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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of class | Trading Symbol(s) | Name of exchange | ||
Class A Common Stock, $1.00 par value | CNBKA | Nasdaq Global Market |
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 RegulationS-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, anon-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 Rule12b-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 Rule12b-2 of the Exchange Act). ☐ Yes ☒ No
As of October 31, 2019, the Registrant had outstanding:
Class A Common Stock, $1.00 par value | 3,650,449 Shares | |
Class B Common Stock, $1.00 par value | 1,917,460 Shares |
Table of Contents
Century Bancorp, Inc.
Page Number | ||||||
Part I | Financial Information | |||||
Forward Looking Statements | 3 | |||||
Item 1. | Financial Statements (unaudited) | |||||
September 30, 2019 and December 31, 2018 | 4 | |||||
Consolidated Statements of Income: Three Months and Nine Months Ended September 30, 2019 and 2018 | 5 | |||||
Consolidated Statements of Comprehensive Income: Three Months and Nine Months Ended September 30, 2019 and 2018 | 6 | |||||
Consolidated Statements of Changes in Stockholders’ Equity: Three Months Ended September 30, 2019 and 2018 | 7 | |||||
Consolidated Statements of Changes in Stockholders’ Equity: Nine Months Ended September 30, 2019 and 2018 | 8 | |||||
Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2019 and 2018 | 9 | |||||
Notes to Consolidated Financial Statements | 10 - 34 | |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35 - 45 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 46 | ||||
Item 4. | Controls and Procedures | 46 | ||||
Part II. | Other Information | |||||
Item 1. | Legal Proceedings | 47 | ||||
Item 1A. | Risk Factors | 47 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 47 | ||||
Item 3. | Defaults Upon Senior Securities | 47 | ||||
Item 4. | Mine Safety Disclosures | 47 | ||||
Item 5. | Other Information | 47 | ||||
Item 6. | Exhibits | 47 | ||||
48 | ||||||
Exhibits | Ex-31.1 | |||||
Ex-31.2 | ||||||
Ex-32.1 | ||||||
Ex-32.2 | ||||||
Ex-101 Instance Document | ||||||
Ex-101 Schema Document | ||||||
Ex-101 Calculation Linkbase Document | ||||||
Ex-101 Labels Linkbase Document | ||||||
Ex-101 Presentation Linkbase Document | ||||||
Ex-101 Definition Linkbase Document |
Table of Contents
Except for the historical information contained herein, this Quarterly Report onForm 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 thisForm 10-Q, and the Company cautions readers not to place undue reliance on such statements.
Page 3 of 48
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Consolidated Balance Sheets (unaudited)
(In thousands, except share data)
September 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 85,014 | $ | 89,540 | ||||
Federal funds sold and interest-bearing deposits in other banks | 249,091 | 252,963 | ||||||
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Total cash and cash equivalents | 334,105 | 342,503 | ||||||
Securitiesavailable-for-sale, amortized cost $261,939 and $336,751, respectively | 261,739 | 336,759 | ||||||
Securitiesheld-to-maturity, fair value $2,188,465 and $1,991,421, respectively | 2,164,135 | 2,046,647 | ||||||
Federal Home Loan Bank of Boston, stock at cost | 14,025 | 17,974 | ||||||
Equity securities, amortized cost $1,635 and $1,635, respectively | 1,672 | 1,596 | ||||||
Loans, net: | ||||||||
Construction and land development | 7,824 | 13,628 | ||||||
Commercial and industrial | 783,950 | 761,625 | ||||||
Municipal | 121,802 | 97,290 | ||||||
Commercial real estate | 765,385 | 750,362 | ||||||
Residential real estate | 364,317 | 348,250 | ||||||
Consumer and overdrafts | 21,748 | 22,083 | ||||||
Home equity | 310,635 | 292,340 | ||||||
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Total loans, net | 2,375,661 | 2,285,578 | ||||||
Less: allowance for loan losses | 29,097 | 28,543 | ||||||
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Net loans | 2,346,564 | 2,257,035 | ||||||
Bank premises and equipment | 31,520 | 23,921 | ||||||
Accrued interest receivable | 13,275 | 14,406 | ||||||
Goodwill | 2,714 | 2,714 | ||||||
Other assets | 129,432 | 120,380 | ||||||
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Total assets | $ | 5,299,181 | $ | 5,163,935 | ||||
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Liabilities | ||||||||
Deposits: | ||||||||
Demand deposits | $ | 797,455 | $ | 813,478 | ||||
Savings and NOW deposits | 1,759,401 | 1,707,019 | ||||||
Money market accounts | 1,249,923 | 1,325,888 | ||||||
Time deposits | 533,074 | 560,579 | ||||||
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Total deposits | 4,339,853 | 4,406,964 | ||||||
Securities sold under agreements to repurchase | 307,235 | 154,240 | ||||||
Other borrowed funds | 209,188 | 202,378 | ||||||
Subordinated debentures | 36,083 | 36,083 | ||||||
Other liabilities | 77,862 | 63,831 | ||||||
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Total liabilities | 4,970,221 | 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 3,650,449 shares and 3,608,329 shares, respectively | 3,650 | 3,608 | ||||||
Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 1,917,460 shares and 1,959,580 shares respectively | 1,918 | 1,960 | ||||||
Additionalpaid-in capital | 12,292 | 12,292 | ||||||
Retained earnings | 328,801 | 301,488 | ||||||
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346,661 | 319,348 | |||||||
Unrealized losses on securitiesavailable-for-sale, net of taxes | (150 | ) | 6 | |||||
Unrealized losses on securities transferred toheld-to-maturity, net of taxes | (1,991 | ) | (2,565 | ) | ||||
Pension liability, net of taxes | (15,560 | ) | (16,350 | ) | ||||
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Total accumulated other comprehensive loss, net of taxes | (17,701 | ) | (18,909 | ) | ||||
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Total stockholders’ equity | 328,960 | 300,439 | ||||||
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Total liabilities and stockholders’ equity | $ | 5,299,181 | $ | 5,163,935 | ||||
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See accompanying notes to unaudited consolidated interim financial statements.
Page 4 of 48
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Century Bancorp, Inc.
Consolidated Statements of Income (unaudited)
(In thousands, except share data)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Interest income | ||||||||||||||||
Loans | $ | 22,117 | $ | 20,167 | $ | 65,106 | $ | 57,613 | ||||||||
Securitiesheld-to-maturity | 14,623 | 11,507 | 43,006 | 32,930 | ||||||||||||
Securitiesavailable-for-sale | 2,184 | 2,500 | 7,305 | 6,821 | ||||||||||||
Federal funds sold and interest-bearing deposits in other banks | 928 | 591 | 3,204 | 2,239 | ||||||||||||
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Total interest income | 39,852 | 34,765 | 118,621 | 99,603 | ||||||||||||
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Interest expense | ||||||||||||||||
Savings and NOW deposits | 5,445 | 2,972 | 16,788 | 7,778 | ||||||||||||
Money market accounts | 5,050 | 3,652 | 15,805 | 9,039 | ||||||||||||
Time deposits | 3,038 | 2,571 | 8,724 | 7,465 | ||||||||||||
Securities sold under agreements to repurchase | 697 | 288 | 1,572 | 657 | ||||||||||||
Other borrowed funds and subordinated debentures | 1,852 | 2,078 | 5,274 | 5,793 | ||||||||||||
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Total interest expense | 16,082 | 11,561 | 48,163 | 30,732 | ||||||||||||
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Net interest income | 23,770 | 23,204 | 70,458 | 68,871 | ||||||||||||
Provision for loan losses | 75 | — | 700 | 900 | ||||||||||||
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Net interest income after provision for loan losses | 23,695 | 23,204 | 69,758 | 67,971 | ||||||||||||
Other operating income | ||||||||||||||||
Service charges on deposit accounts | 2,310 | 2,137 | 6,801 | 6,268 | ||||||||||||
Lockbox fees | 937 | 892 | 3,018 | 2,304 | ||||||||||||
Net gains on sales of securities | 53 | 105 | 61 | 302 | ||||||||||||
Gains on sales of mortgage loans | — | — | 154 | — | ||||||||||||
Other income | 986 | 1,035 | 3,676 | 3,210 | ||||||||||||
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Total other operating income | 4,286 | 4,169 | 13,710 | 12,084 | ||||||||||||
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Operating expenses | ||||||||||||||||
Salaries and employee benefits | 10,670 | 10,570 | 32,621 | 32,331 | ||||||||||||
Occupancy | 1,463 | 1,481 | 4,686 | 4,579 | ||||||||||||
Equipment | 862 | 781 | 2,440 | 2,355 | ||||||||||||
Other | 4,467 | 4,516 | 14,170 | 13,243 | ||||||||||||
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Total operating expenses | 17,462 | 17,348 | 53,917 | 52,508 | ||||||||||||
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Income before income taxes | 10,519 | 10,025 | 29,551 | 27,547 | ||||||||||||
Provision for income taxes | 435 | 444 | 584 | 1,259 | ||||||||||||
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Net income | $ | 10,084 | $ | 9,581 | $ | 28,967 | $ | 26,288 | ||||||||
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Share data: | ||||||||||||||||
Weighted average number of shares outstanding, basic | ||||||||||||||||
Class A | 3,650,449 | 3,608,329 | 3,627,076 | 3,608,129 | ||||||||||||
Class B | 1,917,460 | 1,959,580 | 1,940,833 | 1,959,780 | ||||||||||||
Weighted average number of shares outstanding, diluted | ||||||||||||||||
Class A | 5,567,909 | 5,567,909 | 5,567,909 | 5,567,909 | ||||||||||||
Class B | 1,917,460 | 1,959,580 | 1,940,833 | 1,959,780 | ||||||||||||
Basic earnings per share: | ||||||||||||||||
Class A | $ | 2.19 | $ | 2.09 | $ | 6.30 | $ | 5.73 | ||||||||
Class B | $ | 1.09 | $ | 1.04 | $ | 3.15 | $ | 2.86 | ||||||||
Diluted earnings per share | ||||||||||||||||
Class A | $ | 1.81 | $ | 1.72 | $ | 5.20 | $ | 4.72 | ||||||||
Class B | $ | 1.09 | $ | 1.04 | $ | 3.15 | $ | 2.86 |
See accompanying notes to unaudited consolidated interim financial statements.
Page 5 of 48
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Century Bancorp, Inc.
Consolidated Statements of Comprehensive Income (unaudited)
(In thousands)
Three months ended September 30, | ||||||||
2019 | 2018 | |||||||
Net income | $ | 10,084 | $ | 9,581 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Unrealized gains (losses) on securities: | ||||||||
Unrealized gains (losses) arising during period | 113 | (88 | ) | |||||
Less: reclassification adjustment for gains included in net income | (39 | ) | (76 | ) | ||||
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Total unrealized gains (losses) on securities | 74 | (164 | ) | |||||
Accretion of net unrealized losses transferred | 155 | 238 | ||||||
Defined benefit pension plans: | ||||||||
Amortization of prior service cost and loss included in net periodic benefit cost | 263 | 292 | ||||||
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Other comprehensive income | 492 | 366 | ||||||
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Comprehensive income | $ | 10,576 | $ | 9,947 | ||||
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Nine months ended September 30, | ||||||||
2019 | 2018 | |||||||
Net income | $ | 28,967 | $ | 26,288 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Unrealized gains (losses) on securities: | ||||||||
Unrealized (losses) gains arising during period | (112 | ) | 412 | |||||
Less: reclassification adjustment for gains included in net income | (44 | ) | (217 | ) | ||||
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Total unrealized (losses) gains on securities | (156 | ) | 195 | |||||
Accretion of net unrealized losses transferred | 574 | 872 | ||||||
Defined benefit pension plans: | ||||||||
Amortization of prior service cost and loss included in net periodic benefit cost | 790 | 877 | ||||||
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Other comprehensive income | 1,208 | 1,944 | ||||||
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Comprehensive income | $ | 30,175 | $ | 28,232 | ||||
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See accompanying notes to unaudited consolidated interim financial statements.
Page 6 of 48
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Century Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Three Months Ended September 30, 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 June 30, 2018 | $ | 3,608 | $ | 1,960 | $ | 12,292 | $ | 283,084 | $ | (23,463 | ) | $ | 277,481 | |||||||||||
Net income | — | — | — | 9,581 | — | 9,581 | ||||||||||||||||||
Other comprehensive income, net of tax: | — | |||||||||||||||||||||||
Unrealized holding (losses) gains arising during period, net of $30 in taxes | — | — | — | — | (164 | ) | (164 | ) | ||||||||||||||||
Accretion of unrealized losses on securities transferred toheld-to-maturity, net of $85 in taxes | — | — | — | — | 238 | 238 | ||||||||||||||||||
Pension liability adjustment, net of $114 in taxes | — | — | — | — | 292 | 292 | ||||||||||||||||||
Cash dividends paid, Class A common stock, $.12 per share | — | — | — | (432 | ) | — | (432 | ) | ||||||||||||||||
Cash dividends paid, Class B common stock, $.06 per share | — | — | — | (119 | ) | — | (119 | ) | ||||||||||||||||
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Balance at September 30, 2018 | $ | 3,608 | $ | 1,960 | $ | 12,292 | $ | 292,114 | $ | (23,097 | ) | $ | 286,877 | |||||||||||
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Balance at June 30, 2019 | $ | 3,620 | $ | 1,948 | $ | 12,292 | $ | 319,270 | $ | (18,193 | ) | $ | 318,937 | |||||||||||
Net income | — | — | — | 10,084 | — | 10,084 | ||||||||||||||||||
Other comprehensive income, net of tax: | — | |||||||||||||||||||||||
Unrealized holding (losses) gains arising during period, net of $23 in taxes and $53 in realized gains | — | — | — | — | 74 | 74 | ||||||||||||||||||
Accretion of unrealized losses on securities transferred toheld-to-maturity, net of $54 in taxes | — | — | — | — | 155 | 155 | ||||||||||||||||||
Pension liability adjustment, net of $103 in taxes | — | — | — | — | 263 | 263 | ||||||||||||||||||
Conversion of Class B Common Stock to Class A Common Stock, 30,000 shares | 30 | (30 | ) | — | — | — | — | |||||||||||||||||
Cash dividends paid, Class A common stock, $.12 per share | — | — | — | (438 | ) | — | (438 | ) | ||||||||||||||||
Cash dividends paid, Class B common stock, $.06 per share | — | — | — | (115 | ) | — | (115 | ) | ||||||||||||||||
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Balance at September 30, 2019 | $ | 3,650 | $ | 1,918 | $ | 12,292 | $ | 328,801 | $ | (17,701 | ) | $ | 328,960 | |||||||||||
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See accompanying notes to unaudited consolidated interim financial statements.
Page 7 of 48
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Century Bancorp, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
For the Nine Months Ended September 30, 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 | — | — | — | 26,288 | — | 26,288 | ||||||||||||||||||
Other comprehensive income, net of tax: | — | |||||||||||||||||||||||
Unrealized holding (losses) gains arising during period, net of $39 in taxes and $302 in realized gains | — | — | — | — | 195 | 195 | ||||||||||||||||||
Accretion of unrealized losses on securities transferred toheld-to-maturity, net of $314 in taxes | — | — | — | — | 872 | 872 | ||||||||||||||||||
Pension liability adjustment, net of $342 in taxes | — | — | — | — | 877 | 877 | ||||||||||||||||||
Adoption of ASU2018-2, Income Statement-Reporting Comprehensive Income (Topic 220)-Reclassification of Certain Tax Effects from AOCI | — | — | — | 3,783 | (3,783 | ) | — | |||||||||||||||||
Adoption of ASU2016-1, Financial Instruments-Overall (Subtopic825-10) Recognition and Measurement of Financial Assets and Financial Liabilities | — | — | — | 29 | (29 | ) | — | |||||||||||||||||
Conversion of Class B Common Stock to Class A Common Stock, 2,500 shares | 2 | (2 | ) | — | — | — | — | |||||||||||||||||
Cash dividends paid, Class A common stock, $.36 per share | — | — | — | (1,299 | ) | — | (1,299 | ) | ||||||||||||||||
Cash dividends paid, Class B common stock, $.18 per share | — | — | — | (353 | ) | — | (353 | ) | ||||||||||||||||
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Balance at September 30, 2018 | $ | 3,608 | $ | 1,960 | $ | 12,292 | $ | 292,114 | $ | (23,097 | ) | $ | 286,877 | |||||||||||
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Balance at December 31, 2018 | $ | 3,608 | $ | 1,960 | $ | 12,292 | $ | 301,488 | $ | (18,909 | ) | $ | 300,439 | |||||||||||
Net income | — | — | — | 28,967 | — | 28,967 | ||||||||||||||||||
Other comprehensive income, net of tax: | — | |||||||||||||||||||||||
Unrealized holding (losses) gains arising during period, net of $52 in taxes and $61 in realized gains | — | — | — | — | (156 | ) | (156 | ) | ||||||||||||||||
Accretion of unrealized losses on securities transferred toheld-to-maturity, net of $205 in taxes | — | — | — | — | 574 | 574 | ||||||||||||||||||
Pension liability adjustment, net of $309 in taxes | — | — | — | — | 790 | 790 | ||||||||||||||||||
Conversion of Class B Common Stock to Class A Common Stock, 42,120 shares | 42 | (42 | ) | — | — | — | — | |||||||||||||||||
Cash dividends paid, Class A common stock, $.36 per share | — | — | — | (1,304 | ) | — | (1,304 | ) | ||||||||||||||||
Cash dividends paid, Class B common stock, $.18 per share | — | — | — | (350 | ) | — | (350 | ) | ||||||||||||||||
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Balance at September 30, 2019 | $ | 3,650 | $ | 1,918 | $ | 12,292 | $ | 328,801 | $ | (17,701 | ) | $ | 328,960 | |||||||||||
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See accompanying notes to unaudited consolidated interim financial statements.
Page 8 of 48
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Century Bancorp, Inc.
Consolidated Statements of Cash Flows (unaudited)
For the Nine Months Ended September 30, 2019 and 2018
Nine months ended September 30, | ||||||||
2019 | 2018 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 28,967 | $ | 26,288 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||
Gain on sales of mortgage loans | (154 | ) | — | |||||
Net gains on sales of securities | (61 | ) | (302 | ) | ||||
Net (gain) loss on equity securities | (76 | ) | 47 | |||||
Provision for loan losses | 700 | 900 | ||||||
Deferred income taxes | (593 | ) | (1,270 | ) | ||||
Net depreciation and amortization | (1,693 | ) | 1,116 | |||||
Decrease (increase) in accrued interest receivable | 1,131 | (1,699 | ) | |||||
(Increase) decrease in other assets | (1,037 | ) | 1,542 | |||||
Increase in other liabilities | 2,029 | 4,825 | ||||||
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Net cash provided by operating activities | 29,213 | 31,447 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from redemptions of Federal Home Loan Bank of Boston stock | 13,801 | 13,619 | ||||||
Purchase of Federal Home Loan Bank of Boston stock | (9,852 | ) | (14,583 | ) | ||||
Proceeds from calls/maturities of securitiesavailable-for-sale | 115,574 | 111,922 | ||||||
Proceeds from sales of securitiesavailable-for-sale | 16,285 | 27,517 | ||||||
Purchase of securitiesavailable-for-sale | (57,005 | ) | (108,871 | ) | ||||
Proceeds from calls/maturities of securitiesheld-to-maturity | 313,358 | 187,009 | ||||||
Purchase of securitiesheld-to-maturity | (427,124 | ) | (358,824 | ) | ||||
Proceeds from sales of securitiesheld-to-maturity | 1,194 | — | ||||||
Proceeds from life insurance policies | 5,124 | 375 | ||||||
Net increase in loans | (98,915 | ) | (83,967 | ) | ||||
Proceeds from sales of portfolio loans | 8,871 | — | ||||||
Capital expenditures | (9,962 | ) | (2,900 | ) | ||||
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Net cash used in investing activities | (128,651 | ) | (228,703 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net decrease in time deposits | (27,505 | ) | (45,475 | ) | ||||
Net decrease (increase) in demand, savings, money market and NOW deposits | (39,606 | ) | 92,915 | |||||
Cash dividends | (1,654 | ) | (1,652 | ) | ||||
Net increase (decrease) in securities sold under agreements to repurchase | 152,995 | (18,500 | ) | |||||
Net increase in other borrowed funds | 6,810 | 24,828 | ||||||
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Net cash provided by financing activities | 91,040 | 52,116 | ||||||
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Net decrease in cash and cash equivalents | (8,398 | ) | (145,140 | ) | ||||
Cash and cash equivalents at beginning of period | 342,503 | 356,430 | ||||||
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Cash and cash equivalents at end of period | $ | 334,105 | $ | 211,290 | ||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Cash paid (received) during the period for: | ||||||||
Interest | $ | 48,127 | $ | 30,680 | ||||
Income taxes | (6,604 | ) | 590 | |||||
Change in unrealized gains (losses) on securitiesavailable-for-sale, net of taxes | (156 | ) | 195 | |||||
Change in unrealized losses on securities transferred toheld-to-maturity, net of taxes | 574 | 872 | ||||||
Pension liability adjustment, net of taxes | 790 | 877 | ||||||
Change in due to (from) to broker | — | 897 |
See accompanying notes to unaudited consolidated interim financial statements.
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Century Bancorp, Inc.
Notes to Unaudited Consolidated Interim Financial Statements
Nine Months Ended September 30, 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 Form10-Q should be read in conjunction with the Company’s Annual Report on Form10-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 a review of factors, including historicalcharge-off rates with additional allocations based on qualitative risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.
Note 2. Recent Accounting Developments
Recently Adopted Accounting Standards Updates
In July 2017, FASB issued ASU2017-11, 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 ASU2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic310-20) 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.
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In February 2016, the FASB issued ASU2016-02, Leases. This ASU required 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 eliminated today’s real estate-specific provisions for all companies. For lessors, this ASU modified 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, included in other assets, with a corresponding lease liability, included in other liabilities.
In July 2018, ASU2018-10, “Codification Improvements to Topic 842, Leases” (“ASU2018-10”) was issued to provide more detailed guidance and additional clarification for implementing ASU2016-02. Also in July 2018, ASU2018-11, “Targeted Improvements” (“ASU2018-11”) 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 June 2016, the FASB issued ASU2016-13, 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 implementing this ASU, has purchased a software solution and is capturing information needed to implement this ASU. As part of the FASB ASC 326 implementation process the company is using two models: a rating migration model and a probability of default model. The probability of default model is based primarily on four components: loss history, product lifecycle, behavioral attributes and the economic environment. The ratings migration model is designed to estimate loss reserves according to the CECL standard for rated loans or similar instruments. The model structure follows a grade migration approach, where the default rate is based on the probability of each grade transition which is modeled using historical data.
The Company has started to input information into the models, and is running the software program and comparing to existing results. In addition, the Company has also begun developing accounting policies, as well as designing and implementing new internal controls relevant to the updated methodologies and models. The Company has not determined the dollar impact as of September 30, 2019.
The securitiesheld-to-maturity include U.S. Treasury, U.S. Government Sponsored Enterprises, BSA Backed Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities. The Company expects no impact from ASU2016-13 to arise from this portfolio.
Since ASU2016-13, the FASB has issued amendments intended on improving the clarification of the amendment, ASU2018-19 Codification Improvements to Topic 326, Financial Instruments – Credit Losses and ASU2019-04 Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging. The amendment in ASU2018-19 was issued in November 2018 and was intended to clarify that receivables arising from operating leases are not within the scope of Subtopic326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The amendment in ASU2019-04 was issued in April 2019 and was intended to clarify stakeholders’ specific issues about certain aspects of the amendments in ASU2016-13. ASU2019-05 Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief was also issued in May 2019. This ASU provides entities the option to irrevocably elect the fair value option for certain financial assets previously measured at amortized costs basis. The fair value option election does not apply toheld-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics820-10, Fair Value Measurement—Overall. The amendments in this ASU should be applied on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity early adopted the amendments in ASU2016-13.
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In August 2018, FASB issued ASU2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic350-40): 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 obtaininternal-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 ASU2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic715-20): 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 ASU2018-13, 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 disclosures.
In January 2017, the FASB issued ASU2017-04, 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.
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 comparativeyear-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 andyear-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. SecuritiesAvailable-for-Sale
September 30, 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 | $ | — | $ | 8 | $ | 1,992 | ||||||||||||||||
U.S. Government Sponsored Enterprises | — | — | — | — | 3,946 | — | 31 | 3,915 | ||||||||||||||||||||||||
SBA Backed Securities | 58,714 | 51 | 101 | 58,664 | 70,477 | 1 | 284 | 70,194 | ||||||||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities | 170,532 | 189 | 439 | 170,282 | 162,604 | 536 | 250 | 162,890 | ||||||||||||||||||||||||
Privately Issued Residential Mortgage-Backed Securities | 574 | 6 | 1 | 579 | 679 | 3 | 10 | 672 | ||||||||||||||||||||||||
Obligations Issued by States and Political Subdivisions | 28,519 | 57 | — | 28,576 | 93,445 | 58 | — | 93,503 | ||||||||||||||||||||||||
Other Debt Securities | 3,600 | 64 | 26 | 3,638 | 3,600 | 37 | 44 | 3,593 | ||||||||||||||||||||||||
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Total | $ | 261,939 | $ | 367 | $ | 567 | $ | 261,739 | $ | 336,751 | $ | 635 | $ | 627 | $ | 336,759 | ||||||||||||||||
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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 $196,356,000 and $197,304,000 at September 30, 2019 and December 31, 2018, respectively. Also included in securities
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available-for-sale are securities at fair value pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $32,590,000 and $34,787,000 at September 30, 2019 and December 31, 2018, respectively. The Company realized gross gains of $13,000 from the proceeds of $16,285,000 from the sales ofavailable-for-sale securities for the nine months ended September 30, 2019. The Company realized gross gains of $302,000 from the proceeds of $27,517,000 from the sales ofavailable-for-sale securities for the nine months ended September 30, 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 securitiesavailable-for-sale at September 30, 2019.
Amortized Cost | Fair Value | |||||||
(in thousands) | ||||||||
Within one year | $ | 26,187 | $ | 26,184 | ||||
After one but within five years | 134,881 | 134,811 | ||||||
After five but within ten years | 85,551 | 85,378 | ||||||
More than 10 years | 15,320 | 15,366 | ||||||
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Total | $ | 261,939 | $ | 261,739 | ||||
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The weighted average remaining life of investment securitiesavailable-for-sale at September 30, 2019 was 5.1 years. 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 $234,949,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of September 30, 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 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 September 30, 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.
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The following table shows the temporarily impaired securities of the Company’savailable-for-sale portfolio at September 30, 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 24 and 18 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 134 holdings at September 30, 2019.
September 30, 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 | — | — | — | — | — | — | ||||||||||||||||||
SBA Backed Securities | 11,133 | 11 | 24,944 | 90 | 36,077 | 101 | ||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities | 81,305 | 264 | 27,872 | 175 | 109,177 | 439 | ||||||||||||||||||
Privately Issued Residential Mortgage-Backed Securities | — | — | 282 | 1 | 282 | 1 | ||||||||||||||||||
Obligations Issued by States and Political Subdivisions | — | — | — | — | — | — | ||||||||||||||||||
Other Debt Securities | 800 | 1 | 475 | 25 | 1,275 | 26 | ||||||||||||||||||
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Total temporarily impaired securities | $ | 93,238 | $ | 276 | $ | 53,573 | $ | 291 | $ | 146,811 | $ | 567 | ||||||||||||
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The following table shows the temporarily impaired securities of the Company’savailable-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 | ||||||||||||||||||
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Total temporarily impaired securities | $ | 41,108 | $ | 80 | $ | 93,047 | $ | 547 | $ | 134,155 | $ | 627 | ||||||||||||
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Note 4. Investment SecuritiesHeld-to-Maturity
September 30, 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 | 121,516 | 653 | 67 | 122,102 | 234,228 | 336 | 803 | 233,761 | ||||||||||||||||||||||||
SBA Backed Securities | 47,126 | 452 | 66 | 47,512 | 52,051 | — | 2,065 | 49,986 | ||||||||||||||||||||||||
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities | 1,995,493 | 29,911 | 6,553 | 2,018,851 | 1,750,408 | 2,324 | 55,016 | 1,697,716 | ||||||||||||||||||||||||
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Total | $ | 2,164,135 | $ | 31,016 | $ | 6,686 | $ | 2,188,465 | $ | 2,046,647 | $ | 2,660 | $ | 57,886 | $ | 1,991,421 | ||||||||||||||||
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Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,692,033,000 and $1,441,059,000 at September 30, 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 $427,425,000 and $291,190,000 at September 30, 2019 and December 31, 2018, respectively. The Company realized gross gains of $48,000 from the proceeds of $1,194,000 from the sales ofheld-to-maturity securities for the nine months ended September 30, 2019. The sales of securitiesheld-to-maturity relate to certain mortgage backed securities for which the company has previously collected a substantial portion of its principal investment. There were no sales ofheld-to-maturity securities for the nine months ended September 30, 2018.
At September 30, 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.
The following table shows the maturity distribution of the Company’s securitiesheld-to-maturity at September 30, 2019.
Amortized Cost | Fair Value | |||||||
(in thousands) | ||||||||
Within one year | $ | 70,980 | $ | 71,260 | ||||
After one but within five years | 1,809,564 | 1,829,087 | ||||||
After five but within ten years | 271,068 | 275,192 | ||||||
More than ten years | 12,523 | 12,926 | ||||||
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Total | $ | 2,164,135 | $ | 2,188,465 | ||||
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The weighted average remaining life of investment securitiesheld-to-maturity at September 30, 2019 was 3.6 years. Included in the weighted average remaining life calculation at September 30, 2019 were $66,196,000 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 $111,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of September 30, 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 September 30, 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’sheld-to-maturity portfolio September 30, 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 44 and 112 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 505 holdings at September 30, 2019.
September 30, 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 | 9,976 | 22 | 9,954 | 45 | 19,930 | 67 | ||||||||||||||||||
SBA Backed Securities | 13,673 | 66 | — | — | 13,673 | 66 | ||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage- Backed Securities | 163,889 | 816 | 430,714 | 5,737 | 594,603 | 6,553 | ||||||||||||||||||
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Total temporarily impaired securities | $ | 187,538 | $ | 904 | $ | 440,668 | $ | 5,782 | $ | 628,206 | $ | 6,686 | ||||||||||||
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Page 15 of 48
Table of Contents
The following table shows the temporarily impaired securities of the Company’sheld-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 | ||||||||||||||||||
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Total temporarily impaired securities | $ | 207,932 | $ | 2,076 | $ | 1,369,175 | $ | 55,810 | $ | 1,577,107 | $ | 57,886 | ||||||||||||
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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 September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||||
Allowance for loan losses, beginning of period | $ | 29,070 | $ | 27,144 | $ | 28,543 | $ | 26,255 | ||||||||
Loans charged off | (118 | ) | (89 | ) | (336 | ) | (247 | ) | ||||||||
Recoveries on loans previouslycharged-off | 70 | 1,490 | 190 | 1,637 | ||||||||||||
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Net recoveries (charge-offs) | (48 | ) | 1,401 | (146 | ) | 1,390 | ||||||||||
Provision charged to expense | 75 | — | 700 | 900 | ||||||||||||
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Allowance for loan losses, end of period | $ | 29,097 | $ | 28,545 | $ | 29,097 | $ | 28,545 | ||||||||
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Page 16 of 48
Table of Contents
Further information pertaining to the allowance for loan losses for the three months ending September 30, 2019 is as 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 June 30, 2019 | $ | 1,052 | $ | 11,338 | $ | 1,832 | $ | 10,848 | $ | 2,210 | $ | 380 | $ | 1,120 | $ | 290 | $ | 29,070 | ||||||||||||||||||
Charge-offs | — | (57 | ) | — | — | — | (61 | ) | — | — | (118 | ) | ||||||||||||||||||||||||
Recoveries | — | 23 | — | — | — | 47 | — | — | 70 | |||||||||||||||||||||||||||
Provision | (752 | ) | 9 | 751 | 53 | (24 | ) | (84 | ) | (33 | ) | 155 | 75 | |||||||||||||||||||||||
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Ending balance at September 30, 2019 | $ | 300 | $ | 11,313 | $ | 2,583 | $ | 10,901 | $ | 2,186 | $ | 282 | $ | 1,087 | $ | 445 | $ | 29,097 | ||||||||||||||||||
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Amount of allowance for loan losses for loans deemed to be impaired | $ | — | $ | 2 | $ | — | $ | 86 | $ | — | $ | — | $ | — | $ | — | $ | 88 | ||||||||||||||||||
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Amount of allowance for loan losses for loans not deemed to be impaired | $ | 300 | $ | 11,311 | $ | 2,583 | $ | 10,815 | $ | 2,186 | $ | 282 | $ | 1,087 | $ | 445 | $ | 29,009 | ||||||||||||||||||
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Loans: | ||||||||||||||||||||||||||||||||||||
Ending balance | $ | 7,824 | $ | 783,950 | $ | 121,802 | $ | 765,385 | $ | 364,317 | $ | 21,748 | $ | 310,635 | $ | — | $ | 2,375,661 | ||||||||||||||||||
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Loans deemed to be impaired | $ | — | $ | 203 | $ | — | $ | 2,373 | $ | — | $ | — | $ | — | $ | — | $ | 2,576 | ||||||||||||||||||
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Loans not deemed to be impaired | $ | 7,824 | $ | 783,747 | $ | 121,802 | $ | 763,012 | $ | 364,317 | $ | 21,748 | $ | 310,635 | $ | — | $ | 2,373,085 | ||||||||||||||||||
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Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2019 is as 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 | — | (108 | ) | — | — | — | (228 | ) | — | — | (336 | ) | ||||||||||||||||||||||||
Recoveries | — | 49 | — | — | — | 141 | — | — | 190 | |||||||||||||||||||||||||||
Provision | (792 | ) | 374 | 745 | 238 | (4 | ) | 4 | (24 | ) | 159 | 700 | ||||||||||||||||||||||||
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Ending balance at September 30, 2019 | $ | 300 | $ | 11,313 | $ | 2,583 | $ | 10,901 | $ | 2,186 | $ | 282 | $ | 1,087 | $ | 445 | $ | 29,097 | ||||||||||||||||||
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Amount of allowance for loan losses for loans deemed to be impaired | $ | — | $ | 2 | $ | — | $ | 86 | $ | — | $ | — | $ | — | $ | — | $ | 88 | ||||||||||||||||||
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Amount of allowance for loan losses for loans not deemed to be impaired | $ | 300 | $ | 11,311 | $ | 2,583 | $ | 10,815 | $ | 2,186 | $ | 282 | $ | 1,087 | $ | 445 | $ | 29,009 | ||||||||||||||||||
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Loans: | ||||||||||||||||||||||||||||||||||||
Ending balance | $ | 7,824 | $ | 783,950 | $ | 121,802 | $ | 765,385 | $ | 364,317 | $ | 21,748 | $ | 310,635 | $ | — | $ | 2,375,661 | ||||||||||||||||||
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Loans deemed to be impaired | $ | — | $ | 203 | $ | — | $ | 2,373 | $ | — | $ | — | $ | — | $ | — | $ | 2,576 | ||||||||||||||||||
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Loans not deemed to be impaired | $ | 7,824 | $ | 783,747 | $ | 121,802 | $ | 763,012 | $ | 364,317 | $ | 21,748 | $ | 310,635 | $ | — | $ | 2,373,085 | ||||||||||||||||||
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During the nine months ending September 30, 2019, the Company’s provision was primarily attributable to an increase in municipal, Commercial and industrial, and commercial real estate balances offset, somewhat, by a decrease in construction and land development balances. During the three months ending September 30, 2019, the Company’s provision was primarily attributable to an increase in municipal balances offset, somewhat, by a decrease in construction and land development balances. 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. The Company also monitors the volatility of the losses within the historical data. Overall there were improvements in historical loss rates.
Page 17 of 48
Table of Contents
Further information pertaining to the allowance for loan losses for the three months ending September 30, 2018 follows:
Construction and Land Development | Commercial and Industrial | Municipal | Commercial Real Estate | Residential Real Estate | Consumer | Home Equity | Unallocated | Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance at June 30, 2018 | $ | 633 | $ | 10,384 | $ | 1,704 | $ | 10,209 | $ | 2,493 | $ | 336 | $ | 1,078 | $ | 307 | $ | 27,144 | ||||||||||||||||||
Charge-offs | — | (11 | ) | — | — | — | (78 | ) | — | — | (89 | ) | ||||||||||||||||||||||||
Recoveries | 1,432 | 16 | — | — | — | 42 | — | — | 1,490 | |||||||||||||||||||||||||||
Provision | (1,155 | ) | 895 | 84 | 415 | (182 | ) | 32 | (28 | ) | (61 | ) | — | |||||||||||||||||||||||
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Ending balance at September 30, 2018 | $ | 910 | $ | 11,284 | $ | 1,788 | $ | 10,624 | $ | 2,311 | $ | 332 | $ | 1,050 | $ | 246 | $ | 28,545 | ||||||||||||||||||
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Amount of allowance for loan losses for loans deemed to be impaired | $ | — | $ | 93 | $ | — | $ | 95 | $ | 350 | $ | — | $ | — | $ | — | $ | 538 | ||||||||||||||||||
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Amount of allowance for loan losses for loans not deemed to be impaired | $ | 910 | $ | 11,191 | $ | 1,788 | $ | 10,529 | $ | 1,961 | $ | 332 | $ | 1,050 | $ | 246 | $ | 28,007 | ||||||||||||||||||
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Loans: | ||||||||||||||||||||||||||||||||||||
Ending balance | $ | 12,434 | $ | 783,960 | $ | 94,532 | $ | 730,265 | $ | 335,114 | $ | 21,216 | $ | 283,818 | $ | — | $ | 2,261,339 | ||||||||||||||||||
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Loans deemed to be impaired | $ | — | $ | 660 | $ | — | $ | 2,680 | $ | 2,675 | $ | — | $ | — | $ | — | $ | 6,015 | ||||||||||||||||||
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Loans not deemed to be impaired | $ | 12,434 | $ | 783,300 | $ | 94,532 | $ | 727,585 | $ | 332,439 | $ | 21,216 | $ | 283,818 | $ | — | $ | 2,255,324 | ||||||||||||||||||
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Further information pertaining to the allowance for loan losses for the nine months ending September 30, 2018 follows:
Construction and Land Development | Commercial and Industrial | Municipal | Commercial Real Estate | Residential Real Estate | Consumer | Home Equity | Unallocated | Total | ||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 1,645 | $ | 9,651 | $ | 1,720 | $ | 9,728 | $ | 1,873 | $ | 373 | $ | 989 | $ | 276 | $ | 26,255 | ||||||||||||||||||
Charge-offs | — | (16 | ) | — | — | — | (231 | ) | — | — | (247 | ) | ||||||||||||||||||||||||
Recoveries | 1,432 | 49 | — | — | — | 156 | — | — | 1,637 | |||||||||||||||||||||||||||
Provision | (2,167 | ) | 1,600 | 68 | 896 | 438 | 34 | 61 | (30 | ) | 900 | |||||||||||||||||||||||||
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Ending balance at September 30, 2018 | $ | 910 | $ | 11,284 | $ | 1,788 | $ | 10,624 | $ | 2,311 | $ | 332 | $ | 1,050 | $ | 246 | $ | 28,545 | ||||||||||||||||||
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Amount of allowance for loan losses for loans deemed to be impaired | $ | — | $ | 93 | $ | — | $ | 95 | $ | 350 | $ | — | $ | — | $ | — | $ | 538 | ||||||||||||||||||
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Amount of allowance for loan losses for loans not deemed to be impaired | $ | 910 | $ | 11,191 | $ | 1,788 | $ | 10,529 | $ | 1,961 | $ | 332 | $ | 1,050 | $ | 246 | $ | 28,007 | ||||||||||||||||||
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Loans: | ||||||||||||||||||||||||||||||||||||
Ending balance | $ | 12,434 | $ | 783,960 | $ | 94,532 | $ | 730,265 | $ | 335,114 | $ | 21,216 | $ | 283,818 | $ | — | $ | 2,261,339 | ||||||||||||||||||
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Loans deemed to be impaired | $ | — | $ | 660 | $ | — | $ | 2,680 | $ | 2,675 | $ | — | $ | — | $ | — | $ | 6,015 | ||||||||||||||||||
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Loans not deemed to be impaired | $ | 12,434 | $ | 783,300 | $ | 94,532 | $ | 727,585 | $ | 332,439 | $ | 21,216 | $ | 283,818 | $ | — | $ | 2,255,324 | ||||||||||||||||||
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During the nine months ending September 30, 2018, the Company’s provision was primarily attributable to an increase in residential real estate balances and increased qualitative allocations for commercial and industrial and commercial real estate loans, offset, somewhat by the recovery of a construction loan previouslycharged-off and a decrease in construction balances. During the three months ending September 30, 2018, the Company did not require a provision mainly as a result of recoveries of a construction loan previouslycharged-off and a decrease in construction loan balances offset by increased qualitative allocations for commercial and industrial and commercial real estate loans. The Company monitors the outlook for the industries in which our borrowers operate. Healthcare and higher education are two of the primary industries. In particular the Company utilizes outlooks and forecasts from various sources. Overall a general weakening in the outlook was noted resulting in a general increase in the general economic factors. The Company also monitors the volatility of the losses within the historical data.
Page 18 of 48
Table of Contents
The Company utilizes a six grade internal loan rating system for commercial real estate, construction and commercial loans as follows:
Loans rated1-3 (Pass):
Loans in this category are considered “pass” rated loans with low to average risk.
Loans rated 4 (Monitor):
These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of September 30, 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 September 30, 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 September 30, 2019 and December 31, 2018 and full collectability is doubtful.
Impaired:
Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.
The following table presents the Company’s loans by risk rating at September 30, 2019.
Construction and Land Development | Commercial and Industrial | Municipal | Commercial Real Estate | |||||||||||||
(in thousands) | ||||||||||||||||
Grade: | ||||||||||||||||
1-3 (Pass) | $ | 7,824 | $ | 779,722 | $ | 121,802 | $ | 738,459 | ||||||||
4 (Monitor) | — | 4,025 | — | 24,553 | ||||||||||||
5 (Substandard) | — | — | — | — | ||||||||||||
6 (Doubtful) | — | — | — | — | ||||||||||||
Impaired | — | 203 | — | 2,373 | ||||||||||||
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Total | $ | 7,824 | $ | 783,950 | $ | 121,802 | $ | 765,385 | ||||||||
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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 | ||||||||||||
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Total | $ | 13,628 | $ | 761,625 | $ | 97,290 | $ | 750,362 | ||||||||
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Page 19 of 48
Table of Contents
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2019 and are included within the total loan portfolio.
Commercial and Industrial | Municipal | Commercial Real Estate | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Credit Rating: | ||||||||||||||||
Aaa – Aa3 | $ | 497,124 | $ | 54,495 | $ | 40,759 | $ | 592,378 | ||||||||
A1 – A3 | 187,970 | 7,479 | 148,735 | 344,184 | ||||||||||||
Baa1 – Baa3 | — | 51,133 | 122,288 | 173,421 | ||||||||||||
Ba2 | — | 5,895 | — | 5,895 | ||||||||||||
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Total | $ | 685,094 | $ | 119,002 | $ | 311,782 | $ | 1,115,878 | ||||||||
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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 | ||||||||||||
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Total | $ | 663,719 | $ | 95,490 | $ | 312,368 | $ | 1,071,577 | ||||||||
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|
|
|
The Company utilized payment performance as credit quality indicators for the loan types listed below. The indicators are depicted in the table “aging of past due loans,” below.
Further information pertaining to the allowance for loan losses at September 30, 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 | $ | — | $ | — | $ | — | $ | — | $ | 7,824 | $ | 7,824 | ||||||||||||
Commercial and industrial | 108 | 19 | — | 127 | 783,823 | 783,950 | ||||||||||||||||||
Municipal | — | — | — | — | 121,802 | 121,802 | ||||||||||||||||||
Commercial real estate | 155 | 167 | — | 322 | 765,063 | 765,385 | ||||||||||||||||||
Residential real estate | 1,129 | 334 | — | 1,463 | 362,854 | 364,317 | ||||||||||||||||||
Consumer and overdrafts | 15 | — | — | 15 | 21,733 | 21,748 | ||||||||||||||||||
Home equity | 1,050 | 546 | — | 1,596 | 309,039 | 310,635 | ||||||||||||||||||
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|
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|
| |||||||||||||
Total | $ | 2,457 | $ | 1,066 | $ | — | $ | 3,523 | $ | 2,372,138 | $ | 2,375,661 | ||||||||||||
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Page 20 of 48
Table of Contents
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 | ||||||||||||||||||
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| |||||||||||||
Total | $ | 4,647 | $ | 1,313 | $ | — | $ | 5,960 | $ | 2,279,618 | $ | 2,285,578 | ||||||||||||
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Impaired loans
A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Loans arecharged-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 ischarged-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 21 of 48
Table of Contents
The following is information pertaining to impaired loans for September 30, 2019:
Carrying Value | Unpaid Principal Balance | Required Reserve | Average Carrying Value for 3 Months Ending 9/30/19 | Interest Income Recognized for 3 Months Ending 9/30/19 | Average Carrying Value for 9 Months Ending 9/30/19 | Interest Income Recognized for 9 Months Ending 9/30/19 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
With no required reserve recorded: | ||||||||||||||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Commercial and industrial | 87 | 306 | — | 89 | 2 | 87 | 6 | |||||||||||||||||||||
Municipal | — | — | — | — | — | — | — | |||||||||||||||||||||
Commercial real estate | 167 | 194 | — | 729 | — | 529 | — | |||||||||||||||||||||
Residential real estate | — | — | — | — | — | — | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity | — | — | — | — | — | — | — | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 254 | $ | 500 | $ | — | $ | 818 | $ | 2 | $ | 616 | $ | 6 | ||||||||||||||
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|
|
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|
|
|
|
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| |||||||||||||||
With required reserve recorded: | ||||||||||||||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Commercial and industrial | 116 | 116 | 2 | 310 | 2 | 299 | 6 | |||||||||||||||||||||
Municipal | — | — | — | — | — | — | — | |||||||||||||||||||||
Commercial real estate | 2,206 | 2,326 | 86 | 2,140 | 23 | 2,350 | 67 | |||||||||||||||||||||
Residential real estate | — | — | — | — | — | — | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity | — | — | — | — | — | — | — | |||||||||||||||||||||
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|
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|
|
|
|
|
|
| |||||||||||||||
Total | $ | 2,322 | $ | 2,442 | $ | 88 | $ | 2,450 | $ | 25 | $ | 2,649 | $ | 73 | ||||||||||||||
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| |||||||||||||||
Total: | ||||||||||||||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Commercial and industrial | 203 | 422 | 2 | 399 | 4 | 386 | 12 | |||||||||||||||||||||
Municipal | — | — | — | — | — | — | — | |||||||||||||||||||||
Commercial real estate | 2,373 | 2,520 | 86 | 2,869 | 23 | 2,879 | 67 | |||||||||||||||||||||
Residential real estate | — | — | — | — | — | — | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity | — | — | — | — | — | — | — | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 2,576 | $ | 2,942 | $ | 88 | $ | 3,268 | $ | 27 | $ | 3,265 | $ | 79 | ||||||||||||||
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Page 22 of 48
Table of Contents
The following is information pertaining to impaired loans for September 30, 2018:
Carrying Value | Unpaid Principal Balance | Required Reserve | Average Carrying Value for 3 Months Ending 9/30/18 | Interest Income Recognized for 3 Months Ending 9/30/18 | Average Carrying Value for 9 Months Ending 9/30/18 | Interest Income Recognized for 9 Months Ending 9/30/18 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
With no required reserve recorded: | ||||||||||||||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Commercial and industrial | 84 | 282 | — | 56 | — | 47 | — | |||||||||||||||||||||
Municipal | — | — | — | — | — | — | — | |||||||||||||||||||||
Commercial real estate | 196 | 219 | — | 280 | — | 267 | — | |||||||||||||||||||||
Residential real estate | — | — | — | — | — | — | — | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity | — | — | — | — | — | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 280 | $ | 501 | $ | — | $ | 336 | $ | — | $ | 314 | $ | — | ||||||||||||||
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|
|
|
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|
|
|
|
|
| |||||||||||||||
With required reserve recorded: | ||||||||||||||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Commercial and industrial | 576 | 593 | 93 | 589 | 5 | 490 | 14 | |||||||||||||||||||||
Municipal | — | — | — | — | — | — | — | |||||||||||||||||||||
Commercial real estate | 2,484 | 2,597 | 95 | 2,262 | 24 | 2,278 | 71 | |||||||||||||||||||||
Residential real estate | 2,675 | 2,675 | 350 | 2,675 | — | 3,136 | 80 | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity | — | — | — | — | — | — | — | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 5,735 | $ | 5,865 | $ | 538 | $ | 5,526 | $ | 29 | $ | 5,904 | $ | 165 | ||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total: | ||||||||||||||||||||||||||||
Construction and land development | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Commercial and industrial | 660 | 875 | 93 | 645 | 5 | 537 | 14 | |||||||||||||||||||||
Municipal | — | — | — | — | — | — | — | |||||||||||||||||||||
Commercial real estate | 2,680 | 2,816 | 95 | 2,542 | 24 | 2,545 | 71 | |||||||||||||||||||||
Residential real estate | 2,675 | 2,675 | 350 | 2,675 | — | 3,136 | 80 | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Home equity | — | — | — | — | — | — | — | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 6,015 | $ | 6,366 | $ | 538 | $ | 5,862 | $ | 29 | $ | 6,218 | $ | 165 | ||||||||||||||
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|
Troubled debt restructurings are identified as modifications 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 nine month period ended September 30, 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 nine 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. Thepre-modification and post-modification outstanding recorded investment was $2,675,000 for the residential real estate loan that was not accruing interest and had a specific reserve of $350,000. Thepre-modification and post-modification outstanding recorded investment was $17,000 for the consumer loan that was accruing and had a specific reserve of $1,000. The financial impact for the modifications was not material. There was one troubled debt restructuring, for $2,675,000, which subsequently defaulted during the first nine months of 2018. This troubled debt restructuring became other real estate owned during the fourth quarter of 2018 and subsequently sold during the third quarter of 2019.
Page 23 of 48
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 September 30, 2019 | Three Months Ended September 30, 2018 | Affected Line Item in the Statement where Net Income is Presented | |||||||
(in thousands) | ||||||||||
Unrealized gains and losses on available-for-sale securities | $ | 54 | $ | 105 | Net gains on sales of investments | |||||
Tax (expense) or benefit | (15 | ) | (29 | ) | Provision for income taxes | |||||
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| |||||||
Net of tax | $ | 39 | $ | 76 | Net income | |||||
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| |||||||
Accretion of unrealized losses transferred | $ | (209 | ) | $ | (323 | ) | Interest on securities held-to-maturity | |||
Tax (expense) or benefit | 54 | 85 | Provision for income taxes | |||||||
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| |||||||
Net of tax | $ | (155 | ) | $ | (238 | ) | Net income | |||
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| |||||||
Amortization of defined benefit pension items | ||||||||||
Prior-service costs | $ | (29 | )(b) | $ | (4 | )(b) | Salaries and employee benefits | |||
Actuarial gains (losses) | (337 | )(b) | (402 | )(b) | Salaries and employee benefits | |||||
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|
|
| |||||||
Total before tax | (366 | ) | (406 | ) | Income before taxes | |||||
|
|
|
| |||||||
Tax (expense) or benefit | 103 | 114 | Provision for income taxes | |||||||
|
|
|
| |||||||
Net of tax | $ | (263 | ) | $ | (292 | ) | Net income | |||
|
|
|
| |||||||
Details about Accumulated Other Comprehensive Income Components | Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | Affected Line Item in the Statement where Net Income is Presented | |||||||
(in thousands) | ||||||||||
Unrealized gains and losses on available-for-sale securities | $ | 61 | $ | 302 | Net gains on sales of investments | |||||
Tax (expense) or benefit | (17 | ) | (85 | ) | Provision for income taxes | |||||
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| |||||||
Net of tax | $ | 44 | $ | 217 | Net income | |||||
|
|
|
| |||||||
Accretion of unrealized losses transferred | $ | (779 | ) | $ | (1,186 | ) | Interest on securities held-to-maturity | |||
Tax (expense) or benefit | 205 | 314 | Provision for income taxes | |||||||
|
|
|
| |||||||
Net of tax | $ | (574 | ) | $ | (872 | ) | Net income | |||
|
|
|
| |||||||
Amortization of defined benefit pension items | ||||||||||
Prior-service costs | $ | (86 | )(b) | $ | (12 | )(b) | Salaries and employee benefits | |||
Actuarial gains (losses) | (1,013 | )(b) | (1,207 | )(b) | Salaries and employee benefits | |||||
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|
| |||||||
Total before tax | (1,099 | ) | (1,219 | ) | Income before taxes | |||||
|
|
|
| |||||||
Tax (expense) or benefit | 309 | 342 | Provision for income taxes | |||||||
|
|
|
| |||||||
Net of tax | $ | (790 | ) | $ | (877 | ) | Net income | |||
|
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|
|
(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 8) for additional details). |
Page 24 of 48
Table of Contents
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 September 30, 2019 and 2018.
The following table is a reconciliation of basic EPS and diluted EPS.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands except share and per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Basic EPS Computation: | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income, Class A | $ | 7,986 | $ | 7,535 | $ | 22,849 | $ | 20,674 | ||||||||
Net income, Class B | 2,098 | 2,046 | 6,118 | 5,614 | ||||||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding, Class A | 3,650,449 | 3,608,329 | 3,627,076 | 3,608,129 | ||||||||||||
Weighted average shares outstanding, Class B | 1,917,460 | 1,959,580 | 1,940,833 | 1,959,780 | ||||||||||||
Basic EPS, Class A | $ | 2.19 | $ | 2.09 | $ | 6.30 | $ | 5.73 | ||||||||
Basic EPS, Class B | 1.09 | 1.04 | 3.15 | 2.86 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Diluted EPS Computation: | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income, Class A | $ | 7,986 | $ | 7,535 | $ | 22,849 | $ | 20,674 | ||||||||
Net income, Class B | 2,098 | 2,046 | 6,118 | 5,614 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total net income, for diluted EPS, Class A computation | 10,084 | 9,581 | 28,967 | 26,288 | ||||||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding, basic, Class A | 3,650,449 | 3,608,329 | 3,627,076 | 3,608,129 | ||||||||||||
Weighted average shares outstanding, Class B | 1,917,460 | 1,959,580 | 1,940,833 | 1,959,780 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average shares outstanding diluted, Class A | 5,567,909 | 5,567,909 | 5,567,909 | 5,567,909 | ||||||||||||
Weighted average shares outstanding, Class B | 1,917,460 | 1,959,580 | 1,940,833 | 1,959,780 | ||||||||||||
Diluted EPS, Class A | $ | 1.81 | $ | 1.72 | $ | 5.20 | $ | 4.72 | ||||||||
Diluted EPS, Class B | 1.09 | 1.04 | 3.15 | 2.86 | ||||||||||||
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|
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 25 of 48
Table of Contents
Components of Net Periodic Benefit Cost for the Three Months Ended September 30,
Pension Benefits | Supplemental Insurance/ Retirement Plan | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost | $ | 276 | $ | 353 | $ | 256 | $ | 277 | ||||||||
Interest | 473 | 371 | 482 | 346 | ||||||||||||
Expected return on plan assets | (819 | ) | (954 | ) | — | — | ||||||||||
Recognized prior service cost (benefit) | — | (25 | ) | 28 | 29 | |||||||||||
Recognized net actuarial losses | 229 | 226 | 109 | 176 | ||||||||||||
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|
|
|
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| |||||||||
Net periodic benefit cost (credit) | $ | 159 | $ | (29 | ) | $ | 875 | $ | 828 | |||||||
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|
|
|
|
Components of Net Periodic Benefit Cost for the Nine Months Ended September 30,
Pension Benefits | Supplemental Insurance/ Retirement Plan | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||||
Service cost | $ | 828 | $ | 1,059 | $ | 768 | $ | 831 | ||||||||
Interest | 1,419 | 1,111 | 1,445 | 1,040 | ||||||||||||
Expected return on plan assets | (2,457 | ) | (2,863 | ) | — | — | ||||||||||
Recognized prior service cost (benefit) | — | (75 | ) | 86 | 87 | |||||||||||
Recognized net actuarial losses | 687 | 680 | 326 | 527 | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Net periodic benefit cost (credit) | $ | 477 | $ | (88 | ) | $ | 2,625 | $ | 2,485 | |||||||
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|
|
|
|
|
|
|
Approximately $1,506,000 and $507,000 of costs other than service costs, from the table above, are included in other expenses for the nine months ended September 30, 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 ASC820-10, Fair Value Measurements and Disclosures and ASU2016-1, “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. ASC820-10 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 asG-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 havetwo-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 andnon-investment grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts.
Page 26 of 48
Table of Contents
The results of the fair value hierarchy as of September 30, 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) | ||||||||||||||||
SBA Backed Securities | $ | 58,664 | $ | — | $ | 58,664 | $ | — | ||||||||
U.S. Government Agency and Sponsored Mortgage-Backed Securities | 170,282 | — | 170,282 | — | ||||||||||||
Privately Issued Residential Mortgage- Backed Securities | 579 | — | 579 | — | ||||||||||||
Obligations Issued by States and Political Subdivisions | 28,576 | — | 4,775 | 23,801 | ||||||||||||
Other Debt Securities | 3,638 | — | 3,638 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 261,739 | $ | — | $ | 237,938 | $ | 23,801 | ||||||||
|
|
|
|
|
|
|
| |||||||||
Equity Securities | $ | 1,672 | $ | 324 | $ | 1,348 | $ | — | ||||||||
Financial Instruments Measured at Fair Value on aNon-recurring Basis: | ||||||||||||||||
Impaired Loans | $ | 173 | $ | — | $ | — | $ | 173 |
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. 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 related to impaired loans recognized for the three and nine month periods ended September 30, 2019 amounted to $(204,837) and $37,099, respectively.
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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) | $ | 23,801 | Discounted cash flow | Discount rate | 1.7%-3.1% (3) | |||||
Impaired Loans | $ | 173 | 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. |
The changes in Level 3 securities for the nine month period ended September 30, 2019 are shown in the table below:
Obligations Issued by States & Political Subdivisions | ||||
(in thousands) | ||||
Balance at December 31, 2018 | $ | 88,728 | ||
Purchases | 13,290 | |||
Maturities and calls | (78,196 | ) | ||
Amortization | (21 | ) | ||
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| |||
Balance at September 30, 2019 | $ | 23,801 | ||
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The amortized cost of Level 3 securities was $23,801,000 at September 30, 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.
The fair value of impaired loans decreased by $78,000, for the first nine months of 2019, mainly attributable to one loan that was removed from impaired loans. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2019.
The changes in Level 3 securities for the nine month period ended September 30, 2018, are shown in the table below:
Auction Rate Securities | Obligations Issued by States & Political Subdivisions | Total | ||||||||||
(in thousands) | ||||||||||||
Balance at December 31, 2017 | $ | 4,459 | $ | 78,141 | $ | 82,600 | ||||||
Purchases | — | 105,837 | 105,837 | |||||||||
Maturities and calls | — | (72,640 | ) | (72,640 | ) | |||||||
Transfer to Level 2 | (4,459 | ) | — | (4,459 | ) | |||||||
Amortization | — | (104 | ) | (104 | ) | |||||||
Changes in fair value | — | — | — | |||||||||
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Balance at September 30, 2018 | $ | — | $ | 111,234 | $ | 111,234 | ||||||
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The amortized cost of Level 3 securities was $111,234,000 at September 30, 2018 with an unrealized loss of $0. The securities in this category are generally municipal securities with no readily determinable fair. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity. There was one transfer of a security from level 3 to level 2 for the nine months ended September 30, 2018 as a result of increased trading activity and quoted market prices. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 30, 2018.
The 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 | ||||||||||||||
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Total | $ | 336,759 | $ | — | $ | 248,031 | $ | 88,728 | ||||||||
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Equity Securities | $ | 1,596 | $ | 293 | $ | 1,303 | $ | — | ||||||||
Financial Instruments Measured at Fair Value on aNon-recurring Basis: | ||||||||||||||||
Other Real Estate Owned | $ | 2,225 | $ | — | $ | — | $ | 2,225 | ||||||||
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.
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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 allnon-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.
SecuritiesHeld-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 certainnon-performing assets, fair value of the underlying collateral is determined based on the estimated values of individual 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.
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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 September 30, 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 includenon-maturity deposits, short-term borrowings and accrued interest payable.
September 30, 2019 | Carrying Amount | Estimated Fair Value | Fair Value Measurements Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Securitiesheld-to-maturity | $ | 2,164,135 | $ | 2,188,465 | $ | — | $ | 2,188,465 | $ | — | ||||||||||
Loans (1) | 2,346,564 | 2,398,515 | — | — | 2,398,515 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Time deposits | 533,074 | 532,135 | — | 532,135 | — | |||||||||||||||
Other borrowed funds | 209,188 | 209,263 | — | 209,263 | — | |||||||||||||||
Subordinated debentures | 36,083 | 36,083 | — | 36,083 | — | |||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Securitiesheld-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.
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.
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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 606Revenue from Contracts with Customers with a date of initial application of January 1, 2018 through the third 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 nine months ended September 30, 2019 and September 30, 2018, respectively, as a result of adopting Topic 606.
B. Practical Expedients
The Company applies the practical expedient inparagraph 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 inparagraph 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 specificallyout-of-scope of Topic 606. For the revenuein-scope, the following is a description of principal activities, separated by the timing of revenue recognition, from which the Company generates its revenue from contracts with customers.
a. | Revenue earned at a point in time – Examples of revenue earned at a point in time are ATM transaction fees, wire transfer fees, NSF fees, credit and debit card interchange fees and foreign exchange transaction fees. Revenue is generally derived from transactional information accumulated by our systems and is recognized as revenue immediately as the transactions occur or upon providing the service to complete the customer’s transaction. The Company is the principal in each of these contracts, with the exception of credit and debit card interchange fees, in which case we are acting as the agent and record revenue net of expenses paid to the principal. |
b. | Revenue earned over time – The Company earns revenue from contracts with customers in a variety of ways in which the revenue is earned over a period of time – generally monthly or quarterly. Examples of this type of revenue are deposit account service fees, lockbox fees, investment management fees, merchant referral services, and safe deposit box fees. Account service charges, management fees and referral fees are recognized on a monthly basis while any transaction based income is recorded as the activity occurs. Revenue is primarily based on the number and type of transactions or assets managed and is generally derived from transactional information accumulated by our systems. Revenue is recorded in the same period as the related transactions occur or services are rendered to the customer. |
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D. Disaggregation of revenue
The following table presents total revenues as presented in the Consolidated Statements of Income and the related amounts which are from contracts with customers within the scope of Topic 606. As illustrated here, the vast majority of our revenues are specifically excluded from the scope of Topic 606.
Nine Months Ended 9/30/2019 | Revenue from Contracts in Scope of Topic 606 | Nine Months Ended 9/30/2018 | Revenue from Contracts in Scope of Topic 606 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Net interest income | $ | 70,458 | $ | — | $ | 68,871 | $ | — | ||||||||
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Noninterest income: | ||||||||||||||||
Service charges on deposit accounts | 6,801 | 6,801 | 6,268 | 6,268 | ||||||||||||
Lockbox fees | 3,018 | 3,018 | 2,304 | 2,304 | ||||||||||||
Net gains on sales of securities | 61 | — | 302 | — | ||||||||||||
Gains on sales of mortgage loans | 154 | — | — | — | ||||||||||||
Other income | 3,676 | 2,338 | 3,210 | 2,215 | ||||||||||||
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Total noninterest income | 13,710 | 12,157 | 12,084 | 10,787 | ||||||||||||
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Total revenues | $ | 84,168 | $ | 12,157 | $ | 80,955 | $ | 10,787 | ||||||||
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Three Months Ended 9/30/2019 | Revenue from Contracts in Scope of Topic 606 | Three Months Ended 9/30/2018 | Revenue from Contracts in Scope of Topic 606 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Net interest income | $ | 23,770 | $ | — | $ | 23,204 | $ | — | ||||||||
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Noninterest income: | ||||||||||||||||
Service charges on deposit accounts | 2,310 | 2,310 | 2,137 | 2,137 | ||||||||||||
Lockbox fees | 937 | 937 | 892 | 892 | ||||||||||||
Net gains on sales of securities | 53 | — | 105 | — | ||||||||||||
Gains on sales of mortgage loans | — | — | — | — | ||||||||||||
Other income | 986 | 728 | 1,035 | 751 | ||||||||||||
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Total noninterest income | 4,286 | 3,975 | 4,169 | 3,780 | ||||||||||||
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Total revenues | $ | 28,056 | $ | 3,975 | $ | 27,373 | $ | 3,780 | ||||||||
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The following table provides information about receivables with customers.
September 30, 2019 | December 31, 2018 | |||||||
(dollars in thousands) | ||||||||
Receivables, which are included in “Other assets” | $ | 1,142 | $ | 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 2022 with an option to terminate and no option to extend. Lease income, for the sublease, totaled approximately $29,000 for the nine months ended September 30, 2019. Variable lease costs include costs that are not included in the lease liability.
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The components of lease expense were as follows:
Three Months Ended 9/30/2019 | Nine Months Ended 9/30/2019 | |||||||
(in thousands) | ||||||||
Operating lease cost | $ | 550 | $ | 1,676 | ||||
Variable lease cost | 121 | 405 | ||||||
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Total lease cost | $ | 671 | $ | 2,081 | ||||
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Supplemental cash flow information related to leases was as follows:
Three Months Ended 9/30/2019 | Nine Months Ended 9/30/2019 | |||||||
(in thousands) | ||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from operating leases | $ | 528 | $ | 1,605 | ||||
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Right-of-use assets obtained in exchange for lease obligations: | ||||||||
Operating leases | $ | 433 | $ | 1,318 | ||||
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Supplemental balance sheet information related to leases was as follows:
9/30/2019 | ||||
(in thousands, except lease term and discount rate) | ||||
Operating Leases: | ||||
Operating leaseright-of-use assets | $ | 12,944 | ||
Operating lease liabilities | $ | 13,101 | ||
Weighted Average Remaining Lease Term: | ||||
Operating Leases | | 11 Years | | |
Weighted Average Discount Rate: | ||||
Operating Leases | 3.5 | % |
A summary of future minimum rental payments under such leases as the dates indicated follows:
Minimum Rental Payments | ||||||||
September 30, 2019 | December 31, 2018 | |||||||
(in thousands) | ||||||||
Year Ending December 31, 2019 | $ | 459 | $ | 2,490 | ||||
2020 | 2,038 | 2,170 | ||||||
2021 | 1,759 | 1,694 | ||||||
2022 | 1,603 | 1,331 | ||||||
2023 | 1,541 | 1,104 | ||||||
Thereafter | 8,570 | 1,074 | ||||||
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Total lease payments | $ | 15,970 | $ | 9,863 | ||||
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Less imputed interest | (2,869 | ) | ||||||
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Present value of lease liability | $ | 13,101 | ||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. At September 30, 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 andmedium-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 298 government entities.
Net income for the nine months ended September 30, 2019, was $28,967,000 or $5.20 per Class A share diluted, an increase of 10.2% compared to net income of $26,288,000, or $4.72 per Class A share diluted, for the same period a year ago.
Earnings per share (EPS) for each class of stock and time period is as follows:
Three Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Basic EPS – Class A common | $ | 2.19 | $ | 2.09 | ||||
Basic EPS – Class B common | $ | 1.09 | $ | 1.04 | ||||
Diluted EPS – Class A common | $ | 1.81 | $ | 1.72 | ||||
Diluted EPS – Class B common | $ | 1.09 | $ | 1.04 | ||||
Nine Months Ended September 30 | ||||||||
2019 | 2018 | |||||||
Basic EPS – Class A common | $ | 6.30 | $ | 5.73 | ||||
Basic EPS – Class B common | $ | 3.15 | $ | 2.86 | ||||
Diluted EPS – Class A common | $ | 5.20 | $ | 4.72 | ||||
Diluted EPS – Class B common | $ | 3.15 | $ | 2.86 |
Net interest income totaled $70,458,000 for the nine months ended September 30, 2019 compared to $68,871,000 for the same period in 2018. The 2.3% 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 2.08% 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 7.9% combined with an average yield increase of 0.30%, resulting in an increase in interest income of $19,018,000. The average balance of interest bearing liabilities increased 7.6% combined with an average cost of funds increase of 0.50%, resulting in an increase in interest expense of $17,431,000.
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The trends in the net interest margin are illustrated in the graph below:
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 during 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 ontax-exempt assets. During the fourth quarter of 2018 and first and second quarters of 2019, the Company increased its average interest-bearing deposits. These deposits increased net interest income but decreased the net interest margin. During the third quarter of 2019, the net interest margin increased mainly as a result of deposit rate decreases. 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 $200,000 from $900,000 for the nine months ended September 30, 2018 to $700,000 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 $1,066,000 at September 30, 2019, compared to $3,538,000 at December 31, 2018.
The Company’s effective tax rate decreased from 4.6% for the nine months ended September 30, 2018 to 2.0% 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.
During the third quarter of 2019, the Company purchased the existing Brookline branch location that the Company was leasing. Also, during the third quarter, the Company purchased a future branch location in Salem, New Hampshire. The Company plans to open this branch during the third quarter of 2020.
Recent Market Developments
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the“D-F Act”) became law. TheD-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. TheD-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. TheD-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. TheD-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 onnon-interest bearing transaction accounts through December 31, 2012.
In addition, theD-F Act added a new Section 13 to the Bank Holding Company Act, theso-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. The final Rule amendments impact compliance and metrics, proprietary trading, and covered funds; a second round of revisions is anticipated. The final Rule has an effective date of January 1, 2020 though compliance is not required until January 1, 2021. Under the Rule, the Company may be restricted from engaging in
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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).
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories andoff-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 theD-F Act. The EGRRCPA changes certain of the regulatory requirements of theD-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 theD-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 theD-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 September 30, 2019, total loans outstanding were $2,375,661,000 up by $90,083,000 from the total on December 31, 2018. At September 30, 2019, commercial real estate loans accounted for 32.2%, commercial and industrial accounted for 33.0%, and residential real estate loans, including home equity loans, accounted for 28.4% of total loans.
Commercial and industrial loans increased to $783,950,000 at September 30, 2019 from $761,625,000 at December 31, 2018, primarily as a result of loan originations. Commercial real estate loans increased to $765,385,000 from $750,362,000 on December 31, 2018 primarily as a result of loan originations. Construction loans decreased to $7,824,000 at September 30, 2019 from $13,628,000 on December 31, 2018, primarily as a result of loan payoffs. Residential real estate loans increased to $364,317,000 on September 30, 2019 from $348,250,000 on December 31, 2018, primarily as a result of loan originations. Home equity loans increased to $310,635,000 on September 30, 2019 from $292,340,000 at December 31, 2018, primarily as a result of a home equity loan promotion. Municipal loans increased to $121,802,000 from $97,290,000, primarily as a result of 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.
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Allowance for Loan Losses
The allowance for loan loss at September 30, 2019 was $29,097,000 as compared to $28,543,000 at December 31, 2018. The level of the allowance for loan losses to total loans was 1.22% at September 30, 2019 and 1.25% at December 31, 2018. The coverage ratio has decreased primarily as a result of improvements in historical loss rates. 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. 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 publicly available credit ratings the Company tracks these ratings. These ratings are tracked as a credit quality indicator for these loans. Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2019.
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at September 30, 2019 and are included within the total loan portfolio.
Commercial and Industrial | Municipal | Commercial Real Estate | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Credit Rating: | ||||||||||||||||
Aaa – Aa3 | $ | 497,124 | $ | 54,495 | $ | 40,759 | $ | 592,378 | ||||||||
A1 – A3 | 187,970 | 7,479 | 148,735 | 344,184 | ||||||||||||
Baa1 – Baa3 | — | 51,133 | 122,288 | 173,421 | ||||||||||||
Ba2 | — | 5,895 | — | 5,895 | ||||||||||||
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Total | $ | 685,094 | $ | 119,002 | $ | 311,782 | $ | 1,115,878 | ||||||||
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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 | ||||||||||||
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| |||||||||
Total | $ | 663,719 | $ | 95,490 | $ | 312,368 | $ | 1,071,577 | ||||||||
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The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories.
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The following table summarizes the changes in the Company’s allowance for loan losses for the periods indicated.
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | ||||||||||||||||
Allowance for loan losses, beginning of period | $ | 29,070 | $ | 27,144 | $ | 28,543 | $ | 26,255 | ||||||||
Loans charged off | (118 | ) | (89 | ) | (336 | ) | (247 | ) | ||||||||
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Recoveries on loans previouslycharged-off | 70 | 1,490 | 190 | 1,637 | ||||||||||||
Net (charge-offs) recoveries | (48 | ) | 1,401 | (146 | ) | 1,390 | ||||||||||
Provision charged to expense | 75 | — | 700 | 900 | ||||||||||||
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Allowance for loan losses, end of period | $ | 29,097 | $ | 28,545 | $ | 29,097 | $ | 28,545 | ||||||||
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The Company may experience increased levels of nonaccrual loans if borrowers are negatively impacted by future negative economic conditions. Management continually monitors trends in the loan portfolio to determine the appropriate level of allowance for loan losses. At the current time, management believes that the allowance for loan losses is adequate.
Nonperforming Assets
The following table sets forth information regarding nonperforming assets held by the Bank at the dates indicated:
September 30, 2019 | December 31, 2018 | |||||||
(dollars in thousands) | ||||||||
Nonaccruing loans | $ | 1,066 | $ | 1,313 | ||||
Total nonperforming assets | $ | 1,066 | $ | 3,538 | ||||
Loans past due 90 days or more and still accruing | $ | — | $ | — | ||||
Nonaccruing loans as a percentage of total loans | 0.04 | % | 0.06 | % | ||||
Nonperforming assets as a percentage of total assets | 0.02 | % | 0.07 | % | ||||
Accruing troubled debt restructures | $ | 2,404 | $ | 2,559 |
The decrease in nonperforming assets was primarily the result of the sale of one property classified as other real estate owned.
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.
SecuritiesAvailable-for-Sale (at Fair Value)
The securitiesavailable-for-sale portfolio totaled $261,739,000 at September 30, 2019, a decrease of 22.3% from December 31, 2018. The portfolio decreased mainly as a result of calls/maturities, sales and scheduled principal payments of $131,859,000. This was offset, somewhat, by purchases of securitiesavailable-for-sale totaling $57,005,000. The purchases include $13,290,000 of purchases that are obligations issued by States and Political Subdivisions. 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 5.1 years.
At September 30, 2019, 90.9% of the Company’s securitiesavailable-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.
Securitiesavailable-for-sale totaling $23,801,000 or 9.1% of securitiesavailable-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 nine months of 2019, net unrealized loss on the securitiesavailable-for-sale increased to $200,000 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.
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The following table sets forth the fair value of securitiesavailable-for-sale at the dates indicated.
September 30, 2019 | December 31, 2018 | |||||||
(in thousands) | ||||||||
U.S. Treasury | $ | — | $ | 1,992 | ||||
U.S. Government Sponsored Enterprises | — | 3,915 | ||||||
Small Business Administration | 58,664 | 70,194 | ||||||
U.S Government Agency and Sponsored Enterprise Mortgage-backed Securities | 170,282 | 162,890 | ||||||
Privately Issued Residential Mortgage-backed Securities | 579 | 672 | ||||||
Obligations issued by States and Political Subdivisions | 28,576 | 93,503 | ||||||
Other Debt Securities | 3,638 | 3,593 | ||||||
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Total SecuritiesAvailable–for-Sale | $ | 261,739 | $ | 336,759 | ||||
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The Company realized gross gains of $13,000 from the proceeds of $16,285,000 from the sales ofavailable-for-sale securities for the nine months ended September 30, 2019. The Company realized gross gains of $302,000 from the proceeds of $27,517,000 from the sales ofavailable-for-sales securities for the nine months ended September 30, 2018.
SecuritiesHeld-to-Maturity (at Amortized Cost)
The securitiesheld-to-maturity portfolio totaled $2,164,135,000 on September 30, 2019, an increase of 5.7% from December 31, 2018. Purchases of securitiesheld-to-maturity totaled $427,124,000 for the nine months ended September 30, 2019. The purchases were offset somewhat, by calls, maturities and scheduled principal payments of $313,358,000. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 3.6 years. Unrealized losses decreased during the year primarily as a result of increases in interest rates.
The following table sets forth the amortized cost of securitiesheld-to-maturity at the dates indicated.
September 30, 2019 | December 31, 2018 | |||||||
(in thousands) | ||||||||
U.S. Treasury | $ | — | $ | 9,960 | ||||
U.S. Government Sponsored Enterprises | 121,516 | 234,228 | ||||||
SBA Backed Securities | 47,126 | 52,051 | ||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-backed Securities | 1,995,493 | 1,750,408 | ||||||
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Total SecuritiesHeld-to-Maturity | $ | 2,164,135 | $ | 2,046,647 | ||||
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The Company realized gross gains of $48,000 from the proceeds of $1,199,000 from the sales of securitiesheld-to-maturity for the nine months ended September 30, 2019. There were no sales ofheld-to-maturity securities for the nine months ended September 30, 2018. The sales of securitiesheld-to-maturity relate to certain mortgage backed securities for which the Company had previously collected a substantial portion of its principal investment.
The net unrealized gains on investment securitiesheld-to-maturity was $24,330,000 or 1.1% of the total at September 30, 2019 and the net unrealized losses of $55,226,000 or 2.7% of the total at December 31, 2018. The decrease in the net unrealized losses on securitiesheld-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 September 30, 2019 and December 31, 2018.
At September 30, 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.
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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 nine months of 2019, the FHLBB redeemed $13,801,000 of FHLBB stock and the Company purchased $9,852,000 of FHLBB stock. As of September 30, 2019, no impairment has been recognized.
Equity Securities
At September 30, 2019 equity securities totaled $1,672,000 compared to $1,596,000 at December 31, 2018. Equity securities were reclassified from securitiesavailable-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 ASU2016-1 as previously discussed in Note 9.
Deposits and Borrowed Funds
On September 30, 2019, deposits totaled $4,339,853, representing a 1.5% decrease from December 31, 2018. Total deposits decreased primarily as a result of a decrease in demand deposits, money market accounts, and time deposits. These types of deposits decreased primarily from increased competition and deposit seasonality. Demand deposits decreased mainly as a result of decreased corporate checking balances. Savings and NOW deposits increased mainly as a result of an increase in personal savings and municipal NOW accounts, offset somewhat, by decrease in corporate savings deposits. Money market accounts decreased mainly as a result of a decrease in corporate money market accounts as well as decreases in deposit gathering services accounts. Time deposits decreased primarily as a result of decreased personal, corporate and municipal time deposits.
Borrowed funds totaled $516,423,000 at September 30, 2019 compared to $356,618,000 at December 31, 2018. Borrowed funds increased mainly as a result of an increase in repurchase agreements. Repurchase agreements increased primarily as a result of short-term customer activity.
Stockholders’ Equity
At September 30, 2019, total equity was $328,960,000 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 7.25% on September 30, 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 September 30, 2019, was $59.08 as compared to $53.96 on December 31, 2018.
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Results of Operations
The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the three-month periods indicated.
Three Months Ended | ||||||||||||||||||||||||
September 30, 2019 | September 30, 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 | $ | 1,217,324 | $ | 13,665 | 4.45 | % | $ | 1,111,193 | $ | 11,974 | 4.28 | % | ||||||||||||
Loanstax-exempt | 1,145,136 | 10,704 | 3.71 | % | 1,128,742 | 10,375 | 3.65 | % | ||||||||||||||||
Securitiesavailable-for-sale (5): | ||||||||||||||||||||||||
Taxable | 261,312 | 1,969 | 3.01 | % | 296,315 | 1,970 | 2.66 | % | ||||||||||||||||
Tax-exempt | 32,978 | 262 | 3.18 | % | 113,623 | 647 | 2.28 | % | ||||||||||||||||
Securitiesheld-to-maturity: | ||||||||||||||||||||||||
Taxable | 2,141,931 | 14,623 | 2.73 | % | 1,858,695 | 11,507 | 2.48 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 173,150 | 928 | 2.14 | % | 117,312 | 591 | 2.02 | % | ||||||||||||||||
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Total interest-earning assets | 4,971,831 | 42,151 | 3.38 | % | 4,625,880 | 37,064 | 3.19 | % | ||||||||||||||||
Non interest-earning assets | 248,663 | 227,410 | ||||||||||||||||||||||
Allowance for loan losses | (29,079 | ) | (28,204 | ) | ||||||||||||||||||||
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Total assets | $ | 5,191,415 | $ | 4,825,086 | ||||||||||||||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
NOW accounts | $ | 917,133 | $ | 2,366 | 1.02 | % | $ | 910,975 | $ | 1,741 | 0.76 | % | ||||||||||||
Savings accounts | 868,891 | 3,079 | 1.41 | % | 562,133 | 1,231 | 0.87 | % | ||||||||||||||||
Money market accounts | 1,207,387 | 5,050 | 1.66 | % | 1,231,693 | 3,652 | 1.18 | % | ||||||||||||||||
Time deposits | 517,184 | 3,038 | 2.33 | % | 561,249 | 2,571 | 1.82 | % | ||||||||||||||||
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Total interest-bearing deposits | 3,510,595 | 13,533 | 1.53 | % | 3,266,050 | 9,195 | 1.12 | % | ||||||||||||||||
Securities sold under agreements to repurchase | 252,270 | 697 | 1.10 | % | 151,605 | 288 | 0.75 | % | ||||||||||||||||
Other borrowed funds and subordinated debentures | 250,648 | 1,852 | 2.93 | % | 318,829 | 2,078 | 2.59 | % | ||||||||||||||||
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Total interest-bearing liabilities | 4,013,513 | 16,082 | 1.59 | % | 3,736,484 | 11,561 | 1.23 | % | ||||||||||||||||
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Non-interest-bearing liabilities | ||||||||||||||||||||||||
Demand deposits | 775,080 | 736,622 | ||||||||||||||||||||||
Other liabilities | 79,104 | 69,724 | ||||||||||||||||||||||
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Total liabilities | 4,867,697 | 4,542,830 | ||||||||||||||||||||||
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Stockholders’ equity | 323,718 | 282,256 | ||||||||||||||||||||||
Total liabilities & stockholders’ equity | $ | 5,191,415 | $ | 4,825,086 | ||||||||||||||||||||
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Net interest income on a fully taxable equivalent basis | 26,069 | 25,503 | ||||||||||||||||||||||
Less taxable equivalent adjustment | (2,299 | ) | (2,299 | ) | ||||||||||||||||||||
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Net interest income | $ | 23,770 | $ | 23,204 | ||||||||||||||||||||
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Net interest spread (3) | 1.79 | % | 1.96 | % | ||||||||||||||||||||
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Net interest margin (4) | 2.08 | % | 2.19 | % | ||||||||||||||||||||
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(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 securitiesavailable-for-sale calculated utilizing amortized cost. |
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The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the nine-month periods indicated.
Nine Months Ended | ||||||||||||||||||||||||
September 30, 2019 | September 30, 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 | $ | 1,200,512 | $ | 40,114 | 4.47 | % | $ | 1,076,781 | $ | 33,902 | 4.21 | % | ||||||||||||
Loanstax-exempt | 1,124,624 | 31,658 | 3.76 | % | 1,129,413 | 30,018 | 3.55 | % | ||||||||||||||||
Securitiesavailable-for-sale (5): | ||||||||||||||||||||||||
Taxable | 271,637 | 6,338 | 3.11 | % | 317,753 | 5,719 | 2.40 | % | ||||||||||||||||
Tax-exempt | 53,399 | 1,176 | 2.94 | % | 88,269 | 1,342 | 2.03 | % | ||||||||||||||||
Securitiesheld-to-maturity: | ||||||||||||||||||||||||
Taxable | 2,128,082 | 43,006 | 2.69 | % | 1,816,745 | 32,930 | 2.42 | % | ||||||||||||||||
Interest-bearing deposits in other banks | 184,035 | 3,204 | 2.32 | % | 171,773 | 2,239 | 1.74 | % | ||||||||||||||||
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Total interest-earning assets | 4,962,289 | 125,496 | 3.38 | % | 4,600,734 | 106,150 | 3.08 | % | ||||||||||||||||
Non interest-earning assets | 247,744 | 227,185 | ||||||||||||||||||||||
Allowance for loan losses | (28,936 | ) | (27,235 | ) | ||||||||||||||||||||
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Total assets | $ | 5,181,097 | $ | 4,800,684 | ||||||||||||||||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
NOW accounts | $ | 932,139 | $ | 7,057 | 1.01 | % | $ | 944,879 | $ | 4,669 | 0.66 | % | ||||||||||||
Savings accounts | 885,878 | 9,731 | 1.47 | % | 550,585 | 3,109 | 0.75 | % | ||||||||||||||||
Money market accounts | 1,249,531 | 15,805 | 1.69 | % | 1,208,547 | 9,039 | 1.00 | % | ||||||||||||||||
Time deposits | 512,228 | 8,724 | 2.28 | % | 587,742 | 7,465 | 1.70 | % | ||||||||||||||||
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Total interest-bearing deposits | 3,579,776 | 41,317 | 1.54 | % | 3,291,753 | 24,282 | 0.99 | % | ||||||||||||||||
Securities sold under agreements to repurchase | 205,185 | 1,572 | 1.02 | % | 149,970 | 657 | 0.59 | % | ||||||||||||||||
Other borrowed funds and subordinated debentures | 237,887 | 5,274 | 2.96 | % | 298,480 | 5,793 | 2.59 | % | ||||||||||||||||
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Total interest-bearing liabilities | 4,022,848 | 48,163 | 1.60 | % | 3,740,203 | 30,732 | 1.10 | % | ||||||||||||||||
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Non-interest-bearing liabilities | ||||||||||||||||||||||||
Demand deposits | 764,852 | 718,215 | ||||||||||||||||||||||
Other liabilities | 79,327 | 69,404 | ||||||||||||||||||||||
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Total liabilities | 4,867,027 | 4,527,822 | ||||||||||||||||||||||
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Stockholders’ equity | 314,070 | 272,862 | ||||||||||||||||||||||
Total liabilities & stockholders’ equity | $ | 5,181,097 | $ | 4,800,684 | ||||||||||||||||||||
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Net interest income on a fully taxable equivalent basis | 77,333 | 75,418 | ||||||||||||||||||||||
Less taxable equivalent adjustment | (6,875 | ) | (6,547 | ) | ||||||||||||||||||||
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Net interest income | $ | 70,458 | $ | 68,871 | ||||||||||||||||||||
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Net interest spread (3) | 1.78 | % | 1.98 | % | ||||||||||||||||||||
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Net interest margin (4) | 2.08 | % | 2.19 | % | ||||||||||||||||||||
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(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 securitiesavailable-for-sale calculated utilizing amortized cost. |
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The following table presents certain information on afully-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 September 30, 2019 Compared with Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
Increase/(Decrease) Due to Change in | Increase/(Decrease) Due to Change in | |||||||||||||||||||||||
Volume | Rate | Total | Volume | Rate | Total | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||
Taxable | $ | 1,177 | $ | 514 | $ | 1,691 | $ | 4,051 | $ | 2,161 | $ | 6,212 | ||||||||||||
Tax-exempt | 152 | 177 | 329 | (128 | ) | 1,768 | 1,640 | |||||||||||||||||
Securitiesavailable-for-sale | ||||||||||||||||||||||||
Taxable | (247 | ) | 246 | (1 | ) | (911 | ) | 1,530 | 619 | |||||||||||||||
Tax-exempt | (576 | ) | 191 | (385 | ) | (642 | ) | 476 | (166 | ) | ||||||||||||||
Securitiesheld-to-maturity | ||||||||||||||||||||||||
Taxable | 1,861 | 1,255 | 3,116 | 6,031 | 4,045 | 10,076 | ||||||||||||||||||
Interest-bearing deposits in other banks | 297 | 40 | 337 | 169 | 796 | 965 | ||||||||||||||||||
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Total interest income | 2,664 | 2,423 | 5,087 | 8,570 | 10,776 | 19,346 | ||||||||||||||||||
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Interest expense: | ||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||
NOW accounts | 12 | 613 | 625 | (64 | ) | 2,452 | 2,388 | |||||||||||||||||
Savings accounts | 866 | 982 | 1,848 | 2,595 | 4,027 | 6,622 | ||||||||||||||||||
Money market accounts | (73 | ) | 1,471 | 1,398 | 316 | 6,450 | 6,766 | |||||||||||||||||
Time deposits | (214 | ) | 681 | 467 | (1,049 | ) | 2,308 | 1,259 | ||||||||||||||||
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Total interest-bearing deposits | 591 | 3,747 | 4,338 | 1,798 | 15,237 | 17,035 | ||||||||||||||||||
Securities sold under agreements to repurchase | 243 | 166 | 409 | 302 | 613 | 915 | ||||||||||||||||||
Other borrowed funds and subordinated debentures | (481 | ) | 255 | (226 | ) | (1,274 | ) | 755 | (519 | ) | ||||||||||||||
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Total interest expense | 353 | 4,168 | 4,521 | 826 | 16,605 | 17,431 | ||||||||||||||||||
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Change in net interest income | $ | 2,311 | $ | (1,745 | ) | $ | 566 | $ | 7,744 | $ | (5,829 | ) | $ | 1,915 | ||||||||||
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Net Interest Income
For the three months ended September 30, 2019, net interest income on a fully taxable equivalent basis totaled $26,069,000 compared to $25,503,000 for the same period in 2018, an increase of $566,000 or 2.2%. 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 2.08% 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 7.5% combined with an average yield increase of 0.19%, resulting in an increase in fully taxable equivalent interest income of $5,087,000. The average balance of interest bearing liabilities increased 7.4% combined with an average cost of funds increase of 0.36%, resulting in an increase in interest expense of $4,521,000.
For the nine months ended September 30, 2019, net interest income on a fully taxable equivalent basis totaled $77,333,000 compared to $75,418,000 for the same period in 2018, an increase of $1,915,000 or 2.5%. 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 2.08% 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 7.9% combined with an average yield increase of 0.30%, resulting in an increase in fully taxable equivalent interest income of $19,346,000. The average balance of interest bearing liabilities increased 7.6% combined with an average cost of funds increase of 0.50%, resulting in an increase in interest expense of $17,431,000.
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As illustrated in the table above, the main contributors to the increase in net interest income were from, securitiesheld-to-maturity, loans, securitiesavailable-for-sale, and interest-bearing deposits in other banks. Securitiesheld-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. Securitiesavailable-for-sale income increased from an increase in rates paid on the portfolio. The Company has a sizable floating rateavailable-for-sale portfolio. These securities reprice as interest rates rise or fall. Interest-bearing deposits expense 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 interest-bearing liabilities. The Company has modestly raised interest rates on these products to remain competitive.
Provision for Loan Losses
For the three months ended September 30, 2019, the loan loss provision was $75,000 compared to a provision of $0 for the same period last year. For the nine months ended September 30, 2019, the loan loss provision was $700,000 compared to a provision of $900,000 for the same period last year. The increase in the provision for the third quarter of 2019 was primarily the result of net loan recoveries during the third quarter of 2019. The decrease in the provision, for the nine month period ending, was primarily the result of improvements in historical loss factors. Further discussion relating to changes in portfolio composition is discussed in Note 4.
Non-Interest Income and Expense
Other operating income for the quarter ended September 30, 2019 increased by $117,000 from the same period last year to $4,286,000. This was mainly attributable to an increase in lockbox fees of $45,000 and an increase in service charges on deposit accounts of $173,000. This was offset, somewhat, by a decrease in net gains on sales of securities of $52,000 and a decrease in other income of $49,000. 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. Other income decreased mainly as a result of decreases in gains on insurance policies.
Other operating income for the nine months ended September 30, 2019 increased by $1,626,000 from the same period last year to $13,710,000. This was mainly attributable to an increase in lockbox fees of $714,000, an increase in other income of $466,000, an increase in service charges on deposit accounts of $533,000, and gains on sales of mortgage loans of $154,000 offset, somewhat, by a decrease of $241,000 from the sales of securities. Lockbox income increased as a result of an increase in customer accounts. Other income increase mainly as a result of proceeds from life insurance policies. Service charges on deposit accounts increased primarily as a result of an increase in customer activity.
For the quarter ended September 30, 2019, operating expenses increased by $114,000 or 0.7% to $17,462,000, from the same period last year. This was primarily attributable to an increase in salaries and employee benefits of $100,000 and an increase equipment expenses of $81,000. This was offset, somewhat, by a decrease of $49,000 in other expenses and a decrease of $18,000 in occupancy expenses. The increase in salaries and employee benefits was mainly attributable to merit increases. Equipment expense increased mainly from an increase in service contracts. Occupancy costs decreased primarily as a result of decreases in building maintenance. Other expenses decreased mainly as a result of FDIC assessment credits recognized during the quarter, offset, somewhat, by an increase in pension expense.
For the nine months ended September 30, 2019, operating expenses increased by $1,409,000 or 2.7% to $53,917,000, from the same period last year. This was primarily attributable to an increase in other expenses of $927,000, salaries and employee benefits of $290,000, and occupancy expenses of $107,000, and equipment expenses of $85,000. Other expenses increased primarily as a result of increases in pension and consulting expense offset, somewhat, by FDIC assessment credits recognized during the third quarter of 2019. Salaries and employee benefits increased mainly as a result of merit increases. Occupancy costs increased primarily as a result of increases in rent expense associated with a new operating facility and other annual rent increases. Equipment expenses increased mainly as a result of increases in service contracts.
Income Taxes
For the third quarter of 2019, the Company’s income tax expense totaled $435,000 on pretax income of $10,519,000 resulting in an effective tax rate of 4.1%. For last year’s corresponding quarter, the Company’s income tax expense totaled $444,000 on pretax income of $10,025,000 resulting in an effective tax rate of 4.4%. For the first nine months of 2019, the Company’s income tax expense totaled $584,000 on pretax income of $29,551,000 resulting in an effective tax rate of 2.0%. For the first nine months of 2018, the Company’s income tax expense totaled $1,259,000 on pretax income of $27,547,000 resulting in an effective tax rate of 4.6%. The decrease in the effective tax rate, for the nine month period, 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.
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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 onForm 10-K for the fiscal year ended December 31, 2018, filed with the Securities and Exchange Commission. The information is contained in theForm 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 nine months 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.
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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 and15d-14. | |
31.2 | Certification of Chief Financial Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and15d-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 regulationS-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 on10-Q for the quarter ended September 30 2019, formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Income for the nine months ended September 30, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2019 and 2018; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2019 and 2018; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018; and (vi) Notes to Unaudited Consolidated Interim Financial Statements. |
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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: November 8, 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) |
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