Company Quick10K Filing
Century Bancorp
Price1.00 EPS-38,893,000
Shares-0 P/E-0
MCap-0 P/FCF-0
Net Debt-334 EBIT103
TEV-334 TEV/EBIT-3
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-03-13
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-15
10-Q 2018-09-30 Filed 2018-11-08
10-Q 2018-06-30 Filed 2018-08-07
10-Q 2018-03-31 Filed 2018-05-08
10-K 2017-12-31 Filed 2018-03-15
10-Q 2017-09-30 Filed 2017-11-06
10-Q 2017-06-30 Filed 2017-08-08
10-Q 2017-03-31 Filed 2017-05-08
10-K 2016-12-31 Filed 2017-03-15
10-Q 2016-09-30 Filed 2016-11-07
10-Q 2016-06-30 Filed 2016-08-08
10-Q 2016-03-31 Filed 2016-05-10
10-K 2015-12-31 Filed 2016-03-09
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-06
10-Q 2015-03-31 Filed 2015-05-07
10-K 2014-12-31 Filed 2015-03-12
10-Q 2014-09-30 Filed 2014-11-07
10-Q 2014-06-30 Filed 2014-08-07
10-Q 2014-03-31 Filed 2014-05-08
10-K 2013-12-31 Filed 2014-03-13
10-Q 2013-09-30 Filed 2013-11-08
10-Q 2013-06-30 Filed 2013-08-06
10-K 2012-12-31 Filed 2013-03-12
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-07
10-Q 2012-03-31 Filed 2012-05-08
10-K 2011-12-31 Filed 2012-03-13
10-Q 2011-09-30 Filed 2011-11-07
10-Q 2011-06-30 Filed 2011-08-08
10-Q 2011-03-31 Filed 2011-05-06
10-K 2010-12-31 Filed 2011-03-11
10-Q 2010-09-30 Filed 2010-11-05
10-Q 2010-06-30 Filed 2010-08-06
10-Q 2010-03-31 Filed 2010-05-05
10-K 2009-12-31 Filed 2010-03-11
8-K 2020-07-14 Earnings, Exhibits
8-K 2020-06-01
8-K 2020-04-14
8-K 2020-04-14
8-K 2020-01-21
8-K 2019-10-08
8-K 2019-07-09
8-K 2019-06-11
8-K 2019-04-17
8-K 2019-04-09
8-K 2019-04-06
8-K 2019-01-15
8-K 2018-10-09
8-K 2018-07-10
8-K 2018-04-25
8-K 2018-04-10
8-K 2018-01-16

CNBKA 10Q Quarterly Report

Part I - Item 1
Note 1. Basis of Financial Statement Presentation
Note 2. Securities Available - for - Sale
Note 3. Investment Securities Held - To - Maturity
Note 4. Allowance for Loan Losses
Note 5. Reclassifications Out of Accumulated Other Comprehensive Income (A)
Note 6. Earnings per Share ("Eps")
Note 7. Employee Benefits
Note 8. Fair Value Measurements
Note 9. Fair Values of Financial Instruments
Note 10. Revenue From Contracts with Customers
Note 11. Leases
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds -
Item 3 Defaults Upon Senior Securities - None
Item 4 Mine Safety Disclosures - Not Applicable
Item 5 Other Information - None
Item 6 Exhibits
EX-31.1 d902478dex311.htm
EX-31.2 d902478dex312.htm
EX-32.1 d902478dex321.htm
EX-32.2 d902478dex322.htm

Century Bancorp Earnings 2020-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 d902478d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020.

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-15752

 

 

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

400 MYSTIC AVENUE, MEDFORD, MA   02155
(Address of principal executive offices)   (Zip Code)

(781) 391-4000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of class

 

Trading

Symbol(s)

 

Name of exchange

Class A Common Stock, $1.00 par value   CNBKA   Nasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

(Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

As of April 30, 2020, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

   3,652,349 Shares

Class B Common Stock, $1.00 par value

   1,915,560 Shares

 

 

 


Table of Contents

Century Bancorp, Inc.

Index

 

         Page  
         Number  

Part I

 

Financial Information

     3  
 

Forward Looking Statements

  

Item 1.

 

Financial Statements (unaudited)

  
 

Consolidated Balance Sheets:

March 31, 2020 and December 31, 2019

     4  
 

Consolidated Statements of Income:

Three Months Ended March 31, 2020 and 2019

     5  
 

Consolidated Statements of Comprehensive Income:

Three Months Ended March 31, 2020 and 2019

     6  
 

Consolidated Statements of Changes in Stockholders’ Equity:

Three Months Ended March 31, 2020 and 2019

     7  
 

Consolidated Statements of Cash Flows:

Three Months Ended March 31, 2020 and 2019

     8  
 

Notes to Consolidated Financial Statements

     9 - 29  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29 - 40  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     40  

Item 4.

 

Controls and Procedures

     40  

Part II.

 

Other Information

  

Item 1.

 

Legal Proceedings

     41  

Item 1A.

 

Risk Factors

     41  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     41  

Item 3.

 

Defaults Upon Senior Securities

     41  

Item 4.

 

Mine Safety Disclosures

     41  

Item 5.

 

Other Information

     41  

Item 6.

 

Exhibits

     41  

Signatures

       42  

Exhibits

 

Ex-31.1

  
 

Ex-31.2

  
 

Ex-32.1

  
 

Ex-32.2

  
 

Ex-101 Instance Document

  
 

Ex-101 Schema Document

  
 

Ex-101 Calculation Linkbase Document

  
 

Ex-101 Labels Linkbase Document

  
 

Ex-101 Presentation Linkbase Document

  
 

Ex-101 Definition Linkbase Document

  


Table of Contents

Forward Looking Statements

Except for the historical information contained herein, this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, without limitation, (i) the fact that the Company’s success is dependent to a significant extent upon general economic conditions in New England, (ii) the fact that the Company’s earnings depend to a great extent upon the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings) generated by the Bank and thus the Bank’s results of operations may be adversely affected by increases or decreases in interest rates, (iii) the fact that the banking business is highly competitive and the profitability of the Company depends upon the Bank’s ability to attract loans and deposits within its market area, where the Bank competes with a variety of traditional banking and other institutions such as credit unions and finance companies, and (iv) the fact that a significant portion of the Company’s loan portfolio is comprised of commercial loans, exposing the Company to the risks inherent in loans based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans. Accordingly, the Company’s profitability may be negatively impacted by errors in risk analyses, and by loan defaults, and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions, (v) the fact that the the Company’s business, financial condition and results of operation have been or may be negatively impacted by the extent and duration of the COVID-19 pandemic. These factors, as well as general economic and market conditions, may materially and adversely affect the market price of shares of the Company’s common stock. Because of these and other factors, past financial performance should not be considered an indicator of future performance. The forward-looking statements contained herein represent the Company’s judgment as of the date of this Form 10-Q, and the Company cautions readers not to place undue reliance on such statements.

 

Page 3 of 42


Table of Contents

PART I – Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     March 31,     December 31,  
     2020     2019  
Assets     

Cash and due from banks

   $ 64,523     $ 44,420  

Federal funds sold and interest-bearing deposits in other banks

     218,488       214,273  
  

 

 

   

 

 

 

Total cash and cash equivalents

     283,011       258,693  

Securities available-for-sale, amortized cost $280,520 and $260,924, respectively

     278,019       260,502  

Securities held-to-maturity, fair value $2,365,027 and $2,361,304, respectively

     2,304,074       2,351,120  

Federal Home Loan Bank of Boston, stock at cost

     17,241       19,471  

Equity securities, amortized cost $1,635 and $1,635, respectively

     1,609       1,688  

Loans, net:

    

Construction and land development

     6,493       8,992  

Commercial and industrial

     867,599       812,417  

Municipal

     141,588       120,455  

Commercial real estate

     761,464       786,102  

Residential real estate

     393,338       371,897  

Consumer and overdrafts

     21,039       21,893  

Home equity

     307,373       304,363  
  

 

 

   

 

 

 

Total loans, net

     2,498,894       2,426,119  

Less: allowance for loan losses

     30,804       29,585  
  

 

 

   

 

 

 

Net loans

     2,468,090       2,396,534  

Bank premises and equipment

     36,238       33,952  

Accrued interest receivable

     12,998       13,110  

Goodwill

     2,714       2,714  

Other assets

     158,292       154,640  
  

 

 

   

 

 

 

Total assets

   $ 5,562,286     $ 5,492,424  
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 797,570     $ 712,842  

Savings and NOW deposits

     1,662,414       1,678,250  

Money market accounts

     1,489,679       1,453,572  

Time deposits

     612,849       555,447  
  

 

 

   

 

 

 

Total deposits

     4,562,512       4,400,111  

Securities sold under agreements to repurchase

     219,995       266,045  

Other borrowed funds

     312,120       370,955  

Subordinated debentures

     36,083       36,083  

Due to broker

     5,500       —    

Other liabilities

     85,389       86,649  
  

 

 

   

 

 

 

Total liabilities

     5,221,599       5,159,843  
Stockholders’ Equity     

Preferred Stock – $1.00 par value; 100,000 shares authorized; no shares issued and outstanding

     —         —    

Common stock, Class A, $1.00 par value per share; authorized 10,000,000 shares; issued 3,652,349 shares and 3,650,949 shares, respectively

     3,652       3,651  

Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,915,560 shares and 1,916,960 shares respectively

     1,916       1,917  

Additional paid-in capital

     12,292       12,292  

Retained earnings

     348,093       338,980  
  

 

 

   

 

 

 
     365,953       356,840  

Unrealized losses on securities available-for-sale, net of taxes

     (1,839     (308

Unrealized losses on securities transferred to held-to-maturity, net of taxes

     (1,648     (1,812

Pension liability, net of taxes

     (21,779     (22,139
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (25,266     (24,259
  

 

 

   

 

 

 

Total stockholders’ equity

     340,687       332,581  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,562,286     $ 5,492,424  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended  
     March 31,  
     2020      2019  

Interest income

     

Loans

   $ 22,199      $ 21,309  

Securities held-to-maturity

     15,293        13,788  

Securities available-for-sale

     1,693        2,631  

Federal funds sold and interest-bearing deposits in other banks

     610        1,349  
  

 

 

    

 

 

 

Total interest income

     39,795        39,077  
  

 

 

    

 

 

 

Interest expense

     

Savings and NOW deposits

     3,725        5,466  

Money market accounts

     5,572        5,343  

Time deposits

     3,172        2,793  

Securities sold under agreements to repurchase

     626        385  

Other borrowed funds and subordinated debentures

     1,499        1,652  
  

 

 

    

 

 

 

Total interest expense

     14,594        15,639  
  

 

 

    

 

 

 

Net interest income

     25,201        23,438  

Provision for loan losses

     1,075        375  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     24,126        23,063  

Other operating income

     

Service charges on deposit accounts

     2,296        2,209  

Lockbox fees

     930        1,089  

Gains on sales of mortgage loans

     —          15  

Other income

     1,084        1,114  
  

 

 

    

 

 

 

Total other operating income

     4,310        4,427  
  

 

 

    

 

 

 

Operating expenses

     

Salaries and employee benefits

     11,371        11,035  

Occupancy

     1,515        1,701  

Equipment

     837        783  

FDIC Assessments

     —          373  

Other

     4,450        4,298  
  

 

 

    

 

 

 

Total operating expenses

     18,173        18,190  
  

 

 

    

 

 

 

Income before income taxes

     10,263        9,300  

(Benefit) Provision for income taxes

     597        (118
  

 

 

    

 

 

 

Net income

   $ 9,666      $ 9,418  
  

 

 

    

 

 

 

Share data:

     

Weighted average number of shares outstanding, basic

     

Class A

     3,652,349        3,610,329  

Class B

     1,915,560        1,957,580  

Weighted average number of shares outstanding, diluted

     

Class A

     5,567,909        5,567,909  

Class B

     1,915,560        1,957,580  

Basic earnings per share:

     

Class A

   $ 2.10      $ 2.05  

Class B

   $ 1.05      $ 1.03  

Diluted earnings per share

     

Class A

   $ 1.74      $ 1.69  

Class B

   $ 1.05      $ 1.03  

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended March 31,  
     2020     2019  

Net income

   $ 9,666     $ 9,418  

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     (1,531     (462

Less: reclassification adjustment for gains included in net income

     —         —    
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (1,531     (462

Accretion of net unrealized losses transferred

     164       216  

Defined benefit pension plans:

    

Amortization of prior service cost and loss included in net periodic benefit cost

     360       263  
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (1,007     17  
  

 

 

   

 

 

 

Comprehensive income

   $ 8,659     $ 9,435  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2020 and 2019

 

                               Accumulated        
     Class A      Class B     Additional            Other     Total  
     Common      Common     Paid-In      Retained     Comprehensive     Stockholders’  
     Stock      Stock     Capital      Earnings     Income (Loss)     Equity  
     (In thousands)  

Balance at December 31, 2018

   $ 3,608      $ 1,960     $ 12,292      $ 301,488     $ (18,909   $ 300,439  

Net income

     —          —         —          9,418       —         9,418  

Other comprehensive income, net of tax:

                 —    

Unrealized holding (losses) gains arising during period, net of $166 in taxes

     —          —         —          —         (462     (462

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $78 in taxes

     —          —         —          —         216       216  

Pension liability adjustment, net of $103 in taxes

     —          —         —          —         263       263  

Conversion of Class B Common Stock to Class A Common Stock, 2,300 shares

     2        (2     —          —         —         —    

Cash dividends paid, Class A common stock, $0.12 per share

     —          —         —          (433     —         (433

Cash dividends paid, Class B common stock, $0.06 per share

     —          —         —          (117     —         (117
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

   $ 3,610      $ 1,958     $ 12,292      $ 310,356     $ (18,892   $ 309,324  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2019

   $ 3,651      $ 1,917     $ 12,292      $ 338,980     $ (24,259   $ 332,581  

Net income

     —          —         —          9,666       —         9,666  

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $548 in taxes

     —          —         —          —         (1,531     (1,531

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $58 in taxes

     —          —         —          —         164       164  

Pension liability adjustment, net of $141 in taxes

     —          —         —          —         360       360  

Conversion of Class B Common Stock to Class A Common Stock, 1,400 shares

     1        (1     —          —         —         —    

Cash dividends paid, Class A common stock, $0.12 per share

     —          —         —          (438     —         (438

Cash dividends paid, Class B common stock, $0.06 per share

     —          —         —          (115     —         (115
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2020

   $ 3,652      $ 1,916     $ 12,292      $ 348,093     $ (25,266   $ 340,687  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

For the Three Months Ended March 31, 2020 and 2019

 

     Three months ended March 31,  
     2020     2019  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 9,666     $ 9,418  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

    

Gain on sales of mortgage loans

     —         (15

Net loss (gain) on equity securities

     79       (53

Provision for loan losses

     1,075       375  

Deferred income taxes

     (114     104  

Net depreciation and amortization

     (578     (468

Decrease (increase) in accrued interest receivable

     112       (58

(Increase) decrease in other assets

     2,359       2,187  

Increase in other liabilities

     (336     (458
  

 

 

   

 

 

 

Net cash provided by operating activities

     12,263       11,032  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from redemptions of Federal Home Loan Bank of Boston stock

     6,831       4,777  

Purchase of Federal Home Loan Bank of Boston stock

     (4,601     (1,047

Proceeds from calls/maturities of securities available-for-sale

     20,734       34,927  

Purchase of securities available-for-sale

     (39,719     (34,031

Proceeds from calls/maturities of securities held-to-maturity

     123,723       88,027  

Purchase of securities held-to-maturity

     (70,171     (148,500

Net increase in loans

     (72,621     (25,811

Proceeds from sales of portfolio loans

     —         685  

Bank owned life insurance purchases

     (6,000     —    

Capital expenditures

     (3,084     (1,344
  

 

 

   

 

 

 

Net cash used in investing activities

     (44,908     (82,317
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in time deposits

     57,402       (18,500

Net increase in demand, savings, money market and NOW deposits

     104,999       61,163  

Cash dividends

     (553     (550

Net (decrease) increase in securities sold under agreements to repurchase

     (46,050     10,260  

Net (decrease) increase in other borrowed funds

     (58,835     54,770  
  

 

 

   

 

 

 

Net cash provided by financing activities

     56,963       107,143  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     24,318       35,858  

Cash and cash equivalents at beginning of period

     258,693       342,503  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 283,011     $ 378,361  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid (received) during the period for:

    

Interest

   $ 14,711     $ 15,462  

Income taxes

     300       (1,265

Change in unrealized gains (losses) on securities available-for-sale, net of taxes

     (1,531     (462

Change in unrealized losses on securities transferred to held-to-maturity, net of taxes

     164       216  

Pension liability adjustment, net of taxes

     360       263  

Change in due to (from) to broker

     5,500       11,740  

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Three Months Ended March 31, 2020 and 2019

Note 1. Basis of Financial Statement Presentation

The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly owned subsidiaries, Century Subsidiary Investments, Inc. (“CSII”), Century Subsidiary Investments, Inc. II (“CSII II”), Century Subsidiary Investments, Inc. III (“CSII III”) and Century Financial Services Inc. (“CFSI”). CSII, CSII II, and CSII III are engaged in buying, selling and holding investment securities. CFSI has the power to engage in financial agency, securities brokerage, and investment and financial advisory services and related securities credit. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company.

All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”) and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company’s business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment.

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The Company’s quarterly report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Securities and Exchange Commission. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act allows certain companies to delay FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments (CECL), including the current expected credit losses methodology for estimating allowances for credit losses. The Company has elected to delay FASB ASU 2016-13. This ASU will be delayed until the date on which the national emergency concerning the COVID–19 outbreak declared by the President on March 15, 2020 terminates or December 31, 2020, with an effective retrospective implementation date of January 1, 2020.

Material estimates that are susceptible to change in the near term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on a review of factors, including historical charge-off rates with additional allocations based on qualitative risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. Certain risks and uncertainties remain in the allowance for loan losses as a result of the COVID-19 pandemic that occurred during the first quarter of 2020. Future provision levels will be dependent upon the length of the economic disruption and the effectiveness of government programs to mitigate the economic impact. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.

 

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Note 2. Securities Available-for-Sale

 

     March 31, 2020      December 31, 2019  
            Gross      Gross                    Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair      Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value      Cost      Gains      Losses      Value  
     (in thousands)  

SBA Backed Securities

   $ 50,722      $ 25      $ 132      $ 50,615      $ 54,331      $ 23      $ 143      $ 54,211  

U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities

     208,596        157        2,538        206,215        184,580        139        532        184,187  

Privately Issued Residential Mortgage-Backed Securities

     378        —          44        334        397        1        2        396  

Obligations Issued by States and Political Subdivisions

     17,224        —          —          17,224        18,016        60        —          18,076  

Other Debt Securities

     3,600        42        11        3,631        3,600        51        19        3,632  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 280,520      $ 224      $ 2,725      $ 278,019      $ 260,924      $ 274      $ 696      $ 260,502  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in SBA Backed Securities, and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $185,943,000 and $186,245,000 at March 31, 2020 and December 31, 2019, respectively. Also included in securities available-for-sale are securities at fair value pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $30,619,000 and $32,297,000 at March 31, 2020 and December 31, 2019, respectively. Also included in securities available-for-sale are securities at fair value pledged for borrowing at the Federal Reserve Bank discount window $9,706,000 and $0 at March 31, 2020 and December 31, 2019, respectively. There were no sales of available-for-sale securities for the three months ended March 31, 2020 and March 31, 2019, respectively.

Debt securities of U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the maturity distribution of the Company’s securities available-for-sale at March 31, 2020.

 

     Amortized      Fair  
     Cost      Value  
     (in thousands)  

Within one year

   $ 18,618      $ 18,568  

After one but within five years

     149,846        148,675  

After five but within ten years

     107,266        105,995  

More than 10 years

     4,790        4,781  
  

 

 

    

 

 

 

Total

   $ 280,520      $ 278,019  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at March 31, 2020 was 5.0 years. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations. Also $260,560,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.

As of March 31, 2020 and December 31, 2019, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on SBA Backed Securities, U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2020 or December 31, 2019.

In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates of underlying loans.

 

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The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at March 31, 2020. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 56 and 25 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 124 holdings at March 31, 2020.

 

     March 31, 2020  
     Less than 12 months      12 months or longer      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
Temporarily Impaired Investments    Value      Losses      Value      Losses      Value      Losses  
                   (in thousands)                

SBA Backed Securities

   $ 12,806      $ 25      $ 20,687      $ 107      $ 33,493      $ 132  

U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities

     131,960        1,846        43,274        692        175,234        2,538  

Privately Issued Residential Mortgage-Backed Securities

     334        44        —          —          334        44  

Obligations Issued by States and Political Subdivisions

                 —           —     

Other Debt Securities

     800        —          489        11        1,289        11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 145,900      $ 1,915      $ 64,450      $ 810      $ 210,350      $ 2,725  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2019. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 45 and 18 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 122 holdings at December 31, 2019.

 

     December 31, 2019  
     Less than 12 months      12 months or longer      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
Temporarily Impaired Investments    Value      Losses      Value      Losses      Value      Losses  
                   (in thousands)                

SBA Backed Securities

   $ 14,560      $ 30      $ 22,092      $ 113      $ 36,652      $ 143  

U.S. Government Agency and Sponsored Enterprise Mortgage- Backed Securities

     108,806        379        29,178        153        137,984        532  

Privately Issued Residential Mortgage-Backed Securities

     252        2        —          —          252        2  

Obligations Issued by States and Political Subdivisions

     —          —          —          —          —          —    

Other Debt Securities

     800        1        481        18        1,281        19  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 124,418      $ 412      $ 51,751      $ 284      $ 176,169      $ 696  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 3. Investment Securities Held-to-Maturity

 

    March 31, 2020     December 31, 2019  
          Gross     Gross                 Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated     Amortized     Unrealized     Unrealized     Estimated  
    Cost     Gains     Losses     Fair Value     Cost     Gains     Losses     Fair Value  
    (in thousands)  

U.S. Government Sponsored Enterprises

  $ 89,419     $ 1,113     $ —       $ 90,532     $ 98,867     $ 527     $ 96     $ 99,298  

SBA Backed Securities

    42,856       492       69       43,279       44,379       182       303       44,258  

U.S. Government Sponsored Enterprises Mortgage-Backed Securities

    2,171,799       61,037       1,620       2,231,216       2,207,874       20,720       10,846       2,217,748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,304,074     $ 62,642     $ 1,689     $ 2,365,027     $ 2,351,120     $ 21,429     $ 11,245     $ 2,361,304  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in total investment securities held-to-maturity are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,916,047,000 and $1,776,399,000 at March 31, 2020 and December 31, 2019, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $383,904,000 and $399,646,000 at March 31, 2020 and December 31, 2019, respectively. Also included in securities available-for-sale are securities at fair value pledged for borrowing at the Federal Reserve Bank discount window $196,469,000 and $0 at March 31, 2020 and December 31, 2019, respectively. There were no sales of held-to-maturity securities for the three months ended March 31, 2020 and March 31, 2019, respectively.

 

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At March 31, 2020 and December 31, 2019, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Debt securities of U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprises Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the maturity distribution of the Company’s securities held-to-maturity at March 31, 2020.

 

     Amortized      Fair  
     Cost      Value  
     (in thousands)  

Within one year

   $ 90,437      $ 91,896  

After one but within five years

     1,921,419        1,971,224  

After five but within ten years

     280,016        289,074  

More than ten years

     12,202        12,833  
  

 

 

    

 

 

 

Total

   $ 2,304,074      $ 2,365,027  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at March 31, 2020 was 3.4 years. Included in the weighted average remaining life calculation at March 31, 2020 were $19,000,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations. Also $102,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.

As of March 31, 2020 and December 31, 2019, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not more likely than not that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2020 or December 31, 2019.

In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary.

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio March 31, 2020. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months or longer. There are 34 and 19 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 533 holdings at March 31, 2020.

 

     March 31, 2020  
     Less Than 12 Months      12 Months or Longer      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
Temporarily Impaired Investments    Value      Losses      Value      Losses      Value      Losses  
                   (in thousands)                

SBA Backed Securities

   $ 12,725      $ 69      $ —        $ —        $ 12,725      $ 69  

U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities

     197,134        911        53,703        709        250,837        1,620  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 209,859      $ 980      $ 53,703      $ 709      $ 263,562      $ 1,689  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2019. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 114 and 103 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 531 holdings at December 31, 2019.

 

     December 31, 2019  
     Less Than 12 Months      12 Months or Longer      Total     

 

 
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  
Temporarily Impaired Investments    Value      Losses      Value      Losses      Value      Losses  
                   (in thousands)                

U.S. Treasury

   $ —        $ —        $ —        $ —        $ —        $ —    

U.S. Government Sponsored Enterprises

     24,420        72        9,976        24        34,396        96  

SBA Backed Securities

     25,251        303        —          —          25,251        303  

U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities

     613,905        3,949        389,919        6,897        1,003,824        10,846  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 663,576      $ 4,324      $ 399,895      $ 6,921      $ 1,063,471      $ 11,245  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Allowance for Loan Losses

The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors.

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

 

     Three months ended  
     March 31,  
     2020      2019  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 29,585      $ 28,543  

Loans charged off

     (62      (142

Recoveries on loans previously charged-off

     206        72  
  

 

 

    

 

 

 

Net recoveries (charge-offs)

     144        (70

Provision charged to expense

     1,075        375  
  

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 30,804      $ 28,848  
  

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses for the three months ending March 31, 2020 is as follows:

 

    Construction     Commercial                                            
    and Land     and           Commercial     Residential           Home              
    Development     Industrial     Municipal     Real Estate     Real Estate     Consumer     Equity     Unallocated     Total  
                      (in thousands)                          

Allowance for loan losses:

               

Balance at December 31, 2019

  $ 331     $ 11,596     $ 2,566     $ 11,464     $ 2,194     $ 312     $ 1,065     $ 57     $ 29,585  

Charge-offs

    —         (5     —         —         —         (57     —         —         (62

Recoveries

    —         164       —         —         —         37       5       —         206  

Provision

    (85     673       323       (343     255       4       67       181       1,075  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2020

  $ 246     $ 12,428     $ 2,889     $ 11,121     $ 2,449     $ 296     $ 1,137     $ 238     $ 30,804  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans deemed to be impaired

  $ —       $ —       $ —       $ 85     $ —       $ —       $ —       $ —       $ 85  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans not deemed to be impaired

  $ 246     $ 12,428     $ 2,889     $ 11,036     $ 2,449     $ 296     $ 1,137     $ 238     $ 30,719  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 6,493     $ 867,599     $ 141,588     $ 761,464     $ 393,338     $ 21,039     $ 307,373     $ —       $ 2,498,894  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 623     $ —       $ 2,322     $ —       $ —       $ —       $ —       $ 2,945  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 6,493     $ 866,976     $ 141,588     $ 759,142     $ 393,338     $ 21,039     $ 307,373     $ —       $ 2,495,949  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Further information pertaining to the allowance for loan losses for the three months ending March 31, 2019 is as follows:

 

    Construction     Commercial                                            
    and Land     and           Commercial     Residential           Home              
    Development     Industrial     Municipal     Real Estate     Real Estate     Consumer     Equity     Unallocated     Total  
    (in thousands)  

Allowance for loan losses:

 

Balance at December 31, 2018

  $ 1,092     $ 10,998     $ 1,838     $ 10,663     $ 2,190     $ 365     $ 1,111     $ 286     $ 28,543  

Charge-offs

    —         (43     —         —         —         (99     —         —         (142

Recoveries

    —         18       —         —         —         54       —         —         72  

Provision

    (81     183       160       104       (55     22       (10     52       375  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2019

  $ 1,011     $ 11,156     $ 1,998     $ 10,767     $ 2,135     $ 342     $ 1,101     $ 338     $ 28,848  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans deemed to be impaired

  $ —       $ 6     $ —       $ 94     $ —         $     $ —       $ —       $ 100  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans not deemed to be impaired

  $ 1,011     $ 11,150     $ 1,998     $ 10,673     $ 2,135     $ 342     $ 1,101     $ 338     $ 28,748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 13,305     $ 767,436     $ 105,288     $ 746,703     $ 349,966     $ 22,123     $ 305,839     $ —       $ 2,310,660  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 320     $ —       $ 2,946     $ —       $ —       $ —       $ —       $ 3,266  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 13,305     $ 767,116     $ 105,288     $ 743,757     $ 349,966     $ 22,123     $ 305,839     $ —       $ 2,307,394  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company utilizes a six grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 1-3 (Pass):

Loans in this category are considered “pass” rated loans with low to average risk.

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of March 31, 2020 and December 31, 2019.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of March 31, 2020 and December 31, 2019.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of March 31, 2020 and December 31, 2019 and full collectability is doubtful.

Impaired:

Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.

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

 

     Construction      Commercial                
     and Land      and             Commercial  
     Development      Industrial      Municipal      Real Estate  
            (in thousands)         

Grade:

           

1-3 (Pass)

   $ 6,493      $ 863,026      $ 141,588      $ 734,992  

4 (Monitor)

     —          3,950        —          24,150  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     —          623        —          2,322  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,493      $ 867,599      $ 141,588      $ 761,464  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents the Company’s loans by risk rating at December 31, 2019.

 

     Construction      Commercial                
     and Land      and             Commercial  
     Development      Industrial      Municipal      Real Estate  
     (in thousands)  

Grade:

           

1-3 (Pass)

   $ 8,992      $ 807,486      $ 120,455      $ 759,402  

4 (Monitor)

     —          4,025        —          24,354  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     —          906        —          2,346  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,992      $ 812,417      $ 120,455      $ 786,102  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2020 and are included within the total loan portfolio.

 

     Commercial             Commercial         
     and             Real         
     Industrial      Municipal      Estate      Total  
            (in thousands)         

Credit Rating:

        

Aaa – Aa3

   $ 568,173      $ 74,406      $ 38,955      $ 681,534  

A1 – A3

     185,819        7,354        147,953        341,126  

Baa1 – Baa3

     —          51,133        143,302        194,435  

Ba2

     —          5,895        —          5,895  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 753,992      $ 138,788      $ 330,210      $ 1,222,990  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2019.

 

     Commercial             Commercial         
     and             Real         
     Industrial      Municipal      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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company utilized payment performance as credit quality indicators for the loan types listed below. The indicators are depicted in the table “aging of past due loans,” below.

Further information pertaining to the allowance for loan losses at March 31, 2020 follows:

 

                   Accruing                       
     Accruing             Greater      Total                
     30-89 Days      Non      than      Past      Current         
     Past Due      Accrual      90 Days      Due      Loans      Total  
                   (in thousands)                

Construction and land development

   $ —        $ —        $ —        $ —        $ 6,493      $ 6,493  

Commercial and industrial

     337        374        —          711        866,888        867,599  

Municipal

     —          —          —          —          141,588        141,588  

Commercial real estate

     2,322        238        —          2,560        758,904        761,464  

Residential real estate

     2,455        890        —          3,345        389,993        393,338  

Consumer and overdrafts

     17        6        —          23        21,016        21,039  

Home equity

     1,450        193        —          1,643        305,730        307,373  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,581      $ 1,701      $ —        $ 8,282      $ 2,490,612      $ 2,498,894  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses at December 31, 2019 follows:

 

                   Accruing                       
     Accruing             Greater      Total                
     30-89 Days      Non      than      Past      Current         
     Past Due      Accrual      90 Days      Due      Loans      Total  
                   (in thousands)                

Construction and land development

   $ —        $ —        $ —        $ —        $ 8,992      $ 8,992  

Commercial and industrial

     227        400        —          627        811,790        812,417  

Municipal

     —          —          —          —          120,455        120,455  

Commercial real estate

     840        492        —          1,332        784,770        786,102  

Residential real estate

     1,563        683        —          2,246        369,651        371,897  

Consumer and overdrafts

     18        4        —          22        21,871        21,893  

Home equity

     603        435        —          1,038        303,325        304,363  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,251      $ 2,014      $ —        $ 5,265      $ 2,420,854      $ 2,426,119  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include: the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2019.

 

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The following is information pertaining to impaired loans for March 31, 2020:

 

                          Average      Interest  
                          Carrying      Income  
                          Value      Recognized  
                          for 3      for 3  
            Unpaid             Months      Months  
     Carrying      Principal      Required      Ending      Ending  
     Value      Balance      Reserve      3/31/20      3/31/20  
                   (in thousands)         

With no required reserve recorded:

           

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     623        641        —          582        1  

Municipal

     —          —          —          —          —    

Commercial real estate

     155        185        —          157        —    

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 778      $ 826      $ —        $ 739      $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     —          —          —          113        1  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,167        2,290        85        2,176        22  

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,167      $ 2,290      $ 85      $ 2,289      $ 23  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     623        641        —          695        2  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,322        2,475        85        2,333        22  

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,945      $ 3,116      $ 85      $ 3,028      $ 24  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 17 of 42


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The following is information pertaining to impaired loans for March 31, 2019:

 

                          Average      Interest  
                          Carrying      Income  
                          Value      Recognized  
            Unpaid             for 3 Months      for 3 Months  
     Carrying      Principal      Required      Ending      Ending  
     Value      Balance      Reserve      3/31/19      3/31/19  
     (in thousands)  

With no required reserve recorded:

           

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     93        306        —          87        2  

Municipal

     —          —          —          —          —    

Commercial real estate

     182        206        —          188        —    

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 275      $ 512      $ —        $ 275      $ 2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     227        228        6        262        3  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,764        2,881        94        2,694        24  

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,991      $ 3,109      $ 100      $ 2,956      $ 27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     320        534        6        349        5  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,946        3,087        94        2,882        24  

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,266      $ 3,621      $ 100      $ 3,231      $ 29  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructurings (“TDR”) are identified as modifications in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations.

There was no TDR that occurred during the three-month period ended March 31, 2020. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during the first three months of 2020.

Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 modifications. The Company can then suspend the requirements under GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a TDR, and suspend any determination of a loan modified as a result of COVID-19 as being a TDR, including the requirement to determine impairment for accounting purposes.

As of March 31, 2020, and as a result of COVID-19 loan modification, the Company had modified 58 loans aggregating $32,073,000, primarily consisting of the deferral of principal and/or the extension of the maturity date. Of these modifications, $32,073,000, or 100%, were performing in accordance with their modified terms.

 

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There was no troubled debt restructuring that occurred during the three-month period ended March 31, 2019. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during the first three months of 2019.

Note 5. Reclassifications Out of Accumulated Other Comprehensive Income (a)

Amount Reclassified from Accumulated Other Comprehensive Income

 

     Three     Three     Affected Line Item in the
Details about Accumulated Other    Months Ended     Months Ended     Statement where Net Income is

Comprehensive Income Components

   March 31, 2020     March 31, 2019    

Presented

(in thousands)

Accretion of unrealized losses transferred

   $ (222   $ (294   Securities held-to-maturity

Tax (expense) or benefit

     58       78     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (164   $ (216   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

   $ (29 )(b)    $ (29 )(b)    Salaries and employee benefits

Actuarial gains (losses)

     (472 )(b)      (337 )(b)    Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (501 )      (366   Income before taxes
  

 

 

   

 

 

   

Tax (expense) or benefit

     141       103     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (360   $ (263   Net income
  

 

 

   

 

 

   

 

(a)

Amount in parentheses indicates reductions to net income.

(b)

These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Employee Benefits footnote (Note 7) for additional details).

 

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Note 6. Earnings per Share (“EPS”)

Class A and Class B shares participate equally in undistributed earnings. Under the Company’s Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.

Diluted EPS includes the dilutive effect of common stock equivalents and assumes the conversion of all Class B common stock; basic EPS excludes all common stock equivalents. The Company had no common stock equivalents outstanding for the periods ended March 31, 2020 and 2019.

The following table is a reconciliation of basic EPS and diluted EPS.

 

     Three Months Ended  
     March 31,  
(in thousands except share and per share data)    2020      2019  

Basic EPS Computation:

     

Numerator:

     

Net income, Class A

   $ 7,658      $ 7,409  

Net income, Class B

     2,008        2,009  

Denominator:

     

Weighted average shares outstanding, Class A

     3,652,349        3,610,329  

Weighted average shares outstanding, Class B

     1,915,560        1,957,580  

Basic EPS, Class A

   $ 2.10      $ 2.05  

Basic EPS, Class B

     1.05        1.03  
  

 

 

    

 

 

 

Diluted EPS Computation:

     

Numerator:

     

Net income, Class A

   $ 7,658      $ 7,409  

Net income, Class B

     2,008        2,009  
  

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     9,666        9,418  

Denominator:

     

Weighted average shares outstanding, basic, Class A

     3,652,349        3,610,329  

Weighted average shares outstanding, Class B

     1,915,560        1,957,580  
  

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,567,909        5,567,909  

Weighted average shares outstanding, Class B

     1,915,560        1,957,580  

Diluted EPS, Class A

   $ 1.74      $ 1.69  

Diluted EPS, Class B

     1.05        1.03  
  

 

 

    

 

 

 

Note 7. Employee Benefits

The Company provides pension benefits to its employees under a noncontributory, defined benefit plan which is funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”) and recognizes costs over the estimated employee service period.

The Company also has a Supplemental Executive Insurance/Retirement Plan (the “Supplemental Plan”) which is limited to certain officers and employees of the Company. The Supplemental Plan is accrued on a current basis and recognizes costs over the estimated employee service period.

Executive officers of the Company and its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary, and participants are required to contribute to its cost. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.

 

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Components of Net Periodic Benefit Cost for the Three Months Ended March 31,

 

                   Supplemental Insurance/  
     Pension Benefits      Retirement Plan  
     2020      2019      2020      2019  
            (in thousands)         

Service cost

   $ 344      $ 276      $ 353      $ 256  

Interest

     450        473        466        482  

Expected return on plan assets

     (952      (819      —          —    

Recognized prior service cost (benefit)

     —          —          29        28  

Recognized net actuarial losses

     261        229        211        109  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 103      $ 159      $ 1,059      $ 875  
  

 

 

    

 

 

    

 

 

    

 

 

 

Approximately $465,000 and $502,000 of costs other than service costs, from the table above, are included in other expenses for the three months ended March 31, 2020 and 2019, respectively.

The Company does not intend to contribute to the Defined Benefit Pension Plan in 2020.

Note 8. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures and ASU 2016-1, “Financial Instruments-Overall” (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:

Level I – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.

Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds, and OTC derivatives.

Level III – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include municipal securities with no observable fair value with an average life of one year or less. The securities are carried at cost which approximates fair value. A periodic review of underlying financial statements and credit ratings is performed to assess the appropriateness of these valuations.

 

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The results of the fair value hierarchy as of March 31, 2020, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

     Securities AFS Fair Value Measurements Using  
          Quoted Prices                
            In Active             Significant  
            Markets for      Significant      Other  
            Identical      Observable      Unobservable  
     Carrying      Assets      Inputs      Inputs  
     Value      (Level 1)      (Level 2)      (Level 3)  
            (in thousands)         

SBA Backed Securities

   $ 50,615      $ —        $ 50,615      $ —    

U.S. Government Agency and Sponsored Mortgage-Backed Securities

     206,215        —          206,215        —    

Privately Issued Residential Mortgage- Backed Securities

     334        —          334        —    

Obligations Issued by States and Political Subdivisions

     17,224        —          —          17,224  

Other Debt Securities

     3,631        —          3,631        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Debt Securities

   $ 278,019      $ —        $ 260,795      $ 17,224  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Securities

   $ 1,609      $ 243      $ 1,366      $ —    

Financial Instruments Measured at Fair Value on a Non-recurring Basis

           

Impaired Loans

   $ 608      $ —        $ —        $ 608  

Impaired loan balances represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not observable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. All impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions related to impaired loans recognized for the three-month period ended March 31, 2020 amounted to ($9,000).

The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the assumptions used to value the assets listed below.

 

                      Unobservable Input

Asset

   Fair Value     

Valuation Technique

  

Unobservable Input

   Value or Range

Securities AFS

   $ 17,224     

Discounted cash flow

  

Discount rate

   0%-1% (3)

Impaired Loans

   $ 608     

Appraisal of collateral (1)

  

Appraisal adjustments (2)

   0%

 

(1)

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

(2)

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

(3)

Weighted averages.

 

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The changes in Level 3 securities for the three-month period ended March 31, 2020 are shown in the table below:

 

     Obligations  
     Issued by States  
     & Political  
     Subdivisions  

Balance at December 31, 2019

   $ 13,301  

Purchases

     9,372  

Maturities and calls

     (5,449

Amortization

     —    
  

 

 

 

Balance at March 31, 2020

   $ 17,224  
  

 

 

 

The amortized cost of Level 3 securities was $17,224,000 at March 31, 2020 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The fair value of impaired loans decreased by $269,000, for the first three months of 2020, mainly attributable to one loan that was paid down. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the three-month period ended March 31, 2020.

The changes in Level 3 securities for the three-month period ended March 31, 2019, are shown in the table below:

 

     Obligations  
     Issued by States  
     & Political  
     Subdivisions  

Balance at December 31, 2018

   $ 88,728  

Purchases

     970  

Maturities and calls

     (26,352

Amortization

     (14

Changes in fair value

     —    
  

 

 

 

Balance at March 31, 2019

   $ 63,332  
  

 

 

 

 

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The amortized cost of Level 3 securities was $63,332,000 at March 31, 2019 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity. There was no change in the fair value of other real estate owned for the first three months of 2019. The fair value of impaired loans decreased by $56,000, for the first three months of 2019, mainly as a result of a charge-off of one loan. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the three month period ended March 31, 2019.

The results of the fair value hierarchy as of December 31, 2019, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

     Securities AFS Fair Value Measurements Using  
            Quoted Prices                
            In Active             Significant  
            Markets for      Significant      Other  
            Identical      Observable      Unobservable  
     Carrying      Assets      Inputs      Inputs  
     Value      (Level 1)      (Level 2)      (Level 3)  
            (in thousands)         

SBA Backed Securities

   $ 54,211      $ —        $ 54,211      $ —    

U.S. Government Agency and Sponsored Mortgage-Backed Securities

     184,187        —          184,187        —    

Privately Issued Residential Mortgage-Backed Securities

     396        —          396        —    

Obligations Issued by States and Political Subdivisions

     18,076        —          4,775        13,301  

Other Debt Securities

     3,632           3,632        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 260,502      $ —        $ 247,201      $ 13,301  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Instruments Measured at Fair Value on a Recurring Basis Equity Securities

   $ 1,688      $ 343      $ 1,345      $ —    

Financial Instruments Measured at Fair Value on a Non-recurring Basis Impaired Loans

   $ 877      $ —        $ —        $ 877  

Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals, discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category. Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis or other type of real estate tax assessment. The types of adjustments that are made to specific provisions relate to impaired loans recognized for 2019 for the estimated credit loss amounted to $79,000.

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2019. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2019.

 

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The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands). Management continues to monitor the assumptions used to value the assets listed below.

 

                      Unobservable Input

Asset

   Fair Value     

Valuation Technique

  

Unobservable Input

  

Value or Range

Securities AFS

   $ 13,301     

Discounted cash flow

  

Discount rate

   1.5%-3.2% (3)

Impaired Loans

   $ 877     

Appraisal of collateral (1)

  

Appraisal adjustments (2)

  

0%-30% discount

 

(1)

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

(2)

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

(3)

Weighted averages.

Note 9. Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating fair values of its financial instruments. Excluded from this disclosure are all non-financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

Securities Held-to-Maturity

The fair values of these securities were based on quoted market prices, where available, as provided by third-party investment portfolio pricing vendors. If quoted market prices were not available, fair values provided by the vendors were based on quoted market prices of comparable instruments in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association’s standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Management regards the inputs and methods used by third party pricing vendors to be “Level 2 inputs and methods” as defined in the “fair value hierarchy” provided by FASB.

Loans

The fair value of loans is estimated using the exit price notion consistent with Topic 820, Fair Value Measurement. Fair value is determined based on a discounted cash flow analysis. The discounted cash flow analysis was based on the contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk. For certain non-performing assets, fair value of the underlying collateral is determined based on the estimated values of individual receipts.

Time Deposits

The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Other Borrowed Funds

The fair value of other borrowed funds is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other borrowed funds of similar remaining maturities.

 

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Subordinated Debentures

The fair value of subordinated debentures is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other subordinated debentures of similar remaining maturities.

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2020 and December 31, 2019. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable.

 

                   Fair Value                
     Carrying      Estimated      Measurements      Level 2      Level 3  

March 31, 2020

   Amount      Fair Value      Level 1 Inputs      Inputs      Inputs  
                   (in thousands)                

Financial assets:

              

Securities held-to-maturity

   $ 2,304,074      $ 2,365,027      $ —        $ 2,365,027      $ —    

Loans (1)

     2,468,090        2,437,099        —          —          2,437,099  

Financial liabilities:

              

Time deposits

     612,849        621,553        —          621,553        —    

Other borrowed funds

     312,120        320,830        —          320,830        —    

Subordinated debentures

     36,083        36,083        —          36,083        —    

December 31, 2019

                                  

Financial assets:

              

Securities held-to-maturity

   $ 2,351,120      $ 2,361,304      $ —        $ 2,361,304      $ —    

Loans (1)

     2,396,534        2,424,770        —          —          2,424,770  

Financial liabilities:

              

Time deposits

     555,447        560,746        —          560,746        —    

Other borrowed funds

     370,955        374,531        —          374,531        —    

Subordinated debentures

     36,083        36,083        —          36,083        —    

 

(1)

Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered.

Note 10. Revenue from Contracts with Customers

Revenue from contracts with customers in the scope of ASC Topic 606 is measured based on the consideration specified in the contract with a customer, and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.

The Company’s performance obligations are typically satisfied as services are rendered, and our contracts do not include multiple performance obligations. Payment is generally collected at the time services are rendered, or monthly. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.

 

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The Company pays sales commissions to its employees in accordance with certain incentive plans. The Company expenses sales commissions when incurred if we do not expect to recover these costs from the terms of the contract with the customer. Sales commissions are included in compensation expense.

In certain cases, other parties are involved with providing products and services to our customers. If the Company is a principal in the transaction (providing goods or services itself), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (arranging for another party to provide goods or services), the Company reports its net fee or commission retained as revenue.

Waivers and reversals are recorded as a reduction of revenue either when the revenue is recognized by the Company or at the time the waiver or reversal is earned by the customer.

A. Nature of goods and services

The vast majority of the Company’s revenue is specifically out-of-scope of Topic 606. For the revenue in-scope, the following is a description of principal activities, separated by the timing of revenue recognition, from which the Company generates its revenue from contracts with customers.

 

  a.

Revenue earned at a point in time – Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, NSF fees, credit and debit card interchange fees and foreign exchange transaction fees. Revenue is generally derived from transactional information accumulated by our systems and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is the principal in each of these contracts, with the exception of credit and debit card interchange fees, in which case we are acting as the agent and record revenue net of expenses paid to the principal.

 

  b.

Revenue earned over time – The Company earns revenue from contracts with customers in a variety of ways in which the revenue is earned over a period of time – generally monthly or quarterly. Examples of this type of revenue are deposit account service fees, lockbox fees, investment management fees, merchant referral services, and safe deposit box fees. Account service charges, management fees and referral fees are recognized on a monthly basis while any transaction based income is recorded as the activity occurs. Revenue is primarily based on the number and type of transactions or assets managed and is generally derived from transactional information accumulated by our systems. Revenue is recorded in the same period as the related transactions occur or services are rendered to the customer.

B. Disaggregation of revenue

The following table presents total revenues as presented in the Consolidated Statements of Income and the related amounts which are from contracts with customers within the scope of Topic 606. As illustrated here, the vast majority of our revenues are specifically excluded from the scope of Topic 606.

 

     Three      Revenue from      Three      Revenue from  
     Months      Contracts in      Months      Contracts in  
     Ended      Scope of      Ended      Scope of  
     3/31/2020      Topic 606      3/31/2019      Topic 606  
            (dollars in thousands)         

Total interest income

   $ 25,201      $ —        $ 23,438      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges on deposit accounts

     2,296        2,296        2,209        2,209  

Lockbox fees

     930        930        1,089        1,089  

Gains on sales of mortgage loans

     —          —          15        —    

Other income

     1,084        599        1,114        800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     4,310        3,825        4,427        4,098  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 29,511      $ 3,825      $ 27,865      $ 4,098  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table provides information about receivables with customers.

 

     March 31, 2020      December 31, 2019  
(dollars in thousands)              

Receivables, which are included in “Other assets”

   $ 1,236      $ 1,200  

Note 11. Leases

The Company has operating leases primarily for branch locations as well as data processing centers. The Company’s operating leases have remaining lease terms of 1 year to 32 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. The Company also has one sublease for part of a data processing center that the Company currently leases from a lessor. The sublease expires in 2022 with an option to terminate and no option to extend. Lease income, for the sublease, totaled approximately $9,900 for the three months ended March 31, 2020. Variable lease costs include costs that are not included in the lease liability.

The components of lease expense were as follows:

 

            Three  
     Three Months      Months  
     Ended      Ended  
     3/31/2020      3/31/2019  
(in thousands)              

Operating lease cost

   $ 546      $ 563  

Variable lease cost

     133        148  
  

 

 

    

 

 

 

Total lease cost

   $ 679      $ 711  
  

 

 

    

 

 

 

Supplemental cash flow information related to leases was as follows:

 

            Three  
     Three Months      Months  
     Ended      Ended  
     3/31/2020      3/31/2019  
(in thousands)              

Cash paid for amounts included in the measurement of lease liabilities:

     

Operating cash flows from operating leases

   $ 529      $ 538  
  

 

 

    

 

 

 

Right-of-use assets obtained in exchange for lease obligations:

     

Operating leases

   $ 421      $ 443  
  

 

 

    

 

 

 

Supplemental balance sheet information related to leases was as follows:

 

     3/31/2020     12/31/2019  
(in thousands, except lease term and discount rate)             

Operating Leases:

    

Operating lease right-of-use assets

   $ 12,085     $ 12,521  

Operating lease liabilities

   $ 12,267     $ 12,690  

Weighted Average Remaining Lease Term:

    

Operating Leases

     11 years       11 years  

Weighted Average Discount Rate:

    

Operating Leases

     3.5     3.5

 

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

 

     Minimum Rental Payments  
     March 31, 2020      December 31, 2019  
     (in thousands)  

Year Ending December 31,

     

2020

   $ 1,502      $ 2,030  

2021

     1,754        1,754  

2022

     1,603        1,603  

2023

     1,545        1,545  

2024

     1,277        1,277  

Thereafter

     7,311        7,312  
  

 

 

    

 

 

 

Total lease payments

   $ 14,992      $ 15,521  
  

 

 

    

 

 

 

Less imputed interest

     (2,725      (2,831
  

 

 

    

 

 

 

Present value of lease liability

   $ 12,267      $ 12,690  
  

 

 

    

 

 

 

March 31, 2020 minimum rental payments represent nine months of rental payments remaining in calendar year 2020.

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At March 31, 2020, the Company had total assets of $5.6 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher educational institutions primarily throughout Massachusetts, New Hampshire, Rhode Island, Connecticut and New York.

The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity. The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium sized businesses and retail customers in its market area. In recent years, the Company has increased business to larger institutions, specifically, healthcare and higher education. The Company makes commercial loans, real estate and construction loans and 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 comprising of approximately 298 government entities.

During the first quarter of 2020, the COVID-19 pandemic caused economic turmoil for individuals and businesses throughout the country and, in particular, our market area. Many businesses were required to fully or partially shut down. Many businesses laid off and/or furloughed employees as a result. Unemployment is expected to increase significantly, and GDP is expected to decline 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. We also anticipate the Company’s revenue may be negatively impacted as transaction fees will decline due to decreased volume.

In response to the pandemic, on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act, among other things, provides cash payments to certain individuals and has various programs for businesses. In particular, it includes the Payroll Protection Program 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

 

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exhausted on April 16, 2020. On April 24, 2020, an additional allocation of $310 billion was signed into law. These loans are funded by participating banks and are 100% guaranteed by the SBA. If utilized primarily for payroll, subject to certain other conditions, the loans may be forgiven, in whole or in part, and repaid by the SBA. Subsequent to March 31, 2020, Century Bank received SBA approvals for 1,215 loans totaling approximately $232 million. The fees expected to be collected, from the SBA, should all of the loans close, amount to approximately $7.8 million. The fees will be amortized over the lives of the loans utilizing the level-yield method.

The Company is considered an essential business based on criteria set by the Governor of the Commonwealth of Massachusetts. However, the Company has been and may continue to be affected by a work stoppage, forced quarantine, or other interruption or the unavailability of key employees.

Net income for the three months ended March 31, 2020, was $9,666,000 or $1.74 per Class A share diluted, an increase of 2.6% compared to net income of $9,418,000, or $1.69 per Class A share diluted, for the same period a year ago.

Earnings per share (EPS) for each class of stock and time period is as follows:

 

     Three Months Ended  
     March 31,  
     2020      2019  

Basic EPS – Class A common

   $ 2.10      $ 2.05  

Basic EPS – Class B common

   $ 1.05      $ 1.03  

Diluted EPS – Class A common

   $ 1.74      $ 1.69  

Diluted EPS – Class B common

   $ 1.05      $ 1.03  

Net interest income totaled $25,201,000 for the quarter ended March 31, 2020 compared to $23,438,000 for the same period in 2019. The 7.5% increase in net interest income for the period is primarily due to an increase in average earning assets and prepayment penalties collected. Prepayment penalties collected amounted to approximately $874,000 for the first quarter of 2020 compared to $12,000 for the same period last year. The net interest margin remained stable at 2.11% on a fully taxable equivalent basis in 2019 and 2020.

The average balances of earning assets increased by $244,641,000 or 4.9%, combined with an average yield decrease of 0.14%, resulting in an increase in interest income of $718,000. The average balance of interest-bearing liabilities increased by $265,767,000 or 6.6%, combined with an average interest-bearing liabilities interest cost decrease of 0.21%, resulting in a decrease in interest expense of $1,045,000.

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

 

LOGO

The margin remained relatively stable for the first three quarters of 2018. During the fourth quarter of 2018 and first and second quarters of 2019, the Company increased its average interest-bearing deposits and average earning assets. This increased net interest income but decreased the net interest margin. During the third quarter of 2019, the net interest margin increased mainly as a result of deposit rate decreases. These deposits increased net interest income and the net interest margin. During the fourth quarter of 2019, the net interest margin increased mainly as a result of prepayment penalties collected. Prepayment penalties collected amounted to $1.4 million and contributed approximately eleven basis points to the net interest margin for the fourth quarter of 2019. The net interest margin decreased during the first quarter of 2020, mainly as a result of decreases in rates on earning assets. This was partially offset by prepayment penalties collected of $874,000 and contributed approximately seven basis points to the net interest margin. 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.

 

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The provision for loan losses increased by $700,000 from $375,000 for the quarter ended March 31, 2019 to $1,075,000 for the same period in 2020, primarily due to the increase in economic factors as a result of of the economic impact of the novel coronavirus disease (COVID–19) pandemic. Refer to the allowance for loan loss section of the management discussion and analysis for additional discussion. Non-performing assets totaled $1,701,000 at March 31, 2020, compared to $2,014,000 at December 31, 2019.

The Company’s effective tax rate increased from (1.3%) for the quarter ended March 31, 2019 to 5.8% for the same period in 2020. This was primarily as a result of a reduction in tax accruals, during 2019, related to sequestration of the refundable portion of our alternative minimum tax (AMT) credit carryforward. On January 14, 2019, the IRS updated its announcement “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations” to clarify that refundable AMT credits under Section 53(e) of the Internal Revenue Code are not subject to sequestration for taxable years beginning after December 31, 2017. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. As a result of the CARES Act, the full balance of the AMT credit will be refunded in 2020.

During the third quarter of 2019, the Company purchased the existing Brookline branch location that the Company was leasing. Also, during the third quarter of 2019, the Company purchased a future branch location in Salem, New Hampshire. The Company plans to open this branch during the fourth quarter of 2020.

Recent Market Developments

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “D-F Act”) became law. The D-F Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope, affecting many aspects of bank and financial market regulation. The D-F Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The D-F Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The D-F Act broadened the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest-bearing transaction accounts through December 31, 2012.

In addition, the D-F Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December 2013 and under an extended conformance regulation compliance was required to be achieved by July 21, 2015. The conformance period for investments in and relationships with certain “legacy covered funds” was extended to July 21, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation. The federal banking agencies have issued amendments to the Rule to provide greater clarity and certainty about what activities are prohibited and to improve the effective allocation of compliance resources, and to conform the Rule to the EGRRCPA (discussed below). The federal banking agencies have also issued a notice of proposed rulemaking to liberalize the covered fund rules.

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 will be refunded in 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.

 

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Economic Growth, Regulatory Relief, and Consumer Protection Act

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or the EGRRCPA, became law. This is arguably the most significant financial institution legislation since the D-F Act. The EGRRCPA changes certain of the regulatory requirements of the D-F Act and includes provisions intended to relieve the regulatory burden on “community banks.” Among other things, for qualifying community banks with less than $10 billion in total consolidated assets, the EGRRCPA contains a safe harbor from the D-F Act “ability to repay” mortgage requirements, an exemption from the Volcker Rule, may permit filing of simplified Call Reports, and potentially will result in some alleviation of the D-F Act and U.S. Basel III capital mandates. The EGRRCPA requires the federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%. The federal banking agencies jointly issued a final rule, effective January 1, 2020, which would set the minimum ratio at 9%. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements including the capital ratio requirements that are required to be considered well capitalized under Section 38 of Federal Deposit Insurance Act.

Coronavirus Aid, Relief and Economic Security (CARES) Act

On March 18, 2020 the Families First Coronavirus Response Act (FFCRA) was signed into law and on March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The FFCRA and the CARES Act provide relief for families and businesses impacted by the coronavirus pandemic. The provisions in this legislation include, among other things, loan programs for businesses, expanded unemployment insurance benefits, stimulus payments to certain taxpayers, new provisions on sick leave and family leave, and funding for a variety of health-related efforts and government programs. The CARES Act also allowed a temporary deferral of FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The Company has elected to defer FASB ASU 2016-13. Also as a result of the CARES Act, the full balance of the AMT credit will be refunded in 2020.

Recent Accounting Developments

Recently Adopted Accounting Standards Updates

In August 2018, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This ASU is effective for annual reporting periods beginning after December 15, 2019. The effect of this ASU did not have a material impact on the Company’s consolidated financial position.

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU is effective for annual reporting periods beginning after December 15, 2019. The effect of this update did not have a material impact on the Company’s disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, and application should be on a prospective basis. The effect of this update did not have a material impact on the Company’s consolidated financial position.

Accounting Standards Issued but not yet Adopted

The following list identifies ASUs applicable to the Company that have been issued by the FASB but are not yet effective:

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The effect of this ASU is not expected to have a material impact on the Company’s consolidated financial position.

 

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL). This ASU was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date.

To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. See discussion below of the deferral of the amendments in this ASU.

To implement the new standard the Company has purchased a software solution and has captured the information needed to implement this ASU. As part of the FASB ASC 326 implementation process, the company is using two models: a rating migration model and a probability of default model. The ratings migration model, which will be used for our larger loans made to institutions with available credit ratings, is designed to estimate loss reserves according to the CECL standard for rated loans or similar instruments. The model structure follows a grade migration approach, where the default rate is based on the probability of each grade transition which is modelled using historical data. The probability of default model, which will be used for our remaining commercial loans and our consumer loans, is based primarily on four components: loss history, product lifecycle, behavioral attributes and the economic environment. During the fourth quarter of 2019, the Company tested the two CECL credit models in parallel with the existing incurred loss models. The securities held-to-maturity include U.S. Treasury, U.S. Government Sponsored Enterprises, BSA Backed Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities. The Company expects no impact from ASU 2016-13 to arise from this portfolio.

Since ASU 2016-13, the FASB has issued amendments intended on improving the clarification of the amendment, ASU 2018-19 Codification Improvements to Topic 326, Financial Instruments—Credit Losses and ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging. The amendment in ASU 2018-19 was issued in November 2018 and was intended to clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The amendment in ASU 2019-04 was issued in April 2019 and was intended to clarify stakeholders’ specific issues about certain aspects of the amendments in ASU 2016-13. ASU 2019-05 Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief was also issued in May 2019. This ASU provides entities the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized costs basis. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall. The amendments in this ASU should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity early adopted the amendments in ASU 2016-13. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in this ASU affect a variety of Topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. This ASU is effective for annual reporting periods beginning after December 15, 2019.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act allows certain companies to delay FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments (CECL), including the current expected credit losses methodology for estimating allowances for credit losses. The Company has elected to delay FASB ASU 2016-13. This ASU will be delayed until the date on which the national emergency concerning the COVID–19 outbreak declared by the President on March 15, 2020 terminates or December 31, 2020, with an effective retrospective implementation date of January 1, 2020. The effects of these ASUs will not have a material impact on the Company’s consolidated financial position at January 1, 2020 upon retroactive adoption. The Company does not believe the impact of adoption would have been material to the Company’s consolidated financial position as of March 31, 2020.

In August 2018, FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. This ASU is effective for annual reporting periods beginning after December 15, 2020. The effect of this update will not have a material impact on the Company’s consolidated financial position.

 

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Financial Condition

Loans

On March 31, 2020, total loans outstanding were $2,498,894, up by $72,775,000 from the total on December 31, 2019. At March 31, 2020, commercial real estate loans accounted for 30.5%, commercial and industrial accounted for 34.7%, and residential real estate loans, including home equity loans, accounted for 28.0% of total loans.

Commercial and industrial loans increased to $867,599,000 at March 31, 2020 from $812,417,000 at December 31, 2019, primarily as a result of loan originations. Commercial real estate loans decreased to $761,464,000 from $786,102,000 on December 31, 2019 primarily as a result of loan payoffs. Construction loans decreased to $6,493,000 at March 31, 2020 from $8,992,000 on December 31, 2019, primarily as a result of loan payoffs. Residential real estate loans increased to $393,338,000 on March 31, 2020 from $371,897,000 on December 31, 2019, primarily as a result of loan originations. Home equity loans increased to $307,373,000 on March 31, 2020 from $304,363,000 at December 31, 2019, primarily as a result of a home equity loan promotion. Municipal loans increased to $141,588,000 from $120,455,000, primarily as a result of loan originations.

In recent years, the Company has increased business to larger institutions, specifically, healthcare, higher education, and municipal organizations. Further discussion relating to changes in portfolio composition is discussed in the allowance for loan loss section of the management discussion and analysis. We will closely monitor the concentrations to determine the impact of COVID-19 upon their short-term and long-term operations.

Allowance for Loan Losses

The allowance for loan loss at March 31, 2020 was $30,804,000 as compared to $29,585,000 at December 31, 2019. The level of the allowance for loan losses to total loans was 1.23% at March 31, 2020 and 1.22% at December 31, 2019. The coverage ratio has increased primarily as a result of increased allocations for economic factors associated with the COVID-19 pandemic. The Company monitors the outlook for the industries in which our borrowers operate. Healthcare and higher education are two of the primary industries. In particular the Company utilizes outlooks and forecasts from various sources. The Company also monitors the volatility of the losses within the historical data.

By combining the credit rating, the industry outlook and the loss volatility, the Company arrives at the loss factor for each credit grade. For a large loan to large institutions with publicly available credit ratings, the Company tracks these ratings. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2020.

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2020 and are included within the total loan portfolio.

 

     Commercial             Commercial         
     and             Real         
     Industrial      Municipal      Estate      Total  
     (in thousands)  

Credit Rating:

        

Aaa – Aa3

   $ 568,173      $ 74,406      $ 38,955      $ 681,534  

A1 – A3

     185,819        7,354        147,953        341,126  

Baa1 – Baa3

     —          51,133        143,302        194,435  

Ba2

     —          5,895        —          5,895  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 753,992      $ 138,788      $ 330,210      $ 1,222,990  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit ratings issued by national organizations are presented in the following table at December 31, 2019.

 

     Commercial             Commercial         
     and             Real         
     Industrial      Municipal      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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories.

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

 

     Three months ended  
     March 31,  
             2020                      2019          
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 29,585      $ 28,543  

Loans charged off

     (62      (142

Recoveries on loans previously charged-off

     206        72  
  

 

 

    

 

 

 

Net recoveries (charge-offs)

     144        (70

Provision charged to expense

     1,075        375  
  

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 30,804      $ 28,848  
  

 

 

    

 

 

 

The Company may experience increased levels of nonaccrual loans if borrowers are negatively impacted by future negative economic conditions. Management continually monitors trends in the loan portfolio to determine the appropriate level of allowance for loan losses. At the current time, management believes that the allowance for loan losses is adequate.

Nonperforming Assets

The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated:

 

     March 31,     December 31,  
             2020                     2019          
     (dollars in thousands)  

Nonaccruing loans

   $ 1,701     $ 2,014  

Total nonperforming assets

   $ 1,701     $ 2,014  

Loans past due 90 days or more and still accruing

   $ —       $ —    

Nonaccruing loans as a percentage of total loans

     0.07     0.08

Nonperforming assets as a percentage of total assets

     0.03     0.04

Accruing troubled debt restructures

   $ 2,337     $ 2,361  

Investments

Management continually evaluates its investment alternatives in order to properly manage the overall balance sheet mix. The timing of purchases, sales and reinvestments, if any, will be based on various factors including expectation of movements in market interest rates, deposit flows and loan demand. Notwithstanding these events, it is the intent of management to grow the earning asset base mainly through loan originations while funding this growth through a mix of retail deposits, FHLB advances, and retail repurchase agreements.

Securities Available-for-Sale (at Fair Value)

The securities available-for-sale portfolio totaled $278,019,000 at March 31, 2020, an increase of 6.7% from December 31, 2019. The portfolio increased mainly as a result of purchases of securities available-for-sale totaling $39,719,000. The purchases include $9,372,000 of securities that are obligations issued by States and Political Subdivisions. This was offset, somewhat by calls/maturities and scheduled principal payments of $20,734,000. The portfolio is concentrated in United States Government Sponsored Enterprises, Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 5.0 years.

At March 31, 2020, 93.8% of the Company’s securities available-for-sale are classified as Level 2. The fair values of these securities are generally obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored.

 

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Securities available-for-sale totaling $17,224,000 or 6.2% of securities available-for-sale are classified as Level 3. These securities are generally municipal securities with no observable fair value with an average life of one year or less. The securities are carried at cost which approximates fair value. A periodic review of underlying financial statements and credit ratings is performed to assess the appropriateness of these valuations.

During the first three months of 2020, net unrealized loss on the securities available-for-sale increased to $2,501,000 from a net unrealized loss of $422,000 at December 31, 2019. This was primarily the result of a decrease in the value of floating rate securities.

The following table sets forth the fair value of securities available-for-sale at the dates indicated.

 

     March 31,      December 31,  
             2020                      2019          
     (in thousands)  

Small Business Administration

   $ 50,615      $ 54,211  

U.S Government Agency and Sponsored Enterprise Mortgage-backed Securities

     206,215