Quarterly Report (10-q)

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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, 2021.

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, 2021, the Registrant had outstanding: 

 

Class A Common Stock, $1.00 par value			3,672,969 Shares
Class B Common Stock, $1.00 par value			1,894,940 Shares

 

 

 

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Table of Contents

Century Bancorp, Inc.

Index

 

				Page Number
Part I		Financial Information			3
		Forward Looking Statements
Item 1.		Financial Statements (unaudited)
		Consolidated Balance Sheets: September 30, 2021 and December 31, 2020			4
		Consolidated Statements of Income: Three Months and Nine Months Ended September 30, 2021 and 2020			5
		Consolidated Statements of Comprehensive Income: Three Months and Nine Months Ended September 30, 2021 and 2020			6
		Consolidated Statements of Changes in Stockholders’ Equity: Three Months Ended September 30, 2021 and 2020			7
		Consolidated Statements of Changes in Stockholders’ Equity: Nine Months Ended September 30, 2021 and 2020			8
		Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2021 and 2020			9
		Notes to Consolidated Financial Statements			10-33
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			33-46
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			46
Item 4.		Controls and Procedures			46
Part II.		Other Information
Item 1.		Legal Proceedings			47
Item 1A.		Risk Factors			47
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			47
Item 3.		Defaults Upon Senior Securities			47
Item 4.		Mine Safety Disclosures			47
Item 5.		Other Information			47
Item 6.		Exhibits			47
Signatures					48
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

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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 business, financial condition and results of operation have been or may be negatively impacted by the extent and duration of the

COVID-19

pandemic, (ii) the fact that consumer behavior may change due to changing political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives, (iii) the fact that the Company’s success is dependent to a significant extent upon general economic conditions in New England, (iv) 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, (v) the timing of the proposed merger with Eastern Bankshares, Inc. (“Eastern”), (vi) the risk that a condition to closing of the proposed merger may not be satisfied, (vii) the effect of the announcement of the proposed merger on our ability to maintain relationships with our key partners, customers and employees, and on our operating results and business generally, (viii) the fact that the Bank’s participation in the Paycheck Protection Program involves reputational risks, (ix) 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, (x) the fact that our operations are subject to risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics, (xi) the fact that future credit losses may be higher than currently expected due to changes in economic assumptions and adverse economic developments, and (xii) 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, 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. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond the Company’s control. The forward-looking statements contained herein represent the Company’s judgment as of the date of this quarterly report on from

10-Q,

and the Company cautions readers not to place undue reliance on such statements.

 

Page 3 of 48

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PART I – Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

Assets		September 30, 2021				December 31, 2020
Cash and due from banks		$	97,743			$	136,735
Federal funds sold and interest-bearing deposits in other banks			492,243				237,265
Total cash and cash equivalents			589,986				374,000
Securities available-for-sale, amortized cost $202,720 and $282,273, respectively			204,182				282,448
Securities held-to-maturity, fair value $3,207,259 and $2,579,103, respectively			3,211,977				2,509,088
Federal Home Loan Bank of Boston, stock at cost			11,594				13,361
Equity securities, amortized cost $1,635 and $1,635, respectively			1,680				1,668
Loans, net:
Construction and land development			6,358				10,909
Commercial and industrial			1,321,907				1,314,245
Municipal			138,945				137,607
Commercial real estate			729,384				789,836
Residential real estate			466,109				448,436
Consumer and overdrafts			19,549				20,439
Home equity			243,225				274,357
Total loans, net			2,925,477				2,995,829
Less: allowance for loan losses			34,764				35,486
Net loans			2,890,713				2,960,343
Bank premises and equipment			42,222				39,062
Accrued interest receivable			13,413				13,283
Goodwill			2,714				2,714
Other assets			161,081				162,867
Total assets		$	7,129,562			$	6,358,834
Liabilities
Deposits:
Demand deposits		$	1,203,943			$	1,103,878
Savings and NOW deposits			2,314,472				1,728,092
Money market accounts			2,337,665				2,074,108
Time deposits			348,296				546,143
Total deposits			6,204,376				5,452,221
Securities sold under agreements to repurchase			269,961				232,090
Other borrowed funds			118,786				177,009
Subordinated debentures			36,083				36,083
Due to broker			—				—
Other liabilities			97,405				91,022
Total liabilities			6,726,611				5,988,425
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 3,672,969 shares and 3,655,469 shares, respectively			3,673				3,656
Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,894,940 shares and 1,912,440 shares respectively			1,895				1,912
Additional paid-in capital			12,292				12,292
Retained earnings			408,700				378,699
			426,560				396,559
Unrealized gains on securities available-for-sale, net of taxes			1,062				130
Unrealized losses on securities transferred to held-to-maturity, net of taxes			(830	)			(1,221	)
Pension liability, net of taxes			(23,841	)			(25,059	)
Total accumulated other comprehensive loss, net of taxes			(23,609	)			(26,150	)
Total stockholders’ equity			402,951				370,409
Total liabilities and stockholders’ equity		$	7,129,562			$	6,358,834

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 48

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Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

		Three months ended September 30,								Nine months ended September 30,
		2021				2020				2021				2020
Interest income
Loans		$	20,926			$	21,431			$	63,419			$	63,478
Securities held-to-maturity			13,678				14,186				40,908				44,701
Securities available-for-sale			475				818				1,662				3,493
Federal funds sold and interest-bearing deposits in other banks			186				69				477				747
Total interest income			35,265				36,504				106,466				112,419
Interest expense
Savings and NOW deposits			570				1,726				2,441				7,569
Money market accounts			2,368				3,056				7,743				12,090
Time deposits			791				2,858				3,487				9,141
Securities sold under agreements to repurchase			91				241				330				1,176
Other borrowed funds and subordinated debentures			1,065				1,292				3,527				4,093
Total interest expense			4,885				9,173				17,528				34,069
Net interest income			30,380				27,331				88,938				78,350
(Credit) provision for loan losses			(200	)			900				(750	)			3,675
Net interest income after (credit) provision for loan losses			30,580				26,431				89,688				74,675
Other operating income
Service charges on deposit accounts			2,243				2,239				6,632				6,558
Lockbox fees			914				996				2,876				2,850
Other income			1,015				934				2,973				3,112
Total other operating income			4,172				4,169				12,481				12,520
Operating expenses
Salaries and employee benefits			11,907				11,362				36,459				33,020
Occupancy			1,457				1,477				4,750				4,448
Equipment			956				809				2,836				2,608
FDIC Assessments			1,020				410				2,249				720
Other			5,399				4,109				16,328				12,586
Total operating expenses			20,739				18,167				62,622				53,382
Income before income taxes			14,013				12,433				39,547				33,813
Provision for income taxes			2,281				1,546				6,222				3,204
Net income		$	11,732			$	10,887			$	33,325			$	30,609
Share data:
Weighted average number of shares outstanding, basic
Class A			3,672,969				3,655,469				3,663,669				3,653,429
Class B			1,894,940				1,912,440				1,904,240				1,914,480
Weighted average number of shares outstanding, diluted
Class A			5,567,909				5,567,909				5,567,909				5,567,909
Class B			1,894,940				1,912,440				1,904,240				1,914,480
Basic earnings per share:
Class A		$	2.54			$	2.36			$	7.22			$	6.64
Class B		$	1.27			$	1.18			$	3.61			$	3.32
Diluted earnings per share
Class A		$	2.11			$	1.96			$	5.99			$	5.50
Class B		$	1.27			$	1.18			$	3.61			$	3.32

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 48

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Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

		Three months ended September 30,
		2021				2020
Net income		$	11,732			$	10,887
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period			(208	)			486
Less: reclassification adjustment for gains included in net income			—				—
Total unrealized gains (losses) on securities			(208	)			486
Accretion of net unrealized losses transferred			128				145
Defined benefit pension plans:
Amortization of prior service cost and loss included in net periodic benefit cost			406				360
Other comprehensive income (loss)			326				991
Comprehensive income		$	12,058			$	11,878

 

		Nine months ended September 30,
		2021				2020
Net income		$	33,325			$	30,609
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising during period			932				445
Less: reclassification adjustment for gains included in net income			—				—
Total unrealized gains (losses) on securities			932				445
Accretion of net unrealized losses transferred			391				471
Defined benefit pension plans:
Amortization of prior service cost and loss included in net periodic benefit cost			1,218				1,081
Other comprehensive income (loss)			2,541				1,997
Comprehensive income		$	35,866			$	32,606

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 48

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Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended September 30, 2021 and 2020

 

		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, 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 declared, Class A common stock,   $.14 per share			—				—				—				(512)				—				(512)
Cash dividends declared, Class B common stock,   $.07 per share			—				—				—				(134)				—				(134)
Balance at September 30, 2020			$3,656				$1,912				$12,292				$367,836				$(22,262)				$363,434
Balance at June 30, 2021			$3,662				$1,906				$12,292				$398,630				$(23,935)				$392,555
Net income			—				—				—				11,732				—				11,732
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period, net of $78 in taxes			—				—				—				—				(208)				(208)
Accretion of unrealized losses on securities   transferred to held-to-maturity,   net of $35 in taxes			—				—				—				—				128				128
Pension liability adjustment, net of $159 in taxes			—				—				—				—				406				406
Conversion of Class B Common Stock to   Class A Common Stock, 11,400 shares			11				(11)				—				—				—				—
Cash dividends declared, Class A common stock, $0.36 per share			—				—				—				(1,320)				—				(1,320)
Cash dividends declared, Class B common stock, $0.18 per share			—				—				—				(342)				—				(342)
Balance at September 30, 2021			$3,673				$1,895				$12,292				$408,700				$(23,609)				$402,951

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 48

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Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2021 and 2020

 

		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, 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,   $.38 per share			—				—				—				(1,389	)			—				(1,389	)
Cash dividends paid, Class B common stock,   $.19 per share			—				—				—				(364	)			—				(364	)
Balance at September 30, 2020		$	3,656			$	1,912			$	12,292			$	367,836			$	(22,262	)		$	363,434
Balance at December 31, 2020		$	3,656			$	1,912			$	12,292			$	378,699			$	(26,150	)		$	370,409
Net income			—				—				—				33,325				—				33,325
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during period, net of $355    in taxes			—				—				—				—				932				932
Accretion of unrealized losses on securities   transferred to held-to-maturity,   net of $141 in taxes			—				—				—				—				391				391
Pension liability adjustment, net of $476 in taxes			—				—				—				—				1,218				1,218
Conversion of Class B Common Stock to   Class A Common Stock, 17,500 shares			17				(17	)			—				—				—				—
Cash dividends declared, Class A common stock, $0.72 per share			—				—				—				(2,640	)			—				(2,640	)
Cash dividends declared, Class B common stock, $0.36 per share			—				—				—				(684	)			—				(684	)
Balance at September 30, 2021		$	3,673			$	1,895			$	12,292			$	408,700			$	(23,609	)		$	402,951

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

For the Nine Months Ended September 30, 2021 and 2020

 

		For the Nine Months Ended September 30,
		2021				2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	33,325			$	30,609
Adjustments to reconcile net income to net cash   provided by operating activities:
Net (gain) loss on equity securities			(12	)			43
(Credit) provision for loan losses			(750	)			3,675
Deferred income taxes			(1,129	)			(1,487	)
Net depreciation and amortization (accretion)			1,872				(1,167	)
Increase in accrued interest receivable			(130	)			(113	)
Decrease in other assets			928				3,897
Increase in other liabilities			8,187				3,396
Net cash provided by operating activities			42,291				38,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemptions of Federal Home Loan Bank of Boston stock			1,767				10,836
Purchase of Federal Home Loan Bank of Boston stock			—				(4,726	)
Proceeds from calls/maturities of securities available-for-sale			95,808				57,493
Purchase of securities available-for-sale			(16,155	)			(87,751	)
Proceeds from calls/maturities of securities held-to-maturity			717,320				596,043
Purchase of securities held-to-maturity			(1,418,979	)			(638,023	)
Net decrease ( increase )   in loans			70,407				(563,850	)
Bank owned life insurance purchases			—				(6,000	)
Capital expenditures			(5,783	)			(5,873	)
Net cash used in investing activities			(555,615	)			(641,851	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in time deposits			(197,847	)			26,419
Net increase in demand, savings, money market and NOW deposits			950,002				985,941
Cash dividends			(2,493	)			(1,753	)
Net increase (decrease) in securities sold under agreements to repurchase			37,871				(35,015	)
Net decrease in other borrowed funds			(58,223	)			(218,707	)
Net cash provided by financing activities			729,310				756,885
Net increase in cash and cash equivalents			215,986				153,887
Cash and cash equivalents at beginning of period			374,000				258,693
Cash and cash equivalents at end of period		$	589,986			$	412,580
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	17,891			$	34,384
Income taxes			4,980				1,750
Change in unrealized gains (losses) on securities available-for-sale, net of taxes			932				445
Change in unrealized losses on securities transferred to held-to-maturity, net of taxes			391				471
Pension liability adjustment, net of taxes			1,218				1,081
Change in due to broker			—				9,977
Dividends declared and not paid			831				—

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Nine Months Ended September 30, 2021 and 2020

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. On November 1, 2021, the Company created a plan to dissolve CSII, and CSII II. The dissolution is expected to occur during the fourth quarter of 2021.

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, New York, Virginia, Washington D.C., and Pennsylvania. As a bank holding company, the Company is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (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 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, 2020, 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.

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. 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.

 

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Note 2. Securities

Available-for-Sale

 

 

		September 30, 2021																December 31, 2020
		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		$	38,663			$	623			$	1			$	39,285			$	44,328			$	—			$	289			$	44,039
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities			143,949				807				148				144,608				177,239				819				317				177,741
Privately Issued Residential Mortgage-Backed Securities			239				5				—				244				330				2				4				328
Obligations Issued by States and Political Subdivisions			11,769				—				—				11,769				52,276				—				—				52,276
Other Debt Securities			8,100				191				15				8,276				8,100				24				60				8,064
Total		$	202,720			$	1,626			$	164			$	204,182			$	282,273			$	845			$	670			$	282,448

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 $150,214,000 and $183,269,000 at September 30, 2021 and December 31, 2020, respectively. Also included in securities

available-for-sale

are securities at fair value pledged for borrowing at the Federal Home Loan Bank of Boston (“FHLBB”) amounting to $26,059,000 and $29,885,000 at September 30, 2021 and December 31, 2020, respectively. There were no sales of

available-for-sale

securities for the nine months ended September 30, 2021 and September 30, 2020, respectively.

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, 2021.

 

		Amortized Cost				Fair Value
		(in thousands)
Within one year		$	13,046			$	13,068
After one but within five years			89,147				89,838
After five but within ten years			91,211				91,849
More than 10 years			9,316				9,427
Total		$	202,720			$	204,182

The weighted average remaining life of investment securities

available-for-sale

at September 30, 2021 was 5.4 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 $182,362,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.

As of September 30, 2021 and December 31, 2020, 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, 2021 or December 31, 2020.

 

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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, 2021. 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 3 and 8 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 118 holdings at September 30, 2021.

 

		September 30, 2021
		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		$	—			$	—			$	95			$	1			$	95			$	1
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities			9,228				14				14,285				134				23,513				148
Privately Issued Residential   Mortgage-Backed Securities			—				—				—				—				—				—
Obligations Issued by States   and Political Subdivisions			—				—				—				—				—				—
Other Debt Securities			1,585				15				—				—				1,585				15
Total temporarily impaired securities		$	10,813			$	29			$	14,380			$	135			$	25,193			$	164

The following table shows the temporarily impaired securities of the Company’s

available-for-sale

portfolio at December 31, 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 13 and 21 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 153 holdings at December 31, 2020

.

 

		December 31, 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		$	13,839			$	42			$	30,200			$	247			$	44,039			$	289
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities			18,188				50				33,617				267				51,805				317
Privately Issued Residential Mortgage-Backed Securities			—				—				210				4				210				4
Obligations Issued by States and Political Subdivisions			—				—				—				—				—				—
Other Debt Securities			3,942				58				1,298				2				5,240				60
Total temporarily impaired securities		$	35,969			$	150			$	65,325			$	520			$	101,294			$	670

 

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Note 3. Investment Securities

Held-to-Maturity

 

 

		September 30, 2021																December 31, 2020
		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		$	350,583			$	18			$	5,023			$	345,578			$	244,220			$	389			$	866			$	243,743
SBA Backed Securities			38,594				1,295				—				39,889				37,783				2,002				—				39,785
U.S. Government Sponsored Enterprises Mortgage- Backed Securities			2,822,800				31,114				32,122				2,821,792				2,227,085				69,522				1,032				2,295,575
Total		$	3,211,977			$	32,427			$	37,145			$	3,207,259			$	2,509,088			$	71,913			$	1,898			$	2,579,103

Included in total investment securities

held-to-maturity

are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $2,298,053,000

 a

nd $1,866,989,000 at September 30, 2021 and December 31, 2020, respectively. Also included are securities pledged for borrowing at the FHLBB at fair value amounting to $691,058,000 and $537,367,000 at September 30, 2021 and December 31, 2020, respectively. There were no sales of

held-to-maturity

securities for the nine months ended September 30, 2021 or September 30, 2020, respectively.

At September 30, 2021 and December 31, 2020, 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, 2021.

 

		Amortized Cost				Fair Value
		(in thousands)
Within one year		$	38,603			$	38,877
After one but within five years			1,790,437				1,804,982
After five but within ten years			1,382,937				1,363,400
More than ten years			—				—
Total		$	3,211,977			$	3,207,259

The weighted average remaining life of investment securities

held-to-maturity

at September 30, 2021 was 4.8 years. Included in the weighted average remaining life calculation at September 30, 2021 were $208,740,000 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 $67,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.

As of September 30, 2021 and December 31, 2020, 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, 2021 or December 31, 2020. 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.

 

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The following table shows the temporarily impaired securities of the Company’s

held-to-maturity

portfolio September 30, 2021. 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 149 and 31 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 651 holdings at September 30, 2021.

 

		September 30, 2021
		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)
US Government Sponsored Enterprises		$	194,263			$	2,579			$	146,298			$	2,444			$	340,561			$	5,023
SBA Backed Securities			—				—				—				—				—				—
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities			1,585,765				28,423				107,977				3,699				1,693,742				32,122
Total temporarily impaired securities		$	1,780,028			$	31,002			$	254,275			$	6,143			$	2,034,303			$	37,145

The following table shows the temporarily impaired securities of the Company’s

held-to-maturity

portfolio at December 31, 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 53 and 0 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 600 holdings at December 31, 2020.

 

		December 31, 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)
U.S. Government Sponsored Enterprises		$	162,870			$	866			$	—			$	—			$	162,870			$	866
SBA Backed Securities			—				—				—				—				—				—
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities			302,401				1,032				—				—				302,401				1,032
Total temporarily impaired securities		$	465,271			$	1,898			$	—			$	—			$	465,271			$	1,898

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 September 30,								Nine months ended September 30,
		2021				2020				2021				2020
		(in thousands)								(in thousands)
Allowance for loan losses, beginning of period		$	34,949			$	32,516			$	35,486			$	29,585
Loans charged off			(38	)			(41	)			(134	)			(120	)
Recoveries on loans previously charged-off			53				19				162				254
Net recoveries (charge-offs)			15				(22	)			28				134
(Credit) provision charged to expense			(200	)			900				(750	)			3,675
Allowance for loan losses, end of period		$	34,764			$	33,394			$	34,764			$	33,394

 

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Further information pertaining to the allowance for loan losses for the three months ending September 30, 2021 is as follows:

 

		Construction and Land Development				Commercial and Industrial				Municipal				Commercial Real Estate				Residential Real Estate				Consumer				Home Equity				Unallocated				Total
		(in thousands)
Allowance for loan losses:
Balance at June 30, 2021		$	220			$	16,502			$	2,817			$	11,708			$	2,029			$	204			$	957			$	512			$	34,949
Charge-offs			—				—				—				—				—				(38	)			—				—				(38	)
Recoveries			—				30				—				—				—				23				—				—				53
Provision			(3	)			1,134				(11	)			(1,137	)			(67	)			10				(58	)			(68	)			(200	)
Ending balance at September 30, 2021		$	217			$	17,666			$	2,806			$	10,571			$	1,962			$	199			$	899			$	444			$	34,764
Amount of allowance for loan losses for loans deemed to be impaired		$	—			$	10			$	—			$	71			$	—			$	—			$	—			$	—			$	81
Amount of allowance for loan losses for loans not deemed to be impaired		$	217			$	17,656			$	2,806			$	10,500			$	1,962			$	199			$	899			$	444			$	34,683
Loans:
Ending balance		$	6,358			$	1,321,907			$	138,945			$	729,384			$	466,109			$	19,549			$	243,225			$	—			$	2,925,477
Loans deemed to be impaired		$	—			$	77			$	—			$	2,239			$	—			$	—			$	—			$	—			$	2,316
Loans not deemed to be impaired		$	6,358			$	1,321,830			$	138,945			$	727,145			$	466,109			$	19,549			$	243,225			$	—			$	2,923,161

Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2021 is as follows:

 

		Construction and Land Development				Commercial and Industrial				Municipal				Commercial Real Estate				Residential Real Estate				Consumer				Home Equity				Unallocated				Total
		(in thousands)
Allowance for loan losses:
Balance at December 31, 2020		$	429			$	16,713			$	2,804			$	11,751			$	2,111			$	241			$	1,208			$	229			$	35,486
Charge-offs			—				—				—				—				—				(134	)			—				—				(134	)
Recoveries			—				35				—				—				—				127				—				—				162
Provision			(212	)			918				2				(1,180	)			(149	)			(35	)			(309	)			215				(750	)
Ending balance at September 30, 2021		$	217			$	17,666			$	2,806			$	10,571			$	1,962			$	199			$	899			$	444			$	34,764
Amount of allowance for loan losses for loans deemed to be impaired		$	—			$	10			$	—			$	71			$	—			$	—			$	—			$	—			$	81
Amount of allowance for loan losses for loans not deemed to be impaired		$	217			$	17,656			$	2,806			$	10,500			$	1,962			$	199			$	899			$	444			$	34,683
Loans:
Ending balance		$	6,358			$	1,321,907			$	138,945			$	729,384			$	466,109			$	19,549			$	243,225			$	—			$	2,925,477
Loans deemed to be impaired		$	—			$	77			$	—			$	2,239			$	—			$	—			$	—			$	—			$	2,316
Loans not deemed to be impaired		$	6,358			$	1,321,830			$	138,945			$	727,145			$	466,109			$	19,549			$	243,225			$	—			$	2,923,161

There was a credit to the provision for losses of $750,000 for the nine months ended September 30, 2021. The credit provision for the first nine months of 2021 was primarily attributable to a reduction in specific allocations to the allowance for loan losses and a reduction in the historical experience reserve allocation. This was offset, somewhat, by provisions associated with originations of commercial and industrial loans.

 

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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
		(in thousands)
Allowance for loan losses:
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
		(in thousands)
Allowance for loan losses:
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

There was a provision for loan losses of $3,675,000 for the nine months ended September 30, 2020.

The

provision for the first nine months of 2020 was primarily a result of provisions related to the onset of the

COVID-19

pandemic.

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, 2021 and December 31, 2020.

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, 2021 and December 31, 2020.

 

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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, 2021 and December 31, 2020 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, 2021.

 

		Construction and Land Development				Commercial and Industrial				Municipal				Commercial Real Estate
		(in thousands)
Grade:
1-3 (Pass)		$	6,358			$	1,317,908			$	138,945			$	704,205
4 (Monitor)			—				3,922				—				22,940
5 (Substandard)			—				—				—				—
6 (Doubtful)			—				—				—				—
Impaired			—				77				—				2,239
Total		$	6,358			$	1,321,907			$	138,945			$	729,384

The following table presents the Company’s loans by risk rating at December 31, 2020.

 

		Construction and Land Development				Commercial and Industrial				Municipal				Commercial Real Estate
		(in thousands)
Grade:
1-3 (Pass)		$	10,909			$	1,309,861			$	137,607			$	761,101
4 (Monitor)			—				3,945				—				23,795
5 (Substandard)			—				—				—				—
6 (Doubtful)			—				—				—				—
Impaired			—				439				—				4,940
Total		$	10,909			$	1,314,245			$	137,607			$	789,836

 

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Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2021 and are included within the total loan portfolio.

 

		Commercial and Industrial				Municipal				Commercial Real Estate				Total
		(in thousands)
Credit Rating:
Aaa – Aa3		$	755,120			$	76,412			$	35,915			$	867,447
A1 – A3			259,913				6,980				70,359				337,252
Baa1 – Baa3			50,000				51,133				144,023				245,156
Ba2			—				4,420				—				4,420
Total		$	1,065,033			$	138,945			$	250,297			$	1,454,275

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2020.

 

		Commercial and Industrial				Municipal				Commercial Real Estate				Total
		(in thousands)
Credit Rating:
Aaa – Aa3		$	710,955			$	74,291			$	38,035			$	823,281
A1 – A3			183,123				7,103				145,583				335,809
Baa1 – Baa3			50,000				51,133				140,905				242,038
Ba2			—				5,080				—				5,080
Total		$	944,078			$	137,607			$	324,523			$	1,406,208

The Company utilized payment performance as credit quality indicators for the loan types listed below.

Further information pertaining to the allowance for loan losses at September 30, 2021 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		$	—			$	—			$	—			$	—			$	6,358			$	6,358
Commercial and industrial			—				19				—				19				1,321,888				1,321,907
Municipal			—				—				—				—				138,945				138,945
Commercial real estate			1,798				240				—				2,038				727,346				729,384
Residential real estate			773				743				—				1,516				464,593				466,109
Consumer and overdrafts			1				1				—				2				19,547				19,549
Home equity			1,257				315				—				1,572				241,653				243,225
Total		$	3,829			$	1,318			$	—			$	5,147			$	2,920,330			$	2,925,477

 

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Further information pertaining to the allowance for loan losses at December 31, 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		$	—			$	—			$	—			$	—			$	10,909			$	10,909
Commercial and industrial			56				297				90				443				1,313,802				1,314,245
Municipal			—				—				—				—				137,607				137,607
Commercial real estate			—				2,881				—				2,881				786,955				789,836
Residential real estate			390				527				—				917				447,519				448,436
Consumer and overdrafts			21				1				—				22				20,417				20,439
Home equity			1,001				290				—				1,291				273,066				274,357
Total		$	1,468			$	3,996			$	90			$	5,554			$	2,990,275			$	2,995,829

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, 2020.

 

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The following is information pertaining to impaired loans for September 30, 2021:

 

		Carrying Value				Unpaid Principal Balance				Required Reserve				Average Carrying Value for 3 Months Ending 9/30/2021				Interest Income Recognized for 3 Months Ending 9/30/2021				Average Carrying Value for 9 Months Ending 9/30/2021				Interest Income Recognized for 9 Months Ending 9/30/2021
			(in thousands)
With no required reserve recorded:
Construction and land development		$	—			$	—			$	—			$	—			$	—			$	—			$	—
Commercial and industrial			—				—				—				41				—				19				—
Municipal			—				—				—				—				—				—				—
Commercial real estate			239				276				—				245				—				256				—
Residential real estate			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Home equity			—				—				—				—				—				—				—
Total		$	239			$	276			$	—			$	286			$	—			$	275			$	—
With required reserve recorded:
Construction and land development		$	—			$	—			$	—			$	—			$	—			$	—			$	—
Commercial and industrial			77				97				10				105				1				262				3
Municipal			—				—				—				—				—				—				—
Commercial real estate			2,000				2,132				71				2,009				21				2,551				62
Residential real estate			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Home equity			—				—				—				—				—				—				—
Total		$	2,077			$	2,229			$	81			$	2,114			$	22			$	2,813			$	65
Total:
Construction and land development		$	—			$	—			$	—			$	—			$	—			$	—			$	—
Commercial and industrial			77				97				10				146				1				281				3
Municipal			—				—				—				—				—				—				—
Commercial real estate			2,239				2,408				71				2,254				21				2,807				62
Residential real estate			—				—				—				—				—				—				—
Consumer			—				—				—				—				—				—				—
Home equity			—				—				—				—				—				—				—
Total		$	2,316			$	2,505			$	81			$	2,400			$	22			$	3,088			$	65

 

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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 9/30/2020				Interest Income Recognized for 3 Months Ending 9/30/2020				Average Carrying Value for 9 Months Ending 9/30/2020				Interest Income Recognized for 9 Months Ending 9/30/2020
			(in thousands)
With no required reserve recorded:
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

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 were no TDRs made during the nine-month period ended September 30, 2021. Also, there were no commitments to lend additional funds to TDR borrowers. There were no TDRs that subsequently defaulted during the first nine months of 2021.

Under Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (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.

 

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As of September 30, 2021, and as a result of

COVID-19

loan modifications, the Company had modifications of 2 loans aggregating $16,329,000, primarily consisting of short-term payment deferrals. Both loans were performing in accordance with their modified terms.

There were no TDRs made during the nine-month period ended September 30, 2020. Also, there were no commitments to lend additional funds to TDR borrowers. There were no TDRs that subsequently defaulted during the first nine months of 2020.

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.

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, 2021						Three Months Ended September 30, 2020						Affected Line Item in the Statement where Net Income is Presented
(in thousands)
Unrealized gains and losses on available-for-sale securities		$	—					$	—					Net gains on sales of investments
			—						—					Provision for income taxes
		$	—					$	—					Net income
Accretion of unrealized losses transferred		$	(163	)				$	(196	)				Interest on securities held-to-maturity
			35						51					Provision for income taxes
		$	(128	)				$	(145	)				Net income
Amortization of defined benefit pension items
Prior-service costs		$	(54	)		(b)		$	(29	)		(b)		Salaries and employee benefits
Actuarial gains (losses)			(511	)		(b)			(472	)		(b)		Salaries and employee benefits
Total before tax			(565	)					(501	)				Income before taxes
Tax (expense) or benefit			159						141					Provision for income taxes
Net of tax		$	(406	)				$	(360	)				Net income
Details about Accumulated Other Comprehensive Income Components		Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020						Affected Line Item in the Statement where Net Income is Presented
(in thousands)
Unrealized gains and losses on available-for-sale securities		$	—					$	—					Net gains on sales of investments
			—						—					Provision for income taxes
		$	—					$	—					Net income
Accretion of unrealized losses transferred		$	(532	)				$	(637	)				Interest on securities held-to-maturity
			141						166					Provision for income taxes
		$	(391	)				$	(471	)				Net income
Amortization of defined benefit pension items
Prior-service costs		$	(162	)		(b)		$	(86	)		(b)		Salaries and employee benefits
Actuarial gains (losses)			(1,532	)		(b)			(1,417	)		(b)		Salaries and employee benefits
Total before tax			(1,694	)					(1,503	)				Income before taxes
Tax (expense) or benefit			476						422					Provision for income taxes
Net of tax		$	(1,218	)				$	(1,081	)				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).

 

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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, 2021 and 2020.

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)		2021				2020				2021				2020
Basic EPS Computation:
Numerator:
Net income, Class A		$	9,326			$	8,630			$	26,452			$	24,254
Net income, Class B			2,406				2,257				6,873				6,355
Denominator:
Weighted average shares outstanding, Class A			3,672,969				3,655,469				3,663,669				3,653,429
Weighted average shares outstanding, Class B			1,894,940				1,912,440				1,904,240				1,914,480
Basic EPS, Class A		$	2.54			$	2.36			$	7.22			$	6.64
Basic EPS, Class B			1.27				1.18				3.61				3.32
Diluted EPS Computation:
Numerator:
Net income, Class A		$	9,326			$	8,630			$	26,452			$	24,254
Net income, Class B			2,406				2,257				6,873				6,355
Total net income, for diluted EPS, Class A computation			11,732				10,887				33,325				30,609
Denominator:
Weighted average shares outstanding, basic, Class A			3,672,969				3,655,469				3,663,669				3,653,429
Weighted average shares outstanding, Class B			1,894,940				1,912,440				1,904,240				1,914,480
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			1,894,940				1,912,440				1,904,240				1,914,480
Diluted EPS, Class A		$	2.11			$	1.96			$	5.99			$	5.50
Diluted EPS, Class B			1.27				1.18				3.61				3.32

 

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Note 7. Employee Benefits

The Company provides pension benefits to its employees under a noncontributory defined benefit pension plan, the “Defined Benefit Pension 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 the Century Bancorp, Inc. Supplemental Executive Retirement and Insurance 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.

Components of Net Periodic Benefit Cost for the Three Months Ended September 30,

 

		Pension Benefits								Supplemental Insurance/ Retirement Plan
		2021				2020				2021				2020
		(in thousands)
Service cost			$ 379				$344				$ 363				$ 353
Interest			434				450				434				466
Expected return on plan assets			(1,062)				(952)				—				—
Recognized prior service cost (benefit)							—				54				29
Recognized net actuarial losses			241				261				269				211
Net periodic benefit (credit) cost			$ (8)				$103				$1,120				$1,059

 

		Pension Benefits								Supplemental Insurance/ Retirement Plan
		2021				2020				2021				2020
		(in thousands)
Service cost			$1,137				$1,032				$1,089				$1,059
Interest			1,302				1,350				1,302				1,398
Expected return on plan assets			(3,186)				(2,856)				—				—
Recognized prior service cost (benefit)			—				—				162				87
Recognized net actuarial losses			723				783				807				633
Net periodic benefit (credit) cost			$ (24)				$ 309				$3,360				$3,177

Components of Net Periodic Benefit Cost for the Nine Months Ended September 30,

Approximately $1,110,000 and $1,395,000 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, 2021 and 2020, respectively.

Contributions

The Company has contributed $1,302,000 to the Defined Benefit Pension Plan in 2021.

 

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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.

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, 2021, 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)
SBA Backed Securities		$	39,285			$	—			$	39,285			$	—
U.S. Government Agency and Sponsored   Mortgage-Backed Securities			144,608				—				144,608				—
Privately Issued Residential Mortgage-   Backed Securities			244				—				244				—
Obligations Issued by States and   Political Subdivisions			11,769				—				—				11,769
Other Debt Securities			8,276				—				8,276				—
Total		$	204,182			$	—			$	192,413			$	11,769
Equity Securities		$	1,680			$	342			$	1,338			$	—
Financial Instruments Measured at Fair Value   on a Non-recurring Basis
Impaired Loans		$	258			$	—			$	—			$	258

 

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The results of the fair value hierarchy as of December 31, 2020, 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		$	44,039			$	—			$	44,039			$	—
U.S. Government Agency and Sponsored   Mortgage-Backed Securities			177,741				—				177,741				—
Privately Issued Residential Mortgage-   Backed Securities			328				—				328				—
Obligations Issued by States and   Political Subdivisions			52,276				—				—				52,276
Other Debt Securities			8,064				—				8,064				—
Total		$	282,448			$	—			$	230,172			$	52,276
Equity Securities		$	1,668			$	303			$	1,365			$	—
Financial Instruments Measured at Fair Value   on a Non-recurring  Basis Impaired Loans		$	3,178			$	—			$	—			$	3,178

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 period ended September 30, 2021 amounted to $9,000 and ($491,000). The types of adjustments that are made to specific provisions related to impaired loans recognized for the year ended December 31, 2020 amounted to $501,000.

There were no transfers between level 1, 2 and 3 for the nine months ended September 30, 2021 and the year ended December 31, 2020. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine months ended September 30, 2021 and the year ended December 31, 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) at September 30, 2021. 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 (1)		$ 11,769		Discounted cash flow		Discount rate		0% - 1.0% (2)
Impaired Loans		$ 1,680		Appraisal of collateral (3)		Appraisal adjustments (4)		0% - 17% discount

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) at December 31, 2020. 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 (1)		$ 52,276		Discounted cash flow		Discount rate		0% - 1.0% (2)
Impaired Loans		$ 3,178		Appraisal of collateral (3)		Appraisal adjustments (4)		0% - 17% discount

 

(1)	Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. (2) Weighted averages.

(3)	Fair value is generally determined through independent appraisals of the underlying collateral, which generally include   various Level 3 inputs which are not observable.

(4)	Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.

The changes in Level 3 securities for the nine-month period ended September 30, 2021 are shown in the table below:

 

		Obligations Issued by States & Political Subdivisions
Balance at December 31, 2020		$	52,276
Purchases			14,855
Maturities and calls			(55,325	)
Amortization			(37	)
Balance at September 30, 2021		$	11,769

The amortized cost of Level 3 securities was $11,769,000 at September 30, 2021 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.

 

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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 $2,920,000, for the first nine months of 2021, mainly attributable to one loan relationship that was paid down. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine-month period ended September 30, 2020.

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.

 

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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.

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, 2021 and December 31, 2020. 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, 2021		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		$	3,211,977			$	3,207,259			$	—			$	3,207,259			$	—
Loans (1)			2,890,713				2,796,258				—				—				2,796,258
Financial liabilities:
Time deposits			348,296				345,677				—				345,677				—
Other borrowed funds			118,786				122,013				—				122,013				—
Subordinated debentures			36,083				36,083				—				36,083				—
December 31, 2020
Financial assets:
Securities held-to-maturity		$	2,509,088			$	2,579,103			$	—			$	2,579,103			$	—
Loans (1)			2,960,343				2,902,390				—				—				2,902,390
Financial liabilities:
Time deposits			546,143				556,470				—				556,470				—
Other borrowed funds			177,009				183,000				—				183,000				—
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.

 

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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.

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, “non-sufficient funds” 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.

 

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		Nine Months Ended 9/30/2021				Revenue from Contracts in Scope of Topic 606				Nine Months Ended 9/30/2020				Revenue from Contracts in Scope of Topic 606
		(dollars in thousands)
Net interest income		$	88,938			$	—			$	78,350			$	—
Noninterest income:
Service charges on deposit accounts			6,632				6,632				6,558				6,558
Lockbox fees			2,876				2,876				2,850				2,850
Net gains on sales of securities			—				—				—				—
Gains on sales of mortgage loans			—				—				—				—
Other income			2,973				2,050				3,112				1,738
Total noninterest income			12,481				11,558				12,520				11,146
Total revenues		$	101,419			$	11,558			$	90,870			$	11,146

 

		Three Months Ended 9/30/2021				Revenue from Contracts in Scope of Topic 606				Three Months Ended 9/30/2020				Revenue from Contracts in Scope of Topic 606
		(dollars in thousands)
Net interest income		$	30,380			$	—			$	27,331			$	—
Noninterest income:
Service charges on deposit accounts			2,243				2,243				2,239				2,239
Lockbox fees			914				914				996				996
Net gains on sales of securities			—				—				—				—
Gains on sales of mortgage loans			—				—				—				—
Other income			1,015				684				934				580
Total noninterest income			4,172				3,841				4,169				3,815
Total revenues		$	34,552			$	3,841			$	31,500			$	3,815

The following table provides information about receivables with customers.

 

		September 30, 2021				December 31, 2020
(dollars in thousands)
Receivables, which are included in “Other assets”		$	1,348			$	1,397

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 31 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 which expires in 2024, can be terminated early after each sublease year. Lease income, for the sublease, totaled approximately $31,000 for the nine months ended September 30, 2021. Variable lease costs include costs that are not included in the lease liability.

 

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The components of lease expense were as follows:

 

		Three Months Ended 9/30/2021				Nine Months Ended 9/30/2021				Three Months Ended 9/30/2020				Nine Months Ended 9/30/2020
(in thousands)
Operating lease cost		$	543			$	1,663			$	546			$	1,638
Variable lease cost			192				546				135				441
Total lease cost		$	735			$	2,209			$	681			$	2,079

Supplemental cash flow information related to leases was as follows:

 

		Three Months Ended 9/30/2021				Nine Months Ended 9/30/2021				Three Months Ended 9/30/2020				Nine Months Ended 9/30/2020
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	541			$	1,624			$	529			$	1,586
Right-of-use assets obtained in exchange for lease obligations:
Operating leases		$	376			$	376			$	431			$	1,306

Supplemental balance sheet information related to leases was as follows:

 

		9/30/2021				12/31/2020
(in thousands, except lease term and discount rate)
Operating Leases:
Operating lease right-of-use assets		$	12,734			$	13,713
Operating lease liabilities		$	12,994			$	13,935
Weighted Average Remaining Lease Term:
Operating Leases			10 Years				10 Years
Weighted Average Discount Rate:
Operating Leases			3.1	%			3.1	%

The Company has payment obligations under several

non-cancelable

operating leases for premises and equipment expiring in various years through 2030. Total lease expense approximated $2,209,000 and $2,079,000 for the nine months ended September 30, 2021, and 2020, respectively. Included in lease expense are amounts paid to a company affiliated with Barry R. Sloane, Chairman, President and CEO, and Linda Sloane Kay, Vice Chair, amounting to $395,000 and $329,000, for the nine months ended September 30, 2021, and 2020, respectively. Rental income approximated $621,000 and $498,000, for the nine months ended September 30, 2021, and 2020, respectively.

 

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A summary of future minimum rental payments under such leases as the dates indicated follows:

 

		Minimum Rental Payments
		September 30, 2021				December 31, 2020
		(in thousands)
Year Ending December 31, 2020 2021		$	544			$	2,156
2022			2,072				1,995
2023			2,039				1,962
2024			1,769				1,692
2025			1,548				1,471
Thereafter			7,453				7,394
Total lease payments		$	15,425			$	16,670
Less imputed interest			(2,431	)			(2,735	)
Present value of lease liability		$	12,994			$	13,935

September 30, 2021 minimum rental payments represent three months of rental payments remaining in calendar year 2021.

Note 12. Transaction with Eastern Bankshares, Inc.

On April 7, 2021, the Company and Eastern Bankshares, Inc. (“Eastern”) (NASDAQ: EBC) entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, through a series of transactions, Eastern will acquire the Company in a cash transaction for total consideration valued at approximately $642 million. Under the terms of the Merger Agreement, (i) each holder of Class A common stock will receive a cash payment of $115.28 per share of Class A common stock and (ii) each holder of Class B common stock will receive a cash payment of $115.28 per share of Class B common stock. The transaction is expected to close in the fourth quarter of 2021 and is subject to customary closing conditions. The Company’s shareholders approved the Merger Agreement at the Special Meeting of the Shareholders held on July 7, 2021. The Company received the required regulatory approvals during the third quarter of 2021.

The Company has recognized approximately $2.0 million in merger related costs, mainly consisting of legal and consulting expenses. The expenses have been recorded in other expenses on the income statement. The Company also has contingent merger related fees of approximately $7.4 million mainly consisting of advisory and legal fees that have not been recognized. The contingent merger related fees will be recognized upon closing of the proposed transaction.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company, a Massachusetts state-chartered trust company formed in 1969 and headquartered in Medford, Massachusetts. At September 30, 2021, the Company had total assets of $7.1 billion. Currently, the Company operates 28 banking offices in 21 cities and towns in Massachusetts and Southern New Hampshire, ranging from Braintree in the south to Salem, New Hampshire 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, New York, Virginia, Washington D.C., and Pennsylvania.

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.

 

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The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers its corporate and institutional customers 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, 2021, was $33,325,000 or $5.99 per Class A share diluted, an increase of 8.9% compared to net income of $30,609,000, or $5.50 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,
		2021				2020
Basic EPS – Class A common		$	2.54			$	2.36
Basic EPS – Class B common		$	1.27			$	1.18
Diluted EPS – Class A common		$	2.11			$	1.96
Diluted EPS – Class B common		$	1.27			$	1.18

 

		Nine Months Ended
		September 30,
		2021				2020
Basic EPS – Class A common		$	7.22			$	6.64
Basic EPS – Class B common		$	3.61			$	3.32
Diluted EPS – Class A common		$	5.99			$	5.50
Diluted EPS – Class B common		$	3.61			$	3.32

Net interest income totaled $88.9 million for the nine months ended September 30, 2021, compared to $78.4 million for the same period in 2020. The 13.5% 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 2.01% on a fully

tax-equivalent

basis for the first nine months of 2020 compared to 1.81% for the same period in 2021. This was primarily the result of increased margin pressure as a result of decreases in interest rates across the yield curve in 2020. The average balances of interest-earning assets increased for 2021 compared to the same period last year, by $1.36 billion, or 24.4%, combined with an average yield decrease of 0.68%, resulting in a decrease in interest income of $6.0 million. The average balance of interest-bearing liabilities increased for 2021 compared to the same period last year, by $1.04 billion, or 23.2%, combined with an average interest-bearing liabilities interest cost decrease of 0.59%, resulting in a decrease in interest expense of $16.5 million.

The trends in the net interest margin are illustrated in the graph below:

 

 

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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 that contributed approximately seven basis points to the net interest margin. The net interest margin decreased during the second, third, and fourth quarters of 2020 primarily as a result of increased margin pressure during the recent decrease in interest rates across the yield curve. This was partially offset by prepayment penalties collected of $453,000 that contributed approximately three basis points to the net interest margin during the fourth quarter of 2020. The net interest margin decreased during the first nine months of 2021 primarily from the result of increased margin pressure as a result of the decreases 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 decreased by $4.4 million from $3.7 million for the nine months ended September 30, 2020, compared to a credit of $750,000 for the same period in 2021. The provision for the first nine months of 2020 was primarily a result of provisions related to the onset of the

COVID-19

pandemic. The credit provision for the first nine months of 2021 was primarily attributable to a reduction in specific allocations to the allowance for loan losses and a reduction in the historical experience reserve allocation. This was offset, somewhat, by provisions associated with originations of commercial and industrial loans during 2021.

The Company’s effective tax rate increased from 9.5% for the nine months ended September 30, 2020, to 15.7% for the same period in 2021. The increase in the effective tax rate was primarily the result of an increase in taxable income relative to total income and nondeductible merger related expenses.

During the third quarter of 2019, the Company purchased a future branch location in Salem, New Hampshire. The Company opened this branch during the second 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 fourth quarter of 2021.

Recent Market Developments

Coronavirus Aid, Relief and Economic Security Act, Families First Coronavirus Response Act (“FFCRA”), and Coronavirus Response and Relief Supplemental Appropriations Act of 2021

On March 18, 2020, the FFCRA was signed into law and on March 27, 2020, the 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. Also, as a result of the CARES Act, the full balance of the Company’s AMT credit was refunded in 2020.

The CARES Act, among other things, provides cash payments to certain individuals and has various programs for businesses. In particular, it includes the 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 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. During 2020 and 2021, the Company participated in the PPP. Since the inception of the program, PPP originations totaled approximately 2,008 loans for approximately $341 million. As of September 30, 2021, Century Bank’s PPP loans totaled approximately 661 loans for approximately $95.1 million. The fees collected, from the SBA, amount to approximately $12.7 million. The amount of fees recognized during the first nine months of 2021 amounted to approximately $5.0 million compared to $2.8 million for the same period last year. Total cost deferrals amounted to approximately $1.9 million since inception. The amount of costs recognized during the first nine months of 2021 amounted to approximately $767,000 compared to $394,000 for the same period last year. The fees and costs are being amortized over the lives of the loans utilizing the level-yield method.

Under Section 4013 of the CARES Act, from March 1, 2020 through the earlier of January 1, 2022 or 60 days after the termination date of the national emergency declared by the President on March 13, 2020 concerning the

COVID-19

outbreak (the “national emergency”), a financial institution may elect to suspend the requirements under U.S. GAAP for loan modifications related to the

COVID-19

pandemic that would otherwise be categorized as a troubled debt restructured, including impairment accounting. This troubled debt restructuring relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019.

 

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As of September 30, 2021, and as a result of

COVID-19

loan modifications, the Company has modifications of 2 loans aggregating $16.3 million, primarily consisting of short-term payment deferrals. Both of these loans were performing in accordance with their modified terms. The CARES Act also allows companies to delay Financial Accounting Standards Board (FASB) Accounting Standards Update (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 elected to delay FASB ASU

2016-13.

This ASU was delayed until the earlier of the date on which the national emergency terminates or December 31, 2020, with an effective retrospective implementation date of January 1, 2020. On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law. The law changed the delayed implementation date to the earlier of the Company’s fiscal year that begins after the date on which the national emergency terminates or January 1, 2022.

Recent Accounting Developments

Recently Adopted Accounting Standards Updates

In August 2018, FASB issued ASU

2018-14,

“Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic

715-20)”

(“ASU

2018-14”),

to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU

2018-14

is effective for fiscal years beginning after December 15, 2020, for public business entities and for fiscal years beginning after December 15, 2021, for all other entities. Early adoption is permitted. Management has evaluated ASU

2018-14

and as of January 1, 2021, the Company has adopted ASU

2018-14

and determined the impact to be immaterial.

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 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 at any period as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020 up to the date that the financial statements are available to be issued. 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 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 life cycle, behavioral attributes and the economic environment.

 

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Since 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. See discussion below of the deferral of the amendments in this ASU.

On March 27, 2020, the 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), and subsequent amendments to the ASU noted above, 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 was 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. On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law. The law changed the delayed implementation date to the earlier of the first day of the Company’s fiscal year that begins after the date on which the national emergency terminates or January 1, 2022. The Company does not believe the impact of adoption would have been material to the Company’s consolidated financial statements as of September 30, 2021.

Financial Condition

Loans

On September 30, 2021, total loans outstanding were $2,925,477,000, down by $70,352,000 from the total on December 31, 2020. At September 30, 2021, commercial real estate loans accounted for 24.9%, commercial and industrial accounted for 45.2%, and residential real estate loans, including home equity loans, accounted for 24.2% of total loans.

Commercial and industrial loans increased to $1,321,907,000 on September 30, 2021 from $1,314,245,000 at December 31, 2020. The Company originated approximately $108,197,000 of PPP loans during the nine months ended September 30, 2021 and received approximately $209,558,000 of PPP loan payoffs, primarily from loan forgiveness, for the same period. This was offset by commercial and industrial loan originations. Commercial real estate loans decreased to $729,384,000 on September 30, 2021 from $789,836,000 on December 31, 2020 primarily as a result of loan payoffs. Construction loans decreased to $6,358,000 at September 30, 2021 from $10,909,000 on December 31, 2020, primarily as a result of loan payoffs. Residential real estate loans increased to $466,109,000 on September 30, 2021 from $448,436,000 on December 31, 2020, primarily as a result of loan originations. Home equity loans decreased to $243,225,000 on September 30, 2021 from $274,357,000 on December 31, 2020, primarily as a result of a home equity loan payoffs. Municipal loans increased slightly to $138,945,000 from $137,607,000.

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 below. The Company closely monitors concentrations to determine the impact of

COVID-19

upon their short-term and long-term operations.

 

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Allowance for Loan Losses

The allowance for loan loss at September 30, 2021 was $34,764,000 as compared to $35,486,000 at December 31, 2020. The level of the allowance for loan losses to total loans was 1.19% at September 30, 2021 and 1.18% at December 31, 2020. The ratio of the allowance for loan losses to loans outstanding has increased slightly from December 31, 2020. The increase is primarily the result of commercial and industrial loan originations offset, somewhat, by PPP loans payoffs. 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, 2021.

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2021 and are included within the total loan portfolio.

 

		Commercial and Industrial				Municipal				Commercial Real Estate				Total
		(in thousands)
Credit Rating:
Aaa – Aa3		$	755,120			$	76,412			$	35,915			$	867,447
A1 – A3			259,913				6,980				70,359				337,252
Baa1 – Baa3			50,000				51,133				144,023				245,156
Ba2			—				4,420				—				4,420
Total		$	1,065,033			$	138,945			$	250,297			$	1,454,275

Credit ratings issued by national organizations are presented in the following table at December 31, 2020.

 

		Commercial and Industrial				Municipal				Commercial Real Estate				Total
		(in thousands)
Credit Rating:
Aaa – Aa3		$	710,955			$	74,291			$	38,035			$	823,281
A1 – A3			183,123				7,103				145,583				335,809
Baa1 – Baa3			50,000				51,133				140,905				242,038
Ba2			—				5,080				—				5,080
Total		$	944,078			$	137,607			$	324,523			$	1,406,208

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.

 

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The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated.

 

		Three months ended September 30,								Nine months ended September 30,
		2021				2020				2021				2020
		(in thousands)								(in thousands)
Allowance for loan losses, beginning of period		$	34,949			$	32,516			$	35,486			$	29,585
Loans charged off			(38	)			(41	)			(134	)			(120	)
Recoveries on loans previously charged-off			53				19				162				254
Net recoveries (charge-offs)			15				(22	)			28				134
(Credit) provision charged to expense			(200	)			900				(750	)			3,675
Allowance for loan losses, end of period		$	34,764			$	33,394			$	34,764			$	33,394

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, 2021				December 31, 2020
		(dollars in thousands)
Nonaccruing loans		$	1,318			$	3,996
Total nonperforming assets		$	1,318			$	3,996
Loans past due 90 days or more and still accruing		$	—			$	90
Nonaccruing loans as a percentage of total loans			0.05	%			0.13	%
Nonperforming assets as a percentage of total assets			0.02	%			0.06	%
Accruing troubled debt restructures		$	2,058			$	2,202

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 $204,182,000 at September 30, 2021, a decrease of 27.7% from December 31, 2020. The portfolio decreased mainly as a result of paydowns and maturities of securities

available-for-sale

totaling $95,808,000 offset, somewhat by purchases of $16,155,000. 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 5.4 years.

At September 30, 2021, 94.2% 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 $11,769,000 or 5.8% 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.

 

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During the first nine months of 2021, net unrealized gains on the securities

available-for-sale

increased to $1,462,000 from a net unrealized gain of $175,000 at December 31, 2020. This was primarily the result of an increase 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, 2021				December 31, 2020
		(in thousands)
Small Business Administration		$	39,285			$	44,039
U.S Government Agency and Sponsored Enterprise Mortgage- backed Securities			144,608				177,741
Privately Issued Residential Mortgage-backed Securities			244				328
Obligations issued by States and Political Subdivisions			11,769				52,276
Other Debt Securities			8,276				8,064
Total Securities Available–for-Sale		$	204,182			$	282,448

There were no sales of

available-for-sales

securities for the nine months ended September 30, 2021.

Securities

Held-to-Maturity

(at Amortized Cost)

The securities

held-to-maturity

portfolio totaled $3,211,977,000 on September 30, 2021, an increase of 28.0% from December 31, 2020. Purchases of

held-to-maturity

securities totaled $1,418,979,000 for the nine months ended September 30, 2021. The purchases were offset somewhat, by maturities and scheduled principal payments of $717,320,000. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 4.8 years.

The following table sets forth the amortized cost of securities

held-to-maturity

at the dates indicated.

 

		September 30, 2021				December 31, 2020
		(in thousands)
U.S. Government Sponsored Enterprises		$	350,583			$	244,220
SBA Backed Securities			38,594				37,783
U.S. Government Agency and Sponsored Enterprise Mortgage- backed Securities			2,822,800				2,227,085
Total Securities Held-to-Maturity		$	3,211,977			$	2,509,088

There were no sales of

held-to-maturity

securities for the nine months ended September 30, 2021.

The net unrealized loss on investment securities

held-to-maturity

were $4,718,000 or 0.1% of the total securities

held-to-maturity

portfolio at September 30, 2021 and the net unrealized gains was $70,015,000 or 2.8% of the total securities

held-to-maturity

portfolio at December 31, 2020. The decrease in the net unrealized gains on securities

held-to-maturity

related primarily to an increase 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, 2021 and December 31, 2020.

On September 30, 2021 and December 31, 2020, 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.

 

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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. As of September 30, 2021, there have been no indicators of impairment that would require further consideration of potential impairment.

Equity Securities

On September 30, 2021, equity securities totaled $1,680,000 compared to $1,668,000 at December 31, 2020, the increase is the result of changes in fair values.

Deposits and Borrowed Funds

On September 30, 2021, deposits totaled $6,204,376,000 representing a 13.8% increase from December 31, 2020. Total deposits increased primarily as a result of an increase in savings and NOW deposits, demand deposits, and money market accounts. These types of deposits increased primarily from an increased customer base and the cyclical nature of the municipal deposit 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. Money market accounts increased mainly as a result of an increase in municipal and corporate money market accounts. Time deposits decreased primarily as a result of decreased municipal time deposits.

Borrowed funds totaled $388,747,000 at September 30, 2021 compared to $409,099,000 at December 31, 2020. Borrowed funds decreased mainly as a result of a decrease in borrowings from the FHLBB, offset, somewhat by an increase in repurchase agreements. FHLBB borrowings decreased mainly as a result of the increase in funds provided by deposits. Repurchase agreements increased primarily as a result of short-term customer activity.

Stockholders’ Equity

At September 30, 2021, total equity was $402,951,000 compared to $370,409,000 on December 31, 2020. The Company’s equity increased primarily as a result of earnings, partially offset by dividends paid. The Company’s leverage ratio stood at 6.31% on September 30, 2021, compared to 6.64% at December 31, 2020. 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, 2021, was $72.37 as compared to $66.53 on December 31, 2020.

 

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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, 2021												September 30, 2020
		Average Balance				Interest Income/ Expenses (1)				Rate Earned/ Paid (1)				Average Balance				Interest Income/ Expenses (1)				Rate Earned/ Paid (1)
		(dollars in thousands)
ASSETS
Interest-earning assets:
Loans (2)
Loans taxable		$	1,679,169			$	14,832				3.50	%		$	1,681,573			$	15,074				3.57	%
Loans tax-exempt			1,301,804				7,751				2.36	%			1,240,668				7,997				2.56	%
Securities available-for-sale (5):
Taxable			212,012				445				0.84	%			272,475				722				1.06	%
Tax-exempt			17,845				37				0.83	%			43,000				110				1.02	%
Securities held-to-maturity:
Taxable			3,276,477				13,678				1.67	%			2,368,987				14,186				2.40	%
Interest-bearing deposits in other banks			488,359				186				0.15	%			275,157				69				0.10	%
Total interest-earning assets			6,975,666				36,929				2.11	%			5,881,860				38,158				2.59	%
Non interest-earning assets			332,944												306,887
Allowance for loan losses			(35,003	)											(32,819	)
Total assets		$	7,273,607											$	6,155,928
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts		$	1,342,305			$	297				0.09	%		$	1,170,430			$	1,060				0.36	%
Savings accounts			1,099,585				273				0.10	%			794,806				666				0.33	%
Money market accounts			2,306,353				2,368				0.41	%			1,747,629				3,056				0.70	%
Time deposits			409,856				791				0.77	%			595,453				2,858				1.91	%
Total interest-bearing deposits			5,158,099				3,729				0.29	%			4,308,318				7,640				0.71	%
Securities sold under agreements to repurchase			263,206				91				0.14	%			209,477				241				0.46	%
Other borrowed funds and subordinated debentures			154,951				1,065				2.73	%			207,467				1,292				2.48	%
Total interest-bearing liabilities			5,576,256				4,885				0.35	%			4,725,262				9,173				0.77	%
Non-interest-bearing liabilities
Demand deposits			1,202,969												983,990
Other liabilities			95,987												88,896
Total liabilities			6,875,212												5,798,148
Stockholders’ equity			398,395												357,780
Total liabilities & stockholders’ equity		$	7,273,607											$	6,155,928
Net interest income on a fully taxable equivalent basis							32,044												28,985
Less taxable equivalent adjustment							(1,664	)											(1,654	)
Net interest income						$	30,380											$	27,331
Net interest spread (3)											1.76	%											1.82	%
Net interest margin (4)											1.82	%											1.96	%

 

(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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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 nine-month periods indicated.

 

		Nine Months Ended
		September 30, 2021												September 30, 2020
		Average Balance				Interest Income/ Expenses (1)				Rate Earned/ Paid (1)				Average Balance				Interest Income/ Expenses (1)				Rate Earned/ Paid (1)
		(dollars in thousands)
ASSETS
Interest-earning assets:
Loans (2)
Loans taxable		$	1,715,554			$	45,407				3.54	%		$	1,489,641			$	41,884				3.76	%
Loans tax-exempt			1,270,214				22,908				2.41	%			1,203,359				27,100				3.01	%
Securities available-for-sale (5):
Taxable			226,281				1,465				0.86	%			271,882				3,241				1.59	%
Tax-exempt			35,627				240				0.90	%			21,419				304				1.89	%
Securities held-to-maturity:
Taxable			3,137,556				40,908				1.74	%			2,346,502				44,701				2.54	%
Interest-bearing deposits in other banks			544,227				477				0.12	%			238,525				747				0.42	%
Total interest-earning assets			6,929,459				111,405				2.15	%			5,571,328				117,977				2.83	%
Non interest-earning assets			349,782												294,226
Allowance for loan losses			(35,332	)											(31,359	)
Total assets		$	7,243,909											$	5,834,195
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts		$	1,280,576			$	1,375				0.14	%		$	1,110,309			$	4,633				0.56	%
Savings accounts			1,061,440				1,066				0.13	%			771,588				2,936				0.51	%
Money market accounts			2,332,307				7,743				0.44	%			1,603,367				12,090				1.01	%
Time deposits			460,474				3,487				1.01	%			597,589				9,141				2.04	%
Total interest-bearing deposits			5,134,797				13,671				0.36	%			4,082,853				28,800				0.94	%
Securities sold under agreements to repurchase			247,665				330				0.18	%			220,796				1,176				0.71	%
Other borrowed funds and subordinated debentures			171,639				3,527				2.75	%			206,055				4,093				2.65	%
Total interest-bearing liabilities			5,554,101				17,528				0.42	%			4,509,704				34,069				1.01	%
Non-interest-bearing liabilities
Demand deposits			1,205,456												889,237
Other liabilities			96,964												88,028
Total liabilities			6,856,521												5,486,969
Stockholders’ equity			387,388												347,226
Total liabilities & stockholders’ equity		$	7,243,909											$	5,834,195
Net interest income on a fully taxable equivalent basis							93,877												83,908
Less taxable equivalent adjustment							(4,939	)											(5,558	)
Net interest income						$	88,938											$	78,350
Net interest spread (3)											1.73	%											1.82	%
Net interest margin (4)											1.81	%											2.01	%

 

(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, 2021 Compared with Three Months Ended September 30, 2020												Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020
		Increase/(Decrease) Due to Change in												Increase/(Decrease) Due to Change in
		Volume				Rate				Total				Volume				Rate				Total
		(in thousands)												(in thousands)
Interest income:
Loans
Taxable		$	(18	)		$	(224	)		$	(242	)		$	6,052			$	(2,529	)		$	3,523
Tax-exempt			392				(638	)			(246	)			1,433				(5,625	)			(4,192	)
Securities available-for-sale
Taxable			(143	)			(134	)			(277	)			(477	)			(1,299	)			(1,776	)
Tax-exempt			(55	)			(18	)			(73	)			143				(207	)			(64	)
Securities held-to-maturity
Taxable			4,515				(5,023	)			(508	)			12,613				(16,406	)			(3,793	)
Interest-bearing deposits in other banks			70				47				117				516				(786	)			(270	)
Total interest income			4,761				(5,990	)			(1,229	)			20,280				(26,852	)			(6,572	)
Interest expense:
Deposits
NOW accounts			137				(900	)			(763	)			618				(3,876	)			(3,258	)
Savings accounts			193				(586	)			(393	)			827				(2,697	)			(1,870	)
Money market accounts			806				(1,494	)			(688	)			4,109				(8,456	)			(4,347	)
Time deposits			(708	)			(1,359	)			(2,067	)			(1,767	)			(3,887	)			(5,654	)
Total interest-bearing deposits			428				(4,339	)			(3,911	)			3,787				(18,916	)			(15,129	)
Securities sold under agreements to repurchase			51				(201	)			(150	)			128				(974	)			(846	)
Other borrowed funds and subordinated debentures			(349	)			122				(227	)			(706	)			140				(566	)
Total interest expense			130				(4,418	)			(4,288	)			3,209				(19,750	)			(16,541	)
Change in net interest income		$	4,631			$	(1,572	)		$	3,059			$	17,071			$	(7,102	)		$	9,969

Net Interest Income

For the three months ended September 30, 2021, net interest income on a fully taxable-equivalent basis totaled $32,044,000 compared to $28,985,000 for the same period in 2020, an increase of $3,059,000, or 10.6%. 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 1.96% on a fully

tax-equivalent

basis for the first three months of 2020 compared to 1.82% for the same period in 2021. This was primarily the result of increased margin pressure from decreases in interest rates across the yield curve in 2020. The average balances of interest-earning assets increased for 2021 compared to the same period last year, by $1,093,806,000 or 18.6%, combined with an average yield decrease of 0.48%, resulting in a decrease in interest income of $1,229,000. The average balance of interest- bearing liabilities increased for 2021 compared to the same period last year, by $850,994,000, or 18.0%, combined with an average interest-bearing liabilities interest cost decrease of 0.42%, resulting in a decrease in interest expense of $4,288,000.

For the nine months ended September 30, 2021, net interest income on a fully taxable equivalent basis totaled $93,877,000 compared to $83,908,000 for the same period in 2020, an increase of $9,969,000, or 11.9%. 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 2.01% on a fully

tax-equivalent

basis for the first nine months of 2020 compared to 1.81% for the same period in 2021. This was primarily the result of increased margin pressure from decreases in interest rates across the yield curve in 2020. The average balances of interest-earning assets increased for 2021 compared to the same period last year, by $1,358,131,000, or 24.4%, combined with an average yield decrease of 0.68%, resulting in a decrease in interest income of $6,572,000. The average balance of interest-bearing liabilities increased for 2021 compared to the same period last year, by $1,044,397,000, or 23.2%, combined with an average interest-bearing liabilities interest cost decrease of 0.59%, resulting in a decrease in interest expense of $16,541,000.

 

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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 period was 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,

securities

available-for-sale,

interest-bearing deposits in other banks, and loan income decreased primarily from a decrease in rates paid on the portfolios. Securities

held-to-maturity

income decrease was offset, somewhat, by an increase in volume. Interest-bearing deposits in other banks increased for the three months ended September 30, 2021, primarily as a result of increased volume.

Provision for Loan Losses

The provision for loan losses decreased by $4,425,000 from $3,675,000 for the nine months ended September 30, 2020, compared to a credit of $750,000 for the same period in 2021. The credit for 2021 was offset, somewhat, by provisions associated with originations of commercial and industrial loans. The provision for the first nine months of 2020 was primarily a result of provisions related to the onset of the

COVID-19

pandemic. The credit provision for the first nine months of 2021 was primarily attributable to a reduction in specific allocations to the allowance for loan losses and a reduction in the historical experience reserve allocation.

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, 2021, increased by $3,000 from the same period last year to $4,172,000. This was mainly attributable to an increase in service charges on deposit accounts of $4,000 and an increase in other income of $81,000. This was offset, somewhat, by a decrease of $82,000 in lockbox fees. Service charges on deposit accounts remained relatively stable. Lockbox fees decreased mainly from decreased customer activity. Other income increased mainly from an increase in loan servicing fees.

Other operating income for the nine months ended September 30, 2021, decreased by $39,000 from the same period last year to $12,481,000. This was mainly attributable to a decrease in other income of $139,000. This was offset, somewhat, by an increase in service charges on deposit accounts of $74,000 and an increase in lockbox fees of $26,000. Other income decreased mainly as a result of a decrease in insurance gains on life insurance policies. Service charges on deposit accounts increased mainly as a result of an increase in processing activities and an increase in debit card fees. Lockbox fees increased mainly from increased customer activity.

For the quarter ended September 30, 2021, operating expenses increased by $2,572,000, or 14.2%, to $20,739,000, from the same period last year. This was primarily attributable to an increase in salaries and employee benefits of $545,000, an increase of $610,000 in FDIC assessments, an increase of $1,290,000 in other expenses, and an increase of $147,000 is equipment expenses. The increase in salaries and employee benefits was mainly attributable to merit increases, lower bonus accruals during the same period in 2020 as a result of uncertainties from the

COVID-19

pandemic, decreased deferred origination cost credits, and increased employee benefits including health insurance costs. The increase in FDIC assessments was attributable to increased deposits and increased deposit assessment rates. Other expenses increased mainly from expenses related to the previously announced merger, increases in

COVID-19

related expenses, and increased software maintenance costs. Equipment costs increased mainly from increases in service costs.

For the nine months ended September 30, 2021, operating expenses increased by $9,240,000, or 17.3%, to $62,622,000, from the same period last year. This was primarily attributable to an increase in salaries and employee benefits of $3,439,000, an increase of $302,000 in occupancy costs, an increase of $228,000 in equipment expenses, an increase of $1,529,000 in FDIC assessments, and an increase of $3,742,000 in other expenses. The increase in salaries and employee benefits was mainly attributable to merit increases, lower bonus accruals during the same period in 2020 as a result of uncertainties from the

COVID-19

pandemic, decreased deferred origination cost credits, and increased employee benefits including health insurance costs. The increase in FDIC assessments was attributable to credits applied during the first quarter of 2020, increased deposits and increased deposit assessment rates. The increase in occupancy costs was mainly attributable to an increase in building maintenance. Other expenses increased mainly as a result of expenses related to the previously announced merger, increases in

COVID-19

related expenses, and increases in charitable contributions. Equipment expense increased mainly from an increase in depreciation expense and increased service costs.

Income Taxes

For the quarter ended September 30, 2021, the Company’s income tax expense totaled $2,281,000 on pretax income of $14,013,000 resulting in an effective tax rate of 16.3%. For last year’s corresponding quarter, 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%. This increase was primarily the result of an increase in taxable income relative to total income and nondeductible merger related expenses.

 

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For the nine months ended September 30, 2021, the Company’s income tax expense totaled $6,222,000 on pretax income of $39,547,000 resulting in an effective tax rate of 15.7%. For the nine months ended September 30, 2020, the Company’s income tax expense totaled $3,204,000 on pretax income of $33,813,000 resulting in an effective tax rate of 9.5%. This increase was primarily the result of an increase in taxable income relative to total income and nondeductible merger related expenses.

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, 2020, 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 2021 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, 2021. 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 the “Risk Factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Quarterly Report on Form 10-Q for the quarter ended on June 30, 2021 (the “10-Q”). There have been no material changes since the 10-Q was filed.
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.
+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, 2021, formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended September 30, 2021 and 2020; (v) Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2021 and 2020; (vi) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020; 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 5, 2021		Century Bancorp, Inc.

 

/s/ Barry R. Sloane

Barry R. Sloane

Chairman, President and Chief Executive Officer

/s/ William P. Hornby, CPA

William P. Hornby, CPA

Chief Financial Officer and Treasurer

(Principal Accounting Officer)

 

 

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