10-Q 1 d146853d10q.htm 10-Q 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 March 31, 2016.

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 April 30, 2016, 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:

March 31, 2016 and December 31, 2015

     4   
 

Consolidated Statements of Income:

Three months ended March 31, 2016 and 2015

     5   
 

Consolidated Statements of Comprehensive Income:

Three months ended March 31, 2016 and 2015

     6   
 

Consolidated Statements of Changes in Stockholders’ Equity:

Equity: Three months ended March 31, 2016 and 2015

     7   
 

Consolidated Statements of Cash Flows:

Three months ended March 31, 2016 and 2015

     8   
  Notes to Consolidated Financial Statements      9-28   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29-38   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      38   
Item 4.   Controls and Procedures      38   
Part II.   Other Information   
Item 1.   Legal Proceedings      39   
Item 1A.   Risk Factors      39   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      39   
Item 3.   Defaults Upon Senior Securities      39   
Item 5.   Other Information      39   
Item 6.   Exhibits      39   
Signatures        40   
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 40


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 40


Table of Contents

PART I - Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     March 31,
2016
    December 31,
2015
 
Assets     

Cash and due from banks

   $ 71,655      $ 52,877   

Federal funds sold and interest-bearing deposits in other banks

     232,995        167,847   
  

 

 

   

 

 

 

Total cash and cash equivalents

     304,650        220,724   
  

 

 

   

 

 

 

Short-term investments

     3,241        3,233   

Securities available-for-sale, amortized cost $380,219 and $404,977, respectively

     380,349        404,623   

Securities held-to-maturity, fair value $1,437,205 and $1,438,960, respectively

     1,412,702        1,438,903   

Federal Home Loan Bank of Boston stock, at cost

     23,909        28,807   

Loans Held-for-Sale

     48,180        —     

Loans, net:

    

Commercial and industrial

     529,168        452,235   

Municipal

     85,227        85,685   

Construction and land development

     26,572        27,421   

Commercial real estate

     715,248        721,506   

Residential real estate

     215,040        255,346   

Home equity

     178,377        178,020   

Consumer and other

     12,826        11,323   
  

 

 

   

 

 

 

Total loans, net

     1,762,458        1,731,536   

Less: allowance for loan losses

     23,544        23,075   
  

 

 

   

 

 

 

Net loans

     1,738,914        1,708,461   

Bank premises and equipment

     23,797        24,106   

Accrued interest receivable

     7,524        8,002   

Goodwill

     2,714        2,714   

Other assets

     108,817        107,868   
  

 

 

   

 

 

 

Total assets

   $ 4,054,797      $ 3,947,441   
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 577,842      $ 541,955   

Savings and NOW deposits

     1,197,257        1,070,585   

Money market accounts

     944,621        989,094   

Time deposits

     446,185        473,426   
  

 

 

   

 

 

 

Total deposits

     3,165,905        3,075,060   

Securities sold under agreements to repurchase

     218,230        197,850   

Other borrowed funds

     356,000        368,000   

Subordinated debentures

     36,083        36,083   

Due to broker

     1,741        405   

Other liabilities

     55,997        55,499   
  

 

 

   

 

 

 

Total liabilities

     3,833,956        3,732,897   
  

 

 

   

 

 

 
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

     225,989        221,232   
  

 

 

   

 

 

 
     243,849        239,092   

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

     68        (246

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

     (5,912     (6,896

Pension liability, net of taxes

     (17,164     (17,406
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (23,008     (24,548
  

 

 

   

 

 

 

Total stockholders’ equity

     220,841        214,544   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,054,797      $ 3,947,441   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended March 31,  
     2016      2015  

Interest income

     

Loans

   $ 14,172       $ 12,076   

Securities held-to-maturity

     7,812         8,168   

Securities available-for-sale

     964         732   

Federal funds sold and interest-bearing deposits in other banks

     315         196   
  

 

 

    

 

 

 

Total interest income

     23,263         21,172   
  

 

 

    

 

 

 

Interest expense

     

Savings and NOW deposits

     838         628   

Money market accounts

     795         782   

Time deposits

     1,358         1,156   

Securities sold under agreements to repurchase

     115         114   

Other borrowed funds and subordinated debentures

     2,307         2,085   
  

 

 

    

 

 

 

Total interest expense

     5,413         4,765   
  

 

 

    

 

 

 

Net interest income

     17,850         16,407   

Provision for loan losses

     450         200   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     17,400         16,207   

Other operating income

     

Service charges on deposit accounts

     1,937         1,913   

Lockbox fees

     789         788   

Gains on sales of mortgage loans

     —           99   

Other income

     928         705   
  

 

 

    

 

 

 

Total other operating income

     3,654         3,505   
  

 

 

    

 

 

 

Operating expenses

     

Salaries and employee benefits

     9,776         9,134   

Occupancy

     1,579         1,605   

Equipment

     636         593   

FDIC assessments

     568         503   

Other

     3,124         2,703   
  

 

 

    

 

 

 

Total operating expenses

     15,683         14,538   
  

 

 

    

 

 

 

Income before income taxes

     5,371         5,174   

Provision for income taxes

     64         215   
  

 

 

    

 

 

 

Net income

   $ 5,307       $ 4,959   
  

 

 

    

 

 

 

Share data:

     

Weighted average number of shares outstanding, basic

     

Class A

     3,600,729         3,600,729   

Class B

     1,967,180         1,967,180   

Weighted average number of shares outstanding, diluted

     

Class A

     5,567,909         5,567,909   

Class B

     1,967,180         1,967,180   

Basic earnings per share:

     

Class A

   $ 1.16       $ 1.08   

Class B

   $ 0.58       $ 0.54   

Diluted earnings per share

     

Class A

   $ 0.95       $ 0.89   

Class B

   $ 0.58       $ 0.54   

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended March 31,  
     2016      2015  

Net income

   $ 5,307       $ 4,959   

Other comprehensive income (loss), net of tax:

     

Unrealized gains (losses) on securities:

     

Unrealized (losses) gains arising during period

     314         (30

Less: reclassification adjustment for gains included in net income

     —           —     
  

 

 

    

 

 

 

Total unrealized (losses) gains on securities

     314         (30

Accretion of net unrealized losses transferred

     984         735   

Defined benefit pension plans:

     

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

     242         213   
  

 

 

    

 

 

 

Other comprehensive income

     1,540         918   
  

 

 

    

 

 

 

Comprehensive income

   $ 6,847       $ 5,877   
  

 

 

    

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 40


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2016 and 2015

 

     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, 2014

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

Net income

     —           —           —           4,959        —          4,959   

Other comprehensive income, net of tax:

               

Unrealized holding (losses) gains arising during period, net of $19 in taxes

     —           —           —           —          (30     (30

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $394 in taxes

     —           —           —           —          735        735   

Pension liability adjustment, net of $142 in taxes

     —           —           —           —          213        213   

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

     —           —           —           (432     —          (432

Cash dividends paid, Class B common stock, $.06 per share

     —           —           —           (117     —          (117
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

   $ 3,601       $ 1,967       $ 12,292       $ 204,821      $ (24,853   $ 197,828   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

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

Net income

     —           —           —           5,307        —          5,307   

Other comprehensive income, net of tax:

               

Unrealized holding (losses) gains arising during period, net of $170 in taxes

     —           —           —           —          314        314   

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $527 in taxes

     —           —           —           —          984        984   

Pension liability adjustment, net of $161 in taxes

     —           —           —           —          242        242   

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

     —           —           —           (433     —          (433

Cash dividends paid, Class B common stock, $.06 per share

     —           —           —           (117     —          (117
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

   $ 3,601       $ 1,967       $ 12,292       $ 225,989      $ (23,008   $ 220,841   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Three months ended March 31,  
     2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 5,307      $ 4,959   

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

    

Gain on sales of mortgage loans

     —          (99

Provision for loan losses

     450        200   

Deferred income taxes

     (1,098     (175

Net depreciation and amortization

     729        696   

Decrease (increase) in accrued interest receivable

     478        (672

Increase in other assets

     (744     (4,621

Increase (decrease) in other liabilities

     901        (904
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     6,023        (616
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of short-term investments

     (8     (8

Proceeds from redemptions of Federal Home Loan Bank of Boston stock

     4,898        —     

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

     47,099        34,265   

Purchase of securities available-for-sale

     (21,095     (34,767

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

     113,454        50,467   

Purchase of securities held-to-maturity

     (85,654     (416,137

Net increase in loans

     (79,070     (14,903

Proceeds from sales of portfolio loans

     —          5,061   

Capital expenditures

     (396     (621
  

 

 

   

 

 

 

Net cash used in investing activities

     (20,772     (376,643
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net decrease in time deposits

     (27,241     (689

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

     118,086        178,593   

Cash dividends

     (550     (549

Net increase in securities sold under agreements to repurchase

     20,380        48,030   

Net decrease in other borrowed funds

     (12,000     (87,858
  

 

 

   

 

 

 

Net cash provided by financing activities

     98,675        137,527   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     83,926        (239,732

Cash and cash equivalents at beginning of period

     220,724        305,357   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 304,650      $ 65,625   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 5,405      $ 4,668   

Income taxes

     210        210   

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

     314        (30

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

     984        735   

Pension liability adjustment, net of taxes

     242        213   

Change in due to (from) to broker

     1,336        7,142   

Transfer of loans to Loans Held-for-Sale

     48,180        —     

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Three Months Ended March 31, 2016 and 2015

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, 2015, 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

 

     March 31, 2016      December 31, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

U.S. Treasury

   $ 1,999       $ —         $ 2       $ 1,997       $ 1,999       $ —         $ 10       $ 1,989   

U.S. Government Sponsored Enterprises

     5,000         8         —           5,008                —           —           —     

SBA Backed Securities

     5,925         10         4         5,931         5,983         8         2         5,989   

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

     225,727         759         193         226,293         232,967         859         300         233,526   

Privately Issued Residential Mortgage Backed Securities

     1,362         2         19         1,345         1,437         10         13         1,434   

Obligations Issued by States and Political Subdivisions

     135,490         —           401         135,089         157,838         —           878         156,960   

Other Debt Securities

     4,600         —           131         4,469         4,600         3         130         4,473   

Equity Securities

     116         101         —           217         153         99         —           252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 380,219       $ 880       $ 750       $ 380,349      $ 404,977       $ 979       $ 1,333       $ 404,623    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $213,639,000 and $220,482,000 at March 31, 2016 and December 31, 2015, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $19,103,000 and $20,056,000 at March 31, 2016 and December 31, 2015, respectively. There were no realized gains on sales of investments for the three months ended March 31, 2016 and March 31, 2015, respectively.

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

 

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The following table shows the maturity distribution of the Company’s securities available-for-sale at March 31, 2016.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 129,038       $ 129,037   

After one but within five years

     160,638         161,034   

After five but within ten years

     83,228         83,391   

More than 10 years

     5,699         5,283   

Non-maturing

     1,616         1,604   
  

 

 

    

 

 

 

Total

   $ 380,219       $ 380,349   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at March 31, 2016 was 3.3 years. Included in the weighted average remaining life calculation at March 31, 2016 were $5,000,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations.

As of March 31, 2016 and December 31, 2015, 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. Treasury, SBA Backed Securities, and U.S. Government Agency and 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.

 

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The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at March 31, 2016. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 20 and 10 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 267 holdings at March 31, 2016.

 

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

U.S. Treasury

   $ —         $ —        $ 1,997      $ 2      $ 1,997      $ 2  

Small Business Administration

     1,799        4        —          —          1,799        4  

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

     46,435        113        29,009        80        75,444        193  

Privately Issued Residential Mortgage Backed Securities

     429        2        471        17        900        19  

Obligations Issued by States and Political Subdivisions

     —          —          4,298        401        4,298        401  

Other Debt Securities

     1,184        17        1,685        114        2,869        131  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 49,847      $ 136      $ 37,460      $ 614      $ 87,307      $ 750  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 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 14 and 11 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 290 holdings at December 31, 2015.

 

     December 31, 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

   $ 1,989       $ 10       $ —         $ —         $ 1,989       $ 10   

SBA Backed Securities

     1,031         2         —           —           1,031         2   

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

     26,519         52         49,341         248         75,860         300   

Privately Issued Residential Mortgage-Backed Securities

     —           —           490         13         490         13   

Obligations Issued by States and Political Subdivisions

     —           —           3,820         878         3,820         878   

Other Debt Securities

     497         3         1,373         127         1,870         130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 30,036       $ 67       $ 55,024       $ 1,266       $ 85,060       $ 1,333   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 3. Investment Securities Held-to-Maturity

 

     March 31, 2016      December 31, 2015  
     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

   $ 152,732       $ 3,033       $ 11      $ 155,754       $ 186,734       $ 2,234       $ 141       $ 188,827   

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

     1,259,970         22,843         1,362         1,281,451         1,252,169         7,547         9,583         1,250,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,412,702       $ 25,876       $ 1,373       $ 1,437,205       $ 1,438,903       $ 9,781       $ 9,724       $ 1,438,960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,001,953,000 and $1,004,743,000 at March 31, 2016 and December 31, 2015, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $368,956,000 and $432,965,000 at March 31, 2016 and December 31, 2015, respectively.

At March 31, 2016 and December 31, 2015, 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 March 31, 2016.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 9,242       $ 9,343   

After one but within five years

     1,205,411         1,223,805   

After five but within ten years

     193,283         199,272   

More than ten years

     4,766         4,785   
  

 

 

    

 

 

 

Total

   $ 1,412,702       $ 1,437,205   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at March 31, 2016 was 3.9 years. Included in the weighted average remaining life calculation at March 31, 2016 were $54,658,000 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 March 31, 2016 and December 31, 2015, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not likely that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Government Sponsored Enterprises and 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 March 31, 2016 and December 31, 2015.

 

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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 March 31, 2016. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 20 and 24 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 326 holdings at March 31, 2016.

 

     March 31, 2016  
     Less Than 12 Months      12 Months or Longer      Total  

Temporarily Impaired Investments

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

U.S. Government Sponsored Enterprises

   $ 19,990       $ 11       $ —         $ —         $ 19,990       $ 11   

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

     91,770         379         120,167         983         211,937         1,362   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 111,760       $ 390       $ 120,167       $ 983       $ 231,927       $ 1,373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 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 101 and 26 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 322 holdings at December 31, 2015.

 

     December 31, 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

   $ 9,859       $ 141       $ —         $ —         $ 9,859       $ 141   

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

     626,218         6,657         123,864         2,926         750,082         9,583   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 636,077       $ 6,798       $ 123,864       $ 2,926       $ 759,941       $ 9,724   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Allowance for Loan Losses

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

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

 

     Three months ended
March 31,
 
     2016      2015  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 23,075       $ 22,318   

Loans charged off

     (69      (81

Recoveries on loans previously charged-off

     88         92   
  

 

 

    

 

 

 

Net recoveries (charge-offs)

     19         11   

Provision charged to expense

     450         200   
  

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 23,544       $ 22,529   
  

 

 

    

 

 

 

 

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Further information pertaining to the allowance for loan losses for the three months ending March 31, 2016 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real

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

Allowance for loan losses:

                 

Balance at
December 31, 2015

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

Charge-offs

    —         —          —          —         —         (69     —         —         (69

Recoveries

    —         35        —          —         2        51        —         —         88  

Provision

    (68     759        (4     (56     (73     67        108        (283     450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2016

  $ 1,973      $ 6,693      $ 990      $ 10,533      $ 1,249      $ 693      $ 1,185      $ 228      $ 23,544   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 7      $ 17      $ —       $ 89      $ 27      $ —       $ 89      $ —         229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,966      $ 6,676      $ 990      $ 10,444      $ 1,222      $ 693      $ 1,096      $ 228      $ 23,315   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Ending balance

  $ 26,572      $ 529,168      $ 85,227      $ 715,248      $ 215,040      $ 12,826      $ 178,377      $ —       $ 1,762,458   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 98      $ 429      $ —       $ 1,665      $ 905      $ —       $ 89      $ —       $ 3,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 26,474      $ 528,739      $ 85,227      $ 713,583      $ 214,135      $ 12,826      $ 178,288      $ —       $ 1,759,272   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 15 of 40


Table of Contents

Further information pertaining to the allowance for loan losses for the three months ending March 31, 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      $ 4,758      $ 1,488      $ 11,199      $ 775      $ 810      $ 599      $ 1,097      $ 22,318   

Charge-offs

    —          —          —          —          —          (81     —          —          (81

Recoveries

    —          15        —          2        2        73        —          —          92   

Provision

    292        (128     (115     (74     22        (88     15        276        200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2015

  $ 1,884      $ 4,645      $ 1,373      $ 11,127      $ 799      $ 714      $ 614      $ 1,373      $ 22,529   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 20      $ 96      $ —        $ 631      $ 90      $ —        $ 92      $ —          929   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,864      $ 4,549      $ 1,373      $ 10,496      $ 709      $ 714      $ 522      $ 1,373      $ 21,600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 25,347      $ 157,637      $ 41,406      $ 691,811      $ 258,558      $ 10,508      $ 156,063      $ —        $ 1,341,330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 102      $ 871      $ —        $ 4,304      $ 952      $ —        $ 92      $ —        $ 6,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 25,245      $ 156,766      $ 41,406      $ 687,507      $ 257,606      $ 10,508      $ 155,971      $ —        $ 1,335,009   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Loans rated 1-3 (Pass):

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

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of March 31, 2016 and December 31, 2015.

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 March 31, 2016 and December 31, 2015.

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 March 31, 2016 and December 31, 2015 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.

 

Page 16 of 40


Table of Contents

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

 

     Construction
and Land
Development
     Commercial
and
Industrial
     Municipal      Commercial
Real

Estate
 
     (in thousands)  

Grade:

           

1-3 (Pass)

   $ 19,492       $ 528,721       $ 85,227       $ 712,671   

4 (Monitor)

     6,982         18        —           912   

5 (Substandard)

     —           —           —           —     

6 (Doubtful)

     —           —           —           —     

Impaired

     98         429         —           1,665   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,572       $ 529,168       $ 85,227       $ 715,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2015.

 

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

Grade:

           

1-3 (Pass)

   $ 20,281       $ 451,774       $ 85,685       $ 718,911   

4 (Monitor)

     7,042         18         —           917   

5 (Substandard)

     —           —           —           —     

6 (Doubtful)

     —           —           —           —     

Impaired

     98         443         —           1,678   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,421       $ 452,235       $ 85,685       $ 721,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has increased its exposure to larger loans to large institutions with publically available credit ratings beginning in 2015. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2016.

 

     Commercial
and
Industrial
     Municipal      Commercial
Real

Estate
     Total  
     (in thousands)         

Credit Rating:

           

Aaa – Aa3

   $ 281,922       $ 63,407       $ 7,311       $ 352,640   

A1 – A3

     167,389         7,400         130,512         305,301   

Baa1 – Baa3

     —           8,890         166,796         175,686   

Ba2

     —           4,480         —           4,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 449,311       $ 84,177       $ 304,619         838,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has increased its exposure to larger loans to large institutions with publically available credit ratings beginning in 2015. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2015.

 

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

Credit Rating:

           

Aaa – Aa3

   $ 234,733       $ 63,865       $ 7,547       $ 306,145   

A1 – A3

     140,419         7,400         130,872         278,691   

Baa1 – Baa3

     —           8,890         167,489         176,379   

Ba2

     —           4,480         —           4,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 375,152       $ 84,635       $ 305,908       $ 765,695   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 March 31, 2016 follows:

 

     Accruing
30-89 Days
Past Due
     Non Accrual      Accruing
Greater
Than

90 Days
     Total
Past Due
     Current
Loans
     Total  
     (in thousands)  

Construction and land development

   $ —         $ 98       $ —        $ 98       $ 26,474       $ 26,572   

Commercial and industrial

     226         56         —           282         528,886         529,168   

Municipal

     —           —           —           —           85,227         85,227   

Commercial real estate

     2,290         168         —           2,458         712,790         715,248   

Residential real estate

     1,037         1,036         —           2,073         212,967         215,040   

Consumer and overdrafts

     1         6         —           7         12,819         12,826   

Home equity

     539         126         —           665         177,712         178,377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,093       $ 1,490       $ —         $ 5,583       $ 1,756,875       $ 1,762,458   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ —         $ 99       $ —        $ 99       $ 27,322       $ 27,421   

Commercial and industrial

     —           60         —           60         452,175         452,235   

Municipal

     —           —           —           —           85,685         85,685   

Commercial real estate

     1,462         174         —           1,636         719,870         721,506   

Residential real estate

     596         1,559         —           2,155         253,191         255,346   

Consumer and overdrafts

     6         —           —           6         11,317         11,323   

Home equity

     628         444         —           1,072         176,948         178,020   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,692       $ 2,336       $ —        $ 5,028       $ 1,726,508       $ 1,731,536   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2015.

 

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The following is information pertaining to impaired loans for March 31, 2016:

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value
For 3 Months
Ending 3/31/16
     Interest
Income
Recognized
For 3 Months
Ending 3/31/16
 
     (in thousands)  

With no required reserve recorded:

              

Construction and land development

   $ —         $ —         $ —        $ —         $ —    

Commercial and industrial

     56        243        —           58        —     

Municipal

     —           —           —           —           —     

Commercial real estate

     —           —           —           —           —     

Residential real estate

     109        195        —           111        2  

Consumer

     —           —           —           —           —     

Home equity

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 165      $ 438      $ —         $ 169      $ 2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ 98      $ 108      $ 7      $ 98      $ —     

Commercial and industrial

     373        388        17        378        5  

Municipal

     —           —           —           —           —     

Commercial real estate

     1,665        1,763        89        1,671        15  

Residential real estate

     796        797        27        799        —     

Consumer

     —           —           —           —           —     

Home equity

     89        89        89        90        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,021      $ 3,145      $ 229      $ 3,036      $ 20  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Construction and land development

   $ 98      $ 108      $ 7      $ 98      $ —     

Commercial and industrial

     429        631        17        436        5  

Municipal

     —           —           —           —           —     

Commercial real estate

     1,665        1,763        89        1,671        15  

Residential real estate

     905        992        27        910        2  

Consumer

     —           —           —           —           —     

Home equity

     89        89        89        90        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,186      $ 3,583      $ 229      $ 3,205      $ 22  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following is information pertaining to impaired loans for March 31, 2015:

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average Carrying
Value For 3
Months
Ending 3/31/15
     Interest
Income
Recognized
For 3 Months
Ending 3/31/15
 
     (in thousands)  

With no required reserve recorded:

              

Construction and land development

   $ —         $ —         $ —         $ —         $ —     

Commercial and industrial

     63         105         —           39         —     

Municipal

     —           —           —           —           —     

Commercial real estate

     392         396         —           393         —     

Residential real estate

     132         215         —           134         2   

Consumer

     —           —           —           —           —     

Home equity

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 587       $ 716       $ —         $ 566       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ 102       $ 108       $ 20       $ 103       $ —     

Commercial and industrial

     808         1,010         96         821         11   

Municipal

     —           —           —           —           —     

Commercial real estate

     3,912         4,006         631         3,918         16   

Residential real estate

     820         820         90         823         6   

Consumer

     —           —           —           —           —     

Home equity

     92         92         92         92         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,734       $ 6,036       $ 929       $ 5,757       $ 33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Construction and land development

   $ 102       $ 108       $ 20       $ 103       $ —     

Commercial and industrial

     871         1,115         96         860         11   

Municipal

     —           —           —           —           —     

Commercial real estate

     4,304         4,402         631         4,311         16   

Residential real estate

     952         1,035         90         957         8   

Consumer

     —           —           —           —           —     

Home equity

     92         92         92         92         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,321       $ 6,752       $ 929       $ 6,323       $ 35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no troubled debt restructurings occurring during the three month periods ended March 31, 2016 or March 31, 2015.

 

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

Amount Reclassified from Accumulated Other Comprehensive Income

 

Details about Accumulated Other
Comprehensive Income Components

   Three Months Ended
March 31, 2016
    Three Months Ended
March 31, 2015
    Affected Line Item
in the Statement
Where Net Income
is Presented
(in thousands)

Accretion of unrealized losses transferred

   $ (1,511   $ (1,129   Interest on securities held-to-
maturity

Tax (expense) or benefit

     527        394      Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (984   $ (735   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

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

Actuarial gains (losses)

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

 

 

   

 

 

   

Total before tax

     (403     (355   Income before taxes

Tax (expense) or benefit

     161        142      Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (242   $ (213   Net income
  

 

 

   

 

 

   

Total reclassifications for the period

   $ (1,226   $ (948   Net income, net of tax
  

 

 

   

 

 

   

 

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

Note 6. Earnings per Share (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The Company had no common stock equivalents outstanding for the periods ended March 31, 2015 and 2016.

 

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The following table is a reconciliation of basic EPS and diluted EPS for the three months ended March 31,

 

     Three Months Ended
March 31,
 
(in thousands except share and per share data)    2016      2015  

Basic EPS Computation:

     

Numerator:

     

Net income, Class A

   $ 4,168       $ 3,895   

Net income, Class B

     1,139         1,064   

Denominator:

     

Weighted average shares outstanding, Class A

     3,600,729         3,600,729   

Weighted average shares outstanding, Class B

     1,967,180         1,967,180   

Basic EPS, Class A

   $ 1.16       $ 1.08   

Basic EPS, Class B

     0.58         0.54   

Diluted EPS Computation:

     

Numerator:

     

Net income, Class A

   $ 4,168       $ 3,895   

Net income, Class B

     1,139         1,064   
  

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     5,307         4,959   

Denominator:

     

Weighted average shares outstanding, basic, Class A

     3,600,729         3,600,729   

Weighted average shares outstanding, Class B

     1,967,180         1,967,180   
  

 

 

    

 

 

 

Weighted average shares outstanding diluted,
Class A

     5,567,909         5,567,909   

Weighted average shares outstanding, Class B

     1,967,180         1,967,180   

Diluted EPS, Class A

   $ 0.95       $ 0.89   

Diluted EPS, Class B

     0.58         0.54   
  

 

 

    

 

 

 

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.

Effective January 1, 2016, the Company changed its estimate of the service and interest components of the net periodic benefit cost. Previously, the Company estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The new estimate utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The new estimate provided a more precise measurement of service and interests costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change does not affect the measurement of the Company’s benefit obligations and it is accounted for as a change in accounting estimate, which is applied prospectively.

 

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Components of Net Periodic Benefit Cost (Credit) for the Three Months Ended March 31,

 

     Pension Benefits      Supplemental Insurance/
Retirement Plan
 
     2016      2015      2016      2015  
     (in thousands)  

Service cost

   $ 318       $ 336       $ 455       $ 397   

Interest

     340         394         334         341   

Expected return on plan assets

     (694      (688      —          —    

Recognized prior service cost (benefit)

     (26      (26      29         29   

Recognized net actuarial losses

     200         203         200         150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 138       $ 219       $ 1,018       $ 917   
  

 

 

    

 

 

    

 

 

    

 

 

 

Contributions

The company intends to contribute $2,075,000 to the Pension Plan in 2016. As of March 31, 2016, $1,325,000 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 and municipal bonds.

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

 

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

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

(Level 1)
     Significant
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs

(Level 3)
 
     (in thousands)  

U.S. Treasury

   $ 1,997       $ —        $ 1,997       $ —    

U.S. Government Sponsored Enterprises

     5,008         —          5,008         —    

SBA Backed Securities

     5,931         —          5,931         —    

U.S. Government Agency and Sponsored Mortgage Backed Securities

     226,293         —          226,293         —    

Privately Issued Residential Mortgage Backed Securities

     1,345         —          1,345         —    

Obligations Issued by States and Political Subdivisions

     135,089         —          —          135,089   

Other Debt Securities

     4,469         —          4,469         —    

Equity Securities

     217         217         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 380,349       $ 217       $ 245,043       $ 135,089   
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

     1,044         —           —           1,044   

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 month period ended March 31, 2016 amounted to ($14,000).

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

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

 

Asset

   Fair Value      Valuation Technique   Unobservable Input   Unobservable Input
Value or Range

Securities AFS (4)

   $ 135,089       Discounted cash flow   Discount rate   0%-1% (3)

Impaired Loans

     1,044       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 three-month period ended March 31, 2016 are shown in the table below:

 

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

Balance at December 31, 2015

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

Purchases

     —          15,935         —           15,935   

Maturities and calls

     —          (38,251      (37      (38,288

Amortization

     —          (33      —           (33

Changes in fair value

     478         —           —           478   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2016

   $ 4,298       $ 130,791       $ —         $ 135,089   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $135,490,000 at March 31, 2016 with an unrealized loss of $401,000. 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 three-month period ended March 31, 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

     —          41,909         —          41,909   

Maturities and calls

     —          (19,914      —          (19,914

Amortization

     —          (6      —          (6

Changes in fair value

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2015

   $ 3,820       $ 114,953       $ 102       $ 118,875   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $119,750,000 at March 31, 2015 with an unrealized loss of $875,000. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

 

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The results of the fair value hierarchy as of December 31, 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

   $ 1,989       $ —        $ 1,989       $ —    

U.S. Government Sponsored Enterprises

     —          —          —          —    

SBA Backed Securities

     5,989         —          5,989         —    

U.S. Government Agency and Sponsored Mortgage Backed Securities

     233,526         —          233,526         —    

Privately Issued Residential Mortgage Backed Securities

     1,434         —          1,434         —    

Obligations Issued by States and Political Subdivisions

     156,960         —          —          156,960   

Other Debt Securities

     4,473         —          4,473         —    

Equity Securities

     252         215         —          37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 404,623       $ 215       $ 247,411       $ 156,997   
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

   $ 1,056       $ —        $ —        $ 1,056   

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 2015 for the estimated credit loss amounted to $165,000.

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2015. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 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)

   $ 156,997       Discounted cash flow   Discount rate   0%-1% (3)

Impaired Loans

     1,056       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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Note 9. Fair Values of Financial Instruments

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

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

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

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

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

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

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

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

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

 

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The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2016 and December 31, 2015. 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.

 

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

March 31, 2016

   (in thousands)  

Financial assets:

              

Securities held-to-maturity

   $ 1,412,702       $ 1,437,205       $ —        $ 1,437,205       $ —    

Loans Held-for-Sale

     48,180         48,958            48,958      

Loans (1)

     1,738,914         1,750,498         —          —          1,750,498   

Financial liabilities:

              

Time deposits

     446,185         448,690         —          448,690         —    

Other borrowed funds

     356,000         365,342         —          365,342         —    

Subordinated debentures

     36,083         36,083         —          —          36,083   

December 31, 2015

                                  

Financial assets:

              

Securities held-to-maturity

     1,438,903         1,438,960         —          1,438,960         —    

Loans (1)

     1,708,461         1,677,270         —          —          1,677,270   

Financial liabilities:

              

Time deposits

     473,426         474,046         —          474,046         —    

Other borrowed funds

     368,000         372,209         —          372,209         —    

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 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-1, “Financial Instruments-Overall” (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods therein. The Company is currently assessing the applicability of this ASU and has not determined the impact, if any, as of March 31, 2016.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheet but recognize expenses on their income statements in a manner similar to today’s accounting. This ASU also eliminates today’s real estate-specific provisions for all companies. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. The Company is currently assessing the applicability of this ASU and has not determined the impact, if any, as of March 31, 2016.

In March 2016, the FASB issued ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323) Simplifying the Transition to the Equity Method of Accounting. This ASU requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. This ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

 

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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 March 31, 2016, the Company had total assets of $4.1 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, New Hampshire, Rhode Island, Connecticut and New York.

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

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

The Company has municipal cash management client engagements in Massachusetts, New Hampshire and Rhode Island comprising of approximately 250 government entities.

Net income for the quarter ended March 31, 2016 was $5,307,000, or $0.95 per Class A share diluted, compared to net income of $4,959,000, or $0.89 per Class A share diluted, for the quarter ended March 31, 2015.

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

 

     Three months
ended
March 31,
2016
     Three months
ended
March 31,
2015
 

Basic EPS – Class A common

   $ 1.16       $ 1.08   

Basic EPS – Class B common

   $ 0.58       $ 0.54   

Diluted EPS – Class A common

   $ 0.95       $ 0.89   

Diluted EPS – Class B common

   $ 0.58       $ 0.54   

Net interest income totaled $17.9 million for the quarter ended March 31, 2016 compared to $16.4 million for the same period in 2015. The 8.8% increase in net interest income for the period is primarily due to an increase in average earning assets. The net interest margin increased from 2.12% on a fully taxable equivalent basis for the first quarter of 2015 to 2.18% on the same basis for 2016. This was primarily the result of an increase in rates on earning assets. The average balances of earning assets increased by 6.8% combined with a similar increase in average deposits. Also, interest expense increased 13.6% 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:

Net Interest Margin

 

LOGO

The net interest margin 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. The margin decreased during the fourth quarter of 2015 primarily as a result of lower yielding loan originations. The margin increased during the first quarter of 2016 primarily as a result of an increase in rates on earning assets.

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

The provision for loan losses increased by $250,000 from $200,000 for the quarter ended March 31, 2015 to $450,000 for the same period in 2016, primarily as a result of an increase in loan balances. During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing 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 $1.5 million at March 31, 2016, compared to $2.3 million at December 31, 2015.

For the first three months of 2016, the Company’s effective income tax rate was 1.2% compared to 4.2% for last year’s corresponding period. The effective income tax rate decreased primarily as a result of an increase in tax-exempt income.

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.

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

 

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over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadened the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012. In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance must be achieved by July 21, 2015. The conformance period for investments in and relationships with certain “legacy covered funds” has been extended to July 21, 2016 and is expected to be extended further to July 31, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the 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 March 31, 2016, total loans outstanding were $1.8 billion, up by $30.9 million from the total on December 31, 2015. At March 31, 2016, commercial real estate loans accounted for 40.6% and residential real estate loans, including home equity loans, accounted for 22.3% of total loans.

Commercial and industrial loans increased to $529.2 million March 31, 2016 from $452.2 million at December 31, 2015, primarily as a result of an increase in larger loan originations to large institutions. Construction loans decreased to $26.6 million at March 31, 2016 from $27.4 million on December 31, 2015, primarily as a result of payoffs. Municipal loans decreased slightly to $85.2 million from $85.7 million, primarily as a result of payoffs. 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.

Allowance for Loan Losses

The allowance for loan loss at March 31, 2016 was $23.5 million as compared to $23.1 million at December 31, 2015. The level of the allowance for loan losses to total loans was 1.34% at March 31, 2016 and 1.33% at December 31, 2015.

During 2015, the Company enhanced its approach to the development of the historical loss factors and qualitative factors used on certain loan portfolios. The methodology enhancement was in response to the changes in the risk characteristics of the Company’s new loan originations, as the Company has continued to increase its exposure to larger loan originations to large institutions with strong credit quality. The Company has limited internal loss history experience with these types of loans, and has determined a more appropriate representation of loss expectation is to utilize external historical loss factors based on public credit ratings, as there is a great deal of default and loss data available on these types of loans from the credit rating agencies. As of June 30, 2015, the Company incorporated this information into the development of the historical loss rates for these loan types. During the first quarter of 2016, the Company’s loan portfolio risk profile has remained consistent with year-end. There have been no changes to the allowance methodology which has resulted in a relatively stable ratio of allowance for loan losses to total loans. The combination of the enhancements made to the allowance methodology to address the changing risk profile of the Company’s new loan originations and the increase in these loan types as a percentage of the overall portfolio, has resulted in a relatively stable ratio of allowance for loan losses to total loans.

 

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

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

The Company has increased its exposure to larger loans to large institutions with publically available credit ratings beginning in 2015. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2016.

 

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

Credit Rating:

           

Aaa – Aa3

   $ 281,922       $ 63,407       $ 7,311       $ 352,640   

A1 – A3

     167,389         7,400         130,512         305,301   

Baa1 – Baa3

     —          8,890         166,796         175,686   

Ba2

     —          4,480         —          4,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 449,311       $ 84,177       $ 304,619         838,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has increased its exposure to larger loans to large institutions with publically available credit ratings beginning in 2015. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2015.

 

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

Credit Rating:

           

Aaa – Aa3

   $ 234,733       $ 63,865       $ 7,547       $ 306,145   

A1 – A3

     140,419         7,400         130,872         278,691   

Baa1 – Baa3

     —          8,890         167,489         176,379   

Ba2

     —          4,480         —          4,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 375,152       $ 84,635       $ 305,908       $ 765,695   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Three months ended
March 31,
 
     2016      2015  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 23,075       $ 22,318   

Loans charged off

     (69      (81

Recoveries on loans previously charged-off

     88         92   
  

 

 

    

 

 

 

Net recoveries (charge-offs)

     19         11   

Provision charged to expense

     450         200   
  

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 23,544       $ 22,529   
  

 

 

    

 

 

 

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

 

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Nonperforming Assets

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

 

     March 31,
2016
    December 31,
2015
 
     (Dollars in thousands)  

Nonaccruing loans

   $ 1,490      $ 2,336   

Total nonperforming assets

   $ 1,490      $ 2,336   

Loans past due 90 days or more and still accruing

   $ —       $ —    

Nonaccruing loans as a percentage of total loans

     0.08 %      0.13

Nonperforming assets as a percentage of total
assets

     0.04 %      0.06

Accruing troubled debt restructures

   $ 2,865      $ 2,893   

Cash and Cash Equivalents

Cash and cash equivalents increased from $220.7 million to $304.7 million during the first three months of 2016. This was primarily the result of an increase in higher yielding interest-bearing deposits in other banks during the period.

Short-term Investments

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

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 $380.3 million at March 31, 2016, a decrease of 6.0% from December 31, 2015. The portfolio decreased mainly as a result of calls and maturities. Purchases of securities available-for-sale totaled $20.7 million for the three months ended March 31, 2016. 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 3.3 years.

At March 31, 2016, 64.4% of the Company’s securities available-for-sale are classified as Level 2. The fair values of these securities are generally obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored.

Securities available-for-sale totaling $135.1 million, or 35.5% of securities available-for-sale are classified as Level 3. These securities are generally equity investments or municipal securities with no readily determinable fair value. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.

 

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During the first three months of 2016, net unrealized gains on the securities available-for-sale increased to $130,000 from a net unrealized loss of $354,000 at December 31, 2015. Net unrealized gains on the available-for-sale portfolio increased mainly as a result of one obligation issued by States and Political Subdivisions. The following table sets forth the fair value of securities available-for-sale at the dates indicated.

 

     March 31,
2016
     December 31,
2015
 
     (in thousands)  

U.S. Treasury

   $ 1,997       $ 1,989   

U.S. Government Sponsored Enterprises

     5,008         —     

Small Business Administration

     5,931         5,989   

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

     226,293         233,526   

Privately Issued Residential Mortgage-backed Securities

     1,345         1,434   

Obligations issued by States and Political Subdivisions

     135,089         156,960   

Other Debt Securities

     4,469         4,473   

Equity Securities

     217         252   
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 380,349       $ 404,623   
  

 

 

    

 

 

 

There were no realized gains on sales of investments for the first three months of 2016.

Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $1.4 billion on March 31, 2016, a decrease of 1.8% from the total on December 31, 2015. Purchases of securities held-to-maturity totaled $85.7 million for the three months ended March 31, 2016. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 3.9 years. The following table sets forth the fair value of securities held-to-maturity at the dates indicated.

 

     March 31, 2016      December 31, 2015  
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 152,732       $ 186,734   

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

     1,259,970         1,252,169   
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $ 1,412,702       $ 1,438,903   
  

 

 

    

 

 

 

At March 31, 2016 and December 31, 2015, 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 three months of 2016, the Company redeemed $4.9 million of FHLBB stock. As of March 31, 2016, no impairment has been recognized.

 

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Deposits and Borrowed Funds

On March 31, 2016, deposits totaled $3.2 billion, representing a 3.0% increase from December 31, 2015. Total deposits increased primarily as a result of increases in demand deposits, and savings and NOW deposits. Savings and NOW deposits increased, mainly as a result of municipal deposits, as the Company continued to offer attractive rates for these types of deposits during the first three months of the year. Borrowed funds totaled $574.2 million at March 31, 2016 compared to $565.9 million at December 31, 2015. Borrowed funds increased mainly as a result of an increase in securities sold under agreements to repurchase. This increase was primarily attributable to an increase in large institutional balances. Other borrowed funds decreased mainly as a result of maturing funds.

Stockholders’ Equity

At March 31, 2016, total equity was $220.8 million compared to $214.5 million at December 31, 2015. 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. The Company’s leverage ratio stood at 6.72% at March 31, 2016, compared to 6.79% at December 31, 2015. 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 March 31, 2016 was $39.66 per share compared to $38.53 at December 31, 2015.

 

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Results of Operations

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

 

     Three Months Ended  
     March 31, 2016     March 31, 2015  
     (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

   $ 856,643      $ 8,390        3.94 %    $ 732,191      $ 7,467        4.14

Loans tax-exempt

     930,266        8,881        3.84        606,242        7,142        4.78   

Securities available-for-sale (5):

            

Taxable

     283,095        776        1.10        374,522        625        0.67   

Tax-exempt

     131,388        265        0.81        92,151        162        0.70   

Securities held-to-maturity:

            

Taxable

     1,434,888        7,812        2.18        1,530,383        8,168        2.13   

Interest-bearing deposits in other banks

     245,933        315        0.51        300,638        196        0.26   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     3,882,213        26,439        2.73        3,636,127        23,760        2.62   

Non interest-earning assets

     203,547            184,743       

Allowance for loan losses

     (23,283 )          (22,511    
  

 

 

       

 

 

     

Total assets

   $ 4,062,477          $ 3,798,359       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 833,514      $ 487        0.23 %    $ 762,796      $ 412        0.22

Savings accounts

     384,339        351        0.37        333,948        216        0.26   

Money market accounts

     976,910        795        0.33        999,901        782        0.32   

Time deposits

     448,409        1,358        1.22        377,433        1,156        1.24   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,643,172        2,991        0.46        2,474,078        2,566        0.42   

Securities sold under agreements to repurchase

     222,579        115        0.21        248,508        114        0.19   

Other borrowed funds and subordinated debentures

     366,369        2,307        2.53        339,107        2,085        2.49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     3,232,120        5,413        0.67     3,061,693        4,765        0.63
    

 

 

   

 

 

     

 

 

   

 

 

 

Non-interest-bearing liabilities

            

Demand deposits

     557,116            490,020       

Other liabilities

     55,639            51,639       
  

 

 

       

 

 

     

Total liabilities

     3,844,875            3,603,352       
  

 

 

       

 

 

     

Stockholders’ equity

     217,602            195,007       

Total liabilities & stockholders’ equity

   $ 4,062,477          $ 3,798,359       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       21,026            18,995     

Less taxable equivalent adjustment

       (3,176         (2,588  
    

 

 

       

 

 

   

Net interest income

     $ 17,850          $ 16,407     
    

 

 

   

 

 

     

 

 

   

 

 

 

Net interest spread (3)

         2.06 %          1.99
      

 

 

       

 

 

 

Net interest margin (4)

         2.18 %          2.12
      

 

 

       

 

 

 

 

(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.

 

     Three Months Ended March 31, 2016
Compared with
Three Months Ended March 31, 2015
 
    

Increase/(Decrease)

Due to Change in

 
     Volume      Rate      Total  
     (in thousands)  

Interest income:

        

Loans

        

Taxable

   $ 1,276       $ (353    $ 923   

Tax-exempt

     3,323         (1,584      1,739   

Securities available-for-sale

        

Taxable

     (180      331         151   

Tax-exempt

     77         26         103   

Securities held-to-maturity

        

Taxable

     (517      161         (356

Interest-bearing deposits in other banks

     (41      160         119   
  

 

 

    

 

 

    

 

 

 

Total interest income

     3,938         (1,259      2,679   
  

 

 

    

 

 

    

 

 

 

Interest expense:

        

Deposits:

        

NOW accounts

     42         33         75   

Savings accounts

     37         98         135   

Money market accounts

     (16      29         13   

Time deposits

     224         (22      202   
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     287         138         425   

Securities sold under agreements to repurchase

     (12      13         1   

Other borrowed funds and subordinated debentures

     186         36         222   
  

 

 

    

 

 

    

 

 

 

Total interest expense

     461         187         648   
  

 

 

    

 

 

    

 

 

 

Change in net interest income

   $ 3,477       $ (1,446    $ 2,031   
  

 

 

    

 

 

    

 

 

 

Net Interest Income

For the three months ended March 31, 2016, net interest income on a fully taxable equivalent basis totaled $21.0 million compared to $19.0 million for the same period in 2015, an increase of $2.0 million or 10.7%. 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 average balance of earning assets increased by 6.8% combined with a similar increase in average deposits. The net interest margin increased from 2.12% on a fully taxable equivalent basis in 2015 to 2.18% on the same basis for 2016. This was primarily the result of an increase in rates on earning assets. Also, interest income on a fully taxable equivalent basis increased 11.3%, mainly as a result of an increase in interest earning assets and interest expense increased 13.6% as a result of an increase in deposit balances.

Provision for Loan Losses

For the three months ended March 31, 2016, the loan loss provision was $450,000 compared to a provision of $200,000 for the same period last year. The increase in the provision was primarily as a result of an increase in loan balances. During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. During the first quarter of 2016, the Company’s loan portfolio risk profile has remained consistent with year-end. This was done in response to the changing risk profile of the Company’s new loan originations and related methodology enhancements to address these changes. 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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Non-Interest Income and Expense

Other operating income for the quarter ended March 31, 2016 increased by $149,000 from the same period last year to $3.7 million. This was mainly attributable to an increase in insurance gains of $75,000, credit card fees of $52,000, brokerage commissions of $45,000, and other fees of $52,000. Also, service charges on deposit accounts increased by $24,000, primarily as a result of an increase in debit card fees. Offsetting these increases is a decrease in gains on sales of mortgage loans of $99,000.

For the quarter ended March 31, 2016, operating expenses increased by $1.1 million or 7.9% to $15.7 million, from the same period last year. The increase in operating expenses for the quarter was mainly attributable to an increase of $642,000 in salaries and employee benefits, $421,000 in other expenses, $65,000 in FDIC assessments, and $43,000 in equipment costs. Occupancy cost decreased by $26,000, primarily as a result of increased prior year snow plowing expenses. Salaries and employee benefits increased mainly as a result of merit increases and bonus accruals. Other expenses increased mainly as a result of increases in telephone costs and increased contributions. 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 first quarter of 2016, the Company’s income tax expense totaled $64,000 on pretax income of $5.4 million resulting in an effective tax rate of 1.2%. For last year’s corresponding quarter, the Company’s income tax expense totaled $215,000 on pretax income of $5.2 million resulting in an effective tax rate of 4.2%. The decrease in the effective income tax rate was primarily the result of an increase in tax-exempt income.

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates tied to specific assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. Management believes that there has been no material changes in the interest rate risk reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission. The information is contained in the Form 10-K within the Market Risk and Asset Liability Management section of Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

Item 4. Controls and Procedures

The Company’s management, with participation of the Company’s principal executive and financial officers, has evaluated its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Company’s management, with participation of its principal executive and financial officers, has concluded that the Company’s disclosure controls and procedures are effective. The disclosure controls and procedures also effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act is accumulated and reported to Company management (including the principal executive officer and the principal financial officer) as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has evaluated its internal control over financial reporting and during the first quarter of 2016 there were no changes that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II – Other Information

 

Item 1 Legal proceedings – At the present time, the Company is not engaged in any legal proceedings which, if adversely determined to the Company, would have a material adverse impact on the Company’s financial condition or results of operations. From time to time, the Company is party to routine legal proceedings within the normal course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition and results of operation.

 

Item 1A Risk Factors – Please read “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have been no material changes since this 10-K was filed. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and operating results.

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds –

(a) — (b) Not applicable.

(c) None

 

Item 3 Defaults Upon Senior Securities – None

 

Item 4 Mine Safety Disclosures – Not applicable

 

Item 5 Other Information – None

 

Item 6 Exhibits

 

        31.1

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

        31.2

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

     + 32.1

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

     + 32.2

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

+ + 101.

  INS XBRL Instance Document

+ + 101.

  SCH XBRL Taxonomy Extension Schema

+ + 101.

  CAL XBRL Taxonomy Extension Calculation Linkbase

+ + 101.

  LAB XBRL Taxonomy Extension Label Linkbase

+ + 101.

  PRE XBRL Taxonomy Extension Presentation Linkbase

+ + 101.

  DEF XBRL Taxonomy Definition Linkbase

 

+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++ As provided in Rule 406T of regulation S-T, this information is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and consists of the following materials from Century Bancorp Inc.’s Quarterly Report on 10-Q for the quarter ended March 31, 2016, formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Income for the three months ended March 31, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2016 and 2015; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015; and (vi) Notes to Unaudited Consolidated Interim Financial Statements.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:  

May 10, 2016

   

Century Bancorp, Inc.

/s/ Barry R. Sloane

   
Barry R. Sloane    
President and Chief Executive Officer    

/s/ William P. Hornby

   
William P. Hornby, CPA    
Chief Financial Officer and Treasurer    
(Principal Accounting Officer)    

 

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