UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission file number: 0-15752

CENTURY BANCORP, INC.

 

(Exact name of registrant as specified in its charter)

COMMONWEALTH OF MASSACHUSETTS		04-2498617
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(781) 391-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

As of October 31, 2010, the Registrant had outstanding:

Class A Common Stock, $1.00 par value		3,525,667 Shares
Class B Common Stock, $1.00 par value		2,011,380 Shares

 

 

Century Bancorp, Inc.

				Page
		Index		Number
Part I		Financial Information
		Forward Looking Statements			3
Item 1.		Financial Statements (unaudited)
		Consolidated Balance Sheets:
		September 30, 2010 and December 31, 2009			4
		Consolidated Statements of Income:
		Three months and Nine months ended September 30, 2010 and 2009			5
		Consolidated Statements of Changes in Stockholders’ Equity: Nine months ended September 30, 2010 and 2009			6
		Consolidated Statements of Cash Flows:
		Nine months ended September 30, 2010 and 2009			7
		Notes to Consolidated Financial Statements			8-22
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22-33
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			33
Item 4.		Controls and Procedures			33-34
Part II.		Other Information
Item 1.		Legal Proceedings			34
Item 1A.		Risk Factors			34
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3.		Defaults Upon Senior Securities			34
Item 5.		Other Information			34
Item 6.		Exhibits			34-35
Signatures					36
Exhibits
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Forward Looking Statements

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

PART I — Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)
(In thousands, except share data)

		September 30,				December 31,
		2010				2009
Assets
Cash and due from banks		$	52,855			$	42,627
Federal funds sold and interest-bearing deposits in other banks			242,517				356,015
Total cash and cash equivalents			295,372				398,642
Short-term investments			123,890				18,518
Securities available-for-sale, amortized cost $816,424 and $641,010, respectively			830,939				647,796
Securities held-to-maturity, fair value $235,026 and $221,413, respectively			228,226				217,643
Federal Home Loan Bank of Boston stock, at cost			15,531				15,531
Loans, net:
Commercial and industrial			102,397				141,061
Construction and land development			54,193				60,349
Commercial real estate			383,490				361,823
Residential real estate			198,352				188,096
Home equity			118,296				118,076
Consumer and other			7,108				7,720
Total loans, net			863,836				877,125
Less: allowance for loan losses			13,827				12,373
Net loans			850,009				864,752
Bank premises and equipment			21,345				21,015
Accrued interest receivable			6,045				5,806
Goodwill			2,714				2,714
Core deposit intangible			605				896
Other assets			59,574				60,722
Total assets		$	2,434,250			$	2,254,035
Liabilities
Deposits:
Demand deposits		$	311,256			$	279,874
Savings and NOW deposits			683,105				575,592
Money market accounts			509,335				553,883
Time deposits			379,151				292,638
Total deposits			1,882,847				1,701,987
Securities sold under agreements to repurchase			108,430				118,745
Other borrowed funds			230,481				234,024
Subordinated debentures			36,083				36,083
Due to broker			765				—
Other liabilities			29,726				30,466
Total liabilities			2,288,332				2,121,305
Stockholders’ Equity
Preferred stock — $1.00 par value; 100,000 shares authorized; no shares issued and outstanding			—				—
Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,525,417 shares and 3,515,767 shares, respectively			3,526				3,516
Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 2,011,380 and 2,014,530 shares, respectively			2,011				2,014
Additional paid-in capital			11,467				11,376
Retained earnings			128,146				120,125
			145,150				137,031
Unrealized gains on securities available-for-sale, net of taxes			8,832				4,129
Pension liability, net of taxes			(8,064	)			(8,430	)
Total accumulated other comprehensive income (loss), net of taxes			768				(4,301	)
Total stockholders’ equity			145,918				132,730
Total liabilities and stockholders’ equity		$	2,434,250			$	2,254,035

See accompanying notes to unaudited consolidated interim financial statements.

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)
(In thousands, except share data)

		Three months ended September 30,								Nine months ended September 30,
		2010				2009				2010				2009
Interest income
Loans		$	11,900			$	12,118			$	36,084			$	35,933
Securities held-to-maturity			1,645				1,927				5,501				6,330
Securities available-for-sale			4,618				5,486				14,630				15,740
Federal funds sold and interest-bearing deposits in other banks			465				506				1,246				1,811
Total interest income			18,628				20,037				57,461				59,814
Interest expense
Savings and NOW deposits			940				1,139				3,254				3,872
Money market accounts			876				1,266				3,189				4,919
Time deposits			2,162				2,297				5,746				7,465
Securities sold under agreements to repurchase			116				98				466				423
Other borrowed funds and subordinated debentures			1,946				2,563				6,351				7,707
Total interest expense			6,040				7,363				19,006				24,386
Net interest income			12,588				12,674				38,455				35,428
Provision for loan losses			1,200				1,250				4,225				4,150
Net interest income after provision for loan losses			11,388				11,424				34,230				31,278
Other operating income
Service charges on deposit accounts			2,003				2,032				5,878				6,060
Lockbox fees			745				660				2,193				2,154
Net gain on sales of investments			—				137				1,027				1,115
Other income			664				570				2,678				2,280
Total other operating income			3,412				3,399				11,776				11,609
Operating expenses
Salaries and employee benefits			6,844				6,753				21,619				20,182
Occupancy			937				931				3,003				3,071
Equipment			454				544				1,537				1,826
FDIC assessments			785				638				2,175				2,754
Other			2,293				2,362				7,143				7,128
Total operating expenses			11,313				11,228				35,477				34,961
Income before income taxes			3,487				3,595				10,529				7,926
Provision for income taxes			220				413				879				851
Net income		$	3,267			$	3,182			$	9,650			$	7,075
Share data:
Weighted average number of shares outstanding, basic			5,535,548				5,530,297				5,532,067				5,532,907
Weighted average number of shares outstanding, diluted			5,537,120				5,533,622				5,534,457				5,534,364
Net income per share, basic		$	0.59			$	0.58			$	1.74			$	1.28
Net income per share, diluted		$	0.59			$	0.58			$	1.74			$	1.28
Cash dividends paid:
Class A common stock		$	0.12			$	0.12			$	0.36			$	0.36
Class B common stock		$	0.06			$	0.06			$	0.18			$	0.18

See accompanying notes to unaudited consolidated interim financial statements.

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Three Months Ended September 30, 2010 and 2009

																		Accumulated
		Class A				Class B				Additional								Other				Total
		Common				Common				Paid-In				Retained				Comprehensive				Stockholders’
		Stock				Stock				Capital				Earnings				Income (Loss)				Equity
										(In thousands)
Balance at December 31, 2008		$	3,511			$	2,027			$	11,475			$	112,135			$	(8,645	)		$	120,503
Net income			—				—				—				7,075				—				7,075
Other comprehensive income, net of tax:
Unrealized holding losses arising during period, net of $3,384 in taxes and $1,115 in realized net gains			—				—				—				—				4,940				4,940
Pension liability adjustment, net of $245 in taxes			—				—				—				—				369				369
Comprehensive income																							12,384
Conversion of class B common stock to class A common stock, 10,800 shares			11				(11	)			—				—				—				—
Stock repurchased, 8,110 shares			(8	)			—				(99	)			—				—				(107	)
Cash dividends paid, Class A common stock, $.36 per share			—				—				—				(1,262	)			—				(1,262	)
Cash dividends paid, Class B common stock, $.18 per share			—				—				—				(365	)			—				(365	)
Balance at September 30, 2009		$	3,514			$	2,016			$	11,376			$	117,583			$	(3,336	)		$	131,153
Balance at December 31, 2009		$	3,516			$	2,014			$	11,376			$	120,125			$	(4,301	)		$	132,730
Net income			—				—				—				9,650				—				9,650
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $3,026 in taxes and $1,027 in realized net gains			—				—				—				—				4,703				4,703
Pension liability adjustment, net of $247 in taxes			—				—				—				—				366				366
Comprehensive income																							14,719
Conversion of class B common stock to class A common stock, 3,150 shares			3				(3	)			—				—				—				—
Stock options exercised, 6,500 shares			7								91				—				—				98
Cash dividends paid, Class A common stock, $.36 per share			—				—				—				(1,266	)			—				(1,266	)
Cash dividends paid, Class B common stock, $.18 per share			—				—				—				(363	)			—				(363	)
Balance at September 30, 2010		$	3,526			$	2,011			$	11,467			$	128,146			$	768			$	145,918

See accompanying notes to unaudited consolidated interim financial statements.

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)
(In thousands)

		Nine months ended September 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	9,650			$	7,075
Adjustments to reconcile net income to net cash provided by operating activities:
Mortgage loans originated for sale			—				(374	)
Proceeds from mortgage loans sold			—				379
Gain on sales of loans			—				(5	)
Net gain on sales of investments			(1,027	)			(1,115	)
Provision for loan losses			4,225				4,150
Deferred income taxes			(1,364	)			(1,346	)
Net depreciation and amortization			3,528				4,553
(Increase) decrease in accrued interest receivable			(239	)			177
Increase in other assets			(799	)			(2,775	)
(Decrease) increase in other liabilities			(95	)			1,771
Net cash provided by operating activities			13,879				12,490
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments			117,150				159,168
Purchase of short-term investments			(222,522	)			(184,367	)
Proceeds from maturities of securities available-for-sale			488,823				235,521
Proceeds from sales of securities available-for-sale			34,625				46,044
Purchase of securities available-for-sale			(698,415	)			(400,429	)
Proceeds from maturities of securities held-to-maturity			136,407				74,339
Purchase of securities held-to-maturity			(147,386	)			(67,818	)
Net decrease (increase) in loans			10,553				(39,991	)
Capital expenditures			(1,854	)			(653	)
Net cash used in investing activities			(282,619	)			(178,186	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits			86,513				(22,094	)
Net increase in demand, savings, money market and NOW deposits			94,347				289,414
Net payments for the repurchase of stock			—				(107	)
Net proceeds from exercise of stock options			98				—
Cash dividends			(1,630	)			(1,627	)
Net decrease in securities sold under agreements to repurchase			(10,315	)			(21,300	)
Net decrease in other borrowed funds			(3,543	)			(33,109	)
Net cash provided by financing activities			165,470				211,177
Net (decrease) increase in cash and cash equivalents			(103,270	)			45,481
Cash and cash equivalents at beginning of period			398,642				156,168
Cash and cash equivalents at end of period		$	295,372			$	201,649
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	24,551			$	24,760
Income taxes			3,010				1,883
Change in unrealized gains on securities available-for-sale, net of taxes			4,703				4,940
Pension liability adjustment, net of taxes			366				369
Due to broker			765				25,000

See accompanying notes to unaudited consolidated interim financial statements.

Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements
Three and Nine Months Ended September 30, 2010 and 2009

Note 1. Basis of Financial Statement Presentation

The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly-owned subsidiaries: Century Subsidiary Investments, Inc. (“CSII”); Century Subsidiary Investments, Inc. II (“CSII II”); and Century Subsidiary Investments, Inc. III (“CSII III”). CSII, CSII II, CSII III are engaged in buying, selling and holding investment securities. The Company also owns 100% of Century Bancorp Capital Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company.

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

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The Company’s Quarterly report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as filed with the Securities and Exchange Commission.

Material estimates that are susceptible to change in the near-term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on independent appraisals and review of other factors associated with the loans. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Whenever necessary prior period amounts were reclassified to conform with the current period presentation.

Note 2. Recent Market Developments

The financial services industry is facing unprecedented challenges in the face of the current national and global economic crisis. The global and U.S. economies are experiencing significantly reduced business activity. Dramatic declines in the housing market during the past two years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, have caused many financial institutions to seek additional capital; to merge with larger and stronger institutions; and, in some cases, to fail. The Company is fortunate that the markets it serves have been impacted to a lesser extent than many areas around the country.

In response to the financial crises affecting the banking system and financial markets, there have been several announcements of federal programs designed to purchase assets from, provide equity capital to, and guarantee the liquidity of the industry.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. The EESA authorizes the U.S. Treasury to, among other things, purchase up to $750 billion of mortgages, mortgage-backed securities, and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Company does not expect to participate in the sale of any of our assets into these programs.

On October 14, 2008, the U.S. Treasury announced that it would purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Assets Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), the U.S. Treasury made $250 billion of capital available (from the $750 billion authorized by the EESA) to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the U.S. Treasury received warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions were required to adopt the U. S. Treasury’s standards for executive compensation, dividend restrictions and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program. The U.S. Treasury also announced that nine large financial institutions had already agreed to participate in the TARP Capital Purchase Program. Subsequently, a number of smaller institutions had participated in the TARP Capital Purchase Program. On December 18, 2008, the Company announced in a press release, it had received preliminary approval from the U.S. Treasury to participate in the TARP Capital Purchase Program, in an amount up to $30 million in the form of Century Bancorp, Inc. preferred stock and warrants to purchase Class A common stock. In light of uncertainty surrounding additional restrictions that may be imposed on participants under pending legislation, the Company, on January 14, 2009, informed the U.S. Treasury that it would not be closing on the transaction on January 16, 2009, as originally scheduled. The Company subsequently withdrew its application.

On October 14, 2008, the U.S. Treasury and the FDIC jointly announced a new program, known as the Temporary Liquidity Guarantee Program (“TLGP”), to strengthen confidence and encourage liquidity in the nation’s banking system. The TLGP consists of two programs: the Debt Guarantee Program (“DGP”) and the Transaction Account Guarantee Program (“TAGP”). Under the DGP, as amended, the FDIC will guarantee certain newly issued senior unsecured debt of participating banks, thrifts and certain holding companies issued from October 14, 2008 through October 31, 2009, which debt matures on or prior to December 31, 2012, up to a fixed maximum amount per participant. In addition, under the TAGP, the FDIC will fully guarantee deposits in noninterest bearing transaction accounts without dollar limitation through December 31, 2009. Institutions opting to participate in the DGP will be charged a 50-, 75- or 100-

basis point fee (depending on maturity) for the guarantee of eligible debt, and a 10-basis point assessment will be applicable to deposits in noninterest bearing transaction accounts at institutions participating in the TAGP that exceed the existing deposit insurance limit of $250,000. The Company opted to participate in both the DGP and the TAGP. The annual assessment rate that will apply during the extension period will be either 15, 20 or 25 basis points, depending on the risk category assigned to the institution under the FDIC’s risk-based premium system. On April 13, 2010 the FDIC approved an interim rule to extend the TAGP to December 31, 2010. The Company will continue to participate in the TAGP through December 31, 2010. The interim rule gives the FDIC discretion to extend the program to the end of 2011, without additional rulemaking, if it determines that economic conditions warrant such an extension.

On May 22, 2009, the FDIC announced a special assessment on insured institutions as part of its efforts to rebuild the Deposit Insurance Fund and help maintain public confidence in the banking system. The special assessment is five basis points of each FDIC-insured depository institution’s assets minus Tier 1 capital, as of June 30, 2009. The Company recorded a pre-tax charge of approximately $1.0 million in the second quarter of 2009 in connection with the special assessment.

On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. As a result, the Company is carrying a prepaid asset of $6.8 million as of September 30, 2010. The Company’s quarterly risk-based deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Company.

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

Note 3. Stock Option Accounting

Stock option activity under the Company’s stock option plan for the nine months ended September 30, 2010 is as follows:

						Weighted
						Average
		Amount				Exercise Price
Shares under option:
Outstanding at beginning of year			68,637			$	26.09
Exercised			(6,500	)			15.06
Cancelled			(19,975	)			27.18
Outstanding at end of period			42,162			$	27.27
Exercisable at end of period			42,162			$	27.27
Available to be granted at end of period			222,884

On September 30, 2010, the outstanding options to purchase 42,162 shares of Class A common stock have exercise prices between $15.06 and $35.01, with a weighted average exercise price of $27.27 and a weighted average remaining contractual life of 2.8 years. The intrinsic value of options exercisable at September 30, 2010 had an aggregate value of $46,460. The intrinsic value of options exercised at September 30, 2010 had an aggregate value of $41,236.

The Company uses the fair value method to account for stock options. All of the Company’s stock options are vested and there were no options granted during the first nine months of 2010.

Note 4. Securities Available-for-Sale

		September 30, 2010																December 31, 2009
						Gross				Gross												Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
		( In thousands)
U.S. Treasury		$	1,999			$	9			$	—			$	2,008			$	1,998			$	5			$	—			$	2,003
U.S. Government Sponsored Enterprises			208,252				696				8				208,940				192,942				374				952				192,364
Small Business Administration			9,855				13				—				9,568				—				—				—				—
U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities			551,623				13,739				203				565,159				410,181				8,855				524				418,512
Privately Issued Residential Mortgage Backed Securities			4,506				—				221				4,285				5,383				—				473				4,910
Privately Issued Commercial Mortgage Backed Securities			323				4				—				327				537				7				—				544
Obligations Issued by States and Political Subdivisions			36,478				131				283				36,326				26,627				130				468				26,289
Other Debt Securities			2,300				—				31				2,269				2,300				—				41				2,259
Equity Securities			1,088				669				—				1,757				1,042				71				198				915
Total		$	816,424			$	15,261			$	746			$	830,939			$	641,010			$	9,442			$	2,656			$	647,796

Included in U.S. Government Sponsored Enterprise Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $309,300,000 and $322,064,000 at September 30, 2010 and December 31, 2009, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank amounting to $143,845,000 and $172,497,000 at September 30, 2010 and December 31, 2009, respectively. The Company realized gross gains of $1,027,000 from the proceeds of $34,625,000 from the sales of available-for-sale

securities for the nine months ended September 30, 2010. The Company realized gross gains of $1,115,000 from the proceeds of $46,044,000 from the sales of available-for-sale securities for the nine months ended September 30, 2009.

The following table shows the maturity distribution of the Company’s securities available-for-sale at September 30, 2010.

		Amortized				Fair
		Cost				Value
		( In thousands)
Within one year		$	58,962			$	59,953
After one but within five years			663,442				675,856
After five but within ten years			73,139				73,905
More than 10 years			18,193				17,998
Non-maturing			2,688				3,227
Total		$	816,424			$	830,939

The weighted average remaining life of investment securities available-for-sale at September 30, 2010 was 3.5 years. Included in the weighted average remaining life calculation at September 30, 2010 was $202,315,000 of U.S. Government Sponsored Enterprise obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life. The contractual maturities, which were used in the table above, of mortgage-backed securities will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at September 30, 2010. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 8 and 6 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 289 holdings at September 30, 2010.

		September 30, 2010
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Temporarily Impaired Investments*		(In thousands)
U.S. Government Sponsored Enterprises		$	19,988			$	8			$	—			$	—			$	19,988			$	8
U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities			14,583				203				—				—				14,583				203
Privately Issued Residential Mortgage Backed Securities			1,597				40				2,687				181				4,284				221
Obligations Issued by States and Political Subdivisions			150				1				4,393				282				4,543				283
Other Debt Securities			99				1				1,470				30				1,569				31
Total temporarily impaired securities		$	36,417			$	253			$	8,550			$	493			$	44,967			$	746

As of September 30, 2010, management has concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the

underlying credit quality of the issuers, and the Company does not intend to sell any of its debt securities with unrealized losses and it is not likely that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade. The change in the unrealized losses on the state and municipal securities and the nonagency mortgage-backed securities were primarily caused by changes in credit spreads and liquidity issues in the marketplace.

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

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2009. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 41 and 17 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 287 holdings at December 31, 2009. The Company believes that the investments are temporarily impaired.

		December 31, 2009
		Less than 12 months								12 months or longer								Total
						Unrealized								Unrealized								Unrealized
		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Temporarily Impaired Investments*		(In thousands)
U.S. Government Sponsored Enterprises		$	127,259			$	952			$	—			$	—			$	127,259			$	952
U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities			51,903				428				11,752				96				63,655				524
Privately Issued Residential Mortgage Backed Securities			—				—				4,910				473				4,910				473
Obligations Issued by States and Political Subdivisions			3,427				187				4,393				281				7,820				468
Other Debt Securities			—				—				1,459				41				1,459				41
Equity Securities			—				—				495				198				495				198
Total temporarily impaired securities		$	182,589			$	1,567			$	23,009			$	1,089			$	205,598			$	2,656

Note 5. Investment Securities Held-to-Maturity

						Gross				Gross												Gross				Gross
		Amortized				Unrealized				Unrealized				Fair				Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value				Cost				Gains				Losses				Value
		(In thousands)
		September 30, 2010																December 31, 2009
U.S. Government Sponsored Enterprises		$	79,548			$	541			$	—			$	80,089			$	69,555			$	36			$	707			$	68,884
U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities			148,678				6,259				—				154,937				148,088				4,490				49				152,529
Total		$	228,226			$	6,800			$	—			$	235,026			$	217,643			$	4,526			$	756			$	221,413

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $19,919,000 and $9,036,000 at September 30, 2010 and December 31, 2009, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $86,211,000 and $83,693,000 at September 30, 2010 and December 31, 2009, respectively.

At September 30, 2010 and December 31, 2009, all mortgage-backed securities are obligations of U.S. Government Agencies and Government Sponsored Enterprises. Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the maturity distribution of the Company’s securities held-to-maturity at September 30, 2010.

		Amortized				Fair
		Cost				Value
		( In thousands)
Within one year		$	10,207			$	10,467
After one but within five years			147,859				153,911
After five but within ten years			69,864				70,339
More than ten years			296				309
Total		$	228,226			$	235,026

The weighted average remaining life of investment securities held-to-maturity at September 30, 2010 was 4.1 years. Included in the weighted average remaining life calculation at September 30, 2010 were $79,548,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

There are no unrealized losses in investment securities held-to-maturity at September 30, 2010.

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2009. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 12 and 0 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 94 holdings at December 31, 2009.

		December 31, 2009
		Less Than 12 Months								12 Months or Longer								Total
						Unrealized								Unrealized								Unrealized
Temporarily Impaired Investments*		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
										( In thousands)
U.S. Government Sponsored Enterprises		$	49,848			$	707			$	—			$	—			$	49,848			$	707
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities			11,152				49				—				—				11,152				49
Total temporarily impaired securities		$	61,000			$	756			$	—			$	—			$	61,000			$	756

Note 6. Employee Benefits

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

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

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

Components of Net Periodic Benefit Cost for the Three Months Ended September 30,

										Supplemental Insurance/
		Pension Benefits								Retirement Plan
		2010				2009				2010				2009
						(In thousands)
Service cost		$	213			$	196			$	147			$	113
Interest			333				308				207				233
Expected return on plan assets			(342	)			(281	)			—				—
Recognized prior service cost (benefit)			(26	)			(29	)			28				27
Recognized net actuarial losses			159				171				17				35
Net periodic benefit cost		$	337			$	365			$	399			$	408

Components of Net Periodic Benefit Cost for the Nine Months Ended September 30,

										Supplemental Insurance/
		Pension Benefits								Retirement Plan
		2010				2009				2010				2009
						(In thousands)
Service cost		$	638			$	588			$	441			$	339
Interest			1,000				924				673				699
Expected return on plan assets			(1,025	)			(843	)			—				—
Recognized prior service cost (benefit)			(78	)			(87	)			83				81
Recognized net actuarial losses			476				514				103				106
Net periodic benefit cost		$	1,011			$	1,096			$	1,300			$	1,225

Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2009 that it expected to contribute $1,275,000 to the Pension Plan in 2010. As of September 30, 2010, $956,250 of the contribution had been made. The Company expects to contribute an additional $318,750 by the end of the year.

Note 7. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, (formerly SFAS 157, “Fair Value Measurements,”) which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:

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

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

Level III – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, non-investment grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts.

The results of the fair value hierarchy as of September 30, 2010 are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

		Securities AFS Fair Value Measurements Using
						Quoted Prices
						In Active								Significant
						Markets for				Significant				Other
						Identical				Observable				Unobservable
						Assets				Inputs				Inputs
		Carrying Value				(Level 1)				(Level 2)				(Level 3)
						(In thousands)
U.S. Treasury		$	2,008			$	—			$	2,008			$	—
U.S. Government Sponsored Enterprises			208,940				—				208,940				—
SBA Backed Securities			9,868				—				9,868				—
U.S. Government Agency and Sponsored Mortgage Backed Securities			565,159				—				565,159				—
Privately Issued Residential Mortgage Backed Securities			4,285				—				4,285				—
Privately Issued Commercial Mortgage Backed Securities			327				—				327				—
Obligations Issued by States and Political Subdivisions			36,326				—				16,446				19,880
Other Debt Securities			2,269				—				2,269				—
Equity Securities			1,757				1,478				—				279
Total		$	830,939			$	1,478			$	809,302			$	20,159

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

Impaired Loans			5,781				—				—				5,781