10-Q 1 d88905d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2015.

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, 2015, 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

 

 

 


Table of Contents

Century Bancorp, Inc.

 

   

Index

  

Page
Number

 
Part I  

Financial Information

  
 

Forward Looking Statements

     3   
Item 1.  

Financial Statements (unaudited)

  
 

Consolidated Balance Sheets:
September 30, 2015 and December 31, 2014

     4   
 

Consolidated Statements of Income:
Three months and nine months ended September 30, 2015 and 2014

     5   
 

Consolidated Statements of Comprehensive Income:
Three months and nine months ended September 30, 2015 and 2014

     6   
 

Consolidated Statements of Changes in Stockholders’ Equity:
Nine months ended September 30, 2015 and 2014

     7   
 

Consolidated Statements of Cash Flows:
Nine months ended September 30, 2015 and 2014

     8   
 

Notes to Consolidated Financial Statements

     9-28   
Item 2.  

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

     28-40   
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   
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


Table of Contents

Forward Looking Statements

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

 

Page 3 of 42


Table of Contents

PART I - Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     September 30,
2015
    December 31,
2014
 
Assets     

Cash and due from banks

   $ 51,558      $ 43,367   

Federal funds sold and interest-bearing deposits in other banks

     61,706        261,990   
  

 

 

   

 

 

 

Total cash and cash equivalents

     113,264        305,357   
  

 

 

   

 

 

 

Short-term investments

     2,139        2,131   

Securities available-for-sale, amortized cost $410,206 and $448,210, respectively

     410,214        448,390   

Securities held-to-maturity, fair value $1,565,261 and $1,413,603, respectively

     1,543,775        1,406,792   

Federal Home Loan Bank of Boston stock, at cost

     29,698        24,916   

Loans, net:

    

Commercial and industrial

     378,154        149,732   

Municipal

     87,016        41,850   

Construction and land development

     27,308        22,744   

Commercial real estate

     701,523        696,272   

Residential real estate

     264,105        257,305   

Home equity

     172,091        151,275   

Consumer and other

     10,633        12,188   
  

 

 

   

 

 

 

Total loans, net

     1,640,830        1,331,366   

Less: allowance for loan losses

     22,330        22,318   
  

 

 

   

 

 

 

Net loans

     1,618,500        1,309,048   

Bank premises and equipment

     24,214        24,182   

Accrued interest receivable

     7,306        6,241   

Goodwill

     2,714        2,714   

Other assets

     104,583        94,265   
  

 

 

   

 

 

 

Total assets

   $ 3,856,407      $ 3,624,036   
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 534,870      $ 484,928   

Savings and NOW deposits

     1,071,773        978,619   

Money Market Accounts

     896,509        890,899   

Time deposits

     406,420        383,145   
  

 

 

   

 

 

 

Total deposits

     2,909,572        2,737,591   

Securities sold under agreements to repurchase

     211,770        212,360   

Other borrowed funds

     432,500        395,500   

Subordinated debentures

     36,083        36,083   

Due to broker

     4,430        —     

Other liabilities

     50,920        50,002   
  

 

 

   

 

 

 

Total liabilities

     3,645,275        3,431,536   
  

 

 

   

 

 

 
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 3,600,729 shares and 3,600,729 shares, respectively

     3,601        3,601   

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        1,967   

Additional paid-in capital

     12,292        12,292   

Retained earnings

     215,811        200,411   
  

 

 

   

 

 

 
     233,671        218,271   

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

     (27     77   

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

     (7,782     (10,479

Pension liability, net of taxes

     (14,730     (15,369
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (22,539     (25,771
  

 

 

   

 

 

 

Total stockholders’ equity

     211,132        192,500   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 3,856,407      $ 3,624,036   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended September 30,      Nine months ended September 30,  
     2015      2014      2015      2014  

Interest income

           

Loans

   $ 14,051       $ 12,708       $ 38,597       $ 37,768   

Securities held-to-maturity

     8,834         8,104         26,373         23,904   

Securities available-for-sale

     830         752         2,299         2,366   

Federal funds sold and interest-bearing deposits in other banks

     35         60         328         271   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     23,750         21,624         67,597         64,309   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Savings and NOW deposits

     729         642         2,049         1,911   

Money market accounts

     760         725         2,276         2,033   

Time deposits

     1,231         1,089         3,594         3,315   

Securities sold under agreements to repurchase

     129         90         371         284   

Other borrowed funds and subordinated debentures

     2,285         2,333         6,570         6,753   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     5,134         4,879         14,860         14,296   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     18,616         16,745         52,737         50,013   

Provision for loan losses

     —           600         200         1,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     18,616         16,145         52,537         48,363   

Other operating income

           

Service charges on deposit accounts

     1,941         2,022         5,788         6,068   

Lockbox fees

     782         723         2,458         2,345   

Net gains on sales of securities

     52         —           170         —     

Gains on sales of mortgage loans

     225         133         742         221   

Other income

     830         880         2,387         2,209   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     3,830         3,758         11,545         10,843   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Salaries and employee benefits

     10,087         8,681         28,701         26,332   

Occupancy

     1,499         1,341         4,621         4,105   

Equipment

     697         552         1,949         1,709   

FDIC assessments

     554         502         1,602         1,476   

Other

     3,263         2,900         9,531         8,602   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     16,100         13,976         46,404         42,224   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     6,346         5,927         17,678         16,982   

Provision for income taxes

     180         221         628         745   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 6,166       $ 5,706       $ 17,050       $ 16,237   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share data:

           

Weighted average number of shares outstanding, basic

           

Class A

     3,600,729         3,594,583         3,600,729         3,588,728   

Class B

     1,967,180         1,967,180         1,967,180         1,969,647   

Weighted average number of shares outstanding, diluted

           

Class A

     5,567,909         5,563,278         5,567,909         5,559,909   

Class B

     1,967,180         1,967,180         1,967,180         1,969,647   

Basic earnings per share:

           

Class A

   $ 1.35       $ 1.25       $ 3.72       $ 3.55   

Class B

   $ 0.67       $ 0.62       $ 1.86       $ 1.78   

Diluted earnings per share

           

Class A

   $ 1.11       $ 1.03       $ 3.06       $ 2.92   

Class B

   $ 0.67       $ 0.62       $ 1.86       $ 1.78   

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended September 30,  
     2015     2014  

Net income

   $ 6,166      $ 5,706   

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     27        1,004   

Less: reclassification adjustment for gains included in net income

     (31     —     
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (4     1,004   

Accretion of net unrealized losses transferred

     935        792   

Defined benefit pension plans:

    

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

     213        56   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     1,144        1,852   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 7,310      $ 7,558   
  

 

 

   

 

 

 
     Nine months ended September 30,  
     2015     2014  

Net income

   $ 17,050      $ 16,237   

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     (2     1,509   

Less: reclassification adjustment for gains included in net income

     (102     —     
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (104     1,509   

Accretion of net unrealized losses transferred

     2,697        2,524   

Defined benefit pension plans:

    

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

     639        169   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     3,232        4,202   
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ 20,282      $ 20,439   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2015 and 2014

 

     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, 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 (losses) 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   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

   $ 3,601       $ 1,967      $ 12,292       $ 200,411      $ (25,771   $ 192,500   

Net income

     —           —          —           17,050        —          17,050   

Other comprehensive income, net of tax:

              

Unrealized holding losses arising during period, net of $68 in taxes and $170 in realized net gains

     —           —          —           —          (104     (104

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $1,444 in taxes

     —           —          —           —          2,697        2,697   

Pension liability adjustment, net of $425 in taxes

     —           —          —           —          639        639   

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

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

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

     —           —          —           (354     —          (354
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2015

   $ 3,601       $ 1,967      $ 12,292       $ 215,811      $ (22,539   $ 211,132   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Nine months ended September 30,  
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 17,050      $ 16,237   

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

    

Gain on sales of mortgage loans

     (742     (221

Net gains on sales of securities

     (170     —     

Provision for loan losses

     200        1,650   

Deferred income taxes

     (1,825     (2,648

Net depreciation and amortization

     2,486        2,337   

(Increase) decrease in accrued interest receivable

     (1,065     222   

Increase in other assets

     (10,430     (2,238

Increase in other liabilities

     1,982        2,184   
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,486        17,523   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     —          3,561   

Purchase of short-term investments

     (8     (1,069

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

     163,809        112,242   

Proceeds from sales of securities available-for-sale

     42,716        —     

Purchase of securities available-for-sale

     (168,889     (132,953

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

     310,694        183,533   

Purchase of securities held-to-maturity

     (443,705     (163,064

Net increase in loans

     (356,915     (101,378

Proceeds from sales of portfolio loans

     48,041        13,364   

Capital expenditures

     (2,063     (1,780
  

 

 

   

 

 

 

Net cash used in investing activities

     (406,320     (87,544
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in time deposits

     23,275        (11,445

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

     148,706        86,051   

Net proceeds from exercise of stock options

     —          329   

Cash dividends

     (1,650     (1,646

Net decrease in securities sold under agreements to repurchase

     (590     (19,340

Net increase in other borrowed funds

     37,000        82,356   
  

 

 

   

 

 

 

Net cash provided by financing activities

     206,741        136,305   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (192,093     66,284   

Cash and cash equivalents at beginning of period

     305,357        94,678   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 113,264      $ 160,962   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 14,735      $ 14,295   

Income taxes

     3,780        2,807   

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

     (104     1,509   

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

     2,697        2,524   

Pension liability adjustment, net of taxes

     639        169   

Due (from) to broker

     4,430        7,613   

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Nine Months Ended September 30, 2015 and 2014

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, 2014, as filed with the Securities and Exchange Commission.

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

 

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Note 2. Securities Available-for-Sale

 

     September 30, 2015      December 31, 2014  
     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       $ —         $ 1       $ 1,998       $ 1,999       $ 1       $ —         $ 2,000   

Small Business Administration

     6,384         30         1         6,413         6,684         33         —           6,717   

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

     248,557         1,031         239         249,349         336,158         1,387         452         337,093   

Privately Issued Residential Mortgage Backed Securities

     1,538         4         14         1,528         1,894         5         25         1,874   

Obligations Issued by States and Political Subdivisions

     147,975         —           876         147,099         97,657         —           873         96,784   

Other Debt Securities

     3,600         29         116         3,513         3,600         24         100         3,524   

Equity Securities

     153         161         —           314         218         180         —           398   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 410,206       $ 1,255       $ 1,247       $ 410,214       $ 448,210       $ 1,630       $ 1,450       $ 448,390   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $213,438,000 and $301,038,000 at September 30, 2015 and December 31, 2014, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $21,396,000 and $24,810,000 at September 30, 2015 and December 31, 2014, respectively. The Company realized gross gains of $52,000 from the proceeds of $21,501,000 from the sales of available-for-sale securities for the three months ended September 30, 2015. The Company realized gross gains of $170,000 from the proceeds of $42,716,000 from the sales of available-for-sale securities for the nine months ended September 30, 2015.

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, 2015.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 139,707       $ 139,698   

After one but within five years

     160,760         161,327   

After five but within ten years

     100,082         100,313   

More than 10 years

     8,004         7,176   

Non-maturing

     1,653         1,700   
  

 

 

    

 

 

 

Total

   $ 410,206       $ 410,214   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at September 30, 2015 was 3.5 years. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations.

 

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As of September 30, 2015 and December 31, 2014, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered that the principal and interest on these securities are from issuers that are investment grade. The 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 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, 2015. 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 9 and 14 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 285 holdings at September 30, 2015.

 

     September 30, 2015  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (in thousands)  

U.S. Treasury

   $ 1,998       $ 1       $ —         $ —         $ 1,998       $ 1   

Small Business Administration

     1,321         1         —           —           1,321         1   

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

     17,724         20         70,811         219         88,535         239   

Privately Issued Residential Mortgage Backed Securities

     —           —           532         14         532         14   

Obligations Issued by States and Political Subdivisions

     —           —           3,820         876         3,820         876   

Other Debt Securities

     498         2         1,386         114         1,884         116   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 21,541       $ 24       $ 76,549       $ 1,223       $ 98,090       $ 1,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 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 14 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 262 holdings at December 31, 2014.

 

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     December 31, 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

     24,457         85         77,585         367         102,042         452   

Privately Issued Residential Mortgage Backed Securities

     —           —           678         25         678         25   

Obligations Issued by States and Political Subdivisions

     —           —           3,820         873         3,820         873   

Other Debt Securities

     —           —           1,400         100         1,400         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 24,457       $ 85       $ 83,483       $ 1,365       $ 107,940       $ 1,450   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 3. Investment Securities Held-to-Maturity

 

     September 30, 2015      December 31, 2014  
     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

   $ 235,457       $ 4,356       $ —         $ 239,813       $ 251,617       $ 2,707       $ 249       $ 254,075   

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

     1,308,318         19,332         2,202         1,325,448         1,155,175         11,185         6,832         1,159,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,543,775       $ 23,688       $ 2,202       $ 1,565,261       $ 1,406,792       $ 13,892       $ 7,081       $ 1,413,603   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,028,226,000 and $868,924,000 at September 30, 2015 and December 31, 2014, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $465,954,000 and $458,782,000 at September 30, 2015 and December 31, 2014, respectively.

At September 30, 2015 and December 31, 2014, 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, 2015.

 

     Amortized
Cost
     Fair
Value
 
     ( in thousands)  

Within one year

   $ 5,925       $ 5,976   

After one but within five years

     1,254,122         1,269,863   

After five but within ten years

     279,792         285,450   

More than ten years

     3,936         3,972   
  

 

 

    

 

 

 

Total

   $ 1,543,775       $ 1,565,261   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at September 30, 2015 was 4.2 years. Included in the weighted average remaining life calculation at September 30, 2015 were $118,243,000 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, 2015 and December 31, 2014, 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

 

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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, 2015 and December 31, 2014.

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, 2015. 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 28 and 21 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 340 holdings at September 30, 2015.

 

     September 30, 2015  
     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 Enterprise Mortgage-Backed Securities

     164,251         796         112,323         1,406         276,574         2,202   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 164,251       $ 796       $ 112,323       $ 1,406       $ 276,574       $ 2,202   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 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 34 and 48 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 303 holdings at December 31, 2014.

 

     December 31, 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

   $ 22,414       $ 25       $ 14,776       $ 224       $ 37,190       $ 249   

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

     194,119         1,678         308,526         5,154         502,645         6,832   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 216,533       $ 1,703       $ 323,302       $ 5,378       $ 539,835       $ 7,081   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Allowance for Loan Losses

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

 

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

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (In thousands)  

Allowance for loan losses, beginning of period

   $ 22,245       $ 21,722       $ 22,318       $ 20,941   

Loans charged off

     (129      (163      (613      (705

Recoveries on loans previously charged-off

     214         310         425         583   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries (charge-offs)

     85         147         (188      (122

Provision charged to expense

     —           600         200         1,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 22,330       $ 22,469       $ 22,330       $ 22,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses for the three months ending September 30, 2015 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real

Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (In thousands)  

Allowance for loan losses:

                 

Balance at June 30, 2015

  $ 1,733      $ 4,428      $ 1,000      $ 11,723      $ 722      $ 709      $ 650      $ 1,280      $ 22,245   

Charge-offs

    —          (43     —          —          —          (86     —          —          (129

Recoveries

    —          75        —          80        1        58        —          —          214   

Provision

    126        995        117        (1,086)        115        (2     51        (316     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2015

  $ 1,859      $ 5,455      $ 1,117      $ 10,717      $ 838      $ 679      $ 701      $ 964      $ 22,330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 11      $ 25      $ —        $ 98      $ 36      $ —        $ 91      $ —          261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,848      $ 5,430      $ 1,117      $ 10,619      $ 802      $ 679      $ 610      $ 964      $ 22,069   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Ending balance

  $ 27,308      $ 378,154      $ 87,016      $ 701,523      $ 264,105      $ 10,633      $ 172,091      $ —        $ 1,640,830   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 100      $ 539      $ —        $ 1,692      $ 927      $ —        $ 91      $ —        $ 3,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 27,208      $ 377,615      $ 87,016      $ 699,831      $ 263,178      $ 10,633      $ 172,000      $ —        $ 1,637,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2015 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real

Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (In thousands)  

Allowance for loan losses:

                 

Balance at December 31, 2014

  $ 1,592      $ 4,757      $ 1,488      $ 11,199      $ 776      $ 810      $ 599      $ 1,097      $ 22,318   

Charge-offs

    —          (95     —          (298     —          (220     —          —          (613

Recoveries

    —          147        —          84        5        189        —          —          425   

Provision

    267        646        (371     (268     57        (100     102        (133     200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2015

  $ 1,859      $ 5,455      $ 1,117      $ 10,717      $ 838      $ 679      $ 701      $ 964      $ 22,330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 11      $ 25      $ —        $ 98      $ 36      $ —        $ 91      $ —          261   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,848      $ 5,430      $ 1,117      $ 10,619      $ 802      $ 679      $ 610      $ 964      $ 22,069   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 27,308      $ 378,154      $ 87,016      $ 701,523      $ 264,105      $ 10,633      $ 172,091      $ —        $ 1,640,830   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 100      $ 539      $ —        $ 1,692      $ 927      $ —        $ 91      $ —        $ 3,349   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 27,208      $ 377,615      $ 87,016      $ 699,831      $ 263,178      $ 10,633      $ 172,000      $ —        $ 1,637,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 14 of 42


Table of Contents

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
    Municipal     Commercial
Real
Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (In thousands)  

Allowance for loan losses:

                 

Balance at June 30, 2014

  $ 2,045      $ 2,430      $ 763      $ 11,697      $ 1,927      $ 428      $ 915      $ 1,517      $ 21,722   

Charge-offs

    —          (37     —          —          —          (126     —          —          (163

Recoveries

    —          115        —          1        6        106        82        —          310   

Provision

    (39     2,079        167        (966     (132     46        (41     (514     600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2014

  $ 2,006      $ 4,587      $ 930      $ 10,732      $ 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      $ 4,239      $ 930      $ 10,084      $ 1,649      $ 454      $ 863      $ 1,003      $ 20,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 25,339      $ 152,823      $ 36,624      $ 695,074      $ 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      $ 151,727      $ 36,624      $ 690,334      $ 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
    Municipal     Commercial
Real
Estate
    Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (In thousands)  

Allowance for loan losses:

                 

Balance at December 31, 2013

  $ 2,174      $ 2,617      $ 655      $ 10,935      $ 2,006      $ 432      $ 959      $ 1,163      $ 20,941   

Charge-offs

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

Recoveries

    —          164        —          5        26        305        83        —          583   

Provision

    82        1,857        275        (208     (231     121        (86     (160     1,650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2014

  $ 2,006      $ 4,587      $ 930      $ 10,732      $ 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      $ 4,239      $ 930      $ 10,084      $ 1,649      $ 454      $ 863      $ 1,003      $ 20,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 25,339      $ 152,823      $ 36,624      $ 695,074      $ 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      $ 151,727      $ 36,624      $ 690,334      $ 267,378      $ 10,253      $ 147,500      $ —        $ 1,328,801   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

Page 15 of 42


Table of Contents

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, 2015 and December 31, 2014.

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, 2015 and December 31, 2014.

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, 2015 and December 31, 2014 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, 2015.

 

     Construction
and Land
Development
     Commercial
and
Industrial
     Municipal      Commercial
Real

Estate
 
     (In thousands)  

Grade:

           

1-3 (Pass)

   $ 20,107       $ 377,615       $ 87,016       $ 699,637   

4 (Monitor)

     7,101         —           —           194   

5 (Substandard)

     —           —           —           —     

6 (Doubtful)

     —           —           —           —     

Impaired

     100         539         —           1,692   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,308       $ 378,154       $ 87,016       $ 701,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2014.

 

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

Grade:

           

1-3 (Pass)

   $ 15,515       $ 148,407       $ 41,850       $ 691,322   

4 (Monitor)

     7,126         472         —           633   

5 (Substandard)

     —           —           —           —     

6 (Doubtful)

     —           —           —           —     

Impaired

     103         853         —           4,317   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,744       $ 149,732       $ 41,850       $ 696,272   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2015.

 

     Commercial
and
Industrial
     Municipal      Commercial
Real

Estate
 
     (In thousands)  

Credit Rating:

        

Aaa – Aa3

   $ 180,006       $ 59,628       $ 7,781   

A1 – A3

     112,507         7,400         131,230   

Baa1 – Baa3

     9,680         9,035         154,029   

Ba2

     —           4,480         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 302,193       $ 80,543       $ 293,040   
  

 

 

    

 

 

    

 

 

 

 

Page 16 of 42


Table of Contents

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

Further information pertaining to the allowance for loan losses at September 30, 2015 follows:

 

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

Construction and land development

   $ —         $ 100       $ —         $ 100       $ 27,208       $ 27,308   

Commercial and industrial

     174         75         —           249         377,905         378,154   

Municipal

     —           —           —           —           87,016         87,016   

Commercial real estate

     2,569         180         —           2,749         698,774         701,523   

Residential real estate

     1,089         981         —           2,070         262,035         264,105   

Consumer and overdrafts

     14         7         —           21         10,612         10,633   

Home equity

     273         417         —           690         171,401         172,091   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,119       $ 1,760       $ —         $ 5,879       $ 1,634,951       $ 1,640,830   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses at December 31, 2014 follows:

 

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

Construction and land development

   $ —         $ 103       $ —         $ 103       $ 22,641       $ 22,744   

Commercial and industrial

     905         157         —           1,062         148,670         149,732   

Municipal

     —           —           —           —           41,850         41,850   

Commercial real estate

     1,046         2,781         —           3,827         692,445         696,272   

Residential real estate

     632         846         —           1,478         255,827         257,305   

Consumer and overdrafts

     6         5         —           11         12,177         12,188   

Home equity

     576         254         —           830         150,445         151,275   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,165       $ 4,146       $ —         $ 7,311       $ 1,324,055       $ 1,331,366   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2014.

 

Page 17 of 42


Table of Contents

The following is information pertaining to impaired loans for September 30, 2015:

 

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

Ending 9/30/15
    Interest
Income
Recognized
For 3 Months
Ending 9/30/15
    Average
Carrying Value
For 9 Months

Ending 9/30/15
    Interest
Income
Recognized
For 9 Months
Ending 9/30/15
 
    (Dollars in thousands)  

With no required reserve recorded:

             

Construction and land development

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

Commercial and industrial

    12        12        —          27        —          36        —     

Municipal

    —          —          —          —          —          —          —     

Commercial real estate

    —          —          —          —          —          196        —     

Residential real estate

    119        204        —          122        2        128        6   

Consumer

    —          —          —          —          —          —          —     

Home equity

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 131      $ 216      $ —        $ 149      $ 2      $ 360      $ 6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With required reserve recorded:

             

Construction and land development

  $ 100      $ 108      $ 11      $ 101      $ —        $ 102      $ —     

Commercial and industrial

    527        728        25        551        5        670        16   

Municipal

    —          —          —          —          —          —          —     

Commercial real estate

    1,692        1,789        98        1,700        14        2,809        48   

Residential real estate

    808        809        36        811        1        817        7   

Consumer

    —          —          —          —          —          —          —     

Home equity

    91        91        91        91        —          91        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,218      $ 3,525      $ 261      $ 3,254      $ 20      $ 4,489      $ 71   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total:

             

Construction and land development

  $ 100      $ 108      $ 11      $ 101      $ —        $ 102      $ —     

Commercial and industrial

    539        740        25        578        5        706        16   

Municipal

    —          —          —          —          —          —          —     

Commercial real estate

    1,692        1,789        98        1,700        14        3,005        48   

Residential real estate

    927        1,013        36        933        3        945        13   

Consumer

    —          —          —          —          —          —          —     

Home equity

    91        91        91        91        —          91        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,349      $ 3,741      $ 261      $ 3,403      $ 22      $ 4,849      $ 77   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 18 of 42


Table of Contents

There were no troubled debt restructurings occurring during the nine month periods ended September 30, 2015 or September 30, 2014.

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

Amount Reclassified from Accumulated Other Comprehensive Income

 

Details about Accumulated Other Comprehensive
Income Components

      Three Months Ended
September 30, 2015
    Three Months Ended
September 30, 2014
   

Affected Line Item

in the Statement

Where Net Income

is Presented

(In thousands)

Unrealized gains and losses on available-for-sale securities

       
    $ 52      $ —       

Net gains on sales of securities

      (21     —        Provision for income taxes
   

 

 

   

 

 

   
    $ 31      $ —        Net income
   

 

 

   

 

 

   

Accretion of unrealized losses transferred

       
    $ 1,436      $ 1,216      Interest on securities held-to-maturity
      (501     (424   Provision for income taxes
   

 

 

   

 

 

   
    $ 935      $ 792      Net income
   

 

 

   

 

 

   

Amortization of defined benefit pension items

       

Prior-service costs

    $ (2 )(b)    $ (3 )(b)    Salaries and employee benefits

Actuarial gains (losses)

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

 

 

   

 

 

   

Total before tax

      (354     (94   Income before taxes

Tax (expense) or benefit

      141        38      Provision for income taxes
   

 

 

   

 

 

   

Net of tax

    $ (213   $ (56   Net income
   

 

 

   

 

 

   

Total reclassifications for the period

    $ 753      $ 736      Net income, net of tax
   

 

 

   

 

 

   

 

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Details about Accumulated Other Comprehensive
Income Components

      Nine Months Ended
September 30, 2015
    Nine Months Ended
September 30, 2014
   

Affected Line Item

in the Statement

Where Net Income

is Presented

(In thousands)

Unrealized gains and losses on available-for-sale securities

       
    $ 170      $ —        Net gains on sales of securities
      (68     —        Provision for income taxes
   

 

 

   

 

 

   
    $ 102      $ —        Net income
   

 

 

   

 

 

   

Accretion of unrealized losses transferred

       
    $ 4,141      $ 4,009      Interest on securities held-to-maturity
      (1,444     (1,485   Provision for income taxes
   

 

 

   

 

 

   
    $ 2,697      $ 2,524      Net income
   

 

 

   

 

 

   

Amortization of defined benefit pension items

       

Prior-service costs

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

Actuarial gains (losses)

      (1,056 )(b)      (274 )(b)    Salaries and employee benefits
   

 

 

   

 

 

   

Total before tax

      (1,064     (282   Income before taxes

Tax (expense) or benefit

      425        113      Provision for income taxes
   

 

 

   

 

 

   

Net of tax

    $ (639   $ (169   Net income
   

 

 

   

 

 

   

Total reclassifications for the period

    $ 2,160      $ 2,355      Net income, net of tax
   

 

 

   

 

 

   

 

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

Note 6. Earnings per Share (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are the stock options discussed below. The dilutive effect of these stock options for three and nine months ended September 30, 2014 was an increase of 1,515 and 1,534 shares, respectively. There were no stock options outstanding during the nine months ended September 30, 2015.

 

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

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
(in thousands except share and per share data)                            

Basic EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 4,843      $ 4,480      $ 13,392      $ 12,741   

Net income, Class B

     1,323         1,226         3,658         3,496   

Denominator:

           

Weighted average shares outstanding, Class A

     3,600,729        3,594,583        3,600,729        3,588,728   

Weighted average shares outstanding, Class B

     1,967,180         1,967,180         1,967,180         1,969,647   

Basic EPS, Class A

   $ 1.35      $ 1.25      $ 3.72      $ 3.55   

Basic EPS, Class B

     0.67         0.62         1.86         1.78   

Diluted EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 4,843      $ 4,480      $ 13,392      $ 12,741   

Net income, Class B

     1,323         1,226         3,658         3,496   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     6,166         5,706         17,050         16,237   

Denominator:

           

Weighted average shares outstanding, basic, Class A

     3,600,729        3,594,583        3,600,729        3,588,728   

Weighted average shares outstanding, Class B

     1,967,180        1,967,180        1,967,180        1,969,647   

Dilutive effect of Class A stock options

     —           1,515         —           1,534   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,567,909         5,563,278         5,567,909         5,559,909   

Weighted average shares outstanding, Class B

     1,967,180        1,967,180        1,967,180        1,969,647   

Diluted EPS, Class A

   $ 1.11      $ 1.03      $ 3.06      $ 2.92   

Diluted EPS, Class B

     0.67         0.62         1.86         1.78   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 7. Employee Benefits

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

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

Executive officers of the Company and its subsidiaries who have at least one year of

service may participate in the Supplemental Plan. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.

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

 

     Pension Benefits      Supplemental Insurance/
Retirement Plan
 
     2015      2014      2015      2014  
     (In thousands)  

Service cost

   $ 336       $ 258       $ 397       $ 389   

Interest

     394         367         341         331   

Expected return on plan assets

     (688      (636      —           —     

Recognized prior service cost (benefit)

     (26      (26      29         29   

Recognized net actuarial losses

     203         3         150         88   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 219       $ (34    $ 917       $ 837   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Pension Benefits      Supplemental Insurance/
Retirement Plan
 
     2015      2014      2015      2014  
     (In thousands)  

Service cost

   $ 1,008       $ 775       $ 1,191       $ 1,166   

Interest

     1,182         1,100         1,023         994   

Expected return on plan assets

     (2,064      (1,907      —           —     

Recognized prior service cost (benefit)

     (78      (78      87         86   

Recognized net actuarial losses

     610         9         449         266   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 658       $ (101    $ 2,750       $ 2,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

Contributions

The company intends to contribute $2,000,000 to the Pension Plan in 2015. As of September 30, 2015, $1,500,000 has been contributed.

Note 8. 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 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.

 

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The results of the fair value hierarchy as of September 30, 2015, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

   $ 1,998       $ —         $ 1,998       $ —     

SBA Backed Securities

     6,413         —           6,413         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     249,349         —           249,349         —     

Privately Issued Residential Mortgage Backed Securities

     1,528         —           1,528         —     

Obligations Issued by States and Political Subdivisions

     147,099         —           —           147,099   

Other Debt Securities

     3,513         —           3,513         —     

Equity Securities

     314         277         —           37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 410,214       $ 277       $ 262,801       $ 147,136   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

                                                                                               

Impaired Loans

     1,131         —           —           1,131   

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

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for the three and nine-month periods ended September 30, 2015 amounted to $16,000 and ($227,000), respectively.

There were no transfers between level 1, 2 and 3 for the nine months ended September 30, 2015. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2015.

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)

   $ 147,136       Discounted cash flow   Discount rate   0%-1% (3)

Impaired Loans

     1,131       Appraisal of collateral (1)   Appraisal adjustments (2)   0%-30% discount

 

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

 

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The changes in Level 3 securities for the nine-month period ended September 30, 2015 are shown in the table below:

 

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

Balance at December 31, 2014

   $ 3,820       $ 92,964       $ 102       $ 96,886   

Purchases

     —           166,339         —           166,339   

Maturities and calls

     —           (115,989      (65      (116,054

Amortization

     —           (35      —           (35

Changes in fair value

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2015

   $ 3,820       $ 143,279       $ 37       $ 147,136   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $148,012,000 at September 30, 2015 with an unrealized loss of $876,000. 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, 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 results of the fair value hierarchy as of December 31, 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

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

U.S. Government Sponsored Enterprises

     —           —           —           —     

SBA Backed Securities

     6,717         —           6,717         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     337,093         —           337,093         —     

Privately Issued Residential Mortgage Backed Securities

     1,874         —           1,874         —     

Obligations Issued by States and Political Subdivisions

     96,784         —           —           96,784   

Other Debt Securities

     3,524         —           3,524         —     

Equity Securities

     398         296         —           102   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 448,390       $ 296       $ 351,208       $ 96,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

Impaired Loans

     3,410               —                 —                 3,410   

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

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for the period ended 2014 for the estimated credit loss amounted to $947,000.

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2014. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 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)

   $ 96,886       Discounted cash flow   Discount rate   0%-1% (3)

Impaired Loans

     3,410       Appraisal of collateral (1)   Appraisal adjustments (2)   0%-30% discount

 

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

Note 9. Fair Values of Financial Instruments

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

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

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or

 

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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.

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, 2015 and December 31, 2014. 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.

 

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     Carrying Amount      Estimated Fair
Value
     Fair Value Measurements  
           Level 1 Inputs      Level 2 Inputs      Level 3 Inputs  

September 30, 2015

   (In thousands)  

Financial assets:

              

Securities held-to-maturity

   $ 1,543,775       $ 1,565,261       $ —         $ 1,565,261       $ —     

Loans (1)

     1,618,500         1,595,857         —           —           1,595,857   

Financial liabilities:

              

Time deposits

     406,420         409,931         —           409,931         —     

Other borrowed funds

     432,500         438,504         —           438,504         —     

Subordinated debentures

     36,083         36,083         —           —           36,083   

December 31, 2014

              

Financial assets:

              

Securities held-to-maturity

     1,406,792         1,413,603         —           1,413,603         —     

Loans (1)

     1,309,048         1,291,550         —           —           1,291,550   

Financial liabilities:

              

Time deposits

     383,145         387,919         —           387,919         —     

Other borrowed funds

     395,500         400,196         —           400,196         —     

Subordinated debentures

     36,083         36,083         —           —           36,083   

 

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

Note 10. Recent Accounting Developments

In January 2015, the FASB issued ASU 2015-01, “Income Statement-Extraordinary and Unusual” (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from GAAP the concept of extraordinary items. This Update will align more closely GAAP income statement presentation guidance with International Audit Standards (IAS) 1, Presentation of Financial Statements, which prohibits the presentation and disclosure of extraordinary items. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation” (Topic 810): This ASU was issued to respond to stakeholders’ concerns about the current accounting for consolidation of certain legal entities. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

In April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest” (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Update No. 2015-03 was issued to simplify presentation of debt issuance costs. The amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuances costs are not affected by the amendments in this Update.

 

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The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

In April 2015, the FASB issued ASU 2015-04, “Compensation-Retirement Benefits” (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-05, “Intangible-Goodwill and Other-Internal Use Software” (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update was issued to provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change current account for service contracts. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

In May 2015, the FASB issued ASU 2015-08, “Business Combinations”. (Topic 805): Pushdown Accounting, Amendments to SEC paragraphs Pursuant to Staff Accounting Bulliten115. This to remove references and to amend certain previously issued pushdown accounting guidance. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position.

 

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, 2015, the Company had total assets of $3.9 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.

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.

 

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

The Company has client engagements in Massachusetts, New Hampshire and Rhode Island with approximately 245 government entities throughout the region.

Net income for the quarter ended September 30, 2015 was $6,166,000, or $1.11 per Class A share diluted, compared to net income of $5,706,000, or $1.03 per Class A share diluted, for the quarter ended September 30, 2014. Net income for the nine months ended September 30, 2015 was $17,050,000, or $3.06 per Class A share diluted, compared to net income of $16,237,000, or $2.92 per Class A share diluted, for the nine months ended September 30, 2014.

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

 

     Three months
ended

September 30,
2015
     Three months
ended

September 30,
2014
 

Basic EPS – Class A common

   $ 1.35       $ 1.25   

Basic EPS – Class B common

   $ 0.67       $ 0.62   

Diluted EPS – Class A common

   $ 1.11       $ 1.03   

Diluted EPS – Class B common

   $ 0.67       $ 0.62   

 

     Nine months
ended

September 30,
2015
     Nine months
ended

September 30,
2014
 

Basic EPS – Class A common

   $ 3.72       $ 3.55   

Basic EPS – Class B common

   $ 1.86       $ 1.78   

Diluted EPS – Class A common

   $ 3.06       $ 2.92   

Diluted EPS – Class B common

   $ 1.86       $ 1.78   

Net interest income totaled $52.7 million for the nine months ended September 30, 2015 compared to $50.0 million for the same period in 2014. The 5.4% increase in net interest income is primarily due to an increase in average earning assets. The net interest margin decreased from 2.23% on a fully taxable equivalent basis in 2014 to 2.20% on the same basis for 2015. This was primarily the result of a decrease in rates on earning assets. The average balances of earning assets increased by 7.6% combined with a similar increase in average deposits. Also, interest expense increased 3.9% as a result of an increase in deposit balances.

 

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

 

LOGO

The primary factor accounting for the decrease in the net interest margin for 2013 was an additional large influx of deposits. Management invested the funds in shorter term securities. The net interest margin has declined slightly throughout 2014 and the first quarter of 2015. During the second and third quarter of 2015 the net interest margin increased primarily as a result of an increase in higher yielding assets as well as prepayment penalties collected. The increase in higher yielding assets was primarily the result of increased purchases of securities held-to-maturity.

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

The provision for loan losses decreased by $600,000 for the quarter ended September 30, 2015 from $600,000 for the quarter ended September 30, 2014 primarily as a result of changes in portfolio composition, coupled with strong asset quality. During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing composition of the portfolio. Further discussion relating to changes in portfolio composition is discussed in the allowance for loan loss section of the management discussion and analysis. Non-performing assets totaled $1.8 million at September 30, 2015, compared to $4.1 million at December 31, 2014.

For the first nine months of 2015, the Company’s effective income tax rate was 3.6% compared to 4.4% for last year’s corresponding period. The effective income tax rate decreased primarily as a result of an increase in tax-exempt income.

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

During March 2014, the Company entered into a lease agreement to open a branch located on Boylston Street in Boston, Massachusetts. This property is leased from an entity affiliated with Marshall M. Sloane, Chairman of the Board of the Company. This agreement was approved by the Board of Directors in the absence of the Chairman of the Board. The branch opened on April 22, 2015. The deposits from the Kenmore Square, Boston Massachusetts branch, which closed on September 30, 2014, were moved to the new Boylston Street branch.

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.

 

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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. The conformance period for investments in and relationships with certain “legacy covered funds” has been extended to July 21, 2016. 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.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” (“Basel III”). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule that came into effect in January 2015 sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raises the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The implementation of the framework did not have a material impact on the Company’s financial condition or results of operations.

Financial Condition

Loans

On September 30, 2015, total loans outstanding were $1.6 billion, up by $309.5 million from the total on December 31, 2014. At September 30, 2015, commercial real estate loans accounted for 42.8% and residential real estate loans, including home equity loans, accounted for 26.6% of total loans.

Commercial and industrial loans increased to $378.2 million at September 30, 2015 from $149.7 million at December 31, 2014, primarily as a result of an increase in commercial and industrial financing. Construction loans increased to $27.3 million at September 30, 2015 from $22.7 million on December 31, 2014, primarily as a result of an increase in construction financing. Municipal loans increased from $41.9 million to $87.0 million, primarily as a result of loan originations. In recent quarters, the Company has increased business to larger institutions, specifically, healthcare and higher education. Further discussion relating to changes in portfolio composition is discussed in the allowance for loan loss section of the management discussion and analysis.

 

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Allowance for Loan Losses

The allowance for loan loss at September 30, 2015 was $22.3 million as compared to $22.3 million at December 31, 2014. The level of the allowance for loan losses to total loans was 1.36% at September 30, 2015 and 1.68% at December 31, 2014.

During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors and certain qualitative factors used on certain loan portfolios. The methodology enhancement was in response to the changes in loan portfolio, as the Company has continued to increase its exposure larger loans to large institutions with strong credit quality. The Company has limited loss history experience with these types of loans and has shifted from utilizing the Company’s internal historical loss factors to utilizing historical loss factors based on public credit ratings, as there is a great deal of default and loss data available on these types of loans from the credit rating agencies. As of September 30, 2015, the Company incorporated this information into the development of the historical loss rates for these loan types. These loan types have exhibited lower losses than the Company’s historical experience. The combination of the enhancements made to the allowance methodology to address the changing composition of the loan portfolio and the increase in these loan types as a percentage of the overall portfolio, has resulted in a decrease in the ratio of allowance for loan losses to total loans.

The changes in the allowance for loan losses were primarily attributable to the following variables:

 

    Increased commercial and industrial lending for which credit ratings were utilized. This caused an increase in the allowance for loan losses category.

 

    A shift in the municipal and commercial real estate portfolio for which an increased reliance on credit agency ratings were utilized. This caused a decrease in the allowance for loan losses category.

 

    A reduction in the utilization of qualitative factors and increased reliance on credit agency ratings. This caused a general decrease in the allocation of the allowance for loan losses.

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

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

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2015.

 

     Commercial
and
Industrial
     Municipal      Commercial
Real

Estate
 
     (In thousands)  

Credit Rating:

        

Aaa – Aa3

   $ 180,006       $ 59,628       $ 7,781   

A1 – A3

     112,507         7,400         131,230   

Baa1 – Baa3

     9,680         9,035         154,029   

Ba2

     —           4,480         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 302,193       $ 80,543       $ 293,040   
  

 

 

    

 

 

    

 

 

 

 

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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, 2015 is $27.3 million as compared to $22.7 million at December 31, 2014. Based on the general local conditions facing construction, management closely monitors all construction loans and considers this type of loans to be higher risk.

 

    Small business loans: The outstanding loan balances of small business loans is $35.8 million at September 30, 2015 as compared to $35.3 million at December 31, 2014. These are considered higher risk loans because small 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      Nine months ended  
     September 30,      September 30,  
     2015      2014      2015      2014  
     (In thousands)  

Allowance for loan losses, beginning of period

   $ 22,245       $ 21,722       $ 22,318       $ 20,941   

Loans charged off

     (129      (163      (613      (705

Recoveries on loans previously charged-off

     214         310         425         583   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries (charge-offs)

     85         147         (188      (122

Provision charged to expense

     —           600         200         1,650   
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 22,330       $ 22,469       $ 22,330       $ 22,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

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,
2015
    December 31,
2014
 
     (Dollars in thousands)  

Nonaccruing loans

   $ 1,760      $ 4,146   

Total nonperforming assets

   $ 1,760      $ 4,146   

Loans past due 90 days or more and still accruing

   $ —        $ —     

Nonaccruing loans as a percentage of total loans

     0.11     0.31

Nonperfoming assets as a percentage of total assets

     0.05     0.11

Accruing troubled debt restructures

   $ 2,994      $ 3,296   

Cash and Cash Equivalents

Cash and cash equivalents decreased from $305.4 million to $113.3 million during the first nine months of 2015. This was primarily the result of a decrease in lower yielding interest-bearing deposits in other banks during the period. Management invested excess cash and cash equivalents in higher yielding securities and loans during the period.

Short-term Investments

Short-term investments remained stable during the nine-month period.

 

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Investments

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

Securities Available-for-Sale (at Fair Value)

The securities available-for-sale portfolio totaled $410.2 million at September 30, 2015, a decrease of 8.5% from December 31, 2014. 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 $168.9 million for the nine months ended September 30, 2015. 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 3.5 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 $147.1 million, or 3.8% 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 2015, net unrealized gains on the securities available-for-sale decreased to $8,000 from $180,000 at December 31, 2014. Unrealized gains on the available-for-sale portfolio decreased mainly as a result of a higher proportion of short-term obligations issued by states and political subdivisions that are carried at par value.

 

     September 30,
2015
     December 31,
2014
 
     (In thousands)  

U.S. Treasury

   $ 1,998       $ 2,000   

Small Business Administration

     6,413         6,717   

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

     249,349         337,093   

Privately Issued Residential Mortgage-backed Securities

     1,528         1,874   

Obligations issued by States and Political Subdivisions

     147,099         96,784   

Other Debt Securities

     3,513         3,524   

Equity Securities

     314         398   
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 410,214       $ 448,390   
  

 

 

    

 

 

 

 

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During the first nine months of 2015, the Company capitalized on favorable market conditions and realized $170,000 of net gains on sales of investments. The sale of investments represented five U.S. Government Sponsored enterprises totaling $42,716,000. 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, 2015, an increase of 9.7% from the total on December 31, 2014. 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 portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 4.2 years.

 

     September 30, 2015      December 31, 2014  
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 235,457       $ 251,617   

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

     1,308,318         1,155,175   
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $ 1,543,775       $ 1,406,792   
  

 

 

    

 

 

 

At September 30, 2015 and December 31, 2014, 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. During the first nine months of 2015, the Company purchased $4.8 million and had no redemptions of FHLBB stock. As of September 30, 2015, no impairment has been recognized.

Deposits and Borrowed Funds

On September 30, 2015, deposits totaled $2.9 billion, representing a 6.3% increase from December 31, 2014. Total deposits increased primarily as a result of increases in demand deposits, money market accounts, and savings and NOW, and time deposits. Money market and Savings and NOW, and time 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 $644.3 million compared to $607.9 million at December 31, 2014. Borrowed funds increased mainly as a result of borrowings to fund loan originations.

Stockholders’ Equity

At September 30, 2015, total equity was $211.1 million compared to $192.5 million at December 31, 2014. 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 and amortization of the pension liability. 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

 

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response to rising interest rates. The Company’s leverage ratio stood at 6.71% at September 30, 2015, compared to 6.91% at December 31, 2014. The decrease in the leverage ratio is primarily due to an increase in quarterly average assets, offset somewhat by an increase in stockholders’ equity. Book value as of September 30, 2015 was $37.92 per share compared to $34.57 at December 31, 2014.

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, 2015     September 30, 2014  
     (Dollars 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

   $ 804,462      $ 8,774        4.33   $ 764,345      $ 8,095        4.20

Loans tax-exempt

     790,694        8,147        4.09        571,237        7,153        4.97   

Securities available-for-sale (5):

            

Taxable

     319,006        666        0.84        446,773        675        0.60   

Tax-exempt

     138,031        249        0.72        61,824        117        0.76   

Securities held-to-maturity:

            

Taxable

     1,645,878        8,834        2.15        1,528,523        8,104        2.12   

Interest-bearing deposits in other banks

     47,886        35        0.29        86,656        60        0.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,745,957        26,705        2.85        3,459,358        24,204        2.80   

Non interest-earning assets

     193,519            167,608       

Allowance for loan losses

     (22,333         (22,040    
  

 

 

       

 

 

     

Total assets

   $ 3,917,143          $ 3,604,926       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 769,967      $ 455        0.23   $ 761,506      $ 432        0.23

Savings accounts

     347,222        274        0.31        327,990        210        0.25   

Money market accounts

     930,657        760        0.32        947,986        725        0.30   

Time deposits

     419,687        1,231        1.16        362,507        1,089        1.19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,467,533        2,720        0.44        2,399,989        2,456        0.41   

Securities sold under agreements to repurchase

     249,874        129        0.20        202,050        90        0.18   

Other borrowed funds and subordinated debentures

     418,289        2,285        2.17        287,908        2,333        3.22   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     3,135,696        5,134        0.65     2,889,947        4,879        0.67
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities

            

Demand deposits

     522,834            488,443       

Other liabilities

     51,115            34,672       
  

 

 

       

 

 

     

Total liabilities

     3,709,645            3,413,062       
  

 

 

       

 

 

     

Stockholders’ equity

     207,498            191,864       

Total liabilities & stockholders’ equity

   $ 3,917,143          $ 3,604,926       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       21,571            19,325     

Less taxable equivalent adjustment

       (2,955         (2,580  
    

 

 

       

 

 

   

Net interest income

     $ 18,616          $ 16,745     
    

 

 

   

 

 

     

 

 

   

 

 

 

Net interest spread (3)

         2.20         2.13
      

 

 

       

 

 

 

Net interest margin (4)

         2.28         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.

 

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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, 2015     September 30, 2014  
     (Dollars 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

   $ 761,209      $ 23,963        4.21   $ 763,767      $ 24,531        4.29

Loans tax-exempt

     680,380        22,671        4.46        533,625        20,552        5.15   

Securities available-for-sale (5):

            

Taxable

     347,741        1,900        0.73        454,839        2,184        0.64   

Tax-exempt

     114,363        605        0.71        45,012        276        0.82   

Securities held-to-maturity:

            

Taxable

     1,640,388        26,373        2.14        1,514,604        23,904        2.10   

Interest-bearing deposits in other banks

     163,144        328        0.27        133,929        271        0.27   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,707,225        75,840        2.74        3,445,776        71,718        2.78   

Non interest-earning assets

     189,137            164,682       

Allowance for loan losses

     (22,432         (21,603    
  

 

 

       

 

 

     

Total assets

   $ 3,873,930          $ 3,588,855       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 793,699      $ 1,337        0.23   $ 771,399      $ 1,264        0.22

Savings accounts

     340,496        712        0.28        333,829        647        0.26   

Money market accounts

     959,192        2,276        0.32        929,328        2,033        0.29   

Time deposits

     395,915        3,594        1.21        379,565        3,315        1.17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,489,302        7,919        0.43        2,414,121        7,259        0.40   

Securities sold under agreements to repurchase

     254,521        371        0.19        213,511        284        0.18   

Other borrowed funds and subordinated debentures

     370,152        6,570        2.37        264,116        6,753        3.42   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     3,113,975        14,860        0.64     2,891,748        14,296        0.66
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities

            

Demand deposits

     507,855            476,953       

Other liabilities

     50,907            34,242       
  

 

 

       

 

 

     

Total liabilities

     3,672,737            3,402,943       
  

 

 

       

 

 

     

Stockholders’ equity

     201,193            185,912       

Total liabilities & stockholders’ equity

   $ 3,873,930          $ 3,588,855       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       60,980            57,422     

Less taxable equivalent adjustment

       (8,243         (7,409  
    

 

 

       

 

 

   

Net interest income

     $ 52,737          $ 50,013     
    

 

 

   

 

 

     

 

 

   

 

 

 

Net interest spread (3)

         2.10         2.12
      

 

 

       

 

 

 

Net interest margin (4)

         2.20         2.23
      

 

 

       

 

 

 

 

(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, 2015
Compared with

Three Months Ended September 30, 2014
    Nine Months Ended September 30, 2015
Compared with
Nine Months Ended September 30, 2014
 
    

Increase/(Decrease)

Due to Change in

   

Increase/(Decrease)

Due to Change in

 
     Volume     Rate     Total     Volume     Rate     Total  
     (In thousands)  

Interest income:

            

Loans

            

Taxable

   $ 433      $ 246      $ 679      $ (82   $ (486   $ (568

Tax-exempt

     2,415        (1,421     994        5,141        (3,022     2,119   

Securities available-for-sale

            

Taxable

     (225     216        (9     (559     275        (284

Tax-exempt

     138        (6     132        372        (43     329   

Securities held-to-maturity

            

Taxable

     629        101        730        2,015        454        2,469   

Interest-bearing deposits in other banks

     (28     3        (25     59        (2     57   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     3,362        (861     2,501        6,946        (2,824     4,122   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits:

            

NOW accounts

     5        18        23        37        36        73   

Savings accounts

     13        51        64        13        52        65   

Money market accounts

     (13     48        35        67        176        243   

Time deposits

     168        (26     142        146        133        279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     173        91        264        263        397        660   

Securities sold under agreements to repurchase

     23        16        39        58        29        87   

Other borrowed funds and subordinated debentures

     857        (905     (48     2,241        (2,424     (183
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,053        (798     255        2,562        (1,998     564   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 2,309      $ (63   $ 2,246      $ 4,384      $ (826   $ 3,558   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

For the three months ended September 30, 2015, net interest income on a fully taxable equivalent basis totaled $21.6 million compared to $19.3 million for the same period in 2014, an increase of $2.2 million or 11.6%. This increase in net interest income for the period is primarily due to an increase in interest earning assets and a six basis point increase in the net interest margin. The net interest margin increased from 2.22% on a fully taxable equivalent basis in 2014 to 2.28% on the same basis for 2015. This was primarily the result of prepayment penalties collected during the quarter. Also, interest expense increased slightly as a result of an increase in deposit balances and there was an 8.3% increase in the average balances of earning assets, combined with a similar increase in average deposits.

For the nine months ended September 30, 2015, net interest income on a fully taxable equivalent basis totaled $61.0 million compared to $57.4 million for the same period in 2014, an increase of $3.6 million or 6.2%. This increase in net interest income for the period is primarily due to an increase in interest earning assets and prepayment penalties collected. The net interest margin decreased from 2.23% on a fully taxable equivalent basis in 2014 to 2.20% on the same basis for 2015. This was primarily the result of a decrease in rates on earning assets. The average balances of earning assets increased by 7.6% combined with a similar increase in average deposits. Also, interest expense increased slightly as a result of an increased 3.9% as a result of an increase in deposit balances.

 

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Provision for Loan Losses

For the three months ended September 30, 2015, the loan loss provision was $0 compared to a provision of $600,000 for the same period last year. For the nine months ended September 30, 2015, the loan loss provision was $200,000 compared to a provision of $1.7 million for the same period last year. The decrease in the provision was primarily as a result of changes in portfolio composition, coupled with strong asset quality. During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing composition of the portfolio. Further discussion relating to changes in portfolio composition is discussed in the allowance for loan loss section of the management discussion and analysis.

Non-Interest Income and Expense

Other operating income for the quarter ended September 30, 2015 increased by $72,000 from the same period last year to $3.8 million. This was mainly attributable to an increase in gains on sales of mortgage loans of $92,000 from the same period last year. Gains on sales of investments increased by $52,000. Lockbox fees increased by $59,000 as a result of increased customer volume. Offsetting some of the increases were decreases in service charges on deposit accounts and decreases in other income. This was mainly attributable to a decrease in overdraft fees and other customer fees, respectively.

Other operating income for the nine months ended September 30, 2015 increased by $702,000 to $11.5 million from $10.8 million for the same period last year. This was mainly attributable to an increase in gains on sales of mortgage loans of $521,000 from the same period last year. Also, other income increased by $178,000. This was mainly attributable to an increase in customer fees. Gains on sales of investments increased by $170,000. Lockbox fees increased by $113,000 as a result of increased customer volume. Offsetting some of the increases were decreases in service charges on deposit accounts. This was mainly attributable to a decrease in overdraft fees.

For the quarter ended September 30, 2015, operating expenses increased by $2.1 million or 15.2% to $16.1 million, from the same period last year. The increase in operating expenses for the quarter was mainly attributable to an increase of $1.4 million in salaries and employee benefits, $363,000 in other expenses, $158,000 increase in occupancy costs, $145,000 in equipment costs, and $52,000 in FDIC assessments. Salaries and employee benefits increased mainly as a result of increases in pension costs, merit increases, and bonus accruals. Other expenses increased mainly as a result of increases in legal and software maintenance expenses. Occupancy costs increased mainly as a result of increased costs associated with branch expansion. Equipment costs increased mainly as a result of depreciation of capital improvements. FDIC assessments increased mainly as a result of an increase in the assessment base.

For the nine months ended September 30, 2015, operating expenses increased by $4.2 million or 9.9% to $46.4 million, from the same period last year. The increase in operating expenses for the period was mainly attributable to an increase of $2.4 million in salaries and employee benefits, $929,000 in other expenses, $516,000 increase in occupancy costs, $240,000 in equipment costs, and $126,000 in FDIC assessments. Salaries and employee benefits increased mainly as a result of increases in pension costs and merit increases. Other expenses increased mainly as a result of increases in marketing expenses and legal costs. Occupancy costs increased mainly as a result of increased costs associated with branch expansion. Equipment costs increased mainly as a result of depreciation of capital improvements. FDIC assessments increased mainly as a result of an increase in the assessment base.

Income Taxes

For the third quarter of 2015, the Company’s income tax expense totaled $180,000 on pretax income of $6.3 million resulting in an effective tax rate of 2.8%. For last year’s

 

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corresponding quarter, 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 the first nine months of 2015, the Company’s income tax expense totaled $628,000 on pretax income of $17.7 million resulting in an effective tax rate of 3.6%. For last year’s corresponding period, 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%. The decrease in the effective income tax rate, for both periods, 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, 2014, 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 disc