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Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)   
þ   

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

   For the fiscal year ended December 31, 2015
¨   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

   For the transition period from                to                

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 number)

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

Registrant’s telephone number including area code:

(781) 391-4000

Securities registered pursuant to Section 12(b) of the Act:

 

Class A Common Stock, $1.00 par value   Nasdaq Global Market
(Title of class)   (Name of Exchange)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ

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), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    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 Regulations 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).    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    ¨

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

 

Large accelerated filer ¨

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

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

State the aggregate market value of the registrant’s voting and nonvoting stock held by nonaffiliates, computed using the closing price as reported on Nasdaq as of June 30, 2015 was $147,462,191.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of February 28, 2016:

Class A Common Stock, $1.00 par value 3,600,729 Shares

Class B Common Stock, $1.00 par value 1,967,180 Shares

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

 

(1) Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2015 are incorporated into Part II, Items 5-8 of this Form 10-K.

 

 

 

 


Table of Contents

CENTURY BANCORP INC.

FORM 10-K

TABLE OF CONTENTS

 

          Page  
  

PART I

  
ITEM 1   

BUSINESS

     1-5   
ITEM 1A   

RISK FACTORS

     5-6   
ITEM 1B   

UNRESOLVED STAFF COMMENTS

     6   
ITEM 2   

PROPERTIES

     6   
ITEM 3   

LEGAL PROCEEDINGS

     6   
ITEM 4   

MINE SAFETY DISCLOSURES

     6   
  

PART II

  
ITEM 5   

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     7-8   
ITEM 6   

SELECTED FINANCIAL DATA

     8   
ITEM 7   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     8   
ITEM 7A   

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     8   
ITEM 8   

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     8   
ITEM 9   

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     8   
ITEM 9A   

CONTROLS AND PROCEDURES

     8-9   
ITEM 9B   

OTHER INFORMATION

     9   
  

PART III

  
ITEM 10   

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     90-95   
ITEM 11   

EXECUTIVE COMPENSATION

     95-104   
ITEM 12   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     105-106   
ITEM 13   

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     106   
ITEM 14   

PRINCIPAL ACCOUNTING FEES AND SERVICES

     106-107   
  

PART IV

  
ITEM 15   

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     107-108   
SIGNATURES      109   

 

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Table of Contents

PART I

 

ITEM 1.    BUSINESS

The Company

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 December 31, 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, New Hampshire, Rhode Island, Connecticut, and New York.

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 municipal cash management client engagements in Massachusetts, New Hampshire and Rhode Island comprising of approximately 250 government entities.

Availability of Company Filings

Under the Securities Exchange Act of 1934, Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The Company electronically files with the SEC its periodic and current reports, as well as other filings it makes with the SEC from time to time. The SEC maintains an Internet site that contains reports and other information regarding issuers, including the Company, that file electronically with the SEC, at www.sec.gov, in which all forms filed electronically may be accessed. Additionally, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and additional shareholder information are available free of charge on the Company’s website: www.centurybank.com.

Employees

As of December 31, 2015, the Company had 374 full-time and 64 part-time employees. The Company’s employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good.

 

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Financial Services Modernization

On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act (“Gramm-Leach”) which significantly altered banking laws in the United States. Gramm-Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm Leach, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies were repealed. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking.

In order to engage in these financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a “financial holding company” by demonstrating that each of its bank subsidiaries is “well capitalized,” “well managed,” and has at least a “satisfactory” rating under the Community Reinvestment Act of 1977 (the “CRA”). The Company has not elected to become a financial holding company under Gramm-Leach.

These financial activities authorized by Gramm-Leach may also be engaged in by a “financial subsidiary” of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and any bank affiliates) to be “well capitalized” and “well managed;” the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if the bank is one of the 100 largest banks, it must meet certain financial rating or other comparable requirements. The Company does not currently conduct activities through a financial subsidiary.

Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the SEC will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers’ nonpublic, personal information.

Holding Company Regulation

The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”), and is registered as such with the Board of Governors of the Federal Reserve Bank (the “FRB”), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (i) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth.

The Holding Company Act prohibits a bank holding company, with certain exceptions, from (i) acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any company which is not a bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks, or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto.

 

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Table of Contents

The Company and its subsidiaries are examined by federal and state regulators. The FRB has regulatory authority over holding company activities and performed a review of the Company and its subsidiaries as of June 2014.

USA PATRIOT Act

Under Title III of the USA PATRIOT Act, also known as the “International Money Laundering Abatement and Anti-Terrorism Act of 2001”, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the Gramm-Leach Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Holding Company Act or Bank Merger Act.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection and enhanced and timely disclosure of corporate information. The SEC has adopted a substantial number of implementing rules and the Financial Industry Regulatory Authority (FINRA) has adopted corporate governance rules that have been approved by the SEC and are applicable to the Company. The changes are intended to allow stockholders to monitor more effectively the performance of companies and management. As directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s disclosure controls and procedures and internal controls over financial reporting; that they have made certain disclosures to the Company’s auditors and the Board of Directors about the Company’s disclosure controls and procedures and internal control over financial reporting, and that they have included information in the Company’s quarterly and annual reports about their evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting, and whether there have been significant changes in the Company’s internal disclosure controls and procedures or in other factors that could significantly affect such controls and procedures subsequent to the evaluation and whether there have been any significant changes in the Company’s internal control over financial reporting that have materially affected or reasonably likely to materially affect the Company’s internal control over financial reporting, and compliance with certain other disclosure objectives. Section 906 of the Sarbanes-Oxley Act requires an additional certification that each periodic report containing financial statements fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 and that the information in the report fairly presents, in all material respects, the financial conditions and results of operations of the Company.

Dodd-Frank Wall Street Reform and Consumer Protection Act

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

 

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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 broadened 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 and is expected to be extended further to July 31, 2017. 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.

Deposit Insurance Premiums

The Bank’s deposits have the benefit of FDIC insurance up to applicable limits. The FDIC’s Deposit Insurance Fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of assets that it holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.

On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. The Company’s quarterly risk-based deposit insurance assessments were paid from this amount until June 30, 2013. The Company received a refund of $2.4 million of prepaid FDIC assessments in June 2013.

In February 2011, the FDIC approved a rule to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The rule has kept the overall amount collected from the industry very close to the amount collected prior to the new calculation.

Risk-Based Capital Guidelines

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.

Competition

The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by

 

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enabling them to maintain numerous branch offices and mount extensive advertising campaigns. A number of these competitors are not subject to the regulatory oversight that the Company is subject to, which increases these competitors’ flexibility.

Forward-Looking Statements

Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

ITEM 1A.     RISK FACTORS

The risk factors that may affect the Company’s performance and results of operations include the following:

(i) the Company’s business is dependent upon general economic conditions in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York. The national and local economies may adversely affect the Company’s performance and results of operations;

(ii) the Company’s earnings depend, to a great extent, upon the level of net interest income generated by the Company, and therefore the Company’s results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve;

(iii) the banking business is highly competitive and the profitability of the Company depends upon the Company’s ability to attract loans and deposits in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York, where the Company competes with a variety of traditional banking companies, some of which have vastly greater resources, and nontraditional institutions such as credit unions and finance companies;

(iv) at December 31, 2015, approximately 67.8% of the Company’s loan portfolio was comprised of commercial and commercial real estate loans, exposing the Company to the risks inherent in financings 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;

(v) at December 31, 2015, approximately 25.0% of the Company’s loan portfolio was comprised of residential real estate and home equity loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk and the value of underlying collateral. Accordingly, the Company’s profitability may be negatively impacted by errors in risk analyses, by loan defaults and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions;

(vi) economic conditions and interest rate risk could adversely impact the fair value and the ultimate collectibility of the Company’s investments. Should an investment be deemed “other than temporarily impaired”, the Company would be required to writedown the carrying value of the investment through earnings. Such writedown(s) may have a material adverse effect on the Company’s financial condition and results of operations;

 

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(vii) writedown of goodwill and other identifiable intangible assets would negatively impact our financial condition and results of operations. At December 31, 2015, our goodwill and other identifiable intangible assets were approximately $2.7 million;

(viii) acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States of America generally and in the Company’s markets, which could adversely affect the Company’s financial performance and that of the Company’s borrowers and on the financial markets and the price of the Company’s Class A common stock;

(ix) changes in the extensive laws, regulations and policies governing bank holding companies and their subsidiaries could alter the Company’s business environment or affect the Company’s operations;

(x) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent to secure bank and customer financial information, could present operational issues, require significant capital spending or impact the Company’s reputation; and

These factors, as well as general economic and market conditions in the United States of America, may materially and adversely affect the Company’s performance, results of operations and the market price of shares of the Company’s Class A common stock.

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

No written comments received by the Company from the SEC regarding the Company’s periodic or current reports remain unresolved.

 

ITEM 2.     PROPERTIES

The Company owns its main banking office, headquarters, and operations center in Medford, Massachusetts, which were expanded in 2004, and 11 of the 26 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2015 to 2026. The Company believes that its banking offices are in good condition.

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

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

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.

 

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Company’s consolidated financial position.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)  The Class A Common Stock of the Company is traded on the NASDAQ National Global Market under the symbol “CNBKA.” The price range of the Company’s Class A common stock since January 1, 2014 is shown on page 11. The Company’s Class B Common Stock is not traded on any national securities exchange or other public trading market.

The shares of Class A Common Stock are generally not entitled to vote on any matter, including in the election of Company Directors, but, in limited circumstances, may be entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of the Company’s Class B Common Stock, voting as a separate class, is required to approve certain extraordinary corporate transactions, the holders of Class B Common Stock have the power to prevent any takeover of the Company not approved by them.

(b)  Approximate number of equity security holders as of December 31, 2015:

 

Title of Class

   Approximate Number
of Record Holders
 

Class A Common Stock

     1,058   

Class B Common Stock

     47   

(c)  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.

The following table shows the dividends paid by the Company on the Class A and Class B Common Stock for the periods indicated.

 

     Dividends per
Share
 
     Class A      Class B  

2014

     

First quarter

   $ .12       $ .06   

Second quarter

     .12         .06   

Third quarter

     .12         .06   

Fourth quarter

     .12         .06   

2015

     

First quarter

   $ .12       $ .06   

Second quarter

     .12         .06   

Third quarter

     .12         .06   

Fourth quarter

     .12         .06   

The Company’s ability to pay dividends on its shares depends generally on dividends it receives from the Bank. Both Massachusetts and federal law limit the payment of dividends by the Bank to the Company. Under FDIC regulations and applicable Massachusetts law, the dollar amount of dividends and any other capital distributions that the Bank may make depends upon its capital position and recent net income. Generally, so long as the Bank remains adequately capitalized, it may potentially make capital distributions during any calendar year equal to up to 100% of net income for the year to date plus retained net income for the two preceding years. However, if the Bank’s capital becomes impaired or the FDIC or Commissioner otherwise determines that the Bank should conserve capital, the Bank may be prohibited or otherwise limited from paying any dividends or making any other capital distributions.

 

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The Federal Reserve Board also has authority to prohibit dividends by bank holding companies such as the Company, if their actions constitute unsafe or unsound practices. Prior to the recent financial crisis, the Federal Reserve Board issued a policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that, (1) the company’s net income for the past year is sufficient to cover the cash dividends, (2) the rate of earnings retention is consistent with the company’s capital needs, asset quality, and overall financial condition, and (3) the minimum regulatory capital adequacy ratios are met. It is also the Federal Reserve Board’s policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries. It is expected that the Federal Reserve Board will be more rather than less restrictive for the foreseeable future about dividend practices.

(d)  The following schedule provides information with respect to the Company’s equity compensation plans under which shares of Class A Common Stock are authorized for issuance as of December 31, 2015:

 

     Equity Compensation Plan Information  

Plan Category

   Number of Shares
to be Issued
Upon Exercise of
Outstanding Options
(a)
     Weighted-Average
Exercise Price of
Outstanding Options
(b)
     Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Shares Reflected in
Column (a))
(c)
 

Equity compensation plans approved by security holders

           $         233,934   

Equity compensation plans not approved by security holders

                       
  

 

 

    

 

 

    

 

 

 

Total

           $         233,934   

(e)  The performance graph information required herein is shown on page 12.

 

ITEM 6. SELECTED FINANCIAL DATA

The information required herein is shown on pages 10 through 12.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The information required herein is shown on pages 13 through 36.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required herein is shown on pages 33 and 34.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required herein is shown on pages 37 through 86.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

The Company’s principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures as of December 31, 2015. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective. The Company’s disclosure controls and procedures also effectively ensure that information required to

 

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be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is accumulated and reported to Company management (including the principal executive officer and principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal control over financial reporting and there have been no changes that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting or in other factors that could significantly affect its internal control over financial reporting.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released an updated version of its Internal Control — Integrated Framework (2013) (2013 Framework). The 2013 Framework’s internal control components (i.e., control environment, risk assessment, control activities, information and communication, and monitoring activities) remain predominantly the same as those in the 1992 Framework. However, the 2013 Framework was expanded to include 17 principles which must be present and functioning in order to have an effective system of internal controls. The Company implemented the 2013 Framework effective December 31, 2014.

Management’s report on internal control over financial reporting is shown on page 89. The audit report of the registered public accounting firm is shown on page 88.

 

ITEM 9B. OTHER INFORMATION

None.

 

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Financial Highlights

 

     2015     2014     2013     2012     2011  
(dollars in thousands, except share data)                               

FOR THE YEAR

          

Interest income

   $ 90,093      $ 85,371      $ 79,765      $ 81,494      $ 78,065   

Interest expense

     20,134        19,136        18,805        19,540        22,766   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     69,959        66,235        60,960        61,954        55,299   

Provision for loan losses

     200        2,050        2,710        4,150        4,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     69,759        64,185        58,250        57,804        50,749   

Other operating income

     15,993        15,271        18,615        15,865        16,240   

Operating expenses

     62,198        56,730        55,812        53,238        48,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     23,554        22,726        21,053        20,431        18,247   

Provision for income taxes

     533        866        1,007        1,392        1,554   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 23,021      $ 21,860      $ 20,046      $ 19,039      $ 16,693   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average shares outstanding Class A, basic

     3,600,729        3,591,732        3,575,683        3,557,693        3,543,233   

Average shares outstanding Class B, basic

     1,967,180        1,969,030        1,980,855        1,990,474        1,997,411   

Average shares outstanding Class A, diluted

     5,567,909        5,562,209        5,557,693        5,549,191        5,541,794   

Average shares outstanding Class B, diluted

     1,967,180        1,969,030        1,980,855        1,990,474        1,997,411   

Total shares outstanding at year-end

     5,567,909        5,567,909        5,556,584        5,554,959        5,542,697   

Earnings per share:

          

Basic, Class A

   $ 5.02      $ 4.78      $ 4.39      $ 4.18      $ 3.68   

Basic, Class B

   $ 2.51      $ 2.39      $ 2.19      $ 2.09      $ 1.84   

Diluted, Class A

   $ 4.13      $ 3.93      $ 3.61      $ 3.43      $ 3.01   

Diluted, Class B

   $ 2.51      $ 2.39      $ 2.19      $ 2.09      $ 1.84   

Dividend payout ratio — Non-GAAP(1)

     9.6     10.0     10.9     11.5     13.1

AT YEAR-END

          

Assets

   $ 3,947,441      $ 3,624,036      $ 3,431,154      $ 3,086,209      $ 2,743,225   

Loans

     1,731,536        1,331,366        1,264,763        1,111,788        984,492   

Deposits

     3,075,060        2,737,591        2,715,839        2,445,073        2,124,584   

Stockholders’ equity

     214,544        192,500        176,472        179,990        160,649   

Book value per share

   $ 38.53      $ 34.57      $ 31.76      $ 32.40      $ 28.98   

SELECTED FINANCIAL PERCENTAGES

          

Return on average assets

     0.59     0.61     0.60     0.65     0.63

Return on average stockholders’ equity

     11.26     11.57     11.58     11.06     10.72

Net interest margin, taxable equivalent

     2.18     2.22     2.21     2.51     2.48

Net (recoveries) charge-offs as a percent of average loans

     (0.04 )%      0.05     0.08     0.15     0.21

Average stockholders’ equity to average assets

     5.25     5.27     5.22     5.85     5.88

Efficiency ratio — Non-GAAP(1)

     64.1     62.0     63.0     62.1     62.2

 

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Financial Highlights — (Continued)

 

 

(1) Non-GAAP Financial Measures are reconciled in the following tables:

 

     2015     2014     2013     2012     2011  

Calculation of Efficiency Ratio:

          

Total Operating Expenses (numerator)

   $ 62,198      $ 56,730      $ 55,812      $ 53,238      $ 48,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

   $ 69,959      $ 66,235      $ 60,960      $ 61,954      $ 55,299   

Total Other Operating Income

     15,993        15,271        18,615        15,865        16,240   

Tax Equivalent Adjustment

     11,140        10,033        8,984        7,964        6,782   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Income (denominator)

   $ 97,092      $ 91,539      $ 88,559      $ 85,783      $ 78,321   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency Ratio, Year — Non-GAAP

     64.1 %      62.0     63.0     62.1     62.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2015     2014     2013     2012     2011  

Calculation of Dividend Payout Ratio:

          

Dividends Paid (numerator)

   $ 2,200      $ 2,196      $ 2,191      $ 2,186      $ 2,180   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (denominator)

   $ 23,021      $ 21,860      $ 20,046      $ 19,039      $ 16,693   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividend Payout Ratio – Non-GAAP

     9.6 %      10.0     10.9     11.5     13.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Per Share Data

2015, Quarter Ended

   December 31,      September 30,      June 30,      March 31,  

Market price range (Class A)

           

High

   $ 45.09       $ 41.87       $ 41.44       $ 40.50   

Low

     40.95         38.61         38.37         38.34   

Dividends Class A

     0.12         0.12         0.12         0.12   

Dividends Class B

     0.06         0.06         0.06         0.06   

2014, Quarter Ended

   December 31,      September 30,      June 30,      March 31,  

Market price range (Class A)

           

High

   $ 40.50       $ 38.88       $ 37.68       $ 37.00   

Low

     34.26         34.10         33.05         32.95   

Dividends Class A

     0.12         0.12         0.12         0.12   

Dividends Class B

     0.06         0.06         0.06         0.06   

The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2010 to December 31, 2015 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used.

 

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Financial Highlights — (Continued)

 

Comparison of Five-Year

Cumulative Total Return*

 

LOGO

 

Value of $100 Invested on December 31, 2010 at:    2011      2012      2013      2014      2015  

Century Bancorp, Inc.

   $ 107.37       $ 127.27       $ 130.26       $ 159.05       $ 174.57   

NASDAQ Banks

     74.57         100.48         137.27         153.50         156.89   

NASDAQ U.S.

     99.17         116.48         163.21         187.27         200.31   

 

* Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2010 and that all dividends were reinvested.

 

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

FORWARD-LOOKING STATEMENTS

Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

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 broadened 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 and is expected to be extended further to July 31, 2017. 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.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

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.

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 December 31, 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, New Hampshire, Rhode Island, Connecticut and New York.

The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium sized businesses and retail customers in its market area. In recent quarters, the Company has increased business to larger institutions, specifically, healthcare and higher education. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.

The Company has municipal cash management client engagements in Massachusetts, New Hampshire and Rhode Island comprising of approximately 250 government entities.

The Company had net income of $23,021,000 for the year ended December 31, 2015, compared with net income of $21,860,000 for the year ended December 31, 2014, and net income of $20,046,000 for the year ended December 31, 2013. Class A diluted earnings per share were $4.13 in 2015, compared to $3.93 in 2014 and $3.61 in 2013.

Earnings per share (EPS) for each class of stock and for each year ended December 31, is as follows:

 

     2015      2014      2013  

Basic EPS – Class A common

   $ 5.02       $ 4.78       $ 4.39   

Basic EPS – Class B common

   $ 2.51       $ 2.39       $ 2.19   

Diluted EPS – Class A common

   $ 4.13       $ 3.93       $ 3.61   

Diluted EPS – Class B common

   $ 2.51       $ 2.39       $ 2.19   

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

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

Net Interest Margin

 

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 and third quarter of 2015 the net interest margin increased primarily as a result of an increase in higher yielding assets as well as prepayment penalties collected. The increase in higher yielding assets was primarily the result of increased purchases of securities held-to-maturity. The margin decreased during the fourth quarter of 2015 as a result of lower yielding loan originations as well as a lower level of prepayment penalties.

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.

Historical U.S. Treasury Yield Curve

 

LOGO

A yield curve is a line that typically plots the interest rates of U.S. Treasury Debt, which have different maturity dates but the same credit quality, at a specific point in time. The three main types of yield curve shapes are normal, inverted and flat. Over the past three years, the U.S. economy has experienced low short-term rates. During 2013, longer-term rates increased resulting in a steepening of the yield curve. During 2014 and 2015, longer-term rates decreased resulting in a flattening of the yield curve.

During 2015 and 2014, the Company’s earnings were positively impacted primarily by an increase in net interest income. This increase was primarily due to an increase in earning assets. Also contributing to the increase in earnings for 2015 was a decrease in the provision for loan losses. This was primarily the result of changes in the risk profile of the Company’s new loan originations, related methodology enhancements to address these changes, as well as net recoveries being realized during the year. During 2015, 2014 and 2013, the U.S. economy experienced a low short-term rate environment. The lower short-term rates negatively impacted the net interest margin as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Total assets were $3,947,441,000 at December 31, 2015, an increase of 8.9% from total assets of $3,624,036,000 at December 31, 2014.

On December 31, 2015, stockholders’ equity totaled $214,544,000, compared with $192,500,000 on December 31, 2014. Book value per share increased to $38.53 at December 31, 2015, from $34.57 on December 31, 2014.

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

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

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.

CRITICAL ACCOUNTING POLICIES

Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies.

The Company considers impairment of investment securities, allowance for loan losses and income taxes to be its critical accounting policies. There have been no significant changes in the methods or assumptions used in the investment securities accounting policy that require material estimates and assumptions. There was a methodology enhancement to the allowance for loan losses policy. This enhancement is described below.

Impaired Investment Securities

Management evaluates securities for other-than-temporary impairment (“OTTI”) on a periodic basis. Factors considered in determining whether an impairment is OTTI include: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) projected future cash flows, (3) the financial condition and near-term prospects of the issuers and (4) the intent and ability of the Company to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. The Company records an OTTI loss in an amount equal to the entire difference between the fair value and amortized cost if (1) the Company intends to sell an impaired investment security, (2) it is more likely than not that the Company will be required to sell the investment security before its amortized costs or (3) for debt securities, the present value of expected future cash flows is not sufficient to recover the entire amortized cost basis. If an investment security is determined to be OTTI but the Company does not intend to sell the investment security, only the credit portion of the estimated loss is recognized in earnings, with the non-credit portion of the loss recognized in other comprehensive income.

The Company does not intend to sell any of its debt securities with an unrealized loss, and it is not more likely than not that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, which may be maturity.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Allowance for Loan Losses

Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.

Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. After considering the above components, an unallocated component may be generated to cover uncertainties that could affect management’s estimate of probable losses. Further information regarding the Company’s methodology for assessing the appropriateness of the allowance is contained within Note 1 of the “Notes to Consolidated Financial Statements”.

During 2015, the Company enhanced its approach to the development of the historical loss factors and qualitative factors used on certain loan portfolios. The enhancement is described within the Allowance for Loan Losses section of “Management’s Discussion and Analysis of Results of Operations and Financial Condition”. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Income Taxes

Certain areas of accounting for income taxes require management’s judgment, including determining the expected realization of deferred tax assets and the adequacy of liabilities for uncertain tax positions. Judgments are made regarding various tax positions, which are often subjective and involve assumptions about items that are inherently uncertain. If actual factors and conditions differ materially from estimates made by management, the actual realization of the net deferred tax assets or liabilities for uncertain tax positions could vary materially from the amounts previously recorded.

Deferred tax assets arise from items that may be used as a tax deduction or credit in future income tax returns, for which a financial statement tax benefit has already been recognized. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years’ taxable income to which refund claims could be carried back. Valuation allowances are recorded against those deferred tax assets determined not likely to be realized. Deferred tax liabilities represent items that will require a future tax payment. They generally represent tax expense recognized in the Company’s financial statements for which payment has been deferred, or a deduction taken on the Company’s tax return but not yet recognized as an expense in the Company’s financial statements. Deferred tax liabilities are also recognized for certain non-cash items such as goodwill.

FINANCIAL CONDITION

Investment Securities

The Company’s securities portfolio consists of securities available-for-sale (“AFS”) and securities held-to-maturity (“HTM”).

Securities available-for-sale consist of certain U.S. Treasury and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; other debt securities; and other marketable equities.

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders’ equity. The fair value of securities available-for-sale at December 31, 2015 totaled $404,623,000 and included gross unrealized gains of $979,000 and gross unrealized losses of $1,333,000. A year earlier, the fair value of securities available-for-sale was $448,390,000 including gross unrealized gains of $1,630,000 and gross unrealized losses of $1,450,000. In 2015, the Company recognized gains of $289,000 on the sale of available-for-sale securities. In 2014 and 2013, the Company recognized gains of $450,000 and $3,019,000, respectively.

Securities classified as held-to-maturity consist of U.S. Government Sponsored Enterprises and mortgage-backed securities. Securities held-to-maturity as of December 31, 2015 are carried at their amortized cost of $1,438,903,000. A year earlier, securities held-to-maturity totaled $1,406,792,000. In 2015 the company recognized gains of $305,000 on the sale of held-to-maturity securities. The sales from securities held-to-maturity relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment. In 2014 and 2013, the Company did not recognize any gains on sales of held-to-maturity securities.

During the third quarter of 2013, $987,037,000 of securities available-for-sale with unrealized losses of $25,333,000 were transferred to securities held-to-maturity. This was done in response to rising interest rates and an assessment of liquidity needs.

The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated.

Fair Value of Securities Available-for-Sale

 

     2015     2014     2013  

At December 31,

   Amount      Percent     Amount      Percent     Amount      Percent  
(dollars in thousands)                                        

U.S. Treasury

   $ 1,989         0.5   $ 2,000         0.4   $ 1,998         0.4

U.S. Government Sponsored Enterprises

             0.0             0.0     10,004         2.2

SBA Backed Securities

     5,989         1.5     6,717         1.5     7,302         1.6

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

     233,526         57.7     337,093         75.2     403,189         86.8

Privately Issued Residential Mortgage-Backed Securities

     1,434         0.4     1,874         0.4     2,277         0.5

Obligations Issued by States and Political Subdivisions

     156,960         38.8     96,784         21.6     36,723         7.9

Other Debt Securities

     4,473         1.0     3,524         0.8     2,176         0.5

Equity Securities

     252         0.1     398         0.1     576         0.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 404,623         100.0   $ 448,390         100.0   $ 464,245         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The majority of the Company’s securities AFS are classified as Level 2, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” The fair values of these securities are 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. Management’s understanding of a pricing service’s pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

controls. Management’s validation of a vendor’s pricing methodology includes establishing internal controls to determine that the pricing information received by a pricing service and used by management in the valuation process is relevant and reliable. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not more likely than not that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2015.

Securities available-for-sale totaling $156,997,000, or 4.0% of assets, are classified as Level 3, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” These securities are generally equity investments or municipal securities with no readily determinable fair value. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.

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

The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated.

Amortized Cost of Securities Held-to-Maturity

 

     2015     2014     2013  

At December 31,

   Amount      Percent     Amount      Percent     Amount      Percent  
(dollars in thousands)                                        

U.S. Government Sponsored Enterprises

   $ 186,734         13.0   $ 251,617         17.9   $ 291,779         19.6

U.S. Government Sponsored Enterprise Mortgage-Backed Securities

     1,252,169         87.0     1,155,175         82.1     1,196,105         80.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,438,903         100.0   $ 1,406,792         100.0   $ 1,487,884         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2015. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Fair Value of Securities Available-for-Sale Amounts Maturing

 

    Within
One

Year
    % of
Total
    Weighted
Average
Yield
    One
Year to
Five

Years
    % of
Total
    Weighted
Average
Yield
    Five
Years to
Ten
Years
    % of
Total
    Weighted
Average
Yield
    Over
Ten
Years
    % of
Total
    Weighted
Average
Yield
 
(dollars in thousands)                                                                        

U.S. Treasury

  $        0.0     0.00   $ 1,989        0.5     0.54   $        0.0     0.00   $        0.0     0.00

SBA Backed Securities

           0.0     0.00     1,031        0.3     0.92     4,958        1.2     1.16            0.0     0.00

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

    43        0.0     5.71     142,232        35.1     0.83     91,251        22.6     0.83            0.0     0.00

Privately Issued Residential Mortgage-Backed Securities

    1,434        0.4     1.20            0.0     0.0            0.0     0.00            0.0     0.00

Obligations of States and Political Subdivisions

    150,861        37.3     0.77     1,894        0.5     3.35     385        0.1     4.92     3,820        0.9     0.58

Other Debt Securities

    299        0.1     0.90     799        0.2     1.28     1,000        0.2     6.00     1,003        0.2     6.00

Equity Securities

           0.0     0.00            0.0     0.00            0.0     0.00            0.0     0.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 152,637        37.8     0.78   $ 147,945        36.6     0.86   $ 97,594        24.1     0.91   $ 4,823        1.1     1.71
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Non-
Maturing
     % of
Total
    Weighted
Average
Yield
    Total      % of
Total
    Weighted
Average
Yield
 
(dollars in thousands)                                       

U.S. Treasury

   $         0.0     0.00   $ 1,989         0.5     0.05

SBA Backed Securities

             0.0     0.00     5,989         1.5     1.12

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

             0.0     0.00     233,526         57.7     0.83

Privately Issued Residential Mortgage-Backed Securities

             0.0     0.00     1,434         0.4     1.20

Obligations of States and Political Subdivisions

             0.0     0.00     156,960         38.8     0.81

Other Debt Securities

     1,372         0.3     3.20     4,473         1.0     3.96

Equity Securities

     252         0.1     3.26     252         0.1     3.26
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,624         0.4     3.21   $ 404,623         100.0     0.86
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Amortized Cost of Securities Held-to-Maturity Amounts Maturing

 

    Within
One
Year
    % of
Total
    Weighted
Average
Yield
    One
Year
to Five
Years
    % of
Total
    Weighted
Average
Yield
    Five
Years to
Ten Years
    % of
Total
    Weighted
Average
Yield
    Over
Ten
Years
    % of
Total
    Weighted
Average
Yield
    Total     % of
Total
    Weighted
Average
Yield
 
(dollars in thousands)                                                                                          

U.S. Government Sponsored Enterprises

  $        0.0     0.00   $ 147,636        10.3     1.91   $ 39,098        2.7     2.82   $        0.0     0.00   $ 186,734        13.0     2.10

U.S. Government Sponsored Enterprise Mortgage-Backed Securities

    1,712        0.1     2.99     996,755        69.3     2.26     250,548        17.4     2.37     3,154        0.2     3.02     1,252,169        87.0     2.29
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,712        0.1     2.99   $ 1,144,391        79.6     2.21   $ 289,646        20.1     2.43   $ 3,154        0.2     3.02   $ 1,438,903        100.0     2.26
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2015 and 2014, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2015, sales of securities totaling $51,551,000 in gross proceeds resulted in a net realized gain of $594,000. There were no sales of state, county or municipal securities during 2015 and 2014. In 2014, sales of securities totaling $40,285,000 in gross proceeds resulted in net realized gains of $450,000. In 2013, sales of securities totaling $224,045,000 in gross proceeds resulted in net realized gains of $3,019,000.

Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are dependent upon general market conditions and specific conditions related to the issuers of our securities.

Loans

The Company’s lending activities are conducted principally in Massachusetts, New Hampshire, Rhode Island, Connecticut and New York. The Company grants single-family and multi-family residential loans, commercial and commercial real estate loans, municipal loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers’ geographic areas and of the general economy.

The following summary shows the composition of the loan portfolio at the dates indicated.

 

    2015     2014     2013     2012     2011  

December 31,

  Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
 
(dollars in thousands)                                                            

Construction and land development

  $ 27,421        1.6   $ 22,744        1.7   $ 33,058        2.6   $ 38,618        3.5   $ 56,819        5.7

Commercial and industrial

    452,235        26.1     149,732        11.2     76,675        6.1     88,475        8.0     82,404        8.4

Municipal

    85,685        4.9     41,850        3.1     32,737        2.6     1,446        0.1            0.0

Commercial real estate

    721,506        41.7     696,272        52.3     696,317        55.0     575,019        51.7     487,495        49.5

Residential real estate

    255,346        14.7     257,305        19.3     286,041        22.6     281,857        25.3     239,307        24.3

Consumer

    10,744        0.6     10,925        0.8     8,824        0.7     6,823        0.6     6,197        0.6

Home equity

    178,020        10.3     151,275        11.4     130,277        10.3     118,923        10.7     110,786        11.3

Overdrafts

    579        0.1     1,263        0.2     834        0.1     627        0.1     1,484        0.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,731,536        100.0   $ 1,331,366        100.0   $ 1,264,763        100.0   $ 1,111,788        100.0   $ 984,492        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

At December 31, 2015, 2014, 2013, 2012 and 2011, loans were carried net of discounts of $360,000, $407,000, $454,000, $498,000 and $550,000, respectively. Net deferred loan fees of $988,000, $908,000, $174,000, $369,000 and $666,000 were carried in 2015, 2014, 2013, 2012 and 2011, respectively.

The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2015. The table excludes loans secured by 1–4 family residential real estate and loans for household and family personal expenditures. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.

Remaining Maturities of Selected Loans at December 31, 2015

 

     One Year
or Less
     One to
Five Years
     Over Five
Years
     Total  
(dollars in thousands)                            

Construction and land development

   $ 7,356       $ 4,082       $ 15,983       $ 27,421   

Commercial and industrial

     28,539         23,446         400,250         452,235   

Commercial real estate

     33,598         57,294         630,614         721,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 69,493       $ 84,822       $ 1,046,847       $ 1,201,162   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table indicates the rate variability of the above loans due after one year.

 

December 31, 2015

   One to
Five Years
     Over Five
Years
     Total  
(dollars in thousands)                     

Predetermined interest rates

   $ 38,985       $ 291,900       $ 330,885   

Floating or adjustable interest rates

     45,837         754,947         800,784   
  

 

 

    

 

 

    

 

 

 

Total

   $ 84,822       $ 1,046,847       $ 1,131,669   
  

 

 

    

 

 

    

 

 

 

The Company’s commercial and industrial (“C&I”) loan customers represent various small and middle-market established businesses involved in manufacturing, distribution, retailing and services. C&I loan customers also include large healthcare and higher education institutions. During 2015, the Company increased its lending activities to these types of organizations. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.

Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s market area, which generally includes Massachusetts, New Hampshire, and Rhode Island. Also included are loans to educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and thirty years.

Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized nonresidential-type owner-occupied properties. This complements our C&I emphasis placed on the operating business entities and will continue. The regional economic environment affects the risk of both nonresidential and residential mortgages.

Residential real estate (1–4 family) includes two categories of loans. Included in residential real estate are approximately $23,978,000 of C&I type loans secured by 1–4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the collateral position.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The other category of residential real estate loans is mostly 1–4 family residential properties located in the Bank’s market area. General underwriting criteria are largely the same as those used by Fannie Mae. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a “First Time Homebuyer” product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category.

Home equity loans are extended as both first and second mortgages on owner-occupied residential properties in the Bank’s market area. Loans are underwritten to a maximum loan to property value of 75%.

Bank officers evaluate the feasibility of construction projects based on independent appraisals of the project, architects’ or engineers’ evaluations of the cost of construction and other relevant data. As of December 31, 2015, the Company was obligated to advance a total of $11,589,000 to complete projects under construction.

The composition of nonperforming assets is as follows:

 

December 31,

   2015     2014     2013     2012     2011  
(dollars in thousands)                               

Total nonperforming loans

   $ 2,336      $ 4,146      $ 2,549      $ 4,471      $ 5,827   

Other real estate owned

                                 1,182   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 2,336      $ 4,146      $ 2,549      $ 4,471      $ 7,009   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accruing troubled debt restructured loans

   $ 2,893      $ 3,296      $ 5,969      $ 3,048      $ 4,634   

Loans past due 90 and still accruing

                                 18   

Nonperforming loans as a percent of gross loans

     0.13     0.31     0.20     0.40     0.59

Nonperforming assets as a percent of total assets

     0.06     0.11     0.07     0.14     0.26

The composition of impaired loans at December 31, is as follows:

 

     2015      2014      2013      2012      2011  

Residential real estate, multi-family

   $ 916       $ 962       $ 1,199       $ 766       $ 516   

Home equity

     90         92         94         96           

Commercial real estate

     1,678         4,318         4,520         2,281         4,561   

Construction and land development

     98         103         608         1,500         1,500   

Commercial and industrial

     443         852         1,367         1,282         1,525   

Municipals

                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 3,225       $ 6,327       $ 7,788       $ 5,925       $ 8,102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2015, 2014, 2013, 2012 and 2011, impaired loans had specific reserves of $250,000, $904,000, $1,019,000, $1,732,000 and $741,000 respectively.

The Company was servicing mortgage loans sold to others without recourse of approximately $185,299,000, $143,696,000, $109,301,000, $26,786,000 and $18,196,000 at December 31, 2015, 2014, 2013, 2012, and 2011, respectively. The Company had no loans held for sale at December 31, 2015, December 31, 2014 and December 31, 2013, $9,378,000 at December 31, 2012, $3,389,000 at December 31, 2011.

Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage servicing assets (“MSA”) are amortized into non-interest income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets and are amortized in proportion to, and over the period of estimated net servicing income and are assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $1,305,000 at December 31, 2015, $941,000 at December 31, 2014, $703,000 for December 31, 2013, and $137,000 for December 31, 2012.

Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company’s commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank.

Nonaccrual loans decreased during 2015 primarily due to the sale and partial charge-off of the property securing a large commercial real estate loan subsequent to foreclosure.

Nonaccrual loans increased during 2014 primarily as a result of a large commercial real estate loan. Nonaccrual loans decreased during 2013 primarily as a result of a charge-off of a construction loan and a decrease in residential real estate nonperforming loans. Nonaccrual loans decreased during 2012, primarily as a result of a decrease in home equity and residential real estate nonperforming loans.

The Company continues to monitor closely $11,203,000 and $14,558,000 at December 31, 2015 and 2014, respectively, of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2015, although such values may fluctuate with changes in the economy and the real estate market.

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

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

 

Year Ended December 31,

   2015     2014     2013     2012     2011  
(dollars in thousands)                               

Year-end loans outstanding (net of unearned discount and deferred loan fees)

   $ 1,731,536      $ 1,331,366      $ 1,264,763      $ 1,111,788      $ 984,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loans outstanding (net of unearned discount and deferred loan fees)

   $ 1,507,546      $ 1,307,888      $ 1,184,912      $ 1,036,296      $ 948,883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance of allowance for loan losses at the beginning of year

   $ 22,318      $ 20,941      $ 19,197      $ 16,574      $ 14,053   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans charged-off:

          

Commercial and industrial

            333        234        1,253        676   

Construction

     172        500        1,000               1,200   

Commercial real estate

     298                               

Residential real estate

            24               351        341   

Consumer

     311        525        579        697        607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans charged-off

     781        1,382        1,813        2,301        2,824   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recovery of loans previously charged-off:

          

Commercial and industrial

     212        201        389        307        293   

Construction

     780                               

Real estate

     91        117        31        45        35   

Consumer

     255        391        427        422        467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries of loans previously charged-off:

     1,338        709        847        774        795   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loan (recoveries) charge-offs

     (557     673        966        1,527        2,029   

Provision charged to operating expense

     200        2,050        2,710        4,150        4,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 23,075      $ 22,318      $ 20,941      $ 19,197      $ 16,574   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net (recoveries) charge-offs during the year to average loans outstanding

     (0.04 )%      0.05     0.08     0.15     0.21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of allowance for loan losses to loans outstanding

     1.33     1.68     1.66     1.73     1.68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of the allowance for loan losses results from management’s evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The pace of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in

 

25


Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

charge-offs being higher than historical levels. Charge-offs declined in 2012, 2013, 2014, and 2015 as a result of the overall decrease in the level of nonaccrual loans. The dollar amount of the allowance for loan losses and the level of the allowance for loan losses to total loans increased primarily as a result of a lower level of charge-off activity combined with changes in the portfolio composition and related methodology enhancements to address these changes. During 2015 the Company received a large recovery of a loan previously charged-off. This was primarily attributable to net loan recoveries for 2015.

During 2015, the Company enhanced its approach to the development of the historical loss factors and qualitative factors used on certain loan portfolios. The methodology enhancement was in response to the changes in the risk characteristics of the Company’s new loan originations, as the Company has continued to increase its exposure to larger loan originations to large institutions with strong credit quality. The Company has limited internal loss history experience with these types of loans, and has determined a more appropriate representation of loss expectation is to utilize external historical loss factors based on public credit ratings, as there is 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. The combination of the enhancements made to the allowance methodology to address the changing risk profile of the Company’s new loan originations and the increase in these loan types as a percentage of the overall portfolio, has resulted in a decrease in the ratio of allowance for loan losses to total loans.

In addition, the Company monitors the outlook for the industries in which these institutions operate. Healthcare and higher education are the primary industries. The Company also monitors the volatility of the losses within the historical data.

By combining the credit rating, the industry outlook and the loss volatility, the Company arrives at the quantitative loss factor for each credit grade.

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2015.

 

     Commercial
and
Industrial
     Municipal      Commercial
Real Estate
     Total  
(in thousands)                            

Credit Rating:

           

Aaa-Aa3

   $ 234,733       $ 63,865       $ 7,547       $ 306,145   

A1-A3

     140,419         7,400         130,872         278,691   

Baa1-Baa3

             8,890         167,489         176,379   

Ba2

             4,480                 4,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 375,152       $ 84,635       $ 305,908       $ 765,695   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At December 31 of each year listed below, the allowance is comprised of the following:

 

    2015     2014     2013     2012     2011  
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
 
(dollars in thousands)                                                            

Construction and land development

  $ 2,041        1.6   $ 1,592        1.7   $ 2,174        2.6   $ 3,041        3.5   $ 2,893        5.7

Commercial and industrial

    5,899        26.1        4,757        11.2        2,617        6.1        3,118        8.0        3,139        8.4   

Municipal

    994        4.9        1,488        3.1        655        2.6        24        0.1               0.0   

Commercial real estate

    10,589        41.7        11,199        52.3        10,935        55.0        9,041        51.7        6,566        49.5   

Residential real estate

    1,320        14.7        776        19.3        2,006        22.6        1,994        25.3        1,886        24.3   

Consumer and other

    644        0.7        810        1.0        432        0.8        333        0.7        356        0.8   

Home equity

    1,077        10.3        599        11.4        959        10.3        886        10.7        704        11.3   

Unallocated

    511          1,097          1,163          760          1,030     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 23,075        100.0   $ 22,318        100.0   $ 20,941        100.0   $ 19,197        100.0   $ 16,574        100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. The enhancements described above have resulted in a lower level of unallocated allowance for loan losses. Further information regarding the allocation of the allowance is contained within Note 6 of the “Notes to Consolidated Financial Statements.”

Deposits

The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. Additionally, the Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customer’s checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a report balancing the customer’s checking account.

Interest rates on deposits are set twice per month by the Bank’s rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee.

 

27


Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The following table sets forth the average balances of the Bank’s deposits for the periods indicated.

 

     2015     2014     2013  
     Amount      Percent     Amount      Percent     Amount      Percent  
(dollars in thousands)                                        

Demand Deposits

   $ 518,161         17.2   $ 481,035         16.8   $ 441,193         16.6

Savings and Interest Checking

     1,139,449         37.8     1,096,303         38.2     1,037,320         38.9

Money Market

     951,197         31.5     920,485         32.1     800,052         30.0

Time Certificates of Deposit

     408,711         13.5     372,699         12.9     387,514         14.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,017,518         100.0   $ 2,870,522         100.0   $ 2,666,079         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Time Deposits of $100,000 or more as of December 31, are as follows:

 

     2015      2014  
(dollars in thousands)              

Three months or less

   $ 106,268       $ 66,690   

Three months through six months

     86,015         50,150   

Six months through twelve months

     63,409         30,320   

Over twelve months

     99,108         111,808   
  

 

 

    

 

 

 

Total

   $ 354,800       $ 258,968   
  

 

 

    

 

 

 

Borrowings

The Bank’s borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLBB”) borrowings collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowings from the FHLBB totaled $368,000,000, a decrease of $27,500,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2015, was approximately $198,999,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12, “Other Borrowed Funds and Subordinated Debentures,” for a schedule, including related interest rates and other information.

Subordinated Debentures

In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II.

Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The Company is using the proceeds primarily for general business purposes.

Securities Sold Under Agreements to Repurchase

The Bank’s remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled $197,850,000, a decrease of $14,510,000 from the prior year. See Note 11, “Securities Sold Under Agreements to Repurchase,” for a schedule, including related interest rates and other information.

 

28


Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

RESULTS OF OPERATIONS

Net Interest Income

The Company’s operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 6.3% in 2015 to $81,099,000, compared with $76,268,000 in 2014. The increase in net interest income for 2015 was mainly due to an 8.3% increase in the average balances of earning assets, combined with a similar increase in deposits. The increase in net interest income for 2014 was mainly due to an 8.5% increase in the average balances of earning assets, combined with a similar increase in deposits. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis decreased to 2.18% in 2015 from 2.22% in 2014 and increased from 2.21% in 2013. The decrease in the net interest margin, for 2015, was primarily the result of a decrease in rates on earning assets. This is primarily as a result of originating larger loans to borrowers with high credit quality, some of which are at variable rates. The increase in the net interest margin, for 2014, was primarily the result of a decrease in rates paid on deposits and borrowed funds. The Company collected approximately $945,000, $693,000 and $491,000 respectively, of prepayment penalties, which are included in interest income on loans, for 2015, 2014, and 2013, respectively.

Additional information about the net interest margin is contained in the “Overview” section of this report. Also, 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. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories.

 

29


Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

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 years indicated.

 

     2015     2014     2013  

Year Ended December 31,

  Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
    Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
    Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
 
(dollars in thousands)                                                      

ASSETS

                 

Interest-earning assets:

                 

Loans(2)

                 

Taxable

  $ 783,451      $ 32,136        4.10   $ 757,088      $ 32,198        4.25   $ 760,435      $ 33,214        4.37

Tax-exempt

    724,095        30,862        4.26        550,800        27,798        5.05        424,477        24,918        5.87   

Securities available-for-sale:(3)

                 

Taxable

    334,249        2,558        0.77        445,656        2,883        0.65        951,757        13,083        1.37   

Tax-exempt

    120,389        853        0.71        55,272        428        0.77        46,226        434        0.94   

Securities held-to-maturity:

                 

Taxable

    1,603,530        34,388        2.14        1,499,995        31,745        2.12        812,448        16,615        2.05   

Interest-bearing deposits in other banks

    157,765        436        0.28        129,472        352        0.27        174,264        485        0.28   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    3,723,479      $ 101,233        2.72     3,438,283      $ 95,404        2.77     3,169,607      $ 88,749        2.80

Noninterest-earning assets

    191,700            166,792            167,000       

Allowance for loan losses

    (22,559         (21,876         (20,452    
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 3,892,620          $ 3,583,199          $ 3,316,155       
 

 

 

       

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

Interest-bearing deposits:

                 

NOW accounts

  $ 794,293      $ 1,798        0.23   $ 762,280      $ 1,677        0.22   $ 713,677      $ 1,673        0.23

Savings accounts

    345,156        1,019        0.30        334,023        862        0.26        323,643        912        0.28   

Money market accounts

    951,197        3,038        0.32        920,485        2,715        0.29        800,052        2,472        0.31   

Time deposits

    408,711        4,887        1.20        372,699        4,421        1.19        387,514        4,777        1.23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

    2,499,357        10,742        0.43        2,389,487        9,675        0.40        2,224,886        9,834        0.44   

Securities sold under agreements to repurchase

    245,276        487        0.20        216,937        391        0.18        203,888        361        0.18   

Other borrowed funds and subordinated debentures

    374,108        8,905        2.38        271,710        9,070        3.34        231,032        8,610        3.73   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    3,118,741      $ 20,134        0.65     2,878,134      $ 19,136        0.66     2,659,806      $ 18,805        0.71

Noninterest-bearing liabilities

                 

Demand deposits

    518,161            481,035            441,193       

Other liabilities

    51,247            35,033            42,017       
 

 

 

       

 

 

       

 

 

     

Total liabilities

    3,688,149            3,394,202            3,143,016       
 

 

 

       

 

 

       

 

 

     

Stockholders’ equity

    204,471            188,997            173,139       

Total liabilities and stockholders’ equity

  $ 3,892,620          $ 3,583,199          $ 3,316,155       
 

 

 

       

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

    $ 81,099          $ 76,268          $ 69,944     
   

 

 

       

 

 

       

 

 

   

Less taxable equivalent adjustment

      (11,140         (10,033         (8,984  
   

 

 

       

 

 

       

 

 

   

Net interest income

    $ 69,959          $ 66,235          $ 60,960     
   

 

 

       

 

 

       

 

 

   

Net interest spread

        2.07         2.11         2.09
     

 

 

       

 

 

       

 

 

 

Net interest margin

        2.18         2.22         2.21
     

 

 

       

 

 

       

 

 

 

 

(1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) At amortized cost.

 

30


Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The following table summarizes the year-to-year changes in the Company’s net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest-bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior year’s volume. Changes due to volume are computed by multiplying the change in volume by the prior year’s rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change.

 

     2015 Compared with 2014     2014 Compared with 2013  
     Increase/(Decrease)     Increase/(Decrease)  
     Due to Change in     Due to Change in  

Year Ended December 31,

   Volume     Rate     Total     Volume     Rate     Total  
(dollars in thousands)                                     

Interest income:

            

Loans

            

Taxable

   $ 1,101      $ (1,163   $ (62   $ (146   $ (870   $ (1,016

Tax-exempt

     7,836        (4,772     3,064        6,709        (3,829     2,880   

Securities available-for-sale:

            

Taxable

     (797     472        (325     (5,112     (5,088     (10,200

Tax-exempt

     464        (39     425        77        (83     (6

Securities held-to-maturity:

            

Taxable

     2,216        427        2,643        14,531        599        15,130   

Interest-bearing deposits in other banks

     78        6        84        (123     (10     (133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     10,898        (5,069     5,829        15,936        (9,281     6,655   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits:

            

NOW accounts

     72        49        121        110        (106     4   

Savings accounts

     30        127        157        29        (79     (50

Money market accounts

     93        230        323        359        (116     243   

Time deposits

     430        36        466        (179     (177     (356
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     625        442        1,067        319        (478     (159

Securities sold under agreements to repurchase

     54        42        96        23        7        30   

Other borrowed funds and subordinated debentures

     2,861        (3,026     (165     1,418        (958     460   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,540        (2,542     998        1,760        (1,429     331   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 7,358      $ (2,527   $ 4,831      $ 14,176      $ (7,852   $ 6,324   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average earning assets were $3,723,479,000 in 2015, an increase of $285,196,000 or 8.3% from the average in 2014, which was 8.5% higher than the average in 2013. Total average securities, including securities available-for-sale and securities held-to-maturity, were $2,058,168,000, an increase of 2.9% from the average in 2014. The increase in securities volume was mainly attributable to an increase in taxable securities. An increase in securities balances resulted in higher securities income, which increased 7.8% to $37,799,000 on a fully tax equivalent basis. Total average loans increased 15.3% to $1,507,546,000 after increasing $122,976,000 in 2014. The primary reason for the increase in loans was due in large part to an increase in tax-exempt lending as well as residential second mortgage lending. The increase in loan volume resulted in higher loan income. Loan income increased by 5.0% or $3,002,000 to $62,998,000. Total loan income was $58,132,000 in 2013. Prepayment penalties collected were $945,000, $693,000, and $491,000 for 2015, 2014, and 2013, respectively.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 5.1%, or $146,996,000, in 2015 after increasing by 7.7%, or $204,443,000, in 2014. Deposits increased in 2015, primarily as a result of increases in demand deposits, savings, money market, NOW accounts, and time deposits. Deposits increased in 2014, primarily as a result of increases in demand deposits, savings, money market, and NOW accounts. Borrowed funds and subordinated debentures increased by 26.8% in 2015, following an increase of 12.4% in 2014. The majority of the Company’s borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB increased by approximately $102,398,000, and average retail repurchase agreements increased by $28,339,000 in 2015. Interest expense totaled $20,134,000 in 2015, an increase of $998,000, or 5.2%, from 2014 when interest expense decreased 1.8% from 2013. The increase in interest expense, for 2015, is primarily due to increases in the average balances of deposits and borrowed funds. The increase in interest expense, for 2014, is primarily due to increases in the average balances of both borrowed funds and money market balances, this was offset, somewhat, by a decrease in rates paid on deposits and other borrowed funds.

Provision for Loan Losses

The provision for loan losses was $200,000 in 2015, compared with $2,050,000 in 2014 and $2,710,000 in 2013. These provisions are the result of management’s evaluation of the amounts and credit quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses decreased during 2015, primarily as a result of changes in the portfolio composition, related methodology enhancements to address these changes, as well as net recoveries being realized during the year. The provision for loan losses decreased during 2014, primarily as a result of a lower level of charge-off activity, changes in the portfolio composition, and changes in qualitative economic and other risk factors. 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 risk profile of the Company’s new loan originations and related methodology enhancements to address these changes.

The allowance for loan losses was $23,075,000 at December 31, 2015, compared with $22,318,000 at December 31, 2014. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.33% in 2015 and 1.68% in 2014. The allowance for loan losses increased due to the increase in the size of the loan portfolio. The ratio of allowance for loan losses as a percentage of outstanding loans at year-end decreased as a result of a combination of the enhancements made to the allowance methodology to address the changing risk profile of the Company’s new loan originations and the increase in these loan types as a percentage of the overall portfolio.

Nonperforming loans, which include all non-accruing loans, totaled $2,336,000 on December 31, 2015, compared with $4,146,000 on December 31, 2014. Nonperforming loans decreased primarily as a result of a decrease in commercial real estate nonperforming loans.

Other Operating Income

During 2015, the Company continued to experience strong results in its fee-based services, including fees derived from traditional banking activities such as deposit-related services, its automated lockbox collection system and full-service securities brokerage supported by LPL Financial, a full-service securities brokerage business.

Under the lockbox program, which is not tied to extensions of credit by the Company, the Company’s customers arrange for payments of their accounts receivable to be made directly to the Company. The Company records the amounts paid to its customers, deposits the funds to the customer’s account and provides automated records of the transactions to customers. Typical customers for the lockbox service are municipalities that use it to automate tax collections, cable TV companies and other commercial enterprises.

Through a program called Investment Services at Century Bank, the Bank provides full-service securities brokerage services supported by LPL Financial, a full-service securities brokerage business. Registered

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

representatives employed by Century Bank offer limited investment advice, execute transactions and assist customers in financial and retirement planning. LPL Financial provides research to the Bank’s representatives. The Bank receives a share in the commission revenues.

Total other operating income in 2015 was $15,993,000, an increase of $722,000, or 4.7%, compared to 2014. This increase followed a decrease of $3,344,000, or 18.0%, in 2014, compared to 2013. Included in other operating income are net gains on sales of securities of $594,000, $450,000 and $3,019,000 in 2015, 2014 and 2013, respectively. Also included in other operating income are net gains on sales of mortgage loans of $1,034,000, $757,000 and $1,564,000 in 2015, 2014 and 2013, respectively. Service charge income, which continues to be a major source of other operating income, totaling $7,732,000 in 2015, decreased $331,000 compared to 2014. This followed a decrease of $50,000 in 2014 compared to 2013. The decrease in fees, in 2015, was mainly attributable to a decrease in overdraft fees and fees collected from processing activities; this was offset somewhat by an increase in debit card fees. The decrease in fees, in 2014, was mainly attributable to a decrease in overdraft fees offset, somewhat, by an increase in fees collected from processing activities as well as an increase in debit card fees. Lockbox revenues totaled $3,211,000, up $112,000 in 2015 following an increase of $20,000 in 2014. Other income totaled $3,042,000, up $442,000 in 2015 following an increase of $17,000 in 2014. The increase in 2015 was primarily the result of increases merchant and charge card sales royalties.

Operating Expenses

Total operating expenses were $62,198,000 in 2015, compared to $56,730,000 in 2014 and $55,812,000 in 2013.

Salaries and employee benefits expenses increased by $3,500,000 or 10.0% in 2015, after decreasing by 0.4% in 2014. The increase in 2015 was mainly attributable to increases in staff levels, merit increases in salaries, pension costs and health insurance costs. The decrease in 2014 was mainly attributable to decreases in pension costs, mostly offset by increases in staff levels and merit increases in salaries.

Occupancy expense increased by $613,000, or 11.1%, in 2015, following an increase of $503,000, or 10.1%, in 2014. The increase in 2015 and 2014 was primarily attributable to an increase in rent expense, depreciation expense and building maintenance associated with branch expansion.

Equipment expense increased by $297,000, or 12.8%, in 2015, following an increase of $31,000, or 1.3%, in 2014. The increase in 2015 and 2014 was primarily attributable to an increase depreciation expense associated with branch expansion.

FDIC assessments increased by $182,000, or 9.2%, in 2015, following an increase of $180,000, or 10.1%, in 2014. FDIC assessments increased in 2015 and 2014 mainly as a result of deposit growth.

Other operating expenses increased by $876,000 in 2015, which followed a $352,000 increase in 2014. The increase in 2015 was primarily attributable to an increase in bank security, software maintenance costs, and legal expenses. The increase in 2014 was primarily attributable to an increase in debit card losses, consultants expense, and software maintenance fees.

Provision for Income Taxes

Income tax expense was $533,000 in 2015, $866,000 in 2014, and $1,007,000 in 2013. The effective tax rate was 2.3% in 2015, 3.8% in 2014 and 4.8% in 2013. The decrease in the effective tax rate for 2015 and 2014 was mainly attributable to an increase in tax-exempt interest income as a percentage of taxable income offset slightly by a decrease in tax credits. The federal tax rate was 34% in 2015, 2014 and 2013.

Market Risk and Asset Liability Management

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. To that end, management actively monitors and manages its interest rate risk exposure.

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company’s exposure to differential changes in interest rates between assets and liabilities is an interest rate risk management test.

This test measures the impact on net interest income of an immediate change in interest rates in 100-basis point increments as set forth in the following table:

 

Change in Interest

Rates (in Basis Points)

   Percentage Change in
Net Interest Income(1)
+400    (4.0)
+300    (2.9)
+200    (2.2)
+100    (0.8)
–100    1.1
–200    0.4

 

(1) The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment.

The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk.

Liquidity and Capital Resources

Liquidity is provided by maintaining an adequate level of liquid assets that include cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $223,957,000 on December 31, 2015, compared with $307,489,000 on December 31, 2014. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity.

The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.

Capital Adequacy

Total stockholders’ equity was $214,544,000 at December 31, 2015, compared with $192,500,000 at December 31, 2014. The Company’s equity increased primarily as a result of earnings and a decrease on other comprehensive loss, net of taxes, offset somewhat by dividends paid. Other comprehensive loss, net of taxes, decreased primarily as a result of a decrease in unrealized losses on securities transferred from available-for-sale to held-to-maturity.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The following table reflects capital ratios computed utilizing the recently implemented Basel III regulatory capital framework:

 

     Minimum
Capital Ratios
    Bank     Company  

Leverage ratios

     4.00     6.48     6.79

Common equity tier 1 risk weighted capital ratios

     4.50     11.04     10.04

Tier 1 risk weighted capital ratios

     6.00     11.04     11.55

Total risk weighted capital ratios

     8.00     12.03     12.54

Contractual Obligations, Commitments, and Contingencies

The Company has entered into contractual obligations and commitments. The following tables summarize the Company’s contractual cash obligations and other commitments at December 31, 2015.

Contractual Obligations and Commitments by Maturity (dollars in thousands)

 

     Payments Due — By Period  

CONTRACTUAL OBLIGATIONS

   Total      Less Than
One Year
     One to
Three
Years
     Three to
Five

Years
     After Five
Years
 

FHLBB advances

   $ 368,000       $ 100,000       $ 112,000       $ 91,000       $ 65,000   

Subordinated debentures

     36,083                                 36,083   

Retirement benefit obligations

     37,758         2,883         6,775         6,987         21,113   

Lease obligations

     12,378         2,508         3,879         3,082         2,909   

Customer repurchase agreements

     197,850         197,850                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 652,069       $ 303,241       $ 122,654       $ 101,069       $ 125,105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Amount of Commitment Expiring — By Period  

OTHER COMMITMENTS

   Total      Less Than
One Year
     One to
Three
Years
     Three to
Five

Years
     After Five
Years
 

Lines of credit

   $ 320,874       $ 56,934       $ 103,189       $ 3,735       $ 157,016   

Standby and commercial letters of credit

     4,936         4,295         158         47         436   

Other commitments

     58,944         6,885         2,226         169         49,664   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commitments

   $ 384,754       $ 68,114       $ 105,573       $ 3,951       $ 207,116   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Instruments with Off-Balance-Sheet Risk

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments with off-balance-sheet risk at December 31 are as follows:

 

Contract or Notional Amount

   2015      2014  
(dollars in thousands)   

Financial instruments whose contract amount represents credit risk:

     

Commitments to originate 1–4 family mortgages

   $ 5,638       $ 3,215   

Standby and commercial letters of credit

     4,936         8,057   

Unused lines of credit

     320,874         298,279   

Unadvanced portions of construction loans

     11,589         3,035   

Unadvanced portions of other loans

     41,717         17,186   

Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit was $51,000 and $62,000 for 2015 and 2014, respectively.

Recent Accounting Developments

See Note 1 to the Notes to Consolidated Financial Statements for details of recent accounting developments and their expected impact on the Company’s financial statements.

 

 

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Table of Contents

Consolidated Balance Sheets

 

December 31,

   2015     2014  
(dollars in thousands except share data)             

ASSETS

    

Cash and due from banks (Note 2)

   $ 52,877      $ 43,367   

Federal funds sold and interest-bearing deposits in other banks

     167,847        261,990   
  

 

 

   

 

 

 

Total cash and cash equivalents

     220,724        305,357   

Short-term investments

     3,233        2,131   

Securities available-for-sale, amortized cost $404,977 in 2015 and $448,210 in 2014 (Notes 3, 9 and 11)

     404,623        448,390   

Securities held-to-maturity, fair value $1,438,960 in 2015 and $1,413,603 in 2014 (Notes 4 and 11)

     1,438,903        1,406,792   

Federal Home Loan Bank of Boston, stock at cost

     28,807        24,916   

Loans, net (Note 5)

     1,731,536        1,331,366   

Less: allowance for loan losses (Note 6)

     23,075        22,318   
  

 

 

   

 

 

 

Net loans

     1,708,461        1,309,048   

Bank premises and equipment (Note 7)

     24,106        24,182   

Accrued interest receivable

     8,002        6,241   

Other assets (Notes 5, 8 and 16)

     110,582        96,979   
  

 

 

   

 

 

 

Total assets

   $ 3,947,441      $ 3,624,036   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Demand deposits

   $ 541,955      $ 484,928   

Savings and NOW deposits

     1,070,585        978,619   

Money market accounts

     989,094        890,899   

Time deposits (Note 10)

     473,426        383,145   
  

 

 

   

 

 

 

Total deposits

     3,075,060        2,737,591   

Securities sold under agreements to repurchase (Note 11)

     197,850        212,360   

Other borrowed funds (Note 12)

     368,000        395,500   

Subordinated debentures (Note 12)

     36,083        36,083   

Other liabilities

     55,904        50,002   
  

 

 

   

 

 

 

Total liabilities

     3,732,897        3,431,536   

Commitments and contingencies (Notes 7, 18 and 19)

    

Stockholders’ equity (Note 15):

    

Preferred Stock – $1.00 par value; 100,000 shares authorized; no shares issued and outstanding

              

Common stock, Class A,

    

$1.00 par value per share; authorized 10,000,000 shares; issued 3,600,729 shares in 2015 and 2014

     3,601        3,601   

Common stock, Class B,

    

$1.00 par value per share; authorized 5,000,000 shares; issued 1,967,180 shares in 2015 and 2014

     1,967        1,967   

Additional paid-in capital

     12,292        12,292   

Retained earnings

     221,232        200,411   
  

 

 

   

 

 

 
     239,092        218,271   

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

     (246     77   

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

     (6,896     (10,479

Pension liability, net of taxes

     (17,406     (15,369
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes (Notes 3, 13 and 15)

     (24,548     (25,771
  

 

 

   

 

 

 

Total stockholders’ equity

     214,544        192,500   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,947,441      $ 3,624,036   
  

 

 

   

 

 

 

See accompanying “Notes to Consolidated Financial Statements.”

 

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Table of Contents

Consolidated Statements of Income

 

Year Ended December 31,

   2015      2014      2013  
(dollars in thousands except share data)                     

INTEREST INCOME

        

Loans, taxable

   $ 32,136       $ 32,198       $ 33,214   

Loans, non-taxable

     19,992         17,910         16,082   

Securities available-for-sale, taxable

     1,900         2,601         13,024   

Securities available-for-sale, non-taxable

     583         282         286   

Federal Home Loan Bank of Boston dividends

     658         283         59   

Securities held-to-maturity

     34,388         31,745         16,615   

Federal funds sold, interest-bearing deposits in other banks and short-term investments

     436         352         485   
  

 

 

    

 

 

    

 

 

 

Total interest income

     90,093         85,371         79,765   

INTEREST EXPENSE

        

Savings and NOW deposits

     2,817         2,539         2,585   

Money market accounts

     3,038         2,715         2,472   

Time deposits

     4,887         4,421         4,777   

Securities sold under agreements to repurchase

     487         391         361   

Other borrowed funds and subordinated debentures

     8,905         9,070         8,610   
  

 

 

    

 

 

    

 

 

 

Total interest expense

     20,134         19,136         18,805   
  

 

 

    

 

 

    

 

 

 

Net interest income

     69,959         66,235        </