPS – Class A common
   
$
5.50
 
    $ 5.20  
Diluted EPS – Class B common
   
$
3.32
 
    $ 3.15  
Net interest income totaled $78,400,000 for the nine months ended September 30, 2020 compared to $70,500,000 for the same period in 2019. The 11.2% increase in net interest income for the period is primarily due to a decrease in interest expense as a result of falling interest rates. Prepayment penalties collected amounted to approximately $946,000 for the first nine months of 2020 compared to $18,000 for the same period last year. The net interest margin decreased from 2.08% on a fully
tax-equivalent
basis for the first nine months of 2019 to 2.01% for the same period in 2020. This was primarily the result of increased margin pressure during the recent decrease in interest rates across the yield curve.
The average balances of earning assets increased for the first nine months of 2020 compared to the same period last year, by $609,000,000 or 12.3%, combined with an average yield decrease of 0.55%, resulting in a decrease in interest income of $6,200,000. The average balance of interest-bearing liabilities increased for the first nine months of 2020 compared to the same period last year, by $486,900,000 or 12.1%, combined with an average interest-bearing liabilities interest cost decrease of 0.59%, resulting in a decrease in interest expense of $14,100,000.
The trends in the net interest margin are illustrated in the graph below
 

 
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The margin remained relatively stable for the first three quarters of 2018. During the fourth quarter of 2018 and first and second quarters of 2019, the Company increased its average interest-bearing deposits and average earning assets. This increased net interest income but decreased the net interest margin. During the third quarter of 2019, the net interest margin increased mainly as a result of deposit rate decreases. These deposits increased net interest income and the net interest margin. During the fourth quarter of 2019, the net interest margin increased mainly as a result of prepayment penalties collected. Prepayment penalties collected amounted to $1.4 million and contributed approximately eleven basis points to the net interest margin for the fourth quarter of 2019. The net interest margin decreased during the first quarter of 2020 mainly as a result of decreases in rates on earning assets. This was partially offset by prepayment penalties collected of $874,000 and contributed approximately seven basis points to the net interest margin. The net interest margin decreased during the second and third quarters of 2020 primarily the result of increased margin pressure during the recent decrease in interest rates across the yield curve. While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will positively impact the net interest margin.
The provision for loan losses increased by $2,975,000 from $700,000 for the nine months ended September 30, 2019 to $3,675,000 for the same period in 2020, primarily as a result of the economic uncertainties associated with the novel coronavirus disease (COVID–19) pandemic and increased loan balances, offset by decreases in historical loss rates. Refer to the allowance for loan loss section of the management discussion and analysis for additional discussion. Nonperforming assets totaled $1,400,000 at September 30, 2020, compared to $2,014,000 at December 31, 2019.
The Company’s effective tax rate increased from 2.0% for the nine months ended September 30, 2019 to 9.5% for the same period in 2020. This was primarily as a result of an increase in taxable income relative to total income and a reduction in tax accruals, during 2019, related to sequestration of the refundable portion of our alternative minimum tax (AMT) credit carryforward. On January 14, 2019, the IRS updated its announcement “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations” to clarify that refundable AMT credits under Section 53(e) of the Internal Revenue Code are not subject to sequestration for taxable years beginning after December 31, 2017. On March 27, 2020, the Coronavirus, Aid, Relief and Economic Security (CARES) Act was signed into law. As a result of the CARES Act, the full balance of the AMT credit was refunded during 2020.
During the third quarter of 2019, the Company purchased the existing Brookline branch location that the Company was leasing. Also, during the third quarter of 2019, the Company purchased a future branch location in Salem, New Hampshire. The Company plans to open this branch during the first quarter of 2021. During the second quarter of 2020, the Company executed a lease for a future branch location in Needham, Massachusetts. The Company plans to open this branch during the second quarter of 2021.
Impact of
COVID-19
During the first three quarters of 2020, the
COVID-19
pandemic caused economic turmoil for individuals and businesses throughout the country and, in particular, our market area. Many businesses were required to fully or partially shut down. Many businesses laid off and/or furloughed employees as a result. Unemployment has increased significantly, and GDP declined significantly. This may cause loan defaults in the future as customers are unable to make their contractual loan payments. The Company has increased its provision for loan losses in response to this increased risk. Future provision levels will be dependent upon the length of the economic disruption and the effectiveness of government programs to mitigate the economic impact of the shutdowns. The Company’s revenue has been and may continue to be negatively impacted as transaction fees have declined due to decreased volume.
In response to the pandemic, on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act, among other things, provides cash payments to certain individuals and has various programs for businesses. In particular, it includes the Payroll Protection Program (PPP) which provides forgivable loans to qualified small businesses, primarily to allow these businesses to continue to pay their employees. The original amount allocated to the program was $349 billion, which was exhausted on April 16, 2020. On April 24, 2020, an additional allocation of $310 billion was signed into law. These loans are funded by participating banks and are 100% guaranteed by the U.S. Small Business Administration (SBA). If utilized primarily for payroll, subject to certain other conditions, the loans may be forgiven, in whole or in part, and repaid by the SBA. As of September 30, 2020, Century Bank’s PPP loans totaled approximately 1,324 loans for approximately $232 million. The fees collected, from the SBA, amount to approximately $8.0 million. The fees are being amortized over the lives of the loans utilizing the level-yield method.
The Company is considered an essential business based on criteria set by the Governor of the Commonwealth of Massachusetts. Despite being permitted to continue its operations throughout the pandemic due to its status as an essential business, the operations of the Company nevertheless have been affected as a result of remote work arrangements and the unavailability of employees from time to time. The Company may continue to be affected by a work stoppage, forced quarantine, or other interruption or the unavailability of key employees. While the effects of
COVID-19
are likely to have a
far-reaching,
long-lasting effect on the global, national, and Massachusetts, we believe we have sufficient capital and financial strength, as well as liquidity resources to mitigate the effects of the
COVID-19
pandemic on our operations and financial condition, while continuing to serve our communities and protect shareholder value.
 
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Recent Market Developments
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“D-F
Act”) became law. The
D-F
Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope, affecting many aspects of bank and financial market regulation. The
D-F
Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The
D-F
Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The
D-F
Act broadened the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on
non-interest-bearing
transaction accounts through December 31, 2012.
In addition, the
D-F
Act added a new Section 13 to the Bank Holding Company Act, the
so-called
“Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December 2013 and under an extended conformance regulation compliance was required to be achieved by July 21, 2015. The conformance period for investments in and relationships with certain “legacy covered funds” was extended to July 21, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation. The federal banking agencies have issued amendments to the Rule to provide greater clarity and certainty about what activities are prohibited and to improve the effective allocation of compliance resources, and to conform the Rule to the EGRRCPA (discussed below). Effective October 1, 2020, further amendments to the Rule took effect, which modifies existing exemptions from the definition of covered fund, add new exclusions from the definition of covered fund and provide relief in other areas.
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which 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 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. As a result of the CARES Act, the full balance of the AMT credit was refunded during 2020. The Tax Act also contains 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, the dividend received deduction and net operating loss carryforwards. Tax Act changes for individuals include lower tax rates, mortgage interest and state and local tax limitations as well as an increase in the standard deduction, among others.
Economic Growth, Regulatory Relief, and Consumer Protection Act
On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or the EGRRCPA, became law. This is arguably the most significant financial institution legislation since the
D-F
Act. The EGRRCPA changes certain of the regulatory requirements of the
D-F
Act and includes provisions intended to relieve the regulatory burden on “community banks.” Among other things, for qualifying community banks with less than $10 billion in total consolidated assets, the EGRRCPA contains a safe harbor from the
D-F
Act “ability to repay” mortgage requirements, an exemption from the Volcker Rule, may permit filing of simplified Call Reports, and potentially will result in some alleviation of the
D-F
Act and U.S. Basel III capital mandates. The EGRRCPA requires the federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average
 
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total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%. The federal banking agencies jointly issued a final rule, effective January 1, 2020, which would set the minimum ratio at 9%. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements including the capital ratio requirements that are required to be considered well capitalized under Section 38 of Federal Deposit Insurance Act.
Coronavirus Aid, Relief and Economic Security (CARES) Act and Families First Coronavirus Response Act (FFCRA)
On March 18, 2020 the Families First Coronavirus Response Act (FFCRA) was signed into law and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The FFCRA and the CARES Act provide relief for families and businesses impacted by the coronavirus pandemic. The provisions in this legislation include, among other things, loan programs for businesses, expanded unemployment insurance benefits, stimulus payments to certain taxpayers, new provisions on sick leave and family leave, and funding for a variety of health-related efforts and government programs. The CARES Act also allowed a temporary deferral of FASB ASU
2016-13,
Measurement of Credit Losses on Financial Instruments. The Company has elected to defer FASB ASU
2016-13.
Also, as a result of the CARES Act, the full balance of the AMT was refunded in 2020.
Recent Accounting Developments
Recently Adopted Accounting Standards Updates
In August 2018, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
2018-15,
Intangibles-Goodwill and Other-Internal Use Software (Subtopic
350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain
internal-use
software (and hosting arrangements that include an internal use software license). This ASU is effective for annual reporting periods beginning after December 15, 2019. The effect of this ASU did not have a material impact on the Company’s consolidated financial position.
In August 2018, FASB issued ASU
2018-13,
Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU is effective for annual reporting periods beginning after December 15, 2019. The effect of this update did not have a material impact on the Company’s disclosures.
In January 2017, the FASB issued ASU
2017-04,
Intangibles—Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, and application should be on a prospective basis. The effect of this update did not have a material impact on the Company’s consolidated financial position.
Accounting Standards Issued but not yet Adopted
The following list identifies ASUs applicable to the Company that have been issued by the FASB but are not yet effective:
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. The amendments in the ASU are effective for a limited period and mainly address accounting and reporting challenges due to the transition from LIBOR on existing contracts. The optional expedients may be applied to loans, borrowings, leases and derivatives. The ASU simplifies the accounting analyses for contract modifications and simplifies the hedge effectiveness assessment and allows hedging relationships impacted by the LIBOR transition to continue. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is assessing the impact of this standard but does not expect that it will have a material impact on the Company’s consolidated financial statements, or results of operations.
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020. The effect of this ASU is not expected to have a material impact on the Company’s consolidated financial position.
 
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In June 2016, the FASB issued ASU
2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL). This ASU was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.
To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. See discussion below of the deferral of the amendments in this ASU.
To implement the new standard the Company has purchased a software solution and has captured the information needed to implement this ASU. As part of the FASB ASC 326 implementation process, the company is using two models: a rating migration model and a probability of default model. The ratings migration model, which will be used for our larger loans made to institutions with available credit ratings, is designed to estimate loss reserves according to the CECL standard for rated loans or similar instruments. The model structure follows a grade migration approach, where the default rate is based on the probability of each grade transition which is modelled using historical data. The probability of default model, which will be used for our remaining commercial loans and our consumer loans, is based primarily on four components: loss history, product lifecycle, behavioral attributes and the economic environment. During the fourth quarter of 2019, the Company tested the two CECL credit models in parallel with the existing incurred loss models. The securities
held-to-maturity
include U.S. Treasury, U.S. Government Sponsored Enterprises, SBA Backed Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities. The CECL standard allows assumption of zero expected credit losses where expectation of
non-payment
is zero for these types of securities. The Company expects no impact from ASU
2016-13
to arise from this portfolio.
Since ASU
2016-13,
the FASB has issued amendments intended on improving the clarification of the amendment, ASU
2018-19
Codification Improvements to Topic 326, Financial Instruments—Credit Losses and ASU
2019-04
Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging. The amendment in ASU
2018-19
was issued in November 2018 and was intended to clarify that receivables arising from operating leases are not within the scope of Subtopic
326-20.
Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The amendment in
ASU 2019-04
was issued in April 2019 and was intended to clarify stakeholders’ specific issues about certain aspects of the amendments in ASU
2016-13.
ASU
2019-05
Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief was also issued in May 2019. This ASU provides entities the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized costs basis. The fair value option election does not apply to
held-to-maturity
debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics
820-10,
Fair Value Measurement—Overall. The amendments in this ASU should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity early adopted the amendments in
ASU 2016-13.
In November 2019, the FASB issued ASU
2019-11,
Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in this ASU affect a variety of Topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. This ASU is effective for annual reporting periods beginning after December 15, 2019.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act allows certain companies to delay FASB ASU
2016-13,
Measurement of Credit Losses on Financial Instruments (CECL), including the current expected credit losses methodology for estimating allowances for credit losses. The Company has elected to delay FASB ASU
2016-13.
This ASU will be delayed until the earlier of the date on which the national emergency concerning the COVID–19 outbreak declared by the President on March 15, 2020 terminates or December 31, 2020, with an effective retrospective implementation date of January 1, 2020. The effects of CECL will not have a material impact on the Company’s consolidated financial position at January 1, 2020 upon retroactive adoption. The Company does not believe the impact of adoption would have been material to the Company’s consolidated financial statements as of September 30, 2020.
In August 2018, FASB issued ASU
2018-14,
Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic
715-20):
Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. This ASU is effective for annual reporting periods beginning after December 15, 2020. The effect of this update will not have a material impact on the Company’s consolidated financial position.
 
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Financial Condition
Loans
On September 30, 2020, total loans outstanding were $2,990,133,000, up by $564,014,000 from the total on December 31, 2019. At September 30, 2020, commercial real estate loans accounted for 26.2%, commercial and industrial accounted for 44%, and residential real estate loans, including home equity loans, accounted for 24.4% of total loans.
Commercial and industrial loans increased to $1,315,407,000 at September 30, 2020 from $812,417,000 at December 31, 2019, primarily as a result of approximately $232,000,000 of SBA PPP loan balances and loan originations. Commercial real estate loans decreased to $784,895,000 from $786,102,000 on December 31, 2019 primarily as a result of loan payoffs. Construction loans increased to $9,116,000 at September 30, 2020 from $8,992,000 on December 31, 2019, primarily as a result of loan originations. Residential real estate loans increased to $443,703,000 on September 30, 2020 from $371,897,000 on December 31, 2019, primarily as a result of loan originations and loan purchases. Home equity loans decreased to $287,099,000 on September 30, 2020 from $304,363,000 at December 31, 2019, primarily as a result of a home equity loan payoffs. Municipal loans increased to $130,047,000 from $120,455,000, primarily as a result of loan originations.
In recent years, the Company has increased business to larger institutions, specifically, healthcare, higher education, and municipal organizations. Further discussion relating to changes in portfolio composition is provided in the allowance for loan loss section of the management discussion and analysis. We will closely monitor the concentrations to determine the impact of
COVID-19
upon their short-term and long-term operations.
Allowance for Loan Losses
The allowance for loan loss at September 30, 2020 was $33,394,000 as compared to $29,585,000 at December 31, 2019. The level of the allowance for loan losses to total loans was 1.12% at September 30, 2020 and 1.22% at December 31, 2019. The ratio of the allowance for loan losses to loans outstanding has decreased from December 31, 2019, primarily from approximately $232 million of PPP loans that are guaranteed by the SBA, which require no allowance for loan losses. The Company monitors the outlook for the industries in which our borrowers operate. Healthcare and higher education are two of the primary industries. In particular the Company utilizes outlooks and forecasts from various sources. The Company also monitors the volatility of the losses within the historical data.
By combining the credit rating, the industry outlook and the loss volatility, the Company arrives at the loss factor for each credit grade. For a large loan to large institutions with publicly available credit ratings, the Company tracks these ratings. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2020.
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2020 and are included within the total loan portfolio.
 
    
Commercial
and
Industrial
     
Municipal
     
Commercial
Real
Estate
     
Total
  
Credit Rating:
   
 
(in thousands)
 
Aaa – Aa3
   
$
 647,056
 
   
$
64,806
 
   
$
38,365
 
   
$
750,227
 
A1 – A3
   
 
184,409
 
   
 
7,228
 
   
 
145,467
 
   
 
337,104
 
Baa1 – Baa3
   
 
50,000
 
   
 
51,133
 
   
 
140,486
 
   
 
241,619
 
Ba2
   
 
—  
 
   
 
5,080
 
   
 
—  
 
   
 
5,080
 
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
   
$
881,465
 
   
$
 128,247
 
   
$
 324,318
 
   
$
 1,334,030
 
  
 
 
     
 
 
     
 
 
     
 
 
  
 
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Credit ratings issued by national organizations are presented in the following table at December 31, 2019.
 
     Commercial
and
Industrial		      Municipal      Commercial
Real
Estate		      Total  
Credit Rating:
      (in thousands)  
Aaa – Aa3
    $  523,644      $ 53,273      $ 40,437      $ 617,354  
A1 – A3
      186,044        7,354        148,346        341,744  
Baa1 – Baa3
      —          51,133        144,711        195,844  
Ba2
      —          5,895        —          5,895  
  
 
 
     
 
 
     
 
 
     
 
 
  
Total
    $ 709,688      $  117,655      $  333,494      $  1,160,837  
  
 
 
     
 
 
     
 
 
     
 
 
  
The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories.
The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated.
 
     Three months ended      Nine months ended  
    
2020
      2019     
2020
      2019  
     (in thousands)  
Allowance for loan losses, beginning of period
   
$
 32,516
 
    $  29,070     
$
 29,585
 
    $  28,543  
Loans charged off
   
 
(41
) 
      (118 )    
 
(120
) 
      (336 ) 
Recoveries on loans previously
charged-off
   
 
19
 
      70     
 
254
 
      190  
  
 
 
     
 
 
     
 
 
     
 
 
  
Net recoveries (charge-offs)
   
 
(22
) 
      (48 )    
 
134
 
      (146 ) 
Provision charged to expense
   
 
900
 
      75     
 
3,675
 
      700  
  
 
 
     
 
 
     
 
 
     
 
 
  
Allowance for loan losses, end of period
   
$
33,394
 
    $ 29,097     
$
33,394
 
    $ 29,097  
  
 
 
     
 
 
     
 
 
     
 
 
  
The Company may experience increased levels of nonaccrual loans if borrowers are negatively impacted by future negative economic conditions. Management continually monitors trends in the loan portfolio to determine the appropriate level of allowance for loan losses. At the current time, management believes that the allowance for loan losses is adequate.
Nonperforming Assets
The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated:
 
    
September 30,

2020
     December 31,
2019		  
     (dollars in thousands)  
Nonaccruing loans
   
$
 1,419
 
   $  2,014  
Total nonperforming assets
   
$
1,419
 
   $ 2,014  
Loans past due 90 days or more and still accruing
   
$
49
 
   $ —    
Nonaccruing loans as a percentage of total loans
   
 
0.05
% 
     0.08 % 
Nonperforming assets as a percentage of total assets
   
 
0.02
% 
     0.04 % 
Accruing troubled debt restructures
   
$
2,240
 
   $ 2,361  
 
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Table of Contents
Investments
Management continually evaluates its investment alternatives in order to properly manage the overall balance sheet mix. The timing of purchases, sales and reinvestments, if any, will be based on various factors including expectation of movements in market interest rates, deposit flows and loan demand. Notwithstanding these events, it is the intent of management to grow the earning asset base mainly through loan originations while funding this growth through a mix of retail deposits, FHLB advances, and retail repurchase agreements.
Securities
Available-for-Sale
(at Fair Value)
The securities
available-for-sale
portfolio totaled $291,632,000 at September 30, 2020, an increase of 12.0% from December 31, 2019. The portfolio increased mainly as a result of purchases of securities
available-for-sale
totaling $87,751,000. The purchases include $53,903,000 of securities that are obligations issued by States and Political Subdivisions. This was offset, somewhat by calls/maturities and scheduled principal payments of $57,493,000. The portfolio is concentrated in United States Government Sponsored Enterprises, Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 4.7 years.
At September 30, 2020, 83.3% of the Company’s securities
available-for-sale
are classified as Level 2. The fair values of these securities are generally obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads,
two-sided
markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored.
Securities
available-for-sale
totaling $48,815,000 or 16.7% of securities
available-for-sale
are classified as Level 3. These securities are generally municipal securities with no observable fair value with an average life of one year or less. The securities are carried at cost which approximates fair value. A periodic review of underlying financial statements and credit ratings is performed to assess the appropriateness of these valuations.
During the first nine months of 2020, net unrealized gains on the securities
available-for-sale
increased to $192,000 from a net unrealized loss of $422,000 at December 31, 2019. This was primarily the result of a decrease in the value of floating rate securities.
The following table sets forth the fair value of securities
available-for-sale
at the dates indicated.
 
    
September 30,
      December 31,  
    
2020
      2019  
     (in thousands)  
Small Business Administration
   
$
45,865
 
    $ 54,211  
U.S Government Agency and Sponsored Enterprise Mortgage-backed Securities
   
 
189,904
 
      184,187  
Privately Issued Residential Mortgage-backed Securities
   
 
341
 
      396  
Obligations issued by States and Political Subdivisions
   
 
48,815
 
      18,076  
Other Debt Securities
   
 
6,707
 
      3,632  
  
 
 
     
 
 
  
Total Securities
Available–for-Sale
   
$
 291,632
 
    $  260,502  
  
 
 
     
 
 
  
There were no sales of
available-for-sales
securities for the nine months ended September 30, 2020.
Securities
Held-to-Maturity
(at Amortized Cost)
The securities
held-to-maturity
portfolio totaled $2,407,176,000 on September 30, 2020, an increase of 2.4% from December 31, 2019. Purchases of
held-to-maturity
securities totaled $638,023,000 for the nine months ended September 30, 2020. The purchases were offset somewhat, by maturities and scheduled principal payments of $596,043,000. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 3.6 years.
 
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The following table sets forth the amortized cost of securities
held-to-maturity
at the dates indicated.
 
    
September 30,
2020
      December 31,
2019		  
     (in thousands)  
U.S. Government Sponsored Enterprises
   
$
248,211
 
    $ 98,867  
SBA Backed Securities
   
 
39,384
 
      44,379  
U.S. Government Agency and Sponsored Enterprise Mortgage-backed Securities
   
 
2,119,581
 
      2,207,874  
  
 
 
     
 
 
  
Total Securities
Held-to-Maturity
   
$
 2,407,176
 
    $  2,351,120  
  
 
 
     
 
 
  
There were no sales of
held-to-maturity
securities for the nine months ended September 30, 2020.
The net unrealized gains on investment securities
held-to-maturity
was $77,771,000 or 3.2% of the total at September 30, 2020 and the net unrealized gains was $10,184,000 or 0.4% of the total at December 31, 2019. The increase in the net unrealized gains on securities
held-to-maturity
related primarily to a decrease in interest rates. The gross unrealized losses relate primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not likely that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired as of September 30, 2020 and December 31, 2019.
At September 30, 2020 and December 31, 2019, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.
Federal Home Loan Bank of Boston Stock
The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews this investment for impairment based on the ultimate recoverability of the cost basis in the stock. During the first nine months of 2020, the FHLBB redeemed $10,836,000 of FHLBB stock and the Company purchased $4,726,000 of FHLBB stock. As of September 30, 2020, there have been no indicators of impairment that would require further consideration of potential impairment.
Equity Securities
At September 30, 2020 equity securities totaled $1,645,000 compared to $1,688,000 at December 31, 2019, this was primarily the result of changes in fair values.
Deposits and Borrowed Funds
On September 30, 2020, deposits totaled $5,412,471,000 representing a 23.0% increase from December 31, 2019. Total deposits increased primarily as a result of an increase in savings and NOW deposits, demand deposits, money market accounts, and time deposits. These types of deposits increased primarily from an increased customer base. Savings and NOW deposits increased mainly as a result of an increase in municipal NOW accounts, and corporate savings accounts. Demand deposits increased mainly as a result of increased corporate checking balances as a result of PPP loan proceed deposits. Money market accounts increased mainly as a result of an increase in corporate money market accounts. Time deposits increased primarily as a result of increased personal, corporate and municipal time deposits.
Borrowed funds totaled $383,278,000 at September 30, 2020 compared to $637,000,000 at December 31, 2019. Borrowed funds decreased mainly as a result of a decrease in borrowings from the FHLBB and a decrease in repurchase agreements. FHLBB borrowings decreased mainly as a result of an increase in deposits. Repurchase agreements decreased primarily as a result of short-term customer activity.
Stockholders’ Equity
At September 30, 2020, total equity was $363,434,000 compared to $332,581,000 on December 31, 2019. The Company’s equity increased primarily as a result of earnings, offset, somewhat, by dividends paid. The Company’s leverage ratio stood at 6.79% on September 30, 2020, compared to 7.25% at December 31, 2019. The decrease in the leverage ratio was due to an increase in quarterly average assets, offset somewhat by an increase in stockholders’ equity. Book value as of September 30, 2020, was $65.27 as compared to $59.73 on December 31, 2019.
 
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Results of Operations
The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average annualized rates earned or paid on a fully taxable equivalent basis for each of the three-month periods indicated.
 
     Three Months Ended  
    
September 30, 2020
     September 30, 2019  
    
Average
Balance
    
Interest
Income/
Expenses (1)
    
Rate
Earned/
Paid (1)
     Average
Balance		     Interest
Income/
Expenses (1)		     Rate
Earned/
Paid (1)		  
ASSETS
      (dollars in thousands)  
Interest-earning assets:
             
Loans (2)
             
Loans taxable
   
$
 1,681,573
 
  
$
 15,074
 
  
 
3.57
% 
   $  1,217,324     $  13,665       4.45 % 
Loans
tax-exempt
   
 
1,240,668
 
  
 
7,997
 
  
 
2.56
% 
     1,145,136       10,704       3.71 % 
Securities
available-for-sale
(5):
             
Taxable
   
 
272,475
 
  
 
722
 
  
 
1.06
% 
     261,312       1,969       3.01 % 
Tax-exempt
   
 
43,000
 
  
 
110
 
  
 
1.02
% 
     32,978       262       3.18 % 
Securities
held-to-maturity:
             
Taxable
   
 
2,368,987
 
  
 
14,186
 
  
 
2.40
% 
     2,141,931       14,623       2.73 % 
Interest-bearing deposits in other banks
   
 
275,157
 
  
 
69
 
  
 
0.10
% 
     173,150       928       2.14 % 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-earning assets
   
 
5,881,860
 
  
 
38,158
 
  
 
2.59
% 
     4,971,831       42,151       3.38 % 
Non interest-earning assets
   
 
306,887
 
         248,663      
Allowance for loan losses
   
 
(32,819
) 
         (29,079 )     
  
 
 
        
 
 
      
Total assets
   
$
6,155,928
 
       $ 5,191,415      
  
 
 
        
 
 
      
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Interest-bearing deposits:
             
NOW accounts
   
$
1,170,430
 
  
$
1,060
 
  
 
0.36
% 
   $ 917,133     $ 2,366       1.02 % 
Savings accounts
   
 
794,806
 
  
 
666
 
  
 
0.33
% 
     868,891       3,079       1.41 % 
Money market accounts
   
 
1,747,629
 
  
 
3,056
 
  
 
0.70
% 
     1,207,387       5,050       1.66 % 
Time deposits
   
 
595,453
 
  
 
2,858
 
  
 
1.91
% 
     517,184       3,038       2.33 % 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-bearing deposits
   
 
4,308,318
 
  
 
7,640
 
  
 
0.71
% 
     3,510,595       13,533       1.53 % 
Securities sold under agreements to repurchase
   
 
209,477
 
  
 
241
 
  
 
0.46
% 
     252,270       697       1.10 % 
Other borrowed funds and subordinated debentures
   
 
207,467
 
  
 
1,292
 
  
 
2.48
% 
     250,648       1,852       2.93 % 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-bearing liabilities
   
 
4,725,262
 
  
 
9,173
 
  
 
0.77
% 
     4,013,513       16,082       1.59 % 
    
 
 
    
 
 
      
 
 
    
 
 
  
Non-interest-bearing
liabilities
             
Demand deposits
   
 
983,990
 
         775,080      
Other liabilities
   
 
88,896
 
         79,104      
  
 
 
        
 
 
      
Total liabilities
   
 
5,798,148
 
         4,867,697      
  
 
 
        
 
 
      
Stockholders’ equity
   
 
357,780
 
         323,718      
Total liabilities & stockholders’ equity
   
$
6,155,928
 
       $ 5,191,415      
  
 
 
        
 
 
      
Net interest income on a fully taxable equivalent basis
     
 
28,985
 
         26,069    
Less taxable equivalent adjustment
     
 
(1,654
) 
         (2,299 )   
    
 
 
        
 
 
    
Net interest income
     
$
27,331
 
       $ 23,770    
    
 
 
    
 
 
      
 
 
    
 
 
  
Net interest spread (3)
       
 
1.82
% 
         1.79 % 
      
 
 
        
 
 
  
Net interest margin (4)
       
 
1.96
% 
         2.08 % 
      
 
 
        
 
 
  
 
(1)
On a fully taxable equivalent basis calculated using a federal tax rate of 21%. Rates are annualized.
(2)
Nonaccrual loans are included in average amounts outstanding.
(3)
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)
Net interest margin represents net interest income as a percentage of average interest-earning assets.
(5)
Average balances of securities
available-for-sale
calculated utilizing amortized cost.
 
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The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average annualized rates earned or paid on a fully taxable equivalent basis for each of the nine-month periods indicated.
 
     Nine Months Ended  
    
September 30, 2020
     September 30, 2019  
    
Average
Balance
    
Interest
Income/
Expenses (1)
    
Rate
Earned/
Paid (1)
     Average
Balance		     Interest
Income/
Expenses (1)		     Rate
Earned/
Paid (1)		  
ASSETS
      (dollars in thousands)  
Interest-earning assets:
             
Loans (2)
             
Loans taxable
   
$
 1,489,641
 
  
$
41,884
 
  
 
3.76
% 
   $  1,200,512     $ 40,114       4.47 % 
Loans
tax-exempt
   
 
1,203,359
 
  
 
27,100
 
  
 
3.01
% 
     1,124,624       31,658       3.76 % 
Securities
available-for-sale
(5):
             
Taxable
   
 
271,882
 
  
 
3,241
 
  
 
1.59
% 
     271,637       6,338       3.11 % 
Tax-exempt
   
 
21,419
 
  
 
304
 
  
 
1.89
% 
     53,399       1,176       2.94 % 
Securities
held-to-maturity:
             
Taxable
   
 
2,346,502
 
  
 
44,701
 
  
 
2.54
% 
     2,128,082       43,006       2.69 % 
Interest-bearing deposits in other banks
   
 
238,525
 
  
 
747
 
  
 
0.42
% 
     184,035       3,204       2.32 % 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-earning assets
   
 
5,571,328
 
  
 
117,977
 
  
 
2.83
% 
     4,962,289       125,496       3.38 % 
Non interest-earning assets
   
 
294,226
 
         247,744      
Allowance for loan losses
   
 
(31,359
) 
         (28,936 )     
  
 
 
        
 
 
      
Total assets
   
$
5,834,195
 
       $ 5,181,097      
  
 
 
        
 
 
      
LIABILITIES AND STOCKHOLDERS’ EQUITY
             
Interest-bearing deposits:
             
NOW accounts
   
$
1,110,309
 
  
$
4,633
 
  
 
0.56
% 
   $ 932,139     $ 7,057       1.01 % 
Savings accounts
   
 
771,588
 
  
 
2,936
 
  
 
0.51
% 
     885,878       9,731       1.47 % 
Money market accounts
   
 
1,603,367
 
  
 
12,090
 
  
 
1.01
% 
     1,249,531       15,805       1.69 % 
Time deposits
   
 
597,589
 
  
 
9,141
 
  
 
2.04
% 
     512,228       8,724       2.28 % 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-bearing deposits
   
 
4,082,853
 
  
 
28,800
 
  
 
0.94
% 
     3,579,776       41,317       1.54 % 
Securities sold under agreements to repurchase
   
 
220,796
 
  
 
1,176
 
  
 
0.71
% 
     205,185       1,572       1.02 % 
Other borrowed funds and subordinated debentures
   
 
206,055
 
  
 
4,093
 
  
 
2.65
% 
     237,887       5,274       2.96 % 
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total interest-bearing liabilities
   
 
4,509,704
 
  
 
34,069
 
  
 
1.01
% 
     4,022,848       48,163       1.60 % 
    
 
 
    
 
 
      
 
 
    
 
 
  
Non-interest-bearing
liabilities
             
Demand deposits
   
 
889,237
 
         764,852      
Other liabilities
   
 
88,028
 
         79,327      
  
 
 
        
 
 
      
Total liabilities
   
 
5,486,969
 
         4,867,027      
  
 
 
        
 
 
      
Stockholders’ equity
   
 
347,226
 
         314,070      
Total liabilities & stockholders’ equity
   
$
5,834,195
 
       $ 5,181,097      
  
 
 
        
 
 
      
Net interest income on a fully taxable equivalent basis
     
 
83,908
 
         77,333    
Less taxable equivalent adjustment
     
 
(5,558
) 
         (6,875 )   
    
 
 
        
 
 
    
Net interest income
     
$
78,350
 
       $ 70,458    
    
 
 
    
 
 
      
 
 
    
 
 
  
Net interest spread (3)
       
 
1.82
% 
         1.78 % 
      
 
 
        
 
 
  
Net interest margin (4)
       
 
2.01
% 
         2.08 % 
      
 
 
        
 
 
  
 
(1)
On a fully taxable equivalent basis calculated using a federal tax rate of 21%. Rates are annualized.
(2)
Nonaccrual loans are included in average amounts outstanding.
(3)
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4)
Net interest margin represents net interest income as a percentage of average interest-earning assets.
(5)
Average balances of securities
available-for-sale
calculated utilizing amortized cost.
 
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The following table presents certain information on a
fully-tax
equivalent basis regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to changes in rate and changes in volume.
 
       Three Months Ended September 30, 2020
Compared with
Three Months Ended September 30, 2019		      Nine Months Ended September 30, 2020
Compared with
Nine Months Ended September 30, 2019		  
       Increase/(Decrease)
Due to Change in		      Increase/(Decrease)
Due to Change in		  
       Volume      Rate      Total      Volume      Rate      Total  
Interest income:
        (in thousands)        (in thousands)  
Loans
                    
Taxable
      $  4,502      $ (3,093 )     $ 1,409      $ 8,758      $ (6,988 )     $ 1,770  
Tax-exempt
        829        (3,536 )       (2,707 )       2,108        (6,666 )       (4,558 ) 
Securities
available-for-sale
                    
Taxable
        81        (1,328 )       (1,247 )       6        (3,103 )       (3,097 ) 
Tax-exempt
        63        (215 )       (152 )       (547 )       (325 )       (872 ) 
Securities
held-to-maturity
                    
Taxable
        1,462        (1,899 )       (437 )       4,252        (2,557 )       1,695  
Interest-bearing deposits in other banks
        348        (1,207 )       (859 )       742        (3,199 )       (2,457 ) 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total interest income
        7,285        (11,278 )       (3,993 )       15,319        (22,838 )       (7,519 ) 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Interest expense:
                    
Deposits
                    
NOW accounts
        526        (1,832 )       (1,306 )       1,170        (3,593 )       (2,423 ) 
Savings accounts
        (242 )       (2,171 )       (2,413 )       (1,120 )       (5,675 )       (6,795 ) 
Money market accounts
        1,685        (3,679 )       (1,994 )       3,735        (7,450 )       (3,715 ) 
Time deposits
        418        (598 )       (180 )       1,366        (950 )       416  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total interest-bearing deposits
        2,387        (8,280 )       (5,893 )       5,151        (17,668 )       (12,517 ) 
Securities sold under agreements to repurchase
        (103 )       (353 )       (456 )       113        (509 )       (396 ) 
Other borrowed funds and subordinated debentures
        (295 )       (265 )       (560 )       (662 )       (519 )       (1,181 ) 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Total interest expense
        1,989        (8,898 )       (6,909 )       4,602        (18,696 )       (14,094 ) 
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Change in net interest income
      $ 5,296      $ (2,380 )     $ 2,916      $  10,717      $ (4,142 )     $ 6,575  
    
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
  
Net Interest Income
For the three months ended September 30, 2020, net interest income on a fully taxable equivalent basis totaled $28,985,000 compared to $26,069,000 for the same period in 2019, an increase of $2,916,000 or 11.2%. The increase in net interest income for the period is primarily due to a decrease in interest expense as a result of falling interest rates. The net interest margin decreased from 2.08% on a fully
tax-equivalent
basis for the third quarter of 2019 to 1.96% for the same period in 2020. This was primarily the result of increased margin pressure during the recent decrease in interest rates across the yield curve. The average balances of earning assets increased by $910,029,000 or 18.3%, combined with an average yield decrease of 0.79%, resulting in a decrease in interest income of $3,993,000 on a fully
tax-equivalent
basis. The average balance of interest-bearing liabilities increased by $711,749,000 or 17.7%, combined with an average interest-bearing liabilities interest cost decrease of 0.82%, resulting in a decrease in interest expense of $6,909,000.
For the nine months ended September 30, 2020, net interest income on a fully taxable equivalent basis totaled $83,908,000 compared to $77,333,000 for the same period in 2019, an increase of $6,575,000 or 8.5%. The increase in net interest income for the period is primarily due to a decrease in interest expense as a result of falling interest rates. Prepayment penalties collected amounted to approximately $946,000 for the first nine months of 2020 compared to $18,000 for the same period last year. The net interest margin decreased from 2.08% on a fully
tax-equivalent
basis for the first nine months of 2019 to 2.01% for the same period in 2020. This was primarily the result of increased margin pressure during the recent decrease in interest rates across the yield curve. The average balances of earning assets increased by $609,039,000 or 12.3%, combined with an average yield decrease of 0.55%, resulting in a decrease in interest income of $7,519,000 on a fully
tax-equivalent
basis. The average balance of interest-bearing liabilities increased by $486,856,000 million or 12.1%, combined with an average interest-bearing liabilities interest cost decrease of 0.59%, resulting in a decrease in interest expense of $14,094,000.
 
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As illustrated in the table above, the main contributors to the increase in net interest income for the three and nine-month periods were a decrease in rates paid on interest-bearing deposits. The Company has decreased interest rates on these products as market rates have decreased. Securities
held-to-maturity
income increased, for the nine-month period, primarily as a result of an increase in volume. Securities
available-for-sale,
interest-bearing deposits in other banks, and loan income decreased primarily from a decrease in rates paid on the portfolios. The Company has a sizable floating rate
available-for-sale
and loan portfolio. These portfolios reprice as interest rates rise or fall.
Provision for Loan Losses
The provision for loan losses increased by $2,975,000 from $700,000 for the nine months ended September 30, 2019 to $3,675,000 for the same period in 2020, primarily as a result of the economic uncertainties associated with the novel coronavirus disease (COVID–19) pandemic and increased loan balances. Further discussion relating to changes in portfolio composition is discussed in Note 4.
Non-Interest
Income and Expense
Other operating income for the quarter ended September 30, 2020 decreased by $117,000 from the same period last year to $4,169,000. This was mainly attributable to a decrease in other income of $52,000, a decrease in service charges on deposit accounts of $71,000, and a decrease from net gains on sales of securities of $53,000. This was offset, somewhat, by an increase of $59,000 in lockbox fees. Service charges on deposit accounts decreased mainly as a result of a decrease in customer activity due in large part to the
COVID-19
pandemic. Other income decreased mainly as a result of a decrease in loan servicing fees. Lockbox fees increased mainly as a result of increased customer activity. Also, there were no loan sales during the third quarters of 2020 and 2019.
Other operating income for the nine months ended September 30, 2020 decreased by $1,190,000 from the same period last year to $12,520,000. This was mainly attributable to a decrease in other income of $564,000, a decrease in service charges on deposit accounts of $243,000, a decrease in gains on sales of loans of $154,000, a decrease in lockbox fees of $168,000, and a decrease from net gains on sales of securities of $53,000. Service charges on deposit accounts and lockbox income decreased as a result of a decrease in customer activity due in large part to the
COVID-19
pandemic. Other income decreased mainly as a result of a decrease in loan servicing fees and a decrease in merchant sales royalties offset, somewhat, by increases on the returns of life insurance policies.
For the quarter ended September 30, 2020, operating expenses increased by $705,000 or 4.0% to $18,167,000, from the same period last year. This was primarily attributable to an increase in salaries and employee benefits of $692,000, an increase of $410,000 in FDIC assessments, and an increase of $14,000 in occupancy costs. This was offset, somewhat, by decreases in equipment expenses of $53,000 and a decrease in other expenses of $358,000. The increase in salaries and employee benefits was mainly attributable to merit increases and other employee benefits. The increase in FDIC assessments was attributable to credits applied during the third quarter of 2019. The increase in occupancy costs was mainly attributable to an increase in depreciation. Other expenses decreased mainly as a result of decreases in marketing expenses. Equipment expense decreased mainly from a decrease in depreciation expense.
For the nine months ended September 30, 2020, operating expenses decreased by $535,000 or 1.0% to $53,382,000, from the same period last year. This was primarily attributable to decreases in other expenses of $861,000, occupancy costs $238,000, and FDIC expenses of $3,000. This was offset, somewhat, by increases in salaries and employee benefits of $399,000 and equipment expenses of $168,000. Other expenses decreased mainly as a result of decreases in consultants’ expense, marketing expenses, and other real estate owned expenses, offset, somewhat, by increases in security costs. The decrease in occupancy costs was mainly attributable to a decrease in rent expense associated with the purchases of a previously leased branch. The increase in salaries and employee benefits was mainly attributable to deferred origination costs associated with originating the SBA PPP loans during the second quarter of 2020. This was offset, somewhat, by merit increases and an increase in pension costs. Equipment expense increased mainly from an increase in depreciation expense.
Income Taxes
For the third quarter of 2020, the Company’s income tax expense totaled $1,546,000 on pretax income of $12,433,000 resulting in an effective tax rate of 12.4%. For last year’s corresponding quarter, the Company’s income tax expense totaled $435,000 on pretax income of $10,519,000 resulting in an effective tax rate of 4.1%. This increase was primarily the result of an increase in taxable income relative to total income. For the nine months ended September 30, 2020 the Company’s effective tax rate increased to 9.5% from 2.0% for the same period in 2019. This was primarily as a result of an increase in taxable income relative to total income and a reduction in tax accruals, during 2019, related to sequestration of the refundable portion of our alternative minimum tax (AMT) credit carryforward. On January 14, 2019, the IRS updated its announcement “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations” to clarify that refundable AMT credits under Section 53(e) of the Internal Revenue Code are not subject to sequestration for taxable years beginning after December 31, 2017. On March 27, 2020, the Coronavirus, Aid, Relief and Economic Security (CARES) Act was signed into law. As a result of the CARES Act, the full balance of the AMT credit was refunded in 2020.
 
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Item 3.
Quantitative and Qualitative Disclosure about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates tied to specific assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. Management believes that there has been no material changes in the interest rate risk reported in the Company’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission. The information is contained in the
Form 10-K
within the Market Risk and Asset Liability Management section of Management’s Discussion and Analysis of Results of Operations and Financial Condition.
 
Item 4.
Controls and Procedures
The Company’s management, with participation of the Company’s principal executive and financial officers, has evaluated its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Company’s management, with participation of its principal executive and financial officers, has concluded that the Company’s disclosure controls and procedures are effective. The disclosure controls and procedures also effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act is accumulated and reported to Company management (including the principal executive officer and the principal financial officer) as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has evaluated its internal control over financial reporting and during the first nine months of 2020 there were no changes that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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Part II
–
Other Information
 
Item 1
A number of legal claims against the Company arising in the normal course of business were outstanding at September 30, 2020. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
 
Item 1A
Risk Factors – Please read “Risk Factors” in the Company’s Annual Report on
Form 10-K
for the fiscal year ended December 31, 2019. Except as noted below, there have been no material changes since this
10-K
was filed. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and operating results.
As a result of the
COVID-19
pandemic, the Company’s business, financial condition and results of operation have been and may continue to be, negatively impacted. In light of the ongoing and unprecedented nature of the pandemic, it is difficult to predict its full impact on our business. Future developments, including governmental legislation and other actions, when
COVID-19
can be controlled, and when the economy may be reopened, are highly uncertain. We anticipate the
Covid-19
recession may have adverse effects on our operating results for the year ending December 31, 2020 and possibly beyond.
The following have or may occur:
 
  •  
a decline in the demand for products and services may occur due to, among other things, adverse financial impacts of the pandemic on customers, increased unemployment and temporary or permanent closures of businesses;
 
  •  
deposits could decline if customers need to draw on available balances as a result of the economic downturn;
 
  •  
an increase in loan delinquencies, problem assets and foreclosures due to, among other things, adverse financial impacts of the pandemic on customers;
 
  •  
a decline in collateral value;
 
  •  
a work stoppage, forced quarantine, or other interruption or the unavailability of key employees has occurred in various areas of the Company and may continue to occur;
 
  •  
the unavailability of critical services provided by third party vendors or limitations on the business capacities of our vendors for extended periods of time;
 
  •  
a decline of the yield on our assets to a greater extent than the decline in our cost of interest-bearing liabilities as the result of the reduction of the Federal Reserve Board’s target federal funds rate to near 0%, reducing our net interest margin and spread and reducing net income;
 
  •  
potential losses in our investment securities portfolio due to volatility in the financial markets;
 
  •  
increased cybersecurity risks and a potential loss of productivity in connection with remote work arrangements;
 
  •  
an increase in the allowance for loan losses has occurred and may continue to occur to accommodate potential increased loan defaults.
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds –
(a) – (b) Not applicable.
(c) None
 
Item 3
Defaults Upon Senior Securities – None
 
Item 4
Mine Safety Disclosures – Not applicable
 
Item 5
Other Information – None
 
Item 6
Exhibits
 
    31.1    Certification of Chairman, President and Chief Executive Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14.
    31.2    Certification of Chief Financial Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14.
  +32.1    Certification of Chairman, President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
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  +32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
++101.    INS XBRL Instance Document
++101.    SCH XBRL Taxonomy Extension Schema
++101.    CAL XBRL Taxonomy Extension Calculation Linkbase
++101.    LAB XBRL Taxonomy Extension Label Linkbase
++101.    PRE XBRL Taxonomy Extension Presentation Linkbase
++101.    DEF XBRL Taxonomy Definition Linkbase
    104    Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101)
 
+
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++
As provided in Rule 406T of regulation
S-T,
this information is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and consists of the following materials from Century Bancorp Inc.’s Quarterly Report on
10-Q
for the quarter ended September 30, 2020, formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended September 30, 2020 and 2019; (v) Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2020 and 2019; (vi) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019; and (vii) Notes to Unaudited Consolidated Interim Financial Statements.
 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date: November 6, 2020
    
Century Bancorp, Inc.
/s/ Barry R. Sloane
    
Barry R. Sloane
    
Chairman, President and Chief Executive Officer
    
/s/ William P. Hornby
    
William P. Hornby, CPA
    
Chief Financial Officer and Treasurer
    
(Principal Accounting Officer)
    
 
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