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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2017.

or

 

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

Commission file number: 0-15752

 

 

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(781) 391-4000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

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

(Check one):

 

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of October 31, 2017, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,605,829 Shares  

Class B Common Stock, $1.00 par value

     1,962,080 Shares  

 

 

 


Table of Contents

Century Bancorp, Inc.

 

   

Index

   Page
Number
 

Part I

 

Financial Information

  
 

Forward Looking Statements

     1  

Item 1.

 

Financial Statements (unaudited)

  
 

Consolidated Balance Sheets:
September  30, 2017 and December 31, 2016

     2  
 

Consolidated Statements of Income:
Three Months and Nine Months Ended September 30, 2017 and 2016

     3  
 

Consolidated Statements of Comprehensive Income:
Three Months and Nine Months Ended September 30, 2017 and 2016

     4  
 

Consolidated Statements of Changes in Stockholders’ Equity:
Nine Months Ended September 30, 2017 and 2016

     5  
 

Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2017 and 2016

     6  
 

Notes to Consolidated Financial Statements

     7 - 29  

Item 2.

 

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

     29 -41  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     41  

Item 4.

 

Controls and Procedures

     41  

Part II.

 

Other Information

  

Item 1.

 

Legal Proceedings

     42  

Item 1A.

 

Risk Factors

     42  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     42  

Item 3.

 

Defaults Upon Senior Securities

     42  

Item 4.

 

Mine Safety Disclosures

     42  

Item 5.

 

Other Information

     42  

Item 6.

 

Exhibits

     42 - 43  

Signatures

       44  

Exhibits

 

Ex-31.1

  
 

Ex-31.2

  
 

Ex-32.1

  
 

Ex-32.2

  
 

Ex-101 Instance Document

  
 

Ex-101 Schema Document

  
 

Ex-101 Calculation Linkbase Document

  
 

Ex-101 Labels Linkbase Document

  
 

Ex-101 Presentation Linkbase Document

  
 

Ex-101 Definition Linkbase Document

  


Table of Contents

Forward Looking Statements

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

 

Page 1 of 44


Table of Contents

PART I - Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     September 30,
2017
    December 31,
2016
 
Assets     

Cash and due from banks

   $ 57,921     $ 62,400  

Federal funds sold and interest-bearing deposits in other banks

     195,212       173,751  
  

 

 

   

 

 

 

Total cash and cash equivalents

     253,133       236,151  

Short-term investments

     —         3,183  

Securities available-for-sale, amortized cost $388,004 and $500,220, respectively

     387,790       499,297  

Securities held-to-maturity, fair value $1,637,497 and $ 1,635,808, respectively

     1,654,908       1,653,986  

Federal Home Loan Bank of Boston, stock at cost

     21,937       21,042  

Loans, net:

    

Construction and land development

     16,779       14,928  

Commercial and industrial

     702,646       612,503  

Municipal

     128,412       135,418  

Commercial real estate

     735,844       696,173  

Residential real estate

     272,588       241,357  

Consumer and other

     18,594       11,013  

Home equity

     237,094       211,857  

Overdrafts

     690       684  
  

 

 

   

 

 

 

Total loans, net

     2,112,647       1,923,933  

Less: allowance for loan losses

     25,698       24,406  
  

 

 

   

 

 

 

Net loans

     2,086,949       1,899,527  

Bank premises and equipment

     23,932       23,417  

Accrued interest receivable

     9,926       9,645  

Goodwill

     2,714       2,714  

Other assets

     116,783       113,646  
  

 

 

   

 

 

 

Total assets

   $ 4,558,072     $ 4,462,608  
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 702,527     $ 689,286  

Savings and NOW deposits

     1,276,135       1,304,394  

Money market accounts

     1,019,741       1,181,179  

Time deposits

     607,279       478,359  
  

 

 

   

 

 

 

Total deposits

     3,605,682       3,653,218  

Securities sold under agreements to repurchase

     228,848       182,280  

Other borrowed funds

     358,000       293,000  

Subordinated debentures

     36,083       36,083  

Due to broker

     5,911       —    

Other liabilities

     60,900       57,986  
  

 

 

   

 

 

 

Total liabilities

     4,295,424       4,222,567  
Stockholders’ Equity     

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 3,605,829 shares and 3,600,729 shares, respectively

     3,606       3,601  

Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,962,080 shares and 1,967,180 shares respectively

     1,962       1,967  

Additional paid-in capital

     12,292       12,292  

Retained earnings

     264,191       243,565  
  

 

 

   

 

 

 
     282,051       261,425  

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

     (140     (567

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

     (3,228     (4,084

Pension liability, net of taxes

     (16,035     (16,733
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (19,403     (21,384
  

 

 

   

 

 

 

Total stockholders’ equity

     262,648       240,041  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,558,072     $ 4,462,608  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 2 of 44


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2017      2016     2017      2016  

Interest income

          

Loans

   $ 16,658      $ 15,045     $ 48,668      $ 43,380  

Securities held-to-maturity

     9,447        8,238       28,806        24,178  

Securities available-for-sale

     1,809        1,439       5,143        3,546  

Federal funds sold and interest-bearing deposits in other banks

     607        283       1,349        906  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     28,521        25,005       83,966        72,010  
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense

          

Savings and NOW deposits

     1,727        1,083       4,454        2,859  

Money market accounts

     1,395        909       3,903        2,485  

Time deposits

     2,095        1,464       5,648        4,216  

Securities sold under agreements to repurchase

     129        122       352        363  

Other borrowed funds and subordinated debentures

     1,822        2,213       5,695        6,767  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     7,168        5,791       20,052        16,690  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     21,353        19,214       63,914        55,320  

Provision for loan losses

     450        375       1,340        1,175  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     20,903        18,839       62,574        54,145  

Other operating income

          

Service charges on deposit accounts

     2,089        1,983       6,179        5,882  

Lockbox fees

     735        759       2,367        2,431  

Net gains on sales of securities

     47        19       47        64  

Gains on sales of mortgage loans

     —          533       370        1,331  

Other income

     1,071        931       3,179        2,814  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other operating income

     3,942        4,225       12,142        12,522  
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating expenses

          

Salaries and employee benefits

     10,282        10,544       32,144        30,360  

Occupancy

     1,427        1,509       4,663        4,639  

Equipment

     782        772       2,245        2,087  

FDIC assessments

     340        343       1,218        1,503  

Other

     3,374        3,462       10,857        10,012  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     16,205        16,630       51,127        48,601  
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     8,640        6,434       23,589        18,066  

Provision for income taxes

     617        (52     1,313        32  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 8,023      $ 6,486     $ 22,276      $ 18,034  
  

 

 

    

 

 

   

 

 

    

 

 

 

Share data:

          

Weighted average number of shares outstanding, basic

          

Class A

     3,605,829        3,600,729       3,603,429        3,600,729  

Class B

     1,962,080        1,967,180       1,964,480        1,967,180  

Weighted average number of shares outstanding, diluted

          

Class A

     5,567,909        5,567,909       5,567,909        5,567,909  

Class B

     1,962,080        1,967,180       1,964,480        1,967,180  

Basic earnings per share:

          

Class A

   $ 1.75      $ 1.41     $ 4.86      $ 3.93  

Class B

   $ 0.87      $ 0.71     $ 2.43      $ 1.97  

Diluted earnings per share

          

Class A

   $ 1.44      $ 1.16     $ 4.00      $ 3.24  

Class B

   $ 0.87      $ 0.71     $ 2.43      $ 1.97  

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 3 of 44


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended September 30,  
     2017     2016  

Net income

   $ 8,023     $ 6,486  

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     122       (98

Less: reclassification adjustment for gains included in net income

     (28     (12
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     94       (110

Accretion of net unrealized losses transferred

     223       527  

Defined benefit pension plans:

    

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

     233       242  
  

 

 

   

 

 

 

Other comprehensive income

     550       659  
  

 

 

   

 

 

 

Comprehensive income

   $ 8,573     $ 7,145  
  

 

 

   

 

 

 
     Nine months ended September 30,  
     2017     2016  

Net income

   $ 22,276     $ 18,034  

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     455       (109

Less: reclassification adjustment for gains included in net income

     (28     (39
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     427       (148

Accretion of net unrealized losses transferred

     856       2,274  

Defined benefit pension plans:

    

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

     698       727  
  

 

 

   

 

 

 

Other comprehensive income

     1,981       2,853  
  

 

 

   

 

 

 

Comprehensive income

   $ 24,257     $ 20,887  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 44


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2017 and 2016

 

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

Balance at December 31, 2015

   $ 3,601      $ 1,967     $ 12,292      $ 221,232     $ (24,548   $ 214,544  

Net income

     —          —         —          18,034       —         18,034  

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $128 in taxes and $64 in realized gains

     —          —         —          —         (148     (148

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $1,216 in taxes

     —          —         —          —         2,274       2,274  

Pension liability adjustment, net of $484 in taxes

     —          —         —          —         727       727  

Cash dividends paid, Class A common stock, $.36 per share

     —          —         —          (1,296     —         (1,296

Cash dividends paid, Class B common stock, $.18 per share

     —          —         —          (354     —         (354
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2016

   $ 3,601      $ 1,967     $ 12,292      $ 237,616     $ (21,695   $ 233,781  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   $ 3,601      $ 1,967     $ 12,292      $ 243,565     $ (21,384   $ 240,041  

Net income

     —          —         —          22,276       —         22,276  

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $282 in taxes and $47 in realized gains

     —          —         —          —         427       427  

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $1,022 in taxes

     —          —         —          —         856       856  

Pension liability adjustment, net of $465 in taxes

     —          —         —          —         698       698  

Conversion of Class B Common Stock to Class A Common Stock, 5,100 shares

     5        (5     —          —         —         —    

Cash dividends paid, Class A common stock, $.36 per share

     —          —         —          (1,297     —         (1,297

Cash dividends paid, Class B common stock, $.18 per share

     —          —         —          (353     —         (353
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

   $ 3,606      $ 1,962     $ 12,292      $ 264,191     $ (19,403   $ 262,648  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 44


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2017 and 2016

 

     Nine months ended September 30,  
     2017     2016  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 22,276     $ 18,034  

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

    

Gain on sales of mortgage loans

     (370     (1,331

Net gains on sales of securities

     (47     (64

Provision for loan losses

     1,340       1,175  

Deferred income taxes

     (3,477     (3,143

Net depreciation and amortization

     2,444       2,498  

(Increase) decrease in accrued interest receivable

     (281     405  

Increase in other assets

     (1,478     (3,877

Increase in other liabilities

     4,076       3,484  
  

 

 

   

 

 

 

Net cash provided by operating activities

     24,483       17,181  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds (purchase) of short-term investments

     3,183       (8

Proceeds from redemptions of Federal Home Loan Bank of Boston stock

     7,175       10,276  

Purchase of Federal Home Loan Bank of Boston stock

     (8,070     (2,617

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

     211,576       206,025  

Proceeds from sales of securities available-for-sale

     18,133       2,376  

Purchase of securities available-for-sale

     (111,777     (328,565

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

     231,953       318,815  

Proceeds from sales of securities held-to-maturity

     —         192  

Purchase of securities held-to-maturity

     (230,813     (441,756

Net increase in loans

     (215,063     (182,901

Proceeds from sales of portfolio loans

     26,701       74,668  

Capital expenditures

     (2,881     (1,408
  

 

 

   

 

 

 

Net cash used in investing activities

     (69,883     (344,903
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in time deposits

     128,920       (18,795

Net (decrease) increase in demand, savings, money market and NOW deposits

     (176,456     404,848  

Cash dividends

     (1,650     (1,650

Net increase in securities sold under agreements to repurchase

     46,568       16,470  

Net increase (decrease) in other borrowed funds

     65,000       (75,000
  

 

 

   

 

 

 

Net cash provided by financing activities

     62,382       325,873  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     16,982       (1,849

Cash and cash equivalents at beginning of period

     236,151       220,724  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 253,133     $ 218,875  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 20,055     $ 16,806  

Income taxes

     4,830       2,730  

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

     427       (148

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

     856       2,274  

Pension liability adjustment, net of taxes

     698       727  

Change in due to (from) to broker

     5,911       1,847  

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Nine Months Ended September 30, 2017 and 2016

Note 1. Basis of Financial Statement Presentation

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

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

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The Company’s quarterly report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission.

Material estimates that are susceptible to change in the near term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on independent appraisals and review of other factors, including historical charge-off rates with additional allocations based on risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.

 

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Note 2. Securities Available-for-Sale

 

     September 30, 2017      December 31, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

U.S. Treasury

   $ 1,999      $ —        $ 5      $ 1,994      $ 2,000      $ —        $ —        $ 2,000  

U.S. Government Sponsored Enterprises

     —          —          —          —          25,000        —          48        24,952  

SBA Backed Securities

     80,906        40        182        80,764        57,899        14        146        57,767  

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

     219,268        504        269        219,503        243,703        293        671        243,325  

Privately Issued Residential Mortgage-Backed Securities

     960        4        10        954        1,121        2        14        1,109  

Obligations Issued by States and Political Subdivisions

     79,655        —          410        79,245        165,281        —          405        164,876  

Other Debt Securities

     5,100        76        189        4,987        5,100        18        194        4,924  

Equity Securities

     116        227        —          343        116        228        —          344  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 388,004      $ 851      $ 1,065      $ 387,790      $ 500,220      $ 555      $ 1,478      $ 499,297  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in SBA Backed Securities and U.S. Government Sponsored Enterprise Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $165,178,000 and $210,780,000 at September 30, 2017 and December 31, 2016, respectively. Also included in securities available-for-sale are securities at fair value pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $49,248,000 and $53,396,000 at September 30, 2017 and December 31, 2016, respectively. The Company realized gross gains of $47,000 from the proceeds of $18,133,000 from the sales of available-for-sale securities for the nine months ended September 30, 2017. The Company realized gross gains of $52,000 from the proceeds of $2,376,000 from the sales of available-for-sales securities for the nine months ended September 30, 2016.

Debt securities of U.S. Government Sponsored Enterprises and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the maturity distribution of the Company’s securities available-for-sale at September 30, 2017.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 68,921      $ 68,915  

After one but within five years

     126,680        126,824  

After five but within ten years

     96,671        96,759  

More than 10 years

     94,116        93,597  

Non-maturing

     1,616        1,695  
  

 

 

    

 

 

 

Total

   $ 388,004      $ 387,790  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at September 30, 2017 was 5.8 years. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations.

 

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As of September 30, 2017 and December 31, 2016, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Treasury, SBA Backed Securities, U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities, Privately Issued Residential Mortgage-Backed Securities, Obligations Issued by States and Political Subdivisions, and Other Debt Securities, related primarily to interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

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

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at September 30, 2017. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 10 and 29 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 246 holdings at September 30, 2017.

 

     September 30, 2017  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

U.S. Treasury

   $ 1,994      $ 5      $ —        $ —        $ 1,994      $ 5  

U.S. Government Sponsored Enterprises

     —          —          —          —          —          —    

SBA Backed Securities

     10,561        28        44,789        154        55,350        182  

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

     30,914        77        59,918        192        90,832        269  

Privately Issued Residential

Mortgage-Backed Securities

     —          —          671        10        671        10  

Obligations Issued by States and Political Subdivisions

     —          —          4,297        410        4,297        410  

Other Debt Securities

     399        1        1,812        188        2,211        189  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 43,868      $ 111      $ 111,487      $ 954      $ 155,355      $ 1,065  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2016. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 49 and 15 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 270 holdings at December 31, 2016.

 

     December 31, 2016  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 24,952      $ 48      $ —        $ —        $ 24,952      $ 48  

SBA Backed Securities

     52,346        145        951        1        53,297        146  

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

     135,612        485        31,504        186        167,116        671  

Privately Issued Residential Mortgage-Backed Securities

     —          —          757        14        757        14  

Obligations Issued by States and Political Subdivisions

     —          —          4,298        405        4,298        405  

Other Debt Securities

     453        47        1,553        147        2,006        194  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 213,363      $ 725      $ 39,063      $ 753      $ 252,426      $ 1,478  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 3. Investment Securities Held-to-Maturity

 

    September 30, 2017     December 31, 2016  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Value
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair Value
 
    (in thousands)  

U.S. Government Sponsored Enterprises

  $ 114,527     $ 828     $ 281     $ 115,074     $ 148,326     $ 1,066     $ 527     $ 148,865  

SBA Backed Securities

    58,844       3       1,003       57,844       46,140       —         1,088       45,052  

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

    1,481,537       4,970       21,928       1,464,579       1,459,520       4,948       22,577       1,441,891  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,654,908     $ 5,801     $ 23,212     $ 1,637,497     $ 1,653,986     $ 6,014     $ 24,192     $ 1,635,808  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,221,518,000 and $1,147,207,000 at September 30, 2017 and December 31, 2016, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $291,330,000 and $424,353,000 at September 30, 2017 and December 31, 2016, respectively. There were no sales of held-to-maturity securities for the nine months ended September 30, 2017. The Company realized gross gains of $12,000 from the proceeds of $192,000 from the sales of securities held-to-maturity for the nine months ended September 30, 2016. The sales of securities held-to-maturity relate to certain mortgage backed securities for which the Company had previously collected a substantial portion of its principal investment.

At September 30, 2017 and December 31, 2016, all mortgage-backed securities are obligations of U.S. Government Agencies and Government Sponsored Enterprises. Debt securities of U.S. Government Sponsored Enterprises and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.

 

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The following table shows the maturity distribution of the Company’s securities held-to-maturity at September 30, 2017.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 39,780      $ 39,804  

After one but within five years

     1,219,826        1,208,388  

After five but within ten years

     392,012        386,114  

More than ten years

     3,290        3,191  
  

 

 

    

 

 

 

Total

   $ 1,654,908      $ 1,637,497  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at September 30, 2017 was 4.2 years. Included in the weighted average remaining life calculation at September 30, 2017 were $20,496,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

As of September 30, 2017 and December 31, 2016, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not likely that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not likely that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired September 30, 2017 and December 31, 2016.

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

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at

September 30, 2017. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months or longer. There are 129 and 88 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 392 holdings at September 30, 2017.

 

     September 30, 2017  
     Less Than 12 Months      12 Months or Longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 35,226      $ 270      $ 4,989      $ 11      $ 40,215      $ 281  

SBA Backed Securities

     45,551        659        9,275        344        54,826        1,003  

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

     652,183        9,601        431,094        12,327        1,083,277        21,928  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 732,960      $ 10,530      $ 445,358      $ 12,682      $ 1,178,318      $ 23,212  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2016. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 194 and 16 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 375 holdings at December 31, 2016.

 

     December 31, 2016  
     Less Than 12 Months      12 Months or Longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 59,219      $ 527      $ —        $ —        $ 59,219      $ 527  

SBA Backed Securities

     45,052        1,088        —          —          45,052        1,088  

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

     1,008,960        20,725        58,535        1,852        1,067,495        22,577  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,113,231      $ 22,340      $ 58,535      $ 1,852      $ 1,171,766      $ 24,192  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Allowance for Loan Losses

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

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

 

    

Three months ended

September 30,

    

Nine months ended

September 30,

 
     2017      2016      2017      2016  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 25,289      $ 23,863      $ 24,406      $ 23,075  

Loans charged off

     (95      (118      (292      (298

Recoveries on loans previously charged-off

     54        93        244        345  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries (charge-offs)

     (41      (25      (48      47  

Provision charged to expense

     450        375        1,340        1,175  

Reclassification to other liabilities *

     —          (5      —          (89
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 25,698      $ 24,208      $ 25,698      $ 24,208  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* The reclassification relates to allowance for loan loss allocations on unused commitments that have been reclassified to other liabiliites.

 

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Further information pertaining to the allowance for loan losses for the three months ending September 30, 2017 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (in thousands)  

Allowance for loan losses:

 

Balance at June 30, 2017

  $ 1,137     $ 7,563     $ 1,859     $ 11,028     $ 2,118     $ 195     $ 1,146     $ 243     $ 25,289  

Charge-offs

    —         (20     —         —         —         (75     —         —         (95

Recoveries

    —         9       —         —         —         45       —         —         54  

Provision

    323       1,297       265       (1,491     (45     220       (103     (16     450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2017

  $ 1,460     $ 8,849     $ 2,124     $ 9,537     $ 2,073     $ 385     $ 1,043     $ 227     $ 25,698  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ —       $ 8     $ —       $ 111     $ 67     $ —       $ —       $ —       $ 186  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,460     $ 8,841     $ 2,124     $ 9,426     $ 2,006     $ 385     $ 1,043     $ 227     $ 25,512  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 16,779     $ 702,646     $ 128,412     $ 735,844     $ 272,588     $ 19,284     $ 237,094     $ —       $ 2,112,647  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 366     $ —       $ 2,583     $ 4,318     $ —       $ —       $ —       $ 7,267  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 16,779     $ 702,280     $ 128,412     $ 733,261     $ 268,270     $ 19,284     $ 237,094     $ —       $ 2,105,380  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2017 follows:  
    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (in thousands)  

Allowance for loan losses:

 

Balance at December 31, 2016

  $ 1,012     $ 6,972     $ 1,612     $ 11,135     $ 1,698     $ 582     $ 1,102     $ 293     $ 24,406  

Charge-offs

    —         (49     —         —         —         (243     —         —         (292

Recoveries

    —         63       —         —         2       179       —         —         244  

Provision

    448       1,863       512       (1,598     373       (133     (59     (66     1,340  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2017

  $ 1,460     $ 8,849     $ 2,124     $ 9,537     $ 2,073     $ 385     $ 1,043     $ 227     $ 25,698  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ —       $ 8     $ —       $ 111     $ 67     $ —       $ —       $ —       $ 186  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,460     $ 8,841     $ 2,124     $ 9,426     $ 2,006     $ 385     $ 1,043     $ 227     $ 25,512  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 16,779     $ 702,646     $ 128,412     $ 735,844     $ 272,588     $ 19,284     $ 237,094     $ —       $ 2,112,647  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 366     $ —       $ 2,583     $ 4,318     $ —       $ —       $ —       $ 7,267  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 16,779     $ 702,280     $ 128,412     $ 733,261     $ 268,270     $ 19,284     $ 237,094     $ —       $ 2,105,380  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ending September 30, 2017, the Company’s provision was primarily attributable to an increase in commercial and industrial, construction and land development, and residential real estate balances offset, somewhat, by changes in historical loss rates and qualitative factors. During the three months ending September 30, 2017 the Company’s provision was primarily attributable to an increase in commercial and industrial loan balances offset, somewhat, by changes in historical loss rates and qualitative factors.

 

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Further information pertaining to the allowance for loan losses for the three months ending September 30, 2016 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (in thousands)  

Allowance for loan losses:

 

Balance at June 30, 2016

  $ 2,234     $ 5,842     $ 1,801     $ 10,650     $ 1,302     $ 608     $ 1,158     $ 268     $ 23,863  

Charge-offs

    —         —         —         —         —         (91     (27     —         (118

Recoveries

    —         24       —         —         2       67       —         —         93  

Provision

    (3     307       (29     (752     624       5       155       68       375  

Reclassification to other liabilities

    —         —         —         —         —         —         (5     —         (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2016

  $ 2,231     $ 6,173     $ 1,772     $ 9,898     $ 1,928     $ 589     $ 1,281     $ 336     $ 24,208  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 4     $ 9     $ —       $ 143     $ 7     $ —       $ —       $ —       $ 163  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2,227     $ 6,164     $ 1,772     $ 9,755     $ 1,921     $ 589     $ 1,281     $ 336     $ 24,045  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 19,522     $ 549,290     $ 145,063     $ 692,778     $ 222,881     $ 11,474     $ 200,085     $ —       $ 1,841,093  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 95     $ 399     $ —       $ 3,707     $ 208     $ —       $ —       $ —       $ 4,409  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 19,427     $ 548,891     $ 145,063     $ 689,071     $ 222,673     $ 11,474     $ 200,085     $ —       $ 1,836,684  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2016 follows:  
    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (in thousands)  

Allowance for loan losses:

 

Balance at December 31, 2015

  $ 2,041     $ 5,899     $ 994     $ 10,589     $ 1,320     $ 644     $ 1,077     $ 511     $ 23,075  

Charge-offs

    —         —         —         —         —         (271     (27     —         (298

Recoveries

    —         115       —         —         5       225       —         —         345  

Provision

    193       188       778       (680     605       (6     272       (175     1,175  

Reclassification to other liabilities

    (3     (29     —         (11     (2     (3     (41     —         (89
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2016

  $ 2,231     $ 6,173     $ 1,772     $ 9,898     $ 1,928     $ 589     $ 1,281     $ 336     $ 24,208  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 4     $ 9     $ —       $ 143     $ 7     $ —       $ —       $ —       $ 163  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2,227     $ 6,164     $ 1,772     $ 9,755     $ 1,921     $ 589     $ 1,281     $ 336     $ 24,045  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 19,522     $ 549,290     $ 145,063     $ 692,778     $ 222,881     $ 11,474     $ 200,085     $ —       $ 1,841,093  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 95     $ 399     $ —       $ 3,707     $ 208     $ —       $ —       $ —       $ 4,409  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 19,427     $ 548,891     $ 145,063     $ 689,071     $ 222,673     $ 11,474     $ 200,085     $ —       $ 1,836,684  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ending September 30, 2016, the Company’s provision was primarily attributable to an increase in municipal and residential real estate balances, offset, somewhat by changes in historical loss and qualitative factors. During the three months ending September 30, 2016 the Company’s provision was primarily attributable to an increase in commercial and industrial loan balances.

 

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

Loans rated 1-3 (Pass):

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

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of September 30, 2017 and December 31, 2016.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of September 30, 2017 and December 31, 2016.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of September 30, 2017 and December 31, 2016 and are doubtful for full collection.

Impaired:

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

The following table presents the Company’s loans by risk rating at September 30, 2017.

 

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

Grade:

           

1-3 (Pass)

   $ 16,779      $ 696,934      $ 128,412      $ 708,558  

4 (Monitor)

     —          5,346        —          24,703  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     —          366        —          2,583  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,779      $ 702,646      $ 128,412      $ 735,844  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2016.

 

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

Grade:

  

1-3 (Pass)

   $ 14,834      $ 612,114      $ 135,418      $ 661,271  

4 (Monitor)

     —          —          —          31,753  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     94        389        —          3,149  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,928      $ 612,503      $ 135,418      $ 696,173  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company has increased its exposure to larger loans to large institutions with publically available credit ratings beginning in 2015. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2017 and are included within the total loan portfolio.

 

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

Credit Rating:

  

Aaa – Aa3

   $ 365,441      $ 62,657      $ 45,371      $ 473,469  

A1 – A3

     247,253        7,770        128,743        383,766  

Baa1 – Baa3

     —          46,970        124,932        171,902  

Ba2

     —          8,165        —          8,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 612,694      $ 125,562      $ 299,046      $ 1,037,302  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2016.

 

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

Credit Rating:

  

Aaa – Aa3

   $ 334,674      $ 66,245      $ 6,596      $ 407,515  

A1 – A3

     188,777        33,365        129,423        351,565  

Baa1 – Baa3

     —          26,970        127,366        154,336  

Ba2

     —          3,610        —          3,610  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 523,451      $ 130,190      $ 263,385      $ 917,026  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company utilized payment performance as credit quality indicators for the loan types listed below. The indicators are depicted in the table “aging of past due loans,” below.

Further information pertaining to the allowance for loan losses at September 30, 2017 follows:

 

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

Construction and land development

   $ —        $ —        $ —        $ —        $ 16,779      $ 16,779  

Commercial and industrial

     159        55        —          214        702,432        702,646  

Municipal

     —          —          —          —          128,412        128,412  

Commercial real estate

     611        225        —          836        735,008        735,844  

Residential real estate

     237        670        —          907        271,681        272,588  

Consumer and overdrafts

     11        —          —          11        19,273        19,284  

Home equity

     1,032        648        —          1,680        235,414        237,094  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,050      $ 1,598      $ —        $ 3,648      $ 2,108,999      $ 2,112,647  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 16 of 44


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Further information pertaining to the allowance for loan losses at December 31, 2016 follows:

 

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

Construction and land development

   $ —        $ 94      $ —        $ 94      $ 14,834      $ 14,928  

Commercial and industrial

     37        65        —          102        612,401        612,503  

Municipal

     —          —          —          —          135,418        135,418  

Commercial real estate

     597        150        —          747        695,426        696,173  

Residential real estate

     245        656        —          901        240,456        241,357  

Consumer and overdrafts

     —          11        —          11        11,686        11,697  

Home equity

     735        108        —          843        211,014        211,857  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,614      $ 1,084      $ —        $ 2,698      $ 1,921,235      $ 1,923,933  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include: the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2016.

 

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The following is information pertaining to impaired loans for September 30, 2017:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying
Value
for 3 Months
Ending
9/30/17
     Interest
Income
Recognized
for 3 Months
Ending 9/30/17
     Average
Carrying
Value
for 9 Months
Ending
9/30/17
     Interest
Income
Recognized
for 9 Months
Ending
9/30/17
 
     (in thousands)  

With no required reserve recorded:

  

Construction and land development

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

Commercial and industrial

     54        261        —          60        —          49        —    

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     91        109        —          45        —          313        —    

Residential real estate

     72        163        —          75        2        81        5  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 217      $ 533      $ —        $ 180      $ 2      $ 443      $ 5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ —        $ —        $ —        $ —        $ —        $ 56      $ —    

Commercial and industrial

     312        328        8        319        4        328        12  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     2,492        2,599        111        2,547        22        2,542        69  

Residential real estate

     4,246        4,247        67        4,257        19        1,767        36  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,050      $ 7,174      $ 186      $ 7,123      $ 45      $ 4,693      $ 117  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

   $ —        $ —        $ —        $ —        $ —        $ 56      $ —    

Commercial and industrial

     366        589        8        379        4        377        12  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     2,583        2,708        111        2,592        22        2,855        69  

Residential real estate

     4,318        4,410        67        4,332        21        1,848        41  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,267      $ 7,707      $ 186      $ 7,303      $ 47      $ 5,136      $ 122  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 18 of 44


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The following is information pertaining to impaired loans for September 30, 2016:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value
for 3 Months
Ending 9/30/16
     Interest
Income
Recognized
for 3 Months
Ending 9/30/16
     Average
Carrying
Value
for 9 Months
Ending
9/30/16
     Interest
Income
Recognized
for 9 Months
Ending
9/30/16
 
     (in thousands)  

With no required reserve recorded:

  

Construction and land development

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

Commercial and industrial

     228        414        —          51        2        54        7  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     593        593        —          594        9        310        30  

Residential real estate

     97        186        —          101        2        106        6  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 918      $ 1,193      $ —        $ 746      $ 13      $ 470      $ 43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ 95      $ 108      $ 4      $ 96      $ —        $ 97      $ —    

Commercial and industrial

     171        187        9        353        2        367        7  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     3,114        3,219        143        3,128        31        2,251        64  

Residential real estate

     111        110        7        111        1        387        4  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          36        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,491      $ 3,624      $ 163      $ 3,688      $ 34      $ 3,138      $ 75  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

   $ 95      $ 108      $ 4      $ 96      $ —        $ 97      $ —    

Commercial and industrial

     399        601        9        404        4        421        14  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     3,707        3,812        143        3,722        40        2,561        94  

Residential real estate

     208        296        7        212        3        493        10  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          36        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,409      $ 4,817      $ 163      $ 4,434      $ 47      $ 3,608      $ 118  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There was no troubled debt restructurings that occurred during the nine month period ended September 30, 2017.

There was one commercial real estate troubled debt restructuring during the nine month period ending September 30, 2016. The pre-modification and post-modification outstanding recorded investment was $2,091,000. The loan was modified for 2016, by reducing the interest rate as well as extending the term on the loan. The financial impact for the modification was $7,000 reduction in principal payments and $2,000 reduction in interest payments for the three month period. The financial impact for the modification was $10,000 reduction in principal payments and $2,000 reduction in interest payments for the nine month period.

There were no troubled debt restructurings that subsequently defaulted during the three and nine month periods ending September 30, 2016.

 

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Note 5. Reclassifications Out of Accumulated Other Comprehensive Income (a)

Amount Reclassified from Accumulated Other Comprehensive Income

 

Details about Accumulated Other

Comprehensive Income Components

   Three
Months Ended
September 30, 2017
    Three
Months Ended
September 30, 2016
   

Affected Line Item in the

Statement where Net Income is

Presented

(in thousands)

Unrealized gains and losses on available-for-sale securities

   $ 47     $ 19     Net gains on sales of investments
     (19     (7   Provision for income taxes
  

 

 

   

 

 

   
   $ 28     $ 12     Net income
  

 

 

   

 

 

   

Accretion of unrealized losses transferred

   $ (554   $ (809   Interest on securities held-to-maturity
     331       282     Provision for income taxes
  

 

 

   

 

 

   
   $ (223   $ (527   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

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

Actuarial gains (losses)

     (385 )(b)      (401 )(b)    Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (388     (404   Income before taxes
  

 

 

   

 

 

   
     155       162     Provision for income taxes
  

 

 

   

 

 

   
   $ (233   $ (242   Net income
  

 

 

   

 

 

   

Details about Accumulated Other

Comprehensive Income Components

   Nine
Months Ended
September 30, 2017
    Nine
Months Ended
September 30, 2016
   

Affected Line Item in the

Statement where Net Income is

Presented

(in thousands)

Unrealized gains and losses on available-for-sale securities

   $ 47     $ 64     Net gains on sales of investments
     (19     (25   Provision for income taxes
  

 

 

   

 

 

   
   $ 28     $ 39     Net income
  

 

 

   

 

 

   

Accretion of unrealized losses transferred

   $ (1,878   $ (3,490   Interest on securities held-to-maturity
     1,022       1,216     Provision for income taxes
  

 

 

   

 

 

   
   $ (856   $ (2,274   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

   $ (8 )(b)    $ (8 )(b)    Salaries and employee benefits

Actuarial gains (losses)

     (1,155 )(b)      (1,203 )(b)    Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (1,163     (1,211   Income before taxes
  

 

 

   

 

 

   
     465       484     Provision for income taxes
  

 

 

   

 

 

   
   $ (698   $ (727   Net income
  

 

 

   

 

 

   

 

(a) Amount in parentheses indicates reductions to net income.
(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Employee Benefits footnote (Note 7) for additional details).

 

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Note 6. Earnings per Share (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The Company had no common stock equivalents outstanding for the periods ended September 30, 2017 and 2016.

The following table is a reconciliation of basic EPS and diluted EPS.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in thousands except share and per share data)    2017      2016      2017      2016  

Basic EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 6,307      $ 5,094      $ 17,505      $ 14,165  

Net income, Class B

     1,716        1,392        4,771        3,869  

Denominator:

           

Weighted average shares outstanding, Class A

     3,605,829        3,600,729        3,603,429        3,600,729  

Weighted average shares outstanding, Class B

     1,962,080        1,967,180        1,964,480        1,967,180  

Basic EPS, Class A

   $ 1.75      $ 1.41      $ 4.86      $ 3.93  

Basic EPS, Class B

     0.87        0.71        2.43        1.97  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 6,307      $ 5,094      $ 17,505      $ 14,165  

Net income, Class B

     1,716        1,392        4,771        3,869  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     8,023        6,486        22,276        18,034  

Denominator:

           

Weighted average shares outstanding, basic, Class A

     3,605,829        3,600,729        3,603,429        3,600,729  

Weighted average shares outstanding, Class B

     1,962,080        1,967,180        1,964,480        1,967,180  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,567,909        5,567,909        5,567,909        5,567,909  

Weighted average shares outstanding, Class B

     1,962,080        1,967,180        1,964,480        1,967,180  

Diluted EPS, Class A

   $ 1.44      $ 1.16      $ 4.00      $ 3.24  

Diluted EPS, Class B

     0.87        0.71        2.43        1.97  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7. Employee Benefits

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

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

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

 

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

 

     Pension Benefits      Supplemental Insurance/
Retirement Plan
 
     2017      2016      2017      2016  
     (in thousands)  

Service cost

   $ 310      $ 318      $ 395      $ 455  

Interest

     362        340        345        334  

Expected return on plan assets

     (746      (694      —          —    

Recognized prior service cost (benefit)

     (26      (26      29        29  

Recognized net actuarial losses

     226        200        159        200  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 126      $ 138      $ 928      $ 1,018  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Pension Benefits      Supplemental Insurance/
Retirement Plan
 
     2017      2016      2017      2016  
     (in thousands)  

Service cost

   $ 930      $ 954      $ 1,184      $ 1,366  

Interest

     1,087        1,020        1,035        1,002  

Expected return on plan assets

     (2,238      (2,082      —          —    

Recognized prior service cost (benefit)

     (78      (78      87        87  

Recognized net actuarial losses

     678        600        477        600  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 379      $ 414      $ 2,783      $ 3,055  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contributions

The Company intends to contribute $1,000,000 to the Pension Plan in 2017. As of September 30, 2017, $750,000 has been contributed.

Note 8. Fair Value Measurements

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

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

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

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

 

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The results of the fair value hierarchy as of September 30, 2017, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

     Securities AFS Fair Value Measurements Using  
     Carrying
Value
     Quoted Prices
In Active
Markets for
Identical
Assets

(Level 1)
     Significant
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 
     (in thousands)  

U.S. Treasury

   $ 1,994      $ —        $ 1,994      $ —    

U.S. Government Sponsored Enterprises

     —          —          —          —    

SBA Backed Securities

     80,764        —          80,764        —    

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

     219,503        —          219,503        —    

Privately Issued Residential Mortgage-Backed Securities

     954        —          954        —    

Obligations Issued by States and Political Subdivisions

     79,245        —          —          79,245  

Other Debt Securities

     4,987        —          4,987        —    

Equity Securities

     343        343        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 387,790      $ 343      $ 308,202      $ 79,245  
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

   $ 134      $ —        $ —        $ 134  

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

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for the three and nine month periods ended September 30, 2017 amounted to $15,000 and $11,000, respectively.

There were no transfers between level 1, 2 and 3 for the nine months ended September 30, 2017. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2017.

 

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

 

Asset

   Fair Value      Valuation Technique   Unobservable Input   Unobservable Input
Value or Range

Securities AFS (4)

   $ 79,245      Discounted cash flow   Discount rate   0%-2% (3)

Impaired Loans

   $ 134      Appraisal of collateral (1)   Appraisal adjustments (2)   0%-30% discount

 

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

The changes in Level 3 securities for the three month period ended September 30, 2017 are shown in the table below:

 

     Auction Rate
Securities
     Obligations
Issued by States

& Political
Subdivisions
     Equity
Securities
     Total  
     (in thousands)  

Balance at December 31, 2016

   $ 4,298      $ 160,578      $ —        $ 164,876  

Purchases

     —          61,393        —          61,393  

Maturities and calls

     —          (146,869      —          (146,869

Amortization

     —          (155      —          (155

Changes in fair value

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2017

   $ 4,298      $ 74,947      $ —        $ 79,245  
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $79,655,000 at September 30, 2017 with an unrealized loss of $410,000. The securities in this category are generally municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The changes in Level 3 securities for the six month period ended September 30, 2016, are shown in the table below:

 

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

Balance at December 31, 2015

   $ 3,820      $ 153,140      $ 37      $ 156,997  

Purchases

     —          181,752        —          181,752  

Maturities and calls

     —          (159,116      (37      (159,153

Amortization

     —          (163      —          (163

Changes in fair value

     478        —          —          478  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2016

   $ 4,298      $ 175,613      $ —        $ 179,911  
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $180,315,000 at September 30, 2016 with an unrealized loss of $404,000. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

 

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The results of the fair value hierarchy as of December 31, 2016, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

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

U.S. Government Sponsored Enterprises

     24,952        —          24,952        —    

SBA Backed Securities

     57,767        —          57,767        —    

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

     243,325        —          243,325        —    

Privately Issued Residential Mortgage-Backed Securities

     1,109        —          1,109        —    

Obligations Issued by States and Political Subdivisions

     164,876        —          —          164,876  

Other Debt Securities

     4,924        —          4,924        —    

Equity Securities

     344        344        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 499,297      $ 344      $ 334,077      $ 164,876  
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

   $ 260      $ —        $ —        $ 260  

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

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for 2016 for the estimated credit loss amounted to ($135,000).

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2016. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2016.

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

 

Asset

  Fair Value    

Valuation Technique

  

Unobservable Input

 

Unobservable Input

Value or Range

Securities AFS (4)

  $ 164,876    

Discounted cash flow

  

Discount rate

  0%-1% (3)

Impaired Loans

  $ 260    

Appraisal of collateral (1)

  

Appraisal adjustments (2)

  0%-30% discount

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

 

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(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3) Weighted averages
(4) Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. There was one auction rate security whose fair value is based on the evaluation of the underlying issuer, prevailing interest rates and market liquidity.

Note 9. Fair Values of Financial Instruments

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

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

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

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

Loans Held-for-Sale: Fair value is measured using quoted market prices when available. These assets are typically categorized as Level 1. If quoted market prices are not available, comparable market values may be utilized. These assets are typically categorized as Level 2.

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

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

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

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

 

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The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2017 and December 31, 2016. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable.

 

September 30, 2017

   Carrying
Amount
     Estimated
Fair Value
     Fair Value
Measurements
Level 1 Inputs
     Level 2
Inputs
     Level 3
Inputs
 
     (in thousands)  

Financial assets:

              

Securities held-to-maturity

   $ 1,654,908      $ 1,637,497      $ —        $ 1,637,497      $ —    

Loans (1)

     2,086,949        2,059,983        —          —          2,059,983  

Financial liabilities:

              

Time deposits

     607,279        606,256        —          606,256        —    

Other borrowed funds

     358,000        359,305        —          359,305        —    

Subordinated debentures

     36,083        36,083        —          —          36,083  

December 31, 2016

                                  

Financial assets:

              

Securities held-to-maturity

   $ 1,653,986      $ 1,635,808      $ —        $ 1,635,808      $ —    

Loans (1)

     1,899,527        1,873,703        —          —          1,873,703  

Financial liabilities:

              

Time deposits

     478,359        480,133        —          480,133        —    

Other borrowed funds

     293,000        294,940        —          294,940        —    

Subordinated debentures

     36,083        36,083        —          —          36,083  

 

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

Note 10. Recent Accounting Developments

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interest with a Scope Exception. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2018. Management is currently assessing the applicability of ASU 2017-11 and has not determined the impact of the adoption, if any, as of September 30, 2017.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. FASB issued this Update to address the diversity in practice as well as the cost and complexity when applying the guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017. Management is currently assessing ASU 2017-09. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt. The FASB is issuing this ASU to amend the amortization period for certain purchased callable debt securities held at a premium. The FASB is shortening the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles (GAAP), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management is currently assessing the applicability of this ASU and has not determined the impact, if any, as of September 30, 2017.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this

 

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ASU require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. Management is currently assessing this ASU. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In February 2017, the FASB issued ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960) Defined Contribution Pension Plans (Topic 962) Health and Welfare Benefit Plans (Topic 965), Employee Benefit Plan Master Trust Reporting. The FASB has issued this ASU to improve the usefulness of the information reported to users of employee benefit plan financial statements and to provide clarity to preparers and auditors. This ASU relates primarily to the reporting by an employee benefit plan for its interest in a master trust. The amendments in this ASU clarify presentation requirements for a plan’s interest in a master trust and require more detailed disclosures of the plan’s interest in the master trust. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. Management is currently assessing this ASU and has not determined the impact, if any, as of September 30, 2017.

In February 2017, the FASB issued ASU 2017-05, Other Income Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). This ASU was issued to clarify the scope of Subtopic 610-20, and to add guidance for partial sales of nonfinancial assets. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017 Management is currently assessing this ASU. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted and application should be on a prospective basis. Management is currently assessing this ASU and has not determined the impact, if any, as of September 30, 2017.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing this ASU and has not determined the impact, if any, as of September 30, 2017.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The intention of this ASU is to provide additional clarification on specific issues brought forth by the FASB and the International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition in relation to Topic 606 and revenue recognition. This ASU is to have the same effective date as ASU 2015-14 which deferred the effective date of ASU 2014-09 to December 15, 2017. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. Since the issuance of Update 2014-09, the FASB has finalized various amendments to the standard that include corrections, improvements and timing modifications.

In July 2015, the FASB approved the deferral of the new standard’s effective date by one year. The new standard is effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.

 

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In 2017, we established a cross-functional implementation team consisting of representatives from across our business segments. We utilized a bottom-up approach to analyze the impact of the standard on our contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts. In addition, we identified and implemented appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard. The implementation team has reported the findings and progress of the project to management on a frequent basis over this past year.

We have been closely monitoring FASB activity related to the new standard. In the first nine months of 2017, we made significant progress toward completing our evaluation of the potential changes from adopting the new standard on our future financial reporting and disclosures. In the third quarter of 2017, we finalized our contract reviews. Based on our evaluation, we will use the modified retrospective transition method.

The Company is continuing to assess this ASU. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheet but recognize expenses on their income statements in a manner similar to today’s accounting. This ASU also eliminates today’s real estate-specific provisions for all companies. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. The Company is currently assessing this ASU and has not determined the impact, if any, as of September 30, 2017.

 

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

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At September 30, 2017, the Company had total assets of $4.6 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, businesses, and educational 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.

Net income for the nine months ended September 30, 2017, was $22,276,000 or $4.00 per Class A share diluted, an increase of 23.5% compared to net income of $18,034,000, or $3.24 per Class A share diluted, for the same period a year ago. For the quarter ended September 30, 2017, net income totaled $8,023,000 or $1.44 per Class A share diluted, an increase of 23.7% compared to net income of $6,486,000, or $1.16 per Class A share diluted, for the same period a year ago.

 

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

 

     Three Months Ended
September 30,
 
     2017      2016  

Basic EPS – Class A common

   $ 1.75      $ 1.41  

Basic EPS – Class B common

   $ 0.87      $ 0.71  

Diluted EPS – Class A common

   $ 1.44      $ 1.16  

Diluted EPS – Class B common

   $ 0.87      $ 0.71  
     Nine Months Ended
September 30,
 
     2017      2016  

Basic EPS – Class A common

   $ 4.86      $ 3.93  

Basic EPS – Class B common

   $ 2.43      $ 1.97  

Diluted EPS – Class A common

   $ 4.00      $ 3.24  

Diluted EPS – Class B common

   $ 2.43      $ 1.97  

Net interest income totaled $63,914,000 for the nine months ended September 30, 2017 compared to $55,320,000 for the same period in 2016. The 15.5% increase in net interest income for the period is primarily due to an increase in average earning assets and an increase in the net interest margin. The net interest margin increased from 2.15% on a fully taxable equivalent basis in 2016 to 2.24% for the same period in 2017. This was primarily the result of an increase in rates on earning assets and prepayment penalties collected. The average balances of earning assets increased by 9.6% combined with a similar increase in average deposits. Also, interest expense increased 20.1% primarily as a result of an increase in rates and an increase in deposit balances.

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

 

LOGO

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 primarily as a result of lower yielding loan originations. The margin increased during the first quarter of 2016 primarily as a result of an increase in rates on earning assets. The margin decreased during the second, third, and fourth quarters of 2016 primarily as a result of a decrease in rates on earning assets. The margin increased during the first, second and third quarters of 2017 primarily as a result of an increase in rates on earning assets. This increase was primarily the result of the yield on floating rate assets increasing as a result of recent increases in short term interest rates as well as an increase in prepayment penalties collected during the second quarter of 2017. Prepayment penalties collected amounted to $825,000 and contributed approximately seven basis points to the net interest margin for the second quarter. During the first, second, and third quarters of 2017, the Company has not seen a corresponding increase in short term rates on interest bearing liabilities.

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

The provision for loan losses increased by $165,000 from $1,175,000 for the nine months ended September 30, 2016 to $1,340,000 for the same period in 2017, primarily as a result of an increase in loan growth offset, somewhat, by

 

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changes in historical loss factors. Refer to the allowance for loan loss section of the management discussion and analysis for additional discussion. Non-performing assets totaled $1,598,000 at September 30, 2017, compared to $1,084,000 at December 31, 2016.

For the first nine months of 2017, the Company’s effective income tax rate was 5.6% compared to 0.2% for last year’s corresponding period. The effective income tax rate increased primarily as a result of an increase in taxable income.

During June 2016, the Company entered into a lease agreement to open a new branch located in Wellesley, Massachusetts. The Company closed its existing Wellesley branch and transferred the accounts to the new Wellesley branch which opened on December 19, 2016. On September 25, 2017 the Company purchased the new Wellesley location.

Recent Market Developments

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 improvements in private sector employment, industrial production and U.S. exports. Even though the U.S. economy is in its eighth year of expansion, the consensus forecast is for expansion through at least 2018. Short and medium-term risks to the outlook include uncertainty in the United States over potential fiscal policy changes and uncertainty in Europe with respect to the United Kingdom’s decision to leave the European Union. Long-term risks to the U.S. economy include the slowdown in productivity growth, which may pose a risk to the U.S. standard of living.

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 was required to be achieved by July 21, 2015. The conformance period for investments in and relationships with certain “legacy covered funds” was extended to July 21, 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. The 2016 Presidential election and resulting change to a Republican Administration created the possibility that some of the “reforms” contained in the Act may be repealed or modified. New reforms under discussion include the prospect of some type of regulatory burden relief for small banks which in this context might include the Company. The extent and consequences of any such changes can’t be currently assessed but at the present time the Company does not think it is likely that changes that may be made will have any material effect on the Company’s financial condition and results of operations.

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 included a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raised the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The implementation of the framework did not have a material impact on the Company’s financial condition or results of operations.

 

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Financial Condition

Loans

On September 30, 2017, total loans outstanding were $2,112,647,000, up by $188,714,000 from the total on December 31, 2016. At September 30, 2017, commercial real estate loans accounted for 34.8%, commercial and industrial accounted for 33.3%, and residential real estate loans, including home equity loans, accounted for 24.1% of total loans.

Commercial real estate loans increased to $735,844,000 at September 30, 2017 from $696,173,000 at December 31, 2016, primarily as a result of new loan originations. Residential real estate loans increased to $272,588,000 at September 30, 2017 from $241,357,000 at December 31, 2016, primarily as a result of new loan originations. Home equity loans increased to $237,094,000 at September 30, 2017 from $211,857,000 at December 31, 2016, primarily as a result of a home equity loan promotion.

Commercial and industrial loans increased to $702,646,000 at September 30, 2017 from $612,503,000 at December 31, 2016, primarily as a result of an increase in larger loan originations to large institutions. Construction loans increased to $16,779,000 at September 30, 2017 from $14,928,000 on December 31, 2016. Municipal loans decreased to $128,412,000 from $135,418,000, primarily as a result of payoffs of existing loans. In recent quarters, the Company has increased business to larger institutions, specifically, healthcare, higher education, and municipal organizations. Further discussion relating to changes in portfolio composition is discussed in the allowance for loan loss section of the management discussion and analysis.

Allowance for Loan Losses

The allowance for loan loss at September 30, 2017 was $25,698,000 as compared to $24,406,000 at December 31, 2016. The level of the allowance for loan losses to total loans was 1.22% at September 30, 2017 and 1.27% at December 31, 2016.

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 loans types as a percentage of the overall portfolio, has resulted in a decrease in the ratio of allowance for loan losses to total loans for 2016 and has continued into 2017. Also, during 2016 and the first nine months of 2017, the Company’s weighted average risk rating has decreased. Additionally, the Company has continued to increase its lending for large loans to large institutions with publicly available credit ratings. The historical loss allocation for these types of loans is low. This has contributed to the continued decrease in the ratio of allowance for loan losses to total loans for 2017.

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.

For a large loan to large institutions with publically available credit ratings the Company tracks these ratings. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2017.

 

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

Credit Rating:

  

Aaa – Aa3

   $ 365,441      $ 62,657      $ 45,371      $ 473,469  

A1 – A3

     247,253        7,770        128,743        383,766  

Baa1 – Baa3

     —          46,970        124,932        171,902  

Ba2

     —          8,165        —          8,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 612,694      $ 125,562      $ 299,046      $ 1,037,302  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit ratings issued by national organizations are presented in the following table at December 31, 2016.

 

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

Credit Rating:

  

Aaa – Aa3

   $ 334,674      $ 66,245      $ 6,596      $ 407,515  

A1 – A3

     188,777        33,365        129,423        351,565  

Baa1 – Baa3

     —          26,970        127,366        154,336  

Ba2

     —          3,610        —          3,610  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 523,451      $ 130,190      $ 263,385      $ 917,026  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

    

Three months ended

September 30,

    

Nine months ended

September 30,

 
     2017      2016      2017      2016  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 25,289      $ 23,863      $ 24,406      $ 23,075  

Loans charged off

     (95      (118      (292      (298

Recoveries on loans previously charged-off

     54        93        244        345  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries (charge-offs)

     (41      (25      (48      47  

Provision charged to expense

     450        375        1,340        1,175  

Reclassification to other liabilities *

     —          (5      —          (89
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 25,698      $ 24,208      $ 25,698      $ 24,208  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* The reclassification relates to allowance for loan loss allocations on unused commitments that have been reclassified to other liabiliites.

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

 

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Nonperforming Assets

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

 

     September 30
2017
    December 31,
2016
 
     (dollars in thousands)  

Nonaccruing loans

   $ 1,598     $ 1,084  

Total nonperforming assets

   $ 1,598     $ 1,084  

Loans past due 90 days or more and still accruing

   $ —       $ —    

Nonaccruing loans as a percentage of total loans

     0.08     0.06

Nonperforming assets as a percentage of total assets

     0.04     0.02

Accruing troubled debt restructures

   $ 2,843     $ 3,526  

Cash and Cash Equivalents

Cash and cash equivalents increased from $236,151,000 to $253,133,000 during the first nine months of 2017. This increase was primarily attributable to increased temporary borrowings.

Short-term Investments

Short-term investments decreased by $3,183,000, as a result of maturities during the first nine months of 2017.

Investments

Management continually evaluates its investment alternatives in order to properly manage the overall balance sheet mix. The timing of purchases, sales and reinvestments, if any, will be based on various factors including expectation of movements in market interest rates, deposit flows and loan demand. Notwithstanding these events, it is the intent of management to grow the earning asset base mainly through loan originations while funding this growth through a mix of retail deposits, FHLB advances, and retail repurchase agreements.

Securities Available-for-Sale (at Fair Value)

The securities available-for-sale portfolio totaled $387,790,000 at September 30, 2017, a decrease of 22.3% from December 31, 2016. The portfolio decreased mainly as a result of calls and maturities of securities available-for-sale totaling $211,576,000 for the nine months ended September 30, 2017. The calls and maturities were offset, somewhat, by purchases of $111,777,000. The portfolio is concentrated in United States Government Sponsored Enterprises, Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 5.8 years.

At September 30, 2017, 79.5% of the Company’s securities available-for-sale are classified as Level 2. The fair values of these securities are generally obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored.

Securities available-for-sale totaling $79,245,000 or 20.4% of securities available-for-sale are classified as Level 3. These securities are generally municipal securities with no observable fair value. The securities are carried at cost which approximates fair value. A periodic review of underlying financial statements and credit ratings is performed to assess the appropriateness of these valuations.

During the first nine months of 2017, net unrealized losses on the securities available-for-sale decreased to $214,000 from a net unrealized loss of $923,000 at December 31, 2016. The following table sets forth the fair value of securities available-for-sale at the dates indicated.

 

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     September 30,      December 31,  
     2017      2016  
     (in thousands)  

U.S. Treasury

   $ 1,994      $ 2,000  

U.S. Government Sponsored Enterprises

     —          24,952  

Small Business Administration

     80,764        57,767  

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

     219,503        243,325  

Privately Issued Residential Mortgage- backed Securities

     954        1,109  

Obligations issued by States and Political Subdivisions

     79,245        164,876  

Other Debt Securities

     4,987        4,924  

Equity Securities

     343        344  
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 387,790      $ 499,297  
  

 

 

    

 

 

 

The Company realized gross gains of $47,000 from the proceeds of $18,133,000 from the sales of available-for-sale securities for the nine months ended September 30, 2017. The Company realized gross gains of $52,000 from the proceeds of $2,376,000 from the sales of available-for-sales securities for the nine months ended September 30, 2016.

Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $1,654,908,000 on September 30, 2017, an increase of 0.1% from December 31, 2016. Purchases of securities held-to-maturity totaled $230,813,000 for the nine months ended September 30, 2017. The purchases were offset, by calls and maturities of $231,953,000. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 4.2 years. The following table sets forth the fair value of securities held-to-maturity at the dates indicated.

 

     September 30,
2017
     December 31,
2016
 
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 114,527      $ 148,326  

SBA Backed Securities

     58,844        46,140  

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

     1,481,537        1,459,520  
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $ 1,654,908      $ 1,653,986  
  

 

 

    

 

 

 

There were no sales of held-to-maturity securities for the nine months ended September 30, 2017. The Company realized gross gains of $12,000 from the proceeds of $192,000 from the sales of securities held-to-maturity for the nine months ended September 30, 2016. The sales of securities held-to-maturity relate to certain mortgage backed securities for which the Company had previously collected a substantial portion of its principal investment.

At September 30, 2017 and December 31, 2016, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. There were no sales of investments for the nine months ending September 30, 2017.

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

Federal Home Loan Bank of Boston Stock

The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis in the stock. During the first nine months of 2017, the FHLBB redeemed $7,175,000 of FHLBB stock and the Company purchased $8,070,000 of FHLBB stock. As of September 30, 2017, no impairment has been recognized.

 

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Deposits and Borrowed Funds

On September 30, 2017, deposits totaled $3,605,682,000, representing a 1.3% decrease from December 31, 2016. Total deposits decreased primarily as a result of decreases in money market accounts and savings and NOW deposits. Money market deposits decreased mainly as a result of decreased corporate account balances. Savings and NOW deposits decreased, mainly as a result of decreased personal and municipal deposits. Time deposits increased primarily as a result of increased personal, corporate, and municipal time deposits as the Company has offered competitive rates for these types of deposits.

Borrowed funds totaled $586,848,000 at September 30, 2017 compared to $475,280,000 at December 31, 2016. Borrowed funds increased mainly as a result of an increase in short-term FHLBB borrowings and securities sold under agreements to repurchase. Securities sold under agreements to repurchase increased primarily as a result of increases in corporate accounts.

Stockholders’ Equity

At September 30, 2017, total equity was $262,648,000 compared to $240,041,000 at December 31, 2016. The Company’s equity increased primarily as a result of earnings and a decrease in other comprehensive loss, net of taxes, offset somewhat by dividends paid. Other comprehensive loss, net of taxes, decreased as a result of a decrease in unrealized losses on securities available-for-sale, unrealized losses on securities transferred from available-for-sale to held-to-maturity and amortization of the pension liability. The Company’s leverage ratio stood at 6.56% at September 30, 2017, compared to 6.28% at December 31, 2016. The increase in the leverage ratio was due to an increase in stockholders’ equity, offset somewhat by an increase in quarterly average assets. Book value as of September 30, 2017 was $47.17 per share compared to $43.11 at December 31, 2016.

 

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Results of Operations

The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid o