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Section 1: 10-Q (10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2018.

or

 

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

Commission file number: 0-15752

 

 

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

(781) 391-4000

(Registrant’s telephone number, including area code)

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 Exchange Act).    ☐  Yes    ☒  No

As of April 30, 2018, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,608.029 Shares  

Class B Common Stock, $1.00 par value

     1,959,880 Shares  

 

 

 


Table of Contents

Century Bancorp, Inc.

 

   

Index

   Page
Number
 
Part I  

Financial Information

  
 

Forward Looking Statements

     3  
Item 1.  

Financial Statements (unaudited)

  
 

Consolidated Balance Sheets:

  
 

March 31, 2018 and December 31, 2017

     4  
 

Consolidated Statements of Income:

  
 

Three Months Ended March 31, 2018 and 2017

     5  
 

Consolidated Statements of Comprehensive Income:

  
 

Three Months Ended March 31, 2018 and 2017

     6  
 

Consolidated Statements of Changes in Stockholders’ Equity:

  
 

Three Months Ended March 31, 2018 and 2017

     7  
 

Consolidated Statements of Cash Flows:

  
 

Three Months Ended March 31, 2018 and 2017

     8  
 

Notes to Consolidated Financial Statements

     9 - 30  
Item 2.  

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

     30 - 39  
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     39  
Item 4.  

Controls and Procedures

     39  
Part II.  

Other Information

  
Item 1.  

Legal Proceedings

     40  
Item 1A.  

Risk Factors

     40  
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     40  
Item 3.  

Defaults Upon Senior Securities

     40  
Item 4.  

Mine Safety Disclosures

     40  
Item 5.  

Other Information

     40  
Item 6.  

Exhibits

     40 - 41  
Signatures      42  
Exhibits  

Ex-31.1

  
 

Ex-31.2

  
 

Ex-32.1

  
 

Ex-32.2

  
 

Ex-101 Instance Document

  
 

Ex-101 Schema Document

  
 

Ex-101 Calculation Linkbase Document

  
 

Ex-101 Labels Linkbase Document

  
 

Ex-101 Presentation Linkbase Document

  
 

Ex-101 Definition Linkbase Document

  


Table of Contents

Forward Looking Statements

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

 

Page 3 of 42


Table of Contents

PART I – Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

Assets    March 31,2018     December 31,2017  

Cash and due from banks

   $ 64,544     $ 77,199  

Federal funds sold and interest-bearing deposits in other banks

     186,125       279,231  
  

 

 

   

 

 

 

Total cash and cash equivalents

     250,669       356,430  

Securities available-for-sale, amortized cost $371,013 and $395,947, respectively

     370,976       395,831  

Securities held-to-maturity, fair value $1,760,498 and $1,668,827, respectively

     1,817,633       1,701,233  

Federal Home Loan Bank of Boston, stock at cost

     20,050       21,779  

Equity securities, amortized cost $ 1,635 and $1,635, respectively

     1,654       1,663  

Loans, net:

    

Construction and land development

     17,583       18,931  

Commercial and industrial

     758,621       763,807  

Municipal

     104,044       106,599  

Commercial real estate

     726,440       732,491  

Residential real estate

     300,941       287,731  

Consumer

     18,635       18,458  

Home equity

     260,179       247,345  

Overdrafts

     704       582  
  

 

 

   

 

 

 

Total loans, net

     2,187,147       2,175,944  

Less: allowance for loan losses

     26,695       26,255  
  

 

 

   

 

 

 

Net loans

     2,160,452       2,149,689  

Bank premises and equipment

     23,220       23,527  

Accrued interest receivable

     10,844       11,179  

Goodwill

     2,714       2,714  

Other assets

     118,470       121,527  
  

 

 

   

 

 

 

Total assets

   $ 4,776,682     $ 4,785,572  
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Demand deposits

   $ 715,032     $ 736,020  

Savings and NOW deposits

     1,409,157       1,367,358  

Money market accounts

     1,195,785       1,188,228  

Time deposits

     615,822       625,361  
  

 

 

   

 

 

 

Total deposits

     3,935,796       3,916,967  

Securities sold under agreements to repurchase

     141,560       158,990  

Other borrowed funds

     317,054       347,778  

Subordinated debentures

     36,083       36,083  

Due to broker

     10,011       —    

Other liabilities

     67,978       65,457  
  

 

 

   

 

 

 

Total liabilities

     4,508,482       4,525,275  

Stockholders’ Equity

    

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 3,608,029 shares and 3,605,829 shares, respectively

     3,608       3,606  

Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,959,880 shares and 1,962,080 shares respectively

     1,960       1,962  

Additional paid-in capital

     12,292       12,292  

Retained earnings

     274,636       263,666  
  

 

 

   

 

 

 
     292,496       281,526  

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

     (32     (62

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

     (3,270     (3,050

Pension liability, net of taxes

     (20,994     (18,117
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (24,296     (21,229
  

 

 

   

 

 

 

Total stockholders’ equity

     268,200       260,297  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,776,682     $ 4,785,572  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended
March 31,
 
     2018      2017  

Interest income

     

Loans

   $ 18,267      $ 15,100  

Securities held-to-maturity

     10,288        9,535  

Securities available-for-sale

     1,992        1,611  

Federal funds sold and interest-bearing deposits in other banks

     883        393  
  

 

 

    

 

 

 

Total interest income

     31,430        26,639  
  

 

 

    

 

 

 

Interest expense

     

Savings and NOW deposits

     2,223        1,227  

Money market accounts

     2,453        1,274  

Time deposits

     2,363        1,651  

Securities sold under agreements to repurchase

     181        103  

Other borrowed funds and subordinated debentures

     1,742        1,928  
  

 

 

    

 

 

 

Total interest expense

     8,962        6,183  
  

 

 

    

 

 

 

Net interest income

     22,468        20,456  

Provision for loan losses

     450        400  
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     22,018        20,056  

Other operating income

     

Service charges on deposit accounts

     2,067        2,016  

Lockbox fees

     791        771  

Net gains on sales of securities

     197        —    

Gains on sales of mortgage loans

     —          101  

Other income

     1,138        1,021  
  

 

 

    

 

 

 

Total other operating income

     4,193        3,909  
  

 

 

    

 

 

 

Operating expenses

     

Salaries and employee benefits

     11,225        10,794  

Occupancy

     1,637        1,741  

Equipment

     794        706  

FDIC assessments

     383        438  

Other

     3,962        4,046  
  

 

 

    

 

 

 

Total operating expenses

     18,001        17,725  
  

 

 

    

 

 

 

Income before income taxes

     8,210        6,240  

Provision for income taxes

     501        144  
  

 

 

    

 

 

 

Net income

   $ 7,709      $ 6,096  
  

 

 

    

 

 

 

Share data:

     

Weighted average number of shares outstanding, basic

     

Class A

     3,608,029        3,600,729  

Class B

     1,959,880        1,967,180  

Weighted average number of shares outstanding, diluted

     

Class A

     5,567,909        5,567,909  

Class B

     1,959,880        1,967,180  

Basic earnings per share:

     

Class A

   $ 1.68      $ 1.33  

Class B

   $ 0.84      $ 0.66  

Diluted earnings per share

     

Class A

   $ 1.38      $ 1.09  

Class B

   $ 0.84      $ 0.66  

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended
March 31,
 
     2018     2017  

Net income

   $ 7,709     $ 6,096  

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     213       135  

Less: reclassification adjustment for gains included in net income

     (142     —    
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     71       135  

Accretion of net unrealized losses transferred

     381       373  

Defined benefit pension plans:

    

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

     293       232  
  

 

 

   

 

 

 

Other comprehensive income

     745       740  
  

 

 

   

 

 

 

Comprehensive income

   $ 8,454     $ 6,836  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 42


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2018 and 2017

 

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

Balance at December 31, 2016

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

Net income

     —          —         —          6,096       —         6,096  

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $88 in taxes

     —          —         —          —         135       135  

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $287 in taxes

     —          —         —          —         373       373  

Pension liability adjustment, net of $155 in taxes

     —          —         —          —         232       232  

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

     —          —         —          (432     —         (432

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

     —          —         —          (117     —         (117
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2017

   $ 3,601      $ 1,967     $ 12,292      $ 249,112     $ (20,644   $ 246,328  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

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

Net income

     —          —         —          7,709       —         7,709  

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $9 in taxes and $197 in realized gains

     —          —         —          —         71       71  

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $139 in taxes

     —          —         —          —         381       381  

Pension liability adjustment, net of $114 in taxes

     —          —         —          —         293       293  

Adoption of ASU 2018-2, Income Statement-Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from AOCI

     —          —         —          3,783       (3,783     —    

Adoption of ASU 2016-1, Financial Instruments – Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities

     —          —         —          29       (29     —    

Conversion of Class B Common Stock to Class A Common Stock, 2,200 shares

     2        (2     —          —         —         —    

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

     —          —         —          (434     —         (434

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

     —          —         —          (117     —         (117
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

   $ 3,608      $ 1,960     $ 12,292      $ 274,636     $ (24,296   $ 268,200  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2018 and 2017

 

     Three months ended
March 31,
 
     2018     2017  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 7,709     $ 6,096  

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

    

Gain on sales of mortgage loans

     —         (101

Net gains on sales of securities

     (197     —    

Net loss on equity securities

     9       —    

Provision for loan losses

     450       400  

Deferred income taxes

     (680     (1,165

Net depreciation and amortization

     592       887  

Decrease (increase) in accrued interest receivable

     335       (542

Decrease (increase) in other assets

     3,076       (1,690

Increase in other liabilities

     2,926       2,493  
  

 

 

   

 

 

 

Net cash provided by operating activities

     14,220       6,378  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of short-term investments

     —         1,082  

Proceeds from redemptions of Federal Home Loan Bank of Boston stock

     3,464       714  

Purchase of Federal Home Loan Bank of Boston stock

     (1,735     —    

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

     31,527       41,155  

Proceeds from sales of securities available-for-sale

     17,871       —    

Purchase of securities available-for-sale

     (19,336     (51,606

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

     59,409       62,537  

Purchase of securities held-to-maturity

     (169,974     (217,463

Proceeds from life insurance policies

     375       —    

Net increase in loans

     (11,198     (124,327

Proceeds from sales of portfolio loans

     —         7,899  

Capital expenditures

     (508     (897
  

 

 

   

 

 

 

Net cash used in investing activities

     (90,105     (280,906
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net (decrease) increase in time deposits

     (9,539     42,102  

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

     28,368       48,142  

Cash dividends

     (551     (549

Net (decrease) increase in securities sold under agreements to repurchase

     (17,430     7,640  

Net (decrease) increase in other borrowed funds

     (30,724     8,500  
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (29,876     105,835  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (105,761     (168,693

Cash and cash equivalents at beginning of period

     356,430       236,151  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 250,669     $ 67,458  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 9,008     $ 6,232  

Income taxes

     225       210  

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

     71       135  

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

     381       373  

Pension liability adjustment, net of taxes

     293       232  

Change in due to (from) to broker

     10,011       —    

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Three Months Ended March 31, 2018 and 2017

Note 1. Basis of Financial Statement Presentation

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

All significant intercompany accounts and transactions have been eliminated in consolidation. The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts, 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. The Company’s quarterly report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission.

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

 

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Table of Contents

Note 2. Securities Available-for-Sale

 

     March 31, 2018      December 31, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

U.S. Treasury

   $ 2,000      $ —        $ 19      $ 1,981      $ 1,999      $ —        $ 15      $ 1,984  

U.S. Government Sponsored Enterprises

     3,934        —          13        3,921        —          —          —          —    

SBA Backed Securities

     79,118        —          335        78,783        81,065        46        161        80,950  

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

     200,364        668        271        200,761        225,537        556        317        225,776  

Privately Issued Residential Mortgage-Backed Securities

     823        4        8        819        897        4        9        892  

Obligations Issued by States and Political Subdivisions

     81,174        —          66        81,108        82,849        —          249        82,600  

Other Debt Securities

     3,600        46        43        3,603        3,600        68        39        3,629  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 371,013      $ 718      $ 755      $ 370,976      $ 395,947      $ 674      $ 790      $ 395,831  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in SBA Backed Securities and U.S. Government Sponsored Enterprise Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $217,340,000 and $216,353,000 at March 31, 2018 and December 31, 2017, respectively. Also included in securities available-for-sale are securities at fair value pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $58,870,000 and $67,780,000 at March 31, 2018 and December 31, 2017, respectively. The Company realized gross gains of $197,000 from the proceeds of $17,871,000 from the sales of available-for-sale securities for the three months ended March 31, 2018. There were no sales of available-for-sales securities for the three months ended March 31, 2017.

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

The following table shows the maturity distribution of the Company’s securities available-for-sale at March 31, 2018.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 72,533      $ 72,531  

After one but within five years

     96,860        96,793  

After five but within ten years

     130,698        130,957  

More than 10 years

     70,922        70,695  
  

 

 

    

 

 

 

Total

   $ 371,013      $ 370,976  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at March 31, 2018 was 5.6 years. Included in the weighted average remaining life calculation at March 31, 2018 were $3,934,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

As of March 31, 2018 and December 31, 2017, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Treasury, SBA Backed Securities, U.S. Government Sponsored Enterprises, U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities, Privately Issued Residential Mortgage-Backed Securities, Obligations Issued by States and Political Subdivisions, and Other Debt Securities, related primarily to interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

 

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In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates of underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuer’s financial performance are considered.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at March 31, 2018. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 23 and 22 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 181 holdings at March 31, 2018.

 

     March 31, 2018  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

U.S. Treasury

   $ 1,981      $ 19      $ —        $ —        $ 1,981      $ 19  

U.S. Government Sponsored Enterprises

     3,921        13        —          —          3,921        13  

SBA Backed Securities

     39,032        112        39,752        223        78,784        335  

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

     46,317        38        46,305        233        92,622        271  

Privately Issued Residential Mortgage-Backed Securities

     —          —          582        8        582        8  

Obligations Issued by States and Political Subdivisions

     —          —          4,643        66        4,643        66  

Other Debt Securities

     400        1        457        42        857        43  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 91,651      $ 183      $ 91,739      $ 572      $ 183,390      $ 755  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2017. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 16 and 28 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 249 holdings at December 31, 2017.

 

     December 31, 2017  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

U.S. Treasury

   $ 1,984      $ 15      $ —        $ —        $ 1,984      $ 15  

U.S. Government Sponsored Enterprises

   $ —        $ —        $ —        $ —          —          —    

SBA Backed Securities

     18,378        55        40,911        106        59,289        161  

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

     40,394        123        59,336        194        99,730        317  

Privately Issued Residential Mortgage-Backed Securities

     —          —          633        9        633        9  

Obligations Issued by States and Political Subdivisions

     —          —          4,458        249        4,458        249  

Other Debt Securities

     400        —          461        39        861        39  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 61,156      $ 193      $ 105,799      $ 597      $ 166,955      $ 790  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 3. Investment Securities Held-to-Maturity

 

     March 31, 2018      December 31, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 139,780      $ 18      $ 922      $ 138,876      $ 104,653      $ 341      $ 472      $ 104,522  

SBA Backed Securities

     56,188        —          2,005        54,183        57,235        20        1,271        55,984  

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

     1,621,665        610        54,836        1,567,439        1,539,345        2,261        33,285        1,508,321  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,817,633      $ 628      $ 57,763      $ 1,760,498      $ 1,701,233      $ 2,622      $ 35,028      $ 1,668,827  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,216,741,000 and $1,262,708,000 at March 31, 2018 and December 31, 2017, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $465,541,000 and $382,120,000 at March 31, 2018 and December 31, 2017, respectively. There were no sales of held-to-maturity securities for the three months ended March 31, 2018 and March 31, 2017 respectively.

At March 31, 2018 and December 31, 2017, all mortgage-backed securities are obligations of U.S. Government Agencies and Government Sponsored Enterprises. Debt securities of U.S. Government Sponsored Enterprises and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the maturity distribution of the Company’s securities held-to-maturity at March 31, 2018.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 24,860      $ 24,840  

After one but within five years

     1,184,354        1,150,251  

After five but within ten years

     605,293        582,422  

More than ten years

     3,126        2,985  
  

 

 

    

 

 

 

Total

   $ 1,817,633      $ 1,760,498  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at March 31, 2018 was 4.5 years. Included in the weighted average remaining life calculation at March 31, 2018 were $44,996,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

As of March 31, 2018 and December 31, 2017, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not likely that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.

The unrealized loss on U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not likely that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired March 31, 2018 and December 31, 2017.

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

 

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Table of Contents

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at March 31, 2018. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months or longer. There are 182 and 174 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 423 holdings at March 31, 2018.

 

     March 31, 2018  
     Less Than 12 Months      12 Months or Longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 84,390      $ 583      $ 14,662      $ 339      $ 99,052      $ 922  

SBA Backed Securities

     21,384        592        32,798        1,413        54,182        2,005  

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

     682,644        14,431        815,823        40,405        1,498,467        54,836  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 788,418      $ 15,606      $ 863,283      $ 42,157      $ 1,651,701      $ 57,763  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2017. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 117 and 168 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 404 holdings at December 31, 2017.

 

     December 31, 2017  
     Less Than 12 Months      12 Months or Longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 15,257      $ 239      $ 14,768      $ 233      $ 30,025      $ 472  

SBA Backed Securities

     19,457        142        33,750        1,129        53,207        1,271  

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

     519,481        5,920        814,712        27,365        1,334,193        33,285  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 554,195      $ 6,301      $ 863,230      $ 28,727      $ 1,417,425      $ 35,028  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Allowance for Loan Losses

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

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

 

     Three months ended
March 31,
 
     2018      2017  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 26,255      $ 24,406  

Loans charged off

     (87      (96

Recoveries on loans previously charged-off

     77        117  
  

 

 

    

 

 

 

Net recoveries (charge-offs)

     (10      21  

Provision charged to expense

     450        400  
  

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 26,695      $ 24,827  
  

 

 

    

 

 

 

 

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Further information pertaining to the allowance for loan losses for the three months ending March 31, 2018 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Home
Equity
    Unallocated     Total  
Allowance for loan losses:   (in thousands)  

Balance at December 31, 2017

  $ 1,645     $ 9,651     $ 1,720     $ 9,728     $ 1,873     $ 373     $ 989     $ 276     $ 26,255  

Charge-offs

    —         (5     —         —         —         (82     —         —         (87

Recoveries

    —         23       —         —         —         54       —         —         77  

Provision

    (207     (5     —         59       586       (24     78       (37     450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2018

  $ 1,438     $ 9,664     $ 1,720     $ 9,787     $ 2,459     $ 321     $ 1,067     $ 239     $ 26,695  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ —       $ 12     $ —       $ 94     $ 580     $ —       $ —       $ —       $ 686  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,438     $ 9,652     $ 1,720     $ 9,693     $ 1,879     $ 321     $ 1,067     $ 239     $ 26,009  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 17,583     $ 758,621     $ 104,044     $ 726,440     $ 300,941     $ 19,339     $ 260,179     $ —       $ 2,187,147  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 522     $ —       $ 2,528     $ 2,774     $ —       $ —       $ —       $ 5,824  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 17,583     $ 758,099     $ 104,044     $ 723,912     $ 298,167     $ 19,339     $ 260,179     $ —       $ 2,181,323  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for the three months ending March 31, 2017 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Home
Equity
    Unallocated     Total  
Allowance for loan losses:   (in thousands)  

Balance at December 31, 2016

  $ 1,012     $ 6,972     $ 1,612     $ 11,135     $ 1,698     $ 582     $ 1,102     $ 293     $ 24,406  

Charge-offs

    —         —         —         —         —         (96     —         —         (96

Recoveries

    —         19       —         —         2       96       —         —         117  

Provision

    (139     378       287       81       (29     (130     (52     4       400  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2017

  $ 873     $ 7,369     $ 1,899     $ 11,216     $ 1,671     $ 452     $ 1,050     $ 297     $ 24,827  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 2     $ 21     $ —       $ 130     $ 6     $ —       $ —       $ —       $ 159  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 871     $ 7,348     $ 1,899     $ 11,086     $ 1,665     $ 452     $ 1,050     $ 297     $ 24,668  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 10,773     $ 649,326     $ 153,447     $ 732,151     $ 264,442     $ 11,573     $ 218,782     $ —       $ 2,040,494  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ 93     $ 378     $ —       $ 3,123     $ 190     $ —       $ —       $ —       $ 3,784  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 10,680     $ 648,948     $ 153,447     $ 729,028     $ 264,252     $ 11,573     $ 218,782     $ —       $ 2,036,710  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Loans rated 1-3 (Pass):

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

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of March 31, 2018 and December 31, 2017.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of March 31, 2018 and December 31, 2017.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of March 31, 2018 and December 31, 2017 and are doubtful for full collection.

Impaired:

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

The following table presents the Company’s loans by risk rating at March 31, 2018.

 

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

1-3 (Pass)

   $ 17,583      $ 752,853      $ 104,044      $ 699,363  

4 (Monitor)

     —          5,246        —          24,549  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     —          522        —          2,528  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17,583      $ 758,621      $ 104,044      $ 726,440  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2017.

 

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

1-3 (Pass)

   $ 18,931      $ 758,093      $ 106,599      $ 705,235  

4 (Monitor)

     —          5,366        —          24,702  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     —          348        —          2,554  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,931      $ 763,807      $ 106,599      $ 732,491  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The Company has increased its exposure to larger loans to large institutions with publically available credit ratings beginning in 2015. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2018 and are included within the total loan portfolio.

 

     Commercial
and
Industrial
     Municipal      Commercial
Real
Estate
     Total  
Credit Rating:    (in thousands)  

Aaa – Aa3

   $ 477,230      $ 59,024      $ 43,667      $ 579,921  

A1 – A3

     195,449        7,635        128,211        331,295  

Baa1 – Baa3

     —          26,970        121,125        148,095  

Ba2

     —          8,165        —          8,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 672,679      $ 101,794      $ 293,003      $ 1,067,476  
  

 

 

    

 

 

    

 

 

    

 

 

 

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  
Credit Rating:    (in thousands)  

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Further information pertaining to the allowance for loan losses at March 31, 2018 follows:

 

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

Construction and land development

   $ —        $ —        $ —        $ —        $ 17,583      $ 17,583  

Commercial and industrial

     242        198        —          440        758,181        758,621  

Municipal

     —          —          —          —          104,044        104,044  

Commercial real estate

     1,713        211        —          1,924        724,516        726,440  

Residential real estate

     1,270        186        —          1,456        299,485        300,941  

Consumer and overdrafts

     8        2        —          10        19,329        19,339  

Home equity

     704        789        —          1,493        258,686        260,179  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,937      $ 1,386      $ —        $ 5,323      $ 2,181,824      $ 2,187,147  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Further information pertaining to the allowance for loan losses at December 31, 2017 follows:

 

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

Construction and land development

   $ —        $ —        $ —        $ —        $ 18,931      $ 18,931  

Commercial and industrial

     65        44        —          109        763,698        763,807  

Municipal

     —          —          —          —          106,599        106,599  

Commercial real estate

     672        215        —          887        731,604        732,491  

Residential real estate

     4,282        724        —          5,006        282,725        287,731  

Consumer and overdrafts

     5        6        —          11        19,029        19,040  

Home equity

     618        695        —          1,313        246,032        247,345  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,642      $ 1,684      $ —        $ 7,326      $ 2,168,618      $ 2,175,944  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectability of the loan’s principal is not probable. The specific factors that management considers in making the determination that the collectability of the loan’s principal is not probable include: the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements contained in the Company’s Annual Report for the fiscal year ended December 31, 2017.

 

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The following is information pertaining to impaired loans for March 31, 2018:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value
for 3 Months
Ending 3/31/18
     Interest
Income
Recognized
for 3 Months
Ending 3/31/18
 
With no required reserve recorded:    (in thousands)  

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     27        214        —          49        —    

Municipal

     —          —          —          —          —    

Commercial real estate

     210        231        —          265        —    

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 237      $ 445      $ —        $ 314      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     495        511        12        388        5  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,318        2,430        94        2,278        23  

Residential real estate

     2,774        2,774        580        3,827        6  

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,587      $ 5,715      $ 686      $ 6,493      $ 34  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Construction and land development

   $ —        $ —        $ —        $ —2      $ —    

Commercial and industrial

     522        725        12        437        5  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,528        2,661        94        2,543        23  

Residential real estate

     2,774        2,774        580        3,827        6  

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,824      $ 6,160      $ 686      $ 6,807      $ 34  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following is information pertaining to impaired loans for March 31, 2017:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value
for 3 Months
Ending 3/31/17
     Interest
Income
Recognized
for 3 Months
Ending 3/31/17
 
With no required reserve recorded:    (in thousands)  

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     41        229        —          43        —    

Municipal

     —          —          —          —          —    

Commercial real estate

     588        588        —          589        9  

Residential real estate

     84        174        —          87        2  

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 713      $ 991      $ —        $ 719      $ 11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ 93      $ 108      $ 2      $ 93      $ —    

Commercial and industrial

     337        352        21        339        4  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,535        2,642        130        2,548        23  

Residential real estate

     106        106        6        107        1  

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,071      $ 3,208      $ 159      $ 3,087      $ 28  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Construction and land development

   $ 93      $ 108      $ 2      $ 93      $ —    

Commercial and industrial

     378        581        21        382        4  

Municipal

     —          —          —          —          —    

Commercial real estate

     3,123        3,230        130        3,137        32  

Residential real estate

     190        280        6        194        3  

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,784      $ 4,199      $ 159      $ 3,806      $ 39  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings are identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations.

There was one residential real estate loan and one consumer loan that were modified during the first quarter of 2018. The loans were modified by reducing the interest rates as well as extending the terms on both loans. The pre-modification and post-modification outstanding recorded investment was $2,675,000 for the residential real estate loan that was accruing and had a specific reserve of $575,000. The pre-modification and post-modification outstanding recorded investment was $17,000 for the consumer loan that was accruing and had a specific reserve of $1,000. The financial impact for the modifications was not material.

There was no troubled debt restructuring that occurred during the three month period ended March 31, 2017. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during the first three months of 2017 and 2018.

 

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

Amount Reclassified from Accumulated Other Comprehensive Income

 

Details about Accumulated Other

Comprehensive Income Components

  

Three

Months Ended

March 31, 2018

   

Three

Months Ended

March 31, 2017

   

Affected Line Item in the Statement

where Net Income is Presented

     (in thousands)      

Unrealized gains and losses onavailable-for-sale securities

   $ 197     $ —       Net gains on sales of investments
     (55     —       Provision for income taxes
  

 

 

   

 

 

   
   $ 142     $ —       Net income
  

 

 

   

 

 

   

Accretion of unrealized losses transferred

   $ (520   $ (662   Interest on securities held-to-maturity
     139       289     Provision for income taxes
  

 

 

   

 

 

   
   $ (381   $ (373   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

   $ (4 )(b)    $ (3 )(b)    Salaries and employee benefits

Actuarial gains (losses)

     (403 )(b)      (384 )(b)    Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (407     (387   Income before taxes
  

 

 

   

 

 

   

Tax (expense) or benefit

     114       155     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (293   $ (232   Net income
  

 

 

   

 

 

   

 

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

 

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Note 6. Earnings per Share (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The Company had no common stock equivalents outstanding for the periods ended March 31, 2018 and 2017.

The following table is a reconciliation of basic EPS and diluted EPS.

 

     Three Months Ended
March 31,
 
(in thousands except share and per share data)    2018      2017  

Basic EPS Computation:

     

Numerator:

     

Net income, Class A

   $ 6,062      $ 4,788  

Net income, Class B

     1,647        1,308  

Denominator:

     

Weighted average shares outstanding, Class A

     3,608,029        3,600,729  

Weighted average shares outstanding, Class B

     1,959,880        1,967,180  

Basic EPS, Class A

   $ 1.68      $ 1.33  

Basic EPS, Class B

     0.84        0.66  
  

 

 

    

 

 

 

Diluted EPS Computation:

     

Numerator:

     

Net income, Class A

   $ 6,062      $ 4,788  

Net income, Class B

     1,647        1,308  
  

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     7,709        6,096  

Denominator:

     

Weighted average shares outstanding, basic, Class A

     3,608,029        3,600,729  

Weighted average shares outstanding, Class B

     1,959,880        1,967,180  
  

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,567,909        5,567,909  

Weighted average shares outstanding, Class B

     1,959,880        1,967,180  

Diluted EPS, Class A

   $ 1.38      $ 1.09  

Diluted EPS, Class B

     0.84        0.66  
  

 

 

    

 

 

 

Note 7. Employee Benefits

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

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

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

 

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

 

     Defined Benefit
Pension Plan
     Supplemental Insurance/
Retirement Plan
 
     2018      2017      2018      2017  
     (in thousands)  

Service cost

   $ 353      $ 310      $ 277      $ 395  

Interest

     370        362        346        345  

Expected return on plan assets

     (954      (746      —          —    

Recognized prior service cost (benefit)

     (25      (26      29        29  

Recognized net actuarial losses

     227        226        176        159  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ (29    $ 126      $ 828      $ 928  
  

 

 

    

 

 

    

 

 

    

 

 

 

As a result of the adoption of ASU 2017-07, “Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”, the Company reclassified approximately $169,000 and $349,000 from salaries and employee benefits to other expenses for the three months ended March 31, 2018 and 2017, respectively. The reclassifications represent costs other than service costs from the table above.

Contributions

The Company does not intend to contribute to the Defined Benefit Pension Plan in 2018.

Note 8. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures and ASU 2016-1, “Financial Instruments –Overall” (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:

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

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

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

 

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The results of the fair value hierarchy as of March 31, 2018, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

   $ 1,981      $ —        $ 1,981      $ —    

U.S. Government Sponsored Enterprises

     3,921        —          3,921        —    

SBA Backed Securities

     78,783        —          78,783        —    

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

     200,761        —          200,761        —    

Privately Issued Residential Mortgage-Backed Securities

     819        —          819        —    

Obligations Issued by States and Political Subdivisions

     81,108        —          4,643        76,465  

Other Debt Securities

     3,603        —          3,603        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 370,976      $ —        $ 294,511      $ 76,465  
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

   $ 3,084      $ —        $ —        $ 3,084  

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

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for the three month period ended March 31, 2018 amounted to $581,000.

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

 

Asset

   Fair Value     

Valuation Technique

  

Unobservable Input

  

Unobservable Input

Value or Range

Securities AFS (4)

   $ 76,465     

Discounted cash flow

  

Discount rate

   1.6%-4.4% (3)

Impaired Loans

   $ 3,084     

Appraisal of collateral (1)

  

Appraisal adjustments (2)

  

0%-30% discount

 

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

 

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The changes in Level 3 securities for the three month period ended March 31, 2018 are shown in the table below:

 

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

Balance at December 31, 2017

   $ 4,459      $ 78,141      $ —        $ 82,600  

Purchases

     —          20,416        —          20,416  

Maturities and calls

     —          (22,068      —          (22,068

Transfer

     (4,459      —          —          (4,459

Amortization

     —          (24      —          (24

Changes in fair value

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2018

   $ —        $ 76,465      $ —        $ 76,465  
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $76,465,000 at March 31, 2018 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity. There was one transfer of a security from level 3 to level 2 for the three months ended March 31, 2018 as a result of increased trading activity and quoted market prices. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the three month period ended March 31, 2018.

The changes in Level 3 securities for the three month period ended March 31, 2017, are shown in the table below:

 

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

Balance at December 31, 2016

   $ 4,298      $ 160,578      $ —        $ 164,876  

Purchases

     —          23,088        —          23,088  

Maturities and calls

     —          (24,565      —          (24,565

Amortization

     —          (62      —          (62

Changes in fair value

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2017

   $ 4,298      $ 159,039      $ —        $ 163,337  
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $163,742,000 at March 31, 2017 with an unrealized loss of $405,000. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.

 

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The results of the fair value hierarchy as of December 31, 2017, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

   $ 1,984      $ —        $ 1,984      $ —    

U.S. Government Sponsored Enterprises

     —          —          —          —    

SBA Backed Securities

     80,950        —          80,950        —    

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

     225,776        —          225,776        —    

Privately Issued Residential Mortgage-Backed Securities

     892        —          892        —    

Obligations Issued by States and Political Subdivisions

     82,600        —          —          82,600  

Other Debt Securities

     3,629        —          3,629        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 395,831      $ —        $ 313,231      $ 82,600  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Impaired Loans

   $ 246      $ —        $ —        $ 246  

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

Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis, appraisal of collateral or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for 2017 for the estimated credit loss amounted to $3,000.

There were no transfers between level 1, 2 and 3 for the year ended December 31, 2017. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2017.

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

 

Asset

   Fair Value     

Valuation Technique

  

Unobservable Input

  

Unobservable Input

Value or Range

Securities AFS (4)

   $ 82,600     

Discounted cash flow

  

Discount rate

   1.0%-3.5% (3)

Impaired Loans

   $ 246     

Appraisal of collateral (1)

  

Appraisal adjustments (2)

  

0%-30% discount

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3) Weighted averages

 

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(4) Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. There was one auction rate security whose fair value is based on the evaluation of the underlying issuer, prevailing interest rates and market liquidity.

Note 9. Fair Values of Financial Instruments

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

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

The fair value of loans is estimated using the exit price notion consistent with Topic 820, Fair Value Measurement.

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2018 and December 31, 2017. This table excludes financial instruments for which the carrying amount approximates fair value as these assets and liabilities that are due within one year. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable.

 

March 31, 2018

   Carrying
Amount
     Estimated
Fair Value
     Fair Value
Measurements
Level 1 Inputs
     Level 2
Inputs
     Level 3
Inputs
 
     (in thousands)  

Financial assets:

              

Securities held-to-maturity

   $ 1,817,633      $ 1,760,498      $ —        $ 1,760,498      $ —    

Loans (1)

     2,160,452        2,106,013        —          —          2,106,013  

Financial liabilities:

              

Time deposits

     615,822        613,788        —          613,788        —    

Other borrowed funds

     317,054        315,791        —          315,791        —    

Subordinated debentures

     36,083        36,083        —          —          36,083  

December 31, 2017

              

Financial assets:

              

Securities held-to-maturity

   $ 1,701,233      $ 1,668,827      $ —        $ 1,668,827      $ —    

Loans (1)

     2,149,689        2,094,517        —          —          2,094,517  

Financial liabilities:

              

Time deposits

     625,361        627,517        —          627,517        —    

Other borrowed funds

     347,778        349,364        —          349,364        —    

Subordinated debentures

     36,083        36,083        —          —          36,083  

 

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

Note 10. Recent Accounting Developments

Recently Adopted Accounting Standards Updates

Effective January 1, 2018, the following new accounting guidance was adopted by the Company:

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update include items brought to the Board’s attention by stakeholders. The amendments clarify certain aspects of the guidance issued in Update 2016-1. For public entities, this ASU was effective for the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The effect of this update did not have a material impact on the Company’s consolidated financial position.

 

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In February 2018, the 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 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 adopted this update in the first quarter of 2018 and applied the effects of the changes in the period of adoption. The effect of the changes is approximately $3.8 million that increased retained earnings and a corresponding decrease to AOCI.

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 was effective for annual reporting periods beginning after December 15, 2017. The effect of this update did not have a material impact on the Company’s consolidated financial position.

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 were effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. This ASU is for presentation purposes only, accordingly, there was no impact on the Company’s consolidated financial position. See Note 7 for a further explanation of this ASU.

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 was effective for annual reporting periods beginning after December 15, 2017. The effect of this update did not have a material impact on the Company’s consolidated financial position.

Effective January 1, 2018, the Company adopted ASU 2014-09 “Revenue Recognition (Topic 606): Revenue from Contracts with Customers.” ASU 2014-09 supersedes Topic 605 “Revenue Recognition” and requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

The vast majority of the Company’s revenue is interest income on loans, investment securities and deposits at other financial institutions which are specifically outside the scope of ASU 2014-09. ASU 2014-09 applies primarily to certain non-interest income items in the Company’s financial statements. We adopted Topic 606 as of January 1, 2018 using the cumulative effect transition method. The impact of adopting the new standard was not material. See Note 11 Revenue from Contracts with Customers for further details.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. The amendments of this ASU were 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 was effective for the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The effect of this update did not have a material impact on the Company’s consolidated financial position.

 

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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 were 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 required a reclassification of $375,000 of proceeds from life insurance policies to investing activities from operating activities.

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. The Company used exit price notion when measuring the fair value of financial instruments for disclosure purposes (see Note 9 Fair Value of Financial Instruments). This ASU was effective for fiscal years beginning after December 15, 2017, including interim periods therein. The Company adopted this update in the first quarter of 2018 and applied the effects of the changes retrospectively. The effect of the changes is approximately $29 thousand, which was reclassified from accumulated other comprehensive income to retained earnings.

Accounting Standards Issued but not yet Adopted

The following list identifies ASUs applicable to the Company that have been issued by the FASB but are not yet effective:

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 March 31, 2018.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization of 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 March 31, 2018.

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 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 purchased software solutions to help capture information needed to implement this update. The Company has not determined the impact, if any, as of March 31, 2018.

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 is assessing the implementation steps. During the first quarter of 2018, we established a cross-functional implementation team consisting of representatives from areas related to leasing. The Company has not determined the impact, if any, as of March 31, 2018.

 

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Note 11. Revenue from Contracts with Customers

Revenue from contracts with customers in the scope of ASC Topic 606 is measured based on the consideration specified in the contract with a customer, and excludes amounts collected on behalf of third parties. The Company recognizes revenue from contracts with customers when it satisfies its performance obligations.

The Company’s performance obligations are typically satisfied as services are rendered, and our contracts do not include multiple performance obligations. Payment is generally collected at the time services are rendered, or monthly. Unsatisfied performance obligations at the report date are not material to our consolidated financial statements.

The Company pays sales commissions to its employees in accordance with certain incentive plans. The Company expenses sales commissions when incurred if we do not expect to recover these costs from the terms of the contract with the customer. Sales commissions are included in compensation expense.

In certain cases, other parties are involved with providing products and services to our customers. If the Company is a principal in the transaction (providing goods or services itself), revenues are reported based on the gross consideration received from the customer and any related expenses are reported gross in noninterest expense. If the Company is an agent in the transaction (arranging for another party to provide goods or services), the Company reports its net fee or commission retained as revenue.

Waivers and reversals are recorded as a reduction of revenue either when the revenue is recognized by the Company or at the time the waiver or reversal is earned by the customer.

A. Change in accounting policy

The Company adopted Topic 606 Revenue from Contracts with Customers with a date of initial application of January 1, 2018 and has applied the guidance to all contracts within the scope of Topic 606 as of that date. As a result, the Company has changed its accounting policy for revenue recognition as detailed in this footnote.

The Company applied Topic 606 using the cumulative effect method. Therefore, the comparative information has not been adjusted and continues to be reported under Topic 605. There was no cumulative effect adjustment as of January 1, 2018, and there were no material changes to the financial statements at or for the three months ended March 31, 2018 as a result of adopting Topic 606.

B. Practical Expedients

The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

The Company applies the practical expedient in paragraph 606-10-32-18 and does not adjust the consideration from customers for the effects of a significant financing component if at contract inception the period between when the entity transfers the goods or services and when the customer pays for that good or service will be one year or less.

C. Nature of goods and services

The vast majority of the Company’s revenue is specifically out-of-scope of Topic 606. For the revenue in-scope, the following is a description of principal activities, separated by the timing of revenue recognition, from which the Company generates its revenue from contracts with customers.

 

a. Revenue earned at a point in time – Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, NSF fees, credit and debit card interchange fees and foreign exchange transaction fees. Revenue is generally derived from transactional information accumulated by our systems and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is the principal in each of these contracts, with the exception of credit and debit card interchange fees, in which case we are acting as the agent and record revenue net of expenses paid to the principal.

 

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  b. Revenue earned over time – The Company earns revenue from contracts with customers in a variety of ways in which the revenue is earned over a period of time – generally monthly or quarterly. Examples of this type of revenue are deposit account service fees, lockbox fees, investment management fees, merchant referral services, and safe deposit box fees. Account service charges, management fees and referral fees are recognized on a monthly basis while any transaction based income is recorded as the activity occurs. Revenue is primarily based on the number and type of transactions or assets managed and is generally derived from transactional information accumulated by our systems. Revenue is recorded in the same period as the related transactions occur or services are rendered to the customer.

D. Disaggregation of revenue

The following table presents total revenues as presented in the Consolidated Statements of Income and the related amounts which are from contracts with customers within the scope of Topic 606. As illustrated here, the vast majority of our revenues are specifically excluded from the scope of Topic 606.

 

     Three Months
Ended

March 31, 2018
     Revenue from
Contracts in
Scope of
Topic 606
     Three Months
Ended
March 31, 2017
     Revenue from
Contracts in
Scope of
Topic 606
 

(dollars in thousands)

           

Total interest income

   $ 22,468      $ —        $ 20,456      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges on deposit accounts

     2,067        2,067        2,016        2,016  

Lockbox fees

     791        791        771        771  

Net gains on sales of securities

     197        —          —          —    

Gains on sales of mortgage loans

     —          —          101        —    

Other income

     1,138        719        1,021        603  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     4,193        3,577        3,909        3,390  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 26,661      $ 3,577      $ 24,365      $ 3,390  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information about receivables with customers.

 

     March 31,
2018
     December 31,
2017
 
     (dollars in thousands)  

Receivables, which are included in “Other assets”

   $ 1,161      $ 1,009  

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

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At March 31, 2018, 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 educational institutions throughout Massachusetts, New Hampshire, Rhode Island, Connecticut and New York.

 

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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 comprising of approximately 250 government entities.

Net income for the three months ended March 31, 2018, was $7,709,000 or $1.38 per Class A share diluted, an increase of 26.5% compared to net income of $6,096,000, or $1.09 per Class A share diluted, for the same period a year ago

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

 

    

Three Months Ended

March 31,

 
     2018      2017  

Basic EPS – Class A common

   $ 1.68      $ 1.33  

Basic EPS – Class B common

   $ 0.84      $ 0.66  

Diluted EPS – Class A common

   $ 1.38      $ 1.09  

Diluted EPS – Class B common

   $ 0.84      $ 0.66  

Net interest income totaled $22,468,000 for the three months ended March 31, 2018 compared to $20,456,000 for the same period in 2017. The 9.8% increase in net interest income for the period is primarily due to an increase in average earning assets and an increase in the net interest margin. The net interest margin increased from 2.16% on a fully taxable equivalent basis for the first quarter of 2017 to 2.19% for the same period in 2018. This was primarily the result of an increase in rates on earning assets. The average balances of earning assets increased by 1.8% combined with a similar increase in average deposits. Also, interest expense increased 44.9% primarily as a result of an increase in rates on deposit balances.

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

 

LOGO

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

 

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$825,000 and contributed approximately seven basis points to the net interest margin for the second quarter. During 2017, the Company did not see a corresponding increase in short term rates on interest bearing liabilities. The margin decreased for the first quarter of 2018 mainly as a result of a decrease in the corporate tax rate from 34% to 21%. This decrease results in a lower tax equivalent yield on tax-exempt assets.

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

The provision for loan losses increased by $50,000 from $400,000 for the three months ended March 31, 2017 to $450,000 for the same period in 2018. Refer to the allowance for loan loss section of the management discussion and analysis for additional discussion. Non-performing assets totaled $1,386,000 at March 31, 2018, compared to $1,684,000 at December 31, 2017.

For the first three months of 2018, the Company’s effective income tax rate was 6.1% compared to 2.3% for last year’s corresponding period. The effective income tax rate increased primarily as a result of an increase in taxable income offset, somewhat, by a decrease in the federal tax rate from 34% to 21% as a result of the Tax Cuts and Jobs Act..

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.

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 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 took effect on January 1, 2018. The Tax Act lowered 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, it is anticipated that the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022.

 

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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.

Financial Condition

Loans

On March 31, 2018, total loans outstanding were $2,187,147,000, up by $11,203,000 from the total on December 31, 2017. At March 31, 2018, commercial real estate loans accounted for 33.2%, commercial and industrial accounted for 34.7%, and residential real estate loans, including home equity loans, accounted for 25.7% of total loans.

Commercial real estate loans decreased to $726,440,000 at March 31, 2018 from $732,491,000 at December 31, 2017, primarily as a result of loan payoffs. Residential real estate loans increased to $300,941,000 at March 31, 2018 from $287,731,000 at December 31, 2017, primarily as a result of new loan originations. Home equity loans increased to $260,179,000 at March 31, 2018 from $247,345,000 at December 31, 2017, primarily as a result of a home equity loan promotion.

Commercial and industrial loans decreased to $758,621,000 at March 31, 2018 from $763,807,000 at December 31, 2017, primarily as a result of loan payoffs. Construction loans decreased to $17,583,000 at March 31, 2018 from $18,931,000 on December 31, 2017. Municipal loans decreased to $104,044,000 from $106,599,000, primarily as a result of payoffs of existing loans. In recent years, the Company has increased business to larger institutions, specifically, healthcare, higher education, and municipal organizations. Further discussion relating to changes in portfolio composition is discussed in the allowance for loan loss section of the management discussion and analysis.

Allowance for Loan Losses

The allowance for loan loss at March 31, 2018 was $26,695,000 as compared to $26,255,000 at December 31, 2017. The level of the allowance for loan losses to total loans was 1.22% at March 31, 2018 and 1.21% at December 31, 2017.

For 2017 and 2018, the ratio of the allowance for loan losses to loans outstanding has remained relatively stable.

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. For a large loan to large institutions with publically available credit ratings the Company tracks these ratings. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2018.

 

     Commercial
and
Industrial
     Municipal      Commercial
Real
Estate
     Total  
Credit Rating:    (in thousands)  

Aaa – Aa3

   $ 477,230      $ 59,024      $ 43,667      $ 579,921  

A1 – A3

     195,449        7,635        128,211        331,295  

Baa1 – Baa3

     —          26,970        121,125        148,095  

Ba2

     —          8,165        —          8,165  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 672,679      $ 101,794      $ 293,003      $ 1,067,476  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Credit ratings issued by national organizations are presented in the following table at December 31, 2017.

 

     Commercial
and
Industrial
     Municipal      Commercial
Real
Estate
     Total  
Credit Rating:    (in thousands)  

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Three months ended
March 31,
 
     2018      2017  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 26,255      $ 24,406  

Loans charged off

     (87      (96

Recoveries on loans previously charged-off

     77        117  
  

 

 

    

 

 

 

Net recoveries (charge-offs)

     (10      21  

Provision charged to expense

     450        400  
  

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 26,695      $ 24,827  
  

 

 

    

 

 

 

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

Nonperforming Assets

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

 

     March 31
2018
    December 31,
2017
 
     (dollars in thousands)  

Nonaccruing loans

   $ 1,386     $ 1,684  

Total nonperforming assets

   $ 1,386     $ 1,684  

Loans past due 90 days or more and still accruing

   $ —       $ —    

Nonaccruing loans as a percentage of total loans

     0.06     0.08

Nonperforming assets as a percentage of total assets

     0.03     0.04

Accruing troubled debt restructures

   $ 5,415     $ 2,749  

Investments

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

Securities Available-for-Sale (at Fair Value)

The securities available-for-sale portfolio totaled $370,976,000 at March 31, 2018, a decrease of 6.3% from December 31, 2017. The portfolio decreased mainly as a result of calls, maturities, and sales of securities available-for-sale totaling $49,418,000 for

 

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the three months ended March 31, 2018. The calls and maturities were offset, somewhat, by purchases of $19,336,000. The portfolio is concentrated in United States Government Sponsored Enterprises, Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 5.6 years.

At March 31, 2018, 79.4% of the Company’s securities available-for-sale are classified as Level 2. The fair values of these securities are generally obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored.

Securities available-for-sale totaling $76,465,000 or 20.6% of securities available-for-sale are classified as Level 3. These securities are generally municipal securities with no observable fair value. The securities are carried at cost which approximates fair value. A periodic review of underlying financial statements and credit ratings is performed to assess the appropriateness of these valuations.

 

     March 31,
2018
     December 31,
2017
 
     (in thousands)  

U.S. Treasury

   $ 1,981      $ 1,984  

U.S. Government Sponsored Enterprises

     3,921        —    

Small Business Administration

     78,783        80,950  

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

     200,761        225,776  

Privately Issued Residential Mortgage-
backed Securities

     819        892  

Obligations issued by States and Political Subdivisions

     81,108        82,600  

Other Debt Securities

     3,603        3,629  
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 370,976      $ 395,831  
  

 

 

    

 

 

 

During the first three months of 2018, net unrealized losses on the securities available-for-sale decreased to $37,000 from a net unrealized loss of $118,000 at December 31, 2017. The following table sets forth the fair value of securities available-for-sale at the dates indicated.

The Company realized gross gains of $197,000 from the proceeds of $17,871,000 from the sales of available-for-sale securities for the three months ended March 31, 2018. There were no sales of available-for-sales securities for the three months ended March 31, 2017.

Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $1,817,633,000 on March 31, 2018, an increase of 6.8% from December 31, 2017. Purchases of securities held-to-maturity totaled $174,974,000 for the three months ended March 31, 2018. The purchases were offset somewhat, by scheduled principal payments of $59,409,000. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 4.2 years. The following table sets forth the amortized cost of securities held-to-maturity at the dates indicated.

 

     March 31,
2018
     December 31,
2017
 
     (in thousands)  

U.S. Government Sponsored Enterprises

   $ 139,780      $ 104,653  

SBA Backed Securities

     56,188        57,235  

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

     1,621,665        1,539,345  
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $ 1,817,633      $ 1,701,233  
  

 

 

    

 

 

 

There were no sales of held-to-maturity securities for the three months ended March 31, 2018 and March 31, 2017 respectively.

At March 31, 2018 and December 31, 2017, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. There were no sales of investments for the three months ending March 31, 2018.

 

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

Federal Home Loan Bank of Boston Stock

The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis in the stock. During the first three months of 2018, the FHLBB redeemed $3,464,000 of FHLBB stock and the Company purchased $1,735,000 of FHLBB stock. As of March 31, 2018, no impairment has been recognized.

Equity Securities

At March 31, 2018 equity securities totaled $1,654,000 compared to $1,663,000 at December 31, 2017. Equity securities were reclassified from securities available-for-sale during the current quarter for March 31, 2018 and December 31, 2017, respectively. The unrealized gain, of $29,000 on equity securities, at December 31, 2017, was transferred to retained earnings and the change in the unrealized gain for the first quarter of 2018 was classified as other income, in accordance with ASU 2016-1 as previously discussed in Note 10.

Deposits and Borrowed Funds

On March 31, 2018, deposits totaled $3,935,796,000, representing a 0.5% increase from December 31, 2017. Total deposits increased primarily as a result of an increase in money market accounts and savings and NOW deposits. This was offset somewhat, by a decrease in demand deposits and time deposits. Money market deposits increased mainly as a result of increased municipal account balances. Savings and NOW deposits increased mainly as a result of increased personal, corporate and municipal deposits. Time deposits decreased primarily as a result of decreased municipal time deposits. Demand deposits decreased mainly as a result of decreased corporate checking balances

Borrowed funds totaled $458,614,000 at March 31, 2018 compared to $506,768,000 at December 31, 2017. Borrowed funds decreased mainly as a result of a decrease in short-term FHLBB borrowings and securities sold under agreements to repurchase. Securities sold under agreements to repurchase decreased primarily as a result of decreases in corporate accounts.

Stockholders’ Equity

At March 31, 2018, total equity was $268,200,000 compared to $260,297,000 at December 31, 2017. The Company’s equity increased primarily as a result of earnings, offset, somewhat, by an increase in other comprehensive loss, net of taxes and dividends paid. There were reclassifications between retained earnings and other comprehensive loss as a result of both ASU 2018-2 and ASU 2016-1. The reclassifications amounted to $3,812,000 and increased retained earnings and decreased other comprehensive loss. Excluding the reclassifications, in aggregate, other comprehensive loss, net of taxes, decreased as a result of a decrease in unrealized losses on securities available-for-sale, unrealized losses on securities transferred from available-for-sale to held-to-maturity and amortization of the pension liability. The Company’s leverage ratio stood at 6.77% at March 31, 2018, compared to 6.70% at December 31, 2017. The increase in the leverage ratio was due to an increase in stockholders’ equity, offset somewhat by an increase in quarterly average assets. Book value as of March 31, 2018 was $48.17 per share compared to $46.75 at December 31, 2017.

 

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Results of Operations

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

 

     Three Months Ended  
     March 31, 2018      March 31, 2017  
     Average
Balance
    Interest
Income/
Expenses (1)
     Rate
Earned/
Paid (1)
     Average
Balance
    Interest
Income/
Expenses (1)
    Rate
Earned/
Paid (1)
 
ASSETS    (dollars in thousands)  

Interest-earning assets:

              

Loans (2)

              

Loans taxable

   $ 1,043,345     $ 10,685        4.15%      $ 935,122     $ 9,034       3.92%  

Loans tax-exempt

     1,131,825       9,606        3.44%        1,049,578       9,263       3.58%  

Securities available-for-sale (5):

              

Taxable

     338,393       1,754        2.07%        382,015       1,264       1.32%  

Tax-exempt

     67,694       291        1.72%        151,471       486       1.28%  

Securities held-to-maturity:

              

Taxable

     1,741,492       10,288        2.36%        1,751,435       9,535       2.18%  

Interest-bearing deposits in other banks

     230,194       883        1.53%        204,527       393       0.77%  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     4,552,943       33,507        2.97%        4,474,148       29,975       2.70%  

Non interest-earning assets

     228,451             220,391      

Allowance for loan losses

     (26,546           (24,580    
  

 

 

         

 

 

     

Total assets

   $ 4,754,848           $ 4,669,959      
  

 

 

         

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Interest-bearing deposits:

              

NOW accounts

   $ 954,608     $ 1,353        0.57%      $ 966,191     $ 700       0.29%  

Savings accounts

     540,311       870        0.65%        487,108       527       0.44%  

Money market accounts

     1,180,436       2,453        0.84%        1,216,690       1,274       0.42%  

Time deposits

     604,814       2,363        1.58%        501,857       1,651       1.33%  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     3,280,169       7,039        0.87%        3,171,846       4,152       0.53%  

Securities sold under agreements to repurchase

     160,223       181        0.46%        200,457       103       0.21%  

Other borrowed funds and subordinated
debentures

     274,343       1,742        2.58%        319,733       1,928       2.45%  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     3,714,735       8,962        0.98%        3,692,036       6,183       0.68%  
    

 

 

    

 

 

      

 

 

   

 

 

 

Non-interest-bearing liabilities

              

Demand deposits

     706,959             675,941      

Other liabilities

     69,218             58,663      
  

 

 

         

 

 

     

Total liabilities

     4,490,912             4,426,640      
  

 

 

         

 

 

     

Stockholders’ equity

     263,936             243,319      

Total liabilities & stockholders’ equity

   $ 4,754,848           $ 4,669,959      
  

 

 

         

 

 

     

Net interest income on a fully taxable equivalent basis

       24,545             23,792    

Less taxable equivalent adjustment

       (2,077)             (3,336  
    

 

 

         

 

 

   

Net interest income

     $ 22,468           $ 20,456    
    

 

 

    

 

 

      

 

 

   

 

 

 

Net interest spread (3)

          2.00%            2.02%  
       

 

 

        

 

 

 

Net interest margin (4)

          2.19%            2.16%  
       

 

 

        

 

 

 

 

(1) On a fully taxable equivalent basis calculated using a federal tax rate of 21% for 2018 and 34% for 2017.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(5) Average balances of securities available-for-sale calculated utilizing amortized cost.

 

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

 

     Three Months Ended March 31, 2018
Compared with
Three Months Ended March 31, 2017
 
     Increase/(Decrease)
Due to Change in
 
     Volume      Rate      Total  
Interest income:    (in thousands)  

Loans

        

Taxable

   $ 1,087      $ 564      $ 1,651  

Tax-exempt

     707        (364      343  

Securities available-for-sale

        

Taxable

     (158      648        490  

Tax-exempt

     (325      130        (195

Securities held-to-maturity

        

Taxable

     (54      807        753  

Interest-bearing deposits in other banks

     54        436        490  
  

 

 

    

 

 

    

 

 

 

Total interest income

     1,311        2,221        3,532  
  

 

 

    

 

 

    

 

 

 

Interest expense:

        

Deposits

        

NOW accounts

     (8      661        653  

Savings accounts

     63        280        343  

Money market accounts

     (39      1,218        1,179  

Time deposits

     372        340        712  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     388        2,499        2,887  

Securities sold under agreements to repurchase

     (24      102        78  

Other borrowed funds and subordinated debentures

     (284      98        (186
  

 

 

    

 

 

    

 

 

 

Total interest expense

     80        2,699        2,779  
  

 

 

    

 

 

    

 

 

 

Change in net interest income

   $ 1,231      $ (478    $ 753  
  

 

 

    

 

 

    

 

 

 

Net Interest Income

For the three months ended March 31, 2018, net interest income on a fully taxable equivalent basis totaled $24,545,000 compared to $23,792,000 for the same period in 2017, an increase of $753,000 or 3.2%. This increase in net interest income for the period is primarily due to an increase in average interest earning assets combined with a three basis point increase in the net interest margin. The average balance of earning assets increased by 1.8% combined with a similar increase in average deposits. The net interest margin increased from 2.16% on a fully taxable equivalent basis in 2017 to 2.19% on the same basis for 2018. This was primarily the result of an increase in rates on earning assets. Also, interest income on a fully taxable equivalent basis increased 11.8%, mainly as a result of an increase in rates on earning assets. Interest expense increased 44.9% mainly as a result of an increase in rates paid on deposit balances.

As illustrated in the table above, the main contributors to the increase in net interest income were from loans, securities held-to-maturity, securities available-for-sale, and interest-bearing deposits in other banks. Securities held-to-maturity income increased primarily as a result of an increase in rates. Loans income increased primarily from an increase in volume and an overall increase in rates. Securities available-for-sale income increased from an increase in rates paid on the portfolio. The Company has a sizable floating rate available-for-sale portfolio. These securities reprice as interest rates rise. Interest-bearing deposits income increased primarily from an increase in rates. The increase in interest income was partially offset by an increase in interest expense. This was mainly the result of increased rates paid on money market, saving and NOW accounts, and time deposits. The Company has modestly raised interest rates on these products to remain competitive.

 

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Provision for Loan Losses

For the three months ended March 31, 2018, the loan loss provision was $450,000 compared to a provision of $400,000 for the same period last year. The modest increase in the provision was primarily as a result of increased reserve requirements on an impaired loan. Further discussion relating to changes in portfolio composition is discussed in footnote number four.

Non-Interest Income and Expense

Other operating income for the quarter ended March 31, 2018 increased by $284,000 from the same period last year to $4,193,000. This was mainly attributable to an increase in net gains on sales of securities of $197,000. This was partially offset by a decrease of $101,000 in gains on sales of mortgage loans. Other income increased primarily as a result of an increase in wealth management fees, merchant charge card fees, and brokerage commissions. Also, service charges on deposit accounts increased primarily as a result of an increase in customer activity. Lockbox income increased by $20,000, mainly as a result of increased customer activity.

For the quarter ended March 31, 2018, operating expenses increased by $276,000 or 1.6% to $18,001,000, from the same period last year. The increase in operating expenses for the quarter was mainly attributable to an increase of $431,000 in salaries and employee benefits, and $88,000 in equipment expenses. This was partially offset by decreases in occupancy expense of $104,000, FDIC assessments of $55,000, and $84,000 in other expenses. Salaries and employee benefits increased mainly as a result of merit increases. Equipment expenses increased mainly as a result of increased depreciation expense. Other expenses decreased primarily as a result of a decrease pension expense and decreased contributions. This was partially offset by an increase in legal and consulting expenses. FDIC assessments decreased slightly primarily as a result of a decrease in the assessment rate. Occupancy costs decreased primarily as a result of decreased rent expense associated with a reduction in rent at select locations.

Income Taxes

For the first quarter of 2018, the Company’s income tax expense totaled $501,000 on pretax income of $8,210,000 resulting in an effective tax rate of 6.10%. For last year’s corresponding quarter, the Company’s income tax expense totaled $144,000 on pretax income of $6,240,000 resulting in an effective tax rate of 2.3%. The increase in the effective income tax rate was primarily the result of an increase in taxable income, offset somewhat, by a decrease in the corporate tax rate from 34% to 21% as a result of the Tax Cuts and Jobs Act. Taxable income increased primarily from an increase in taxable interest income as a percentage of total interest income.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates tied to specific assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. Management believes that there has been no material changes in the interest rate risk reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission. The information is contained in the Form 10-K within the Market Risk and Asset Liability Management section of Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Item 4. Controls and Procedures

The Company’s management, with participation of the Company’s principal executive and financial officers, has evaluated its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Company’s management, with participation of its principal executive and financial officers, has concluded that the Company’s disclosure controls and procedures are effective. The disclosure controls and procedures also effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act is accumulated and reported to Company management (including the principal executive officer and the principal financial officer) as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has evaluated its internal control over financial reporting and during the first quarter of 2018 there were no changes that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part IIOther Information

 

Item 1 A number of legal claims against the Company arising in the normal course of business were outstanding at March 31, 2018. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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.

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

 

Item 1A Risk Factors – Please read “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. There have been no material changes since this 10-K was filed. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and operating results.

 

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

(a) – (b) Not applicable.

(c) None

 

Item 3 Defaults Upon Senior Securities – None

 

Item 4 Mine Safety Disclosures – Not applicable

 

Item 5 Other Information – None

 

Item 6 Exhibits

 

      31.1    Certification of President and Chief Executive Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14.
      31.2    Certification of Chief Financial Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14.
   + 32.1    Certification of President and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   + 32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
+ + 101.    INS XBRL Instance Document
+ + 101.    SCH XBRL Taxonomy Extension Schema
+ + 101.    CAL XBRL Taxonomy Extension Calculation Linkbase
+ + 101.    LAB XBRL Taxonomy Extension Label Linkbase
+ + 101.    PRE XBRL Taxonomy Extension Presentation Linkbase
+ + 101.    DEF XBRL Taxonomy Definition Linkbase

 

 

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+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
++ As provided in Rule 406T of regulation S-T, this information is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and consists of the following materials from Century Bancorp Inc.’s Quarterly Report on 10-Q for the quarter ended March 31 2018, formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2018 and December 31, 2017; (ii) Consolidated Statements of Income for the three months ended March 31, 2018 and 2017; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2018 and 2017; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017; and (vi) Notes to Unaudited Consolidated Interim Financial Statements.

 

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SIGNATURES

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

 

Date: May 8, 2018     Century Bancorp, Inc.
/s/ Barry R. Sloane    

 

Barry R. Sloane    
President and Chief Executive Officer    
/s/ William P. Hornby    

 

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

 

Page 42 of 42

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Section 2: EX-31.1 (EX-31.1)

EX-31.1

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF THE COMPANY

PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14

I, Barry R. Sloane, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Century Bancorp, Inc.;

 

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this quarterly report;

 

  4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and;

 

  d. Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors;

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involve management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 8, 2018       /s/ Barry R. Sloane
      Barry R. Sloane
      President and Chief Executive Officer
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Section 3: EX-31.2 (EX-31.2)

EX-31.2

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF THE COMPANY

PURSUANT TO SECURITIES EXCHANGE ACT RULES 13A-14 AND 15D-14

I, William P. Hornby, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Century Bancorp, Inc.;

 

  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this quarterly report;

 

  4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and;

 

  d. Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors;

 

  a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. any fraud, whether or not material, that involve management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 8, 2018       /s/ William P. Hornby
      William P. Hornby, CPA
      Chief Financial Officer and Treasurer
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Section 4: EX-32.1 (EX-32.1)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Century Bancorp, Inc. (the “Company”) for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Barry R. Sloane
Barry R. Sloane
President and Chief Executive Officer
Date: May 8, 2018

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to Subsections (a) and (b) of Section 1350 of Chapter 63 of Title 18 of the United States Code in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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Section 5: EX-32.2 (EX-32.2)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Century Bancorp, Inc. (the “Company”) for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ William P. Hornby
William P. Hornby, CPA
Chief Financial Officer and Treasurer
Date: May 8, 2018

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished solely pursuant to Subsections (a) and (b) of Section 1350 of Chapter 63 of Title 18 of the United States Code in accordance with Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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