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Section 1: 10-K (10-K)

10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2017

 

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

For the transition period from             to            

Commission file number 0-15752

 

 

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification number)

400 MYSTIC AVENUE, MEDFORD, MA   02155
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number including area code:

(781) 391-4000

Securities registered pursuant to Section 12(b) of the Act:

 

Class A Common Stock, $1.00 par value   Nasdaq Global Market
(Title of class)   (Name of Exchange)

 

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K    ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

State the aggregate market value of the registrant’s voting and nonvoting stock held by nonaffiliates, computed using the closing price as reported on Nasdaq as of June 30, 2017 was $230,477,369.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of February 28, 2018:

Class A Common Stock, $1.00 par value 3,607,429 Shares

Class B Common Stock, $1.00 par value 1,960,480 Shares

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

 

(1) Portions of the Registrant’s Annual Report to Stockholders for the fiscal year ended December 31, 2017 are incorporated into Part II, Items 5-8 of this Form 10-K.

 

 

 


Table of Contents

CENTURY BANCORP INC.

FORM 10-K

TABLE OF CONTENTS

 

         Page  
  PART I   
ITEM 1  

BUSINESS

     1-5  
ITEM 1A  

RISK FACTORS

     5  
ITEM 1B  

UNRESOLVED STAFF COMMENTS

     7  
ITEM 2  

PROPERTIES

     7  
ITEM 3  

LEGAL PROCEEDINGS

     7  
ITEM 4  

MINE SAFETY DISCLOSURES

     8  
  PART II   
ITEM 5  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     9-10  
ITEM 6  

SELECTED FINANCIAL DATA

     10  
ITEM 7  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

     10  
ITEM 7A  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     10  
ITEM 8  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     10  
ITEM 9  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     10  
ITEM 9A  

CONTROLS AND PROCEDURES

     11  
ITEM 9B  

OTHER INFORMATION

     11  
  PART III   
ITEM 10  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     99-103  
ITEM 11  

EXECUTIVE COMPENSATION

     104-113  
ITEM 12  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     114  
ITEM 13  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

     115  
ITEM 14  

PRINCIPAL ACCOUNTING FEES AND SERVICES

     115  
  PART IV   
ITEM 15  

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     116  
ITEM 16  

FORM 10-K SUMMARY

     118  
SIGNATURES      119  

 

 

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PART I

 

ITEM 1. BUSINESS

The Company

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At December 31, 2017, the Company had total assets of $4.8 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The 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 large healthcare and higher education 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. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.

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

Availability of Company Filings

Under the Securities Exchange Act of 1934, Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission (the “SEC”). The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The Company electronically files with the SEC its periodic and current reports, as well as other filings it makes with the SEC from time to time. The SEC maintains an Internet site that contains reports and other information regarding issuers, including the Company, that file electronically with the SEC, at www.sec.gov, in which all forms filed electronically may be accessed. Additionally, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and additional shareholder information are available free of charge on the Company’s website: www.centurybank.com.

Employees

As of December 31, 2017, the Company had 385 full-time and 62 part-time employees. The Company’s employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good.

 

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Financial Services Modernization

On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act (“Gramm-Leach”) which significantly altered banking laws in the United States. Gramm-Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm Leach, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies were repealed. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking.

In order to engage in these financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a “financial holding company” by demonstrating that each of its bank subsidiaries is “well capitalized,” “well managed,” and has at least a “satisfactory” rating under the Community Reinvestment Act of 1977 (the “CRA”). The Company has not elected to become a financial holding company under Gramm-Leach.

These financial activities authorized by Gramm-Leach may also be engaged in by a “financial subsidiary” of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and any bank affiliates) to be “well capitalized” and “well managed;” the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if the bank is one of the 100 largest banks, it must meet certain financial rating or other comparable requirements. The Company does not currently conduct activities through a financial subsidiary.

Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the SEC will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers’ nonpublic, personal information.

Holding Company Regulation

The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the “Holding Company Act”), and is registered as such with the Board of Governors of the Federal Reserve Bank (the “FRB”), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (i) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth.

The Holding Company Act prohibits a bank holding company, with certain exceptions, from (i) acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any company which is

 

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not a bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks, or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Company and its subsidiaries are examined by federal and state regulators. The FRB has regulatory authority over holding company activities and performed a review of the Company and its subsidiaries as of September 2016.

USA PATRIOT Act

Under Title III of the USA PATRIOT Act, also known as the “International Money Laundering Abatement and Anti-Terrorism Act of 2001”, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the Gramm-Leach Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Holding Company Act or Bank Merger Act.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection and enhanced and timely disclosure of corporate information. The SEC has adopted a substantial number of implementing rules and the Financial Industry Regulatory Authority (FINRA) has adopted corporate governance rules that have been approved by the SEC and are applicable to the Company. The changes are intended to allow stockholders to monitor more effectively the performance of companies and management. As directed by Section 302(a) of the Sarbanes-Oxley Act, the Company’s Chief Executive Officer and Chief Financial Officer are each required to certify that the Company’s quarterly and annual reports do not contain any untrue statement of a material fact. This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Company’s disclosure controls and procedures and internal controls over financial reporting; that they have made certain disclosures to the Company’s auditors and the Board of Directors about the Company’s disclosure controls and procedures and internal control over financial reporting, and that they have included information in the Company’s quarterly and annual reports about their evaluation of the Company’s disclosure controls and procedures and internal control over financial reporting, and whether there have been significant changes in the Company’s internal disclosure controls and procedures or in other factors that could significantly affect such controls and procedures subsequent to the evaluation and whether there have been any significant changes in the Company’s internal control over financial reporting that have materially affected or reasonably likely to materially affect the Company’s internal control over financial reporting, and compliance with certain other disclosure objectives. Section 906 of the Sarbanes-Oxley Act requires an additional certification that each periodic report containing financial statements fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 and that the information in the report fairly presents, in all material respects, the financial conditions and results of operations of the Company.

Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad

 

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in scope, affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadened the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012. In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance must be achieved by July 21, 2015. The conformance period for investments in and relationships with certain “legacy covered funds” was extended to July 21, 2016 and was extended further to July 31, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Company’s financial condition or results of operation.

Tax Cuts and Jobs Act

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act take effect on January 1, 2018. The Tax Act lowers the Company’s federal tax rate from 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards.

Deposit Insurance Premiums

The Bank’s deposits have the benefit of FDIC insurance up to applicable limits. The FDIC’s Deposit Insurance Fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of assets that it holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.

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

 

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In February 2011, the FDIC approved a rule to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The rule has kept the overall amount collected from the industry very close to the amount collected prior to the new calculation.

Risk-Based Capital Guidelines

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

Competition

The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. A number of these competitors are not subject to the regulatory oversight that the Company is subject to, which increases these competitors’ flexibility.

Forward-Looking Statements

Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

ITEM 1A. RISK FACTORS

The risk factors that may affect the Company’s performance and results of operations include the following:

(i) the Company’s business is dependent upon general economic conditions in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York. The national and local economies may adversely affect the Company’s performance and results of operations;

 

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(ii) the Company’s earnings depend, to a great extent, upon the level of net interest income generated by the Company, and therefore the Company’s results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve;

(iii) the banking business is highly competitive and the profitability of the Company depends upon the Company’s ability to attract loans and deposits in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York, where the Company competes with a variety of traditional banking companies, some of which have vastly greater resources, and nontraditional institutions such as credit unions and finance companies; .

(iv) at December 31, 2017, approximately 68.8% of the Company’s loan portfolio was comprised of commercial and commercial real estate loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans;

(v) at December 31, 2017, approximately 24.6% of the Company’s loan portfolio was comprised of residential real estate and home equity loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk and the value of underlying collateral. Accordingly, the Company’s profitability may be negatively impacted by errors in risk analyses, by loan defaults and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions;

(vi) economic conditions and interest rate risk could adversely impact the fair value and the ultimate collectibility of the Company’s investments. Should an investment be deemed “other than temporarily impaired”, the Company would be required to writedown the carrying value of the investment through earnings. Such writedown(s) may have a material adverse effect on the Company’s financial condition and results of operations;

(vii) writedown of goodwill and other identifiable intangible assets would negatively impact our financial condition and results of operations. At December 31, 2017, our goodwill and other identifiable intangible assets were approximately $2.7 million;

(viii) acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States of America generally and in the Company’s markets, which could adversely affect the Company’s financial performance and that of the Company’s borrowers and on the financial markets and the price of the Company’s Class A common stock;

(ix) changes in the extensive laws, regulations and policies governing companies generally and bank holding companies and their subsidiaries, such as the Act and the Tax Act, could alter the Company’s business environment or affect the Company’s operations;

(x) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent to secure bank and customer financial information, could present operational issues, require significant capital spending or impact the Company’s reputation;

(xi) evolving information technologies, the need to mitigate against and react to cyber-security risks and electronic fraud risks require significant resources and notwithstanding our investment in resources, we remain subject to cyber security risks and electronic fraud;

(xii) the Company’s loan customers may not repay loans according to their terms, and the collateral securing the payment of loans may be insufficient to assure repayment or cover losses. If loan customers fail to repay loans according to the terms of the loans, the Company may experience significant credit losses which could have a material adverse effect on its operating results and capital ratios;

(xiii) the Company is subject to extensive regulation, supervision and examination. Any change in the laws or regulations or failure by the Company to comply with applicable law and regulation, or a change in regulators’ supervisory policies or examination procedures, whether by the Massachusetts Commissioner of

 

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Banks, the FDIC, the Federal Reserve Board, other state or federal regulators, the United States Congress, or the Massachusetts legislature could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows. Changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters, could also impact the Company’s financial results; and

These factors, as well as general economic and market conditions in the United States of America, may materially and adversely affect the Company’s performance, results of operations and the market price of shares of the Company’s Class A common stock.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

No written comments received by the Company from the SEC regarding the Company’s periodic or current reports remain unresolved.

 

ITEM 2. PROPERTIES

The Company owns its main banking office, headquarters, and operations center in Medford, Massachusetts, which were expanded in 2004, and 11 of the 26 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2018 to 2028. The Company believes that its banking offices are in good condition.

During June 2016, the Company entered into a lease agreement to open a new branch located in Wellesley, Massachusetts. The Company closed its existing Wellesley branch and transferred the accounts to the new Wellesley branch which opened on December 19, 2016. On September 25, 2017 the Company purchased the new Wellesley location.

 

ITEM 3. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Company’s consolidated financial position.

On September 7, 2017, Crimson Galeria Limited Partnership, Raj & Raj, LLC, Harvard Square Holdings LLC, and Charles River Holdings LLC (collectively, the “Plaintiffs”) filed suit in the United States District Court for the District of Massachusetts against the Attorney General of the Commonwealth of Massachusetts, the Massachusetts Department of Public Health, the City of Cambridge, the Town of Georgetown, as well as against the Bank, Healthy Pharms, Inc., (“Healthy Pharms”), Timbuktu Real Estate, LLC, Paul Overgaag, Nathaniel Averill, 4Front Advisors, LLC, 4Front Holdings LLC, Kristopher T. Krane, 3 Brothers Real Estate, LLC, Red Line Management, LLC, unspecified insurance providers to certain Plaintiffs, Tomolly, Inc., and (collectively, the “Defendants”).

The Plaintiffs allege that they own property in Cambridge, MA, and claim that the value and use of their property will be impaired by Healthy Pharms decision to open a registered medicinal marijuana dispensary in abutting or nearby situated property. The Plaintiffs further allege that the Bank has a banking relationship with Healthy Pharms and that, by entering into such relationship, the Bank conspired with Healthy Pharms to violate the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. The Plaintiffs seek unspecified treble damages and attorney’s costs and fees, as well as injunctive and declaratory relief.

The Company believes that the claims and allegations against the Bank set forth in the complaint are without merit, and the Company and the Bank intend to vigorously defend against them.

 

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On December 15, 2017, the Company filed a motion to dismiss the complaint; the plaintiffs filed an opposition brief, and the Company has filed a reply in further support of its motion.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) The Class A Common Stock of the Company is traded on the NASDAQ National Global Market under the symbol “CNBKA.” The price range of the Company’s Class A common stock since January 1, 2016 is shown on page 14. The Company’s Class B Common Stock is not traded on any national securities exchange or other public trading market.

The shares of Class A Common Stock are generally not entitled to vote on any matter, including in the election of Company Directors, but, in limited circumstances, may be entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of the Company’s Class B Common Stock, voting as a separate class, is required to approve certain extraordinary corporate transactions, the holders of Class B Common Stock have the power to prevent any takeover of the Company not approved by them.

(b) Approximate number of equity security holders as of December 31, 2017:

 

Class A Common Stock

     1,025  

Class B Common Stock

     175  

(c) Under the 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.

The following table shows the dividends paid by the Company on the Class A and Class B Common Stock for the periods indicated.

 

     Class A      Class B  

2016

     

First quarter

   $ 0.12      $ 0.06  

Second quarter

     0.12        0.06  

Third quarter

     0.12        0.06  

Fourth quarter

     0.12        0.06  

2017

     

First quarter

   $ 0.12      $ 0.06  

Second quarter

     0.12        0.06  

Third quarter

     0.12        0.06  

Fourth quarter

     0.12        0.06  

The Company’s ability to pay dividends on its shares depends generally on dividends it receives from the Bank. Both Massachusetts and federal law limit the payment of dividends by the Bank to the Company. Under FDIC regulations and applicable Massachusetts law, the dollar amount of dividends and any other capital distributions that the Bank may make depends upon its capital position and recent net income. Generally, so long as the Bank remains adequately capitalized, it may potentially make capital distributions during any calendar year equal to up to 100% of net income for the year to date plus retained net income for the two preceding years. However, if the Bank’s capital becomes impaired or the FDIC or Commissioner otherwise determines that the Bank should conserve capital, the Bank may be prohibited or otherwise limited from paying any dividends or making any other capital distributions.

 

9


Table of Contents

The Federal Reserve Board also has authority to prohibit dividends by bank holding companies such as the Company, if their actions constitute unsafe or unsound practices. Prior to the recent financial crisis, the Federal Reserve Board issued a policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that, (1) the company’s net income for the past year is sufficient to cover the cash dividends, (2) the rate of earnings retention is consistent with the company’s capital needs, asset quality, and overall financial condition, and (3) the minimum regulatory capital adequacy ratios are met. It is also the Federal Reserve Board’s policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries. It is expected that the Federal Reserve Board will be more rather than less restrictive for the foreseeable future about dividend practices.

(d) The following schedule provides information with respect to the Company’s equity compensation plans under which shares of Class A Common Stock are authorized for issuance as of December 31, 2017:

 

     Equity Compensation Plan Information  

Plan Category

   Number of Shares
to be Issued
Upon Exercise of
Outstanding Options
(a)
     Weighted-Average
Exercise Price of
Outstanding Options
(b)
     Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Shares Reflected in
Column (a))
( c)
 

Equity compensation plans approved by
security holders

     —        $ —          233,934  

Equity compensation plans not approved by
security holders

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total

     —        $ —          233,934  

(e) The performance graph information required herein is shown on page 13.

 

ITEM 6. SELECTED FINANCIAL DATA

The information required herein is shown on pages 13 through 15.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The information required herein is shown on pages 16 through 39.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required herein is shown on pages 37.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required herein is shown on pages 40 through 95.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

 

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ITEM 9A. CONTROLS AND PROCEDURES

The Company’s principal executive officer and principal financial officer have evaluated the Company’s disclosure controls and procedures as of December 31, 2017. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective. The Company’s 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 Securities Exchange Act of 1934 is accumulated and reported to Company management (including the principal executive officer and principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal control over financial reporting and there have been no changes that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting or in other factors that could significantly affect its internal control over financial reporting.

On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released an updated version of its Internal Control — Integrated Framework (2013) (2013 Framework). The 2013 Framework’s internal control components (i.e., control environment, risk assessment, control activities, information and communication, and monitoring activities) remain predominantly the same as those in the 1992 Framework. However, the 2013 Framework was expanded to include 17 principles which must be present and functioning in order to have an effective system of internal controls. The Company implemented the 2013 Framework effective December 31, 2014.

Management’s report on internal control over financial reporting is shown on page 98. The audit report of the registered public accounting firm is shown on page 97.

 

ITEM 9B. OTHER INFORMATION

None.

 

 

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FINANCIAL STATEMENTS

 

Financial Highlights

     13  

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

     16  

Consolidated Balance Sheets

     40  

Consolidated Statements of Income

     41  

Consolidated Statements of Comprehensive Income

     42  

Consolidated Statements of Changes in Stockholders’ Equity

     43  

Consolidated Statements of Cash Flows

     44  

Notes to Consolidated Financial Statements

     45  

Reports of Independent Registered Public Accounting Firm

     96  

Management’s Report on Internal Control Over Financial Reporting

     98  

 

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Financial Highlights

 

     2017     2016     2015     2014     2013  
(dollars in thousands, except share data)                               

FOR THE YEAR

          

Interest income

   $ 113,436     $ 96,699     $ 90,093     $ 85,371     $ 79,765  

Interest expense

     27,820       22,617       20,134       19,136       18,805  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     85,616       74,082       69,959       66,235       60,960  

Provision for loan losses

     1,790       1,375       200       2,050       2,710  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     83,826       72,707       69,759       64,185       58,250  

Other operating income

     16,552       16,222       15,993       15,271       18,615  

Operating expenses

     67,119       64,757       62,198       56,730       55,812  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     33,259       24,172       23,554       22,726       21,053  

Provision for income taxes

     10,958       (362     533       866       1,007  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 22,301     $ 24,534     $ 23,021     $ 21,860     $ 20,046  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core earnings — Non-GAAP(1)

   $ 30,749     $ 24,534     $ 23,021     $ 21,860     $ 20,046  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average shares outstanding Class A, basic

     3,604,029       3,600,729       3,600,729       3,591,732       3,575,683  

Average shares outstanding Class B, basic

     1,963,880       1,967,180       1,967,180       1,969,030       1,980,855  

Average shares outstanding Class A, diluted

     5,567,909       5,567,909       5,567,909       5,562,209       5,557,693  

Average shares outstanding Class B, diluted

     1,963,880       1,967,180       1,967,180       1,969,030       1,980,855  

Total shares outstanding at year-end

     5,567,909       5,567,909       5,567,909       5,567,909       5,556,584  

Earnings per share:

          

Basic, Class A

   $ 4.86     $ 5.35     $ 5.02     $ 4.78     $ 4.39  

Basic, Class B

   $ 2.43     $ 2.68     $ 2.51     $ 2.39     $ 2.19  

Diluted, Class A

   $ 4.01     $ 4.41     $ 4.13     $ 3.93     $ 3.61  

Diluted, Class B

   $ 2.43     $ 2.68     $ 2.51     $ 2.39     $ 2.19  

Dividend payout ratio — Non-GAAP(1)

     9.9     9.0     9.6     10.0     10.9

AT YEAR-END

          

Assets

   $ 4,785,572     $ 4,462,608     $ 3,947,441     $ 3,624,036     $ 3,431,154  

Loans

     2,175,944       1,923,933       1,731,536       1,331,366       1,264,763  

Deposits

     3,916,967       3,653,218       3,075,060       2,737,591       2,715,839  

Stockholders’ equity

     260,297       240,041       214,544       192,500       176,472  

Book value per share

   $ 46.75     $ 43.11     $ 38.53     $ 34.57     $ 31.76  

SELECTED FINANCIAL PERCENTAGES

          

Return on average assets

     0.48     0.57     0.59     0.61     0.60

Return on average stockholders’ equity

     8.75     10.80     11.26     11.57     11.58

Net interest margin, taxable equivalent

     2.25     2.12     2.18     2.22     2.21

Net (recoveries) charge-offs as a percent of average loans

     0.00     0.00     (0.04 )%      0.05     0.08

Average stockholders’ equity to average assets

     5.50     5.29     5.25     5.27     5.22

Efficiency ratio — Non-GAAP(1)

     57.8     62.7     64.1     62.0     63.0

 

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Financial Highlights — (Continued)

 

 

(1) Non-GAAP Financial Measures are reconciled in the following tables:

 

     2017     2016     2015     2014     2013  

Calculation of Efficiency Ratio:

          

Total Operating Expenses (numerator)

   $ 67,119     $ 64,757     $ 62,198     $ 56,730     $ 55,812  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

   $ 85,616     $ 74,082     $ 69,959     $ 66,235     $ 60,960  

Total Other Operating Income

     16,552       16,222       15,993       15,271       18,615  

Tax Equivalent Adjustment

     13,979       12,917       11,140       10,033       8,984  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Income (denominator)

   $ 116,147     $ 103,221     $ 97,092     $ 91,539     $ 88,559  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Efficiency Ratio, Year — Non-GAAP

     57.8     62.7     64.1     62.0     63.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2017     2016     2015     2014     2013  

Calculation of Dividend Payout Ratio:

          

Dividends Paid (numerator)

   $ 2,200     $ 2,201     $ 2,200     $ 2,196     $ 2,191  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (denominator)

   $ 22,301     $ 24,534     $ 23,021     $ 21,860     $ 20,046  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividend Payout Ratio — Non-GAAP

     9.9     9.0     9.6     10.0     10.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2017     2016     2015     2014     2013  

Calculation of core earnings:

          

Net Income

   $ 22,301     $ 24,534     $ 23,021     $ 21,860     $ 20,046  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add: Deferred Tax Remeasurement Charge

     8,448                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core earnings — Non-GAAP

   $ 30,749     $ 24,534     $ 23,021     $ 21,860     $ 20,046  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Per Share Data

2017, Quarter Ended

   December 31,      September 30,      June 30,      March 31,  

Market price range (Class A)

           

High

   $ 89.40      $ 81.10      $ 66.65      $ 64.87  

Low

     77.85        61.95        53.35        58.55  

Dividends Class A

     0.12        0.12        0.12        0.12  

Dividends Class B

     0.06        0.06        0.06        0.06  

2016, Quarter Ended

   December 31,      September 30,      June 30,      March 31,  

Market price range (Class A)

           

High

   $ 62.60      $ 45.45      $ 43.24      $ 43.96  

Low

     44.95        41.41        38.75        38.61  

Dividends Class A

     0.12        0.12        0.12        0.12  

Dividends Class B

     0.06        0.06        0.06        0.06  

The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2012 to December 31, 2017 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used.

 

14


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Financial Highlights — (Continued)

 

Comparison of Five-Year

Cumulative Total Return*

 

LOGO

 

Value of $100 Invested on December 31, 2012 at:    2013      2014      2015      2016      2017  

Century Bancorp, Inc.

   $ 102.35      $ 124.97      $ 137.17      $ 191.38      $ 251.31  

NASDAQ Banks

     136.62        152.78        156.15        197.60        233.94  

NASDAQ U.S.

     140.12        160.78        171.97        187.22        242.71  

 

* Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on December 31, 2012 and that all dividends were reinvested.

 

15


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

FORWARD-LOOKING STATEMENTS

Certain statements contained herein are not based on historical facts and are “forward-looking statements” within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as “may,” “will,” “believe,” “expect,” “estimate,” “anticipate,” “continue” or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

RECENT MARKET DEVELOPMENTS

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

In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance was required to be achieved by July 21, 2015. The conformance period for investments in and relationships with certain “legacy covered funds” has been extended to July 21, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the 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

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

that came into effect in January 2015 sets the Basel III minimum regulatory capital requirements for all organizations. It included a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raised the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The implementation of the framework did not have a material impact on the Company’s financial condition or results of operations.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act takes effect on January 1, 2018. The Tax Act lowers the Company’s federal tax rate from 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards. Tax Act changes for individuals include lower tax rates, mortgage interest and state and local tax limitations as well as an increase in the standard deduction, among others.

OVERVIEW

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At December 31, 2017, the Company had total assets of $4.8 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The 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 large healthcare and higher education 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 years, the Company has increased business to larger institutions, specifically, healthcare and higher education. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.

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

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The Company had net income of $22,301,000 for the year ended December 31, 2017, compared with net income of $24,534,000 for the year ended December 31, 2016 and net income of $23,021,000 for the year ended December 31, 2015. Class A diluted earnings per share were $4.01 in 2017 compared to $4.41 in 2016 and compared to $4.13 in 2015.

During 2017, the Company’s earnings were negatively impacted by a reduction in the value of its net deferred tax asset resulting in a charge of $8.4 million to income tax expense. This was the result of the enactment of the Tax Act on December 22, 2017, which lowered the Company’s federal tax rate from 34% to 21%. During 2017 and 2016, the Company’s earnings were positively impacted primarily by an increase in net interest income. This increase was primarily due to an increase in earning assets. Also contributing to the increase in earnings for 2016 was a decrease in the provision for loan losses. This was primarily the result of changes in the risk profile of the Company’s new loan originations, related methodology enhancements to address these changes, as well as net recoveries being realized during the year. During 2016 and 2015, the U.S. economy experienced a low short-term rate environment. The lower short-term rates negatively impacted the net interest margin as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits.

Earnings per share (EPS) for each class of stock and for each year ended December 31, is as follows:

 

     2017      2016      2015  

Basic EPS – Class A common

   $ 4.86      $ 5.35      $ 5.02  

Basic EPS – Class B common

   $ 2.43      $ 2.68      $ 2.51  

Diluted EPS – Class A common

   $ 4.01      $ 4.41      $ 4.13  

Diluted EPS – Class B common

   $ 2.43      $ 2.68      $ 2.51  

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

Net Interest Margin

 

LOGO

During the second and third quarters of 2015 the net interest margin increased primarily as a result of an increase in higher yielding assets as well as prepayment penalties collected. The increase in higher yielding assets was primarily the result of increased purchases of securities held-to-maturity. The margin decreased during the fourth quarter of 2015 primarily as a result of lower yielding loan originations. The margin increased during the first quarter of 2016 primarily as a result of an increase in rates on earning assets. The margin decreased during the second, third, and fourth quarters of 2016 primarily as a result of a decrease in rates on earning assets. The margin increased during 2017 primarily as a result of an increase in rates on earning assets. This increase was primarily the result of the yield on floating rate assets increasing as a result of recent increases in short term interest rates as well as an increase in prepayment penalties collected during the second quarter of 2017. Prepayment penalties collected amounted to $825,000 and contributed approximately seven basis points to the net interest margin for the second quarter. During 2017, the Company has not seen a corresponding increase in short term rates on interest bearing liabilities. While management will continue its efforts to improve the net

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

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

Historical U.S. Treasury Yield Curve

 

LOGO

A yield curve is a line that typically plots the interest rates of U.S. Treasury Debt, which have different maturity dates but the same credit quality, at a specific point in time. The three main types of yield curve shapes are normal, inverted and flat. Over the past three years, the U.S. economy has experienced low short-term rates. During 2016 and 2017, short-term rates increased more than longer-term rates resulting in a flattening of the yield curve. This flattening of the yield curve became more pronounced during 2017.

Total assets were $4,785,572,000 at December 31, 2017, an increase of 7.2% from total assets of $4,462,608,000 at December 31, 2016.

On December 31, 2017, stockholders’ equity totaled $260,297,000, compared with $240,041,000 on December 31, 2016. Book value per share increased to $46.75 at December 31, 2017, from $43.11 on December 31, 2016.

During June 2016, the Company entered into a lease agreement to open a new branch located in Wellesley, Massachusetts. The Company closed its existing Wellesley branch and transferred the accounts to the new Wellesley branch which opened on December 19, 2016. On September 25, 2017 the Company purchased the new Wellesley location.

CRITICAL ACCOUNTING POLICIES

Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies.

The Company considers allowance for loan losses and income taxes to be its critical accounting policies.

Allowance for Loan Losses

Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. After considering the above components, an unallocated component may be generated to cover uncertainties that could affect management’s estimate of probable losses. Further information regarding the Company’s methodology for assessing the appropriateness of the allowance is contained within Note 1 of the “Notes to Consolidated Financial Statements”.

During 2016 and 2017, the Company continued to enhance its methodology to the allowance for loan losses by updating qualitative factors on certain loan portfolios. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Income Taxes

Certain areas of accounting for income taxes require management’s judgment, including determining the expected realization of deferred tax assets and the adequacy of liabilities for uncertain tax positions. Judgments are made regarding various tax positions, which are often subjective and involve assumptions about items that are inherently uncertain. If actual factors and conditions differ materially from estimates made by management, the actual realization of the net deferred tax assets or liabilities for uncertain tax positions could vary materially from the amounts previously recorded.

Deferred tax assets arise from items that may be used as a tax deduction or credit in future income tax returns, for which a financial statement tax benefit has already been recognized. The realization of the net deferred tax asset generally depends upon future levels of taxable income. Valuation allowances are recorded against those deferred tax assets determined not likely to be realized. Deferred tax liabilities represent items that will require a future tax payment. They generally represent tax expense recognized in the Company’s financial statements for which payment has been deferred, or a deduction taken on the Company’s tax return but not yet recognized as an expense in the Company’s financial statements. Deferred tax liabilities are also recognized for certain non-cash items such as goodwill.

FINANCIAL CONDITION

Investment Securities

The Company’s securities portfolio consists of securities available-for-sale (“AFS”) and securities held-to-maturity (“HTM”).

Securities available-for-sale consist of certain U.S. Treasury, U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; other debt securities; and other marketable equities.

These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders’ equity. The fair value of securities available-for-sale at December 31, 2017 totaled $397,475,000 and included gross unrealized gains of $860,000 and gross unrealized losses of $948,000. A year earlier, the fair value of securities available-for-sale was $499,297,000 including gross unrealized gains of $555,000 and gross unrealized losses of $1,478,000. In 2017, the Company recognized gains of $47,000 on the sale of available-for-sale securities. In 2016 and 2015, the Company recognized gains of $52,000 and $289,000, respectively.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Securities classified as held-to-maturity consist of U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities. Securities held-to-maturity as of December 31, 2017 are carried at their amortized cost of $1,701,233,000. A year earlier, securities held-to-maturity totaled $1,653,986,000. In 2017 the company did not recognize any gains on the sale of held-to-maturity securities. In 2016 and 2015 the company recognized gains of $12,000 and $305,000, respectively, on the sale of held-to-maturity securities. The sales from securities held-to-maturity relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment.

The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated.

Fair Value of Securities Available-for-Sale

 

     2017     2016     2015  

At December 31,

   Amount      Percent     Amount      Percent     Amount      Percent  
(dollars in thousands)                                        

U.S. Treasury

   $ 1,984        0.5   $ 2,000        0.4   $ 1,989        0.5

U.S. Government Sponsored Enterprises

            0.0     24,952        5.0            0.0

SBA Backed Securities

     80,950        20.3     57,767        11.6     5,989        1.5

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

     225,775        56.8     243,325        48.7     233,526        57.7

Privately Issued Residential Mortgage-Backed Securities

     892        0.2     1,109        0.2     1,434        0.4

Obligations Issued by States and Political Subdivisions

     82,600        20.8     164,876        33.0     156,960        38.8

Other Debt Securities

     4,971        1.3     4,924        1.0     4,473        1.0

Equity Securities

     303        0.1     344        0.1     252        0.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 397,475        100.0   $ 499,297        100.0   $ 404,623        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The majority of the Company’s securities AFS are classified as Level 2, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Management’s understanding of a pricing service’s pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing controls. Management’s validation of a vendor’s pricing methodology includes establishing internal controls to determine that the pricing information received by a pricing service and used by management in the valuation process is relevant and reliable. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not more likely than not that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2017.

The increase in SBA Backed Securities was primarily the result of an increased investment return combined with a lower risk rating in these types of securities. The decrease in Obligations Issued by States and Political

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Subdivisions was primarily the result of increased competition in the bidding process for these types of securities.

Securities available-for-sale totaling $82,600,000, or 1.7% of assets, are classified as Level 3, as defined in Note 1 of the “Notes to Consolidated Financial Statements.” These securities are generally municipal securities with no readily determinable fair value. The Company also utilizes internal pricing analysis on various municipal securities using market rates on comparable securities. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.

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

The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated.

Amortized Cost of Securities Held-to-Maturity

 

     2017     2016     2015  

At December 31,

   Amount      Percent     Amount      Percent     Amount      Percent  
(dollars in thousands)                                        

U.S. Government Sponsored Enterprises

   $ 104,653        6.2   $ 148,326        9.0   $ 186,734        13.0

SBA Backed Securities

     57,235        3.4     46,140        2.8            0.0

U.S. Government Sponsored Enterprise Mortgage-Backed Securities

     1,539,345        90.4     1,459,520        88.2     1,252,169        87.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,701,233        100.0   $ 1,653,986        100.0   $ 1,438,903        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2017. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Fair Value of Securities Available-for-Sale Amounts Maturing

 

    Within
One
Year
    % of
Total
    Weighted
Average
Yield
    One
Year to
Five
Years
    % of
Total
    Weighted
Average
Yield
    Five
Years to
Ten
Years
    % of
Total
    Weighted
Average
Yield
    Over
Ten
Years
    % of
Average
Total
    Weighted
Yield
 
(dollars in thousands)                                                                        

U.S. Treasury

  $       0.0     0.00   $ 1,984       0.5     1.28   $       0.0     0.00   $       0.0     0.00

U.S. Government Sponsored Enterprises

          0.0     0.00           0.0     0.00           0.0     0.00           0.0     0.00

SBA Backed Securities

          0.0     0.00     14,816       3.7     1.73     27,031       6.8     1.89     39,103       9.8     1.90

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

          0.0     0.00     85,292       21.5     2.00     116,018       29.2     2.03     24,465       6.2     1.99

Privately Issued Residential Mortgage-Backed Securities

    892       0.2     1.87           0.0     0.00           0.0     0.00           0.0     0.00

Obligations of States and Political Subdivisions

    77,146       19.4     1.82     770       0.2     3.96     225       0.1     4.80     4,459       1.1     3.45

Other Debt Securities

    300       0.1     1.91     1,261       0.3     2.04     1,033       0.3     6.00     1,035       0.3     6.00

Equity Securities

          0.0     0.00                 0.00           0.0     0.00           0.0     0.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 78,338       19.7     1.82   $ 104,123       26.2     1.96   $ 144,307       36.4     2.04   $ 69,062       17.4     2.09
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

     Non-
Maturing
     % of
Total
    Weighted
Average
Yield
    Total      % of
Total
    Weighted
Average
Yield
 
(dollars in thousands)                                       

U.S. Treasury

   $        0.0     0.00   $ 1,984        0.5     1.28

U.S. Government Agency Sponsored Enterprises

            0.0     0.00            0.0     0.00

SBA Backed Securities

            0.0     0.00     80,950        20.3     1.87

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

            0.0     0.00     225,775        56.8     2.02

Privately Issued Residential Mortgage-Backed Securities

            0.0     0.00     892        0.2     1.87

Obligations of States and Political Subdivisions

            0.0     0.00     82,600        20.8     1.94

Other Debt Securities

     1,342        0.3     2.22     4,971        1.3     3.64

Equity Securities

     303        0.1     6.21     303        0.1     6.21
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,645        0.4     2.95   $ 397,475        100.0     1.99
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Amortized Cost of Securities Held-to-Maturity Amounts Maturing

 

    Within
One
Year
    % of
Total
    Weighted
Average
Yield
    One
Year
to Five
Years
    % of
Total
    Weighted
Average
Yield
    Five
Years
to Ten
Years
    % of
Total
    Weighted
Average
Yield
    Over
Ten
Years
    % of
Total
    Weighted
Average
Yield
    Total     % of
Total
    Weighted
Average
Yield
 
(dollars in
thousands)
                                                                                         

U.S. Government Sponsored Enterprises

  $ 19,947       1.2     1.60   $ 84,706       5.0     2.12   $       0.0     0.00   $       0.0     0.00   $ 104,653       6.2     2.02

SBA Backed Securities

          0.0     0.00     6,939       0.4     1.58     50,296       3.0     2.38           0.0     0.00     57,235       3.4     2.28

U.S. Government Sponsored Enterprise Mortgage-Backed Securities

    8,805       0.5     2.47     1,165,634       68.5     2.26     361,620       21.2     2.42     3,286       0.2     3.10     1,539,345       90.4     2.30
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 28,752       1.7     1.86   $ 1,257,279       73.9     2.25   $ 411,916       24.2     2.41   $ 3,286       0.2     3.10   $ 1,701,233       100.0     2.28
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2017 and 2016, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders’ equity. In 2017, sales of securities totaling $18,180,000 in gross proceeds resulted in a net realized gain of $47,000. In 2016, sales of securities totaling $2,568,000 in gross proceeds resulted in a net realized gain of $64,000. There were no sales of state, county or municipal securities during 2017 and 2016.

Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are dependent upon general market conditions and specific conditions related to the issuers of our securities.

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Loans

The Company’s lending activities are conducted principally in Massachusetts, New Hampshire, Rhode Island, Connecticut and New York. The Company grants single-family and multi-family residential loans, commercial and commercial real estate loans, municipal loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers’ geographic areas and of the general economy.

The following summary shows the composition of the loan portfolio at the dates indicated.

 

    2017     2016     2015     2014     2013  

December 31,

  Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
 
(dollars in thousands)                                                            

Construction and land development

  $ 18,931       0.9   $ 14,928       0.8   $ 27,421       1.6   $ 22,744       1.7   $ 33,058       2.6

Commercial and industrial

    763,807       35.1     612,503       31.8     452,235       26.1     149,732       11.2     76,675       6.1

Municipal

    106,599       4.9     135,418       7.0     85,685       4.9     41,850       3.1     32,737       2.6

Commercial real estate

    732,491       33.7     696,173       36.2     721,506       41.7     696,272       52.3     696,317       55.0

Residential real estate

    287,731       13.2     241,357       12.5     255,346       14.7     257,305       19.3     286,041       22.6

Consumer

    18,458       0.8     11,013       0.6     10,744       0.6     10,925       0.8     8,824       0.7

Home equity

    247,345       11.4     211,857       11.0     178,020       10.3     151,275       11.4     130,277       10.3

Overdrafts

    582       0.0     684       0.1     579       0.1     1,263       0.2     834       0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,175,944       100.0   $ 1,923,933       100.0   $ 1,731,536       100.0   $ 1,331,366       100.0   $ 1,264,763       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2017, 2016, 2015, 2014 and 2013, loans were carried net of discounts of $272,000, $313,000, $360,000, $407,000 and $454,000, respectively. Net deferred loan fees of $362,000, $641,000, $988,000, $908,000 and $174,000 were carried in 2017, 2016, 2015, 2014 and 2013, respectively.

The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2017. The table excludes loans secured by 1–4 family residential real estate, loans for household and family personal expenditures, and municipal loans. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.

Remaining Maturities of Selected Loans at December 31, 2017

 

     One Year
or Less
     One to
Five Years
     Over Five
Years
     Total  
(dollars in thousands)                            

Construction and land development

   $      $ 466      $ 18,465      $ 18,931  

Commercial and industrial

     34,601        57,909        671,297        763,807  

Commercial real estate

     28,122        80,724        623,645        732,491  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 62,723      $ 139,099      $ 1,313,407      $ 1,515,229  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The following table indicates the rate variability of the above loans due after one year.

 

December 31, 2017

   One to
Five Years
     Over Five
Years
     Total  
(dollars in thousands)                     

Predetermined interest rates

   $ 69,260      $ 325,671      $ 394,931  

Floating or adjustable interest rates

     69,839        987,736        1,057,575  
  

 

 

    

 

 

    

 

 

 

Total

   $ 139,099      $ 1,313,407      $ 1,452,506  
  

 

 

    

 

 

    

 

 

 

The Company’s commercial and industrial (“C&I”) loan customers represent various small and middle-market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.

C&I loan customers also include large healthcare and higher education institutions. During 2016 and 2017, the Company increased its lending activities to these types of organizations. This increase may expose the Company to concentration risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other more intangible factors, which are considered in originating commercial loans. The percentage of these types of organizations to total C&I loans has increased to 87 % at December 31, 2017, compared to 81% at December 31, 2016.

Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s market area, which generally includes Massachusetts, New Hampshire, and Rhode Island. Also included are loans to educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and thirty years.

Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized nonresidential-type owner-occupied properties. This complements our C&I emphasis placed on the operating business entities and will continue. The regional economic environment affects the risk of both nonresidential and residential mortgages.

Municipal loans customers include loans to municipalities or related interests, primarily for infrastructure projects. The Company had increased its lending activities to municipalities through 2016. Municipal loans decreased during 2017 as a result of loan payoffs.

Residential real estate (1–4 family) includes two categories of loans. Included in residential real estate are approximately $33,835,000 of C&I type loans secured by 1–4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the collateral position.

The other category of residential real estate loans is mostly 1–4 family residential properties located in the Bank’s market area. General underwriting criteria are largely the same as those used by Fannie Mae. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a “First Time Homebuyer” product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category.

Home equity loans are extended as both first and second mortgages on owner-occupied residential properties in the Bank’s market area. Loans are underwritten to a maximum loan to property value of 75%.

 

25


Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Bank officers evaluate the feasibility of construction projects based on independent appraisals of the project, architects’ or engineers’ evaluations of the cost of construction and other relevant data. As of December 31, 2017, the Company was obligated to advance a total of $15,152,000 to complete projects under construction.

The composition of nonperforming assets is as follows:

 

December 31,

   2017     2016     2015     2014     2013  
(dollars in thousands)                               

Total nonperforming loans

   $ 1,684     $ 1,084     $ 2,336     $ 4,146     $ 2,549  

Other real estate owned

                              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 1,684     $ 1,084     $ 2,336     $ 4,146     $ 2,549  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Accruing troubled debt restructured loans

   $ 2,749     $ 3,526     $ 2,893     $ 3,296     $ 5,969  

Loans past due 90 and still accruing

                              

Nonperforming loans as a percent of gross loans

     0.08     0.06     0.13     0.31     0.20

Nonperforming assets as a percent of total assets

     0.04     0.02     0.06     0.11     0.07

The composition of impaired loans at December 31, is as follows:

 

     2017      2016      2015      2014      2013  

Residential real estate, multi-family

   $ 4,212      $ 198      $ 916      $ 962      $ 1,199  

Home equity

                   90        92        94  

Commercial real estate

     2,554        3,149        1,678        4,318        4,520  

Construction and land development

            94        98        103        608  

Commercial and industrial

     348        389        443        852        1,367  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 7,114      $ 3,830      $ 3,225      $ 6,327      $ 7,788  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2017, 2016, 2015, 2014 and 2013 impaired loans had specific reserves of $164,000, $173,000, $250,000, $904,000 and $1,019,000, respectively.

The Company was servicing mortgage loans sold to others without recourse of approximately $229,533,000, $229,730,000, $185,299,000, $143,696,000 and $109,301,000 at December 31, 2017, 2016, 2015, 2014 and 2013, respectively. The Company had no loans held for sale at December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014 and December 31, 2013.

Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage servicing assets (“MSA”) are amortized into non-interest income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $1,525,000 at December 31, 2017, $1,629,000 at December 31, 2016, $1,305,000 at December 31, 2015, $941,000 at December 31, 2014 and $703,000 for December 31, 2013.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company’s commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank.

Nonaccrual loans increased during 2017, primarily as a result of an increase in home equity and residential real estate nonperforming loans. Nonaccrual loans decreased during 2016, primarily as a result of a decrease in home equity and residential real estate nonperforming loans. Nonaccrual loans decreased during 2015 primarily due to the sale and partial charge-off of the property securing a large commercial real estate loan subsequent to foreclosure. Nonaccrual loans increased during 2014 primarily as a result of a large commercial real estate loan.

The Company continues to monitor closely $37,184,000 and $35,583,000 at December 31, 2017 and 2016, respectively, of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2017, although such values may fluctuate with changes in the economy and the real estate market. The increase is primarily attributable to one loan relationship secured by real estate.

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Allowance for Loan Losses

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

 

Year Ended December 31,

   2017     2016     2015     2014     2013  
(dollars in thousands)                               

Year-end loans outstanding (net of unearned discount and deferred loan fees)

   $ 2,175,944     $ 1,923,933     $ 1,731,536     $ 1,331,366     $ 1,264,763  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loans outstanding (net of unearned discount and deferred loan fees)

   $ 2,059,797     $ 1,838,136     $ 1,507,546     $ 1,307,888     $ 1,184,912  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance of allowance for loan losses at the beginning of year

   $ 24,406     $ 23,075     $ 22,318     $ 20,941     $ 19,197  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans charged-off:

          

Commercial and industrial

     49                   333       234  

Construction

                 172       500       1,000  

Commercial real estate

                 298              

Residential real estate

           27             24        

Consumer

     341       362       311       525       579  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans charged-off

     390       389       781       1,382       1,813  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recovery of loans previously charged-off:

          

Commercial and industrial

     110       132       212       201       389  

Construction

                 780              

Real estate

     84       6       91       117       31  

Consumer

     255       296       255       391       427  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries of loans previously charged-off:

     449       434       1,338       709       847  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loan (recoveries) charge-offs

     (59     (45     (557     673       966  

Provision charged to operating expense

     1,790       1,375       200       2,050       2,710  

Reclassification to other liabilities

           (89                  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 26,255     $ 24,406     $ 23,075     $ 22,318     $ 20,941  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of net (recoveries) charge-offs during the year to average loans outstanding

     0.00     0.00     (0.04 )%      0.05     0.08
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ratio of allowance for loan losses to loans outstanding

     1.21     1.27     1.33     1.68     1.66
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The amount of the allowance for loan losses results from management’s evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

condition of the borrower, the state of the economy and other relevant information. The pace of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge-offs declined in 2014, 2015 and 2016 as a result of the overall decrease in the level of nonaccrual loans. The dollar amount of the allowance for loan losses increased primarily as a result of an increase in loan balances offset, somewhat, by lower historical loss factors.

During 2015, the Company enhanced its approach to the development of the historical loss factors and qualitative factors used on certain loan portfolios. The methodology enhancement was in response to the changes in the risk characteristics of the 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. 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 decrease in the ratio of allowance for loan losses to total loans for 2015. For 2016 and 2017, the change in the ratio of the allowance for loan losses to loans outstanding, was primarily due to changes in portfolio composition, lower historical loss rates, and qualitative factor adjustments.

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

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

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2017.

 

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

Credit Rating:

           

Aaa-Aa3

   $ 478,905      $ 62,029      $ 45,066      $ 586,000  

A1-A3

     195,599        7,635        128,554        331,788  

Baa1-Baa3

            26,970        122,000        148,970  

Ba2

            8,165               8,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 674,504      $ 104,799      $ 295,620      $ 1,074,923  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2016.

 

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

Credit Rating:

           

Aaa-Aa3

   $ 334,674      $ 66,245      $ 6,596      $ 407,515  

A1-A3

     188,777        33,365        129,423        351,565  

Baa1-Baa3

            26,970        127,366        154,336  

Ba2

            3,610               3,610  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 523,451      $ 130,190      $ 263,385      $ 917,026  
  

 

 

    

 

 

    

 

 

    

 

 

 

The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At December 31 of each year listed below, the allowance is comprised of the following:

 

    2017     2016     2015     2014     2013  
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
    Amount     Percent
of Loans
in Each
Category
to Total
Loans
 
(dollars in thousands)                                                            

Construction and land development

  $ 1,645       0.9   $ 1,012       0.8   $ 2,041       1.6   $ 1,592       1.7   $ 2,174       2.6

Commercial and industrial

    9,651       35.1     6,972       31.8     5,899       26.1     4,757       11.2     2,617       6.1

Municipal

    1,720       4.9     1,612       7.1     994       4.9     1,488       3.1     655       2.6

Commercial real estate

    9,728       33.7     11,135       36.2     10,589       41.7     11,199       52.3     10,935       55.0

Residential real estate

    1,873       13.2     1,698       12.5     1,320       14.7     776       19.3     2,006       22.6

Consumer and other

    373       0.8     582       0.6     644       0.7     810       1.0     432       0.8

Home equity

    989       11.4     1,102       11.0     1,077       10.3     599       11.4     959       10.3

Unallocated

    276         293         511         1,097         1,163    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 26,255       100.0   $ 24,406       100.0   $ 23,075       100.0   $ 22,318       100.0   $ 20,941       100.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. The enhancements described above have resulted in a lower level of unallocated allowance for loan losses. Further information regarding the allocation of the allowance is contained within Note 6 of the “Notes to Consolidated Financial Statements.”

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Deposits

The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. Additionally, the Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customer’s checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a report balancing the customer’s checking account.

Interest rates on deposits are set twice per month by the Bank’s rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee.

The following table sets forth the average balances of the Bank’s deposits for the periods indicated.

 

     2017     2016     2015  
     Amount      Percent     Amount      Percent     Amount      Percent  
(dollars in thousands)                                        

Demand Deposits

   $ 687,853        18.0   $ 609,159        17.8   $ 518,161        17.2

Savings and Interest Checking

     1,457,872        38.2     1,322,714        38.6     1,139,449        37.8

Money Market

     1,105,072        28.9     1,041,404        30.4     951,197        31.5

Time Certificates of Deposit

     566,940        14.9     452,562        13.2     408,711        13.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,817,737        100.0   $ 3,425,839        100.0   $ 3,017,518        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Time Deposits of $100,000 or more as of December 31, are as follows:

 

     2017      2016  
(dollars in thousands)              

Three months or less

   $ 107,649      $ 84,522  

Three months through six months

     137,260        42,736  

Six months through twelve months

     123,468        85,476  

Over twelve months

     135,426        153,243  
  

 

 

    

 

 

 

Total

   $ 503,803      $ 365,977  
  

 

 

    

 

 

 

Borrowings

The Bank’s borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLBB”) borrowings collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowings from the FHLBB totaled $347,778,000, an increase of $54,778,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2017, was approximately $127,631,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12, “Other Borrowed Funds and Subordinated Debentures,” for a schedule, including related interest rates and other information.

Subordinated Debentures

In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II.

Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The coupon rate on these securities was 3.46% at December 31, 2017. The Company is using the proceeds primarily for general business purposes.

Securities Sold Under Agreements to Repurchase

The Bank’s remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled $158,990,000, a decrease of $23,290,000 from the prior year. See Note 11, “Securities Sold Under Agreements to Repurchase,” for a schedule, including related interest rates and other information.

RESULTS OF OPERATIONS

Net Interest Income

The Company’s operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 14.5% in 2017 to $99,595,000, compared with $86,999,000 in 2016. The increase in net interest income for 2017 was mainly due to an 8.1% increase in the average balances of earning assets, combined with a similar increase in deposits. The increase in net interest income for 2016 was mainly due to a 10.3% increase in the average balances of earning assets, combined with a similar increase in deposits. The level of interest rates, the ability of the Company’s earning assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis increased to 2.25 % in 2017 and decreased to 2.12% in 2016 from 2.18% in 2015. The increase in the net interest margin for 2017 was primarily attributable to an increase in rates on earning assets and prepayment penalties collected. The decrease in the net interest margin, for 2016, was primarily the result of a decrease in rates on earning assets. This is primarily as a result of originating larger loans to borrowers with high credit quality, some of which are at variable rates. The Company collected approximately $907,000, $416,000 and $945,000, respectively, of prepayment penalties, which are included in interest income on loans, for 2017, 2016 and 2015, respectively.

Additional information about the net interest margin is contained in the “Overview” section of this report. Also, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

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 years indicated.

 

    2017     2016     2015  

Year Ended December 31,

  Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
    Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
    Average
Balance
    Interest
Income/
Expense(1)
    Rate
Earned/
Paid(1)
 
(dollars in thousands)                                                      

ASSETS

                 

Interest-earning assets:

                 

Loans(2)

                 

Taxable

  $ 978,593     $ 39,103       4.00   $ 866,180     $ 34,324       3.96   $ 783,451     $ 32,136       4.10

Tax-exempt

    1,081,204       40,420       3.74     971,956       35,943       3.70     724,095       30,862       4.26

Securities available-for-sale:(3)

                 

Taxable

    354,918       5,859       1.65     349,023       3,969       1.14     334,249       2,558       0.77

Tax-exempt

    106,717       1,588       1.49     149,631       1,465       0.98     120,389       853       0.71

Securities held-to-maturity:

                 

Taxable

    1,725,280       38,348       2.22     1,533,032       32,679       2.13     1,603,530       34,388       2.14

Interest-bearing deposits in other banks

    189,193       2,097       1.11     235,339       1,236       0.53     157,765       436       0.28
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    4,435,905       127,415       2.87     4,105,161       109,616       2.67     3,723,479       101,233       2.72

Noninterest-earning assets

    221,628           210,203           191,700      

Allowance for loan losses

    (25,329         (23,872         (22,559    
 

 

 

       

 

 

       

 

 

     

Total assets

  $ 4,632,204         $ 4,291,492         $ 3,892,620      
 

 

 

       

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Interest-bearing deposits:

                 

NOW accounts

  $ 949,924     $ 3,669       0.39   $ 904,892     $ 2,311       0.26   $ 794,293     $ 1,798       0.23

Savings accounts

    507,948       2,627       0.52     417,822       1,709       0.41     345,156       1,019       0.30

Money market accounts

    1,105,071       5,626       0.51     1,041,404       3,542       0.34     951,197       3,038       0.32

Time deposits

    566,941       7,919       1.40     452,562       5,706       1.26     408,711       4,887       1.20
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

    3,129,884       19,841       0.63     2,816,680       13,268       0.47     2,499,357       10,742       0.43

Securities sold under agreements to repurchase

    189,684       496       0.26     222,956       472       0.21     245,276       487       0.20

Other borrowed funds and subordinated debentures

    309,102       7,483       2.42     357,974       8,877       2.48     374,108       8,905       2.38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    3,628,670       27,820       0.77     3,397,610       22,617       0.67     3,118,741       20,134       0.65

Noninterest-bearing liabilities

                 

Demand deposits

    687,853           609,159           518,161      

Other liabilities

    60,925           57,602           51,247      
 

 

 

       

 

 

       

 

 

     

Total liabilities

    4,377,448           4,064,371           3,688,149      
 

 

 

       

 

 

       

 

 

     

Stockholders’ equity

    254,756           227,121           204,471      

Total liabilities and stockholders’ equity

  $ 4,632,204         $ 4,291,492         $ 3,892,620      
 

 

 

       

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

    $ 99,595         $ 86,999         $ 81,099    
   

 

 

       

 

 

       

 

 

   

Less taxable equivalent adjustment

      (13,979         (12,917         (11,140  
   

 

 

       

 

 

       

 

 

   

Net interest income

    $ 85,616         $ 74,082         $ 69,959    
   

 

 

       

 

 

       

 

 

   

Net interest spread

        2.11         2.00         2.07
     

 

 

       

 

 

       

 

 

 

Net interest margin

        2.25         2.12         2.18
     

 

 

       

 

 

       

 

 

 

 

(1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) At amortized cost.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

The following table summarizes the year-to-year changes in the Company’s net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest-bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior year’s volume. Changes due to volume are computed by multiplying the change in volume by the prior year’s rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change.

 

     2017 Compared with 2016     2016 Compared with 2015  
     Increase/(Decrease)     Increase/(Decrease)  
     Due to Change in     Due to Change in  

Year Ended December 31,

   Volume     Rate     Total     Volume     Rate     Total  
(dollars in thousands)                                     

Interest income:

            

Loans

            

Taxable

   $ 4,490     $ 289     $ 4,779     $ 3,306     $ (1,118   $ 2,188  

Tax-exempt

     4,080       397       4,477       9,556       (4,475     5,081  

Securities available-for-sale:

            

Taxable

     68       1,822       1,890       118       1,293       1,411  

Tax-exempt

     (498     621       123       238       374       612  

Securities held-to-maturity:

            

Taxable

     4,229       1,440       5,669       (1,504     (205     (1,709

Interest-bearing deposits in other banks

     (283     1,144       861       283       517       800  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     12,086       5,713       17,799       11,997       (3,614     8,383  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits:

            

NOW accounts

     120       1,238       1,358       267       246       513  

Savings accounts

     412       506       918       244       446       690  

Money market accounts

     228       1,856       2,084       299       205       504  

Time deposits

     1,551       662       2,213       543       276       819  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     2,311       4,262       6,573       1,353       1,173       2,526  

Securities sold under agreements to repurchase

     (77     101       24       (46     31       (15

Other borrowed funds and subordinated debentures

     (1,187     (207     (1,394     (392     364       (28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,047       4,156       5,203       915       1,568       2,483  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 11,039     $ 1,557     $ 12,596     $ 11,082     $ (5,182   $ 5,900  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average earning assets were $4,435,905,000 in 2017, an increase of $330,744,000 or 8.1% from the average in 2016, which was 10.3% higher than the average in 2015. Total average securities, including securities available-for-sale and securities held-to-maturity, were $2,186,915,000, an increase of 7.6% from the average in 2016. The increase in securities volume was mainly attributable to an increase in taxable securities held-to-maturity. An increase in securities volume and short term rates resulted in higher securities income, which increased 20.2% to $45,795,000 on a fully tax equivalent basis. Total average loans increased 12.1% to

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

$2,059,797,000 after increasing $330,590,000 in 2016. The primary reason for the increase in loans was due in large part to an increase in tax-exempt lending as well as taxable residential mortgage and commercial lending. The increase in loan volume resulted in higher loan income. Loan income increased by 13.2% or $9,256,000 to $79,523,000 in 2017 compared to 2016. Total loan income was $62,998,000 in 2015. Prepayment penalties collected were $907,000, $416,000, and $945,000 for 2017, 2016, and 2015, respectively.

The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 11.4%, or $391,898,000, in 2017 after increasing by 13.5%, or $408,321,000, in 2016. Deposits increased in 2017, primarily as a result of increases in time deposits, savings, demand deposits, money market, and NOW accounts. Deposits increased in 2016, primarily as a result of increases in demand deposits, savings, money market, NOW accounts, and time deposits. Borrowed funds and subordinated debentures decreased by 14.1% in 2017, following a decrease of 6.2% in 2016. The majority of the Company’s borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $48,872,000, and average retail repurchase agreements decreased by $33,272,000 in 2017. Interest expense totaled $27,820,000 in 2017, an increase of $5,203,000, or 23.0%, from 2016 when interest expense increased 12.3% from 2015. The increase in interest expense, for 2017, is primarily due to increases in the rates on deposits as well as an increase in average balances of deposits offset, somewhat, by a decrease in borrowed funds. The increase in interest expense, for 2016, is primarily due to increases in the average balances of deposits as well as an increase in rates offset, somewhat, by a decrease in borrowed funds.

Provision for Loan Losses

The provision for loan losses was $1,790,000 in 2017, compared with $1,375,000 in 2016 and $200,000 in 2015. These provisions are the result of management’s evaluation of the amounts and credit quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses increased during 2017, primarily as a result of an increase in loan balances offset, somewhat, by changes in historical loss factors. The provision for loan losses increased during 2016, primarily as a result of an increase in loan balances. During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing risk profile of the Company’s new loan originations and related methodology enhancements to address these changes.

Other Operating Income

During 2017, the Company continued to experience strong results in its fee-based services, including fees derived from traditional banking activities such as deposit-related services, its automated lockbox collection system and full-service securities brokerage supported by LPL Financial, a full-service securities brokerage business.

Under the lockbox program, which is not tied to extensions of credit by the Company, the Company’s customers arrange for payments of their accounts receivable to be made directly to the Company. The Company records the amounts paid to its customers, deposits the funds to the customer’s account and provides automated records of the transactions to customers. Typical customers for the lockbox service are municipalities that use it to automate tax collections, cable TV companies and other commercial enterprises.

Through a program called Investment Services at Century Bank, the Bank provides full-service securities brokerage services supported by LPL Financial, a full-service securities brokerage business. Registered representatives employed by Century Bank offer limited investment advice, execute transactions and assist customers in financial and retirement planning. LPL Financial provides research to the Bank’s representatives. The Bank receives a share in the commission revenues.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Total other operating income in 2017 was $16,552,000, an increase of $330,000, or 2.0%, compared to 2016. This increase followed an increase of $229,000, or 1.4%, in 2016, compared to 2015. Included in other operating income are net gains on sales of securities of $47,000, $64,000 and $594,000 in 2017, 2016 and 2015, respectively. Also included in other operating income are net gains on sales of mortgage loans of $370,000, $1,331,000 and $1,034,000 in 2017, 2016 and 2015, respectively. Service charge income, which continues to be a major source of other operating income, totaling $8,586,000 in 2017, increased $679,000 compared to 2016. This followed an increase of $175,000 in 2016 compared to 2015. The increase in fees, in 2017, was mainly attributable to an increase in fees collected from processing activities and debit card fees. The increase in fees, in 2016, was mainly attributable to an increase in fees collected from processing activities and debit card fees; this was offset somewhat by a decrease in overdraft fees. Lockbox revenues totaled $3,290,000, up $126,000 in 2017 following a decrease of $47,000 in 2016. Other income totaled $3,906,000, up $465,000 in 2017 following an increase of $399,000 in 2016. The increase in 2017 was primarily the result of increases in wealth management fees, and merchant card sales royalties. The increase in 2016 was primarily the result of increases in wealth management fees, merchant and charge card sales royalties, and cash surrender values of life insurance policies.

Operating Expenses

Total operating expenses were $67,119,000 in 2017, compared to $64,757,000 in 2016 and $62,198,000 in 2015.

Salaries and employee benefits expenses increased by $1,865,000 or 4.7% in 2017, after increasing by 3.8% in 2016. The increase in 2017 was mainly attributable to merit increases in salaries, bonus, and health insurance costs. The increase in 2016 was mainly attributable to merit increases in salaries, bonus accruals, pension costs and health insurance costs.

Occupancy expense decreased by $7,000, or 0.1%, in 2017, following an increase of $31,000, or 0.5%, in 2016. The decrease in 2017 was primarily attributable to a decrease in rent expense. The increase in 2016 was primarily attributable to an increase in rent expense.

Equipment expense increased by $47,000, or 1.7%, in 2017, following an increase of $219,000, or 8.3%, in 2016. The increase in 2017 was primarily attributable to an increase in service contracts. The increase in 2016 was primarily attributable to an increase in depreciation expense.

FDIC assessments decreased by $321,000, or 16.9%, in 2017, following a decrease of $250,000, or 11.6%, in 2016. FDIC assessments decreased in 2017 and 2016 mainly as a result of a decrease in the assessment rate.

Other operating expenses increased by $778,000 in 2017, which followed a $1,107,000 increase in 2016. The increase in 2017 was primarily attributable to an increase in contributions, legal expenses, and marketing expenses. The increase in 2016 was primarily attributable to an increase in marketing expenses, telephone expenses, software maintenance costs, contributions, and postage expenses.

Provision for Income Taxes

Income tax expense was 10,958,000 in 2017, $(362,000) in 2016, and $533,000 in 2015. The effective tax rate was 32.9% in 2017, (1.5%) in 2016 and 2.3% in 2015. The increase in the effective tax rate for 2017 was primarily the result of a reduction in the value of the deferred tax asset resulting in a charge of $8,448,000 to income tax expense. On December 22, 2017, the Tax Act was enacted, which lowered the Company’s federal tax rate from 34% to 21%. As a result of the rate reduction, the Company recorded a reduction in the value of its net deferred tax asset. The decrease in the effective tax rate for 2016 was mainly attributable to an increase in tax-exempt interest income as a percentage of taxable income. The federal tax rate was 34% in 2017, 2016 and 2015.

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

Market Risk and Asset Liability Management

Market risk is the risk of loss from adverse changes in market prices and rates. The 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 change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Company’s exposure to differential changes in interest rates between assets and liabilities is an interest rate risk management test.

This test measures the impact on net interest income of an immediate change in interest rates in 100-basis point increments as set forth in the following table:

 

Change in Interest

Rates (in Basis Points)

   Percentage Change in
Net Interest Income(1)
+400    (10.1)
+300    (9.0)
+200    (6.3)
+100    (2.5)
–100    1.2
–200    2.6

 

(1) The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment.

The changes in the table above are within the Company’s policy parameters.

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. The Company relies primarily on its asset-liability structure to control interest rate risk.

Liquidity and Capital Resources

Liquidity is provided by maintaining an adequate level of liquid assets that includes cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $356,430,000 on December 31, 2017, compared with $239,334,000 on December 31, 2016. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity.

The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.

Capital Adequacy

Total stockholders’ equity was $260,297,000 at December 31, 2017, compared with $240,041,000 at December 31, 2016. The Company’s equity increased primarily as a result of earnings and a decrease on other comprehensive loss, net of taxes, offset somewhat by dividends paid. Other comprehensive loss, net of taxes,

 

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Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

decreased primarily as a result of a decrease in unrealized losses on securities transferred from available-for-sale to held-to-maturity and a decrease in unrealized losses on securities available-for-sale. This was offset, somewhat, by an increase in the pension liability, net of taxes. The reduction in the value of the Company’s deferred tax asset of $8.4 million impacted the Company’s total equity as a reduction to retained earnings.

Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The following table reflects capital ratios computed utilizing the recently implemented Basel III regulatory capital framework:

 

     Minimum
Capital Ratios
    Bank     Company  

Leverage ratios

     4.00     6.55     6.78

Common equity tier 1 risk weighted capital ratios

     4.50     11.69     10.71

Tier 1 risk weighted capital ratios

     6.00     11.69     12.05

Total risk weighted capital ratios

     8.00     12.70     13.05

Contractual Obligations, Commitments, and Contingencies

The Company has entered into contractual obligations and commitments. The following tables summarize the Company’s contractual cash obligations and other commitments at December 31, 2017.

Contractual Obligations and Commitments by Maturity (dollars in thousands)

 

     Payments Due — By Period  

CONTRACTUAL OBLIGATIONS

   Total      Less Than
One Year
     One to
Three
Years
     Three to
Five
Years
     After Five
Years
 

FHLBB advances

   $ 347,778      $ 164,500      $ 91,000      $ 28,500      $ 63,778  

Subordinated debentures

     36,083                             36,083  

Retirement benefit obligations

     43,460        3,626        7,371        7,825        24,638  

Lease obligations

     10,660        2,309        4,005        2,404        1,942  

Customer repurchase agreements

     158,990        158,990                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual cash obligations

   $ 596,971      $ 329,425      $ 102,376      $ 38,729      $ 126,441  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Amount of Commitment Expiring — By Period  

OTHER COMMITMENTS

   Total      Less Than
One Year
     One to
Three
Years
     Three to
Five
Years
     After Five
Years
 

Lines of credit

   $ 434,618      $ 26,127      $ 138,030      $ 5,132      $ 265,329  

Standby and commercial letters of credit

     5,520        2,991        2,371        106        52  

Other commitments

     56,502        6,105        4,234        2,491        43,672  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commitments

   $ 496,640      $ 35,223      $ 144,635      $ 7,729      $ 309,053  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Instruments with Off-Balance-Sheet Risk

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to

 

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Table of Contents

Management’s Discussion and Analysis of Results of Operations and Financial Condition — (Continued)

 

originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments with off-balance-sheet risk at December 31 are as follows:

 

Contract or Notional Amount

   2017      2016  
(dollars in thousands)   

Financial instruments whose contract amount represents credit risk:

     

Commitments to originate 1–4 family mortgages

   $ 5,748      $ 13,877  

Standby and commercial letters of credit

     5,520        6,796  

Unused lines of credit

     434,618        362,357  

Unadvanced portions of construction loans

     15,152        22,049  

Unadvanced portions of other loans

     35,602        52,224  

Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit was $66,000 and $44,000 for 2017 and 2016, respectively.

Recent Accounting Developments

See Note 1 to the Notes to Consolidated Financial Statements for details of recent accounting developments and their expected impact on the Company’s financial statements.

 

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Table of Contents

Consolidated Balance Sheets

 

December 31,

   2017     2016  
(dollars in thousands except share data)             

ASSETS

    

Cash and due from banks (Note 2)

   $ 77,199     $ 62,400  

Federal funds sold and interest-bearing deposits in other banks

     279,231       173,751  
  

 

 

   

 

 

 

Total cash and cash equivalents

     356,430       236,151  

Short-term investments

           3,183  

Securities available-for-sale, amortized cost $397,563 in 2017 and $500,220 in 2016 (Notes 3, 9 and 11)

     397,475       499,297  

Securities held-to-maturity, fair value $1,668,827 in 2017 and $1,635,808 in 2016 (Notes 4 and 11)

     1,701,233       1,653,986  

Federal Home Loan Bank of Boston, stock at cost

     21,779       21,042  

Loans, net (Note 5)

     2,175,944       1,923,933  

Less: allowance for loan losses (Note 6)

     26,255       24,406  
  

 

 

   

 

 

 

Net loans

     2,149,689       1,899,527  

Bank premises and equipment (Note 7)

     23,527       23,417  

Accrued interest receivable

     11,179       9,645  

Other assets (Notes 5, 8 and 16)

     124,260       116,360  
  

 

 

   

 

 

 

Total assets

   $ 4,785,572     $ 4,462,608  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Demand deposits

   $ 736,020     $ 689,286  

Savings and NOW deposits

     1,367,358       1,304,394  

Money market accounts

     1,188,228       1,181,179  

Time deposits (Note 10)

     625,361       478,359  
  

 

 

   

 

 

 

Total deposits

     3,916,967       3,653,218  

Securities sold under agreements to repurchase (Note 11)

     158,990       182,280  

Other borrowed funds (Note 12)

     347,778       293,000  

Subordinated debentures (Note 12)

     36,083       36,083  

Other liabilities

     65,457       57,986  
  

 

 

   

 

 

 

Total liabilities

     4,525,275       4,222,567  

Commitments and contingencies (Notes 7, 18 and 19)

    

Stockholders’ equity (Note 15):

    

Preferred Stock – $1.00 par value; 100,000 shares authorized; no shares issued and outstanding

            

Common stock, Class A,

    

$1.00 par value per share; authorized 10,000,000 shares; issued 3,605,829 shares in 2017 and 3,600,729 shares in 2016

     3,606       3,601  

Common stock, Class B,

    

$1.00 par value per share; authorized 5,000,000 shares; issued 1,962,080 shares in 2017 and 1,967,180 shares in 2016

     1,962       1,967  

Additional paid-in capital

     12,292       12,292  

Retained earnings

     263,666       243,565  
  

 

 

   

 

 

 
     281,526       261,425  

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

     (62     (567

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

     (3,050     (4,084

Pension liability, net of taxes

     (18,117     (16,733
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes (Notes 3, 13 and 15)

     (21,229     (21,384
  

 

 

   

 

 

 

Total stockholders’ equity

     260,297       240,041  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,785,572     $ 4,462,608  
  

 

 

   

 

 

 

See accompanying “Notes to Consolidated Financial Statements.”

 

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Table of Contents

Consolidated Statements of Income

 

Year Ended December 31,

   2017      2016     2015  
(dollars in thousands except share data)                    

INTEREST INCOME

       

Loans, taxable

   $ 39,103      $ 34,324     $ 32,136  

Loans, non-taxable

     26,910        23,440       19,992  

Securities available-for-sale, taxable

     4,987        3,003       1,900  

Securities available-for-sale, non-taxable

     1,119        1,051       583  

Federal Home Loan Bank of Boston dividends

     872        966       658  

Securities held-to-maturity

     38,348        32,679       34,388  

Federal funds sold, interest-bearing deposits in other banks and short-term investments

     2,097        1,236       436  
  

 

 

    

 

 

   

 

 

 

Total interest income

     113,436        96,699       90,093  

INTEREST EXPENSE

       

Savings and NOW deposits

     6,296        4,020       2,817  

Money market accounts

     5,626        3,542       3,038  

Time deposits

     7,919        5,706       4,887  

Securities sold under agreements to repurchase

     496        472       487  

Other borrowed funds and subordinated debentures

     7,483        8,877       8,905  
  

 

 

    

 

 

   

 

 

 

Total interest expense

     27,820        22,617       20,134  
  

 

 

    

 

 

   

 

 

 

Net interest income

     85,616        74,082       69,959  

Provision for loan losses (Note 6)

     1,790        1,375       200  
  

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     83,826        72,707       69,759  

OTHER OPERATING INCOME

       

Service charges on deposit accounts

     8,586        7,907       7,732  

Lockbox fees

     3,290        3,164       3,211  

Brokerage commissions

     353        315       380  

Net gains on sales of securities

     47        64       594  

Gains on sales of mortgage loans

     370        1,331       1,034  

Other income

     3,906        3,441       3,042  
  

 

 

    

 

 

   

 

 

 

Total other operating income

     16,552        16,222       15,993  

OPERATING EXPENSES

       

Salaries and employee benefits (Note 17)

     41,913        40,048       38,596  

Occupancy

     6,140        6,147       6,116  

Equipment

     2,892        2,845       2,626  

FDIC assessments

     1,581        1,902       2,152  

Other (Note 20)

     14,593        13,815       12,708  
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     67,119        64,757       62,198  
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     33,259        24,172       23,554  

Provision for income taxes (Note 16)

     10,958        (362     533  
  

 

 

    

 

 

   

 

 

 

Net income

   $ 22,301      $ 24,534     $ 23,021  
  

 

 

    

 

 

   

 

 

 

SHARE DATA (Note 14)

       

Weighted average number of shares outstanding, basic

       

Class A

     3,604,029        3,600,729       3,600,729  

Class B

     1,963,880        1,967,180       1,967,180  

Weighted average number of shares outstanding, diluted

       

Class A

     5,567,909        5,567,909       5,567,909  

Class B

     1,963,880        1,967,180       1,967,180  

Basic earnings per share

       

Class A

   $ 4.86      $ 5.35     $ 5.02  

Class B

   $ 2.43      $ 2.68     $ 2.51  

Diluted earnings per share

       

Class A

   $ 4.01      $ 4.41     $ 4.13  

Class B

   $ 2.43      $ 2.68     $ 2.51  

See accompanying “Notes to Consolidated Financial Statements.”

 

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Consolidated Statements of Comprehensive Income

 

Year Ended December 31,

   2017     2016     2015  
(dollars in thousands)                   

NET INCOME

   $ 22,301     $ 24,534     $ 23,021  

Other comprehensive income (loss), net of tax:

      

Unrealized gains (losses) on securities:

      

Unrealized holding gains (losses) arising during period

     533       (289     38  

Less: reclassification adjustment for gains included in net income

     (28     (32     (361
  

 

 

   

 

 

   

 

 

 

Total unrealized gains (losses) on securities

     505       (321     (323

Accretion of net unrealized losses transferred during period

     1,034       2,812       3,583  

Defined benefit pension plans:

      

Pension liability adjustment:

      

Net (loss) gain

     (2,315     (297     (2,890

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

     931       970       853  
  

 

 

   

 

 

   

 

 

 

Total pension liability adjustment

     (1,384     673       (2,037

Other comprehensive income

     155       3,164       1,223  
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 22,456     $ 27,698     $ 24,244  
  

 

 

   

 

 

   

 

 

 

See accompanying “Notes to Consolidated Financial Statements.”

 

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Consolidated Statements of Changes in Stockholders’ Equity

 

     Class A
Common
Stock
     Class B
Common
Stock
    Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other

Comprehensive
Loss
    Total
Stockholders’
Equity
 
(dollars in thousands except share data)                                       

BALANCE, DECEMBER 31, 2014

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

Net income

                         23,021             23,021  

Other comprehensive income, net of tax:

              

Unrealized holding gains arising during period, net of $211 in taxes and $594 in realized net gains

                               (323     (323

Accretion of net unrealized losses transferred during the period, net of $1,919 in taxes

                               3,583       3,583  

Pension liability adjustment, net of $1,357 in taxes

                               (2,037     (2,037

Cash dividends, Class A Common Stock, $0.48 per share

                         (1,728           (1,728

Cash dividends, Class B Common Stock, $0.24 per share

                         (472           (472
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, DECEMBER 31, 2015

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

Net income

                         24,534             24,534  

Other comprehensive income, net of tax:

              

Unrealized holding gains arising during period, net of $248 in taxes and $52 in realized net gains

                               (321     (321

Accretion of net unrealized losses transferred during the period, net of $1,505 in taxes

                               2,812       2,812  

Pension liability adjustment, net of $448 in taxes

                               673       673  

Cash dividends, Class A Common Stock, $0.48 per share

                         (1,729           (1,729

Cash dividends, Class B Common Stock, $0.24 per share

                         (472           (472
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, DECEMBER 31, 2016

   $ 3,601      $ 1,967     $ 12,292      $ 243,565     $ (21,384   $ 240,041  

Net income

                         22,301             22,301  

Other comprehensive income, net of tax:

              

Unrealized holding gains arising during period, net of $331 in taxes and $47 in realized net gains

                               505       505  

Accretion of net unrealized losses transferred during the period, net of $1,258 in taxes

                               1,034       1,034  

Pension liability adjustment, net of $286 in taxes

                               (1,384     (1,384

Conversion of Class B Common Stock to Class A

              

Common Stock, 5,100 shares

     5        (5                         

Cash dividends, Class A Common Stock, $0.48 per share

                         (1,729           (1,729

Cash dividends, Class B Common Stock, $0.24 per share

                         (471           (471
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, DECEMBER 31, 2017

   $ 3,606      $ 1,962     $ 12,292      $ 263,666     $ (21,229   $ 260,297  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying “Notes to Consolidated Financial Statements.”

 

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Table of Contents

Consolidated Statements of Cash Flows

 

Year Ended December 31,

   2017     2016     2015  
(dollars in thousands)                   

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 22,301     $ 24,534     $ 23,021  

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

      

Gain on sales of portfolio loans

     (370     (1,331     (1,034

Gain on sale of fixed assets

     (11            

Net gains on sales of securities

     (47     (64     (594

Provision for loan losses

     1,790       1,375       200  

Deferred tax benefit (expense)

     6,918       (4,676     (3,259

Net depreciation and amortization

     3,047       3,561       3,296  

Increase in accrued interest receivable

     (1,534     (1,643     (1,761

Gain on sales of other real estate owned

                 (57

Increase in other assets

     (16,195     (2,953     (10,862

Increase in other liabilities

     5,802       3,203       2,103  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     21,701       22,006       11,053  

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Proceeds from maturities of short-term investments

     5,284       3,233        

Purchase of short-term investments

     (2,101     (3,183     (1,102

Proceeds from redemptions of Federal Home Loan Bank of Boston stock

     10,127       10,381       891  

Purchase of Federal Home Loan Bank of Boston stock

     (10,864     (2,616     (4,782

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

     259,388       277,657       206,109  

Proceeds from sales of securities available-for-sale

     18,180       2,376       47,853  

Purchase of securities available-for-sale

     (175,147     (375,608     (210,302

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

     293,221       416,599       414,786  

Proceeds from sales of securities held-to-maturity

           192       3,698  

Purchase of securities held-to-maturity

     (337,773     (627,670     (444,969

Proceeds from sales of portfolio loans

     26,701       74,668       66,600  

Net increase in loans

     (278,242     (265,732     (467,048

Proceeds from sales of other real estate owned

                 1,973  

Proceeds from sales of fixed assets

     11              

Capital expenditures

     (3,244     (2,263     (2,652
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (194,459     (491,966     (388,945

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Net increase in time deposit accounts

     147,002       4,933       90,281  

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

     116,747       573,225       247,188  

Cash dividends

     (2,200     (2,201     (2,200

Net decrease in securities sold under agreements to repurchase

     (23,290     (15,570     (14,510

Net increase (decrease) in other borrowed funds

     54,778       (75,000     (27,500
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     293,037       485,387       293,259  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     120,279       15,427       (84,633

Cash and cash equivalents at beginning of year

     236,151       220,724       305,357  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 356,430     $ 236,151     $ 220,724  
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

      

Cash paid during the year for:

      

Interest

   $ 27,731     $ 22,668     $ 19,979  

Income taxes

     5,330       3,730       4,300  

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

   $ 505     $ (321   $ (323

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

     1,034       2,812       3,583  

Pension liability adjustment, net of taxes

     (1,384     673       (2,037

Transfer of loans to other real estate owned

                 1,916  

See accompanying “Notes to Consolidated Financial Statements.”

 

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Table of Contents

Notes to Consolidated Financial Statements

1.    Summary of Significant Accounting Policies

BASIS OF FINANCIAL STATEMENT PRESENTATION

The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the 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, New Hampshire, Rhode Island, Connecticut and New York. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”) and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the 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.

Material estimates that are susceptible to change in the near term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on a review of factors, including historical charge-off rates with additional allocations based on qualitative risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the 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.

FAIR VALUE MEASUREMENTS

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

Level I — Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with

 

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Notes to Consolidated Financial Statements — (Continued)

 

quoted prices, such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.

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

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

CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, federal funds sold and certificates of deposit.

SHORT-TERM INVESTMENTS

As of December 31, 2017 and 2016, short-term investments include highly liquid certificates of deposit with original maturities of more than 90 days but less than one year.

INVESTMENT SECURITIES

Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of estimated related income taxes. The Company has no securities held for trading.

Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis.

Management also considers the Company’s capital adequacy, interest-rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the investment securities before recovery. If the Company determines that a decline in fair value is OTTI and that it is more likely than not that the Company will not sell or be required to sell the investment security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in the Company’s consolidated statement of income and the noncredit portion is recognized in accumulated other comprehensive income. The credit portion of the OTTI impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the investment security. If the Company determines that a decline in fair value is OTTI and it is more likely than not that it will sell or be required to sell the investment security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the security will be recognized in the Company’s consolidated statement of income.

 

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Notes to Consolidated Financial Statements — (Continued)

 

The transfer of a security between categories of investments shall be accounted for at fair value. For a debt security transferred into the held-to-maturity category from the available-for-sale category, the unrealized holding gain or loss at the date of the transfer shall continue to be reported in a separate component of shareholders’ equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held-to-maturity security.

The sale of a security held-to-maturity may occur after a substantial portion (at least 85%) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments over its term. For variable rate securities, the scheduled payments need not be equal.

FEDERAL HOME LOAN BANK STOCK

The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis of the stock. As of December 31, 2017, no impairment has been recognized.

LOANS HELD FOR SALE

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.

LOANS

Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become ninety days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Past-due status is based on contractual terms of the loan. Loans, including impaired loans, on which the accrual of interest has been discontinued, are designated nonaccrual loans. When a loan is placed on nonaccrual, all income that has been accrued but remains unpaid is reversed against current period income, and all amortization of deferred loan costs and fees is discontinued. Nonaccrual loans may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. Income received on nonaccrual loans is either recorded in income or applied to the principal balance of the loan, depending on management’s evaluation as to the collectibility of principal.

Loan origination fees and related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. Prepayments are not initially considered when amortizing premiums and discounts.

The Bank measures impairment for impaired loans at either the fair value of the loan, the present value of the expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. This method applies to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans such as residential real estate and consumer loans that are collectively evaluated for impairment and loans that are measured at fair value. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance when such an amount has been identified definitively as uncollectible. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be

 

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Table of Contents

Notes to Consolidated Financial Statements — (Continued)

 

paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Loans are charged-off when management believes that the collectibility of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectibility 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. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification effective rate of interest.

TRANSFERS OF FINANCIAL ASSETS

Transfers of financial assets, typically residential mortgages and loan participations for the Company, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.

ACQUIRED LOANS

In accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly Statement of Position (“SOP”) No. 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”) the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loan’s contractually required payments received in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30 requires that the Company recognize the excess of all cash flows expected at acquisition over the Company’s initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a reduction of the loan balance.

Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of FASB ASC 310-30. For such loans, the discount, if any, representing the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the interest method over the term of the loan. Prepayments are not considered in the calculation of accretion income. Additionally, the discount is not accreted on nonperforming loans.

When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the Company’s acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees. There were no new loans acquired during the year ended December 31, 2017.

NONPERFORMING ASSETS

In addition to nonperforming loans, nonperforming assets include other real estate owned. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned is recorded initially at the lower of cost or the estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred.

Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations,

 

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Notes to Consolidated Financial Statements — (Continued)

 

while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is based on management’s evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans that ultimately prove uncollectible. The components of the allowance for loan losses represent estimates based upon Accounting Standards Codification (“ASC”) Topic 450, contingencies, and ASC Topic 310 Receivables. ASC Topic 450 applies to homogenous loan pools such as consumer installment, residential mortgages, consumer lines of credit and commercial loans that are not individually evaluated for impairment under ASC Topic 310. In determining the level of the allowance, periodic evaluations are made of the loan portfolio, which takes into account factors such as the characteristics of the loans, loan status, financial strength of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgment. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management’s methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.

While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in management’s opinion, collectibility is not probable. The specific factors that management considers in making the determination that the collectibility of the loan’s principal is not probable include the delinquency status of the loan, the fair value of the collateral and the financial strength of the borrower and/or guarantors.

Under ASC Topic 310, a loan is impaired, based upon current information and in management’s opinion, when it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest, or if a loan is designated as a Troubled Debt Restructuring (“TDR”). Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a) present value of anticipated future cash flows, (b) the loan’s observable fair market price or (c) fair value of collateral if the loan is collateral dependent. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance when such an amount has been identified definitively as uncollectible.

In estimating probable loan loss under ASC Topic 450 management considers numerous factors, including historical charge-offs and subsequent recoveries. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect the amount of the formula allowance. Risk grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. On these loans, the formula allowances are based on the risk ratings, the historical loss experience, and the loss emergence period. Historical loss data and loss emergence periods are developed based on the Company’s historical experience. For larger loans with available external credit ratings, these ratings are utilized rather than the

 

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Company’s risk ratings. The historical loss factor and loss emergence periods for these loans are based on data published by the rating agencies for similar credits as the Company has limited internal historical data. For the residential real estate and consumer loan portfolios, the formula allowances are calculated by applying historical loss experience and the loss emergence period to the outstanding balance in each loan category. Loss factors and loss emergence periods are based on the Company’s historical net loss experience.

Additional allowances are added to portfolio segments based on qualitative factors. Management considers potential factors identified in regulatory guidance. Management has identified certain qualitative factors, which could impact the degree of loss sustained within the portfolio. These include market risk factors and unique portfolio risk factors that are inherent characteristics of the Company’s loan portfolio. Market risk factors may consist of changes to general economic and business conditions, such as unemployment and GDP that may impact the Company’s loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include the outlooks for business segments in which the Company’s borrowers operate and loan size. The potential ranges for qualitative factors are based on historical volatility in losses. The actual amount utilized is based on management’s assessment of current conditions.

After considering the above components, an unallocated component may be generated to cover uncertainties that could affect management’s estimate of probable losses. These uncertainties include the effects of loans in new geographical areas and new industries. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

BANK PREMISES AND EQUIPMENT

Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Land is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated.

GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization. Identifiable intangible assets consist of core deposit intangibles and are assets resulting from acquisitions that are being amortized over their estimated useful lives. Goodwill and identifiable intangible assets are included in other assets on the consolidated balance sheets. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Currently, the Company’s goodwill is evaluated at the entity level as there is only one reporting unit. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.

Goodwill impairment is evaluated by first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary.

The first step, in the two-step impairment test, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.

 

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SERVICING

The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in loan servicing fee income.

STOCK OPTION ACCOUNTING

The Company follows the fair value recognition provisions of FASB ASC 718, Compensation — Stock Compensation for all share-based payments. The Company’s method of valuation for share-based awards granted utilizes the Black-Scholes option-pricing model. The Company will recognize compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.

During 2000 and 2004, common stockholders of the Company approved stock option plans (the “Option Plans”) that provide for granting of options to purchase up to 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive nonqualified or incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on management’s recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were no options to purchase shares of Class A common stock outstanding at December 31, 2017.

The Company uses the fair value method to account for stock options. There were no options granted during 2017 and 2016.

INCOME TAXES

The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The Company accounts for uncertain tax positions in accordance with FASB ASC 740.

The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law.

 

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The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgment changes regarding an uncertain tax position.

For tax years beginning after December 31, 2017, the corporate alternative minimum tax (“AMT”) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the AMT credit carryforward will be recovered in tax years beginning before 2022. As a result of the change, the Company has classified its AMT credit carryforward as currently receivable.

EARNINGS PER SHARE (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are stock options.

The company utilizes the two class method for reporting EPS. The two-class method is an earnings allocation formula that treats Class A and Class B shares as having rights to earnings that otherwise would have been available only to Class A shareholders and Class B shareholders as if converted to Class A shares.

TREASURY STOCK

Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act, provisions of which eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares.

PENSION

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

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

Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary. Individual life insurance policies, which are owned by the Company, are purchased covering the life of each participant.

The Company utilizes a full yield curve approach in the estimation of the service and interest components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the underlying projected cash flows.

RECENT ACCOUNTING DEVELOPMENTS

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial

 

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statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company will adopt this update in the first quarter of 2018 and will apply the effects of the changes retrospectively. The effect of the changes is approximately $3.8 million.

In July 2017, FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interest with a Scope Exception. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2018. Management is currently assessing the applicability of ASU 2017-11 and has not determined the impact of the adoption, if any, as of December 31, 2017.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. FASB issued this Update to address the diversity in practice as well as the cost and complexity when applying the guidance in Topic 718, Compensation — Stock Compensation, to a change to the terms or conditions of a share-based payment award. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt. The FASB is issuing this ASU to amend the amortization period for certain purchased callable debt securities held at a premium. The FASB is shortening the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles (GAAP), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management is currently assessing the applicability of this ASU and has not determined the impact, if any, as of December 31, 2017.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this ASU require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. This ASU is for presentation purposes only, accordingly, there will be no impact on the Company’s consolidated financial position.

In February 2017, the FASB issued ASU 2017-05, Other Income Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). This ASU was issued to clarify the scope of Subtopic 610-20, and to add guidance for partial sales of nonfinancial assets. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill

 

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impairment test. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted and application should be on a prospective basis. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is in the process of analyzing this ASU and has begun evaluating software solutions to help capture information needed to implement this update. The Company has not determined the impact, if any, as of December 31, 2017.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The intention of this ASU is to provide additional clarification on specific issues brought forth by the FASB and the International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition in relation to Topic 606 and revenue recognition. This ASU is to have the same effective date as ASU 2015-14 which deferred the effective date of ASU 2014-09 to December 15, 2017. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. Since the issuance of Update 2014-09, the FASB has finalized various amendments to the standard that include corrections, improvements and timing modifications.

In July 2015, the FASB approved the deferral of the new standard’s effective date by one year. The new standard is effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.

We monitored FASB activity related to the new standard. A significant amount of the Company’s revenues are derived from interest income on financial assets, which are excluded from the scope of the amended guidance.

In 2017, we established a cross-functional implementation team consisting of representatives from across our business segments. We utilized a bottom-up approach to analyze the impact of the standard on our contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts. In addition, we identified and implemented appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard. The implementation team has reported the findings and progress of the project to management on a frequent basis over this past year.

During 2017, we completed our evaluation of the potential changes from adopting the new standard on our future financial reporting and disclosures. In the third quarter of 2017, we finalized our contract reviews. The Company did not identify any significant changes in the timing of revenue recognition when considering the amended accounting guidance.

 

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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 has begun analyzing this ASU and will be assessing implementation steps beginning in 2018. The Company has not determined the impact, if any, as of December 31, 2017.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. The amendments of this ASU was issued to require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 326) Classification of Certain Cash Receipts and Cash Payments. Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In January 2016, FASB issued 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 effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

2.    Cash and Due from Banks

The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $0 at December 31, 2017, and $0 at December 31, 2016.

 

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3.    Securities Available-for-Sale

 

     December 31, 2017      December 31, 2016  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair
Value
 
(dollars in thousands)                                                        

U.S. Treasury

   $ 1,999      $      $ 15      $ 1,984      $ 2,000      $      $      $ 2,000  

U.S. Government Sponsored Enterprises

                                 25,000               48        24,952  

SBA Backed Securities

     81,065        46        161        80,950        57,899        14        146        57,767  

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

     225,537        555        317        225,775        243,703        293        671        243,325  

Privately Issued Residential Mortgage-Backed Securities

     897        4        9        892        1,121        2        14        1,109  

Obligations Issued by States and Political Subdivisions

     82,849               249        82,600        165,281               405        164,876  

Other Debt Securities

     5,100        68        197        4,971        5,100        18        194        4,924  

Equity Securities

     116        187               303        116        228               344  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 397,563      $ 860      $ 948      $ 397,475      $ 500,220      $ 555      $ 1,478      $ 499,297  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $216,353,000 and 210,780,000 at December 31, 2017 and 2016, respectively. Also included in securities available-for-sale at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $67,780,000 and $53,396,000 at December 31, 2017 and 2016, respectively. The Company realized gains on sales of securities of $47,000, $52,000 and $289,000 from the proceeds of sales of available-for-sale securities of $18,180,000, $2,376,000 and $47,853,000 for the years ended December 31, 2017, 2016, and 2015, respectively.

Debt securities of U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the estimated maturity distribution of the Company’s securities available-for-sale at December 31, 2017.