10-Q 1 d548539d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2013.

or

 

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

Commission file number: 0-15752

 

 

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

400 MYSTIC AVENUE,

MEDFORD, MA

  02155
(Address of principal executive offices)   (Zip Code)

(781) 391-4000

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

As of July 31, 2013, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,574,404 Shares   

Class B Common Stock, $1.00 par value

     1,982,180 Shares   

 

 

 


Table of Contents

Century Bancorp, Inc.

 

   

Index

   Page
Number
 

Part I

  Financial Information   
  Forward Looking Statements      3         

Item 1.

  Financial Statements (unaudited)   
  Consolidated Balance Sheets: June 30, 2013 and December 31, 2012      4         
  Consolidated Statements of Income: Three months and six months ended June 30, 2013 and 2012      5         
  Consolidated Statements of Comprehensive Income: Three months and six months ended June 30, 2013 and 2012      6         
  Consolidated Statements of Changes in Stockholders’ Equity: Six months ended June 30, 2013 and 2012      7         
  Consolidated Statements of Cash Flows: Six months ended June 30, 2013 and 2012      8         
  Notes to Consolidated Financial Statements      9-27     

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      27-38   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      38        

Item 4.

  Controls and Procedures      38        

Part II.

  Other Information   

Item 1.

  Legal Proceedings      38        

Item 1A.

  Risk Factors      39        

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      39        

Item 3.

  Defaults Upon Senior Securities      39        

Item 5.

  Other Information      39        

Item 6.

  Exhibits      39-40   

Signatures

       41        

Exhibits

  Ex-31.1   
  Ex-31.2   
  Ex-32.1   
  Ex-32.2   
  Ex-101 Instance Document   
  Ex-101 Schema Document   
  Ex-101 Calculation Linkbase Document   
  Ex-101 Labels Linkbase Document   
  Ex-101 Presentation Linkbase Document   
  Ex-101 Definition Linkbase Document   

 

Page 2 of 41


Table of Contents

Forward Looking Statements

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

 

Page 3 of 41


Table of Contents

PART I—Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     June 30,
2013
    December 31,
2012
 

Assets

    

Cash and due from banks

   $ 49,192      $ 53,646   

Federal funds sold and interest-bearing deposits in other banks

     122,713        98,637   
  

 

 

   

 

 

 

Total cash and cash equivalents

     171,905        152,283   
  

 

 

   

 

 

 

Short-term investments

     19,611        17,367   

Securities available-for-sale, amortized cost $1,568,936 and $1,414,595, respectively

     1,552,216        1,434,801   

Securities held-to-maturity, fair value $268,802 and $281,924, respectively

     267,613        275,507   

Federal Home Loan Bank of Boston stock, at cost

     16,082        15,146   

Loans, net:

    

Commercial and industrial

     101,918        88,475   

Construction and land development

     34,919        38,618   

Commercial real estate

     609,462        576,465   

Residential real estate

     283,392        281,857   

Home equity

     125,918        118,923   

Consumer and other

     8,123        7,450   
  

 

 

   

 

 

 

Total loans, net

     1,163,732        1,111,788   

Less: allowance for loan losses

     20,500        19,197   
  

 

 

   

 

 

 

Net loans

     1,143,232        1,092,591   

Bank premises and equipment

     23,367        23,899   

Accrued interest receivable

     6,005        5,811   

Goodwill

     2,714        2,714   

Other assets

     83,191        66,090   
  

 

 

   

 

 

 

Total assets

   $ 3,285,936      $ 3,086,209   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Demand deposits

   $ 440,120      $ 438,429   

Savings and NOW deposits

     964,923        933,316   

Money Market Accounts

     769,660        653,345   

Time deposits

     466,492        419,983   
  

 

 

   

 

 

 

Total deposits

     2,641,195        2,445,073   

Securities sold under agreements to repurchase

     214,290        191,390   

Other borrowed funds

     177,144        195,144   

Subordinated debentures

     36,083        36,083   

Due to broker

     10,711        —     

Other liabilities

     40,280        38,529   
  

 

 

   

 

 

 

Total liabilities

     3,119,703        2,906,219   
  

 

 

   

 

 

 
Stockholders’ Equity     

Preferred stock—$1.00 par value; 100,000 shares authorized; no shares issued and outstanding

     —          —     

Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,574,379 shares and 3,568,079 shares, respectively

     3,574        3,568   

Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 1,982,180 and 1,986,880 shares, respectively

     1,982        1,986   

Additional paid-in capital

     11,931        11,891   

Retained earnings

     171,299        162,892   
  

 

 

   

 

 

 
     188,786        180,337   

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

     (10,223     12,330   

Pension liability, net of taxes

     (12,330     (12,677
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (22,553     (347
  

 

 

   

 

 

 

Total stockholders’ equity

     166,233        179,990   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,285,936      $ 3,086,209   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended June 30,      Six months ended June 30,  
     2013      2012      2013      2012  

Interest income

           

Loans

   $ 11,997       $ 12,572       $ 23,878       $ 24,620   

Securities held-to-maturity

     1,419         1,924         2,939         3,387   

Securities available-for-sale

     5,571         5,668         11,188         11,383   

Federal funds sold and interest-bearing deposits in other banks

     145         148         264         287   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     19,132         20,312         38,269         39,677   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Savings and NOW deposits

     649         560         1,259         1,087   

Money market accounts

     582         618         1,114         1,230   

Time deposits

     1,234         1,600         2,568         3,281   

Securities sold under agreements to repurchase

     89         88         179         180   

Other borrowed funds and subordinated debentures

     2,066         2,057         4,092         4,108   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,620         4,923         9,212         9,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     14,512         15,389         29,057         29,791   

Provision for loan losses

     750         900         1,500         2,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     13,762         14,489         27,557         27,791   

Other operating income

           

Service charges on deposit accounts

     2,034         1,922         3,976         3,910   

Lockbox fees

     838         781         1,610         1,480   

Net gains on sales of investments

     781         442         1,664         590   

Gains on sales of mortgage loans held for sale

     821         131         991         131   

Other income

     747         712         1,414         1,496   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     5,221         3,988         9,655         7,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Salaries and employee benefits

     8,382         8,191         17,000         16,332   

Occupancy

     1,193         1,176         2,475         2,298   

Equipment

     610         544         1,192         1,127   

FDIC assessments

     450         445         850         852   

Other

     3,027         3,095         5,610         5,642   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     13,662         13,451         27,127         26,251   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     5,321         5,026         10,085         9,147   

Provision for income taxes

     295         255         583         568   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,026       $ 4,771       $ 9,502       $ 8,579   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share data:

           

Weighted average number of shares outstanding, basic

           

Class A

     3,574,379         3,556,474         3,571,963         3,553,734   

Class B

     1,982,180         1,991,880         1,984,530         1,992,818   

Weighted average number of shares outstanding, diluted

           

Class A

     5,557,354         5,548,830         5,557,655         5,547,237   

Class B

     1,982,180         1,991,880         1,984,530         1,992,818   

Basic earnings per share:

           

Class A

   $ 1.10       $ 1.05       $ 2.08       $ 1.89   

Class B

   $ 0.55       $ 0.52       $ 1.04       $ 0.94   

Diluted earnings per share

           

Class A

   $ 0.90       $ 0.86       $ 1.71       $ 1.55   

Class B

   $ 0.55       $ 0.52       $ 1.04       $ 0.94   

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended June 30,  
     2013     2012  

Net income

   $ 5,026      $ 4,771   

Other comprehensive income, net of tax:

    

Unrealized (losses) gains on securities:

    

Unrealized holding (losses) gains arising during period

     (18,656     824   

Less: reclassification adjustment for gains included in net income

     (781     (442
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (19,437     382   

Defined benefit pension plans:

    

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

     174        162   
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (19,263     544   
  

 

 

   

 

 

 

Comprehensive (loss) income

   $ (14,237   $ 5,315   
  

 

 

   

 

 

 
     Six months ended June 30,  
     2013     2012  

Net income

   $ 9,502      $ 8,579   

Other comprehensive income, net of tax:

    

Unrealized (losses) gains on securities:

    

Unrealized holding (losses) gains arising during period

     (20,889     2,708   

Less: reclassification adjustment for gains included in net income

     (1,664     (590
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (22,553     2,118   

Defined benefit pension plans:

    

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

     347        324   
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (22,206     2,442   
  

 

 

   

 

 

 

Comprehensive (loss) income

   $ (12,704   $ 11,021   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Six Months Ended June 30, 2013 and 2012

 

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

Balance at December 31, 2011

   $ 3,548       $ 1,994      $ 11,587       $ 146,039      $ (2,519   $ 160,649   

Net income

     —           —          —           8,579        —          8,579   

Other comprehensive income, net of tax:

              

Unrealized holding gains arising during period, net of $1,314 in taxes and $590 in realized net gains

     —           —          —           —          2,118        2,118   

Pension liability adjustment, net of $216 in taxes

     —           —          —           —          324        324   

Conversion of class B common stock to class A common stock, 2,500 shares

     2         (2     —           —          —          —     

Stock options exercised, 5,712 shares

     6         —          124         —          —          130   

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

     —           —          —           (852     —          (852

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

     —           —          —           (240     —          (240
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 3,556       $ 1,992      $ 11,711       $ 153,526      $ (77   $ 170,708   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

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

Net income

     —           —          —           9,502        —          9,502   

Other comprehensive income, net of tax:

              

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

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

Pension liability adjustment, net of $231 in taxes

     —           —          —           —          347        347   

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

     4         (4     —           —          —          —     

Stock options exercised, 1,600 shares

     2         —          40         —          —          42   

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

     —           —          —           (857     —          (857

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

     —           —          —           (238     —          (238
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Six months ended June 30,  
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 9,502      $ 8,579   

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

    

Mortgage loans originated for sale

     (56,001     (2,448

Proceeds from mortgage loans sold

     50,010        5,968   

Gain on sales of mortgage loans held for sale

     (991     (131

Net gain on sales of investments

     (1,664     (590

Provision for loan losses

     1,500        2,000   

Deferred income taxes

     (823     (783

Net depreciation and amortization

     3,058        3,158   

(Decrease)Increase in accrued interest receivable

     (194     150   

Gain on sale of other real estate owned

     —          (4

Increase in other assets

     (2,203     (5,311

Increase in other liabilities

     2,353        1,271   
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,547        11,859   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     6,317        17,315   

Purchase of short-term investments

     (8,561     (21,100

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

     174,303        318,626   

Proceeds from sales of securities available-for-sale

     163,593        233,002   

Purchase of securities available-for-sale

     (482,373     (490,103

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

     37,453        54,211   

Purchase of securities held-to-maturity

     (29,825     (161,722

Net increase in loans

     (45,143     (48,302

Proceeds from sales of other real estate owned

     —          1,187   

Capital expenditures

     (658     (2,209
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (184,894     (99,095
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase(decrease) in time deposits

     46,509        (14,087

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

     149,613        228,897   

Net proceeds from exercise of stock options

     42        130   

Cash dividends

     (1,095     (1,092

Net increase in securities sold under agreements to repurchase

     22,900        29,870   

Net decrease in other borrowed funds

     (18,000     (35,590
  

 

 

   

 

 

 

Net cash provided by financing activities

     199,969        208,128   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     19,622        120,892   

Cash and cash equivalents at beginning of period

     152,283        207,766   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 171,905      $ 328,658   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 9,317      $ 10,022   

Income taxes

     1,550        1,353   

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

     (22,553     2,118   

Pension liability adjustment, net of taxes

     347        324   

Due to broker

     10,711        37,195   

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Six Months Ended June 30, 2013 and 2012

Note 1. Basis of Financial Statement Presentation

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

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

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. The Company’s quarterly report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission.

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

 

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Note 2. Recent Market Developments

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

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope, affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012.

On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. As a result, the Company was carrying a prepaid asset of $2.4 million as of March 31, 2013. The Company’s quarterly risk-based deposit insurance assessments was paid from this amount until the amount is exhausted or until June 30, 2013, when any amount remaining would be returned to the Company. The Company received a refund of $2.4 million of prepaid FDIC assessments in June 2013.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier 1 ratio of 4.5 percent of risk-weighted assets, raises the minimum Tier 1 capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The Company has analyzed the final rules; the implementation of the framework will not have a material impact on the Company’s financial condition or results of operations.

 

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The Governor of Massachusetts has proposed a tax plan that would modify existing income tax rules. The governor’s plan is part of his budget recommendations for fiscal year 2014, and will subject security corporations to the same tax base and rate as regular business corporations. The proposed tax changes would take effect as of January 1, 2014. Subsequently both the Massachusetts House of Representatives and the Massachusetts Senate approved bills that would neither eliminate nor revise the tax rate for security corporations. The Governor of Massachusetts signed the fiscal 2014 budget. The budget did not repeal Security Corporations tax status.

Note 3. Stock Option Accounting

Stock option activity under the Company’s stock option plan for the six months ended June 30, 2013 is as follows:

 

     Amount     Weighted
Average
Exercise Price
 

Shares under option:

    

Outstanding at beginning of year

     23,350      $ 31.17   

Exercised

     (1,600     26.68   

Forfeited

     (1,350     26.68   
  

 

 

   

 

 

 

Outstanding at end of period

     20,400      $ 31.82   
  

 

 

   

 

 

 

Exercisable at end of period

     20,400      $ 31.82   
  

 

 

   

 

 

 

Available to be granted at end of period

     224,884     
  

 

 

   

On June 30, 2013, the outstanding options to purchase 20,400 shares of Class A common stock have exercise prices between $31.60 and $31.83, with a weighted average exercise price of $31.82 and a weighted average remaining contractual life of 1.25 years. The intrinsic value of options exercisable at June 30, 2013 had an aggregate value of $64,872. The intrinsic value of options exercised at June 30, 2013 had an aggregate value of $13,312.

The Company uses the fair value method to account for stock options. All of the Company’s stock options are vested and there were no options granted during the first six months of 2013.

Note 4. Securities Available-for-Sale

 

     June 30, 2013      December 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     ( In thousands)  

U.S. Treasury

   $ 1,996       $ —         $ 4       $ 1,992       $ 2,000       $ 4       $ —         $ 2,004   

U.S. Government Sponsored Enterprises

     254,944         —           8,612         246,332         130,048         360         68         130,340   

Small Business Administration

     7,760         107         —           7,867         8,043         113         —           8,156   

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

     1,244,471         8,774         16,331         1,236,914         1,212,953         20,816         412         1,233,357   

Privately Issued Residential Mortgage Backed Securities

     2,651         9         7         2,653         2,938         31         22         2,947   

Obligations Issued by States and Political Subdivisions

     54,367         25         724         53,668         55,855         41         722         55,174   

Other Debt Securities

     2,300         —           106         2,194         2,300         —           47         2,253   

Equity Securities

     447         149         —           596         458         112         —           570   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,568,936       $ 9,064       $ 25,784       $ 1,552,216       $ 1,414,595       $ 21,477       $ 1,271       $ 1,434,801   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Included in U.S. Government Sponsored Enterprise Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $741,202,000 and $665,028,000 at June 30, 2013 and December 31, 2012, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $308,654,000 and $220,313,000 at June 30, 2013 and December 31, 2012, respectively. The Company realized gross gains of $1,664,000 from the proceeds of $163,593,000 from the sales of available-for-sale securities for the six months ended June 30, 2013. The Company realized gross gains of $590,000 from the proceeds of $233,002,000 from the sales of available-for-sale securities for the six months ended June 30, 2012.

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

The following table shows the maturity distribution of the Company’s securities available-for-sale at June 30, 2013.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 55,219       $ 55,325   

After one but within five years

     753,219         755,445   

After five but within ten years

     747,073         728,512   

More than 10 years

     11,478         10,945   

Non-maturing

     1,947         1,989   
  

 

 

    

 

 

 

Total

   $ 1,568,936       $ 1,552,216   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at June 30, 2013 was 5.1 years. Included in the weighted average remaining life calculation at June 30, 2013 was $209,956,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life. The contractual maturities, which were used in the table above, of mortgage-backed securities will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations.

As of June 30, 2013 and December 31, 2012, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade. The change in the unrealized losses on the state and municipal securities and the nonagency mortgage-backed securities was primarily caused by changes in credit spreads and liquidity issues in the marketplace.

The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not more likely than not that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013 and December 31, 2012.

In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and

 

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estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates of underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuer’s financial performance are considered.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at June 30, 2013. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 131 and 4 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 456 holdings at June 30, 2013.

 

     June 30, 2013  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 248,324       $ 8,616       $ —         $ —         $ 248,324       $ 8,616   

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

     640,699         16,313         2,302         18         643,001         16,331   

Privately Issued Residential Mortgage Backed Securities

     1,735         7         —           —           1,735         7   

Obligations Issued by States and Political Subdivisions

     —           —           3,963         724         3,963         724   

Other Debt Securities

     —           —           1,394         106         1,394         106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 890,758       $ 24,936       $ 7,659       $ 848       $ 898,417       $ 25,784   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2012. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 20 and 7 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 458 holdings at December 31, 2012.

 

     December 31, 2012  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 34,967       $ 68       $ —         $ —         $ 34,967       $ 68   

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

     93,006         383         10,169         29         103,175         412   

Privately Issued Residential Mortgage Backed Securities

     —           —           1,863         22         1,863         22   

Obligations Issued by States and Political Subdivisions

     —           —           3,963         722         3,963         722   

Other Debt Securities

     —           —           1,453         47         1,453         47   

Equity Securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 127,973       $ 451       $ 17,448       $ 820       $ 145,421       $ 1,271   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Investment Securities Held-to-Maturity

 

     June 30, 2013      December 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 10,000       $ —         $ 330       $ 9,670       $ 17,747       $ 19       $ 8       $ 17,758   

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

     257,613         2,501         982         259,132         257,760         6,480         74         264,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 267,613       $ 2,501       $ 1,312       $ 268,802       $ 275,507       $ 6,499       $ 82       $ 281,924   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $136,354,000 and $149,366,000 at June 30, 2013 and December 31, 2012, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $87,892,000 and $103,617,000 at June 30, 2013 and December 31, 2012, respectively.

At June 30, 2013 and December 31, 2012, all mortgage-backed securities are obligations of U.S. Government Agencies and Government Sponsored Enterprises. Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the maturity distribution of the Company’s securities held-to-maturity at June 30, 2013.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 28,236       $ 28,390   

After one but within five years

     173,851         175,064   

After five but within ten years

     55,566         55,389   

More than ten years

     9,960         9,959   
  

 

 

    

 

 

 

Total

   $ 267,613       $ 268,802   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at June 30, 2013 was 3.7 years. Included in the weighted average remaining life calculation at June 30, 2013 were $10,000,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

As of June 30, 2013 and December 31, 2012, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not more likely than not that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2013 and December 31, 2012.

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

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at June 30, 2013. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 20 and 1 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 86 holdings at June 30, 2013.

 

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     June 30, 2013  
     Less Than 12 Months      12 Months or Longer      Total  

Temporarily Impaired Investments

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

U.S. Government Sponsored Enterprises

   $ 9,670       $ 330       $ —         $ —         $ 9,670       $ 330   

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

     125,675         843         5,015         139         130,690         982   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 135,345       $ 1,173       $ 5,015       $ 139       $ 140,360       $ 1,312   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2012. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 3 and 1 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 96 holdings at December 31, 2012.

 

     December 31, 2012  
     Less Than 12 Months      12 Months or Longer      Total  

Temporarily Impaired Investments

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     ( In thousands)  

U.S. Government Sponsored Enterprises

   $ 9,994       $ 8       $ —         $ —         $ 9,994       $ 8   

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

     8,936         50         5,371         24         14,307         74   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 18,930       $ 58       $ 5,371       $ 24       $ 24,301       $ 82   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 6. Allowance for Loan Losses

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

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

 

     Three months ended June 30,     Six months ended June 30,  
             2013                     2012                     2013                     2012          
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 19,759      $ 17,434      $ 19,197      $ 16,574   

Loans charged off

     (160     (635     (533     (1,059

Recoveries on loans previously charged-off

     151        280        336        464   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (9     (355     (197     (595

Provision charged to expense

     750        900        1,500        2,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 20,500      $ 17,979      $ 20,500      $ 17,979   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Construction
and Land
Development
     Commercial
and
Industrial
    Commercial
Real

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

Allowance for loan losses:

                    

Balance at March 31, 2013

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

Charge-offs

     —           (6     —           —          (154     —           —           (160

Recoveries

     —           56        1         1        92        1         —           151   

Provision

     42         (358     644         (42     68        98         298         750   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2013

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Loans:

                    

Ending balance

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Loans deemed to be impaired

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Loans not deemed to be impaired

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

 

     Construction
and Land
Development
     Commercial
and
Industrial
    Commercial
Real

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

Allowance for loan losses:

                     

Balance at December 31, 2012

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

Charge-offs

     —           (234     —           —           (299     —           —           (533

Recoveries

     —           121        4         4         206        1         —           336   

Provision

     200         210        355         32         123        45         535         1,500   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2013

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans:

                     

Ending balance

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans deemed to be impaired

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Loans not deemed to be impaired

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

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

Page 16 of 41


Table of Contents

Further information pertaining to the allowance for loan losses for three months ending June 30, 2012 follows:

 

     Construction
and Land
Development
    Commercial
and
Industrial
    Commercial
Real

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

Allowance for loan losses:

                 

Balance at March 31, 2012

   $ 2,920      $ 3,220      $ 7,341       $ 1,784      $ 317      $ 741      $ 1,111      $ 17,434   

Charge-offs

     —          (289     —           (59     (287     —          —          (635

Recoveries

     —          164        2         3        111        —          —          280   

Provision

     (31     371        411         65        152        (60     (8     900   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2012

   $ 2,889      $ 3,466      $ 7,754       $ 1,793      $ 293      $ 681      $ 1,103      $ 17,979   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,000      $ 871      $ 450       $ 92      $ —        $ —        $ —        $ 2,413   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,889      $ 2,595      $ 7,304       $ 1,701      $ 293      $ 681      $ 1,103      $ 15,566   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

   $ 36,422      $ 78,971      $ 535,232       $ 259,006      $ 6,597      $ 112,602      $ —        $ 1,028,830   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

   $ 1,500      $ 2,328      $ 2,321       $ 513      $ —        $ —        $ —        $ 6,662   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

   $ 34,922      $ 76,643      $ 532,911       $ 258,493      $ 6,597      $ 112,602      $ —        $ 1,022,168   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for six months ending June 30, 2012 follows:

 

     Construction
and Land
Development
    Commercial
and
Industrial
    Commercial
Real

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

Allowance for loan losses:

                  

Balance at December 31, 2012

   $ 2,893      $ 3,139      $ 6,566       $ 1,886      $ 356      $ 704      $ 1,030       $ 16,574   

Charge-offs

     —          (399     —           (219     (441     —          —           (1,059

Recoveries

     —          206        3         9        246        —          —           464   

Provision

     (4     520        1,185         117        132        (23     73         2,000   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at June 30, 2012

   $ 2,889      $ 3,466      $ 7,754       $ 1,793      $ 293      $ 681      $ 1,103       $ 17,979   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 1,000      $ 871      $ 450       $ 92      $ —        $ —        $ —         $ 2,413   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 1,889      $ 2,595      $ 7,304       $ 1,701      $ 293      $ 681      $ 1,103       $ 15,566   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans:

                  

Ending balance

   $ 36,422      $ 78,971      $ 535,232       $ 259,006      $ 6,597      $ 112,602      $ —         $ 1,028,830   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans deemed to be impaired

   $ 1,500      $ 2,328      $ 2,321       $ 513      $ —        $ —        $ —         $ 6,662   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Loans not deemed to be impaired

   $ 34,922      $ 76,643      $ 532,911       $ 258,493      $ 6,597      $ 112,602      $ —         $ 1,022,168   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

Page 17 of 41


Table of Contents

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

Loans rated 1-3 (Pass):

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

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of June 30, 2013 and December 31, 2012.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of June 30, 2013 and December 31, 2012.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of June 30, 2013 and December 31, 2012 and are doubtful for full collection.

Impaired:

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

The following table presents the Company’s loans by risk rating at June 30, 2013.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real

estate
 
     (Dollars in thousands)  

Grade:

        

1-3 (Pass)

   $ 26,027       $ 100,344       $ 602,932   

4 (Monitor)

     7,392         472         4,165   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     1,500         1,102         2,365   
  

 

 

    

 

 

    

 

 

 

Total

   $ 34,919       $ 101,918       $ 609,462   
  

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2012.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real

estate
 
     (Dollars in thousands)  

Grade:

        

1-3(Pass)

   $ 29,719       $ 86,587       $ 569,760   

4 (Monitor)

     7,399         606         4,424   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     1,500         1,282         2,281   
  

 

 

    

 

 

    

 

 

 

Total

   $ 38,618       $ 88,475       $ 576,465   
  

 

 

    

 

 

    

 

 

 

 

Page 18 of 41


Table of Contents

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

Further information pertaining to the allowance for loan losses at June 30, 2013 follows:

 

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

Construction and land development

   $ —         $ 1,500       $ —         $ 1,500       $ 33,419       $ 34,919   

Commercial and industrial

     1,173         444         —           1,617         100,301         101,918   

Commercial real estate

     5,240         357         —           5,597         603,865         609,462   

Residential real estate

     1,205         913         —           2,118         281,274         283,392   

Consumer and overdrafts

     10         21         —           31         8,092         8,123   

Home equity

     847         25         —           872         125,046         125,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,475       $ 3,260       $ —         $ 11,735       $ 1,151,997       $ 1,163,732   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses at December 31, 2012 follows:

 

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

Construction and land development

   $ —         $ 1,500       $ —         $ 1,500       $ 37,118       $ 38,618   

Commercial and industrial

     1,256         676            1,932         86,543         88,475   

Commercial real estate

     3,450         674         —           4,124         572,341         576,465   

Residential real estate

     864         1,597         —           2,461         279,396         281,857   

Consumer and overdrafts

     32         24         —           56         7,394         7,450   

Home equity

     1,088         —           —           1,088         117,835         118,923   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,690       $ 4,471       $ —         $ 11,161       $ 1,100,627       $ 1,111,788   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Page 19 of 41


Table of Contents

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

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value

For 3 Months
Ending 6/30/13
     Average
Carrying Value

For 6 Months
Ending 6/30/13
     Interest
Income
Recognized
for 3 Months
Ending  6/30/13
     Interest
Income
Recognized
for 6 Months
Ending  6/30/13
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

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

Commercial and industrial

     206         235         —           385         451         1         1   

Commercial real estate

     122         122         —           113         136         —           —     

Residential real estate

     266         266         —           146         96         —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

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

Commercial and industrial

     896         1,128         92         866         856         8         17   

Commercial real estate

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

Residential real estate

     905         991         147         909         834         —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     96         96         96         96         96         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

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

Commercial and industrial

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

Commercial real estate

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

Residential real estate

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

Consumer

     —           —           —           —           —           —           —     

Home equity

     96         96         96         96         96         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 41


Table of Contents

The following is information pertaining to impaired loans for June 30, 2012:

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average Carrying
Value for 3
Months Ending
6/30/12
     Average Carrying
Value for 6
Months Ending
6/30/12
     Interest
Income
Recognized
For 3 Months
Ending 6/30/12
     Interest
Income
Recognized
For 6 months
Ending 6/30/12
 
     (Dollars in thousands)  

With no required reserve recorded:

              

Construction and land development

   $ —         $ —         $ —         $ —         $ 643       $ —         $ —     

Commercial and industrial

     409         454         —           282         334         —           —     

Commercial real estate

     176         201         —           178         180         —           —     

Residential real estate

     31         32         —           32         97         —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 616       $ 687       $ —         $ 492       $ 1,254       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ 1,500       $ 3,292       $ 1,000       $ 1,500       $ 857       $  —         $  —     

Commercial and industrial

     1,919         2,147         871         1,556         1,408         12         27   

Commercial real estate

     2,145         2,183         450         3,056         3,410         58         78   

Residential real estate

     482         482         92         482         657         —           1   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,046       $ 8,104       $ 2,413       $ 6,594       $ 6,332       $ 70       $ 106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

                    

Construction and land development

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

Commercial and industrial

     2,328         2,601         871         1,838         1,742         12         27   

Commercial real estate

     2,321         2,384         450         3,234         3,590         58         78   

Residential real estate

     513         514         92         514         754         —           1   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,662       $ 8,791       $ 2,413       $ 7,086       $ 7,586       $ 70       $ 106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

Details about Accumulated

Other Comprehensive

Income Components

   Amount Reclassified
from Accumulated
Other Comprehensive
Income
   

Affected Line Item

in the Statement

Where Net Income

is Presented

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

Unrealized gains and losses on available-for-sale securities

  

   
   $ 781      $ 1,664      Net Gains on sales of investments
     (302     (652   Provision for income taxes
  

 

 

   

 

 

   
   $ 479      $ 1,012      Net Income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

   $ (3   $ (6   Salaries and employee benefits (b)

Actuarial gains (losses)

     (287     (574   Salaries and employee benefits (b)
  

 

 

   

 

 

   

Total before tax

     (290     (580   Income before taxes

Tax (expense) or benefit

     116        233      Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (174   $ (347   Net income
  

 

 

   

 

 

   

Total reclassifications for the period

   $ 305      $ 665      Net income
  

 

 

   

 

 

   

 

(a) Amounts in parentheses indicate debits to profit/loss.
(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see employee benefits footnote (Note 9) for additional details).

 

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Note 8. Earnings per Share (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are the stock options discussed below. The dilutive effect of these stock options for the three months ended June 30, 2013 and 2012 was an increase of 795 and 476 shares, respectively. The dilutive effect of these stock options for the six months ended June 30, 2013 and 2012 was an increase of 1,162 and 686 shares, respectively.

The following table is a reconciliation of basic EPS and diluted EPS for:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2013      2012      2013      2012  

Basic EPS Computation:

           

(in thousands except share and per share data)

           

Numerator:

           

Net income, Class A

   $ 3,935       $ 3,727       $ 7,437       $ 6,702   

Net income, Class B

     1,091         1,044         2,065         1,877   

Denominator:

           

Weighted average shares outstanding, Class A

     3,574,379         3,556,474         3,571,963         3,553,734   

Weighted average shares outstanding, Class B

     1,982,180         1,991,880         1,984,530         1,992,817   

Basic EPS, Class A

   $ 1.10       $ 1.05       $ 2.08       $ 1.89   

Basic EPS, Class B

     0.55         0.52         1.04         0.94   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 3,935       $ 3,727       $ 7,437       $ 6,702   

Net income, Class B

     1,091         1,044         2,065         1,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     5,026         4,771         9,502         8,579   

Denominator:

           

Weighted average shares outstanding, basic, Class A

     3,574,379         3,556,474         3,571,963         3,553,734   

Weighted average shares outstanding, Class B

     1,982,180         1,991,880         1,984,530         1,992,817   

Dilutive effect of Class A stock options

     795         476         1,162         686   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,557,354         5,548,830         5,557,655         5,547,237   

Weighted average shares outstanding, Class B

     1,982,180         1,991,880         1,984,530         1,992,817   

Diluted EPS, Class A

   $ 0.90       $ 0.86       $ 1.71       $ 1.55   

Diluted EPS, Class B

     0.55         0.52         1.04         0.94   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 9. Employee Benefits

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

 

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

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

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

 

                                                                       
     Pension Benefits     Supplemental Insurance/
Retirement Plan
 
     2013     2012     2013      2012  
           (In thousands)               

Service cost

   $ 299      $ 274      $  381       $  355   

Interest

     314        323        267         231   

Expected return on plan assets

     (470     (410     —           —     

Recognized prior service cost (benefit)

     (26     (26     29         29   

Recognized net actuarial losses

     158        184        129         84   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 275      $ 345      $ 806       $ 699   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

                                                                           
     Pension Benefits     Supplemental Insurance/
Retirement Plan
 
     2013     2012     2013      2012  
           (In thousands)               

Service cost

   $ 598      $ 548      $ 763       $ 711   

Interest

     628        647        534         462   

Expected return on plan assets

     (940     (820     —           —     

Recognized prior service cost (benefit)

     (52     (52     58         58   

Recognized net actuarial losses

     316        368        258         168   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 550      $ 691      $ 1,613       $ 1,399   
  

 

 

   

 

 

   

 

 

    

 

 

 

Contributions

The Company currently intends to contribute $1,800,000 to the Pension Plan in 2013. As of June 30, 2013, $900,000 of the contribution had been made. The Company expects to contribute an additional $900,000 by the end of the year. Also, an additional $2,819,000 was contributed to the Pension Plan during the first quarter of 2013 to reduce variable annual premiums payable to Pension Benefit Guarantee Corporation.

Note 10. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, (formerly SFAS 157, “Fair Value Measurements,”) which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:

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

 

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

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

The results of the fair value hierarchy as of June 30, 2013, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

   $ 1,992       $ —         $ 1,992       $ —     

U.S. Government Sponsored Enterprises

     246,332         —           246,332         —     

SBA Backed Securities

     7,867         —           7,867         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     1,236,914         —           1,236,914         —     

Privately Issued Residential Mortgage Backed Securities

     2,653         —           2,653         —     

Obligations Issued by States and Political Subdivisions

     53,668         —           1,706         51,962   

Other Debt Securities

     2,194         —           2,194         —     

Equity Securities

     596         264         —           332   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  1,552,216       $  264       $  1,499,658       $  52,294   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

  

Impaired Loans

     2,989         —           —           2,989   

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

 

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Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for the three and six-month periods ended June 30, 2013 amounted to ($222,000) and ($198,000), respectively.

There were no transfers between level 1 and 2 for the six months ended June 30, 2013. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the six month period ended June 30, 2013.

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

 

Asset

   Fair Value     

Valuation Technique

  

Unobservable Input

   Unobservable Input
Value or Range

Securities AFS (4)

   $ 52,294       Discounted cash flow (DCF) unless maturity is one year or less       0%-1%(3)

Impaired Loans

     2,989      

Appraisal of collateral/

DCF/assessments (1)

  

Discount rate

Appraisal adjustments/

DCF assessment

Adjustments (2)

   0%-25% discount

 

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

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

 

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

Balance at December 31, 2012

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

Purchases

     —           29,370        —          29,370   

Maturities and calls

     —           (30,830     (10     (30,840

Amortization

     —           (18     —          (18

Changes in fair value

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

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

 

 

    

 

 

   

 

 

   

 

 

 

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

The changes in Level 3 securities for the six-month period ended June 30, 2012, are shown in the table below:

 

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

Balance at December 31, 2011

   $ 3,725       $ 14,772      $ 417      $ 18,914   

Purchases

     —           64,970        —          64,970   

Maturities and calls

     —           (15,058     (34