EDGAR 10-K Filing

Company CIK: 812348
Filing Year: 2021
Filename: 812348_10-K_2021_0001193125-21-075928.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
The Company
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At December 31, 2020, the Company had total assets of $6.4 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized
businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher education institutions throughout Massachusetts, New Hampshire, Rhode Island, Connecticut, New York, Virginia, Washington DC, 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 and 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. 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 to 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 comprised of approximately 302 government entities.
Availability of Company Filings
Under the Securities Exchange Act of 1934, Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission (the “SEC”). The Company electronically files with the SEC its periodic and current reports, as well as other filings it makes with the SEC from time to time. The SEC maintains an Internet site that contains reports and other information regarding issuers, including the Company, that file electronically with the SEC, at www.sec.gov, in which all forms filed electronically may be accessed. Additionally, our annual report on Form 10-K,
quarterly reports on Form 10-Q
and current reports on Form 8-K
and additional shareholder information are available free of charge on the Company’s website: www.centurybank.com.
Employees and Human Capital Resources
As of December 31, 2020, the Company had 418 full-time and 50 part-time employees. The Company’s employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good. We encourage and support the growth and development of our employees. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs, customized corporate training engagements and educational reimbursement programs.
The safety, health and wellness of our employees is a top priority. The COVID-19
pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, we were able to transition, over a short period of time, 28% of our employees to effectively working from remote locations and ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19
illness and have been provided additional paid time off to cover compensation during such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, keeping the employee portion of health care premiums to a minimum and sponsoring various wellness programs. We believe our commitment to living out our core values, actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages and providing valuable fringe benefits aids in retention of our top-performing
employees.
Supervision and Regulation
The Company and the Bank are subject to extensive regulation under federal and state laws designed to promote the safety and soundness of depository institutions and protect consumers.
Among other requirements, these laws require extensive disclosures to consumers concerning the substantive terms of the deposit taking, lending, and payment services provided by the Bank, regulate the collection, use and disclosure of non-public
personal information concerning consumers and require disclosure of privacy practices, prohibit unfair, deceptive and/or abusive acts or practices, and address other matters. Violations of consumer protection laws can result in substantial civil money penalties and other consequences.
The Community Reinvestment Act requires the Federal Deposit Insurance Corporation to evaluate the Bank’s performance in helping to meet the credit needs of the entire communities it serves, generally based upon the Banks record of making loans in its assessment area, its investments in community development projects, affordable housing and programs that benefit low-to-moderate
income persons and geographies, and its delivery of services through its branch offices and ATMs. Failure to achieve at least a “Satisfactory” rating under the Community Reinvestment Act could prevent the Bank or the Company from undertaking certain activities in the future, including establishment of new branch offices and the acquisition of other financial institutions. Massachusetts has a law that is substantially equivalent to the federal Community Reinvestment Act.
Federal law requires financial institutions such as the Bank to implement a written anti-money laundering program to mitigate risk that the financial services it provides may be used to facilitate money laundering and terrorist financing, including verifying the identify its customers and beneficial owners of legal entity customers, and monitoring and reporting to the government suspicious activity.
Banking laws require banks and bank holding companies to operate with at least a minimum level of capital, restrict dividends payable by banks and bank holding companies and require bank holding companies to serve as a source of financial strength to their subsidiary banks. These laws may limit the Company’s capacity to declare and pay dividends to shareholders and may require the Company to take actions to support the Bank even at times when the Company may not necessarily have the resources to do so.
Certain aspects of federal and state banking laws are described below.
Financial Services Modernization
On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act (“Gramm-Leach”) which significantly altered banking laws in the United States. Gramm-Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm Leach, many of the
depression-era
laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies were repealed. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking.
In order to engage in these financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a “financial holding company” by demonstrating that each of its bank subsidiaries is “well capitalized,” “well managed,” and has at least a “satisfactory” rating under the Community Reinvestment Act of 1977 (the “CRA”). The Company has not elected to become a financial holding company under Gramm-Leach.
These financial activities authorized by Gramm-Leach may also be engaged in by a “financial subsidiary” of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and any bank affiliates) to be “well capitalized” and “well managed;” the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if the bank is one of the 100 largest banks, it must meet certain financial rating or other comparable requirements. The Company does not currently conduct activities through a financial subsidiary.
Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the SEC will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers’ nonpublic, personal information.
Holding Company Regulation
The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”) and is registered as such with the Board of Governors of the Federal Reserve System (the “FRB”), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach
status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (i) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank or bank holding company, unless it already owns or controls a majority of the voting stock of that bank or bank holding company, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth.
The Holding Company Act prohibits a bank holding company, with certain exceptions, from (i) acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any company which is not a bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The Company and its subsidiaries are examined by federal and state regulators.
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, also known as the “International Money Laundering Abatement and Anti-Terrorism Act of 2001”, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize, or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the Gramm-Leach Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Holding Company Act or Bank Merger Act.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection and enhanced and timely disclosure of corporate information. The SEC has adopted a substantial number of implementing rules and the Financial Industry Regulatory Authority (FINRA) has adopted corporate governance rules that have been approved by the SEC and are applicable to the Company. The changes are intended to allow stockholders to monitor more effectively the performance of companies and management. As directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s disclosure controls and procedures and internal controls over financial reporting; that they have made certain disclosures to the Company’s auditors and the Board of Directors about the Company’s disclosure controls and procedures and internal control over financial reporting, and that they have included information in the Company’s quarterly and annual reports about their evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting, and whether there have been significant changes in the Company’s internal disclosure controls and procedures or in other factors that could significantly affect such controls and procedures subsequent to the evaluation and whether there have been any significant changes in the Company’s internal control over financial reporting that have materially affected or reasonably likely to materially affect the Company’s internal control over financial reporting, and compliance with certain other disclosure objectives. Section 906 of the Sarbanes-Oxley Act requires an additional certification that each periodic report containing financial statements fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 and that the information in the report fairly presents, in all material respects, the financial conditions and results of operations of the Company.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “D-F
Act”) became law. The D-F
Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope, affecting many aspects of bank and financial market regulation. The D-F
Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration, and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The D-F
Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The D-F
Act broadened the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000.
In addition, the D-F
Act added a new Section 13 to the Bank Holding Company Act, the so-called
“Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December 2013 and under an extended conformance regulation compliance was required to be achieved by July 21, 2015. The conformance period for investments in and relationships with certain “legacy covered funds” was extended to July 21, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation. The federal banking agencies have issued amendments to the Rule to provide greater clarity and certainty about what activities are prohibited and to improve the effective allocation of compliance resources, and to conform the Rule to the EGRRCPA (discussed below). In addition, pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act, or EGRRCPA, which was enacted on May 24, 2018, the Volcker rule excludes from its coverage an insured depository institution if it has and if every company that controls it has total consolidated assets of $10 billion or less and consolidated trading assets and liabilities that are 5% or less of consolidated assets.
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act took effect on January 1, 2018. The Tax Act lowered the Company’s federal tax rate from 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. As a result of the CARES Act, the full balance of the AMT credit was refunded during 2020. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards. Tax Act changes for individuals include lower tax rates, mortgage interest and state and local tax limitations as well as an increase in the standard deduction, among others.
Coronavirus Aid, Relief and Economic Security (CARES) Act, Families First Coronavirus Response Act (FFCRA), and Coronavirus Response and Relief Supplemental Appropriations Act of 2021
On March 18, 2020 the Families First Coronavirus Response Act (FFCRA) was signed into law and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The FFCRA and the CARES Act provide relief for families and businesses impacted by the coronavirus pandemic. The provisions in this legislation include, among other things, loan programs for businesses, expanded unemployment insurance benefits, stimulus payments to certain taxpayers, new provisions on sick leave and family leave, and funding for a variety of health-related efforts and government programs. Also, as a result of the CARES Act, the full balance of the AMT credit was refunded in 2020.
In response to the pandemic, on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act, among other things, provides cash payments to certain individuals and has various programs for businesses. In particular, it includes the Payroll Protection Program (PPP) which provides forgivable loans to qualified small businesses, primarily to allow these businesses to continue to pay their employees. The original amount allocated to the program was $349 billion, which was exhausted on April 16, 2020. On April 24, 2020, an additional allocation of $310 billion was signed into law. These loans are
funded by participating banks and are 100% guaranteed by the U.S. Small Business Administration (SBA). If utilized primarily for payroll, subject to certain other conditions, the loans may be forgiven, in whole or in part, and repaid by the SBA. During 2020, the Company participated in the SBA PPP program. PPP originations totaled approximately 1,300 loans for approximately $232 million. As of December 31, 2020, Century Bank’s PPP loans totaled approximately 1,157 loans for approximately $196 million. The fees collected, from the SBA, amount to approximately $8.0 million. Cost deferrals amounted to approximately $1.2 million. 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, 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 Troubled Debt Restructuring (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.
As of December 31, 2020, and as a result of COVID-19
loan modifications, the Company has modifications of 20 loans aggregating approximately $25 million, primarily consisting of short-term payment deferrals. Of these modifications, $25 million, or 100%, 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 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 Company’s fiscal year that begins after the date on which the national emergency terminates or January 1, 2022.
Economic Growth, Regulatory Relief, and Consumer Protection Act
The EGRRCPA requires the federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%. The federal banking agencies jointly issued a final rule, effective January 1, 2020, which set the minimum ratio at 9%. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements including the capital ratio requirements that are required to be considered well capitalized under Section 38 of Federal Deposit Insurance Act. On March 27, 2020, the CARES Act was enacted to address the economic effects of the COVID-19
pandemic. The CARES Act reduced the community bank leverage ratio from 9% to 8% until the earlier of the end of the national emergency related to the COVID-19
pandemic or December 31, 2020. In response to the CARES Act, federal banking regulators set the community bank leverage ratio at 8% for the remainder of 2020, 8.5% for 2021 and 9% thereafter. The Company and the Bank have not elected to use the community bank leverage framework.
Deposit Insurance Premiums
The Bank’s deposits are insured by the FDIC insurance up to applicable limits. The FDIC’s Deposit Insurance Fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of assets that it holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. Deposit insurance premiums are based on total consolidated assets less average tangible equity. In 2016, the FDIC’s Board of Directors adopted a final rule that changed the manner in which deposit insurance assessment rates are calculated for established small banks, generally those banks with less
than $10 billion of assets that have been insured for at least five years. The rule utilizes the CAMELS rating system, which is a supervisory rating system designed to take into account and reflect all financial and operational risks that a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk. To determine a bank’s assessment rate, each of seven financial ratios and a weighted average of CAMELS component ratings are multiplied by a corresponding pricing multiplier. The sum of these products is added to a uniform amount, with the resulting sum being an institution’s initial base assessment rate (subject to minimum or maximum assessment rates based on a bank’s CAMELS composite rating). This method takes into account various measures, including an institution’s leverage ratio, brokered deposit ratio, one-year
asset growth, the ratio of net income before taxes to total assets and considerations related to asset quality. In December 2018, the FDIC issued a final rule to implement a provision in EGRRCPA providing a limited exception for a capped amount of reciprocal deposits from treatment as brokered deposits for qualifying institutions.
On January 24, 2019, the FDIC notified the Company that $1.2 million of small bank assessment credits were available to offset quarterly FDIC assessment charges. The FDIC Deposit Insurance Fund Reserve Ratio reached 1.40% as of June 30, 2019, and the FDIC first applied small bank credits on the September 30, 2019 assessment invoice (for the second quarter of 2019). The FDIC will continue to apply small bank credits so long as the Reserve Ratio is at least 1.35%. After applying small bank credits for four quarters, the FDIC will remit the value of any remaining small bank credits in the next assessment period in which the Reserve Ratio is at least 1.35%. The Company utilized the remaining small bank assessment credit during 2020.
Risk-Based Capital Guidelines
Federal banking regulators have issued risk-based capital guidelines, which assign risk weights to asset categories and off-balance-sheet
items and require banking organizations to maintain capital as a specified percentage of risk-weighted assets and a minimum. Also, the Basel Committee has issued capital standards entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule that came into effect in January 2015 sets the Basel III minimum regulatory capital requirements for all organizations. It included a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raised the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The implementation of the framework did not have a material impact on the Company’s financial condition or results of operations.
Competition
The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. A number of these competitors are not subject to the regulatory oversight that the Company is subject to, which increases these competitors’ flexibility.
Forward-Looking Statements
Except for the historical information contained herein, this Annual Report on Form 10-K
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 of the indeterminant length and extent of the economic contraction resulting from the COVID-19
pandemic, (ii) 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, (iii) the fact that consumer behavior may change due to changing political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives, (iv) the fact that the Company’s success is dependent to a significant extent upon general economic conditions in New England, (v) 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, (vi) the fact that the Bank’s participation in the Paycheck Protection Program involves reputational risks (vii) 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, (viii) the fact that our operations are subject to risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics, (ix) the fact that future credit losses may be higher than currently expected due to changes in economic assumptions and adverse economic developments, and (x) 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, including those described under “Risk Factors” in Item 1A. of this Annual Report on Form 10-K,
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 Form 10-K,
and the Company cautions readers not to place undue reliance on such statements.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
THE COVID-19
PANDEMIC
The COVID-19
pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers, business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.
As a result of the COVID-19
pandemic, the Company’s business, financial condition and results of operation have been and may continue to be, negatively impacted. In light of the ongoing and unprecedented nature of the pandemic, it is difficult to predict its full impact on our business. Future developments, including governmental legislation and other actions, when COVID-19
can be controlled, and when the economy may be reopened, are highly uncertain. The COVID-19
recession had adverse effects on our operating results for the year ending December 31, 2020 and possibly beyond.
The following have or may occur:
•
a decline in the demand for products and services may occur due to, among other things, adverse financial impacts of the pandemic on customers, increased unemployment and temporary or permanent closures of businesses;
•
deposits could decline if customers need to draw on available balances as a result of the economic downturn;
•
an increase in loan delinquencies, problem assets and foreclosures due to, among other things, adverse financial impacts of the pandemic on customers;
•
a decline in collateral value;
•
a work stoppage, forced quarantine, or other interruption or the unavailability of key employees has occurred in various areas of the Company and may continue to occur;
•
the unavailability of critical services provided by third party vendors or limitations on the business capacities of our vendors for extended periods of time;
•
a decline of the yield on our assets to a greater extent than the decline in our cost of interest-bearing liabilities as the result of the reduction of the Federal Reserve Board’s target federal funds rate to near 0%, reducing our net interest margin and spread and reducing net income;
•
potential losses in our investment securities portfolio due to volatility in the financial markets;
•
increased cybersecurity risks and a potential loss of productivity in connection with remote work arrangements;
•
an increase in the allowance for loan losses has occurred and may continue to occur to accommodate potential increased loan defaults.
Our participation in the SBA’s PPP may expose us to reputational harm, increased litigation risk, as well as the risk that the SBA may not fund some or all of the guarantees associated with PPP loans.
As of December 31, 2020, we have originated approximately 1,300 loans aggregating to approximately $232 million through the PPP. Lenders participating in the PPP have faced increased public scrutiny about their loan application process and procedures, and the nature and type of the borrowers receiving PPP loans. We depend on our reputation as a trusted and responsible financial services company to compete effectively in the communities that we serve, and any negative public or customer response to, or any litigation or claims that might arise out of, our participation in the PPP and any other legislative or regulatory initiatives and programs that may be enacted in response to the COVID-19
pandemic, could adversely impact our business. Other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP, and we may be subject to the same or similar litigation, in addition to litigation in connection with our processing of PPP loan forgiveness applications. In addition, if the SBA determines that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.
BUSINESS DEVELOPMENT AND COMPETITION
We face significant and increasing competition in the financial services industry.
The banking business is highly competitive and the profitability of the Company depends upon the Company’s ability to attract loans and deposits in Massachusetts, New Hampshire, Rhode Island, Connecticut, New York, Virginia, Washington DC, and Pennsylvania, where the Company competes with a variety of traditional banking companies, some of which have vastly greater resources, and nontraditional institutions such as credit unions and finance companies.
Our business may be adversely affected if we fail to adapt our products and services to evolving industry standards and consumer preferences.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The widespread adoption of new technologies, including internet services, cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we grow and develop our internet and mobile banking and wealth management channel strategies in addition to remote connectivity solutions. We might not be successful in: developing or introducing new products and services; integrating new products or services into our existing offerings;
responding or adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits; achieving market acceptance of our products and services; reducing costs in response to pressures to deliver products and services at lower prices; or sufficiently developing and maintaining loyal customers.
We rely on other companies to provide key components of our business infrastructure.
Third-party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, using established criteria and complying with applicable regulatory guidance to evaluate each vendor’s overall risk profile, capabilities, financial stability, and internal control environment, we do not control their daily business environment and actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers, impair our ability to conduct our business efficiently and effectively, and/or result in regulatory action, financial loss, litigation, and loss of reputation. Replacing these third party vendors could also entail significant delay and expense.
BANKING AND MARKET CONDITIONS
Changes in interest rates may hurt our earnings, results of operations and financial condition.
The Company’s earnings depend, to a great extent, upon the level of net interest income generated by the Company, and therefore the Company’s results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve.
Our loan portfolio is subject to various credit risks.
At December 31, 2020, approximately 74.8% of the Company’s loan portfolio was comprised of commercial and commercial real estate loans, exposing the Company to the risks inherent in financings 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.
At December 31, 2020, approximately 24.1% of the Company’s loan portfolio was comprised of residential real estate and home equity loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk and the value of underlying collateral. Accordingly, the Company’s profitability may be negatively impacted by errors in risk analyses, by loan defaults and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions.
Changes in the valuation of our securities could adversely affect us.
Economic conditions and interest rate risk could adversely impact the fair value and the ultimate collectability of the Company’s investments. Should an investment be deemed “other than temporarily impaired”, the Company would be required to write-down the carrying value of the investment through earnings. Such write-down(s) may have a material adverse effect on the Company’s financial condition and results of operations.
Impairment of goodwill and/or intangible assets could adversely affect us.
Write-down of goodwill and other identifiable intangible assets would negatively impact our financial condition and results of operations. At December 31, 2020, our goodwill and other identifiable intangible assets were approximately $3.5 million.
Loan Customers may not be able to repay loans according to their terms.
The Company’s loan customers may not repay loans according to their terms, and the collateral securing the payment of loans may be insufficient to assure repayment or cover losses. If loan customers fail to repay loans according to the terms of the loans, the Company may experience significant credit losses which could have a material adverse effect on its operating results and capital ratios.
Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect the Company’s business, financial condition, or results of operations.
On July 27, 2017, the Financial Conduct Authority (FCA), a regulator of financial services firms in the United Kingdom, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. The FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve. Other financial services regulators and industry groups are evaluating the phase-out
of LIBOR and the development of alternate reference rate indices or reference rates. The Company has loans, investment securities, borrowings and other financial instruments with attributes that are dependent on LIBOR. Although the Company has incorporated LIBOR replacement language in many of its governing documents, the transition to a new rate will require changes to risk and pricing models, valuation tools, product design and funding strategies. The Company is evaluating the potential impact of the replacement of the LIBOR benchmark interest rate, and what the impact of such a transition will have on the Company’s business, financial condition, or results of operations.
BUSINESS CONTINUITY AND SECURITY RISKS
Climate change, severe weather, natural disasters, acts of terrorism and other external events could harm our business.
Natural disasters, including severe weather events of increasing strength and frequency due to climate change, can disrupt our operations, result in damage to the Company’s properties, reduce or destroy the value of the collateral for the Company’s loans and negatively affect the economies in which the Company operates, which could have a material adverse effect on the Company’s results of operations and financial condition. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on the Company’s ability to conduct business, and the Company’s insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest or pandemics, including COVID 19, could cause disruptions to the Company’s business or the economy as a whole. While the Company has established and regularly tests disaster recovery procedures, the occurrence of any such event could have a material adverse effect on the Company’s business, operations and financial condition.
We may not be able to successfully implement future information technology system enhancements, which could adversely affect our business operations and profitability.
The potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent to secure bank and customer financial information, could present operational issues, require significant capital spending or impact the Company’s reputation.
We face continuing and growing security risks to our information base, including the information we maintain relating to our customers.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our
security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our results of operations and competitive position.
REGULATORY AND LEGAL
Our business is highly regulated, and changes in the laws and regulations that apply to us could have an adverse impact on our business.
The Company is subject to extensive regulation, supervision and examination. Any change in the laws or regulations or failure by the Company to comply with applicable law and regulation, or a change in regulators’ supervisory policies or examination procedures, whether by the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board, other state or federal regulators, the United States Congress, or the Massachusetts legislature could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows. Changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters, could also impact the Company’s financial results.
Additionally, changes in the extensive laws, regulations and policies governing companies generally and bank holding companies and their subsidiaries, such as the Act and the Tax Act, could alter the Company’s business environment or affect the Company’s operations.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and any failure to comply with these laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The CFPB, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA, the Equal Credit Opportunity Act, the Fair Housing Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have an adverse effect on our business, reputation, results of operation, and financial condition.
These factors, as well as general economic and market conditions in the United States of America, may materially and adversely affect the Company’s performance, results of operations and the market price of shares of the Company’s Class A common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED STAFF COMMENTS
No written comments received by the Company from the SEC regarding the Company’s periodic or current reports remain unresolved.

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
The Company owns its main banking office, headquarters, and operations center in Medford, Massachusetts, which were expanded in 2004, and 11 of the 26 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2021 to 2030. The Company believes that its banking offices are in good condition.
During the third quarter of 2019, the Company purchased the existing Brookline branch location that the Company was leasing. Also, during the third quarter of 2019, the Company purchased a future branch location in Salem, New Hampshire. The Company plans to open this branch during the first quarter of 2021. During the second quarter of 2020, the Company executed a lease for a future branch location in Needham, Massachusetts. The Company plans to open this branch during the third quarter of 2021.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Company’s consolidated financial position.

---

ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT
’
S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) The Class A Common Stock of the Company is traded on the NASDAQ National Global Market under the symbol “CNBKA.” The Company’s Class B Common Stock is not traded on any national securities exchange or other public trading market.
The shares of Class A Common Stock are generally not entitled to vote on any matter, including in the election of Company Directors, but, in limited circumstances, may be entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of the Company’s Class B Common Stock, voting as a separate class, is required to approve certain extraordinary corporate transactions, the holders of Class B Common Stock have the power to prevent any takeover of the Company not approved by them.
(b) Approximate number of equity security holders as of December 31, 2020:
Title of Class
Approximate Number
of Record Holders
Class A Common Stock
Class B Common Stock
(c) The Company has historically paid a quarterly cash dividend. During 2020, the quarterly dividend has increased resulting in annual dividends of $0.54 on Class A shares and $0.27 on Class B shares as compared to $0.48 and $0.24, respectively for 2019. The Company anticipates it will continue to pay a quarterly cash dividend and will evaluate the amount of these dividends on a quarterly basis.
(d) The performance graph information required herein is shown on page 19.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
SELECTED FINANCIAL DATA
The information required herein is shown on pages 17 through 19.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The information required herein is shown on pages 20 through 43.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required herein is shown on page 39-40.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required herein is shown on pages 44 through 96.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A.
CONTROLS AND PROCEDURES
The Company’s principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures as of December 31, 2020. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective. The Company’s 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 Securities Exchange Act of 1934 is accumulated and reported to Company management (including the principal executive officer and principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal control over financial reporting and there have been no changes that occurred during the fourth fiscal quarter that have materially affected or are reasonably likely to materially affect its internal control over financial reporting or in other factors that could significantly affect its internal control over financial reporting.
On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released an updated version of its Internal Control - Integrated Framework (2013) (2013 Framework). The 2013 Framework’s internal control components (i.e., control environment, risk assessment, control activities, information, and communication, and monitoring activities) remain predominantly the same as those in the 1992 Framework. However, the 2013 Framework was expanded to include 17 principles which must be present and functioning in order to have an effective system of internal controls. The Company implemented the 2013 Framework effective December 31, 2014.
Management’s report on internal control over financial reporting is shown on page 102. The audit report of the registered public accounting firm is shown on page 100.

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ITEM 9B. OTHER INFORMATION
ITEM 9B.
OTHER INFORMATION
None.
FINANCIAL STATEMENTS
Financial Highlights
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Financial Highlights
(dollars in thousands, except share data)
FOR THE YEAR
Interest income
$
149,036
$ 159,139
$ 137,056
$ 113,436
$ 96,699
Interest expense
42,207
63,350
44,480
27,820
22,617
Net interest income
106,829
95,789
92,576
85,616
74,082
Provision for loan losses
5,825
1,250
1,350
1,790
1,375
Net interest income after provision for loan losses
101,004
94,539
91,226
83,826
72,707
Other operating income
19,100
18,399
16,248
16,552
16,222
Operating expenses
73,488
72,129
69,693
67,119
64,757
Income before income taxes
46,616
40,809
37,781
33,259
24,172
Provision for income taxes
4,407
1,110
1,568
10,958
(362 )
Net income
$
42,209
$ 39,699
$ 36,213
$ 22,301
$ 24,534
Core earnings-Non-GAAP
(1)
$
42,209
$ 39,699
$ 36,213
$ 30,749
$ 24,534
Average shares outstanding Class A, basic
3,653,939
3,633,044
3,608,179
3,604,029
3,600,729
Average shares outstanding Class B, basic
1,913,970
1,934,865
1,959,730
1,963,880
1,967,180
Average shares outstanding Class A, diluted
5,567,909
5,567,909
5,567,909
5,567,909
5,567,909
Average shares outstanding Class B, diluted
1,913,970
1,934,865
1,959,730
1,963,880
1,967,180
Total shares outstanding at year-end
5,567,909
5,567,909
5,567,909
5,567,909
5,567,909
Earnings per share:
Basic, Class A
$
9.15
$ 8.63
$ 7.89
$ 4.86
$ 5.35
Basic, Class B
$
4.58
$ 4.31
$ 3.95
$ 2.43
$ 2.68
Diluted, Class A
$
7.58
$ 7.13
$ 6.50
$ 4.01
$ 4.41
Diluted, Class B
$
4.58
$ 4.31
$ 3.95
$ 2.43
$ 2.68
Dividend payout ratio-Non-GAAP
(1)
5.9
%
5.6 %
6.1 %
9.9 %
9.0 %
AT YEAR-END
Assets
$
6,358,834
$ 5,492,424
$ 5,163,935
$ 4,785,572
$ 4,462,608
Loans
2,995,829
2,426,119
2,285,578
2,175,944
1,923,933
Deposits
5,452,221
4,400,111
4,406,964
3,916,967
3,653,218
Stockholders’ equity
370,409
332,581
300,439
260,297
240,041
Book value per share
$
66.53
$ 59.73
$ 53.96
$ 46.75
$ 43.11
SELECTED FINANCIAL PERCENTAGES
Return on average assets
0.70
%
0.76 %
0.74 %
0.48 %
0.57 %
Return on average stockholders’ equity
11.96
%
12.44 %
13.05 %
8.75 %
10.80 %
Net interest margin, taxable equivalent
2.00
%
2.10 %
2.18 %
2.25 %
2.12 %
Net (recoveries) charge-offs as a percent of average loans
0.00
%
0.01 %
(0.04 )%
0.00 %
0.00 %
Average stockholders’ equity to average assets
5.89
%
6.12 %
5.71 %
5.50 %
5.29 %
Efficiency ratio-Non-GAAP
(1)
55.2
%
58.4 %
59.2 %
57.8 %
62.7 %
(1)
Non-GAAP
Financial Measures are reconciled in the following tables:
Financial Highlights
Calculation of Efficiency Ratio:
Total Operating Expenses
$
73,488
$ 72,129
$ 69,693
$ 67,119
$ 64,757
Less: Other Real Estate Owned Expenses
-
(134 )
(59 )
-
-
Total Adjusted Operating Expenses (numerator)
$
73,488
$ 71,995
$ 69,634
$ 67,119
$ 64,757
Net Interest Income
106,829
95,789
92,576
85,616
74,082
Total Other Operating Income
19,100
18,399
16,248
16,552
16,222
Tax Equivalent Adjustment
7,280
9,068
8,854
13,979
12,917
Total Income (denominator)
$
133,209
$ 123,256
$ 117,678
$ 116,147
$ 103,221
Efficiency Ratio, Year-Non-GAAP
55.2
%
58.4 %
59.2 %
57.8 %
62.7 %
Calculation of Dividend Payout Ratio:
Dividends Paid (numerator)
$
2,490
$ 2,207
$ 2,203
$ 2,200
$ 2,201
Net Income (denominator)
$
42,209
$ 39,699
$ 36,213
$ 22,301
$ 24,534
Dividend Payout Ratio-Non-GAAP
5.9
%
5.6 %
6.1 %
9.9 %
9.0 %
Calculation of Core Earnings:
Net Income
$
42,209
$ 39,699
$ 36,213
$ 22,301
$ 24,534
Add: Deferred Tax Remeasurement Charge
-
-
-
8,448
-
Core earnings-Non-GAAP
$
42,209
$ 39,699
$ 36,213
$ 30,749
$ 24,534
The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2015 to December 31, 2020 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end,
was not a trading day, the preceding trading day was used.
Financial Highlights
Comparison of Five-Year
Cumulative Total Return*
Value of $100 Invested on December 31, 2015 at:
Century Bancorp, Inc.
$ 139.52
$ 183.22
$ 159.62
$ 213.23
$
184.77
NASDAQ Banks
126.54
149.82
125.25
171.82
149.83
NASDAQ U.S.
108.87
141.13
137.12
187.44
271.64
*
Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2015 and that all dividends were reinvested.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, this Annual Report 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 of the indeterminant length and extent of the economic contraction resulting from the COVID-19
pandemic, (ii) 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, (iii) the fact that consumer behavior may change due to changing political, business and economic conditions, including increased unemployment, or legislative or regulatory initiatives, (iv) the fact that the Company’s success is dependent to a significant extent upon general economic conditions in New England, (v) 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, (vi) the fact that the Bank’s participation in the Paycheck Protection Program involves reputational risks, (vii) 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, (viii) the fact that our operations are subject to risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics, (ix) the fact that future credit losses may be higher than currently expected due to changes in economic assumptions and adverse economic developments, and (x) 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 Annual Report, and the Company cautions readers not to place undue reliance on such statements.
Coronavirus Aid, Relief and Economic Security (CARES) Act, Families First Coronavirus Response Act (FFCRA), and Coronavirus Response and Relief Supplemental Appropriations Act of 2021
On March 18, 2020 the Families First Coronavirus Response Act (FFCRA) was signed into law and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The FFCRA and the CARES Act provide relief for families and businesses impacted by the coronavirus pandemic. The provisions in this legislation include, among other things, loan programs for businesses, expanded unemployment insurance benefits, stimulus payments to certain taxpayers, new provisions on sick leave and family leave, and funding for a variety of health-related efforts and government programs. Also, as a result of the CARES Act, the full balance of the AMT credit was refunded in 2020.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
In response to the pandemic, on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act, among other things, provides cash payments to certain individuals and has various programs for businesses. In particular, it includes the Payroll Protection Program (PPP) which provides forgivable loans to qualified small businesses, primarily to allow these businesses to continue to pay their employees. The original amount allocated to the program was $349 billion, which was exhausted on April 16, 2020. On April 24, 2020, an additional allocation of $310 billion was signed into law. These loans are funded by participating banks and are 100% guaranteed by the U.S. Small Business Administration (SBA). If utilized primarily for payroll, subject to certain other conditions, the loans may be forgiven, in whole or in part, and repaid by the SBA. During 2020, the Company participated in the PPP. PPP originations totaled approximately 1,300 loans for approximately $232 million. As of December 31, 2020, Century Bank’s PPP loans totaled approximately 1,157 loans for approximately $196 million. The fees collected, from the SBA, amount to approximately $8.0 million. Cost deferrals amounted to approximately $1.2 million. 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, 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.
As of December 31, 2020, and as a result of COVID-19
loan modifications, the Company has modifications of 20 loans aggregating approximately $25 million, primarily consisting of short-term payment deferrals. Of these modifications, $25 million, or 100%, 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 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 Company’s fiscal year that begins after the date on which the national emergency terminates or January 1, 2022.
OVERVIEW
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary: Century Bank and Trust Company (the “Bank”) formed in 1969. At December 31, 2020, the Company had total assets of $6.4 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized
businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher education institutions throughout Massachusetts, New Hampshire, Rhode Island, Connecticut, New York, Virginia, Washington DC, 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 and 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.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit
organizations, and individuals. It emphasizes service to small and medium sized businesses and retail customers in its market area. In recent years, the Company has increased business to larger institutions, specifically, healthcare, and higher education. The Company makes commercial loans, real estate and construction loans and 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 comprised of approximately 302 government entities.
The Company had net income of $42,209,000 for the year ended December 31, 2020, compared with net income of $39,699,000 for the year ended December 31, 2019, and net income of $36,213,000 for the year ended December 31, 2018. Class A diluted earnings per share were $7.58 in 2020 compared to $7.13 in 2019 and compared to $6.50 in 2018.
During 2020, 2019 and 2018, the Company’s earnings were positively impacted primarily by an increase in net interest income. The increase in net interest income for 2020 is primarily due to a decrease in interest expense as a result of falling interest rates. The increases for 2019 was primarily due to an increase in earning assets.
Earnings per share (EPS) for each class of stock and for each year ended December 31, is as follows:
Basic EPS-Class A common
$
9.15
$ 8.63
$ 7.89
Basic EPS-Class B common
$
4.58
$ 4.31
$ 3.95
Diluted EPS-Class A common
$
7.58
$ 7.13
$ 6.50
Diluted EPS-Class B common
$
4.58
$ 4.31
$ 3.95
The trends in the net interest margin are illustrated in the graph below:
Net Interest Margin
The net interest margin remained relatively stable for the first three quarters of 2018. During the fourth quarter of 2018 and first and second quarters of 2019, the Company increased its average interest-bearing deposits and average earning assets. This increased net interest income but decreased the net interest margin. During the third quarter of 2019, the net interest margin increased mainly as a result of deposit rate decreases. These deposits increased net interest income and the net interest margin. During the fourth quarter of 2019, the net interest margin increased mainly as a result of prepayment penalties collected. Prepayment penalties collected amounted to $1.4 million and contributed approximately eleven basis points to the net interest margin for the fourth quarter of 2019. The net interest margin decreased during the first quarter of 2020 mainly as a result of decreases in rates on earning assets. This was partially offset by prepayment penalties collected of $874,000 and contributed approximately seven basis points to the net interest margin. The net interest margin decreased during the second, third, and fourth quarters of 2020 primarily the result of increased margin pressure due to the recent decrease in interest rates across the yield curve. This was partially offset
Management’s Discussion and Analysis of Results of Operations and Financial Condition
by prepayment penalties collected of $453,000 and contributed approximately three basis points to the net interest margin during the fourth quarter of 2020. 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 continue to positively impact the net interest margin.
Historical U.S. Treasury Yield Curve
A yield curve typically plots the interest rates of U.S. Treasury Debt, which have different maturity dates but the same credit quality, at a specific point in time. The three main types of yield curve shapes are normal, inverted, and flat. Over the past three years, the U.S. economy has experienced low short-term rates. During 2018, short-term rates increased more than longer-term rates resulting in a flattening of the yield curve. During 2019, short-term rates decreased more than longer-term rates resulting in a steepening of the yield curve. During 2020, rates across the yield curve decreased to historically low levels. Also, short-term rates decreased more than longer-term rates resulting in a steepening of the yield curve.
Total assets were $6,358,834,000 at December 31, 2020, an increase of 15.8% from total assets of $5,492,424,000 at December 31, 2019.
On December 31, 2020, stockholders’ equity totaled $370,409,000, compared with $332,581,000 on December 31, 2019. Book value per share increased to $66.53 at December 31, 2020, from $59.73 at December 31, 2019.
During the third quarter of 2019, the Company purchased the existing Brookline, Massachusetts
branch location that the Company was leasing. Also, during the third quarter of 2019, the Company purchased a future branch location in Salem, New Hampshire. The Company plans to open this branch during the first quarter of 2021. During the second quarter of 2020, the Company executed a lease for a future branch location in Needham, Massachusetts. The Company plans to open this branch during the third quarter of 2021.
Impact of COVID-19
During 2020, the COVID-19
pandemic caused economic turmoil for individuals and businesses throughout the country and, in particular, our market area. Many businesses were required to fully or partially shut down. Many businesses laid off and/or furloughed employees as a result. Unemployment has increased significantly, and GDP declined significantly. This may cause loan defaults in the future as customers are unable to make their contractual loan payments. The Company has increased its provision for loan losses in response to this increased risk. Future provision levels will be dependent upon the length of the economic disruption and the effectiveness of government programs to mitigate the economic impact of the shutdowns. The Company’s revenue has been and may continue to be negatively impacted as transaction fees have declined due to decreased volume.
The Company is considered an essential business based on criteria set by the Governor of the Commonwealth of Massachusetts. Despite being permitted to continue its operations throughout the pandemic due to its status as an essential business, the operations of the Company nevertheless have been affected as a result of remote work arrangements and the unavailability of employees from time to time. The Company may continue to be affected by a work stoppage, forced quarantine, or other interruption or the unavailability of key employees. While the effects of COVID-19
are likely to have a far-reaching,
long-lasting effect on the global, national, and Massachusetts economies, we believe we have sufficient capital and financial strength, as well as liquidity resources to mitigate the effects of the COVID-19
pandemic on our operations
Management’s Discussion and Analysis of Results of Operations and Financial Condition
and financial condition, while continuing to serve our communities and protect shareholder value.
CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies.
The Company considers allowance for loan losses to be its critical accounting policy.
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance.
Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. After considering the above components, an unallocated component may be generated to cover uncertainties that could affect management’s estimate of probable losses. Further information regarding the Company’s methodology for assessing the appropriateness of the allowance is contained within Note 1 of the “Notes to Consolidated Financial Statements”.
During 2018, the Company further enhanced its methodology to the allowance for loan losses by including additional metrics for qualitative factors on certain loan portfolios. Further enhancements and refinements include adding qualitative factors to certain loan portfolios to enhance granularity. The Company also updated and added data sources to measure present and forecasted economic conditions. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
FINANCIAL CONDITION
Investment Securities
The Company’s securities portfolio consists of securities available-for-sale
(“AFS”), securities held-to-maturity
(“HTM”), and equity securities.
Securities available-for-sale
consist of certain U.S. Treasury, U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county, and municipal securities; privately issued mortgage-backed securities; and other debt securities.
These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders’ equity. The fair value of securities available-for-sale
at December 31, 2020 totaled $282,448,000 and included gross unrealized gains of $845,000 and gross unrealized losses of $670,000. A year earlier, the fair value of securities available-for-sale
was $260,502,000 including gross unrealized gains of $274,000 and gross unrealized losses of $696,000. In 2020 the Company did not recognize any gains on the sale of available-for-sale
securities. In 2019 and 2018, the Company recognized gains of $13,000 and $302,000, respectively.
Securities classified as held-to-maturity
consist of U.S. Government Sponsored Enterprises, SBA
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities. Securities held-to-maturity
as of December 31, 2020 are carried at their amortized cost of $2,509,088,000. A year earlier, securities held-to-maturity
totaled $2,351,120,000. In 2020, 2019, and 2018, the Company recognized gains of $0 and $48,000, and $0 respectively, on the sale of held-to-maturity
securities. The sale from securities held-to-maturity
relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment.
Equity securities are reported at fair value with unrealized gains and losses included in earnings. The fair value of equity securities at December 31, 2020 and December 31, 2019, amounted to $1,668,000 and $1,688,000, respectively.
The following table sets forth the fair value and percentage distribution of securities available-for-sale
at the dates indicated.
Fair Value of Securities Available-for-Sale
At December 31,
Amount
Percent
Amount
Percent
Amount
Percent
(dollars in thousands)
U.S. Treasury
$
-
0.0
%
$ -
0.0 %
$ 1,992
0.6 %
U.S. Government Sponsored Enterprises
-
0.0
%
-
0.0 %
3,915
1.2 %
SBA Backed Securities
44,039
15.6
%
54,211
20.8 %
70,194
20.9 %
U.S. Government Agency and Sponsored
Enterprises Mortgage-Backed Securities
177,741
62.9
%
184,187
70.7 %
162,890
48.4 %
Privately Issued Residential Mortgage-Backed Securities
0.1
%
0.1 %
0.2 %
Obligations Issued by States and Political Subdivisions
52,276
18.5
%
18,076
7.0 %
93,503
27.7 %
Other Debt Securities
8,064
2.9
%
3,632
1.4 %
3,593
1.0 %
Total
$
282,448
100.0
%
$ 260,502
100.0 %
$ 336,759
100.0 %
The majority of the Company’s securities AFS are classified as Level 2, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” The fair values of these securities are 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. Management’s understanding of a pricing service’s pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing controls. Management’s validation of a vendor’s pricing methodology includes establishing internal controls to determine that the pricing information received by pricing services and used by management in the valuation process is relevant and reliable. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale
securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not more likely than not that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2020.
Securities available-for-sale
totaling $52,276,000, or 0.8% of assets, are classified as Level 3, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” These securities are generally municipal securities with no readily determinable fair value. The Company also utilizes internal pricing analysis on various municipal
Management’s Discussion and Analysis of Results of Operations and Financial Condition
securities using market rates on comparable securities. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.
Debt securities of Government Sponsored Enterprises refer primarily to debt securities of Fannie Mae and Freddie Mac.
The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity
at the dates indicated.
Amortized Cost of Securities Held-to-Maturity
At December 31,
Amount
Percent
Amount
Percent
Amount
Percent
(dollars in thousands)
U.S. Treasury
$
-
0.0
%
$ -
0.0 %
$ 9,960
0.5 %
U.S. Government Sponsored Enterprises
244,220
9.7
%
98,867
4.2 %
234,228
11.5 %
SBA Backed Securities
37,783
1.5
%
44,379
1.9 %
52,051
2.5 %
U.S. Government Sponsored Enterprise Mortgage-Backed Securities
2,227,085
88.8
%
2,207,874
93.9 %
1,750,408
85.5 %
Total
$
2,509,088
100.0
%
$ 2,351,120
100.0 %
$ 2,046,647
100.0 %
The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2020. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Fair Value of Securities Available-for-Sale
Amounts Maturing
Within
One
Year
% of
Total
Weighted
Average
Yield
One Year
to Five
Years
% of
Total
Weighted
Average
Yield
Five Years
to Ten
Years
% of
Total
Weighted
Average
Yield
Over
Ten
Years
% of
Total
Weighted
Average
Yield
Total
% of
Total
Weighted
Average
Yield
(dollars in thousands)
SBA Backed Securities
$ -
0.0 %
0.00 %
$ 14,056
5.0 %
0.65 %
$ 13,148
4.6 %
0.75 %
$ 16,835
6.0 %
0.65 %
$ 44,039
15.6 %
0.68 %
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
1,758
0.6 %
0.46 %
97,877
34.7 %
0.60 %
78,106
27.6 %
0.55 %
-
0.0 %
0.00 %
177,741
62.9 %
0.58 %
Privately Issued Residential Mortgage-Backed Securities
0.1 %
1.44 %
-
0.0 %
0.00 %
-
0.0 %
0.00 %
-
0.0 %
0.00 %
0.1 %
1.44 %
Obligations of States and Political Subdivisions
49,113
17.4 %
0.90 %
3,003
1.0 %
1.30 %
0.1 %
3.00 %
-
0.0 %
0.00 %
52,276
18.5 %
0.93 %
Other Debt Securities”
1,298
0.5 %
1.05 %
0.1 %
1.01 %
6,466
2.3 %
4.85 %
-
0.0 %
0.00 %
8,064
2.9 %
4.09 %
Total
$ 52,497
18.6 %
0.89 %
$ 115,236
40.8 %
0.63 %
$ 97,880
34.6 %
0.87 %
$ 16,835
6.0 %
0.65 %
$ 282,448
100.0 %
0.76 %
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Amortized Cost of Securities Held-to-Maturity
Amounts Maturing
Within
One
Year
% of
Total
Weighted
Average
Yield
One Year
to Five
Years
% of
Total
Weighted
Average
Yield
Five Years
to Ten
Years
% of
Total
Weighted
Average
Yield
Over
Ten
Years
% of
Total
Weighted
Average
Yield
Total
% of
Total
Weighted
Average
Yield
(dollars in thousands)
U.S. Government Sponsored Enterprises
$ 10,000
0.4 %
1.88 %
$ 30,500
1.2 %
1.72 %
$ 203,720
8.1 %
0.87 %
$ -
0.0 %
0.00 %
$ 244,220
9.7 %
1.01 %
SBA Backed Securities
-
0.0 %
0.00 %
5,325
0.2 %
1.83 %
32,458
1.3 %
2.41 %
-
0.0 %
0.00 %
37,783
1.5 %
2.32 %
U.S. Government Sponsored Enterprise Mortgage- Backed Securities
69,572
2.8 %
1.91 %
1,834,764
73.1 %
2.15 %
319,754
12.8 %
1.84 %
2,995
0.1 %
3.03 %
2,227,085
88.8 %
2.10 %
Total
$ 79,572
3.2 %
1.91 %
$ 1,870,589
74.5 %
2.14 %
$ 555,932
22.2 %
1.52 %
$ 2,995
0.1 %
3.03 %
$ 2,509,088
100.0 %
2.00 %
At December 31, 2020 and 2019, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2020 there were no sales of securities. In 2019, sales of securities totaling $17,478,000 in gross proceeds resulted in a net realized gain of $61,000. There were no sales of state, county, or municipal securities during 2020, 2019 and 2018.
Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are dependent upon general market conditions and specific conditions related to the issuers of our securities.
Loans
The Company’s lending activities are conducted principally in Massachusetts, New Hampshire, Rhode Island, Connecticut, New York, Virginia, Washington DC, and Pennsylvania. The Company grants single-family and multi-family residential loans, commercial and commercial real estate loans, municipal loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers’ geographic areas and of the general economy. During 2020 the Company participated in the SBA’s PPP program. PPP originations totaled approximately $232,000,000.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following summary shows the composition of the loan portfolio at the dates indicated.
December 31,
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
(dollars in thousands)
Construction and land development
$
10,909
0.4
%
$ 8,992
0.4 %
$ 13,628
0.6 %
$ 18,931
0.9 %
$ 14,928
0.8 %
Commercial and industrial
1,314,245
43.8
%
812,417
33.5 %
761,625
33.3 %
763,807
35.1 %
612,503
31.8 %
Municipal
137,607
4.6
%
120,455
5.0 %
97,290
4.3 %
106,599
4.9 %
135,418
7.0 %
Commercial real estate
789,836
26.3
%
786,102
32.4 %
750,362
32.8 %
732,491
33.7 %
696,173
36.2 %
Residential real estate
448,436
15.0
%
371,897
15.3 %
348,250
15.2 %
287,731
13.2 %
241,357
12.5 %
Consumer
20,007
0.7
%
21,071
0.9 %
21,359
0.9 %
18,458
0.8 %
11,013
0.6 %
Home equity
274,357
9.2
%
304,363
12.5 %
292,340
12.9 %
247,345
11.4 %
211,857
11.0 %
Overdrafts
0.0
%
0.0 %
0.0 %
0.0 %
0.1 %
Total
$
2,995,829
100.0
%
$ 2,426,119
100.0 %
$ 2,285,578
100.0 %
$ 2,175,944
100.0 %
$ 1,923,933
100.0 %
At December 31, 2020, 2019, 2018, 2017 and 2016, loans were carried net of (premiums) discounts of $(74,000), $(292,000), $(364,000), $46,000 and $313,000, respectively. Net deferred loan fees of $4,444,000, $220,000, $496,000, $588,000 and $641,000 were carried in 2020, 2019, 2018, 2017 and 2016, respectively.
The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2020. The table excludes loans secured by 1-4 family residential real estate, loans for household and family personal expenditures, and municipal loans. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.
December 31, 2020
One Year or Less
One to Five Years
Over Five Years
Total
(dollars in thousands)
Construction and land development
$
2,747
$
-
$
8,162
$
10,909
Commercial and industrial
78,000
282,410
953,835
1,314,245
Commercial real estate
37,592
100,400
651,844
789,836
Total
$
118,339
$
382,810
$
1,613,841
$
2,114,990
The following table indicates the rate variability of the above loans due after one year.
December 31, 2020
One to Five Years
Over Five Years
Total
(dollars in thousands)
Predetermined interest rates
$
276,122
$
543,134
$
819,256
Floating or adjustable interest rates
106,688
1,070,707
1,177,395
Total
$
382,810
$
1,613,841
$
1,996,651
The Company’s commercial and industrial (“C&I”) loan customers include large healthcare and higher education institutions. During 2017, the Company increased its lending activities to these types of organizations. This increase may expose the Company to concentration risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other more intangible factors, which are considered in originating commercial loans. The percentage of these types of organizations to total C&I loans has declined to 72% at December 31, 2020, compared to 87% at December 31, 2019. During 2020 the Company participated in the SBA’s PPP program. PPP balances totaled $196,000,000 at December 31, 2020 and are included in C&I loans.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
C&I loan customers also include various small and middle-market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.
Commercial real estate loans are extended to educational institutions, hospitals and other non-profit
organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and thirty years. Also included in commercial real estate loans are loans extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s market area, which generally includes Massachusetts, New Hampshire, and Rhode Island.
Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized nonresidential-type owner-occupied properties. This complements our C&I emphasis placed on the operating business entities and will continue. The regional economic environment affects the risk of both nonresidential and residential mortgages.
Municipal loans customers include loans to municipalities or related interests, primarily for infrastructure projects. The Company had increased its lending activities to municipalities through 2016. Municipal loans decreased during 2017 and 2018 as a result of loan payoffs. Municipal loans increased during 2019 and 2020 as a result of increased loan originations.
Residential real estate loans (1-4 family) includes two categories of loans. Included in residential real estate are approximately $53,302,000 of C&I type loans secured by 1-4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the nature of the collateral.
The other category of residential real estate loans is mostly 1-4 family residential properties located in the Bank’s market area. Underwriting criteria are generally the same as those used by Fannie Mae. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a “First Time Homebuyer” product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category.
Home equity loans are extended as both first and second mortgages on owner-occupied residential properties in the Bank’s market area and are underwritten to a maximum loan to property value of 75%.
Bank officers evaluate the feasibility of construction projects based on independent appraisals of the project, architects’ or engineers’ evaluations of the cost of construction and other relevant data. As of December 31, 2020, the Company was obligated to advance a total of $54,553,000 to complete projects under construction.
Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company’s commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Nonaccrual loans remained relatively stable from 2016 through 2020.
The composition of nonperforming assets is as follows:
December 31,
(dollars in thousands)
Total nonperforming loans
$
3,996
$ 2,014
$ 1,313
$ 1,684
$ 1,084
Other real estate owned
-
-
2,225
-
-
Total nonperforming assets
$
3,996
$ 2,014
$ 3,538
$ 1,684
$ 1,084
Accruing troubled debt restructured loans
$
2,202
$ 2,361
$ 2,559
$ 2,749
$ 3,526
Loans past due 90 and still accruing
-
-
-
-
Nonperforming loans as a percent of gross loans
0.13
%
0.08 %
0.15 %
0.08 %
0.06 %
Nonperforming assets as a percent of total assets
0.06
%
0.04 %
0.07 %
0.04 %
0.02 %
The composition of impaired loans is as follows:
Residential real estate, multi-family
$
-
$ -
$ -
$ 4,212
$
Home equity
-
-
-
-
-
Commercial real estate
4,940
2,346
2,650
2,554
3,149
Construction and land development
-
-
-
-
Commercial and industrial
Total impaired loans
$
5,379
$ 3,252
$ 3,051
$ 7,114
$ 3,830
At December 31, 2020, 2019, 2018, 2017 and 2016 impaired loans had specific reserves of $589,000, $102,000, $145,000, $164,000 and $173,000, respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $125,998,000, $204,690,000, $209,160,000, $229,533,000 and $229,730,000 at December 31, 2020, 2019, 2018, 2017 and 2016, respectively. The Company had no loans held for sale at December 31, 2020, 2019, 2018, 2017 and 2016.
Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage servicing assets (“MSA”) are amortized into non-interest
income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $773,000 at December 31, 2020, $1,202,000 at December 31, 2019, $1,226,000 at December 31, 2018, $1,525,000 at December 31, 2017 and $1,629,000 at December 31, 2016.
Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
The Company continues to monitor closely $33,119,000 and $31,631,000 at December 31, 2020 and 2019, respectively, of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2020, although such values may fluctuate with changes in the economy and the real estate market. The increase is primarily attributable to two loan relationships secured by real estate.
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 years indicated.
Year Ended December 31,
(dollars in thousands)
Year-end
loans outstanding
(net of unearned discount and deferred loan fees)
$
2,995,829
$ 2,426,119
$ 2,285,578
$ 2,175,944
$ 1,923,933
Average loans outstanding
(net of unearned discount and deferred loan fees)
$
2,774,069
$ 2,341,190
$ 2,222,946
$ 2,059,797
$ 1,838,136
Balance of allowance for loan losses at the beginning of year
$
29,585
$ 28,543
$ 26,255
$ 24,406
$ 23,075
Loans charged-off:
Commercial and industrial
-
Construction
-
-
-
-
-
Commercial real estate
-
-
-
-
-
Residential real estate
-
-
Consumer
Total loans charged-off
Recovery of loans previously charged-off:
Commercial and industrial
Construction
-
-
1,436
-
-
Real estate
-
Consumer
Total recoveries of loans previously charged-off:
1,771
Net loan (recoveries) charge-offs
(76
)
(938 )
(59 )
(45 )
Provision charged to operating expense
5,825
1,250
1,350
1,790
1,375
Reclassification to other liabilities
-
-
-
-
(89 )
Balance at end of year
$
35,486
$ 29,585
$ 28,543
$ 26,255
$ 24,406
Ratio of net (recoveries) charge-offs during the year to average loans outstanding
0.00
%
0.01 %
(0.04 )%
0.00 %
0.00 %
Ratio of allowance for loan losses to loans outstanding
1.18
%
1.22 %
1.25 %
1.21 %
1.27 %
Management’s Discussion and Analysis of Results of Operations and Financial Condition
The amount of the allowance for loan losses results from management’s evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The level of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge-offs increased in 2018 primarily as a result of one residential real estate loan. During 2018, there was also a large recovery of a construction loan that was previously charged-off.
The dollar amount of the allowance for loan losses increased primarily as a result of an increase in loan balances offset, somewhat, by lower historical loss factors.
The Company has continued to increase its exposure to larger loan originations to large institutions with strong credit quality in recent years. The Company has limited internal loss history experience with these types of loans and has determined a more appropriate representation of loss expectation is to utilize external historical loss factors based on public credit ratings, as there is a great deal of default and loss data available on these types of loans from the credit rating agencies. The Company incorporated this information into the development of the historical loss rates for these loan types. For 2017, the change in the ratio of the allowance for loan losses to loans outstanding, was primarily due to changes in portfolio composition, lower historical loss rates, and qualitative factor adjustments. For 2018, the ratio increased, primarily as a result of changes in qualitative factors related to general economic factors pertaining to certain industries. For 2019, the ratio decreased primarily as a result of improvements in historical loss factors. For 2020, the ratio decreased, primarily from approximately $196 million of qualifying Payroll Protection Program (PPP) loans that are guaranteed by the U.S. Small Business Administration (SBA), which require no allowance for loan losses.
In addition, the Company monitors the outlook for the industries in which these institutions operate. Healthcare and higher education are the primary industries. 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.
Credit ratings issued by national organizations were utilized as credit quality indicators, for certain of the Company’s loans, 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
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Credit ratings issued by national organizations were utilized as credit quality indicators, for certain of the Company’s loans, as presented in the following table at December 31, 2019.
Commercial
and Industrial
Municipal
Commercial
Real Estate
Total
(in thousands)
Credit Rating:
Aaa-Aa3
$ 523,644
$ 53,273
$ 40,437
$ 617,354
A1-A3
186,044
7,354
148,346
341,744
Baa1-Baa3
-
51,133
144,711
195,844
Ba2
-
5,895
-
5,895
Total
$ 709,688
$ 117,655
$ 333,494
$ 1,160,837
The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At December 31 of each year listed below, the allowance is comprised of the following:
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Percent
of Loans
in Each
Category
to Total
Loans
(dollars in thousands)
Construction and land development
$
0.4
%
$
0.4 %
$ 1,092
0.6 %
$ 1,645
0.9 %
$ 1,012
0.8 %
Commercial and industrial
16,713
43.8
%
11,596
33.5 %
10,998
33.3 %
9,651
35.1 %
6,972
31.8 %
Municipal
2,804
4.6
%
2,566
5.0 %
1,838
4.3 %
1,720
4.9 %
1,612
7.1 %
Commercial real estate
11,751
26.3
%
11,464
32.4 %
10,663
32.8 %
9,728
33.7 %
11,135
36.2 %
Residential real estate
2,111
15.0
%
2,194
15.3 %
2,190
15.2 %
1,873
13.2 %
1,698
12.5 %
Consumer and other
0.7
%
0.9 %
0.9 %
0.8 %
0.6 %
Home equity
1,208
9.2
%
1,065
12.5 %
1,111
12.9 %
11.4 %
1,102
11.0 %
Unallocated
Total
$
35,486
100.0
%
$ 29,585
100.0 %
$ 28,543
100.0 %
$ 26,255
100.0 %
$ 24,406
100.0 %
Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. The enhancements described above have resulted in a lower level of unallocated allowance for loan losses. Further information regarding the allocation of the allowance is contained within Note 6 of the “Notes to Consolidated Financial Statements.”
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Deposits
The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. Additionally, the Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customer’s checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a report balancing the customer’s checking account.
Interest rates on deposits are set twice per month by the Bank’s rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee.
The following table sets forth the average balances of the Bank’s deposits for the periods indicated.
Amount
Percent
Amount
Percent
Amount
Percent
(dollars in thousands)
Demand Deposits
$
921,718
18.0
%
$ 760,420
17.4 %
$ 753,604
18.5 %
Savings and Interest Checking
1,900,406
37.1
%
1,810,481
41.5 %
1,514,259
37.1 %
Money Market
1,708,674
33.3
%
1,273,389
29.2 %
1,230,010
30.2 %
Time Certificates of Deposit
595,864
11.6
%
519,761
11.9 %
577,975
14.2 %
Total
$
5,126,662
100.0
%
$ 4,364,051
100.0 %
$ 4,075,848
100.0 %
Time Deposits of $100,000 or more as of December 31, are as follows:
(dollars in thousands)
Three months or less
$
165,992
$ 84,940
Three months through six months
94,649
94,562
Six months through twelve months
141,650
146,830
Over twelve months
55,645
130,719
Total
$
457,936
$ 457,051
Borrowings
The Bank’s borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLBB”) borrowings collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowings from the FHLBB totaled $177,009,000, a decrease of $193,946,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2020, was approximately $591,974,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12 of the notes to consolidated financial statements, “Other Borrowed Funds and Subordinated Debentures,” for a schedule, including related interest rates and other information.
Subordinated Debentures
In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The coupon rate on these securities was 2.09% at December 31, 2020. The Company is using the proceeds primarily for general business purposes.
Securities Sold Under Agreements to Repurchase
The Bank’s remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled $232,090,000, a decrease of $33,955,000 from the prior year. See Note 11, “Securities Sold Under Agreements to Repurchase,” for a schedule, including their interest rates and other information.
RESULTS OF OPERATIONS
Net Interest Income
The Company’s operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 8.8% in 2020 to $114,110,000, compared with $104,857,000 in 2019. The increase in net interest income for 2020 is primarily due to a decrease in interest expense as a result of falling interest rates and an increase in average earning assets. The increase in net interest income for 2019 was mainly due to a 7.2% increase in the average balances of earning assets, combined with a similar increase in deposits and prepayment penalties collected. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis decreased to 2.00% in 2020 and decreased to 2.10% in 2019 from 2.18% in 2018. The decrease in the net interest margin for 2020 was primarily the result of increased margin pressure due to the recent decrease in interest rates across the yield curve. The decrease in the net interest margin for 2019 was primarily attributable to an increase in rates paid on deposits. The Company collected approximately $1,400,000, $1,456,000, and $39,000, respectively, of prepayment penalties, which are included in interest income on loans, for 2020, 2019 and 2018, respectively.
Additional information about the net interest margin is contained in the “Overview” section of this report. Also, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the years indicated.
Year Ended December 31,
Average
Balance
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
Average
Balance
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
Average
Balance
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans(2)
Taxable
$
1,559,577
$
57,554
3.69
%
$ 1,207,896
$ 54,720
4.53 %
$ 1,102,390
$ 46,615
4.23 %
Tax-exempt
1,214,492
35,540
2.93
%
1,133,294
41,998
3.71 %
1,120,556
40,439
3.61 %
Securities available-for-sale:
(3)
Taxable
267,527
3,891
1.45
%
268,516
8,078
3.01 %
310,071
7,864
2.54 %
Tax-exempt
27,947
1.49
%
45,088
1,324
2.94 %
90,027
1,938
2.15 %
Securities held-to-maturity:
Taxable
2,372,491
58,072
2.45
%
2,152,580
58,036
2.70 %
1,854,328
45,556
2.46 %
Interest-bearing deposits in other banks
274,901
0.31
%
189,710
4,051
2.14 %
183,903
3,498
1.90 %
Total interest-earning assets
5,716,935
156,317
2.73
%
4,997,084
168,207
3.37 %
4,661,275
145,910
3.13 %
Noninterest-earning assets
307,002
250,864
229,244
Allowance for loan losses
(31,951
)
(29,004 )
(27,531 )
Total assets
$
5,991,986
$ 5,218,944
$ 4,862,988
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts
$
1,120,080
$
5,443
0.49
%
$ 940,998
$ 9,357
0.99 %
$ 926,143
$ 6,579
0.71 %
Savings accounts
780,326
3,437
0.44
%
869,483
11,826
1.36 %
588,116
5,178
0.88 %
Money market accounts
1,708,674
15,012
0.88
%
1,273,389
21,170
1.66 %
1,230,010
13,922
1.13 %
Time deposits
595,864
11,573
1.94
%
519,761
11,804
2.27 %
577,975
10,208
1.77 %
Total interest-bearing deposits
4,204,944
35,465
0.84
%
3,603,631
54,157
1.50 %
3,322,244
35,887
1.08 %
Securities sold under agreements to repurchase
221,609
1,376
0.62
%
224,361
2,347
1.05 %
147,944
0.66 %
Other borrowed funds and subordinated debentures
201,656
5,366
2.66
%
231,926
6,846
2.95 %
291,674
7,617
2.61 %
Total interest-bearing liabilities
4,628,209
42,207
0.91
%
4,059,918
63,350
1.56 %
3,761,862
44,480
1.18 %
Noninterest-bearing liabilities
Demand deposits
921,718
760,420
753,604
Other liabilities
89,147
79,437
70,020
Total liabilities
5,639,074
4,899,775
4,585,486
Stockholders’ equity
352,912
319,169
277,502
Total liabilities and stockholders’ equity
$
5,991,986
$ 5,218,944
$ 4,862,988
Net interest income on a fully taxable equivalent basis
$
114,110
$ 104,857
$ 101,430
Less taxable equivalent adjustment
(7,281
)
(9,068 )
(8,854 )
Net interest income
$
106,829
$ 95,789
$ 92,576
Net interest spread
1.82
%
1.81 %
1.95 %
Net interest margin
2.00
%
2.10 %
2.18 %
(1)
On a fully taxable equivalent basis calculated using a federal tax rate of 21%.
(2)
Nonaccrual loans are included in average amounts outstanding.
(3)
At amortized cost.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following table summarizes the year-to-year
changes in the Company’s net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest-bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior year’s volume. Changes due to volume are computed by multiplying the change in volume by the prior year’s rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change.
Year Ended December 31,
2020 Compared with 2019
Increase/(Decrease)
Due to Change in
2019 Compared with 2018
Increase/(Decrease)
Due to Change in
Volume
Rate
Total
Volume
Rate
Total
(dollars in thousands)
Interest income:
Loans
Taxable
$
14,127
$
(11,293
)
$
2,834
$ 4,644
$ 3,461
$ 8,105
Tax-exempt
2,848
(9,306
)
(6,458
)
1,096
1,559
Securities available-for-sale:
Taxable
(30
)
(4,157
)
(4,187
)
(1,136 )
1,350
Tax-exempt
(395
)
(512
)
(907
)
(1,171 )
(614 )
Securities held-to-maturity:
Taxable
5,642
(5,606
)
7,772
4,708
12,480
Interest-bearing deposits in other banks
1,283
(4,491
)
(3,208
)
Total interest income
23,475
(35,365
)
(11,890
)
10,685
11,612
22,297
Interest expense:
Deposits:
NOW accounts
1,534
(5,448
)
(3,914
)
2,671
2,778
Savings accounts
(1,105
)
(7,284
)
(8,389
)
3,108
3,540
6,648
Money market accounts
5,803
(11,961
)
(6,158
)
6,741
7,248
Time deposits
1,603
(1,834
)
(231
)
(1,105 )
2,701
1,596
Total interest-bearing deposits
7,835
(26,527
)
(18,692
)
2,617
15,653
18,270
Securities sold under agreements to repurchase
(28
)
(943
)
(971
)
1,371
Other borrowed funds and subordinated debentures
(843
)
(637
)
(1,480
)
(1,685 )
(771 )
Total interest expense
6,964
(28,107
)
(21,143
)
1,574
17,296
18,870
Change in net interest income
$
16,511
$
(7,258
)
$
9,253
$ 9,111
$ (5,684 )
$ 3,427
Average earning assets were $5,716,935,000 in 2020, an increase of $719,851,000 or 14.4% from the average in 2019, which was 7.2% higher than the average in 2018. Total average securities, including securities available-for-sale
and securities held-to-maturity,
were $2,667,965,000, an increase of 8.2% from the average in 2019. The increase in securities volume was mainly attributable to an increase in taxable securities held-to-maturity.
An increase in securities volume and a decrease in rates resulted in lower securities income, which decreased 7.5% to $62,380,000 on a fully taxable equivalent basis. Total average loans increased by $432,879,000, or 18.5% to $2,774,069,000 after increasing by $118,244,000, or 5.3% in 2019. The primary reasons for the increase in loans were SBA PPP loans, taxable commercial and industrial loans, tax-exempt
commercial and industrial loans, and residential mortgage lending. The increase in loan volume offset by lower interest rates resulted in lower loan income. Loan income decreased by 3.7% or $3,624,000 to $93,094,000 in 2020 compared to 2019. The increase in loan volume resulted in higher loan income for 2019. Loan income
Management’s Discussion and Analysis of Results of Operations and Financial Condition
increased by 11.1% or $9,664,000 to $96,718,000 in 2019 compared to 2018. This was mainly the result of an increase in rates and average balances. Total loan income was $87,054,000 in 2018.
The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 17.5%, or $762,611,000, in 2020 after increasing by 7.1%, or $288,203,000, in 2019. Deposits increased in 2020, primarily as a result of increases in demand deposits, NOW deposits, money market accounts, and time deposits. Deposits increased in 2019, primarily as a result of increases in savings and NOW deposits, demand deposits, and money market accounts. This was offset, somewhat, by a decrease in time deposits. Borrowed funds and subordinated debentures decreased by 7.2% in 2020, following a decrease of 3.8% in 2019. The majority of the Company’s borrowed funds are borrowings from the FHLBB, and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $30,270,000, and average retail repurchase agreements decreased by $2,752,000 in 2020. Interest expense totaled $42,207,000 in 2020, a decrease of $21,143,000, or 33.4%, from 2019 when interest expense increased 42.4% from 2018. The decrease in interest expense, for 2020, is primarily due to decreases in the rates on deposits and borrowed funds offset, somewhat, by an increase in average balances of deposits. The increase in interest expense, for 2019, is primarily due to increases in the rates on deposits and borrowed funds as well as an increase in average balances of deposits and repurchase agreements.
Provision for Loan Losses
The provision for loan losses was $5,825,000 in 2020, compared with $1,250,000 in 2019 and $1,350,000 in 2018. These provisions are the result of management’s evaluation of the amounts and credit quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses increased during 2020, primarily as a result of the economic uncertainties associated with the COVID-19
pandemic and increased loan balances, partially offset by a decline in historical loss rates. The provision for loan losses decreased during 2019, primarily as a result of improvements in historical loss factors.
Other Operating Income
During 2020, the Company continued to experience strong results in its fee-based
services, including fees derived from traditional banking activities such as deposit-related services, its automated lockbox collection system and full-service securities brokerage supported by LPL Financial, a full-service securities brokerage business.
Under the lockbox program, which is not tied to extensions of credit by the Company, the Company’s customers arrange for payments of their accounts receivable to be made directly to the Company. The Company records the amounts paid to its customers, deposits the funds to the customer’s account and provides automated records of the transactions to customers. Typical customers for the lockbox service are municipalities that use it to automate tax collections, utilities, and other commercial enterprises.
Through a program called Investment Services at Century Bank, the Bank provides full-service securities brokerage services supported by LPL Financial, a full-service securities brokerage
business. Registered representatives employed by Century Bank offer limited investment advice, execute transactions, and assist customers in financial and retirement planning. LPL Financial provides research to the Bank’s representatives. The Bank receives a share in the commission revenues.
Total other operating income in 2020 was $19,100,000, an increase of $701,000, or 3.8%, compared to 2019. This increase followed an increase of $2,151,000, or 13.2%, in 2019, compared to 2018. Included in other operating income are net gains on sales of securities of $0, $61,000, and $302,000 in 2020, 2019 and 2018, respectively. Also included in other operating income are net gains on sales of mortgage loans of $0, $412,000, and $0 in 2020, 2019 and 2018, respectively.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Service charge income, which continues to be a major source of other operating income, totaling $8,818,000 in 2020, decreased $402,000 compared to 2019. This followed an increase of $660,000 in 2019 compared to 2018. The decrease in fees, in 2020, was mainly attributable to a decrease in overdraft charges. The increase in fees, in 2019, was mainly attributable to an increase in processing activities and an increase in debit card fees. Lockbox revenues totaled $3,745,000, a decrease of $228,000 in 2020 following an increase of $699,000 in 2019. Lockbox revenues decreased during 2020 primarily as a result of a decrease in customer activity. Lockbox revenues increased during 2019 primarily as a result of the addition of a large lockbox customer. Other income totaled $6,266,000, up $1,810,000 in 2020 following an increase of $692,000 in 2019. The increase in 2020 was primarily the result of a death benefit received from life insurance policies. The increase in 2019 was primarily the result of a death benefit received from life insurance policies as well as increases in wealth management fees.
Operating Expenses
Total operating expenses were $73,488,000 in 2020, compared to $72,129,000 in 2019 and $69,693,000 in 2018.
Salaries and employee benefits expenses increased by $1,289,000 or 2.9% in 2020, after increasing by 3.1% in 2019. The increase in 2020 was mainly attributable to merit increases in salaries and increased pension costs. The increase in 2019 was mainly attributable to merit increases in salaries. Occupancy expense decreased by $206,000, or 3.3%, in 2020, following an increase of $154,000, or 2.5%, in 2019. The decrease in 2020 was primarily attributable to a decrease in rent expense. The increase in 2019 was primarily attributable to an increase in rent and real estate tax expense.
Equipment expense increased by $257,000, or 7.9%, in 2020, following an increase of $106,000, or 3.4%, in 2019. The increase in 2020 was primarily attributable to an increase in depreciation expense due to an increase in fixed assets. The increase in 2019 was primarily attributable to an increase in service contracts expense.
FDIC assessments increased by $445,000, or 61.0%, in 2020, following a decrease of $742,000, or 50.4%, in 2019. FDIC assessments increased in 2020 mainly as a result of FDIC assessment credits recognized during 2019. FDIC assessments decreased in 2019 mainly as a result of FDIC assessment credits recognized during 2019.
Other operating expenses decreased by $426,000 in 2020, which followed a $1,614,000 increase in 2019. The decrease in 2020 was primarily attributable to a decrease in marketing expenses offset, somewhat, by increases in security costs. The increase in 2019 was primarily attributable to an increase in pension and software maintenance expense.
Provision for Income Taxes
Income tax expense was $4,407,000 in 2020, $1,110,000 in 2019, and $1,568,000 in 2018. The effective tax rate was 9.5% in 2020, 2.7% in 2019, and 4.2% in 2018. The increase in 2020 was primarily as a result of an increase in the mix of taxable income relative to total income and a reduction in tax accruals, during 2019, related to sequestration of the refundable portion of our alternative minimum tax (AMT) credit carryforward, offset by an increase in life insurance proceeds received. The decrease for 2019 was primarily as a result of a reduction in tax accruals related to sequestration of the refundable portion of our alternative minimum tax (AMT) credit carryforward. On January 14, 2019, the IRS updated its announcement “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations” to clarify that refundable AMT credits under Section 53(e) of the Internal Revenue Code are not subject to sequestration for taxable years beginning after December 31, 2017. On March 27, 2020, the CARES Act was signed into law. As a result of the CARES Act, the full balance of the AMT credit was refunded in 2020. The federal tax rate was 21% in 2020, 2019 and 2018.
Market Risk and Asset Liability Management
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’s Discussion and Analysis of Results of Operations and Financial Condition
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 change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by 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. One measure of the Company’s exposure to differential changes in interest rates between assets and liabilities is an interest rate risk management test.
This test measures the impact on net interest income of an immediate change in interest rates in 100-basis
point increments as set forth in the following table:
Change in Interest Rates
(in Basis Points)
Percentage Change in
Net Interest Income(1)
+400
(10.9)
+300
(7.5)
+200
(5.6)
+100
(4.3)
0.2
(2.9)
(1)
The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment.
The changes in the table above are within the Company’s policy parameters.
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. The Company relies primarily on its asset-liability structure to control interest rate risk.
Liquidity and Capital Resources
Liquidity is provided by maintaining an adequate level of liquid assets that includes cash and due from
banks, federal funds sold and other temporary investments. Liquid assets totaled $374,000,000 on December 31, 2020, compared with $258,693,000 on December 31, 2019. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity.
The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.
Capital Adequacy
Total stockholders’ equity was $370,409,000 at December 31, 2020, compared with $332,581,000 at December 31, 2019. The Company’s equity increased primarily as a result of earnings, offset somewhat by an increase in other comprehensive loss, net of taxes, and by dividends paid. Other comprehensive loss, net of taxes, increased primarily as a result of an increase in the pension liability, net of taxes, offset somewhat by a decrease in unrealized losses on securities transferred from available-for-sale
to held-to-maturity,
net of taxes, and an increase in unrealized gains on securities available-for-sale,
net of taxes.
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet
items. The following table reflects capital ratios computed utilizing the recently implemented Basel III regulatory capital framework:
Minimum
Capital Ratios
Bank
Company
Leverage ratios
4.00
%
6.41
%
6.64
%
Common equity tier 1 risk weighted capital ratios
4.50
%
12.00
%
11.39
%
Tier 1 risk weighted capital ratios
6.00
%
12.00
%
12.40
%
Total risk weighted capital ratios
8.00
%
13.03
%
13.43
%
Management’s Discussion and Analysis of Results of Operations and Financial Condition
Contractual Obligations, Commitments, and Contingencies
The Company has entered into contractual obligations and commitments. The following tables summarize the Company’s contractual cash obligations and other commitments at December 31, 2020.
Payments Due-By Period
CONTRACTUAL OBLIGATIONS
Total
Less Than
One Year
One to
Three Years
Three to
Five Years
After Five
Years
(dollars in thousands)
FHLBB advances
$
177,009
$
67,500
$
33,500
$
67,000
$
9,009
Subordinated debentures
36,083
-
-
-
36,083
Retirement benefit obligations
58,959
4,578
9,456
10,925
34,000
Lease obligations
16,670
2,156
3,957
3,163
7,394
Customer repurchase agreements
232,090
232,090
-
-
-
Total contractual cash obligations
$
520,811
$
306,324
$
46,913
$
81,088
$
86,486
Amount of Commitment Expiring-By Period
OTHER COMMITMENTS
Total
Less Than
One Year
One to
Three Years
Three to
Five Years
After Five
Years
(dollars in thousands)
Lines of credit
$
787,206
$
49,158
$
206,992
$
123,842
$
407,214
Standby and commercial letters of credit
5,344
2,266
2,910
-
Other commitments
96,483
32,548
2,601
6,063
55,271
Total commitments
$
889,033
$
83,972
$
212,503
$
130,073
$
462,485
Financial Instruments with Off-Balance-Sheet
Risk
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet
instruments.
Financial instruments with off-balance-sheet
risk at December 31 are as follows:
Contract or Notional Amount
(dollars in thousands)
Financial instruments whose contract amount represents credit risk:
Commitments to originate 1-4 family mortgages
$
28,163
$ 13,806
Standby and commercial letters of credit
5,344
5,779
Unused lines of credit
787,206
625,524
Unadvanced portions of construction loans
54,553
11,062
Unadvanced portions of other loans
13,767
15,801
Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally
Management’s Discussion and Analysis of Results of Operations and Financial Condition
have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit was $78,000 and $44,000 for 2020 and 2019, respectively.
Recent Accounting Developments
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 December 2019, the FASB issued ASU 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The effect of this ASU is not expected to have a material impact on the Company’s consolidated financial position.
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
Management’s Discussion and Analysis of Results of Operations and Financial Condition
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. During the fourth quarter of 2019 and during 2020, the Company tested the two CECL credit models in parallel with the existing incurred loss models. The securities held-to-maturity
include U.S. Treasury, U.S. Government Sponsored Enterprises, SBA Backed Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities. The CECL standard allows assumption of zero expected credit losses where expectation of non-payment
is zero for these types of securities. The Company expects no impact from ASU 2016-13
to arise from this portfolio.
Since ASU 2016-13,
the FASB has issued amendments intended on improving the clarification of the amendment, ASU 2018-19
Codification Improvements to Topic 326, Financial Instruments-Credit Losses and ASU 2019-04
Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging. The amendment in ASU 2018-19
was issued in November 2018 and was intended to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20.
Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The amendment in ASU 2019-04
was issued in April 2019 and was intended to clarify stakeholders’ specific issues about certain aspects of the amendments in ASU 2016-13.
ASU 2019- 05 Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief was also issued in May 2019. This ASU provides entities the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized costs basis. The fair value option election does not apply to held-to-maturity
debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10,
Fair Value Measurement-Overall. The amendments in this ASU should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of
financial position as of the date that an entity early adopted the amendments in ASU 2016-13.
In November 2019, the FASB issued ASU 2019-11,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The amendments in this ASU affect a variety of Topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. This ASU is effective for annual reporting periods beginning after December 15, 2019.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act allows certain companies to delay FASB ASU 2016-13,
Measurement of Credit Losses on Financial Instruments (CECL), 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 December 31, 2020.
In August 2018, FASB issued ASU 2018-14,
Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20):
Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. This ASU is effective for annual reporting periods beginning after December 15, 2020. The effect of this update will not have a material impact on the Company’s consolidated financial position.
Consolidated Balance Sheets
December 31,
(dollars in thousands except share data)
ASSETS
Cash and due from banks (Note 2)
$
136,735
$ 44,420
Federal funds sold and interest-bearing deposits in other banks
237,265
214,273
Total cash and cash equivalents
374,000
258,693
Securities available-for-sale,
amortized cost $282,273 in 2020 and $260,924 in 2019 (Notes 3, 9 and 11)
282,448
260,502
Securities held-to-maturity,
fair value $2,579,103 in 2020 and $2,361,304 in 2019 (Notes 4 and 11)
2,509,088
2,351,120
Federal Home Loan Bank of Boston, stock at cost
13,361
19,471
Equity securities, cost $1,635 in 2020 and $1,635 in 2019, respectively
1,668
1,688
Loans, net (Note 5)
2,995,829
2,426,119
Less: allowance for loan losses (Note 6)
35,486
29,585
Net loans
2,960,343
2,396,534
Bank premises and equipment (Note 7)
39,062
33,952
Accrued interest receivable
13,283
13,110
Other assets (Notes 5, 6, 8, 16, 17, 23)
165,581
157,354
Total assets
$
6,358,834
$ 5,492,424
LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits
$
1,103,878
$ 712,842
Savings and NOW deposits
1,728,092
1,678,250
Money market accounts
2,074,108
1,453,572
Time deposits (Note 10)
546,143
555,447
Total deposits
5,452,221
4,400,111
Securities sold under agreements to repurchase (Note 11)
232,090
266,045
Other borrowed funds (Note 12)
177,009
370,955
Subordinated debentures (Note 12)
36,083
36,083
Other liabilities (Note 17)
91,022
86,649
Total liabilities
5,988,425
5,159,843
Commitments and contingencies (Notes 18 and 19)
Stockholders’ equity (Note 15):
Preferred Stock-$1.00 par value; 100,000 shares authorized; no shares issued and outstanding
-
-
Common stock, Class A,
$1.00 par value per share; authorized 10,000,000 shares; issued 3,655,469 shares in 2020 and 3,650,949 shares in 2019
3,656
3,651
Common stock, Class B,
$1.00 par value per share; authorized 5,000,000 shares; issued 1,912,440 in 2020 and 1,916,960 shares in 2019
1,912
1,917
Additional paid-in
capital
12,292
12,292
Retained earnings
378,699
338,980
396,559
356,840
Unrealized gains(losses) on securities available-for-sale,
net of taxes
(308 )
Unrealized losses on securities transferred to held-to-maturity,
net of taxes
(1,221
)
(1,812 )
Pension liability, net of taxes
(25,059
)
(22,139 )
Total accumulated other comprehensive loss, net of taxes
(Notes 3, 13 and 15)
(26,150
)
(24,259 )
Total stockholders’ equity
370,409
332,581
Total liabilities and stockholders’ equity
$
6,358,834
$ 5,492,424
See accompanying “Notes to Consolidated Financial Statements.”
Consolidated Statements of Income
Year Ended December 31,
(dollars in thousands except share data)
INTEREST INCOME
Loans, taxable
$
57,554
$ 54,720
$ 46,615
Loans, non-taxable
28,329
33,167
31,936
Securities available-for-sale,
taxable
3,264
7,125
6,748
Securities available-for-sale,
non-taxable
1,087
1,587
Federal Home Loan Bank of Boston dividends
1,116
Securities held-to-maturity
58,072
58,036
45,556
Federal funds sold, interest-bearing deposits in other banks and short-term investments
4,051
3,498
Total interest income
149,036
159,139
137,056
INTEREST EXPENSE
Savings and NOW deposits
8,880
21,183
11,757
Money market accounts
15,012
21,170
13,922
Time deposits
11,573
11,804
10,208
Securities sold under agreements to repurchase
1,376
2,347
Other borrowed funds and subordinated debentures
5,366
6,846
7,617
Total interest expense
42,207
63,350
44,480
Net interest income
106,829
95,789
92,576
Provision for loan losses (Note 6)
5,825
1,250
1,350
Net interest income after provision for loan losses
101,004
94,539
91,226
OTHER OPERATING INCOME
Service charges on deposit accounts
8,818
9,220
8,560
Lockbox fees
3,745
3,973
3,274
Brokerage commissions
Net gains on sales of securities
-
Gains on sales of mortgage loans
-
-
Other income
6,266
4,456
3,764
Total other operating income
19,100
18,399
16,248
OPERATING EXPENSES
Salaries and employee benefits (Note 17)
45,303
44,014
42,710
Occupancy
6,040
6,246
6,092
Equipment
3,495
3,238
3,132
FDIC assessments
1,174
1,471
Other (Note 20)
17,476
17,902
16,288
Total operating expenses
73,488
72,129
69,693
Income before income taxes
46,616
40,809
37,781
Provision for income taxes (Note 16)
4,407
1,110
1,568
Net income
$
42,209
$ 39,699
$ 36,213
SHARE DATA (Note 14)
Weighted average number of shares outstanding, basic
Class A
3,653,939
3,633,044
3,608,179
Class B
1,913,970
1,934,865
1,959,730
Weighted average number of shares outstanding, diluted
Class A
5,567,909
5,567,909
5,567,909
Class B
1,913,970
1,934,865
1,959,730
Basic earnings per share
Class A
$
9.15
$ 8.63
$ 7.89
Class B
$
4.58
$ 4.31
$ 3.95
Diluted earnings per share
Class A
$
7.58
$ 7.13
$ 6.50
Class B
$
4.58
$ 4.31
$ 3.95
See accompanying “Notes to Consolidated Financial Statements.”
Consolidated Statements of Comprehensive Income
Year Ended December 31,
(dollars in thousands)
NET INCOME
$
42,209
$ 39,699
$ 36,213
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
(270 )
Less: reclassification adjustment for gains included in net income
-
(44 )
(217 )
Total unrealized gains (losses) on securities
(314 )
Accretion of net unrealized losses transferred during period
1,086
Defined benefit pension plans:
Pension liability adjustment, net of tax:
Net (loss) gain
(4,361
)
(6,842 )
3,770
Amortization of prior service cost and loss included in net periodic benefit cost
1,441
1,053
1,167
Total pension liability adjustment
(2,920
)
(5,789 )
4,937
Other comprehensive (loss) income
(1,891
)
(5,350 )
6,132
Comprehensive income
$
40,318
$ 34,349
$ 42,345
See accompanying “Notes to Consolidated Financial Statements.”
Consolidated Statements of Changes in Stockholders’ Equity
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Stockholders’
Equity
(dollars in thousands except share data)
BALANCE, DECEMBER 31, 2017
$ 3,606
$ 1,962
$ 12,292
$ 263,666
$ (21,229 )
$ 260,297
Net income
-
-
-
36,213
-
36,213
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $16 in taxes and $302 in realized net gains
-
-
-
-
Accretion of net unrealized losses transferred during the period, net of $391 in taxes
-
-
-
-
1,086
1,086
Pension liability adjustment, net of $1,930 in taxes
-
-
-
-
4,937
4,937
Adoption of ASU 2018-2,
Income Statement-Reporting Comprehensive Income (Topic 220)-Reclassification of Certain Tax Effects from AOCI
-
-
-
3,783
(3,783 )
-
Adoption of ASU 2016-1,
Financial Instruments-Overall (Subtopic 825-10)
Recognition and Measurement of Financial Assets and Financial Liabilities
-
-
-
(29 )
-
Conversion of Class B Common Stock to Class A Common Stock, 2,500 shares
(2 )
-
-
-
-
Cash dividends, Class A Common Stock, $0.48 per share
-
-
-
(1,732 )
-
(1,732 )
Cash dividends, Class B Common Stock, $0.24 per share
-
-
-
(471 )
-
(471 )
BALANCE, DECEMBER 31, 2018
$ 3,608
$ 1,960
$ 12,292
$ 301,488
$ (18,909 )
$ 300,439
Net income
-
-
-
39,699
-
39,699
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $116 in taxes and $61 in realized net gains
-
-
-
-
(314 )
(314 )
Accretion of net unrealized losses transferred during the period, net of $269 in taxes
-
-
-
-
Pension liability adjustment, net of $2,263 in taxes
-
-
-
-
(5,789 )
(5,789 )
Conversion of Class B Common Stock to Class A Common Stock, 42,620 shares
(43 )
-
-
-
-
Cash dividends, Class A Common Stock, $0.48 per share
-
-
-
(1,742 )
-
(1,742 )
Cash dividends, Class B Common Stock, $0.24 per share
-
-
-
(465 )
-
(465 )
BALANCE, DECEMBER 31, 2019
$ 3,651
$ 1,917
$ 12,292
338,980
(24,259 )
$ 332,581
Net income
-
-
-
42,209
-
42,209
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $159 in taxes
-
-
-
-
Accretion of net unrealized losses transferred during the period, net of $207 in taxes
-
-
-
-
Pension liability adjustment, net of $1,142 in taxes
-
-
-
-
(2,920
)
(2,920
)
Conversion of Class B Common Stock to Class A
Common Stock, 4,520 shares
(5
)
-
-
-
-
Cash dividends, Class A Common Stock, $0.54 per share
-
-
-
(1,973
)
-
(1,973
)
Cash dividends, Class B Common Stock, $0.27 per share
-
-
-
(517
)
-
(517
)
BALANCE, DECEMBER 31, 2020
$
3,656
$
1,912
$
12,292
$
378,699
$
(26,150
)
$
370,409
See accompanying “Notes to Consolidated Financial Statements.”
Consolidated Statements of Cash Flows
Year Ended December 31,
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
42,209
$ 39,699
$ 36,213
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of portfolio loans
-
(412 )
-
Loss on sales of other real estate owned
-
-
Net gains on sales of securities
-
(61 )
(302 )
Net (gain) loss on equity securities
(92 )
Provision for loan losses
5,825
1,250
1,350
Deferred tax (expense) benefit
(1,089
)
(2,135 )
(1,766 )
Net depreciation and amortization
(1,070
)
(2,382 )
(Increase) decrease in accrued interest receivable
(173
)
1,296
(3,227 )
Decrease in other assets
(413
)
8,532
2,326
(Decrease) increase in other liabilities
(934
)
2,075
5,242
Net cash provided by operating activities
44,375
47,849
40,788
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from redemptions of Federal Home Loan Bank of Boston stock
10,836
14,380
18,388
Purchase of Federal Home Loan Bank of Boston stock
(4,726
)
(15,877 )
(14,583 )
Proceeds from calls/maturities of securities available-for-sale
86,691
144,739
215,406
Proceeds from sales of securities available-for-sale
-
16,285
27,517
Purchase of securities available-for-sale
(107,744
)
(85,123 )
(183,588 )
Proceeds from calls/maturities of securities held-to-maturity
902,981
458,915
234,741
Proceeds from sales of securities held-to-maturity
-
1,193
-
Purchase of securities held-to-maturity
(1,056,023
)
(757,997 )
(576,140 )
Proceeds from life insurance policies
3,900
5,461
Proceeds from sales of portfolio loans
-
22,120
-
Net increase in loans
(569,595
)
(162,415 )
(110,874 )
Bank owned life insurance purchases
(8,731
)
(33,664 )
-
Proceeds from sales of other real estate owned
-
2,146
-
Capital expenditures
(8,376
)
(13,144 )
(3,601 )
Net cash used in investing activities
(750,787
)
(402,981 )
(392,359 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in time deposit accounts
(9,304
)
(5,132 )
(64,782 )
Net increase (decrease) in demand, savings, money market and NOW deposits
1,061,414
(1,721 )
554,779
Cash dividends
(2,490
)
(2,207 )
(2,203 )
Net (decrease) increase in securities sold under agreements to repurchase
(33,955
)
111,805
(4,750 )
Net (decrease) increase in other borrowed funds
(193,946
)
168,577
(145,400 )
Net cash provided by financing activities
821,719
271,322
337,644
Net increase (decrease) in cash and cash equivalents
115,307
(83,810 )
(13,927 )
Cash and cash equivalents at beginning of year
258,693
342,503
356,430
Cash and cash equivalents at end of year
$
374,000
$ 258,693
$ 342,503
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest
$
42,655
$ 63,345
$ 44,289
Income taxes
$
4,300
$ (6,504 )
$
Change in unrealized losses on securities available-for-sale,
net of taxes
$
$ (314 )
$
Change in unrealized losses on securities transferred to held-to-maturity,
net of taxes
$
$
$ 1,086
Pension liability adjustment, net of taxes
$
(2,920)
$ (5,789 )
$ 4,937
Transfer of loans to other real estate owned
$
-
$ -
$ 2,225
See accompanying “Notes to Consolidated Financial Statements.”
Notes to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly owned subsidiaries, Century Subsidiary Investments, Inc. (“CSII”), Century Subsidiary Investments, Inc. II (“CSII II”), Century Subsidiary Investments, Inc. III (“CSII III”) and Century Financial Services Inc. (“CFSI”). CSII, CSII II, and CSII III are engaged in buying, selling, and holding investment securities. CFSI has the power to engage in financial agency, securities brokerage, and investment and financial advisory services and related securities credit. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company.
All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a full range of banking services to individual, business, and municipal customers in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”) and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to
control the money supply and credit availability in order to influence the economy. All aspects of the Company’s business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment.
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.
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. 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. Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.
FAIR VALUE MEASUREMENTS
The Company follows FASB ASC 820-10,
Fair Value Measurements and Disclosures,
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
Notes to Consolidated Financial Statements
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 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 includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value has 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 that are generally included in this category are G-7
government, agency securities, corporate bonds and loans, mortgage whole loans, municipal bonds and over the counter (“OTC”) derivatives.
Level III-These instruments 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 certain commercial mortgage loans, certain private equity investments, distressed debt, and noninvestment grade residual interests in securitizations as well as certain highly structured OTC derivative contracts.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, federal funds sold and certificates of deposit.
INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost; debt securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt securities not classified as either held-to-maturity
or trading are classified as available-for-sale
and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated related income taxes. Equity securities are reported at fair value with unrealized gains and losses included in earnings. The Company has no securities held for trading.
Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis.
Management also considers the Company’s capital adequacy, interest-rate risk, liquidity, and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the investment securities before recovery. Other-than-temporary-impairment (OTTI) arises when a security’s fair value is less than its amortized cost and, based on specific factors, the loss is considered OTTI. If the Company determines that a decline in fair value is OTTI and that it is more likely than not that the Company will not sell or be required to sell the investment security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in the Company’s consolidated statement of income and the noncredit portion is recognized in accumulated other comprehensive income. The credit portion of the OTTI impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the investment security. If the Company determines that a decline in fair value is OTTI and it is more likely than not that it will sell or be required to sell the investment security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the security will
Notes to Consolidated Financial Statements
be recognized in the Company’s consolidated statement of income.
The transfer of a security between categories of investments shall be accounted for at fair value. For a debt security transferred into the held-to-maturity
category from the available-for-sale
category, the unrealized holding gain or loss at the date of the transfer shall continue to be reported in a separate component of shareholders’ equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain, or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held-to-maturity
security.
The sale of a security held-to-maturity
may occur after a substantial portion (at least 85%) of the principal outstanding at acquisition has been paid. This may be due either to prepayments on the debt security or to scheduled payments on the debt security that is payable in equal installments over its term. For variable rate securities, the scheduled payments need not be equal.
FEDERAL HOME LOAN BANK 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 for impairment based on the ultimate recoverability of the cost basis of the stock. As of December 31, 2020, no impairment has been recognized.
LOANS HELD FOR SALE
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
LOANS
Loans are stated at the principal amount outstanding, net of amounts charged off, unamortized premiums or discounts, and deferred loan fees or costs. Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become ninety days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Past-due
status is based on contractual terms of the loan. Loans, including impaired loans, on which the accrual of interest has been discontinued, are designated nonaccrual loans. When a loan is placed on nonaccrual, all income that has been accrued but remains unpaid is reversed against current period income, and all amortization of deferred loan costs and fees is discontinued. Nonaccrual loans may be returned to an accrual status when principal and interest payments are not delinquent, or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. Income received on nonaccrual loans is either recorded in income or applied to the principal balance of the loan, depending on management’s evaluation as to the collectibility of principal.
Loan origination fees and related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. Prepayments are not initially considered when amortizing premiums and discounts.
The Bank measures impairment for impaired loans at either the fair value of the loan, the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. This method applies to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans such as residential real estate and consumer loans that are collectively evaluated for impairment. 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 when such an amount has been identified definitively as
Notes to Consolidated Financial Statements
uncollectible. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Loans are charged-off
when management believes that the collectibility of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectibility 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. In addition, criteria for classification of a loan as in-substance
foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification
effective rate of interest.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets, typically residential mortgages, and loan participations for the Company, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.
ACQUIRED LOANS
In accordance with FASB ASC 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit Quality
(formerly Statement of Position (“SOP”) No. 03-3,
“Accounting for Certain Loans or Debt Securities Acquired in a Transfer”) the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the
loan’s contractually required payments received in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30
requires that the Company recognize the excess of all cash flows expected at acquisition over the Company’s initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a reduction of the loan balance.
Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of FASB ASC 310-30.
For such loans, the discount, if any, representing the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the interest method over the term of the loan. Prepayments are not considered in the calculation of accretion income. Additionally, the discount is not accreted on nonperforming loans.
When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the Company’s acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees.
NONPERFORMING ASSETS
In addition to nonperforming loans, nonperforming assets include other real estate owned. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned is recorded initially at the lower of cost or the estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred.
Notes to Consolidated Financial Statements
Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations, while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans that ultimately prove uncollectible. The components of the allowance for loan losses represent estimates based upon Accounting Standards Codification (“ASC”) Topic 450, contingencies, and ASC Topic 310 Receivables. ASC Topic 450 applies to homogenous loan pools such as consumer installment, residential mortgages, consumer lines of credit and commercial loans that are not individually evaluated for impairment under ASC Topic 310. In determining the level of the allowance, periodic evaluations are made of the loan portfolio, which takes into account factors such as the characteristics of the loans, loan status, financial strength of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgment. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.
While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans
are charged-off
in whole or in part when, in management’s opinion, collectibility is not probable. The specific factors that management considers in making the determination that the collectibility of the loan’s principal is not probable include the delinquency status of the loan, the fair value of the collateral and the financial strength of the borrower and/or guarantors.
Under ASC Topic 310, a loan is impaired, based upon current information and in management’s opinion, when it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest, or if a loan is designated as a Troubled Debt Restructuring (“TDR”). Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a) present value of anticipated future cash flows, (b) the loan’s observable fair market price or (c) fair value of collateral if the loan is collateral dependent. 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 when such an amount has been identified definitively as uncollectible.
In estimating probable loan loss under ASC Topic 450, management considers numerous factors, including historical charge-offs and subsequent recoveries. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect the amount of the formula allowance. Risk
Notes to Consolidated Financial Statements
grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. On these loans, the formula allowances are based on the risk ratings, the historical loss experience, and the loss emergence period. Historical loss data and loss emergence periods are developed based on the Company’s historical experience. For larger loans with available external credit ratings, these ratings are utilized rather than the Company’s risk ratings. The historical loss factor and loss emergence periods for these loans are based on data published by the rating agencies for similar credits as the Company has limited internal historical data. For the residential real estate and consumer loan portfolios, the formula allowances are calculated by applying historical loss experience and the loss emergence period to the outstanding balance in each loan category. Loss factors and loss emergence periods are based on the Company’s historical net loss experience.
Additional allowances are added to portfolio segments based on qualitative factors. Management considers potential factors identified in regulatory guidance. Management has identified certain qualitative factors, which could impact the degree of loss sustained within the portfolio. These include market risk factors and unique portfolio risk factors that are inherent characteristics of the Company’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions, such as unemployment and GDP that may impact the Company’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include the outlooks for business segments in which the Company’s borrowers operate and loan size. The potential ranges for qualitative factors are based on historical volatility in losses. The actual amount utilized is based on management’s assessment of current conditions.
After considering the above components, an unallocated component may be generated to cover uncertainties that could affect management’s estimate of probable losses. These uncertainties include the effects of loans in new geographical areas and new industries. The unallocated component of the
allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Land is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization. Identifiable intangible assets consist of core deposit intangibles and are assets resulting from acquisitions that are being amortized over their estimated useful lives. Goodwill and identifiable intangible assets are included in other assets on the consolidated balance sheets. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Currently, the Company’s goodwill is evaluated at the entity level as there is only one reporting unit. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Goodwill impairment is evaluated by first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more
Notes to Consolidated Financial Statements
likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the quantitative impairment test will be unnecessary.
The quantitative impairment test, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, the difference is recorded as impairment.
SERVICING
The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in loan servicing fee income.
INCOME TAXES
The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company accounts for uncertain tax positions in accordance with FASB ASC 740.
The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law.
The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgment changes regarding an uncertain tax position.
Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. As a result of the CARES Act, the full balance of the AMT credit was refunded during 2020. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards. Tax Act changes for individuals include lower tax rates, mortgage interest and state and local tax limitations as well as an increase in the standard deduction, among others.
Notes to Consolidated Financial Statements
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; basic EPS excludes all common stock equivalents.
The Company utilizes the two class method for reporting EPS. The two-class
method is an earnings allocation formula that treats Class A and Class B shares as having rights to earnings that otherwise would have been available only to Class A shareholders and Class B shareholders as if converted to Class A shares.
PENSION
The Company provides pension benefits to certain of its employees under a noncontributory, defined benefit plan, which is funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and recognizes costs over the estimated employee service period.
The Company also has a Supplemental Executive Insurance/Retirement Plan (“the Supplemental Plan”), which is limited to certain officers and employees of the Company. The Supplemental Plan is accrued on a current basis and recognizes costs over the estimated employee service period.
Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary. Individual life insurance policies, which are owned by the Company, are purchased covering the life of each participant.
Prior to December 31, 2019, the Company utilized a full yield curve approach in the estimation of the service and interest components by applying the specific spot rates along the yield curve used in the
determination of the benefit obligation to the underlying projected cash flows.
Effective December 31, 2019, the discount rate is determined by preparing an analysis of the respective plan’s expected future cash flows and high-quality fixed-income investments currently available and expected to be available during the period to maturity of the benefits.
LEASING
A right-of-use
(ROU) asset and corresponding lease liability is recognized at the lease commencement date when the Company is a lessee. ROU lease assets are included in other assets on the consolidated balance sheet. A ROU asset reflects the present value of the future minimum lease payments adjusted for any initial direct costs, incentives, or other payments prior to the lease commencement date. A lease liability represents a legal obligation to make lease payments and is determined by the present value of the future minimum lease payments discounted using the rate implicit in the lease, or the Company’s incremental borrowing rate. Variable lease payments that are dependent on an index, or rate, are initially measured using the index or rate at the commencement date and are included in the measurement of the lease liability. Renewal options are not included as part of the ROU asset or lease liability unless the option is deemed reasonably certain to exercise.
For real estate leases, lease components and non-lease
components are accounted for as a single lease component. Operating lease expense is comprised of operating lease costs and variable lease costs, net of sublease income, and is reflected as part of occupancy within non-interest
expense in the consolidated statement of income. Operating lease expense is recorded on a straight-line basis. Refer to Note 23: Leasing for further information.
RECENT ACCOUNTING DEVELOPMENTS
Recently Adopted Accounting Standards Updates
In August 2018, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15,
Intangibles-Goodwill and Other-
Notes to Consolidated Financial Statements
Internal Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use
software (and hosting arrangements that include an internal use software license). This ASU is effective for annual reporting periods beginning after December 15, 2019. The effect of this ASU did not have a material impact on the Company’s consolidated financial position.
In August 2018, FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU is effective for annual reporting periods beginning after December 15, 2019. The effect of this update did not have a material impact on the Company’s disclosures.
In January 2017, the FASB issued ASU 2017-04,
Intangibles-Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, and application should be on a prospective basis. The effect of this update did not have a material impact on the Company’s consolidated financial position.
Securities and Exchange Commission (SEC) Ruling:
In August 2018, the SEC issued a final rule that amends certain of the Commission’s disclosure requirements “that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment.” The financial reporting implications of
the final rule’s amendments may vary by company, but the changes are generally expected to reduce or eliminate some of an SEC registrant’s disclosure requirements. In limited circumstances, however, the amendments may expand those requirements, including those related to interim disclosures about changes in stockholders’ equity. Under the requirements, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date
periods, with subtotals for each interim period.” Beginning with its March 31, 2019 filing, the Company included a reconciliation for the current quarter and year-to-date
interim periods as well as the comparative periods of the prior years (i.e., a reconciliation covering each period for which an income statement is presented).
2.
Cash and Due from Banks
The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $0 at December 31, 2020, and $0 at December 31, 2019.
Notes to Consolidated Financial Statements
3.
Securities Available-for-Sale
December 31, 2020
December 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
(dollars in thousands)
SBA Backed Securities
$
44,328
$
-
$
$
44,039
$ 54,331
$
$
$ 54,211
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities
177,239
177,741
184,580
184,187
Privately Issued Residential Mortgage-Backed Securities
Obligations Issued by States and Political Subdivisions
52,276
-
-
52,276
18,016
-
18,076
Other Debt Securities
8,100
8,064
3,600
3,632
Total
$
282,273
$
$
$
282,448
$ 260,924
$
$
$ 260,502
Included in SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $183,269,000 and $186,245,000 at December 31, 2020 and 2019, respectively. Also included in securities available-for-sale
at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $29,885,000 and $32,297,000 at December 31, 2020 and 2019, respectively. The Company did not realize any gains on sales of securities for the year ended December 31, 2020. The Company realized gains of $13,000 and $302,000 from the proceeds of sales of available-for-sale
securities of $16,285,000 and $27,517,000 for the years ended December 31, 2019, and 2018, respectively.
Debt securities of U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.
The following table shows the estimated maturity distribution of the Company’s securities available-for-sale
at December 31, 2020.
Amortized
Cost
Fair
Value
(dollars in thousands)
Within one year
$
52,501
$
52,497
After one but within five years
114,877
115,236
After five but within ten years
97,911
97,880
More than ten years
16,984
16,835
Total
$
282,273
$
282,448
The weighted average remaining life of investment securities available-for-sale
at December 31, 2020, was 4.7 years. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities due to the ability of the issuers to prepay underlying obligations. Also, $222,696,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
Notes to Consolidated Financial Statements
As of December 31, 2020 and December 31, 2019, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade. The change in the unrealized losses on the Obligations Issued by States and Political Subdivisions, Privately Issued Residential Mortgage-Backed Securities and Other Debt Securities was primarily caused by changes in credit spreads and liquidity issues in the marketplace.
The unrealized loss on SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality. 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 December 31, 2020 and December 31, 2019.
In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. 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 December 31, 2020. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and 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.
Temporarily Impaired Investments
December 31, 2020
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(dollars in thousands)
SBA Backed Securities
$
13,839
$
$
30,200
$
$
44,039
$
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
18,188
33,617
51,805
Privately Issued Residential Mortgage-Backed Securities
-
-
Obligations Issued by States and Political Subdivisions
-
-
-
-
-
-
Other Debt Securities
3,942
1,298
5,240
Total temporarily impaired securities
$
35,969
$
$
65,325
$
$
101,294
$
Notes to Consolidated Financial Statements
The following table shows the temporarily impaired securities of the Company’s available-for-sale
portfolio at December 31, 2019. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer.
There are
10 and
30 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of
190 holdings at December 31, 2019.
Temporarily Impaired Investments
December 31, 2019
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(dollars in thousands)
SBA Backed Securities
$ 14,560
$
$ 22,092
$
$ 36,652
$
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
108,806
29,178
137,984
Privately Issued Residential Mortgage-Backed Securities
-
-
Obligations Issued by States and Political Subdivisions
-
-
-
-
-
-
Other Debt Securities
1,281
Total temporarily impaired securities
$ 124,418
$
$ 51,751
$
$ 176,169
$
4.
Investment Securities Held-to-Maturity
December 31, 2020
December 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
(dollars in thousands)
U.S. Government Sponsored Enterprises
$
244,220
$
$
$
243,743
$ 98,867
$
$
$ 99,298
SBA Backed Securities
37,783
2,002
-
39,785
44,379
44,258
U.S. Government Sponsored Enterprises Mortgage-Backed Securities
2,227,085
69,522
1,032
2,295,575
2,207,874
20,720
10,846
2,217,748
Total
$
2,509,088
$
71,913
$
1,898
$
2,579,103
$ 2,351,120
$ 21,429
$ 11,245
$ 2,361,304
Included in U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprise Mortgage-Backed Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,866,989,000 and $1,776,399,000 at December 31, 2020, and 2019, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $537,367,000 and $399,646,000 at December 31, 2020, and 2019, respectively. The Company did not realize any gains of sales of securities for the year ending December 31, 2020. The Company realized gains on sales of securities of $48,000 from the proceeds of sales of held-to-maturity
securities of $1,193,000 for the year ending December 31, 2019. The sales from securities held-to-maturity
relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principle investment. The Company did not realize any gains of sales of securities for the year ending December 31, 2018.
Notes to Consolidated Financial Statements
At December 31, 2020 and 2019, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Government Sponsored Enterprises 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 December 31, 2020.
Amortized
Cost
Fair
Value
(dollars in thousands)
Within one year
$
79,572
$
80,175
After one but within five years
1,870,589
1,927,961
After five but within ten years
555,932
567,577
More than ten years
2,995
3,390
Total
$
2,509,088
$
2,579,103
The weighted average remaining life of investment securities held-to-maturity
at December 31, 2020, was 3.9 years. Included in the weighted average remaining life calculation at December 31, 2020, were $218,730,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities due to the ability of the issuers to prepay underlying obligations. Also, $85,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of December 31, 2020 and December 31, 2019, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.
The unrealized loss on U.S. Government Sponsored Enterprises, SBA Backed Securities and U.S. Government Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not more likely than not that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2020 and December 31, 2019.
In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary.
Notes to Consolidated Financial Statements
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 12 months or less and a continuous loss position for 12 months and 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.
Temporarily Impaired Investments
December 31, 2020
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(dollars in thousands)
U.S. Government Sponsored Enterprises
$
162,870
$
$
-
$
-
$
162,870
$
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
The following table shows the temporarily impaired securities of the Company’s
held-to-maturity
portfolio at December
31,
2019. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for
12 months or less and a continuous loss position for
12 months and longer.
There are 56 and 315 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 475 holdings at December 31, 2019.
Temporarily Impaired Investments
December 31, 2019
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(dollars in thousands)
U.S. Government Sponsored Enterprises
$ 24,420
$
$ 9,976
$
$ 34,396
$
SBA Backed Securities
25,251
-
-
25,251
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities
613,905
3,949
389,919
6,897
1,003,824
10,846
Total temporarily impaired securities
$ 663,576
$ 4,324
$ 399,895
$ 6,921
$ 1,063,471
$ 11,245
5.
Loans
The majority of the Bank’s lending activities are conducted in Massachusetts with other lending activity principally in New Hampshire, Rhode Island, Connecticut, New York, Virginia, Washington DC, and Pennsylvania. The Bank originates construction, commercial and residential real estate loans, commercial and industrial loans, municipal loans, consumer, home equity and other loans for its portfolio.
Notes to Consolidated Financial Statements
The following summary shows the composition of the loan portfolio at the dates indicated.
December 31,
(dollars in thousands)
Construction and land development
$
10,909
$ 8,992
Commercial and industrial
1,314,245
812,417
Municipal
137,607
120,455
Commercial real estate
789,836
786,102
Residential real estate
448,436
371,897
Consumer
20,007
21,071
Home equity
274,357
304,363
Overdrafts
Total
$
2,995,829
$ 2,426,119
At December 31, 2020, and December 31, 2019, loans were carried net of (premiums) discounts of $(74,000) and $(292,000), respectively. Net deferred fees included in loans at December 31, 2020, and December 31, 2019, were $4,444,000 and $220,000, respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $125,998,000 and $204,690,000 at December 31, 2020, and December 31, 2019, respectively. The Company had no residential real estate loans held for sale at December 31, 2020 and December 31, 2019. The Company’s mortgage servicing rights totaled $773,000 and $1,202,000 at December 31, 2020 and December 31, 2019, respectively and are classified in other assets on the consolidated balance sheets.
As of December 31, 2020, and 2019, the Company’s recorded investment in impaired loans was $5,379,000 and $3,252,000, respectively. If an impaired loan is placed on nonaccrual, the loan may be returned to an accrual status when principal and interest payments are not delinquent, and the risk characteristics have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. At December 31, 2020, there were $5,103,000 of impaired loans with specific reserves of $589,000. At December 31, 2019, there were $2,322,000 of impaired loans with specific reserves of $102,000.
Loans are designated as troubled debt restructures when a concession is made on a credit as a result of financial difficulties of the borrower. Typically, such concessions consist of a reduction in interest rate to a below-market rate, taking into account the credit quality of the note, or a deferment of payments, principal or interest, which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination. With the exception of COVID-19
loan modifications, as described in Note 6, restructured loans are included in the impaired loan category.
Notes to Consolidated Financial Statements
The composition of nonaccrual loans and impaired loans is as follows:
December 31,
(dollars in thousands)
Loans on nonaccrual
$
3,996
$ 2,014
$ 1,313
Loans 90 days past due and still accruing
-
-
Impaired loans on nonaccrual included above
3,178
Total recorded investment in impaired loans
5,379
3,252
3,051
Average recorded investment of impaired loans
3,641
3,161
5,491
Accruing troubled debt restructures
2,202
2,361
2,559
Interest income not recorded on nonaccrual loans according to their original terms
Interest income on nonaccrual loans actually recorded
-
-
-
Interest income recognized on impaired loans
Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.
The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2020.
Balance at
December 31, 2019
Additions
Repayments
and
Deletions
Balance at
December 31, 2020
(dollars in thousands)
$12,031
$6,340
$2,389
$15,982
6.
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 years indicated.
An analysis of the allowance for loan losses for each of the three years ending December 31, 2020, 2019 and 2018 is as follows:
(dollars in thousands)
Allowance for loan losses, beginning of year
$
29,585
$ 28,543
$ 26,255
Loans charged-off
(238
)
(454 )
(833 )
Recoveries on loans previously charged-off
1,771
Net recoveries (charge-offs )
(208 )
Provision charged to expense
5,825
1,250
1,350
Allowance for loan losses, end of year
$
35,486
$ 29,585
$ 28,543
Notes to Consolidated Financial Statements
Further information pertaining to the allowance for loan losses at December 31, 2020 follows:
Construction
and Land
Development
Commercial
and
Industrial
Municipal
Commercial
Real Estate
Residential
Real Estate
Consumer
Home
Equity
Unallocated
Total
(dollars in thousands)
Allowance for Loan Losses:
Ending balance at December 31, 2019
$
$
11,596
$
2,566
$
11,464
$
2,194
$
$
1,065
$
$
29,585
Charge-offs
-
(29
)
-
-
-
(209
)
-
-
(238
)
Recoveries
-
-
-
-
-
Provision
4,949
(83
)
5,825
Ending balance at December 31, 2020
$
$
16,713
$
2,804
$
11,751
$
2,111
$
$
1,208
$
$
35,486
Amount of allowance for loan losses for loans deemed to be impaired
$
-
$
$
-
$
$
-
$
-
$
-
$
-
$
Amount of allowance for loan losses for loans not deemed to be impaired
$
$
16,573
$
2,804
$
11,302
$
2,111
$
$
1,208
$
$
34,897
Loans:
Ending balance
$
10,909
$
1,314,245
$
137,607
$
789,836
$
448,436
$
20,439
$
274,357
$
-
$
2,995,829
Loans deemed to be impaired
$
-
$
$
-
$
4,940
$
-
$
-
$
-
$
-
$
5,379
Loans not deemed to be impaired
$
10,909
$
1,313,806
$
137,607
$
784,896
$
448,436
$
20,439
$
274,357
$
-
$
2,990,450
Further information pertaining to the allowance for loan losses at December 31, 2019 follows:
Construction
and Land
Development
Commercial
and
Industrial
Municipal
Commercial
Real Estate
Residential
Real Estate
Consumer
Home
Equity
Unallocated
Total
(dollars in thousands)
Allowance for Loan Losses:
Ending balance at December 31, 2018
$ 1,092
$ 10,998
$ 1,838
$ 10,663
$ 2,190
$
$ 1,111
$
$ 28,543
Charge-offs
-
(137 )
-
-
-
(295 )
(22 )
-
(454 )
Recoveries
-
-
-
-
-
-
Provision
(761 )
(24 )
(229 )
1,250
Ending balance at December 31, 2019
$
$ 11,596
$ 2,566
$ 11,464
$ 2,194
$
$ 1,065
$
$ 29,585
Amount of allowance for loan losses for loans deemed to be impaired
$ -
$
$ -
$
$ -
$ -
$ -
$ -
$
Amount of allowance for loan losses for loans not deemed to be impaired
$
$ 11,581
$ 2,566
$ 11,377
$ 2,194
$
$ 1,065
$
$ 29,483
Loans:
Ending balance
$ 8,992
$ 812,417
$ 120,455
$ 786,102
$ 371,897
$ 21,893
$ 304,363
$ -
$ 2,426,119
Loans deemed to be impaired
$ -
$
$ -
$ 2,346
$ -
$ -
$ -
$ -
$ 3,252
Loans not deemed to be impaired
$ 8,992
$ 811,511
$ 120,455
$ 783,756
$ 371,897
$ 21,893
$ 304,363
$ -
$ 2,422,867
Notes to Consolidated Financial Statements
CREDIT QUALITY INFORMATION
The Company utilizes a six-grade
internal loan rating system for commercial real estate, construction and commercial 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 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 December 31, 2020.
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 December 31, 2020 and are doubtful for full collection.
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 December 31, 2020.
Construction
and Land
Development
Commercial
and
Industrial
Municipal
Commercial
Real Estate
(dollars 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
-
-
4,940
Total
$10,909
$
1,314,245
$
137,607
$789,836
The Company has increased its exposure to larger loans to large institutions with publicly available credit ratings. These ratings are tracked as a credit quality indicator for these loans.
The following table presents the Company’s loans by credit rating at December 31, 2020.
Commercial
and
Industrial
Municipal
Commercial
Real Estate
Total
(dollars 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
Notes to Consolidated Financial Statements
The following table presents the Company’s loans by risk rating at December 31, 2019.
Construction
and Land
Development
Commercial
and
Industrial
Municipal
Commercial
Real Estate
(dollars in thousands)
Grade:
1-3
(Pass)
$ 8,992
$ 807,486
$ 120,455
$ 759,402
4 (Monitor)
-
4,025
-
24,354
5 (Substandard)
-
-
-
-
6 (Doubtful)
-
-
-
-
Impaired
-
-
2,346
Total
$ 8,992
$ 812,417
$ 120,455
$ 786,102
The following table presents the Company’s loans by credit rating at December 31, 2019.
Commercial
and
Industrial
Municipal
Commercial
Real Estate
Total
(dollars in thousands)
Credit Rating:
Aaa-Aa3
$ 523,644
$ 53,273
$ 40,437
$ 617,354
A1-A3
186,044
7,354
148,346
341,744
Baa1-Baa3
-
51,133
144,711
195,844
Ba2
-
5,895
-
5,895
Total
$ 709,688
$ 117,655
$ 333,494
$ 1,160,837
The Company utilized payment performance as credit quality indicators for residential real estate, consumer and overdrafts, and the home equity portfolio. The indicators are depicted in the table “aging of past-due
loans,” below.
AGING OF PAST-DUE
LOANS
At December 31, 2020, the aging of past due loans are as follows:
Accruing
30-89 Days
Past Due
Non
Accrual
Accruing
Greater
Than
90 Days
Total
Past
Due
Current
Loans
Total
(dollars in thousands)
Construction and land development
$
-
$
-
$
-
$
-
$
10,909
$
10,909
Commercial and industrial
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
-
447,519
448,436
Consumer and overdrafts
-
20,417
20,439
Home equity
1,001
-
1,291
273,066
274,357
Total
$
1,468
$
3,996
$
$
5,554
$
2,990,275
$
2,995,829
Notes to Consolidated Financial Statements
At December 31, 2019 the aging of past due loans are as follows:
Accruing
30-89 Days
Past Due
Non
Accrual
Accruing
Greater
Than
90 Days
Total
Past Due
Current
Loans
Total
(dollars in thousands)
Construction and land development
$ -
$ -
$ -
$ -
$ 8,992
$ 8,992
Commercial and industrial
-
811,790
812,417
Municipal
-
-
-
-
120,455
120,455
Commercial real estate
-
1,332
784,770
786,102
Residential real estate
1,563
-
2,246
369,651
371,897
Consumer and overdrafts
-
21,871
21,893
Home equity
-
1,038
303,325
304,363
Total
$ 3,251
$ 2,014
$ -
$ 5,265
$ 2,420,854
$ 2,426,119
IMPAIRED LOANS
A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off
when management believes that the collectibility of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectibility 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 “Notes to Consolidated Financial Statements.”
Notes to Consolidated Financial Statements
The following is information pertaining to impaired loans at December 31, 2020:
Carrying
Value
Unpaid
Balance
Principal
Required
Reserve
Average
Carrying Value
Recognized
Interest
Income
(dollars in thousands)
With no required reserve recorded:
Construction and land development
$
-
$
-
$
-
$
-
$
-
Commercial and industrial
-
-
Municipal
-
-
-
-
-
Commercial real estate
-
-
Residential real estate
-
-
-
-
Consumer
-
-
-
-
-
Home equity
-
-
-
-
-
Total
$
$
$
-
$
1,197
$
-
With required reserve recorded:
Construction and land development
$
-
$
-
$
-
$
-
$
-
Commercial and industrial
Municipal
-
-
-
-
-
Commercial real estate
4,668
4,797
2,323
Residential real estate
-
-
-
-
-
Consumer
-
-
-
-
-
Home equity
-
-
-
-
-
Total
$
5,103
$
5,251
$
$
2,444
$
Total
Construction and land development
$
-
$
-
$
-
$
-
$
-
Commercial and industrial
Municipal
-
-
-
-
-
Commercial real estate
4,940
5,103
2,760
Residential real estate
-
-
-
-
Consumer
-
-
-
-
-
Home equity
-
-
-
-
-
Total
$
5,379
$
5,562
$
$
3,641
$
Notes to Consolidated Financial Statements
The following is information pertaining to impaired loans at December 31, 2019:
Carrying
Value
Unpaid
Balance
Principal
Required
Reserve
Average
Carrying
Value
Recognized
Interest
Income
(dollars in thousands)
With no required reserve recorded:
Construction and land development
$ -
$ -
$ -
$ -
$ -
Commercial and industrial
-
Municipal
-
-
-
-
-
Commercial real estate
-
-
Residential real estate
-
-
-
-
-
Consumer
-
-
-
-
-
Home equity
-
-
-
-
-
Total
$
$ 1,165
$ -
$
$
With required reserve recorded:
Construction and land development
$ -
$ -
$ -
$ -
$ -
Commercial and industrial
Municipal
-
-
-
-
-
Commercial real estate
2,186
2,306
2,314
Residential real estate
-
-
-
-
-
Consumer
-
-
-
-
-
Home equity
-
-
-
-
-
Total
$ 2,322
$ 2,443
$
$ 2,578
$
Total
Construction and land development
$ -
$ -
$ -
$ -
$ -
Commercial and industrial
1,113
Municipal
-
-
-
-
-
Commercial real estate
2,346
2,495
2,759
Residential real estate
-
-
-
-
-
Consumer
-
-
-
-
-
Home equity
-
-
-
-
-
Total
$ 3,252
$ 3,608
$
$ 3,161
$
Troubled Debt Restructurings (TDRs) are identified as a modification 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 modification did not result in an increase in the allowance for these loans beyond any previously established allocations.
There was one commercial and industrial loan that was modified during the first quarter of 2019. The loan was modified by reducing the interest rates as well as extending the term on the loan. The pre-modification
and post-modification outstanding recorded investment was $39,000. The financial impact for the modification was not material. This loan was subsequently charged off during the third quarter of 2019. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers.
There were no TDRs that occurred during the year 2020. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during 2020.
Notes to Consolidated Financial Statements
Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19
modifications. The Company can then suspend the requirements under GAAP for loan modifications related to COVID-19
that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19
as being a TDR, including the requirement to determine impairment for accounting purposes.
As of December 31, 2020, and as a result of COVID-19
loan modifications, the Company has 20 loans operating under modified terms aggregating $25,022,000, primarily consisting of short-term payment deferrals. Of these modifications, $25,022,000, or 100%, were performing in accordance with their modified terms.
7.
Bank Premises and Equipment
December 31,
Estimated Useful Life
(dollars in thousands)
Land
$
7,905
$ 7,246
-
Bank premises
34,556
28,175
30-39
years
Furniture and equipment
34,381
33,259
3-10
years
Leasehold improvements
12,830
12,674
30-39
years or lease term
89,672
81,354
Accumulated depreciation and amortization
(50,610
)
(47,402 )
Total
$
39,062
$ 33,952
Depreciation and amortization amounted to $3,266,000, $3,235,000, and $3,206,000 at December 31, 2020, 2019 and 2018, respectively.
8.
Goodwill and Identifiable Intangible Assets
At December 31, 2020 and 2019, the Company concluded that it is not more likely than not that fair value of the reporting unit is less than its carrying value, and goodwill is not considered to be impaired.
The changes in goodwill and identifiable intangible assets for the years ended December 31, 2020 and 2019 are shown in the table below.
Carrying Amount of Goodwill and Intangibles
Goodwill
Mortgage
Servicing Rights
Total
(dollars in thousands)
Balance at December 31, 2018
$ 2,714
$ 1,226
$ 3,940
Additions
-
Amortization Expense
-
(261 )
(261 )
Balance at December 31, 2019
$ 2,714
$ 1,202
$ 3,916
Additions
-
-
-
Amortization Expense
-
(429 )
(429 )
Balance at December 31, 2020
$
2,714
$
$
3,487
Notes to Consolidated Financial Statements
9.
Fair Value Measurements
The Company follows FASB ASC 820-10,
Fair Value Measurements and Disclosures,
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 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 G-7
government, agency securities, corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives.
Level III-These instruments 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 certain commercial mortgage loans, and obligations issued by states and political subdivisions.
The results of the fair value hierarchy as of December 31, 2020, are as follows:
Fair Value Measurements Using
Carrying
Value
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant Other
Unobservable
Inputs
(Level 3)
(dollars in thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis
Securities AFS
SBA Backed Securities
$
44,039
$
-
$
44,039
$
-
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities
177,741
-
177,741
-
Privately Issued Residential Mortgage-Backed Securities
-
-
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
$
$
1,365
$
-
Financial Instruments Measured at Fair Value on a Non-recurring
Basis
Impaired Loans
$
3,178
$
-
$
-
$
3,178
Notes to Consolidated Financial Statements
The results of the fair value hierarchy as of December 31, 2019, are as follows:
Fair Value Measurements Using
Carrying
Value
Quoted Prices
in Active Markets
for Identical Assets
(Level 1)
Significant
Observable Inputs
(Level 2)
Significant Other
Unobservable
Inputs
(Level 3)
(dollars in thousands)
Financial Instruments Measured at Fair Value on a Recurring Basis
Securities AFS
SBA Backed Securities
$ 54,211
$ -
$ 54,211
$ -
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities
184,187
-
184,187
-
Privately Issued Residential Mortgage-Backed Securities
-
-
Obligations Issued by States and Political Subdivisions
18,076
-
4,775
13,301
Other Debt Securities
3,632
-
3,632
-
Total
$ 260,502
$ -
$ 247,201
$ 13,301
Equity Securities
$ 1,688
$
$ 1,345
$ -
Financial Instruments Measured at Fair Value on a Non-recurring
Basis
Impaired Loans
$
$ -
$ -
$
Impaired loan balances in the tables above represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.
Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for the estimated credit loss amounted to $501,000 and $79,000 for 2020 and 2019, respectively.
There were no transfers between level 1, 2 and 3 for the year ended December 31, 2020 and December 31, 2019. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2020 and December 31, 2019.
Notes to Consolidated Financial Statements
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
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, 2019. 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)
$ 13,301
Discounted cash flow
Discount rate
1.5%-3.2%
(2)
Impaired Loans
Appraisal of collateral(3)
Appraisal adjustments(4)
0%-30% 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 identifiable.
(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 year ended December 31, 2020 are as shown in the table below:
Obligations
Issued by States
and Political
Subdivisions
(dollars in thousands)
Balance at December 31, 2019
$ 13,301
Purchases
71,095
Maturities/redemptions
(32,073 )
Transfer to Level 2
-
Amortization
(47 )
Change in fair value
-
Balance at December 31, 2020
$ 52,276
The amortized cost of Level 3 securities was $52,276,000 with an unrealized loss of $0 at December 31, 2020. The securities in this category are generally municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.
Notes to Consolidated Financial Statements
The changes in Level 3 securities for the year ended December 31, 2019 are as shown in the table below:
Obligations
Issued by States
and Political
Subdivisions
(dollars in thousands)
Balance at December 31, 2018
$ 88,728
Purchases
21,408
Maturities/redemptions
(96,812 )
Transfer to Level 2
-
Amortization
(23 )
Change in fair value
-
Balance at December 31, 2019
$ 13,301
The amortized cost of Level 3 securities was $13,301,000 with an unrealized loss of $0 at December 31, 2019. The securities in this category are generally municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.
10.
Deposits
The following is a summary of remaining maturities or re-pricing
of time deposits as of December 31,
Percent
Percent
(dollars in thousands)
Within one year
$
465,080
%
$ 383,497
%
Over one year to two years
50,456
%
123,016
%
Over two years to three years
19,104
%
27,223
%
Over three years to five years
11,503
%
21,711
%
Total
$
546,143
%
$ 555,447
%
Time deposits of more than $250,000 totaled $350,290,000 and $342,809,000 in 2020 and 2019, respectively.
Deposits totaling $34,622,000 and $34,964,000 were attributable to related parties at December 31, 2020 and December 31, 2019, respectively.
11.
Securities Sold Under Agreements to Repurchase
The following is a summary of securities sold under agreements to repurchase as of December 31,
(dollars in thousands)
Amount outstanding at December 31
$
232,090
$ 266,045
$ 154,240
Weighted average rate at December 31
0.34
%
0.96 %
0.82 %
Maximum amount outstanding at any month end
$
253,980
$ 307,235
$ 174,150
Daily average balance outstanding during the year
$
221,609
$ 224,361
$ 147,944
Weighted average rate during the year
0.62
%
1.05 %
0.66 %
Notes to Consolidated Financial Statements
Amounts outstanding at December 31, 2020, 2019, and 2018 carried maturity dates of the next business day. U.S. Government Sponsored Enterprise securities with a total amortized cost of $226,942,000, $264,737,000, and $160,576,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 2020, 2019, and 2018, respectively. The approximate fair value of the collateral at those dates was $234,125,000, $265,687,000, and $156,369,000, respectively.
12.
Other Borrowed Funds and Subordinated Debentures
The following is a summary of other borrowed funds and subordinated debentures as of December 31,
(dollars in thousands)
Amount outstanding at December 31
$
213,092
$ 407,038
$ 238,461
Weighted average rate at December 31
2.38
%
2.37 %
2.76 %
Maximum amount outstanding at any month end
$
348,203
$ 487,502
$ 542,913
Daily average balance outstanding during the year
$
201,656
$ 231,926
$ 291,674
Weighted average rate during the year
2.66
%
2.95 %
2.61 %
FEDERAL HOME LOAN BANK BORROWINGS
Federal Home Loan Bank of Boston (“FHLBB”) borrowings are collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2020, was approximately $591,974,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. A schedule of the maturity distribution of FHLBB advances with the weighted average interest rates is as follows:
December 31,
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
(dollars in thousands)
Within one year
$
67,500
1.78
%
$ 218,000
1.86 %
$ 63,000
2.17 %
Over one year to two years
$
3,500
2.15
%
$ 42,500
2.58 %
$ 28,000
2.29 %
Over two years to three years
$
30,000
3.38
%
$ 3,500
2.15 %
$ 25,000
3.34 %
Over three years to five years
$
67,000
2.64
%
$ 70,000
2.85 %
$ 33,500
2.23 %
Over five years
$
9,009
2.83
%
$ 36,955
2.88 %
$ 52,878
2.47 %
Total
$
177,009
2.44
%
$ 370,955
2.23 %
$ 202,378
2.42 %
Included in the table above are $40,000,000, $40,000,000, and $40,000,000, respectively, of FHLBB advances at December 31, 2020, 2019 and 2018, that are puttable at the discretion of FHLBB. These put dates were not utilized in the table above.
During 2019, the Company restructured $15,000,000 of FHLBB advances. Prior to the restructure, the weighted average rate on these advances was 3.33% and the weighted average maturity was 14 months. Subsequent to the restructure, the weighted average rate was 2.37% and the weighted average maturity was 60 months.
SUBORDINATED DEBENTURES
Subordinated debentures totaled $36,083,000 at December 31, 2020, 2019, and 2018.
Notes to Consolidated Financial Statements
In December 2004, the Company consummated the sale of a trust preferred securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust II.
Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The coupon rate on these securities was 2.09% at December 31, 2020 and 3.76% at December 31, 2019.
OTHER BORROWED FUNDS
There were no overnight federal funds purchased at December 31, 2020, 2019, and 2018.
13.
Reclassifications Out of Accumulated Other Comprehensive Income(a)
Amount Reclassified from Accumulated
Other Comprehensive Income
Details About Accumulated Other
Comprehensive Income Components
Year Ended
December 31, 2020(a)
Year Ended
December 31, 2019(a)
Affected Line Item in the Statement
Where Net Income is Presented
Unrealized gains and losses on available-for-sale
securities
$
-
$
Net gains on sales of investments
-
(17 )
Provision for income taxes
$
-
$
Net income
Accretion of unrealized losses transferred
$
(798
)
$ (1,022 )
Interest income securities held-to-maturity
Provision for income taxes
$
(591
)
$ (753 )
Net income
Amortization of defined benefit pension items
Prior-service costs
$
(114
)
$ (114 )
Salaries and employee benefits(b)
Actuarial gains (losses)
(1,889
)
(1,351 )
Salaries and employee benefits(b)
Total before tax
(2,003
)
(1,465 )
Income before taxes
Tax (expense) or benefit
Provision for income taxes
Net of tax
$
(1,441
)
$ (1,053 )
Net income
(a)
Amounts in parentheses indicate decreases to profit/loss.
(b)
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see employee benefits footnote (Note 17) for additional details).
14.
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; basic EPS excludes all common stock equivalents. There were no common stock equivalents for 2020, 2019 and 2018, respectively.
Notes to Consolidated Financial Statements
The following table is a reconciliation of basic EPS and diluted EPS:
Year Ended December 31,
(in thousands except share and per share data)
BASIC EPS COMPUTATION
Numerator:
Net income, Class A
$
33,449
$ 31,351
$ 28,479
Net income, Class B
8,760
8,348
7,734
Denominator:
Weighted average shares outstanding, Class A
3,653,939
3,633,044
3,608,179
Weighted average shares outstanding, Class B
1,913,970
1,934,865
1,959,730
Basic EPS, Class A
$
9.15
$ 8.63
$ 7.89
Basic EPS, Class B
$
4.58
$ 4.31
$ 3.95
DILUTED EPS COMPUTATION
Numerator:
Net income, Class A
$
33,449
$ 31,351
$ 28,479
Net income, Class B
8,760
8,348
7,734
Total net income, for diluted EPS, Class A computation
42,209
39,699
36,213
Denominator:
Weighted average shares outstanding, basic, Class A
3,653,939
3,633,044
3,608,179
Weighted average shares outstanding, Class B
1,913,970
1,934,865
1,959,730
Weighted average shares outstanding diluted, Class A
5,567,909
5,567,909
5,567,909
Weighted average shares outstanding, Class B
1,913,970
1,934,865
1,959,730
Diluted EPS, Class A
$
7.58
$ 7.13
$ 6.50
Diluted EPS, Class B
$
4.58
$ 4.31
$ 3.95
15.
Stockholders’ Equity
DIVIDENDS
Holders of the Class A common stock may not vote in the election of directors but may vote as a class to approve certain extraordinary corporate transactions. Holders of Class B common stock may vote in the election of directors. Class A common stockholders are entitled to receive dividends per share equal to at least 200% per share of that paid, if any, on each share of Class B common stock. Class A common stock is publicly traded. Class B common stock is not publicly traded; however, it can be converted on a per share basis to Class A common stock at any time at the option of the holder. Dividend payments by the Company are dependent in part on the dividends it receives from the Bank, which are subject to certain regulatory restrictions.
CAPITAL RATIOS
The Bank and the Company are subject to various regulatory requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional
Notes to Consolidated Financial Statements
discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank and Company’s financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank and Company must meet specific capital guidelines that involve quantitative measures of the Bank and Company’s assets and liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank and Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2020, that the Bank and the Company meet all capital adequacy requirements to which they are subject.
The Basel Committee has issued capital standards entitled “Basel III: A global framework for more resilient banks and banking systems” (Basel III). The Federal Reserve has finalized its rule implementing the Basel III regulatory capital framework. The rule was effective in January 2015 and sets the Basel III minimum Regulatory capital requirements. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Common Equity tier 1, tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes would cause a change in the Bank’s categorization.
The Bank’s actual capital amounts and ratios are presented in the following table:
Actual
For Capital
Adequacy Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2020 (Basel III)
Total Capital (to Risk-Weighted Assets)
$
448,695
13.03
%
$
275,403
8.00
%
$
344,254
10.00
%
Tier 1 Capital (to Risk-Weighted Assets)
413,209
12.00
%
206,553
6.00
%
275,403
8.00
%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
413,209
12.00
%
154,914
4.50
%
223,765
6.50
%
Tier 1 Capital (to 4th Quarter Average Assets)
413,209
6.41
%
257,763
4.00
%
322,204
5.00
%
As of December 31, 2019 (Basel III)
Total Capital (to Risk-Weighted Assets)
$ 401,850
13.57 %
$ 236,830
8.00 %
$ 296,037
10.00 %
Tier 1 Capital (to Risk-Weighted Assets)
372,265
12.57 %
177,622
6.00 %
236,830
8.00 %
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
372,265
12.57 %
133,217
4.50 %
192,424
6.50 %
Tier 1 Capital (to 4th Quarter Average Assets)
372,265
7.01 %
212,549
4.00 %
265,686
5.00 %
Notes to Consolidated Financial Statements
The Company’s actual capital amounts and ratios are presented in the following table:
Actual
For Capital
Adequacy Purposes
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2020 (Basel III)
Total Capital (to Risk-Weighted Assets)
$
464,331
13.43
%
$
276,673
8.00
%
$
345,842
10.00
%
Tier 1 Capital (to Risk-Weighted Assets)
428,845
12.40
%
207,505
6.00
%
276,673
8.00
%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
393,845
11.39
%
155,629
4.50
%
224,797
6.50
%
Tier 1 Capital (to 4th Quarter Average Assets)
428,845
6.64
%
258,414
4.00
%
323,017
5.00
%
As of December 31, 2019 (Basel III)
Total Capital (to Risk-Weighted Assets)
$ 415,863
13.97 %
$ 238,132
8.00 %
$ 297,665
10.00 %
Tier 1 Capital (to Risk-Weighted Assets)
386,308
12.98 %
178,599
6.00 %
238,132
8.00 %
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
351,308
11.80 %
133,949
4.50 %
193,482
6.50 %
Tier 1 Capital (to 4th Quarter Average Assets)
386,308
7.25 %
213,222
4.00 %
266,528
5.00 %
16.
Income Taxes
The current and deferred components of income tax expense (benefit) for the years ended December 31, are as follows:
(dollars in thousands)
Current expense:
Federal
$
3,651
$ 2,548
$ 2,637
State
1,845
Total current expense
5,496
3,245
3,334
Deferred (benefit) expense:
Federal
(491
)
(1,660 )
(1,238 )
State
(598
)
(367 )
(528 )
Valuation Allowance
-
(108 )
-
Total deferred (benefit) expense
(1,089
)
(2,135 )
(1,766 )
Provision for income taxes
$
4,407
$ 1,110
$ 1,568
Income tax accounts included in other assets at December 31, are as follows:
(dollars in thousands)
Income tax receivable
$
2,250
$ 3,446
Deferred income tax asset, net
26,431
24,566
Total
$
28,681
$ 28,012
Notes to Consolidated Financial Statements
Differences between income tax expense (benefit) at the statutory federal income tax rate and total income tax expense are summarized as follows:
(dollars in thousands)
Federal income tax expense at statutory rate
$
9,789
$ 8,570
$ 7,934
State income tax, net of federal income tax benefit
Life insurance income
(834
)
(265 )
(176 )
Tax-exempt
interest, net
(5,490
)
(6,737 )
(6,510 )
Tax credits, net
(231
)
(292 )
(349 )
Valuation allowance reversal
-
(108 )
-
Sequestration (reversal) accrual
-
(438 )
Other, net
Total
$
4,407
$ 1,110
$ 1,568
Effective tax rate
9.45
%
2.72 %
4.15 %
The following table sets forth the Company’s gross deferred income tax assets and gross deferred income tax liabilities at December 31:
(dollars in thousands)
Deferred income tax assets:
Allowance for loan losses
$
10,025
$ 8,354
Deferred compensation
8,833
8,910
Pension and SERP liability
9,911
8,770
Operating lease liabilities
3,917
3,567
Unrealized losses on securities transferred to held-to-maturity
Depreciation
1,214
1,060
QZAB credit
-
PPP loan origination fees
-
Accrued bonus
-
Charitable contributions carryforward
-
Nonaccrual interest
Other
Gross deferred income tax asset
35,635
33,421
Deferred income tax liabilities:
Pension liability
(4,142
)
(4,258 )
Operating lease right-of-use
assets
(3,855
)
(3,520 )
Deferred origination costs
(584
)
(516 )
Prepaid expenses
(361
)
(337 )
Mortgage servicing rights
(217
)
(338 )
Unrealized (gains) losses on securities available-for-sale
(45
)
Gross deferred income tax liability
(9,204
)
(8,855 )
Deferred income tax asset net
$
26,431
$ 24,566
Notes to Consolidated Financial Statements
Based on the Company’s historical and current pre-tax
earnings, management believes it is more likely than not that the Company will realize the deferred income tax asset existing at December 31, 2020. There was no valuation allowance at December 31, 2020 or December 31, 2019. During 2019, the valuation allowance on a charitable contribution carryforward was reversed. Management believes that existing net deductible temporary differences which give rise to the deferred tax asset will reverse during periods in which the Company generates net taxable income. In addition, gross deductible temporary differences are expected to reverse in periods during which offsetting gross taxable temporary differences are expected to reverse. Factors beyond management’s control, such as the general state of the economy and real estate values, can affect future levels of taxable income, and no assurance can be given that sufficient taxable income will be generated to fully absorb gross deductible temporary differences.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act took effect on January 1, 2018. The Tax Act lowered the Company’s federal tax rate from 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. During 2019, a reduction in tax accruals related to sequestration of the refundable portion of our AMT credit carryforward amounted to $438,000. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. As a result of the CARES Act, the full balance of the AMT credit was refunded during 2020. The other provisions under the CARES Act did not have a material impact on the Company’s income taxes for 2020. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards. Tax Act changes for individuals include lower tax rates, mortgage interest and state and local tax limitations as well as an increase in the standard deduction, among others.
The Company did not have any unrecognized tax benefits nor a balance of accrued interest and penalties related to uncertain tax positions.
The Company and its subsidiaries file a consolidated federal tax return. The Company is subject to federal and Massachusetts examinations for tax years after December 31, 2016.
17.
Employee Benefits
The Company has a Qualified Defined Benefit Pension Plan (the “Plan”), which had been offered to all employees reaching minimum age and service requirements. In 2006, the Bank became a member of the Savings Bank Employees Retirement Association (“SBERA”) within which it then began maintaining the Qualified Defined Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for its retirement plans. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range of 47% to 61% of total portfolio assets. The remainder of the portfolio is allocated to fixed income securities with target range of 24% to 38% and other investments including global asset allocation and hedge funds from 9% to 15%.
The Trustees of SBERA, through its Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings. The Company closed the plan to employees hired after March 31, 2006.
Notes to Consolidated Financial Statements
The measurement date for the Plan is December 31 for each year. The benefits expected to be paid in each year from 2021 to 2025 are $2,008,000, $2,188,000, $2,322,000, $2,521,000, and $2,707,000, respectively. The aggregate benefits expected to be paid in the five years from 2026 to 2030 are $16,087,000.
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under Topic 820 are described as follows:
LEVEL 1
Inputs to the valuation methodology are quoted market prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.
LEVEL 2
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly, such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other that quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
LEVEL 3
Inputs that are unobservable inputs for the asset or liability.
Below is a description of the valuation methodologies used for assets measured at fair value.
Collective Funds
Valued at either the closing price reported on the active market on which the individual securities are traded or valued at the net asset value (NAV) of units of a collective trust. The NAV, as provided by the trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV. Participant transactions (purchases and sales) may occur daily. Were SBERA to initiate a full redemption of the collective trust, the investment advisor reserves the right to temporarily delay withdrawal from the trust in order to ensure that securities liquidations will be carried out in an orderly business manner.
Equity Securities
Valued at the closing price reported on the active market on which the individual securities are traded.
Mutual Funds
Valued at the daily closing price as reported by the fund. Mutual funds held open-end
mutual funds that are registered with the U.S. Securities and Exchange Commission. The funds are required to publish their daily NAV and to transact at that price.
The mutual funds held are deemed to be actively traded.
Notes to Consolidated Financial Statements
Limited Partnerships and Hedge Funds
The funds are valued at NAV, without further adjustment, as calculated by the fund’s manager based upon the terms and conditions of the organization documents of the underlying investments, with further consideration to portfolio risks.
The following table sets forth by level, within the fair value hierarchy, the plan’s assets at fair value. Classification within the fair value hierarchy table is based upon the lowest level of any input that is significant to the fair value measurement:
The fair value of plan assets and major categories as of December 31, 2020, is as follows:
Description
Percent
NAV
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Collective Funds
10.6
%
$
-
$
5,999
$
-
$
-
$
5,999
Equity Securities
26.6
%
-
14,952
-
-
14,952
Diversified Mutual Funds
12.3
%
-
6,949
-
-
6,949
Short Term Investments
0.2
%
-
-
-
Total investments measured in the fair value hierarchy
49.7
%
-
28,021
-
-
28,021
Investments measured at net asset value(1)
50.3
%
28,412
-
-
-
28,412
100.0
%
$28,412
$28,021
$
-
$
-
$56,433
(1)
In accordance with Subtopic 820-10,
certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.
The fair value of plan assets and major categories as of December 31, 2019, is as follows:
Description
Percent
NAV
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Collective Funds
8.3 %
$ -
$ 4,289
$ -
$ -
$ 4,289
Equity Securities
9.7 %
-
5,016
-
-
5,016
Diversified Mutual Funds
31.1 %
-
16,081
-
-
16,081
Total investments measured in the fair value hierarchy
49.1 %
-
25,386
-
-
25,386
Investments measured at net asset value(1)
50.9 %
26,274
-
-
-
26,274
100.0 %
$ 26,274
$ 25,386
$ -
$ -
$ 51,660
(1)
In accordance with Subtopic 820-10,
certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.
INVESTMENTS MEASURED USING THE NET ASSET VALUE PER SHARE PRACTICAL EXPEDIENT
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient. There are no participant redemption restrictions for these investments.
Notes to Consolidated Financial Statements
The investments measured using the net asset value per share practical expedient as of December 31, 2020, is as follows:
Percent
Fair Value
(dollars in thousands)
Collective Funds by Category:
Equity
12.6 %
$ 7,113
US debt securities
18.0 %
10,131
International equities
14.1 %
7,964
Limited Partnerships by Category:
Emerging markets
4.1 %
2,308
Hedge Funds by Category:
Global opportunities(1)
0.3 %
Private investment entities and/or separately managed accounts(2)
1.2 %
50.3 %
$ 28,412
The investments measured using the net asset value per share practical expedient as of December 31, 2019, is as follows:
Percent
Fair Value
(dollars in thousands)
Collective Funds by Category:
Equity
19.2 %
$ 9,932
US debt securities
15.2 %
7,874
International equities
10.1 %
5,208
Limited Partnerships by Category:
Emerging markets
3.2 %
1,635
Multi-strategy
1.2 %
Hedge Funds by Category:
Global opportunities(1)
0.5 %
Private investment entities and/or separately managed accounts(2)
1.4 %
50.9 %
$ 26,274
(1)
This category has an investment strategy to pursue a hybrid absolute return via portfolio managers, secondaries, and co-investments
with a flexible and opportunistic mandate tactically allocating capital to look to capitalize on market dislocations and inefficiencies. The opportunities are expected to fall within the following strategies: Niche Alternatives and Private Credit and Hedge Fund secondaries. The fair value of the investments in this category have been determined using the last sales price, for listed securities, and in accordance with the agreement terms for portfolio-managed investments, notes, swaps, and other similar products.
(2)
The Fund’s investment objective is to invest in highly attractive, select investment opportunities by maintaining investments through private investment entities and/or separately managed accounts (each, an Investment or a Portfolio and collectively, the Investments or the Portfolios) with investment management professionals (each a Manager and collectively, the Managers) specializing in various alternative investment strategies. The Managers have broad investment experience and the ability to leverage their existing relationships with corporate management teams, investment banks and other institutions to gain access to certain investment opportunities. As such, the Manager is presented with “best idea” investment opportunities, typically in asset classes where market dislocations or other events have created attractive investment opportunities. The Managers are not restricted in the investment strategies that they may employ across different asset classes and regions. The Manager anticipates that any number of strategies will be eligible for consideration for investment by the Fund and the Fund reserves the right to invest in any particular strategy or asset class it deems appropriate.
Notes to Consolidated Financial Statements
The Company has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan), which is limited to certain officers and employees of the Company. The Supplemental Plan is voluntary. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.
The benefits expected to be paid in each year from 2021 to 2025 are $2,570,000, $2,507,000, $2,439,000, $2,595,000, and $3,102,000, respectively. The aggregate benefits expected to be paid in the five years from 2026 to 2030 are $17,913,000.
Defined Benefit Pension Plan
Supplemental Insurance/
Retirement Plan
(dollars in thousands)
Change projected in benefit obligation
Benefit obligation at beginning of year
$
49,434
$ 40,509
$
49,976
$ 40,405
Service cost
1,377
1,103
1,412
1,024
Interest cost
1,801
1,892
1,862
1,926
Prior service cost
-
-
-
Actuarial (gain)/loss
3,245
7,099
4,703
7,537
Benefits paid
(1,418
)
(1,169 )
(4,511
)
(916 )
Projected benefit obligation at end of year
$
54,439
$ 49,434
$
53,943
$ 49,976
Change in plan assets
Fair value of plan assets at beginning of year
$
51,660
$ 44,437
Actual return on plan assets
6,191
8,392
Employer contributions
-
-
Benefits paid
(1,418
)
(1,169 )
Fair value of plan assets at end of year
$
56,433
$ 51,660
(Unfunded) Funded status
$
1,994
$ 2,226
$
(53,943
)
$ (49,976 )
Accumulated benefit obligation
$
54,439
$ 49,434
$
48,767
$ 45,238
Weighted-average assumptions as of December 31
Discount rate-Liability
3.25
%
3.71 %
3.21
%
3.71 %
Discount rate-Expense
3.71
%
4.76 %
3.71
%
4.79 %
Expected return on plan assets
7.50
%
7.50 %
NA
NA
Rate of compensation increase
4.00
%
4.00 %
4.00
%
4.00 %
Components of net periodic benefit cost
Service cost
$
1,377
$ 1,103
$
1,412
$ 1,024
Interest cost
1,801
1,892
1,862
1,926
Expected return on plan assets
(3,808
)
(3,275 )
-
-
Recognized prior service cost
-
-
Recognized net losses
1,041
Net periodic cost (benefit)
$
$
$
4,236
$ 3,499
Other changes in plan assets and benefit obligations recognized in other comprehensive income
Amortization of prior service cost
$
-
$ -
$
(114)
$ (114 )
Net (gain) loss
(179
)
1,066
3,809
7,101
Total recognized in other comprehensive income
(179
)
1,066
3,695
6,987
Total recognized in net periodic benefit cost and other comprehensive income
$
$ 1,702
$
7,931
$ 10,486
Notes to Consolidated Financial Statements
The following table represents the unrecognized pension liability at the time period indicated:
Plan
December 31, 2020
Supplemental
Plan
Total
Plan
December 31, 2019
Supplemental
Plan
Total
(dollars in thousands)
Prior service cost
$
-
$
(739
)
$
(739
)
$ -
$ (307 )
$ (307 )
Net actuarial loss
(12,741
)
(21,780
)
(34,521
)
(12,920 )
(17,971 )
(30,891 )
Total
$
(12,741
)
$
(22,519
)
$
(35,260
)
$ (12,920 )
$ (18,278 )
$ (31,198 )
The following table summarizes the amounts included in Accumulated Other Comprehensive Loss at December 31, 2020, expected to be recognized as components of net periodic benefit cost in the next year:
Plan
Supplemental
Plan
Amortization of prior service cost to be recognized in 2021
$ -
$
Amortization of loss to be recognized in 2021
1,079
Assumptions for the expected return on plan assets and discount rates in the Company’s Plan and Supplemental Plan are periodically reviewed. As part of the review, management in consultation with independent consulting actuaries performs an analysis of expected returns based on the plan’s asset allocation. This forecast reflects the Company’s and actuarial firm’s expected return on plan assets for each significant asset class or economic indicator. The range of returns developed relies on forecasts and on broad market historical benchmarks for expected return, correlation and volatility for each asset class. Also, as a part of the review, the Company’s management in consultation with independent consulting actuaries performs an analysis of discount rates based on expected returns of high-grade fixed income debt securities.
Prior to December 31, 2019, the Company utilized a full yield curve approach in the estimation of the service and interest components of the net periodic pension cost by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows.
Beginning December 31, 2019, the discount rate was determined by preparing an analysis of the respective plan’s expected future cash flows and high-quality fixed-income investments currently available and expected to be available during the period to maturity of the benefits. Mortality assumptions are based on the “RP 2015 Mortality Table projected with Scale MP 2016” in 2019 and the “Amount-weighted Pri-2012 White Collar Mortality Table, adjusted for mortality improvements with the Scale MP-2020 mortality improvement scale on a generational basis in 2020.”
This methodology more accurately matches yields to the expected benefit payments than the previous method. The discount rate used is an estimate of the rate at which the plans could settle their obligations. Rather than using a rate and curve developed using a bond portfolio, this method selects individual bonds to match to the expected cash flows of the Plans. This provides a more accurate depiction of the true cost to the plans to settle the obligations as the Plans could theoretically go into the marketplace and purchase the specific bonds used in the analysis in order to settle the obligations of the Plans.
The financial impact of the enhanced estimate to the discount rate amounted to approximately $6,800,000 decrease in the projected benefit obligations for the combined plans at December 31, 2019.
The Company offers a 401(k) defined contribution plan for all employees reaching minimum age and service requirements. The plan is voluntary and employee contributions are matched by the Company at a rate of 33.3% for the first 6% of compensation contributed by each employee. The Company’s match totaled $533,000 for 2020, $458,000 for 2019 and $454,000 for 2018. Administrative costs associated with the plan are absorbed by the Company.
Notes to Consolidated Financial Statements
During 2020, the Company entered into split dollar life insurance agreements with two of its key executives. These agreements require that insurance policies be maintained that would provide an aggregate of $15,000,000 of insurance to the executives. This benefit vests over ten years. The expense related to these agreements totaled $155,000 for 2020.
The Company has a cash incentive plan that is designed to reward our executives and officers for the achievement of annual financial performance goals of the Company as well as business line, department and individual performance. The plan supports the philosophy that management be measured for their performance as a team in the attainment of these goals. Discretionary bonus expense amounted to $2,529,000, $2,364,000, and $2,355,000 in 2020, 2019, and 2018, respectively.
The Company does not offer any postretirement programs other than pensions.
18.
Commitments and Contingencies
A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2020. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse effect on the Company’s consolidated financial position or results of operations.
19.
Financial Instruments with Off-Balance-Sheet
Risk
The Company is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notational amounts of those instruments
reflect the extent of involvement the Company has in these particular classes of financial instruments.
The Company’s exposure to credit loss in the event of non-performance
by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance
sheet instruments. Financial instruments with off-balance
sheet risk at December 31 are as follows:
Contract or Notional Amount
(dollars in thousands)
Financial instruments whose contract amount represents credit risk
Commitments to originate 1-4 family mortgages
$
28,163
$ 13,806
Standby and commercial letters of credit
5,344
5,779
Unused lines of credit
787,206
625,524
Unadvanced portions of construction loans
54,553
11,062
Unadvanced portions of other loans
13,767
15,801
Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.
Notes to Consolidated Financial Statements
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
20.
Other Operating Expenses
Year ended December 31,
(dollars in thousands)
Marketing
$
1,295
$ 2,132
$ 2,346
Software maintenance/amortization
2,580
2,409
2,002
Legal and audit
1,668
1,514
1,444
Contributions
1,077
Processing services
1,712
1,875
1,740
Consulting
1,151
1,552
1,464
Postage and delivery
1,002
1,021
Supplies
1,096
Telephone
1,012
Directors’ fees
Insurance
Pension
1,859
2,008
Other
2,373
1,744
1,685
Total
$
17,476
$ 17,902
$ 16,288
21.
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 is determined based on the estimated values of the underlying collateral of individual analysis of receipts.
TIME DEPOSITS
The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.
Notes to Consolidated Financial Statements
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 December 31, 2020 and December 31, 2019. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include deposits other than time deposits, securities sold under agreements to repurchase, and accrued interest payable.
Fair Value Measurements
Carrying
Amount
Estimated
Fair Value
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
(dollars in thousands)
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
-
December 31, 2019
Financial assets:
Securities held-to-maturity
$ 2,351,120
$ 2,361,304
$ -
$ 2,361,304
$ -
Loans(1)
2,396,534
2,424,770
-
-
2,424,770
Financial liabilities:
Time deposits
555,447
560,746
-
560,746
-
Other borrowed funds
370,955
374,531
-
374,531
-
Subordinated debentures
36,083
36,083
-
36,083
-
(1)
Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant
Notes to Consolidated Financial Statements
effect on the fair value estimates and have not been considered.
22.
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. Change in Accounting Policy
The Company adopted Topic 606 Revenue from Contracts with Customers with a date of initial
application of January 1, 2018 and has applied the guidance to all contracts within the scope of Topic 606 as of that date. As a result, the Company has changed its accounting policy for revenue recognition as detailed in this footnote.
The Company applied Topic 606 using the cumulative effect method. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605. There was no cumulative effect adjustment as of January 1, 2018, and there were no material changes to the financial statements at or for the year ended December 31, 2018 as a result of adopting Topic 606.
B. Practical Expedients
The Company applies the practical expedient in paragraph 606-10-50-14
and does not disclose information about remaining performance obligations that have original expected durations of one year or less.
The Company applies the practical expedient in paragraph 606-10-32-18
and does not adjust the consideration from customers for the effects of a significant financing component if at contract inception the period between when the entity transfers the goods or services and when the customer pays for that good or service will be one year or less.
C. 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.
1. Revenue earned at a point in time-Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, NSF fees, credit and debit card interchange fees and foreign exchange transaction fees. Revenue is generally derived from transactional information accumulated by our systems and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is the principal in each of these contracts, with the exception of credit and debit card
Notes to Consolidated Financial Statements
interchange fees, in which case we are acting as the agent and record revenue net of expenses paid to the principal.
2. 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.
D. 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.
Year ended
December 31,
Revenue from
Contracts in
Scope of
Topic 606
Year ended
December 31,
Revenue from
Contracts in
Scope of
Topic 606
Year ended
December 31,
Revenue from
Contracts in
Scope of
Topic 606
(dollars in thousands)
Total net interest income
$
106,829
$
-
$ 95,789
$ -
$ 92,576
$ -
Noninterest income:
Service charges on deposit accounts
8,818
8,818
9,220
9,220
8,560
8,560
Lockbox fees
3,745
3,745
3,973
3,973
3,274
3,274
Brokerage commissions
-
-
-
Net gains on sales of securities
-
-
-
-
Gains on sales of mortgage loans
-
-
-
-
-
Other income
6,266
2,132
4,456
2,799
3,764
2,536
Total noninterest income
19,100
14,695
18,399
15,992
16,248
14,370
Total revenues
$
125,929
$
14,695
$ 114,188
$ 15,992
$ 108,824
$ 14,370
The following table provides information about receivables with customers.
December 31,
(dollars in thousands)
Receivables, which are included in “Other assets”
$
1,397
$ 1,200
23.
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 expires in 2022 with an option to terminate and no option to extend. Lease income, for the sublease, totaled approximately $40,000 for the year ended December 31, 2020. Variable lease costs
Notes to Consolidated Financial Statements
include costs that are not included in the lease liability.
The components of lease expense were as follows:
Year Ended December 31,
(in thousands)
Operating lease cost
$
2,179
$ 2,216
Variable lease cost
Total lease cost
$
2,758
$ 2,744
Supplemental cash flow information related to leases was as follows:
Year Ended December 31,
(in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
2,085
$ 2,130
Right-of-use
assets obtained in exchange for new lease obligations:
Operating leases
$
3,044
$
Supplemental balance sheet information related to leases was as follows:
Year Ended December 31,
(in thousands, except lease term
and discount rate)
Operating Leases:
Operating lease right-of-use
assets
$
13,713
$ 12,521
Operating lease liabilities
$
13,935
$ 12,690
Weighted Average Remaining Lease Term:
Operating Leases
10 Years
11 Years
Weighted Average Discount Rate:
Operating Leases
3.1
%
3.5 %
The Company is obligated under a number of non-cancelable operating leases for premises and equipment expiring in various years through 2030. Total lease expense approximated $2,758,000, $2,744,000 and $2,601,000 for the years ended December 31, 2020, 2019 and 2018, 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 $439,000, $458,000 and $444,000, respectively. Rental income approximated $658,000, $419,000 and $373,000 in 2020, 2019 and 2018, respectively.
A summary of future payments of lease liabilities were as follows:
Minimum Rental
Payments
Year Ending December 31,
(in thousands)
$
-
$ 2,030
2,156
1,754
1,995
1,603
1,962
1,545
1,692
1,277
1,471
-
Thereafter
7,394
7,312
Total lease payments
$
16,670
$ 15,521
Less imputed interest
(2,735
)
(2,831 )
Present value of lease liability
$
13,935
$ 12,690
Notes to Consolidated Financial Statements
24.
Quarterly Results of Operations (unaudited)
2020 Quarters
Fourth
Third
Second
First
(in thousands, except share data)
Interest income
$
36,617
$
36,504
$
36,120
$
39,795
Interest expense
8,138
9,173
10,302
14,594
Net interest income
28,479
27,331
25,818
25,201
Provision for loan losses
2,150
1,700
1,075
Net interest income after provision for loan losses
26,329
26,431
24,118
24,126
Other operating income
6,580
4,169
4,041
4,310
Operating expenses
20,106
18,167
17,042
18,173
Income before income taxes
12,803
12,433
11,117
10,263
Provision for income taxes
1,203
1,546
1,061
Net income
$
11,600
$
10,887
$
10,056
$
9,666
Share data:
Average shares outstanding, basic
Class A
3,655,469
3,655,469
3,652,469
3,652,349
Class B
1,912,440
1,912,440
1,915,440
1,915,560
Average shares outstanding, diluted
Class A
5,567,909
5,567,909
5,567,909
5,567,909
Class B
1,912,440
1,912,440
1,915,440
1,915,560
Earnings per share, basic
Class A
$
2.52
$
2.36
$
2.18
$
2.10
Class B
$
1.26
$
1.18
$
1.09
$
1.05
Earnings per share, diluted
Class A
$
2.08
$
1.96
$
1.81
$
1.74
Class B
$
1.26
$
1.18
$
1.09
$
1.05
Notes to Consolidated Financial Statements
2019 Quarters
Fourth
Third
Second
First
(in thousands, except share data)
Interest income
$ 40,518
$ 39,852
$ 39,692
$ 39,077
Interest expense
15,187
16,082
16,442
15,639
Net interest income
25,331
23,770
23,250
23,438
Provision for loan losses
Net interest income after provision for loan losses
24,781
23,695
23,000
23,063
Other operating income
4,689
4,286
4,997
4,427
Operating expenses
18,212
17,462
18,264
18,190
Income before income taxes
11,258
10,519
9,733
9,300
Provision for income taxes
(118 )
Net income
$ 10,732
$ 10,084
$ 9,466
$ 9,418
Share data:
Average shares outstanding, basic
Class A
3,650,949
3,650,449
3,620,449
3,610,329
Class B
1,916,960
1,917,460
1,947,460
1,957,580
Average shares outstanding, diluted
Class A
5,567,909
5,567,909
5,567,909
5,567,909
Class B
1,916,960
1,917,460
1,947,460
1,957,580
Earnings per share, basic
Class A
$ 2.33
$ 2.19
$ 2.06
$ 2.05
Class B
$ 1.16
$ 1.09
$ 1.03
$ 1.03
Earnings per share, diluted
Class A
$ 1.93
$ 1.81
$ 1.70
$ 1.69
Class B
$ 1.16
$ 1.09
$ 1.03
$ 1.03
25.
Parent Company Financial Statements
The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of December 31, 2020 and 2019 and the statements of income and cash flows for each of the years in the three-year period ended December 31, 2020, are presented below. The statements of changes in stockholders’ equity are identical to the consolidated statements of changes in stockholders’ equity and are therefore not presented here.
BALANCE SHEETS
December 31,
(dollars in thousands)
ASSETS:
Cash
$
5,141
$ 3,177
Investment in subsidiary, at equity
389,724
353,489
Other assets
15,920
16,325
Total assets
$
410,785
$ 372,991
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities
$
4,293
$ 4,327
Subordinated debentures
36,083
36,083
Stockholders’ equity
370,409
332,581
Total liabilities and stockholders’ equity
$
410,785
$ 372,991
Notes to Consolidated Financial Statements
STATEMENTS OF INCOME
Year Ended December 31,
(dollars in thousands)
Income:
Dividends from subsidiary
$
5,000
$ 5,000
$ 4,750
Other income
Total income
5,025
5,065
4,803
Interest expense
1,577
1,474
Operating expenses
Income before income taxes and equity in undistributed income of subsidiary
3,839
3,273
3,104
Benefit from income taxes
(244
)
(363 )
(347 )
Income before equity in undistributed income of subsidiary
4,083
3,636
3,451
Equity in undistributed income of subsidiary
38,126
36,063
32,762
Net income
$
42,209
$ 39,699
$ 36,213
STATEMENTS OF CASH FLOWS
December 31,
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
42,209
$ 39,699
$ 36,213
Adjustments to reconcile net income to net cash provided by operating activities
Undistributed income of subsidiary
(38,126
)
(36,063 )
(32,762 )
Decrease (increase) in other assets
(158 )
(Decrease) increase in liabilities
(34
)
(180 )
(1,808 )
Net cash provided by (used in) operating activities
4,454
4,121
1,485
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid
(2,490
)
(2,207 )
(2,203 )
Net cash used in financing activities
(2,490
)
(2,207 )
(2,203 )
Net (decrease) in cash
1,964
1,914
(718 )
Cash at beginning of year
3,177
1,263
1,981
Cash at end of year
$
5,141
$ 3,177
$ 1,263
Report of Independent Registered Public Accounting Firm
KPMG LLP
Two Financial Center
60 South Street
Boston, Massachusetts 02111-2759
To the Stockholders and Board of Directors
Century Bancorp, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 10, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we
Report of Independent Registered Public Accounting Firm
are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for loan losses related to loans collectively evaluated for impairment
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company’s allowance for loan losses related to loans collectively evaluated for impairment (ALL) was $34.9 million of a total allowance for loan losses of $35.5 million as of December 31, 2020. The methodology used to determine the ALL estimate consists of both formula allowances and qualitative factors. The formula allowances are based on historical loss data that evaluate homogenous loans by portfolio segment over a loss emergence period. Historical loss data and loss emergence periods are developed based on the Company’s historical experience or when limited internal data is available, based on data published by external rating agencies. Individual loans within the commercial and industrial, municipal, commercial real estate and real estate construction loan portfolio segments are assigned internal or external risk ratings to further segment the portfolios. For these loans, the formula allowances are based on the risk ratings, historical loss data, and the loss emergence period. In addition, adjustments for qualitative factors are made to the formula allowances when market risk factors and unique portfolio risk factors are identified which could impact the degree of loss sustained within the portfolio. These factors include market risk factors and unique portfolio risk factors that are inherent characteristics of the Company’s loan portfolio and are not captured in the formula allowances.
We identified the assessment of the ALL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the ALL because of significant measurement uncertainty. Specifically, the assessment included an evaluation of the overall ALL methodology used to estimate (1) the formula allowances, including the relevance and reliability of certain key inputs and assumptions: portfolio segmentation, internal and external risk ratings assigned to commercial loans, loss emergence periods for each loan segment, and the internal and external historical loss data, and (2) the qualitative factors, including the relevance and reliability of the judgments and supporting documentation for each factor. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address the ALL. We evaluated the design and tested the operating effectiveness of certain internal controls related to the assessment of the ALL, including controls related to the:
•
development of the ALL methodology
•
development of the formula allowances and the key inputs and assumptions
•
development of the qualitative factors
•
analysis of the ALL results, trends and ratios.
We evaluated the Company’s process to develop the ALL estimate. Specifically, we tested the sources of the key inputs and assumptions that the Company used by considering whether they are relevant and reliable. We tested the qualitative factors and related adjustments by evaluating trends in the total ALL, including the qualitative factor adjustments, for consistency with trends in loan portfolio growth and credit performance.
In addition, we involved credit risk professionals with specialized skills and knowledge who assisted in evaluating:
•
the Company’s ALL methodology for compliance with U.S. generally accepted accounting principles
•
the appropriateness of the method used to develop the formula allowances, including relevance and reliability of inputs used to develop the loss emergence period assumptions
Report of Independent Registered Public Accounting Firm
•
whether the loan portfolio is appropriately segmented by similar risk characteristics by comparing it to the Company’s business environment and relevant industry practices
•
the relevance of internal and external historical loss data and whether it was representative of the credit characteristics of the current portfolio
•
internal risk ratings for a sample of individual commercial loans, by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral
•
the determination of the qualitative factors, including the data and assumptions used and challenged whether alternative data or assumptions should have been utilized, and the effect of those factors on the ALL compared with relevant credit risk factors and consistency with credit trends.
We also assessed the sufficiency of the audit evidence obtained related to the ALL by evaluating the:
•
cumulative results of the audit procedures
•
qualitative aspects of the Company’s accounting practices
•
potential bias in the accounting estimate.
We have served as the Company’s auditor since 1982.
Boston, Massachusetts
March 10, 2021
Report of Independent Registered Public Accounting Firm
KPMG LLP
Two Financial Center
60 South Street
Boston, Massachusetts 02111-2759
To the Stockholders and Board of Directors
Century Bancorp, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Century Bancorp, Inc. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated March 10, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting
. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
Report of Independent Registered Public Accounting Firm
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Boston, Massachusetts
March 10, 2021
Management’s Report on Internal Control Over Financial Reporting
CENTURY BANCORP, INC.
400 Mystic Avenue
Medford, Massachusetts 02155
We, together with the other members of executive management of Century Bancorp, Inc. and our subsidiary (the “Company”), are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on our assessment, we believe that, as of December 31, 2020, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Their report appears on page 100.
Barry R. Sloane
William P. Hornby, CPA
Chairman, President & CEO
Chief Financial Officer & Treasurer
March 10, 2021
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The directors of the Company and their ages are as follows:
Name
Age
Position
George R. Baldwin
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Dr. O’Neil A. Britton
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Stephen R. Delinsky
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Louis J. Grossman
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Russell B. Higley, Esquire
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Jackie Jenkins-Scott
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Linda Sloane Kay
Vice Chair of the Board, Century Bancorp, Inc., and Century Bank and Trust Company
Fraser Lemley
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Joseph P. Mercurio
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Dr. Anthony P. Monaco
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Joseph J. Senna, Esquire (Resigned January 2021)
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Jo Ann Simons
Director, Century Bancorp, Inc., and Century Bank and Trust Company
Barry R. Sloane
Chairman of the Board, President and Chief Executive Officer, Century Bancorp, Inc. and Century Bank and Trust Company
Mr.
Baldwin
became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1995. Mr. Baldwin is President and CEO of G. Baldwin & Co., a financial service firm. He was formerly CEO, Owner and Director of Kaler Carney Liffler, a multi-state regional insurance agency; and subsequently he became Chairman of the New England area of Arthur J. Gallagher & Co., America’s third largest insurance broker. Mr. Baldwin’s extensive three-decade background in banking and insurance is relevant to Century’s insurance and financial customers and qualifies him to continue to serve as a director of the Company.
Dr.
Britton
became a director of the Company and of Century Bank and Trust Company in 2020. Dr. Britton has served as Chief Medical Officer and Senior Vice President at Massachusetts General Hospital since 2016. Dr. Britton’s experience in the healthcare field, which is relevant to certain customer relationships of the Company, has qualified him to serve as director of the Company.
Mr.
Delinsky
became a director of the Company and of Century Bank and Trust Company in 2013. He was an attorney with the law firm of Clark, Hunt, Ahearn & Embry until the end of June 2019. Prior to that, Mr. Delinsky was an attorney at the law firm of Eckert Seamans Cherin & Mellott, LLC. Currently, he’s an attorney in private practice. Mr. Delinsky’s experience as an attorney, and expertise in civil and criminal trial experience in state and federal courts, has qualified him to serve as director of the Company.
Mr.
Grossman
became a director of the Company and of Century Bank and Trust Company in January 2016. Mr. Grossman has been President and Treasurer of The Grossman Companies, Inc. since 1980, when he and his father, Morton, purchased the family real estate business. In January 2015 he became Chairman. Mr. Grossman’s experience and expertise in real estate, which is relevant to customer relationships of the Company, qualifies him to serve as director of the Company.
Mr.
Higley
became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1986. Mr. Higley is an attorney in private practice. Mr. Higley’s experience as an attorney and expertise in the real estate industry, which is relevant to real estate customers of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
Ms.
Jenkins-Scott
became a director of the Company and of Century Bank and Trust Company in 2006. Ms. Jenkins-Scott is past President of Boston’s Wheelock College. Ms. Jenkins-Scott’s experience as President of a college and expertise in the educational field as well as President and CEO of a non-profit
entity, which is relevant to certain customer relationships of the Company, has qualified her to serve as director of the Company. Also, her tenure and experience as a director of the Company has qualified her to continue to serve.
Ms.
Sloane Kay
became a director of the Company in 2005. Ms. Kay joined Century Bank and Trust Company in 1983 as Assistant Vice President and currently serves as Vice Chair of the Board. Ms. Kay’s experience in senior management, business development, customer relationships and tenure at Century Bank and Trust Company has qualified her to serve as Vice Chair of the Board of the Company.
Mr.
Lemley
became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1988. Mr. Lemley is Chairman of the Board and CEO of Sentry Auto Group. Mr. Lemley’s experience as CEO of a company and expertise in the automotive industry, which is relevant to certain other customers in the automotive industry of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
Mr.
Mercurio
became a director of the Company in 1990 and a director of Century Bank and Trust Company in 1995 and voluntarily resigned in 2004. He was then re-elected
in 2010. In December 2010, Mr. Mercurio retired as Executive Vice President of Boston University having completed 38 years of service. He subsequently served as Senior Vice President for Administration and Finance and Senior Advisor to the President at Quincy College; and now serves as an independent consultant in the field of higher administration and education. Mr. Mercurio’s experience in the educational field, which is relevant to certain customer relationships of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
Dr.
Monaco
became a director of the Company and of Century Bank and Trust Company in 2020. Dr. Monaco has served as President of Tufts University since 2011. President Monaco’s experience in the educational and non-profit
fields, which is relevant to certain customer relationships of the Company, has qualified him to serve as director of the Company.
Mr.
Senna
became a director of the Company in 1986. He has been a director of Century Bank and Trust Company since 1979. Mr. Senna is an attorney and managing partner of C&S Capital Properties, LLC, a real estate management and development firm. Mr. Senna’s experience as an attorney and expertise in the real estate
industry, which is relevant to real estate related customers in addition to his years of service as Chairman of the Audit Committee, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve. Mr. Senna resigned from the Board of Century Bancorp, Inc. and Century Bank and Trust Company January 2021.
Ms.
Simons
became a director of the Company and a director of Century Bank and Trust Company in January 2016. Ms. Simons has served as CEO of Northeast Arc since 2016, and was President and CEO of Cardinal Cushing Centers, Inc. from 2008 through January 2016. Previously she served as the Executive Director of Communities. She has numerous nonprofit Board experience with regional and national organizations. These nonprofit organizations specialize in the support of individuals with disabilities. Ms. Simons’ experience and expertise with nonprofit organizations, which is relevant to customer relationships of the Company, qualifies her to serve as director of the Company.
Mr.
Barry
R. Sloane
has been a director of the Company and Century Bank and Trust Company since 1997. Mr. Sloane is Chairman, President and CEO of Century Bancorp and Chairman, President and CEO of Century Bank and Trust Company. Mr. Sloane is also Treasurer and a Trustee of the Savings Bank Employee Retirement System (SBERA). Mr. Sloane’s experience at the Company as well as his experience at other financial services companies and expertise in the financial services industry has qualified him to serve as Chairman of the Board.
All of the Company’s directors are elected annually and hold office until their successors are duly elected and qualified. A majority of the members of the Company’s Board of Directors have been determined by the Company’s Board of Directors to be independent within the meaning of current NASDAQ listing standards. There are no family relationships between any of the directors or executive officers, except that Barry R. Sloane and Linda Sloane Kay are siblings.
Executive officers are elected annually by the Board prior to the Annual Meeting of Shareholders to serve for a one year term and until their successors are elected and qualified. The following table sets forth the name and age of each executive officer of the Company and the principal positions and offices he/she holds with the Company.
Barry R. Sloane
Chairman, President and CEO; Chairman, President and CEO, Century Bank and Trust Company. Mr. Sloane is 65 years old.
Linda Sloane Kay
Vice Chair; Vice Chair, Century Bank and Trust Company. Ms. Sloane Kay is 59 years old. She joined the Company in 1983.
William P. Hornby
Chief Financial Officer and Treasurer; Chief Financial Officer and Treasurer, Century Bank and Trust Company. Mr. Hornby is 54 years old. He joined the Company in 2007.
Paul A. Evangelista
Executive Vice President, Century Bank and Trust Company with responsibility for retail, operations and marketing. Mr. Evangelista is 57 years old. He joined the Company in 1999.
David B. Woonton
Executive Vice President, Century Bank and Trust Company with responsibility for lending. Mr. Woonton is 65 years old. He joined the Company in 1999.
The Audit Committee
The Audit Committee meets with KPMG LLP, the Company’s independent registered public accounting firm, in connection with the annual audit and quarterly reviews of the Company’s financial statements. The Audit Committee was composed of four directors during 2020, Joseph J. Senna, Chair (resigned January 2021), Stephen R. Delinsky, Chair, Jo Ann Simons, and Joseph P. Mercurio, each of whom the Board of Directors has determined is independent under current NASDAQ listing standards. Also, Dr. O’Neil Britton was elected to the audit committee in February 2021 and the Board of Directors has determined that he is independent under current NASDAQ listing standards. The Board of Directors has determined that Mr. Senna and Ms. Jo Ann
Simons qualify as “audit committee financial experts”, as that term is defined in Item 407(d)(5) of Regulation S-K
promulgated by the SEC. The Audit Committee reviews the findings and recommendations of the FRB, FDIC, and the Massachusetts Division of Banks in connection with their examinations and the internal audit reports and procedures for the Company and its subsidiaries. The Audit Committee met five times during 2020.
Audit Committee Report
The Audit Committee of the Company’s Board of Directors is responsible for providing independent, objective oversight of the Company’s accounting functions and internal controls. The Audit Committee reviews: the financial information provided to shareholders and others; the systems of internal controls regarding finance, accounting, legal/regulatory compliance, and ethics; and the audit and financial reporting processes. The Audit Committee operates under a written charter first adopted and approved by the Board of Directors in 2000. The Audit Committee has reviewed and reassessed its Charter. A copy of the Audit Committee Charter was last published in the Form 10-K
for the period ending December 31, 2019.
Management is responsible for the Company’s internal controls and financial reporting process. The independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue their reports thereon. The Audit Committee’s responsibility is to monitor and oversee these processes.
The Audit Committee has reviewed and discussed the audited financial statements with management and the independent registered public accounting firm. The Audit Committee has also discussed with KPMG LLP, the independent registered public accounting firm for the Company, the matters required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board (PCAOB) and the SEC.
The Audit Committee has also received the written disclosures and the letter from KPMG LLP as required by the PCAOB. The Audit Committee has discussed with KPMG LLP the firm’s independence, including a review of audit and non-audit
fees and services, and concluded that KPMG LLP is independent.
Based on the review and discussions referred to in the paragraph above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Company’s Annual Report on Form 10-K
for the last fiscal year for filing with the Securities and Exchange Commission.
/s/ Stephen R. Delinsky, Chair
/s/ Jo Ann Simons
/s/ Joseph P. Mercurio
/s/ Dr. O’Neil A. Britton
Nominating Committee
The Company’s Nominating Committee has three director members, Stephen R. Delinsky, Fraser Lemley and Louis J. Grossman, each of whom the Board of Directors has determined to be independent under the NASDAQ current listing standards. The Nominating Committee operates pursuant to a written policy. The nominating committee implements the process by identifying a potential candidate and evaluating whether the candidate is eligible and qualified for service. The Committee has developed criteria for the selection of new directors to the Board, including but not limited to, diversity, age, skills, experience, time availability (including the number of other boards a director candidate sits on), NASDAQ listing standards, applicable federal and state laws and regulations, Board and Company needs and such other criteria as the Committee shall determine to be relevant. The committee’s effectiveness is assessed by reviewing existing Board of Directors attendance and performance; experience, skills and contributions that the existing Director brings to the Board; and independence, prior to nominating an existing director for reelection.
Board Leadership Structure
Barry R. Sloane is the Chairman of the Board, President and CEO. Linda Sloane Kay is Vice Chair of the Board.
Oversight of Risk
The Board oversees risk through various Board Committees which report directly to the Board. Also, various committees comprised of Company management report to the Board.
The principal Board Committees responsible for overseeing the various elements of risk are the Audit Committee, the Asset Liability Committee and the Executive Committee. The Audit Committee is responsible for monitoring all elements of risk, primarily through its oversight of the internal audit program. The Asset Liability Committee monitors interest rate risk principally through management’s models and simulations. The Executive Committee monitors credit risk through its review of large originators, classified assets, and the calculation of the allowance for loan losses and concentrations of credits.
The principal committees comprised of management are Management Committee, Corporate Risk Management Committee, Loan Approval Committee and Asset Liability Pricing Committee. Management Committee is comprised of senior management and is responsible for overseeing all elements of risk. The Corporate Risk Management Committee meets quarterly to address specific elements of risk. Loan Approval Committee is responsible for overseeing credit risk. The Asset Liability Committee oversees interest rate risk. The committees comprised of management report to the Board of Directors, as needed, through senior management’s attendance and reporting at Board of Directors meetings.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions. A copy of the Company’s Code of Ethics may be obtained upon written request to Investor Relations, Century Bancorp, Inc., 400 Mystic Avenue, Medford, Massachusetts 02155.
Delinquent Section 16(a) Reports
Based solely on a review of Forms 4 filed with the SEC during the fiscal year ended December 31, 2020, the Company believes a beneficial owner of more than 10% of the Company’s Class A Common Stock, James J. Filler filed 35 (thirty-five) late reports covering 90 (ninety) transactions that were not reported on a timely basis.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11.
EXECUTIVE COMPENSATION
The following is a discussion and analysis of our executive compensation policies and practices with respect to compensation reported for fiscal year 2020.
Introduction
The following discussion and analysis includes separate sections on:
•
The Composition and Responsibilities of the Compensation Committee
•
The Company’s Executive Compensation Conclusion
•
Compensation Discussion and Analysis (CD&A)
•
Philosophy and Objectives of the Company
•
Compensation Process
•
Compensation Consultant
•
Compensation Components
•
Post-Employment Compensation
•
Chief Executive Officer Compensation
•
Executive Officer Compensation
•
Employment Agreements
•
Report of the Compensation Committee
Composition and Responsibilities of the Compensation Committee
The Compensation Committee is a committee of the Board of Directors composed of Fraser Lemley as Chairman, Joseph Mercurio and Jo Ann Simons, each of whom the Board has determined is independent as defined by the NASDAQ listing rules.
The Compensation Committee oversees compensation programs applicable to employees at all levels of the Company and makes decisions regarding executive compensation that is intended to align total compensation with business objectives and enable the Company to attract, retain and reward individuals who are contributing to the Company’s success.
The Compensation Committee reviews the Company’s cash incentive, retirement, and benefit plans and makes its recommendations to the Board with respect to these areas.
All decisions with respect to executive and director compensation are approved by the Compensation Committee and recommended to the full Board for ratification.
The Company’s Executive Compensation Conclusion
Based upon review, the Compensation Committee and the Board of Directors found the Company’s Chief Executive Officer’s, the Chief Financial Officer’s and the other Named Executive Officers’ total compensation to be reasonable. In addition to the other factors noted, the Committee and the Board considered that the Company maintains only one change of control provision and did not award stock incentive awards for fiscal year 2020. It should be noted that when the Committee and the Board considers any component of executive compensation, the mix and aggregate amounts of all components are taken into consideration.
Compensation Discussion and Analysis (CD&A)
Philosophy and Objectives of Company
The Company’s executive compensation philosophy is based on the following principles:
•
Compensation programs should be designed to attract and retain executives, to motivate them to achieve and to reward them appropriately for their performance.
•
Compensation should be competitive and equitable in light of the executive’s responsibilities, experience, and performance.
•
Provide annual compensation that takes into account the Company’s performance with respect to its financial and strategic objectives, the performance of functions and business areas under the executive’s management and the results of established goals;
•
Align the financial interests of the executive with those of shareholders by providing both short-term and long-term incentives;
•
Offer a total compensation program for each executive based on (i) the level of responsibility of the executive’s position, (ii) the experience and skills necessary relative to the other senior management positions, (iii) comparison of compensation to similarly positioned executives of peer financial institutions; and
•
Evaluate the overall compensation of our executives in light of general economic and specific company, industry and competitive considerations.
Compensation Process
The Company maintains governance practices to ensure that it can reach its compensation-related decisions in an informed and appropriate manner.
Base salaries, which are the Company’s major element of compensation, are reviewed for executive officers and employees at the regularly scheduled fall meeting of the Compensation Committee. At this meeting the Committee also reviews and adopts, as appropriate, proposals for the discretionary officer cash incentive plan for the new fiscal year, as well as, additions, amendments, modifications or terminations of retirement and benefit programs.
The Compensation Committee’s process incorporates the following:
•
The Committee operates under a written charter which is periodically reviewed.
•
The Committee meets with representatives of management to review and discuss prepared materials and issues.
•
The Committee considers recommendations from the Chief Executive Officer with respect to the compensation of the Company’s Named Executive Officers.
•
Our independent compensation consultant attends Committee meetings as requested.
•
The Committee meets and deliberates privately without management present. Our consultant participates in these sessions as requested.
•
The Committee may consult with the non-management
and independent directors regarding decisions affecting Executive compensation.
•
The Committee reports the Committee’s major actions to the entire Board at the Board of Director’s meeting in December or the following January.
•
The Committee recommends for approval to the Board of Directors the fees for our Board and Board Committees.
•
The Board of Directors then considers the report of the Compensation Committee and accepts or amends and approves or ratifies all matters presented for consideration.
To the extent permitted by applicable law, the Committee or the Board may delegate to management certain of its duties and responsibilities, including with respect to the adoption, amendment, modification or termination of benefit plans and with respect to the awards of stock options under certain stock plans.
Compensation Consultant
When making determinations regarding the compensation paid to our executives the Compensation Committee and the Board of Directors rely, in part, on the expertise of our independent compensation consultant,
Thomas Warren & Associates, to conduct an assessment of our executive compensation. In addition to conferring with certain executives, the consultant works with internal company support staff to obtain compensation and market data. Thomas Warren & Associates identifies a group of peer companies in consideration of such factors as asset size, geography, type of financial services offered and the complexity and scope of operations and makes use of executive compensation comparisons, published surveys and peer analyses.
The Compensation Committee and the Board of Directors took Thomas Warren & Associates’ recommendations into consideration when setting base salaries, bonuses and other benefits for fiscal 2020.
Compensation Components
With respect to Executive compensation, the Company reviews the mix of base salary, cash incentive plans and benefits for our individual executives, however, there is no specific formula for allocating between cash and non-cash
compensation. The competitiveness of total compensation potential for our executives is reviewed against industry practices and the Company’s peers as identified by our independent compensation consultant. The major elements of the Company’s executive compensation package (i.e., base salary, cash and incentive plans) are similar to those found in many companies.
Base Salary Compensation:
When evaluating executive base salary compensation, the Company takes into consideration such factors as:
•
The attainment of business and strategic goals and the financial performance of the Company;
•
The importance, complexity, and level of responsibility of the executive’s position within the organizational structure;
•
The performance of the executive’s business area’s goals and the accomplishment of objectives for the previous year;
•
The difficulty of achieving desired results;
•
The value of the executive’s unique skills, abilities and general management capabilities to support the long-term performance of the Company;
•
The executive’s contribution as a member of the Executive Management Team.
While the Company reviews numerous quantitative and qualitative factors noted above when determining executive base salary compensation, the performance of the Company’s stock is not generally considered a factor in this determination as the price of the Company’s common stock is subject to various factors beyond the Company’s control. The Company believes that the price of the stock in the long-term will reflect the Company’s operating performance and how well our executives manage the Company.
Ultimately, the Compensation Committee and the Board of Directors have the authority to use discretion when making executive compensation determinations after review of all the information that they deem relevant.
Cash Incentive Plan:
The Company has a discretionary cash incentive plan that is designed to reward our executives and officers for the achievement of annual financial performance goals of the Company as well as business line, department and individual performance. The plan supports the philosophy that management be measured for their performance as a team in the attainment of these goals.
Awards are based upon the attainment of established objectives including profitability, expense control, sales volumes and overall job performance. Awards are generally not granted unless the Company achieves certain financial targets.
Upon recommendation of the Compensation Committee, the Board of Directors determines the aggregate amount, if any, to be awarded. In recognition of the Company’s solid performance, discretionary awards were granted for fiscal 2020. Awards for the Chief Executive Officer and the other Named Executive Officers were reviewed and approved by the Board of Directors and are noted on the Summary Compensation Table.
Post-Employment Compensation
Defined Benefit Pension Plan:
The Company had a qualified Defined Benefit Pension Plan which had been offered to all employees reaching a minimum age and service requirement. In 2006 the Bank became a member of the Savings Bank Employee Retirement Association (“SBERA”) within which it maintains the qualified Defined Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for pension plans participating in SBERA. The Trustee of SBERA, through SBERA’s Investment Committee, selects investment managers for the common and collective trust portfolio. A professional advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify equity investments across a spectrum of investment types. (e.g. small cap, large cap, international, etc.) and styles (e.g. growth, value, etc.). The Company has closed the plan to employees hired after March 31, 2006.
Benefits under the plan are based upon an employee’s years of service and career average compensation. The 2020 increase in the actuarial present value of each Named Executive Officer’s accumulated benefit under the plan is set forth in the Summary Compensation Table which appears on page 114 and the actuarial present value of each Named Executive Officer is set forth in the Pension Benefits Table which appears on page 115.
401(k) Plan:
Our executives are eligible to participate in the Company’s 401(k) contributory defined contribution plan. The Company contributes a matching contribution equal to 33.33% on the first 6% of the participant’s compensation that has been contributed to the plan. Our Named Executive Officers participated in the 401(k) plan during fiscal 2020 and received matching contributions up to a maximum of $5,700. The plan is currently administered by SBERA and BPAS.
Supplemental Executive Insurance/Retirement Income Plan:
The Company has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan) which is limited to select officers and employees of the Company.
Executive officers of the Company or 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. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Individual life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.
Benefits under the Supplemental Plan are based upon an employee’s years of service and average compensation over the highest thirty-six
(36) consecutive months. The 2020 increase in the actuarial present value of each Named Executive Officer’s accumulated benefit under the Supplemental Plan is set forth in the Summary Compensation Table which appears below and the actuarial present value of each Named Executive Officer is set forth in the Supplemental Executive Insurance/Retirement Benefits Table which appears on page .
Split Dollar Life Insurance Agreements:
On August 17, 2020, Century Bancorp, Inc. wholly owned subsidiary Century Bank and Trust Company, entered into material definitive agreements with Barry R. Sloane and Linda Sloane Kay (The “Insureds”). The
agreements provide life insurance protection for the Insured’s family in the event of the Insured’s death. The death benefit will be equal to $10,000,000 for Barry R. Sloane and $5,000,000 for Linda Sloane Kay. In February 2021, these agreements were amended to increase the death benefit to $20,000,000 for Mr. Sloane and to $10,000,000 for Ms. Kay. The right to receive a benefit upon death is subject to vesting over a period of ten years, provided that the entitlement will become fully vested in the event of the executive’s death while in service with the Company or in the event of a change in control of the Company.
Chief Executive Officer Compensation and CEO Pay Ratio
The Company granted Chief Executive Officer, Barry R. Sloane, a 14% salary increase in 2020. In recognition of the Company’s solid financial performance in 2020, the Company also granted a $ $321,460 cash bonus payable to Mr. Barry R. Sloane.
The 2020 total compensation for the Chief Executive Officer was $2,439,402, as shown in the Summary Compensation Table. The 2020 estimated median compensation for the Company was $54,254. The CEO total compensation was approximately 45 times the total compensation of the median employee calculated in the same manner. In determining the median employee, a listing was prepared of all employees as of December 31, 2020. Compensation was annualized for those employees that were not employed for the full year of 2020.
Executive Officer Compensation
In light of the Company’s performance, Linda Sloane Kay was granted a 23% salary increase. The Company determined that base salary compensation for each of the following Named Executive Officers, Paul Evangelista, David Woonton and William Hornby be increased by 5% in 2020. In light of the Company’s financial performance in 2020, cash bonuses were awarded to all of the above Named Executive Officers as noted in the Summary Compensation Table.
The Company based its determinations on its subjective analysis of each individual’s performance and contribution to the corporation’s goals and objectives and considered the quantitative and qualitative factors referenced above.
Executive Benefits
We limit additional executive benefits that we make available to our executive officers. Where such benefits are provided, they are intended to support other business purposes including facilitating business development efforts.
Employment Agreement
The Company has an employment agreement with Mr. David Woonton. The agreement grants two years of service payable upon a change of control of the Company.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the foregoing Report of the Compensation Committee, including the CD&A, with management. In reliance on the reviews and discussions referred to above, the Compensation Committee recommended to the Board, and the Board has approved, that the CD&A be included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2020 for filing with the SEC.
/s/ Fraser Lemley, Chairman
/s/ Joseph Mercurio
/s/ Jo Ann Simons
Compensation Committee Interlocks and Insider Participation
Mr. Lemley, Mr. Mercurio and Ms. Simons served as members of the Compensation Committee during 2020. No member of our Compensation Committee was an employee or former employee of our company or any of our subsidiaries. During the past year, none of our executive officers served as: (1) a member of the Compensation Committee (or other committee of the Board of Directors performing equivalent functions or, in the absence of any such committee, the entire Board of Directors) of another entity, one of whose executive officers served on our Compensation Committee; (2) a director of another entity, one of whose executive officers served on our Compensation Committee; or (3) a member of the Compensation Committee (or other committee of the Board of Directors performing equivalent functions or, in the absence of any such committee, the entire Board of Directors) of another entity, one of whose executive officers served as a director on our Board of Directors.
Compensation Paid to Executive Officers
The following table sets forth information for the three year period ended December 31, 2020 concerning the compensation for services in all capacities to Century Bancorp, Inc. and its subsidiaries of our principal executive officer and our principal financial officer as well as our other three most highly compensated executive officers (or executive officers of our subsidiaries). We refer to these individuals throughout this 10-K
statement as the “Named Executive Officers”.
Summary Compensation Table
Name and Principal Position
Year
Salary
($)
Bonus
($)
Option
Awards
($)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings-
December 31, ($)
All Other
Compensation
($) (1)
Total
($)
Barry R. Sloane
819,087
321,460
-
1,217,322
81,533
2,439,402
Chairman, President and CEO,
719,086
303,264
-
1,646,224
50,242
2,718,816
Century Bancorp, Inc. and Century
Bank and Trust Company
684,844
280,800
-
21,774
44,605
1,032,023
Linda Sloane Kay
526,512
136,620
-
1,411,013
44,027
2,118,172
Vice Chair, Executive Vice President
426,512
128,887
-
1,252,213
10,709
1,818,321
Century Bancorp, Inc. and Century
Bank and Trust Company
406,202
119,340
-
105,491
28,961
659,994
David B. Woonton
447,838
213,620
-
716,068
27,470
1,404,996
Executive Vice President,
426,512
128,887
-
853,041
15,215
1,423,655
Century Bank and Trust Company
406,202
119,340
-
35,136
8,429
569,107
Paul A. Evangelista
447,838
212,120
-
1,089,826
26,555
1,776,339
Executive Vice President,
426,512
128,887
-
1,338,790
17,397
1,911,586
Century Bank and Trust Company
406,202
119,340
-
3,581
12,317
541,440
William P. Hornby
407,195
114,480
-
941,087
27,576
1,490,338
Chief Financial Officer and
387,804
108,000
-
965,412
20,500
1,481,716
Treasurer, Century Bancorp, Inc. and Century Bank and Trust Company
369,338
100,000
-
-
20,583
489,921
(1) All other compensation for 2020 is composed of the following amounts:
Compensation Item
Barry R.
Sloane
Linda
Sloane
Kay
David B.
Woonton
Paul A.
Evangelista
William P.
Hornby
401(k) Matching Contributions
$ 5,700
$ 5,596
$ 5,606
$ 5,609
$ 5,606
Split Dollar Insurance
8,384
2,292
-
-
-
Tax Equivalency Payments
36,502
33,647
18,648
19,242
20,626
Excess Group Life Insurance Premiums
2,286
2,286
Long-Term Disability Premiums
Memberships
25,000
-
-
-
-
Taxable Expense Reimbursements
2,731
-
-
-
Pension Benefits
The following table sets forth information concerning plans that provide for payments or other benefits at, following, or in connection with, retirement for each Named Executive Officer.
PENSION BENEFITS TABLE
Name
Plan Name
Number of Years
Credited Service
(#)
Present Value
of Accumulated
Benefit
12/31/2020
($)(1)
Payments
During Last
Fiscal Year
12/31/2020
($)
Barry R. Sloane
Defined Benefit
484,401
-
Chairman, President and CEO
Pension Plan
Linda Sloane Kay
Defined Benefit
732,319
-
Vice Chair and Executive Vice President
Pension Plan
David B. Woonton
Defined Benefit
1,222,328
-
Executive Vice President, Century Bank and Trust Company
Pension Plan
Paul A. Evangelista
Defined Benefit
985,830
-
Executive Vice President,
Century Bank and Trust Company
Pension Plan
William P. Hornby(2)
Defined Benefit
-
-
-
Chief Financial Officer and Treasurer
Pension Plan
(1) The present value of accumulated benefits was calculated with the assumption that retirement occurs at age 65. The benefit is calculated using an interest rate of 2.37% and was based on Amount-Weighted Pri-2012 Mortality Tables with Scale MP-2020.
(2) Not a member of the Defined Benefit Pension Plan.
SUPPLEMENTAL EXECUTIVE INSURANCE/RETIREMENT BENEFITS
Name
Plan Name
Number of
Years
Credited
Service
(#)
Present Value of
Accumulated
Benefit-
12/31/2020
($)(1)
Payments
During
Last Fiscal
Year-
12/31/2020
($)
Barry R. Sloane(2)
Supplemental Executive
10,671,289
-
Chairman, President and CEO
Insurance/Retirement Plan
Linda Sloane Kay(2)
Supplemental Executive
4,507,274
-
Vice Chair and Executive Vice President
Insurance/Retirement Plan
David B. Woonton(2)
Supplemental Executive
4,545,429
-
Executive Vice President, Century Bank and Trust Company
Insurance/Retirement Plan
Paul A. Evangelista(2)
Supplemental Executive
4,786,968
-
Executive Vice President, Century Bank and Trust Company
Insurance/Retirement Plan
William P. Hornby(2)
Supplemental Executive
3,402,829
-
Chief Financial Officer and
Treasurer
Insurance/Retirement Plan
(1) The present value of accumulated benefits was calculated with the assumption that retirement occurs at age 65. The benefit is calculated using an interest rate of 3.21% and the Amount-Weighted Pri-2012
White Collar Mortality Table, adjusted for mortality improvements with the Scale MP-2020
mortality improvements scale on a generational basis.
(2) As of December 31, 2020, Messrs. Barry R. Sloane, Paul A. Evangelista, David B. Woonton, Linda Sloane Kay and William P. Hornby were 100%, 100%, 100%, 77.5% and 77.5% vested, respectively, under the Supplemental Executive Insurance/Retirement Plan.
Director Compensation
Directors not employed by the Company receive a $20,000 retainer per year, $500 per Company Board meeting attended, $1,000 per Bank Board meeting attended and $1,000 per committee meeting attended. Joseph Senna received $3,000 per Audit Committee meeting as Chairman of the Audit Committee.
DIRECTOR COMPENSATION TABLE 2020
Name
Fees Earned or
Paid in Cash
($)
All Other
Compensation ($)
Total ($)
George R. Baldwin
48,500
-
48,500
O’Neil A. Britton, MD
14,833
-
14,833
Stephen R. Delinsky
44,500
-
44,500
Louis Grossman
52,500
-
52,500
Russell B. Higley
43,000
-
43,000
Jackie Jenkins-Scott
54,000
-
54,000
Linda Sloane Kay
-
-
-
Fraser Lemley
55,000
-
55,000
Joseph P. Mercurio
45,000
-
45,000
Anthony P. Monaco, MD, PhD
17,833
-
17,833
Joseph J. Senna (resigned January 2021)
62,000
-
62,000
Jo Ann Simons
46,000
-
46,000
Barry R. Sloane
-
-
-
George F. Swansburg (1)
16,500
14,500
31,000
(1) The amount listed in all other compensation is for serving as Administrator of Century Bancorp Capital Trust II. Mr. Swansburg resigned from the Board of Century Bancorp, Inc. and Century Bank and trust Company in June 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as to the number and percentage of shares of Class A and Class B Common Stock beneficially owned as of February 26, 2021, (i) by each person known by the Company to own beneficially more than 5% of the Company’s outstanding shares of Class A or Class B Common Stock, (ii) by each of the Company’s directors and executive officers; and (iii) by all directors and executive officers as a group. As of February 26, 2021, there were 3,656,469 shares of Class A Common Stock and 1,911,440 shares of Class B Common Stock outstanding.
Name and Address of Beneficial Owner
Class A
Owned
% A
Owned
Class B
Owned
% B
Owned
James J. Filler
861,714 (4)
23.57 %
2964 Shook Hill Parkway, Birmingham, AL 35223
BlackRock, Inc.
230,061 (5)
6.29 %
55 East 52nd Street, New York, NY 10055
Renaissance Technologies LLC
185,798 (6)
5.08 %
800 Third Avenue, New York, NY 10022
Sloane Family Enterprises, Limited Partnership
8,146
0.22 %
1,721,841
90.08 %
400 Mystic Avenue, Medford, MA 02155
George R. Baldwin(a)
5,819
0.16 %
O’Neil A. Britton (a)
0.00 %
Stephen R. Delinsky(a)
3,061 (3)
0.08 %
Paul A. Evangelista(b)
8,192
0.22 %
Brian J. Feeney(b)-deceased in 2020
1,987
0.05 %
Louis Grossman(a)
0.03 %
Russell B. Higley, Esquire(a)
4,602
0.13 %
William P. Hornby(b)
1,000
0.03 %
Jackie Jenkins-Scott(a)
0.00 %
Linda Sloane Kay(a)(b)
25,261 (1)
0.69 %
60,000
3.14 %
Fraser Lemley(a)
23,764
0.65 %
Joseph P. Mercurio(a)
0.00 %
Anthony Monaco
0.00 %
Joseph J. Senna(a)
25,001
0.68 %
Jo Ann Simons
0.01 %
Barry R. Sloane(a)(b)
8,944 (2)
0.24 %
George F. Swansburg(a)
32,251
0.88 %
David B. Woonton(b)
0.02 %
All directors and officers as a group (18 in number)
150,359
4.06 %
1,781,841
93.17 %
(a) Denotes director of the Company.
(b) Denotes officer of the Company or one of its subsidiaries.
(1) Includes 10,350 shares owned by Ms. Kay’s spouse, 10,927 shares held in trust for Ms. Kay’s children and 3,105 shares owned by the Marshall M. and Barbara J. Sloane Private Foundation.
(2) Includes 918 shares held in trust for Mr. Barry Sloane’s children and 72 shares owned by Mr. Barry Sloane’s spouse. Includes 3,111 shares pledged and 3,105 shares owned by the Marshall M. and Barbara J. Sloane Private Foundation.
(3) Includes 262 shares owned by Mr. Delinsky’s children.
(4) The Company has relied upon the information set forth in the Form 4 filed with the SEC by James J. Filler on January 4, 2021.
(5) The Company has relied upon the information set forth in the Schedule 13G filed with the SEC by BlackRock, Inc. on January 29, 2021.
(6) The Company has relied upon the information set forth in the Schedule 13G filed with the SEC by Renaissance Technologies LLC on February 10, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Directors and Officers of the Company and Bank and members of their immediate family are at present, as in the past, customers of the Bank and have transactions with the Bank in the ordinary course of business. In addition, certain of the Directors are at present, as in the past, also Directors, Officers or Stockholders of corporations or members of partnerships that are customers of the Bank and have transactions with the Bank in the ordinary course of business. Such transactions with Directors and Officers of the Company and the Bank and their families and with such corporations and partnerships were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other features unfavorable to the Bank. The Directors annually approve amounts to be paid to related parties for services rendered. The Company reviews related party transactions monthly.
NASDAQ Stock Market (“NASDAQ”) rules, and our governance principles, require that at least a majority of our Board be composed of “independent” directors. All of our directors other than Barry R. Sloane and Linda Sloane Kay are “independent” within the meaning of both the NASDAQ rules and our own corporate governance principles. Ten of our twelve directors, therefore, are currently “independent” directors.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee separately pre-approves
each of the following services, in compliance with the requirements of the Sarbanes-Oxley Act and SEC regulations, before they are rendered by the auditor: financial statement audit, attestation, preparation of tax returns and audit of 401(k) and pension plans. The Audit Committee’s pre-approval
procedures, in compliance with the requirements of the Sarbanes-Oxley Act and SEC regulations, allow the Company’s auditors to perform certain services without specific permission from the Audit Committee, as long as these services comply with the following requirements: (a) the services consist of special projects relating to strategic tax savings initiatives, corporate tax structure engagements or merger and acquisition consulting; (b) aggregate special project services cannot exceed $30,000 during the calendar year; and (c) the Audit Committee must be informed about each service at its next scheduled meeting. All other services provided by the Company’s auditor must be separately pre-approved
before they are rendered.
Description of Fees
Fiscal 2020
Amount
Fiscal 2019
Amount
Audit fees(1)
$
630,000
$ 610,000
Audit-related fees
-
-
Tax fees(2)
55,000
53,000
Other fees
-
-
$
685,000
$ 663,000
(1) includes fees for annual audit, review of quarterly financial statements, and internal control attestations.
(2) includes fees for tax compliance and tax consulting.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements.
The following financial statements of the company and its subsidiaries are presented in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2020 and 2019
Consolidated Statements of Income - Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Changes in Stockholders’ Equity-Years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows-Years Ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules are omitted because either the required information is shown in the financial statements or notes incorporated by reference, or they are not applicable, or the data is not significant.
(3) Exhibits
3.1
Articles of Organization of Century Bancorp, Inc. dated January 7, 1972 (filed herewith).
3.2
Articles of Amendment of Century Bancorp, Inc. effective May 14, 1987 (filed herewith).
3.3
Articles of Amendment of Century Bancorp, Inc. effective January 9, 2009, incorporated by reference to the Registrant’s Form 8-K filed on April 29, 2009.
3.4
Bylaws of Century Bancorp, Inc., as amended effective October 9, 2007, incorporated by reference to the Registrant’s Form 10-Q filed on November 8, 2007.
4.1
Form of Common Stock Certificates of the Company (filed herewith).
4.2
Description of Registrant’s Securities, incorporated by reference to the Registrant’s Form 10-K filed on March 13, 2020.
10.1
The Century Bancorp Supplemental Executive Retirement and Insurance Plan, as amended and restated effective as of December 31, 2016, incorporated by reference to the Registrant’s Form 10-K filed on March 18, 2018.
10.2
Century Bancorp Capital Trust II Purchase Agreement, dated November 30, 2004, between Century Bancorp Capital Trust II, Century Bancorp, Inc., Sandler O’Neill Partners, L.P., First Tennessee Bank National Association and Keefe, Bruyette and Woods, Inc., incorporated by reference to the Registrant’s Form 10-K filed on March 15, 2005.
10.3
The Century Bancorp Supplemental Executive Retirement and Insurance Plan, as amended and restated effective as of December 31, 2016, first amendment effective January 21, 2020 (filed herewith).
10.4
The Century Bancorp Supplemental Executive Retirement and Insurance Plan, as amended and restated effective as of December 31, 2016, second amendment effective October 13, 2020. (filed herewith).
10.5
Century Bancorp, Inc. Indenture, dated December 2, 2004, between Century Bancorp, Inc. and Wilmington Trust Company, incorporated by reference to the Registrant’s Form 10-K filed on March 15, 2005.
10.6
Amended and Restated Declaration of Trust of Century Bancorp Capital Trust II, dated December 2, 2004, between the Trustees of Century Bancorp Capital Trust II, George F. Swansburg and Century Bancorp, Inc., incorporated by reference to the Registrant’s Form 10-K filed on March 15, 2005.
10.7
Guarantee Agreement, dated December 2, 2004, between the Century Bancorp, Inc. and Wilmington Trust Company, incorporated by reference to the Registrant’s Form 10-K filed on March 15, 2005.
10.8
Split Dollar Life Insurance Agreement, as amended and restated, between Century Bank and Trust Company and Barry R. Sloane, effective February 17, 2021, incorporated by reference to the Registrant’s Form 8-K filed on February 18, 2021.
10.9
Split Dollar Life Insurance Agreement, as amended and restated, between Century Bank and Trust Company and Linda Sloane Kay, effective February 17, 2021, incorporated by reference to the Registrant’s Form 8-K filed on February 18, 2021.
Code of Ethics (filed herewith).
Subsidiaries of the Registrant (filed herewith).
23.1
Consent of Independent Registered Public Accounting Firm (filed herewith).
31.1
Certification of 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 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.
99.1
Audit Committee Charter, incorporated by reference previously filed with a 10-K filed on March 15, 2019.
99.2
Nominating Committee Charter (filed herewith).
99.3
Compensation Committee Charter (filed herewith).
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.
Cover Page Interactive Data File (formatted as Inline XBRL, and contained in Exhibit 101)
(p)
Paper filing
+ 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.
(b) Exhibits required by Item 601 of Regulation S-K.
See (a)(3) above for exhibits filed herewith.
(c) Financial Statement required by Regulation S-X.
Schedules to Consolidated Financial Statements required by Regulation S-X
are not required under the related instructions or are inapplicable, and therefore have been omitted.