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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 September 30, 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 every Interactive Data File required to be submitted 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 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      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 October 31, 2018, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,608,329 Shares  

Class B Common Stock, $1.00 par value

     1,959,580 Shares  

 

 

 


Table of Contents

Century Bancorp, Inc.

Index

 

   

 

   Page
Number
 
Part I  

Financial Information

  
 

Forward Looking Statements

     3  

Item 1.

 

Financial Statements (unaudited)

  
 

Consolidated Balance Sheets:

  
 

September 30, 2018 and December 31, 2017

     4  
 

Consolidated Statements of Income:

  
 

Three Months and Nine Months Ended September 30, 2018 and 2017

     5  
 

Consolidated Statements of Comprehensive Income:

  
 

Three Months and Nine Months Ended September 30, 2018 and 2017

     6  
 

Consolidated Statements of Changes in Stockholders’ Equity:

  
 

Nine Months Ended September 30, 2018 and 2017

     7  
 

Consolidated Statements of Cash Flows:

  
 

Nine Months Ended September 30, 2018 and 2017

     8  
 

Notes to Consolidated Financial Statements

     9-33  

Item 2.

 

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

     34-45  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     45  

Item 4.

 

Controls and Procedures

     45  
Part II.  

Other Information

  

Item 1.

 

Legal Proceedings

     46  

Item 1A.

 

Risk Factors

     46  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     46  

Item 3.

 

Defaults Upon Senior Securities

     46  

Item 4.

 

Mine Safety Disclosures

     46  

Item 5.

 

Other Information

     46  

Item 6.

 

Exhibits

     47  

Signatures

     48  

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 48


Table of Contents

PART I – Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

Assets    September 30,
2018
    December 31,
2017
 

Cash and due from banks

   $ 68,945     $ 77,199  

Federal funds sold and interest-bearing deposits in other banks

     142,345       279,231  
  

 

 

   

 

 

 

Total cash and cash equivalents

     211,290       356,430  

Securities available-for-sale, amortized cost $366,385 and $395,947, respectively

     366,503       395,831  

Securities held-to-maturity, fair value $1,795,117 and $1,668,827, respectively

     1,875,752       1,701,233  

Federal Home Loan Bank of Boston, stock at cost

     22,743       21,779  

Equity securities, amortized cost $1,616 and $1,616, respectively

     1,616       1,663  

Loans, net:

    

Construction and land development

     12,434       18,931  

Commercial and industrial

     783,960       763,807  

Municipal

     94,532       106,599  

Commercial real estate

     730,265       732,491  

Residential real estate

     335,114       287,731  

Consumer

     20,677       18,458  

Home equity

     283,818       247,345  

Overdrafts

     539       582  
  

 

 

   

 

 

 

Total loans, net

     2,261,339       2,175,944  

Less: allowance for loan losses

     28,545       26,255  
  

 

 

   

 

 

 

Net loans

     2,232,794       2,149,689  

Bank premises and equipment

     24,023       23,527  

Accrued interest receivable

     12,878       11,179  

Goodwill

     2,714       2,714  

Other assets

     120,110       121,527  
  

 

 

   

 

 

 

Total assets

   $ 4,870,423     $ 4,785,572  
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Demand deposits

   $ 731,095     $ 736,020  

Savings and NOW deposits

     1,359,334       1,367,358  

Money market accounts

     1,294,092       1,188,228  

Time deposits

     579,886       625,361  
  

 

 

   

 

 

 

Total deposits

     3,964,407       3,916,967  

Securities sold under agreements to repurchase

     140,490       158,990  

Other borrowed funds

     372,606       347,778  

Subordinated debentures

     36,083       36,083  

Due to broker

     897        

Other liabilities

     69,063       65,457  
  

 

 

   

 

 

 

Total liabilities

     4,583,546       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 3,608,329 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 1,959,580 shares and 1,962,080 shares respectively

     1,960       1,962  

Additional paid-in capital

     12,292       12,292  

Retained earnings

     292,114       263,666  
  

 

 

   

 

 

 
     309,974       281,526  

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

     92       (62

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

     (2,779     (3,050

Pension liability, net of taxes

     (20,410     (18,117
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (23,097     (21,229
  

 

 

   

 

 

 

Total stockholders’ equity

     286,877       260,297  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,870,423     $ 4,785,572  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 48


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2018      2017      2018      2017  

Interest income

           

Loans

   $ 20,167      $ 16,658      $ 57,613      $ 48,668  

Securities held-to-maturity

     11,507        9,447        32,930        28,806  

Securities available-for-sale

     2,500        1,809        6,821        5,143  

Federal funds sold and interest-bearing deposits in other banks

     591        607        2,239        1,349  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     34,765        28,521        99,603        83,966  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Savings and NOW deposits

     2,972        1,727        7,778        4,454  

Money market accounts

     3,652        1,395        9,039        3,903  

Time deposits

     2,571        2,095        7,465        5,648  

Securities sold under agreements to repurchase

     288        129        657        352  

Other borrowed funds and subordinated debentures

     2,078        1,822        5,793        5,695  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     11,561        7,168        30,732        20,052  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     23,204        21,353        68,871        63,914  

Provision for loan losses

     —          450        900        1,340  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     23,204        20,903        67,971        62,574  

Other operating income

           

Service charges on deposit accounts

     2,137        2,089        6,268        6,179  

Lockbox fees

     892        735        2,304        2,367  

Net gains on sales of securities

     105        47        302        47  

Gains on sales of mortgage loans

     —          —          —          370  

Other income

     1,035        1,071        3,210        3,179  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     4,169        3,942        12,084        12,142  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Salaries and employee benefits

     10,570        9,933        32,331        31,097  

Occupancy

     1,481        1,427        4,579        4,663  

Equipment

     781        782        2,355        2,245  

FDIC assessments

     368        340        1,110        1,218  

Other

     4,148        3,723        12,133        11,904  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     17,348        16,205        52,508        51,127  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     10,025        8,640        27,547        23,589  

Provision for income taxes

     444        617        1,259        1,313  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 9,581      $ 8,023      $ 26,288      $ 22,276  
  

 

 

    

 

 

    

 

 

    

 

 

 

Share data:

           

Weighted average number of shares outstanding, basic

           

Class A

     3,608,329        3,605,829        3,608,129        3,603,429  

Class B

     1,959,580        1,962,080        1,959,780        1,964,480  

Weighted average number of shares outstanding, diluted

           

Class A

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

Class B

     1,959,580        1,962,080        1,959,780        1,964,480  

Basic earnings per share:

           

Class A

   $ 2.09      $ 1.75      $ 5.73      $ 4.86  

Class B

   $ 1.04      $ 0.87      $ 2.86      $ 2.43  

Diluted earnings per share

           

Class A

   $ 1.72      $ 1.44      $ 4.72      $ 4.00  

Class B

   $ 1.04      $ 0.87      $ 2.86      $ 2.43  

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 48


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended
September 30,
 
     2018     2017  

Net income

   $ 9,581     $ 8,023  

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     (88     122  

Less: reclassification adjustment for gains included in net income

     (76     (28
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (164     94  

Accretion of net unrealized losses transferred

     238       223  

Defined benefit pension plans:

    

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

     292       233  
  

 

 

   

 

 

 

Other comprehensive income

     366       550  
  

 

 

   

 

 

 

Comprehensive income

   $ 9,947     $ 8,573  
  

 

 

   

 

 

 

 

     Nine months ended
September 30,
 
     2018     2017  

Net income

   $ 26,288     $ 22,276  

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     412       455  

Less: reclassification adjustment for gains included in net income

     (217     (28
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     195       427  

Accretion of net unrealized losses transferred

     872       856  

Defined benefit pension plans:

    

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

     877       698  
  

 

 

   

 

 

 

Other comprehensive income

     1,944       1,981  
  

 

 

   

 

 

 

Comprehensive income

   $ 28,232     $ 24,257  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 48


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Nine Months Ended September 30, 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

     —          —         —          22,276       —         22,276  

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $282 in taxes and $47 in realized gains

     —          —         —          —         427       427  

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $1,022 in taxes

     —          —         —          —         856       856  

Pension liability adjustment, net of $465 in taxes

     —          —         —          —         698       698  

Conversion of Class B Common Stock to Class A Common Stock, 5,100 shares

     5        (5     —          —         —         —    

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

     —          —         —          (1,297     —         (1,297

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

     —          —         —          (353     —         (353
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

   $ 3,606      $ 1,962     $ 12,292      $ 264,191     $ (19,403   $ 262,648  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2017

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

Net income

     —          —         —          26,288       —         26,288  

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $39 in taxes, and $302 in realized gains

     —          —         —          —         195       195  

Accretion of unrealized losses on securities transferred to held-to-maturity, net of $314 in taxes

     —          —         —          —         872       872  

Pension liability adjustment, net of $342 in taxes

     —          —         —          —         877       877  

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, 2,500 shares

     2        (2     —          —         —         —    

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

     —          —         —          (1,299     —         (1,299

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

     —          —         —          (353     —         (353
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

   $ 3,608      $ 1,960     $ 12,292      $ 292,114     $ (23,097   $ 286,877  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 48


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

For the Nine Months Ended September 30, 2018 and 2017

 

     Nine months ended
September 30,
 
     2018     2017  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 26,288     $ 22,276  

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

    

Gain on sales of mortgage loans

     —         (370

Net gains on sales of securities

     (302     (47

Net loss on equity securities

     47       —    

Provision for loan losses

     900       1,340  

Deferred income taxes

     (1,270     (3,477

Net depreciation and amortization

     1,116       2,444  

Increase in accrued interest receivable

     (1,699     (281

Decrease (increase) in other assets

     1,542       (1,478

Increase in other liabilities

     4,825       4,076  
  

 

 

   

 

 

 

Net cash provided by operating activities

     31,447       24,483  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     —         3,183  

Proceeds from redemptions of Federal Home Loan Bank of Boston stock

     13,619       7,175  

Purchase of Federal Home Loan Bank of Boston stock

     (14,583     (8,070

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

     111,922       211,576  

Proceeds from sales of securities available-for-sale

     27,517       18,133  

Purchase of securities available-for-sale

     (108,871     (111,777

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

     187,009       231,953  

Purchase of securities held-to-maturity

     (358,824     (230,813

Proceeds from life insurance policies

     375       —    

Net increase in loans

     (83,967     (215,063

Proceeds from sales of portfolio loans

     —         26,701  

Capital expenditures

     (2,900     (2,881
  

 

 

   

 

 

 

Net cash used in investing activities

     (228,703     (69,883
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net (decrease) increase in time deposits

     (45,475     128,920  

Net (decrease) increase in demand, savings, money market and NOW deposits

     92,915       (176,456

Cash dividends

     (1,652     (1,650

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

     (18,500     46,568  

Net increase in other borrowed funds

     24,828       65,000  
  

 

 

   

 

 

 

Net cash provided by financing activities

     52,116       62,382  
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (145,140     16,982  

Cash and cash equivalents at beginning of period

     356,430       236,151  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 211,290     $ 253,133  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 30,680     $ 20,255  

Income taxes

     590       4,830  

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

     195       427  

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

     872       856  

Pension liability adjustment, net of taxes

     877       698  

Change in due to (from) to broker

     897       5,911  

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Nine Months Ended September 30, 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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Note 2. Securities Available-for-Sale

 

     September 30, 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

   $ 1,999      $ —        $ 13      $ 1,986      $ 1,999      $ —        $ 15      $ 1,984  

U.S. Government Sponsored Enterprises

     3,942        —          53        3,889        —          —          —          —    

SBA Backed Securities

     71,417        —          293        71,124        81,065        46        161        80,950  

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

     168,760        666        211        169,215        225,537        556        317        225,776  

Privately Issued Residential Mortgage-Backed Securities

     720        4        9        715        897        4        9        892  

Obligations Issued by States and Political Subdivisions

     115,947        62        —          116,009        82,849        —          249        82,600  

Other Debt Securities

     3,600        21        56        3,565        3,600        68        39        3,629  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 366,385      $ 753      $ 635      $ 366,503      $ 395,947      $ 674      $ 790      $ 395,831  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in SBA Backed Securities, 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 $210,362,000 and $216,353,000 at September 30, 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 $35,852,000 and $67,780,000 at September 30, 2018 and December 31, 2017, respectively. The Company realized gross gains of $302,000 from the proceeds of $27,517,000 from the sales of available-for-sale securities for the nine months ended September 30, 2018. The Company realized gross gains of $47,000 from the proceeds of $18,133,000 from the sales of available-for-sales securities for the nine months ended September 30, 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 September 30, 2018.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 115,302      $ 115,282  

After one but within five years

     60,862        60,682  

After five but within ten years

     156,425        156,782  

More than 10 years

     33,796        33,757  
  

 

 

    

 

 

 

Total

   $ 366,385      $ 366,503  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at September 30, 2018 was 4.9 years. Included in the weighted average remaining life calculation at September 30, 2018 were $3,942,000 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.

 

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As of September 30, 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.

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

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at September 30, 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 13 and 25 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 195 holdings at September 30, 2018.

 

     September 30, 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

   $ —        $ —        $ 1,986      $ 13      $ 1,986      $ 13  

U.S. Government Sponsored Enterprises

     3,889        53        —          —          3,889        53  

SBA Backed Securities

     25,567        42        45,557        251        71,124        293  

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

     31,311        60        26,032        151        57,343        211  

Privately Issued Residential Mortgage-Backed Securities

     —          —          524        9        524        9  

Obligations Issued by States and Political Subdivisions

     —          —          —          —          —          —    

Other Debt Securities

     —          —          744        56        744        56  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 60,767      $ 155      $ 74,843      $ 480      $ 135,610      $ 635  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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        54        40,911        107        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        1        461        38        861        39  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 3. Investment Securities Held-to-Maturity

 

     September 30, 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. Treasury

   $ 9,903      $ —        $ 3      $ 9,900      $ —        $ —        $ —        $ —    

U.S. Government Sponsored Enterprises

     167,968        —          2,152        165,816        104,653        341        472        104,522  

SBA Backed Securities

     53,576        —          2,759        50,817        57,235        20        1,271        55,984  

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

     1,644,305        139        75,860        1,568,584        1,539,345        2,261        33,285        1,508,321  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,875,752      $ 139      $ 80,774      $ 1,795,117      $ 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 $1,267,793,000 and $1,262,708,000 at September 30, 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 $515,979,000 and $382,120,000 at September 30, 2018 and December 31, 2017, respectively. There were no sales of held-to-maturity securities for the nine months ended September 30, 2018 and September 30, 2017 respectively.

At September 30, 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.

 

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The following table shows the maturity distribution of the Company’s securities held-to-maturity at September 30, 2018.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 39,091      $ 38,932  

After one but within five years

     1,210,561        1,163,813  

After five but within ten years

     622,996        589,508  

More than ten years

     3,104        2,864  
  

 

 

    

 

 

 

Total

   $ 1,875,752      $ 1,795,117  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at September 30, 2018 was 4.5 years. Included in the weighted average remaining life calculation at September 30, 2018 were $82,990,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

As of September 30, 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 the rise in 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 September 30, 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.

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio September 30, 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 176 and 232 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 446 holdings at September 30, 2018.

 

     September 30, 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

   $ 9,900      $ 3      $ —        $ —        $ 9,900      $ 3  

U.S. Government Sponsored Enterprises

     135,760        1,171        29,517        981        165,277        2,152  

SBA Backed Securities

     2,487        75        48,330        2,684        50,817        2,759  

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

     557,866        13,733        997,268        62,127        1,555,134        75,860  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 706,013      $ 14,982      $ 1,075,115      $ 65,792      $ 1,781,128      $ 80,774  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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
September 30,
     Nine months ended
September 30,
 
     2018      2017      2018      2017  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 27,144      $ 25,289      $ 26,255      $ 24,406  

Loans charged off

     (89      (95      (247      (292

Recoveries on loans previously charged-off

     1,490        54        1,637        244  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries (charge-offs)

     1,401        (41      1,390        (48

Provision charged to expense

     —          450        900        1,340  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 28,545      $ 25,698      $ 28,545      $ 25,698  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Further information pertaining to the allowance for loan losses for the three months ending September 30, 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 June 30, 2018

  $ 633     $ 10,384     $ 1,704     $ 10,209     $ 2,493     $ 336     $ 1,078     $ 307     $ 27,144  

Charge-offs

    —         (11     —         —         —         (78     —         —         (89

Recoveries

    1,432       16       —         —         —         42       —         —         1,490  

Provision

    (1,155     895       84       415       (182     32       (28     (61     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2018

  $ 910     $ 11,284     $ 1,788     $ 10,624     $ 2,311     $ 332     $ 1,050     $ 246     $ 28,545  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ —       $ 93     $ —       $ 95     $ 350     $ —       $ —       $ —       $ 538  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 910     $ 11,191     $ 1,788     $ 10,529     $ 1,961     $ 332     $ 1,050     $ 246     $ 28,007  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 12,434     $ 783,960     $ 94,532     $ 730,265     $ 335,114     $ 21,216     $ 283,818     $ —       $ 2,261,339  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 660     $ —       $ 2,680     $ 2,675     $ —       $ —       $ —       $ 6,015  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 12,434     $ 783,300     $ 94,532     $ 727,585     $ 332,439     $ 21,216     $ 283,818     $ —       $ 2,255,324  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —         (16     —         —         —         (231     —         —         (247

Recoveries

    1,432       49       —         —         —         156       —         —         1,637  

Provision

    (2,167     1,600       68       896       438       34       61       (30     900  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2018

  $ 910     $ 11,284     $ 1,788     $ 10,624     $ 2,311     $ 332     $ 1,050     $ 246     $ 28,545  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ —       $ 93     $ —       $ 95     $ 350     $ —       $ —       $ —       $ 538  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 910     $ 11,191     $ 1,788     $ 10,529     $ 1,961     $ 332     $ 1,050     $ 246     $ 28,007  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 12,434     $ 783,960     $ 94,532     $ 730,265     $ 335,114     $ 21,216     $ 283,818     $ —       $ 2,261,339  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 660     $ —       $ 2,680     $ 2,675     $ —       $ —       $ —       $ 6,015  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 12,434     $ 783,300     $ 94,532     $ 727,585     $ 332,439     $ 21,216     $ 283,818     $ —       $ 2,255,324  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ending September 30, 2018, the Company’s provision was primarily attributable to an increase in residential real estate balances and increased qualitative allocations for commercial and industrial and commercial real estate loans, offset, somewhat by the recovery of a construction loan previously charged-off and a decrease in construction balances. During the three months ending September 30, 2018, the Company did not require a provision mainly as a result of recoveries of a construction loan previously charged-off and a decrease in construction loan balances offset by increased qualitative allocations for commercial and industrial and commercial real estate loans. The Company monitors the outlook for the industries in which our borrowers operate. Healthcare and higher education are two of the primary industries. In particular the Company utilizes outlooks and forecasts from various sources. Overall a general weakening in the outlook was noted resulting in a general increase in the general economic factors. The Company also monitors the volatility of the losses within the historical data.

 

Page 15 of 48


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Further information pertaining to the allowance for loan losses for the three months ending September 30, 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 June 30, 2017

  $ 1,137     $ 7,563     $ 1,859     $ 11,028     $ 2,118     $ 195     $ 1,146     $ 243     $ 25,289  

Charge-offs

    —         (20     —         —         —         (75     —         —         (95

Recoveries

    —         9       —         —         —         45       —         —         54  

Provision

    323       1,297       265       (1,491     (45     220       (103     (16     450  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2017

  $ 1,460     $ 8,849     $ 2,124     $ 9,537     $ 2,073     $ 385     $ 1,043     $ 227     $ 25,698  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ —       $ 8     $ —       $ 111     $ 67     $ —       $ —       $ —       $ 186  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,460     $ 8,841     $ 2,124     $ 9,426     $ 2,006     $ 385     $ 1,043     $ 227     $ 25,512  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 16,779     $ 702,646     $ 128,412     $ 735,844     $ 272,588     $ 19,284     $ 237,094     $ —       $ 2,112,647  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 366     $ —       $ 2,583     $ 4,318     $ —       $ —       $ —       $ 7,267  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 16,779     $ 702,280     $ 128,412     $ 733,261     $ 268,270     $ 19,284     $ 237,094     $ —       $ 2,105,380  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    —         (49     —         —         —         (243     —         —         (292

Recoveries

    —         63       —         —         2       179       —         —         244  

Provision

    448       1,863       512       (1,598     373       (133     (59     (66     1,340  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2017

  $ 1,460     $ 8,849     $ 2,124     $ 9,537     $ 2,073     $ 385     $ 1,043     $ 227     $ 25,698  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ —       $ 8     $ —       $ 111     $ 67     $ —       $ —       $ —       $ 186  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,460     $ 8,841     $ 2,124     $ 9,426     $ 2,006     $ 385     $ 1,043     $ 227     $ 25,512  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 16,779     $ 702,646     $ 128,412     $ 735,844     $ 272,588     $ 19,284     $ 237,094     $ —       $ 2,112,647  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 366     $ —       $ 2,583     $ 4,318     $ —       $ —       $ —       $ 7,267  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 16,779     $ 702,280     $ 128,412     $ 733,261     $ 268,270     $ 19,284     $ 237,094     $ —       $ 2,105,380  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the nine months ending September 30, 2017, the Company’s provision was primarily attributable to an increase in commercial and industrial, construction and land development, and residential real estate balances offset, somewhat, by changes in historical loss rates and qualitative factors. During the three months ending September 30, 2017 the Company’s provision was primarily attributable to an increase in commercial and industrial loan balances offset, somewhat, by changes in historical loss rates and qualitative factors.

 

Page 16 of 48


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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 September 30, 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 September 30, 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 September 30, 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 September 30, 2018.

 

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

1-3 (Pass)

   $ 12,434      $ 779,165      $ 94,532      $ 703,039  

4 (Monitor)

     —          4,135        —          24,546  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     —          660        —          2,680  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,434      $ 783,960      $ 94,532      $ 730,265  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 2018 and are included within the total loan portfolio.

 

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

Aaa – Aa3

   $ 492,117      $ 57,958      $ 43,106      $ 593,181  

A1 – A3

     194,465        995        110,191        305,651  

Baa1 – Baa3

     —          26,970        119,409        146,379  

Ba2

     —          6,810        —          6,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 686,582      $ 92,733      $ 272,706      $ 1,052,021  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30, 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

   $ —        $ —        $ —        $ —        $ 12,434      $ 12,434  

Commercial and industrial

     322        346        —          668        783,292        783,960  

Municipal

     —          —          —          —          94,532        94,532  

Commercial real estate

     980        196        —          1,176        729,089        730,265  

Residential real estate

     1,668        2,678        372        4,718        330,396        335,114  

Consumer and overdrafts

     15        10        —          25        21,191        21,216  

Home equity

     752        499        99        1,350        282,468        283,818  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,737      $ 3,729      $ 471      $ 7,937      $ 2,253,402      $ 2,261,339  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 18 of 48


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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  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 19 of 48


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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.

The following is information pertaining to impaired loans for September 30, 2018:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying
Value for
3 Months
Ending
9/30/18
     Interest
Income
Recognized
for
3 Months
Ending
9/30/18
     Average
Carrying
Value for
9 Months
Ending
9/30/18
     Interest
Income
Recognized
for
9 Months
Ending
9/30/18
 
With no required reserve recorded:    (in thousands)  

Construction and land development

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

Commercial and industrial

     84        282        —          56        —          47        —    

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     196        219        —          280        —          267        —    

Residential real estate

     —          —          —          —          —          —          —    

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 280      $ 501      $ —        $ 336      $ —        $ 314      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

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

Commercial and industrial

     576        593        93        589        5        490        14  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     2,484        2,597        95        2,262        24        2,278        71  

Residential real estate

     2,675        2,675        350        2,675        —          3,136        80  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,735      $ 5,865      $ 538      $ 5,526      $ 29      $ 5,904      $ 165  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

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

Commercial and industrial

     660        875        93        645        5        537        14  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     2,680        2,816        95        2,542        24        2,545        71  

Residential real estate

     2,675        2,675        350        2,675        —          3,136        80  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,015      $ 6,366      $ 538      $ 5,862      $ 29      $ 6,218      $ 165  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 48


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The following is information pertaining to impaired loans for September 30, 2017:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying
Value for
3 Months
Ending
9/30/17
     Interest
Income
Recognized
for
3 Months
Ending
9/30/17
     Average
Carrying
Value for
9 Months
Ending
9/30/17
     Interest
Income
Recognized
for
9 Months
Ending
9/30/17
 
With no required reserve recorded:    (in thousands)  

Construction and land development

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

Commercial and industrial

     54        261        —          60        —          49        —    

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     91        109        —          45        —          313        —    

Residential real estate

     72        163        —          75        2        81        5  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 217      $ 533      $ —        $ 180      $ 2      $ 443      $ 5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ —        $ —        $ —        $ —        $ —        $ 56      $ —    

Commercial and industrial

     312        328        8        319        4        328        12  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     2,492        2,599        111        2,547        22        2,542        69  

Residential real estate

     4,246        4,247        67        4,257        19        1,767        36  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,050      $ 7,174      $ 186      $ 7,123      $ 45      $ 4,693      $ 117  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

                    

Construction and land development

   $ —        $ —        $ —        $ —        $ —        $ 56      $ —    

Commercial and industrial

     366        589        8        379        4        377        12  

Municipal

     —          —          —          —          —          —          —    

Commercial real estate

     2,583        2,708        111        2,592        22        2,855        69  

Residential real estate

     4,318        4,410        67        4,332        21        1,848        41  

Consumer

     —          —          —          —          —          —          —    

Home equity

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,267      $ 7,707      $ 186      $ 7,303      $ 47      $ 5,136      $ 122  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 not accruing interest and had a specific reserve of $350,000. 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 one troubled debt restructuring, for $2,675,000, which subsequently defaulted during the first nine months of 2018.

There was no troubled debt restructuring that occurred during the nine month period ended September 30, 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 nine months of 2017.

 

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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
September 30, 2018
    Three
Months Ended
September 30, 2017
   

Affected Line Item in the

Statement where Net Income is

Presented

(in thousands)

Unrealized gains and losses on available-for-sale securities

   $ 105     $ 47     Net gains on sales of investments

Tax (expense) or benefit

     (29     (19   Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ 76     $ 28     Net income
  

 

 

   

 

 

   

Accretion of unrealized losses transferred

   $ (323   $ (554   Interest on securities held-to-maturity

Tax (expense) or benefit

     85       331     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (238   $ (223   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

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

Actuarial gains (losses)

     (402 )(b)      (385 )(b)    Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (406     (388   Income before taxes
  

 

 

   

 

 

   

Tax (expense) or benefit

     114       155     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (292   $ (233   Net income
  

 

 

   

 

 

   

Details about Accumulated Other
Comprehensive Income Components

   Nine
Months Ended
September 30, 2018
    Nine
Months Ended
September 30, 2017
   

Affected Line Item in the

Statement where Net Income is

Presented

(in thousands)

Unrealized gains and losses on available-for-sale securities

   $ 302     $ 47     Net gains on sales of investments

Tax (expense) or benefit

     (85     (19   Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ 217     $ 28     Net income
  

 

 

   

 

 

   

Accretion of unrealized losses transferred

   $ (1,186   $ (1,878   Interest on securities held-to-maturity

Tax (expense) or benefit

     314       1,022     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (872   $ (856   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

   $ (12 )(b)    $ (8 )(b)    Salaries and employee benefits

Actuarial gains (losses)

     (1,207 )(b)      (1,155 )(b)    Salaries and employee benefits
  

 

 

   

 

 

   

Total before tax

     (1,219     (1,163   Income before taxes
  

 

 

   

 

 

   

Tax (expense) or benefit

     342       465     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (877   $ (698   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 September 30, 2018 and 2017.

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in thousands except share and per share data)    2018      2017      2018      2017  

Basic EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 7,535      $ 6,307      $ 20,674      $ 17,505  

Net income, Class B

     2,046        1,716        5,614        4,771  

Denominator:

           

Weighted average shares outstanding, Class A

     3,608,329        3,605,829        3,608,129        3,603,429  

Weighted average shares outstanding, Class B

     1,959,580        1,962,080        1,959,780        1,964,480  

Basic EPS, Class A

   $ 2.09      $ 1.75      $ 5.73      $ 4.86  

Basic EPS, Class B

     1.04        0.87        2.86        2.43  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS Computation:

           

Numerator:

           

Net income, Class A

   $ 7,535      $ 6,307      $ 20,674      $ 17,505  

Net income, Class B

     2,046        1,716        5,614        4,771  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     9,581        8,023        26,288        22,276  

Denominator:

           

Weighted average shares outstanding, basic, Class A

     3,608,329        3,605,829        3,608,129        3,603,429  

Weighted average shares outstanding, Class B

     1,959,580        1,962,080        1,959,780        1,964,480  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

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

Weighted average shares outstanding, Class B

     1,959,580        1,962,080        1,959,780        1,964,480  

Diluted EPS, Class A

   $ 1.72      $ 1.44      $ 4.72      $ 4.00  

Diluted EPS, Class B

     1.04        0.87        2.86        2.43  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 September 30,

 

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

Service cost

   $ 353      $ 310      $ 277      $ 395  

Interest

     371        362        346        345  

Expected return on plan assets

     (954      (746      —          —    

Recognized prior service cost (benefit)

     (25      (26      29        29  

Recognized net actuarial losses

     226        226        176        159  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ (29    $ 126      $ 828      $ 928  
  

 

 

    

 

 

    

 

 

    

 

 

 

Components of Net Periodic Benefit Cost for the Six Months Ended June 30,

 

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

Service cost

   $ 1,059      $ 930      $ 831      $ 1,184  

Interest

     1,111        1,087        1,040        1,035  

Expected return on plan assets

     (2,863      (2,238      —          —    

Recognized prior service cost (benefit)

     (75      (78      87        87  

Recognized net actuarial losses

     680        678        527        477  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ (88    $ 379      $ 2,485      $ 2,783  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $508,000 and $1,047,000 from salaries and employee benefits to other expenses for the nine months ended September 30, 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 September 30, 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

   $ 1,986      $ —        $ 1,986      $ —    

U.S. Government Sponsored Enterprises

     3,889        —          3,889        —    

SBA Backed Securities

     71,124        —          71,124        —    

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

     169,215        —          169,215        —    

Privately Issued Residential Mortgage-Backed Securities

     715        —          715        —    

Obligations Issued by States and Political Subdivisions

     116,009        —          4,775        111,234  

Other Debt Securities

     3,565        —          3,565        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 366,503      $ —        $ 255,269      $ 111,234  
  

 

 

    

 

 

    

 

 

    

 

 

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

Impaired Loans

   $ 3,107      $ —        $ —        $ 3,107  

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 (credits) provisions relate to impaired loans recognized for the three and nine month periods ended September 30, 2018 amounted to $(187,000) and $427,000, respectively.

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)

   $ 111,234     

Discounted cash flow

  

Discount rate

   2.0%-4.5% (3)

Impaired Loans

   $ 3,107     

Appraisal of collateral (1)

  

Appraisal adjustments (2)

  

0%-30% discount

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.

(3)

Weighted averages.

(4)

Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.

 

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The changes in Level 3 securities for the nine month period ended September 30, 2018 are shown in the table below:

 

     Auction Rate
Securities
     Obligations
Issued by States

& Political
Subdivisions
     Total  
     (in thousands)  

Balance at December 31, 2017

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

Purchases

     —          105,837        105,837  

Maturities and calls

     —          (72,640      (72,640

Transfer

     (4,459      —          (4,459

Amortization

     —          (104      (104

Changes in fair value

     —          —          —    

Balance at September 30, 2018

   $ —        $ 111,234      $ 111,234  
  

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $111,234,000 at September 30, 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 nine months ended September 30, 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 nine month period ended September 30, 2018.

The changes in Level 3 securities for the nine month period ended September 30, 2017, are shown in the table below:

 

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

Balance at December 31, 2016

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

Purchases

     —          61,393        61,393  

Maturities and calls

     —          (146,869      (146,869

Amortization

     —          (155      (155

Changes in fair value

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2017

   $ 4,298      $ 74,947      $ 79,245  
  

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $79,655,000 at September 30, 2017 with an unrealized loss of $410,000. The securities in this category are generally 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

 

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(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.

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 September 30, 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.

 

September 30, 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

   $ 1,875,752      $ 1,795,117      $ —        $ 1,795,117      $ —    

Loans (1)

     2,232,794        2,188,606        —          —          2,188,606  

Financial liabilities:

              

Time deposits

     579,886        577,531        —          577,531        —    

Other borrowed funds

     372,606        371,531        —          371,531        —    

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.

 

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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 March 2018 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-05: Income Taxes (Topic 740) Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 — Income Tax Accounting Implications of the Tax Cuts and Jobs Act. This ASU is effective for fiscal years beginning after December 22, 2017. The effect of this update did not have a material impact on the Company’s consolidated financial position.

In February 2018, the FASB issued 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.

In February 2018, the FASB issued 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.

 

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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.

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 August 2018, FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force) The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).This ASU is effective for annual reporting periods beginning after December 15, 2019. The Company has not determined the impact, if any, as of September 30, 2018.

In August 2018, FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit plans. The amendments in this ASU remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. This ASU is effective for annual reporting periods beginning after December 15, 2020. The Company has not determined the impact, if any, as of September 30, 2018.

In August 2018, FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. This ASU is effective for annual reporting periods beginning after December 15, 2019. The Company has not determined the impact, if any, as of September 30, 2018.

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. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization of Purchased Callable Debt. The FASB is issuing this ASU to amend the amortization period for certain purchased

 

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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. The effect of this update is not expected to have a material impact on the Company’s consolidated financial position.

In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill 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 a software solution and began to capture information needed to implement this update. The Company has not determined the impact, if any, as of September 30, 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. During the second quarter of 2018, the Company continued to analyze the potential impact of this ASU by identifying and beginning to quantify the financial impact of real estate leases. The Company also began the process during the quarter to review various contracts to determine if they contain embedded leases. The Company began quantifying the financial impact of potential embedded leases during the third quarter of 2018. The Company has not determined the impact, if any, as of September 30, 2018.

In July 2018, ASU 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”) was issued to provide more detailed guidance and additional clarification for implementing ASU 2016-02. Also in July 2018, ASU 2018-11, “Targeted Improvements” (“ASU 2018-11”) was issued and allows for an optional transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be retroactively applied to the earliest reporting period presented in the consolidated financial statements.” The Company intends to use this optional transition method for the adoption of Topic 842.

Securities and Exchange Commission (SEC) ruling:

In August 2018, the SEC issued a final rule that amends certain of the Commission’s disclosure requirements “that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, or changes in the information environment.” The financial reporting implications of the final rule’s amendments may vary by company, but the changes are generally expected to reduce or eliminate some of an SEC registrant’s disclosure requirements. In limited circumstances, however, the amendments may expand those requirements, including those related to interim disclosures about changes in stockholders’ equity. Under the requirements, registrants must now analyze changes in stockholders’ equity, in the form of a reconciliation, for “the current and comparative year-to-date periods, with subtotals for each interim period.” The Company will therefore include a reconciliation for the current quarter and year-to-date interim periods as well as the comparative periods of the prior years (i.e., a reconciliation covering each period for which an income statement is presented). The final rule is effective for all filings submitted on or after November 5, 2018. The final rule excludes the Company’s third quarter 2018 10-Q.

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.

 

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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 month and nine months ended September 30, 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.

 

  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.

 

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  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.

 

     Nine
Months
Ended
9/30/2018
     Revenue from
Contracts in
Scope of
Topic 606
     Nine
Months
Ended
9/30/2017
     Revenue from
Contracts in
Scope of
Topic 606
 
     (dollars in thousands)  

Total net interest income

   $ 68,871      $ —        $ 63,914      $ —    

Noninterest income:

           

Service charges on deposit accounts

     6,268        6,268        6,179        6,179  

Lockbox fees

     2,304        2,304        2,367        2,367  

Net gains on sales of securities

     302        —          47        —    

Gains on sales of mortgage loans

     —          —          370        —    

Other income

     3,210        2,215        3,179        2,048  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     12,084        10,787        12,142        10,594  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 80,955      $ 10,787      $ 76,056      $ 10,594  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three
Months
Ended
9/30/2018
     Revenue from
Contracts in
Scope of
Topic 606
     Three
Months
Ended
9/30/2017
     Revenue from
Contracts in
Scope of
Topic 606
 
     (dollars in thousands)  

Total net interest income

   $ 23,204      $ —        $ 21,353      $ —    

Noninterest income:

           

Service charges on deposit accounts

     2,137        2,137        2,089        2,089  

Lockbox fees

     892        892        735        735  

Net gains on sales of securities

     105        —          47        —    

Gains on sales of mortgage loans

     —          —          —          —    

Other income

     1,035        751        1,071        712  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     4,169        3,780        3,942        3,536  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 27,373      $ 3,780      $ 25,295      $ 3,536  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information about receivables with customers.

 

(dollars in thousands)    September 30, 2018      December 31, 2017  

Receivables, which are included in “Other assets”

   $ 1,095      $ 1,009  

 

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

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At September 30, 2018, the Company had total assets of $4.9 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher educational institutions primarily throughout Massachusetts, New Hampshire, Rhode Island, Connecticut and New York.

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

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

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

Net income for the nine months ended September 30, 2018, was $26,288,000 or $4.72 per Class A share diluted, an increase of 18.0% compared to net income of $22,276,000, or $4.00 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
September 30,
 
     2018      2017  

Basic EPS – Class A common

   $ 2.09      $ 1.75  

Basic EPS – Class B common

   $ 1.04      $ 0.87  

Diluted EPS – Class A common

   $ 1.72      $ 1.44  

Diluted EPS – Class B common

   $ 1.04      $ 0.87  
     Nine Months
Ended
September 30,
 
     2018      2017  

Basic EPS – Class A common

   $ 5.73      $ 4.86  

Basic EPS – Class B common

   $ 2.86      $ 2.43  

Diluted EPS – Class A common

   $ 4.72      $ 4.00  

Diluted EPS – Class B common

   $ 2.86      $ 2.43  

Net interest income totaled $68,871,000 for the nine months ended September 30, 2018 compared to $63,914,000 for the same period in 2017. The 7.8% increase in net interest income for the period is primarily due to an increase in average earning assets. The net interest margin decreased from 2.24% on a fully taxable equivalent basis in 2017 to 2.19% for the same period in 2018. This was primarily the result of a decrease in the federal corporate tax rate from 34% to 21% as well as the higher prepayment penalties collected during the second quarter of 2017. The decrease in the tax rate results in a lower tax equivalent yield on tax-exempt assets.

 

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The average balances of earning assets increased by 3.8% combined with an average yield increase of 0.24%, resulting in an increase in interest income of $15,637,000. The average balance of interest bearing liabilities increased 2.7% combined with an average yield increase of 0.36%, resulting in an increase in interest expense of $10,680,000.

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

 

LOGO

The net interest margin decreased during the second, third, and fourth quarters of 2016 primarily as a result of a decrease in rates on earning assets. The margin increased during 2017 primarily as a result of an increase in rates on earning assets. This increase was primarily the result of the yield on floating rate assets increasing as a result of recent increases in short term interest rates as well as an increase in prepayment penalties collected during the second quarter of 2017. Prepayment penalties collected amounted to $825,000 and contributed approximately seven basis points to the net interest margin for the second quarter of 2017. During 2017, the Company did not see a corresponding increase in short term rates on interest bearing liabilities. The margin decreased for the first, second, and third quarters 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 decreased by $440,000 from $1,340,000 for the nine months ended September 30, 2017 to $900,000 for the same period in 2018, primarily as a result of net recoveries of $1,390,000 offset by changes in qualitative factors. Refer to the allowance for loan loss section of the management discussion and analysis for additional discussion. Non-performing assets totaled $3,729,000 at September 30, 2018, compared to $1,684,000 at December 31, 2017.

For first nine months of 2018, the Company’s effective income tax rate was 4.6% compared to 5.6% for the same period in 2017. This was primarily the result of a decrease in the federal tax rate from 34% to 21% as a result of the Tax Cuts and Jobs Act, offset somewhat by an increase in taxable income.

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 “D-F Act”) became law. The D-F 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 D-F 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 D-F 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 D-F 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.

 

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In addition, the D-F 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. 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.

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act, or the EGRRCPA, became law. This is the most significant financial institution legislation since the D-F Act. The EGRRCPA changes certain of the regulatory requirements of the D-F Act and includes provisions intended to relieve the regulatory burden on “community banks.” Among other things for qualifying community banks with less than $10 billion in total consolidated assets the EGRRCPA contains a safe harbor from the D-F Act “ability to repay” mortgage requirements, an exemption from the Volcker Rule, may permit filing of simplified Call Reports, and potentially will result in some alleviation of the D-F Act and U.S. Basel III capital mandates. The EGRRCPA requires the federal banking agencies to develop a community bank leverage ratio (defined as the ratio of tangible equity capital to average total consolidated assets) for banks and holding companies with total consolidated assets of less than $10 billion and an appropriate risk profile. The required regulations must specify a minimum community bank leverage ratio of not less than 8% and not more than 10%. Qualifying banks that exceed the minimum community bank leverage ratio will be deemed to be in compliance with all other capital and leverage requirements including the capital ratio requirements that are required to be considered well capitalized under Section 38 of Federal Deposit Insurance Act.

Financial Condition

Loans

On September 30, 2018, total loans outstanding were $2,261,339,000 up by $85,395,000 from the total on December 31, 2017. At September 30, 2018, commercial real estate loans accounted for 32.3%, commercial and industrial accounted for 34.7%, and residential real estate loans, including home equity loans, accounted for 27.4% of total loans.

Commercial real estate loans decreased slightly to $730,265,000 from $732,491,000 on December 31, 2017 primarily as a result of loan repayments. Commercial and industrial loans increased to $783,960,000 at September 30, 2018 from $763,807,000 at December 31, 2017, primarily as a result of loan originations. Construction loans decreased to $12,434,000 at September 30, 2018 from $18,931,000 on December 31, 2017, primarily as a result of loan repayments and refinancing of existing loans to other loan categories. Residential real estate loans increased to $335,114,000 on September 30, 2018 from $287,731,000 on December 31, 2017, primarily as a result of new loan originations. Home equity loans increased to $283,818,000 on September 30, 2018 from $247,345,000 at December 31, 2017, primarily as a result of a home equity loan promotion. Municipal loans decreased to $94,532,000 from $106,599,000, primarily as a result of payoffs to existing loans.

 

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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 September 30, 2018 was $28,545,000 as compared to $26,255,000 at December 31, 2017. The level of the allowance for loan losses to total loans was 1.26% at September 30, 2018 and 1.21% at December 31, 2017. The coverage ratio increased by 0.05% mainly as a result of changes in qualitative factors related to general economic factors pertaining to certain industries. The Company monitors the outlook for the industries in which our borrowers operate. Healthcare and higher education are two of the primary industries. In particular the Company utilizes outlooks and forecasts from various sources. Overall a general weakening in the outlook was noted resulting in a general increase in the general economic factors. 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 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 September 30, 2018.

 

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

Aaa – Aa3

   $ 492,117      $ 57,958      $ 43,106      $ 593,181  

A1 – A3

     194,465        995        110,191        305,651  

Baa1 – Baa3

     —          26,970        119,409        146,379  

Ba2

     —          6,810        —          6,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 686,582      $ 92,733      $ 272,706      $ 1,052,021  
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2018      2017      2018      2017  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 27,144      $ 25,289      $ 26,255      $ 24,406  

Loans charged off

     (89      (95      (247      (292

Recoveries on loans previously charged-off

     1,490        54        1,637        244  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net recoveries (charge-offs)

     1,401        (41      1,390        (48

Provision charged to expense

     —          450        900        1,340  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 28,545      $ 25,698      $ 28,545      $ 25,698  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Nonperforming Assets

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

 

     September 30
2018
    December 31,
2017
 
     (dollars in thousands)  

Nonaccruing loans

   $ 3,729     $ 1,684  

Total nonperforming assets

   $ 3,729     $ 1,684  

Loans past due 90 days or more and still accruing

   $ 471     $ —    

Nonaccruing loans as a percentage of total loans

     0.16     0.08

Nonperforming assets as a percentage of total assets

     0.08     0.04

Accruing troubled debt restructures

   $ 2,598     $ 2,749  

The increase in nonperforming assets and loans 90 days past due or more and still accruing is primarily the result of residential loans.

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 $366,503,000 at September 30, 2018, a decrease of 7.4% from December 31, 2017. The portfolio decreased mainly as a result of calls, maturities, sales and scheduled principal payments of securities available-for-sale totaling $139,439,000 for the nine months ended September 30, 2018. They were offset, somewhat, by purchases of $108,871,000. 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 4.9 years.

At September 30, 2018, 69.7% 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 $111,234,000 or 30.4% of securities available-for-sale are classified as Level 3. These securities are generally municipal securities with no observable fair value with an average life of one year or less. 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.

 

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During the first nine months of 2018, net unrealized gains on the securities available-for-sale increased to $118,000 from a net unrealized loss of $116,000 at December 31, 2017. This was primarily the result of an increase in the value of floating rate securities and the increase in the value of one obligation which was a states and political subdivisions security.

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

 

     September 30,
2018
     December 31,
2017
 
     (in thousands)  

U.S. Treasury

   $ 1,986      $ 1,984  

U.S. Government Sponsored Enterprises

     3,889        —    

Small Business Administration

     71,124        80,950  

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

     169,215        225,776  

Privately Issued Residential Mortgage-backed Securities

     715        892  

Obligations issued by States and Political Subdivisions

     116,009        82,600  

Other Debt Securities

     3,565        3,629  
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 366,503      $ 395,831  
  

 

 

    

 

 

 

The Company realized gross gains of $302,000 from the proceeds of $27,517,000 from the sales of available-for-sale securities for the nine months ended September 30, 2018. The Company realized gross gains of $47,000 from the proceeds of $18,133,000 from the sales of available-for-sales securities for the nine months ended September 30, 2017.

Securities Held-to-Maturity (at Amortized Cost)