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EX-32.2 - EX-32.2 - CENTURY BANCORP INC | d500608dex322.htm |
EX-32.1 - EX-32.1 - CENTURY BANCORP INC | d500608dex321.htm |
EX-31.2 - EX-31.2 - CENTURY BANCORP INC | d500608dex312.htm |
EX-31.1 - EX-31.1 - CENTURY BANCORP INC | d500608dex311.htm |
EX-23.1 - EX-23.1 - CENTURY BANCORP INC | d500608dex231.htm |
EX-21 - EX-21 - CENTURY BANCORP INC | d500608dex21.htm |
EX-10.3 - EX-10.3 - CENTURY BANCORP INC | d500608dex103.htm |
EX-4.2 - EX-4.2 - CENTURY BANCORP INC | d500608dex42.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-15752
CENTURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS | 04-2498617 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification number) | |
400 MYSTIC AVENUE, MEDFORD, MA | 02155 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number including area code:
(781) 391-4000
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $1.00 par value | Nasdaq Global Market | |
(Title of class) | (Name of Exchange) |
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
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 Act). Yes ☐ No ☒
State the aggregate market value of the registrants voting and nonvoting stock held by nonaffiliates, computed using the closing price as reported on Nasdaq as of June 30, 2017 was $230,477,369.
Indicate the number of shares outstanding of each of the registrants classes of common stock as of February 28, 2018:
Class A Common Stock, $1.00 par value 3,607,429 Shares
Class B Common Stock, $1.00 par value 1,960,480 Shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
(1) | Portions of the Registrants Annual Report to Stockholders for the fiscal year ended December 31, 2017 are incorporated into Part II, Items 5-8 of this Form 10-K. |
Table of Contents
CENTURY BANCORP INC.
FORM 10-K
Page | ||||||
PART I | ||||||
ITEM 1 | 1-5 | |||||
ITEM 1A | 5 | |||||
ITEM 1B | 7 | |||||
ITEM 2 | 7 | |||||
ITEM 3 | 7 | |||||
ITEM 4 | 8 | |||||
PART II | ||||||
ITEM 5 | 9-10 | |||||
ITEM 6 | 10 | |||||
ITEM 7 | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
10 | ||||
ITEM 7A | 10 | |||||
ITEM 8 | 10 | |||||
ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
10 | ||||
ITEM 9A | 11 | |||||
ITEM 9B | 11 | |||||
PART III | ||||||
ITEM 10 | 99-103 | |||||
ITEM 11 | 104-113 | |||||
ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
114 | ||||
ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
115 | ||||
ITEM 14 | 115 | |||||
PART IV | ||||||
ITEM 15 | 116 | |||||
ITEM 16 | 118 | |||||
SIGNATURES | 119 |
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ITEM 1. | BUSINESS |
The Company
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the Company) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the Bank): Century Bank and Trust Company formed in 1969. At December 31, 2017, the Company had total assets of $4.8 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 Banks customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher education institutions throughout Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York.
The Companys results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.
The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.
The Company has municipal cash management client engagements in Massachusetts, New Hampshire and Rhode Island comprised of approximately 250 government entities.
Availability of Company Filings
Under the Securities Exchange Act of 1934, Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission (the SEC). The public may read and copy any materials filed with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The Company electronically files with the SEC its periodic and current reports, as well as other filings it makes with the SEC from time to time. The SEC maintains an Internet site that contains reports and other information regarding issuers, including the Company, that file electronically with the SEC, at www.sec.gov, in which all forms filed electronically may be accessed. Additionally, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and additional shareholder information are available free of charge on the Companys website: www.centurybank.com.
Employees
As of December 31, 2017, the Company had 385 full-time and 62 part-time employees. The Companys employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good.
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Financial Services Modernization
On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act (Gramm-Leach) which significantly altered banking laws in the United States. Gramm-Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm Leach, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies were repealed. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking.
In order to engage in these financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a financial holding company by demonstrating that each of its bank subsidiaries is well capitalized, well managed, and has at least a satisfactory rating under the Community Reinvestment Act of 1977 (the CRA). The Company has not elected to become a financial holding company under Gramm-Leach.
These financial activities authorized by Gramm-Leach may also be engaged in by a financial subsidiary of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and any bank affiliates) to be well capitalized and well managed; the aggregate consolidated assets of all of that banks financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if the bank is one of the 100 largest banks, it must meet certain financial rating or other comparable requirements. The Company does not currently conduct activities through a financial subsidiary.
Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks financial subsidiaries, the SEC will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers nonpublic, personal information.
Holding Company Regulation
The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the Holding Company Act), and is registered as such with the Board of Governors of the Federal Reserve Bank (the FRB), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (i) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the companys consolidated net worth.
The Holding Company Act prohibits a bank holding company, with certain exceptions, from (i) acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any company which is
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not a bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks, or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The Company and its subsidiaries are examined by federal and state regulators. The FRB has regulatory authority over holding company activities and performed a review of the Company and its subsidiaries as of September 2016.
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, also known as the International Money Laundering Abatement and Anti-Terrorism Act of 2001, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the Gramm-Leach Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Holding Company Act or Bank Merger Act.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection and enhanced and timely disclosure of corporate information. The SEC has adopted a substantial number of implementing rules and the Financial Industry Regulatory Authority (FINRA) has adopted corporate governance rules that have been approved by the SEC and are applicable to the Company. The changes are intended to allow stockholders to monitor more effectively the performance of companies and management. As directed by Section 302(a) of the Sarbanes-Oxley Act, the Companys Chief Executive Officer and Chief Financial Officer are each required to certify that the Companys quarterly and annual reports do not contain any untrue statement of a material fact. This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Companys disclosure controls and procedures and internal controls over financial reporting; that they have made certain disclosures to the Companys auditors and the Board of Directors about the Companys disclosure controls and procedures and internal control over financial reporting, and that they have included information in the Companys quarterly and annual reports about their evaluation of the Companys disclosure controls and procedures and internal control over financial reporting, and whether there have been significant changes in the Companys internal disclosure controls and procedures or in other factors that could significantly affect such controls and procedures subsequent to the evaluation and whether there have been any significant changes in the Companys internal control over financial reporting that have materially affected or reasonably likely to materially affect the Companys internal control over financial reporting, and compliance with certain other disclosure objectives. Section 906 of the Sarbanes-Oxley Act requires an additional certification that each periodic report containing financial statements fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 and that the information in the report fairly presents, in all material respects, the financial conditions and results of operations of the Company.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad
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in scope, affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadened the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012. In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called Volcker Rule, (the Rule) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance must be achieved by July 21, 2015. The conformance period for investments in and relationships with certain legacy covered funds was extended to July 21, 2016 and was extended further to July 31, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Companys financial condition or results of operation.
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act take effect on January 1, 2018. The Tax Act lowers the Companys federal tax rate from 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (AMT) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards.
Deposit Insurance Premiums
The Banks deposits have the benefit of FDIC insurance up to applicable limits. The FDICs Deposit Insurance Fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of assets that it holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.
On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. The Companys quarterly risk-based deposit insurance assessments were paid from this amount until June 30, 2013. The Company received a refund of $2.4 million of prepaid FDIC assessments in June 2013.
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In February 2011, the FDIC approved a rule to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The rule has kept the overall amount collected from the industry very close to the amount collected prior to the new calculation.
Risk-Based Capital Guidelines
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled Basel III: A global regulatory framework for more resilient banks and banking systems (Basel III). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule that came into effect in January 2015 sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raises the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The implementation of the framework did not have a material impact on the Companys financial condition or results of operations.
Competition
The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. A number of these competitors are not subject to the regulatory oversight that the Company is subject to, which increases these competitors flexibility.
Forward-Looking Statements
Certain statements contained herein are not based on historical facts and are forward-looking statements within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Companys control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as may, will, believe, expect, estimate, anticipate, continue or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
ITEM 1A. | RISK FACTORS |
The risk factors that may affect the Companys performance and results of operations include the following:
(i) the Companys business is dependent upon general economic conditions in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York. The national and local economies may adversely affect the Companys performance and results of operations;
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(ii) the Companys earnings depend, to a great extent, upon the level of net interest income generated by the Company, and therefore the Companys results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve;
(iii) the banking business is highly competitive and the profitability of the Company depends upon the Companys ability to attract loans and deposits in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York, where the Company competes with a variety of traditional banking companies, some of which have vastly greater resources, and nontraditional institutions such as credit unions and finance companies; .
(iv) at December 31, 2017, approximately 68.8% of the Companys loan portfolio was comprised of commercial and commercial real estate loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans;
(v) at December 31, 2017, approximately 24.6% of the Companys loan portfolio was comprised of residential real estate and home equity loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk and the value of underlying collateral. Accordingly, the Companys profitability may be negatively impacted by errors in risk analyses, by loan defaults and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions;
(vi) economic conditions and interest rate risk could adversely impact the fair value and the ultimate collectibility of the Companys investments. Should an investment be deemed other than temporarily impaired, the Company would be required to writedown the carrying value of the investment through earnings. Such writedown(s) may have a material adverse effect on the Companys financial condition and results of operations;
(vii) writedown of goodwill and other identifiable intangible assets would negatively impact our financial condition and results of operations. At December 31, 2017, our goodwill and other identifiable intangible assets were approximately $2.7 million;
(viii) acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States of America generally and in the Companys markets, which could adversely affect the Companys financial performance and that of the Companys borrowers and on the financial markets and the price of the Companys Class A common stock;
(ix) changes in the extensive laws, regulations and policies governing companies generally and bank holding companies and their subsidiaries, such as the Act and the Tax Act, could alter the Companys business environment or affect the Companys operations;
(x) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent to secure bank and customer financial information, could present operational issues, require significant capital spending or impact the Companys reputation;
(xi) evolving information technologies, the need to mitigate against and react to cyber-security risks and electronic fraud risks require significant resources and notwithstanding our investment in resources, we remain subject to cyber security risks and electronic fraud;
(xii) the Companys loan customers may not repay loans according to their terms, and the collateral securing the payment of loans may be insufficient to assure repayment or cover losses. If loan customers fail to repay loans according to the terms of the loans, the Company may experience significant credit losses which could have a material adverse effect on its operating results and capital ratios;
(xiii) the Company is subject to extensive regulation, supervision and examination. Any change in the laws or regulations or failure by the Company to comply with applicable law and regulation, or a change in regulators supervisory policies or examination procedures, whether by the Massachusetts Commissioner of
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Banks, the FDIC, the Federal Reserve Board, other state or federal regulators, the United States Congress, or the Massachusetts legislature could have a material adverse effect on the Companys business, financial condition, results of operations, and cash flows. Changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters, could also impact the Companys financial results; and
These factors, as well as general economic and market conditions in the United States of America, may materially and adversely affect the Companys performance, results of operations and the market price of shares of the Companys Class A common stock.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
No written comments received by the Company from the SEC regarding the Companys periodic or current reports remain unresolved.
ITEM 2. | PROPERTIES |
The Company owns its main banking office, headquarters, and operations center in Medford, Massachusetts, which were expanded in 2004, and 11 of the 26 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2018 to 2028. The Company believes that its banking offices are in good condition.
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.
ITEM 3. | LEGAL PROCEEDINGS |
The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Companys consolidated financial position.
On September 7, 2017, Crimson Galeria Limited Partnership, Raj & Raj, LLC, Harvard Square Holdings LLC, and Charles River Holdings LLC (collectively, the Plaintiffs) filed suit in the United States District Court for the District of Massachusetts against the Attorney General of the Commonwealth of Massachusetts, the Massachusetts Department of Public Health, the City of Cambridge, the Town of Georgetown, as well as against the Bank, Healthy Pharms, Inc., (Healthy Pharms), Timbuktu Real Estate, LLC, Paul Overgaag, Nathaniel Averill, 4Front Advisors, LLC, 4Front Holdings LLC, Kristopher T. Krane, 3 Brothers Real Estate, LLC, Red Line Management, LLC, unspecified insurance providers to certain Plaintiffs, Tomolly, Inc., and (collectively, the Defendants).
The Plaintiffs allege that they own property in Cambridge, MA, and claim that the value and use of their property will be impaired by Healthy Pharms decision to open a registered medicinal marijuana dispensary in abutting or nearby situated property. The Plaintiffs further allege that the Bank has a banking relationship with Healthy Pharms and that, by entering into such relationship, the Bank conspired with Healthy Pharms to violate the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. The Plaintiffs seek unspecified treble damages and attorneys costs and fees, as well as injunctive and declaratory relief.
The Company believes that the claims and allegations against the Bank set forth in the complaint are without merit, and the Company and the Bank intend to vigorously defend against them.
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ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(a) The Class A Common Stock of the Company is traded on the NASDAQ National Global Market under the symbol CNBKA. The price range of the Companys Class A common stock since January 1, 2016 is shown on page 14. The Companys Class B Common Stock is not traded on any national securities exchange or other public trading market.
The shares of Class A Common Stock are generally not entitled to vote on any matter, including in the election of Company Directors, but, in limited circumstances, may be entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of the Companys Class B Common Stock, voting as a separate class, is required to approve certain extraordinary corporate transactions, the holders of Class B Common Stock have the power to prevent any takeover of the Company not approved by them.
(b) Approximate number of equity security holders as of December 31, 2017:
Class A Common Stock |
1,025 | |||
Class B Common Stock |
175 |
(c) Under the Companys Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.
The following table shows the dividends paid by the Company on the Class A and Class B Common Stock for the periods indicated.
Class A | Class B | |||||||
2016 |
||||||||
First quarter |
$ | 0.12 | $ | 0.06 | ||||
Second quarter |
0.12 | 0.06 | ||||||
Third quarter |
0.12 | 0.06 | ||||||
Fourth quarter |
0.12 | 0.06 | ||||||
2017 |
||||||||
First quarter |
$ | 0.12 | $ | 0.06 | ||||
Second quarter |
0.12 | 0.06 | ||||||
Third quarter |
0.12 | 0.06 | ||||||
Fourth quarter |
0.12 | 0.06 |
The Companys ability to pay dividends on its shares depends generally on dividends it receives from the Bank. Both Massachusetts and federal law limit the payment of dividends by the Bank to the Company. Under FDIC regulations and applicable Massachusetts law, the dollar amount of dividends and any other capital distributions that the Bank may make depends upon its capital position and recent net income. Generally, so long as the Bank remains adequately capitalized, it may potentially make capital distributions during any calendar year equal to up to 100% of net income for the year to date plus retained net income for the two preceding years. However, if the Banks capital becomes impaired or the FDIC or Commissioner otherwise determines that the Bank should conserve capital, the Bank may be prohibited or otherwise limited from paying any dividends or making any other capital distributions.
9
Table of Contents
The Federal Reserve Board also has authority to prohibit dividends by bank holding companies such as the Company, if their actions constitute unsafe or unsound practices. Prior to the recent financial crisis, the Federal Reserve Board issued a policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Boards view that a bank holding company should pay cash dividends only to the extent that, (1) the companys net income for the past year is sufficient to cover the cash dividends, (2) the rate of earnings retention is consistent with the companys capital needs, asset quality, and overall financial condition, and (3) the minimum regulatory capital adequacy ratios are met. It is also the Federal Reserve Boards policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries. It is expected that the Federal Reserve Board will be more rather than less restrictive for the foreseeable future about dividend practices.
(d) The following schedule provides information with respect to the Companys equity compensation plans under which shares of Class A Common Stock are authorized for issuance as of December 31, 2017:
Equity Compensation Plan Information | ||||||||||||
Plan Category |
Number of Shares to be Issued Upon Exercise of Outstanding Options (a) |
Weighted-Average Exercise Price of Outstanding Options (b) |
Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in Column (a)) ( c) |
|||||||||
Equity compensation plans approved by |
| $ | | 233,934 | ||||||||
Equity compensation plans not approved by |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total |
| $ | | 233,934 |
(e) The performance graph information required herein is shown on page 13.
ITEM 6. | SELECTED FINANCIAL DATA |
The information required herein is shown on pages 13 through 15.
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
The information required herein is shown on pages 16 through 39.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information required herein is shown on pages 37.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required herein is shown on pages 40 through 95.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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ITEM 9A. | CONTROLS AND PROCEDURES |
The Companys principal executive officer and principal financial officer have evaluated the Companys disclosure controls and procedures as of December 31, 2017. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Companys disclosure controls and procedures are effective. The Companys disclosure controls and procedures also effectively ensure that information required to be disclosed in the Companys filings and submissions with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is accumulated and reported to Company management (including the principal executive officer and principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal control over financial reporting and there have been no changes that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting or in other factors that could significantly affect its internal control over financial reporting.
On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released an updated version of its Internal Control Integrated Framework (2013) (2013 Framework). The 2013 Frameworks internal control components (i.e., control environment, risk assessment, control activities, information and communication, and monitoring activities) remain predominantly the same as those in the 1992 Framework. However, the 2013 Framework was expanded to include 17 principles which must be present and functioning in order to have an effective system of internal controls. The Company implemented the 2013 Framework effective December 31, 2014.
Managements report on internal control over financial reporting is shown on page 98. The audit report of the registered public accounting firm is shown on page 97.
ITEM 9B. | OTHER INFORMATION |
None.
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FINANCIAL STATEMENTS
13 | ||||
Managements Discussion and Analysis of Results of Operations and Financial Condition |
16 | |||
40 | ||||
41 | ||||
42 | ||||
43 | ||||
44 | ||||
45 | ||||
96 | ||||
Managements Report on Internal Control Over Financial Reporting |
98 |
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2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(dollars in thousands, except share data) | ||||||||||||||||||||
FOR THE YEAR |
||||||||||||||||||||
Interest income |
$ | 113,436 | $ | 96,699 | $ | 90,093 | $ | 85,371 | $ | 79,765 | ||||||||||
Interest expense |
27,820 | 22,617 | 20,134 | 19,136 | 18,805 | |||||||||||||||
|
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|
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|
|
|
|
|
|
|||||||||||
Net interest income |
85,616 | 74,082 | 69,959 | 66,235 | 60,960 | |||||||||||||||
Provision for loan losses |
1,790 | 1,375 | 200 | 2,050 | 2,710 | |||||||||||||||
|
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|
|
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|
|
|
|
|||||||||||
Net interest income after provision for loan losses |
83,826 | 72,707 | 69,759 | 64,185 | 58,250 | |||||||||||||||
Other operating income |
16,552 | 16,222 | 15,993 | 15,271 | 18,615 | |||||||||||||||
Operating expenses |
67,119 | 64,757 | 62,198 | 56,730 | 55,812 | |||||||||||||||
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|
|
|
|||||||||||
Income before income taxes |
33,259 | 24,172 | 23,554 | 22,726 | 21,053 | |||||||||||||||
Provision for income taxes |
10,958 | (362 | ) | 533 | 866 | 1,007 | ||||||||||||||
|
|
|
|
|
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|
|
|
|
|||||||||||
Net income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Core earnings Non-GAAP(1) |
$ | 30,749 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
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|
|||||||||||
Average shares outstanding Class A, basic |
3,604,029 | 3,600,729 | 3,600,729 | 3,591,732 | 3,575,683 | |||||||||||||||
Average shares outstanding Class B, basic |
1,963,880 | 1,967,180 | 1,967,180 | 1,969,030 | 1,980,855 | |||||||||||||||
Average shares outstanding Class A, diluted |
5,567,909 | 5,567,909 | 5,567,909 | 5,562,209 | 5,557,693 | |||||||||||||||
Average shares outstanding Class B, diluted |
1,963,880 | 1,967,180 | 1,967,180 | 1,969,030 | 1,980,855 | |||||||||||||||
Total shares outstanding at year-end |
5,567,909 | 5,567,909 | 5,567,909 | 5,567,909 | 5,556,584 | |||||||||||||||
Earnings per share: |
||||||||||||||||||||
Basic, Class A |
$ | 4.86 | $ | 5.35 | $ | 5.02 | $ | 4.78 | $ | 4.39 | ||||||||||
Basic, Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 | $ | 2.39 | $ | 2.19 | ||||||||||
Diluted, Class A |
$ | 4.01 | $ | 4.41 | $ | 4.13 | $ | 3.93 | $ | 3.61 | ||||||||||
Diluted, Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 | $ | 2.39 | $ | 2.19 | ||||||||||
Dividend payout ratio Non-GAAP(1) |
9.9 | % | 9.0 | % | 9.6 | % | 10.0 | % | 10.9 | % | ||||||||||
AT YEAR-END |
||||||||||||||||||||
Assets |
$ | 4,785,572 | $ | 4,462,608 | $ | 3,947,441 | $ | 3,624,036 | $ | 3,431,154 | ||||||||||
Loans |
2,175,944 | 1,923,933 | 1,731,536 | 1,331,366 | 1,264,763 | |||||||||||||||
Deposits |
3,916,967 | 3,653,218 | 3,075,060 | 2,737,591 | 2,715,839 | |||||||||||||||
Stockholders equity |
260,297 | 240,041 | 214,544 | 192,500 | 176,472 | |||||||||||||||
Book value per share |
$ | 46.75 | $ | 43.11 | $ | 38.53 | $ | 34.57 | $ | 31.76 | ||||||||||
SELECTED FINANCIAL PERCENTAGES |
||||||||||||||||||||
Return on average assets |
0.48 | % | 0.57 | % | 0.59 | % | 0.61 | % | 0.60 | % | ||||||||||
Return on average stockholders equity |
8.75 | % | 10.80 | % | 11.26 | % | 11.57 | % | 11.58 | % | ||||||||||
Net interest margin, taxable equivalent |
2.25 | % | 2.12 | % | 2.18 | % | 2.22 | % | 2.21 | % | ||||||||||
Net (recoveries) charge-offs as a percent of average loans |
0.00 | % | 0.00 | % | (0.04 | )% | 0.05 | % | 0.08 | % | ||||||||||
Average stockholders equity to average assets |
5.50 | % | 5.29 | % | 5.25 | % | 5.27 | % | 5.22 | % | ||||||||||
Efficiency ratio Non-GAAP(1) |
57.8 | % | 62.7 | % | 64.1 | % | 62.0 | % | 63.0 | % |
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Financial Highlights (Continued)
(1) | Non-GAAP Financial Measures are reconciled in the following tables: |
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Calculation of Efficiency Ratio: |
||||||||||||||||||||
Total Operating Expenses (numerator) |
$ | 67,119 | $ | 64,757 | $ | 62,198 | $ | 56,730 | $ | 55,812 | ||||||||||
|
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|
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|
|
|
|||||||||||
Net Interest Income |
$ | 85,616 | $ | 74,082 | $ | 69,959 | $ | 66,235 | $ | 60,960 | ||||||||||
Total Other Operating Income |
16,552 | 16,222 | 15,993 | 15,271 | 18,615 | |||||||||||||||
Tax Equivalent Adjustment |
13,979 | 12,917 | 11,140 | 10,033 | 8,984 | |||||||||||||||
|
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|
|
|
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|
|
|||||||||||
Total Income (denominator) |
$ | 116,147 | $ | 103,221 | $ | 97,092 | $ | 91,539 | $ | 88,559 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Efficiency Ratio, Year Non-GAAP |
57.8 | % | 62.7 | % | 64.1 | % | 62.0 | % | 63.0 | % | ||||||||||
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|||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Calculation of Dividend Payout Ratio: |
||||||||||||||||||||
Dividends Paid (numerator) |
$ | 2,200 | $ | 2,201 | $ | 2,200 | $ | 2,196 | $ | 2,191 | ||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Net Income (denominator) |
$ | 22,301 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Dividend Payout Ratio Non-GAAP |
9.9 | % | 9.0 | % | 9.6 | % | 10.0 | % | 10.9 | % | ||||||||||
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2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Calculation of core earnings: |
||||||||||||||||||||
Net Income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
|
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|||||||||||
Add: Deferred Tax Remeasurement Charge |
8,448 | | | | | |||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||
Core earnings Non-GAAP |
$ | 30,749 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
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|
Per Share Data 2017, Quarter Ended |
December 31, | September 30, | June 30, | March 31, | ||||||||||||
Market price range (Class A) |
||||||||||||||||
High |
$ | 89.40 | $ | 81.10 | $ | 66.65 | $ | 64.87 | ||||||||
Low |
77.85 | 61.95 | 53.35 | 58.55 | ||||||||||||
Dividends Class A |
0.12 | 0.12 | 0.12 | 0.12 | ||||||||||||
Dividends Class B |
0.06 | 0.06 | 0.06 | 0.06 | ||||||||||||
2016, Quarter Ended |
December 31, | September 30, | June 30, | March 31, | ||||||||||||
Market price range (Class A) |
||||||||||||||||
High |
$ | 62.60 | $ | 45.45 | $ | 43.24 | $ | 43.96 | ||||||||
Low |
44.95 | 41.41 | 38.75 | 38.61 | ||||||||||||
Dividends Class A |
0.12 | 0.12 | 0.12 | 0.12 | ||||||||||||
Dividends Class B |
0.06 | 0.06 | 0.06 | 0.06 |
The stock performance graph below compares the cumulative total shareholder return of the Companys Class A Common Stock from December 31, 2012 to December 31, 2017 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used.
14
Table of Contents
Financial Highlights (Continued)
Comparison of Five-Year
Cumulative Total Return*
Value of $100 Invested on December 31, 2012 at: | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||
Century Bancorp, Inc. |
$ | 102.35 | $ | 124.97 | $ | 137.17 | $ | 191.38 | $ | 251.31 | ||||||||||
NASDAQ Banks |
136.62 | 152.78 | 156.15 | 197.60 | 233.94 | |||||||||||||||
NASDAQ U.S. |
140.12 | 160.78 | 171.97 | 187.22 | 242.71 |
* | Assumes that the value of the investment in the Companys Common Stock and each index was $100 on December 31, 2012 and that all dividends were reinvested. |
15
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are forward-looking statements within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Companys control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as may, will, believe, expect, estimate, anticipate, continue or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
RECENT MARKET DEVELOPMENTS
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 has been 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 Companys financial condition or results of operation.
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled Basel III: A global regulatory framework for more resilient banks and banking systems (Basel III). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule
16
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
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 Companys financial condition or results of operations.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act takes effect on January 1, 2018. The Tax Act lowers the Companys federal tax rate from 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (AMT) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards. Tax Act changes for individuals include lower tax rates, mortgage interest and state and local tax limitations as well as an increase in the standard deduction, among others.
OVERVIEW
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the Company) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the Bank): Century Bank and Trust Company formed in 1969. At December 31, 2017, the Company had total assets of $4.8 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 Banks customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher education institutions throughout Massachusetts, New Hampshire, Rhode Island, Connecticut and New York.
The Companys 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 years, 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 comprised of approximately 250 government entities.
17
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
The Company had net income of $22,301,000 for the year ended December 31, 2017, compared with net income of $24,534,000 for the year ended December 31, 2016 and net income of $23,021,000 for the year ended December 31, 2015. Class A diluted earnings per share were $4.01 in 2017 compared to $4.41 in 2016 and compared to $4.13 in 2015.
During 2017, the Companys earnings were negatively impacted by a reduction in the value of its net deferred tax asset resulting in a charge of $8.4 million to income tax expense. This was the result of the enactment of the Tax Act on December 22, 2017, which lowered the Companys federal tax rate from 34% to 21%. During 2017 and 2016, the Companys earnings were positively impacted primarily by an increase in net interest income. This increase was primarily due to an increase in earning assets. Also contributing to the increase in earnings for 2016 was a decrease in the provision for loan losses. This was primarily the result of changes in the risk profile of the Companys new loan originations, related methodology enhancements to address these changes, as well as net recoveries being realized during the year. During 2016 and 2015, the U.S. economy experienced a low short-term rate environment. The lower short-term rates negatively impacted the net interest margin as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits.
Earnings per share (EPS) for each class of stock and for each year ended December 31, is as follows:
2017 | 2016 | 2015 | ||||||||||
Basic EPS Class A common |
$ | 4.86 | $ | 5.35 | $ | 5.02 | ||||||
Basic EPS Class B common |
$ | 2.43 | $ | 2.68 | $ | 2.51 | ||||||
Diluted EPS Class A common |
$ | 4.01 | $ | 4.41 | $ | 4.13 | ||||||
Diluted EPS Class B common |
$ | 2.43 | $ | 2.68 | $ | 2.51 |
The trends in the net interest margin are illustrated in the graph below:
Net Interest Margin
During the second and third quarters 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 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 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
18
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin.
Historical U.S. Treasury Yield Curve
A yield curve is a line that typically plots the interest rates of U.S. Treasury Debt, which have different maturity dates but the same credit quality, at a specific point in time. The three main types of yield curve shapes are normal, inverted and flat. Over the past three years, the U.S. economy has experienced low short-term rates. During 2016 and 2017, short-term rates increased more than longer-term rates resulting in a flattening of the yield curve. This flattening of the yield curve became more pronounced during 2017.
Total assets were $4,785,572,000 at December 31, 2017, an increase of 7.2% from total assets of $4,462,608,000 at December 31, 2016.
On December 31, 2017, stockholders equity totaled $260,297,000, compared with $240,041,000 on December 31, 2016. Book value per share increased to $46.75 at December 31, 2017, from $43.11 on December 31, 2016.
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.
CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies.
The Company considers allowance for loan losses and income taxes to be its critical accounting policies.
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Managements methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.
19
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. After considering the above components, an unallocated component may be generated to cover uncertainties that could affect managements estimate of probable losses. Further information regarding the Companys methodology for assessing the appropriateness of the allowance is contained within Note 1 of the Notes to Consolidated Financial Statements.
During 2016 and 2017, the Company continued to enhance its methodology to the allowance for loan losses by updating qualitative factors on certain loan portfolios. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Income Taxes
Certain areas of accounting for income taxes require managements judgment, including determining the expected realization of deferred tax assets and the adequacy of liabilities for uncertain tax positions. Judgments are made regarding various tax positions, which are often subjective and involve assumptions about items that are inherently uncertain. If actual factors and conditions differ materially from estimates made by management, the actual realization of the net deferred tax assets or liabilities for uncertain tax positions could vary materially from the amounts previously recorded.
Deferred tax assets arise from items that may be used as a tax deduction or credit in future income tax returns, for which a financial statement tax benefit has already been recognized. The realization of the net deferred tax asset generally depends upon future levels of taxable income. Valuation allowances are recorded against those deferred tax assets determined not likely to be realized. Deferred tax liabilities represent items that will require a future tax payment. They generally represent tax expense recognized in the Companys financial statements for which payment has been deferred, or a deduction taken on the Companys tax return but not yet recognized as an expense in the Companys financial statements. Deferred tax liabilities are also recognized for certain non-cash items such as goodwill.
FINANCIAL CONDITION
Investment Securities
The Companys securities portfolio consists of securities available-for-sale (AFS) and securities held-to-maturity (HTM).
Securities available-for-sale consist of certain U.S. Treasury, U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; other debt securities; and other marketable equities.
These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders equity. The fair value of securities available-for-sale at December 31, 2017 totaled $397,475,000 and included gross unrealized gains of $860,000 and gross unrealized losses of $948,000. A year earlier, the fair value of securities available-for-sale was $499,297,000 including gross unrealized gains of $555,000 and gross unrealized losses of $1,478,000. In 2017, the Company recognized gains of $47,000 on the sale of available-for-sale securities. In 2016 and 2015, the Company recognized gains of $52,000 and $289,000, respectively.
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Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Securities classified as held-to-maturity consist of U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities. Securities held-to-maturity as of December 31, 2017 are carried at their amortized cost of $1,701,233,000. A year earlier, securities held-to-maturity totaled $1,653,986,000. In 2017 the company did not recognize any gains on the sale of held-to-maturity securities. In 2016 and 2015 the company recognized gains of $12,000 and $305,000, respectively, on the sale of held-to-maturity securities. The sales from securities held-to-maturity relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment.
The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated.
Fair Value of Securities Available-for-Sale
2017 | 2016 | 2015 | ||||||||||||||||||||||
At December 31, |
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Treasury |
$ | 1,984 | 0.5 | % | $ | 2,000 | 0.4 | % | $ | 1,989 | 0.5 | % | ||||||||||||
U.S. Government Sponsored Enterprises |
| 0.0 | % | 24,952 | 5.0 | % | | 0.0 | % | |||||||||||||||
SBA Backed Securities |
80,950 | 20.3 | % | 57,767 | 11.6 | % | 5,989 | 1.5 | % | |||||||||||||||
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities |
225,775 | 56.8 | % | 243,325 | 48.7 | % | 233,526 | 57.7 | % | |||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
892 | 0.2 | % | 1,109 | 0.2 | % | 1,434 | 0.4 | % | |||||||||||||||
Obligations Issued by States and Political Subdivisions |
82,600 | 20.8 | % | 164,876 | 33.0 | % | 156,960 | 38.8 | % | |||||||||||||||
Other Debt Securities |
4,971 | 1.3 | % | 4,924 | 1.0 | % | 4,473 | 1.0 | % | |||||||||||||||
Equity Securities |
303 | 0.1 | % | 344 | 0.1 | % | 252 | 0.1 | % | |||||||||||||||
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Total |
$ | 397,475 | 100.0 | % | $ | 499,297 | 100.0 | % | $ | 404,623 | 100.0 | % | ||||||||||||
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The majority of the Companys securities AFS are classified as Level 2, as defined in Note 1 of the Notes to Consolidated Financial Statements. The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Managements understanding of a pricing services pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing controls. Managements validation of a vendors pricing methodology includes establishing internal controls to determine that the pricing information received by a pricing service and used by management in the valuation process is relevant and reliable. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not more likely than not that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2017.
The increase in SBA Backed Securities was primarily the result of an increased investment return combined with a lower risk rating in these types of securities. The decrease in Obligations Issued by States and Political
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Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Subdivisions was primarily the result of increased competition in the bidding process for these types of securities.
Securities available-for-sale totaling $82,600,000, or 1.7% of assets, are classified as Level 3, as defined in Note 1 of the Notes to Consolidated Financial Statements. These securities are generally municipal securities with no readily determinable fair value. The Company also utilizes internal pricing analysis on various municipal securities using market rates on comparable securities. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.
Debt securities of Government Sponsored Enterprises refer primarily to debt securities of Fannie Mae and Freddie Mac.
The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated.
Amortized Cost of Securities Held-to-Maturity
2017 | 2016 | 2015 | ||||||||||||||||||||||
At December 31, |
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
$ | 104,653 | 6.2 | % | $ | 148,326 | 9.0 | % | $ | 186,734 | 13.0 | % | ||||||||||||
SBA Backed Securities |
57,235 | 3.4 | % | 46,140 | 2.8 | % | | 0.0 | % | |||||||||||||||
U.S. Government Sponsored Enterprise Mortgage-Backed Securities |
1,539,345 | 90.4 | % | 1,459,520 | 88.2 | % | 1,252,169 | 87.0 | % | |||||||||||||||
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Total |
$ | 1,701,233 | 100.0 | % | $ | 1,653,986 | 100.0 | % | $ | 1,438,903 | 100.0 | % | ||||||||||||
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The following two tables set forth contractual maturities of the Banks securities portfolio at December 31, 2017. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Fair Value of Securities Available-for-Sale Amounts Maturing
Within One Year |
% of Total |
Weighted Average Yield |
One Year to Five Years |
% of Total |
Weighted Average Yield |
Five Years to Ten Years |
% of Total |
Weighted Average Yield |
Over Ten Years |
% of Average Total |
Weighted Yield |
|||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury |
$ | | 0.0 | % | 0.00 | % | $ | 1,984 | 0.5 | % | 1.28 | % | $ | | 0.0 | % | 0.00 | % | $ | | 0.0 | % | 0.00 | % | ||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
| 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | ||||||||||||||||||||||||||||
SBA Backed Securities |
| 0.0 | % | 0.00 | % | 14,816 | 3.7 | % | 1.73 | % | 27,031 | 6.8 | % | 1.89 | % | 39,103 | 9.8 | % | 1.90 | % | ||||||||||||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities |
| 0.0 | % | 0.00 | % | 85,292 | 21.5 | % | 2.00 | % | 116,018 | 29.2 | % | 2.03 | % | 24,465 | 6.2 | % | 1.99 | % | ||||||||||||||||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
892 | 0.2 | % | 1.87 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | ||||||||||||||||||||||||||||
Obligations of States and Political Subdivisions |
77,146 | 19.4 | % | 1.82 | % | 770 | 0.2 | % | 3.96 | % | 225 | 0.1 | % | 4.80 | % | 4,459 | 1.1 | % | 3.45 | % | ||||||||||||||||||||||||||||
Other Debt Securities |
300 | 0.1 | % | 1.91 | % | 1,261 | 0.3 | % | 2.04 | % | 1,033 | 0.3 | % | 6.00 | % | 1,035 | 0.3 | % | 6.00 | % | ||||||||||||||||||||||||||||
Equity Securities |
| 0.0 | % | 0.00 | % | | | 0.00 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | |||||||||||||||||||||||||||||
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Total |
$ | 78,338 | 19.7 | % | 1.82 | % | $ | 104,123 | 26.2 | % | 1.96 | % | $ | 144,307 | 36.4 | % | 2.04 | % | $ | 69,062 | 17.4 | % | 2.09 | % | ||||||||||||||||||||||||
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22
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Non- Maturing |
% of Total |
Weighted Average Yield |
Total | % of Total |
Weighted Average Yield |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Treasury |
$ | | 0.0 | % | 0.00 | % | $ | 1,984 | 0.5 | % | 1.28 | % | ||||||||||||
U.S. Government Agency Sponsored Enterprises |
| 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | ||||||||||||||
SBA Backed Securities |
| 0.0 | % | 0.00 | % | 80,950 | 20.3 | % | 1.87 | % | ||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities |
| 0.0 | % | 0.00 | % | 225,775 | 56.8 | % | 2.02 | % | ||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
| 0.0 | % | 0.00 | % | 892 | 0.2 | % | 1.87 | % | ||||||||||||||
Obligations of States and Political Subdivisions |
| 0.0 | % | 0.00 | % | 82,600 | 20.8 | % | 1.94 | % | ||||||||||||||
Other Debt Securities |
1,342 | 0.3 | % | 2.22 | % | 4,971 | 1.3 | % | 3.64 | % | ||||||||||||||
Equity Securities |
303 | 0.1 | % | 6.21 | % | 303 | 0.1 | % | 6.21 | % | ||||||||||||||
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Total |
$ | 1,645 | 0.4 | % | 2.95 | % | $ | 397,475 | 100.0 | % | 1.99 | % | ||||||||||||
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Amortized Cost of Securities Held-to-Maturity Amounts Maturing
Within One Year |
% of Total |
Weighted Average Yield |
One Year to Five Years |
% of Total |
Weighted Average Yield |
Five Years to Ten Years |
% of Total |
Weighted Average Yield |
Over Ten Years |
% of Total |
Weighted Average Yield |
Total | % of Total |
Weighted Average Yield |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
$ | 19,947 | 1.2 | % | 1.60 | % | $ | 84,706 | 5.0 | % | 2.12 | % | $ | | 0.0 | % | 0.00 | % | $ | | 0.0 | % | 0.00 | % | $ | 104,653 | 6.2 | % | 2.02 | % | ||||||||||||||||||||||||||||||
SBA Backed Securities |
| 0.0 | % | 0.00 | % | 6,939 | 0.4 | % | 1.58 | % | 50,296 | 3.0 | % | 2.38 | % | | 0.0 | % | 0.00 | % | 57,235 | 3.4 | % | 2.28 | % | |||||||||||||||||||||||||||||||||||
U.S. Government Sponsored Enterprise Mortgage-Backed Securities |
8,805 | 0.5 | % | 2.47 | % | 1,165,634 | 68.5 | % | 2.26 | % | 361,620 | 21.2 | % | 2.42 | % | 3,286 | 0.2 | % | 3.10 | % | 1,539,345 | 90.4 | % | 2.30 | % | |||||||||||||||||||||||||||||||||||
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Total |
$ | 28,752 | 1.7 | % | 1.86 | % | $ | 1,257,279 | 73.9 | % | 2.25 | % | $ | 411,916 | 24.2 | % | 2.41 | % | $ | 3,286 | 0.2 | % | 3.10 | % | $ | 1,701,233 | 100.0 | % | 2.28 | % | ||||||||||||||||||||||||||||||
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At December 31, 2017 and 2016, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders equity. In 2017, sales of securities totaling $18,180,000 in gross proceeds resulted in a net realized gain of $47,000. In 2016, sales of securities totaling $2,568,000 in gross proceeds resulted in a net realized gain of $64,000. There were no sales of state, county or municipal securities during 2017 and 2016.
Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are dependent upon general market conditions and specific conditions related to the issuers of our securities.
23
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Loans
The Companys lending activities are conducted principally in Massachusetts, New Hampshire, Rhode Island, Connecticut and New York. The Company grants single-family and multi-family residential loans, commercial and commercial real estate loans, municipal loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers geographic areas and of the general economy.
The following summary shows the composition of the loan portfolio at the dates indicated.
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||
December 31, |
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
Amount | Percent of Total |
||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Construction and land development |
$ | 18,931 | 0.9 | % | $ | 14,928 | 0.8 | % | $ | 27,421 | 1.6 | % | $ | 22,744 | 1.7 | % | $ | 33,058 | 2.6 | % | ||||||||||||||||||||
Commercial and industrial |
763,807 | 35.1 | % | 612,503 | 31.8 | % | 452,235 | 26.1 | % | 149,732 | 11.2 | % | 76,675 | 6.1 | % | |||||||||||||||||||||||||
Municipal |
106,599 | 4.9 | % | 135,418 | 7.0 | % | 85,685 | 4.9 | % | 41,850 | 3.1 | % | 32,737 | 2.6 | % | |||||||||||||||||||||||||
Commercial real estate |
732,491 | 33.7 | % | 696,173 | 36.2 | % | 721,506 | 41.7 | % | 696,272 | 52.3 | % | 696,317 | 55.0 | % | |||||||||||||||||||||||||
Residential real estate |
287,731 | 13.2 | % | 241,357 | 12.5 | % | 255,346 | 14.7 | % | 257,305 | 19.3 | % | 286,041 | 22.6 | % | |||||||||||||||||||||||||
Consumer |
18,458 | 0.8 | % | 11,013 | 0.6 | % | 10,744 | 0.6 | % | 10,925 | 0.8 | % | 8,824 | 0.7 | % | |||||||||||||||||||||||||
Home equity |
247,345 | 11.4 | % | 211,857 | 11.0 | % | 178,020 | 10.3 | % | 151,275 | 11.4 | % | 130,277 | 10.3 | % | |||||||||||||||||||||||||
Overdrafts |
582 | 0.0 | % | 684 | 0.1 | % | 579 | 0.1 | % | 1,263 | 0.2 | % | 834 | 0.1 | % | |||||||||||||||||||||||||
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Total |
$ | 2,175,944 | 100.0 | % | $ | 1,923,933 | 100.0 | % | $ | 1,731,536 | 100.0 | % | $ | 1,331,366 | 100.0 | % | $ | 1,264,763 | 100.0 | % | ||||||||||||||||||||
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At December 31, 2017, 2016, 2015, 2014 and 2013, loans were carried net of discounts of $272,000, $313,000, $360,000, $407,000 and $454,000, respectively. Net deferred loan fees of $362,000, $641,000, $988,000, $908,000 and $174,000 were carried in 2017, 2016, 2015, 2014 and 2013, respectively.
The following table summarizes the remaining maturity distribution of certain components of the Companys loan portfolio on December 31, 2017. The table excludes loans secured by 14 family residential real estate, loans for household and family personal expenditures, and municipal loans. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.
Remaining Maturities of Selected Loans at December 31, 2017
One Year or Less |
One to Five Years |
Over Five Years |
Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Construction and land development |
$ | | $ | 466 | $ | 18,465 | $ | 18,931 | ||||||||
Commercial and industrial |
34,601 | 57,909 | 671,297 | 763,807 | ||||||||||||
Commercial real estate |
28,122 | 80,724 | 623,645 | 732,491 | ||||||||||||
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Total |
$ | 62,723 | $ | 139,099 | $ | 1,313,407 | $ | 1,515,229 | ||||||||
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24
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
The following table indicates the rate variability of the above loans due after one year.
December 31, 2017 |
One to Five Years |
Over Five Years |
Total | |||||||||
(dollars in thousands) | ||||||||||||
Predetermined interest rates |
$ | 69,260 | $ | 325,671 | $ | 394,931 | ||||||
Floating or adjustable interest rates |
69,839 | 987,736 | 1,057,575 | |||||||||
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Total |
$ | 139,099 | $ | 1,313,407 | $ | 1,452,506 | ||||||
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The Companys commercial and industrial (C&I) loan customers represent various small and middle-market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.
C&I loan customers also include large healthcare and higher education institutions. During 2016 and 2017, the Company increased its lending activities to these types of organizations. This increase may expose the Company to concentration risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other more intangible factors, which are considered in originating commercial loans. The percentage of these types of organizations to total C&I loans has increased to 87 % at December 31, 2017, compared to 81% at December 31, 2016.
Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Banks market area, which generally includes Massachusetts, New Hampshire, and Rhode Island. Also included are loans to educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and thirty years.
Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized nonresidential-type owner-occupied properties. This complements our C&I emphasis placed on the operating business entities and will continue. The regional economic environment affects the risk of both nonresidential and residential mortgages.
Municipal loans customers include loans to municipalities or related interests, primarily for infrastructure projects. The Company had increased its lending activities to municipalities through 2016. Municipal loans decreased during 2017 as a result of loan payoffs.
Residential real estate (14 family) includes two categories of loans. Included in residential real estate are approximately $33,835,000 of C&I type loans secured by 14 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the collateral position.
The other category of residential real estate loans is mostly 14 family residential properties located in the Banks market area. General underwriting criteria are largely the same as those used by Fannie Mae. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a First Time Homebuyer product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category.
Home equity loans are extended as both first and second mortgages on owner-occupied residential properties in the Banks market area. Loans are underwritten to a maximum loan to property value of 75%.
25
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Bank officers evaluate the feasibility of construction projects based on independent appraisals of the project, architects or engineers evaluations of the cost of construction and other relevant data. As of December 31, 2017, the Company was obligated to advance a total of $15,152,000 to complete projects under construction.
The composition of nonperforming assets is as follows:
December 31, |
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Total nonperforming loans |
$ | 1,684 | $ | 1,084 | $ | 2,336 | $ | 4,146 | $ | 2,549 | ||||||||||
Other real estate owned |
| | | | | |||||||||||||||
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Total nonperforming assets |
$ | 1,684 | $ | 1,084 | $ | 2,336 | $ | 4,146 | $ | 2,549 | ||||||||||
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Accruing troubled debt restructured loans |
$ | 2,749 | $ | 3,526 | $ | 2,893 | $ | 3,296 | $ | 5,969 | ||||||||||
Loans past due 90 and still accruing |
| | | | | |||||||||||||||
Nonperforming loans as a percent of gross loans |
0.08 | % | 0.06 | % | 0.13 | % | 0.31 | % | 0.20 | % | ||||||||||
Nonperforming assets as a percent of total assets |
0.04 | % | 0.02 | % | 0.06 | % | 0.11 | % | 0.07 | % |
The composition of impaired loans at December 31, is as follows:
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Residential real estate, multi-family |
$ | 4,212 | $ | 198 | $ | 916 | $ | 962 | $ | 1,199 | ||||||||||
Home equity |
| | 90 | 92 | 94 | |||||||||||||||
Commercial real estate |
2,554 | 3,149 | 1,678 | 4,318 | 4,520 | |||||||||||||||
Construction and land development |
| 94 | 98 | 103 | 608 | |||||||||||||||
Commercial and industrial |
348 | 389 | 443 | 852 | 1,367 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total impaired loans |
$ | 7,114 | $ | 3,830 | $ | 3,225 | $ | 6,327 | $ | 7,788 | ||||||||||
|
|
|
|
|
|
|
|
|
|
At December 31, 2017, 2016, 2015, 2014 and 2013 impaired loans had specific reserves of $164,000, $173,000, $250,000, $904,000 and $1,019,000, respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $229,533,000, $229,730,000, $185,299,000, $143,696,000 and $109,301,000 at December 31, 2017, 2016, 2015, 2014 and 2013, respectively. The Company had no loans held for sale at December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014 and December 31, 2013.
Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage servicing assets (MSA) are amortized into non-interest income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $1,525,000 at December 31, 2017, $1,629,000 at December 31, 2016, $1,305,000 at December 31, 2015, $941,000 at December 31, 2014 and $703,000 for December 31, 2013.
26
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.
Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Companys commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank.
Nonaccrual loans increased during 2017, primarily as a result of an increase in home equity and residential real estate nonperforming loans. Nonaccrual loans decreased during 2016, primarily as a result of a decrease in home equity and residential real estate nonperforming loans. Nonaccrual loans decreased during 2015 primarily due to the sale and partial charge-off of the property securing a large commercial real estate loan subsequent to foreclosure. Nonaccrual loans increased during 2014 primarily as a result of a large commercial real estate loan.
The Company continues to monitor closely $37,184,000 and $35,583,000 at December 31, 2017 and 2016, respectively, of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2017, although such values may fluctuate with changes in the economy and the real estate market. The increase is primarily attributable to one loan relationship secured by real estate.
27
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Allowance for Loan Losses
The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Companys allowance for loan losses for the years indicated.
Year Ended December 31, |
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Year-end loans outstanding (net of unearned discount and deferred loan fees) |
$ | 2,175,944 | $ | 1,923,933 | $ | 1,731,536 | $ | 1,331,366 | $ | 1,264,763 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average loans outstanding (net of unearned discount and deferred loan fees) |
$ | 2,059,797 | $ | 1,838,136 | $ | 1,507,546 | $ | 1,307,888 | $ | 1,184,912 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance of allowance for loan losses at the beginning of year |
$ | 24,406 | $ | 23,075 | $ | 22,318 | $ | 20,941 | $ | 19,197 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans charged-off: |
||||||||||||||||||||
Commercial and industrial |
49 | | | 333 | 234 | |||||||||||||||
Construction |
| | 172 | 500 | 1,000 | |||||||||||||||
Commercial real estate |
| | 298 | | | |||||||||||||||
Residential real estate |
| 27 | | 24 | | |||||||||||||||
Consumer |
341 | 362 | 311 | 525 | 579 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans charged-off |
390 | 389 | 781 | 1,382 | 1,813 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Recovery of loans previously charged-off: |
||||||||||||||||||||
Commercial and industrial |
110 | 132 | 212 | 201 | 389 | |||||||||||||||
Construction |
| | 780 | | | |||||||||||||||
Real estate |
84 | 6 | 91 | 117 | 31 | |||||||||||||||
Consumer |
255 | 296 | 255 | 391 | 427 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total recoveries of loans previously charged-off: |
449 | 434 | 1,338 | 709 | 847 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loan (recoveries) charge-offs |
(59 | ) | (45 | ) | (557 | ) | 673 | 966 | ||||||||||||
Provision charged to operating expense |
1,790 | 1,375 | 200 | 2,050 | 2,710 | |||||||||||||||
Reclassification to other liabilities |
| (89 | ) | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at end of year |
$ | 26,255 | $ | 24,406 | $ | 23,075 | $ | 22,318 | $ | 20,941 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of net (recoveries) charge-offs during the year to average loans outstanding |
0.00 | % | 0.00 | % | (0.04 | )% | 0.05 | % | 0.08 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of allowance for loan losses to loans outstanding |
1.21 | % | 1.27 | % | 1.33 | % | 1.68 | % | 1.66 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
The amount of the allowance for loan losses results from managements evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial
28
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
condition of the borrower, the state of the economy and other relevant information. The pace of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge-offs declined in 2014, 2015 and 2016 as a result of the overall decrease in the level of nonaccrual loans. The dollar amount of the allowance for loan losses increased primarily as a result of an increase in loan balances offset, somewhat, by lower historical loss factors.
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 Companys 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 Companys new loan originations and the increase in these loan types as a percentage of the overall portfolio, has resulted in a decrease in the ratio of allowance for loan losses to total loans for 2015. For 2016 and 2017, the change in the ratio of the allowance for loan losses to loans outstanding, was primarily due to changes in portfolio composition, lower historical loss rates, and qualitative factor adjustments.
In addition, the Company monitors the outlook for the industries in which these institutions operate. Healthcare and higher education are the primary industries. The Company also monitors the volatility of the losses within the historical data.
By combining the credit rating, the industry outlook and the loss volatility, the Company arrives at the quantitative loss factor for each credit grade.
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2017.
Commercial and Industrial |
Municipal | Commercial Real Estate |
Total | |||||||||||||
(in thousands) | ||||||||||||||||
Credit Rating: |
||||||||||||||||
Aaa-Aa3 |
$ | 478,905 | $ | 62,029 | $ | 45,066 | $ | 586,000 | ||||||||
A1-A3 |
195,599 | 7,635 | 128,554 | 331,788 | ||||||||||||
Baa1-Baa3 |
| 26,970 | 122,000 | 148,970 | ||||||||||||
Ba2 |
| 8,165 | | 8,165 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 674,504 | $ | 104,799 | $ | 295,620 | $ | 1,074,923 | ||||||||
|
|
|
|
|
|
|
|
29
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
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 allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At December 31 of each year listed below, the allowance is comprised of the following:
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||
Amount | Percent of Loans in Each Category to Total Loans |
Amount | Percent of Loans in Each Category to Total Loans |
Amount | Percent of Loans in Each Category to Total Loans |
Amount | Percent of Loans in Each Category to Total Loans |
Amount | Percent of Loans in Each Category to Total Loans |
|||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Construction and land development |
$ | 1,645 | 0.9 | % | $ | 1,012 | 0.8 | % | $ | 2,041 | 1.6 | % | $ | 1,592 | 1.7 | % | $ | 2,174 | 2.6 | % | ||||||||||||||||||||
Commercial and industrial |
9,651 | 35.1 | % | 6,972 | 31.8 | % | 5,899 | 26.1 | % | 4,757 | 11.2 | % | 2,617 | 6.1 | % | |||||||||||||||||||||||||
Municipal |
1,720 | 4.9 | % | 1,612 | 7.1 | % | 994 | 4.9 | % | 1,488 | 3.1 | % | 655 | 2.6 | % | |||||||||||||||||||||||||
Commercial real estate |
9,728 | 33.7 | % | 11,135 | 36.2 | % | 10,589 | 41.7 | % | 11,199 | 52.3 | % | 10,935 | 55.0 | % | |||||||||||||||||||||||||
Residential real estate |
1,873 | 13.2 | % | 1,698 | 12.5 | % | 1,320 | 14.7 | % | 776 | 19.3 | % | 2,006 | 22.6 | % | |||||||||||||||||||||||||
Consumer and other |
373 | 0.8 | % | 582 | 0.6 | % | 644 | 0.7 | % | 810 | 1.0 | % | 432 | 0.8 | % | |||||||||||||||||||||||||
Home equity |
989 | 11.4 | % | 1,102 | 11.0 | % | 1,077 | 10.3 | % | 599 | 11.4 | % | 959 | 10.3 | % | |||||||||||||||||||||||||
Unallocated |
276 | 293 | 511 | 1,097 | 1,163 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 26,255 | 100.0 | % | $ | 24,406 | 100.0 | % | $ | 23,075 | 100.0 | % | $ | 22,318 | 100.0 | % | $ | 20,941 | 100.0 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. The enhancements described above have resulted in a lower level of unallocated allowance for loan losses. Further information regarding the allocation of the allowance is contained within Note 6 of the Notes to Consolidated Financial Statements.
30
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Deposits
The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. Additionally, the Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customers checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a report balancing the customers checking account.
Interest rates on deposits are set twice per month by the Banks rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee.
The following table sets forth the average balances of the Banks deposits for the periods indicated.
2017 | 2016 | 2015 | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Demand Deposits |
$ | 687,853 | 18.0 | % | $ | 609,159 | 17.8 | % | $ | 518,161 | 17.2 | % | ||||||||||||
Savings and Interest Checking |
1,457,872 | 38.2 | % | 1,322,714 | 38.6 | % | 1,139,449 | 37.8 | % | |||||||||||||||
Money Market |
1,105,072 | 28.9 | % | 1,041,404 | 30.4 | % | 951,197 | 31.5 | % | |||||||||||||||
Time Certificates of Deposit |
566,940 | 14.9 | % | 452,562 | 13.2 | % | 408,711 | 13.5 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,817,737 | 100.0 | % | $ | 3,425,839 | 100.0 | % | $ | 3,017,518 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits of $100,000 or more as of December 31, are as follows:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Three months or less |
$ | 107,649 | $ | 84,522 | ||||
Three months through six months |
137,260 | 42,736 | ||||||
Six months through twelve months |
123,468 | 85,476 | ||||||
Over twelve months |
135,426 | 153,243 | ||||||
|
|
|
|
|||||
Total |
$ | 503,803 | $ | 365,977 | ||||
|
|
|
|
Borrowings
The Banks borrowings consisted primarily of Federal Home Loan Bank of Boston (FHLBB) borrowings collateralized by a blanket pledge agreement on the Banks FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Banks portfolios. The Banks borrowings from the FHLBB totaled $347,778,000, an increase of $54,778,000 from the prior year. The Banks remaining term borrowing capacity at the FHLBB at December 31, 2017, was approximately $127,631,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12, Other Borrowed Funds and Subordinated Debentures, for a schedule, including related interest rates and other information.
Subordinated Debentures
In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II.
Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first
31
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The coupon rate on these securities was 3.46% at December 31, 2017. The Company is using the proceeds primarily for general business purposes.
Securities Sold Under Agreements to Repurchase
The Banks remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled $158,990,000, a decrease of $23,290,000 from the prior year. See Note 11, Securities Sold Under Agreements to Repurchase, for a schedule, including related interest rates and other information.
RESULTS OF OPERATIONS
Net Interest Income
The Companys operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 14.5% in 2017 to $99,595,000, compared with $86,999,000 in 2016. The increase in net interest income for 2017 was mainly due to an 8.1% increase in the average balances of earning assets, combined with a similar increase in deposits. The increase in net interest income for 2016 was mainly due to a 10.3% increase in the average balances of earning assets, combined with a similar increase in deposits. The level of interest rates, the ability of the Companys earning assets and liabilities to adjust to changes in interest rates and the mix of the Companys earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis increased to 2.25 % in 2017 and decreased to 2.12% in 2016 from 2.18% in 2015. The increase in the net interest margin for 2017 was primarily attributable to an increase in rates on earning assets and prepayment penalties collected. The decrease in the net interest margin, for 2016, was primarily the result of a decrease in rates on earning assets. This is primarily as a result of originating larger loans to borrowers with high credit quality, some of which are at variable rates. The Company collected approximately $907,000, $416,000 and $945,000, respectively, of prepayment penalties, which are included in interest income on loans, for 2017, 2016 and 2015, respectively.
Additional information about the net interest margin is contained in the Overview section of this report. Also, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories.
32
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
The following table sets forth the distribution of the Companys average assets, liabilities and stockholders equity, and average rates earned or paid on a fully taxable equivalent basis for each of the years indicated.
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
Year Ended December 31, |
Average Balance |
Interest Income/ Expense(1) |
Rate Earned/ Paid(1) |
Average Balance |
Interest Income/ Expense(1) |
Rate Earned/ Paid(1) |
Average Balance |
Interest Income/ Expense(1) |
Rate Earned/ Paid(1) |
|||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||||||||||||||
Loans(2) |
||||||||||||||||||||||||||||||||||||
Taxable |
$ | 978,593 | $ | 39,103 | 4.00 | % | $ | 866,180 | $ | 34,324 | 3.96 | % | $ | 783,451 | $ | 32,136 | 4.10 | % | ||||||||||||||||||
Tax-exempt |
1,081,204 | 40,420 | 3.74 | % | 971,956 | 35,943 | 3.70 | % | 724,095 | 30,862 | 4.26 | % | ||||||||||||||||||||||||
Securities available-for-sale:(3) |
||||||||||||||||||||||||||||||||||||
Taxable |
354,918 | 5,859 | 1.65 | % | 349,023 | 3,969 | 1.14 | % | 334,249 | 2,558 | 0.77 | % | ||||||||||||||||||||||||
Tax-exempt |
106,717 | 1,588 | 1.49 | % | 149,631 | 1,465 | 0.98 | % | 120,389 | 853 | 0.71 | % | ||||||||||||||||||||||||
Securities held-to-maturity: |
||||||||||||||||||||||||||||||||||||
Taxable |
1,725,280 | 38,348 | 2.22 | % | 1,533,032 | 32,679 | 2.13 | % | 1,603,530 | 34,388 | 2.14 | % | ||||||||||||||||||||||||
Interest-bearing deposits in other banks |
189,193 | 2,097 | 1.11 | % | 235,339 | 1,236 | 0.53 | % | 157,765 | 436 | 0.28 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest-earning assets |
4,435,905 | 127,415 | 2.87 | % | 4,105,161 | 109,616 | 2.67 | % | 3,723,479 | 101,233 | 2.72 | % | ||||||||||||||||||||||||
Noninterest-earning assets |
221,628 | 210,203 | 191,700 | |||||||||||||||||||||||||||||||||
Allowance for loan losses |
(25,329 | ) | (23,872 | ) | (22,559 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total assets |
$ | 4,632,204 | $ | 4,291,492 | $ | 3,892,620 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
| |||||||||||||||||||||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||||||||||||||||||||||
NOW accounts |
$ | 949,924 | $ | 3,669 | 0.39 | % | $ | 904,892 | $ | 2,311 | 0.26 | % | $ | 794,293 | $ | 1,798 | 0.23 | % | ||||||||||||||||||
Savings accounts |
507,948 | 2,627 | 0.52 | % | 417,822 | 1,709 | 0.41 | % | 345,156 | 1,019 | 0.30 | % | ||||||||||||||||||||||||
Money market accounts |
1,105,071 | 5,626 | 0.51 | % | 1,041,404 | 3,542 | 0.34 | % | 951,197 | 3,038 | 0.32 | % | ||||||||||||||||||||||||
Time deposits |
566,941 | 7,919 | 1.40 | % | 452,562 | 5,706 | 1.26 | % | 408,711 | 4,887 | 1.20 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest-bearing deposits |
3,129,884 | 19,841 | 0.63 | % | 2,816,680 | 13,268 | 0.47 | % | 2,499,357 | 10,742 | 0.43 | % | ||||||||||||||||||||||||
Securities sold under agreements to repurchase |
189,684 | 496 | 0.26 | % | 222,956 | 472 | 0.21 | % | 245,276 | 487 | 0.20 | % | ||||||||||||||||||||||||
Other borrowed funds and subordinated debentures |
309,102 | 7,483 | 2.42 | % | 357,974 | 8,877 | 2.48 | % | 374,108 | 8,905 | 2.38 | % | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total interest-bearing liabilities |
3,628,670 | 27,820 | 0.77 | % | 3,397,610 | 22,617 | 0.67 | % | 3,118,741 | 20,134 | 0.65 | % | ||||||||||||||||||||||||
Noninterest-bearing liabilities |
||||||||||||||||||||||||||||||||||||
Demand deposits |
687,853 | 609,159 | 518,161 | |||||||||||||||||||||||||||||||||
Other liabilities |
60,925 | 57,602 | 51,247 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Total liabilities |
4,377,448 | 4,064,371 | 3,688,149 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Stockholders equity |
254,756 | 227,121 | 204,471 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 4,632,204 | $ | 4,291,492 | $ | 3,892,620 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Net interest income on a fully taxable equivalent basis |
$ | 99,595 | $ | 86,999 | $ | 81,099 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Less taxable equivalent adjustment |
(13,979 | ) | (12,917 | ) | (11,140 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Net interest income |
$ | 85,616 | $ | 74,082 | $ | 69,959 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Net interest spread |
2.11 | % | 2.00 | % | 2.07 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||||||||||||||
Net interest margin |
2.25 | % | 2.12 | % | 2.18 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
(1) | On a fully taxable equivalent basis calculated using a federal tax rate of 34%. |
(2) | Nonaccrual loans are included in average amounts outstanding. |
(3) | At amortized cost. |
33
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
The following table summarizes the year-to-year changes in the Companys net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest-bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior years volume. Changes due to volume are computed by multiplying the change in volume by the prior years rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change.
2017 Compared with 2016 | 2016 Compared with 2015 | |||||||||||||||||||||||
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||
Due to Change in | Due to Change in | |||||||||||||||||||||||
Year Ended December 31, |
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Loans |
||||||||||||||||||||||||
Taxable |
$ | 4,490 | $ | 289 | $ | 4,779 | $ | 3,306 | $ | (1,118 | ) | $ | 2,188 | |||||||||||
Tax-exempt |
4,080 | 397 | 4,477 | 9,556 | (4,475 | ) | 5,081 | |||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||
Taxable |
68 | 1,822 | 1,890 | 118 | 1,293 | 1,411 | ||||||||||||||||||
Tax-exempt |
(498 | ) | 621 | 123 | 238 | 374 | 612 | |||||||||||||||||
Securities held-to-maturity: |
||||||||||||||||||||||||
Taxable |
4,229 | 1,440 | 5,669 | (1,504 | ) | (205 | ) | (1,709 | ) | |||||||||||||||
Interest-bearing deposits in other banks |
(283 | ) | 1,144 | 861 | 283 | 517 | 800 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest income |
12,086 | 5,713 | 17,799 | 11,997 | (3,614 | ) | 8,383 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest expense: |
||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||
NOW accounts |
120 | 1,238 | 1,358 | 267 | 246 | 513 | ||||||||||||||||||
Savings accounts |
412 | 506 | 918 | 244 | 446 | 690 | ||||||||||||||||||
Money market accounts |
228 | 1,856 | 2,084 | 299 | 205 | 504 | ||||||||||||||||||
Time deposits |
1,551 | 662 | 2,213 | 543 | 276 | 819 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-bearing deposits |
2,311 | 4,262 | 6,573 | 1,353 | 1,173 | 2,526 | ||||||||||||||||||
Securities sold under agreements to repurchase |
(77 | ) | 101 | 24 | (46 | ) | 31 | (15 | ) | |||||||||||||||
Other borrowed funds and subordinated debentures |
(1,187 | ) | (207 | ) | (1,394 | ) | (392 | ) | 364 | (28 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest expense |
1,047 | 4,156 | 5,203 | 915 | 1,568 | 2,483 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Change in net interest income |
$ | 11,039 | $ | 1,557 | $ | 12,596 | $ | 11,082 | $ | (5,182 | ) | $ | 5,900 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Average earning assets were $4,435,905,000 in 2017, an increase of $330,744,000 or 8.1% from the average in 2016, which was 10.3% higher than the average in 2015. Total average securities, including securities available-for-sale and securities held-to-maturity, were $2,186,915,000, an increase of 7.6% from the average in 2016. The increase in securities volume was mainly attributable to an increase in taxable securities held-to-maturity. An increase in securities volume and short term rates resulted in higher securities income, which increased 20.2% to $45,795,000 on a fully tax equivalent basis. Total average loans increased 12.1% to
34
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
$2,059,797,000 after increasing $330,590,000 in 2016. The primary reason for the increase in loans was due in large part to an increase in tax-exempt lending as well as taxable residential mortgage and commercial lending. The increase in loan volume resulted in higher loan income. Loan income increased by 13.2% or $9,256,000 to $79,523,000 in 2017 compared to 2016. Total loan income was $62,998,000 in 2015. Prepayment penalties collected were $907,000, $416,000, and $945,000 for 2017, 2016, and 2015, respectively.
The Companys sources of funds include deposits and borrowed funds. On average, deposits increased 11.4%, or $391,898,000, in 2017 after increasing by 13.5%, or $408,321,000, in 2016. Deposits increased in 2017, primarily as a result of increases in time deposits, savings, demand deposits, money market, and NOW accounts. Deposits increased in 2016, primarily as a result of increases in demand deposits, savings, money market, NOW accounts, and time deposits. Borrowed funds and subordinated debentures decreased by 14.1% in 2017, following a decrease of 6.2% in 2016. The majority of the Companys borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $48,872,000, and average retail repurchase agreements decreased by $33,272,000 in 2017. Interest expense totaled $27,820,000 in 2017, an increase of $5,203,000, or 23.0%, from 2016 when interest expense increased 12.3% from 2015. The increase in interest expense, for 2017, is primarily due to increases in the rates on deposits as well as an increase in average balances of deposits offset, somewhat, by a decrease in borrowed funds. The increase in interest expense, for 2016, is primarily due to increases in the average balances of deposits as well as an increase in rates offset, somewhat, by a decrease in borrowed funds.
Provision for Loan Losses
The provision for loan losses was $1,790,000 in 2017, compared with $1,375,000 in 2016 and $200,000 in 2015. These provisions are the result of managements evaluation of the amounts and credit quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses increased during 2017, primarily as a result of an increase in loan balances offset, somewhat, by changes in historical loss factors. The provision for loan losses increased during 2016, primarily as a result of an increase in loan balances. During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing risk profile of the Companys new loan originations and related methodology enhancements to address these changes.
Other Operating Income
During 2017, the Company continued to experience strong results in its fee-based services, including fees derived from traditional banking activities such as deposit-related services, its automated lockbox collection system and full-service securities brokerage supported by LPL Financial, a full-service securities brokerage business.
Under the lockbox program, which is not tied to extensions of credit by the Company, the Companys customers arrange for payments of their accounts receivable to be made directly to the Company. The Company records the amounts paid to its customers, deposits the funds to the customers account and provides automated records of the transactions to customers. Typical customers for the lockbox service are municipalities that use it to automate tax collections, cable TV companies and other commercial enterprises.
Through a program called Investment Services at Century Bank, the Bank provides full-service securities brokerage services supported by LPL Financial, a full-service securities brokerage business. Registered representatives employed by Century Bank offer limited investment advice, execute transactions and assist customers in financial and retirement planning. LPL Financial provides research to the Banks representatives. The Bank receives a share in the commission revenues.
35
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Total other operating income in 2017 was $16,552,000, an increase of $330,000, or 2.0%, compared to 2016. This increase followed an increase of $229,000, or 1.4%, in 2016, compared to 2015. Included in other operating income are net gains on sales of securities of $47,000, $64,000 and $594,000 in 2017, 2016 and 2015, respectively. Also included in other operating income are net gains on sales of mortgage loans of $370,000, $1,331,000 and $1,034,000 in 2017, 2016 and 2015, respectively. Service charge income, which continues to be a major source of other operating income, totaling $8,586,000 in 2017, increased $679,000 compared to 2016. This followed an increase of $175,000 in 2016 compared to 2015. The increase in fees, in 2017, was mainly attributable to an increase in fees collected from processing activities and debit card fees. The increase in fees, in 2016, was mainly attributable to an increase in fees collected from processing activities and debit card fees; this was offset somewhat by a decrease in overdraft fees. Lockbox revenues totaled $3,290,000, up $126,000 in 2017 following a decrease of $47,000 in 2016. Other income totaled $3,906,000, up $465,000 in 2017 following an increase of $399,000 in 2016. The increase in 2017 was primarily the result of increases in wealth management fees, and merchant card sales royalties. The increase in 2016 was primarily the result of increases in wealth management fees, merchant and charge card sales royalties, and cash surrender values of life insurance policies.
Operating Expenses
Total operating expenses were $67,119,000 in 2017, compared to $64,757,000 in 2016 and $62,198,000 in 2015.
Salaries and employee benefits expenses increased by $1,865,000 or 4.7% in 2017, after increasing by 3.8% in 2016. The increase in 2017 was mainly attributable to merit increases in salaries, bonus, and health insurance costs. The increase in 2016 was mainly attributable to merit increases in salaries, bonus accruals, pension costs and health insurance costs.
Occupancy expense decreased by $7,000, or 0.1%, in 2017, following an increase of $31,000, or 0.5%, in 2016. The decrease in 2017 was primarily attributable to a decrease in rent expense. The increase in 2016 was primarily attributable to an increase in rent expense.
Equipment expense increased by $47,000, or 1.7%, in 2017, following an increase of $219,000, or 8.3%, in 2016. The increase in 2017 was primarily attributable to an increase in service contracts. The increase in 2016 was primarily attributable to an increase in depreciation expense.
FDIC assessments decreased by $321,000, or 16.9%, in 2017, following a decrease of $250,000, or 11.6%, in 2016. FDIC assessments decreased in 2017 and 2016 mainly as a result of a decrease in the assessment rate.
Other operating expenses increased by $778,000 in 2017, which followed a $1,107,000 increase in 2016. The increase in 2017 was primarily attributable to an increase in contributions, legal expenses, and marketing expenses. The increase in 2016 was primarily attributable to an increase in marketing expenses, telephone expenses, software maintenance costs, contributions, and postage expenses.
Provision for Income Taxes
Income tax expense was 10,958,000 in 2017, $(362,000) in 2016, and $533,000 in 2015. The effective tax rate was 32.9% in 2017, (1.5%) in 2016 and 2.3% in 2015. The increase in the effective tax rate for 2017 was primarily the result of a reduction in the value of the deferred tax asset resulting in a charge of $8,448,000 to income tax expense. On December 22, 2017, the Tax Act was enacted, which lowered the Companys federal tax rate from 34% to 21%. As a result of the rate reduction, the Company recorded a reduction in the value of its net deferred tax asset. The decrease in the effective tax rate for 2016 was mainly attributable to an increase in tax-exempt interest income as a percentage of taxable income. The federal tax rate was 34% in 2017, 2016 and 2015.
36
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Market Risk and Asset Liability Management
Market risk is the risk of loss from adverse changes in market prices and rates. The Companys market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. To that end, management actively monitors and manages its interest rate risk exposure.
The Companys profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Companys earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Companys exposure to differential changes in interest rates between assets and liabilities is an interest rate risk management test.
This test measures the impact on net interest income of an immediate change in interest rates in 100-basis point increments as set forth in the following table:
Change in Interest Rates (in Basis Points) |
Percentage Change in Net Interest Income(1) | |
+400 | (10.1) | |
+300 | (9.0) | |
+200 | (6.3) | |
+100 | (2.5) | |
100 | 1.2 | |
200 | 2.6 |
(1) | The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment. |
The changes in the table above are within the Companys policy parameters.
The Companys primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Companys net interest income and capital, while structuring the Companys asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk.
Liquidity and Capital Resources
Liquidity is provided by maintaining an adequate level of liquid assets that includes cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $356,430,000 on December 31, 2017, compared with $239,334,000 on December 31, 2016. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity.
The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.
Capital Adequacy
Total stockholders equity was $260,297,000 at December 31, 2017, compared with $240,041,000 at December 31, 2016. The Companys equity increased primarily as a result of earnings and a decrease on other comprehensive loss, net of taxes, offset somewhat by dividends paid. Other comprehensive loss, net of taxes,
37
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
decreased primarily as a result of a decrease in unrealized losses on securities transferred from available-for-sale to held-to-maturity and a decrease in unrealized losses on securities available-for-sale. This was offset, somewhat, by an increase in the pension liability, net of taxes. The reduction in the value of the Companys deferred tax asset of $8.4 million impacted the Companys total equity as a reduction to retained earnings.
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The following table reflects capital ratios computed utilizing the recently implemented Basel III regulatory capital framework:
Minimum Capital Ratios |
Bank | Company | ||||||||||
Leverage ratios |
4.00 | % | 6.55 | % | 6.78 | % | ||||||
Common equity tier 1 risk weighted capital ratios |
4.50 | % | 11.69 | % | 10.71 | % | ||||||
Tier 1 risk weighted capital ratios |
6.00 | % | 11.69 | % | 12.05 | % | ||||||
Total risk weighted capital ratios |
8.00 | % | 12.70 | % | 13.05 | % |
Contractual Obligations, Commitments, and Contingencies
The Company has entered into contractual obligations and commitments. The following tables summarize the Companys contractual cash obligations and other commitments at December 31, 2017.
Contractual Obligations and Commitments by Maturity (dollars in thousands)
Payments Due By Period | ||||||||||||||||||||
CONTRACTUAL OBLIGATIONS |
Total | Less Than One Year |
One to Three Years |
Three to Five Years |
After Five Years |
|||||||||||||||
FHLBB advances |
$ | 347,778 | $ | 164,500 | $ | 91,000 | $ | 28,500 | $ | 63,778 | ||||||||||
Subordinated debentures |
36,083 | | | | 36,083 | |||||||||||||||
Retirement benefit obligations |
43,460 | 3,626 | 7,371 | 7,825 | 24,638 | |||||||||||||||
Lease obligations |
10,660 | 2,309 | 4,005 | 2,404 | 1,942 | |||||||||||||||
Customer repurchase agreements |
158,990 | 158,990 | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total contractual cash obligations |
$ | 596,971 | $ | 329,425 | $ | 102,376 | $ | 38,729 | $ | 126,441 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Amount of Commitment Expiring By Period | ||||||||||||||||||||
OTHER COMMITMENTS |
Total | Less Than One Year |
One to Three Years |
Three to Five Years |
After Five Years |
|||||||||||||||
Lines of credit |
$ | 434,618 | $ | 26,127 | $ | 138,030 | $ | 5,132 | $ | 265,329 | ||||||||||
Standby and commercial letters of credit |
5,520 | 2,991 | 2,371 | 106 | 52 | |||||||||||||||
Other commitments |
56,502 | 6,105 | 4,234 | 2,491 | 43,672 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commitments |
$ | 496,640 | $ | 35,223 | $ | 144,635 | $ | 7,729 | $ | 309,053 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to
38
Table of Contents
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments with off-balance-sheet risk at December 31 are as follows:
Contract or Notional Amount |
2017 | 2016 | ||||||
(dollars in thousands) | ||||||||
Financial instruments whose contract amount represents credit risk: |
||||||||
Commitments to originate 14 family mortgages |
$ | 5,748 | $ | 13,877 | ||||
Standby and commercial letters of credit |
5,520 | 6,796 | ||||||
Unused lines of credit |
434,618 | 362,357 | ||||||
Unadvanced portions of construction loans |
15,152 | 22,049 | ||||||
Unadvanced portions of other loans |
35,602 | 52,224 |
Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit was $66,000 and $44,000 for 2017 and 2016, respectively.
Recent Accounting Developments
See Note 1 to the Notes to Consolidated Financial Statements for details of recent accounting developments and their expected impact on the Companys financial statements.
39
Table of Contents
December 31, |
2017 | 2016 | ||||||
(dollars in thousands except share data) | ||||||||
ASSETS |
||||||||
Cash and due from banks (Note 2) |
$ | 77,199 | $ | 62,400 | ||||
Federal funds sold and interest-bearing deposits in other banks |
279,231 | 173,751 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
356,430 | 236,151 | ||||||
Short-term investments |
| 3,183 | ||||||
Securities available-for-sale, amortized cost $397,563 in 2017 and $500,220 in 2016 (Notes 3, 9 and 11) |
397,475 | 499,297 | ||||||
Securities held-to-maturity, fair value $1,668,827 in 2017 and $1,635,808 in 2016 (Notes 4 and 11) |
1,701,233 | 1,653,986 | ||||||
Federal Home Loan Bank of Boston, stock at cost |
21,779 | 21,042 | ||||||
Loans, net (Note 5) |
2,175,944 | 1,923,933 | ||||||
Less: allowance for loan losses (Note 6) |
26,255 | 24,406 | ||||||
|
|
|
|
|||||
Net loans |
2,149,689 | 1,899,527 | ||||||
Bank premises and equipment (Note 7) |
23,527 | 23,417 | ||||||
Accrued interest receivable |
11,179 | 9,645 | ||||||
Other assets (Notes 5, 8 and 16) |
124,260 | 116,360 | ||||||
|
|
|
|
|||||
Total assets |
$ | 4,785,572 | $ | 4,462,608 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Demand deposits |
$ | 736,020 | $ | 689,286 | ||||
Savings and NOW deposits |
1,367,358 | 1,304,394 | ||||||
Money market accounts |
1,188,228 | 1,181,179 | ||||||
Time deposits (Note 10) |
625,361 | 478,359 | ||||||
|
|
|
|
|||||
Total deposits |
3,916,967 | 3,653,218 | ||||||
Securities sold under agreements to repurchase (Note 11) |
158,990 | 182,280 | ||||||
Other borrowed funds (Note 12) |
347,778 | 293,000 | ||||||
Subordinated debentures (Note 12) |
36,083 | 36,083 | ||||||
Other liabilities |
65,457 | 57,986 | ||||||
|
|
|
|
|||||
Total liabilities |
4,525,275 | 4,222,567 | ||||||
Commitments and contingencies (Notes 7, 18 and 19) |
||||||||
Stockholders equity (Note 15): |
||||||||
Preferred Stock $1.00 par value; 100,000 shares authorized; no shares issued and outstanding |
| | ||||||
Common stock, Class A, |
||||||||
$1.00 par value per share; authorized 10,000,000 shares; issued 3,605,829 shares in 2017 and 3,600,729 shares in 2016 |
3,606 | 3,601 | ||||||
Common stock, Class B, |
||||||||
$1.00 par value per share; authorized 5,000,000 shares; issued 1,962,080 shares in 2017 and 1,967,180 shares in 2016 |
1,962 | 1,967 | ||||||
Additional paid-in capital |
12,292 | 12,292 | ||||||
Retained earnings |
263,666 | 243,565 | ||||||
|
|
|
|
|||||
281,526 | 261,425 | |||||||
Unrealized losses on securities available-for-sale, net of taxes |
(62 | ) | (567 | ) | ||||
Unrealized losses on securities transferred to held-to-maturity, net of taxes |
(3,050 | ) | (4,084 | ) | ||||
Pension liability, net of taxes |
(18,117 | ) | (16,733 | ) | ||||
|
|
|
|
|||||
Total accumulated other comprehensive loss, net of taxes (Notes 3, 13 and 15) |
(21,229 | ) | (21,384 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
260,297 | 240,041 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 4,785,572 | $ | 4,462,608 | ||||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
40
Table of Contents
Consolidated Statements of Income
Year Ended December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands except share data) | ||||||||||||
INTEREST INCOME |
||||||||||||
Loans, taxable |
$ | 39,103 | $ | 34,324 | $ | 32,136 | ||||||
Loans, non-taxable |
26,910 | 23,440 | 19,992 | |||||||||
Securities available-for-sale, taxable |
4,987 | 3,003 | 1,900 | |||||||||
Securities available-for-sale, non-taxable |
1,119 | 1,051 | 583 | |||||||||
Federal Home Loan Bank of Boston dividends |
872 | 966 | 658 | |||||||||
Securities held-to-maturity |
38,348 | 32,679 | 34,388 | |||||||||
Federal funds sold, interest-bearing deposits in other banks and short-term investments |
2,097 | 1,236 | 436 | |||||||||
|
|
|
|
|
|
|||||||
Total interest income |
113,436 | 96,699 | 90,093 | |||||||||
INTEREST EXPENSE |
||||||||||||
Savings and NOW deposits |
6,296 | 4,020 | 2,817 | |||||||||
Money market accounts |
5,626 | 3,542 | 3,038 | |||||||||
Time deposits |
7,919 | 5,706 | 4,887 | |||||||||
Securities sold under agreements to repurchase |
496 | 472 | 487 | |||||||||
Other borrowed funds and subordinated debentures |
7,483 | 8,877 | 8,905 | |||||||||
|
|
|
|
|
|
|||||||
Total interest expense |
27,820 | 22,617 | 20,134 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
85,616 | 74,082 | 69,959 | |||||||||
Provision for loan losses (Note 6) |
1,790 | 1,375 | 200 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for loan losses |
83,826 | 72,707 | 69,759 | |||||||||
OTHER OPERATING INCOME |
||||||||||||
Service charges on deposit accounts |
8,586 | 7,907 | 7,732 | |||||||||
Lockbox fees |
3,290 | 3,164 | 3,211 | |||||||||
Brokerage commissions |
353 | 315 | 380 | |||||||||
Net gains on sales of securities |
47 | 64 | 594 | |||||||||
Gains on sales of mortgage loans |
370 | 1,331 | 1,034 | |||||||||
Other income |
3,906 | 3,441 | 3,042 | |||||||||
|
|
|
|
|
|
|||||||
Total other operating income |
16,552 | 16,222 | 15,993 | |||||||||
OPERATING EXPENSES |
||||||||||||
Salaries and employee benefits (Note 17) |
41,913 | 40,048 | 38,596 | |||||||||
Occupancy |
6,140 | 6,147 | 6,116 | |||||||||
Equipment |
2,892 | 2,845 | 2,626 | |||||||||
FDIC assessments |
1,581 | 1,902 | 2,152 | |||||||||
Other (Note 20) |
14,593 | 13,815 | 12,708 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
67,119 | 64,757 | 62,198 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
33,259 | 24,172 | 23,554 | |||||||||
Provision for income taxes (Note 16) |
10,958 | (362 | ) | 533 | ||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | ||||||
|
|
|
|
|
|
|||||||
SHARE DATA (Note 14) |
||||||||||||
Weighted average number of shares outstanding, basic |
||||||||||||
Class A |
3,604,029 | 3,600,729 | 3,600,729 | |||||||||
Class B |
1,963,880 | 1,967,180 | 1,967,180 | |||||||||
Weighted average number of shares outstanding, diluted |
||||||||||||
Class A |
5,567,909 | 5,567,909 | 5,567,909 | |||||||||
Class B |
1,963,880 | 1,967,180 | 1,967,180 | |||||||||
Basic earnings per share |
||||||||||||
Class A |
$ | 4.86 | $ | 5.35 | $ | 5.02 | ||||||
Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 | ||||||
Diluted earnings per share |
||||||||||||
Class A |
$ | 4.01 | $ | 4.41 | $ | 4.13 | ||||||
Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 |
See accompanying Notes to Consolidated Financial Statements.
41
Table of Contents
Consolidated Statements of Comprehensive Income
Year Ended December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands) | ||||||||||||
NET INCOME |
$ | 22,301 | $ | 24,534 | $ | 23,021 | ||||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Unrealized gains (losses) on securities: |
||||||||||||
Unrealized holding gains (losses) arising during period |
533 | (289 | ) | 38 | ||||||||
Less: reclassification adjustment for gains included in net income |
(28 | ) | (32 | ) | (361 | ) | ||||||
|
|
|
|
|
|
|||||||
Total unrealized gains (losses) on securities |
505 | (321 | ) | (323 | ) | |||||||
Accretion of net unrealized losses transferred during period |
1,034 | 2,812 | 3,583 | |||||||||
Defined benefit pension plans: |
||||||||||||
Pension liability adjustment: |
||||||||||||
Net (loss) gain |
(2,315 | ) | (297 | ) | (2,890 | ) | ||||||
Amortization of prior service cost and loss included in net periodic benefit cost |
931 | 970 | 853 | |||||||||
|
|
|
|
|
|
|||||||
Total pension liability adjustment |
(1,384 | ) | 673 | (2,037 | ) | |||||||
Other comprehensive income |
155 | 3,164 | 1,223 | |||||||||
|
|
|
|
|
|
|||||||
Comprehensive income (loss) |
$ | 22,456 | $ | 27,698 | $ | 24,244 | ||||||
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
42
Table of Contents
Consolidated Statements of Changes in Stockholders Equity
Class A Common Stock |
Class B Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Loss |
Total Stockholders Equity |
|||||||||||||||||||
(dollars in thousands except share data) | ||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2014 |
$ | 3,601 | $ | 1,967 | $ | 12,292 | $ | 200,411 | $ | (25,771 | ) | $ | 192,500 | |||||||||||
Net income |
| | | 23,021 | | 23,021 | ||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains arising during period, net of $211 in taxes and $594 in realized net gains |
| | | | (323 | ) | (323 | ) | ||||||||||||||||
Accretion of net unrealized losses transferred during the period, net of $1,919 in taxes |
| | | | 3,583 | 3,583 | ||||||||||||||||||
Pension liability adjustment, net of $1,357 in taxes |
| | | | (2,037 | ) | (2,037 | ) | ||||||||||||||||
Cash dividends, Class A Common Stock, $0.48 per share |
| | | (1,728 | ) | | (1,728 | ) | ||||||||||||||||
Cash dividends, Class B Common Stock, $0.24 per share |
| | | (472 | ) | | (472 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
BALANCE, DECEMBER 31, 2015 |
$ | 3,601 | $ | 1,967 | $ | 12,292 | $ | 221,232 | $ | (24,548 | ) | $ | 214,544 | |||||||||||
Net income |
| | | 24,534 | | 24,534 | ||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains arising during period, net of $248 in taxes and $52 in realized net gains |
| | | | (321 | ) | (321 | ) | ||||||||||||||||
Accretion of net unrealized losses transferred during the period, net of $1,505 in taxes |
| | | | 2,812 | 2,812 | ||||||||||||||||||
Pension liability adjustment, net of $448 in taxes |
| | | | 673 | 673 | ||||||||||||||||||
Cash dividends, Class A Common Stock, $0.48 per share |
| | | (1,729 | ) | | (1,729 | ) | ||||||||||||||||
Cash dividends, Class B Common Stock, $0.24 per share |
| | | (472 | ) | | (472 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
BALANCE, DECEMBER 31, 2016 |
$ | 3,601 | $ | 1,967 | $ | 12,292 | $ | 243,565 | $ | (21,384 | ) | $ | 240,041 | |||||||||||
Net income |
| | | 22,301 | | 22,301 | ||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains arising during period, net of $331 in taxes and $47 in realized net gains |
| | | | 505 | 505 | ||||||||||||||||||
Accretion of net unrealized losses transferred during the period, net of $1,258 in taxes |
| | | | 1,034 | 1,034 | ||||||||||||||||||
Pension liability adjustment, net of $286 in taxes |
| | | | (1,384 | ) | (1,384 | ) | ||||||||||||||||
Conversion of Class B Common Stock to Class A |
||||||||||||||||||||||||
Common Stock, 5,100 shares |
5 | (5 | ) | | | | | |||||||||||||||||
Cash dividends, Class A Common Stock, $0.48 per share |
| | | (1,729 | ) | | (1,729 | ) | ||||||||||||||||
Cash dividends, Class B Common Stock, $0.24 per share |
| | | (471 | ) | | (471 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
BALANCE, DECEMBER 31, 2017 |
$ | 3,606 | $ | 1,962 | $ | 12,292 | $ | 263,666 | $ | (21,229 | ) | $ | 260,297 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
43
Table of Contents
Consolidated Statements of Cash Flows
Year Ended December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Gain on sales of portfolio loans |
(370 | ) | (1,331 | ) | (1,034 | ) | ||||||
Gain on sale of fixed assets |
(11 | ) | | | ||||||||
Net gains on sales of securities |
(47 | ) | (64 | ) | (594 | ) | ||||||
Provision for loan losses |
1,790 | 1,375 | 200 | |||||||||
Deferred tax benefit (expense) |
6,918 | (4,676 | ) | (3,259 | ) | |||||||
Net depreciation and amortization |
3,047 | 3,561 | 3,296 | |||||||||
Increase in accrued interest receivable |
(1,534 | ) | (1,643 | ) | (1,761 | ) | ||||||
Gain on sales of other real estate owned |
| | (57 | ) | ||||||||
Increase in other assets |
(16,195 | ) | (2,953 | ) | (10,862 | ) | ||||||
Increase in other liabilities |
5,802 | 3,203 | 2,103 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
21,701 | 22,006 | 11,053 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Proceeds from maturities of short-term investments |
5,284 | 3,233 | | |||||||||
Purchase of short-term investments |
(2,101 | ) | (3,183 | ) | (1,102 | ) | ||||||
Proceeds from redemptions of Federal Home Loan Bank of Boston stock |
10,127 | 10,381 | 891 | |||||||||
Purchase of Federal Home Loan Bank of Boston stock |
(10,864 | ) | (2,616 | ) | (4,782 | ) | ||||||
Proceeds from calls/maturities of securities available-for-sale |
259,388 | 277,657 | 206,109 | |||||||||
Proceeds from sales of securities available-for-sale |
18,180 | 2,376 | 47,853 | |||||||||
Purchase of securities available-for-sale |
(175,147 | ) | (375,608 | ) | (210,302 | ) | ||||||
Proceeds from calls/maturities of securities held-to-maturity |
293,221 | 416,599 | 414,786 | |||||||||
Proceeds from sales of securities held-to-maturity |
| 192 | 3,698 | |||||||||
Purchase of securities held-to-maturity |
(337,773 | ) | (627,670 | ) | (444,969 | ) | ||||||
Proceeds from sales of portfolio loans |
26,701 | 74,668 | 66,600 | |||||||||
Net increase in loans |
(278,242 | ) | (265,732 | ) | (467,048 | ) | ||||||
Proceeds from sales of other real estate owned |
| | 1,973 | |||||||||
Proceeds from sales of fixed assets |
11 | | | |||||||||
Capital expenditures |
(3,244 | ) | (2,263 | ) | (2,652 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(194,459 | ) | (491,966 | ) | (388,945 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Net increase in time deposit accounts |
147,002 | 4,933 | 90,281 | |||||||||
Net increase in demand, savings, money market and NOW deposits |
116,747 | 573,225 | 247,188 | |||||||||
Cash dividends |
(2,200 | ) | (2,201 | ) | (2,200 | ) | ||||||
Net decrease in securities sold under agreements to repurchase |
(23,290 | ) | (15,570 | ) | (14,510 | ) | ||||||
Net increase (decrease) in other borrowed funds |
54,778 | (75,000 | ) | (27,500 | ) | |||||||
|
|
|
|
|
|
|||||||
Net cash provided by financing activities |
293,037 | 485,387 | 293,259 | |||||||||
|
|
|
|
|
|
|||||||
Net increase (decrease) in cash and cash equivalents |
120,279 | 15,427 | (84,633 | ) | ||||||||
Cash and cash equivalents at beginning of year |
236,151 | 220,724 | 305,357 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at end of year |
$ | 356,430 | $ | 236,151 | $ | 220,724 | ||||||
|
|
|
|
|
|
|||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 27,731 | $ | 22,668 | $ | 19,979 | ||||||
Income taxes |
5,330 | 3,730 | 4,300 | |||||||||
Change in unrealized gains on securities available-for-sale, net of taxes |
$ | 505 | $ | (321 | ) | $ | (323 | ) | ||||
Change in unrealized losses on securities transferred to held-to-maturity, net of taxes |
1,034 | 2,812 | 3,583 | |||||||||
Pension liability adjustment, net of taxes |
(1,384 | ) | 673 | (2,037 | ) | |||||||
Transfer of loans to other real estate owned |
| | 1,916 |
See accompanying Notes to Consolidated Financial Statements.
44
Table of Contents
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
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 Banks 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 Companys 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.
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 a review of factors, including historical charge-off rates with additional allocations based on qualitative 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 Companys 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.
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
45
Table of Contents
Notes to Consolidated Financial Statements (Continued)
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 includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value has 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 that are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds and over the counter (OTC) derivatives.
Level III These instruments have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, and noninvestment grade residual interests in securitizations as well as certain highly structured OTC derivative contracts.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, federal funds sold and certificates of deposit.
SHORT-TERM INVESTMENTS
As of December 31, 2017 and 2016, short-term investments include highly liquid certificates of deposit with original maturities of more than 90 days but less than one year.
INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders equity, net of estimated related income taxes. The Company has no securities held for trading.
Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis.
Management also considers the Companys capital adequacy, interest-rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the investment securities before recovery. If the Company determines that a decline in fair value is OTTI and that it is more likely than not that the Company will not sell or be required to sell the investment security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in the Companys consolidated statement of income and the noncredit portion is recognized in accumulated other comprehensive income. The credit portion of the OTTI impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the investment security. If the Company determines that a decline in fair value is OTTI and it is more likely than not that it will sell or be required to sell the investment security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the security will be recognized in the Companys consolidated statement of income.
46
Table of Contents
Notes to Consolidated Financial Statements (Continued)
The transfer of a security between categories of investments shall be accounted for at fair value. For a debt security transferred into the held-to-maturity category from the available-for-sale category, the unrealized holding gain or loss at the date of the transfer shall continue to be reported in a separate component of shareholders equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held-to-maturity security.
The sale of a security held-to-maturity may occur after a substantial portion (at least 85%) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments over its term. For variable rate securities, the scheduled payments need not be equal.
FEDERAL HOME LOAN BANK 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 of the stock. As of December 31, 2017, no impairment has been recognized.
LOANS HELD FOR SALE
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
LOANS
Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become ninety days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Past-due status is based on contractual terms of the loan. Loans, including impaired loans, on which the accrual of interest has been discontinued, are designated nonaccrual loans. When a loan is placed on nonaccrual, all income that has been accrued but remains unpaid is reversed against current period income, and all amortization of deferred loan costs and fees is discontinued. Nonaccrual loans may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. Income received on nonaccrual loans is either recorded in income or applied to the principal balance of the loan, depending on managements evaluation as to the collectibility of principal.
Loan origination fees and related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. Prepayments are not initially considered when amortizing premiums and discounts.
The Bank measures impairment for impaired loans at either the fair value of the loan, the present value of the expected future cash flows discounted at the loans effective interest rate or the fair value of the collateral if the loan is collateral dependent. This method applies to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans such as residential real estate and consumer loans that are collectively evaluated for impairment and loans that are measured at fair value. 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 when such an amount has been identified definitively as uncollectible. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be
47
Table of Contents
Notes to Consolidated Financial Statements (Continued)
paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Loans are charged-off when management believes that the collectibility of the loans principal is not probable. The specific factors that management considers in making the determination that the collectibility of the loans 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. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification effective rate of interest.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets, typically residential mortgages and loan participations for the Company, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.
ACQUIRED LOANS
In accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly Statement of Position (SOP) No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer) the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Companys initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loans contractually required payments received in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30 requires that the Company recognize the excess of all cash flows expected at acquisition over the Companys initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a reduction of the loan balance.
Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of FASB ASC 310-30. For such loans, the discount, if any, representing the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the interest method over the term of the loan. Prepayments are not considered in the calculation of accretion income. Additionally, the discount is not accreted on nonperforming loans.
When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the Companys acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees. There were no new loans acquired during the year ended December 31, 2017.
NONPERFORMING ASSETS
In addition to nonperforming loans, nonperforming assets include other real estate owned. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned is recorded initially at the lower of cost or the estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred.
Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations,
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while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on managements evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans that ultimately prove uncollectible. The components of the allowance for loan losses represent estimates based upon Accounting Standards Codification (ASC) Topic 450, contingencies, and ASC Topic 310 Receivables. ASC Topic 450 applies to homogenous loan pools such as consumer installment, residential mortgages, consumer lines of credit and commercial loans that are not individually evaluated for impairment under ASC Topic 310. In determining the level of the allowance, periodic evaluations are made of the loan portfolio, which takes into account factors such as the characteristics of the loans, loan status, financial strength of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgment. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Managements methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.
While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in managements opinion, collectibility is not probable. The specific factors that management considers in making the determination that the collectibility of the loans principal is not probable include the delinquency status of the loan, the fair value of the collateral and the financial strength of the borrower and/or guarantors.
Under ASC Topic 310, a loan is impaired, based upon current information and in managements opinion, when it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest, or if a loan is designated as a Troubled Debt Restructuring (TDR). Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a) present value of anticipated future cash flows, (b) the loans observable fair market price or (c) fair value of collateral if the loan is collateral dependent. 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 when such an amount has been identified definitively as uncollectible.
In estimating probable loan loss under ASC Topic 450 management considers numerous factors, including historical charge-offs and subsequent recoveries. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect the amount of the formula allowance. Risk grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. On these loans, the formula allowances are based on the risk ratings, the historical loss experience, and the loss emergence period. Historical loss data and loss emergence periods are developed based on the Companys historical experience. For larger loans with available external credit ratings, these ratings are utilized rather than the
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Companys risk ratings. The historical loss factor and loss emergence periods for these loans are based on data published by the rating agencies for similar credits as the Company has limited internal historical data. For the residential real estate and consumer loan portfolios, the formula allowances are calculated by applying historical loss experience and the loss emergence period to the outstanding balance in each loan category. Loss factors and loss emergence periods are based on the Companys historical net loss experience.
Additional allowances are added to portfolio segments based on qualitative factors. Management considers potential factors identified in regulatory guidance. Management has identified certain qualitative factors, which could impact the degree of loss sustained within the portfolio. These include market risk factors and unique portfolio risk factors that are inherent characteristics of the Companys loan portfolio. Market risk factors may consist of changes to general economic and business conditions, such as unemployment and GDP that may impact the Companys loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include the outlooks for business segments in which the Companys borrowers operate and loan size. The potential ranges for qualitative factors are based on historical volatility in losses. The actual amount utilized is based on managements assessment of current conditions.
After considering the above components, an unallocated component may be generated to cover uncertainties that could affect managements estimate of probable losses. These uncertainties include the effects of loans in new geographical areas and new industries. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Land is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization. Identifiable intangible assets consist of core deposit intangibles and are assets resulting from acquisitions that are being amortized over their estimated useful lives. Goodwill and identifiable intangible assets are included in other assets on the consolidated balance sheets. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the segment (or reporting unit) level. Currently, the Companys goodwill is evaluated at the entity level as there is only one reporting unit. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Goodwill impairment is evaluated by first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary.
The first step, in the two-step impairment test, used to identify potential impairment, involves comparing each reporting units fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.
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SERVICING
The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in loan servicing fee income.
STOCK OPTION ACCOUNTING
The Company follows the fair value recognition provisions of FASB ASC 718, Compensation Stock Compensation for all share-based payments. The Companys method of valuation for share-based awards granted utilizes the Black-Scholes option-pricing model. The Company will recognize compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.
During 2000 and 2004, common stockholders of the Company approved stock option plans (the Option Plans) that provide for granting of options to purchase up to 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive nonqualified or incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on managements recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were no options to purchase shares of Class A common stock outstanding at December 31, 2017.
The Company uses the fair value method to account for stock options. There were no options granted during 2017 and 2016.
INCOME TAXES
The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company accounts for uncertain tax positions in accordance with FASB ASC 740.
The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law.
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The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Companys judgment changes regarding an uncertain tax position.
For tax years beginning after December 31, 2017, the corporate alternative minimum tax (AMT) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the AMT credit carryforward will be recovered in tax years beginning before 2022. As a result of the change, the Company has classified its AMT credit carryforward as currently receivable.
EARNINGS PER SHARE (EPS)
Class A and Class B shares participate equally in undistributed earnings. Under the Companys Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.
Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are stock options.
The company utilizes the two class method for reporting EPS. The two-class method is an earnings allocation formula that treats Class A and Class B shares as having rights to earnings that otherwise would have been available only to Class A shareholders and Class B shareholders as if converted to Class A shares.
TREASURY STOCK
Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act, provisions of which eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares.
PENSION
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 or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary. Individual life insurance policies, which are owned by the Company, are purchased covering the life of each participant.
The Company utilizes a full yield curve approach in the estimation of the service and interest components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the underlying projected cash flows.
RECENT ACCOUNTING DEVELOPMENTS
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, Income Statement Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial
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statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company will adopt this update in the first quarter of 2018 and will apply the effects of the changes retrospectively. The effect of the changes is approximately $3.8 million.
In July 2017, FASB issued 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 December 31, 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. The effect of this update is not expected to have a material impact on the Companys 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 December 31, 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 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. This ASU is for presentation purposes only, accordingly, there will be no impact on the Companys consolidated financial position.
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. The effect of this update is not expected to have a material impact on the Companys 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
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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. The effect of this update is not expected to have a material impact on the Companys consolidated financial position.
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 in the process of analyzing this ASU and has begun evaluating software solutions to help capture information needed to implement this update. The Company has not determined the impact, if any, as of December 31, 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