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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2014.

or

 

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

Commission file number: 0-15752

 

 

CENTURY BANCORP, INC.

 

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
400 MYSTIC AVENUE, MEDFORD, MA   021255
(Address of principal executive offices)   (Zip Code)

(781) 391-4000

 

(Registrant’s telephone number, including area code)

 

 

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

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

As of July 31, 2014, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,590,429 Shares   

Class B Common Stock, $1.00 par value

     1,967,580 Shares   

 

 

 


Table of Contents

Century Bancorp, Inc.

 

     Index    Page
Number
Part I.   

Financial Information

  
  

Forward Looking Statements

   3
Item 1.   

Financial Statements (unaudited)

  
  

Consolidated Balance Sheets: June 30, 2014 and December 31, 2013

   4
  

Consolidated Statements of Income: Three months and six months ended June 30, 2014 and 2013

   5
  

Consolidated Statements of Comprehensive Income: Three months and six months ended June 30, 2014 and 2013

   6
  

Consolidated Statements of Changes in Stockholders’ Equity: Six months ended June 30, 2014 and 2013

   7
  

Consolidated Statements of Cash Flows: Six months ended June 30, 2014 and 2013

   8
  

Notes to Consolidated Financial Statements

   9-28
Item 2.   

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

   29-40
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

   40
Item 4.   

Controls and Procedures

   40
Part II.   

Other Information

  
Item 1.   

Legal Proceedings

   40
Item 1A.   

Risk Factors

   40
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   41
Item 3.   

Defaults Upon Senior Securities

  
Item 5.   

Other Information

   41
Item 6.   

Exhibits

   41-42
Signatures       43
Exhibits   

Ex-31.1

  
  

Ex-31.2

  
  

Ex-32.1

  
  

Ex-32.2

  
  

Ex-101 Instance Document

  
  

Ex-101 Schema Document

  
  

Ex-101 Calculation Linkbase Document

  
  

Ex-101 Labels Linkbase Document

  
  

Ex-101 Presentation Linkbase Document

  
  

Ex-101 Definition Linkbase Document

  

 

Page 2 of 43


Table of Contents

Forward Looking Statements

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

 

Page 3 of 43


Table of Contents

PART I – Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     June 30,     December 31,  
     2014     2013  
Assets     

Cash and due from banks

   $ 77,565      $ 59,956   

Federal funds sold and interest-bearing deposits in other banks

     14,212        34,722   
  

 

 

   

 

 

 

Total cash and cash equivalents

     91,777        94,678   
  

 

 

   

 

 

 

Short-term investments

     2,125        4,617   

Securities available-for-sale, amortized cost $495,162 and $465,943, respectively

     494,309        464,245   

Securities held-to-maturity, fair value $1,537,839 and $1,464,449, respectively

     1,536,988        1,487,884   

Federal Home Loan Bank of Boston stock, at cost

     19,656        18,072   

Loans, net:

    

Commercial and industrial

     88,666        92,402   

Construction and land development

     25,861        33,058   

Commercial real estate

     766,965        713,327   

Residential real estate

     282,468        286,041   

Home equity

     140,616        130,277   

Consumer and other

     9,649        9,658   
  

 

 

   

 

 

 

Total loans, net

     1,314,225        1,264,763   

Less: allowance for loan losses

     21,722        20,941   
  

 

 

   

 

 

 

Net loans

     1,292,503        1,243,822   

Bank premises and equipment

     23,456        23,400   

Accrued interest receivable

     6,714        6,539   

Goodwill

     2,714        2,714   

Other assets

     87,392        85,183   
  

 

 

   

 

 

 

Total assets

   $ 3,557,634      $ 3,431,154   
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 504,265      $ 475,862   

Savings and NOW deposits

     1,045,987        992,796   

Money Market Accounts

     911,897        864,957   

Time deposits

     388,189        382,224   
  

 

 

   

 

 

 

Total deposits

     2,850,338        2,715,839   

Securities sold under agreements to repurchase

     180,010        214,440   

Other borrowed funds

     267,500        255,144   

Subordinated debentures

     36,083        36,083   

Due to broker

     2,000        —     

Other liabilities

     33,442        33,176   
  

 

 

   

 

 

 

Total liabilities

     3,369,373        3,254,682   
  

 

 

   

 

 

 
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 3,589,129 shares and 3,580,404 shares, respectively

     3,589        3,580   

Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 1,967,580 and 1,976,180 shares, respectively

     1,968        1,976   

Additional paid-in capital

     11,935        11,932   

Retained earnings

     190,182        180,747   
  

 

 

   

 

 

 
     207,674        198,235   

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

     (540     (1,045

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

     (11,935     (13,667

Pension liability, net of taxes

     (6,938     (7,051
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (19,413     (21,763
  

 

 

   

 

 

 

Total stockholders’ equity

     188,261        176,472   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,557,634      $ 3,431,154   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 43


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  

Interest income

           

Loans

   $ 12,611       $ 11,997       $ 25,060       $ 23,878   

Securities held-to-maturity

     8,020         1,419         15,800         2,939   

Securities available-for-sale

     794         5,571         1,614         11,188   

Federal funds sold and interest-bearing deposits in other banks

     129         145         211         264   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     21,554         19,132         42,685         38,269   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Savings and NOW deposits

     660         649         1,269         1,259   

Money market accounts

     669         582         1,308         1,114   

Time deposits

     1,141         1,234         2,226         2,568   

Securities sold under agreements to repurchase

     93         89         194         179   

Other borrowed funds and subordinated debentures

     2,237         2,066         4,420         4,092   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,800         4,620         9,417         9,212   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     16,754         14,512         33,268         29,057   

Provision for loan losses

     450         750         1,050         1,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     16,304         13,762         32,218         27,557   

Other operating income

           

Service charges on deposit accounts

     2,012         2,034         4,046         3,976   

Lockbox fees

     845         838         1,622         1,610   

Net gains on sales of investments

     —           781         —           1,664   

Gains on sales of mortgage loans held for sale

     81         821         88         991   

Other income

     677         747         1,329         1,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     3,615         5,221         7,085         9,655   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Salaries and employee benefits

     8,776         8,382         17,651         17,000   

Occupancy

     1,322         1,193         2,764         2,475   

Equipment

     585         610         1,157         1,192   

FDIC assessments

     494         450         974         850   

Other

     2,912         3,027         5,702         5,610   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     14,089         13,662         28,248         27,127   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     5,830         5,321         11,055         10,085   

Provision for income taxes

     231         295         524         583   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,599       $ 5,026       $ 10,531       $ 9,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share data:

           

Weighted average number of shares outstanding, basic

           

Class A

     3,589,125         3,574,379         3,585,773         3,571,963   

Class B

     1,967,580         1,982,180         1,970,880         1,984,530   

Weighted average number of shares outstanding, diluted

           

Class A

     5,558,032         5,557,354         5,558,105         5,557,655   

Class B

     1,967,580         1,982,180         1,970,880         1,984,530   

Basic earnings per share:

           

Class A

   $ 1.22       $ 1.10       $ 2.30       $ 2.08   

Class B

   $ 0.61       $ 0.55       $ 1.15       $ 1.04   

Diluted earnings per share

           

Class A

   $ 1.01       $ 0.90       $ 1.89       $ 1.71   

Class B

   $ 0.61       $ 0.55       $ 1.15       $ 1.04   

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 43


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended June 30,  
     2014      2013  

Net income

   $ 5,599       $ 5,026   

Other comprehensive income (loss), net of tax:

     

Unrealized gains (losses) on securities:

     

Unrealized gains (losses) arising and transferred during period

     262         (18,656

Less: reclassification adjustment for gains included in net income

     —           (781
  

 

 

    

 

 

 

Total unrealized gains (losses) on securities

     262         (19,437

Accretion of net unrealized losses transferred

     808         —     

Defined benefit pension plans:

     

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

     56         174   
  

 

 

    

 

 

 

Other comprehensive income (loss)

     1,126         (19,263
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 6,725       $ (14,237
  

 

 

    

 

 

 
     Six months ended June 30,  
     2014      2013  

Net income

   $ 10,531       $ 9,502   

Other comprehensive income (loss), net of tax:

     

Unrealized gains (losses) on securities:

     

Unrealized gains (losses) arising and transferred during period

     505         (20,889

Less: reclassification adjustment for gains included in net income

     —           (1,664
  

 

 

    

 

 

 

Total unrealized gains (losses) on securities

     505         (22,553

Accretion of net unrealized losses transferred

     1,732         —     

Defined benefit pension plans:

     

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

     113         347   
  

 

 

    

 

 

 

Other comprehensive income (loss)

     2,350         (22,206
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 12,881       $ (12,704
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 43


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Six Months Ended June 30, 2014 and 2013

 

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

Balance at December 31, 2012

   $ 3,568       $ 1,986      $ 11,891       $ 162,892      $ (347   $ 179,990   

Net income

     —           —          —           9,502        —          9,502   

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $14,372 in taxes and $1,664 in realized net gains

     —           —          —           —          (22,553     (22,553

Pension liability adjustment, net of $231 in taxes

     —           —          —           —          347        347   

Conversion of class B common stock to class A common stock, 4,700 shares

     4         (4         

Stock options exercised, 1,600 shares

     2         —          40         —          —          42   

Cash dividends paid, Class A common stock,

              

$.24 per share

     —           —          —           (857     —          (857

Cash dividends paid, Class B common stock,

              

$.12 per share

     —           —          —           (238     —          (238
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ 3,574       $ 1,982      $ 11,931       $ 171,299      $ (22,553   $ 166,233   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 3,580       $ 1,976      $ 11,932       $ 180,747      $ (21,763   $ 176,472   

Net income

     —           —          —           10,531        —          10,531   

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $339 in taxes

     —           —          —           —          505        505   

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $1,061 in taxes

               1,732        1,732   

Pension liability adjustment, net of $75 in taxes

     —           —          —           —          113        113   

Conversion of class B common stock to class A common stock, 8,600 shares

     8         (8     —           —          —          —     

Stock options exercised, 125 shares

     1         —          3         —          —          4   

Cash dividends paid, Class A common stock,

              

$.24 per share

     —           —          —           (859     —          (859

Cash dividends paid, Class B common stock,

              

$.12 per share

     —           —          —           (237     —          (237
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 3,589       $ 1,968      $ 11,935       $ 190,182      $ (19,413   $ 188,261   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 43


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Six months ended June 30,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 10,531      $ 9,502   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Mortgage loans originated for sale

     (5,994     (56,001

Proceeds from mortgage loans sold

     6,082        50,010   

Gain on sales of mortgage loans held for sale

     (88     (991

Net gain on sales of investments

     —          (1,664

Provision for loan losses

     1,050        1,500   

Deferred income taxes

     (1,547     (823

Net depreciation and amortization

     1,630        3,058   

Increase in accrued interest receivable

     (175     (194

Increase in other assets

     (2,192     (2,203

Increase in other liabilities

     454        2,353   
  

 

 

   

 

 

 

Net cash provided by operating activities

     9,751        4,547   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     3,561        6,317   

Purchase of short-term investments

     (1,069     (8,561

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

     71,155        174,303   

Proceeds from sales of securities available-for-sale

     —          163,593   

Purchase of securities available-for-sale

     (100,084     (482,373

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

     106,312        37,453   

Purchase of securities held-to-maturity

     (152,901     (29,825

Net increase in loans

     (49,707     (45,143

Capital expenditures

     (1,252     (658
  

 

 

   

 

 

 

Net cash used in investing activities

     (123,985     (184,894
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in time deposits

     5,965        46,509   

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

     128,534        149,613   

Net proceeds from exercise of stock options

     4        42   

Cash dividends

     (1,096     (1,095

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

     (34,430     22,900   

Net increase (decrease) in other borrowed funds

     12,356        (18,000
  

 

 

   

 

 

 

Net cash provided by financing activities

     111,333        199,969   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (2,901     19,622   

Cash and cash equivalents at beginning of period

     94,678        152,283   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 91,777      $ 171,905   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 9,421      $ 9,317   

Income taxes

     1,991        1,550   

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

     505        (22,553

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

     1,732        —     

Pension liability adjustment, net of taxes

     113        347   

Due to broker

     2,000        10,711   

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 8 of 43


Table of Contents

Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Six Months Ended June 30, 2014 and 2013

Note 1. Basis of Financial Statement Presentation

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

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

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The Company’s quarterly report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, 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, including historical charge-off rates with additional allocations based on risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.

 

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Note 2. Recent Market Developments

The financial services industry continues to face challenges in the aftermath of the recent national and global economic crisis. Since June 2009, the U.S. economy has been recovering from the most severe recession and financial crisis since the Great Depression. There have been some improvements in private sector employment, industrial production and U.S. exports; nevertheless, the pace of economic recovery has been slow. Financial markets have improved since the depths of the crisis but are still unsettled and volatile. There is continued concern about the U.S. economic outlook.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “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 Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012. In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance must be achieved by July 21, 2015. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation.

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. The Company’s quarterly risk-based deposit insurance assessments were paid from this amount until June 30, 2013. The Company received a refund of $2.4 million of prepaid FDIC assessments in June 2013.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule, that will come into effect in January 2015, sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raises the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The Company has analyzed the final rules; the implementation of the framework will not have a material impact on the Company’s financial condition or results of operations.

 

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Note 3. Stock Option Accounting

Stock option activity under the Company’s stock option plan for the six months ended June 30, 2014 is as follows:

 

     Amount     Weighted
Average
Exercise
Price
 

Shares under option:

    

Outstanding at beginning of year

     20,225      $ 31.82   

Exercised

     (125     31.83   

Forfeited

     —          —     
  

 

 

   

 

 

 

Outstanding at end of period

     20,100      $ 31.82   
  

 

 

   

 

 

 

Exercisable at end of period

     20,100      $ 31.82   
  

 

 

   

 

 

 

Available to be granted at end of period

     225,034     
  

 

 

   

On June 30, 2014, the outstanding options to purchase 20,100 shares of Class A common stock have exercise prices between $31.60 and $31.83, with a weighted average exercise price of $31.82 and a weighted average remaining contractual life of 0.25 years. The intrinsic value of options exercisable at June 30, 2014 had an aggregate value of $70,551. The intrinsic value of options exercised at June 30, 2014 had an aggregate value of $439.

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 six months of 2014.

Note 4. Securities Available-for-Sale

 

     June 30, 2014      December 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     ( In thousands)  

U.S. Treasury

   $ 1,998       $ 3       $ —         $ 2,001       $ 1,997       $ 1       $ —         $ 1,998   

U.S. Government Sponsored Enterprises

     —           —           —           —           9,995         9         —           10,004   

Small Business Administration

     6,915         58         —           6,973         7,270         32         —           7,302   

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

     419,732         1,039         1,146         419,625         404,103         588         1,501         403,190   

Privately Issued Residential Mortgage Backed Securities

     2,122         16         11         2,127         2,294         6         23         2,277   

Obligations Issued by States and Political Subdivisions

     61,768         5         871         60,902         37,578         15         870         36,723   

Other Debt Securities

     2,300         —           120         2,180         2,300         —           125         2,175   

Equity Securities

     327         174      

 

—  

  

     501         406         170         —           576   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 495,162       $ 1,295       $ 2,148       $ 494,309       $ 465,943       $ 821       $ 2,519       $ 464,245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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During the third quarter of 2013, securities available-for-sale with an amortized cost of $1,012,370,000 were transferred to securities held-to-maturity at their fair value of $987,037,000 in response to rising interest rates. Rising interest rates have the potential to increase unrealized losses on the available-for-sale portfolio. The transfer was implemented to lessen the effects of rising interest rates.

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 $346,459,000 and $368,137,000 at June 30, 2014 and December 31, 2013, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $34,242,000 and $12,214,000 at June 30, 2014 and December 31, 2013, respectively. There were no realized gains on sales of investments for the six months ended June 30, 2014. The Company realized gross gains of $1,664,000 from the proceeds of $163,593,000 from the sales of available-for-sale securities for the six months ended June 30, 2013.

Debt securities of 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 available-for-sale at June 30, 2014.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 55,709       $ 55,728   

After one but within five years

     239,010         239,068   

After five but within ten years

     189,203         188,968   

More than 10 years

     9,413         8,664   

Non-maturing

     1,827         1,881   
  

 

 

    

 

 

 

Total

   $ 495,162       $ 494,309   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at June 30, 2014 was 4.6 years. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations.

As of June 30, 2014 and December 31, 2013, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered 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 was primarily caused by changes in credit spreads and liquidity issues in the marketplace.

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

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.

 

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The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at June 30, 2014. 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 27 and 14 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 254 holdings at June 30, 2014.

 

     June 30, 2014  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

U.S. Government Sponsored Enterprises

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

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

     166,346         764         66,805         382         233,151         1,146   

Privately Issued Residential Mortgage Backed Securities

     —           —           793         11         793         11   

Obligations Issued by States and Political Subdivisions

     —           —           3,820         871         3,820         871   

Other Debt Securities

     —           —           1,380         120         1,380         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 166,346       $ 764       $ 72,798       $ 1,384       $ 239,144       $ 2,148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2013. 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 20 and 7 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 458 holdings at December 31, 2013.

 

     December 31, 2013  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

U.S. Government Sponsored Enterprises

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

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

     289,709         1, 352         24,557         149         314,266         1,501   

Privately Issued Residential Mortgage Backed Securities

     1,486         23         —           —           1,486         23   

Obligations Issued by States and Political Subdivisions

     —           —           3,820         870         3,820         870   

Other Debt Securities

     —           —           1,376         125         1,376         125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 291,195       $ 1,375       $ 29,753       $ 1,144       $ 320,948       $ 2,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Investment Securities Held-to-Maturity

 

     June 30, 2014      December 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 328,351       $ 2,021       $ 633       $ 329,739       $ 291,779       $ 185       $ 5,043       $ 286,921   

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

     1,208,637         9,516         10,053         1,208,100         1,196,105         2,239         20,816         1,177,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,536,988       $ 11,537       $ 10,686       $ 1,537,839       $ 1,487,884       $ 2,424       $ 25,859       $ 1,464,449   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $746,339,000 and $732,144,000 at June 30, 2014 and December 31, 2013, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $494,453,000 and $510,060,000 at June 30, 2014 and December 31, 2013, respectively.

At June 30, 2014 and December 31, 2013, 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 June 30, 2014.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 4,464       $ 4,512   

After one but within five years

     1,042,137         1,042,271   

After five but within ten years

     489,585         490,234   

More than ten years

     802         822   
  

 

 

    

 

 

 

Total

   $ 1,536,988       $ 1,537,839   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at June 30, 2014 was 4.8 years. Included in the weighted average remaining life calculation at June 30, 2014 were $260,065,000 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.

As of June 30, 2014 and December 31, 2013, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not likely that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not 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 at June 30, 2014 and December 31, 2013.

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.

 

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The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at June 30, 2014. 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 43 and 57 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 310 holdings at June 30, 2014.

 

     June 30, 2014  
     Less Than 12 Months      12 Months or Longer      Total  

Temporarily Impaired Investments

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (Dollars in thousands)  

U.S. Government Sponsored Enterprises

   $ 61,736       $ 232       $ 29,161       $ 401       $ 90,897       $ 633   

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

     222,198         2,179         376,287         7,874         598,485         10,053   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 283,934       $ 2,411       $ 405,448       $ 8,275       $ 689,382       $ 10,686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2013. 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 3 and 1 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 96 holdings at December 31, 2013.

 

     December 31, 2013  
     Less Than 12 Months      12 Months or Longer      Total  
Temporarily Impaired Investments    Fair Value      Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     ( In thousands)  

U.S. Government Sponsored Enterprises

   $ 232,535       $ 5,043       $ —         $ —         $ 232,535       $ 5,043   

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

     931,180         18,654         80,362         2,162         1,011,542         20,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,163,715       $ 23,697       $ 80,362       $ 2,162       $ 1,244,077       $ 25,859   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 6. Allowance for Loan Losses

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

 

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 21,259      $ 19,759      $ 20,941      $ 19,197   

Loans charged off

     (113     (160     (542     (533

Recoveries on loans previously charged-off

     126        151        273        336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     13        (9     (269     (197

Provision charged to expense

     450        750        1,050        1,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 21,722      $ 20,500      $ 21,722      $ 20,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Further information pertaining to the allowance for loan losses for the three months ending June 30, 2014 follows:

 

     Construction
and Land
Development
     Commercial
and
Industrial
    Commercial
Real

Estate
     Residential
Real
Estate
     Consumer     Home
Equity
     Unallocated      Total  
     (Dollars in thousands)  

Allowance for loan losses:

             

Balance at March 31, 2014

   $ 1,825       $ 3,090      $ 11,874       $ 1,873       $ 425      $ 902       $ 1,270       $ 21,259   

Charge-offs

     —           (14     —           —           (99     —           —           (113

Recoveries

     —           24        2         15         84        1         —           126   

Provision

     220         (185     99         39         18        12         247         450   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2014

   $ 2,045       $ 2,915      $ 11,975       $ 1,927       $ 428      $ 915       $ 1,517       $ 21,722   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 273       $ 353      $ 359       $ 160       $ —        $ 93       $ —           1,238   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 1,772       $ 2,562      $ 11,616       $ 1,767       $ 428      $ 822       $ 1,517       $ 20,484   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans:

                     

Ending balance

   $ 25,861       $ 88,666      $ 766,965       $ 282,468       $ 9,649      $ 140,616       $ —         $ 1,314,225   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans deemed to be impaired

   $ 356       $ 1,093      $ 4,775       $ 1,559       $ —        $ 93       $ —         $ 7,876   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans not deemed to be impaired

   $ 25,505       $ 87,573      $ 762,190       $ 280,909       $ 9,649      $ 140,523       $ —         $ 1,306,349   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses for the six months ending June 30, 2014 follows:

 

     Construction
and Land
Development
    Commercial
and
Industrial
    Commercial
Real

Estate
     Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated      Total  
     (Dollars in thousands)  

Allowance for loan losses:

           

Balance at December 31, 2013

   $ 2,174      $ 2,989      $ 11,218       $ 2,006      $ 432      $ 959      $ 1,163       $ 20,941   

Charge-offs

     (250     (14     —           —          (278     —          —           (542

Recoveries

     —          48        4         20        200        1        —           273   

Provision

     121        (108     753         (99     74        (45     354         1,050   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at June 30, 2014

   $ 2,045      $ 2,915      $ 11,975       $ 1,927      $ 428      $ 915      $ 1,517       $ 21,722   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 273      $ 353      $ 359       $ 160      $ —        $ 93      $ —           1,238   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 1,772      $ 2,562      $ 11,616       $ 1,767      $ 428      $ 822      $ 1,517       $ 20,484   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

                  

Ending balance

   $ 25,861      $ 88,666      $ 766,965       $ 282,468      $ 9,649      $ 140,616      $ —         $ 1,314,225   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans deemed to be impaired

   $ 356      $ 1,093      $ 4,775       $ 1,559      $ —        $ 93      $ —         $ 7,876   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans not deemed to be impaired

   $ 25,505      $ 87,573      $ 762,190       $ 280,909      $ 9,649      $ 140,523      $ —         $ 1,306,349   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

Page 16 of 43


Table of Contents

Further information pertaining to the allowance for loan losses for the three months ending June 30, 2013 follows:

 

     Construction
and Land
Development
     Commercial
and
Industrial
    Commercial
Real

Estate
     Residential
Real
Estate
    Consumer     Home
Equity
     Unallocated      Total  
     (Dollars in thousands)  

Allowance for loan losses:

            

Balance at March 31, 2013

   $ 3,199       $ 3,523      $ 8,779       $ 2,071      $ 357      $ 833       $ 997       $ 19,759   

Charge-offs

     —           (6     —           —          (154     —           —           (160

Recoveries

     —           56        1         1        92        1         —           151   

Provision

     42         (358     644         (42     68        98         298         750   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2013

   $ 3,241       $ 3,215      $ 9,424       $ 2,030      $ 363      $ 932       $ 1,295       $ 20,500   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 1,000       $ 92      $ 204       $ 147      $ —        $ 96       $ —           1,539   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 2,241       $ 3,123      $ 9,220       $ 1,883      $ 363      $ 836       $ 1,295       $ 18,961   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Loans:

                    

Ending balance

   $ 34,919       $ 101,918      $ 609,462       $ 283,392      $ 8,123      $ 125,918       $ —         $ 1,163,732   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Loans deemed to be impaired

   $ 1,500       $ 1,102      $ 2,365       $ 1,171      $ —        $ 96       $ —         $ 6,234   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Loans not deemed to be impaired

   $ 33,419       $ 100,816      $ 607,097       $ 282,221      $ 8,123      $ 125,822       $ —         $ 1,157,498   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses for the six months ending June 30, 2013 follows:

 

     Construction
and Land
Development
     Commercial
and
Industrial
    Commercial
Real

Estate
     Residential
Real
Estate
     Consumer     Home
Equity
     Unallocated      Total  
     (Dollars in thousands)  

Allowance for loan losses:

             

Balance at December 31, 2012

   $ 3,041       $ 3,118      $ 9,065       $ 1,994       $ 333      $ 886       $ 760       $ 19,197   

Charge-offs

     —           (234     —           —           (299     —           —           (533

Recoveries

     —           121        4         4         206        1         —           336   

Provision

     200         210        355         32         123        45         535         1,500   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2013

   $ 3,241       $ 3,215      $ 9,424       $ 2,030       $ 363      $ 932       $ 1,295       $ 20,500   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 1,000       $ 92      $ 204       $ 147       $ —        $ 96       $ —           1,539   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 2,241       $ 3,123      $ 9,220       $ 1,883       $ 363      $ 836       $ 1,295       $ 18,961   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans:

                     

Ending balance

   $ 34,919       $ 101,918      $ 609,462       $ 283,392       $ 8,123      $ 125,918       $ —         $ 1,163,732   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans deemed to be impaired

   $ 1,500       $ 1,102      $ 2,365       $ 1,171       $ —        $ 96       $ —         $ 6,234   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans not deemed to be impaired

   $ 33,419       $ 100,816      $ 607,097       $ 282,221       $ 8,123      $ 125,822       $ —         $ 1,157,498   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

Page 17 of 43


Table of Contents

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

Loans rated 1-3 (Pass):

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

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of June 30, 2014 and December 31, 2013.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of June 30, 2014 and December 31, 2013.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of June 30, 2014 and December 31, 2013 and are doubtful for full collection.

Impaired:

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

The following table presents the Company’s loans by risk rating at June 30, 2014.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real

estate
 
     (Dollars in thousands)  

Grade:

  

1-3 (Pass)

   $ 18,283       $ 87,101       $ 761,273   

4 (Monitor)

     7,222         472         917   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     356         1,093         4,775   
  

 

 

    

 

 

    

 

 

 

Total

   $ 25,861       $ 88,666       $ 766,965   
  

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2013.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real
estate
 
     (Dollars in thousands)  

Grade:

  

1-3 (Pass)

   $ 25,138       $ 90,563       $ 707,461   

4 (Monitor)

     7,312         472         1,346   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     608         1,367         4,520   
  

 

 

    

 

 

    

 

 

 

Total

   $ 33,058       $ 92,402       $ 713,327   
  

 

 

    

 

 

    

 

 

 

The Company utilized payment performance as credit quality indicators for residential real estate, consumer and overdrafts, and the home equity portfolio. The indicators are depicted in the table “aging of past due loans,” below.

 

Page 18 of 43


Table of Contents

Further information pertaining to the allowance for loan losses at June 30, 2014 follows:

 

     Accruing
30-89
Days

Past Due
     Non Accrual      Accrual
Greater
Than
90 Days
     Total
Past Due
     Current
Loans
     Total  
     (Dollars in thousands)  

Construction and land development

   $ —         $ 356       $ —         $ 356       $ 25,505       $ 25,861   

Commercial and industrial

     1,051         450         —           1,501         87,165         88,666   

Commercial real estate

     2,570         610         614         3,794         763,171         766,965   

Residential real estate

     1,154         1,426         —           2,580         279,888         282,468   

Consumer and overdrafts

     1         3         —           4         9,645         9,649   

Home equity

     326         —           —           326         140,290         140,616   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,102       $ 2,845       $ 614       $ 8,561       $ 1,305,664       $ 1,314,225   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses at December 31, 2013 follows:

 

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

Construction and land development

   $ —         $ 500       $ —         $ 500       $ 32,558       $ 33,058   

Commercial and industrial

     112         706            818         91,584         92,402   

Commercial real estate

     1,496         306         —           1,802         711,525         713,327   

Residential real estate

     2,232         1,034         —           3,266         282,775         286,041   

Consumer and overdrafts

     11         3         —           14         9,644         9,658   

Home equity

     1,710         —           —           1,710         128,567         130,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,561       $ 2,549       $ —         $ 8,110       $ 1,256,653       $ 1,264,763   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include; the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2013.

 

Page 19 of 43


Table of Contents

The following is information pertaining to impaired loans for June 30, 2014:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying
Value
For 3 Months

Ending 6/30/14
     Interest
Income
Recognized
For 3 Months
Ending 6/30/14
     Average
Carrying Value
For 6 Months

Ending 6/30/14
     Interest
Income
Recognized
For 6 Months
Ending 6/30/14
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

   $ —         $ —         $ —         $ 188       $ —         $ 321       $ —     

Commercial and industrial

     11         42         —           11         —           71         —     

Commercial real estate

     400         400         —           100         —           80         —     

Residential real estate

     70         70         —           31         —           104         —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 481       $ 512       $ —         $ 330       $ —         $ 576       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ 356       $ 3,400       $ 273       $ 169       $ —         $ 143       $ —     

Commercial and industrial

     1,082         1,332         353         1,095         8         1,104         19   

Commercial real estate

     4,375         4,466         359         4,391         36         4,405         74   

Residential real estate

     1,489         1,684         160         1,106         3         1,039         5   

Consumer

     —           —           —           —           —           —           —     

Home equity

     93         93         93         94         —           94         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,395       $ 10,975       $ 1,238       $ 6,855       $ 47       $ 6,785       $ 98   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

   $ 356       $ 3,400       $ 273       $ 357       $ —         $ 465       $ —     

Commercial and industrial

     1,093         1,374         353         1,106         8         1,175         19   

Commercial real estate

     4,775         4,866         359         4,491         36         4,485         74   

Residential real estate

     1,559         1,754         160         1,137         3         1,143         5   

Consumer

     —           —           —           —           —           —           —     

Home equity

     93         93         93         94         —           94         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,876       $ 11,487       $ 1,238       $ 7,185       $ 47       $ 7,362       $ 98   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is information pertaining to impaired loans for June 30, 2013:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average Carrying
Value For 3
Months
Ending 6/30/13
     Average Carrying
Value For 6
Months
Ending 6/30/13
     Interest
Income
Recognized
For 3 Months
Ending 6/30/13
     Interest
Income
Recognized
For 6 Months
Ending 6/30/13
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

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

Commercial and industrial

     206         235         —           385         451         1         1   

Commercial real estate

     122         122         —           113         136         —           —     

Residential real estate

     266         266         —           146         96         —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 594       $ 623       $ —         $ 644       $ 683       $ 1       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 43


Table of Contents

With required reserve recorded:

                    

Construction and land development

   $ 1,500       $ 3,292       $ 1,000       $ 1,500       $ 1,500       $ —         $ —     

Commercial and industrial

     896         1,128         92         866         856         8         17   

Commercial real estate

     2,243         2,330         204         2,169         2,143         20         46   

Residential real estate

     905         991         147         909         834         —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     96         96         96         96         96         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,640       $ 7,837       $ 1,539       $ 5,540       $ 5,429       $ 28       $ 63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

   $ 1,500       $ 3,292       $ 1,000       $ 1,500       $ 1,500       $ —         $ —     

Commercial and industrial

     1,102         1,363         92         1,251         1,307         9         18   

Commercial real estate

     2,365         2,452         204         2,282         2,279         20         46   

Residential real estate

     1,171         1,257         147         1,055         930         —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     96         96         96         96         96         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,234       $ 8,460       $ 1,539       $ 6,184       $ 6,112       $ 29       $ 64   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no troubled debt restructurings occurring during the six month periods ended June 30, 2014 or June 30, 2013.

Note 7. Reclassifications Out of Accumulated Other Comprehensive Income (a)

Amount Reclassified from Accumulated Other Comprehensive Income

 

Details about Accumulated

Other Comprehensive

Income Components

   Three Months Ended
June 30, 2014
    Three Months Ended
June 30, 2013
   

Affected Line Item

in the Statement

Where Net Income

is Presented

     (in thousands)      

Unrealized gains and losses on available-for-sale securities

  

 
   $ —        $ 781      Net gains on sales of investments
     —          (302   Provision for income taxes
  

 

 

   

 

 

   
   $ —        $ 479      Net income
  

 

 

   

 

 

   
Accretion of unrealized losses transferred     
     $1,286      $ —        Securities held-to-maturity
     (478)        —        Provision for income taxes
  

 

 

   

 

 

   
   $ 808      $ —        Net income
  

 

 

   

 

 

   
Amortization of defined benefit pension items     

Prior-service costs

   $ (3 )(b)    $ (3   Salaries and employee benefits

Actuarial gains (losses)

     (91 )(b)      (287   Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (94     (290   Income before taxes

Tax (expense) or benefit

     38        116      Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (56   $ (174   Net income
  

 

 

   

 

 

   

Total reclassifications for the period

   $ 752      $ 305      Net income, net of tax
  

 

 

   

 

 

   

 

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Details about Accumulated

Other Comprehensive

Income Components

   Six Months Ended
June 30, 2014
    Six Months Ended
June 30, 2013
   

Affected Line Item

in the Statement

Where Net Income

is Presented

     (in thousands)      

Unrealized gains and losses on available-for-sale securities

  

 
   $ —        $ 1,664      Net gains on sales of investments
     —          (652   Provision for income taxes
  

 

 

   

 

 

   
   $ —        $ 1,012      Net income
  

 

 

   

 

 

   
Accretion of unrealized losses transferred     
     $2,793      $ —        Securities held-to-maturity
     (1,061)        —        Provision for income taxes
  

 

 

   

 

 

   
   $ 1,732      $ —        Net income
  

 

 

   

 

 

   
Amortization of defined benefit pension items     

Prior-service costs

   $ (5 )(b)    $ (6   Salaries and employee benefits

Actuarial gains (losses)

     (183 )(b)      (574   Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (188     (580   Income before taxes

Tax (expense) or benefit

     75        233      Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (113   $ (347   Net income
  

 

 

   

 

 

   

Total reclassifications for the period

   $ 1,619      $ 665      Net income, net of tax
  

 

 

   

 

 

   

 

  (a) Amounts in parentheses indicate debits to profit/loss.

 

  (b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see employee benefits footnote (Note 9) for additional details).

Note 8. Earnings per Share (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are the stock options discussed below. The dilutive effect of these stock options for 2014 and 2013 was an increase of 1,452 and 1,162 shares, respectively.

 

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The following table is a reconciliation of basic EPS and diluted EPS for the three and six months ended June 30,

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

(in thousands except share and per share data)

           

Basic EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 4,394       $ 3,935       $ 8,259       $ 7,437   

Net income, Class B

     1,205         1,091         2,272         2,065   

Denominator:

           

Weighted average shares outstanding, Class A

     3,589,125         3,574,379         3,585,773         3,571,963   

Weighted average shares outstanding, Class B

     1,967,580         1,982,180         1,970,880         1,984,530   

Basic EPS, Class A

   $ 1.22       $ 1.10       $ 2.30       $ 2.08   

Basic EPS, Class B

     0.61         0.55         1.15         1.04   

Diluted EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 4,394       $ 3,935       $ 8,259       $ 7,437   

Net income, Class B

     1,205         1,091         2,272         2,065   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     5,599         5,026         10,531         9,502   

Denominator:

           

Weighted average shares outstanding, basic, Class A

     3,589,125         3,574,379         3,585,773         3,571,963   

Weighted average shares outstanding, Class B

     1,967,580         1,982,180         1,970,880         1,984,530   

Dilutive effect of Class A stock options

     1,327         795         1,452         1,162   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,558,032         5,557,354         5,558,105         5,557,655   

Weighted average shares outstanding, Class B

     1,967,580         1,982,180         1,970,880         1,984,530   

Diluted EPS, Class A

   $ 1.01       $ 0.90       $ 1.89       $ 1.71   

Diluted EPS, Class B

     0.61         0.55         1.15         1.04   

Note 9. Employee Benefits

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

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

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

Components of Net Periodic Benefit Cost (Credit) for the Three Months Ended June 30,

 

     Pension Benefits     Supplemental Insurance/
Retirement Plan
 
     2014     2013     2014      2013  
     (In thousands)  

Service cost

   $ 258      $ 299      $ 389       $ 381   

Interest

     367        314        331         267   

Expected return on plan assets

     (636     (470     —           —     

Recognized prior service cost (benefit)

     (26     (26     29         29   

Recognized net actuarial losses

     3        158        88         129   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ (34   $ 275      $ 837       $ 806   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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Components of Net Periodic Benefit Cost (Credit) for the Six Months Ended June 30,

 

     Pension Benefits     Supplemental Insurance/
Retirement Plan
 
     2014     2013     2014      2013  
     (In thousands)  

Service cost

   $ 516      $ 598      $ 778       $ 763   

Interest

     734        628        662         534   

Expected return on plan assets

     (1,272     (940     —           —     

Recognized prior service cost (benefit)

     (52     (52     58         58   

Recognized net actuarial losses

     6        316        176         258   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ (68   $ 550      $ 1,674       $ 1,613   
  

 

 

   

 

 

   

 

 

    

 

 

 

Contributions

As of June 30, 2014, $920,000 has been contributed. The Company does not anticipate making any additional contributions.

Note 10. 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.

 

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The results of the fair value hierarchy as of June 30, 2014, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

   $ 2,001       $ —         $ 2,001       $ —     

U.S. Government Sponsored Enterprises

     —           —           —           —     

SBA Backed Securities

     6,973         —           6,973         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     419,625         —           419,625         —     

Privately Issued Residential Mortgage Backed Securities

     2,127         —           2,127         —     

Obligations Issued by States and Political Subdivisions

     60,902         —           408         60,494   

Other Debt Securities

     2,180         —           2,180         —     

Equity Securities

     501         290         —           211   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 494,309       $ 290       $ 433,314       $ 60,705   
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

         2,539         —           —             2,539   

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

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for the three-month period and six-month periods ended June 30, 2014 amounted to $276,000 and $530,000, respectively.

There were no transfers between level 1 and 2 for the three months ended June 30, 2014. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the six month period ended June 30, 2014.

 

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

 

Asset

   Fair
Value
     Valuation Technique    Unobservable Input    Unobservable Input
Value or Range

Securities AFS (4)

   $ 60,705       Discounted cash flow    Discount rate    0% -1% (3)

Impaired Loans

     2,539       Appraisal of collateral (1)    Appraisal adjustments (2)    0%-25% discount

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3) Weighted averages
(4) Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.

The changes in Level 3 securities for the six-month period ended June 30, 2014 are shown in the table below:

 

     Auction
Rate

Securities
     Obligations
Issued by
States &
Political
Subdivisions
    Equity
Securities
    Total  
            (In thousands)              

Balance at December 31, 2013

   $ 3,820         32,487      $ 290      $ 36,597   

Purchases

     —           51,471        —          51,471   

Maturities and calls

     —           (27,282     (79     (27,361

Amortization

     —           (2     —          (2

Changes in fair value

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 3,820       $ 56,674      $ 211      $ 60,705   
  

 

 

    

 

 

   

 

 

   

 

 

 

The amortized cost of Level 3 securities was $61,577,000 at June 30, 2014 with an unrealized loss of $872,000. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The changes in Level 3 securities for the six-month period ended June 30, 2013, are shown in the table below:

 

     Auction
Rate
Securities
     Obligations
Issued by
States &
Political
Subdivisions
    Equity
Securities
    Total  
            (In thousands)              

Balance at December 31, 2012

   $ 3,963       $ 49,477      $ 342      $ 53,782   

Purchases

     —           29,370        —          29,370   

Maturities and calls

     —           (30,830     (10     (30,840

Amortization

     —           (18     —          (18

Changes in fair value

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ 3,963       $ 47,999      $ 332      $ 52,294   
  

 

 

    

 

 

   

 

 

   

 

 

 

The amortized cost of Level 3 securities was $53,018,000 at June 30, 2013 with an unrealized loss of $724,000. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

Note 11. Fair Values of Financial Instruments

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

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

 

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

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

Loans: For variable-rate loans, that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair value of other loans is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Incremental credit risk for nonperforming loans has been considered.

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

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

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

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2014 and December 31, 2013. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-

term borrowings and accrued interest payable.

 

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                   Fair Value Measurements  

June 30, 2014

   Carrying Amount      Estimated
Fair Value
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 

(in thousands)

              

Financial assets:

              

Securities held-to-maturity

   $ 1,536,988       $ 1,537,839       $ —         $ 1,537,839       $ —     

Loans (1)

     1,292,503         1,269,530         —           —           1,269,530   

Financial liabilities:

              

Time deposits

     388,189         393,502         —           393,502         —     

Other borrowed funds

     267,500         270,576         —           270,576         —     

Subordinated debentures

     36,083         41,036         —           —           41,036   

December 31, 2013

              

Financial assets:

              

Securities held-to-maturity

     1,487,884         1,464,449         —           1,464,449         —     

Loans (1)

     1,243,822         1,214,192         —           —           1,214,192   

Financial liabilities:

              

Time deposits

     382,224         386,742         —           386,742         —     

Other borrowed funds

     255,144         254,736         —           254,736         —     

Subordinated debentures

     36,083         39,503         —           —           39,503   

 

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

Note 12. Recent Accounting Developments

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about offsetting assets and liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company implemented the provisions of ASU 2011-11 as of January 1, 2013. The adoption of this pronouncement did not have a material effect on the consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220)

Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income or as a separate disclosure in the notes to the financial statements. The new standard is effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. The Company has presented a separate footnote (Note 7) as a result of this pronouncement.

In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company has assessed the impact of ASU 2014-14 and the adoption of this amendment will not have a material impact on the Company’s financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At June 30, 2014, the Company had total assets of $3.6 billion. Currently, the Company operates 26 banking offices in 19 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.

During July 2012, the Company received state regulatory approval to close a branch at Chestnut Hill in Newton, Massachusetts. The branch closed on September 21, 2012 and the accounts were temporarily moved to the Brookline, Massachusetts branch. During July 2012, the Company entered into a lease agreement and received regulatory approval to open a branch at a new location at Chestnut Hill in Newton, Massachusetts. The branch opened on November 7, 2013 and the majority of the accounts that were temporarily moved to the Brookline, Massachusetts branch were moved to the new branch at Chestnut Hill in Newton, Massachusetts.

During December 2013, the Company entered into a lease agreement to open a branch located in Woburn, Massachusetts. The branch is scheduled to open during the fourth quarter of 2014.

During March 2014, the Company entered into a lease agreement to open a branch located on Boylston Street in Boston, Massachusetts. This property will be leased from an entity affiliated with Marshall M. Sloane, Chairman of the Board of the Company. This agreement was approved by the Board of Directors in the absence of the Chairman of the Board. The branch is scheduled to open during the first quarter of 2015. The deposits from the Kenmore Square, Boston Massachusetts branch, which is scheduled to close on September 30, 2014, will be moved to the new Boylston Street branch.

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. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.

The Company is also a provider of financial services, including cash management, transaction processing and short term financing to municipalities in Massachusetts, New Hampshire, and Rhode Island. The Company has deposit relationships with approximately 193 (55%) of the 351 cities and towns in Massachusetts.

 

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Net income for the quarter ended June 30, 2014 was $5,599,000, or $1.01 per Class A share diluted, compared to net income of $5,026,000, or $0.90 per Class A share diluted, for the quarter ended June 30, 2013. Net income for the six-month period ended June 30, 2014 was $10,531,000, or $1.89 per Class A share diluted, compared to net income of $9,502,000, or $1.71 per Class A share diluted, for the quarter ended June 30, 2013. Earnings per share (EPS) for each class of stock and time period is as follows:

 

                                               
     Three months
ended

June 30,
2014
     Three months
ended

June 30,
2013
 

Basic EPS — Class A common

   $ 1.22       $ 1.10   

Basic EPS — Class B common

   $ 0.61       $ 0.55   

Diluted EPS — Class A common

   $ 1.01       $ 0.90   

Diluted EPS — Class B common

   $ 0.61       $ 0.55   

 

                                               
     Six months
ended

June 30,
2014
     Six months
ended

June 30,
2013
 

Basic EPS — Class A common

   $ 2.30       $ 2.08   

Basic EPS — Class B common

   $ 1.15       $ 1.04   

Diluted EPS — Class A common

   $ 1.89       $ 1.71   

Diluted EPS — Class B common

   $ 1.15       $ 1.04   

Net interest income totaled $33.3 million for the six-months ended June 30, 2014 compared to $29.1 million for the same period in 2013. The 14.5% increase in net interest income for the period is primarily due to an increase in average earning assets. The net interest margin increased from 2.21% on a fully taxable equivalent basis in 2013 to 2.23% on the same basis for 2014. This was primarily the result of a decrease in rates paid on deposits and borrowed funds. Also, interest expense increased slightly as a result of an increase in deposit balances and there was a 13.3% increase in the average balances of earning assets, combined with a similar increase in average deposits.

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

 

LOGO

From the beginning of 2012 through the third quarter of 2012, management stabilized the net interest margin by continuing to lower the cost of funds, and by deploying excess liquidity through expansion of the investment portfolio. Also, the Company collected approximately $3,253,000 of prepayment penalties during 2012. The primary factor accounting for the decrease in the net interest margin for the fourth quarter of

 

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2012 and through the fourth quarter of 2013 was an additional large influx of deposits. Management invested the funds in shorter term securities. The net interest margin increased during the first quarter of 2014 primarily as a result of pricing discipline and decreased during the second quarter of 2014 primarily as a result of a decrease in asset yields.

While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin.

For the three months ended June 30, 2014, the loan loss provision was $450,000 compared to a provision of $750,000 for the same period last year. For the six months ended June 30, 2014, the loan loss provision was $1.1 million compared to a provision of $1.5 million for the same period last year. The decrease in the provision was primarily as a result of changes in the portfolio composition and changes in qualitative economic factors. Nonperforming loans decreased to $2.8 million at June 30, 2014 from $3.3 million on June 30, 2013.

The Company had no sales of investment securities during the six months ended June 30, 2014. The Company capitalized on favorable market conditions for the three and six months ended June 30, 2013 and realized net gains on sales of investments of $781,000 and 1.7 million, respectively.

Included in operating expenses for the first six months ended June 30, 2014 are FDIC assessments of $974,000 compared to $850,000 for the same period in 2013.

For the first six months of 2014, the Company’s effective income tax rate was 4.7% compared to 5.8% for last year’s corresponding period. The effective income tax rate decreased primarily as a result of an increase in tax-exempt income.

Financial Condition

Loans

On June 30, 2014, total loans outstanding were $1.3 billion, up by $49.5 million from the total on December 31, 2013. At June 30, 2014, commercial real estate loans accounted for 58.4% and residential real estate loans, including home equity loans, accounted for 32.2% of total loans.

Commercial and industrial loans decreased to $88.7 million at June 30, 2014 from $92.4 million at December 31, 2013, primarily as a result of a decrease in commercial and industrial financing. Construction loans decreased to $25.9 million at June 30, 2014 from $33.1 million on December 31, 2013, primarily as a result of loan payments.

Allowance for Loan Losses

The allowance for loan loss at June 30, 2014 was $21.7 million as compared to $20.9 million at December 31, 2013. The increase was due to the increase in the size of the loan portfolio. Also, the level of the allowance for loan losses to total loans decreased slightly from 1.66% at December 31, 2013 to 1.65% at June 30, 2014. In evaluating the allowance for loan losses the Company considered the following categories to be higher risk:

 

    Construction loans: The outstanding loan balance of construction loans at June 30, 2014 is $25.9 million as compared to $33.1 million at December 31, 2013. Based on the general local conditions facing construction, management closely monitors all construction loans and considers this type of loans to be higher risk.

 

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    Higher balance loans: Loans greater than $1.0 million are considered “high balance loans”. The balance of these loans is $744.0 million at June 30, 2014 as compared to $701.1 million at December 31, 2013. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high balance loans. Included in high balance loans are loans greater than $10.0 million. The balance of these loans, which is included in the loans greater than $1.0 million category, is $433.9 million, at June 30, 2014 as compared to $377.9 million at December 31, 2013. Additional allowance allocations are made based upon the level of this type of high balance loans that is separate and greater than the $1.0 million allocation.

 

    Small business loans: The outstanding loan balances of small business loans is $38.0 million at June 30, 2014 as compared to $40.2 million at December 31, 2013. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion.

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2014     2013     2014     2013  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 21,259      $ 19,759      $ 20,941      $ 19,197   

Loans charged off

     (113     (160     (542     (533

Recoveries on loans previously charged-off

     126        151        273        336   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     13        (9     (269     (197

Provision charged to expense

     450        750        1,050        1,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 21,722      $ 20,500      $ 21,722      $ 20,500   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Nonperforming Assets

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

 

     June 30, 2014     December 31, 2013  
     (Dollars in thousands)  

Nonaccruing loans

   $ 2,845      $ 2,549   

Loans past due 90 days or more and still accruing

   $ 614      $ —     

Nonaccruing loans as a percentage of total loans

     0.22     0.20

Accruing troubled debt restructures

   $ 5,883      $ 5,969   

 

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Cash and Cash Equivalents

Cash and cash equivalents decreased during the first six months of 2014. This was primarily the result of a decrease in lower yielding interest-bearing deposits in other banks during the quarter.

Short-term Investments

Short-term investments decreased as a result of maturities.

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 $494.3 million at June 30, 2014, an increase of 6.5% from December 31, 2013. During the third quarter of 2013, $987.0 million of securities available-for-sale with unrealized losses of $25.3 million were transferred to securities held-to-maturity. This was done in response to rising interest rates. Purchases of securities available-for-sale totaled $100.1 million for the six months ended June 30, 2014. 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 4.6 years.

The majority of the Company’s securities AFS 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 $60.7 million, or 1.7% of assets are classified as Level 3. These securities are generally failed auction rate securities, equity investments or obligations of states and political subdivisions with no readily determinable fair value. Failed auction rate securities were reclassified to Level 3 during the first quarter of 2009 due to the lack of an active market. Fair values for Level 3 securities are, generally, arrived at based upon a review of market trades of similar instruments, if any, as well as an analysis of the security based upon market liquidity and prevailing market interest rates.

During the first six months of 2014, net unrealized losses on the securities available-for-sale decreased to $0.9 million from $1.7 million at December 31, 2013. Unrealized losses on the available-for-sale portfolio increased as a result of increases in interest rates.

 

     June 30, 2014      December 31, 2013  
     (In thousands)  

U.S. Treasury

   $ 2,001       $ 1,998   

U.S. Government Sponsored Enterprises

     —           10,004   

Small Business Administration

     6,973         7,302   

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

     419,625         403,189   

Privately Issued Residential Mortgage-backed Securities

     2,127         2,277   

Obligations issued by States and Political Subdivisions

     60,902         36,723   

Other Debt Securities

     2,180         2,176   

Equity Securities

     501         576   
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 494,309       $ 464,245   
  

 

 

    

 

 

 

 

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There were no realized gains on sales of investments for the first six months of 2014.

Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $1.5 billion on June 30, 2014, an increase of 3.3% from the total on December 31, 2013. During the third quarter of 2013, $987.0 million of securities available-for-sale with unrealized losses of $25.3 million were transferred to securities held-to-maturity. This was done in response to rising interest rates. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 4.8 years.

 

     June 30, 2014      December 31, 2013  
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 328,351       $ 291,779   

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

     1,208,637         1,196,105   
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $ 1,536,988       $ 1,487,884   
  

 

 

    

 

 

 

At June 30, 2014 and December 31, 2013, 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”) system, 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 for impairment based on the ultimate recoverability of the cost basis in the stock. For the quarter ended June 30, 2014, the FHLBB reported preliminary net income of $31.3 million. The FHLBB also declared a dividend equal to an annual yield of 1.48%. During the first six months of 2014, the Company purchased $2.3 million of additional capital stock and redeemed $700,000. As of June 30, 2014, no impairment has been recognized.

Deposits and Borrowed Funds

On June 30, 2014, deposits totaled $2.9 billion, representing a 5.0% increase from December 31, 2013. Total deposits increased primarily as a result of increases in demand deposits, money market accounts, and savings and NOW deposits. Money market and Savings and NOW deposits increased as the Company continued to offer attractive rates for these types of deposits during the first six months of the year. Borrowed funds totaled $447.5 million compared to $469.6 million at December 31, 2013. Borrowed funds increased mainly as a result of an increase in borrowings from the FHLBB.

 

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Stockholders’ Equity

At June 30, 2014, total equity was $188.3 million compared to $176.5 million at December 31, 2013. The Company’s equity increased primarily as a result of earnings and a decrease in other comprehensive loss, net of taxes, offset somewhat by dividends paid. Other comprehensive loss, net of taxes, decreased as a result of a decrease in unrealized losses on securities available-for-sale and securities transferred from available-for-sale to held-to-maturity. During the third quarter of 2013, $987.0 million of securities available-for-sale with unrealized losses of $25.3 million were transferred to securities held-to-maturity. This was done in response to rising interest rates. The Company’s leverage ratio stood at 6.47% at June 30, 2014, compared to 6.50% at December 31, 2013. The decrease in the leverage ratio is due to an increase in assets, offset somewhat, by an increase stockholders’ equity. Book value as of June 30, 2014 was $33.88 per share compared to $31.76 at December 31, 2013.

 

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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 rates earned or paid on a fully taxable equivalent basis for each of the three-month periods indicated.

 

     Three Months Ended  
     June 30, 2014     June 30, 2013  
     (In thousands)  
     Average
Balance
    Interest
Income/
Expense (1)
    Rate
Earned/
Paid (1)
    Average
Balance
    Interest
Income/
Expense (1)
    Rate
Earned/
Paid (1)
 

ASSETS

            

Interest-earning assets:

            

Loans (2)

            

Loans taxable

   $ 764,653      $ 8,237        4.32   $ 760,440      $ 8,343        4.40

Loans tax-exempt

     526,116        6,791        5.18        393,213        5,721        5.84   

Securities available-for-sale (5):

            

Taxable

     457,955        739        0.65        1,424,732        5,495        1.54   

Tax-exempt

     38,600        84        0.87        47,779        117        0.98   

Securities held-to-maturity:

            

Taxable

     1,522,059        8,020        2.11        251,518        1,419        2.26   

Interest-bearing deposits in other banks

     194,418        129        0.27        206,535        145        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,503,801        24,000        2.75        3,084,217        21,240        2.76   

Non interest-earning assets

     164,071            173,309       

Allowance for loan losses

     (21,566         (20,149    
  

 

 

       

 

 

     

Total assets

   $ 3,646,306          $ 3,237,377       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 820,396      $ 450        0.22   $ 711,429      $ 416        0.23

Savings accounts

     333,290        210        0.25        320,686        233        0.29   

Money market accounts

     935,477        669        0.29        752,880        582        0.31   

Time deposits

     399,554        1,141        1.14        387,381        1,234        1.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,488,717        2,470        0.40        2,172,376        2,465        0.46   

Securities sold under agreements to repurchase

     211,829        93        0.18        199,255        89        0.18   

Other borrowed funds and subordinated debentures

     251,752        2,237        3.56        219,305        2,066        3.78   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,952,298        4,800        0.65     2,590,936        4,620        0.72
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities

            

Demand deposits

     473,578            425,366       

Other liabilities

     34,434            43,383       
  

 

 

       

 

 

     

Total liabilities

     3,460,310            3,059,685       
  

 

 

       

 

 

     

Stockholders’ equity

     185,996            177,692       

Total liabilities & stockholders’ equity

   $ 3,646,306          $ 3,237,377       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       19,200            16,620     

Less taxable equivalent adjustment

       (2,446         (2,108  
    

 

 

       

 

 

   

Net interest income

     $ 16,754          $ 14,512     
    

 

 

   

 

 

     

 

 

   

 

 

 

Net interest spread (3)

         2.10         2.04
      

 

 

       

 

 

 

Net interest margin (4)

         2.20         2.16
      

 

 

       

 

 

 

 

(1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(5) Average balances of securities available-for-sale calculated utilizing amortized cost.

 

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The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the six-month periods indicated.

 

     Six Months Ended  
     June 30, 2014     June 30, 2013  
     (In thousands)  
     Average
Balance
    Interest
Income/
Expense (1)
    Rate
Earned/
Paid (1)
    Average
Balance
    Interest
Income/
Expense (1)
    Rate
Earned/
Paid (1)
 

ASSETS

            

Interest-earning assets:

            

Loans (2)

            

Loans taxable

   $ 763,474      $ 16,436        4.34   $ 757,468      $ 16,695        4.44

Loans tax-exempt

     514,506        13,399        5.25        382,809        11,251        5.93   

Securities available-for-sale (5):

            

Taxable

     458,939        1,509        0.66        1,395,196        11,023        1.58   

Tax-exempt

     36,466        159        0.87        51,000        252        0.99   

Securities held-to-maturity:

            

Taxable

     1,507,529        15,800        2.10        259,812        2,939        2.26   

Interest-bearing deposits in other banks

     157,958        211        0.27        188,730        264        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,438,872        47,514        2.79        3,035,015        42,424        2.81   

Non interest-earning assets

     163,195            174,857       

Allowance for loan losses

     (21,380         (19,828    
  

 

 

       

 

 

     

Total assets

   $ 3,580,687          $ 3,190,044       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 776,427      $ 831        0.22   $ 694,068      $ 805        0.23

Savings accounts

     336,797        438        0.26        316,449        454        0.29   

Money market accounts

     919,844        1,308        0.29        727,499        1,114        0.31   

Time deposits

     388,236        2,226        1.16        391,005        2,568        1.32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,421,304        4,803        0.40        2,129,021        4,941        0.47   

Securities sold under agreements to repurchase

     219,336        194        0.18        203,755        179        0.18   

Other borrowed funds and subordinated debentures

     252,022        4,420        3.54        214,979        4,092        3.84   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,892,662        9,417        0.66     2,547,755        9,212        0.73
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities

            

Demand deposits

     471,114            421,646       

Other liabilities

     34,025            41,724       
  

 

 

       

 

 

     

Total liabilities

     3,397,801            3,011,125       
  

 

 

       

 

 

     

Stockholders’ equity

     182,886            178,919       

Total liabilities & stockholders’ equity

   $ 3,580,687          $ 3,190,044       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       38,097            33,212     

Less taxable equivalent adjustment

       (4,829         (4,155  
    

 

 

       

 

 

   

Net interest income

     $ 33,268          $ 29,057     
    

 

 

   

 

 

     

 

 

   

 

 

 

Net interest spread (3)

         2.13         2.08
      

 

 

       

 

 

 

Net interest margin (4)

         2.23         2.21
      

 

 

       

 

 

 

 

(1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(5) Average balances of securities available-for-sale calculated utilizing amortized cost.

 

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The following table presents certain information on a fully-tax equivalent basis regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to changes in rate and changes in volume.

 

     Three Months Ended June 30, 2014
Compared with

Three Months Ended June 30,  2013
    Six Months Ended June 30, 2014
Compared with
Six Months Ended June 30,  2013
 
    

Increase/(Decrease)

Due to Change in

   

Increase/(Decrease)

Due to Change in

 
     Volume     Rate     Total     Volume     Rate     Total  
     (in thousands)     (in thousands)  

Interest income:

            

Loans

            

Taxable

   $ 46      $ (152   $ (106   $ 132      $ (391   $ (259

Tax-exempt

     1,770        (700     1,070        3,539        (1,391     2,148   

Securities available-for-sale

        

Taxable

     (2,561     (2,195     (4,756     (5,088     (4,426     (9,514

Tax-exempt

     (21     (12     (33     (66     (27     (93

Securities held-to-maturity

        

Taxable

     6,701        (100     6,601        13,093        (232     12,861   

Interest-bearing deposits in other

banks

     (8     (8     (16     (42     (11     (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     5,927        (3,167     2,760        11,568        (6,478     5,090   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits:

        

NOW accounts

     61        (27     34        91        (65     26   

Savings accounts

     9        (32     (23     28        (44     (16

Money market accounts

     133        (46     87        278        (84     194   

Time deposits

     38        (131     (93     (18     (324     (342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     241        (236     5        379        (517     (138

Securities sold under agreements to repurchase

     6        (2     4        14        1        15   

Other borrowed funds and subordinated debentures

     293        (122     171