CNTRY BNC Overview
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the "Company") is aMassachusetts corporation formed in 1972 and has one banking subsidiary (the "Bank"):Century Bank and Trust Company , aMassachusetts state-chartered trust company formed in 1969 and headquartered inMedford, Massachusetts . AtJune 30, 2021 , the Company had total assets of$7.3 billion . Currently, the Company operates 28 banking offices in 21 cities and towns inMassachusetts andSouthern New Hampshire , ranging fromBraintree in the south toSalem, New Hampshire in the north. The Bank's customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher educational institutions primarily throughoutMassachusetts ,New Hampshire ,Rhode Island ,Connecticut ,New York ,Virginia ,Washington D.C. , andPennsylvania . 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 atCentury Bank , which is supported by LPL Financial, a third party full-service securities brokerage business. The Company has municipal cash management client engagements inMassachusetts ,New Hampshire andRhode Island composed of approximately 302 government entities. Net income for the six months endedJune 30, 2021 , was$21,593,000 or$3.88 per Class A share diluted, an increase of 9.5% compared to net income of$19,722,000 , or$3.54 per Class A share diluted, for the same period a year ago. Earnings per share "EPS" for each class of stock and time period is as follows: Three Months Ended June 30, 2021 2020 Basic EPS - Class A common$ 2.35 $ 2.18 Basic EPS - Class B common$ 1.17 $ 1.09 Diluted EPS - Class A common$ 1.94 $ 1.81 Diluted EPS - Class B common$ 1.17 $ 1.09 Six Months Ended June 30, 2021 2020 Basic EPS - Class A common$ 4.68 $ 4.28 Basic EPS - Class B common$ 2.34 $ 2.14 Diluted EPS - Class A common$ 3.88 $ 3.54 Diluted EPS - Class B common$ 2.34 $ 2.14 Page 34 of 49
-------------------------------------------------------------------------------- Net interest income totaled$58.6 million for the six months endedJune 30, 2021 compared to$51.0 million for the same period in 2020. The 14.8% increase in net interest income for the period is primarily due to a decrease in interest expense as a result of falling interest rates. The net interest margin decreased from 2.04% on a fully tax-equivalent basis for the first six months of 2020 compared to 1.81% for the same period in 2021. This was primarily the result of the recent decrease in interest rates across the yield curve. The average balances of interest-earning assets increased for 2021 compared to the same period last year, by$1.49 billion or 27.5%, combined with an average yield decrease of 0.79%, resulting in a decrease in interest income of$4.7 million . The average balance of interest-bearing liabilities increased for 2021 compared to the same period last year, by$1.14 billion or 26.0%, combined with an average interest-bearing liabilities interest cost decrease of 0.68%, resulting in a decrease in interest expense of$12.3 million . The trends in the net interest margin are illustrated in the graph below: [[Image Removed]] The net interest margin decreased during the first quarter of 2020 mainly as a result of decreases in rates on earning assets. This was partially offset by prepayment penalties collected of$874,000 and contributed approximately seven basis points to the net interest margin. The net interest margin decreased during the second, third, and fourth quarters of 2020 primarily as a result of increased margin pressure during the recent decrease in interest rates across the yield curve. This was partially offset by prepayment penalties collected of$453,000 and contributed approximately three basis points to the net interest margin during the fourth quarter of 2020. The net interest margin decreased during the first half of 2021 primarily as a result of the recent decrease in interest rates across the yield curve. While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will positively impact the net interest margin. There was a credit to the provision for loan losses of$550,000 for the six months endedJune 30, 2021 compared to a provision of$3.3 million for the same period in 2020. The provision for the first six months of 2020 was primarily a result of provisions related to the onset of the COVID-19 pandemic. The credit provision for the first six months of 2021 was primarily attributable to a reduction in specific allocations to the allowance for loan losses and a reduction in the historical experience reserve allocation. The Company's effective tax rate increased from 7.8% for the six months endedJune 30, 2020 to 15.4% for the same period in 2021. This was primarily as a result of an increase in taxable income relative to total income and nondeductible merger related expenses. During the third quarter of 2019, the Company purchased a future branch location inSalem, New Hampshire . The Company opened this branch during the second quarter of 2021. During the second quarter of 2020, the Company executed a lease for a future branch location inNeedham, Massachusetts . The Company plans to open this branch during the fourth quarter of 2021. Page 35 of 49 -------------------------------------------------------------------------------- Recent Market Developments Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), Families First Coronavirus Response Act ("FFCRA"), and Coronavirus Response and Relief Supplemental Appropriations Act of 2021 OnMarch 18, 2020 , the FFCRA was signed into law and onMarch 27, 2020 , the CARES Act was signed into law. The FFCRA and the CARES Act provide relief for families and businesses impacted by the coronavirus pandemic. The provisions in this legislation include, among other things, loan programs for businesses, expanded unemployment insurance benefits, stimulus payments to certain taxpayers, new provisions on sick leave and family leave, and funding for a variety of health-related efforts and government programs. Also, as a result of the CARES Act, the full balance of the Company's AMT credit was refunded in 2020. The CARES Act, among other things, provides cash payments to certain individuals and has various programs for businesses. In particular, it includes the PPP which provides forgivable loans to qualified small businesses, primarily to allow these businesses to continue to pay their employees. The original amount allocated to the program was$349 billion , which was exhausted onApril 16, 2020 . OnApril 24, 2020 , an additional allocation of$310 billion was signed into law. These loans are funded by participating banks and are 100% guaranteed by the SBA. If utilized primarily for payroll, subject to certain other conditions, the loans may be forgiven, in whole or in part, and repaid by the SBA. During 2020 and 2021, the Company participated in the PPP. Since the inception of the program, PPP originations totaled approximately 2,008 loans for approximately$341 million . As ofJune 30, 2021 ,Century Bank's PPP loans totaled approximately 939 loans for approximately$142 million . The fees collected, from the SBA, amount to approximately$12.7 million . The amount of fees recognized during the first six months of 2021 amounted to approximately$3.5 million compared to$1.1 million for the same period last year. Total cost deferrals amounted to approximately$1.9 million since inception. The amount of costs recognized during the first six months of 2021 amounted to approximately$688,000 compared to$146,000 for the same period last year. The fees and costs are being amortized over the lives of the loans utilizing the level-yield method. Under Section 4013 of the CARES Act, fromMarch 1, 2020 through the earlier ofJanuary 1, 2022 or 60 days after the termination date of the national emergency declared by the President onMarch 13, 2020 concerning the COVID-19 outbreak (the "national emergency"), a financial institution may elect to suspend the requirements underU.S. GAAP for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a troubled debt restructured, including impairment accounting. This troubled debt restructuring relief applies for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as ofDecember 31, 2019 . As ofJune 30, 2021 , and as a result of COVID-19 loan modifications, the Company has modifications of 4 loans aggregating$16.5 million , primarily consisting of short-term payment deferrals. Of these modifications,$16.5 million , or 100%, were performing in accordance with their modified terms. The CARES Act also allows companies to delayFinancial Accounting Standards Board (FASB) Accounting Standards Update (ASU) 2016-13, Measurement of Credit Losses on Financial Instruments (CECL), including the current expected credit losses methodology for estimating allowances for credit losses. The Company elected to delay FASB ASU 2016-13. This ASU was delayed until the earlier of the date on which the national emergency terminates orDecember 31, 2020 , with an effective retrospective implementation date ofJanuary 1, 2020 . OnDecember 27, 2020 , the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law. The law changed the delayed implementation date to the earlier of the Company's fiscal year that begins after the date on which the national emergency terminates orJanuary 1, 2022 . Recent Accounting Developments Recently Adopted Accounting Standards Updates InAugust 2018 , FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)" ("ASU 2018-14"), to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for fiscal years beginning afterDecember 15, 2020 , for public business entities and for fiscal years beginning afterDecember 15, 2021 , for all other entities. Early adoption is permitted. Management has evaluated ASU 2018-14 and as ofJanuary 1, 2021 , the Company has adopted ASU 2018-14 and determined the impact to be immaterial. InDecember 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 afterDecember 15, 2020 . The effect of this ASU did not have a material impact on the Company's consolidated financial position. Page 36 of 49 -------------------------------------------------------------------------------- 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: InMarch 2020 , the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU are effective for a limited period and mainly address accounting and reporting challenges due to the transition from LIBOR on existing contracts. The optional expedients may be applied to loans, borrowings, leases and derivatives at any period as of any date from the beginning of an interim period that includes or is subsequent toMarch 12, 2020 , or prospectively from a date within an interim period that includes or is subsequent toMarch 12, 2020 up to the date that the financial statements are available to be issued. The ASU simplifies the accounting analyses for contract modifications and simplifies the hedge effectiveness assessment and allows hedging relationships impacted by the LIBOR transition to continue. The amendments in this ASU are effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . The Company is assessing the impact of this standard but does not expect that it will have a material impact on the Company's consolidated financial statements, or results of operations. InJune 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 afterDecember 15, 2019 , including interim periods within those fiscal years. See discussion below of the deferral of the amendments in this ASU. To implement the new standard the Company has purchased a software solution and has captured the information needed to implement this ASU. As part of the FASB ASC 326 implementation process, the company is using two models: a rating migration model and a probability of default model. The ratings migration model, which will be used for our larger loans made to institutions with available credit ratings, is designed to estimate loss reserves according to the CECL standard for rated loans or similar instruments. The model structure follows a grade migration approach, where the default rate is based on the probability of each grade transition which is modelled using historical data. The probability of default model, which will be used for our remaining commercial loans and our consumer loans, is based primarily on four components: loss history, product life cycle, behavioral attributes and the economic environment. Since the fourth quarter of 2019, the Company tested the two CECL credit models in parallel with the existing incurred loss models. The securities held-to-maturity includeU.S. Treasury ,U.S. Government Sponsored Enterprises ,SBA Backed Securities andU.S. Government Agency andSponsored Enterprise Mortgage-Backed Securities . The CECL standard allows assumption of zero expected credit losses where expectation of non-payment is zero for these types of securities. The Company expects no impact from ASU 2016-13 to arise from this portfolio. Since ASU 2016-13, the FASB has issued amendments intended on improving the clarification of the amendment, ASU 2018-19 Codification Improvements to Topic 326, Financial Instruments-Credit Losses and ASU 2019-04 Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging. The amendment in ASU 2018-19 was issued inNovember 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 inApril 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 inMay 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. InNovember 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 afterDecember 15, 2019 . See discussion below of the deferral of the amendments in this ASU. Page 37 of 49 -------------------------------------------------------------------------------- OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act allows certain companies to delay FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments (CECL), and subsequent amendments to the ASU noted above, including the current expected credit losses methodology for estimating allowances for credit losses. The Company has elected to delay FASB ASU 2016-13. This ASU was delayed until the earlier of the date on which the national emergency concerning the COVID-19 outbreak declared by the President onMarch 15, 2020 terminates orDecember 31, 2020 , with an effective retrospective implementation date ofJanuary 1, 2020 . OnDecember 27, 2020 , the Coronavirus Response and Relief Supplemental Appropriations Act of 2021 was signed into law. The law changed the delayed implementation date to the earlier of the first day of the Company's fiscal year that begins after the date on which the national emergency terminates orJanuary 1, 2022 . The Company does not believe the impact of adoption would have been material to the Company's consolidated financial statements as ofJune 30, 2021 . Financial Condition Loans OnJune 30, 2021 , total loans outstanding were$2,999,133,000 , up by$3,304,000 from the total onDecember 31, 2020 . AtJune 30, 2021 , commercial real estate loans accounted for 27.1%, commercial and industrial accounted for 43.2%, and residential real estate loans, including home equity loans, accounted for 24.1% of total loans. Commercial and industrial loans decreased to$1,296,399,000 onJune 30, 2021 from$1,314,245,000 atDecember 31, 2020 . The Company originated approximately$108,197,000 of PPP loans during the six months endedJune 30, 2021 and received approximately$162,837,000 of PPP loan payoffs, primarily from loan forgiveness, during the first six months of 2021. Commercial real estate loans increased to$813,163,000 onJune 30, 2021 from$789,836,000 onDecember 31, 2020 primarily as a result of loan originations. Construction loans decreased to$6,404,000 atJune 30, 2021 from$10,909,000 onDecember 31, 2020 , primarily as a result of loan payoffs. Residential real estate loans increased to$471,671,000 onJune 30, 2021 from$448,436,000 onDecember 31, 2020 , primarily as a result of loan originations. Home equity loans decreased to$252,114,000 onJune 30, 2021 from$274,357,000 onDecember 31, 2020 , primarily as a result of a home equity loan payoffs. Municipal loans increased slightly to$138,771,000 from$137,607,000 . In recent years, the Company has increased business to larger institutions, specifically, healthcare, higher education, and municipal organizations. Further discussion relating to changes in portfolio composition is provided in the allowance for loan loss section 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 atJune 30, 2021 was$34,949,000 as compared to$35,486,000 atDecember 31, 2020 . The level of the allowance for loan losses to total loans was 1.17% atJune 30, 2021 and 1.18% atDecember 31, 2020 . The ratio of the allowance for loan losses to loans outstanding has decreased slightly fromDecember 31, 2020 , primarily from the payoff of a large loan relationship which had a specific reserve and a reduction in the historical experience reserve allocation. The Company monitors the outlook for the industries in which our borrowers operate. Healthcare and higher education are two of the primary industries. In particular the Company utilizes outlooks and forecasts from various sources. The Company also monitors the volatility of the losses within the historical data. By combining the credit rating, the industry outlook and the loss volatility, the Company arrives at the loss factor for each credit grade. For a large loan to large institutions with publicly available credit ratings, the Company tracks these ratings. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table atJune 30, 2021 . Page 38 of 49 -------------------------------------------------------------------------------- Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table atJune 30, 2021 and are included within the total loan portfolio. Commercial and Commercial Industrial Municipal Real Estate Total (in thousands) Credit Rating: Aaa - Aa3$ 761,705 $ 75,825 $ 36,184 $ 873,714 A1 - A3 181,928 6,983 143,001 331,912 Baa1 - Baa3 50,000 51,133 145,513 246,646 Ba2 - 4,830 - 4,830 Total$ 993,633 $ 138,771 $ 324,698 $ 1,457,102
Credit ratings issued by national organizations are presented in the following
table at
Commercial
and Commercial
Industrial Municipal Real Estate Total
(in thousands)
Credit Rating:
Aaa - Aa3 $ 710,955 $ 74,291 $ 38,035 $ 823,281
A1 - A3 183,123 7,103 145,583 335,809
Baa1 - Baa3 50,000 51,133 140,905 242,038
Ba2 - 5,080 - 5,080
Total $ 944,078 $ 137,607 $ 324,523 $ 1,406,208
The allowance for loan losses is an estimate of the amount needed for an
adequate reserve to absorb losses in the existing loan portfolio. This amount is
determined by an evaluation of the loan portfolio, including input from an
independent organization engaged to review selected larger loans, a review of
loan experience and current economic conditions. Although the allowance is
allocated between categories, the entire allowance is available to absorb losses
attributable to all loan categories.
The following table summarizes the changes in the Company's allowance for loan
losses for the periods indicated.
Three months ended Six months ended
June 30, June 30,
2021 2020 2021 2020
(in thousands) (in thousands)
Allowance for loan losses, beginning of period $ 34,952 $ 30,804 $ 35,486 $ 29,585
Loans charged off (29 ) (17 ) (96 ) (79 )
Recoveries on loans previously
charged-off 26 29 109 235
Net recoveries (charge-offs) (3 ) 12 13 156
(Credit) provision charged to expense - 1,700 (550 ) 2,775
Allowance for loan losses, end of period
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.
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Nonperforming Assets
The following table sets forth information regarding nonperforming assets held
by the Bank at the dates indicated:
June 30, December 31,
2021 2020
(dollars in thousands)
Nonaccruing loans $ 1,270 $3,996
Total nonperforming assets $ 1,270 $3,996 Loans past due 90 days or more and still accruing $ -
$ 90 Nonaccruing loans as a percentage of total loans 0.04 % 0.13 % Nonperforming assets as a percentage of total assets 0.02 % 0.06 % Accruing troubled debt restructures$ 2,079
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$232,033,000 atJune 30, 2021 , a decrease of 17.8% fromDecember 31, 2020 . The portfolio decreased mainly as a result of paydowns and maturities of securities available-for-sale totaling$68,112,000 offset, somewhat by purchases of$16,055,000 . The portfolio is concentrated inUnited States Government Sponsored Enterprises ,Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 5.3 years. AtJune 30, 2021 , 88.5% of the Company's securities available-for-sale are classified as Level 2. The fair values of these securities are generally obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored. Securities available-for-sale totaling$26,747,000 or 11.5% 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 six months of 2021, net unrealized gains on the securities available-for-sale increased to$1,748,000 from a net unrealized gain of$175,000 atDecember 31, 2020 . This was primarily the result of an increase in the value of floating rate securities. The following table sets forth the fair value of securities available-for-sale at the dates indicated. June 30, December 31, 2021 2020 (in thousands) Small Business Administration$ 41,065 $ 44,039 U.S Government Agency and Sponsored Enterprise Mortgage-backed Securities 155,632
177,741
Privately Issued Residential Mortgage-backed Securities 274
328
Obligations issued by States and Political Subdivisions 26,747 52,276 Other Debt Securities 8,315 8,064Total Securities Available-for-Sale$ 232,033 $282,448 There were no sales of available-for-sales securities for the six months endedJune 30, 2021 . Page 40 of 49
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Securities Held-to-Maturity (at Amortized Cost) The securities held-to-maturity portfolio totaled$3,350,561,000 onJune 30, 2021 , an increase of 33.5% fromDecember 31, 2020 . Purchases of held-to-maturity securities totaled$1,358,830,000 for the six months endedJune 30, 2021 . The purchases were offset somewhat, by maturities and scheduled principal payments of$518,044,000 . The portfolio is concentrated inUnited States Government Sponsored Enterprises andMortgage-backed Securities and had an estimated weighted average remaining life of 4.7 years. The following table sets forth the amortized cost of securities held-to-maturity at the dates indicated. June 30, December 31, 2021 2020 (in thousands) U.S. Government Sponsored Enterprises$ 356,080 $ 244,220 SBA Backed Securities 34,626
37,783
U.S. Government Agency and Sponsored Enterprise Mortgage-backed Securities 2,959,855 2,227,085Total Securities Held-to-Maturity$ 3,350,561 $ 2,509,088 There were no sales of held-to-maturity securities for the six months endedJune 30, 2021 . The net unrealized gains on investment securities held-to-maturity were$10,170,000 or 0.3% of the total securities held-to-maturity portfolio atJune 30, 2021 and the net unrealized gains was$70,015,000 or 2.8% of the total securities held-to-maturity portfolio atDecember 31, 2020 . The decrease in the net unrealized gains on securities held-to-maturity related primarily to an increase in interest rates. The gross unrealized losses relate primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not likely that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired as ofJune 30, 2021 andDecember 31, 2020 . OnJune 30, 2021 andDecember 31, 2020 , all mortgage-backed securities are obligations ofU.S. Government Sponsored Enterprises . Debt securities ofGovernment Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac. Federal Home Loan Bank ofBoston Stock The Bank , as a member of theFederal Home Loan Bank of Boston ("FHLBB"), is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews this investment for impairment based on the ultimate recoverability of the cost basis in the stock. As ofJune 30, 2021 , there have been no indicators of impairment that would require further consideration of potential impairment. Equity Securities OnJune 30, 2021 , equity securities totaled$1,697,000 compared to$1,668,000 atDecember 31, 2020 , the increase is the result of changes in fair values. Deposits and Borrowed Funds OnJune 30, 2021 , deposits totaled$6,373,179,000 representing a 16.9% increase fromDecember 31, 2020 . Total deposits increased primarily as a result of an increase in savings and NOW deposits, demand deposits, and money market accounts. These types of deposits increased primarily from an increased customer base and the cyclical nature of the municipal deposit base. Savings and NOW deposits increased mainly as a result of an increase in municipal NOW accounts and corporate savings accounts. Demand deposits increased mainly as a result of increased corporate checking balances as a result of PPP loan proceed deposits. Money market accounts increased mainly as a result of an increase in municipal and corporate money market accounts. Time deposits decreased primarily as a result of decreased municipal time deposits. Borrowed funds totaled$367,331,000 atJune 30, 2021 compared to$409,099,000 atDecember 31, 2020 . Borrowed funds decreased mainly as a result of a decrease in borrowings from the FHLBB, offset, somewhat by an increase in repurchase agreements. FHLBB borrowings decreased mainly as a result of the increase in funds provided by deposits. Repurchase agreements increased primarily as a result of short-term customer activity. Page 41 of 49 -------------------------------------------------------------------------------- Stockholders' Equity AtJune 30, 2021 , total equity was$392,555,000 compared to$370,409,000 onDecember 31, 2020 . The Company's equity increased primarily as a result of earnings, partially offset by dividends paid. The Company's leverage ratio stood at 6.13% onJune 30, 2021 , compared to 6.64% atDecember 31, 2020 . The decrease in the leverage ratio was due to an increase in quarterly average assets, offset somewhat by an increase in stockholders' equity. Book value as ofJune 30, 2021 , was$70.50 as compared to$66.53 onDecember 31, 2020 . Page 42 of 49 -------------------------------------------------------------------------------- Results of Operations The following table sets forth the distribution of the Company's average assets, liabilities and stockholders' equity, and average annualized rates earned or paid on a fully taxable equivalent basis for each of the three-month periods indicated. Three Months Ended June 30, 2021 June 30, 2020 Interest Rate Interest Rate Average Income/ Earned/ Average Income/ Earned/ Balance Expenses (1) Paid (1) Balance Expenses (1) Paid (1) (dollars in thousands) ASSETS Interest-earning assets: Loans (2) Loans taxable$ 1,724,413 $ 14,889 3.46 %$ 1,501,889 $ 13,270 3.55 % Loans tax-exempt 1,269,934 7,625 2.41 % 1,204,389 8,374 2.80 %
Securities available-for-sale (5): Taxable 226,453 481 0.85 % 280,834 938 1.34 % Tax-exempt 41,096 93 0.91 % 11,378 54 1.90 % Securities held-to-maturity: Taxable 3,314,919 14,113
1.70 % 2,370,522 15,222 2.57 %
Interest-bearing deposits in other banks 431,658 112 0.10 % 266,089 68 0.10 %
Total interest-earning assets 7,008,473 37,313 2.13 % 5,635,101 37,926 2.69 %
Non interest-earning assets 353,817 290,228
Allowance for loan losses (35,268 ) (31,477 )
Total assets $ 7,327,022 $ 5,893,852
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 1,338,232 $ 430 0.13 % $ 1,143,571 $ 1,320 0.46 %
Savings accounts 1,015,868 323 0.13 % 803,135 798 0.40 %
Money market accounts 2,394,172 2,489 0.42 % 1,580,486 3,462 0.88 %
Time deposits 462,382 1,115 0.97 % 607,942 3,111 2.06 %
Total interest-bearing deposits 5,210,654 4,357 0.34 % 4,135,134 8,691 0.85 %
Securities sold under agreements to
repurchase 244,666 98 0.16 % 206,764 309 0.60 %
Other borrowed funds and subordinated
debentures 171,568 1,224 2.86 % 192,843 1,302 2.72 %
Total interest-bearing liabilities 5,626,888 5,679 0.40 % 4,534,741 10,302 0.91 %
Non-interest-bearing
liabilities
Demand deposits 1,217,456 924,506
Other liabilities 95,165 87,756
Total liabilities 6,939,509 5,547,003
Stockholders' equity 387,513 346,849
Total liabilities & stockholders' equity $ 7,327,022 $ 5,893,852
Net interest income on a fully taxable
equivalent basis 31,634 27,624
Less taxable equivalent adjustment (1,643 ) (1,806 )
Net interest income $ 29,991 $ 25,818
Net interest spread (3) 1.72 % 1.78 %
Net interest margin (4) 1.81 % 1.97 %
(1) On a fully taxable equivalent basis calculated using a federal tax rate of
21%. Rates are annualized.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average
interest-earning assets.
(5) Average balances of securities
available-for-sale
calculated utilizing amortized cost.
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Results of Operations
The following table sets forth the distribution of the Company's average assets,
liabilities and stockholders' equity, and average annualized rates earned or
paid on a fully taxable equivalent basis for each of the three-month periods
indicated.
Six Months Ended
June 30, 2021 June 30, 2020
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expenses (1) Paid (1) Balance Expenses (1) Paid (1)
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans (2)
Loans taxable $ 1,734,048 $ 30,576 3.56 % $ 1,388,944 $ 26,751 3.87 %
Loans
tax-exempt 1,254,157 15,156 2.44 % 1,188,176 19,163 3.24 %Securities available-for-sale (5): Taxable 233,534 1,020 0.87 % 271,583 2,520 1.86 % Tax-exempt 44,666 203 0.91 % 10,509 191 3.63 % Securities held-to-maturity: Taxable 3,066,945 27,230
1.78 % 2,335,136 30,515 2.61 %
Interest-bearing deposits in other banks 572,623 291 0.10 % 220,008 678 0.62 %
Total interest-earning assets 6,905,973 74,476 2.17 % 5,414,356 79,818 2.96 %
Non interest-earning assets 358,342 287,825
Allowance for loan losses (35,500 ) (30,621 )
Total assets $ 7,228,815 $ 5,671,560
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts $ 1,249,201 $ 1,077 0.17 % $ 1,079,919 $ 3,573 0.67 %
Savings accounts 1,042,051 794 0.15 % 759,852 2,270 0.60 %
Money market accounts 2,345,499 5,375 0.46 % 1,530,442 9,034 1.19 %
Time deposits 486,202 2,696 1.12 % 598,669 6,283 2.11 %
Total interest-bearing deposits 5,122,953 9,942 0.39 % 3,968,882 21,160 1.07 %
Securities sold under agreements to
repurchase 239,765 239 0.20 % 226,518 935 0.83 %
Other borrowed funds and subordinated
debentures 180,121 2,462 2.76 % 205,341 2,801 2.74 %
Total interest-bearing liabilities 5,542,839 12,643 0.46 % 4,400,741 24,896 1.14 %
Non-interest-bearing
liabilities
Demand deposits 1,206,719 841,339
Other liabilities 97,464 87,589
Total liabilities 6,847,022 5,329,669
Stockholders' equity 381,793 341,891
Total liabilities & stockholders' equity $ 7,228,815 $ 5,671,560
Net interest income on a fully taxable
equivalent basis 61,833 54,922
Less taxable equivalent adjustment (3,275 ) (3,903 )
Net interest income $ 58,558 $ 51,019
Net interest spread (3) 1.71 % 1.83 %
Net interest margin (4) 1.81 % 2.04 %
(1) On a fully taxable equivalent basis calculated using a federal tax rate of
21%. Rates are annualized.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average
interest-earning assets.
(5) Average balances of securities
available-for-sale
calculated utilizing amortized cost.
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The following table presents certain information on a
fully-tax
equivalent basis regarding changes in the Company's interest income and interest
expense for the periods indicated. For each category of interest-earning assets
and interest-bearing liabilities, information is provided with respect to
changes attributable to changes in rate and changes in volume.
Three Months Ended June 30, 2021 Six Months Ended June 30, 2021
Compared with Compared with
Three Months Ended June 30, 2020 Six Months Ended June 30, 2020
Increase/(Decrease) Increase/(Decrease)
Due to Change in Due to Change in
Volume Rate Total Volume Rate Total
(in thousands) (in thousands)Interest income: Loans Taxable$ 1,959 $ (340 ) $ 1,619 $ 6,164 $ (2,339 ) $ 3,825 Tax-exempt 446 (1,195 ) (749 ) 1,003 (5,010 ) (4,007 ) Securities available-for-sale Taxable (159 ) (298 ) (457 ) (314 ) (1,186 ) (1,500 ) Tax-exempt 80 (41 ) 39 243 (231 ) 12 Securities held-to-maturity Taxable 4,957 (6,066 ) (1,109 ) 8,048 (11,333 ) (3,285 ) Interest-bearing deposits in other banks 43 1 44 490 (877 ) (387 ) Total interest income 7,326 (7,939 ) (613 ) 15,634 (20,976 ) (5,342 ) Interest expense: Deposits NOW accounts 195 (1,085 ) (890 ) 484 (2,980 ) (2,496 ) Savings accounts 172 (647 ) (475 ) 630 (2,106 ) (1,476 ) Money market accounts 1,326 (2,299 ) (973 ) 3,421 (7,080 ) (3,659 ) Time deposits (621 ) (1,375 ) (1,996 ) (1,024 ) (2,563 ) (3,587 ) Total interest-bearing deposits 1,072 (5,406 )
(4,334 ) 3,511 (14,729 ) (11,218 ) Securities sold under agreements to repurchase
50 (261 ) (211 ) 51 (747 ) (696 )
Other borrowed funds and subordinated
debentures (147 ) 69 (78 ) (352 ) 13 (339 )
Total interest expense 975 (5,598 ) (4,623 ) 3,210 (15,463 ) (12,253 )
Change in net interest income $ 6,351 $ (2,341) $ 4,010 $ 12,424 $ (5,513) $ 6,911
Net Interest Income
For the three months ended June 30, 2021 , net interest income on a fully
taxable-equivalent basis totaled $31,634,000 compared to $27,624,000 for the
same period in 2020, an increase of $4,010,000 , or 14.5%. The increase in net
interest income for the period is primarily due to a decrease in interest
expense as a result of falling interest rates. The net interest margin decreased
from 1.97% on a fully
tax-equivalent
basis for the first three months of 2020 compared to 1.81% for the same period
in 2021. This was primarily the result of increased margin pressure during the
recent decrease in interest rates across the yield curve. The average balances
of interest-earning assets increased for 2021 compared to the same period last
year, by $1,373,372,000 or 24.4%, combined with an average yield decrease of
0.56%, resulting in a decrease in interest income of $613,000 . The average
balance of interest-bearing liabilities increased for 2021 compared to the same
period last year, by $1,092,147,000 , or 24.1%, combined with an average
interest-bearing liabilities interest cost decrease of 0.51%, resulting in a
decrease in interest expense of $4,623,000 .
For the six months ended June 30, 2021 , net interest income on a fully taxable
equivalent basis totaled $61,833,000 compared to $54,922,000 for the same period
in 2020, an increase of $6,911,000 , or 12.6%. The increase in net interest
income for the period is primarily due to a decrease in interest expense as a
result of falling interest rates. The net interest margin decreased from 2.04%
on a fully
tax-equivalent
basis for the first six months of 2020 compared to 1.81% for the same period in
2021. This was primarily the result of increased margin pressure during the
recent decrease in interest rates across the yield curve. The average balances
of interest-earning assets increased for 2021 compared to the same period last
year, by $1,491,617,000 , or 27.5%, combined with an average yield decrease of
0.79%, resulting in a decrease in interest income of $5,342,000 . The average
balance of interest-bearing liabilities increased for 2021 compared to the same
period last year, by $1,142,098,000 , or 26.0%, combined with an average
interest-bearing liabilities interest cost decrease of 0.68%, resulting in a
decrease in interest expense of $12,253,000 .
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As illustrated in the table above, the main contributors to the increase in net
interest income for the three and
six-month
period was a decrease in rates paid on interest-bearing deposits. The Company
has decreased interest rates on these products as market rates have decreased.
Securities
held-to-maturity,
securities
available-for-sale,
interest-bearing deposits in other banks, and loan income decreased primarily
from a decrease in rates paid on the portfolios. Securities
held-to-maturity
income decrease was offset, somewhat, by an increase in volume. Loan income
increased for the three months ended June 30, 2021 , primarily as a result of
increased volume.
Provision for Loan Losses
The provision for loan losses decreased by $3,325,000 from $2,775,000 for the
six months ended June 30, 2020 compared to a credit of $550,000 for the same
period in 2021. The provision for the first six months of 2020 was primarily a
result of provisions related to the onset of the
COVID-19
pandemic. The credit provision for the first six months of 2021 was primarily
attributable to a reduction in specific allocations to the allowance for loan
losses and a reduction in the historical experience reserve allocation.
Further discussion relating to changes in portfolio composition is discussed in
Note 4.
Non-Interest
Income and Expense
Other operating income for the quarter ended June 30, 2021 increased by $65,000
from the same period last year to $4,106,000 . This was mainly attributable to an
increase in service charges on deposit accounts of $148,000 and an increase in
lockbox fees of $42,000 . This was offset, somewhat, by a decrease of $125,000 in
other income. Service charges on deposit accounts increased mainly as a result
of an increase in processing activities and an increase in debit card fees.
Lockbox fees increased mainly as a result of increased customer activity. Other
income decreased mainly as a result of a decrease in insurance gains on life
insurance policies.
Other operating income for the six months ended June 30, 2021 decreased by
$42,000 from the same period last year to $8,309,000 . This was mainly
attributable to a decrease in other income of $220,000 . This was offset,
somewhat, by an increase of $108,000 in lockbox fees and $70,000 in service
charges on deposit accounts. Service charges on deposit accounts increased
mainly as a result of a increase in processing activities and an increase in
debit card fees. Lockbox fees increased mainly as a result of increased customer
activity. Other income decreased mainly as a result of a decrease in insurance
gains on life insurance policies.
For the quarter ended June 30, 2021 , operating expenses increased by $3,970,000 ,
or 23.3%, to $21,012,000 , from the same period last year. This was primarily
attributable to an increase in salaries and employee benefits of $2,015,000 , an
increase of $135,000 in occupancy costs, an increase of $447,000 in FDIC
assessments, and an increase of $1,404,000 in other expenses. The increase in
salaries and employee benefits was mainly attributable to merit increases, lower
bonus accruals during the same period in 2020 as a result of uncertainties from
the
COVID-19
pandemic, decreased deferred origination cost credits, and increased employee
benefits including health insurance costs. The increase in FDIC assessments was
attributable to increased deposits and increased deposit assessment rates. The
increase in occupancy costs was mainly attributable to an increase in building
maintenance costs. Other expenses increased mainly as a result of expenses
related to the previously announced merger, increases in
COVID-19
related expenses, and increases in charitable contributions.
For the six months ended June 30, 2021 , operating expenses increased by
$6,668,000 , or 18.9%, to $41,883,000 , from the same period last year. This was
primarily attributable to an increase in salaries and employee benefits of
$2,894,000 , an increase of $322,000 in occupancy costs, an increase of $81,000
in equipment expenses, an increase of $919,000 in FDIC assessments, and an
increase of $2,452,000 in other expenses. The increase in salaries and employee
benefits was mainly attributable to merit increases, lower bonus accruals during
the same period in 2020 as a result of uncertainties from the
COVID-19
pandemic, decreased deferred origination cost credits, and increased employee
benefits including health insurance costs. The increase in FDIC assessments was
attributable to credits applied during the first quarter of 2020, increased
deposits and increased deposit assessment rates. The increase in occupancy costs
was mainly attributable to an increase in building maintenance. Other expenses
increased mainly as a result of expenses related to the previously announced
merger, increases in
COVID-19
related expenses, and increases in charitable contributions. Equipment expense
increased mainly from an increase in depreciation expense.
Income Taxes
For the quarter ended June 30, 2021 , the Company's income tax expense totaled
$2,262,000 on pretax income of $13,085,000 resulting in an effective tax rate of
17.3%. For last year's corresponding quarter, the Company's income tax expense
totaled $1,061,000 on pretax income of $11,117,000 resulting in an effective tax
rate of 9.5%. This increase was primarily the result of an increase in taxable
income relative to total income and nondeductible merger related expenses.
For the six months ended June 30, 2021 , the Company's income tax expense totaled
$3,941,000 on pretax income of $25,534,000 resulting in an effective tax rate of
15.4%. For the six months ended June 30, 2020 , the Company's income tax expense
totaled $1,658,000 on pretax income of $21,380,000 resulting in an effective tax
rate of 7.8%. This increase was primarily the result of an increase in taxable
income relative to total income and nondeductible merger related expenses.
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