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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, 2015.

or

 

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

Commission file number: 0-15752

 

 

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(781) 391-4000

(Registrant’s telephone number, including area code)

 

 

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, 2015, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value   3,600,729 Shares
Class B Common Stock, $1.00 par value   1,967,180 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, 2015 and December 31, 2014
     4   
  Consolidated Statements of Income:
Three months and six months ended June 30, 2015 and 2014
     5   
  Consolidated Statements of Comprehensive Income:
Three months and six months ended June 30, 2015 and 2014
     6   
  Consolidated Statements of Changes in Stockholders’ Equity:
Six months ended June 30, 2015 and 2014
     7   
  Consolidated Statements of Cash Flows:
Six months ended June 30, 2015 and 2014
     8   
  Notes to Consolidated Financial Statements      9-28   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28-39   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      39   

Item 4.

  Controls and Procedures      39   

Part II.

  Other Information   

Item 1.

  Legal Proceedings      39   

Item 1A.

  Risk Factors      40   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      40   

Item 3.

  Defaults Upon Senior Securities      40   

Item 4.

  Mine Safety Disclosures      40   

Item 5.

  Other Information      40   

Item 6.

  Exhibits      40   

Signatures

       41   

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 41


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 41


Table of Contents

PART I—Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     June 30,     December 31,  
     2015     2014  
Assets     

Cash and due from banks

   $ 60,547      $ 43,367   

Federal funds sold and interest-bearing deposits in other banks

     24,522        261,990   
  

 

 

   

 

 

 

Total cash and cash equivalents

     85,069        305,357   
  

 

 

   

 

 

 

Short-term investments

     2,139        2,131   

Securities available-for-sale, amortized cost $440,044 and $448,210, respectively

     440,059        448,390   

Securities held-to-maturity, fair value $1,689,572 and $1,413,603, respectively

     1,683,568        1,406,792   

Federal Home Loan Bank of Boston stock, at cost

     27,748        24,916   

Loans, net:

    

Commercial and industrial

     291,142        149,732   

Municipal

     87,241        41,850   

Construction and land development

     26,521        22,744   

Commercial real estate

     713,770        696,272   

Residential real estate

     248,103        257,305   

Home equity

     167,271        151,275   

Consumer and other

     10,646        12,188   
  

 

 

   

 

 

 

Total loans, net

     1,544,694        1,331,366   

Less: allowance for loan losses

     22,245        22,318   
  

 

 

   

 

 

 

Net loans

     1,522,449        1,309,048   

Bank premises and equipment

     24,416        24,182   

Accrued interest receivable

     7,281        6,241   

Goodwill

     2,714        2,714   

Other assets

     118,375        94,265   
  

 

 

   

 

 

 

Total assets

   $ 3,913,818      $ 3,624,036   
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 512,167      $ 484,928   

Savings and NOW deposits

     1,054,132        978,619   

Money Market Accounts

     902,106        890,899   

Time deposits

     383,284        383,145   
  

 

 

   

 

 

 

Total deposits

     2,851,689        2,737,591   

Securities sold under agreements to repurchase

     283,830        212,360   

Other borrowed funds

     485,500        395,500   

Subordinated debentures

     36,083        36,083   

Due to broker

     2,418        —     

Other liabilities

     49,925        50,002   
  

 

 

   

 

 

 

Total liabilities

     3,709,445        3,431,536   
  

 

 

   

 

 

 
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 3,600,729 shares and 3,600,729 shares, respectively

     3,601        3,601   

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

     1,967        1,967   

Additional paid-in capital

     12,292        12,292   

Retained earnings

     210,196        200,411   
  

 

 

   

 

 

 
     228,056        218,271   

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

     (23     77   

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

     (8,717     (10,479

Pension liability, net of taxes

     (14,943     (15,369
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (23,683     (25,771
  

 

 

   

 

 

 

Total stockholders’ equity

     204,373        192,500   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,913,818      $ 3,624,036   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 41


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,  
     2015      2014      2015      2014  

Interest income

           

Loans

   $ 12,470       $ 12,611       $ 24,546       $ 25,060   

Securities held-to-maturity

     9,371         8,020         17,539         15,800   

Securities available-for-sale

     737         794         1,469         1,614   

Federal funds sold and interest-bearing deposits in other banks

     97         129         293         211   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     22,675         21,554         43,847         42,685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Savings and NOW deposits

     692         660         1,320         1,269   

Money market accounts

     734         669         1,516         1,308   

Time deposits

     1,207         1,141         2,363         2,226   

Securities sold under agreements to repurchase

     128         93         242         194   

Other borrowed funds and subordinated debentures

     2,200         2,237         4,285         4,420   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,961         4,800         9,726         9,417   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     17,714         16,754         34,121         33,268   

Provision for loan losses

     —           450         200         1,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     17,714         16,304         33,921         32,218   

Other operating income

           

Service charges on deposit accounts

     1,934         2,012         3,847         4,046   

Lockbox fees

     888         845         1,676         1,622   

Net gains on sales of securities

     118         —           118         —     

Gains on sales of mortgage loans

     418         81         517         88   

Other income

     852         677         1,557         1,329   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     4,210         3,615         7,715         7,085   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Salaries and employee benefits

     9,480         8,776         18,614         17,651   

Occupancy

     1,517         1,322         3,122         2,764   

Equipment

     659         585         1,252         1,157   

FDIC assessments

     545         494         1,048         974   

Other

     3,565         2,912         6,268         5,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     15,766         14,089         30,304         28,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     6,158         5,830         11,332         11,055   

Provision for income taxes

     233         231         448         524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,925       $ 5,599       $ 10,884       $ 10,531   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share data:

           

Weighted average number of shares outstanding, basic

           

Class A

     3,600,729         3,589,125         3,600,729         3,585,773   

Class B

     1,967,180         1,967,580         1,967,180         1,970,880   

Weighted average number of shares outstanding, diluted

           

Class A

     5,567,909         5,558,032         5,567,909         5,558,105   

Class B

     1,967,180         1,967,580         1,967,180         1,970,880   

Basic earnings per share:

           

Class A

   $ 1.29       $ 1.22       $ 2.37       $ 2.30   

Class B

   $ 0.65       $ 0.61       $ 1.19       $ 1.15   

Diluted earnings per share

           

Class A

   $ 1.06       $ 1.01       $ 1.95       $ 1.89   

Class B

   $ 0.65       $ 0.61       $ 1.19       $ 1.15   

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 41


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended June 30,  
     2015     2014  

Net income

   $ 5,925      $ 5,599   

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     1        262   

Less: reclassification adjustment for gains included in net income

     (71     —     
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (70     262   

Accretion of net unrealized losses transferred

     1,027        808   

Defined benefit pension plans:

    

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

     213        56   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     1,170        1,126   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 7,095      $ 6,725   
  

 

 

   

 

 

 
     Six months ended June 30,  
     2015     2014  

Net income

   $ 10,884      $ 10,531   

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     (29     505   

Less: reclassification adjustment for gains included in net income

     (71     —     
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (100     505   

Accretion of net unrealized losses transferred

     1,762        1,732   

Defined benefit pension plans:

    

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

     426        113   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     2,088        2,350   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 12,972      $ 12,881   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 41


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Six Months Ended June 30, 2015 and 2014

 

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

Balance at December 31, 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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   $ 3,601       $ 1,967      $ 12,292       $ 200,411      $ (25,771   $ 192,500   

Net income

     —           —          —           10,884        —          10,884   

Other comprehensive income, net of tax:

              

Unrealized holding losses arising during period, net of $64 in taxes and $118 in realized net gains

     —           —          —           —          (100     (100

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $943 in taxes

     —           —          —           —          1,762        1,762   

Pension liability adjustment, net of $284 in taxes

     —           —          —           —          426        426   

Cash dividends paid, Class A common stock, $.24 per share

     —           —          —           (865     —          (865

Cash dividends paid, Class B common stock, $.12 per share

     —           —          —           (234     —          (234
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ 3,601       $ 1,967      $ 12,292       $ 210,196      $ (23,683   $ 204,373   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 41


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Six months ended June 30,  
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 10,884      $ 10,531   

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

    

Gain on sales of mortgage loans

     (517     (88

Net gains on sales of securities

     (118     —     

Provision for loan losses

     200        1,050   

Deferred income taxes

     (819     (1,547

Net depreciation and amortization

     1,639        1,630   

Increase in accrued interest receivable

     (1,040     (175

Increase in other assets

     (13,357     (2,192

Increase in other liabilities

     632        454   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (2,496     9,663   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     —          3,561   

Purchase of short-term investments

     (8     (1,069

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

     91,052        71,155   

Proceeds from sales of securities available-for-sale

     21,215        —     

Purchase of securities available-for-sale

     (115,690     (100,084

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

     169,457        106,312   

Purchase of securities held-to-maturity

     (443,705     (152,901

Net increase in loans

     (249,003     (55,701

Proceeds from sales of portfolio loans

     35,941        6,082   

Capital expenditures

     (1,520     (1,252
  

 

 

   

 

 

 

Net cash used in investing activities

     (492,261     (123,897
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in time deposits

     139        5,965   

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

     113,959        128,534   

Net proceeds from exercise of stock options

     —          4   

Cash dividends

     (1,099     (1,096

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

     71,470        (34,430

Net increase in other borrowed funds

     90,000        12,356   
  

 

 

   

 

 

 

Net cash provided by financing activities

     274,469        111,333   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (220,288     (2,901

Cash and cash equivalents at beginning of period

     305,357        94,678   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 85,069      $ 91,777   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 9,646      $ 9,421   

Income taxes

     2,730        1,991   

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

     (100     505   

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

     1,762        1,732   

Pension liability adjustment, net of taxes

     426        113   

Due (from) to broker

     (8,764     2,000   

Loans transferred to other real estate owned

     1,916        —     

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 8 of 41


Table of Contents

Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Six Months Ended June 30, 2015 and 2014

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, 2014, 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. Securities Available-for-Sale

 

     June 30, 2015      December 31, 2014  
     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

   $ 1,999       $ —         $ 2       $ 1,997       $ 1,999       $ 1       $ —         $ 2,000   

Small Business Administration

     6,446         48         —           6,494         6,684         33         —           6,717   

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

     272,775         1,114         326         273,563         336,158         1,387         452         337,093   

Privately Issued Residential Mortgage Backed Securities

     1,654         4         17         1,641         1,894         5         25         1,874   

Obligations Issued by States and Political Subdivisions

     153,417         —           876         152,541         97,657         —           873         96,784   

Other Debt Securities

     3,600         14         115         3,499         3,600         24         100         3,524   

Equity Securities

     153         171         —           324         218         180         —           398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 440,044       $ 1,351       $ 1,336       $ 440,059       $ 448,210       $ 1,630       $ 1,450       $ 448,390   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $256,228,000 and $301,038,000 at June 30, 2015 and December 31, 2014, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $22,268,000 and $24,810,000 at June 30, 2015 and December 31, 2014, respectively. The Company realized gross gains of $118,000 from the proceeds of $21,215,000 from the sales of available-for-sale securities for the six months ended June 30, 2015.

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, 2015.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 147,326       $ 147,327   

After one but within five years

     161,584         162,236   

After five but within ten years

     121,460         121,600   

More than 10 years

     8,021         7,187   

Non-maturing

     1,653         1,709   
  

 

 

    

 

 

 

Total

   $ 440,044       $ 440,059   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at June 30, 2015 was 3.7 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.

 

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As of June 30, 2015 and December 31, 2014, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered that the principal and interest on these securities are from issuers that are investment grade. The 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.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at June 30, 2015. 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 5 and 14 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 285 holdings at June 30, 2015.

 

     June 30, 2015  
     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

   $ 1,997       $ 2       $ —         $ —         $ 1,997       $ 2   

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

     7,335         5         74,363         321         81,698         326   

Privately Issued Residential Mortgage Backed Securities

     —           —           597         17         597         17   

Obligations Issued by States and Political Subdivisions

     —           —           3,820         876         3,820         876   

Other Debt Securities

     399         1         1,386         114         1,785         115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 9,731       $ 8       $ 80,166       $ 1,328       $ 89,897       $ 1,336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 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 3 and 14 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 262 holdings at December 31, 2014.

 

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     December 31, 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

     24,457         85         77,585         367         102,042         452   

Privately Issued Residential Mortgage Backed Securities

     —           —           678         25         678         25   

Obligations Issued by States and Political Subdivisions

     —           —           3,820         873         3,820         873   

Other Debt Securities

     —           —           1,400         100         1,400         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 24,457       $ 85       $ 83,483       $ 1,365       $ 107,940       $ 1,450   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 3. Investment Securities Held-to-Maturity

 

     June 30, 2015      December 31, 2014  
     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

   $ 319,405       $ 3,233       $ 392       $ 322,246       $ 251,617       $ 2,707       $ 249       $ 254,075   

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

     1,364,163         10,707         7,544         1,367,326         1,155,175         11,185         6,832         1,159,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,683,568       $ 13,940       $ 7,936       $ 1,689,572       $ 1,406,792       $ 13,892       $ 7,081       $ 1,413,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,062,575,000 and $868,924,000 at June 30, 2015 and December 31, 2014, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $411,957,000 and $458,782,000 at June 30, 2015 and December 31, 2014, respectively.

At June 30, 2015 and December 31, 2014, 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, 2015.

 

     Amortized
Cost
     Fair
Value
 
     ( in thousands)  

Within one year

   $ 2,854       $ 2,895   

After one but within five years

     1,264,143         1,268,516   

After five but within ten years

     406,814         408,543   

More than ten years

     9,757         9,618   
  

 

 

    

 

 

 

Total

   $ 1,683,568       $ 1,689,572   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at June 30, 2015 was 4.5 years. Included in the weighted average remaining life calculation at June 30, 2015 were $202,373,000 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, 2015 and December 31, 2014, 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.

 

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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, 2015 and December 31, 2014.

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

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at June 30, 2015. 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 98 and 22 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 352 holdings at June 30, 2015.

 

     June 30, 2015  
     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

   $ 91,968       $ 392       $ —         $ —         $ 91,968       $ 392   

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

     561,000         4,935         123,344         2,609         684,344         7,544   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 652,968       $ 5,327       $ 123,344       $ 2,609       $ 776,312       $ 7,936   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 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 34 and 48 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 303 holdings at December 31, 2014.

 

     December 31, 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

   $ 22,414       $ 25       $ 14,776       $ 224       $ 37,190       $ 249   

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

     194,119         1,678         308,526         5,154         502,645         6,832   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 216,533       $ 1,703       $ 323,302       $ 5,378       $ 539,835       $ 7,081   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Allowance for Loan Losses

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

 

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

 

     Three months ended      Six months ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
     (In thousands)  

Allowance for loan losses, beginning of period

   $ 22,529       $ 21,259       $ 22,318       $ 20,941   

Loans charged off

     (403      (113      (484      (542

Recoveries on loans previously charged-off

     119         126         211         273   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries (charge-offs)

     (284      13         (273      (269

Provision charged to expense

     —           450         200         1,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 22,245       $ 21,722       $ 22,245       $ 21,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses for the three months ending June 30, 2015 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real

Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (In thousands)  

Allowance for loan losses:

                 

Balance at March 31, 2015

  $ 1,884      $ 4,645      $ 1,373      $ 11,127      $ 799      $ 714      $ 614      $ 1,373      $ 22,529   

Charge-offs

    —          (52     —          (298     —          (53     —          —          (403

Recoveries

    —          56        —          2        2        59        —          —          119   

Provision

    (151     (221     (373     892        (79     (11     36        (93     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2015

  $ 1,733      $ 4,428      $ 1,000      $ 11,723      $ 722      $ 709      $ 650      $ 1,280      $ 22,245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 12      $ 43      $ —        $ 108      $ 41      $ —        $ 91      $ —          295   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,721      $ 4,385      $ 1,000      $ 11,615      $ 681      $ 709      $ 559      $ 1,280      $ 21,950   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 26,521      $ 291,142      $ 87,241      $ 713,770      $ 248,103      $ 10,646      $ 167,271      $ —        $ 1,544,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 101      $ 595      $ —        $ 1,705      $ 941      $ —        $ 91      $ —        $ 3,433   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 26,420      $ 290,547      $ 87,241      $ 712,065      $ 247,162      $ 10,646      $ 167,180      $ —        $ 1,541,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for the six months ending June 30, 2015 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real

Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (In thousands)  

Allowance for loan losses:

                 

Balance at December 31, 2014

  $ 1,592      $ 4,758      $ 1,488      $ 11,199      $ 775      $ 810      $ 599      $ 1,097      $ 22,318   

Charge-offs

    —          (52     —          (298     —          (134     —          —          (484

Recoveries

    —          71        —          4        4        132        —          —          211   

Provision

    141        (349     (488     818        (57     (99     51        183        200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2015

  $ 1,733      $ 4,428      $ 1,000      $ 11,723      $ 722      $ 709      $ 650      $ 1,280      $ 22,245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 12      $ 43      $ —        $ 108      $ 41      $ —        $ 91      $ —          295   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,721      $ 4,385      $ 1,000      $ 11,615      $ 681      $ 709      $ 559      $ 1,280      $ 21,950   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 26,521      $ 291,142      $ 87,241      $ 713,770      $ 248,103      $ 10,646      $ 167,271      $ —        $ 1,544,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 101      $ 595      $ —        $ 1,705      $ 941      $ —        $ 91      $ —        $ 3,433   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 26,420      $ 290,547      $ 87,241      $ 712,065      $ 247,162      $ 10,646      $ 167,180      $ —        $ 1,541,261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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
    Municipal     Commercial
Real
Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (In thousands)  

Allowance for loan losses:

                 

Balance at March 31, 2014

  $ 1,825      $ 2,593      $ 804      $ 11,567      $ 1,873      $ 425      $ 902      $ 1,270      $ 21,259   

Charge-offs

    —          (14     —          —          —          (99     —          —          (113

Recoveries

    —          24        —          2        15        84        1        —          126   

Provision

    220        (173     (41     128        39        18        12        247        450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2014

  $ 2,045      $ 2,430      $ 763      $ 11,697      $ 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      $ 2,077      $ 763      $ 11,338      $ 1,767      $ 428      $ 822      $ 1,517      $ 20,484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 25,861      $ 73,204      $ 31,982      $ 750,445      $ 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      $ 72,111      $ 31,982      $ 745,670      $ 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
    Municipal     Commercial
Real
Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (In thousands)  

Allowance for loan losses:

                 

Balance at December 31, 2013

  $ 2,174      $ 2,617      $ 655      $ 10,935      $ 2,006      $ 432      $ 959      $ 1,163      $ 20,941   

Charge-offs

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

Recoveries

    —          48        —          4        20        200        1        —          273   

Provision

    121        (221     108        758        (99     74        (45     354        1,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2014

  $ 2,045      $ 2,430      $ 763      $ 11,697      $ 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      $ 2,077      $ 763      $ 11,338      $ 1,767      $ 428      $ 822      $ 1,517      $ 20,484   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 25,861      $ 73,204      $ 31,982      $ 750,445      $ 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      $ 72,111      $ 31,982      $ 745,670      $ 280,909      $ 9,649      $ 140,523      $ —        $ 1,306,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

Page 15 of 41


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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, 2015 and December 31, 2014.

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, 2015 and December 31, 2014.

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, 2015 and December 31, 2014 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, 2015.

 

     Construction
and Land
Development
     Commercial
and
Industrial
     Municipal      Commercial
Real

Estate
 
     (In thousands)  

Grade:

           

1-3 (Pass)

   $  19,396       $ 290,547       $ 87,241       $ 711,449   

4 (Monitor)

     7,024         —           —           616   

5 (Substandard)

     —           —           —           —     

6 (Doubtful)

     —           —           —           —     

Impaired

     101         595         —           1,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,521       $ 291,142       $ 87,241       $ 713,770   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2014.

 

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

Grade:

           

1-3 (Pass)

   $ 15,515       $ 148,407       $ 41,850       $ 691,322   

4 (Monitor)

     7,126         472         —           633   

5 (Substandard)

     —           —           —           —     

6 (Doubtful)

     —           —           —           —     

Impaired

     103         853         —           4,317   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,744       $ 149,732       $ 41,850       $ 696,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing composition of the portfolio. In recent quarters, the Company has increased its exposure to larger loans to larger institutions which receive credit ratings. The Company currently has limited loss experience with these types of loans. There is, however, a great deal of default and loss data available on these types of loans from the credit rating agencies. As of June 30, 2015, the Company incorporated this information into the development of the historical loss rates for these loan types. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at June 30, 2015.

 

Page 16 of 41


Table of Contents
     Commercial
and
Industrial
     Municipal      Commercial
Real

Estate
 
     (In thousands)  

Credit Rating:

        

Aaa – Aa3

   $ 135,059       $ 60,483       $ 8,014   

A1 – A3

     80,385         7,820         131,641   

Baa1 – Baa3

     —           9,035         154,699   

Ba2

     —           4,480         —     
  

 

 

    

 

 

    

 

 

 

Total

   $  215,444       $ 81,818       $ 294,354   
  

 

 

    

 

 

    

 

 

 

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.

Further information pertaining to the allowance for loan losses at June 30, 2015 follows:

 

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

Construction and land development

   $ —         $ 101       $  —         $ 101       $ 26,420       $ 26,521   

Commercial and industrial

     —           122         —           122         291,020         291,142   

Municipal

     —           —           —           —           87,241         87,241   

Commercial real estate

     926         186         —           1,112         712,658         713,770   

Residential real estate

     927         1,136         —           2,063         246,040         248,103   

Consumer and overdrafts

     8         3         —           11         10,635         10,646   

Home equity

     407         638         —           1,045         166,226         167,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  2,268       $  2,186       $ —         $  4,454       $  1,540,240       $ 1,544,694   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses at December 31, 2014 follows:

 

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

Construction and land development

   $ —         $ 103       $ —         $ 103       $ 22,641       $ 22,744   

Commercial and industrial

     905         157         —           1,062         148,670         149,732   

Municipal

     —           —           —           —           41,850         41,850   

Commercial real estate

     1,046         2,781         —           3,827         692,445         696,272   

Residential real estate

     632         846         —           1,478         255,827         257,305   

Consumer and overdrafts

     6         5         —           11         12,177         12,188   

Home equity

     576         254         —           830         150,445         151,275   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,165       $ 4,146       $ —         $ 7,311       $ 1,324,055       $ 1,331,366   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Page 17 of 41


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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, 2014.

The following is information pertaining to impaired loans for June 30, 2015:

 

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

Ending 6/30/15
     Interest
Income
Recognized
For 3 Months
Ending 6/30/15
     Average
Carrying Value
For 6 Months

Ending 6/30/15
     Interest
Income
Recognized
For 6 Months
Ending 6/30/15
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

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

Commercial and industrial

     32         32         —           47         —           40         —     

Municipal

     —           —           —           —           —           —           —     

Commercial real estate

     —           —           —           196         —           280         —     

Residential real estate

     126         210         —           129         2         131         4   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 158       $ 242       $ —         $ 372       $ 2       $ 451       $ 4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ 101       $ 108       $ 12       $ 102       $ —         $ 102       $ —     

Commercial and industrial

     563         765         43         644         5         722         11   

Municipal

     —           —           —           —           —           —           —     

Commercial real estate

     1,705         1,801         108         2,809         17         3,286         33   

Residential real estate

     815         815         41         817         1         820         7   

Consumer

     —           —           —           —           —           —           —     

Home equity

     91         91         91         91         —           92         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,275       $ 3,580       $ 295       $ 4,463       $ 23       $ 5,022       $ 51   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

   $ 101       $ 108       $ 12       $ 102       $ —         $ 102       $ —     

Commercial and industrial

     595         797         43         691         5         762         11   

Municipal

     —           —           —           —           —           —           —     

Commercial real estate

     1,705         1,801         108         3,005         17         3,566         33   

Residential real estate

     941         1,025         41         946         3         951         11   

Consumer

     —           —           —           —           —           —           —     

Home equity

     91         91         91         91         —           92         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,433       $ 3,822       $ 295       $ 4,835       $ 25       $ 5,473       $ 55   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 18 of 41


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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no troubled debt restructurings occurring during the six month periods ended June 30, 2015 or June 30, 2014.

Note 5. 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, 2015
    Three Months Ended
June 30, 2014
   

Affected Line Item

in the Statement

Where Net Income

is Presented

(in thousands)

Unrealized gains and losses on available-for-sale securities

  $ 118      $ —        Net gains on sales of securities
    (47     —        Provision for income taxes
 

 

 

   

 

 

   
  $ 71      $ —        Net income
 

 

 

   

 

 

   

Accretion of unrealized losses transferred

  

 
  $ 1,576      $  1,286      Interest on securities held-to-maturity
    (549     (478   Provision for income taxes
 

 

 

   

 

 

   
  $ 1,027      $ 808      Net income
 

 

 

   

 

 

   

Amortization of defined benefit pension items

  

 

Prior-service costs

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

Actuarial gains (losses)

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

 

 

   

 

 

   

Total before tax

    (355     (94   Income before taxes

Tax (expense) or benefit

    142        38      Provision for income taxes
 

 

 

   

 

 

   

Net of tax

  $ (213   $ (56   Net income
 

 

 

   

 

 

   

Total reclassifications for the period

  $ 885      $ 752      Net income, net of tax
 

 

 

   

 

 

   

 

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Details about Accumulated

Other Comprehensive

Income Components

   Six Months Ended
June 30, 2015
    Six Months Ended
June 30, 2014
   

Affected Line Item

in the Statement

Where Net Income

is Presented

(in thousands)

Unrealized gains and losses on available-for-sale securities

   $ 118      $ —        Net gains on sales of securities
     (47     —        Provision for income taxes
  

 

 

   

 

 

   
   $ 71      $ —        Net income
  

 

 

   

 

 

   

Accretion of unrealized losses transferred

  

   
   $  2,705      $ 2,793      Interest on securities held-to-maturity
     (943     (1,061   Provision for income taxes
  

 

 

   

 

 

   
   $ 1,762      $ 1,732      Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

  

   

Prior-service costs

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

Actuarial gains (losses)

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

 

 

   

 

 

   

Total before tax

     (710     (188   Income before taxes

Tax (expense) or benefit

     284        75      Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (426   $ (113   Net income
  

 

 

   

 

 

   

Total reclassifications for the period

   $ 1,407      $ 1,619      Net income, net of tax
  

 

 

   

 

 

   

 

(a) Amount 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 8) for additional details).

Note 6. Earnings per Share (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; 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 three and six months ended June 30, 2014 was an increase of 1,327 and 1,452 shares, respectively. There were no stock options outstanding during the six months ended June 30, 2015.

 

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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,

 
     2015      2014      2015      2014  

Basic EPS Computation:
(in thousands except share and per share data)

           

Numerator:

           

Net income, Class A

   $ 4,654       $ 4,394       $ 8,549       $ 8,259   

Net income, Class B

     1,271         1,205         2,335         2,272   

Denominator:

           

Weighted average shares outstanding, Class A

     3,600,729         3,589,125         3,600,729         3,585,773   

Weighted average shares outstanding, Class B

     1,967,180         1,967,580         1,967,180         1,970,880   

Basic EPS, Class A

   $ 1.29       $ 1.22       $ 2.37       $ 2.30   

Basic EPS, Class B

     0.65         0.61         1.19         1.15   

Diluted EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 4,654       $ 4,394       $ 8,549       $ 8,259   

Net income, Class B

     1,271         1,205         2,335         2,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     5,925         5,599         10,884         10,531   

Denominator:

           

Weighted average shares outstanding, basic, Class A

     3,600,729         3,589,125         3,600,729         3,585,773   

Weighted average shares outstanding, Class B

     1,967,180         1,967,580         1,967,180         1,970,880   

Dilutive effect of Class A stock options

     —           1,327         —           1,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,567,909         5,558,032         5,567,909         5,558,105   

Weighted average shares outstanding, Class B

     1,967,180         1,967,580         1,967,180         1,970,880   

Diluted EPS, Class A

   $ 1.06       $ 1.01       $ 1.95       $ 1.89   

Diluted EPS, Class B

     0.65         0.61         1.19         1.15   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7. Employee Benefits

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

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

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

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

 

     Pension Benefits      Supplemental Insurance/
Retirement Plan
 
     2015      2014      2015      2014  
     (In thousands)  

Service cost

   $ 336       $ 258       $  397       $ 389   

Interest

     394         367         341         331   

Expected return on plan assets

     (688      (636      —           —     

Recognized prior service cost (benefit)

     (26      (26      29         29   

Recognized net actuarial losses

     204         3         149         88   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 220       $ (34    $ 916       $ 837   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Pension Benefits      Supplemental Insurance/
Retirement Plan
 
     2015      2014      2015      2014  
     (In thousands)  

Service cost

   $ 672       $ 516       $ 794       $ 778   

Interest

     788         734         682         662   

Expected return on plan assets

     (1,376      (1,272      —           —     

Recognized prior service cost (benefit)

     (52      (52      58         58   

Recognized net actuarial losses

     407         6         299         176   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 439       $ (68    $ 1,833       $ 1,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

Contributions

The company intends to contribute $2,000,000 to the Pension Plan in 2015. As of June 30, 2015, $1,000,000 has been contributed.

Note 8. 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, 2015, 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

   $ 1,997       $ —         $ 1,997       $ —     

SBA Backed Securities

     6,494         —           6,494         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     273,563         —           273,563         —     

Privately Issued Residential Mortgage Backed Securities

     1,641         —           1,641         —     

Obligations Issued by States and Political Subdivisions

     152,541         —           —           152,541   

Other Debt Securities

     3,499         —           3,499         —     

Equity Securities

     324         287         —           37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 440,059       $ 287       $ 287,194       $ 152,578   
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

     1,159         —           —           1,159   

Other Real Estate Owned

     1,916               1,916   

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, appraisal of collateral 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 and six-month periods ended June 30, 2015 amounted to $558,000 and $594,000, respectively.

There were no transfers between level 1, 2 and 3 for the six months ended June 30, 2015. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the six month period ended June 30, 2015.

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)

   $ 152,578       Discounted cash flow   Discount rate   0%-1% (3)

Impaired Loans

     1,159       Appraisal of collateral (1)   Appraisal adjustments (2)   0%-30% discount

Other Real Estate Owned

     1,916       Appraisal (1)   Appraisal adjustments (2)   0%-30% discount

 

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(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, 2015 are shown in the table below:

 

     Auction
Rate

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

Balance at December 31, 2014

   $ 3,820       $ 92,964       $ 102       $ 96,886   

Purchases

     —           113,179         —           113,179   

Maturities and calls

     —           (57,411      (65      (57,476

Amortization

     —           (11      —           (11

Changes in fair value

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2015

   $ 3,820       $ 148,721       $ 37       $ 152,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $153,454,000 at June 30, 2015 with an unrealized loss of $876,000. 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, 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.

 

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The results of the fair value hierarchy as of December 31, 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

   $ 2,000       $ —         $ 2,000       $ —     

U.S. Government Sponsored Enterprises

     —           —           —           —     

SBA Backed Securities

     6,717         —           6,717         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     337,093         —           337,093         —     

Privately Issued Residential Mortgage Backed Securities

     1,874         —           1,874         —     

Obligations Issued by States and Political Subdivisions

     96,784         —           —           96,784   

Other Debt Securities

     3,524         —           3,524         —     

Equity Securities

     398         296         —           102   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 448,390       $ 296       $ 351,208       $ 96,886   
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

     3,410         —           —           3,410   

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, appraisal of collateral 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 period ended 2014 for the estimated credit loss amounted to $947,000.

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2014. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2014.

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)

   $ 96,886       Discounted cash flow   Discount rate   0%-1% (3)

Impaired Loans

     3,410       Appraisal of collateral (1)   Appraisal adjustments (2)   0%-30% discount

 

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

 

 

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Note 9. Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating fair values of its financial instruments. Excluded from this disclosure are all 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.

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, 2015 and December 31, 2014. 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  
     Carrying
Amount
     Estimated
Fair Value
     Level 1
Inputs
     Level 2
Inputs
     Level 3
Inputs
 
     (In thousands)  

June 30, 2015

              

Financial assets:

              

Securities held-to-maturity

   $ 1,683,568       $ 1,689,572       $ —         $ 1,689,572       $ —     

Loans (1)

     1,522,449         1,503,326         —           —           1,503,326   

Financial liabilities:

              

Time deposits

     383,284         387,675         —           387,675         —     

Other borrowed funds

     485,500         487,271         —           487,271         —     

Subordinated debentures

     36,083         36,083         —           —           36,083   

December 31, 2014

              

Financial assets:

              

Securities held-to-maturity

     1,406,792         1,413,603         —           1,413,603         —     

Loans (1)

     1,309,048         1,291,550         —           —           1,291,550   

Financial liabilities:

              

Time deposits

     383,145         387,919         —           387,919         —     

Other borrowed funds

     395,500         400,196         —           400,196         —     

Subordinated debentures

     36,083         36,083         —           —           36,083   

 

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

Note 10. Recent Accounting Developments

In November 2014, the FASB issued ASU 2014-17, “Business Combinations”. (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force). This ASU was issued to provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period in which the change-in-control event occurred should be considered a change in accounting principle in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. The amendments in this Update are effective on November 18, 2014. The adoption of this standard did not have a material impact on the Company’s financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement-Extraordinary and Unusual” (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from GAAP the concept of extraordinary items. This Update will align more closely GAAP income statement presentation guidance with International Audit Standards (IAS) 1, Presentation of Financial Statements, which prohibits the presentation and disclosure of extraordinary items. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-04, “Compensation-Retirement Benefits” (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be

 

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applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

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, 2015, the Company had total assets of $3.9 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.

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 has client engagements in Massachusetts, New Hampshire and Rhode Island with approximately 245 government entities throughout the region.

Net income for the quarter ended June 30, 2015 was $5,925,000, or $1.06 per Class A share diluted, compared to net income of $5,599,000, or $1.01 per Class A share diluted, for the quarter ended June 30, 2014. Net income for the six months ended June 30, 2015 was $10,884,000, or $1.95 per Class A share diluted, compared to net income of $10,531,000, or $1.89 per Class A share diluted, for the six months ended June 30, 2014.

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

 

     Three months ended
June 30, 2015
     Three months ended
June 30, 2014
 

Basic EPS – Class A common

   $ 1.29       $ 1.22   

Basic EPS – Class B common

   $ 0.65       $ 0.61   

Diluted EPS – Class A common

   $ 1.06       $ 1.01   

Diluted EPS – Class B common

   $ 0.65       $ 0.61   

 

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     Six months ended
June 30, 2015
     Six months ended
June 30, 2014
 

Basic EPS – Class A common

   $ 2.37       $ 2.30   

Basic EPS – Class B common

   $ 1.19       $ 1.15   

Diluted EPS – Class A common

   $ 1.95       $ 1.89   

Diluted EPS – Class B common

   $ 1.19       $ 1.15   

Net interest income totaled $34.1 million for the six-months ended June 30, 2015 compared to $33.3 million for the same period in 2014. The 2.6% increase in net interest income is primarily due to an increase in average earning assets. The net interest margin decreased from 2.23% on a fully taxable equivalent basis in 2014 to 2.16% on the same basis for 2015. This was primarily the result of a decrease in rates on earning assets. The average balances of earning assets increased by 7.2% combined with a similar increase in average deposits. Also, interest expense increased 3.3% as a result of an increase in deposit balances.

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

 

LOGO

The primary factor accounting for the decrease in the net interest margin for 2013 was an additional large influx of deposits. Management invested the funds in shorter term securities. The net interest margin has declined slightly throughout 2014 and the first quarter of 2015. During the second quarter of 2015 the net interest margin increased primarily as a result of an increase in higher yielding assets. This was primarily the result of lower yielding interest-bearing deposits in other banks invested in securities held-to-maturity.

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.

The provision for loan losses decreased by $450,000 for the quarter ended June 30, 2015 from $450,000 for the quarter ended June 30, 2014 primarily as a result of changes in portfolio composition. During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing composition of the portfolio. Non-performing assets totaled $4.1 million at June 30, 2015, compared to $4.1 million at December 31, 2014.

For the first six months of 2015, the Company’s effective income tax rate was 4.0% compared to 4.7% for last year’s corresponding period. The effective income tax rate decreased primarily as a result of an increase in tax-exempt income.

During December 2013, the Company entered into a lease agreement to open a branch located in Woburn, Massachusetts. The branch opened on November 3, 2014.

 

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During March 2014, the Company entered into a lease agreement to open a branch located on Boylston Street in Boston, Massachusetts. This property is 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 opened on April 22, 2015. The deposits from the Kenmore Square, Boston Massachusetts branch, which closed on September 30, 2014, were moved to the new Boylston Street branch.

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. The conformance period for investments in and relationships with certain “legacy covered funds” has been extended to July 21, 2016. 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.

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 came 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 implementation of the framework did not have a material impact on the Company’s financial condition or results of operations.

 

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Financial Condition

Loans

On June 30, 2015, total loans outstanding were $1.5 billion, up by $213.3 million from the total on December 31, 2014. At June 30, 2015, commercial real estate loans accounted for 46.2% and residential real estate loans, including home equity loans, accounted for 26.9% of total loans.

Commercial and industrial loans increased to $291.1 million at June 30, 2015 from $149.7 million at December 31, 2014, primarily as a result of an increase in commercial and industrial financing. Construction loans increased to $26.5 million at June 30, 2015 from $22.7 million on December 31, 2014, primarily as a result of an increase in construction financing. Municipal loans increased from $41.9 million to $87.2 million, primarily as a result of loan originations.

Allowance for Loan Losses

The allowance for loan loss at June 30, 2015 was $22.2 million as compared to $22.3 million at December 31, 2014. The change in the allowance for loan losses was primarily due to changes in portfolio composition. The level of the allowance for loan losses to total loans was 1.44% at June 30, 2015 and 1.68% at December 31, 2014.

During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing composition of the portfolio. In recent quarters, the Company has increased its exposure to larger loans to larger institutions which receive credit ratings. The Company currently has limited loss experience with these types of loans. There is, however, a great deal of default and loss data available on these types of loans from the credit rating agencies. As of June 30, 2015, the Company incorporated this information into the development of the historical loss rates for these loan types. Management believes incorporating this data results a more accurate indication of historical losses. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at June 30, 2015.

 

     Commercial
and
Industrial
     Municipal      Commercial
Real

Estate
 
     (In thousands)  

Credit Rating:

        

Aaa – Aa3

   $ 135,059       $ 60,483       $ 8,014   

A1 – A3

     80,385         7,820         131,641   

Baa1 – Baa3

     —           9,035         154,699   

Ba2

     —           4,480         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 215,444       $ 81,818       $ 294,354   
  

 

 

    

 

 

    

 

 

 

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, 2015 is $26.5 million as compared to $22.7 million at December 31, 2014. Based on the general local conditions facing construction, management closely monitors all construction loans and considers this type of loans to be higher risk.

 

   

Small business loans: The outstanding loan balances of small business loans is $37.8 million at June 30, 2015 as compared to $35.3 million at December 31, 2014. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation

 

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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      Six months ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
     (In thousands)  

Allowance for loan losses, beginning of period

   $ 22,529       $ 21,259       $ 22,318       $ 20,941   

Loans charged off

     (403      (113      (484      (542

Recoveries on loans previously charged-off

     119         126         211         273   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries (charge-offs)

     (284      13         (273      (269

Provision charged to expense

     —           450         200         1,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 22,245       $ 21,722       $ 22,245       $ 21,722   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015     December 31, 2014  
     (Dollars in thousands)  

Nonaccruing loans

   $ 2,186      $ 4,146   

Total nonperforming assets

   $ 4,101      $ 4,146   

Loans past due 90 days or more and still accruing

   $ —        $ —     

Nonaccruing loans as a percentage of total loans

     0.14     0.31

Nonperfoming assets as a percentage of total assets

     0.10     0.11

Accruing troubled debt restructures

   $ 3,024      $ 3,296   

Cash and Cash Equivalents

Cash and cash equivalents decreased during the first six months of 2015. This was primarily the result of a decrease in lower yielding interest-bearing deposits in other banks during the period. Management invested excess cash and cash equivalents in higher yielding securities and loans during the period.

Short-term Investments

Short-term investments remained stable during the six-month period.

 

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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 $440.1 million at June 30, 2015, a decrease of 1.9% from December 31, 2014. 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 $115.7 million for the six months ended June 30, 2015. 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 3.7 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 $152.6 million, or 3.9% 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 2015, net unrealized gains on the securities available-for-sale decreased to $15,000 from $180,000 at December 31, 2014. Unrealized gains on the available-for-sale portfolio decreased mainly as a result of a higher proportion of short-term obligations issued by states and political subdivisions that are carried at par value.

 

     June 30, 2015      December 31, 2014  
     (In thousands)  

U.S. Treasury

   $ 1,997       $ 2,000   

Small Business Administration

     6,494         6,717   

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

     273,563         337,093   

Privately Issued Residential Mortgage-backed Securities

     1,641         1,874   

Obligations issued by States and Political Subdivisions

     152,541         96,784   

Other Debt Securities

     3,499         3,524   

Equity Securities

     324         398   
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 440,059       $ 448,390   
  

 

 

    

 

 

 

During the first six months of 2015, the Company capitalized on favorable market conditions and realized $118,000 of net gains on sales of investments. The sale of investments represented five U.S. Government Sponsored enterprises totaling $21,215,000. Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

 

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Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $1.7 billion on June 30, 2015, an increase of 19.7% from the total on December 31, 2014. 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 4.5 years.

 

     June 30, 2015      December 31, 2014  
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 319,405       $ 251,617   

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

     1,364,163         1,155,175   
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $ 1,683,568       $ 1,406,792   
  

 

 

    

 

 

 

At June 30, 2015 and December 31, 2014, 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. During the first six months of 2015, the Company purchased $2.8 million and had no redemptions of FHLBB stock. As of June 30, 2015, no impairment has been recognized.

Deposits and Borrowed Funds

On June 30, 2015, deposits totaled $2.9 billion, representing a 4.2% increase from December 31, 2014. 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 $769.3 million compared to $607.9 million at December 31, 2014. Borrowed funds increased mainly as a result of borrowings to fund loan originations.

Stockholders’ Equity

At June 30, 2015, total equity was $204.4 million compared to $192.5 million at December 31, 2014. 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 and amortization of the pension liability. 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 6.58% at June 30, 2015, compared to 6.91% at December 31, 2014. The decrease in the leverage ratio is primarily due to an increase in quarterly average assets, offset somewhat by an increase in stockholders’ equity. Book value as of June 30, 2015 was $36.71 per share compared to $34.57 at December 31, 2014.

 

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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, 2015     June 30, 2014  
     (Dollars 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

   $ 746,178      $ 7,723        4.15   $ 764,653      $ 8,237        4.32

Loans tax-exempt

     642,178        7,382        4.61        526,116        6,791        5.18   

Securities available-for-sale (5):

            

Taxable

     350,301        609        0.70        457,955        739        0.65   

Tax-exempt

     112,405        194        0.69        38,600        84        0.87   

Securities held-to-maturity:

            

Taxable

     1,743,636        9,371        2.15        1,522,059        8,020        2.11   

Interest-bearing deposits in other banks

     143,684        97        0.27        194,418        129        0.27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,738,382        25,376        2.73        3,503,801        24,000        2.75   

Non interest-earning assets

     189,054            164,071       

Allowance for loan losses

     (22,453         (21,566    
  

 

 

       

 

 

     

Total assets

   $ 3,904,983          $ 3,646,306       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 848,256      $ 470        0.22   $ 820,396      $ 450        0.22

Savings accounts

     340,171        222        0.26        333,290        210        0.25   

Money market accounts

     947,778        734        0.31        935,477        669        0.29   

Time deposits

     390,161        1,207        1.24        399,554        1,141        1.14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,526,366        2,633        0.42        2,488,717        2,470        0.40   

Securities sold under agreements to repurchase

     265,165        128        0.19        211,829        93        0.18   

Other borrowed funds and subordinated debentures

     352,189        2,200        2.51        251,752        2,237        3.56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     3,143,720        4,961        0.63     2,952,298        4,800        0.65
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities Demand deposits

     510,350            473,578       

Other liabilities

     49,977            34,434       
  

 

 

       

 

 

     

Total liabilities

     3,704,047            3,460,310       
  

 

 

       

 

 

     

Stockholders’ equity

     200,936            185,996       

Total liabilities & stockholders’ equity

   $ 3,904,983          $ 3,646,306       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       20,415            19,200     

Less taxable equivalent adjustment

       (2,701         (2,446  
    

 

 

       

 

 

   

Net interest income

     $ 17,714          $ 16,754     
    

 

 

       

 

 

   

Net interest spread (3)

         2.09         2.10
      

 

 

       

 

 

 

Net interest margin (4)

         2.19         2.20
      

 

 

       

 

 

 

 

(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, 2015     June 30, 2014  
     (Dollars 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

   $ 739,223      $ 15,189        4.14   $ 763,474      $ 16,436        4.34

Loans tax-exempt

     624,310        14,524        4.69        514,506        13,399        5.25   

Securities available-for-sale (5):

            

Taxable

     362,345        1,234        0.68        458,939        1,509        0.66   

Tax-exempt

     102,334        356        0.70        36,466        159        0.87   

Securities held-to-maturity:

            

Taxable

     1,637,598        17,539        2.14        1,507,529        15,800        2.10   

Interest-bearing deposits in other banks

     221,727        293        0.26        157,958        211        0.27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,687,537        49,135        2.69        3,438,872        47,514        2.79   

Non interest-earning assets

     186,911            163,195       

Allowance for loan losses

     (22,482         (21,380    
  

 

 

       

 

 

     

Total assets

   $ 3,851,966          $ 3,580,687       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 805,761      $ 882        0.22   $ 776,427      $ 831        0.22

Savings accounts

     337,077        438        0.26        336,797        438        0.26   

Money market accounts

     973,696        1,515        0.31        919,844        1,308        0.29   

Time deposits

     383,832        2,363        1.24        388,236        2,226        1.16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,500,366        5,198        0.42        2,421,304        4,803        0.40   

Securities sold under agreements to repurchase

     256,883        242        0.19        219,336        194        0.18   

Other borrowed funds and subordinated debentures

     345,684        4,286        2.50        252,022        4,420        3.54   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     3,102,933        9,726        0.63     2,892,662        9,417        0.66
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities Demand deposits

     500,241            471,114       

Other liabilities

     50,804            34,025       
  

 

 

       

 

 

     

Total liabilities

     3,653,978            3,397,801       
  

 

 

       

 

 

     

Stockholders’ equity

     197,988            182,886       

Total liabilities & stockholders’ equity

   $ 3,851,966          $ 3,580,687       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       39,409            38,097     

Less taxable equivalent adjustment

       (5,288         (4,829  
    

 

 

       

 

 

   

Net interest income

     $ 34,121          $ 33,268     
    

 

 

       

 

 

   

Net interest spread (3)

         2.05         2.13
      

 

 

       

 

 

 

Net interest margin (4)

         2.16         2.23
      

 

 

       

 

 

 

 

(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.

 

Page 36 of 41


Table of Contents

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, 2015
Compared with

Three Months Ended June 30, 2014
    Six Months Ended June 30, 2015
Compared with
Six Months Ended June 30, 2014
 
     Increase/(Decrease)     Increase/(Decrease)  
     Due to Change in     Due to Change in  
     Volume     Rate     Total     Volume     Rate     Total  
     (In thousands)  

Interest income:

            

Loans

            

Taxable

   $ (196   $ (318   $ (514   $ (512   $ (735   $ (1,247

Tax-exempt

     1,389        (798     591        2,656        (1,531     1,125   

Securities available-for-sale

            

Taxable

     (184     54        (130     (327     52        (275

Tax-exempt

     131        (21     110        235        (38     197   

Securities held-to-maturity

            

Taxable

     1,188        163        1,351        1,387        352        1,739   

Interest-bearing deposits in other banks

     (34     2        (32     84        (2     82   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     2,294        (918     1,376        3,523        (1,902     1,621   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits:

            

NOW accounts

     15        5        20        32        19        51   

Savings accounts

     4        8        12        —          —          —     

Money market accounts

     9        56        65        79        128        207   

Time deposits

     (27     93        66        (25     162        137   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     1        162        163        86        309        395   

Securities sold under agreements to repurchase

     25        10        35        35        13        48   

Other borrowed funds and subordinated debentures

     741        (778     (37     1,374        (1,508     (134
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     767        (606     161        1,495        (1,186     309   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 1,527      $ (312   $ 1,215      $ 2,028      $ (716   $ 1,312