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options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.false2020FY--12-31CENTURY BANCORP INC0000812348MAMAus-gaap:OperatingLeaseLiabilityComprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses. 0000812348 2020-01-01 2020-12-31 0000812348 2019-01-01 2019-12-31 0000812348 2018-01-01 2018-12-31 0000812348 2020-12-31 0000812348 2019-12-31 0000812348 2018-12-31 0000812348 2017-01-01 2017-12-31 0000812348 2020-10-01 2020-12-31 0000812348 2020-07-01 2020-09-30 0000812348 2020-04-01 2020-06-30 0000812348 2020-01-01 2020-03-31 0000812348 2019-10-01 2019-12-31 0000812348 2019-07-01 2019-09-30 0000812348 2019-04-01 2019-06-30 0000812348 2019-01-01 2019-03-31 0000812348 2020-06-30 0000812348 2017-12-31 0000812348 cnbka:SmallBusinessAdministrationMember 2019-12-31 0000812348 us-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMember 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 
10-K
 
 
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
        
    
to
    
    
        
    
Commission file number
0-15752
 
 
CENTURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
 
 
COMMONWEALTH OF MASSACHUSETTS
 
04-2498617
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification number)
   
400 MYSTIC AVENUE, MEDFORD, MA
 
02155
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number including area code:
(781) 391-4000
Securities registered pursuant to Section 12(b) of the Act:
 
Title of class
 
Trading
Symbol(s)
 
Name of exchange
Class A Common Stock, $1.00 par value
 
CNBKA
 
Nasdaq Global Market
 
 
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☑
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations
S-T
(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2
of the Exchange Act. (Check one):
 
Large accelerated filer      Accelerated filer  
       
Non-accelerated filer      Smaller reporting company  
       
         Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☑
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Act).    Yes  ☐    No  ☑
State the aggregate market value of the registrant’s voting and nonvoting stock held by nonaffiliates, computed using the closing price as reported on Nasdaq as of June 30, 2020 was $282,567,303.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of February 28, 2021:
Class A Common Stock, $1.00 par value 3,656,469 Shares
Class B Common Stock, $1.00 par value 1,911,440 Shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the
Form 10-K
(e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
 
(1)
Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2020 are incorporated into Part II, Items
5-8
of this Form
10-K.
 
 
 

CENTURY BANCORP INC.
FORM
10-K
TABLE OF CONTENTS
 
 
  
 
  
Page
 
 
  
  
     
ITEM 1
  
  
 
1-7
 
ITEM 1A
  
  
 
8-12
 
ITEM 1B
  
  
 
12
 
ITEM 2
  
  
 
12
 
ITEM 3
  
  
 
13
 
ITEM 4
  
  
 
13
 
     
 
  
  
     
ITEM 5
  
  
 
14
 
ITEM 6
  
  
 
14
 
ITEM 7
  
  
 
14
 
ITEM 7A
  
  
 
14
 
ITEM 8
  
  
 
14
 
ITEM 9
  
  
 
14
 
ITEM 9A
  
  
 
15
 
ITEM 9B
  
  
 
15
 
     
 
  
  
     
ITEM 10
  
  
 
103
 
ITEM 11
  
  
 
107
 
ITEM 12
  
  
 
118
 
ITEM 13
  
  
 
119
 
ITEM 14
  
  
 
119
 
     
 
  
  
     
ITEM 15
  
  
 
120
 
ITEM 16
  
  
 
122
 
  
 
123
 
 
i

PART I
 
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.
 
1

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
 
2

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.
 
3

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.
 
4

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
 
5

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
 
6

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
 
7

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.
 
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;
 
8

   
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;
 
9

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.
 
10

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
 
11

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.
 
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.
 
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.
 
12

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.
 
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 DISCLOSURES
Not applicable.
 
13

PART II
 
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
     750  
Class B Common Stock
     40  
 
(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.
 
ITEM 6.
SELECTED FINANCIAL DATA
The information required herein is shown on pages 17 through 19.
 
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.
 
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
The information required herein is shown on pages 44 through 96.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
 
14

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.
 
ITEM 9B.
OTHER INFORMATION
None.
 
15


Financial Highlights
 
   
2020
    2019     2018     2017     2016  
(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:
 
17

Financial Highlights
 
    
2020
    2019     2018     2017     2016  
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
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
2020
    2019     2018     2017     2016  
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
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
2020
     2019      2018      2017      2016  
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.
 
18

Financial Highlights
 
Comparison of Five-Year
Cumulative Total Return*
 
 
Value of $100 Invested on December 31, 2015 at:
  
2016
    
2017
    
2018
    
2019
    
2020
 
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.
 
19

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.
 
20

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.
 
21

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:
 
    
2020
     2019      2018  
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
 
22

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
 
23

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
 
24

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,   
2020
    2019     2018  
    
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
  
 
328
 
  
 
0.1
    396        0.1     672        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
 
25

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,   
  2020
      2019       2018  
    
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
    328       0.1     1.44     —         0.0     0.00     —         0.0     0.00     —         0.0     0.00     328       0.1     1.44
Obligations of States and Political Subdivisions
    49,113       17.4     0.90     3,003       1.0     1.30     160       0.1     3.00     —         0.0     0.00     52,276       18.5     0.93
Other Debt Securities”
    1,298       0.5     1.05     300       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
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
26

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.
 
27

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,  
2020
    2019     2018     2017     2016  
   
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
 
 
432
 
 
 
0.0
    822       0.0     724       0.0     582       0.0     684       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.
 
28

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.
 
29

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,
  
2020
    2019     2018     2017     2016  
(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
  
 
90
 
    —         —         —         —    
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:
 
    
2020
     2019      2018      2017      2016  
Residential real estate, multi-family
  
$
—  
 
   $ —        $ —        $ 4,212      $ 198  
Home equity
  
 
—  
 
     —          —          —          —    
Commercial real estate
  
 
4,940
 
     2,346        2,650        2,554        3,149  
Construction and land development
  
 
—  
 
     —          —          —          94  
Commercial and industrial
  
 
439
 
     906        401        348        389  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
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.
 
30

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,
  
2020
    2019     2018     2017     2016  
(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
  
 
29
 
    137       67       49       —    
Construction
  
 
—  
 
    —         —         —         —    
Commercial real estate
  
 
—  
 
    —         —         —         —    
Residential real estate
  
 
—  
 
    22       450       —         27  
Consumer
  
 
209
 
    295       316       341       362  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total loans
charged-off
  
 
238
 
    454       833       390       389  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Recovery of loans previously
charged-off:
          
Commercial and industrial
  
 
197
 
    60       57       110       132  
Construction
  
 
—  
 
    —         1,436       —         —    
Real estate
  
 
5
 
    —         75       84       6  
Consumer
  
 
112
 
    186       203       255       296  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total recoveries of loans previously
charged-off:
  
 
314
 
    246       1,771       449       434  
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Net loan (recoveries) charge-offs
  
 
(76
    208       (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
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
31

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
 
  
 
 
    
 
 
    
 
 
    
 
 
 
 
32

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:
 
   
2020
    2019     2018     2017     2016  
   
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
 
$
429
 
 
 
0.4
  $ 331       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
 
 
241
 
 
 
0.7
    312       0.9     365       0.9     373       0.8     582       0.6
Home equity
 
 
1,208
 
 
 
9.2
    1,065       12.5     1,111       12.9     989       11.4     1,102       11.0
Unallocated
 
 
229
 
      57         286         276         293    
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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.”
 
33

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.