10-Q 1 d803492d10q.htm FORM 10-Q Form 10-Q

 

 

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 September 30, 2014.

or

 

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

Commission file number: 0-15752

 

 

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
400 MYSTIC AVENUE, MEDFORD, MA   02155
(Address of principal executive offices)   (Zip Code)

(781) 391-4000

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

As of October 31, 2014, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,600,729 Shares   

Class B Common Stock, $1.00 par value

     1,967,180 Shares   

 

 

 

 

Page 1 of 42


Century Bancorp, Inc.

 

    

Index

   Page
Number
Part I    Financial Information   
   Forward Looking Statements    3
Item 1.    Financial Statements (unaudited)   
   Consolidated Balance Sheets: September 30, 2014 and December 31, 2013    4
   Consolidated Statements of Income: Three months and nine months ended September 30, 2014 and 2013    5
   Consolidated Statements of Comprehensive Income: Three months and nine months ended September 30, 2014 and 2013    6
   Consolidated Statements of Changes in Stockholders’ Equity: Nine months ended September 30, 2014 and 2013    7
   Consolidated Statements of Cash Flows: Nine months ended September 30, 2014 and 2013    8
   Notes to Consolidated Financial Statements    9-29
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    29-40
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    40
Item 4.    Controls and Procedures    40
Part II.    Other Information   
Item 1.    Legal Proceedings    40
Item 1A.    Risk Factors    40-41
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    41
Item 3.    Defaults Upon Senior Securities    41
Item 5.    Other Information    41
Item 6.    Exhibits    41

Signatures

      42
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 42


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 42


PART I - Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     September 30,
2014
    December 31,
2013
 
Assets     

Cash and due from banks

   $ 57,425      $ 59,956   

Federal funds sold and interest-bearing deposits in other banks

     103,537        34,722   
  

 

 

   

 

 

 

Total cash and cash equivalents

     160,962        94,678   
  

 

 

   

 

 

 

Short-term investments

     2,125        4,617   

Securities available-for-sale, amortized cost $489,876 and $465,943, respectively

     490,683        464,245   

Securities held-to-maturity, fair value $1,463,535 and $1,464,449, respectively

     1,471,137        1,487,884   

Federal Home Loan Bank of Boston stock, at cost

     22,231        18,072   

Loans held-for-sale

     16,279        —     

Loans, net:

    

Commercial and industrial

     152,823        76,675   

Municipal

     36,624        32,737   

Construction and land development

     25,339        33,058   

Commercial real estate

     695,074        696,317   

Residential real estate

     268,927        286,041   

Home equity

     147,593        130,277   

Consumer and other

     10,253        9,658   
  

 

 

   

 

 

 

Total loans, net

     1,336,633        1,264,763   

Less: allowance for loan losses

     22,469        20,941   
  

 

 

   

 

 

 

Net loans

     1,314,164        1,243,822   

Bank premises and equipment

     23,451        23,400   

Accrued interest receivable

     6,317        6,539   

Goodwill

     2,714        2,714   

Other assets

     87,350        85,183   
  

 

 

   

 

 

 

Total assets

   $ 3,597,413      $ 3,431,154   
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 496,583      $ 475,862   

Savings and NOW deposits

     1,015,626        992,796   

Money Market Accounts

     907,457        864,957   

Time deposits

     370,779        382,224   
  

 

 

   

 

 

 

Total deposits

     2,790,445        2,715,839   

Securities sold under agreements to repurchase

     195,100        214,440   

Other borrowed funds

     337,500        255,144   

Subordinated debentures

     36,083        36,083   

Due to broker

     7,613        —     

Other liabilities

     35,078        33,176   
  

 

 

   

 

 

 

Total liabilities

     3,401,819        3,254,682   
  

 

 

   

 

 

 
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 3,599,729 shares and 3,580,404 shares, respectively

     3,600        3,580   

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

     1,967        1,976   

Additional paid-in capital

     12,250        11,932   

Retained earnings

     195,338        180,747   
  

 

 

   

 

 

 
     213,155        198,235   

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

     464        (1,045

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

     (11,143     (13,667

Pension liability, net of taxes

     (6,882     (7,051
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (17,561     (21,763
  

 

 

   

 

 

 

Total stockholders’ equity

     195,594        176,472   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,597,413      $ 3,431,154   
  

 

 

   

 

 

 

 

Page 4 of 42


Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended September 30,      Nine months ended September 30,  
     2014      2013      2014      2013  

Interest income

           

Loans

   $ 12,708       $ 12,856       $ 37,768       $ 36,734   

Securities held-to-maturity

     8,104         6,181         23,904         9,120   

Securities available-for-sale

     752         1,392         2,366         12,580   

Federal funds sold and interest-bearing deposits in other banks

     60         120         271         384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     21,624         20,549         64,309         58,818   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Savings and NOW deposits

     642         674         1,911         1,933   

Money market accounts

     725         681         2,033         1,795   

Time deposits

     1,089         1,089         3,315         3,657   

Securities sold under agreements to repurchase

     90         89         284         268   

Other borrowed funds and subordinated debentures

     2,333         2,218         6,753         6,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,879         4,751         14,296         13,963   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     16,745         15,798         50,013         44,855   

Provision for loan losses

     600         750         1,650         2,250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     16,145         15,048         48,363         42,605   

Other operating income

           

Service charges on deposit accounts

     2,022         2,064         6,068         6,040   

Lockbox fees

     723         736         2,345         2,346   

Net gains on sales of investments

     —           1,001         —           2,665   

Gains on sales of mortgage loans held for sale

     133         247         221         1,238   

Other income

     880         726         2,209         2,140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     3,758         4,774         10,843         14,429   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Salaries and employee benefits

     8,681         8,858         26,332         25,858   

Occupancy

     1,341         1,240         4,105         3,715   

Equipment

     552         554         1,709         1,746   

FDIC assessments

     502         462         1,476         1,312   

Other

     2,900         2,881         8,602         8,491   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     13,976         13,995         42,224         41,122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     5,927         5,827         16,982         15,912   

Provision for income taxes

     221         308         745         891   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,706       $ 5,519       $ 16,237       $ 15,021   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share data:

           

Weighted average number of shares outstanding, basic

           

Class A

     3,594,583         3,578,400         3,588,728         3,574,109   

Class B

     1,967,180         1,978,180         1,969,647         1,982,413   

Weighted average number of shares outstanding, diluted

           

Class A

     5,563,278         5,558,031         5,559,909         5,557,783   

Class B

     1,967,180         1,978,180         1,969,647         1,982,413   

Basic earnings per share:

           

Class A

   $ 1.25       $ 1.21       $ 3.55       $ 3.29   

Class B

   $ 0.62       $ 0.60       $ 1.78       $ 1.64   

Diluted earnings per share

           

Class A

   $ 1.03       $ 0.99       $ 2.92       $ 2.70   

Class B

   $ 0.62       $ 0.60       $ 1.78       $ 1.64   

See accompanying notes to unaudited consolidated interim financial statements.

 

 

Page 5 of 42


Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended September 30,  
     2014      2013  

Net income

   $ 5,706       $ 5,519   

Other comprehensive income (loss), net of tax:

     

Unrealized gains (losses) on securities:

     

Unrealized gains (losses) arising and transferred during period

     1,004         (4,968

Less: reclassification adjustment for gains included in net income

     —           (1,001
  

 

 

    

 

 

 

Total unrealized gains (losses) on securities

     1,004         (5,969

Accretion of net unrealized losses transferred

     792         910   

Defined benefit pension plans:

     

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

     56         173   
  

 

 

    

 

 

 

Other comprehensive income (loss)

     1,852         (4,886
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 7,558       $ 633   
  

 

 

    

 

 

 
     Nine months ended September 30,  
     2014      2013  

Net income

   $ 16,237       $ 15,021   

Other comprehensive income (loss), net of tax:

     

Unrealized gains (losses) on securities:

     

Unrealized gains (losses) arising and transferred during period

     1,509         (25,857

Less: reclassification adjustment for gains included in net income

     —           (2,665
  

 

 

    

 

 

 

Total unrealized gains (losses) on securities

     1,509         (28,522

Accretion of net unrealized losses transferred

     2,524         910   

Defined benefit pension plans:

     

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

     169         520   
  

 

 

    

 

 

 

Other comprehensive income (loss)

     4,202         (27,092
  

 

 

    

 

 

 

Comprehensive income (loss)

   $ 20,439       $ (12,071
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 42


Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2014 and 2013

 

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

Balance at December 31, 2012

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

Net income

     —           —          —           15,021        —          15,021   

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $8,266 in taxes and $2,665 in realized net gains

     —           —          —           —          (12,969     (12,969

Unrealized losses on securities transferred to held-to-maturity net of $9,206 in taxes

               (14,643     (14,643

Pension liability adjustment, net of $346 in taxes

     —           —          —           —          520        520   

Conversion of class B common stock to class A common stock, 8,700 shares

     8         (8         

Stock options exercised, 1,625 shares

     2         —          41         —          —          43   

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

     —           —          —           (1,285     —          (1,285

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

     —           —          —           (357     —          (357
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ 3,578       $ 1,978      $ 11,932       $ 176,271      $ (27,439   $ 166,320   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 3,580       $ 1,976      $ 11,932       $ 180,747      $ (21,763   $ 176,472   

Net income

     —           —          —           16,237        —          16,237   

Other comprehensive income, net of tax:

              

Unrealized holding gains arising during period, net of $996 in taxes

     —           —          —           —          1,509        1,509   

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $1,485 in taxes

               2,524        2,524   

Pension liability adjustment, net of $113 in taxes

     —           —          —           —          169        169   

Conversion of class B common stock to class A common stock, 9,000 shares

     9         (9     —           —          —          —     

Stock options exercised, 10,325 shares

     11         —          318         —          —          329   

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

     —           —          —           (1,290     —          (1,290

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

     —           —          —           (356     —          (356
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 3,600       $ 1,967      $ 12,250       $ 195,338      $ (17,561   $ 195,594   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 42


Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Nine months ended
September 30,
 
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 16,237      $ 15,021   

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

    

Gain on sales of mortgage loans held for sale

     (221     (1,238

Net gain on sales of investments

     —          (2,665

Provision for loan losses

     1,650        2,250   

Deferred income taxes

     (2,648     (1,297

Net depreciation and amortization

     2,337        4,421   

Decrease(increase) in accrued interest receivable

     222        (265

Increase in other assets

     (2,238     (4,321

Increase in other liabilities

     2,184        3,527   
  

 

 

   

 

 

 

Net cash provided by operating activities

     17,523        15,433   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     3,561        16,317   

Purchase of short-term investments

     (1,069     (8,561

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

     112,242        228,212   

Proceeds from sales of securities available-for-sale

     —          216,078   

Purchase of securities available-for-sale

     (132,953     (536,612

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

     183,533        79,249   

Purchase of securities held-to-maturity

     (163,064     (190,718

Net increase in loans

     (101,378     (182,406

Proceeds from sales of portfolio loans

     13,364        64,219   

Capital expenditures

     (1,780     (1,232
  

 

 

   

 

 

 

Net cash used in investing activities

     (87,544     (315,454
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net decrease in time deposits

     (11,445     (68,433

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

     86,051        311,489   

Net proceeds from exercise of stock options

     329        43   

Cash dividends

     (1,646     (1,642

Net decrease in securities sold under agreements to repurchase

     (19,340     (6,230

Net increase in other borrowed funds

     82,356        46,000   
  

 

 

   

 

 

 

Net cash provided by financing activities

     136,305        281,227   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     66,284        (18,794

Cash and cash equivalents at beginning of period

     94,678        152,283   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 160,962      $ 133,489   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 14,295      $ 13,993   

Income taxes

     2,807        2,898   

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

     1,509        (12,969

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

     2,524        (14,643

Pension liability adjustment, net of taxes

     169        520   

Due to broker

     7,613        3,086   

Transfer of securities available-for-sale to held-to-maturity

     —          987,037   

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 8 of 42


Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Nine Months Ended September 30, 2014 and 2013

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, 2013, 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.

 

Page 9 of 42


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. Financial markets have improved since the depths of the crisis but are still unsettled and volatile. There is continued concern about the U.S. economic outlook.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope, affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012. In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance must be achieved by July 21, 2015. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation.

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

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 will come into effect in January 2015, sets the Basel III minimum regulatory

 

Page 10 of 42


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 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.

Note 3. Stock Option Accounting

Stock option activity under the Company’s stock option plan for the nine months ended September 30, 2014 is as follows:

 

     Amount     Weighted
Average
Exercise Price
 

Shares under option:

    

Outstanding at beginning of year

     20,225     $ 31.82   

Exercised

     (10,325     31.83   

Forfeited

     (8,900     31.83   
  

 

 

   

 

 

 

Outstanding at end of period

     1,000     $ 31.60   
  

 

 

   

 

 

 

Exercisable at end of period

     1,000     $ 31.60   
  

 

 

   

 

 

 

Available to be granted at end of period

     233,784    
  

 

 

   

On September 30, 2014, the outstanding options to purchase 1,000 shares of Class A common stock has an exercise price of $31.60 with a weighted average exercise price of $31.60 and a weighted average remaining contractual life of 13 days. The intrinsic value of options exercisable at September 30, 2014 had an aggregate value of $3,020. The intrinsic value of options exercised at September 30, 2014 had an aggregate value of $28,807.

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 nine months of 2014.

Note 4. Securities Available-for-Sale

 

     September 30, 2014      December 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     ( In thousands)  

U.S. Treasury

   $ 1,999       $ 2       $ —         $ 2,001       $ 1,997       $ 1       $ —         $ 1,998   

U.S. Government Sponsored Enterprises

     —           —           —           —           9,995         9         —           10,004   

Small Business Administration

     6,787         42         —           6,829         7,270         32         —           7,302   

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

     391,721         2,185         623         393,283         404,103         588         1,501         403,190   

Privately Issued Residential Mortgage Backed Securities

     1,993         9         11         1,991         2,294         6         23         2,277   

Obligations Issued by States and Political Subdivisions

     83,749         2         873         82,878         37,578         15         870         36,723   

Other Debt Securities

     3,300         5         109         3,196         2,300         —           125         2,175   

Equity Securities

     327         178         —           505         406         170         —           576   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 489,876       $ 2,423       $ 1,616       $ 490,683       $ 465,943       $ 821       $ 2,519       $ 464,245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 11 of 42


During the third quarter of 2013, securities available-for-sale with an amortized cost of $1,012,370,000 were transferred to securities held-to-maturity at their fair value of $987,037,000 in response to rising interest rates. Rising interest rates have the potential to increase unrealized losses on the available-for-sale portfolio. The transfer was implemented to lessen the effects of rising interest rates.

Included in U.S. Government Sponsored Enterprise Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $333,036,000 and $368,137,000 at September 30, 2014 and December 31, 2013, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $21,706,000 and $12,214,000 at September 30, 2014 and December 31, 2013, respectively. There were no realized gains on sales of investments for the nine months ended September 30, 2014. The Company realized gross gains of $2,665,000 from the proceeds of $216,078,000 from the sales of available-for-sale securities for the nine months ended September 30, 2013.

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 September 30, 2014.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 77,321       $ 77,322   

After one but within five years

     175,594         176,505   

After five but within ten years

     226,116         226,788   

More than 10 years

     9,018         8,172   

Non-maturing

     1,827         1,896   
  

 

 

    

 

 

 

Total

   $ 489,876       $ 490,683   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at September 30, 2014 was 4.4 years. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations.

As of September 30, 2014 and December 31, 2013, 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 Sponsored Enterprises and U.S. Government Sponsored Enterprises Mortgage Backed Securities related primarily to interest rates and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity. The Company does not consider these investments to be other-than-temporarily impaired.

In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying

 

Page 12 of 42


loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates of underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuer’s financial performance are considered.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at September 30, 2014. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 3 and 17 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 257 holdings at September 30, 2014.

 

     September 30, 2014  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

U.S. Government Sponsored Enterprises

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

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

     20,768         99         99,716         524         120,484         623   

Privately Issued Residential Mortgage Backed Securities

                —           737         11         737         11   

Obligations Issued by States and Political Subdivisions

                —           3,820         873         3,820         873   

Other Debt Securities

                —           1,390         109         1,390         109   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 20,768       $ 99       $ 105,663       $ 1,517       $ 126,431       $ 1,616   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 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 47 and 7 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 234 holdings at December 31, 2013.

 

     December 31, 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

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

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

     289,709         1, 352         24,557         149         314,266         1,501   

Privately Issued Residential Mortgage Backed Securities

     1,486         23         —           —           1,486         23   

Obligations Issued by States and Political Subdivisions

     —           —           3,820         870         3,820         870   

Other Debt Securities

     —           —           1,376         125         1,376         125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 291,195       $ 1,375       $ 29,753       $ 1,144       $ 320,948       $ 2,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Investment Securities Held-to-Maturity

 

    September 30, 2014     December 31, 2013  
    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

  $ 291,158      $ 1,377      $ 870      $ 291,665      $ 291,779      $ 185      $ 5,043      $ 286,921   

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

    1,179,979        6,408        14,517        1,171,870        1,196,105        2,239        20,816        1,177,528   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,471,137      $ 7,785      $ 15,387      $ 1,463,535      $ 1,487,884      $ 2,424      $ 25,859      $ 1,464,449   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 13 of 42


Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $839,764,000 and $732,144,000 at September 30, 2014 and December 31, 2013, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $466,789,000 and $510,060,000 at September 30, 2014 and December 31, 2013, respectively.

At September 30, 2014 and December 31, 2013, 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 September 30, 2014.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 4,168       $ 4,230   

After one but within five years

     988,565         983,567   

After five but within ten years

     477,606         474,921   

More than ten years

     798         817   
  

 

 

    

 

 

 

Total

   $ 1,471,137       $ 1,463,535   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at September 30, 2014 was 4.7 years. Included in the weighted average remaining life calculation at September 30, 2014 were $213,343,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

As of September 30, 2014 and December 31, 2013, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not likely that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not likely that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2014 and December 31, 2013.

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

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at September 30, 2014. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 84 and 53 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 305 holdings at September 30, 2014.

 

Page 14 of 42


     September 30, 2014  
     Less Than 12 Months      12 Months or Longer      Total  

Temporarily Impaired Investments

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

U.S. Government Sponsored Enterprises

   $ 105,032       $ 507       $ 14,637       $ 363       $ 119,669       $ 870   

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

     422,503         4,626         346,611         9,891         769,114         14,517   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 527,535       $ 5,133       $ 361,248       $ 10,254       $ 888,783       $ 15,387   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 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 191 and 13 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 300 holdings at December 31, 2013.

 

     December 31, 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

   $ 232,535       $ 5,043       $ —         $ —         $ 232,535       $ 5,043   

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

     931,180         18,654         80,362         2,162         1,011,542         20,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 1,163,715       $ 23,697       $ 80,362       $ 2,162       $ 1,244,077       $ 25,859   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, financial condition of borrowers, the value of collateral securing loans and other relevant factors.

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 21,722      $ 20,500      $ 20,941      $ 19,197   

Loans charged off

     (163     (149     (705     (682

Recoveries on loans previously charged-off

     310        149        583        485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     147        —          (122     (197

Provision charged to expense

     600        750        1,650        2,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 22,469      $ 21,250      $ 22,469      $ 21,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 15 of 42


Further information pertaining to the allowance for loan losses for the three months ending September 30, 2014 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 June 30, 2014

  $ 2,045      $ 2,915      $ 11,975      $ 1,927      $ 428      $ 915      $ 1,517      $ 21,722   

Charge-offs

    —          (37     —          —          (126     —          —          (163

Recoveries

    —          115        1        6        106        82        —          310   

Provision

    (39     2,396        (1,116     (132     46        (41     (514     600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2014

  $ 2,006      $ 5,389      $ 10,860      $ 1,801      $ 454      $ 956      $ 1,003      $ 22,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 272      $ 348      $ 648      $ 152      $ —        $ 93      $ —          1,513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,734      $ 5,041      $ 10,212      $ 1,649      $ 454      $ 863      $ 1,003      $ 20,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Ending balance

  $ 25,339      $ 181,627      $ 702,894      $ 268,927      $ 10,253      $ 147,593      $ —        $ 1,336,633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 354      $ 1,096      $ 4,740      $ 1,549      $ —        $ 93      $ —        $ 7,832   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 24,985      $ 180,531      $ 698,154      $ 267,378      $ 10,253      $ 147,500      $ —        $ 1,328,801   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2014 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, 2013

  $ 2,174      $ 2,989      $ 11,218      $ 2,006      $ 432      $ 959      $ 1,163      $ 20,941   

Charge-offs

    (250     (51     —          —          (404     —          —          (705

Recoveries

    —          164        5        26        305        83        —          583   

Provision

    82        2,287        (363     (231     121        (86     (160     1,650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2014

  $ 2,006      $ 5,389      $ 10,860      $ 1,801      $ 454      $ 956      $ 1,003      $ 22,469   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 272      $ 348      $ 648      $ 152      $ —        $ 93      $ —          1,513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,734      $ 5,041      $ 10,212      $ 1,649      $ 454      $ 863      $ 1,003      $ 20,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Ending balance

  $ 25,339      $ 181,627      $ 702,894      $ 268,927      $ 10,253      $ 147,593      $ —        $ 1,336,633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 354      $ 1,096      $ 4,740      $ 1,549      $ —        $ 93      $ —        $ 7,832   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 24,985      $ 180,531      $ 698,154      $ 267,378      $ 10,253      $ 147,500      $ —        $ 1,328,801   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 16 of 42


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

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

Charge-offs

    —          —          —          —          (149     —          —          (149

Recoveries

    —          42        2        4        101        —          —          149   

Provision

    (114     (534     1,162        176        76        17        (33     750   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2013

  $ 3,127      $ 2,723      $ 10,588      $ 2,210      $ 391      $ 949      $
 
1
,262
  
  
  $ 21,250   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,000      $ 90      $ 445      $ 139      $ —        $ 95      $ —          1,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2,127      $ 2,633      $ 10,143      $ 2,071      $ 391      $ 854      $ 1,262      $ 19,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Ending balance

  $ 32,750      $ 87,468      $ 666,166      $ 309,291      $ 8,728      $ 126,645      $ —        $ 1,231,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 1,500      $ 1,132      $ 4,688      $ 1,151      $ —        $ 95      $ —        $ 8,566   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 31,250      $ 86,336      $ 661,478      $ 308,140      $ 8,728      $ 126,550      $ —        $ 1,222,482   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for the nine months ending September 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     —          —          (448     —          —          (682

Recoveries

    —          163        5        9        307        1        —          485   

Provision

    86        (324     1,518        207        199        62        502        2,250   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2013

  $ 3,127      $ 2,723      $ 10,588      $ 2,210      $ 391      $ 949      $
 
1
,262
  
  
  $ 21,250   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,000      $ 90      $ 445      $ 139      $ —        $ 95      $ —          1,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2,127      $ 2,633      $ 10,143      $ 2,071      $ 391      $ 854      $ 1,262      $ 19,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Ending balance

  $ 32,750      $ 87,468      $ 666,166      $ 309,291      $ 8,728      $ 126,645      $ —        $ 1,231,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 1,500      $ 1,132      $ 4,688      $ 1,151      $ —        $ 95      $ —        $ 8,566   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 31,250      $ 86,336      $ 661,478      $ 308,140      $ 8,728      $ 126,550      $ —        $ 1,222,482   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 17 of 42


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

Loans rated 1-3 (Pass):

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

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of September 30, 2014 and December 31, 2013.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of September 30, 2014 and December 31, 2013.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of September 30, 2014 and December 31, 2013 and are doubtful for full collection.

Impaired:

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

The following table presents the Company’s loans by risk rating at September 30, 2014.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real

estate
 
     (Dollars in thousands)  

Grade:

  

1-3 (Pass)

   $ 17,808       $ 180,059       $ 697,509   

4 (Monitor)

     7,177         472         645   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     354         1,096         4,740   
  

 

 

    

 

 

    

 

 

 

Total

   $ 25,339       $ 181,627       $ 702,894   
  

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2013.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real
estate
 
     (Dollars in thousands)  

Grade:

  

1-3 (Pass)

   $ 25,138       $ 90,563       $ 707,461   

4 (Monitor)

     7,312         472         1,346   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     608         1,367         4,520   
  

 

 

    

 

 

    

 

 

 

Total

   $ 33,058       $ 92,402       $ 713,327   
  

 

 

    

 

 

    

 

 

 

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.

 

Page 18 of 42


Further information pertaining to the allowance for loan losses at September 30, 2014 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

   $ —         $ 354       $  —         $ 354       $ 24,985       $ 25,339   

Commercial and industrial

     895         418         —           1,313         180,314         181,627   

Commercial real estate

     1,608         2,787         —           4,395         698,499         702,894   

Residential real estate

     378         2,197         —           2,575         266,352         268,927   

Consumer and overdrafts

     5         8         —           13         10,240         10,253   

Home equity

     1,072         254         —           1,326         146,267         147,593   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  3,958       $  6,018       $ —         $  9,976       $  1,326,657       $ 1,336,633   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ —         $ 500       $ —         $ 500       $ 32,558       $ 33,058   

Commercial and industrial

     112         706         —           818         91,584         92,402   

Commercial real estate

     1,496         306         —           1,802         711,525         713,327   

Residential real estate

     2,232         1,034         —           3,266         282,775         286,041   

Consumer and overdrafts

     11         3         —           14         9,644         9,658   

Home equity

     1,710         —           —           1,710         128,567         130,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,561       $ 2,549       $ —         $ 8,110       $ 1,256,653       $ 1,264,763   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include; the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2013.

 

Page 19 of 42


The following is information pertaining to impaired loans for September 30, 2014:

 

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

Ending 9/30/14
     Interest
Income
Recognized For
3 Months
Ending 9/30/14
     Average
Carrying Value
For 9 Months

Ending 9/30/14
     Interest
Income
Recognized For
9 Months
Ending 9/30/14
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

   $ —         $ —         $ —         $ —         $ —         $ 225       $ —     

Commercial and industrial

     11         42         —           11         —           53         —     

Commercial real estate

     392         396         —           396         —           175         —     

Residential real estate

     —           —           —           18         —           72         —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 403       $ 438       $ —         $ 425       $ —         $ 525       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ 354       $ 3,400       $ 272       $ 355       $ —         $ 207       $ —     

Commercial and industrial

     1,085         1,337         348         1,078         8         1,095         24   

Commercial real estate

     4,348         4,440         648         4,492         39         4,443         113   

Residential real estate

     1,549         1,549         152         1,536         3         1,193         8   

Consumer

     —           —           —           —           —           —           —     

Home equity

     93         93         93         93         —           94         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,429       $ 10,819       $ 1,513       $ 7,554       $ 50       $ 7,032       $ 145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

   $ 354       $ 3,400       $ 272       $ 355       $ —         $ 432       $ —     

Commercial and industrial

     1,096         1,379         348         1,089         8         1,148         24   

Commercial real estate

     4,740         4,836         648         4,888         39         4,618         113   

Residential real estate

     1,549         1,549         152         1,554         3         1,265         8   

Consumer

     —           —           —           —           —           —           —     

Home equity

     93         93         93         93         —           94         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,832       $ 11,257       $ 1,513       $ 7,979       $ 50       $ 7,557       $ 145   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value
For 3 Months
Ending 9/30/13
     Interest
Income
Recognized For
3 Months
Ending 9/30/13
     Average
Carrying Value
For 9 Months
Ending 9/30/13
     Interest
Income
Recognized For
9 Months
Ending 9/30/13
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

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

Commercial and industrial

     264         294         —           239         —           390         1   

Commercial real estate

     218         218         —           126         —           133         —     

Residential real estate

     254         263         —           260         —           145         —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 736       $ 775       $ —         $ 625       $ 1       $ 668       $ 1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 42


With required reserve recorded:

                    

Construction and land development

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

Commercial and industrial

     868         1,101         90         885         12         864         29   

Commercial real estate

     4,470         4,558         445         2,796         26         2,394         72   

Residential real estate

     897         979         139         901         —           853         —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     95         95         95         95         —           96         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,830       $ 10,025       $ 1,769       $ 6,177       $ 38       $ 5,707       $ 101   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

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

Commercial and industrial

     1,132         1,395         90         1,124         12         1,254         30   

Commercial real estate

     4,688         4,776         445         2,922         26         2,527         72   

Residential real estate

     1,151         1,242         139         1,161         —           998         —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     95         95         95         95         —           96         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,566       $ 10,800       $ 1,769       $ 6,802       $ 38       $ 6,375       $ 102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings were identified as a modification in which a concession was granted to a customer who is having financial difficulties. This concession may be below market rate, longer amortization/term, and a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations. There was one commercial real estate troubled debt restructuring, totaling $2.2 million during the period ended September 30, 2014, that subsequently defaulted. There was one commercial and industrial troubled debt restructuring that occurred during the three and nine month period ended September 30, 2014. The pre-modification and post-modification outstanding recorded investment amounted to $23,811 and $23,761, respectively. The term of the loan was extended and the financial impact of the modification for the performing commercial and industrial loan was a $50 increase in principal payments for the quarter and year-to-date ended September 30, 2014.

Troubled Debt Restructurings occurring during the three and nine month periods ended September 30, 2013:

 

     Number
of
Contracts
     Pre-modification
outstanding
recorded
investment
     Post-
modification
outstanding
recorded
investment
 
     (Dollars in thousands)  

Construction and land development

     1       $ 108       $ 108   

Commercial and industrial

     1         41         41   

Commercial real estate

     1         2,247         2,242   
  

 

 

    

 

 

    

 

 

 

Total

     3       $ 2,396       $ 2,391   
  

 

 

    

 

 

    

 

 

 

The loans were modified, for the loans, by reducing interest rates as well as extending term for the commercial and industrial loan. The financial impact of the modifications for performing commercial and industrial loans were $366 reduction in principal and $217 reduction in interest payments for the quarter and year-to-date ended September 30, 2013. The financial impact of the modifications for performing commercial real estate loans were $1,786 increase in principal and $7,907 reduction in interest payments for the quarter and year-to-date ended September 30, 2013. The financial impact of the modifications for performing construction and land development loans were $530 reduction in principal and $415 reduction in interest payments for the quarter and year-to-date ended September 30, 2013.

 

Page 21 of 42


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

Amount Reclassified from Accumulated Other Comprehensive Income

 

Details about Accumulated
Other Comprehensive
Income Components

   Three Months Ended
September 30, 2014
    Three Months Ended
September 30, 2013
   

Affected Line Item
in the Statement
Where Net Income
is Presented

     (in thousands)      

Unrealized gains and losses on available-for-sale securities

   $ —        $ 1,001      Net gains on sales of investments
     —          (387   Provision for income taxes
  

 

 

   

 

 

   
   $ —        $ 614      Net income
  

 

 

   

 

 

   
Accretion of unrealized losses transferred
   $ 1,216      $ 1,485      Securities held-to-maturity
     (424     (575   Provision for income taxes
  

 

 

   

 

 

   
   $ 792      $ 910      Net income
  

 

 

   

 

 

   
Amortization of defined benefit pension items

Prior-service costs

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

Actuarial gains (losses)

     (91 )(b)      (287   Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (94     (290   Income before taxes

Tax (expense) or benefit

     38        117      Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (56   $ (173   Net income
  

 

 

   

 

 

   

Total reclassifications for the period

   $ 736      $ 1,351      Net income, net of tax
  

 

 

   

 

 

   

Details about Accumulated
Other Comprehensive
Income Components

   Nine Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2013
   

Affected Line Item
in the Statement
Where Net Income
is Presented

     (in thousands)      

Unrealized gains and losses on available-for-sale securities

   $ —        $ 2,665      Net gains on sales of investments
     —          (1,035   Provision for income taxes
  

 

 

   

 

 

   
   $ —        $ 1,630      Net income
  

 

 

   

 

 

   

Accretion of unrealized losses transferred

   $ 4,009      $ 1,485      Securities held-to-maturity
     (1,485     (575   Provision for income taxes
  

 

 

   

 

 

   
   $ 2,524      $ 910      Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

Prior-service costs

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

Actuarial gains (losses)

     (274 )(b)      (859   Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (282     (867   Income before taxes

Tax (expense) or benefit

     113        347      Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (169   $ (520   Net income
  

 

 

   

 

 

   

Total reclassifications for the period

   $ 2,355      $ 2,020      Net income, net of tax
  

 

 

   

 

 

   

 

Page 22 of 42


(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).

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 2014 and 2013 was an increase of 1,534 and 1,162 shares, respectively.

The following table is a reconciliation of basic EPS and diluted EPS for the three and nine months ended September 30,

 

     Three Months Ended
September 30
     Nine Months Ended
September 30,
 
     2014      2013      2014      2013  

(in thousands except share and per share data)

           

Basic EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 4,480       $ 4,324       $ 12,741       $ 11,760   

Net income, Class B

     1,226         1,195         3,496         3,261   

Denominator:

           

Weighted average shares outstanding, Class A

     3,594,583         3,578,400         3,588,728         3,574,109   

Weighted average shares outstanding, Class B

     1,967,180         1,987,180         1,969,647         1,982,413   

Basic EPS, Class A

   $ 1.25       $ 1.21       $ 3.55       $ 3.29   

Basic EPS, Class B

     0.62         0.60         1.78         1.64   

Diluted EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 4,480       $ 4,324       $ 12,741       $ 11,760   

Net income, Class B

     1,226         1,195         3,496         3,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     5,706         5,519         16,237         15,021   

Denominator:

           

Weighted average shares outstanding, basic, Class A

     3,594,583         3,578,400         3,588,728         3,574,109   

Weighted average shares outstanding, Class B

     1,967,180         1,978,180         1,969,647         1,982,413   

Dilutive effect of Class A stock options

     1,515         1,451         1,534         1,261   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,563,278         5,558,031         5,559,909         5,557,783   

Weighted average shares outstanding, Class B

     1,967,180         1,978,180         1,969,647         1,982,413   

Diluted EPS, Class A

   $ 1.03       $ 0.99       $ 2.92       $ 2.70   

Diluted EPS, Class B

     0.62         0.60         1.78         1.64   

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.

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.

 

Page 23 of 42


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

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

 

     Pension Benefits     Supplemental
Insurance/
Retirement
Plan
 
     2014     2013     2014      2013  
    

(In thousands)

 

Service cost

   $ 258      $ 299      $ 389       $ 381   

Interest

     367        314        331         267   

Expected return on plan assets

     (636     (470     —           —     

Recognized prior service cost (benefit)

     (26     (26     29         29   

Recognized net actuarial losses

     3        158        88         129   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ (34   $ 275      $ 837       $ 806   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

     Pension Benefits     Supplemental
Insurance/
Retirement Plan
 
     2014     2013     2014      2013  
    

(In thousands)

 

Service cost

   $ 775      $ 897      $ 1,166       $ 1,144   

Interest

     1,100        942        994         803   

Expected return on plan assets

     (1,907     (1,410     —           —     

Recognized prior service cost (benefit)

     (78     (78     86         86   

Recognized net actuarial losses

     9        473        266         386   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ (101   $ 824      $ 2,512       $ 2,419   
  

 

 

   

 

 

   

 

 

    

 

 

 

Contributions

As of June 30, 2014, $920,000 has been contributed. The Company does not anticipate making any additional contributions.

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.

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

 

Page 24 of 42


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 September 30, 2014, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

   $ 2,001       $ —         $ 2,001       $ —     

U.S. Government Sponsored Enterprises

     —           —           —           —     

SBA Backed Securities

     6,829         —           6,829         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     393,283         —           393,283         —     

Privately Issued Residential Mortgage Backed Securities

     1,991         —           1,991         —     

Obligations Issued by States and Political Subdivisions

     82,878         —           403         82,475   

Other Debt Securities

     3,196         1,005         2,191         —     

Equity Securities

     505         294         —           211   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 490,683       $ 1,299       $ 406,698       $ 82,686   
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

     4,680         —           —           4,680   

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

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on

 

Page 25 of 42


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-month period and nine-month periods ended September 30, 2014 amounted to $483,000 and $999,000, respectively.

There were no transfers between level 1 and 2 for the three months ended September 30, 2014. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the six month period ended September 30, 2014.

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

 

Asset

   Fair Value     

Valuation Technique

  

Unobservable Input

   Unobservable Input
Value or Range

Securities AFS(4)

   $ 82,686       Discounted cash flow    Discount rate    0% -1% (3)

Impaired Loans

     4,680       Appraisal of collateral (1)    Appraisal adjustments (2)    0%-25% discount

 

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

The changes in Level 3 securities for the nine-month period ended September 30, 2014 are shown in the table below:

 

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

Balance at December 31, 2013

   $ 3,820       $ 32,487      $ 290      $ 36,597   

Purchases

     —           86,378        —          86,378   

Maturities and calls

     —           (40,206     (79     (40,285

Amortization

     —           (4     —          (4

Changes in fair value

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

   $ 3,820       $ 78,655      $ 211      $ 82,686   
  

 

 

    

 

 

   

 

 

   

 

 

 

The amortized cost of Level 3 securities was $83,559,000 at September 30, 2014 with an unrealized loss of $872,000. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

The changes in Level 3 securities for the nine-month period ended September 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

     —           43,807        —          43,807   

Maturities and calls

     —           (57,036     (51     (57,087

Amortization

     —           (23     —          (23

Changes in fair value

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ 3,963       $ 36,225      $ 291      $ 40,479   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

Page 26 of 42


The amortized cost of Level 3 securities was $41,204,000 at September 30, 2013 with an unrealized loss of $725,000. 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.

Note 11. Fair Values of Financial Instruments

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

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

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

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

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

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

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

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

 

Page 27 of 42


The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2014 and December 31, 2013. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable.

 

                   Fair Value Measurements  
     Carrying Amount      Estimated Fair
Value
     Level 1 Inputs      Level 2 Inputs      Level 3 Inputs  
September 30, 2014                                   
(in thousands)                                   

Financial assets:

              

Securities held-to-maturity

   $ 1,471,137       $ 1,463,535       $ —         $ 1,463,535       $ —     

Loans (1)

     1,314,164         1,291,746         —           —           1,291,746   

Financial liabilities:

              

Time deposits

     370,779         375,650         —           375,650         —     

Other borrowed funds

     337,500         340,500         —           340,500         —     

Subordinated debentures

     36,083         36,083         —           —           36,083   

December 31, 2013

              

Financial assets:

              

Securities held-to-maturity

     1,487,884         1,464,449         —           1,464,449         —     

Loans (1)

     1,243,822         1,214,192         —           —           1,214,192   

Financial liabilities:

              

Time deposits

     382,224         386,742         —           386,742         —     

Other borrowed funds

     255,144         254,736         —           254,736         —     

Subordinated debentures

     36,083         39,503         —           —           39,503   

 

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

Note 12. Recent Accounting Developments

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company implemented the provisions of ASU 2011-11 as of January 1, 2013. The adoption of this pronouncement did not have a material effect on the consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income or as a separate disclosure in the notes to the financial statements. The new standard is effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. The Company has presented a separate footnote (Note 7) as a result of this pronouncement.

In January 2014, the FASB issued ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments

 

Page 28 of 42


in this update clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company has assessed the impact of ASU 2014-04 and the adoption of this amendment will not have a material impact on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860) Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This ASU eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. In addition, the ASU requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The ASU is effective for annual periods beginning after December 15, 2014 and interim periods beginning after December 15, 2015; early application is not permitted. The Company is currently assessing the applicability of this ASU and has not determined the impact, if any, as of September 30, 2014.

In August 2014, the FASB issued ASU 2014-14, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40) Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This ASU which will require creditors to derecognize certain foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a single unit of account. ASU 2014-14 is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the ASU is effective for annual periods ending after December 15, 2015, and interim periods beginning after December 15, 2015. An entity can elect a prospective or a modified retrospective transition method, but must use the same transition method that it elected under FASB ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. Early adoption, including adoption in an interim period, is permitted if the entity already adopted ASU 2014-04. The Company has assessed the impact of ASU 2014-14 and the adoption of this amendment will not have a material impact on the Company’s financial statements.

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

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At September 30, 2014, the Company had total assets of $3.6 billion. Currently, the Company operates 25 banking offices in 19 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.

 

Page 29 of 42


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

During December 2013, the Company entered into a lease agreement to open a branch located in Woburn, Massachusetts. The branch is scheduled to open during the fourth quarter of 2014.

During March 2014, the Company entered into a lease agreement to open a branch located on Boylston Street in Boston, Massachusetts. This property is leased from an entity affiliated with Marshall M. Sloane, Chairman of the Board of the Company. This agreement was approved by the Board of Directors in the absence of the Chairman of the Board. The branch is scheduled to open during the first quarter of 2015. The deposits from the Kenmore Square, Boston Massachusetts branch, which closed on September 30, 2014, will be moved to the new Boylston Street branch.

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

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

The Company is also a provider of financial services, including cash management, transaction processing and short term financing to municipalities in Massachusetts, New Hampshire, and Rhode Island. The Company has deposit relationships with approximately 193 (55%) of the 351 cities and towns in Massachusetts.

Net income for the quarter ended September 30, 2014 was $5,706,000, or $1.03 per Class A share diluted, compared to net income of $5,519,000, or $0.99 per Class A share diluted, for the quarter ended September 30, 2013. Net income for the nine-month period ended September 30, 2014 was $16,237,000, or $2.92 per Class A share diluted, compared to net income of $15,021,000, or $2.70 per Class A share diluted, for the nine-month period ended September 30, 2013. Earnings per share (EPS) for each class of stock and time period is as follows:

 

     Three months
ended

September 30,
2014
     Three months
ended

September 30,
2013
 

Basic EPS – Class A common

   $ 1.25       $ 1.21   

Basic EPS – Class B common

   $ 0.62       $ 0.60   

Diluted EPS – Class A common

   $ 1.03       $ 0.99   

Diluted EPS – Class B common

   $ 0.62       $ 0.60   

 

Page 30 of 42


     Nine months
ended
September 30,
2014
     Nine months
ended

September 30,
2013
 

Basic EPS – Class A common

   $ 3.55       $ 3.29   

Basic EPS – Class B common

   $ 1.78       $ 1.64   

Diluted EPS – Class A common

   $ 2.92       $ 2.70   

Diluted EPS – Class B common

   $ 1.78       $ 1.64   

Net interest income totaled $50.0 million for the nine months ended September 30, 2014 compared to $44.9 million for the same period in 2013. The 11.5% increase in net interest income for the period is primarily due to an increase in average earning assets. The net interest margin increased from 2.21% on a fully taxable equivalent basis in 2013 to 2.23% on the same basis for 2014. This was primarily the result of a decrease in rates paid on deposits and borrowed funds. Also, interest expense increased slightly as a result of an increase in deposit balances and there was a 10.7% increase in the average balances of earning assets, combined with a similar increase in average deposits.

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

 

 

LOGO

From the beginning of 2012 through the third quarter of 2012, management stabilized the net interest margin by continuing to lower the cost of funds, and by deploying excess liquidity through expansion of the investment portfolio. Also, the Company collected approximately $3,253,000 of prepayment penalties during 2012. The primary factor accounting for the decrease in the net interest margin for the fourth quarter of 2012 and through the fourth quarter of 2013 was an additional large influx of deposits. Management invested the funds in shorter term securities. The net interest margin increased during the first quarter of 2014 primarily as a result of pricing discipline and decreased during the second quarter of 2014 primarily as a result of a decrease in asset yields. The net interest margin increased slightly during the third quarter of 2014, primarily as a result of increases in asset yields.

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

For the three months ended September 30, 2014, the loan loss provision was $600,000 compared to a provision of $750,000 for the same period last year. For the nine months ended September 30, 2014, the loan loss provision was $1.7 million compared to a provision of $2.3 million for the same period last year. The decrease in the provision was primarily as a result of changes in the portfolio composition and changes in qualitative economic factors. Nonperforming loans increased to $6.0 million at September 30, 2014 from $3.7 million on September 30, 2013. The increase was mainly the result of a single $2.2 million commercial real estate loan. `

 

Page 31 of 42


The Company had no sales of investment securities during the nine months ended September 30, 2014. The Company capitalized on favorable market conditions for the three and nine months ended September 30, 2013 and realized net gains on sales of investments of $1.0 million and $2.7 million, respectively.

Included in operating expenses for the first nine months ended September 30, 2014 are FDIC assessments of $1.5 million compared to $1.3 million for the same period in 2013.

For the first nine months of 2014, the Company’s effective income tax rate was 4.4% compared to 5.6% for last year’s corresponding period. The effective income tax rate decreased primarily as a result of an increase in tax-exempt income.

Financial Condition

Loans

On September 30, 2014, total loans outstanding were $1.3 billion, up by $71.9 million from the total on December 31, 2013. At September 30, 2014, commercial real estate loans accounted for 52.0% and residential real estate loans, including home equity loans, accounted for 31.2% of total loans.

Commercial and industrial loans increased to $152.8 million at September 30, 2014 from $76.7 million at December 31, 2013, primarily as a result of an increase in commercial and industrial financing. Construction loans decreased to $25.3 million at September 30, 2014 from $33.1 million on December 31, 2013, primarily as a result of loan payments. Municipal loans increased from $36.6 million to $32.7 million, primarily as a result of an increase in municipal commercial and industrial originations.

Allowance for Loan Losses

The allowance for loan loss at September 30, 2014 was $22.5 million as compared to $20.9 million at December 31, 2013. The increase was due to the increase in the size of the loan portfolio. The level of the allowance for loan losses to total loans was 1.68% at September 30, 2014 and at December 31, 2014. In evaluating the allowance for loan losses the Company considered the following categories to be higher risk:

 

    Construction loans: The outstanding loan balance of construction loans at September 30, 2014 is $25.3 million as compared to $33.1 million at December 31, 2013. Based on the general local conditions facing construction, management closely monitors all construction loans and considers this type of loans to be higher risk.

 

    Higher balance loans: Loans greater than $1.0 million are considered “high balance loans”. The balance of these loans is $778.7 million at September 30, 2014 as compared to $701.1 million at December 31, 2013. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high balance loans. Included in high balance loans are loans greater than $10.0 million. The balance of these loans, which is included in the loans greater than $1.0 million category, is $472.7 million, at September 30, 2014 as compared to $377.9 million at December 31, 2013. Additional allowance allocations are made based upon the level of this type of high balance loans that is separate and greater than the $1.0 million allocation.

 

   

Small business loans: The outstanding loan balances of small business loans is $36.8 million at September 30, 2014 as compared to $40.2 million at December 31, 2013. These are considered higher risk loans because small

 

Page 32 of 42


 

businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion.

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 21,722      $ 20,500      $ 20,941      $ 19,197   

Loans charged off

     (163     (149     (705     (682

Recoveries on loans previously charged-off

     310        149        583        485   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     147        —          (122     (197

Provision charged to expense

     600        750        1,650        2,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 22,469      $ 21,250      $ 22,469      $ 21,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Nonperforming Assets

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

 

     September 30, 2014     December 31, 2013  
     (Dollars in thousands)  

Nonaccruing loans

   $ 6,018      $ 2,549   

Loans past due 90 days or more and still accruing

   $ —        $ —     

Nonaccruing loans as a percentage of total loans

     0.45     0.20

Accruing troubled debt restructures

   $ 3,697      $ 5,969   

Cash and Cash Equivalents

Cash and cash equivalents increased during the first nine months of 2014. This was primarily the result of an increase in lower yielding interest-bearing deposits in other banks during the quarter.

Short-term Investments

Short-term investments decreased as a result of maturities.

Investments

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

 

Page 33 of 42


Securities Available-for-Sale (at Fair Value)

The securities available-for-sale portfolio totaled $490.7 million at September 30, 2014, an increase of 5.7% from December 31, 2013. During the third quarter of 2013, $987.0 million of securities available-for-sale with unrealized losses of $25.3 million were transferred to securities held-to-maturity. This was done in response to rising interest rates. Purchases of securities available-for-sale totaled $133.0 million for the nine months ended September 30, 2014. The portfolio is concentrated in United States Government Sponsored Enterprises, Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 4.4 years.

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

Securities available-for-sale totaling $82.7 million, or 2.3% of assets are classified as Level 3. These securities are generally failed auction rate securities, equity investments or obligations of states and political subdivisions with no readily determinable fair value. Failed auction rate securities were reclassified to Level 3 during the first quarter of 2009 due to the lack of an active market. Fair values for Level 3 securities are, generally, arrived at based upon a review of market trades of similar instruments, if any, as well as an analysis of the security based upon market liquidity and prevailing market interest rates.

During the first nine months of 2014, net unrealized gains on the securities available-for-sale increased to $807,000 from a $1.7 million loss at December 31, 2013. Unrealized gains on the available-for-sale portfolio increased as a result of increases in interest rates.

 

     September 30, 2014      December 31, 2013  
     (In thousands)  

U.S. Treasury

   $ 2,001       $ 1,998   

U.S. Government Sponsored Enterprises

     —           10,004   

Small Business Administration

     6,829         7,302   

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

     393,283         403,189   

Privately Issued Residential Mortgage-backed Securities

     1,991         2,277   

Obligations issued by States and Political Subdivisions

     82,878         36,723   

Other Debt Securities

     3,196         2,176   

Equity Securities

     505         576   
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 490,683       $ 464,245   
  

 

 

    

 

 

 

There were no realized gains on sales of investments for the first nine months of 2014.

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

Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $1.5 billion on September 30, 2014, a decrease of 1.1% from the total on December 31, 2013. During the third quarter of

 

Page 34 of 42


2013, $987.0 million of securities available-for-sale with unrealized losses of $25.3 million were transferred to securities held-to-maturity. This was done in response to rising interest rates. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 4.7 years.

 

     September 30, 2014      December 31, 2013  
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 291,158       $ 291,779   

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

     1,179,979         1,196,105   
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $ 1,471,137       $ 1,487,884   
  

 

 

    

 

 

 

At September 30, 2014 and December 31, 2013, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises.

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

Federal Home Loan Bank of Boston Stock

The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”) system, is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis in the stock. For the nine months ended September 30, 2014, the FHLBB reported preliminary net income of $115.3 million. The FHLBB also declared a dividend equal to an annual yield of 1.49%. During the first nine months of 2014, the Company purchased $4.8 million of additional capital stock and redeemed $680,000. As of September 30, 2014, no impairment has been recognized.

Deposits and Borrowed Funds

On September 30, 2014, deposits totaled $2.8 billion, representing a 2.7% increase from December 31, 2013. Total deposits increased primarily as a result of increases in demand deposits, money market accounts, and savings and NOW deposits. Money market and Savings and NOW deposits increased as the Company continued to offer attractive rates for these types of deposits during the first nine months of the year. Borrowed funds totaled $532.6 million compared to $469.6 million at December 31, 2013. Borrowed funds increased mainly as a result of an increase in borrowings from the FHLBB.

Stockholders’ Equity

At September 30, 2014, total equity was $195.6 million compared to $176.5 million at December 31, 2013. The Company’s equity increased primarily as a result of earnings and a decrease in other comprehensive loss, net of taxes, offset somewhat by dividends paid. Other comprehensive loss, net of taxes, decreased as a result of a decrease in unrealized losses on securities available-for-sale and securities transferred from available-for-sale to held-to-maturity. During the third quarter of 2013, $987.0 million of securities available-for-sale with unrealized losses of $25.3 million were transferred to securities held-to-maturity. This was done in response to rising interest rates. The Company’s leverage ratio stood at 6.70% at September 30, 2014, compared to 6.50% at December 31, 2013. The increase in the leverage ratio is primarily due to an increase stockholders’ equity. Book value as of September 30, 2014 was $35.14 per share compared to $31.76 at December 31, 2013.

 

Page 35 of 42


Results of Operations

The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the three-month periods indicated.

 

     Three Months Ended  
     September 30, 2014     September 30, 2013  
     ( In thousands)  
     Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
    Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
 

ASSETS

            

Interest-earning assets:

            

Loans (2)

            

Loans taxable

   $ 764,345      $ 8,095        4.20   $ 759,299      $ 8,283        4.33

Loans tax-exempt

     571,237        7,153        4.97        456,405        6,935        6.03   

Securities available-for-sale (5):

            

Taxable

     446,773        675        0.60        569,505        1,329        0.93   

Tax-exempt

     61,824        117        0.76        44,526        96        0.86   

Securities held-to-maturity:

            

Taxable

     1,528,523        8,104        2.12        1,260,195        6,181        1.96   

Interest-bearing deposits in other banks

     86,656        61        0.28        171,895        120        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,459,358        24,205        2.80        3,261,825        22,944        2.81   

Non interest-earning assets

     167,608            156,818       

Allowance for loan losses

     (22,040         (20,850    
  

 

 

       

 

 

     

Total assets

   $ 3,604,926          $ 3,397,793       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 761,506      $ 433        0.23   $ 719,079      $ 441        0.24

Savings accounts

     327,990        210        0.25        330,608        233        0.28   

Money market accounts

     947,986        725        0.30        852,628        681        0.32   

Time deposits

     362,507        1,089        1.19        399,846        1,089        1.08   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,399,989        2,457        0.41        2,302,161        2,444        0.42   

Securities sold under agreements to repurchase

     202,050        90        0.18        200,173        89        0.18   

Other borrowed funds and subordinated debentures

     287,908        2,334        3.22        238,348        2,218        3.69   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,889,947        4,881        0.67     2,740,682        4,751        0.69
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities

            

Demand deposits

     488,443            449,057       

Other liabilities

     34,672            42,392       
  

 

 

       

 

 

     

Total liabilities

     3,413,062            3,232,131       
  

 

 

       

 

 

     

Stockholders’ equity

     191,864            165,662       

Total liabilities & stockholders’ equity

   $ 3,604,926          $ 3,397,793       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       19,324            18,193     

Less taxable equivalent adjustment

       (2,580         (2,395  
    

 

 

       

 

 

   

Net interest income

     $ 16,744          $ 15,798     
    

 

 

   

 

 

     

 

 

   

 

 

 

Net interest spread (3)

         2.13         2.13
      

 

 

       

 

 

 

Net interest margin (4)

         2.22         2.22
      

 

 

       

 

 

 

 

(1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(5) Average balances of securities available-for-sale calculated utilizing amortized cost.

 

Page 36 of 42


The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the nine-month periods indicated.

 

     Nine Months Ended  
     September 30, 2014     September 30, 2013  
     ( In thousands)  
     Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
    Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
 

ASSETS

            

Interest-earning assets:

            

Loans (2)

            

Loans taxable

   $ 763,767      $ 24,531        4.29   $ 758,086      $ 24,979        4.41

Loans tax-exempt

     533,625        20,552        5.15        407,609        18,186        5.97   

Securities available-for-sale (5):

            

Taxable

     454,839        2,184        0.64        1,116,942        12,350        1.47   

Tax-exempt

     45,012        276        0.82        48,818        349        0.95   

Securities held-to-maturity:

            

Taxable

     1,514,604        23,904        2.10        596,938        9,120        2.04   

Interest-bearing deposits in other banks

     133,929        272        0.27        183,057        384        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,445,776        71,719        2.78        3,111,450        65,368        2.81   

Non interest-earning assets

     164,682            168,777       

Allowance for loan losses

     (21,603         (20,172    
  

 

 

       

 

 

     

Total assets

   $ 3,588,855          $ 3,260,055       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 771,399      $ 1,264        0.22   $ 702,497      $ 1,246        0.24

Savings accounts

     333,829        647        0.26        321,220        687        0.29   

Money market accounts

     929,328        2,033        0.29        769,667        1,795        0.31   

Time deposits

     379,565        3,315        1.17        393,985        3,657        1.24   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,414,121        7,259        0.40        2,187,369        7,385        0.45   

Securities sold under agreements to repurchase

     213,511        284        0.18        202,548        268        0.18   

Other borrowed funds and subordinated debentures

     264,116        6,754        3.42        222,854        6,310        3.79   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,891,748        14,297        0.66     2,612,771        13,963        0.71
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities

            

Demand deposits

     476,953            430,884       

Other liabilities

     34,242            41,949       
  

 

 

       

 

 

     

Total liabilities

     3,402,943            3,085,604       
  

 

 

       

 

 

     

Stockholders’ equity

     185,912            174,451       

Total liabilities & stockholders’ equity

   $ 3,588,855          $ 3,260,055       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       57,422            51,405     

Less taxable equivalent adjustment

       (7,409         (6,550  
    

 

 

       

 

 

   

Net interest income

     $ 50,013          $ 44,855     
    

 

 

   

 

 

     

 

 

   

 

 

 

Net interest spread (3)

         2.12         2.09
      

 

 

       

 

 

 

Net interest margin (4)

         2.23         2.21
      

 

 

       

 

 

 

 

(1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(5) Average balances of securities available-for-sale calculated utilizing amortized cost.

 

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The following table presents certain information on a fully-tax equivalent basis regarding changes in the Company’s interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to changes in rate and changes in volume.

 

     Three Months Ended September 30, 2014
Compared with

Three Months Ended September 30, 2013
    Nine Months Ended September 30, 2014
Compared with
Nine Months Ended September 30, 2013
 
    

Increase/(Decrease)

Due to Change in

   

Increase/(Decrease)

Due to Change in

 
     Volume     Rate     Total     Volume     Rate     Total  
     (in thousands)     (in thousands)  

Interest income:

            

Loans

            

Taxable

   $ 55      $ (243   $ (188   $ 186      $ (634   $ (448

Tax-exempt

     1,564        (1,346     218        5,089        (2,723     2,366   

Securities available-for-sale

            

Taxable

     (248     (406     (654     (5,202     (4,964     (10,166

Tax-exempt

     34        (13     21        (26     (47     (73

Securities held-to-maturity

            

Taxable

     1,393        530        1,923        14,473        311        14,784   

Interest-bearing deposits in other banks

     (60     1        (59     (100     (12     (112
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     2,738        (1,477     1,261        14,420        (8,069     6,351   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits:

            

NOW accounts

     25        (33     (8     117        (99     18   

Savings accounts

     (2     (21     (23     26        (66     (40

Money market accounts

     74        (30     44        355        (117     238   

Time deposits

     (107     107        —          (131     (211     (342
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     (10     23        13        367        (493     (126

Securities sold under agreements to repurchase

     1        —          1        15        1        16   

Other borrowed funds and subordinated debentures

     425        (309     116        1,094        (650     444   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     416        (286     130        1,476        (1,142     334   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 2,322      $ (1,191   $ 1,131      $ 12,944      $ (6,927   $ 6,017   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

For the three months ended September 30, 2014, net interest income on a fully taxable equivalent basis totaled $19.3 million compared to $18.2 million for the same period in 2013, an increase of $1.1 million or 6.2%. This increase in net interest income for the period is primarily due to an increase in interest earning assets. The net interest margin remained stable at 2.22% on a fully taxable equivalent basis in 2013 and 2014. Also, interest expense increased slightly as a result of an increase in deposit balances and there was a 6.1% increase in the average balances of earning assets, combined with a similar increase in average deposits.

For the nine months ended September 30, 2014, net interest income on a fully taxable equivalent basis totaled $57.4 million compared to $51.4 million for the same period in 2013, an increase of $6.0 million or 11.7%. This increase in net interest income for the period is primarily due to an increase in interest earning assets as well as a decrease in rates paid on deposits and borrowed funds. The net interest margin increased from 2.21% on a fully taxable equivalent basis in 2013 to 2.23% on the same basis for 2014. This was primarily the result of a decrease in

rates paid on deposits and borrowed funds. Also, interest expense increased slightly as a result of an increase in deposit balances and there was a 10.7% increase in the average balances of earning assets, combined with a similar increase in average deposits.

 

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Provision for Loan Losses

For the three months ended September 30, 2014, the loan loss provision was $600,000 compared to a provision of $750,000 for the same period last year. For the nine months ended September 30, 2014, the loan loss provision was $1.7 million compared to a provision of $2.3 million for the same period last year. The decrease in the provision was primarily as a result of changes in the portfolio composition and changes in qualitative economic factors.

Non-Interest Income and Expense

Other operating income for the quarter ended September 30, 2014 decreased by $1.0 million to $3.8 million from $4.8 million for the same period last year. This was mainly attributable to a decrease in net gains on sales of investments of $1.0 million. Also, there was a decrease in gains on sales of mortgage loans held for sale of $114,000. There was a decrease in service charges on deposit accounts of $42,000, which was mainly attributable to a decrease in overdraft fees. Lockbox fees decreased by $13,000 as a result of increased customer volume.

Other operating income for the nine months ended September 30, 2014 decreased by $3.6 million to $10.8 million from $14.4 million for the same period last year. This was mainly attributable to a decrease in gains on sales of investments of $2.7 million. Also, there was a decrease in gains on sales of mortgage loans held for sale of $1.0 million. There was an increase in service charges on deposit accounts of $28,000, which was mainly attributable to an increase in debit card fees and deposit related fees.

For the quarter ended September 30, 2014, operating expenses decreased by $19,000 or 0.1% to $14.0 million, from the same period last year. The decrease in operating expenses for the quarter was mainly attributable to a decrease of $177,000 in salaries and employee benefits, offset, somewhat, by an increase of $101,000 in occupancy expenses, $40,000 in FDIC assessments, and $19,000 in other expenses. Equipment expenses decreased by $2,000. Salaries and employee benefits decreased mainly as a result of decreases in pension expenses, offset, somewhat, by merit increases, increased staffing levels, and increased bonus expense. Occupancy increased mainly as a result of costs associated with the Chestnut Hill branch opening during the fourth quarter of 2013. Other expenses increased mainly as a result of a decrease in marketing and legal expense.

For the nine months ended September 30, 2014, operating expenses increased by $1.1 million or 2.7% to $42.2 million, from the same period last year. The increase in operating expenses for the nine months was mainly attributable to an increase of $474,000 in salaries and employee benefits, $390,000 in occupancy expenses, $164,000 in FDIC assessments and $111,000 in other expenses. Salaries and employee benefits increased mainly as a result of merit increases, increased staffing levels, and increased bonus expense. Occupancy increased mainly as a result of costs associated with the Chestnut Hill branch opening during the fourth quarter of 2013. Other expenses increased mainly as a result of increased uninsured losses and increased software maintenance expense.

Income Taxes

For the third quarter of 2014, the Company’s income tax expense totaled $221,000 on pretax income of $5.9 million resulting in an effective tax rate of 3.7%. For last year’s corresponding quarter, the Company’s income tax expense totaled $308,000 on pretax income of $5.8 million resulting in an effective tax rate of 5.3%. The decrease in the effective income tax rate was primarily the result of an increase in tax-exempt income.

 

Page 39 of 42


For the first nine months of 2014, the Company’s income tax expense totaled $745,000 on pretax income of $17.0 million resulting in an effective tax rate of 4.4%. For last year’s corresponding quarter, the Company’s income tax expense totaled $891,000 on pretax income of $15.9 million resulting in an effective tax rate of 5.6%. The decrease in the effective income tax rate was primarily the result of an increase in tax-exempt income.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates tied to specific 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. The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. Management believes that there has been no material changes in the interest rate risk reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the Securities and Exchange Commission. The information is contained in the Form 10-K within the Market Risk and Asset Liability Management section of Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Item 4. Controls and Procedures

The Company’s management, with participation of the Company’s principal executive and financial officers, has evaluated its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Company’s management, with participation of its principal executive and financial officers, has concluded that the Company’s disclosure controls and procedures are effective. The disclosure controls and procedures also effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act is accumulated and reported to Company management (including the principal executive officer and the principal financial officer) as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has evaluated its internal control over financial reporting and during the third quarter of 2014 there were no changes that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Part II – Other Information

Item 1

   Legal proceedings – At the present time, the Company is not engaged in any legal proceedings which, if adversely determined to the Company, would have a material adverse impact on the Company’s financial condition or results of operations. From time to time, the Company is party to routine legal proceedings within the normal course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition and results of operation.

Item 1A

   Risk Factors – Please read “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. There have been no material changes since this 10-K was filed. These risks are not the only ones facing the Company. Additional

 

Page 40 of 42


     risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely effect the Company’s business, financial condition and operating results.

Item 2

     Unregistered Sales of Equity Securities and Use of Proceeds –
    

(a) — (b) Not applicable.

    

(c) None

Item 3

     Defaults Upon Senior Securities – None

Item 5

     Other Information – None

Item 6

     Exhibits
     31.1 Certification of President and Chief Executive Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14.
     31.2 Certification of Chief Financial Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14.
 

+

   32.1 Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

+

   32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     + + 101.INS XBRL Instance Document
     + + 101.SCH XBRL Taxonomy Extension Schema
     + + 101.CAL XBRL Taxonomy Extension Calculation Linkbase
     + + 101.LAB XBRL Taxonomy Extension Label Linkbase
     + + 101.PRE XBRL Taxonomy Extension Presentation Linkbase
     + + 101.DEF XBRL Taxonomy Definition Linkbase

 

 

+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
+ + As provided in Rule 406T of regulation S-T, this information is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and consists of the following materials from Century Bancorp Inc.’s Quarterly Report on 10-Q for the quarter ended September 30, 2014, formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Income for the three months ended September 30, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2014 and 2013; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 and 2013;