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    CNBKA   US1564321065

CNTRY BNC

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CENTURY BANCORP : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/06/2021 | 02:04pm EST

Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context
otherwise requires, the "Company") is a Massachusetts corporation formed in 1972
and has one banking subsidiary (the "Bank"): Century Bank and Trust Company, a
Massachusetts state-chartered trust company formed in 1969 and headquartered in
Medford, Massachusetts. At June 30, 2021, the Company had total assets of
$7.3 billion. Currently, the Company operates 28 banking offices in 21 cities
and towns in Massachusetts and Southern New Hampshire, ranging from Braintree in
the south to Salem, New Hampshire in the north. The Bank's customers consist
primarily of small and
medium-sized
businesses and retail customers in these communities and surrounding areas, as
well as local governments and large healthcare and higher educational
institutions primarily throughout Massachusetts, New Hampshire, Rhode Island,
Connecticut, New York, Virginia, Washington D.C., and Pennsylvania.
The Company's results of operations are largely dependent on net interest
income, which is the difference between the interest earned on loans and
securities and interest paid on deposits and borrowings. The results of
operations are also affected by the level of income and fees from loans,
deposits, as well as operating expenses, the provision for loan losses, the
impact of federal and state income taxes and the relative levels of interest
rates and economic activity. The Company offers a wide range of services to
commercial enterprises, state and local governments and agencies,
non-profit
organizations and individuals. It emphasizes service to small and medium sized
businesses and retail customers in its market area. In recent years, the Company
has increased business to larger institutions, specifically, healthcare and
higher education. The Company makes commercial loans, real estate and
construction loans and consumer loans, and accepts savings, time, and demand
deposits. In addition, the Company offers its corporate and institutional
customers automated lock box collection services, cash management services and
account reconciliation services, and actively promotes the marketing of these
services to the municipal market. Also, the Company provides full-service
securities brokerage services through a program called Investment Services at
Century Bank, which is supported by LPL Financial, a third party full-service
securities brokerage business.
The Company has municipal cash management client engagements in Massachusetts,
New Hampshire and Rhode Island composed of approximately 302 government
entities.
Net income for the six months ended June 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
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Net interest income totaled $58.6 million for the six months ended June 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 ended June 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 ended
June 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
in Salem, New Hampshire. The Company opened this branch during the second
quarter of 2021. During the second quarter of 2020, the Company executed a lease
for a future branch location in Needham, Massachusetts. The Company plans to
open this branch during the fourth quarter of 2021.

                                 Page 35 of 49
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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
On March 18, 2020, the FFCRA was signed into law and on March 27, 2020, the
CARES Act was signed into law. The FFCRA and the CARES Act provide relief for
families and businesses impacted by the coronavirus pandemic. The provisions in
this legislation include, among other things, loan programs for businesses,
expanded unemployment insurance benefits, stimulus payments to certain
taxpayers, new provisions on sick leave and family leave, and funding for a
variety of health-related efforts and government programs. Also, as a result of
the CARES Act, the full balance of the Company's AMT credit was refunded in
2020.
The CARES Act, among other things, provides cash payments to certain individuals
and has various programs for businesses. In particular, it includes the PPP
which provides forgivable loans to qualified small businesses, primarily to
allow these businesses to continue to pay their employees. The original amount
allocated to the program was $349 billion, which was exhausted on April 16,
2020. On April 24, 2020, an additional allocation of $310 billion was signed
into law. These loans are funded by participating banks and are 100% guaranteed
by the SBA. If utilized primarily for payroll, subject to certain other
conditions, the loans may be forgiven, in whole or in part, and repaid by the
SBA. During 2020 and 2021, the Company participated in the PPP. Since the
inception of the program, PPP originations totaled approximately 2,008 loans for
approximately $341 million. As of June 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, from March 1, 2020 through the earlier of
January 1, 2022 or 60 days after the termination date of the national emergency
declared by the President on March 13, 2020 concerning the
COVID-19
outbreak (the "national emergency"), a financial institution may elect to
suspend the requirements under U.S. GAAP for loan modifications related to the
COVID-19
pandemic that would otherwise be categorized as a troubled debt restructured,
including impairment accounting. This troubled debt restructuring relief applies
for the term of the loan modification that occurs during the applicable period
for a loan that was not more than 30 days past due as of December 31, 2019.
As of June 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 delay Financial Accounting Standards
Board (FASB) Accounting Standards Update (ASU)
2016-13,
Measurement of Credit Losses on Financial Instruments (CECL), including the
current expected credit losses methodology for estimating allowances for credit
losses. The Company elected to delay FASB ASU
2016-13.
This ASU was delayed until the earlier of the date on which the national
emergency terminates or December 31, 2020, with an effective retrospective
implementation date of January 1, 2020. On December 27, 2020, the Coronavirus
Response and Relief Supplemental Appropriations Act of 2021 was signed into law.
The law changed the delayed implementation date to the earlier of the Company's
fiscal year that begins after the date on which the national emergency
terminates or January 1, 2022.
Recent Accounting Developments
Recently Adopted Accounting Standards Updates
In August 2018, FASB issued ASU
2018-14,
"Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic
715-20)"
("ASU
2018-14"),
to modify the disclosure requirements for employers that sponsor defined benefit
pension or other postretirement plans. ASU
2018-14
is effective for fiscal years beginning after December 15, 2020, for public
business entities and for fiscal years beginning after December 15, 2021, for
all other entities. Early adoption is permitted. Management has evaluated ASU
2018-14
and as of January 1, 2021, the Company has adopted ASU
2018-14
and determined the impact to be immaterial.
In December 2019, the FASB issued ASU
2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The
amendments in this ASU simplify the accounting for income taxes by removing
certain exceptions to the general principles in Topic 740. The amendments also
improve consistent application of and simplify GAAP for other areas of Topic 740
by clarifying and amending existing guidance. The amendments in this ASU are
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2020. The effect of this ASU did not have a
material impact on the Company's consolidated financial position.

                                 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:
In March 2020, the FASB issued ASU
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting. The amendments in the ASU are effective for a
limited period and mainly address accounting and reporting challenges due to the
transition from LIBOR on existing contracts. The optional expedients may be
applied to loans, borrowings, leases and derivatives at any period as of any
date from the beginning of an interim period that includes or is subsequent to
March 12, 2020, or prospectively from a date within an interim period that
includes or is subsequent to March 12, 2020 up to the date that the financial
statements are available to be issued. The ASU simplifies the accounting
analyses for contract modifications and simplifies the hedge effectiveness
assessment and allows hedging relationships impacted by the LIBOR transition to
continue. The amendments in this ASU are effective for all entities as of
March 12, 2020 through December 31, 2022. The Company is assessing the impact of
this standard but does not expect that it will have a material impact on the
Company's consolidated financial statements, or results of operations.
In June 2016, the FASB issued ASU
2016-13,
Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (CECL). This ASU was issued to provide financial statement
users with more decision-useful information about the expected credit losses on
financial instruments and other commitments to extend credit held by a reporting
entity at each reporting date.
To achieve this objective, the amendments in this ASU replace the incurred loss
impairment methodology in current GAAP with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and
supportable information to inform credit loss estimates. The amendments in this
ASU are effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years. See discussion below of the deferral
of the amendments in this ASU.
To implement the new standard the Company has purchased a software solution and
has captured the information needed to implement this ASU. As part of the FASB
ASC 326 implementation process, the company is using two models: a rating
migration model and a probability of default model. The ratings migration model,
which will be used for our larger loans made to institutions with available
credit ratings, is designed to estimate loss reserves according to the CECL
standard for rated loans or similar instruments. The model structure follows a
grade migration approach, where the default rate is based on the probability of
each grade transition which is modelled using historical data. The probability
of default model, which will be used for our remaining commercial loans and our
consumer loans, is based primarily on four components: loss history, product
life cycle, behavioral attributes and the economic environment. Since the fourth
quarter of 2019, the Company tested the two CECL credit models in parallel with
the existing incurred loss models. The securities
held-to-maturity
include U.S. Treasury, U.S. Government Sponsored Enterprises, SBA Backed
Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed
Securities. The CECL standard allows assumption of zero expected credit losses
where expectation of
non-payment
is zero for these types of securities. The Company expects no impact from ASU
2016-13
to arise from this portfolio.
Since ASU
2016-13,
the FASB has issued amendments intended on improving the clarification of the
amendment, ASU
2018-19
Codification Improvements to Topic 326, Financial Instruments-Credit Losses and
ASU
2019-04
Codification Improvements to Topic 326, Financial Instruments-Credit Losses,
Topic 815, Derivatives and Hedging. The amendment in ASU
2018-19
was issued in November 2018 and was intended to clarify that receivables arising
from operating leases are not within the scope of Subtopic
326-20.
Instead, impairment of receivables arising from operating leases should be
accounted for in accordance with Topic 842, Leases. The amendment in ASU
2019-04
was issued in April 2019 and was intended to clarify stakeholders' specific
issues about certain aspects of the amendments in ASU
2016-13.
ASU 2019- 05 Financial Instruments-Credit Losses (Topic 326): Targeted
Transition Relief was also issued in May 2019. This ASU provides entities the
option to irrevocably elect the fair value option for certain financial assets
previously measured at amortized costs basis. The fair value option election
does not apply to
held-to-maturity
debt securities. An entity that elects the fair value option should subsequently
apply the guidance in Subtopics
820-10,
Fair Value Measurement-Overall. The amendments in this ASU should be applied on
a modified-retrospective basis by means of a cumulative-effect adjustment to the
opening balance of retained earnings balance in the statement of financial
position as of the date that an entity early adopted the amendments in ASU
2016-13.
In November 2019, the FASB issued ASU
2019-11,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The
amendments in this ASU affect a variety of Topics in the Codification. The
amendments apply to all reporting entities within the scope of the affected
accounting guidance. This ASU is effective for annual reporting periods
beginning after December 15, 2019. See discussion below of the deferral of the
amendments in this ASU.

                                 Page 37 of 49
--------------------------------------------------------------------------------
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act
was signed into law. The CARES Act allows certain companies to delay FASB ASU
2016-13,
Measurement of Credit Losses on Financial Instruments (CECL), and subsequent
amendments to the ASU noted above, including the current expected credit losses
methodology for estimating allowances for credit losses. The Company has elected
to delay FASB ASU
2016-13.
This ASU was delayed until the earlier of the date on which the national
emergency concerning the
COVID-19
outbreak declared by the President on March 15, 2020 terminates or December 31,
2020, with an effective retrospective implementation date of January 1, 2020. On
December 27, 2020, the Coronavirus Response and Relief Supplemental
Appropriations Act of 2021 was signed into law. The law changed the delayed
implementation date to the earlier of the first day of the Company's fiscal year
that begins after the date on which the national emergency terminates or
January 1, 2022. The Company does not believe the impact of adoption would have
been material to the Company's consolidated financial statements as of June 30,
2021.
Financial Condition
Loans
On June 30, 2021, total loans outstanding were $2,999,133,000, up by $3,304,000
from the total on December 31, 2020. At June 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 on June 30, 2021
from $1,314,245,000 at December 31, 2020. The Company originated approximately
$108,197,000 of PPP loans during the six months ended June 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 on June 30, 2021 from $789,836,000 on December 31, 2020 primarily
as a result of loan originations. Construction loans decreased to $6,404,000 at
June 30, 2021 from $10,909,000 on December 31, 2020, primarily as a result of
loan payoffs. Residential real estate loans increased to $471,671,000 on
June 30, 2021 from $448,436,000 on December 31, 2020, primarily as a result of
loan originations. Home equity loans decreased to $252,114,000 on June 30, 2021
from $274,357,000 on December 31, 2020, primarily as a result of a home equity
loan payoffs. Municipal loans increased slightly to $138,771,000 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 at June 30, 2021 was $34,949,000 as compared to
$35,486,000 at December 31, 2020. The level of the allowance for loan losses to
total loans was 1.17% at June 30, 2021 and 1.18% at December 31, 2020. The ratio
of the allowance for loan losses to loans outstanding has decreased slightly
from December 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 at June 30, 2021.

                                 Page 38 of 49
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Credit ratings issued by national organizations were utilized as credit quality
indicators as presented in the following table at June 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 December 31, 2020.

                  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 $ 34,949 $ 32,516

$ 34,949 $ 32,516




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.

                                 Page 39 of 49
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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        

$2,202

Investments

Management continually evaluates its investment alternatives in order to
properly manage the overall balance sheet mix. The timing of purchases, sales
and reinvestments, if any, will be based on various factors including
expectation of movements in market interest rates, deposit flows and loan
demand. Notwithstanding these events, it is the intent of management to grow the
earning asset base mainly through loan originations while funding this growth
through a mix of retail deposits, FHLB advances, and retail repurchase
agreements.
Securities
Available-for-Sale
(at Fair Value)
The securities
available-for-sale
portfolio totaled $232,033,000 at June 30, 2021, a decrease of 17.8% from
December 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 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 5.3 years.
At June 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 at December 31,
2020. This was primarily the result of an increase in the value of floating rate
securities.
The following table sets forth the fair value of securities
available-for-sale
at the dates indicated.

                                                           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                8,064

Total Securities
Available-for-Sale                                         $ 232,033             $282,448



There were no sales of
available-for-sales
securities for the six months ended June 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 on June 30, 2021, an increase of 33.5% from
December 31, 2020. Purchases of
held-to-maturity
securities totaled $1,358,830,000 for the six months ended June 30, 2021. The
purchases were offset somewhat, by maturities and scheduled principal payments
of $518,044,000. The portfolio is concentrated in United States Government
Sponsored Enterprises and Mortgage-backed Securities and had an estimated
weighted average remaining life of 4.7 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            2,227,085

Total Securities
Held-to-Maturity                                         $ 3,350,561       $    2,509,088



There were no sales of
held-to-maturity
securities for the six months ended June 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 at June 30, 2021 and the net unrealized gains was $70,015,000 or 2.8%
of the total securities
held-to-maturity
portfolio at December 31, 2020. The decrease in the net unrealized gains on
securities
held-to-maturity
related primarily to an increase in interest rates. The gross unrealized losses
relate primarily to interest rates and not credit quality, and because the
Company does not intend to sell any of these securities and it is not likely
that it will be required to sell these securities before the anticipated
recovery of the remaining amortized cost, the Company does not consider these
investments to be other-than-temporarily impaired as of June 30, 2021 and
December 31, 2020.
On June 30, 2021 and December 31, 2020, all mortgage-backed securities are
obligations of U.S. Government Sponsored Enterprises. Debt securities of
Government Sponsored Enterprises primarily refer to debt securities of Fannie
Mae and Freddie Mac.
Federal Home Loan Bank of Boston Stock
The Bank, as a member of the Federal Home Loan Bank of Boston ("FHLBB"), is
required to maintain an investment in capital stock of the FHLBB. Based on
redemption provisions, the stock has no quoted market value and is carried at
cost. At its discretion, the FHLBB may declare dividends on the stock. The
Company reviews this investment for impairment based on the ultimate
recoverability of the cost basis in the stock. As of June 30, 2021, there have
been no indicators of impairment that would require further consideration of
potential impairment.
Equity Securities
On June 30, 2021, equity securities totaled $1,697,000 compared to $1,668,000 at
December 31, 2020, the increase is the result of changes in fair values.
Deposits and Borrowed Funds
On June 30, 2021, deposits totaled $6,373,179,000 representing a 16.9% increase
from December 31, 2020. Total deposits increased primarily as a result of an
increase in savings and NOW deposits, demand deposits, and money market
accounts. These types of deposits increased primarily from an increased customer
base and the cyclical nature of the municipal deposit base. Savings and NOW
deposits increased mainly as a result of an increase in municipal NOW accounts
and corporate savings accounts. Demand deposits increased mainly as a result of
increased corporate checking balances 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 at June 30, 2021 compared to $409,099,000 at
December 31, 2020. Borrowed funds decreased mainly as a result of a decrease in
borrowings from the FHLBB, offset, somewhat by an increase in repurchase
agreements. FHLBB borrowings decreased mainly as a result of the increase in
funds provided by deposits. Repurchase agreements increased primarily as a
result of short-term customer activity.

                                 Page 41 of 49
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Stockholders' Equity
At June 30, 2021, total equity was $392,555,000 compared to $370,409,000 on
December 31, 2020. The Company's equity increased primarily as a result of
earnings, partially offset by dividends paid. The Company's leverage ratio stood
at 6.13% on June 30, 2021, compared to 6.64% at December 31, 2020. The decrease
in the leverage ratio was due to an increase in quarterly average assets, offset
somewhat by an increase in stockholders' equity. Book value as of June 30, 2021,
was $70.50 as compared to $66.53 on December 31, 2020.

                                 Page 42 of 49
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Results of Operations
The following table sets forth the distribution of the Company's average assets,
liabilities and stockholders' equity, and average annualized rates earned or
paid on a fully taxable equivalent basis for each of the three-month periods
indicated.

                                                                                    Three Months Ended
                                                            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.



                                 Page 43 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.

                                                                                     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.



                                 Page 44 of 49
--------------------------------------------------------------------------------
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.

                                 Page 45 of 49
--------------------------------------------------------------------------------
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.

                                 Page 46 of 49

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