Company Quick10K Filing
Quick10K
Century Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$93.87 6 $523
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-11 Officers
8-K 2019-04-17 Shareholder Vote
8-K 2019-04-09 Earnings, Exhibits
8-K 2019-04-06 Control
8-K 2019-01-15 Earnings, Exhibits
8-K 2018-10-09 Earnings, Exhibits
8-K 2018-07-10 Earnings, Exhibits
8-K 2018-04-25 Shareholder Vote
8-K 2018-04-10 Earnings, Exhibits
8-K 2018-01-16 Earnings, Exhibits
GE General Electric 87,560
BMTC Bryn Mawr Bank 776
AKS AK Steel Holding 775
DCOM Dime Community Bancshares 712
CDE Coeur Mining 681
LL Lumber Liquidators 358
AAC AAC Holdings 48
AMNL Applied Minerals 0
VRDR Verde Resources 0
VPRB VPR Brands 0
CNBKA 2019-03-31
Part I - Item 1
Note 1. Basis of Financial Statement Presentation
Note 2. Recent Accounting Developments
Note 3. Securities Available-For-Sale
Note 4. Investment Securities Held-To-Maturity
Note 5. Allowance for Loan Losses
Note 6. Reclassifications Out of Accumulated Other Comprehensive Income (A)
Note 7. Earnings per Share ("Eps")
Note 8. Employee Benefits
Note 9. Fair Value Measurements
Note 10. Fair Values of Financial Instruments
Note 11. Revenue From Contracts with Customers
Note 12. Leases
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds -
Item 3 Defaults Upon Senior Securities - None
Item 4 Mine Safety Disclosures - Not Applicable
Item 5 Other Information - None
Item 6 Exhibits
EX-31.1 d721291dex311.htm
EX-31.2 d721291dex312.htm
EX-32.1 d721291dex321.htm
EX-32.2 d721291dex322.htm

Century Bancorp Earnings 2019-03-31

CNBKA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 d721291d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2019.

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

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

 

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

As of April 30, 2019, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,610,329 Shares  

Class B Common Stock, $1.00 par value

     1,957,580 Shares  

 

 

 


Table of Contents

Century Bancorp, Inc.

Index

 

          Page
Number
 

Part I

   Financial Information      3  
   Forward Looking Statements   

Item 1.

   Financial Statements (unaudited)   
   Consolidated Balance Sheets:
March 31, 2019 and December 31, 2018
     4  
   Consolidated Statements of Income:
Three Months Ended March 31, 2019 and 2018
     5  
   Consolidated Statements of Comprehensive Income:
Three Months Ended March 31, 2019 and 2018
     6  
   Consolidated Statements of Changes in Stockholders’ Equity:
Three Months Ended March 31, 2019 and 2018
     7  
   Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2019 and 2018
     8  
   Notes to Consolidated Financial Statements      9 - 32  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      33 - 42  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      42  

Item 4.

   Controls and Procedures      42  

Part II.

   Other Information   

Item 1.

   Legal Proceedings      43  

Item 1A.

   Risk Factors      43  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      43  

Item 3.

   Defaults Upon Senior Securities      43  

Item 4.

   Mine Safety Disclosures      43  

Item 5.

   Other Information      43  

Item 6.

   Exhibits      43  

Signatures

        44  

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 44


Table of Contents

PART I – Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     March 31,
2019
    December 31,
2018
 

Assets

    

Cash and due from banks

   $ 77,121     $ 89,540  

Federal funds sold and interest-bearing deposits in other banks

     301,240       252,963  
  

 

 

   

 

 

 

Total cash and cash equivalents

     378,361       342,503  

Securities available-for-sale, amortized cost $345,709 and $336,751, respectively

     345,089       336,759  

Securities held-to-maturity, fair value $2,074,443 and $1,991,421, respectively

     2,110,555       2,046,647  

Federal Home Loan Bank of Boston, stock at cost

     14,244       17,974  

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

     1,649       1,596  

Loans, net:

    

Construction and land development

     13,305       13,628  

Commercial and industrial

     767,436       761,625  

Municipal

     105,288       97,290  

Commercial real estate

     746,703       750,362  

Residential real estate

     349,966       348,250  

Consumer

     21,562       21,359  

Home equity

     305,839       292,340  

Overdrafts

     561       724  
  

 

 

   

 

 

 

Total loans, net

     2,310,660       2,285,578  

Less: allowance for loan losses

     28,848       28,543  
  

 

 

   

 

 

 

Net loans

     2,281,812       2,257,035  

Bank premises and equipment

     24,494       23,921  

Accrued interest receivable

     14,464       14,406  

Goodwill

     2,714       2,714  

Other assets

     132,684       120,380  
  

 

 

   

 

 

 

Total assets

   $ 5,306,066     $ 5,163,935  
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Demand deposits

   $ 764,545     $ 813,478  

Savings and NOW deposits

     1,783,987       1,707,019  

Money market accounts

     1,359,016       1,325,888  

Time deposits

     542,079       560,579  
  

 

 

   

 

 

 

Total deposits

     4,449,627       4,406,964  

Securities sold under agreements to repurchase

     164,500       154,240  

Other borrowed funds

     257,148       202,378  

Subordinated debentures

     36,083       36,083  

Due to broker

     11,740       —    

Other liabilities

     77,644       63,831  
  

 

 

   

 

 

 

Total liabilities

     4,996,742       4,863,496  

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 3,610,329 shares and
3,608,329 shares, respectively

     3,610       3,608  

Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,957,580 shares and
1,959,580 shares respectively

     1,958       1,960  

Additional paid-in capital

     12,292       12,292  

Retained earnings

     310,356       301,488  
  

 

 

   

 

 

 
     328,216       319,348  

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

     (456     6  

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

     (2,349     (2,565

Pension liability, net of taxes

     (16,087     (16,350
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (18,892     (18,909
  

 

 

   

 

 

 

Total stockholders’ equity

     309,324       300,439  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 5,306,066     $ 5,163,935  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 44


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended
March 31,
 
     2019     2018  

Interest income

    

Loans

   $ 21,309     $ 18,267  

Securities held-to-maturity

     13,788       10,288  

Securities available-for-sale

     2,631       1,992  

Federal funds sold and interest-bearing deposits in other banks

     1,349       883  
  

 

 

   

 

 

 

Total interest income

     39,077       31,430  
  

 

 

   

 

 

 

Interest expense

    

Savings and NOW deposits

     5,466       2,223  

Money market accounts

     5,343       2,453  

Time deposits

     2,793       2,363  

Securities sold under agreements to repurchase

     385       181  

Other borrowed funds and subordinated debentures

     1,652       1,742  
  

 

 

   

 

 

 

Total interest expense

     15,639       8,962  
  

 

 

   

 

 

 

Net interest income

     23,438       22,468  

Provision for loan losses

     375       450  
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     23,063       22,018  

Other operating income

    

Service charges on deposit accounts

     2,209       2,067  

Lockbox fees

     1,089       791  

Net gains on sales of securities

     —         197  

Gains on sales of mortgage loans

     15       —    

Other income

     1,114       1,138  
  

 

 

   

 

 

 

Total other operating income

     4,427       4,193  
  

 

 

   

 

 

 

Operating expenses

    

Salaries and employee benefits

     11,035       11,225  

Occupancy

     1,701       1,637  

Equipment

     783       794  

FDIC assessments

     373       383  

Other

     4,298       3,962  
  

 

 

   

 

 

 

Total operating expenses

     18,190       18,001  
  

 

 

   

 

 

 

Income before income taxes

     9,300       8,210  

(Benefit) provision for income taxes

     (118     501  
  

 

 

   

 

 

 

Net income

   $ 9,418     $ 7,709  
  

 

 

   

 

 

 

Share data:

    

Weighted average number of shares outstanding, basic

    

Class A

     3,610,329       3,608,029  

Class B

     1,957,580       1,959,880  

Weighted average number of shares outstanding, diluted

    

Class A

     5,567,909       5,567,909  

Class B

     1,957,580       1,959,880  

Basic earnings per share:

    

Class A

   $ 2.05     $ 1.68  

Class B

   $ 1.03     $ 0.84  

Diluted earnings per share

    

Class A

   $ 1.69     $ 1.38  

Class B

   $ 1.03     $ 0.84  

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 44


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended March 31,  
     2019     2018  

Net income

   $ 9,418     $ 7,709  

Other comprehensive income (loss), net of tax:

    

Unrealized gains (losses) on securities:

    

Unrealized (losses) gains arising during period

     (462     213  

Less: reclassification adjustment for gains included in net income

     —         (142
  

 

 

   

 

 

 

Total unrealized (losses) gains on securities

     (462     71  

Accretion of net unrealized losses transferred

     216       381  

Defined benefit pension plans:

    

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

     263       293  
  

 

 

   

 

 

 

Other comprehensive income

     17       745  
  

 

 

   

 

 

 

Comprehensive income

   $ 9,435     $ 8,454  
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 44


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2019 and 2018

 

     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, 2017

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

Net income

     —          —         —          7,709       —         7,709  

Other comprehensive income, net of tax:

              

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

     —          —         —          —         71       71  

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

     —          —         —          —         381       381  

Pension liability adjustment, net of $114 in taxes

     —          —         —          —         293       293  

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

     —          —         —          3,783       (3,783     —    

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

     —          —         —          29       (29     —    

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

     2        (2     —          —         —         —    

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

     —          —         —          (434     —         (434

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

     —          —         —          (117     —         (117
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2018

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2018

   $ 3,608      $ 1,960     $ 12,292      $ 301,488     $ (18,909   $ 300,439  

Net income

     —          —         —          9,418       —         9,418  

Other comprehensive income, net of tax:

              

Unrealized holding (losses) gains arising during period, net of $166 in taxes

     —          —         —          —         (462     (462

Accretion of unrealized losses on securities transferred to
held-to-maturity, net of $78 in taxes

     —          —         —          —         216       216  

Pension liability adjustment, net of $103 in taxes

     —          —         —          —         263       263  

Conversion of Class B Common Stock to Class A Common Stock, 2,300 shares

     2        (2     —          —         —         —    

Cash dividends paid, Class A common stock, $0.12 per share

     —          —         —          (433     —         (433

Cash dividends paid, Class B common stock, $0.06 per share

     —          —         —          (117     —         (117
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

   $ 3,610      $ 1,958     $ 12,292      $ 310,356     $ (18,892   $ 309,324  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 44


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

For the Three Months Ended March 31, 2019 and 2018

 

     Three months ended March 31,  
     2019     2018  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 9,418     $ 7,709  

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

    

Gain on sales of mortgage loans

     (15     —    

Net gains on sales of securities

     —         (197

Net (gain) loss on equity securities

     (53     9  

Provision for loan losses

     375       450  

Deferred income taxes

     104       (680

Net depreciation and amortization

     (468     592  

(Increase) decrease in accrued interest receivable

     (58     335  

Decrease in other assets

     2,187       3,076  

(Decrease) increase in other liabilities

     (458     2,926  
  

 

 

   

 

 

 

Net cash provided by operating activities

     11,032       14,220  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from redemptions of Federal Home Loan Bank of Boston stock

     4,777       3,464  

Purchase of Federal Home Loan Bank of Boston stock

     (1,047     (1,735

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

     34,927       31,527  

Proceeds from sales of securities available-for-sale

     —         17,871  

Purchase of securities available-for-sale

     (34,031     (19,336

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

     88,027       59,409  

Purchase of securities held-to-maturity

     (148,500     (169,974

Proceeds from life insurance policies

     —         375  

Net increase in loans

     (25,811     (11,198

Proceeds from sales of portfolio loans

     685       —    

Capital expenditures

     (1,344     (508
  

 

 

   

 

 

 

Net cash used in investing activities

     (82,317     (90,105
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net decrease in time deposits

     (18,500     (9,539

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

     61,163       28,368  

Cash dividends

     (550     (551

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

     10,260       (17,430

Net increase (decrease) in other borrowed funds

     54,770       (30,724
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     107,143       (29,876
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     35,858       (105,761

Cash and cash equivalents at beginning of period

     342,503       356,430  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 378,361     $ 250,669  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid (received) during the period for:

    

Interest

   $ 15,462     $ 9,008  

Income taxes

     (1,265     225  

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

     (462     71  

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

     216       381  

Pension liability adjustment, net of taxes

     263       293  

Change in due to (from) to broker

     11,740       10,011  

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 8 of 44


Table of Contents

Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Three Months Ended March 31, 2019 and 2018

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, 2018, 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.

Note 2. Recent Accounting Developments

Recently Adopted Accounting Standards Updates

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 did not 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 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 did not have a material impact on the Company’s consolidated financial position.

 

Page 9 of 44


Table of Contents

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. The Company also reviewed contracts to determine if they contain embedded leases. The Company’s balance sheet impact was $15.1 million as of January 1, 2019. This amount was recorded as a right of use asset with a corresponding lease liability.

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 used this optional transition method for the adoption of Topic 842.

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

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

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 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, has purchased a software solution and is capturing information needed to implement this update. The Company has started to input information and is in the beginning stages of running the software program. The Company has not determined the impact, if any, as of March 31, 2019.

 

Page 10 of 44


Table of Contents

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.” Beginning with its March 31, 2019 filing, the Company included 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).

Note 3. Securities Available-for-Sale

 

     March 31, 2019      December 31, 2018  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

U.S. Treasury

   $ 2,000      $ —        $ 2      $ 1,998      $ 2,000      $ —        $ 8      $ 1,992  

U.S. Government Sponsored Enterprises

     3,950        —          8        3,942        3,946        —          31        3,915  

SBA Backed Securities

     72,906        —          318        72,588        70,477        1        284        70,194  

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

     194,549        228        572        194,205        162,604        536        250        162,890  

Privately Issued Residential Mortgage-Backed Securities

     653        4        8        649        679        3        10        672  

Obligations Issued by States and Political Subdivisions

     68,051        56        —          68,107        93,445        58        —          93,503  

Other Debt Securities

     3,600        41        41        3,600        3,600        37        44        3,593  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 345,709      $ 329      $ 949      $ 345,089      $ 336,751      $ 635      $ 627      $ 336,759  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 $188,887,000 and $197,304,000 at March 31, 2109 and December 31, 2018, 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 $34,787,000 at March 31, 2019 and December 31, 2018, respectively. There were no sales of available-for-sale securities for the three months ended March 31, 2019. The Company realized gross gains of $197,000 from the proceeds of $17,871,000 from the sales of available-for-sale securities for the three months ended March 31, 2018.

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

The following table shows the maturity distribution of the Company’s securities available-for-sale at March 31, 2019.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 66,419      $ 66,413  

After one but within five years

     101,922        101,815  

After five but within ten years

     133,284        132,854  

More than 10 years

     44,084        44,007  
  

 

 

    

 

 

 

Total

   $ 345,709      $ 345,089  
  

 

 

    

 

 

 

 

Page 11 of 44


Table of Contents

The weighted average remaining life of investment securities available-for-sale at March 31, 2019 was 5.2 years. Included in the weighted average remaining life calculation at March 31, 2019 were $3,950,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations. Also $273,776,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.

As of March 31, 2019 and December 31, 2018, management concluded that the unrealized losses of its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation, the Company considered that the principal and interest on these securities are from issuers that are investment grade. The change in the unrealized losses on the Obligations Issued by States and Political Subdivisions, Privately Issued Residential Mortgage-Backed Securities and Other Debt Securities was primarily caused by changes in credit spreads and liquidity issues in the marketplace.

The unrealized loss on SBA Backed Securities, U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2019 or December 31, 2018.

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.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at March 31, 2019. 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 21 and 31 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 183 holdings at March 31, 2019.

 

     March 31, 2019  
     Less than 12 months      12 months or longer      Total  

Temporarily Impaired Investments

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

U.S. Treasury

   $ —        $ —        $ 1,998      $ 2      $ 1,998      $ 2  

U.S. Government Sponsored Enterprises

     —          —          3,942        8        3,942        8  

SBA Backed Securities

     19,409        40        53,180        278        72,589        318  

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

     70,530        278        43,656        294        114,186        572  

Privately Issued Residential Mortgage-Backed Securities

     —          —          479        8        479        8  

Obligations Issued by States and Political Subdivisions

     —          —          —          —          —          —    

Other Debt Securities

     —          —          459        41        459        41  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 89,939      $ 318      $ 103,714      $ 631      $ 193,653      $ 949  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 12 of 44


Table of Contents

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2018. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 10 and 30 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 190 holdings at December 31, 2018.

 

     December 31, 2018  
     Less than 12 months      12 months or longer      Total  

Temporarily Impaired Investments

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

U.S. Treasury

   $ —        $ —        $ 1,992      $ 8      $ 1,992      $ 8  

U.S. Government Sponsored Enterprises

     3,914        31        —          —          3,914        31  

SBA Backed Securities

     17,950        28        44,323        256        62,273        284  

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

     19,244        21        45,782        229        65,026        250  

Privately Issued Residential Mortgage-Backed Securities

     —          —          495        10        495        10  

Obligations Issued by States and Political Subdivisions

     —          —          —          —          —          —    

Other Debt Securities

     —          —          455        44        455        44  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 41,108      $ 80      $ 93,047      $ 547      $ 134,155      $ 627  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 4. Investment Securities Held-to-Maturity

 

     March 31, 2019      December 31, 2018  
     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

   $ —        $ —        $ —        $ —        $ 9,960      $ —        $ 2      $ 9,958  

U.S. Government Sponsored Enterprises

     201,327        453        417        201,363        234,228        336        803        233,761  

SBA Backed Securities

     50,797               1,295        49,502        52,051        —          2,065        49,986  

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

     1,858,431        5,306        40,159        1,823,578        1,750,408        2,324        55,016        1,697,716  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,110,555      $ 5,759      $ 41,871      $ 2,074,443      $ 2,046,647      $ 2,660      $ 57,886      $ 1,991,421  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,499,836,000 and $1,441,059,000 at March 31, 2019 and December 31, 2018, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $305,776,000 and $291,190,000 at March 31, 2019 and December 31, 2018, respectively. There were no sales of held-to-maturity securities for the three months ended March 31, 2019 and March 31, 2018 respectively.

At March 31, 2019 and December 31, 2018, 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.

 

Page 13 of 44


Table of Contents

The following table shows the maturity distribution of the Company’s securities held-to-maturity at March 31, 2019.

 

     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Within one year

   $ 37,216      $ 37,070  

After one but within five years

     1,723,841        1,696,173  

After five but within ten years

     336,847        328,635  

More than ten years

     12,651        12,565  
  

 

 

    

 

 

 

Total

   $ 2,110,555      $ 2,074,443  
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at March 31, 2019 was 4.0 years. Included in the weighted average remaining life calculation at March 31, 2019 were $116,160,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities, due to the ability of the issuers to prepay underlying obligations. Also $120,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.

As of March 31, 2019 and December 31, 2018, 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 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 Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not more likely than not that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2019 or December 31, 2018.

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 March 31, 2019. 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 12 and 304 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 487 holdings at March 31, 2019.

 

     March 31, 2019  
     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

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

U.S. Government Sponsored Enterprises

     —          —          74,876        417        74,876        417  

SBA Backed Securities

     —          —          49,502        1,295        49,502        1,295  

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

     59,831        439        1,237,048        39,720        1,296,879        40,159  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 59,831      $ 439      $ 1,361,426      $ 41,432      $ 1,421,257      $ 41,871  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 14 of 44


Table of Contents

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2018. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for less than 12 months and a continuous loss position for 12 months or longer. There are 56 and 315 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 475 holdings at December 31, 2018.

 

     December 31, 2018  
     Less Than 12 Months      12 Months or Longer      Total  

Temporarily Impaired Investments

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

U.S. Treasury

   $ 9,958      $ 2      $ —        $ —        $ 9,958      $ 2  

U.S. Government Sponsored Enterprises

     9,849        42        69,499        761        79,348        803  

SBA Backed Securities

     —          —          49,987        2,065        49,987        2,065  

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

     188,125        2,032        1,249,689        52,984        1,437,814        55,016  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 207,932      $ 2,076      $ 1,369,175      $ 55,810      $ 1,577,107      $ 57,886  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Allowance for Loan Losses

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

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

 

     Three months ended
March 31,
 
     2019      2018  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 28,543      $ 26,255  

Loans charged off

     (142      (87

Recoveries on loans previously charged-off

     72        77  
  

 

 

    

 

 

 

Net charge-offs

     (70      (10

Provision charged to expense

     375        450  
  

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 28,848      $ 26,695  
  

 

 

    

 

 

 

 

Page 15 of 44


Table of Contents

Further information pertaining to the allowance for loan losses for the three months ending March 31, 2019 follows:

 

    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (in thousands)  

Allowance for loan losses:

 

Balance at December 31, 2018

  $ 1,092     $ 10,998     $ 1,838     $ 10,663     $ 2,190     $ 365     $ 1,111     $ 286     $ 28,543  

Charge-offs

    —         (43     —         —         —         (99     —         —         (142

Recoveries

    —         18       —         —         —         54       —         —         72  

Provision

    (81     183       160       104       (55     22       (10     52       375  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2019

  $ 1,011     $ 11,156     $ 1,998     $ 10,767     $ 2,135     $ 342     $ 1,101     $ 338     $ 28,848  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ —       $ 6     $ —       $ 94     $ —       $ —       $ —       $ —       $ 100  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,011     $ 11,150     $ 1,998     $ 10,673     $ 2,135     $ 342     $ 1,101     $ 338     $ 28,748  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

  $ 13,305     $ 767,436     $ 105,288     $ 746,703     $ 349,966     $ 22,123     $ 305,839     $ —       $ 2,310,660  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

  $ —       $ 320     $ —       $ 2,946     $ —       $ —       $ —       $ —       $ 3,266  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

  $ 13,305     $ 767,116     $ 105,288     $ 743,757     $ 349,966     $ 22,123     $ 305,839     $ —       $ 2,307,394  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Further information pertaining to the allowance for loan losses for the three months ending March 31, 2018 follows:  
    Construction
and Land
Development
    Commercial
and
Industrial
    Municipal     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Home
Equity
    Unallocated     Total  
    (in thousands)  

Allowance for loan losses:

 

Balance at December 31, 2107

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

Charge-offs

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

Recoveries

    —         23       —         —         —         54       —         —         77  

Provision

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2018

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

                 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 16 of 44


Table of Contents

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

Loans rated 1-3 (Pass):

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

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of March 31, 2019 and December 31, 2018.

Loans rated 5 (Substandard):

Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of March 31, 2019 and December 31, 2018.

Loans rated 6 (Doubtful):

Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of March 31, 2019 and December 31, 2018 and are doubtful for full collection.

Impaired:

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

The following table presents the Company’s loans by risk rating at March 31, 2019.

 

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

Grade:

  

1-3 (Pass)

   $ 13,305      $ 762,991      $ 105,288      $ 719,367  

4 (Monitor)

     —          4,125        —          24,390  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     —          320        —          2,946  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,305      $ 767,436      $ 105,288      $ 746,703  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

Grade:

  

1-3 (Pass)

   $ 13,628      $ 757,089      $ 97,290      $ 723,170  

4 (Monitor)

     —          4,135        —          24,542  

5 (Substandard)

     —          —          —          —    

6 (Doubtful)

     —          —          —          —    

Impaired

     —          401        —          2,650  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,628      $ 761,625      $ 97,290      $ 750,362  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 17 of 44


Table of Contents

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2019 and are included within the total loan portfolio.

 

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

Credit Rating:

  

Aaa – Aa3

   $ 482,374      $ 62,103      $ 41,335      $ 585,812  

A1 – A3

     181,409        7,605        151,031        340,045  

Baa1 – Baa3

     —          26,970        118,868        145,838  

Ba2

     —          6,810        —          6,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 663,783      $ 103,488      $ 311,234      $ 1,078,505  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2018.

 

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

Credit Rating:

  

Aaa – Aa3

   $ 491,247      $ 54,105      $ 42,790      $ 588,142  

A1 – A3

     172,472        7,605        151,381        331,458  

Baa1 – Baa3

     —          26,970        118,197        145,167  

Ba2

     —          6,810        —          6,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 663,719      $ 95,490      $ 312,368      $ 1,071,577  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 18 of 44


Table of Contents

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

Further information pertaining to the allowance for loan losses at March 31, 2019 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

   $ —        $ —        $  —        $ —        $ 13,305      $ 13,305  

Commercial and industrial

     138        31        —          169        767,267        767,436  

Municipal

     —                 —          —          105,288        105,288  

Commercial real estate

     422        182        —          604        746,099        746,703  

Residential real estate

     2,202        119        —          2,321        347,645        349,966  

Consumer and overdrafts

     2        6        —          8        22,115        22,123  

Home equity

     1,659        1,164        —          2,823        303,016        305,839  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,423      $ 1,502      $ —        $ 5,925      $ 2,304,735      $ 2,310,660  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

Construction and land development

   $ —        $ —        $ —        $ —        $ 13,628      $ 13,628  

Commercial and industrial

     187        115        —          302        761,323        761,625  

Municipal

     —          —          —          —          97,290        97,290  

Commercial real estate

     774        190        —          964        749,398        750,362  

Residential real estate

     2,554        569        —          3,123        345,127        348,250  

Consumer and overdrafts

     24        14        —          38        22,045        22,083  

Home equity

     1,108        425        —          1,533        290,807        292,340  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,647      $ 1,313      $  —        $ 5,960      $ 2,279,618      $ 2,285,578  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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, 2018.

 

Page 19 of 44


Table of Contents

The following is information pertaining to impaired loans for March 31, 2019:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying
Value
for 3 Months
Ending
3/31/19
     Interest
Income
Recognized
for 3 Months
Ending
3/31/19
 
     (in thousands)  

With no required reserve recorded:

  

Construction and land development

   $ —        $      $ —        $ —        $ —    

Commercial and industrial

     93        306        —          87        2  

Municipal

     —          —          —          —          —    

Commercial real estate

     182        206        —          188        —    

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 275      $ 512      $  —        $ 275      $ 2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     227        228        6        262        3  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,764        2,881        94        2,694        24  

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,991      $ 3,109      $ 100      $ 2,956      $ 27  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Construction and land development

   $ —        $ —        $ —        $ —        $  —    

Commercial and industrial

     320        534        6        349        5  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,946        3,087        94        2,882        24  

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,266      $ 3,621      $ 100      $ 3,231      $ 29  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 44


Table of Contents

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

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying
Value
for 3 Months
Ending
3/31/18
     Interest
Income
Recognized
for 3 Months
Ending
3/31/18
 
     (in thousands)  

With no required reserve recorded:

  

Construction and land development

   $ —        $ —        $ —        $ —        $ —    

Commercial and industrial

     87        291        —          49        —    

Municipal

     —          —          —          —          —    

Commercial real estate

     189        212        —          265        —    

Residential real estate

     —          —          —          —          —    

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 276      $ 503      $ —        $ 314      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ —        $ —        $ —        $ —        $  —    

Commercial and industrial

     314        315        54        388        5  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,461        2,575        91        2,278        23  

Residential real estate

     —          —          —          3,827        6  

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,775      $ 2,890      $ 145      $ 6,493      $ 34  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total:

              

Construction and land development

   $ —        $ —        $  —        $ —        $ —    

Commercial and industrial

     401        606        54        437        5  

Municipal

     —          —          —          —          —    

Commercial real estate

     2,650        2,787        91        2,543        23  

Residential real estate

     —          —          —          3,827        6  

Consumer

     —          —          —          —          —    

Home equity

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,051      $ 3,393      $ 145      $ 6,807      $ 34  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 no troubled debt restructuring that occurred during the three month period ended March 31, 2019. Also, there were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during the first three months of 2019.

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 $575,000. The pre-modification and post-modification outstanding recorded investment was $17,000 for the consumer loan that was accruing and had a specific reserve of $1,000. The financial impact for the modifications was not material. There were no troubled debt restructurings that subsequently defaulted during the first three months of 2018.

 

Page 21 of 44


Table of Contents

Note 6. Reclassifications Out of Accumulated Other Comprehensive Income (a)

Amount Reclassified from Accumulated Other Comprehensive Income

 

Details about Accumulated Other
Comprehensive Income Components

   Three
Months Ended
March 31, 2019
    Three
Months Ended
March 31, 2018
   

Affected Line Item in the Statement

where Net Income is Presented

                             (in thousands)                                             

Unrealized gains and losses on available-for-sale securities

   $ —       $ 197     Net gains on sales of investments

Tax (expense) or benefit

     —         (55   Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ —       $ 142     Net income
  

 

 

   

 

 

   

Accretion of unrealized losses transferred

   $ (294   $ (520   Interest on securities held-to-maturity

Tax (expense) or benefit

     78       139     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (216   $ (381   Net income
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Prior-service costs

   $ (29 (b)    $ (4 ) (b)    Salaries and employee benefits

Actuarial gains (losses)

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

 

 

   

 

 

   

Total before tax

     (366     (407   Income before taxes
  

 

 

   

 

 

   

Tax (expense) or benefit

     103       114     Provision for income taxes
  

 

 

   

 

 

   

Net of tax

   $ (263   $ (293   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).

Note 7. Earnings per Share (“EPS”)

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

Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The Company had no common stock equivalents outstanding for the periods ended March 31, 2019 and 2018.

 

Page 22 of 44


Table of Contents

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

 

     Three Months Ended
March 31,
 
(in thousands except share and per share data)    2019      2018  

Basic EPS Computation:

     

Numerator:

     

Net income, Class A

   $ 7,409      $ 6,062  

Net income, Class B

     2,009        1,647  

Denominator:

     

Weighted average shares outstanding, Class A

     3,610,329        3,608,029  

Weighted average shares outstanding, Class B

     1,957,580        1,959,880  

Basic EPS, Class A

   $ 2.05      $ 1.68  

Basic EPS, Class B

     1.03        0.84  
  

 

 

    

 

 

 

Diluted EPS Computation:

     

Numerator:

     

Net income, Class A

   $ 7,409      $ 6,062  

Net income, Class B

     2,009        1,647  
  

 

 

    

 

 

 

Total net income, for diluted EPS, Class A computation

     9,418        7,709  

Denominator:

     

Weighted average shares outstanding, basic, Class A

     3,610,329        3,608,029  

Weighted average shares outstanding, Class B

     1,957,580        1,959,880  
  

 

 

    

 

 

 

Weighted average shares outstanding diluted, Class A

     5,567,909        5,567,909  

Weighted average shares outstanding, Class B

     1,957,580        1,959,880  

Diluted EPS, Class A

   $ 1.69      $ 1.38  

Diluted EPS, Class B

     1.03        0.84  
  

 

 

    

 

 

 

Note 8. 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.

 

Page 23 of 44


Table of Contents

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

 

     Pension Benefits      Supplemental Insurance/
Retirement Plan
 
     2019      2018      2019      2018  
     (in thousands)  

Service cost

   $ 276      $ 353      $ 256      $ 277  

Interest

     473        370        482        346  

Expected return on plan assets

     (819      (954      —          —    

Recognized prior service cost (benefit)

     —          (25      28        29  

Recognized net actuarial losses

     229        227        109        176  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit (credit) cost

   $ 159      $ (29    $ 875      $ 828  
  

 

 

    

 

 

    

 

 

    

 

 

 

Approximately $502,000 and $169,000 of costs other than service costs, from the table above, are included in other expenses for the three months ended March 31, 2019 and 2018, respectively.

Contributions

The Company does not intend to contribute to the Defined Benefit Pension Plan in 2019.

Note 9. 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.

 

Page 24 of 44


Table of Contents

The results of the fair value hierarchy as of March 31, 2019, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

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

U.S. Government Sponsored Enterprises

     3,942        —          3,942        —    

SBA Backed Securities

     72,588        —          72,588        —    

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

     194,205        —          194,205        —    

Privately Issued Residential Mortgage-Backed Securities

     649        —          649        —    

Obligations Issued by States and Political Subdivisions

     68,107        —          4,775        63,332  

Other Debt Securities

     3,600        —          3,600        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  345,089      $ —        $  281,757      $  63,332  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Real Estate Owned

   $ 2,225      $ —        $ —        $ 2,225  

Financial Instruments Measured at Fair Value on a Recurring Basis Equity Securities

   $ 1,649      $ 328      $ 1,321      $ —    

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

   $ 195      $ —        $ —        $ 195  

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 month period ended March 31, 2019 amounted to ($2,000).

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

 

Asset

   Fair Value      Valuation Technique   Unobservable Input   Unobservable Input
Value or Range

Securities AFS (4)

   $  63,332      Discounted cash flow   Discount rate   2.1%-3.8% (3)

Other Real Estate Owned

   $ 2,225      Appraisal of collateral (1)   Appraisal adjustments (2)   30% discount

Impaired Loans

   $ 195      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.

 

Page 25 of 44


Table of Contents

The changes in Level 3 securities for the three month period ended March 31, 2019 are shown in the table below:

 

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

Balance at December 31, 2018

   $  —        $ 88,728      $ 88,728  

Purchases

     —          970        970  

Maturities and calls

     —          (26,352      (26,352

Amortization

     —          (14      (14

Changes in fair value

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2019

   $ —        $ 63,332      $ 63,332  
  

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $63,332,000 at March 31, 2019 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 no change in the fair value of other real estate owned for the first three months of 2019. The fair value of impaired loans decreased by $56,000, for the first three months of 2019, mainly as a result of a charge-off of one loan. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the three month period ended March 31, 2019.

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

 

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

Balance at December 31, 2017

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

Purchases

     —          20,416        20,416  

Maturities and calls

     —          (22,068      (22,068

Transfer to Level 2

     (4,459      —          (4,459

Amortization

     —          (24      (24

Changes in fair value

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Balance at March 31, 2018

   $ —        $ 76,465      $ 76,465  
  

 

 

    

 

 

    

 

 

 

The amortized cost of Level 3 securities was $76,465,000 at March 31, 2018 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair value 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.

 

Page 26 of 44


Table of Contents

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

Financial Instruments Measured at Fair Value on a Recurring Basis:

 

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

U.S. Treasury

   $ 1,992      $ —        $ 1,992      $ —    

U.S. Government Sponsored Enterprises

     3,915        —          3,915        —    

SBA Backed Securities

     70,194        —          70,194        —    

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

     162,890        —          162,890        —    

Privately Issued Residential Mortgage-Backed Securities

     672        —          672        —    

Obligations Issued by States and Political Subdivisions

     93,503        —          4,775        88,728  

Other Debt Securities

     3,593           3,593     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  336,759      $  —        $  248,031      $  88,728  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Real Estate Owned

   $ 2,225      $ —        $ —        $ 2,225  

Financial Instruments Measured at Fair Value on a Recurring Basis Equity Securities

   $ 1,596      $ 293      $ 1,303      $ —    

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

   $ 251      $ —        $ —        $ 251  

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 relate to impaired loans recognized for 2018 for the estimated credit loss amounted to $540,000.

There was a transfer of an auction rate security during 2018 from level 3 to level 2. Quoted prices on the auction rate security became available but traded infrequently. There were no other transfers between level 1, 2 and 3 for the year ended December 31, 2018. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2018.

 

Page 27 of 44


Table of Contents

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)

   $  88,728     

Discounted cash flow

  

Discount rate

   2.1%-4.1% (3)

Other Real Estate Owned

   $ 2,225     

Appraisal of collateral (1)

  

Appraisal adjustments (2)

  

30% discount

Impaired Loans

   $ 251     

Appraisal of collateral (1)

  

Appraisal adjustments (2)

  

0%-30% discount

 

(1)

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

(2)

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

(3)

Weighted averages.

(4)

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

Note 10. Fair Values of Financial Instruments

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

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

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

Securities Held-to-Maturity

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

Loans

The fair value of loans is estimated using the exit price notion consistent with Topic 820, Fair Value Measurement. Fair value is determined based on a discounted cash flow analysis. The discounted cash flow analysis was based on the contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk. For certain non-performing assets fair value is determined based on the estimated values of the underlying collateral of individual analysis of receipts.

Time Deposits

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

Other Borrowed Funds

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

 

Page 28 of 44


Table of Contents

Subordinated Debentures

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

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2019 and December 31, 2018. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable.

 

March 31, 2019

   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

   $  2,110,555      $  2,074,443      $  —        $  2,074,443      $ —    

Loans (1)

     2,310,660        2,321,747        —          —          2,321,747  

Financial liabilities:

              

Time deposits

     542,079        542,733        —          542,733        —    

Other borrowed funds

     257,148        259,045        —          259,045        —    

Subordinated debentures

     36,083        36,083        —          36,083        —    

December 31, 2018

                                  

Financial assets:

              

Securities held-to-maturity

   $ 2,046,647      $ 1,991,421      $ —        $ 1,991,421      $ —    

Loans (1)

     2,257,035        2,279,712        —          —          2,279,712  

Financial liabilities:

              

Time deposits

     560,579        559,988        —          559,988        —    

Other borrowed funds

     202,378        203,122        —          203,122        —    

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.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered.

 

Page 29 of 44


Table of Contents

Note 11. Revenue from Contracts with Customers

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

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

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

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

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

A. Change in accounting policy

The Company adopted Topic 606 Revenue from Contracts with Customers with a date of initial application of January 1, 2018 through the first quarter of 2019 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. There was no cumulative effect adjustment as of January 1, 2018, and there were no material changes to the financial statements at or for the three months ended March 31, 2018 and March 31, 2019, respectively, 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.

 

Page 30 of 44


Table of Contents

D. Disaggregation of revenue

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

 

     Three
Months
Ended
3/31/2019
     Revenue from
Contracts in
Scope of
Topic 606
     Three
Months
Ended
3/31/2018
     Revenue from
Contracts in
Scope of
Topic 606
 
     (dollars in thousands)  

Total net interest income

   $  23,438      $ —        $  22,468      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Service charges on deposit accounts

     2,209        2,209        2,067        2,067  

Lockbox fees

     1,089        1,089        791        791  

Net gains on sales of securities

     —          —          197        —    

Gains on sales of mortgage loans

     15        —          —          —    

Other income

     1,114        800        1,138        719  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     4,427        4,098        4,193        3,577  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 27,865      $  4,098      $ 26,661      $  3,577  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information about receivables with customers.

 

(dollars in thousands)    March 31, 2019      December 31, 2018  

Receivables, which are included in “Other assets”

   $  1,343      $  1,205  

Note 12. Leases

The Company has operating leases primarily for branch locations as well as data processing centers. The Company’s operating leases have remaining lease terms of 1 year to 32 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. The Company also has one sublease for part of a data processing center that the Company currently leases from a lessor. The sublease expires in 2021 with an option to terminate and no option to extend. Lease income, for the sublease, totaled approximately $10,000 for the three months ended March 31, 2019.

The components of lease expense were as follows:

 

     Three Months
Ended
3/31/2019
 
(in thousands)       

Operating lease costs including variable costs

   $  711  
  

 

 

 

Supplemental cash flow information related to leases was as follows:

 

     Three Months
Ended
3/31/2019
 
(in thousands)       

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows from operating leases

   $  538  
  

 

 

 

Right-of-use assets obtained in exchange for lease obligations:

  

Operating leases

   $ 443  
  

 

 

 

 

Page 31 of 44


Table of Contents

Supplemental balance sheet information related to leases was as follows:

 

     3/31/2019  
(in thousands, except lease term and discount rate)       

Operating Leases:

  

Operating lease right-of-use assets, included in other assets

   $  14,496  

Operating lease liabilities, included in other liabilities

   $ 14,637  

Weighted Average Remaining Lease Term:

  

Operating Leases

     11 Years  

Weighted Average Discount Rate:

  

Operating Leases

     3.45

Maturities of lease liabilities were as follows:

 

     Operating
Leases
 
(in thousands)       

Year Ending December 31,

  

2019 (excluding the three months ended March 31, 2019)

   $ 1,632  

2020

     2,120  

2021

     1,841  

2022

     1,709  

2023

     1,671  

Thereafter

     8,949  
  

 

 

 

Total lease payments

     17,922  

Less imputed interest

     (3,285
  

 

 

 

Total lease payments

   $  14,637  
  

 

 

 

As of March 31, 2019, we have an additional operating lease with total undiscounted cash payments of $144,000, for a data center, that has not yet commenced. This operating lease will commence in April 2019 with a lease term of 3 years.

 

Page 32 of 44


Table of Contents

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

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At March 31, 2019, the Company had total assets of $5.3 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 three months ended March 31, 2019, was $9,418,000 or $1.69 per Class A share diluted, an increase of 22.2% compared to net income of $7,709,000, or $1.38 per Class A share diluted, for the same period a year ago.

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

 

     Three Months Ended
March 31,
 
     2019      2018  

Basic EPS – Class A common

   $ 2.05      $ 1.68  

Basic EPS – Class B common

   $ 1.03      $ 0.84  

Diluted EPS – Class A common

   $ 1.69      $ 1.38  

Diluted EPS – Class B common

   $ 1.03      $ 0.84  

Net interest income totaled $23,438,000 for the quarter ended March 31, 2019 compared to $22,468,000 for the same period in 2018. The 4.3% increase in net interest income for the period is primarily due to an increase in average earning assets. The net interest margin decreased from 2.19% on a fully taxable equivalent basis in 2018 to 2.11% for the same period in 2019. This was primarily the result of increased rates paid on deposits.

The average balances of earning assets increased by 8.7% combined with an average yield increase of 0.40%, resulting in an increase in interest income of $7,647,000. The average balance of interest bearing liabilities increased 7.7% combined with an average cost of funds increase of 0.61%, resulting in an increase in interest expense of $6,677,000.

 

Page 33 of 44


Table of Contents

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

 

LOGO

The net interest 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 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. During the fourth quarter of 2018 and first quarter of 2019, the Company increased its interest-bearing deposits. These deposits increased net interest income, but decreased the net interest margin. 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 $75,000 from $450,000 for the three months ended March 31, 2018 to $375,000 for the same period in 2019. Refer to the allowance for loan loss section of the management discussion and analysis for additional discussion. Non-performing assets totaled $3,727,000 at March 31, 2019, compared to $3,538,000 at December 31, 2018.

The Company’s effective tax rate decreased from 6.1% for the quarter ended March 31, 2018 to (1.3%) for the same period in 2019. This was primarily as a result of a reduction in tax accruals related to sequestration of the refundable portion of our alternative minimum tax (AMT) credit carryforward. On January 14, 2019, the IRS updated its announcement “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations” to clarify that refundable AMT credits under Section 53(e) of the Internal Revenue Code are not subject to sequestration for taxable years beginning after December 31, 2017. Therefore, the full amount of the AMT credit carryover will be refunded to the Company.

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.

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” was 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. The federal banking agencies have issued notices of proposed rulemaking to make certain amendments to the Rule to simply and tailor compliance requirements and to conform the Rule to the EGRRCPA (discussed below).

 

Page 34 of 44


Table of Contents

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 arguably 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%. The federal banking agencies jointly issued a notice of proposed rulemaking which would set the minimum ratio at 9%. 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 March 31, 2019, total loans outstanding were $2,310,660,000 up by $25,082,000 from the total on December 31, 2018. At March 31, 2019, commercial real estate loans accounted for 32.3%, commercial and industrial accounted for 33.2%, and residential real estate loans, including home equity loans, accounted for 28.4% of total loans.

Commercial real estate loans decreased to $746,703,000 from $750,362,000 on December 31, 2018 primarily as a result of loan payoffs. Commercial and industrial loans increased to $767,436,000 at March 31, 2019 from $761,625,000 at December 31, 2018, primarily as a result of loan originations. Construction loans decreased slightly to $13,305,000 at March 31, 2019 from $13,628,000 on December 31, 2018. Residential real estate loans increased slightly to $349,966,000 on March 31, 2019 from $348,250,000 on December 31, 2018, primarily as a result of new loan originations. Home equity loans increased to $305,839,000 on March 31, 2019 from $292,340,000 at December 31, 2018, primarily as a result of a home equity loan promotion. Municipal loans increased to $105,288,000 from $97,290,000, primarily as a result of new loan originations.

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.

 

Page 35 of 44


Table of Contents

Allowance for Loan Losses

The allowance for loan loss at March 31, 2019 was $28,848,000 as compared to $28,543,000 at December 31, 2018. The level of the allowance for loan losses to total loans was 1.25% at March 31, 2019 and 1.25% at December 31, 2018. The coverage ratio remained stable. 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 for these industries 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 March 31, 2019.

Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at March 31, 2019 and are included within the total loan portfolio.

 

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

Credit Rating:

  

Aaa – Aa3

   $  482,374      $ 62,103      $ 41,335      $ 585,812  

A1 – A3

     181,409        7,605        151,031        340,045  

Baa1 – Baa3

     —          26,970        118,868        145,838  

Ba2

     —          6,810        —          6,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 663,783      $  103,488      $  311,234      $  1,078,505  
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit ratings issued by national organizations are presented in the following table at December 31, 2018.

 

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

Credit Rating:

  

Aaa – Aa3

   $  491,247      $  54,105      $ 42,790      $ 588,142  

A1 – A3

     172,472        7,605        151,381        331,458  

Baa1 – Baa3

     —          26,970        118,197        145,167  

Ba2

     —          6,810        —          6,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 663,719      $ 95,490      $  312,368      $  1,071,577  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 36 of 44


Table of Contents

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

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

 

     Three months ended
March 31,
 
     2019      2018  
     (in thousands)  

Allowance for loan losses, beginning of period

   $  28,543      $  26,255  

Loans charged off

     (142      (87

Recoveries on loans previously charged-off

     72        77  
  

 

 

    

 

 

 

Net recoveries (charge-offs)

     (70      (10

Provision charged to expense

     375        450  
  

 

 

    

 

 

 

Allowance for loan losses, end of period

   $ 28,848      $ 26,695  
  

 

 

    

 

 

 

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

Nonperforming Assets

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

 

     March 31,
2019
    December 31,
2018
 
     (dollars in thousands)  

Nonaccruing loans

   $  1,502     $  1,313  

Total nonperforming assets

   $ 3,727     $ 3,538  

Loans past due 90 days or more and still accruing

   $ —       $ —    

Nonaccruing loans as a percentage of total loans

     0.07     0.06

Nonperforming assets as a percentage of total assets

     0.07     0.07

Accruing troubled debt restructures

   $ 2,542     $ 2,559  

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 $345,089,000 at March 31, 2019, an increase of 2.5% from December 31, 2018. The portfolio increased mainly as a result of purchases of securities available-for-sale totaling $43,884,000 for the three months ended March 31, 2019. The purchases include $9,853,000 of purchases that are due to brokers. They were offset, somewhat, by calls/maturities, sales and scheduled principal payments of $34,927,000. The portfolio is concentrated in United States Government Sponsored Enterprises, Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 5.2 years.

At March 31, 2019, 81.6% 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.

 

Page 37 of 44


Table of Contents

Securities available-for-sale totaling $63,332,000 or 18.4% 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.

During the first three months of 2019, net unrealized loss on the securities available-for-sale increased to $620,000 from a net unrealized gain of $8,000 at December 31, 2018. This was primarily the result of a decrease 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.

 

     March 31,
2019
     December 31,
2018
 
     (in thousands)  

U.S. Treasury

   $ 1,998      $ 1,992  

U.S. Government Sponsored Enterprises

     3,942        3,915  

Small Business Administration

     72,588        70,194  

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

     194,205        162,890  

Privately Issued Residential Mortgage-backed Securities

     649        672  

Obligations issued by States and Political Subdivisions

     68,107        93,503  

Other Debt Securities

     3,600        3,593  
  

 

 

    

 

 

 

Total Securities Available-for-Sale

   $  345,089      $  336,759  
  

 

 

    

 

 

 

There were no sales of available-for-sale securities for the three months ended March 31, 2019. The Company realized gross gains of $197,000 from the proceeds of $17,871,000 from the sales of available-for-sales securities for the three months ended March 31, 2018.

Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $2,110,555,000 on March 31, 2019, an increase of 3.1% from December 31, 2018. Purchases of securities held-to-maturity totaled $148,500,000 for the three months ended March 31, 2019. The purchases were offset somewhat, by call, maturities and scheduled principal payments of $88,027,000. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 4.0 years. Unrealized losses increased during the year primarily as a result of increases in interest rates.

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

 

     March 31,
2019
     December 31,
2018
 
     (in thousands)  

U.S. Treasury

   $ —        $ 9,960  

U.S. Government Sponsored Enterprises

     201,327        234,228  

SBA Backed Securities

     50,797        52,051  

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

     1,858,431        1,750,408  
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $  2,110,555      $  2,046,647  
  

 

 

    

 

 

 

There were no sales of held-to-maturity securities for the three months ended March 31, 2019 and March 31, 2018 respectively.

 

Page 38 of 44


Table of Contents

The net unrealized losses on investment securities held-to-maturity was $36,112,000 or 1.7% of the total and $55,226,000 or 2.7% of the total at March 31, 2019 and December 31, 2018, respectively. The decrease in the net unrealized losses on securities held-to-maturity related primarily to a decrease in interest rates. The gross unrealized losses relate primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not likely that it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired March 31, 2019 and December 31, 2018.

At March 31, 2019 and December 31, 2018, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

Federal Home Loan Bank of Boston Stock

The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis in the stock. During the first three months of 2019, the FHLBB redeemed $4,777,000 of FHLBB stock and the Company purchased $1,047,000 of FHLBB stock. As of March 31, 2019, no impairment has been recognized.

Equity Securities

At March 31, 2019 equity securities totaled $1,649,000 compared to $1,596,000 at December 31, 2018. Equity securities were reclassified from securities available-for-sale during the first quarter of 2018. The unrealized gain, of $29,000 on equity securities, at December 31, 2017, was transferred to retained earnings and the change in the unrealized gain for the first quarter of 2018 was classified as other income, in accordance with ASU 2016-1 as previously discussed in Note 10.

Deposits and Borrowed Funds

On March 31, 2019, deposits totaled $4,449,627,000, representing a 1.0% increase from December 31, 2018. Total deposits increased primarily as a result of an increase in Savings and NOW deposits and money market accounts. This was offset somewhat, by a decrease in demand deposits and time deposits. Money market accounts increased mainly from deposit gathering services. Savings and NOW deposits increased mainly as a result of increased municipal deposits. Time deposits decreased primarily as a result of decreased corporate and personal time deposits. Demand deposits decreased mainly as a result of decreased corporate checking balances.

Borrowed funds totaled $421,648,000 at March 31, 2019 compared to $356,618,000 at December 31, 2018. Borrowed funds increased mainly as a result of an increase in short-term FHLBB borrowings.

Stockholders’ Equity

At March 31, 2019, total equity was $309,324,000 compared to $300,439,000 on December 31, 2018. The Company’s equity increased primarily as a result of earnings, offset, somewhat, by dividends paid. The Company’s leverage ratio stood at 6.92% on March 31, 2019, compared to 6.91% at December 31, 2018. The increase in the leverage ratio was due to an increase in stockholders’ equity, offset somewhat by an increase in quarterly average assets. Book value as of March 31, 2019, was $55.55 as compared to $53.96 on December 31, 2018.

 

Page 39 of 44


Table of Contents

Results of Operations

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

 

     Three Months Ended  
     March 31, 2019     March 31, 2018  
     Average
Balance
    Interest
Income/
Expenses (1)
    Rate
Earned/
Paid (1)
    Average
Balance
    Interest
Income/
Expenses (1)
    Rate
Earned/
Paid (1)
 
     (dollars in thousands)  

ASSETS

  

Interest-earning assets:

            

Loans (2)

            

Loans taxable

   $  1,182,782     $  13,096       4.49   $  1,043,345     $  10,685       4.15

Loans tax-exempt

     1,109,824       10,411       3.80     1,131,825       9,606       3.44

Securities available-for-sale (5):

            

Taxable

     273,309       2,182       3.19     338,393       1,754       2.07

Tax-exempt

     78,560       545       2.77     67,694       291       1.72

Securities held-to-maturity:

            

Taxable

     2,078,626       13,788       2.65     1,741,492       10,288       2.36

Interest-bearing deposits in other banks

     225,870       1,349       2.39     230,194       883       1.53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     4,948,971       41,371       3.37     4,552,943       33,507       2.97

Non interest-earning assets

     247,261           228,451      

Allowance for loan losses

     (28,708         (26,546    
  

 

 

       

 

 

     

Total assets

   $ 5,167,524         $ 4,754,848      
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 902,321     $ 2,156       0.97   $ 954,608     $ 1,353       0.57

Savings accounts

     909,798       3,310       1.48     540,311       870       0.65

Money market accounts

     1,271,707       5,343       1.70     1,180,436       2,453       0.84

Time deposits

     516,781       2,793       2.19     604,814       2,363       1.58
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     3,600,607       13,602       1.53     3,280,169       7,039       0.87

Securities sold under agreements to repurchase

     168,447       385       0.93     160,223       181       0.46

Other borrowed funds and subordinated debentures

     231,920       1,652       2.89     274,343       1,742       2.58
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     4,000,974       15,639       1.59     3,714,735       8,962       0.98
    

 

 

   

 

 

     

 

 

   

 

 

 

Non-interest-bearing liabilities

            

Demand deposits

     782,794           706,959      

Other liabilities

     79,156           69,218      
  

 

 

       

 

 

     

Total liabilities

     4,862,924           4,490,912      
  

 

 

       

 

 

     

Stockholders’ equity

     304,600           263,936      

Total liabilities & stockholders’ equity

   $ 5,167,524         $ 4,754,848      
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       25,732           24,545    

Less taxable equivalent adjustment

       (2,294         (2,077  
    

 

 

       

 

 

   

Net interest income

     $ 23,438         $ 22,468    
    

 

 

       

 

 

   

Net interest spread (3)

         1.79         2.00
      

 

 

       

 

 

 

Net interest margin (4)

         2.11         2.19
      

 

 

       

 

 

 

 

(1)

On a fully taxable equivalent basis calculated using a federal tax rate of 21%.

(2)

Nonaccrual loans are included in average amounts outstanding.

(3)

Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(4)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

(5)

Average balances of securities available-for-sale calculated utilizing amortized cost.

 

Page 40 of 44


Table of Contents

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

 

     Three Months Ended March 31, 2019
Compared with
Three Months Ended March 31, 2018
 
     Increase/(Decrease)
Due to Change in
 
     Volume      Rate      Total  
     (in thousands)  

Interest income:

  

Loans

        

Taxable

   $  1,500      $ 911      $  2,411  

Tax-exempt

     (190      995        805  

Securities available-for-sale

        

Taxable

     (385      813        428  

Tax-exempt

     53        201        254  

Securities held-to-maturity

        

Taxable

     2,141        1,359        3,500  

Interest-bearing deposits in other banks

     (17      483        466  
  

 

 

    

 

 

    

 

 

 

Total interest income

     3,102        4,762        7,864  
  

 

 

    

 

 

    

 

 

 

Interest expense:

        

Deposits

        

NOW accounts

     (78      881        803  

Savings accounts

     859        1,581        2,440  

Money market accounts

     203        2,687        2,890  

Time deposits

     (380      810        430  
  

 

 

    

 

 

    

 

 

 

Total interest-bearing deposits

     604        5,959        6,563  

Securities sold under agreements to repurchase

     10        194        204  

Other borrowed funds and subordinated debentures

     (288      198        (90
  

 

 

    

 

 

    

 

 

 

Total interest expense

     326        6,351        6,677  
  

 

 

    

 

 

    

 

 

 

Change in net interest income

   $ 2,776      $  (1,589    $ 1,187  
  

 

 

    

 

 

    

 

 

 

Net Interest Income

For the three months ended March 31, 2019, net interest income on a fully taxable equivalent basis totaled $25,732,000 compared to $24,545,000 for the same period in 2018, an increase of $1,187,000 or 4.8%. The increase in net interest income for the period is primarily due to an increase in average earning assets. The net interest margin decreased from 2.19% on a fully taxable equivalent basis in 2018 to 2.11% for the same period in 2019. This was primarily the result of increased rates paid on deposits. The average balances of earning assets increased by 8.7% combined with an average yield increase of 0.40%, resulting in an increase in fully taxable equivalent interest income of $7,864,000. The average balance of interest bearing liabilities increased 7.7% combined with an average cost of funds increase of 0.61%, resulting in an increase in interest expense of $6,677,000.

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

 

Page 41 of 44


Table of Contents

Provision for Loan Losses

For the three months ended March 31, 2019, the loan loss provision was $375,000 compared to a provision of $450,000 for the same period last year. Further discussion relating to changes in portfolio composition is discussed in footnote number four.

Non-Interest Income and Expense

Other operating income for the quarter ended March 31, 2019 increased by $234,000 from the same period last year to $4,427,000. This was mainly attributable to an increase in lockbox fees of $298,000 and an increase in service charges on deposit accounts of $142,000 offset, somewhat, by a decrease of $197,000 from the sales of securities. Lockbox income increased as a result of an increase in customer accounts. Service charges on deposit accounts increased primarily as a result of an increase in customer activity.

For the quarter ended March 31, 2019, operating expenses increased by $189,000 or 1.0% to $18,190,000, from the same period last year. This was primarily attributable to an increase in other expenses of $336,000 and occupancy expenses of $64,000 offset, somewhat, by decreases salaries and employee benefits of $190,000, equipment expenses $11,000 and FDIC assessments of $10,000. Other expenses increased primarily as a result of increases in pension expense. Occupancy costs increased primarily as a result of increases in rent expense associated with a new operating facility and other annual rent increases. The decrease in salaries and employee benefits was mainly attributable to a decrease in bonus accruals. FDIC assessments decreased primarily as a result of a decrease in the assessment rate. Equipment expenses remained relatively stable.

Income Taxes

For the first quarter of 2019, the Company’s income tax benefit totaled $118,000 on pretax income of $9,300,000 resulting in an effective tax rate of (1.3)%. For last year’s corresponding quarter, the Company’s income tax expense totaled $501,000 on pretax income of $8,210,000 resulting in an effective tax rate of 6.1%. The decrease in the effective tax rate was primarily as a result of a reduction in tax accruals related to sequestration of the refundable portion of our alternative minimum tax (AMT) credit carryforward. On January 14, 2019, the IRS updated its announcement “Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations” to clarify that refundable AMT credits under Section 53(e) of the Internal Revenue Code are not subject to sequestration for taxable years beginning after December 31, 2017. Therefore, the full amount of the AMT credit carryover will be refunded to the Company.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates tied to specific assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. Management believes that there has been no material changes in the interest rate risk reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission. The information is contained in the Form 10-K within the Market Risk and Asset Liability Management section of Management’s Discussion and Analysis of Results of Operations and Financial Condition.

Item 4. Controls and Procedures

The Company’s management, with participation of the Company’s principal executive and financial officers, has evaluated its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Company’s management, with participation of its principal executive and financial officers, has concluded that the Company’s disclosure controls and procedures are effective. The disclosure controls and procedures also effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act is accumulated and reported to Company management (including the principal executive officer and the principal financial officer) as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has evaluated its internal control over financial reporting and during the first quarter of 2019 there were no changes that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Page 42 of 44


Table of Contents

Part IIOther Information

 

Item 1

A number of legal claims against the Company arising in the normal course of business were outstanding at March 31, 2019. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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

Item 1A Risk Factors – Please read “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018. There have been no material changes since this 10-K was filed. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and operating results.

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds –

(a) – (b) Not applicable.

(c) None

 

Item 3

Defaults Upon Senior Securities – None

 

Item 4

Mine Safety Disclosures – Not applicable

 

Item 5

Other Information – None

 

Item 6

Exhibits

 

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

 

+

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

++

As provided in Rule 406T of regulation S-T, this information is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and consists of the following materials from Century Bancorp Inc.’s Quarterly Report on 10-Q for the quarter ended March 31 2019, formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2019 and December 31, 2018; (ii) Consolidated Statements of Income for the three months ended March 31, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018; and (vi) Notes to Unaudited Consolidated Interim Financial Statements.

 

Page 43 of 44


Table of Contents

SIGNATURES

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

 

Date: May 9, 2019

     

    Century Bancorp, Inc.

 

  /s/ Barry R. Sloane
  Barry R. Sloane
  Chairman, President and Chief Executive Officer

 

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

 

Page 44 of 44