UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-15752
CENTURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS | 04-2498617 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification number) |
|
400 MYSTIC AVENUE, MEDFORD, MA | 02155 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number including area code:
(781) 391-4000
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $1.00 par value | Nasdaq Global Market | |
(Title of class) | (Name of Exchange) |
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
State the aggregate market value of the registrants voting and nonvoting stock held by nonaffiliates, computed using the closing price as reported on Nasdaq as of June 30, 2017 was $230,477,369.
Indicate the number of shares outstanding of each of the registrants classes of common stock as of February 28, 2018:
Class A Common Stock, $1.00 par value 3,607,429 Shares
Class B Common Stock, $1.00 par value 1,960,480 Shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).
(1) | Portions of the Registrants Annual Report to Stockholders for the fiscal year ended December 31, 2017 are incorporated into Part II, Items 5-8 of this Form 10-K. |
CENTURY BANCORP INC.
FORM 10-K
Page | ||||||
PART I | ||||||
ITEM 1 | 1-5 | |||||
ITEM 1A | 5 | |||||
ITEM 1B | 7 | |||||
ITEM 2 | 7 | |||||
ITEM 3 | 7 | |||||
ITEM 4 | 8 | |||||
PART II | ||||||
ITEM 5 | 9-10 | |||||
ITEM 6 | 10 | |||||
ITEM 7 |
MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
10 | ||||
ITEM 7A | 10 | |||||
ITEM 8 | 10 | |||||
ITEM 9 |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
10 | ||||
ITEM 9A | 11 | |||||
ITEM 9B | 11 | |||||
PART III | ||||||
ITEM 10 | 99-103 | |||||
ITEM 11 | 104-113 | |||||
ITEM 12 |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
114 | ||||
ITEM 13 |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
115 | ||||
ITEM 14 | 115 | |||||
PART IV | ||||||
ITEM 15 | 116 | |||||
ITEM 16 | 118 | |||||
SIGNATURES | 119 |
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ITEM 1. | BUSINESS |
The Company
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the Company) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the Bank): Century Bank and Trust Company formed in 1969. At December 31, 2017, the Company had total assets of $4.8 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Banks customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher education institutions throughout Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York.
The Companys results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.
The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.
The Company has municipal cash management client engagements in Massachusetts, New Hampshire and Rhode Island comprised of approximately 250 government entities.
Availability of Company Filings
Under the Securities Exchange Act of 1934, Sections 13 and 15(d), periodic and current reports must be filed with the Securities and Exchange Commission (the SEC). The public may read and copy any materials filed with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0030. The Company electronically files with the SEC its periodic and current reports, as well as other filings it makes with the SEC from time to time. The SEC maintains an Internet site that contains reports and other information regarding issuers, including the Company, that file electronically with the SEC, at www.sec.gov , in which all forms filed electronically may be accessed. Additionally, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and additional shareholder information are available free of charge on the Companys website: www.centurybank.com.
Employees
As of December 31, 2017, the Company had 385 full-time and 62 part-time employees. The Companys employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good.
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Financial Services Modernization
On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act (Gramm-Leach) which significantly altered banking laws in the United States. Gramm-Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm Leach, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies were repealed. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking.
In order to engage in these financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a financial holding company by demonstrating that each of its bank subsidiaries is well capitalized, well managed, and has at least a satisfactory rating under the Community Reinvestment Act of 1977 (the CRA). The Company has not elected to become a financial holding company under Gramm-Leach.
These financial activities authorized by Gramm-Leach may also be engaged in by a financial subsidiary of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and any bank affiliates) to be well capitalized and well managed; the aggregate consolidated assets of all of that banks financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if the bank is one of the 100 largest banks, it must meet certain financial rating or other comparable requirements. The Company does not currently conduct activities through a financial subsidiary.
Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks financial subsidiaries, the SEC will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers nonpublic, personal information.
Holding Company Regulation
The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the Holding Company Act), and is registered as such with the Board of Governors of the Federal Reserve Bank (the FRB), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before (i) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the companys consolidated net worth.
The Holding Company Act prohibits a bank holding company, with certain exceptions, from (i) acquiring direct or indirect ownership or control of more than 5% of any class of voting shares of any company which is
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not a bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks, or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The Company and its subsidiaries are examined by federal and state regulators. The FRB has regulatory authority over holding company activities and performed a review of the Company and its subsidiaries as of September 2016.
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, also known as the International Money Laundering Abatement and Anti-Terrorism Act of 2001, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the Gramm-Leach Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Holding Company Act or Bank Merger Act.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among other issues, corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection and enhanced and timely disclosure of corporate information. The SEC has adopted a substantial number of implementing rules and the Financial Industry Regulatory Authority (FINRA) has adopted corporate governance rules that have been approved by the SEC and are applicable to the Company. The changes are intended to allow stockholders to monitor more effectively the performance of companies and management. As directed by Section 302(a) of the Sarbanes-Oxley Act, the Companys Chief Executive Officer and Chief Financial Officer are each required to certify that the Companys quarterly and annual reports do not contain any untrue statement of a material fact. This requirement has several parts, including certification that these officers are responsible for establishing, maintaining and regularly evaluating the effectiveness of the Companys disclosure controls and procedures and internal controls over financial reporting; that they have made certain disclosures to the Companys auditors and the Board of Directors about the Companys disclosure controls and procedures and internal control over financial reporting, and that they have included information in the Companys quarterly and annual reports about their evaluation of the Companys disclosure controls and procedures and internal control over financial reporting, and whether there have been significant changes in the Companys internal disclosure controls and procedures or in other factors that could significantly affect such controls and procedures subsequent to the evaluation and whether there have been any significant changes in the Companys internal control over financial reporting that have materially affected or reasonably likely to materially affect the Companys internal control over financial reporting, and compliance with certain other disclosure objectives. Section 906 of the Sarbanes-Oxley Act requires an additional certification that each periodic report containing financial statements fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934 and that the information in the report fairly presents, in all material respects, the financial conditions and results of operations of the Company.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad
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in scope, affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadened the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012. In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called Volcker Rule, (the Rule) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance must be achieved by July 21, 2015. The conformance period for investments in and relationships with certain legacy covered funds was extended to July 21, 2016 and was extended further to July 31, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Companys financial condition or results of operation.
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act take effect on January 1, 2018. The Tax Act lowers the Companys federal tax rate from 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (AMT) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards.
Deposit Insurance Premiums
The Banks deposits have the benefit of FDIC insurance up to applicable limits. The FDICs Deposit Insurance Fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of assets that it holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis.
On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. The Companys quarterly risk-based deposit insurance assessments were paid from this amount until June 30, 2013. The Company received a refund of $2.4 million of prepaid FDIC assessments in June 2013.
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In February 2011, the FDIC approved a rule to change the assessment base from adjusted domestic deposits to average consolidated total assets minus average tangible equity. The rule has kept the overall amount collected from the industry very close to the amount collected prior to the new calculation.
Risk-Based Capital Guidelines
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled Basel III: A global regulatory framework for more resilient banks and banking systems (Basel III). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule that came into effect in January 2015 sets the Basel III minimum regulatory capital requirements for all organizations. It includes a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raises the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The implementation of the framework did not have a material impact on the Companys financial condition or results of operations.
Competition
The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. A number of these competitors are not subject to the regulatory oversight that the Company is subject to, which increases these competitors flexibility.
Forward-Looking Statements
Certain statements contained herein are not based on historical facts and are forward-looking statements within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Companys control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as may, will, believe, expect, estimate, anticipate, continue or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
ITEM 1A. | RISK FACTORS |
The risk factors that may affect the Companys performance and results of operations include the following:
(i) the Companys business is dependent upon general economic conditions in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York. The national and local economies may adversely affect the Companys performance and results of operations;
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(ii) the Companys earnings depend, to a great extent, upon the level of net interest income generated by the Company, and therefore the Companys results of operations may be adversely affected by increases or decreases in interest rates or by the shape of the yield curve;
(iii) the banking business is highly competitive and the profitability of the Company depends upon the Companys ability to attract loans and deposits in Massachusetts, New Hampshire, Rhode Island, Connecticut, and New York, where the Company competes with a variety of traditional banking companies, some of which have vastly greater resources, and nontraditional institutions such as credit unions and finance companies; .
(iv) at December 31, 2017, approximately 68.8% of the Companys loan portfolio was comprised of commercial and commercial real estate loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans;
(v) at December 31, 2017, approximately 24.6% of the Companys loan portfolio was comprised of residential real estate and home equity loans, exposing the Company to the risks inherent in financings based upon analyses of credit risk and the value of underlying collateral. Accordingly, the Companys profitability may be negatively impacted by errors in risk analyses, by loan defaults and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions;
(vi) economic conditions and interest rate risk could adversely impact the fair value and the ultimate collectibility of the Companys investments. Should an investment be deemed other than temporarily impaired, the Company would be required to writedown the carrying value of the investment through earnings. Such writedown(s) may have a material adverse effect on the Companys financial condition and results of operations;
(vii) writedown of goodwill and other identifiable intangible assets would negatively impact our financial condition and results of operations. At December 31, 2017, our goodwill and other identifiable intangible assets were approximately $2.7 million;
(viii) acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States of America generally and in the Companys markets, which could adversely affect the Companys financial performance and that of the Companys borrowers and on the financial markets and the price of the Companys Class A common stock;
(ix) changes in the extensive laws, regulations and policies governing companies generally and bank holding companies and their subsidiaries, such as the Act and the Tax Act, could alter the Companys business environment or affect the Companys operations;
(x) the potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent to secure bank and customer financial information, could present operational issues, require significant capital spending or impact the Companys reputation;
(xi) evolving information technologies, the need to mitigate against and react to cyber-security risks and electronic fraud risks require significant resources and notwithstanding our investment in resources, we remain subject to cyber security risks and electronic fraud;
(xii) the Companys loan customers may not repay loans according to their terms, and the collateral securing the payment of loans may be insufficient to assure repayment or cover losses. If loan customers fail to repay loans according to the terms of the loans, the Company may experience significant credit losses which could have a material adverse effect on its operating results and capital ratios;
(xiii) the Company is subject to extensive regulation, supervision and examination. Any change in the laws or regulations or failure by the Company to comply with applicable law and regulation, or a change in regulators supervisory policies or examination procedures, whether by the Massachusetts Commissioner of
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Banks, the FDIC, the Federal Reserve Board, other state or federal regulators, the United States Congress, or the Massachusetts legislature could have a material adverse effect on the Companys business, financial condition, results of operations, and cash flows. Changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters, could also impact the Companys financial results; and
These factors, as well as general economic and market conditions in the United States of America, may materially and adversely affect the Companys performance, results of operations and the market price of shares of the Companys Class A common stock.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
No written comments received by the Company from the SEC regarding the Companys periodic or current reports remain unresolved.
ITEM 2. | PROPERTIES |
The Company owns its main banking office, headquarters, and operations center in Medford, Massachusetts, which were expanded in 2004, and 11 of the 26 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2018 to 2028. The Company believes that its banking offices are in good condition.
During June 2016, the Company entered into a lease agreement to open a new branch located in Wellesley, Massachusetts. The Company closed its existing Wellesley branch and transferred the accounts to the new Wellesley branch which opened on December 19, 2016. On September 25, 2017 the Company purchased the new Wellesley location.
ITEM 3. | LEGAL PROCEEDINGS |
The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Companys consolidated financial position.
On September 7, 2017, Crimson Galeria Limited Partnership, Raj & Raj, LLC, Harvard Square Holdings LLC, and Charles River Holdings LLC (collectively, the Plaintiffs) filed suit in the United States District Court for the District of Massachusetts against the Attorney General of the Commonwealth of Massachusetts, the Massachusetts Department of Public Health, the City of Cambridge, the Town of Georgetown, as well as against the Bank, Healthy Pharms, Inc., (Healthy Pharms), Timbuktu Real Estate, LLC, Paul Overgaag, Nathaniel Averill, 4Front Advisors, LLC, 4Front Holdings LLC, Kristopher T. Krane, 3 Brothers Real Estate, LLC, Red Line Management, LLC, unspecified insurance providers to certain Plaintiffs, Tomolly, Inc., and (collectively, the Defendants).
The Plaintiffs allege that they own property in Cambridge, MA, and claim that the value and use of their property will be impaired by Healthy Pharms decision to open a registered medicinal marijuana dispensary in abutting or nearby situated property. The Plaintiffs further allege that the Bank has a banking relationship with Healthy Pharms and that, by entering into such relationship, the Bank conspired with Healthy Pharms to violate the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. The Plaintiffs seek unspecified treble damages and attorneys costs and fees, as well as injunctive and declaratory relief.
The Company believes that the claims and allegations against the Bank set forth in the complaint are without merit, and the Company and the Bank intend to vigorously defend against them.
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ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(a) The Class A Common Stock of the Company is traded on the NASDAQ National Global Market under the symbol CNBKA. The price range of the Companys Class A common stock since January 1, 2016 is shown on page 14. The Companys Class B Common Stock is not traded on any national securities exchange or other public trading market.
The shares of Class A Common Stock are generally not entitled to vote on any matter, including in the election of Company Directors, but, in limited circumstances, may be entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of the Companys Class B Common Stock, voting as a separate class, is required to approve certain extraordinary corporate transactions, the holders of Class B Common Stock have the power to prevent any takeover of the Company not approved by them.
(b) Approximate number of equity security holders as of December 31, 2017:
Class A Common Stock |
1,025 | |||
Class B Common Stock |
175 |
(c) Under the Companys Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.
The following table shows the dividends paid by the Company on the Class A and Class B Common Stock for the periods indicated.
Class A | Class B | |||||||
2016 |
||||||||
First quarter |
$ | 0.12 | $ | 0.06 | ||||
Second quarter |
0.12 | 0.06 | ||||||
Third quarter |
0.12 | 0.06 | ||||||
Fourth quarter |
0.12 | 0.06 | ||||||
2017 |
||||||||
First quarter |
$ | 0.12 | $ | 0.06 | ||||
Second quarter |
0.12 | 0.06 | ||||||
Third quarter |
0.12 | 0.06 | ||||||
Fourth quarter |
0.12 | 0.06 |
The Companys ability to pay dividends on its shares depends generally on dividends it receives from the Bank. Both Massachusetts and federal law limit the payment of dividends by the Bank to the Company. Under FDIC regulations and applicable Massachusetts law, the dollar amount of dividends and any other capital distributions that the Bank may make depends upon its capital position and recent net income. Generally, so long as the Bank remains adequately capitalized, it may potentially make capital distributions during any calendar year equal to up to 100% of net income for the year to date plus retained net income for the two preceding years. However, if the Banks capital becomes impaired or the FDIC or Commissioner otherwise determines that the Bank should conserve capital, the Bank may be prohibited or otherwise limited from paying any dividends or making any other capital distributions.
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The Federal Reserve Board also has authority to prohibit dividends by bank holding companies such as the Company, if their actions constitute unsafe or unsound practices. Prior to the recent financial crisis, the Federal Reserve Board issued a policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Boards view that a bank holding company should pay cash dividends only to the extent that, (1) the companys net income for the past year is sufficient to cover the cash dividends, (2) the rate of earnings retention is consistent with the companys capital needs, asset quality, and overall financial condition, and (3) the minimum regulatory capital adequacy ratios are met. It is also the Federal Reserve Boards policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries. It is expected that the Federal Reserve Board will be more rather than less restrictive for the foreseeable future about dividend practices.
(d) The following schedule provides information with respect to the Companys equity compensation plans under which shares of Class A Common Stock are authorized for issuance as of December 31, 2017:
Equity Compensation Plan Information | ||||||||||||
Plan Category |
Number of Shares
to be Issued Upon Exercise of Outstanding Options (a) |
Weighted-Average
Exercise Price of Outstanding Options (b) |
Number of Shares
Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in Column (a)) ( c) |
|||||||||
Equity compensation plans approved by
|
| $ | | 233,934 | ||||||||
Equity compensation plans not approved by
|
| | | |||||||||
|
|
|
|
|
|
|||||||
Total |
| $ | | 233,934 |
(e) The performance graph information required herein is shown on page 13.
ITEM 6. | SELECTED FINANCIAL DATA |
The information required herein is shown on pages 13 through 15.
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
The information required herein is shown on pages 16 through 39.
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The information required herein is shown on pages 37.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required herein is shown on pages 40 through 95.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
10
ITEM 9A. | CONTROLS AND PROCEDURES |
The Companys principal executive officer and principal financial officer have evaluated the Companys disclosure controls and procedures as of December 31, 2017. Based on this evaluation, the principal executive officer and principal financial officer have concluded that the Companys disclosure controls and procedures are effective. The Companys disclosure controls and procedures also effectively ensure that information required to be disclosed in the Companys filings and submissions with the Securities and Exchange Commission under the Securities Exchange Act of 1934 is accumulated and reported to Company management (including the principal executive officer and principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal control over financial reporting and there have been no changes that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect its internal control over financial reporting or in other factors that could significantly affect its internal control over financial reporting.
On May 14, 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released an updated version of its Internal Control Integrated Framework (2013) (2013 Framework). The 2013 Frameworks internal control components (i.e., control environment, risk assessment, control activities, information and communication, and monitoring activities) remain predominantly the same as those in the 1992 Framework. However, the 2013 Framework was expanded to include 17 principles which must be present and functioning in order to have an effective system of internal controls. The Company implemented the 2013 Framework effective December 31, 2014.
Managements report on internal control over financial reporting is shown on page 98. The audit report of the registered public accounting firm is shown on page 97.
ITEM 9B. | OTHER INFORMATION |
None.
11
FINANCIAL STATEMENTS
13 | ||||
Managements Discussion and Analysis of Results of Operations and Financial Condition |
16 | |||
40 | ||||
41 | ||||
42 | ||||
43 | ||||
44 | ||||
45 | ||||
96 | ||||
Managements Report on Internal Control Over Financial Reporting |
98 |
12
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(dollars in thousands, except share data) | ||||||||||||||||||||
FOR THE YEAR |
||||||||||||||||||||
Interest income |
$ | 113,436 | $ | 96,699 | $ | 90,093 | $ | 85,371 | $ | 79,765 | ||||||||||
Interest expense |
27,820 | 22,617 | 20,134 | 19,136 | 18,805 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
85,616 | 74,082 | 69,959 | 66,235 | 60,960 | |||||||||||||||
Provision for loan losses |
1,790 | 1,375 | 200 | 2,050 | 2,710 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income after provision for loan losses |
83,826 | 72,707 | 69,759 | 64,185 | 58,250 | |||||||||||||||
Other operating income |
16,552 | 16,222 | 15,993 | 15,271 | 18,615 | |||||||||||||||
Operating expenses |
67,119 | 64,757 | 62,198 | 56,730 | 55,812 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income taxes |
33,259 | 24,172 | 23,554 | 22,726 | 21,053 | |||||||||||||||
Provision for income taxes |
10,958 | (362 | ) | 533 | 866 | 1,007 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Core earnings Non-GAAP(1) |
$ | 30,749 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average shares outstanding Class A, basic |
3,604,029 | 3,600,729 | 3,600,729 | 3,591,732 | 3,575,683 | |||||||||||||||
Average shares outstanding Class B, basic |
1,963,880 | 1,967,180 | 1,967,180 | 1,969,030 | 1,980,855 | |||||||||||||||
Average shares outstanding Class A, diluted |
5,567,909 | 5,567,909 | 5,567,909 | 5,562,209 | 5,557,693 | |||||||||||||||
Average shares outstanding Class B, diluted |
1,963,880 | 1,967,180 | 1,967,180 | 1,969,030 | 1,980,855 | |||||||||||||||
Total shares outstanding at year-end |
5,567,909 | 5,567,909 | 5,567,909 | 5,567,909 | 5,556,584 | |||||||||||||||
Earnings per share: |
||||||||||||||||||||
Basic, Class A |
$ | 4.86 | $ | 5.35 | $ | 5.02 | $ | 4.78 | $ | 4.39 | ||||||||||
Basic, Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 | $ | 2.39 | $ | 2.19 | ||||||||||
Diluted, Class A |
$ | 4.01 | $ | 4.41 | $ | 4.13 | $ | 3.93 | $ | 3.61 | ||||||||||
Diluted, Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 | $ | 2.39 | $ | 2.19 | ||||||||||
Dividend payout ratio Non-GAAP(1) |
9.9 | % | 9.0 | % | 9.6 | % | 10.0 | % | 10.9 | % | ||||||||||
AT YEAR-END |
||||||||||||||||||||
Assets |
$ | 4,785,572 | $ | 4,462,608 | $ | 3,947,441 | $ | 3,624,036 | $ | 3,431,154 | ||||||||||
Loans |
2,175,944 | 1,923,933 | 1,731,536 | 1,331,366 | 1,264,763 | |||||||||||||||
Deposits |
3,916,967 | 3,653,218 | 3,075,060 | 2,737,591 | 2,715,839 | |||||||||||||||
Stockholders equity |
260,297 | 240,041 | 214,544 | 192,500 | 176,472 | |||||||||||||||
Book value per share |
$ | 46.75 | $ | 43.11 | $ | 38.53 | $ | 34.57 | $ | 31.76 | ||||||||||
SELECTED FINANCIAL PERCENTAGES |
||||||||||||||||||||
Return on average assets |
0.48 | % | 0.57 | % | 0.59 | % | 0.61 | % | 0.60 | % | ||||||||||
Return on average stockholders equity |
8.75 | % | 10.80 | % | 11.26 | % | 11.57 | % | 11.58 | % | ||||||||||
Net interest margin, taxable equivalent |
2.25 | % | 2.12 | % | 2.18 | % | 2.22 | % | 2.21 | % | ||||||||||
Net (recoveries) charge-offs as a percent of average loans |
0.00 | % | 0.00 | % | (0.04 | )% | 0.05 | % | 0.08 | % | ||||||||||
Average stockholders equity to average assets |
5.50 | % | 5.29 | % | 5.25 | % | 5.27 | % | 5.22 | % | ||||||||||
Efficiency ratio Non-GAAP(1) |
57.8 | % | 62.7 | % | 64.1 | % | 62.0 | % | 63.0 | % |
13
Financial Highlights (Continued)
(1) | Non-GAAP Financial Measures are reconciled in the following tables: |
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Calculation of Efficiency Ratio: |
||||||||||||||||||||
Total Operating Expenses (numerator) |
$ | 67,119 | $ | 64,757 | $ | 62,198 | $ | 56,730 | $ | 55,812 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net Interest Income |
$ | 85,616 | $ | 74,082 | $ | 69,959 | $ | 66,235 | $ | 60,960 | ||||||||||
Total Other Operating Income |
16,552 | 16,222 | 15,993 | 15,271 | 18,615 | |||||||||||||||
Tax Equivalent Adjustment |
13,979 | 12,917 | 11,140 | 10,033 | 8,984 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Income (denominator) |
$ | 116,147 | $ | 103,221 | $ | 97,092 | $ | 91,539 | $ | 88,559 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Efficiency Ratio, Year Non-GAAP |
57.8 | % | 62.7 | % | 64.1 | % | 62.0 | % | 63.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Calculation of Dividend Payout Ratio: |
||||||||||||||||||||
Dividends Paid (numerator) |
$ | 2,200 | $ | 2,201 | $ | 2,200 | $ | 2,196 | $ | 2,191 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net Income (denominator) |
$ | 22,301 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Dividend Payout Ratio Non-GAAP |
9.9 | % | 9.0 | % | 9.6 | % | 10.0 | % | 10.9 | % | ||||||||||
|
|
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|
|
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|
|
|
|||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Calculation of core earnings: |
||||||||||||||||||||
Net Income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Add: Deferred Tax Remeasurement Charge |
8,448 | | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Core earnings Non-GAAP |
$ | 30,749 | $ | 24,534 | $ | 23,021 | $ | 21,860 | $ | 20,046 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Per Share Data 2017, Quarter Ended |
December 31, | September 30, | June 30, | March 31, | ||||||||||||
Market price range (Class A) |
||||||||||||||||
High |
$ | 89.40 | $ | 81.10 | $ | 66.65 | $ | 64.87 | ||||||||
Low |
77.85 | 61.95 | 53.35 | 58.55 | ||||||||||||
Dividends Class A |
0.12 | 0.12 | 0.12 | 0.12 | ||||||||||||
Dividends Class B |
0.06 | 0.06 | 0.06 | 0.06 | ||||||||||||
2016, Quarter Ended |
December 31, | September 30, | June 30, | March 31, | ||||||||||||
Market price range (Class A) |
||||||||||||||||
High |
$ | 62.60 | $ | 45.45 | $ | 43.24 | $ | 43.96 | ||||||||
Low |
44.95 | 41.41 | 38.75 | 38.61 | ||||||||||||
Dividends Class A |
0.12 | 0.12 | 0.12 | 0.12 | ||||||||||||
Dividends Class B |
0.06 | 0.06 | 0.06 | 0.06 |
The stock performance graph below compares the cumulative total shareholder return of the Companys Class A Common Stock from December 31, 2012 to December 31, 2017 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a trading day, the preceding trading day was used.
14
Financial Highlights (Continued)
Comparison of Five-Year
Cumulative Total Return*
Value of $100 Invested on December 31, 2012 at: | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||
Century Bancorp, Inc. |
$ | 102.35 | $ | 124.97 | $ | 137.17 | $ | 191.38 | $ | 251.31 | ||||||||||
NASDAQ Banks |
136.62 | 152.78 | 156.15 | 197.60 | 233.94 | |||||||||||||||
NASDAQ U.S. |
140.12 | 160.78 | 171.97 | 187.22 | 242.71 |
* | Assumes that the value of the investment in the Companys Common Stock and each index was $100 on December 31, 2012 and that all dividends were reinvested. |
15
Managements Discussion and Analysis of Results of Operations and Financial Condition
FORWARD-LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are forward-looking statements within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Companys control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as may, will, believe, expect, estimate, anticipate, continue or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets, and the availability of and costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
RECENT MARKET DEVELOPMENTS
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope, affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection, which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadened the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also permanently raises the current standard maximum FDIC deposit insurance amount to $250,000. The Act extended unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012.
In addition, the Act added a new Section 13 to the Bank Holding Company Act, the so-called Volcker Rule, (the Rule) which generally restricts certain banking entities such as the Company and its subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The Rule became effective July 21, 2012. The final implementing regulations for the Rule were issued by various regulatory agencies in December, 2013 and under an extended conformance regulation compliance was required to be achieved by July 21, 2015. The conformance period for investments in and relationships with certain legacy covered funds has been extended to July 21, 2017. Under the Rule, the Company may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless it qualifies for an exemption from the rule. The Company has little involvement in prohibited proprietary trading or investment activities in covered funds and the Company does not expect that complying with the requirements of the Rule will have any material effect on the Companys financial condition or results of operation.
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. Also, the Basel Committee has issued capital standards entitled Basel III: A global regulatory framework for more resilient banks and banking systems (Basel III). The Federal Reserve Board has finalized its rule implementing the Basel III regulatory capital framework. The rule
16
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
that came into effect in January 2015 sets the Basel III minimum regulatory capital requirements for all organizations. It included a new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raised the minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets and would set a new conservation buffer of 2.5 percent of risk-weighted assets. The implementation of the framework did not have a material impact on the Companys financial condition or results of operations.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted, which represents the most comprehensive reform to the U.S. tax code in over thirty years. The majority of the provisions of the Tax Act takes effect on January 1, 2018. The Tax Act lowers the Companys federal tax rate from 34% to 21%. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (AMT) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards. Tax Act changes for individuals include lower tax rates, mortgage interest and state and local tax limitations as well as an increase in the standard deduction, among others.
OVERVIEW
Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the Company) is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the Bank): Century Bank and Trust Company formed in 1969. At December 31, 2017, the Company had total assets of $4.8 billion. Currently, the Company operates 27 banking offices in 20 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Banks customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and large healthcare and higher education institutions throughout Massachusetts, New Hampshire, Rhode Island, Connecticut and New York.
The Companys results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.
The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium sized businesses and retail customers in its market area. In recent years, the Company has increased business to larger institutions, specifically, healthcare and higher education. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.
The Company has municipal cash management client engagements in Massachusetts, New Hampshire and Rhode Island comprised of approximately 250 government entities.
17
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
The Company had net income of $22,301,000 for the year ended December 31, 2017, compared with net income of $24,534,000 for the year ended December 31, 2016 and net income of $23,021,000 for the year ended December 31, 2015. Class A diluted earnings per share were $4.01 in 2017 compared to $4.41 in 2016 and compared to $4.13 in 2015.
During 2017, the Companys earnings were negatively impacted by a reduction in the value of its net deferred tax asset resulting in a charge of $8.4 million to income tax expense. This was the result of the enactment of the Tax Act on December 22, 2017, which lowered the Companys federal tax rate from 34% to 21%. During 2017 and 2016, the Companys earnings were positively impacted primarily by an increase in net interest income. This increase was primarily due to an increase in earning assets. Also contributing to the increase in earnings for 2016 was a decrease in the provision for loan losses. This was primarily the result of changes in the risk profile of the Companys new loan originations, related methodology enhancements to address these changes, as well as net recoveries being realized during the year. During 2016 and 2015, the U.S. economy experienced a low short-term rate environment. The lower short-term rates negatively impacted the net interest margin as the rate at which short-term deposits could be invested declined more than the rates offered on those deposits.
Earnings per share (EPS) for each class of stock and for each year ended December 31, is as follows:
2017 | 2016 | 2015 | ||||||||||
Basic EPS Class A common |
$ | 4.86 | $ | 5.35 | $ | 5.02 | ||||||
Basic EPS Class B common |
$ | 2.43 | $ | 2.68 | $ | 2.51 | ||||||
Diluted EPS Class A common |
$ | 4.01 | $ | 4.41 | $ | 4.13 | ||||||
Diluted EPS Class B common |
$ | 2.43 | $ | 2.68 | $ | 2.51 |
The trends in the net interest margin are illustrated in the graph below:
Net Interest Margin
During the second and third quarters of 2015 the net interest margin increased primarily as a result of an increase in higher yielding assets as well as prepayment penalties collected. The increase in higher yielding assets was primarily the result of increased purchases of securities held-to-maturity. The margin decreased during the fourth quarter of 2015 primarily as a result of lower yielding loan originations. The margin increased during the first quarter of 2016 primarily as a result of an increase in rates on earning assets. The margin decreased during the second, third, and fourth quarters of 2016 primarily as a result of a decrease in rates on earning assets. The margin increased during 2017 primarily as a result of an increase in rates on earning assets. This increase was primarily the result of the yield on floating rate assets increasing as a result of recent increases in short term interest rates as well as an increase in prepayment penalties collected during the second quarter of 2017. Prepayment penalties collected amounted to $825,000 and contributed approximately seven basis points to the net interest margin for the second quarter. During 2017, the Company has not seen a corresponding increase in short term rates on interest bearing liabilities. While management will continue its efforts to improve the net
18
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin.
Historical U.S. Treasury Yield Curve
A yield curve is a line that typically plots the interest rates of U.S. Treasury Debt, which have different maturity dates but the same credit quality, at a specific point in time. The three main types of yield curve shapes are normal, inverted and flat. Over the past three years, the U.S. economy has experienced low short-term rates. During 2016 and 2017, short-term rates increased more than longer-term rates resulting in a flattening of the yield curve. This flattening of the yield curve became more pronounced during 2017.
Total assets were $4,785,572,000 at December 31, 2017, an increase of 7.2% from total assets of $4,462,608,000 at December 31, 2016.
On December 31, 2017, stockholders equity totaled $260,297,000, compared with $240,041,000 on December 31, 2016. Book value per share increased to $46.75 at December 31, 2017, from $43.11 on December 31, 2016.
During June 2016, the Company entered into a lease agreement to open a new branch located in Wellesley, Massachusetts. The Company closed its existing Wellesley branch and transferred the accounts to the new Wellesley branch which opened on December 19, 2016. On September 25, 2017 the Company purchased the new Wellesley location.
CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies.
The Company considers allowance for loan losses and income taxes to be its critical accounting policies.
Allowance for Loan Losses
Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Managements methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.
19
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. After considering the above components, an unallocated component may be generated to cover uncertainties that could affect managements estimate of probable losses. Further information regarding the Companys methodology for assessing the appropriateness of the allowance is contained within Note 1 of the Notes to Consolidated Financial Statements.
During 2016 and 2017, the Company continued to enhance its methodology to the allowance for loan losses by updating qualitative factors on certain loan portfolios. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Income Taxes
Certain areas of accounting for income taxes require managements judgment, including determining the expected realization of deferred tax assets and the adequacy of liabilities for uncertain tax positions. Judgments are made regarding various tax positions, which are often subjective and involve assumptions about items that are inherently uncertain. If actual factors and conditions differ materially from estimates made by management, the actual realization of the net deferred tax assets or liabilities for uncertain tax positions could vary materially from the amounts previously recorded.
Deferred tax assets arise from items that may be used as a tax deduction or credit in future income tax returns, for which a financial statement tax benefit has already been recognized. The realization of the net deferred tax asset generally depends upon future levels of taxable income. Valuation allowances are recorded against those deferred tax assets determined not likely to be realized. Deferred tax liabilities represent items that will require a future tax payment. They generally represent tax expense recognized in the Companys financial statements for which payment has been deferred, or a deduction taken on the Companys tax return but not yet recognized as an expense in the Companys financial statements. Deferred tax liabilities are also recognized for certain non-cash items such as goodwill.
FINANCIAL CONDITION
Investment Securities
The Companys securities portfolio consists of securities available-for-sale (AFS) and securities held-to-maturity (HTM).
Securities available-for-sale consist of certain U.S. Treasury, U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities; state, county and municipal securities; privately issued mortgage-backed securities; other debt securities; and other marketable equities.
These securities are carried at fair value, and unrealized gains and losses, net of applicable income taxes, are recognized as a separate component of stockholders equity. The fair value of securities available-for-sale at December 31, 2017 totaled $397,475,000 and included gross unrealized gains of $860,000 and gross unrealized losses of $948,000. A year earlier, the fair value of securities available-for-sale was $499,297,000 including gross unrealized gains of $555,000 and gross unrealized losses of $1,478,000. In 2017, the Company recognized gains of $47,000 on the sale of available-for-sale securities. In 2016 and 2015, the Company recognized gains of $52,000 and $289,000, respectively.
20
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Securities classified as held-to-maturity consist of U.S. Government Sponsored Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise mortgage-backed securities. Securities held-to-maturity as of December 31, 2017 are carried at their amortized cost of $1,701,233,000. A year earlier, securities held-to-maturity totaled $1,653,986,000. In 2017 the company did not recognize any gains on the sale of held-to-maturity securities. In 2016 and 2015 the company recognized gains of $12,000 and $305,000, respectively, on the sale of held-to-maturity securities. The sales from securities held-to-maturity relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment.
The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated.
Fair Value of Securities Available-for-Sale
2017 | 2016 | 2015 | ||||||||||||||||||||||
At December 31, |
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Treasury |
$ | 1,984 | 0.5 | % | $ | 2,000 | 0.4 | % | $ | 1,989 | 0.5 | % | ||||||||||||
U.S. Government Sponsored Enterprises |
| 0.0 | % | 24,952 | 5.0 | % | | 0.0 | % | |||||||||||||||
SBA Backed Securities |
80,950 | 20.3 | % | 57,767 | 11.6 | % | 5,989 | 1.5 | % | |||||||||||||||
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities |
225,775 | 56.8 | % | 243,325 | 48.7 | % | 233,526 | 57.7 | % | |||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
892 | 0.2 | % | 1,109 | 0.2 | % | 1,434 | 0.4 | % | |||||||||||||||
Obligations Issued by States and Political Subdivisions |
82,600 | 20.8 | % | 164,876 | 33.0 | % | 156,960 | 38.8 | % | |||||||||||||||
Other Debt Securities |
4,971 | 1.3 | % | 4,924 | 1.0 | % | 4,473 | 1.0 | % | |||||||||||||||
Equity Securities |
303 | 0.1 | % | 344 | 0.1 | % | 252 | 0.1 | % | |||||||||||||||
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|
|||||||||||||
Total |
$ | 397,475 | 100.0 | % | $ | 499,297 | 100.0 | % | $ | 404,623 | 100.0 | % | ||||||||||||
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The majority of the Companys securities AFS are classified as Level 2, as defined in Note 1 of the Notes to Consolidated Financial Statements. The fair values of these securities are obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Managements understanding of a pricing services pricing methodologies includes obtaining an understanding of the valuation risks, assessing its qualification, verification of sources of information and processes used to develop prices and identifying, documenting, and testing controls. Managements validation of a vendors pricing methodology includes establishing internal controls to determine that the pricing information received by a pricing service and used by management in the valuation process is relevant and reliable. Market indicators and industry and economic events are also monitored. The decline in fair value from amortized cost for individual available-for-sale securities that are temporarily impaired is not attributable to changes in credit quality. Because the Company does not intend to sell any of its debt securities and it is not more likely than not that it will be required to sell the debt securities before the anticipated recovery of their remaining amortized cost, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2017.
The increase in SBA Backed Securities was primarily the result of an increased investment return combined with a lower risk rating in these types of securities. The decrease in Obligations Issued by States and Political
21
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Subdivisions was primarily the result of increased competition in the bidding process for these types of securities.
Securities available-for-sale totaling $82,600,000, or 1.7% of assets, are classified as Level 3, as defined in Note 1 of the Notes to Consolidated Financial Statements. These securities are generally municipal securities with no readily determinable fair value. The Company also utilizes internal pricing analysis on various municipal securities using market rates on comparable securities. The securities are carried at fair value with periodic review of underlying financial statements and credit ratings to assess the appropriateness of these valuations.
Debt securities of Government Sponsored Enterprises refer primarily to debt securities of Fannie Mae and Freddie Mac.
The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated.
Amortized Cost of Securities Held-to-Maturity
2017 | 2016 | 2015 | ||||||||||||||||||||||
At December 31, |
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
$ | 104,653 | 6.2 | % | $ | 148,326 | 9.0 | % | $ | 186,734 | 13.0 | % | ||||||||||||
SBA Backed Securities |
57,235 | 3.4 | % | 46,140 | 2.8 | % | | 0.0 | % | |||||||||||||||
U.S. Government Sponsored Enterprise Mortgage-Backed Securities |
1,539,345 | 90.4 | % | 1,459,520 | 88.2 | % | 1,252,169 | 87.0 | % | |||||||||||||||
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Total |
$ | 1,701,233 | 100.0 | % | $ | 1,653,986 | 100.0 | % | $ | 1,438,903 | 100.0 | % | ||||||||||||
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The following two tables set forth contractual maturities of the Banks securities portfolio at December 31, 2017. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Fair Value of Securities Available-for-Sale Amounts Maturing
Within
One Year |
% of
Total |
Weighted
Average Yield |
One
Year to Five Years |
% of
Total |
Weighted
Average Yield |
Five
Years to Ten Years |
% of
Total |
Weighted
Average Yield |
Over
Ten Years |
% of
Average Total |
Weighted
Yield |
|||||||||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Treasury |
$ | | 0.0 | % | 0.00 | % | $ | 1,984 | 0.5 | % | 1.28 | % | $ | | 0.0 | % | 0.00 | % | $ | | 0.0 | % | 0.00 | % | ||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
| 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | ||||||||||||||||||||||||||||
SBA Backed Securities |
| 0.0 | % | 0.00 | % | 14,816 | 3.7 | % | 1.73 | % | 27,031 | 6.8 | % | 1.89 | % | 39,103 | 9.8 | % | 1.90 | % | ||||||||||||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities |
| 0.0 | % | 0.00 | % | 85,292 | 21.5 | % | 2.00 | % | 116,018 | 29.2 | % | 2.03 | % | 24,465 | 6.2 | % | 1.99 | % | ||||||||||||||||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
892 | 0.2 | % | 1.87 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | ||||||||||||||||||||||||||||
Obligations of States and Political Subdivisions |
77,146 | 19.4 | % | 1.82 | % | 770 | 0.2 | % | 3.96 | % | 225 | 0.1 | % | 4.80 | % | 4,459 | 1.1 | % | 3.45 | % | ||||||||||||||||||||||||||||
Other Debt Securities |
300 | 0.1 | % | 1.91 | % | 1,261 | 0.3 | % | 2.04 | % | 1,033 | 0.3 | % | 6.00 | % | 1,035 | 0.3 | % | 6.00 | % | ||||||||||||||||||||||||||||
Equity Securities |
| 0.0 | % | 0.00 | % | | | 0.00 | % | | 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | |||||||||||||||||||||||||||||
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Total |
$ | 78,338 | 19.7 | % | 1.82 | % | $ | 104,123 | 26.2 | % | 1.96 | % | $ | 144,307 | 36.4 | % | 2.04 | % | $ | 69,062 | 17.4 | % | 2.09 | % | ||||||||||||||||||||||||
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22
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Non-
Maturing |
% of
Total |
Weighted
Average Yield |
Total |
% of
Total |
Weighted
Average Yield |
|||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Treasury |
$ | | 0.0 | % | 0.00 | % | $ | 1,984 | 0.5 | % | 1.28 | % | ||||||||||||
U.S. Government Agency Sponsored Enterprises |
| 0.0 | % | 0.00 | % | | 0.0 | % | 0.00 | % | ||||||||||||||
SBA Backed Securities |
| 0.0 | % | 0.00 | % | 80,950 | 20.3 | % | 1.87 | % | ||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities |
| 0.0 | % | 0.00 | % | 225,775 | 56.8 | % | 2.02 | % | ||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
| 0.0 | % | 0.00 | % | 892 | 0.2 | % | 1.87 | % | ||||||||||||||
Obligations of States and Political Subdivisions |
| 0.0 | % | 0.00 | % | 82,600 | 20.8 | % | 1.94 | % | ||||||||||||||
Other Debt Securities |
1,342 | 0.3 | % | 2.22 | % | 4,971 | 1.3 | % | 3.64 | % | ||||||||||||||
Equity Securities |
303 | 0.1 | % | 6.21 | % | 303 | 0.1 | % | 6.21 | % | ||||||||||||||
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Total |
$ | 1,645 | 0.4 | % | 2.95 | % | $ | 397,475 | 100.0 | % | 1.99 | % | ||||||||||||
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Amortized Cost of Securities Held-to-Maturity Amounts Maturing
Within
One Year |
% of
Total |
Weighted
Average Yield |
One
Year to Five Years |
% of
Total |
Weighted
Average Yield |
Five
Years to Ten Years |
% of
Total |
Weighted
Average Yield |
Over
Ten Years |
% of
Total |
Weighted
Average Yield |
Total |
% of
Total |
Weighted
Average Yield |
||||||||||||||||||||||||||||||||||||||||||||||
(dollars in
thousands) |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
$ | 19,947 | 1.2 | % | 1.60 | % | $ | 84,706 | 5.0 | % | 2.12 | % | $ | | 0.0 | % | 0.00 | % | $ | | 0.0 | % | 0.00 | % | $ | 104,653 | 6.2 | % | 2.02 | % | ||||||||||||||||||||||||||||||
SBA Backed Securities |
| 0.0 | % | 0.00 | % | 6,939 | 0.4 | % | 1.58 | % | 50,296 | 3.0 | % | 2.38 | % | | 0.0 | % | 0.00 | % | 57,235 | 3.4 | % | 2.28 | % | |||||||||||||||||||||||||||||||||||
U.S. Government Sponsored Enterprise Mortgage-Backed Securities |
8,805 | 0.5 | % | 2.47 | % | 1,165,634 | 68.5 | % | 2.26 | % | 361,620 | 21.2 | % | 2.42 | % | 3,286 | 0.2 | % | 3.10 | % | 1,539,345 | 90.4 | % | 2.30 | % | |||||||||||||||||||||||||||||||||||
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Total |
$ | 28,752 | 1.7 | % | 1.86 | % | $ | 1,257,279 | 73.9 | % | 2.25 | % | $ | 411,916 | 24.2 | % | 2.41 | % | $ | 3,286 | 0.2 | % | 3.10 | % | $ | 1,701,233 | 100.0 | % | 2.28 | % | ||||||||||||||||||||||||||||||
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At December 31, 2017 and 2016, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which exceeded 10% of stockholders equity. In 2017, sales of securities totaling $18,180,000 in gross proceeds resulted in a net realized gain of $47,000. In 2016, sales of securities totaling $2,568,000 in gross proceeds resulted in a net realized gain of $64,000. There were no sales of state, county or municipal securities during 2017 and 2016.
Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are dependent upon general market conditions and specific conditions related to the issuers of our securities.
23
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Loans
The Companys lending activities are conducted principally in Massachusetts, New Hampshire, Rhode Island, Connecticut and New York. The Company grants single-family and multi-family residential loans, commercial and commercial real estate loans, municipal loans, and a variety of consumer loans. To a lesser extent, the Company grants loans for the construction of residential homes, multi-family properties, commercial real estate properties and land development. Most loans granted by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments are generally dependent on the health of the real estate market in the borrowers geographic areas and of the general economy.
The following summary shows the composition of the loan portfolio at the dates indicated.
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||
December 31, |
Amount |
Percent
of Total |
Amount |
Percent
of Total |
Amount |
Percent
of Total |
Amount |
Percent
of Total |
Amount |
Percent
of Total |
||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Construction and land development |
$ | 18,931 | 0.9 | % | $ | 14,928 | 0.8 | % | $ | 27,421 | 1.6 | % | $ | 22,744 | 1.7 | % | $ | 33,058 | 2.6 | % | ||||||||||||||||||||
Commercial and industrial |
763,807 | 35.1 | % | 612,503 | 31.8 | % | 452,235 | 26.1 | % | 149,732 | 11.2 | % | 76,675 | 6.1 | % | |||||||||||||||||||||||||
Municipal |
106,599 | 4.9 | % | 135,418 | 7.0 | % | 85,685 | 4.9 | % | 41,850 | 3.1 | % | 32,737 | 2.6 | % | |||||||||||||||||||||||||
Commercial real estate |
732,491 | 33.7 | % | 696,173 | 36.2 | % | 721,506 | 41.7 | % | 696,272 | 52.3 | % | 696,317 | 55.0 | % | |||||||||||||||||||||||||
Residential real estate |
287,731 | 13.2 | % | 241,357 | 12.5 | % | 255,346 | 14.7 | % | 257,305 | 19.3 | % | 286,041 | 22.6 | % | |||||||||||||||||||||||||
Consumer |
18,458 | 0.8 | % | 11,013 | 0.6 | % | 10,744 | 0.6 | % | 10,925 | 0.8 | % | 8,824 | 0.7 | % | |||||||||||||||||||||||||
Home equity |
247,345 | 11.4 | % | 211,857 | 11.0 | % | 178,020 | 10.3 | % | 151,275 | 11.4 | % | 130,277 | 10.3 | % | |||||||||||||||||||||||||
Overdrafts |
582 | 0.0 | % | 684 | 0.1 | % | 579 | 0.1 | % | 1,263 | 0.2 | % | 834 | 0.1 | % | |||||||||||||||||||||||||
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Total |
$ | 2,175,944 | 100.0 | % | $ | 1,923,933 | 100.0 | % | $ | 1,731,536 | 100.0 | % | $ | 1,331,366 | 100.0 | % | $ | 1,264,763 | 100.0 | % | ||||||||||||||||||||
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At December 31, 2017, 2016, 2015, 2014 and 2013, loans were carried net of discounts of $272,000, $313,000, $360,000, $407,000 and $454,000, respectively. Net deferred loan fees of $362,000, $641,000, $988,000, $908,000 and $174,000 were carried in 2017, 2016, 2015, 2014 and 2013, respectively.
The following table summarizes the remaining maturity distribution of certain components of the Companys loan portfolio on December 31, 2017. The table excludes loans secured by 14 family residential real estate, loans for household and family personal expenditures, and municipal loans. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.
Remaining Maturities of Selected Loans at December 31, 2017
One Year
or Less |
One to
Five Years |
Over Five
Years |
Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Construction and land development |
$ | | $ | 466 | $ | 18,465 | $ | 18,931 | ||||||||
Commercial and industrial |
34,601 | 57,909 | 671,297 | 763,807 | ||||||||||||
Commercial real estate |
28,122 | 80,724 | 623,645 | 732,491 | ||||||||||||
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Total |
$ | 62,723 | $ | 139,099 | $ | 1,313,407 | $ | 1,515,229 | ||||||||
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24
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
The following table indicates the rate variability of the above loans due after one year.
December 31, 2017 |
One to
Five Years |
Over Five
Years |
Total | |||||||||
(dollars in thousands) | ||||||||||||
Predetermined interest rates |
$ | 69,260 | $ | 325,671 | $ | 394,931 | ||||||
Floating or adjustable interest rates |
69,839 | 987,736 | 1,057,575 | |||||||||
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Total |
$ | 139,099 | $ | 1,313,407 | $ | 1,452,506 | ||||||
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The Companys commercial and industrial (C&I) loan customers represent various small and middle-market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration in any one business sector, and loan risks are generally diversified among many borrowers.
C&I loan customers also include large healthcare and higher education institutions. During 2016 and 2017, the Company increased its lending activities to these types of organizations. This increase may expose the Company to concentration risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other more intangible factors, which are considered in originating commercial loans. The percentage of these types of organizations to total C&I loans has increased to 87 % at December 31, 2017, compared to 81% at December 31, 2016.
Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Banks market area, which generally includes Massachusetts, New Hampshire, and Rhode Island. Also included are loans to educational institutions, hospitals and other non-profit organizations. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three and thirty years.
Amortization schedules are long term and thus a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized nonresidential-type owner-occupied properties. This complements our C&I emphasis placed on the operating business entities and will continue. The regional economic environment affects the risk of both nonresidential and residential mortgages.
Municipal loans customers include loans to municipalities or related interests, primarily for infrastructure projects. The Company had increased its lending activities to municipalities through 2016. Municipal loans decreased during 2017 as a result of loan payoffs.
Residential real estate (14 family) includes two categories of loans. Included in residential real estate are approximately $33,835,000 of C&I type loans secured by 14 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the collateral position.
The other category of residential real estate loans is mostly 14 family residential properties located in the Banks market area. General underwriting criteria are largely the same as those used by Fannie Mae. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a First Time Homebuyer product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category.
Home equity loans are extended as both first and second mortgages on owner-occupied residential properties in the Banks market area. Loans are underwritten to a maximum loan to property value of 75%.
25
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Bank officers evaluate the feasibility of construction projects based on independent appraisals of the project, architects or engineers evaluations of the cost of construction and other relevant data. As of December 31, 2017, the Company was obligated to advance a total of $15,152,000 to complete projects under construction.
The composition of nonperforming assets is as follows:
December 31, |
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Total nonperforming loans |
$ | 1,684 | $ | 1,084 | $ | 2,336 | $ | 4,146 | $ | 2,549 | ||||||||||
Other real estate owned |
| | | | | |||||||||||||||
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Total nonperforming assets |
$ | 1,684 | $ | 1,084 | $ | 2,336 | $ | 4,146 | $ | 2,549 | ||||||||||
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Accruing troubled debt restructured loans |
$ | 2,749 | $ | 3,526 | $ | 2,893 | $ | 3,296 | $ | 5,969 | ||||||||||
Loans past due 90 and still accruing |
| | | | | |||||||||||||||
Nonperforming loans as a percent of gross loans |
0.08 | % | 0.06 | % | 0.13 | % | 0.31 | % | 0.20 | % | ||||||||||
Nonperforming assets as a percent of total assets |
0.04 | % | 0.02 | % | 0.06 | % | 0.11 | % | 0.07 | % |
The composition of impaired loans at December 31, is as follows:
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Residential real estate, multi-family |
$ | 4,212 | $ | 198 | $ | 916 | $ | 962 | $ | 1,199 | ||||||||||
Home equity |
| | 90 | 92 | 94 | |||||||||||||||
Commercial real estate |
2,554 | 3,149 | 1,678 | 4,318 | 4,520 | |||||||||||||||
Construction and land development |
| 94 | 98 | 103 | 608 | |||||||||||||||
Commercial and industrial |
348 | 389 | 443 | 852 | 1,367 | |||||||||||||||
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|
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Total impaired loans |
$ | 7,114 | $ | 3,830 | $ | 3,225 | $ | 6,327 | $ | 7,788 | ||||||||||
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At December 31, 2017, 2016, 2015, 2014 and 2013 impaired loans had specific reserves of $164,000, $173,000, $250,000, $904,000 and $1,019,000, respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $229,533,000, $229,730,000, $185,299,000, $143,696,000 and $109,301,000 at December 31, 2017, 2016, 2015, 2014 and 2013, respectively. The Company had no loans held for sale at December 31, 2017, December 31, 2016, December 31, 2015, December 31, 2014 and December 31, 2013.
Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage servicing assets (MSA) are amortized into non-interest income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are assessed for impairment based on fair value at each reporting date. MSAs are reported in other assets in the consolidated balance sheets. MSAs totaled $1,525,000 at December 31, 2017, $1,629,000 at December 31, 2016, $1,305,000 at December 31, 2015, $941,000 at December 31, 2014 and $703,000 for December 31, 2013.
26
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.
Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Companys commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank.
Nonaccrual loans increased during 2017, primarily as a result of an increase in home equity and residential real estate nonperforming loans. Nonaccrual loans decreased during 2016, primarily as a result of a decrease in home equity and residential real estate nonperforming loans. Nonaccrual loans decreased during 2015 primarily due to the sale and partial charge-off of the property securing a large commercial real estate loan subsequent to foreclosure. Nonaccrual loans increased during 2014 primarily as a result of a large commercial real estate loan.
The Company continues to monitor closely $37,184,000 and $35,583,000 at December 31, 2017 and 2016, respectively, of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2017, although such values may fluctuate with changes in the economy and the real estate market. The increase is primarily attributable to one loan relationship secured by real estate.
27
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Allowance for Loan Losses
The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Companys allowance for loan losses for the years indicated.
Year Ended December 31, |
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Year-end loans outstanding (net of unearned discount and deferred loan fees) |
$ | 2,175,944 | $ | 1,923,933 | $ | 1,731,536 | $ | 1,331,366 | $ | 1,264,763 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Average loans outstanding (net of unearned discount and deferred loan fees) |
$ | 2,059,797 | $ | 1,838,136 | $ | 1,507,546 | $ | 1,307,888 | $ | 1,184,912 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance of allowance for loan losses at the beginning of year |
$ | 24,406 | $ | 23,075 | $ | 22,318 | $ | 20,941 | $ | 19,197 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans charged-off: |
||||||||||||||||||||
Commercial and industrial |
49 | | | 333 | 234 | |||||||||||||||
Construction |
| | 172 | 500 | 1,000 | |||||||||||||||
Commercial real estate |
| | 298 | | | |||||||||||||||
Residential real estate |
| 27 | | 24 | | |||||||||||||||
Consumer |
341 | 362 | 311 | 525 | 579 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans charged-off |
390 | 389 | 781 | 1,382 | 1,813 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Recovery of loans previously charged-off: |
||||||||||||||||||||
Commercial and industrial |
110 | 132 | 212 | 201 | 389 | |||||||||||||||
Construction |
| | 780 | | | |||||||||||||||
Real estate |
84 | 6 | 91 | 117 | 31 | |||||||||||||||
Consumer |
255 | 296 | 255 | 391 | 427 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total recoveries of loans previously charged-off: |
449 | 434 | 1,338 | 709 | 847 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net loan (recoveries) charge-offs |
(59 | ) | (45 | ) | (557 | ) | 673 | 966 | ||||||||||||
Provision charged to operating expense |
1,790 | 1,375 | 200 | 2,050 | 2,710 | |||||||||||||||
Reclassification to other liabilities |
| (89 | ) | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at end of year |
$ | 26,255 | $ | 24,406 | $ | 23,075 | $ | 22,318 | $ | 20,941 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of net (recoveries) charge-offs during the year to average loans outstanding |
0.00 | % | 0.00 | % | (0.04 | )% | 0.05 | % | 0.08 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of allowance for loan losses to loans outstanding |
1.21 | % | 1.27 | % | 1.33 | % | 1.68 | % | 1.66 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
The amount of the allowance for loan losses results from managements evaluation of the quality of the loan portfolio considering such factors as loan status, specific reserves on impaired loans, collateral values, financial
28
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
condition of the borrower, the state of the economy and other relevant information. The pace of the charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Charge-offs declined in 2014, 2015 and 2016 as a result of the overall decrease in the level of nonaccrual loans. The dollar amount of the allowance for loan losses increased primarily as a result of an increase in loan balances offset, somewhat, by lower historical loss factors.
During 2015, the Company enhanced its approach to the development of the historical loss factors and qualitative factors used on certain loan portfolios. The methodology enhancement was in response to the changes in the risk characteristics of the Companys new loan originations, as the Company has continued to increase its exposure to larger loan originations to large institutions with strong credit quality. The Company has limited internal loss history experience with these types of loans, and has determined a more appropriate representation of loss expectation is to utilize external historical loss factors based on public credit ratings, as there is a great deal of default and loss data available on these types of loans from the credit rating agencies. As of June 30, 2015, the Company incorporated this information into the development of the historical loss rates for these loan types. The combination of the enhancements made to the allowance methodology to address the changing risk profile of the Companys new loan originations and the increase in these loan types as a percentage of the overall portfolio, has resulted in a decrease in the ratio of allowance for loan losses to total loans for 2015. For 2016 and 2017, the change in the ratio of the allowance for loan losses to loans outstanding, was primarily due to changes in portfolio composition, lower historical loss rates, and qualitative factor adjustments.
In addition, the Company monitors the outlook for the industries in which these institutions operate. Healthcare and higher education are the primary industries. The Company also monitors the volatility of the losses within the historical data.
By combining the credit rating, the industry outlook and the loss volatility, the Company arrives at the quantitative loss factor for each credit grade.
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2017.
Commercial
and Industrial |
Municipal |
Commercial
Real Estate |
Total | |||||||||||||
(in thousands) | ||||||||||||||||
Credit Rating: |
||||||||||||||||
Aaa-Aa3 |
$ | 478,905 | $ | 62,029 | $ | 45,066 | $ | 586,000 | ||||||||
A1-A3 |
195,599 | 7,635 | 128,554 | 331,788 | ||||||||||||
Baa1-Baa3 |
| 26,970 | 122,000 | 148,970 | ||||||||||||
Ba2 |
| 8,165 | | 8,165 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 674,504 | $ | 104,799 | $ | 295,620 | $ | 1,074,923 | ||||||||
|
|
|
|
|
|
|
|
29
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2016.
Commercial
and Industrial |
Municipal |
Commercial
Real Estate |
Total | |||||||||||||
(in thousands) | ||||||||||||||||
Credit Rating: |
||||||||||||||||
Aaa-Aa3 |
$ | 334,674 | $ | 66,245 | $ | 6,596 | $ | 407,515 | ||||||||
A1-A3 |
188,777 | 33,365 | 129,423 | 351,565 | ||||||||||||
Baa1-Baa3 |
| 26,970 | 127,366 | 154,336 | ||||||||||||
Ba2 |
| 3,610 | | 3,610 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 523,451 | $ | 130,190 | $ | 263,385 | $ | 917,026 | ||||||||
|
|
|
|
|
|
|
|
The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio, including input from an independent organization engaged to review selected larger loans, a review of loan experience and current economic conditions. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. At December 31 of each year listed below, the allowance is comprised of the following:
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||
Amount |
Percent
of Loans in Each Category to Total Loans |
Amount |
Percent
of Loans in Each Category to Total Loans |
Amount |
Percent
of Loans in Each Category to Total Loans |
Amount |
Percent
of Loans in Each Category to Total Loans |
Amount |
Percent
of Loans in Each Category to Total Loans |
|||||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Construction and land development |
$ | 1,645 | 0.9 | % | $ | 1,012 | 0.8 | % | $ | 2,041 | 1.6 | % | $ | 1,592 | 1.7 | % | $ | 2,174 | 2.6 | % | ||||||||||||||||||||
Commercial and industrial |
9,651 | 35.1 | % | 6,972 | 31.8 | % | 5,899 | 26.1 | % | 4,757 | 11.2 | % | 2,617 | 6.1 | % | |||||||||||||||||||||||||
Municipal |
1,720 | 4.9 | % | 1,612 | 7.1 | % | 994 | 4.9 | % | 1,488 | 3.1 | % | 655 | 2.6 | % | |||||||||||||||||||||||||
Commercial real estate |
9,728 | 33.7 | % | 11,135 | 36.2 | % | 10,589 | 41.7 | % | 11,199 | 52.3 | % | 10,935 | 55.0 | % | |||||||||||||||||||||||||
Residential real estate |
1,873 | 13.2 | % | 1,698 | 12.5 | % | 1,320 | 14.7 | % | 776 | 19.3 | % | 2,006 | 22.6 | % | |||||||||||||||||||||||||
Consumer and other |
373 | 0.8 | % | 582 | 0.6 | % | 644 | 0.7 | % | 810 | 1.0 | % | 432 | 0.8 | % | |||||||||||||||||||||||||
Home equity |
989 | 11.4 | % | 1,102 | 11.0 | % | 1,077 | 10.3 | % | 599 | 11.4 | % | 959 | 10.3 | % | |||||||||||||||||||||||||
Unallocated |
276 | 293 | 511 | 1,097 | 1,163 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 26,255 | 100.0 | % | $ | 24,406 | 100.0 | % | $ | 23,075 | 100.0 | % | $ | 22,318 | 100.0 | % | $ | 20,941 | 100.0 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. The enhancements described above have resulted in a lower level of unallocated allowance for loan losses. Further information regarding the allocation of the allowance is contained within Note 6 of the Notes to Consolidated Financial Statements.
30
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Deposits
The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. Additionally, the Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customers checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a report balancing the customers checking account.
Interest rates on deposits are set twice per month by the Banks rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Executive Management Committee.
The following table sets forth the average balances of the Banks deposits for the periods indicated.
2017 | 2016 | 2015 | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Demand Deposits |
$ | 687,853 | 18.0 | % | $ | 609,159 | 17.8 | % | $ | 518,161 | 17.2 | % | ||||||||||||
Savings and Interest Checking |
1,457,872 | 38.2 | % | 1,322,714 | 38.6 | % | 1,139,449 | 37.8 | % | |||||||||||||||
Money Market |
1,105,072 | 28.9 | % | 1,041,404 | 30.4 | % | 951,197 | 31.5 | % | |||||||||||||||
Time Certificates of Deposit |
566,940 | 14.9 | % | 452,562 | 13.2 | % | 408,711 | 13.5 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,817,737 | 100.0 | % | $ | 3,425,839 | 100.0 | % | $ | 3,017,518 | 100.0 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Time Deposits of $100,000 or more as of December 31, are as follows:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Three months or less |
$ | 107,649 | $ | 84,522 | ||||
Three months through six months |
137,260 | 42,736 | ||||||
Six months through twelve months |
123,468 | 85,476 | ||||||
Over twelve months |
135,426 | 153,243 | ||||||
|
|
|
|
|||||
Total |
$ | 503,803 | $ | 365,977 | ||||
|
|
|
|
Borrowings
The Banks borrowings consisted primarily of Federal Home Loan Bank of Boston (FHLBB) borrowings collateralized by a blanket pledge agreement on the Banks FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Banks portfolios. The Banks borrowings from the FHLBB totaled $347,778,000, an increase of $54,778,000 from the prior year. The Banks remaining term borrowing capacity at the FHLBB at December 31, 2017, was approximately $127,631,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12, Other Borrowed Funds and Subordinated Debentures, for a schedule, including related interest rates and other information.
Subordinated Debentures
In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II.
Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first
31
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The coupon rate on these securities was 3.46% at December 31, 2017. The Company is using the proceeds primarily for general business purposes.
Securities Sold Under Agreements to Repurchase
The Banks remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled $158,990,000, a decrease of $23,290,000 from the prior year. See Note 11, Securities Sold Under Agreements to Repurchase, for a schedule, including related interest rates and other information.
RESULTS OF OPERATIONS
Net Interest Income
The Companys operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 14.5% in 2017 to $99,595,000, compared with $86,999,000 in 2016. The increase in net interest income for 2017 was mainly due to an 8.1% increase in the average balances of earning assets, combined with a similar increase in deposits. The increase in net interest income for 2016 was mainly due to a 10.3% increase in the average balances of earning assets, combined with a similar increase in deposits. The level of interest rates, the ability of the Companys earning assets and liabilities to adjust to changes in interest rates and the mix of the Companys earning assets and liabilities affect net interest income. The net interest margin on a fully taxable equivalent basis increased to 2.25 % in 2017 and decreased to 2.12% in 2016 from 2.18% in 2015. The increase in the net interest margin for 2017 was primarily attributable to an increase in rates on earning assets and prepayment penalties collected. The decrease in the net interest margin, for 2016, was primarily the result of a decrease in rates on earning assets. This is primarily as a result of originating larger loans to borrowers with high credit quality, some of which are at variable rates. The Company collected approximately $907,000, $416,000 and $945,000, respectively, of prepayment penalties, which are included in interest income on loans, for 2017, 2016 and 2015, respectively.
Additional information about the net interest margin is contained in the Overview section of this report. Also, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than corresponding asset categories.
32
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
The following table sets forth the distribution of the Companys average assets, liabilities and stockholders equity, and average rates earned or paid on a fully taxable equivalent basis for each of the years indicated.
(1) | On a fully taxable equivalent basis calculated using a federal tax rate of 34%. |
(2) | Nonaccrual loans are included in average amounts outstanding. |
(3) | At amortized cost. |
33
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
The following table summarizes the year-to-year changes in the Companys net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest-bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior years volume. Changes due to volume are computed by multiplying the change in volume by the prior years rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change.
2017 Compared with 2016 | 2016 Compared with 2015 | |||||||||||||||||||||||
Increase/(Decrease) | Increase/(Decrease) | |||||||||||||||||||||||
Due to Change in | Due to Change in | |||||||||||||||||||||||
Year Ended December 31, |
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Loans |
||||||||||||||||||||||||
Taxable |
$ | 4,490 | $ | 289 | $ | 4,779 | $ | 3,306 | $ | (1,118 | ) | $ | 2,188 | |||||||||||
Tax-exempt |
4,080 | 397 | 4,477 | 9,556 | (4,475 | ) | 5,081 | |||||||||||||||||
Securities available-for-sale: |
||||||||||||||||||||||||
Taxable |
68 | 1,822 | 1,890 | 118 | 1,293 | 1,411 | ||||||||||||||||||
Tax-exempt |
(498 | ) | 621 | 123 | 238 | 374 | 612 | |||||||||||||||||
Securities held-to-maturity: |
||||||||||||||||||||||||
Taxable |
4,229 | 1,440 | 5,669 | (1,504 | ) | (205 | ) | (1,709 | ) | |||||||||||||||
Interest-bearing deposits in other banks |
(283 | ) | 1,144 | 861 | 283 | 517 | 800 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest income |
12,086 | 5,713 | 17,799 | 11,997 | (3,614 | ) | 8,383 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Interest expense: |
||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||
NOW accounts |
120 | 1,238 | 1,358 | 267 | 246 | 513 | ||||||||||||||||||
Savings accounts |
412 | 506 | 918 | 244 | 446 | 690 | ||||||||||||||||||
Money market accounts |
228 | 1,856 | 2,084 | 299 | 205 | 504 | ||||||||||||||||||
Time deposits |
1,551 | 662 | 2,213 | 543 | 276 | 819 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-bearing deposits |
2,311 | 4,262 | 6,573 | 1,353 | 1,173 | 2,526 | ||||||||||||||||||
Securities sold under agreements to repurchase |
(77 | ) | 101 | 24 | (46 | ) | 31 | (15 | ) | |||||||||||||||
Other borrowed funds and subordinated debentures |
(1,187 | ) | (207 | ) | (1,394 | ) | (392 | ) | 364 | (28 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest expense |
1,047 | 4,156 | 5,203 | 915 | 1,568 | 2,483 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Change in net interest income |
$ | 11,039 | $ | 1,557 | $ | 12,596 | $ | 11,082 | $ | (5,182 | ) | $ | 5,900 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Average earning assets were $4,435,905,000 in 2017, an increase of $330,744,000 or 8.1% from the average in 2016, which was 10.3% higher than the average in 2015. Total average securities, including securities available-for-sale and securities held-to-maturity, were $2,186,915,000, an increase of 7.6% from the average in 2016. The increase in securities volume was mainly attributable to an increase in taxable securities held-to-maturity. An increase in securities volume and short term rates resulted in higher securities income, which increased 20.2% to $45,795,000 on a fully tax equivalent basis. Total average loans increased 12.1% to
34
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
$2,059,797,000 after increasing $330,590,000 in 2016. The primary reason for the increase in loans was due in large part to an increase in tax-exempt lending as well as taxable residential mortgage and commercial lending. The increase in loan volume resulted in higher loan income. Loan income increased by 13.2% or $9,256,000 to $79,523,000 in 2017 compared to 2016. Total loan income was $62,998,000 in 2015. Prepayment penalties collected were $907,000, $416,000, and $945,000 for 2017, 2016, and 2015, respectively.
The Companys sources of funds include deposits and borrowed funds. On average, deposits increased 11.4%, or $391,898,000, in 2017 after increasing by 13.5%, or $408,321,000, in 2016. Deposits increased in 2017, primarily as a result of increases in time deposits, savings, demand deposits, money market, and NOW accounts. Deposits increased in 2016, primarily as a result of increases in demand deposits, savings, money market, NOW accounts, and time deposits. Borrowed funds and subordinated debentures decreased by 14.1% in 2017, following a decrease of 6.2% in 2016. The majority of the Companys borrowed funds are borrowings from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $48,872,000, and average retail repurchase agreements decreased by $33,272,000 in 2017. Interest expense totaled $27,820,000 in 2017, an increase of $5,203,000, or 23.0%, from 2016 when interest expense increased 12.3% from 2015. The increase in interest expense, for 2017, is primarily due to increases in the rates on deposits as well as an increase in average balances of deposits offset, somewhat, by a decrease in borrowed funds. The increase in interest expense, for 2016, is primarily due to increases in the average balances of deposits as well as an increase in rates offset, somewhat, by a decrease in borrowed funds.
Provision for Loan Losses
The provision for loan losses was $1,790,000 in 2017, compared with $1,375,000 in 2016 and $200,000 in 2015. These provisions are the result of managements evaluation of the amounts and credit quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The provision for loan losses increased during 2017, primarily as a result of an increase in loan balances offset, somewhat, by changes in historical loss factors. The provision for loan losses increased during 2016, primarily as a result of an increase in loan balances. During the second quarter of 2015, the Company enhanced its approach to the development of the historical loss factors on certain loans within the portfolio. This was done in response to the changing risk profile of the Companys new loan originations and related methodology enhancements to address these changes.
Other Operating Income
During 2017, the Company continued to experience strong results in its fee-based services, including fees derived from traditional banking activities such as deposit-related services, its automated lockbox collection system and full-service securities brokerage supported by LPL Financial, a full-service securities brokerage business.
Under the lockbox program, which is not tied to extensions of credit by the Company, the Companys customers arrange for payments of their accounts receivable to be made directly to the Company. The Company records the amounts paid to its customers, deposits the funds to the customers account and provides automated records of the transactions to customers. Typical customers for the lockbox service are municipalities that use it to automate tax collections, cable TV companies and other commercial enterprises.
Through a program called Investment Services at Century Bank, the Bank provides full-service securities brokerage services supported by LPL Financial, a full-service securities brokerage business. Registered representatives employed by Century Bank offer limited investment advice, execute transactions and assist customers in financial and retirement planning. LPL Financial provides research to the Banks representatives. The Bank receives a share in the commission revenues.
35
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Total other operating income in 2017 was $16,552,000, an increase of $330,000, or 2.0%, compared to 2016. This increase followed an increase of $229,000, or 1.4%, in 2016, compared to 2015. Included in other operating income are net gains on sales of securities of $47,000, $64,000 and $594,000 in 2017, 2016 and 2015, respectively. Also included in other operating income are net gains on sales of mortgage loans of $370,000, $1,331,000 and $1,034,000 in 2017, 2016 and 2015, respectively. Service charge income, which continues to be a major source of other operating income, totaling $8,586,000 in 2017, increased $679,000 compared to 2016. This followed an increase of $175,000 in 2016 compared to 2015. The increase in fees, in 2017, was mainly attributable to an increase in fees collected from processing activities and debit card fees. The increase in fees, in 2016, was mainly attributable to an increase in fees collected from processing activities and debit card fees; this was offset somewhat by a decrease in overdraft fees. Lockbox revenues totaled $3,290,000, up $126,000 in 2017 following a decrease of $47,000 in 2016. Other income totaled $3,906,000, up $465,000 in 2017 following an increase of $399,000 in 2016. The increase in 2017 was primarily the result of increases in wealth management fees, and merchant card sales royalties. The increase in 2016 was primarily the result of increases in wealth management fees, merchant and charge card sales royalties, and cash surrender values of life insurance policies.
Operating Expenses
Total operating expenses were $67,119,000 in 2017, compared to $64,757,000 in 2016 and $62,198,000 in 2015.
Salaries and employee benefits expenses increased by $1,865,000 or 4.7% in 2017, after increasing by 3.8% in 2016. The increase in 2017 was mainly attributable to merit increases in salaries, bonus, and health insurance costs. The increase in 2016 was mainly attributable to merit increases in salaries, bonus accruals, pension costs and health insurance costs.
Occupancy expense decreased by $7,000, or 0.1%, in 2017, following an increase of $31,000, or 0.5%, in 2016. The decrease in 2017 was primarily attributable to a decrease in rent expense. The increase in 2016 was primarily attributable to an increase in rent expense.
Equipment expense increased by $47,000, or 1.7%, in 2017, following an increase of $219,000, or 8.3%, in 2016. The increase in 2017 was primarily attributable to an increase in service contracts. The increase in 2016 was primarily attributable to an increase in depreciation expense.
FDIC assessments decreased by $321,000, or 16.9%, in 2017, following a decrease of $250,000, or 11.6%, in 2016. FDIC assessments decreased in 2017 and 2016 mainly as a result of a decrease in the assessment rate.
Other operating expenses increased by $778,000 in 2017, which followed a $1,107,000 increase in 2016. The increase in 2017 was primarily attributable to an increase in contributions, legal expenses, and marketing expenses. The increase in 2016 was primarily attributable to an increase in marketing expenses, telephone expenses, software maintenance costs, contributions, and postage expenses.
Provision for Income Taxes
Income tax expense was 10,958,000 in 2017, $(362,000) in 2016, and $533,000 in 2015. The effective tax rate was 32.9% in 2017, (1.5%) in 2016 and 2.3% in 2015. The increase in the effective tax rate for 2017 was primarily the result of a reduction in the value of the deferred tax asset resulting in a charge of $8,448,000 to income tax expense. On December 22, 2017, the Tax Act was enacted, which lowered the Companys federal tax rate from 34% to 21%. As a result of the rate reduction, the Company recorded a reduction in the value of its net deferred tax asset. The decrease in the effective tax rate for 2016 was mainly attributable to an increase in tax-exempt interest income as a percentage of taxable income. The federal tax rate was 34% in 2017, 2016 and 2015.
36
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
Market Risk and Asset Liability Management
Market risk is the risk of loss from adverse changes in market prices and rates. The Companys 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 Companys profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Companys earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Companys exposure to differential changes in interest rates between assets and liabilities is an interest rate risk management test.
This test measures the impact on net interest income of an immediate change in interest rates in 100-basis point increments as set forth in the following table:
Change in Interest Rates (in Basis Points) |
Percentage Change in
Net Interest Income(1) |
|
+400 | (10.1) | |
+300 | (9.0) | |
+200 | (6.3) | |
+100 | (2.5) | |
100 | 1.2 | |
200 | 2.6 |
(1) | The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment. |
The changes in the table above are within the Companys policy parameters.
The Companys primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Companys net interest income and capital, while structuring the Companys asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk.
Liquidity and Capital Resources
Liquidity is provided by maintaining an adequate level of liquid assets that includes cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $356,430,000 on December 31, 2017, compared with $239,334,000 on December 31, 2016. In each of these two years, deposit and borrowing activity has generally been adequate to support asset activity.
The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.
Capital Adequacy
Total stockholders equity was $260,297,000 at December 31, 2017, compared with $240,041,000 at December 31, 2016. The Companys equity increased primarily as a result of earnings and a decrease on other comprehensive loss, net of taxes, offset somewhat by dividends paid. Other comprehensive loss, net of taxes,
37
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
decreased primarily as a result of a decrease in unrealized losses on securities transferred from available-for-sale to held-to-maturity and a decrease in unrealized losses on securities available-for-sale. This was offset, somewhat, by an increase in the pension liability, net of taxes. The reduction in the value of the Companys deferred tax asset of $8.4 million impacted the Companys total equity as a reduction to retained earnings.
Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance-sheet items. The following table reflects capital ratios computed utilizing the recently implemented Basel III regulatory capital framework:
Minimum
Capital Ratios |
Bank | Company | ||||||||||
Leverage ratios |
4.00 | % | 6.55 | % | 6.78 | % | ||||||
Common equity tier 1 risk weighted capital ratios |
4.50 | % | 11.69 | % | 10.71 | % | ||||||
Tier 1 risk weighted capital ratios |
6.00 | % | 11.69 | % | 12.05 | % | ||||||
Total risk weighted capital ratios |
8.00 | % | 12.70 | % | 13.05 | % |
Contractual Obligations, Commitments, and Contingencies
The Company has entered into contractual obligations and commitments. The following tables summarize the Companys contractual cash obligations and other commitments at December 31, 2017.
Contractual Obligations and Commitments by Maturity (dollars in thousands)
Payments Due By Period | ||||||||||||||||||||
CONTRACTUAL OBLIGATIONS |
Total |
Less Than
One Year |
One to
Three Years |
Three to
Five Years |
After Five
Years |
|||||||||||||||
FHLBB advances |
$ | 347,778 | $ | 164,500 | $ | 91,000 | $ | 28,500 | $ | 63,778 | ||||||||||
Subordinated debentures |
36,083 | | | | 36,083 | |||||||||||||||
Retirement benefit obligations |
43,460 | 3,626 | 7,371 | 7,825 | 24,638 | |||||||||||||||
Lease obligations |
10,660 | 2,309 | 4,005 | 2,404 | 1,942 | |||||||||||||||
Customer repurchase agreements |
158,990 | 158,990 | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total contractual cash obligations |
$ | 596,971 | $ | 329,425 | $ | 102,376 | $ | 38,729 | $ | 126,441 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Amount of Commitment Expiring By Period | ||||||||||||||||||||
OTHER COMMITMENTS |
Total |
Less Than
One Year |
One to
Three Years |
Three to
Five Years |
After Five
Years |
|||||||||||||||
Lines of credit |
$ | 434,618 | $ | 26,127 | $ | 138,030 | $ | 5,132 | $ | 265,329 | ||||||||||
Standby and commercial letters of credit |
5,520 | 2,991 | 2,371 | 106 | 52 | |||||||||||||||
Other commitments |
56,502 | 6,105 | 4,234 | 2,491 | 43,672 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commitments |
$ | 496,640 | $ | 35,223 | $ | 144,635 | $ | 7,729 | $ | 309,053 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to
38
Managements Discussion and Analysis of Results of Operations and Financial Condition (Continued)
originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments with off-balance-sheet risk at December 31 are as follows:
Contract or Notional Amount |
2017 | 2016 | ||||||
(dollars in thousands) | ||||||||
Financial instruments whose contract amount represents credit risk: |
||||||||
Commitments to originate 14 family mortgages |
$ | 5,748 | $ | 13,877 | ||||
Standby and commercial letters of credit |
5,520 | 6,796 | ||||||
Unused lines of credit |
434,618 | 362,357 | ||||||
Unadvanced portions of construction loans |
15,152 | 22,049 | ||||||
Unadvanced portions of other loans |
35,602 | 52,224 |
Commitments to originate loans, unadvanced portions of construction loans and unused letters of credit are generally agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The fair value of standby letters of credit was $66,000 and $44,000 for 2017 and 2016, respectively.
Recent Accounting Developments
See Note 1 to the Notes to Consolidated Financial Statements for details of recent accounting developments and their expected impact on the Companys financial statements.
39
See accompanying Notes to Consolidated Financial Statements.
40
Consolidated Statements of Income
Year Ended December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands except share data) | ||||||||||||
INTEREST INCOME |
||||||||||||
Loans, taxable |
$ | 39,103 | $ | 34,324 | $ | 32,136 | ||||||
Loans, non-taxable |
26,910 | 23,440 | 19,992 | |||||||||
Securities available-for-sale, taxable |
4,987 | 3,003 | 1,900 | |||||||||
Securities available-for-sale, non-taxable |
1,119 | 1,051 | 583 | |||||||||
Federal Home Loan Bank of Boston dividends |
872 | 966 | 658 | |||||||||
Securities held-to-maturity |
38,348 | 32,679 | 34,388 | |||||||||
Federal funds sold, interest-bearing deposits in other banks and short-term investments |
2,097 | 1,236 | 436 | |||||||||
|
|
|
|
|
|
|||||||
Total interest income |
113,436 | 96,699 | 90,093 | |||||||||
INTEREST EXPENSE |
||||||||||||
Savings and NOW deposits |
6,296 | 4,020 | 2,817 | |||||||||
Money market accounts |
5,626 | 3,542 | 3,038 | |||||||||
Time deposits |
7,919 | 5,706 | 4,887 | |||||||||
Securities sold under agreements to repurchase |
496 | 472 | 487 | |||||||||
Other borrowed funds and subordinated debentures |
7,483 | 8,877 | 8,905 | |||||||||
|
|
|
|
|
|
|||||||
Total interest expense |
27,820 | 22,617 | 20,134 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income |
85,616 | 74,082 | 69,959 | |||||||||
Provision for loan losses (Note 6) |
1,790 | 1,375 | 200 | |||||||||
|
|
|
|
|
|
|||||||
Net interest income after provision for loan losses |
83,826 | 72,707 | 69,759 | |||||||||
OTHER OPERATING INCOME |
||||||||||||
Service charges on deposit accounts |
8,586 | 7,907 | 7,732 | |||||||||
Lockbox fees |
3,290 | 3,164 | 3,211 | |||||||||
Brokerage commissions |
353 | 315 | 380 | |||||||||
Net gains on sales of securities |
47 | 64 | 594 | |||||||||
Gains on sales of mortgage loans |
370 | 1,331 | 1,034 | |||||||||
Other income |
3,906 | 3,441 | 3,042 | |||||||||
|
|
|
|
|
|
|||||||
Total other operating income |
16,552 | 16,222 | 15,993 | |||||||||
OPERATING EXPENSES |
||||||||||||
Salaries and employee benefits (Note 17) |
41,913 | 40,048 | 38,596 | |||||||||
Occupancy |
6,140 | 6,147 | 6,116 | |||||||||
Equipment |
2,892 | 2,845 | 2,626 | |||||||||
FDIC assessments |
1,581 | 1,902 | 2,152 | |||||||||
Other (Note 20) |
14,593 | 13,815 | 12,708 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
67,119 | 64,757 | 62,198 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
33,259 | 24,172 | 23,554 | |||||||||
Provision for income taxes (Note 16) |
10,958 | (362 | ) | 533 | ||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | ||||||
|
|
|
|
|
|
|||||||
SHARE DATA (Note 14) |
||||||||||||
Weighted average number of shares outstanding, basic |
||||||||||||
Class A |
3,604,029 | 3,600,729 | 3,600,729 | |||||||||
Class B |
1,963,880 | 1,967,180 | 1,967,180 | |||||||||
Weighted average number of shares outstanding, diluted |
||||||||||||
Class A |
5,567,909 | 5,567,909 | 5,567,909 | |||||||||
Class B |
1,963,880 | 1,967,180 | 1,967,180 | |||||||||
Basic earnings per share |
||||||||||||
Class A |
$ | 4.86 | $ | 5.35 | $ | 5.02 | ||||||
Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 | ||||||
Diluted earnings per share |
||||||||||||
Class A |
$ | 4.01 | $ | 4.41 | $ | 4.13 | ||||||
Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 |
See accompanying Notes to Consolidated Financial Statements.
41
Consolidated Statements of Comprehensive Income
Year Ended December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands) | ||||||||||||
NET INCOME |
$ | 22,301 | $ | 24,534 | $ | 23,021 | ||||||
Other comprehensive income (loss), net of tax: |
||||||||||||
Unrealized gains (losses) on securities: |
||||||||||||
Unrealized holding gains (losses) arising during period |
533 | (289 | ) | 38 | ||||||||
Less: reclassification adjustment for gains included in net income |
(28 | ) | (32 | ) | (361 | ) | ||||||
|
|
|
|
|
|
|||||||
Total unrealized gains (losses) on securities |
505 | (321 | ) | (323 | ) | |||||||
Accretion of net unrealized losses transferred during period |
1,034 | 2,812 | 3,583 | |||||||||
Defined benefit pension plans: |
||||||||||||
Pension liability adjustment: |
||||||||||||
Net (loss) gain |
(2,315 | ) | (297 | ) | (2,890 | ) | ||||||
Amortization of prior service cost and loss included in net periodic benefit cost |
931 | 970 | 853 | |||||||||
|
|
|
|
|
|
|||||||
Total pension liability adjustment |
(1,384 | ) | 673 | (2,037 | ) | |||||||
Other comprehensive income |
155 | 3,164 | 1,223 | |||||||||
|
|
|
|
|
|
|||||||
Comprehensive income (loss) |
$ | 22,456 | $ | 27,698 | $ | 24,244 | ||||||
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
42
Consolidated Statements of Changes in Stockholders Equity
Class A
Common Stock |
Class B
Common Stock |
Additional
Paid-in Capital |
Retained
Earnings |
Accumulated
Other Comprehensive Loss |
Total
Stockholders Equity |
|||||||||||||||||||
(dollars in thousands except share data) | ||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2014 |
$ | 3,601 | $ | 1,967 | $ | 12,292 | $ | 200,411 | $ | (25,771 | ) | $ | 192,500 | |||||||||||
Net income |
| | | 23,021 | | 23,021 | ||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains arising during period, net of $211 in taxes and $594 in realized net gains |
| | | | (323 | ) | (323 | ) | ||||||||||||||||
Accretion of net unrealized losses transferred during the period, net of $1,919 in taxes |
| | | | 3,583 | 3,583 | ||||||||||||||||||
Pension liability adjustment, net of $1,357 in taxes |
| | | | (2,037 | ) | (2,037 | ) | ||||||||||||||||
Cash dividends, Class A Common Stock, $0.48 per share |
| | | (1,728 | ) | | (1,728 | ) | ||||||||||||||||
Cash dividends, Class B Common Stock, $0.24 per share |
| | | (472 | ) | | (472 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
BALANCE, DECEMBER 31, 2015 |
$ | 3,601 | $ | 1,967 | $ | 12,292 | $ | 221,232 | $ | (24,548 | ) | $ | 214,544 | |||||||||||
Net income |
| | | 24,534 | | 24,534 | ||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains arising during period, net of $248 in taxes and $52 in realized net gains |
| | | | (321 | ) | (321 | ) | ||||||||||||||||
Accretion of net unrealized losses transferred during the period, net of $1,505 in taxes |
| | | | 2,812 | 2,812 | ||||||||||||||||||
Pension liability adjustment, net of $448 in taxes |
| | | | 673 | 673 | ||||||||||||||||||
Cash dividends, Class A Common Stock, $0.48 per share |
| | | (1,729 | ) | | (1,729 | ) | ||||||||||||||||
Cash dividends, Class B Common Stock, $0.24 per share |
| | | (472 | ) | | (472 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
BALANCE, DECEMBER 31, 2016 |
$ | 3,601 | $ | 1,967 | $ | 12,292 | $ | 243,565 | $ | (21,384 | ) | $ | 240,041 | |||||||||||
Net income |
| | | 22,301 | | 22,301 | ||||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||||||
Unrealized holding gains arising during period, net of $331 in taxes and $47 in realized net gains |
| | | | 505 | 505 | ||||||||||||||||||
Accretion of net unrealized losses transferred during the period, net of $1,258 in taxes |
| | | | 1,034 | 1,034 | ||||||||||||||||||
Pension liability adjustment, net of $286 in taxes |
| | | | (1,384 | ) | (1,384 | ) | ||||||||||||||||
Conversion of Class B Common Stock to Class A |
||||||||||||||||||||||||
Common Stock, 5,100 shares |
5 | (5 | ) | | | | | |||||||||||||||||
Cash dividends, Class A Common Stock, $0.48 per share |
| | | (1,729 | ) | | (1,729 | ) | ||||||||||||||||
Cash dividends, Class B Common Stock, $0.24 per share |
| | | (471 | ) | | (471 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
BALANCE, DECEMBER 31, 2017 |
$ | 3,606 | $ | 1,962 | $ | 12,292 | $ | 263,666 | $ | (21,229 | ) | $ | 260,297 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
43
Consolidated Statements of Cash Flows
See accompanying Notes to Consolidated Financial Statements.
44
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Century Bancorp, Inc. (the Company) and its wholly owned subsidiary, Century Bank and Trust Company (the Bank). The consolidated financial statements also include the accounts of the Banks 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 Companys business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment.
The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates.
Material estimates that are susceptible to change in the near term relate to the allowance for loan losses. Management believes that the allowance for loan losses is adequate based on a review of factors, including historical charge-off rates with additional allocations based on qualitative risk factors for each category and general economic factors. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.
FAIR VALUE MEASUREMENTS
The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:
Level I Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with
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Notes to Consolidated Financial Statements (Continued)
quoted prices, such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.
Level II Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments that are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds and over the counter (OTC) derivatives.
Level III These instruments have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, and noninvestment grade residual interests in securitizations as well as certain highly structured OTC derivative contracts.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash equivalents include highly liquid assets with an original maturity of three months or less. Highly liquid assets include cash and due from banks, federal funds sold and certificates of deposit.
SHORT-TERM INVESTMENTS
As of December 31, 2017 and 2016, short-term investments include highly liquid certificates of deposit with original maturities of more than 90 days but less than one year.
INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders equity, net of estimated related income taxes. The Company has no securities held for trading.
Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. Gains and losses on the sale of investment securities are recognized on the trade date on a specific identification basis.
Management also considers the Companys capital adequacy, interest-rate risk, liquidity and business plans in assessing whether it is more likely than not that the Company will sell or be required to sell the investment securities before recovery. If the Company determines that a decline in fair value is OTTI and that it is more likely than not that the Company will not sell or be required to sell the investment security before recovery of its amortized cost, the credit portion of the impairment loss is recognized in the Companys consolidated statement of income and the noncredit portion is recognized in accumulated other comprehensive income. The credit portion of the OTTI impairment represents the difference between the amortized cost and the present value of the expected future cash flows of the investment security. If the Company determines that a decline in fair value is OTTI and it is more likely than not that it will sell or be required to sell the investment security before recovery of its amortized cost, the entire difference between the amortized cost and the fair value of the security will be recognized in the Companys consolidated statement of income.
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Notes to Consolidated Financial Statements (Continued)
The transfer of a security between categories of investments shall be accounted for at fair value. For a debt security transferred into the held-to-maturity category from the available-for-sale category, the unrealized holding gain or loss at the date of the transfer shall continue to be reported in a separate component of shareholders equity but shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The amortization of an unrealized holding gain or loss reported in equity will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held-to-maturity security.
The sale of a security held-to-maturity may occur after a substantial portion (at least 85%) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on a debt security payable in equal installments over its term. For variable rate securities, the scheduled payments need not be equal.
FEDERAL HOME LOAN BANK STOCK
The Bank, as a member of the Federal Home Loan Bank of Boston (FHLBB), is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis of the stock. As of December 31, 2017, no impairment has been recognized.
LOANS HELD FOR SALE
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
LOANS
Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become ninety days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Past-due status is based on contractual terms of the loan. Loans, including impaired loans, on which the accrual of interest has been discontinued, are designated nonaccrual loans. When a loan is placed on nonaccrual, all income that has been accrued but remains unpaid is reversed against current period income, and all amortization of deferred loan costs and fees is discontinued. Nonaccrual loans may be returned to an accrual status when principal and interest payments are not delinquent or the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. Income received on nonaccrual loans is either recorded in income or applied to the principal balance of the loan, depending on managements evaluation as to the collectibility of principal.
Loan origination fees and related direct loan origination costs are offset, and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. Prepayments are not initially considered when amortizing premiums and discounts.
The Bank measures impairment for impaired loans at either the fair value of the loan, the present value of the expected future cash flows discounted at the loans effective interest rate or the fair value of the collateral if the loan is collateral dependent. This method applies to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans such as residential real estate and consumer loans that are collectively evaluated for impairment and loans that are measured at fair value. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance when such an amount has been identified definitively as uncollectible. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be
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Notes to Consolidated Financial Statements (Continued)
paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Loans are charged-off when management believes that the collectibility of the loans principal is not probable. The specific factors that management considers in making the determination that the collectibility of the loans principal is not probable include the delinquency status of the loan, the fair value of the collateral, if secured, and, the financial strength of the borrower and/or guarantors. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification effective rate of interest.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets, typically residential mortgages and loan participations for the Company, are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.
ACQUIRED LOANS
In accordance with FASB ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (formerly Statement of Position (SOP) No. 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer) the Company reviews acquired loans for differences between contractual cash flows and cash flows expected to be collected from the Companys initial investment in the acquired loans to determine if those differences are attributable, at least in part, to credit quality. If those differences are attributable to credit quality, the loans contractually required payments received in excess of the amount of its cash flows expected at acquisition, or nonaccretable discount, is not accreted into income. FASB ASC 310-30 requires that the Company recognize the excess of all cash flows expected at acquisition over the Companys initial investment in the loan as interest income using the interest method over the term of the loan. This excess is referred to as accretable discount and is recorded as a reduction of the loan balance.
Loans which, at acquisition, do not have evidence of deterioration of credit quality since origination are outside the scope of FASB ASC 310-30. For such loans, the discount, if any, representing the excess of the amount of reasonably estimable and probable discounted future cash collections over the purchase price, is accreted into interest income using the interest method over the term of the loan. Prepayments are not considered in the calculation of accretion income. Additionally, the discount is not accreted on nonperforming loans.
When a loan is paid off, the excess of any cash received over the net investment is recorded as interest income. In addition to the amount of purchase discount that is recognized at that time, income may include interest owed by the borrower prior to the Companys acquisition of the loan, interest collected if on nonperforming status, prepayment fees and other loan fees. There were no new loans acquired during the year ended December 31, 2017.
NONPERFORMING ASSETS
In addition to nonperforming loans, nonperforming assets include other real estate owned. Other real estate owned is comprised of properties acquired through foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate owned is recorded initially at the lower of cost or the estimated fair value less costs to sell. When such assets are acquired, the excess of the loan balance over the estimated fair value of the asset is charged to the allowance for loan losses. An allowance for losses on other real estate owned is established by a charge to earnings when, upon periodic evaluation by management, further declines in the estimated fair value of properties have occurred.
Such evaluations are based on an analysis of individual properties as well as a general assessment of current real estate market conditions. Holding costs and rental income on properties are included in current operations,
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Notes to Consolidated Financial Statements (Continued)
while certain costs to improve such properties are capitalized. Gains and losses from the sale of other real estate owned are reflected in earnings when realized.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on managements evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans that ultimately prove uncollectible. The components of the allowance for loan losses represent estimates based upon Accounting Standards Codification (ASC) Topic 450, contingencies, and ASC Topic 310 Receivables. ASC Topic 450 applies to homogenous loan pools such as consumer installment, residential mortgages, consumer lines of credit and commercial loans that are not individually evaluated for impairment under ASC Topic 310. In determining the level of the allowance, periodic evaluations are made of the loan portfolio, which takes into account factors such as the characteristics of the loans, loan status, financial strength of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgment. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Managements methodology for assessing the appropriateness of the allowance consists of several key elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an unallocated allowance. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment.
While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in managements opinion, collectibility is not probable. The specific factors that management considers in making the determination that the collectibility of the loans principal is not probable include the delinquency status of the loan, the fair value of the collateral and the financial strength of the borrower and/or guarantors.
Under ASC Topic 310, a loan is impaired, based upon current information and in managements opinion, when it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest, or if a loan is designated as a Troubled Debt Restructuring (TDR). Specific allowances for loan losses entail the assignment of allowance amounts to individual loans on the basis of loan impairment. Under this method, loans are selected for evaluation based upon a change in internal risk rating, occurrence of delinquency, loan classification or nonaccrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the amount of a probable loss is able to be estimated on the basis of: (a) present value of anticipated future cash flows, (b) the loans observable fair market price or (c) fair value of collateral if the loan is collateral dependent. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance when such an amount has been identified definitively as uncollectible.
In estimating probable loan loss under ASC Topic 450 management considers numerous factors, including historical charge-offs and subsequent recoveries. The formula allowances are based on evaluations of homogenous loans to determine the allocation appropriate within each portfolio segment. Formula allowances are based on internal risk ratings or credit ratings from external sources. Individual loans within the commercial and industrial, commercial real estate and real estate construction loan portfolio segments are assigned internal risk ratings to group them with other loans possessing similar risk characteristics. Changes in risk grades affect the amount of the formula allowance. Risk grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. On these loans, the formula allowances are based on the risk ratings, the historical loss experience, and the loss emergence period. Historical loss data and loss emergence periods are developed based on the Companys historical experience. For larger loans with available external credit ratings, these ratings are utilized rather than the
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Notes to Consolidated Financial Statements (Continued)
Companys risk ratings. The historical loss factor and loss emergence periods for these loans are based on data published by the rating agencies for similar credits as the Company has limited internal historical data. For the residential real estate and consumer loan portfolios, the formula allowances are calculated by applying historical loss experience and the loss emergence period to the outstanding balance in each loan category. Loss factors and loss emergence periods are based on the Companys historical net loss experience.
Additional allowances are added to portfolio segments based on qualitative factors. Management considers potential factors identified in regulatory guidance. Management has identified certain qualitative factors, which could impact the degree of loss sustained within the portfolio. These include market risk factors and unique portfolio risk factors that are inherent characteristics of the Companys loan portfolio. Market risk factors may consist of changes to general economic and business conditions, such as unemployment and GDP that may impact the Companys loan portfolio customer base in terms of ability to repay and that may result in changes in value of underlying collateral. Unique portfolio risk factors may include the outlooks for business segments in which the Companys borrowers operate and loan size. The potential ranges for qualitative factors are based on historical volatility in losses. The actual amount utilized is based on managements assessment of current conditions.
After considering the above components, an unallocated component may be generated to cover uncertainties that could affect managements estimate of probable losses. These uncertainties include the effects of loans in new geographical areas and new industries. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Land is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated.
GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not subject to amortization. Identifiable intangible assets consist of core deposit intangibles and are assets resulting from acquisitions that are being amortized over their estimated useful lives. Goodwill and identifiable intangible assets are included in other assets on the consolidated balance sheets. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the segment (or reporting unit) level. Currently, the Companys goodwill is evaluated at the entity level as there is only one reporting unit. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Goodwill impairment is evaluated by first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary.
The first step, in the two-step impairment test, used to identify potential impairment, involves comparing each reporting units fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the amount of impairment.
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Notes to Consolidated Financial Statements (Continued)
SERVICING
The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in loan servicing fee income.
STOCK OPTION ACCOUNTING
The Company follows the fair value recognition provisions of FASB ASC 718, Compensation Stock Compensation for all share-based payments. The Companys method of valuation for share-based awards granted utilizes the Black-Scholes option-pricing model. The Company will recognize compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.
During 2000 and 2004, common stockholders of the Company approved stock option plans (the Option Plans) that provide for granting of options to purchase up to 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive nonqualified or incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on managements recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were no options to purchase shares of Class A common stock outstanding at December 31, 2017.
The Company uses the fair value method to account for stock options. There were no options granted during 2017 and 2016.
INCOME TAXES
The Company uses the asset and liability method in accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company accounts for uncertain tax positions in accordance with FASB ASC 740.
The Company classifies interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law.
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Notes to Consolidated Financial Statements (Continued)
The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Companys judgment changes regarding an uncertain tax position.
For tax years beginning after December 31, 2017, the corporate alternative minimum tax (AMT) has been repealed. For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the AMT credit carryforward will be recovered in tax years beginning before 2022. As a result of the change, the Company has classified its AMT credit carryforward as currently receivable.
EARNINGS PER SHARE (EPS)
Class A and Class B shares participate equally in undistributed earnings. Under the Companys Articles of Organization, the holders of Class A Common Stock are entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.
Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are stock options.
The company utilizes the two class method for reporting EPS. The two-class method is an earnings allocation formula that treats Class A and Class B shares as having rights to earnings that otherwise would have been available only to Class A shareholders and Class B shareholders as if converted to Class A shares.
TREASURY STOCK
Effective July 1, 2004, companies incorporated in Massachusetts became subject to Chapter 156D of the Massachusetts Business Corporation Act, provisions of which eliminate the concept of treasury stock and provide that shares reacquired by a company are to be treated as authorized but unissued shares.
PENSION
The Company provides pension benefits to its employees under a noncontributory, defined benefit plan, which is funded on a current basis in compliance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and recognizes costs over the estimated employee service period.
The Company also has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan), which is limited to certain officers and employees of the Company. The Supplemental Plan is accrued on a current basis and recognizes costs over the estimated employee service period.
Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary. Individual life insurance policies, which are owned by the Company, are purchased covering the life of each participant.
The Company utilizes a full yield curve approach in the estimation of the service and interest components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the underlying projected cash flows.
RECENT ACCOUNTING DEVELOPMENTS
In February 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-02, Income Statement Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial
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Notes to Consolidated Financial Statements (Continued)
statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company will adopt this update in the first quarter of 2018 and will apply the effects of the changes retrospectively. The effect of the changes is approximately $3.8 million.
In July 2017, FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interest with a Scope Exception. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2018. Management is currently assessing the applicability of ASU 2017-11 and has not determined the impact of the adoption, if any, as of December 31, 2017.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. FASB issued this Update to address the diversity in practice as well as the cost and complexity when applying the guidance in Topic 718, Compensation Stock Compensation, to a change to the terms or conditions of a share-based payment award. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017. The effect of this update is not expected to have a material impact on the Companys consolidated financial position.
In March 2017, the FASB issued ASU 2017-08, Receivables Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt. The FASB is issuing this ASU to amend the amortization period for certain purchased callable debt securities held at a premium. The FASB is shortening the amortization period for the premium to the earliest call date. Under current generally accepted accounting principles (GAAP), entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management is currently assessing the applicability of this ASU and has not determined the impact, if any, as of December 31, 2017.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this ASU require that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. This ASU is for presentation purposes only, accordingly, there will be no impact on the Companys consolidated financial position.
In February 2017, the FASB issued ASU 2017-05, Other Income Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). This ASU was issued to clarify the scope of Subtopic 610-20, and to add guidance for partial sales of nonfinancial assets. For public entities, this ASU is effective for annual reporting periods beginning after December 15, 2017. The effect of this update is not expected to have a material impact on the Companys consolidated financial position.
In January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Topic 350). This ASU was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
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Notes to Consolidated Financial Statements (Continued)
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 Companys consolidated financial position.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU was issued to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is in the process of analyzing this ASU and has begun evaluating software solutions to help capture information needed to implement this update. The Company has not determined the impact, if any, as of December 31, 2017.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The intention of this ASU is to provide additional clarification on specific issues brought forth by the FASB and the International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition in relation to Topic 606 and revenue recognition. This ASU is to have the same effective date as ASU 2015-14 which deferred the effective date of ASU 2014-09 to December 15, 2017. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which will replace numerous requirements in U.S. GAAP, including industry-specific requirements, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. Since the issuance of Update 2014-09, the FASB has finalized various amendments to the standard that include corrections, improvements and timing modifications.
In July 2015, the FASB approved the deferral of the new standards effective date by one year. The new standard is effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016.
We monitored FASB activity related to the new standard. A significant amount of the Companys revenues are derived from interest income on financial assets, which are excluded from the scope of the amended guidance.
In 2017, we established a cross-functional implementation team consisting of representatives from across our business segments. We utilized a bottom-up approach to analyze the impact of the standard on our contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to our revenue contracts. In addition, we identified and implemented appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard. The implementation team has reported the findings and progress of the project to management on a frequent basis over this past year.
During 2017, we completed our evaluation of the potential changes from adopting the new standard on our future financial reporting and disclosures. In the third quarter of 2017, we finalized our contract reviews. The Company did not identify any significant changes in the timing of revenue recognition when considering the amended accounting guidance.
54
Notes to Consolidated Financial Statements (Continued)
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheet but recognize expenses on their income statements in a manner similar to todays accounting. This ASU also eliminates todays real estate-specific provisions for all companies. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. The Company has begun analyzing this ASU and will be assessing implementation steps beginning in 2018. The Company has not determined the impact, if any, as of December 31, 2017.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. The amendments of this ASU was issued to require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For public entities, this ASU is effective for the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The effect of this update is not expected to have a material impact on the Companys consolidated financial position.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 326) Classification of Certain Cash Receipts and Cash Payments. Stakeholders indicated that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The effect of this update is not expected to have a material impact on the Companys consolidated financial position.
In January 2016, FASB issued ASU 2016-1, Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU significantly revises an entitys accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods therein. The effect of this update is not expected to have a material impact on the Companys consolidated financial position.
2. Cash and Due from Banks
The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $0 at December 31, 2017, and $0 at December 31, 2016.
55
Notes to Consolidated Financial Statements (Continued)
3. Securities Available-for-Sale
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
|||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||
U.S. Treasury |
$ | 1,999 | $ | | $ | 15 | $ | 1,984 | $ | 2,000 | $ | | $ | | $ | 2,000 | ||||||||||||||||
U.S. Government Sponsored Enterprises |
| | | | 25,000 | | 48 | 24,952 | ||||||||||||||||||||||||
SBA Backed Securities |
81,065 | 46 | 161 | 80,950 | 57,899 | 14 | 146 | 57,767 | ||||||||||||||||||||||||
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities |
225,537 | 555 | 317 | 225,775 | 243,703 | 293 | 671 | 243,325 | ||||||||||||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
897 | 4 | 9 | 892 | 1,121 | 2 | 14 | 1,109 | ||||||||||||||||||||||||
Obligations Issued by States and Political Subdivisions |
82,849 | | 249 | 82,600 | 165,281 | | 405 | 164,876 | ||||||||||||||||||||||||
Other Debt Securities |
5,100 | 68 | 197 | 4,971 | 5,100 | 18 | 194 | 4,924 | ||||||||||||||||||||||||
Equity Securities |
116 | 187 | | 303 | 116 | 228 | | 344 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 397,563 | $ | 860 | $ | 948 | $ | 397,475 | $ | 500,220 | $ | 555 | $ | 1,478 | $ | 499,297 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $216,353,000 and 210,780,000 at December 31, 2017 and 2016, respectively. Also included in securities available-for-sale at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $67,780,000 and $53,396,000 at December 31, 2017 and 2016, respectively. The Company realized gains on sales of securities of $47,000, $52,000 and $289,000 from the proceeds of sales of available-for-sale securities of $18,180,000, $2,376,000 and $47,853,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
Debt securities of U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities primarily refer to debt securities of Fannie Mae and Freddie Mac.
The following table shows the estimated maturity distribution of the Companys securities available-for-sale at December 31, 2017.
Amortized
Cost |
Fair Value | |||||||
(dollars in thousands) | ||||||||
Within one year |
$ | 78,343 | $ | 78,338 | ||||
After one but within five years |
104,041 | 104,123 | ||||||
After five but within ten years |
144,184 | 144,307 | ||||||
More than ten years |
69,379 | 69,062 | ||||||
Nonmaturing |
1,616 | 1,645 | ||||||
|
|
|
|
|||||
Total |
$ | 397,563 | $ | 397,475 | ||||
|
|
|
|
The weighted average remaining life of investment securities available-for-sale at December 31, 2017, was 5.7 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, $313,037,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
56
Notes to Consolidated Financial Statements (Continued)
As of December 31, 2017 and December 31, 2016, 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 the fact that the principal and interest on these securities are from issuers that are investment grade. The change in the unrealized losses on the Obligations Issued by States and Political Subdivisions, Privately Issued Residential Mortgage-Backed Securities and Other Debt Securities was primarily caused by changes in credit spreads and liquidity issues in the marketplace.
The unrealized loss on SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises 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 December 31, 2017 and December 31, 2016.
In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates of underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuers financial performance are considered.
The following table shows the temporarily impaired securities of the Companys available-for-sale portfolio at December 31, 2017. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 16 and 28 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 255 holdings at December 31, 2017.
December 31, 2017 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Temporarily Impaired Investments |
Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Treasury |
$ | 1,984 | $ | 15 | $ | | $ | | $ | 1,984 | $ | 15 | ||||||||||||
U.S. Government Sponsored Enterprises |
| | | | | | ||||||||||||||||||
SBA Backed Securities |
18,378 | 54 | 40,911 | 107 | 59,289 | 161 | ||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities |
40,394 | 123 | 59,336 | 194 | 99,730 | 317 | ||||||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
| | 633 | 9 | 633 | 9 | ||||||||||||||||||
Obligations Issued by States and Political Subdivisions |
| | 4,458 | 249 | 4,458 | 249 | ||||||||||||||||||
Other Debt Securities |
400 | 1 | 1,803 | 196 | 2,203 | 197 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 61,156 | $ | 193 | $ | 107,141 | $ | 755 | $ | 168,297 | $ | 948 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the temporarily impaired securities of the Companys available-for-sale portfolio at December 31, 2016. This table shows the unrealized market loss of securities that have been in a continuous
57
Notes to Consolidated Financial Statements (Continued)
unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 49 and 15 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 270 holdings at December 31, 2016.
December 31, 2016 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Temporarily Impaired Investments |
Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Treasury |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
U.S. Government Sponsored Enterprises |
24,952 | 48 | | | 24,952 | 48 | ||||||||||||||||||
SBA Backed Securities |
52,346 | 145 | 951 | 1 | 53,297 | 146 | ||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities |
135,612 | 485 | 31,504 | 186 | 167,116 | 671 | ||||||||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
| | 757 | 14 | 757 | 14 | ||||||||||||||||||
Obligations Issued by States and Political Subdivisions |
| | 4,298 | 405 | 4,298 | 405 | ||||||||||||||||||
Other Debt Securities |
453 | 47 | 1,553 | 147 | 2,006 | 194 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 213,363 | $ | 725 | $ | 39,063 | $ | 753 | $ | 252,426 | $ | 1,478 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
4. Investment Securities Held-to-Maturity
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated
Fair Value |
|||||||||||||||||||||||||
(dollars in
thousands) |
||||||||||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
$ | 104,653 | $ | 341 | $ | 472 | $ | 104,522 | $ | 148,326 | $ | 1,066 | $ | 527 | $ | 148,865 | ||||||||||||||||
SBA Backed Securities |
57,235 | 20 | 1,271 | 55,984 | 46,140 | | 1,088 | 45,052 | ||||||||||||||||||||||||
U.S. Government Sponsored Enterprises Mortgage-Backed Securities |
1,539,345 | 2,261 | 33,285 | 1,508,321 | 1,459,520 | 4,948 | 22,577 | 1,441,891 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 1,701,233 | $ | 2,622 | $ | 35,028 | $ | 1,668,827 | $ | 1,653,986 | $ | 6,014 | $ | 24,192 | $ | 1,635,808 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprise Mortgage-Backed Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $1,262,708,000 and $1,147,207,000 at December 31, 2017, and 2016, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $382,120,000 and $424,353,000 at December 31, 2017, and 2016, respectively. The Company did not realize any gains of sales of securities for the year ending December 31, 2017. The Company realized gains on sales of securities of $12,000 from the proceeds of sales of held-to-maturity securities of $192,000 for the year ending December 31, 2016. The sales from securities held-to-maturity relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment. The Company realized gains
58
Notes to Consolidated Financial Statements (Continued)
on sales of securities of $305,000 from the proceeds of sales of held-to-maturity securities of $3,698,000 for the year ending December 31, 2015.
At December 31, 2017 and 2016, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.
The following table shows the maturity distribution of the Companys securities held-to-maturity at December 31, 2017.
Amortized
Cost |
Fair Value | |||||||
(dollars in thousands) | ||||||||
Within one year |
$ | 28,752 | $ | 28,726 | ||||
After one but within five years |
1,257,279 | 1,234,931 | ||||||
After five but within ten years |
411,916 | 401,947 | ||||||
More than ten years |
3,286 | 3,223 | ||||||
|
|
|
|
|||||
Total |
$ | 1,701,233 | $ | 1,668,827 | ||||
|
|
|
|
The weighted average remaining life of investment securities held-to-maturity at December 31, 2017, was 4.3 years. Included in the weighted average remaining life calculation at December 31, 2017, were $20,496,000 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, $159,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of December 31, 2017 and December 31, 2016, 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 December 31, 2017 and December 31, 2016.
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 Companys held-to-maturity portfolio at December 31, 2017. This table shows the unrealized market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are
59
Notes to Consolidated Financial Statements (Continued)
117 and 168 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 404 holdings at December 31, 2017.
December 31, 2017 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Temporarily Impaired Investments |
Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
Fair Value |
Unrealized
Losses |
||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
$ | 15,257 | $ | 239 | $ | 14,768 | $ | 233 | $ | 30,025 | $ | 472 | ||||||||||||
SBA Backed Securities |
19,457 | 142 | 33,750 | 1,129 | 53,207 | 1,271 | ||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities |
519,481 | 5,920 | 814,712 | 27,365 | 1,334,193 | 33,285 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 554,195 | $ | 6,301 | $ | 863,230 | $ | 28,727 | $ | 1,417,425 | $ | 35,028 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the temporarily impaired securities of the Companys held-to-maturity portfolio at December 31, 2016. 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 and longer. There are 194 and 16 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 375 holdings at December 31, 2016.
December 31, 2016 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Temporarily Impaired Investments |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
U.S. Government Sponsored Enterprises |
$ | 59,219 | $ | 527 | $ | | $ | | $ | 59,219 | $ | 527 | ||||||||||||
SBA Backed Securities |
45,052 | 1,088 | | | 45,052 | 1,088 | ||||||||||||||||||
U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities |
1,008,960 | 20,725 | 58,535 | 1,852 | 1,067,495 | 22,577 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 1,113,231 | $ | 22,340 | $ | 58,535 | $ | 1,852 | $ | 1,171,766 | $ | 24,192 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
5. Loans
The majority of the Banks lending activities are conducted in Massachusetts with other lending activity principally in New Hampshire, Rhode Island, Connecticut and New York. The Bank originates construction, commercial and residential real estate loans, commercial and industrial loans, municipal loans, consumer, home equity and other loans for its portfolio.
60
Notes to Consolidated Financial Statements (Continued)
The following summary shows the composition of the loan portfolio at the dates indicated.
December 31, |
2017 | 2016 | ||||||
(dollars in thousands) | ||||||||
Construction and land development |
$ | 18,931 | $ | 14,928 | ||||
Commercial and industrial |
763,807 | 612,503 | ||||||
Municipal |
106,599 | 135,418 | ||||||
Commercial real estate |
732,491 | 696,173 | ||||||
Residential real estate |
287,731 | 241,357 | ||||||
Consumer |
18,458 | 11,013 | ||||||
Home equity |
247,345 | 211,857 | ||||||
Overdrafts |
582 | 684 | ||||||
|
|
|
|
|||||
Total |
$ | 2,175,944 | $ | 1,923,933 | ||||
|
|
|
|
At December 31, 2017, and December 31, 2016, loans were carried net of discounts of $272,000 and $313,000, respectively. Net deferred fees included in loans at December 31, 2017, and December 31, 2016, were $362,000 and $641,000, respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $229,533,000 and $229,730,000 at December 31, 2017, and December 31, 2016, respectively. The Company had no residential real estate loans held for sale at December 31, 2017 and December 31, 2016. The Companys mortgage servicing rights totaled $1,525,000 and $1,629,000 at December 31, 2017 and December 31, 2016, respectively.
As of December 31, 2017 and 2016, the Companys recorded investment in impaired loans was $7,114,000 and $3,830,000, respectively. If an impaired loan is placed on nonaccrual, the loan may be returned to an accrual status when principal and interest payments are not delinquent and the risk characteristics have improved to the extent that there no longer exists a concern as to the collectibility of principal and interest. At December 31, 2017, there were $ 6,581,000 impaired loans with specific reserves of $164,000. At December 31, 2016, there were $3,105,000 of impaired loans with a specific reserve of $173,000.
Loans are designated as troubled debt restructures when a concession is made on a credit as a result of financial difficulties of the borrower. Typically, such concessions consist of a reduction in interest rate to a below-market rate, taking into account the credit quality of the note, or a deferment of payments, principal or interest, which materially alters the Banks position or significantly extends the notes maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loans origination. Restructured loans are included in the impaired loan category.
61
Notes to Consolidated Financial Statements (Continued)
The composition of nonaccrual loans and impaired loans is as follows:
December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands) | ||||||||||||
Loans on nonaccrual |
$ | 1,684 | $ | 1,084 | $ | 2,336 | ||||||
Loans 90 days past due and still accruing |
| | | |||||||||
Impaired loans on nonaccrual included above |
254 | 304 | 332 | |||||||||
Total recorded investment in impaired loans |
7,114 | 3,830 | 3,225 | |||||||||
Average recorded investment of impaired loans |
5,608 | 3,661 | 4,490 | |||||||||
Accruing troubled debt restructures |
2,749 | 3,526 | 2,893 | |||||||||
Interest income not recorded on nonaccrual loans according to their original terms |
51 | 37 | 91 | |||||||||
Interest income on nonaccrual loans actually recorded |
| | | |||||||||
Interest income recognized on impaired loans |
182 | 140 | 104 |
Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.
The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2017.
Balance at December 31, 2016 |
Additions |
Repayments
and Deletions |
Balance at
December 31, 2017 |
|||||||||
(dollars in thousands) | ||||||||||||
$10,982 |
$ | 572 | $ | 5,729 | $ | 5,825 |
6. 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 Companys allowance for loan losses for the years indicated.
An analysis of the allowance for loan losses for each of the three years ending December 31, 2017, 2016 and 2015 is as follows:
2017 | 2016 | 2015 | ||||||||||
(dollars in thousands) | ||||||||||||
Allowance for loan losses, beginning of year |
$ | 24,406 | $ | 23,075 | $ | 22,318 | ||||||
Loans charged-off |
(390 | ) | (389 | ) | (781 | ) | ||||||
Recoveries on loans previously charged-off |
449 | 434 | 1,338 | |||||||||
|
|
|
|
|
|
|||||||
Net recoveries (charge-offs) |
59 | 45 | 557 | |||||||||
Provision charged to expense |
1,790 | 1,375 | 200 | |||||||||
Reclassification to other liabilities* |
| (89 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Allowance for loan losses, end of year |
$ | 26,255 | $ | 24,406 | $ | 23,075 | ||||||
|
|
|
|
|
|
* | The reclassification relates to allowance for loan losses allocations on unused commitments that have been reclassified to other liabilities. |
62
Notes to Consolidated Financial Statements (Continued)
Further information pertaining to the allowance for loan losses at December 31, 2017 follows:
Construction
and Land Development |
Commercial
and Industrial |
Municipal |
Commercial
Real Estate |
Residential
Real Estate |
Consumer |
Home
Equity |
Unallocated | Total | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 |
$ | 1,012 | $ | 6,972 | $ | 1,612 | $ | 11,135 | $ | 1,698 | $ | 582 | $ | 1,102 | $ | 293 | $ | 24,406 | ||||||||||||||||||
Charge-offs |
| (49 | ) | | | | (341 | ) | | | (390 | ) | ||||||||||||||||||||||||
Recoveries |
| 110 | | | 2 | 255 | 82 | | 449 | |||||||||||||||||||||||||||
Provision |
633 | 2,618 | 108 | (1,407 | ) | 173 | (123 | ) | (195 | ) | (17 | ) | 1,790 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance at December 31, 2017 |
$ | 1,645 | $ | 9,651 | $ | 1,720 | $ | 9,728 | $ | 1,873 | $ | 373 | $ | 989 | $ | 276 | $ | 26,255 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Amount of allowance for loan losses for loans deemed to be impaired |
$ | | $ | 7 | $ | | $ | 99 | $ | 58 | $ | | $ | | $ | | $ | 164 | ||||||||||||||||||
Amount of allowance for loan losses for loans not deemed to be impaired |
$ | 1,645 | $ | 9,644 | $ | 1,720 | $ | 9,629 | $ | 1,815 | $ | 373 | $ | 989 | $ | 276 | $ | 26,091 | ||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||||||
Ending balance |
$ | 18,931 | $ | 763,807 | $ | 106,599 | $ | 732,491 | $ | 287,731 | $ | 19,040 | $ | 247,345 | $ | | $ | 2,175,944 | ||||||||||||||||||
Loans deemed to be impaired |
$ | | $ | 348 | $ | | $ | 2,554 | $ | 4,212 | $ | | $ | | $ | | $ | 7,114 | ||||||||||||||||||
Loans not deemed to be impaired |
$ | 18,931 | $ | 763,459 | $ | 106,599 | $ | 729,937 | $ | 283,519 | $ | 19,040 | $ | 247,345 | $ | | $ | 2,168,830 |
Further information pertaining to the allowance for loan losses at December 31, 2016 follows:
Construction
and Land Development |
Commercial
and Industrial |
Municipal |
Commercial
Real Estate |
Residential
Real Estate |
Consumer |
Home
Equity |
Unallocated | Total | ||||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||||||||||||||
Balance at December 31, 2015 |
$ | 2,041 | $ | 5,899 | $ | 994 | $ | 10,589 | $ | 1,320 | $ | 644 | $ | 1,077 | $ | 511 | $ | 23,075 | ||||||||||||||||||
Charge-offs |
| | | | | (362 | ) | (27 | ) | | (389 | ) | ||||||||||||||||||||||||
Recoveries |
| 132 | | | 6 | 296 | | | 434 | |||||||||||||||||||||||||||
Reclassification to other liabilities |
(5 | ) | (25 | ) | | (9 | ) | (3 | ) | (3 | ) | (44 | ) | | (89 | ) | ||||||||||||||||||||
Provision |
(1,024 | ) | 966 | 618 | 555 | 375 | 7 | 96 | (218 | ) | 1,375 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Ending balance at December 31, 2016 |
$ | 1,012 | $ | 6,972 | $ | 1,612 | $ | 11,135 | $ | 1,698 | $ | 582 | $ | 1,102 | $ | 293 | $ | 24,406 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Amount of allowance for loan losses for loans deemed to be impaired |
$ | 3 | $ | 23 | $ | | $ | 140 | $ | 7 | $ | | $ | | $ | | $ | 173 | ||||||||||||||||||
Amount of allowance for loan losses for loans not deemed to be impaired |
$ | 1,009 | $ | 6,949 | $ | 1,612 | $ | 10,995 | $ | 1,691 | $ | 582 | $ | 1,102 | $ | 293 | $ | 24,233 | ||||||||||||||||||
Loans: |
||||||||||||||||||||||||||||||||||||
Ending balance |
$ | 14,928 | $ | 612,503 | $ | 135,418 | $ | 696,173 | $ | 241,357 | $ | 11,697 | $ | 211,857 | $ | | $ | 1,923,933 | ||||||||||||||||||
Loans deemed to be impaired |
$ | 94 | $ | 389 | $ | | $ | 3,149 | $ | 198 | $ | | $ | | $ | | $ | 3,830 | ||||||||||||||||||
Loans not deemed to be impaired |
$ | 14,834 | $ | 612,114 | $ | 135,418 | $ | 693,024 | $ | 241,159 | $ | 11,697 | $ | 211,857 | $ | | $ | 1,920,103 |
63
Notes to Consolidated Financial Statements (Continued)
CREDIT QUALITY INFORMATION
The Company utilizes a six-grade internal loan rating system for commercial real estate, construction and commercial loans as follows:
Loans rated 1-3 (Pass) Loans in this category are considered pass rated loans with low to average risk.
Loans rated 4 (Monitor) These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of December 31, 2017.
Loans rated 5 (Substandard) Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more significant credit quality deterioration as of December 31, 2017.
Loans rated 6 (Doubtful) Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit quality deterioration as of December 31, 2017, and are doubtful for full collection.
Impaired Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that the Company will be unable to collect all amounts due.
The following table presents the Companys loans by risk rating at December 31, 2017.
Construction
and Land Development |
Commercial
and Industrial |
Municipal |
Commercial
Real Estate |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Grade: |
||||||||||||||||
1-3 (Pass) |
$ | 18,931 | $ | 758,093 | $ | 106,599 | $ | 705,235 | ||||||||
4 (Monitor) |
| 5,366 | | 24,702 | ||||||||||||
5 (Substandard) |
| | | | ||||||||||||
6 (Doubtful) |
| | | | ||||||||||||
Impaired |
| 348 | | 2,554 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 18,931 | $ | 763,807 | $ | 106,599 | $ | 732,491 | ||||||||
|
|
|
|
|
|
|
|
The Company has increased its exposure to larger loans to large institutions with publicly available credit ratings. These ratings are tracked as a credit quality indicator for these loans.
The following table presents the Companys loans by credit rating at December 31, 2017.
Commercial
and Industrial |
Municipal |
Commercial
Real Estate |
Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Credit Rating: |
||||||||||||||||
Aaa-Aa3 |
$ | 478,905 | $ | 62,029 | $ | 45,066 | $ | 586,000 | ||||||||
A1-A3 |
195,599 | 7,635 | 128,554 | 331,788 | ||||||||||||
Baa1-Baa3 |
| 26,970 | 122,000 | 148,970 | ||||||||||||
Ba2 |
| 8,165 | | 8,165 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 674,504 | $ | 104,799 | $ | 295,620 | $ | 1,074,923 | ||||||||
|
|
|
|
|
|
|
|
64
Notes to Consolidated Financial Statements (Continued)
The following table presents the Companys loans by risk rating at December 31, 2016.
Construction
and Land Development |
Commercial
and Industrial |
Municipal |
Commercial
Real Estate |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Grade: |
||||||||||||||||
1-3 (Pass) |
$ | 14,834 | $ | 612,114 | $ | 135,418 | $ | 661,271 | ||||||||
4 (Monitor) |
| | | 31,753 | ||||||||||||
5 (Substandard) |
| | | | ||||||||||||
6 (Doubtful) |
| | | | ||||||||||||
Impaired |
94 | 389 | | 3,149 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 14,928 | $ | 612,503 | $ | 135,418 | $ | 696,173 | ||||||||
|
|
|
|
|
|
|
|
The following table presents the Companys loans by credit rating at December 31, 2016.
Commercial
and Industrial |
Municipal |
Commercial
Real Estate |
Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Credit Rating: |
||||||||||||||||
Aaa-Aa3 |
$ | 334,674 | $ | 66,245 | $ | 6,596 | $ | 407,515 | ||||||||
A1-A3 |
188,777 | 33,365 | 129,423 | 351,565 | ||||||||||||
Baa1-Baa3 |
| 26,970 | 127,366 | 154,336 | ||||||||||||
Ba2 |
| 3,610 | | 3,610 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 523,451 | $ | 130,190 | $ | 263,385 | $ | 917,026 | ||||||||
|
|
|
|
|
|
|
|
The Company utilized payment performance as credit quality indicators for residential real estate, consumer and overdrafts, and the home equity portfolio. The indicators are depicted in the table aging of past-due loans, below.
AGING OF PAST-DUE LOANS
At December 31, 2017 the aging of past due loans are as follows:
Accruing
30-89 Days Past Due |
Non
Accrual |
Accruing
Greater Than 90 Days |
Total
Past Due |
Current
Loans |
Total | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Construction and land development |
$ | | $ | | $ | | $ | | $ | 18,931 | $ | 18,931 | ||||||||||||
Commercial and industrial |
65 | 44 | | 109 | 763,698 | 763,807 | ||||||||||||||||||
Municipal |
| | | | 106,599 | 106,599 | ||||||||||||||||||
Commercial real estate |
672 | 215 | | 887 | 731,604 | 732,491 | ||||||||||||||||||
Residential real estate |
4,282 | 724 | | 5,006 | 282,725 | 287,731 | ||||||||||||||||||
Consumer and overdrafts |
5 | 6 | | 11 | 19,029 | 19,040 | ||||||||||||||||||
Home equity |
618 | 695 | | 1,313 | 246,032 | 247,345 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 5,642 | $ | 1,684 | $ | | $ | 7,326 | $ | 2,168,618 | $ | 2,175,944 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
65
Notes to Consolidated Financial Statements (Continued)
At December 31, 2016 the aging of past due loans are as follows:
Accruing
30-89 Days Past Due |
Non
Accrual |
Accruing
Greater Than 90 Days |
Total
Past Due |
Current
Loans |
Total | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Construction and land development |
$ | | $ | 94 | $ | | $ | 94 | $ | 14,834 | $ | 14,928 | ||||||||||||
Commercial and industrial |
37 | 65 | | 102 | 612,401 | 612,503 | ||||||||||||||||||
Municipal |
| | | | 135,418 | 135,418 | ||||||||||||||||||
Commercial real estate |
597 | 150 | | 747 | 695,426 | 696,173 | ||||||||||||||||||
Residential real estate |
245 | 656 | | 901 | 240,456 | 241,357 | ||||||||||||||||||
Consumer and overdrafts |
| 11 | | 11 | 11,686 | 11,697 | ||||||||||||||||||
Home equity |
735 | 108 | | 843 | 211,014 | 211,857 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,614 | $ | 1,084 | $ | | $ | 2,698 | $ | 1,921,235 | $ | 1,923,933 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
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 loans effective interest rate, except that as a practical expedient, the Company measures impairment based on a loans observable market price or the fair value of the collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectibility of the loans principal is not probable. The specific factors that management considers in making the determination that the collectibility of the loans principal is not probable include; the delinquency status of the loan, the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectible. The Companys policy for recognizing interest income on impaired loans is contained within Note 1 of the Notes to Consolidated Financial Statements.
66
Notes to Consolidated Financial Statements (Continued)
The following is information pertaining to impaired loans at December 31, 2017:
Carrying
Value |
Unpaid
Balance Principal |
Required
Reserve |
Average
Carrying Value Recognized |
Interest
Income |
||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
With no required reserve recorded: |
||||||||||||||||||||
Construction and land development |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Commercial and industrial |
113 | 325 | | 54 | 4 | |||||||||||||||
Municipal |
| | | | | |||||||||||||||
Commercial real estate |
420 | 548 | | 286 | 21 | |||||||||||||||
Residential real estate |
| | | 73 | | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 533 | $ | 873 | $ | | $ | 413 | $ | 25 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
With required reserve recorded: |
||||||||||||||||||||
Construction and land development |
$ | | $ | | $ | | $ | 43 | $ | | ||||||||||
Commercial and industrial |
235 | 235 | 7 | 318 | 12 | |||||||||||||||
Municipal |
| | | | | |||||||||||||||
Commercial real estate |
2,134 | 2,135 | 99 | 2,501 | 72 | |||||||||||||||
Residential real estate |
4,212 | 4,212 | 58 | 2,333 | 73 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 6,581 | $ | 6,582 | $ | 164 | $ | 5,195 | $ | 157 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
||||||||||||||||||||
Construction and land development |
$ | | $ | | $ | | $ | 43 | $ | | ||||||||||
Commercial and industrial |
348 | 560 | 7 | 372 | 16 | |||||||||||||||
Municipal |
| | | | | |||||||||||||||
Commercial real estate |
2,554 | 2,683 | 99 | 2,787 | 93 | |||||||||||||||
Residential real estate |
4,212 | 4,212 | 58 | 2,406 | 73 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 7,114 | $ | 7,455 | $ | 164 | $ | 5,608 | $ | 182 | ||||||||||
|
|
|
|
|
|
|
|
|
|
67
Notes to Consolidated Financial Statements (Continued)
The following is information pertaining to impaired loans at December 31, 2016:
Carrying
Value |
Unpaid
Balance Principal |
Required
Reserve |
Average
Carrying Value Recognized |
Interest
Income |
||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
With no required reserve recorded: |
||||||||||||||||||||
Construction and land development |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Commercial and industrial |
45 | 232 | | 53 | | |||||||||||||||
Municipal |
| | | | | |||||||||||||||
Commercial real estate |
590 | 590 | | 375 | 39 | |||||||||||||||
Residential real estate |
90 | 179 | | 102 | 7 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Home equity |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 725 | $ | 1,001 | $ | | $ | 530 | $ | 46 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
With required reserve recorded: |
||||||||||||||||||||
Construction and land development |
$ | 94 | $ | 108 | $ | 3 | $ | 96 | $ | | ||||||||||
Commercial and industrial |
344 | 360 | 23 | 360 | 18 | |||||||||||||||
Municipal |
| | | | | |||||||||||||||
Commercial real estate |
2,559 | 2,665 | 140 | 2,324 | 71 | |||||||||||||||
Residential real estate |
108 | 108 | 7 | 323 | 5 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Home equity |
| | | 28 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 3,105 | $ | 3,241 | $ | 173 | $ | 3,131 | $ | 94 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
||||||||||||||||||||
Construction and land development |
$ | 94 | $ | 108 | $ | 3 | $ | 96 | $ | | ||||||||||
Commercial and industrial |
389 | 592 | 23 | 413 | 18 | |||||||||||||||
Municipal |
| | | | | |||||||||||||||
Commercial real estate |
3,149 | 3,255 | 140 | 2,699 | 110 | |||||||||||||||
Residential real estate |
198 | 287 | 7 | 425 | 12 | |||||||||||||||
Consumer |
| | | | | |||||||||||||||
Home equity |
| | | 28 | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 3,830 | $ | 4,242 | $ | 173 | $ | 3,661 | $ | 140 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings are identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations.
There were no troubled debt restructurings occurring during the year ended December 31, 2017.
There was one commercial real estate troubled debt restructuring during the year ended December 31, 2016. The pre-modification and post-modification outstanding recorded investment was $2,091,000. The loan was modified in 2016, by reducing the interest rate as well as extending the term on the loan. The financial impact for
68
Notes to Consolidated Financial Statements (Continued)
the modification was $16,000 reduction in principal payments and $5,000 reduction in interest payments for 2016.
There were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during 2017 and 2016.
7. Bank Premises and Equipment
December 31, | 2017 | 2016 | Estimated Useful Life | |||||||||
(dollars in thousands) | ||||||||||||
Land |
$ | 3,850 | $ | 3,478 | | |||||||
Bank premises |
21,055 | 19,272 | 30-39 years | |||||||||
Furniture and equipment |
27,117 | 26,271 | 3-10 years | |||||||||
Leasehold improvements |
12,674 | 12,802 | 30-39 years or lease term | |||||||||
|
|
|
|
|||||||||
64,696 | 61,823 | |||||||||||
Accumulated depreciation and amortization |
(41,169 | ) | (38,406 | ) | ||||||||
|
|
|
|
|||||||||
Total |
$ | 23,527 | $ | 23,417 | ||||||||
|
|
|
|
The Company is obligated under a number of non-cancelable operating leases for premises and equipment expiring in various years through 2028. Total lease expense approximated $2,608,000, $2,834,000 and $2,755,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Included in lease expense are amounts paid to a company affiliated with Marshall M. Sloane, Chairman of the Board, amounting to $439,000, $424,000 and $413,000, respectively. Rental income approximated $321,000, $318,000 and $314,000 in 2017, 2016 and 2015, respectively. Depreciation and amortization amounted to $3,208,000, $3,099,000 and $2,728,000 at December 31, 2017, 2016 and 2015 respectively.
Future minimum rental commitments for non-cancelable operating leases with initial or remaining terms of one year or more at December 31, 2017, were as follows:
Year | Amount | |||||||
(dollars in thousands) | ||||||||
2018 | $ | 2,309 | ||||||
2019 | 2,149 | |||||||
2020 | 1,856 | |||||||
2021 | 1,382 | |||||||
2022 | 1,022 | |||||||
Thereafter | 1,942 | |||||||
|
|
|
|
|||||
$ | 10,660 | |||||||
|
|
8. Goodwill and Identifiable Intangible Assets
At December 31, 2017 and 2016, the Company concluded that it is not more likely than not that fair value of the reporting unit is less than its carrying value, and goodwill is not considered to be impaired.
69
Notes to Consolidated Financial Statements (Continued)
The changes in goodwill and identifiable intangible assets for the years ended December 31, 2017 and 2016 are shown in the table below.
Carrying Amount of Goodwill and Intangibles |
Goodwill |
Mortgage
Servicing Rights |
Total | |||||||||
(dollars in thousands) | ||||||||||||
Balance at December 31, 2015 |
$ | 2,714 | $ | 1,305 | $ | 4,019 | ||||||
Additions |
| 708 | 708 | |||||||||
Amortization Expense |
| (384 | ) | (384 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2016 |
$ | 2,714 | $ | 1,629 | $ | 4,343 | ||||||
Additions |
| 276 | 276 | |||||||||
Amortization Expense |
| (380 | ) | (380 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance at December 31, 2017 |
$ | 2,714 | $ | 1,525 | $ | 4,239 | ||||||
|
|
|
|
|
|
9. Fair Value Measurements
The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, which among other things, requires enhanced disclosures about assets and liabilities carried at fair value. ASC 820-10 establishes a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The three broad levels of the hierarchy are as follows:
Level I Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level I are highly liquid cash instruments with quoted prices such as G-7 government, agency securities, listed equities and money market securities, as well as listed derivative instruments.
Level II Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds and OTC derivatives.
Level III These instruments have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using managements best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, non-investment grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts.
70
Notes to Consolidated Financial Statements (Continued)
The results of the fair value hierarchy as of December 31, 2017, are as follows:
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) |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Financial Instruments Measured at Fair Value on a Recurring Basis Securities AFS |
||||||||||||||||
U.S. Treasury |
$ | 1,984 | $ | | $ | 1,984 | $ | | ||||||||
U.S. Government Agency Sponsored Enterprises |
| | | | ||||||||||||
SBA Backed Securities |
80,950 | | 80,950 | | ||||||||||||
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities |
225,775 | | 225,775 | | ||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
892 | | 892 | | ||||||||||||
Obligations Issued by States and Political Subdivisions |
82,600 | | | 82,600 | ||||||||||||
Other Debt Securities |
4,971 | | 4,971 | | ||||||||||||
Equity Securities |
303 | 303 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 397,475 | $ | 303 | $ | 314,572 | $ | 82,600 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Financial Instruments Measured at Fair Value on a Non-recurring Basis |
||||||||||||||||
Impaired Loans |
$ | 246 | $ | | $ | | $ | 246 |
Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the loans 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 managements 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 managements 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 or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for 2017 for the estimated credit loss amounted to $3,000.
There were no transfers between level 1, 2 and 3 for the year ended December 31, 2017. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2017.
The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in
71
Notes to Consolidated Financial Statements (Continued)
thousands) at December 31, 2017. Management continues to monitor the assumptions used to value the assets listed below.
Asset |
Fair Value |
Valuation Technique |
Unobservable Input |
Unobservable Input
|
||||||
Securities AFS(1) |
$ | 82,600 | Discounted cash flow | Discount rate | 1.0%-3.5%(2) | |||||
Impaired Loans |
246 | Appraisal of collateral(3) | Appraisal adjustments(4) | 0%-30% discount |
(1) | Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. |
(2) | Weighted averages. |
(3) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. |
(4) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses. |
The changes in Level 3 securities for the year ended December 31, 2017 are as shown in the table below:
Auction Rate
Securities |
Obligations
Issued by States and Political Subdivisions |
Equity
Securities |
Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Balance at December 31, 2016 |
$ | 4,298 | $ | 160,578 | $ | | $ | 164,876 | ||||||||
Purchases |
| 99,136 | | 99,136 | ||||||||||||
Maturities/redemptions |
| (181,394 | ) | | (181,394 | ) | ||||||||||
Amortization |
| (179 | ) | | (179 | ) | ||||||||||
Change in fair value |
161 | | | 161 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at December 31, 2017 |
$ | 4,459 | $ | 78,141 | $ | | $ | 82,600 | ||||||||
|
|
|
|
|
|
|
|
The amortized cost of Level 3 securities was $82,849,000 with an unrealized loss of $249,000 at December 31, 2017. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.
72
Notes to Consolidated Financial Statements (Continued)
The results of the fair value hierarchy as of December 31, 2016, are as follows:
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) |
|||||||||||||
(dollars in thousands) | ||||||||||||||||
Financial Instruments Measured at Fair Value on a Recurring Basis Securities AFS |
||||||||||||||||
U.S. Treasury |
$ | 2,000 | $ | | $ | 2,000 | $ | | ||||||||
U.S. Government Agency Sponsored Enterprises |
24,952 | | 24,952 | | ||||||||||||
BA Backed Securities |
57,767 | | 57,767 | | ||||||||||||
U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities |
243,325 | | 243,325 | | ||||||||||||
Privately Issued Residential Mortgage-Backed Securities |
1,109 | | 1,109 | | ||||||||||||
Obligations Issued by States and Political Subdivisions |
164,876 | | | 164,876 | ||||||||||||
Other Debt Securities |
4,924 | | 4,924 | | ||||||||||||
Equity Securities |
344 | 344 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 499,297 | $ | 344 | $ | 334,077 | $ | 164,876 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Financial Instruments Measured at Fair Value on a Non-recurring Basis |
||||||||||||||||
Impaired Loans |
$ | 260 | $ | | $ | | $ | 260 |
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 managements 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 or other type of real estate tax assessment. The types of adjustments that are made to specific provisions (credits) relate to impaired loans recognized for 2016 for the estimated credit loss amounted to ($135,000).
There were no transfers between level 1 and 2 for the year ended December 31, 2016. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the year ended December 31, 2016.
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) at December 31, 2016. Management continues to monitor the assumptions used to value the assets listed below.
Asset |
Fair Value |
Valuation Technique |
Unobservable Input |
Unobservable Input
|
||||||
Securities AFS (1) |
$ | 164,876 | Discounted cash flow | Discount rate | 0%-1% (2) | |||||
Impaired Loans |
260 | Appraisal of collateral (3) | Appraisal adjustments (4) | 0%-30% discount |
(1) | Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value. |
73
Notes to Consolidated Financial Statements (Continued)
(2) | Weighted averages. |
(3) | Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. |
(4) | Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses. |
The changes in Level 3 securities for the year ended December 31, 2016 are as shown in the table below:
Auction Rate
Securities |
Obligations
Issued by States and Political Subdivisions |
Equity
Securities |
Total | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Balance at December 31, 2015 |
$ | 3,820 | $ | 153,140 | $ | 37 | $ | 156,997 | ||||||||
Purchases |
| 216,646 | | 216,646 | ||||||||||||
Maturities/redemptions |
| (208,990 | ) | (37 | ) | (209,027 | ) | |||||||||
Amortization |
| (218 | ) | | (218 | ) | ||||||||||
Change in fair value |
478 | | | 478 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at December 31, 2016 |
$ | 4,298 | $ | 160,578 | $ | | $ | 164,876 | ||||||||
|
|
|
|
|
|
|
|
The amortized cost of Level 3 securities was $165,281,000 with an unrealized loss of $405,000 at December 31, 2016. The securities in this category are generally equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities based on an evaluation of the underlying issuer, prevailing rates and market liquidity.
10. Deposits
The following is a summary of remaining maturities or re-pricing of time deposits as of December 31,
2017 | Percent | 2016 | Percent | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Within one year |
$ | 436,911 | 70 | % | $ | 262,406 | 55 | % | ||||||||
Over one year to two years |
121,802 | 19 | % | 87,952 | 18 | % | ||||||||||
Over two years to three years |
30,098 | 5 | % | 83,067 | 17 | % | ||||||||||
Over three years to five years |
36,550 | 6 | % | 44,934 | 10 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 625,361 | 100 | % | $ | 478,359 | 100 | % | ||||||||
|
|
|
|
|
|
|
|
Time deposits of more than $250,000 totaled $345,183,000 and $250,476,000 in 2017 and 2016, respectively. The increase was mainly attributable to competitive market rates for these types of deposits.
Deposits totaling $35,486,000 and $26,191,000 were attributable to related parties at December 31, 2017 and December 31, 2016, respectively.
74
Notes to Consolidated Financial Statements (Continued)
11. Securities Sold Under Agreements to Repurchase
The following is a summary of securities sold under agreements to repurchase as of December 31,
2017 | 2016 | 2015 | ||||||||||
(dollars in thousands) | ||||||||||||
Amount outstanding at December 31 |
$ | 158,990 | $ | 182,280 | $ | 197,850 | ||||||
Weighted average rate at December 31 |
0.32 | % | 0.21 | % | 0.21 | % | ||||||
Maximum amount outstanding at any month end |
$ | 228,848 | $ | 241,110 | $ | 299,890 | ||||||
Daily average balance outstanding during the year |
$ | 189,684 | $ | 222,956 | $ | 245,276 | ||||||
Weighted average rate during the year |
0.26 | % | 0.21 | % | 0.20 | % |
Amounts outstanding at December 31, 2017, 2016 and 2015 carried maturity dates of the next business day. U.S. Government Sponsored Enterprise securities with a total amortized cost of $162,927,000, $183,829,000, and $199,152,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 2017, 2016 and 2015, respectively. The approximate fair value of the collateral at those dates was $ 159,051,000, $182,074,000, and $197,318,000, respectively.
12. Other Borrowed Funds and Subordinated Debentures
The following is a summary of other borrowed funds and subordinated debentures as of December 31,
2017 | 2016 | 2015 | ||||||||||
(dollars in thousands) | ||||||||||||
Amount outstanding at December 31 |
$ | 383,861 | $ | 329,083 | $ | 404,083 | ||||||
Weighted average rate at December 31 |
2.26 | % | 2.39 | % | 2.29 | % | ||||||
Maximum amount outstanding at any month end |
$ | 491,583 | $ | 467,083 | $ | 521,583 | ||||||
Daily average balance outstanding during the year |
$ | 309,102 | $ | 357,974 | $ | 374,109 | ||||||
Weighted average rate during the year |
2.42 | % | 2.48 | % | 2.38 | % |
FEDERAL HOME LOAN BANK BORROWINGS
Federal Home Loan Bank of Boston (FHLBB) borrowings are collateralized by a blanket pledge agreement on the Banks FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Banks portfolios. The Banks remaining term borrowing capacity at the FHLBB at December 31, 2017, was approximately $127,631,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. A schedule of the maturity distribution of FHLBB advances with the weighted average interest rates is as follows:
2017 | 2016 | 2015 | ||||||||||||||||||||||
December 31, |
Amount |
Weighted
Average Rate |
Amount |
Weighted
Average Rate |
Amount |
Weighted
Average Rate |
||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Within one year |
$ | 164,500 | 1.82 | % | $ | 77,500 | 2.21 | % | $ | 100,000 | 1.89 | % | ||||||||||||
Over one year to two years |
$ | 63,000 | 2.17 | % | $ | 54,500 | 2.25 | % | $ | 57,500 | 2.72 | % | ||||||||||||
Over two years to three years |
$ | 28,000 | 2.29 | % | $ | 58,000 | 1.87 | % | $ | 54,500 | 2.25 | % | ||||||||||||
Over three years to five years |
$ | 28,500 | 3.19 | % | $ | 58,000 | 2.68 | % | $ | 91,000 | 1.85 | % | ||||||||||||
Over five years |
$ | 63,778 | 2.38 | % | $ | 45,000 | 2.85 | % | $ | 65,000 | 3.23 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 347,778 | 2.13 | % | $ | 293,000 | 2.34 | % | $ | 368,000 | 2.30 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
75
Notes to Consolidated Financial Statements (Continued)
Included in the table above are $20,000,000, $45,000,000 and $55,000,000, respectively, of FHLBB advances at December 31, 2017, 2016 and 2015, that are putable at the discretion of FHLBB. These put dates were not utilized in the table above.
SUBORDINATED DEBENTURES
Subordinated debentures totaled $36,083,000 at December 31, 2017 and 2016. In May 1998, the Company consummated the sale of a trust preferred securities offering, in which it issued $29,639,000 of subordinated debt securities due 2029 to its newly formed unconsolidated subsidiary Century Bancorp Capital trust. Century Bancorp Capital Trust the issued 2,875,000 shares of Cumulative Trust Preferred with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30% . The Company redeemed through its subsidiary, Century Bancorp Capital Trust, its 8.30% Trust Preferred Securities, January 10, 2005.
In December 2004, the Company consummated the sale of a trust preferred securities offering, in which it issued $36,083,000 of subordinated debt securities due 2034 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust II.
Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The coupon rate on these securities was 3.46% at December 31, 2017 and 2.83% at December 31, 2016.
OTHER BORROWED FUNDS
There were no overnight federal funds purchased at December 31, 2017 and 2016.
13. Reclassifications Out of Accumulated Other Comprehensive Income (a)
Amount Reclassified from Accumulated
Other Comprehensive Income |
||||||||||
Details about Accumulated Other Comprehensive Income Components |
Year ended
December 31, 2017 (a) |
Year ended
December 31, 2016 (a) |
Affected line item in the Statement
|
|||||||
Unrealized gains and losses on available-for-sale securities |
$ | 47 | $ | 52 | Net gains on sales of investments | |||||
(19 | ) | (20 | ) | Provision for income taxes | ||||||
|
|
|
|
|||||||
$ | 28 | $ | 32 | Net income | ||||||
|
|
|
|
|||||||
Accretion of unrealized losses transferred |
$ | (2,292 | ) | $ | (4,317 | ) | Securities held-to-maturity | |||
1,258 | 1,505 | Provision for income taxes | ||||||||
|
|
|
|
|||||||
$ | (1,034 | ) | $ | (2,812 | ) | Net income | ||||
|
|
|
|
|||||||
Amortization of defined benefit pension items |
||||||||||
Prior-service costs |
$ | (10 | ) | $ | (10 | ) | Salaries and employee benefits (b) | |||
Actuarial gains (losses) |
(1,540 | ) | (1,606 | ) | Salaries and employee benefits (b) | |||||
|
|
|
|
|||||||
Total before tax |
(1,550 | ) | (1,616 | ) | Income before taxes | |||||
Tax (expense) or benefit |
619 | 646 | Provision for income taxes | |||||||
|
|
|
|
|||||||
Net of tax |
$ | (931 | ) | $ | (970 | ) | Net income | |||
|
|
|
|
76
Notes to Consolidated Financial Statements (Continued)
(a) | Amounts in parentheses indicate decreases to profit/loss. |
(b) | These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see employee benefits footnote (Note 17) for additional details). |
14. Earnings per share (EPS)
Class A and Class B shares participate equally in undistributed earnings. Under the Companys 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. There were no common stock equivalents for 2017, 2016 and 2015, respectively.
The following table is a reconciliation of basic EPS and diluted EPS:
Year Ended December 31, |
2017 | 2016 | 2015 | |||||||||
(in thousands except share and per share data) | ||||||||||||
BASIC EPS COMPUTATION |
||||||||||||
Numerator: |
||||||||||||
Net income, Class A |
$ | 17,526 | $ | 19,270 | $ | 18,081 | ||||||
Net income, Class B |
4,775 | 5,264 | 4,940 | |||||||||
Denominator: |
||||||||||||
Weighted average shares outstanding, Class A |
3,604,029 | 3,600,729 | 3,600,729 | |||||||||
Weighted average shares outstanding, Class B |
1,963,880 | 1,967,180 | 1,967,180 | |||||||||
Basic EPS, Class A |
$ | 4.86 | $ | 5.35 | $ | 5.02 | ||||||
Basic EPS, Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 | ||||||
|
|
|
|
|
|
|||||||
DILUTED EPS COMPUTATION |
||||||||||||
Numerator: |
||||||||||||
Net income, Class A |
$ | 17,526 | $ | 19,270 | $ | 18,081 | ||||||
Net income, Class B |
4,775 | 5,264 | 4,940 | |||||||||
|
|
|
|
|
|
|||||||
Total net income, for diluted EPS, Class A computation |
22,301 | 24,534 | 23,021 | |||||||||
Denominator: |
||||||||||||
Weighted average shares outstanding, basic, Class A |
3,604,029 | 3,600,729 | 3,600,729 | |||||||||
Weighted average shares outstanding, Class B |
1,963,880 | 1,967,180 | 1,967,180 | |||||||||
|
|
|
|
|
|
|||||||
Weighted average shares outstanding diluted, Class A |
5,567,909 | 5,567,909 | 5,567,909 | |||||||||
Weighted average shares outstanding, Class B |
1,963,880 | 1,967,180 | 1,967,180 | |||||||||
Diluted EPS, Class A |
$ | 4.01 | $ | 4.41 | $ | 4.13 | ||||||
Diluted EPS, Class B |
$ | 2.43 | $ | 2.68 | $ | 2.51 | ||||||
|
|
|
|
|
|
15. Stockholders Equity
DIVIDENDS
Holders of the Class A common stock may not vote in the election of directors but may vote as a class to approve certain extraordinary corporate transactions. Holders of Class B common stock may vote in the election of directors. Class A common stockholders are entitled to receive dividends per share equal to at least 200% per
77
Notes to Consolidated Financial Statements (Continued)
share of that paid, if any, on each share of Class B common stock. Class A common stock is publicly traded. Class B common stock is not publicly traded; however, it can be converted on a per share basis to Class A common stock at any time at the option of the holder. Dividend payments by the Company are dependent in part on the dividends it receives from the Bank, which are subject to certain regulatory restrictions.
STOCK OPTION PLAN
During 2000 and 2004, common stockholders of the Company approved stock option plans (the Option Plans) that provide for granting of options for not more than 150,000 shares of Class A common stock per plan. Under the Option Plans, all officers and key employees of the Company are eligible to receive nonqualified and incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on managements recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for nonqualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of grant). There were no options outstanding at December 31, 2017 and December 31, 2016.
CAPITAL RATIOS
The Bank and the Company are subject to various regulatory requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank and Companys financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank and Company must meet specific capital guidelines that involve quantitative measures of the Bank and Companys assets and liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank and Companys capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2017, that the Bank and the Company meet all capital adequacy requirements to which they are subject.
The Basel Committee has issued capital standards entitled Basel III: A global framework for more resilient banks and banking systems (Basel III). The Federal Reserve has finalized its rule implementing the Basel III regulatory capital framework. The rule was effective in January 2015 and sets the Basel III minimum Regulatory capital requirements. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Common Equity tier 1, tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes would cause a change in the Banks categorization.
78
Notes to Consolidated Financial Statements (Continued)
The Banks actual capital amounts and ratios are presented in the following table:
Actual |
For Capital
Adequacy Purposes |
To Be Well
Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2017 (Basel III) |
||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) |
$ | 329,666 | 12.70 | % | $ | 207,707 | 8.00 | % | $ | 259,633 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) |
303,411 | 11.69 | % | 155,780 | 6.00 | % | 207,707 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 Capital (to Risk-Weighted Assets) |
303,411 | 11.69 | % | 116,835 | 4.50 | % | 168,762 | 6.50 | % | |||||||||||||||
Tier 1 Capital (to 4th Qtr. Average Assets) |
303,411 | 6.55 | % | 185,199 | 4.00 | % | 231,499 | 5.00 | % | |||||||||||||||
As of December 31, 2016 (Basel III) |
||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) |
$ | 293,143 | 12.27 | % | $ | 191,081 | 8.00 | % | $ | 238,851 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) |
268,737 | 11.25 | % | 143,311 | 6.00 | % | 191,081 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 Capital (to Risk-Weighted Assets) |
268,737 | 11.25 | % | 107,483 | 4.50 | % | 155,253 | 6.50 | % | |||||||||||||||
Tier 1 Capital (to 4th Qtr. Average Assets) |
268,737 | 6.02 | % | 178,469 | 4.00 | % | 223,086 | 5.00 | % |
The Companys actual capital amounts and ratios are presented in the following table:
Actual |
For Capital
Adequacy Purposes |
To Be Well
Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2017 (Basel III) |
||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) |
$ | 341,033 | 13.05 | % | $ | 209,049 | 8.00 | % | $ | 261,312 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) |
314,778 | 12.05 | % | 156,787 | 6.00 | % | 209,049 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 Capital (to Risk-Weighted Assets) |
279,778 | 10.71 | % | 117,590 | 4.50 | % | 169,853 | 6.50 | % | |||||||||||||||
Tier 1 Capital (to 4th Qtr. Average Assets) |
314,778 | 6.78 | % | 185,657 | 4.00 | % | 232,072 | 5.00 | % | |||||||||||||||
As of December 31, 2016 (Basel III) |
||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets) |
$ | 305,065 | 12.72 | % | $ | 191,904 | 8.00 | % | $ | 239,880 | 10.00 | % | ||||||||||||
Tier 1 Capital (to Risk-Weighted Assets) |
280,659 | 11.70 | % | 143,928 | 6.00 | % | 191,904 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 Capital (to Risk-Weighted Assets) |
249,753 | 10.41 | % | 107,946 | 4.50 | % | 155,922 | 6.50 | % | |||||||||||||||
Tier 1 Capital (to 4th Qtr. Average Assets) |
280,659 | 6.28 | % | 178,903 | 4.00 | % | 223,628 | 5.00 | % |
79
Notes to Consolidated Financial Statements (Continued)
16. Income Taxes
The current and deferred components of income tax (benefit) expense for the years ended December 31, are as follows:
2017 | 2016 | 2015 | ||||||||||
(dollars in thousands) | ||||||||||||
Current expense: |
||||||||||||
Federal |
$ | 3,628 | $ | 3,875 | $ | 3,393 | ||||||
State |
412 | 439 | 399 | |||||||||
|
|
|
|
|
|
|||||||
Total current expense |
4,040 | 4,314 | 3,792 | |||||||||
|
|
|
|
|
|
|||||||
Deferred (benefit) expense: |
||||||||||||
Federal |
6,496 | (4,450 | ) | (3,098 | ) | |||||||
State |
422 | (334 | ) | (161 | ) | |||||||
Valuation Allowance |
| 108 | | |||||||||
|
|
|
|
|
|
|||||||
Total deferred expense (benefit) |
6,918 | (4,676 | ) | (3,259 | ) | |||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 10,958 | $ | (362 | ) | $ | 533 | |||||
|
|
|
|
|
|
Income tax accounts included in other assets at December 31, are as follows:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Currently receivable |
$ | 15,940 | $ | 633 | ||||
Deferred income tax asset, net |
20,892 | 43,129 | ||||||
|
|
|
|
|||||
Total |
$ | 36,832 | $ | 43,762 | ||||
|
|
|
|
Differences between income tax (benefit) expense at the statutory federal income tax rate and total income tax expense are summarized as follows:
2017 | 2016 | 2015 | ||||||||||
(dollars in thousands) | ||||||||||||
Federal income tax expense at statutory rates |
$ | 11,308 | $ | 8,218 | $ | 8,008 | ||||||
State income tax, net of federal income tax benefit |
550 | 69 | 157 | |||||||||
Insurance income |
(371 | ) | (406 | ) | (375 | ) | ||||||
Effect of tax-exempt interest |
(8,683 | ) | (8,259 | ) | (6,915 | ) | ||||||
Net tax credit |
(341 | ) | (395 | ) | (460 | ) | ||||||
Valuation allowance |
| 108 | | |||||||||
Deferred tax remeasurement |
8,448 | | | |||||||||
Other |
47 | 303 | 118 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 10,958 | $ | (362 | ) | $ | 533 | |||||
|
|
|
|
|
|
|||||||
Effective tax rate |
32.95 | % | (1.50 | )% | 2.30 | % |
80
Notes to Consolidated Financial Statements (Continued)
The following table sets forth the Companys gross deferred income tax assets and gross deferred income tax liabilities at December 31:
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Deferred income tax assets: |
||||||||
Allowance for loan losses |
$ | 7,855 | $ | 10,419 | ||||
AMT credit |
| 10,234 | ||||||
Deferred compensation |
7,555 | 9,684 | ||||||
Pension and SERP liability |
8,436 | 11,320 | ||||||
Unrealized losses on securities transferred to held-to-maturity |
1,303 | 3,161 | ||||||
Depreciation |
631 | 968 | ||||||
Accrued bonus |
| 612 | ||||||
Unrealized (gains) losses on securities available-for-sale |
14 | 357 | ||||||
Charitable contributions carryforward |
442 | 266 | ||||||
Acquisition premium |
17 | 128 | ||||||
Nonaccrual interest |
97 | 125 | ||||||
Limited partnerships |
21 | 30 | ||||||
Investments write down |
17 | 26 | ||||||
Other |
173 | 220 | ||||||
|
|
|
|
|||||
Gross deferred income tax asset |
26,561 | 47,550 | ||||||
|
|
|
|
|||||
Valuation allowance |
(108 | ) | (108 | ) | ||||
|
|
|
|
|||||
Gross deferred income tax asset, net of valuation allowance |
26,453 | 47,442 | ||||||
|
|
|
|
|||||
Deferred income tax liabilities: |
||||||||
Pension asset (liability) |
(4,403 | ) | (3,662 | ) | ||||
Deferred origination costs |
(481 | ) | | |||||
Prepaid expenses |
(248 | ) | | |||||
Mortgage servicing rights |
(429 | ) | (651 | ) | ||||
|
|
|
|
|||||
Gross deferred income tax liability |
(5,561 | ) | (4,313 | ) | ||||
|
|
|
|
|||||
Deferred income tax asset, net |
$ | 20,892 | $ | 43,129 | ||||
|
|
|
|
Based on the Companys historical and current pre-tax earnings, management believes it is more likely than not that the Company will realize the deferred income tax asset existing at December 31, 2017, with the exception of a $108,000 valuation allowance on a charitable contribution carryforward that has a remaining carryforward period of 3-4 years. Management believes that existing net deductible temporary differences which give rise to the deferred tax asset will reverse during periods in which the Company generates net taxable income. In addition, gross deductible temporary differences are expected to reverse in periods during which offsetting gross taxable temporary differences are expected to reverse. Factors beyond managements control, such as the general state of the economy and real estate values, can affect future levels of taxable income, and no assurance can be given that sufficient taxable income will be generated to fully absorb gross deductible temporary differences.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was enacted. The majority of the provisions of the Tax Act takes effect on January 1, 2018. The Tax Act lowers the Companys federal tax rate from 34% to 21%. The Company evaluated its deferred taxes at 21% as of the enactment date and recorded additional tax expense of $8,448,000. 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
81
Notes to Consolidated Financial Statements (Continued)
offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend received deduction and net operating loss carryforwards.
The Company is in an Alternative Minimum Tax (AMT) credit position. As the AMT has been repealed and the existing credit is refundable, the AMT credit, totalling $14,001,000, has been reclassified to currently receivable. The Company and its subsidiaries file a consolidated federal tax return. The Company is subject to federal and state examinations for tax years after December 31, 2013.
17. Employee Benefits
The Company has a Qualified Defined Benefit Pension Plan (the Plan), which had been offered to all employees reaching minimum age and service requirements. In 2006, the Bank became a member of the Savings Bank Employees Retirement Association (SBERA) within which it then began maintaining the Qualified Defined Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for its retirement plans. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range of 40% to 64% of total portfolio assets. The remainder of the portfolio is allocated to fixed income securities with target range of 15% to 25% and other investments including global asset allocation and hedge funds from 25% to 41%.
The Trustees of SBERA, through its Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings. The Company closed the plan to employees hired after March 31, 2006.
The measurement date for the Plan is December 31 for each year. The benefits expected to be paid in each year from 2018 to 2022 are $1,530,000, $1,569,000, $1,732,000, $1,832,000, and $1,988,000, respectively. The aggregate benefits expected to be paid in the five years from 2023 to 2027 are $11,531,000.
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under Topic 820 are described as follows:
LEVEL 1
Inputs to the valuation methodology are quoted market prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.
LEVEL 2
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly, such as: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other that quoted prices that are observable for the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
82
Notes to Consolidated Financial Statements (Continued)
LEVEL 3
Inputs that are unobservable inputs for the asset or liability.
Below is a description of the valuation methodologies used for assets measured at fair value.
Collective Funds
Valued at either the closing price reported on the active market on which the individual securities are traded or valued at the net asset value (NAV) of units of a collective trust. The NAV, as provided by the trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV. Participant transactions (purchases and sales) may occur daily. Were SBERA to initiate a full redemption of the collective trust, the investment advisor reserves the right to temporarily delay withdrawal from the trust in order to ensure that securities liquidations will be carried out in an orderly business manner.
Equity Securities
Valued at the closing price reported on the active market on which the individual securities are traded.
Mutual Funds
Valued at the daily closing price as reported by the fund. Mutual funds held open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. The funds are required to publish their daily NAV and to transact at that price.
The mutual funds held are deemed to be actively traded.
Limited Partnerships and Hedge Funds
The funds are valued at NAV, without further adjustment, as calculated by the funds manager based upon the terms and conditions of the organization documents of the underlying investments, with further consideration to portfolio risks.
The following table sets forth by level, within the fair value hierarchy, the plans assets at fair value. Classification within the fair value hierarchy table is based upon the lowest level of any input that is significant to the fair value measurement:
The fair value of plan assets and major categories as of December 31, 2017, is as follows:
Description |
Percent | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Collective Funds |
3.6 | % | $ | 1,741 | $ | | $ | | $ | 1,741 | ||||||||||
Equity Securities |
10.7 | % | 5,195 | | | 5,195 | ||||||||||||||
Diversified Mutual Funds |
17.8 | % | 8,615 | | | 8,615 | ||||||||||||||
Short-term investments |
7.9 | % | 3,836 | | | 3,836 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investments measured in the fair value hierarchy |
40.0 | % | 19,387 | | | 19,387 | ||||||||||||||
Investments measured at net asset value(1) |
60.0 | % | | | | 29,035 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
100.0 | % | $ | 19,387 | $ | | $ | | $ | 48,422 | |||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. |
83
Notes to Consolidated Financial Statements (Continued)
The fair value of plan assets and major categories as of December 31, 2016, is as follows:
Description |
Percent | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Collective Funds |
6.9 | % | $ | 2,600 | $ | | $ | | $ | 2,600 | ||||||||||
Equity Securities |
19.7 | % | 7,363 | | | 7,363 | ||||||||||||||
Diversified Mutual Funds |
12.3 | % | 4,615 | | | 4,615 | ||||||||||||||
Short-term investments |
1.3 | % | 475 | | | 475 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total investments measured in the fair value hierarchy |
40.2 | % | 15,053 | | | 15,053 | ||||||||||||||
Investments measured at net asset value(1) |
59.8 | % | | | | 22,394 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
100.0 | % | $ | 15,053 | $ | | $ | | $ | 37,447 | |||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. |
There were no transfers to or from Level 1, 2, and 3 during the period.
INVESTMENTS MEASURED USING THE NET ASSET VALUE PER SHARE PRACTICAL EXPEDIENT
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient.
There are no participant redemption restrictions for these investments.
The investments measured using the net asset value per share practical expedient as of December 31, 2017, is as follows:
Percent |
Fair
Value |
|||||||
(dollars in thousands) | ||||||||
Collective Funds by Category: |
||||||||
Equity |
31.6 | % | $ | 15,304 | ||||
Diversified |
0.7 | % | 344 | |||||
US debt securities |
9.4 | % | 4,569 | |||||
International equities |
9.1 | % | 4,419 | |||||
Limited Partnerships by Category: |
||||||||
Emerging markets |
2.8 | % | 1,353 | |||||
Multi-strategy |
1.5 | % | 705 | |||||
Hedge Funds by Category: |
||||||||
Multi-strategy(1) |
3.5 | % | 1,674 | |||||
Global opportunities(2) |
0.7 | % | 345 | |||||
Private investment entities and/or separately managed accounts (3) |
0.7 | % | 322 | |||||
|
|
|
|
|||||
60.0 | % | $ | 29,035 | |||||
|
|
|
|
84
Notes to Consolidated Financial Statements (Continued)
The investments measured using the net asset value per share practical expedient as of December 31, 2016, is as follows:
Percent |
Fair
Value |
|||||||
(dollars in thousands) | ||||||||
Collective Funds by Category: |
||||||||
Equity |
24.1 | % | $ | 9,013 | ||||
Diversified |
0.1 | % | 47 | |||||
US debt securities |
11.3 | % | 4,241 | |||||
International equities |
9.8 | % | 3,684 | |||||
Limited Partnerships by Category: |
||||||||
Emerging markets |
0.0 | % | | |||||
Multi-strategy |
7.0 | % | 2,623 | |||||
Hedge Funds by Category: |
||||||||
Multi-strategy(1) |
5.6 | % | 2,082 | |||||
Global opportunities(2) |
1.1 | % | 422 | |||||
Private investment entities and/or separately managed accounts(3) |
0.8 | % | 282 | |||||
|
|
|
|
|||||
59.8 | % | $ | 22,394 | |||||
|
|
|
|
(1) | This category includes investments in hedge funds that pursue multiple strategies to diversify risks and reduce volatility. Fund objectives are to seek above-average rates of return and long-term capital growth through investments, which are fund of funds with a diversified portfolio of private investment entities and/or separately managed accounts managed by investment managers or achieve superior risk-adjusted capital appreciation over the long-term, generally through an investment, which invests in private investment funds and discretional managed accounts, structured notes, swaps or other similar products. The fair values of the investments in this category have been determined using the net asset value per share of the fund(s). |
(2) | This category has an investment strategy to pursue a hybrid absolute return via portfolio managers, secondaries, and co-investments with a flexible and opportunistic mandate tactically allocating capital to look to capitalize on market dislocations and inefficiencies. The opportunities are expected to fall within the following strategies: Niche Alternatives and Private Credit and Hedge Fund secondaries. The fair value of the investments in this category have been determined using the last sales price, for listed securities, and in accordance with the agreement terms for portfolio-managed investments, notes, swaps, and other similar products. |
(3) | The Funds investment objective is to invest in highly attractive, select investment opportunities by maintaining investments through private investment entities and/or separately managed accounts (each, an Investment or a Portfolio and collectively, the Investments or the Portfolios) with investment management professionals (each a Manager and collectively, the Managers) specializing in various alternative investment strategies. The Managers have broad investment experience and the ability to leverage their existing relationships with corporate management teams, investment banks and other institutions to gain access to certain investment opportunities. As such, the Manager is presented with best idea investment opportunities, typically in asset classes where market dislocations or other events have created attractive investment opportunities. The Managers are not restricted in the investment strategies that they may employ across different asset classes and regions. The Manager anticipates that any number of strategies will be eligible for consideration for investment by the Fund and the Fund reserves the right to invest in any particular strategy or asset class it deems appropriate. |
85
Notes to Consolidated Financial Statements (Continued)
ASSET ALLOCATION
SBERA offers a common and collective trust as the underlying investment structure for its retirement plans. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range of 40% to 64% of total portfolio assets. The remainder of the portfolio is allocated to fixed income securities with a target range of 15% to 25% and other investments including global asset allocation and hedge funds from 25% to 41%.
The Trustees of SBERA, through the Associations Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings.
The Company 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 voluntary. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.
The benefits expected to be paid in each year from 2018 to 2022 are $2,096,000, $2,068,000, $2,002,000, $1,939,000 and $1,966,000, respectively. The aggregate benefits expected to be paid in the five years from 2023 to 2027 are $13,107,000.
Defined Benefit
Pension Plan |
Supplemental Insurance/
Retirement Plan |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Change projected in benefit obligation |
||||||||||||||||
Benefit obligation at beginning of year |
$ | 42,255 | $ | 38,597 | $ | 38,610 | $ | 38,204 | ||||||||
Service cost |
1,241 | 1,273 | 1,582 | 1,820 | ||||||||||||
Interest cost |
1,450 | 1,358 | 1,382 | 1,334 | ||||||||||||
Actuarial (gain)/loss |
3,456 | 2,593 | 2,087 | (1,653 | ) | |||||||||||
Benefits paid |
(1,337 | ) | (1,566 | ) | (1,082 | ) | (1,095 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Projected benefit obligation at end of year |
$ | 47,065 | $ | 42,255 | $ | 42,579 | $ | 38,610 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Change in plan assets |
||||||||||||||||
Fair value of plan assets at beginning of year |
$ | 37,447 | $ | 33,717 | ||||||||||||
Actual return on plan assets |
5,312 | 3,221 | ||||||||||||||
Employer contributions |
7,000 | 2,075 | ||||||||||||||
Benefits paid |
(1,337 | ) | (1,566 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Fair value of plan assets at end of year |
$ | 48,422 | $ | 37,447 | ||||||||||||
|
|
|
|
|||||||||||||
(Unfunded) Funded status |
$ | 1,357 | $ | (4,808 | ) | $ | (42,579 | ) | $ | (38,610 | ) | |||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated benefit obligation |
$ | 47,065 | $ | 42,255 | $ | 40,375 | $ | 36,392 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average assumptions as of December 31 |
||||||||||||||||
Discount rate Liability |
3.49 | % | 3.99 | % | 3.42 | % | 3.85 | % | ||||||||
Discount rate Expense |
3.99 | % | 4.18 | % | 3.85 | % | 4.01 | % | ||||||||
Expected return on plan assets |
8.00 | % | 8.00 | % | NA | NA | ||||||||||
Rate of compensation increase |
4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % |
86
Notes to Consolidated Financial Statements (Continued)
Defined Benefit
Pension Plan |
Supplemental Insurance/
Retirement Plan |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Components of net periodic benefit cost |
||||||||||||||||
Service cost |
$ | 1,241 | $ | 1,273 | $ | 1,582 | $ | 1,820 | ||||||||
Interest cost |
1,450 | 1,358 | 1,382 | 1,334 | ||||||||||||
Expected return on plan assets |
(2,985 | ) | (2,776 | ) | | | ||||||||||
Recognized prior service cost |
(104 | ) | (104 | ) | 114 | 114 | ||||||||||
Recognized net losses |
903 | 801 | 636 | 805 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic cost (benefit) |
$ | 505 | $ | 552 | $ | 3,714 | $ | 4,073 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Other changes in plan assets and benefit obligations recognized in other comprehensive income |
||||||||||||||||
Amortization of prior service cost |
$ | 104 | $ | 104 | $ | (114 | ) | $ | (114 | ) | ||||||
Net (gain) loss |
409 | 1,347 | 1,752 | (2,458 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recognized in other comprehensive income |
513 | 1,451 | 1,638 | (2,572 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total recognized in net periodic benefit cost and other comprehensive income |
$ | 1,018 | $ | 2,003 | $ | 5,352 | $ | 1,501 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Plan |
Supplemental
Plan |
Total | Plan |
Supplemental
Plan |
Total | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Prior service cost |
$ | 100 | $ | (535 | ) | $ | (435 | ) | $ | 204 | $ | (649 | ) | $ | (445 | ) | ||||||||
Net actuarial loss |
(14,408 | ) | (15,168 | ) | (29,576 | ) | (13,999 | ) | (13,416 | ) | (27,415 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | (14,308 | ) | $ | (15,703 | ) | $ | (30,011 | ) | $ | (13,795 | ) | $ | (14,065 | ) | $ | (27,860 | ) | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the amounts included in Accumulated Other Comprehensive Loss at December 31, 2017, expected to be recognized as components of net periodic benefit cost in the next year:
Plan |
Supplemental
Plan |
|||||||
Amortization of prior service cost to be recognized in 2018 |
$ | (100 | ) | $ | 114 | |||
Amortization of loss to be recognized in 2018 |
904 | 707 |
Assumptions for the expected return on plan assets and discount rates in the Companys Plan and Supplemental Plan are periodically reviewed. As part of the review, management in consultation with independent consulting actuaries performs an analysis of expected returns based on the plans asset allocation. This forecast reflects the Companys and actuarial firms expected return on plan assets for each significant asset class or economic indicator. The range of returns developed relies on forecasts and on broad market historical benchmarks for expected return, correlation and volatility for each asset class. Also, as a part of the review, the Companys management in consultation with independent consulting actuaries performs an analysis of discount rates based on expected returns of high-grade fixed income debt securities.
Effective January 1, 2016, the Company changed its estimate of the service and interest components of the net periodic benefit cost. Previously, the Company estimated the service and interest cost components utilizing a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation. The
87
Notes to Consolidated Financial Statements (Continued)
new estimate utilizes a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to their underlying projected cash flows. The new estimate provided a more precise measurement of service and interests costs by improving the correlation between projected benefit cash flows and their corresponding spot rates. The change does not affect the measurement of the Companys benefit obligations and it is accounted for as a change in accounting estimate, which is applied prospectively. For 2016, the change in estimate reduced periodic plan cost by $859,000 compared to the prior estimate. Mortality assumptions are based on the RP 2015 Mortality Table projected with Scale MP 2016.
The Company offers a 401(k) defined contribution plan for all employees reaching minimum age and service requirements. The plan is voluntary and employee contributions are matched by the Company at a rate of 33.3% for the first 6% of compensation contributed by each employee. The Companys match totaled $445,000 for 2017, $418,000 for 2016 and $403,000 for 2015. Administrative costs associated with the plan are absorbed by the Company.
The Company has a cash incentive plan that is designed to reward our executives and officers for the achievement of annual financial performance goals of the Company as well as business line, department and individual performance. The plan supports the philosophy that management be measured for their performance as a team in the attainment of these goals. Discretionary bonus expense amounted to $1,859,000, $1,418,000 and $1,178,000 in 2017, 2016, and 2015, respectively.
The Company does not offer any postretirement programs other than pensions.
18. Commitments and Contingencies
A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2017. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse effect on the Companys consolidated financial position or results of operations.
On September 7, 2017, Crimson Galeria Limited Partnership, Raj & Raj, LLC, Harvard Square Holdings LLC, and Charles River Holdings LLC (collectively, the Plaintiffs) filed suit in the United States District Court for the District of Massachusetts against the Attorney General of the Commonwealth of Massachusetts, the Massachusetts Department of Public Health, the City of Cambridge, the Town of Georgetown, as well as against the Bank, Healthy Pharms, Inc., (Healthy Pharms), Timbuktu Real Estate, LLC, Paul Overgaag, Nathaniel Averill, 4Front Advisors, LLC, 4Front Holdings LLC, Kristopher T. Krane, 3 Brothers Real Estate, LLC, Red Line Management, LLC, unspecified insurance providers to certain Plaintiffs, Tomolly, Inc., and (collectively, the Defendants).
The Plaintiffs allege that they own property in Cambridge, MA, and claim that the value and use of their property will be impaired by Healthy Pharms decision to open a registered medicinal marijuana dispensary in abutting or nearby situated property. The Plaintiffs further allege that the Bank has a banking relationship with Healthy Pharms and that, by entering into such relationship, the Bank conspired with Healthy Pharms to violate the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. The Plaintiffs seek unspecified treble damages, and attorneys costs and fees, as well as injunctive and declaratory relief.
The Company believes that the claims and allegations against the Bank set forth in the complaint are without merit, and the Company and the Bank intend to vigorously defend against them.
On December 15, 2017, the Company filed a motion to dismiss the complaint; the plaintiffs filed an opposition brief, and the Company filed a reply in further support of its motion.
19. Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.
88
Notes to Consolidated Financial Statements (Continued)
These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Financial instruments with off-balance-sheet risk at December 31 are as follows:
Contract or Notional Amount
2017 | 2016 | |||||||
(dollars in thousands) | ||||||||
Financial instruments whose contract amount represents credit risk: |
||||||||
Commitments to originate 14 family mortgages |
$ | 5,748 | $ | 13,877 | ||||
Standby and commercial letters of credit |
5,520 | 6,796 | ||||||
Unused lines of credit |
434,618 | 362,357 | ||||||
Unadvanced portions of construction loans |
15,152 | 22,049 | ||||||
Unadvanced portions of other loans |
35,602 | 52,224 |
Commitments to originate loans, unadvanced portions of construction loans, unused lines of credit and unused letters of credit are generally agreements to lend to a customer, provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
89
Notes to Consolidated Financial Statements (Continued)
20. Other Operating Expenses
Year ended December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands) | ||||||||||||
Marketing |
$ | 2,315 | $ | 2,185 | $ | 1,849 | ||||||
Software maintenance/amortization |
1,859 | 1,863 | 1,670 | |||||||||
Legal and audit |
1,543 | 1,255 | 1,269 | |||||||||
Contributions |
993 | 789 | 690 | |||||||||
Processing services |
1,160 | 1,040 | 1,002 | |||||||||
Consulting |
1,199 | 1,168 | 1,050 | |||||||||
Postage and delivery |
966 | 987 | 905 | |||||||||
Supplies |
945 | 948 | 965 | |||||||||
Telephone |
1,020 | 1,032 | 804 | |||||||||
Directors fees |
440 | 413 | 377 | |||||||||
Insurance |
308 | 323 | 301 | |||||||||
Other |
1,845 | 1,812 | 1,826 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 14,593 | $ | 13,815 | $ | 12,708 | ||||||
|
|
|
|
|
|
21. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating fair values of its financial instruments. Excluded from this disclosure are all non-financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.
SECURITIES HELD-TO-MATURITY
The fair values of these securities were based on quoted market prices, where available, as provided by third-party investment portfolio pricing vendors. If quoted market prices were not available, fair values provided by the vendors were based on quoted market prices of comparable instruments in active markets and/or based on a matrix pricing methodology which employs The Bond Market Associations 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
For variable-rate loans, that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair value of other loans is estimated using discounted cash flow analysis, based
90
Notes to Consolidated Financial Statements (Continued)
on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Incremental credit risk for nonperforming loans has been considered.
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 Companys time deposit liabilities do not take into consideration the value of the Companys 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.
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 Companys financial instruments as of December 31, 2017 and December 31, 2016. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, short-term investments, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable.
Carrying Amount |
Estimated
Fair Value |
Level 1 Inputs |
Fair Value
Measurements Level 2 Inputs |
Level 3 Inputs | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
December 31, 2017 |
||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Securities held-to-maturity |
$ | 1,701,233 | $ | 1,668,827 | $ | | $ | 1,668,827 | $ | | ||||||||||
Loans(1) |
2,149,689 | 2,094,517 | | | 2,094,517 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Time deposits |
625,361 | 627,517 | | 627,517 | | |||||||||||||||
Other borrowed funds |
347,778 | 349,364 | | 349,364 | | |||||||||||||||
Subordinated debentures |
36,083 | 36,083 | | | 36,083 | |||||||||||||||
December 31, 2016 |
||||||||||||||||||||
Financial assets: |
||||||||||||||||||||
Securities held-to-maturity |
$ | 1,653,986 | $ | 1,635,808 | $ | | $ | 1,635,808 | $ | | ||||||||||
Loans(1) |
1,899,527 | 1,873,703 | | | 1,873,703 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Time deposits |
478,359 | 480,133 | | 480,133 | | |||||||||||||||
Other borrowed funds |
293,000 | 294,940 | | 294,940 | | |||||||||||||||
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. |
91
Notes to Consolidated Financial Statements (Continued)
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 Banks entire holdings of a particular financial instrument. Because no active market exists for some of the Banks 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.
22. Quarterly Results of Operations (unaudited)
2017 Quarters |
Fourth | Third | Second | First | ||||||||||||
(in thousands, except share data) | ||||||||||||||||
Interest income |
$ | 29,470 | $ | 28,521 | $ | 28,806 | $ | 26,639 | ||||||||
Interest expense |
7,768 | 7,168 | 6,701 | 6,183 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income |
21,702 | 21,353 | 22,105 | 20,456 | ||||||||||||
Provision for loan losses |
450 | 450 | 490 | 400 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for loan losses |
21,252 | 20,903 | 21,615 | 20,056 | ||||||||||||
Other operating income |
4,410 | 3,942 | 4,291 | 3,909 | ||||||||||||
Operating expenses |
15,992 | 16,205 | 17,197 | 17,725 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
9,670 | 8,640 | 8,709 | 6,240 | ||||||||||||
Provision for income taxes |
9,645 | 617 | 552 | 144 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 25 | $ | 8,023 | $ | 8,157 | $ | 6,096 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Share data: |
||||||||||||||||
Average shares outstanding, basic |
||||||||||||||||
Class A |
3,605,829 | 3,605,829 | 3,603,729 | 3,600,729 | ||||||||||||
Class B |
1,962,080 | 1,962,080 | 1,964,180 | 1,967,180 | ||||||||||||
Average shares outstanding, diluted |
||||||||||||||||
Class A |
5,567,909 | 5,567,909 | 5,567,909 | 5,567,909 | ||||||||||||
Class B |
1,962,080 | 1,962,080 | 1,964,180 | 1,967,180 | ||||||||||||
Earnings per share, basic |
||||||||||||||||
Class A |
$ | 0.01 | $ | 1.75 | $ | 1.78 | $ | 1.33 | ||||||||
Class B |
$ | | $ | 0.87 | $ | 0.89 | $ | 0.66 | ||||||||
Earnings per share, diluted |
||||||||||||||||
Class A |
$ | | $ | 1.44 | $ | 1.47 | $ | 1.09 | ||||||||
Class B |
$ | | $ | 0.87 | $ | 0.89 | $ | 0.66 |
92
Notes to Consolidated Financial Statements (Continued)
2016 Quarters |
Fourth | Third | Second | First | ||||||||||||
(in thousands, except share data) | ||||||||||||||||
Interest income |
$ | 24,689 | $ | 25,005 | $ | 23,742 | $ | 23,263 | ||||||||
Interest expense |
5,927 | 5,791 | 5,486 | 5,413 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income |
18,762 | 19,214 | 18,256 | 17,850 | ||||||||||||
Provision for loan losses |
200 | 375 | 350 | 450 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for loan losses |
18,562 | 18,839 | 17,906 | 17,400 | ||||||||||||
Other operating income |
3,700 | 4,225 | 4,643 | 3,654 | ||||||||||||
Operating expenses |
16,156 | 16,630 | 16,288 | 15,683 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
6,106 | 6,434 | 6,261 | 5,371 | ||||||||||||
Provision for income taxes |
(394 | ) | (52 | ) | 20 | 64 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 6,500 | $ | 6,486 | $ | 6,241 | $ | 5,307 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Share data: |
||||||||||||||||
Average shares outstanding, basic |
||||||||||||||||
Class A |
3,600,729 | 3,600,729 | 3,600,729 | 3,600,729 | ||||||||||||
Class B |
1,967,180 | 1,967,180 | 1,967,180 | 1,967,180 | ||||||||||||
Average shares outstanding, diluted |
||||||||||||||||
Class A |
5,567,909 | 5,567,909 | 5,567,909 | 5,567,909 | ||||||||||||
Class B |
1,967,180 | 1,967,180 | 1,967,180 | 1,967,180 | ||||||||||||
Earnings per share, basic |
||||||||||||||||
Class A |
$ | 1.42 | $ | 1.41 | $ | 1.36 | $ | 1.16 | ||||||||
Class B |
$ | 0.71 | $ | 0.71 | $ | 0.68 | $ | 0.58 | ||||||||
Earnings per share, diluted |
||||||||||||||||
Class A |
$ | 1.17 | $ | 1.16 | $ | 1.12 | $ | 0.95 | ||||||||
Class B |
$ | 0.71 | $ | 0.71 | $ | 0.68 | $ | 0.58 |
93
Notes to Consolidated Financial Statements (Continued)
23. Parent Company Financial Statements
The balance sheets of Century Bancorp, Inc. (Parent Company) as of December 31, 2017 and 2016 and the statements of income and cash flows for each of the years in the three-year period ended December 31, 2017, are presented below. The statements of changes in stockholders equity are identical to the consolidated statements of changes in stockholders equity and are therefore not presented here.
BALANCE SHEETS
December 31, |
2017 | 2016 | ||||||
(dollars in thousands) | ||||||||
ASSETS: |
||||||||
Cash |
$ | 1,981 | $ | 2,768 | ||||
Investment in subsidiary, at equity |
283,881 | 263,070 | ||||||
Other assets |
16,833 | 10,335 | ||||||
|
|
|
|
|||||
Total assets |
$ | 302,695 | $ | 276,173 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
Liabilities |
$ | 6,315 | $ | 49 | ||||
Subordinated debentures |
36,083 | 36,083 | ||||||
Stockholders equity |
260,297 | 240,041 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 302,695 | $ | 276,173 | ||||
|
|
|
|
STATEMENTS OF INCOME
Year Ended December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands) | ||||||||||||
Income: |
||||||||||||
Dividends from subsidiary |
$ | 2,500 | $ | 2,000 | $ | 1,500 | ||||||
Interest income from deposits in bank |
1 | 3 | 13 | |||||||||
Other income |
34 | 28 | 24 | |||||||||
|
|
|
|
|
|
|||||||
Total income |
2,535 | 2,031 | 1,537 | |||||||||
Interest expense |
1,121 | 937 | 792 | |||||||||
Operating expenses |
209 | 220 | 212 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes and equity in undistributed income of subsidiary |
1,205 | 874 | 533 | |||||||||
Benefit from income taxes |
(440 | ) | (383 | ) | (328 | ) | ||||||
|
|
|
|
|
|
|||||||
Income before equity in undistributed income of subsidiary |
1,645 | 1,257 | 861 | |||||||||
Equity in undistributed income of subsidiary |
20,656 | 23,277 | 22,160 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | ||||||
|
|
|
|
|
|
94
Notes to Consolidated Financial Statements (Continued)
STATEMENTS OF CASH FLOWS
December 31, |
2017 | 2016 | 2015 | |||||||||
(dollars in thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 22,301 | $ | 24,534 | $ | 23,021 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||||||
Undistributed income of subsidiary |
(20,656 | ) | (23,277 | ) | (22,160 | ) | ||||||
Depreciation and amortization |
| | 3 | |||||||||
Increase in other assets |
(6,498 | ) | (1,527 | ) | (1,112 | ) | ||||||
Decrease in liabilities |
6,266 | 9 | 4 | |||||||||
|
|
|
|
|
|
|||||||
Net cash (used in) operating activities |
1,413 | (261 | ) | (244 | ) | |||||||
|
|
|
|
|
|
|||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Net proceeds from the exercise of stock options |
| | | |||||||||
Cash dividends paid |
(2,200 | ) | (2,201 | ) | (2,200 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in financing activities |
(2,200 | ) | (2,201 | ) | (2,200 | ) | ||||||
|
|
|
|
|
|
|||||||
Net (decrease) in cash |
(787 | ) | (2,462 | ) | (2,444 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash at beginning of year |
2,768 | 5,230 | 7,674 | |||||||||
|
|
|
|
|
|
|||||||
Cash at end of year |
$ | 1,981 | $ | 2,768 | $ | 5,230 | ||||||
|
|
|
|
|
|
95
Report of Independent Registered Public Accounting Firm
KPMG LLP
Independent Registered Public Accounting Firm
Two Financial Center
60 South Street
Boston, Massachusetts 02111-2759
The Board of Directors and Stockholders
Century Bancorp, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and its subsidiary (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes, collectively, the consolidated financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Companys internal control over financial reporting as of December 31, 2017, based on criteria established in Internal ControlIntegrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2018 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Companys auditor since 1982.
Boston, Massachusetts
March 15, 2018
96
Report of Independent Registered Public Accounting Firm
KPMG LLP
Independent Registered Public Accounting Firm
Two Financial Center
60 South Street
Boston, Massachusetts 02111-2759
The Board of Directors and Stockholders
Century Bancorp, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Century Bancorp, Inc. and its subsidiarys (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal ControlIntegrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal ControlIntegrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes, collectively, the consolidated financial statements, and our report dated March 15, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Boston, Massachusetts
March 15, 2018
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Managements Report on Internal Control Over Financial Reporting
CENTURY BANCORP, INC.
400 Mystic Avenue
Medford, Massachusetts 02155
We, together with the other members of executive management of Century Bancorp, Inc. and our subsidiary (the Company), are responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control system was designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Companys management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework (2013). Based on our assessment, we believe that, as of December 31, 2017, the Companys internal control over financial reporting is effective based on those criteria.
The Companys independent registered public accounting firm has issued an audit report on the effectiveness of the Companys internal control over financial reporting. Their report appears on page 97.
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Barry R. Sloane |
William P. Hornby, CPA | |
President & CEO |
Chief Financial Officer & Treasurer | |
March 15, 2018 |
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The directors of the Company and their ages are as follows:
Name |
Age |
Position |
||||
George R. Baldwin |
74 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Stephen R. Delinsky |
73 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Louis J. Grossman |
68 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Russell B. Higley, Esquire |
78 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Jackie Jenkins-Scott |
68 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Linda Sloane Kay |
56 | Director, Century Bancorp, Inc.; Director and Executive Vice President, Century Bank and Trust Company | ||||
Fraser Lemley |
77 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Joseph P. Mercurio |
69 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Joseph J. Senna, Esquire |
78 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Jo Ann Simons |
65 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Barry R. Sloane |
62 | Director, President and Chief Executive Officer, Century Bancorp, Inc.; Director, President and Chief Executive Officer, Century Bank and Trust Company | ||||
Marshall M. Sloane |
91 | Chairman of the Board, Century Bancorp, Inc. and Century Bank and Trust Company | ||||
George F. Swansburg |
75 | Director, Century Bancorp, Inc., and Century Bank and Trust Company | ||||
Jon Westling |
75 | Director, Century Bancorp, Inc., and Century Bank and Trust Company |
Mr. Baldwin became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1995. Mr. Baldwin is President and CEO of G. Baldwin & Co., a financial service firm. He was formerly CEO, Owner and Director of Kaler Carney Liffler, a multi-state regional insurance agency; and subsequently he became Chairman of the New England area of Arthur J. Gallagher & Co., Americas third largest insurance broker. Mr. Baldwins extensive three-decade background in banking and insurance is relevant to Centurys insurance and financial customers and qualifies him to continue to serve as a director of the Company.
Mr. Delinsky became a director of the Company and of Century Bank in 2013. He is an attorney with the law firm of Clark, Hunt, Ahearn & Embry. Prior to that, Mr. Delinsky was an attorney at the law firm of Eckert
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Seamans Cherin & Mellott, LLC. Mr. Delinskys experience as an attorney, and expertise in civil and criminal trial experience in state and federal courts, has qualified him to serve as director of the Company.
Mr. Grossman became a director of the Company and of Century Bank and Trust Company in January, 2016. Mr. Grossman has been President and Treasurer of The Grossman Companies, Inc. since 1980, when he and his father, Morton, purchased the family real estate business. In January, 2015 he became Chairman. Mr. Grossmans experience and expertise in real estate, which is relevant to customer relationships of the Company, qualifies him to serve as director of the Company.
Mr. Higley became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1986. Mr. Higley is an attorney in private practice. Mr. Higleys experience as an attorney and expertise in the real estate industry, which is relevant to real estate customers of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
Ms. Jenkins-Scott became a director of the Company and of Century Bank and Trust Company in 2006. Ms. Jenkins-Scott is past President of Bostons Wheelock College. Ms. Jenkins-Scotts experience as President of a college and expertise in the educational field as well as President and CEO of a non-profit entity, which is relevant to certain customer relationships of the Company, has qualified her to serve as director of the Company. Also, her tenure and experience as a director of the Company has qualified her to continue to serve.
Ms. Kay became a director of the Company in 2005. Ms. Kay joined Century Bank and Trust Company in 1983 as Assistant Vice President and currently serves as Executive Vice President. Ms. Kays experience in business development, customer relationships and tenure at Century Bank and Trust Company has qualified her to serve as director of the Company.
Mr. Lemley became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1988. Mr. Lemley is Chairman of the Board and CEO of Sentry Auto Group. Mr. Lemleys experience as CEO of a company and expertise in the automotive industry, which is relevant to certain other customers in the automotive industry of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
Mr. Mercurio became a director of the Company in 1990 and a director of Century Bank and Trust Company in 1995 and voluntarily resigned in 2004. He was then re-elected in 2010. In December, 2010, Mr. Mercurio retired as Executive Vice President of Boston University having completed 38 years of service. He subsequently served as Senior Vice President for Administration and Finance and currently serves as Senior Advisor to the President at Quincy College. Mr. Mercurio is also an independent consultant in the field of higher education administration. Mr. Mercurios experience in the educational field, which is relevant to certain customer relationships of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
Mr. Senna became a director of the Company in 1986. He has been a director of Century Bank and Trust Company since 1979. Mr. Senna is an attorney and managing partner of C&S Capital Properties, LLC, a real estate management and development firm. Mr. Sennas experience as an attorney and expertise in the real estate industry, which is relevant to real estate related customers in addition to his years of service as Chairman of the Audit Committee, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
Ms. Simons became a director of the Company and a director of Century Bank and Trust Company in January, 2016. Ms. Simons is CEO of Northeast ARC and was President and CEO of Cardinal Cushing Centers, Inc. from 2008 through January, 2016. These nonprofit organizations specialize in the support of individuals with disabilities. Ms. Simons experience and expertise with nonprofit organizations, which is relevant to customer relationships of the Company, qualifies her to serve as director of the Company.
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Mr. Barry R. Sloane has been a director of the Company and Century Bank and Trust Company since 1997. Mr. Sloane is President and CEO of Century Bancorp and President and CEO of Century Bank and Trust Company. Mr. Sloane is also a trustee of the Savings Bank Employee Retirement System (SBERA). Mr. Sloanes experience at the Company as well as his experience at other financial services companies and expertise in the financial services industry has qualified him to serve as director of the Company.
Mr. Marshall M. Sloane is the founder of the Company and is currently the Chairman of the Board. He founded Century Bank and Trust Company in 1969 and is currently the Chairman of the Board. Mr. Sloanes extensive banking experience qualifies him to serve as Chairman of the Board.
Mr. Swansburg became a director of the Company in 1986. He has been a director of Century Bank and Trust Company since 1992. From 1992 to 1998 he was President and Chief Operating Officer of Century Bank and Trust Company. He is now retired from Century Bank and Trust Company. Mr. Swansburgs experience as President and Chief Operating Officer of Century Bank and Trust Company and expertise in the banking industry has qualified him to serve as a director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
Mr. Westling became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1995. Mr. Westling is President Emeritus and Professor of History and Humanities at Boston University. Mr. Westlings experience as president of a University and expertise in the educational field, which is relevant to certain customer relationships of the Company, has qualified him to serve as director of the Company. Also, his tenure and experience as a director of the Company has qualified him to continue to serve.
All of the Companys directors are elected annually and hold office until their successors are duly elected and qualified. A majority of the members of the Companys Board of Directors have been determined by the Companys Board of Directors to be independent within the meaning of current FINRA listing standards. There are no family relationships between any of the directors or executive officers, except that Barry R. Sloane is the son of Marshall M. Sloane and Linda Sloane Kay is the daughter of Marshall M. Sloane.
Executive officers are elected annually by the Board prior to the Annual Meeting of Shareholders to serve for a one year term and until their successors are elected and qualified. The following table sets forth the name and age of each executive officer of the Company and the principal positions and offices he/she holds with the Company.
Marshall M. Sloane |
Chairman of the Board of the Company and Century Bank and Trust Company. Mr. Sloane is 91 years old. | |
Barry R. Sloane |
Director, President and CEO; Director, President and CEO, Century Bank and Trust Company. Mr. Sloane is 62 years old. | |
William P. Hornby |
Chief Financial Officer and Treasurer; Chief Financial Officer and Treasurer, Century Bank and Trust Company. Mr. Hornby is 51 years old. He joined the Company in 2007. | |
Paul A. Evangelista |
Executive Vice President, Century Bank and Trust Company with responsibility for retail, operations and marketing. Mr. Evangelista is 54 years old. He joined the Company in 1999. | |
Brian J. Feeney |
Executive Vice President, Century Bank and Trust Company, Head of Institutional Services Group. Mr. Feeney is 57 years old. He joined the Company in 1989. | |
Linda Sloane Kay |
Executive Vice President, Century Bank and Trust Company with responsibility for business development. Ms. Kay is 56 years old. She joined the Company in 1983. | |
David B. Woonton |
Executive Vice President, Century Bank and Trust Company with responsibility for lending. Mr. Woonton is 62 years old. He joined the Company in 1999. |
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The Audit Committee
The Audit Committee meets with KPMG LLP, the Companys independent registered public accounting firm, in connection with the annual audit and quarterly reviews of the Companys financial statements. The Audit Committee was composed of four directors during 2017, Joseph J. Senna, Chair, Stephen R. Delinsky, Joseph P. Mercurio, and Jon Westling, each of whom the Board of Directors has determined is independent under current FINRA listing standards. Effective December 31, 2017, Joseph Mercurio resigned from the Companys Audit Committee and was replaced by Jo Ann Simons. The Board of Directors has determined that Mr. Senna and Ms. Jo Ann Simons qualify as audit committee financial experts, as that term is defined in Item 407(d)(5) of Regulation S-K promulgated by the SEC. The Audit Committee reviews the findings and recommendations of the FRB, FDIC, and the Massachusetts Division of Banks in connection with their examinations and the internal audit reports and procedures for the Company and its subsidiaries. The Audit Committee met five times during 2017.
Audit Committee Report
The Audit Committee of the Companys Board of Directors is responsible for providing independent, objective oversight of the Companys accounting functions and internal controls. The Audit Committee reviews: the financial information provided to shareholders and others; the systems of internal controls regarding finance, accounting, legal/regulatory compliance, and ethics; and the audit and financial reporting processes. The Audit Committee operates under a written charter first adopted and approved by the Board of Directors in 2000. The Audit Committee has reviewed and reassessed its Charter. A copy of the Audit Committee Charter was last published in the Form 10-K for the period ending December 31, 2015.
Management is responsible for the Companys internal controls and financial reporting process. The independent registered public accounting firm is responsible for performing an independent audit of the Companys consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue their reports thereon. The Audit Committees responsibility is to monitor and oversee these processes.
The Audit Committee has reviewed and discussed the audited financial statements with management and the independent registered public accounting firm. The Audit Committee has also discussed with KPMG LLP, the independent registered public accounting firm for the Company, the matters required to be discussed by the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 16, Communication with Audit Committees.
The Audit Committee has also received the written disclosures and the letter from KPMG LLP as required by the PCAOB. The Audit Committee has discussed with KPMG LLP the firms independence, including a review of audit and non-audit fees and services, and concluded that KPMG LLP is independent.
Based on the review and discussions referred to in the paragraph above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Companys Annual Report on Form 10-K for the last fiscal year for filing with the Securities and Exchange Commission.
/s/ Joseph J. Senna, Chair | ||
/s/ Stephen R. Delinsky | ||
/s/ Jo Ann Simons | ||
/s/ Jon Westling |
Nominating Committee
The Companys Nominating Committee has three director members, Stephen R. Delinsky, Fraser Lemley and Jon Westling, each of whom the Board of Directors has determined to be independent under the NASDAQ current listing standards. The Nominating Committee operates pursuant to a written policy. The nominating
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committee implements the process by identifying a potential candidate and evaluating whether the candidate is eligible and qualified for service. The Committee has developed criteria for the selection of new directors to the Board, including but not limited to, diversity, age, skills, experience, time availability (including the number of other boards a director candidate sits on), NASDAQ listing standards, applicable federal and state laws and regulations, Board and Company needs and such other criteria as the Committee shall determine to be relevant. The committees effectiveness is assessed by reviewing existing Board of Directors attendance and performance; experience, skills and contributions that the existing Director brings to the Board; and independence, prior to nominating an existing director for reelection.
Board Leadership Structure
The Company has implemented a careful succession plan by separating the CEO and Chairmans position. The positions were separated to retain Marshall M. Sloane, who is a valuable asset given his history with the Company and his experience, as Chairman. Barry R. Sloane is the CEO. Marshall M. Sloane continues as Chairman of the Board.
Oversight of Risk
The Board oversees risk through various Board Committees which report directly to the Board. Also, various committees comprised of Company management report to the Board.
The principal Board Committees responsible for overseeing the various elements of risk are the Audit Committee, the Asset Liability Committee and the Executive Committee. The Audit Committee is responsible for monitoring all elements of risk, primarily through its oversight of the internal audit program. The Asset Liability Committee monitors interest rate risk principally through managements models and simulations. The Executive Committee monitors credit risk through its review of large originators, classified assets, and the calculation of the allowance for loan losses and concentrations of credits.
The principal committees comprised of management are Management Committee, Corporate Risk Management Committee, Loan Approval Committee and Asset Liability Pricing Committee. Management Committee is comprised of senior management and is responsible for overseeing all elements of risk. The Corporate Risk Management Committee meets quarterly to address specific elements of risk. Loan Approval Committee is responsible for overseeing credit risk. The Asset Liability Committee oversees interest rate risk. The committees comprised of management report to the Board of Directors, as needed, through senior managements attendance and reporting at Board of Directors meetings.
Code of Ethics
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions. A copy of the Companys Code of Ethics may be obtained upon written request to Investor Relations, Century Bancorp, Inc., 400 Mystic Avenue, Medford, Massachusetts 02155.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of the copies of Forms 3, 4 and 5 and amendments thereto, if any, and any written representations furnished to the Company, none of the Companys officers or Directors failed to file on a timely basis reports required by Section 16 of the Securities Exchange Act of 1934 during the fiscal year ended December 31, 2017, or in prior fiscal years.
Based solely on a review of Forms 4 filed with the SEC during the fiscal year ended December 31, 2017, the Company believes a beneficial owner of more than 10% of the Companys Class A Common Stock, James J. Filler, timely filed all reports he was required to file during the aforementioned fiscal year except nineteen (19) reports covering twenty-six (26) transactions that were filed late by Mr. Filler.
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ITEM 11. EXECUTIVE COMPENSATION
The following is a discussion and analysis of our executive compensation policies and practices with respect to compensation reported for fiscal year 2017.
Introduction
The following discussion and analysis includes separate sections on:
| The Composition and Responsibilities of the Compensation Committee |
| The Companys Executive Compensation Conclusion |
| Compensation Discussion and Analysis (CD&A) |
| Philosophy and Objectives of the Company |
| Compensation Process |
| Compensation Consultant |
| Compensation Components |
| Post-Employment Compensation |
| Chief Executive Officer Compensation |
| Executive Officer Compensation |
| Consulting Services Agreements |
| Employment Agreements |
| Report of the Compensation Committee |
Composition and Responsibilities of the Compensation Committee
The Compensation Committee is a committee of the Board of Directors composed of Fraser Lemley as Chairman, Joseph Mercurio and Jon Westling, each of whom the Board has determined is independent as defined by the FINRA current listing standards.
The Compensation Committee oversees compensation programs applicable to employees at all levels of the Company and makes decisions regarding executive compensation that is intended to align total compensation with business objectives and enable the Company to attract, retain and reward individuals who are contributing to the Companys success.
The Compensation Committee reviews the Companys cash incentive, stock incentive, retirement, and benefit plans and makes its recommendations to the Board with respect to these areas.
All decisions with respect to executive and director compensation are approved by the Compensation Committee and recommended to the full Board for ratification.
The Companys Executive Compensation Conclusion
Based upon review, the Compensation Committee and the Board of Directors found the Companys Chief Executive Officers, the Chief Financial Officers and the other Named Executive Officers total compensation to be reasonable. In addition to the other factors noted, the Committee and the Board considered that the Company maintains only one change of control provision and did not award stock incentive awards for fiscal year 2017. It should be noted that when the Committee and the Board considers any component of executive compensation, the mix and aggregate amounts of all components are taken into consideration.
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Compensation Discussion and Analysis (CD&A)
Philosophy and Objectives of Company
The Companys executive compensation philosophy is based on the following principles:
| Compensation programs should be designed to attract and retain executives, to motivate them to achieve and to reward them appropriately for their performance. |
| Compensation should be competitive and equitable in light of the executives responsibilities, experience, and performance. |
| Provide annual compensation that takes into account the Companys performance with respect to its financial and strategic objectives, the performance of functions and business areas under the executives management and the results of established goals; |
| Align the financial interests of the executive with those of shareholders by providing both short-term and long-term incentives; |
| Offer a total compensation program for each executive based on (i) the level of responsibility of the executives position, (ii) the experience and skills necessary relative to the other senior management positions, (iii) comparison of compensation to similarly positioned executives of peer financial institutions; and |
| Evaluate the overall compensation of our executives in light of general economic and specific company, industry and competitive considerations. |
Compensation Process
The Company maintains governance practices to ensure that it can reach its compensation-related decisions in an informed and appropriate manner.
Base salaries, which are the Companys major element of compensation, are reviewed for executive officers and employees at the regularly scheduled fall meeting of the Compensation Committee. At this meeting the Committee also reviews and adopts, as appropriate, proposals for the discretionary officer cash incentive plan for the new fiscal year, stock option grants, additions, amendments, modifications or terminations of retirement and benefit programs.
The Compensation Committees process incorporates the following:
| The Committee operates under a written charter which is periodically reviewed. The Committee amended its charter in 2014 to conform to NASDAQ compensation committee rule amendments. |
| The Committee meets with representatives of management to review and discuss prepared materials and issues. |
| The Committee considers recommendations from the Chief Executive Officer with respect to the compensation of the Companys Named Executive Officers. |
| Our independent compensation consultant attends Committee meetings as requested. |
| The Committee meets and deliberates privately without management present. Our consultant participates in these sessions as requested. |
| The Committee may consult with the non-management and independent directors regarding decisions affecting Executive compensation. |
| The Committee reports the Committees major actions to the entire Board at the Board of Directors meeting in December or the following January. |
| The Committee recommends for approval to the Board of Directors the fees for our Board and Board Committees. |
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| The Board of Directors then considers the report of the Compensation Committee and accepts or amends and approves or ratifies all matters presented for consideration. |
To the extent permitted by applicable law, the Committee or the Board may delegate to management certain of its duties and responsibilities, including with respect to the adoption, amendment, modification or termination of benefit plans and with respect to the awards of stock options under certain stock plans.
Compensation Consultant
When making determinations regarding the compensation paid to our executives the Compensation Committee and the Board of Directors rely, in part, on the expertise of our independent compensation consultant, Thomas Warren & Associates, to conduct an assessment of our executive compensation. In addition to conferring with certain executives, the consultant works with internal company support staff to obtain compensation and market data. Thomas Warren & Associates identifies a group of peer companies in consideration of such factors as asset size, geography, type of financial services offered and the complexity and scope of operations and makes use of executive compensation comparisons, published surveys and peer analyses.
The Compensation Committee and the Board of Directors took Thomas Warren & Associates recommendations into consideration when setting base salaries for fiscal 2017.
Compensation Components
With respect to Executive compensation, the Company reviews the mix of base salary, cash and stock based incentive plans and benefits for our individual executives, however, there is no specific formula for allocating between cash and non-cash compensation. The competitiveness of total compensation potential for our executives is reviewed against industry practices and the Companys peers as identified by our independent compensation consultant. The major elements of the Companys executive compensation package (i.e., base salary, cash and stock based incentive plans) are similar to those found in many companies.
Base Salary Compensation:
When evaluating executive base salary compensation, the Company takes into consideration such factors as:
| The attainment of business and strategic goals and the financial performance of the Company; |
| The importance, complexity, and level of responsibility of the executives position within the organizational structure; |
| The performance of the executives business areas goals and the accomplishment of objectives for the previous year; |
| The difficulty of achieving desired results; |
| The value of the executives unique skills, abilities and general management capabilities to support the long-term performance of the Company; |
| The executives contribution as a member of the Executive Management Team. |
While the Company reviews numerous quantitative and qualitative factors noted above when determining executive base salary compensation, the performance of the Companys stock is not generally considered a factor in this determination as the price of the Companys common stock is subject to various factors beyond the Companys control. The Company believes that the price of the stock in the long-term will reflect the Companys operating performance and how well our executives manage the Company.
Ultimately, the Compensation Committee and the Board of Directors have the authority to use discretion when making executive compensation determinations after review of all the information that they deem relevant.
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Cash Incentive Plan:
The Company has a discretionary cash incentive plan that is designed to reward our executives and officers for the achievement of annual financial performance goals of the Company as well as business line, department and individual performance. The plan supports the philosophy that management be measured for their performance as a team in the attainment of these goals.
Awards are based upon the attainment of established objectives including profitability, expense control, sales volumes and overall job performance. Awards are generally not granted unless the Company achieves certain financial targets.
Upon recommendation of the Compensation Committee, the Board of Directors determines the aggregate amount, if any, to be awarded. In recognition of the Companys solid performance, discretionary awards were granted for fiscal 2017. Awards for the Chief Executive Officer and the other Named Executive Officers were reviewed and approved by the Board of Directors and are noted on the Summary Compensation Table.
Stock Option Plans:
During 2000 and 2004, common stockholders of the Company approved stock option plans (the Option Plans) to encourage ownership of Class A common stock of the Company by directors, officers and employees of the Company and its Affiliates and to provide additional incentives for them to promote the success of the Companys business through awards of or relating to shares of the Companys Class A common stock. Under the Option Plans, all officers and key employees of the Company are eligible to receive non-qualified and incentive stock options to purchase shares of Class A common stock. The Option Plans are administered by the Compensation Committee of the Board of Directors, whose members are ineligible to participate in the Option Plans. Based on managements recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the stocks trading value for non-qualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (not more than ten years from the date of the grant).
The Compensation Committee has complete discretion to make or select the manner of making all necessary determinations with respect to each option to be granted by the committee under the Option Plans including the director, employee, or officer to receive an Option. However, in determining the long-term incentive component (stock incentive plan) of executive compensation, the Committee does consider the Companys performance and relative shareholder return, the value of similar incentives awards at peer companies and the awards given in past years. The Committee may take into account the nature of the services provided by the respective officers, employees, and directors, their present and potential contributions to the success of the Company, and any other factors that the Compensation Committee, in its discretion, determines are relevant.
Option grants were not awarded in 2017.
Post-Employment Compensation
Defined Benefit Pension Plan:
The Company had a qualified Defined Benefit Pension Plan which had been offered to all employees reaching a minimum age and service requirement. In 2006 the Bank became a member of the Savings Bank Employee Retirement Association (SBERA) within which it maintains the qualified Defined Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for pension plans participating in SBERA. The Trustee of SBERA, through SBERAs Investment Committee, selects investment managers for the common and collective trust portfolio. A professional advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager
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searches. The overall investment objective is to diversify equity investments across a spectrum of investment types. (e.g. small cap, large cap, international, etc.) and styles (e.g. growth, value, etc.). The Company has closed the plan to employees hired after March 31, 2006.
Benefits under the plan are based upon an employees years of service and career average compensation. The 2017 increase in the actuarial present value of each Named Executive Officers accumulated benefit under the plan is set forth in the Summary Compensation Table which appears on page 110 and the actuarial present value of each Named Executive Officer is set forth in the Pension Benefits Table which appears on page 111.
401(k) Plan:
Our executives are eligible to participate in the Companys 401(k) contributory defined contribution plan. The Company contributes a matching contribution equal to 33.33% on the first 6% of the participants compensation that has been contributed to the plan. The Chief Executive Officer and five of the Named Executive Officers participated in the 401(k) plan during fiscal 2017 and received matching contributions up to a maximum of $5,400. The plan is currently administered by SBERA.
Supplemental Executive Insurance/Retirement Income Plan:
The Company has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan) which is limited to select officers and employees of the Company.
Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Individual life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.
Benefits under the Supplemental Plan are based upon an employees years of service and highest three year average compensation. The 2017 increase in the actuarial present value of each Named Executive Officers accumulated benefit under the Supplemental Plan is set forth in the Summary Compensation Table which appears below and the actuarial present value of each Named Executive Officer is set forth in the Supplemental Executive Insurance/Retirement Benefits Table which appears on page 112.
Previously, the Company has entered into an agreement with Mr. Marshall Sloane to freeze his Supplemental Executive/Insurance Retirement Income Plan benefit. In consideration of this frozen benefit, the Company has acquired life insurance policies providing a death benefit of $25,000,000 upon the death of the survivor of Mr. Sloane or Mrs. Sloane. Mr. Sloane has elected 50% joint and survivor annuity. Under this plan he received $523,639 in 2017.
Chief Executive Officer Compensation
The Company granted Chief Executive Officer, Barry R. Sloane, a 5% salary increase in 2017. In recognition of the Companys solid financial performance in 2017, the Company also granted a $240,000 cash bonus payable to Mr. Barry R. Sloane.
The 2017 total compensation for the Chief Executive Officer was $2,055,158, as shown in the Summary Compensation Table. The 2017 estimated median compensation for the Company was $48,920. The CEO total compensation was approximately 42 times the total compensation of the median employee calculated in the same manner. In determining the median employee, a listing was prepared of all employees as of December 31, 2017. Compensation was annualized for those employees that were not employed for the full year of 2017.
108
Executive Officer Compensation
Consistent with the decisions regarding CEO base compensation, the Company determined that the base salary compensation for each of the following Named Executive Officers, Linda Sloane Kay, Paul Evangelista, David Woonton, William Hornby and Brian Feeney increased 5% in 2017. In light of the Companys financial performance in 2017, cash bonuses were awarded to all of the above Named Executive Officers as noted in the Summary Compensation Table.
The Company based its determinations on its subjective analysis of each individuals performance and contribution to the corporations goals and objectives and considered the quantitative and qualitative factors referenced above.
Executive Benefits
We limit additional executive benefits that we make available to our executive officers. Where such benefits are provided, they are intended to support other business purposes including facilitating business development efforts.
Consulting Services Agreement
The Company renewed its consulting agreement with Marshall M. Sloane to provide the Company advice on strategic planning and operational management, assist with business development efforts and clients, participate in public relations and community outreach efforts and provides other services as may be requested by the Board of Directors. The Company agreed to pay Mr. Sloane an annual contract fee of $405,401 per year during 2017 with provisions to reimburse Mr. Sloane for all related business expenses and the expense of obtaining health insurance comparable to that which the Company provided while he was Chief Executive Officer. In recognition of the Companys financial performance, the Company also awarded Mr. Sloane a special Directors bonus for 2017 as noted on the Summary Compensation Table.
Employment Agreement
The Company has entered into an employment agreement with Mr. David Woonton. The agreement grants two years of service payable upon a change of control of the Company.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the foregoing Report of the Compensation Committee, including the CD&A, with management. In reliance on the reviews and discussions referred to above, the Compensation Committee recommended to the Board, and the Board has approved, that the CD&A be included in the Companys Annual Report on Form 10-K for the year ended December 31, 2017 for filing with the SEC.
/s/ Fraser Lemley, Chairman | ||
/s/ Joseph Mercurio | ||
/s/ Jon Westling |
Compensation Paid to Executive Officers
The following table sets forth information for the three year period ended December 31, 2017 concerning the compensation for services in all capacities to Century Bancorp, Inc. and its subsidiaries of our principal executive officers and our principal financial officer as well as our other four most highly compensated executive officers (or executive officers of our subsidiaries). We refer to these individuals throughout this 10-K statement as the Named Executive Officers.
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Summary Compensation Table
Name and Principal Position |
Year |
Salary
($) |
Bonus
($) |
Stock
Awards ($) |
Option
Awards ($) |
Change in
Pension Value and Nonqualified Deferred Compensation Earnings- December 31, ($) |
All Other
Compensation ($) (1) |
Total
($) |
||||||||||||||||||||||||
Marshall M. Sloane (2) |
2017 | | | | | | 1,280,741 | 1,280,741 | ||||||||||||||||||||||||
Chairman of the Board, |
2016 | | | | | | 1,124,822 | 1,124,822 | ||||||||||||||||||||||||
Century Bancorp, Inc. and Century Bank and Trust Company |
2015 | | | | | 542,344 | 1,020,928 | 1,563,272 | ||||||||||||||||||||||||
Barry R. Sloane |
2017 | 652,232 | 240,000 | | | 1,103,884 | 59,042 | 2,055,158 | ||||||||||||||||||||||||
President and CEO, Century |
2016 | 621,174 | 200,000 | | | 1,098,238 | 55,122 | 1,974,534 | ||||||||||||||||||||||||
Bancorp, Inc. and Century Bank and Trust Company |
2015 | 603,081 | 132,120 | | | 1,528,901 | 61,409 | 2,325,511 | ||||||||||||||||||||||||
David B. Woonton |
2017 | 386,859 | 79,936 | | | 137,891 | 7,541 | 612,227 | ||||||||||||||||||||||||
Executive Vice President, |
2016 | 368,437 | 66,613 | | | 284,037 | 10,771 | 729,858 | ||||||||||||||||||||||||
Century Bank and Trust Company |
2015 | 357,706 | 62,842 | | | 607,906 | 16,221 | 1,044,675 | ||||||||||||||||||||||||
Paul A. Evangelista |
2017 | 386,859 | 79,936 | | | 488,865 | 8,814 | 964,474 | ||||||||||||||||||||||||
Executive Vice President, |
2016 | 368,437 | 66,613 | | | 225,130 | 9,279 | 669,459 | ||||||||||||||||||||||||
Century Bank and Trust Company |
2015 | 357,706 | 62,842 | | | 422,371 | 12,750 | 855,669 | ||||||||||||||||||||||||
Linda Sloane Kay |
2017 | 386,859 | 102,000 | | | 661,850 | 22,835 | 1,173,544 | ||||||||||||||||||||||||
Executive Vice President |
2016 | 368,437 | 85,000 | | | 430,658 | 22,481 | 906,576 | ||||||||||||||||||||||||
Century Bank and Trust Company |
2015 | 357,706 | 62,842 | | | 410,910 | 21,506 | 852,964 | ||||||||||||||||||||||||
Brian J. Feeney |
2017 | 351,763 | 77,986 | | | 552,360 | 17,555 | 999,664 | ||||||||||||||||||||||||
Executive Vice President, |
2016 | 335,012 | 64,988 | | | 361,405 | 17,047 | 778,452 | ||||||||||||||||||||||||
Century Bank and Trust Company |
2015 | 317,246 | 54,986 | | | 391,958 | 18,512 | 782,702 | ||||||||||||||||||||||||
William P. Hornby |
2017 | 351,750 | 78,000 | | | 439,310 | 14,914 | 883,974 | ||||||||||||||||||||||||
Chief Financial Officer and |
2016 | 335,000 | 65,000 | | | 265,483 | 15,398 | 680,881 | ||||||||||||||||||||||||
Treasurer, Century Bancorp, Inc. and Century Bank and Trust Compan y |
2015 | 317,246 | 54,986 | | | 273,718 | 15,688 | 661,638 |
(1) | The amount listed in all other compensation includes amounts attributable to term insurance premiums paid for the Supplemental Executive Insurance/Retirement Plan, matching contribution for the 401(k) plan, excess group life insurance premiums and long-term disability premiums and, as applicable, country club membership dues and taxable expense reimbursements. |
(2) | This amount, for 2017, includes $405,401 for consulting services, $643,713 amounts attributable to term insurance premiums for the Supplemental Executive Insurance/Retirement Plan, $41,650 for Director fees, $168,056 for bonus, as well as country club membership dues, health insurance premiums and Medicare reimbursements. |
Pension Benefits
The following table sets forth information concerning plans that provide for payments or other benefits at, following, or in connection with, retirement for each Named Executive Officer.
110
PENSION BENEFITS TABLE
Name |
Plan Name |
Number of Years
Credited Service (#) |
Present
Value of Accumulated Benefit 12/31/2017 ($)(1) |
Payments
During Last Fiscal Year 12/31/2017 ($) |
||||||||||
Marshall M. Sloane |
Defined Benefit | 33 | 523,476 | 94,261 | ||||||||||
Chairman of the Board |
Pension Plan | |||||||||||||
Barry R. Sloane |
Defined Benefit | 14 | 337,065 | | ||||||||||
President and CEO |
Pension Plan | |||||||||||||
David B. Woonton |
Defined Benefit | 18 | 833,610 | | ||||||||||
Executive Vice President, |
Pension Plan | |||||||||||||
Century Bank and Trust Company |
||||||||||||||
Paul A. Evangelista |
Defined Benefit | 18 | 633,657 | | ||||||||||
Executive Vice President, |
Pension Plan | |||||||||||||
Century Bank and Trust Company |
||||||||||||||
Linda Sloane Kay |
Defined Benefit | 17 | 411,964 | | ||||||||||
Executive Vice President |
Pension Plan | |||||||||||||
Century Bank and Trust Company |
||||||||||||||
Brian J. Feeney |
Defined Benefit | 28 | 703,314 | | ||||||||||
Executive Vice President, |
Pension Plan | |||||||||||||
Century Bank and Trust Company |
||||||||||||||
William P. Hornby(2) |
Defined Benefit | | | | ||||||||||
Chief Financial Officer and Treasurer |
Pension Plan |
(1) | The present value of accumulated benefits was calculated with the assumption that retirement occurs at age 65. The benefit is calculated using an interest rate of 3.67% and the mortality table used is the RP 2014 adjusted to 2006 White Collar Mortality Table with projection MP 2017. |
(2) | Not a member of the Defined Benefit Pension Plan. |
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SUPPLEMENTAL EXECUTIVE INSURANCE/RETIREMENT BENEFITS
Name |
Plan Name |
Number of
Years Credited Service (#) |
Present Value of
Accumulated Benefit-12/31/2017 ($)(1) |
Payments
During Last Fiscal Year-12/31/2017 ($) |
||||||||||
Marshall M. Sloane(2) |
Supplemental Executive | 33 | 2,733,390 | 523,639 | ||||||||||
Chairman of the Board |
Insurance/Retirement Plan | |||||||||||||
Barry R. Sloane(2) |
Supplemental Executive | 16 | 8,692,533 | | ||||||||||
President and CEO |
Insurance/Retirement Plan | |||||||||||||
David B. Woonton(2) |
Supplemental Executive | 18 | 3,918,931 | | ||||||||||
Executive Vice President, |
Insurance/Retirement Plan | |||||||||||||
Century Bank and Trust Company |
||||||||||||||
Paul A. Evangelista(2) |
Supplemental Executive | 18 | 3,150,578 | | ||||||||||
Executive Vice President, |
Insurance/Retirement Plan | |||||||||||||
Century Bank and Trust Company |
||||||||||||||
Linda Sloane Kay(2) |
Supplemental Executive | 9 | 2,058,911 | | ||||||||||
Executive Vice President, |
Insurance/Retirement Plan | |||||||||||||
Century Bank and Trust Company |
||||||||||||||
Brian J. Feeney(2) |
Supplemental Executive | 10 | 1,882,654 | | ||||||||||
Executive Vice President, |
Insurance/Retirement Plan | |||||||||||||
Century Bank and Trust Company |
||||||||||||||
William P. Hornby(2) |
Supplemental Executive | 9 | 1,538,995 | | ||||||||||
Chief Financial Officer and Treasurer |
Insurance/Retirement Plan |
(1) | The present value of accumulated benefits was calculated with the assumption that retirement occurs at age 65. The benefit is calculated using an interest rate of 3.42% and the mortality table used is RP 2014 adjusted to 2006 White Collar Mortality Table with projection MP 2017. |
(2) | As of January 1, 2017, Messrs. Marshall M. Sloane, Barry R. Sloane, Paul A. Evangelista, David B. Woonton, Brian J. Feeney, Linda Sloane Kay and William P. Hornby were 100%, 100%, 100%, 100%, 62.5%, 55% and 55% vested, respectively, under the Supplemental Executive Insurance/Retirement Plan. |
Director Compensation
Directors not employed by the Company receive a $17,600 retainer per year, $350 per Company Board meeting attended, $900 per Bank Board meeting attended and $750 per committee meeting attended. Joseph Senna receives $2,400 per Audit Committee meeting as Chairman of the Audit Committee.
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DIRECTOR COMPENSATION TABLE 2017
Name |
Fees Earned or
Paid in Cash ($) |
All Other
Compensation ($) |
Total ($) | |||||||||
George R. Baldwin |
41,800 | | 41,800 | |||||||||
Stephen R. Delinsky |
36,400 | | 36,400 | |||||||||
Louis Grossman |
40,000 | | 40,000 | |||||||||
Russell B. Higley |
34,000 | | 34,000 | |||||||||
Jackie Jenkins-Scott |
40,150 | | 40,150 | |||||||||
Linda Sloane Kay |
| | | |||||||||
Fraser Lemley |
42,400 | | 42,400 | |||||||||
Joseph P. Mercurio |
42,550 | | 42,550 | |||||||||
Joseph J. Senna |
50,050 | | 50,050 | |||||||||
Jo Ann Simons |
36,550 | | 36,550 | |||||||||
Barry R. Sloane |
| | | |||||||||
Marshall M. Sloane(1) |
| | | |||||||||
George F. Swansburg(2) |
43,550 | 14,500 | 58,050 | |||||||||
Jon Westling |
30,550 | | 30,550 |
(1) | Amounts paid are listed in the Summary Compensation Table. |
(2) | The amount listed in all other compensation is for serving as Administrator of Century Bancorp Capital Trust II. |
113
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth certain information as to the number and percentage of shares of Class A and Class B Common Stock beneficially owned as of December 31, 2017, (i) by each person known by the Company to own beneficially more than 5% of the Companys outstanding shares of Class A or Class B Common Stock, (ii) by each of the Companys directors and executive officers; and (iii) by all directors and executive officers as a group. As of December 31, 2017, there were 3,605,829 shares of Class A Common Stock and 1,962,080 shares of Class B Common Stock outstanding.
Name and Address of Beneficial Owner |
Class A
Owned |
% A
Owned |
Class B
Owned |
% B
Owned |
||||||||||||
James J. Filler(6) |
602,972 | 16.72 | % | |||||||||||||
2964 Shook Hill Parkway, Birmingham, AL 35223 |
||||||||||||||||
Marshall M. Sloane(a) |
31,617 | (1) | 0.88 | % | 1,721,841 | (2) | 87.76 | % | ||||||||
400 Mystic Avenue, Medford, MA 02155 |
||||||||||||||||
George R. Baldwin(a) |
5,819 | 0.16 | % | |||||||||||||
Stephen R. Delinsky(a) |
2,989 | (5) | 0.08 | % | ||||||||||||
Paul A. Evangelista(b) |
7,771 | 0.22 | % | |||||||||||||
Brian J. Feeney(b) |
1,926 | 0.05 | % | |||||||||||||
Louis Grossman(a) |
100 | 0.00 | % | |||||||||||||
Russell B. Higley, Esquire(a) |
4,602 | 0.13 | % | |||||||||||||
William P. Hornby(b) |
500 | 0.01 | % | |||||||||||||
Jackie Jenkins-Scott(a) |
40 | 0.00 | % | |||||||||||||
Linda Sloane Kay(a)(b) |
10,978 | (3) | 0.30 | % | 60,000 | 3.06 | % | |||||||||
Fraser Lemley(a) |
23,764 | 0.66 | % | |||||||||||||
Joseph P. Mercurio(a) |
100 | 0.00 | % | |||||||||||||
Joseph J. Senna(a) |
25,001 | 0.69 | % | |||||||||||||
Jo Ann Simons |
100 | 0.00 | % | |||||||||||||
Barry R. Sloane(a)(b) |
4,764 | (4) | 0.13 | % | ||||||||||||
George F. Swansburg(a) |
32,251 | 0.89 | % | |||||||||||||
Jon Westling(a) |
9,088 | 0.25 | % | |||||||||||||
David B. Woonton(b) |
800 | 0.02 | % | |||||||||||||
All directors and officers as a group (18 in number) |
162,210 | 4.50 | % | 1,781,841 | 90.81 | % |
(a) | Denotes director of the Company. |
(b) | Denotes officer of the Company or one of its subsidiaries. |
(1) | Includes 2,500 shares owned by Mr. Sloanes spouse and also includes 16,899 shares held in trust for Mr. Sloanes grandchildren. |
(2) | Includes 1,500 shares owned by Mr. Sloanes spouse, 1,694,580 shares held by Sloane Family Enterprises LP, and does not include 60,000 shares owned by Linda Sloane Kay. Mr. Sloane disclaims beneficial ownership of such 60,000 shares and 1,694,580 shares held by Sloane Family Enterprises LP. |
(3) | Includes 10,134 shares owned by Ms. Kays spouse. |
(4) | Includes 40 shares owned by Mr. Barry Sloanes children and 72 shares owned by Mr. Barry Sloanes spouse. Includes 3,111 shares pledged. |
(5) | Includes 257 shares owned by Mr. Delinskys children. |
(6) | The Company has relied upon the information set forth in the Form 4 filed with the SEC by James J. Filler on December 29, 2017. |
114
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Certain Directors and Officers of the Company and Bank and members of their immediate family are at present, as in the past, customers of the Bank and have transactions with the Bank in the ordinary course of business. In addition, certain of the Directors are at present, as in the past, also Directors, Officers or Stockholders of corporations or members of partnerships that are customers of the Bank and have transactions with the Bank in the ordinary course of business. Such transactions with Directors and Officers of the Company and the Bank and their families and with such corporations and partnerships were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other features unfavorable to the Bank. The Directors annually approve amounts to be paid to related parties for services rendered. The Company reviews related party transactions monthly.
NASDAQ Stock Market (NASDAQ) rules, and our governance principles, require that at least a majority of our Board be composed of independent directors. All of our directors other than Marshall M. Sloane, Barry R. Sloane, Linda Sloane Kay, and George F. Swansburg are independent within the meaning of both the NASDAQ rules and our own corporate governance principles. Ten of our fourteen directors, therefore, are currently independent directors.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The Audit Committee separately pre-approves each of the following services, in compliance with the requirements of the Sarbanes-Oxley Act and SEC regulations, before they are rendered by the auditor: financial statement audit, attestation, preparation of tax returns and audit of 401(k) and pension plans. The Audit Committees pre-approval procedures, in compliance with the requirements of the Sarbanes-Oxley Act and SEC regulations, allow the Companys auditors to perform certain services without specific permission from the Audit Committee, as long as these services comply with the following requirements: (a) the services consist of special projects relating to strategic tax savings initiatives, corporate tax structure engagements or merger and acquisition consulting; (b) aggregate special project services cannot exceed $50,000 during the calendar year; and (c) the Audit Committee must be informed about each service at its next scheduled meeting. All other services provided by the Companys auditor must be separately pre-approved before they are rendered.
Description of Fees |
Fiscal 2017
Amount |
Fiscal 2016
Amount |
||||||
Audit fees(1) |
$ | 495,000 | $ | 490,000 | ||||
Audit-related fees |
| | ||||||
Tax fees(2) |
50,000 | 49,000 | ||||||
Other fees |
| | ||||||
|
|
|
|
|||||
$ | 545,000 | $ | 539,000 | |||||
|
|
|
|
(1) | includes fees for annual audit, review of quarterly financial statements, and internal control attestations. |
(2) | includes fees for tax compliance and tax consulting. |
115
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements .
The following financial statements of the company and its subsidiaries are presented in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets December 31, 2017 and 2016
Consolidated Statements of Income Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders Equity-Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows-Years Ended December 31, 2017, 2016, and 2015
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
All schedules are omitted because either the required information is shown in the financial statements or notes incorporated by reference, or they are not applicable, or the data is not significant.
(3) Exhibits
116
117
+ | This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
* | As provided in Rule 406T of Regulation S-T, this information is filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
(b) Exhibits required by Item 601 of Regulation S-K .
See (a)(3) above for exhibits filed herewith.
(c) Financial Statement required by Regulation S-X.
Schedules to Consolidated Financial Statements required by Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted.
ITEM 16. | FORM 10-K SUMMARY |
Not applicable.
118
Pursuant to the requirements of Section 13 or 15 (d) 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, on this 15th day of March, 2018.
Century Bancorp, Inc. | ||
By: | /s/ Marshall M. Sloane | |
Marshall M. Sloane, Chairman |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated.
/s/ George R. Baldwin George R. Baldwin, Director |
/s/ Joseph Senna Joseph Senna, Director |
|
/s/ Stephen R. Delinsky Stephen R. Delinsky, Director |
/s/ Jo Ann Simons Jo Ann Simons, Director |
|
/s/ Louis J. Grossman Louis J. Grossman, Director |
/s/ George F. Swansburg George F. Swansburg, Director |
|
/s/ Russell B. Higley Russell B. Higley, Esquire, Director |
/s/ Jon Westling Jon Westling, Director |
|
/s/ Jackie Jenkins-Scott Jackie Jenkins-Scott, Director |
/s/ Marshall M. Sloane Marshall M. Sloane, Chairman |
|
/s/ Linda Sloane Kay Linda Sloane Kay, Director Executive Vice President, Century Bank and Trust Company |
/s/ Barry R. Sloane Barry R. Sloane, Director, President and Chief Executive Officer |
|
/s/ Fraser Lemley Fraser Lemley, Director |
/s/ William P. Hornby William P. Hornby, CPA, Chief Financial Officer and Treasurer |
|
/s/ Joseph P. Mercurio Joseph P. Mercurio, Director |
/s/ Anthony C. LaRosa Anthony C. LaRosa, CPA, Senior Vice President, Century Bank and Trust Company, Principal Accounting Officer |
119
Exhibit 4.2
SBERA 401(k) PLAN
AS ADOPTED BY
CENTURY BANCORP, INC.
SUMMARY PLAN DESCRIPTION
Effective: January 1, 2015
401(k) ROTH
Effective August 1, 2015
TABLE OF CONTENTS
PAGE
SBERA 401(k) PLAN AS ADOPTED BY CENTURY BANCORP, INC.
SUMMARY PLAN DESCRIPTION
ARTICLE I
INTRODUCTION
Your Employer has set up a 401(k) Plan to help you save for your retirement. Details about how the Plan works are contained in this booklet. While this summary describes the main provisions of the Plan, it does not include every detail or limitation. Every attempt has been made to give you accurate, but easily understandable information about the Plan. If, however, there is a disagreement between this booklet and the official Plan document, the Plan document will control. You may get a copy of the Plan document from the Plan Administrator who may charge you a reasonable fee for the copy.
Please note that legally married same-gender spouses of Plan Participants now have the same spousal rights as opposite-gender spouses under all ERISA-governed qualified retirement plans. This is without regard to the state in which the affected individuals reside. Therefore, wherever the term spouse is used in this booklet any applicable rights provided under this Plan to a spouse of a Plan Participant shall also apply to a legally married same-gender spouse.
ARTICLE II
GENERAL PLAN INFORMATION
A. | Agent for Service of Legal Process |
The designated agent for service of legal process and the address at which process may be served on such person is listed below. Service of legal process may also be made upon a Plan Trustee or the Plan Administrator.
Name of individual(s)
Address:
B. | Effective Date |
The Effective Date is the date on which this Plan originally was established or the date that an amendment to this Plan goes into effect.
This is an amendment and restatement of an existing Plan to comply with the Pension Protection Act of 2006 (PPA). The original Effective Date of the Plan was October 1, 1996. The Effective Date of the amendment and restatement of the Plan is January 1, 2015.
The Effective Date for Roth Elective Deferrals is different from the Effective Date above and shall be effective August 1, 2015.
C. | Employer |
Name: |
Century Bancorp |
|
Address: |
400 Mystic Avenue |
|
Medford, MA 02155 |
||
Telephone: |
781-391-4000 |
|
Tax ID Number: |
04-2498617 |
D. | Three-Digit Plan Number: 002 |
E. | Plan Administrator |
The Employer has designated the following individual(s) to serve as the Plan Administrator:
Name and Address: |
Thomas Forese, Jr. Savings Banks Employees Retirement Association 12 Gill Street Woburn, MA 01801 |
|
Telephone: |
781-938-9595 |
1
F. | Plan Year |
The Plan Year is the consecutive twelve (12) month period beginning on January 1 and ending on December 31.
G. | Plan Assets |
Plan assets are held in a Trust Account. The Trustees are named below:
Name: |
Savings Banks Employees Retirement Association | |
Address: |
12 Gill Street | |
Woburn, MA 01801 | ||
Telephone: |
781-938-6559 |
ARTICLE III
ELIGIBILITY AND PARTICIPATION IN THE PLAN
A. | Eligibility Requirements for Participation in the Plan |
Age/Service Requirement to make and receive Contributions under the Plan : You must meet the following age and/or service requirement before being eligible to make or receive any contribution that the Employer may make to this Plan:
Age Requirement
You must be age 21 or older.
Service Requirement
There is no Service requirement.
Measuring Service for Eligibility Purposes
This Plan does not require you perform a minimum period of Service in order to participate. Therefore, it does not count hours or track periods of Service for eligibility purposes.
Computation Period
The Plan has a Service requirement of less than one (1) year for counting Service; therefore, hours are not counted for participation.
Predecessor Organizations
You will not receive credit for eligibility if you worked for any predecessor organization of this company.
B. | Determination of Eligible Employees |
You will be notified when you have completed the requirements necessary to become a Participant. An eligible Employee who becomes a Participant is entitled to the benefits and is bound by all of the terms, provisions, and conditions of this Plan, including any and all amendments which may be adopted, and including the terms, provisions and conditions of any funding vehicle(s) to which Plan contributions for the Participant have been applied.
To participate in this Plan, you must follow the procedures for enrollment as explained to you by the Plan Administrator. This may involve completing enrollment forms and returning them to the Plan Administrator or completing the documents electronically. If you have been notified that you are eligible to participate but fail to comply with the enrollment procedures, you will be deemed to have waived all of your rights under the Plan except the right to enroll at a future date.
The Plan will cover all Employees.
2
C. | Entry Date for Participation in the Plan |
Once you have met the eligibility requirements (if any), you will begin participation in the Plan on the Entry Date noted below. If you are rehired after terminating Service but were a Plan Participant before you terminated employment, you do not have to meet the eligibility requirements again. You will become a Participant on your date of rehire. If you did not meet the eligibility requirements at the time you terminated employment, you must meet the eligibility requirements as if you were a new Employee.
If you were ineligible to participate because you were in a class of Employees not covered by the Plan, and your classification later becomes eligible to participate in the Plan, you will enter the Plan immediately, provided you have already satisfied the Plans age and Service requirements, if any.
If you become ineligible to participate in the Plan because you are no longer an eligible Employee, you will not receive future Employer Contributions. You will participate immediately if you again become an eligible Employee. All Years of Service with your Employer, even when you were not eligible, will be counted when calculating your vested percentage in your account balance.
Eligible Employees will enter the Plan on the first day of the month coinciding with or next following the date on which you meet the eligibility requirements.
ARTICLE IV
CONTRIBUTIONS TO THIS PLAN
A. | Compensation for Determining Plan Contributions |
For all Contributions : Compensation for determining all contributions made to the Plan includes your income as reflected on your pay stub which may reflect the cash value of fringe benefits provided to you by your Employer. Certain types of Compensation may be taken into account if paid after termination of employment but within two and one-half (2 1 ⁄ 2 ) months such as Compensation and payments for overtime, commissions, and bonuses that would have been payable if employment had not been terminated and payments for bona fide sick, vacation and other leave which you could have used if employment continued.
Your Compensation includes all pre-tax contributions you may make to this or other plans of your Employer.
However, Compensation for Plan purposes shall not include:
| Other: Reimbursements, expense allowances, taxable fringes, nondeductible moving expenses, unfunded deferred compensation payouts while employed and taxable group-term life insurance. |
Compensation Computation Period
Compensation for determining all contributions made to the Plan will be the Compensation defined above paid to you during the Plan Year while you are a Participant.
B. | Employee Contributions |
Elective Deferrals
Elective Deferrals are contributions you elect to have made to the Plan on your behalf instead of being paid to you in cash as Compensation. This choice made by completing a salary deferral agreement provided by the Employer. The money contributed to the Plan and any earnings on that money is not taxable until it is actually distributed to you. You will however pay Social Security taxes on the amount you contribute to this Plan. The Employer will notify you of the annual dollar limit for Elective Deferrals. This amount may be adjusted annually for inflation and applies to all salary deferrals you make in a given calendar year to this Plan or any other plan that is a cash or deferred arrangement. Such plans include 403(b) annuities, a Simplified Employee Pension (SEP), or another 401(k) plan. (If you participate in both this Plan and a 457 eligible deferred compensation plan, ask the employer maintaining the 457 plan about certain contribution limits that may be applicable to you.)
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As an eligible Employee, you may authorize your Employer to withhold from a minimum of 2% up to a maximum of 75% of your Compensation.
Bonuses will be deferred at the rate you elected on your Salary Deferral Agreement.
If you have or will attain age fifty (50) before the end of the calendar year, you may make additional Catch-Up Contributions to your Plan Account. Catch-Up Contributions are Elective Deferrals (including Roth, if applicable) that can be made in excess of any otherwise applicable Plan limit such as the annual dollar or other IRS Code or testing limits. Catch-Up Contributions are, however, subject to their own maximum annual dollar limit. For a further explanation of these limits, please ask your Plan Administrator.
If the Elective Deferrals you make to this Plan and the plan of another unrelated employer are more than the annual dollar limit in a given year, you must ask one of the plans to refund the excess amount to you. If you choose this Plan, you must notify the Plan Administrator, in writing, by March 1 of the next calendar year so the excess amount and related earnings may be refunded by April 15. The excess amount is taxable for the year in which you made the excess deferral. If you fail to request a refund, you will be taxed twice: once in the year of deferral and again in the year the excess amount is actually paid to you. If the excess amount was contributed to this Plan or another plan maintained by this Employer, the Plan Administrator will automatically return the excess amount and associated earnings to you by April 15.
You may stop making contributions to the Plan at any time. You may increase or decrease the percentage of your Compensation that you have elected to defer to the Plan on the first day of the beginning of the next payroll period.
If you stop making contributions to the Plan, you may resume contributions again on the beginning of the next payroll period. Your Employer may also reduce or terminate your contributions if it is necessary to keep the Plan within the limits imposed by law.
Roth Elective Deferrals
Roth Elective Deferrals are similar to the pre-tax Elective Deferrals that you make to the Plan. They are different because Roth Elective Deferrals are after-tax deferrals that (1) you designate irrevocably as Roth Elective Deferrals at the time they are deferred, (2) your Employer treats as includible in your income at the time you would have received the amount in cash had you not made the deferral election, and (3) are amounts that are accounted for separately from all other amounts under the Plan. If you elect to make Roth Elective Deferrals, the deferrals are made with money that you have already paid Federal income taxes on, so these deferrals and, in most cases, earnings on them will not be subject to Federal income taxes when distributed to you. However, for earnings to qualify for tax-free treatment, such a distribution must be a qualified distribution from your Roth Elective Deferral account.
All Employees who meet the eligibility requirements to make pre-tax Elective Deferrals may make Roth Elective Deferrals. You may irrevocably designate all or any part of your Elective Deferrals to the Plan as Roth Elective Deferrals. The decision whether to take advantage of the Roth Elective Deferral option may be complicated and your personal financial and tax situation must be considered. Before making your election on how to allocate your Elective Deferrals between pre-tax and Roth, we recommend that you consult with your personal tax or legal advisor.
You may terminate your Roth Elective Deferral election at any time upon proper and timely notice to the Employer. You may modify your Roth Elective Deferral election on a prospective basis as of such times established by the Plan Administrator for pre-tax Elective Deferrals. A Participant who ceases Roth Elective Deferrals may return as a Participant as of such times established by the Plan Administrator for pre-tax Elective Deferrals.
In-Plan Roth Rollovers may be made of all or any part of the contributions made to the Plan. This means that you may irrevocably designate all or any part of your Vested Account Balance as a Roth Rollover Contribution. While this designation will result in a taxable event, the Plan does not make an actual distribution to you but instead transfers the amount from a pre-tax account to an after-tax account.
The taxable amount of an In-Plan Roth Rollover will be included in your gross income equal to the fair market value of the distribution. If the distribution includes Employer securities attributable to Employee Contributions, the fair market value includes any net unrealized appreciation within the meaning of Code Section 402(e)(4). If an outstanding loan is rolled over in an In-Plan Roth Rollover, the amount includible in gross income is the balance of the loan.
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In-Plan Roth Rollovers are not subject to the 20% mandatory withholding of Code Section 3405(c). However, you may elect to increase your payroll withholding or make estimated tax payments to avoid an underpayment penalty. In-Plan Roth Rollovers will not be subject to the 10% additional tax on early distribution unless you receive a distribution from the Roth Rollover account within the five (5) year period that begins on January 1 of the year of the rollover.
The decision to take advantage of the In-Plan Roth Rollover feature may be complicated and your personal financial and tax situation must be considered. Before making any such election, we recommend that you consult with your personal tax or legal advisor.
Automatic Enrollment upon Eligibility
When you become eligible to participate in the Plan, a fixed amount is automatically taken from your pay unless you elect otherwise. This is known as an Automatic Contribution Arrangement. At your time of hire, you received a notice that explains this feature and a salary deferral agreement. You also received information about your rights to alter those amounts including how and when you may amend the amount of automatic deferral. This election is effective for your first pay period and all subsequent pay periods, unless you elected otherwise at the time you were hired or you filed a change with the Plan Administrator within a reasonable period thereafter. Such change must have been made before you received Compensation for the first pay period after you become eligible to defer. Any election you file after that time will be effective for payroll periods beginning in the month next following the date your new election is filed. You will be notified annually of your salary reduction percentage or dollar amount, and your right to change these amounts.
This Automatic Contribution Arrangement is effective as of the original date an Automatic Contribution Arrangement became effective prior to the amendment and/or restatement of this Plan and applies to Employees:
| Eligible prior to the amendment or restatement of this Plan (see the Plan Provisions schedule attached at the end of this Summary Plan Description for additional information or contact the Plan Administrator). |
| Who were hired or rehired on or after the date specified above. |
| Whose entry date for Elective Deferrals is on or after the date specified above. |
| Who are eligible to make Elective Deferrals but who have not completed a Salary Deferral Agreement. |
| Who are eligible to make Elective Deferrals but who are contributing less than the amount specified below. This will apply as of the date of this restatement. |
The Automatic Deferral Amount shall be 3% of Compensation and designated as a pre-tax Elective Deferral.
Rollover Contributions
A Rollover Contribution is a direct transfer of your retirement benefits from another qualified plan to this Plan, or a distribution from another qualified plan that was first transferred to an IRA (a conduit IRA) and then from that IRA to this Plan. A Rollover Contribution may also be made within sixty (60) days of the time it was distributed to you by another qualified plan or an IRA, if your Plan permits such rollovers. A tax Form 1099-R will be issued to you showing that either a direct transfer to another qualified plan or an IRA has been made, or that a distribution has been made to you.
Rollover Contributions may be made to this Plan at any time after you become an Employee. The Plan will accept a contribution of an Eligible Rollover Distribution or Contribution from:
A Qualified Plan described in Code Section 401(a) or 403(a).
An annuity contract described in Code Section 403(b).
An eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state.
An Individual Retirement Account or Annuity described in Code Section 408(a) or 408(b).
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The Plan will also accept a Direct Rollover of an Eligible Rollover Distribution or Contribution from the following plans:
A Qualified Plan described in Code Section 401(a) or 403(a), excluding Voluntary After-tax Contributions.
An annuity contract described in Code Section 403(b), excluding Voluntary After-tax Contributions.
An eligible plan under Code Section 457(b) which is maintained by a state, political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state.
A Roth Elective Deferral Account if it is a Direct Rollover from another Roth Elective Deferral Account under a Qualified Plan described in Code Section 402A(e)(1) and only to the extent that the rollover is permitted under Code Section 402(c).
A separate account will be established for your Rollover Contribution. You are always 100% vested in your rollover account balance and you will always have the right to receive the full amount of your rollover account balance. However, your rollover account balance will be affected by investment gains and losses so your account may increase or decrease in value.
If you believe you qualify for a rollover, see your Plan Administrator for more details.
C. | Employer Contributions |
Matching Contributions
A Matching Contribution is a contribution made by the Employer to the Plan for eligible Participants based on contributions made by Participants to the Plan.
A Matching Contribution will be allocated on your behalf in accordance with the formula listed below, and will be made in relation to Elective Deferrals (including Roth, if applicable) made by Plan Participants.
Matching Contribution Allocation Formula
Discretionary Match : The Employer may make a Matching Contribution on behalf of eligible Participants in an amount equal to either a percentage of Compensation or a dollar amount as it directly relates to Elective Deferrals made during the Plan Year by eligible Participants.
Matching Contribution Computation Period
The Compensation or any dollar limitation imposed in calculating the Matching Contribution will be determined based on each payroll period.
Employer Non-Elective Contributions made under Formula 1 :
An Employer Non-Elective Contribution is a contribution made to the Plan on your behalf at the discretion of the Employer. Whether any contribution will be made is determined on an annual basis. For example, a contribution may be made for three Plan Years, and none made for the fourth Plan Year. If a discretionary contribution is made, it shall be allocated to the account of eligible Participants in accordance with the formula described below.
Pro-Rata/Proportionate Contribution Formula : You will receive a contribution equal to the pro-rata or proportionate share of your Compensation as it compares to the total Compensation of all Plan Participants.
Qualified Matching Contributions
Qualified Matching Contributions (QMACs) are contributions made by the Employer that are 100% vested when made and cannot be withdrawn before you attain age 59 1 ⁄ 2 while you are still employed. These contributions may be used to help the Plan pass certain tests required by law. A QMAC may be made to the Plan if you are an eligible Participant equal to:
| an amount determined annually for eligible Participants. |
Qualified Non-Elective Contributions
Qualified Non-Elective Contributions (QNECs) are contributions made by the Employer that are 100% vested when made, and cannot be withdrawn before you attain age 59 1 ⁄ 2 while you are still employed.
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These contributions may be used to help the Plan pass certain tests required by law. The Employer may elect to make a discretionary QNEC to you as an eligible Participant. This part of the Employers contribution and the allocation thereof shall be unrelated to any other Employer contribution made hereunder and shall be fully vested at all times. A QNEC may be made to the Plan if you are an eligible Participant:
| The Employer may choose to contribute a Qualified Non-Elective Contribution in order to pass the necessary qualification tests for a Plan year. This additional contribution, if any, shall be determined by the Employer with respect to each Plan Years eligible Participants. These contributions are nonforfeitable and are not available for withdrawal during your employment. |
D. | Eligibility to Receive Employer Contributions made to the Plan |
Employer contributions will be allocated to eligible Participants who worked 1 Hours of Service during the Plan Year.
Predecessor Organizations
You will not receive credit for allocation purposes if you worked for any predecessor organization of this company.
E. | Net Profits |
Employer contributions made to the Plan are not conditioned on profits.
F. | Government Regulations |
Federal law places certain limits on the maximum contribution that can be made to a retirement plan. The first limit is an individual limit based on total contributions. The maximum contribution that you may have allocated to your account in a given year may not be more than 100% of your Compensation or the dollar limit set by law every year, whichever is less. This dollar amount is adjusted annually for inflation. For questions about the current years limit, please contact the Plan Administrator.
The second limit is a group limit based on the percentage of contributions made to the Plan by all Participants. The amount of contributions that Highly Compensated Employees will receive in given year may be limited by the amount of contributions that are made on behalf of Non-Highly Compensated Employees. See your Plan Administrator for a more detailed explanation of the various limitations.
Generally, a Highly Compensated Employee is any Employee who during the current or prior Plan Year was a more than 5% owner of the company or who in the prior Plan Year received Compensation in excess of the limit set by law. This limit may also increase in future years.
The Plan Administrator will inform you if you are a Highly Compensated Employee. If you are not currently or never were a Highly Compensated Employee, as described above, or a family member of a 5% owner, you are a Non-Highly Compensated Employee. Family members include your parents, spouse, children, and grandchildren. Family members do not include brothers or sisters, aunts, uncles, grandparents, or cousins, or in-laws of your children.
G. | Employer Contributions due to Qualified Military Service |
If you go on qualified military service leave, your Employer is required to restore your account when you return to work with any basic contributions that would have been made on your behalf, had you not been absent due to the leave. Your Employer has a period of three (3) times the period of your military service leave to make up such missed contributions, not to exceed five (5) years. When determining the contributions to be restored to your account, your Employer will use the Compensation you would have received during the period of your leave, based on your rate of pay during the twelve (12) month period preceding your leave.
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ARTICLE V
PARTICIPANT ACCOUNTS
Your Employer will set up a recordkeeping account in your name to show the value of your retirement benefits; this is called your Participant Account. Your Employer will make the following contributions to your account:
| your share of any Employer Contributions made on your behalf, |
| the amount of any contributions you may make as a Participant including Elective Deferrals (and Roth Elective Deferrals, if applicable), Catch-Up Contributions, Voluntary After-tax Contributions, Required After-tax Contributions, and/or Rollover Contributions, as applicable, |
| your share of any forfeited amounts of former Employees (these are amounts left behind by Employees who stopped working before they were 100% vested in their benefit), and |
| your share of any investment earnings and increases in the value of investments. |
The Employer will subtract from your Plan Account any withdrawals or distributions you receive, any investment losses or decreases in the value of investments, and your share of administrative fees and expenses paid out of the Plan, if applicable. It is also possible to lose all or a portion of your account for the following reasons:
| you terminate your employment before you are 100% vested in the part of your account balance made up of Employer contributions, |
| you cannot be located when a benefit becomes payable to you, or |
| a portion of or all of your benefits are assigned (transferred) to an alternate payee under a Qualified Domestic Relations Order. |
The Employer will value the contributions in your Plan Account on the last day of the Plan Year as well as daily.
ARTICLE VI
VESTING
Vesting means that you have earned the right to a portion of or the full amount of your Participant Account. Once you have vested a portion of or the full amount of your account, that amount cannot be forfeited or taken away from you (however, your Vested Account Balance will be adjusted for any investment gains and losses). All contributions that you make, plus any investment earnings on those contributions, are always 100% vested and cannot be forfeited for any reason.
Determining Vested Balance . Your vested account balance is determined by multiplying the percentage from the vesting schedule described below by the total value of your Participant Account. The vesting schedule is based on your Years of Service, and determines how rapidly your Account Balance becomes non-forfeitable. The portion of your account balance to which you are not entitled is called a forfeiture and is left behind in the Plan when you terminate your employment.
Employer contributions not already fully vested when contributed (i.e., Safe Harbor Contributions, QNECs and QMACs) will vest in accordance with the following schedule:
Type of Contribution |
Vesting Schedule |
|
All Contributions |
1 |
Vesting Schedule Descriptions
Years of Service | ||||||||||||||||||||||||
1 | 2 | 3 | 4 | 5 | 6 | |||||||||||||||||||
1. |
20 | % | 40 | % | 60 | % | 80 | % | 100 | % | 100 | % |
If you are not already fully vested, you will automatically become fully vested if you attain Normal Retirement Age (or Early Retirement Age, if applicable), if you terminate employment due to Disability, if you die, or if the Plan is terminated or is partially terminated. [See Article XII for the definition of a partial termination.]
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If you terminate employment and receive a distribution of the vested portion of your account balance, the non-vested part of your account will be forfeited. If you are rehired, you may repay the amount you received if you are re-employed before you have five (5) consecutive one (1) year Breaks in Service. If you repay the amount you received, the non-vested part of your account that was forfeited will be restored to your account. This is called a buy back. If you want to buy back, you must complete repayment within five (5) years after your date of reemployment, or if earlier, before five (5) consecutive one (1) year Breaks in Service have occurred. If you do not repay the amount you received, the non-vested portion of your account balance will be forfeited permanently. All periods of Service with your Employer will count toward vesting Service for future employer contributions even if you do not decide to buy back.
If you are not vested in any part of your Employer Contribution account balance before you terminate employment and you have a Break in Service, but are reemployed prior to having five (5) consecutive one (1) year Breaks in Service, you will be deemed to have repaid your distribution upon reemployment and your old account balance will be restored automatically. You will continue to vest in both your old and new account balances based on all periods of Service you have with your Employer.
Example: At the time you quit, you had a total account balance of $10,000. If you were only 40% vested and you decided to take a distribution of your vested balance, you would receive 40% of $10,000, or $4,000. The non-vested part of your account balance ($6,000) was forfeited at that time. Three (3) years later you are rehired. Since you were rehired within five (5) years, you may repay the $4,000 distribution. If you buy back, you must repay the $4,000 within five (5) years of being rehired, and the non-vested portion of your account ($6,000) will be restored to your Plan Account. After the non-vested portion of your account is restored, you will be vested in 40% of the old and new portions of your account balance. Your vested percentage will then increase based upon your Years of Service after your reemployment.
If you were not vested in any of the Employer Contributions in your account, and you leave work and are reemployed after having five (5) consecutive one (1) year Breaks in- Service, you will forfeit your old account balance, but all periods of Service with your Employer will count towards the vesting of your new account balance.
Measuring Service for Vesting Purposes
Your Vested Percentage is computed using the Elapsed Time Method . A Year of Service for vesting will be determined on the basis of the Elapsed Time method. You will receive credit for the total of all time period(s) starting with your first day of employment or reemployment and ending on the date that a Period of Severance begins. The first day of employment or reemployment is the first day you perform an Hour of Service for the Employer. You will also receive credit for any Period of Severance of less than twelve (12) consecutive months.
Predecessor Organizations
You will not receive credit for vesting if you worked for any predecessor organization of this company.
ARTICLE VII
TOP-HEAVY RULES
A Top-Heavy Plan is one in which the total account balances of all Key Employees are more than 60% of the total account balances of all Employees. A Key Employee is an Employee who at any time during the Plan Year containing the determination date, generally the last day of the prior Plan Year, is (or was) any of the following individuals:
| An officer earning more than $165,000, as adjusted; |
| a more than 5% owner (or a family member of a more than 5% owner) of the Employer; or |
| a 1% or more owner (or a family member of a 1% or more owner) earning more than $150,000. |
All other Employees are called Non-Key Employees. Your Plan Administrator will notify you if you are a Key Employee.
If the Plan becomes top-heavy, a top-heavy minimum contribution must be made to the Plan and a special vesting schedule may apply. If the Plan becomes top-heavy and you qualify, you will receive a contribution equal to 3% of your Compensation or, if less, equal to the highest actual percentage of contribution allocated to any Key Employee. If the Plan becomes top-heavy, the Plan Administrator will notify you of any change in the vesting schedule. Such schedule will remain in effect even if the Plan later stops being top-heavy.
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If the Plan is top-heavy and you are a Non-Key Employee, you will receive a top-heavy minimum contribution if you are credited with at least one (1) Hour of Service during the Plan Year and you are employed on the last day of the Plan Year.
ARTICLE VIII
IN-SERVICE DISTRIBUTIONS
A. | In-Service Distributions |
After having attained age 59 1 ⁄ 2 , you may withdraw all or any part of your vested contributions made to the Plan
You may elect to withdraw all or any part of your Rollover Contributions, if any, while still employed without restriction.
B. | Hardship Withdrawals |
A Hardship withdrawal is a distribution that may be taken from the Plan to satisfy an immediate and heavy financial need that cannot be satisfied from other financial resources. Your Employer must approve Hardship withdrawal applications in a nondiscriminatory manner. The amount of a Hardship withdrawal is limited to that amount needed to meet the need (including the amount necessary to pay any taxes that you will have to pay). You must show that you are qualified for a Hardship distribution by completing a written application form that will be provided by the Plan Administrator upon your request. If the Plan Administrator so advises you, your Spouse must consent in writing to the withdrawal. Amounts withdrawn for Hardship may not be re-deposited to this or any other Plan maintained by the Employer, and they may not be rolled over to either an IRA or another qualified retirement plan. Generally, you must first take any other available distribution and, if applicable, borrow the maximum loan amount allowed under this and all other plans of your Employer. However, if a Plan loan would increase the amount of your financial need, you do not have to take the loan. For example, if you need money to purchase your principal residence, and a Plan loan would disqualify you from obtaining other necessary financing, you do not have to take the loan.
While you continue to be eligible to receive Employer contributions that may be made to the Plan, your right to make Elective Deferrals (including Roth Elective Deferrals) must be suspended for six (6) months.
You may apply for a Hardship withdrawal from this Plan for the following reasons only:
a. | to purchase your principal residence (but not to pay mortgage payments), |
b. | to pay tuition and related post-secondary educational expenses for you, your Spouse, or your dependents or your primary beneficiary for the next twelve (12) months, |
c. | to pay medical care expenses of the type that are otherwise deductible for income tax purposes that are not covered by insurance and are incurred or will be incurred by you, your Spouse or your dependents or your primary beneficiary, |
d. | to prevent your eviction from or foreclosure on your principal residence, |
e. | to pay for burial or funeral expense for your deceased parent, spouse, child or dependent or your primary beneficiary (as defined in the Plan), or |
f. | to pay expenses for the repair of damage to your principal residence that would qualify for the casualty deduction under the IRS tax code. |
The following types of contributions are available for Hardship withdrawal:
Elective Deferrals.
Rollover Contributions, plus their earnings.
Vested Non-Elective Contributions (Formula 1), including earnings.
Vested Matching Contributions (under Formula 1), including earnings.
Income taxes must be paid on a Hardship withdrawal. If you are under age 59 1 ⁄ 2 , you may also have to pay a 10% penalty tax on the withdrawal. Hardship withdrawals of vested Employer contributions are not subject to the mandatory 20% income tax withholding because they are not eligible to be rolled over to an IRA or another qualified retirement plan.
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C. | Required Minimum Distributions |
As required by law, your entire interest in this Plan must be distributed or begin to be distributed no later than your Required Beginning Date. At that time, you must take at least a minimum amount called a required minimum distribution.
During your lifetime, distributions generally will be based on the Uniform Life Expectancy Table published by the IRS. Upon your death, if you have named a Beneficiary or Beneficiaries (see the discussion in Article IX) their life expectancy generally will be used to determine their payments. These rules will be explained to you and your Beneficiary(ies) by the Plan Administrator once you reach age 70 1 ⁄ 2 or earlier if you should die.
If you are not a more than 5% owner of your Employer, you may delay starting payment of your retirement benefits until you terminate employment, even if you are older than age 70 1 ⁄ 2 , however, if you are a 5% or more owner, you must take a distribution upon attainment of age 70 1 ⁄ 2 , even if you are still working. This is your Required Beginning Date.
D. | Qualified Reservist Distributions |
A Qualified Reservist Distribution may be requested by a Participant who is ordered or called to active duty for a period of one hundred and eighty (180) days or more because he or she is a member of a reservist unit may request a Qualified Reservist Distribution (QRD). A Participant called to active duty prior to June 18, 2008 and whose period of active duty continues after June 18, 2008 may request a QRD if the period of active duty meets the duration requirements. The right to receive a QRD only applies to the Participant who is called to active duty. It does not apply to a Participant because another family member is called to active duty. A Participant may request a QRD on or after the date of the order or call to active duty and before the last day of the Plan Year (or a grace period if permitted by the Employer) during which the order or call to active duty occurred. The Employer and/or Plan Administrator must receive a copy of the order or call to active duty prior to any amounts being distributed. The Employer and/or Plan Administrator may rely on the order to determine the period that the Participant has been ordered to determine the period that the Participant has been ordered or called to active duty. The Participant is eligible for a QRD if the order specifies a period of one hundred and eighty (180) or more days. It does not matter if the actual period of active duty is less or otherwise changed. A Participant will be eligible for a QRD if the original order or call is less than one hundred and eighty (180) days and subsequent calls or orders increase the total period of active duty to one hundred and eighty (180) or more days.
The ten percent (10%) early withdrawal penalty tax will not apply to a Qualified Reservist Distribution (QRD):
| attributable solely to Elective Deferrals under a 401(k) Plan; |
| made to a Participant who is a member of a reserve component as defined in Title 37 of the U.S.C. Section 101, who was ordered or called to active duty after September 11, 2001 for a period in excess of one hundred and seventy nine (179) days or for an indefinite period; and |
| that is made during the period beginning on the date of the order or call to duty and ending at the close of the active duty period. |
A Participant who receives a qualified reservist distribution may repay to an individual retirement plan (in one or more contributions) the amount of the distribution at any time during the two (2) year period after the end of the active duty period. The dollar limitations that would otherwise apply to IRA contributions will not apply to repayment contributions during such two (2) year period and no deduction is allowed for any contribution made under this provision.
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ARTICLE IX
DISTRIBUTIONS FROM THE PLAN
A. | Normal Retirement Benefits |
Generally, the full value of your account balance is payable at your Normal Retirement Date. The Normal Retirement Age under this Plan is the attainment of age 65. Your Normal Retirement Date is the date you attain your Normal Retirement Age. Whether or not you work past Normal Retirement Age, you will continue to fully participate in the Plan.
B. | Early Retirement Benefits |
This Plan does not provide for an Early Retirement Age.
C. | Disability |
Disability is defined as an illness or injury of a potentially permanent nature that is expected to last for a continuous period at least twelve (12) months (or is expected to result in death) which prevents you from engaging in any occupation for which you may reasonably fill based on training, education or experience only. A physician who has been selected by or is satisfactory to the Employer must certify Disability.
D. | Death Benefits |
You may choose the person or persons (the Beneficiary or Beneficiaries) who will receive benefits under the Plan if you die. You must name your Beneficiary (or Beneficiaries) on a form provided by the Plan Administrator, and return the form to the Plan Administrator. If you are married, your Spouse is your Beneficiary automatically. If you wish to name someone else, you must complete a beneficiary designation form and get your Spouses written consent. Your Spouses signature must be witnessed by a notary public or by the Plan Administrator.
A Designated Beneficiary will also include a non-spouse Designated Beneficiary. For this purpose, a non-spouse Designated Beneficiary means a Designated Beneficiary other than (i) a Surviving Spouse or (ii) a Spouse or former Spouse who is an Alternate Payee under a Qualified Domestic Relations Order.
In the event of your death, the full value of your account is payable to your Beneficiary in a lump sum or, if the plan permits, in installment payments over any period that does not exceed the life expectancy of your Beneficiary.
E. | Normal Form of Payment |
The Plans normal form of payment is a lump sum. When benefits become due, you or your representative should apply to the Employer requesting payment of your account.
Qualified Distribution of Roth Elective Deferrals
A distribution from a designated Roth Elective Deferral account is considered a qualified distribution if such distribution is made on or after the date on which you attain age 59 1 ⁄ 2 , is made to your Beneficiary (or to your estate) on or after your death, or is attributable to you becoming disabled. In addition, any amounts distributed or paid from a designated Roth Elective Deferral account must have been held in your Roth Elective Deferral account for five (5) taxable years for the distribution to be qualified. When counting the five (5) taxable years, year one (1) starts with the first taxable year in which you make a Roth Elective Deferral to the Plan, or if earlier, the first taxable year in which you made a Roth Elective Deferral under another employers plan where you were a participant which you then rolled over to your Roth Elective Deferral account under this Plan. If a distribution is qualified, neither your contributions nor their earnings will be includible in your gross income.
F. | Optional Forms of Payment |
If you do not want the Plans normal form of benefit payment, you may request to receive your benefit in any of the following optional forms indicated below:
lump sum.
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installment payments (will not be less than $100 or paid over any period that exceeds the life expectancy of you and your Beneficiary).
partial payments; the minimum must be $1000.
Payment shall be made in the form of:
cash
Employer securities
If you die after you have reached age 70 1 ⁄ 2 and started payment of your benefits in installment payments, your Beneficiary (or Beneficiaries) will continue to receive payments based upon the appropriate life expectancy values.
You may need the written consent of your Spouse to select an optional form of payment. See your Plan Administrator for details.
G. | Rollover of Payment |
If your distribution is an eligible rollover distribution, you may either have them paid directly to you or you may have them directly rolled over to another qualified plan or your IRA. The Plan Administrator will provide information to you about eligible rollover distributions shortly before your distribution is to occur. Required minimum distributions may never be rolled over.
In the case of an Eligible Rollover Distribution to a non-spouse Designated Beneficiary, an Eligible Retirement Plan is an individual retirement or individual retirement annuity as defined in Code Sections 408(a) and 408(b). A Direct Rollover of a distribution by a non-spouse Beneficiary is a rollover of an Eligible Rollover Distribution for purposes of Code Section 402(c) only. Accordingly, the distribution is not subject to the Direct Rollover requirements of Code Section 401(a)(31), the notice requirements of Code Section 402(f), or the mandatory withholding requirements of Code Section 3405(c). If an amount is distributed from a Plan and is received by a non-spouse Beneficiary, the distribution is not eligible for rollover. An Eligible Retirement Plan shall include a Roth IRA as described in Code Section 408A.
For purposes of this paragraph, to the extent provided in rules prescribed by the Secretary, a trust maintained for the benefit of one or more designated beneficiaries shall be treated in the same manner as a Designated Beneficiary.
If you do not have your benefits, which are eligible rollover distributions, directly rolled over, the Plan Administrator will withhold 20% of the distribution for payment of Federal taxes. If you are under age 59 1 ⁄ 2 , the benefit payment may also be subject to a 10% early distribution penalty. There is no tax withholding for any penalty tax that may be due when you file your Federal income tax return for the year in which you receive a pre-age 59 1 ⁄ 2 distribution.
You may do a rollover yourself, if you complete the rollover within sixty (60) days of when you received the distribution. Check with your personal tax advisor to make sure that your distribution is an Eligible Rollover Distribution. However, the 20% of your payment that was withheld by your Employer will be taxable unless you also deposit an equivalent amount into a Qualified Plan or an IRA.
Example : You have a vested account balance of $100,000 at the time you terminate employment. If you elect a direct rollover, the entire $100,000 will be transferred to the trustee of another qualified retirement plan or the IRA. The entire amount is reported as a rollover on your tax return, and you will not pay taxes. If you receive the benefit directly, 20% of the distribution ($20,000) will be automatically withheld from your payment. You will receive only $80,000. If within sixty (60) days you decide to roll over the entire $100,000 to an IRA, you will need to deposit $20,000 of your own money to make up the difference. If you do this, the $20,000 withheld may be refunded to you when you file your taxes. However, if you do not, only $80,000 will be rolled over and the remaining $20,000 will be taxable income. If you are under 59 1 ⁄ 2 when you receive your payment, you will also be subject to the 10% early distribution penalty unless you qualify for an exception such as death or Disability.
Certain benefit payments are not eligible for rollover and therefore will also not be subject to the 20% mandatory withholding. These types of payments include annuities paid over your lifetime, installments payments for a period of at least ten (10) years, minimum required distributions at age 70 1 ⁄ 2 , Hardship withdrawals, and (depending on the plan you are rolling over to) any Voluntary or Required After-tax Contributions, if any.
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Non-Spouse Beneficiaries who inherit Qualified Plan assets may roll over their interest into an IRA established by the Beneficiary. This allows for the continued tax-deferral of accumulation while mandatory distributions are taken over the Beneficiarys life expectancy.
Special Rules Regarding Rollovers of Roth Elective Deferrals
There are some special rules that apply to Direct Rollovers of Roth Elective Deferrals. A Direct Rollover of a distribution from a Roth Elective Deferral Account under this Plan will only be made to another Roth Elective Deferral account under another retirement plan that accepts Roth Elective Deferrals, or to a Roth IRA, and only to the extent the rollover is permitted under the law. Our Plan shall not provide for a Direct Rollover (including any automatic rollover) of distributions from your Roth Elective Deferral account if the amount of those distributions that are Eligible Rollover Distributions are less than $200 during a year. Additionally, any distribution from your Roth Elective Deferral account will not be taken into consideration when determining whether distributions from your other accounts are reasonably expected to total less than $200 during a year. However, Eligible Rollover Distributions from your Roth Elective Deferral account are taken into consideration when determining whether the total amount of your account balances under the Plan exceed $1,000 for purposes of mandatory distributions from the Plan and the treatment of those distributions. [See the Plan Administrator for the full explanation of Eligible Rollover Distributions and for information regarding mandatory distributions and the automatic rollover provisions of this Plan.]
If you were a participant in another plan and you receive a distribution from that plan that includes Roth Elective Deferral amounts, you may be able to rollover those amounts to this Plan through a Direct Rollover, (see the Plan Administrator to verify that Direct Rollovers are accepted by this Plan). All Roth Elective Deferral amounts will be accounted for separately from any other accounts you have under this Plan. The plan that transfers your amount over to this Plan shall report to this Plan the amount of your Roth Elective Deferrals, as well as associated earnings, and the first year of the five (5) taxable year period so that we will not need to obtain the information from you. When counting the five (5) consecutive tax years of plan participation, year one (1) starts with the first day of the first taxable year in which you make a Roth Elective Deferral to any designated Roth Elective Deferral account established for you under a particular plan, and where such amount is first includible in your gross income. This period ends when five (5) consecutive taxable years have been completed.
H. | Involuntary Cash-Out Provisions |
When you incur a Severance from Employment, you (and your Spouse, if applicable) must consent to any distribution when your Vested Account Balance exceeds $5,000. The value of your Vested Account Balance shall include Rollover Contributions that you may have made to this Plan.
If your Vested Account Balance is $1,000 or less when you terminate employment, you will be cashed-out. Your distribution will be paid as soon as practicable after complying with the applicable federal income tax withholding laws. Distribution of amounts greater than $1,000 will only be made with your consent. Your Rollover Contributions, if any, will always be included when determining whether the $1,000 threshold has been exceeded.
I. | Time of Payment |
When termination of employment is due to retirement, Disability, or death:
Your payments will start as soon as administratively feasible following the date on which a distribution is requested by you or is payable.
When termination of employment is for any other reason:
Your payments will start as soon as administratively feasible following the date on which a distribution is requested by you or is payable.
You may delay payment of your benefit if your account balance is more than $5,000 at the time you terminate Service. If your Vested Account Balance is less than $5,000, you may be cashed out as described in the above Involuntary Cash-Out Provisions section. Generally, you do not have to take a withdrawal until your Required Beginning Date, even if you have terminated employment. If you have terminated employment, your Required Beginning Date is the April 1 st of the calendar year following the calendar year in which you attain age 70 1 ⁄ 2 . See your Plan Administrator for more details.
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J. | Qualified Domestic Relations Order (QDRO) |
A Qualified Domestic Relations Order (known as a QDRO) is a court order issued under state domestic relations law relating to divorce, legal separation, custody or support proceedings. A QDRO recognizes the right of someone other than you (known as an Alternate Payee) to receive all or a portion of your Plan benefits. You will be notified if a QDRO relating to your Plan benefits is received by the Plan. Participants and Beneficiaries under the Plan may obtain from the Plan Administrator without charge a copy of the Plans QDRO procedures. The benefit established by a QDRO may be distributed to the Alternate Payee as of the date the QDRO is determined to be qualified.
K. | Death Benefits Under USERRA-Qualified Active Military Service |
If you die or become disabled (as defined under the terms of the Plan) on or after January 1, 2007 while performing qualified military service with respect to the Employer maintaining this Plan, you may be treated as if you had resumed employment in accordance with your reemployment rights under USERRA, on the day preceding your death or Disability (as the case may be) and terminated employment on the actual date of your death or Disability. The Employer maintaining the retirement plan must credit all Employees performing qualified military service who died or become disabled as a result of performing qualified military service, prior to reemployment by the Employer with Service and benefits on reasonable equivalent terms. Please see the Plan Administrator for more information and how this section may affect you.
ARTICLE X
INVESTMENTS
Your contributions to the Plan will be invested in any security or other form of property that is considered suitable for a retirement plan. Such investments can include, but are not limited to, common and preferred stocks, put and call options which are traded on an exchange, bonds, money market instruments, mutual funds, savings accounts, certificates of deposit, or Treasury bills.
A. | Investment Direction |
Participants will direct the investment of all Contributions.
You may invest in the alternatives made available by the Employer under the Plan. A description of what investment vehicles are available to you, and the procedures for making investment selections and changes in investment selections, will be provided to you by the Plan Administrator.
The Plan will permit you the right to reallocate their contributions to a different fund and to transfer contributions into and out of investments provided under the Plan, subject to possible restrictions on these types of transactions. The Plan Administrator may decline to implement investment directives where it in its sole discretion deems it appropriate (for example, your directive may be declined for excessive trading, market timing, or for any other legitimate reason where the Plan Administrator, in fulfilling its fiduciary role under ERISA, believes that it would be imprudent to implement the directive). The Plan Administrator has the power to adopt such rules and procedures to govern all Participant elections and directions under the terms of the Plan.
If the Plan invests or permits investments in mutual funds, Plan Participants are advised to consult the mutual fund prospectus, which may contain restrictions on the frequent trading of shares in response to short-term market fluctuations, a practice known as market timing. The prospectus may provide that the manager of the fund reserves the right to refuse purchase orders and fund exchanges if the fund manager believes the transaction would have a disruptive effect on the portfolio of the mutual fund.
This Plan elects to comply with the regulations extending fiduciary relief for decisions to invest Plan assets in default investment funds which meet the Qualified Default Investment Alternative requirements.
This Plan is intended to satisfy ERISA Section 404(c). If you exercise control over the assets in your account, you will not be considered a Plan fiduciary by reason of that control, and no other fiduciary, such as the Trustee, Employer or Plan Administrator, shall be held responsible for losses resulting from that control. Under the Department of Labor Regulations, fiduciary protection is available only in a Participant directed plan that meets special requirements. Accordingly, you must be permitted to choose from a broad range of investment alternatives that meet certain criteria including:
a. | a reasonable opportunity to affect the level of return and degree of risk to which your accounts are subject; |
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b. | the opportunity to choose from at least three investment alternatives. Each alternative must be diversified; for example, if a fund invests only in assets within the same industry, it may not be considered adequately diversified. Each alternative must be materially different from the other alternatives in terms of risk and return characteristics. In the aggregate, the alternatives must enable you to achieve a portfolio with aggregate risk and return characteristics that at any point are within a range normally appropriate for the Participants in the Plan. Each of the three funds when combined with other alternatives, must tend to minimize, through diversification, the overall risk of loss; and |
c. | the opportunity to diversify so as to minimize the risk of large losses, taking into account the nature of the Plan and the size of your accounts. |
You are provided an opportunity to exercise control over the assets in your accounts. For this opportunity to exist, you must be permitted to make transfers among investment alternatives with a frequency that matches the volatility of the investments. For example, if three (3) core funds are offered to satisfy the broad range requirement, a transfer option must be offered at least quarterly for all three (3) core funds. You must be provided with sufficient information to permit informed investment decision-making. Investment instructions will be given to an identified Plan fiduciary who is obligated to comply with those instructions.
Disclosure Requirements under ERISA Section 404(c)
You must automatically be given the following specific information regarding your investment choices:
a. | An explanation that the Plan is designed to be a 404(c) plan and that Plan fiduciaries may be relieved of liability for any losses that are the direct result of your investment instructions; |
b. | Plan fiduciaries must distribute any summary prospectuses, financial reports or similar materials that are furnished to the Plan. You may also request a complete copy of any prospectus that is furnished to the Plan. You must also receive a general description of each investment alternative. The description must address the investment objectives, risk and return characteristics, and type and diversification of assets that make up the portfolio. |
c. | The procedures for giving investment instructions, including any limitations on transfers or any restrictions on the exercise of voting, tender, or similar rights. |
d. | If the Plan offers Employer securities, you must have the ability to transfer funds out of Employer securities and into any of the core funds available in the Plan at a frequency similar to the volatility level of the Employer security. |
e. | A description of any transaction fees (e.g. commissions, sales, loads, deferred sales charges) that will be directly assessed against your account. |
f. | The name, address, and telephone number of the Plan fiduciary responsible for providing information to you upon request. The fiduciary may be identified by position (e.g., Plan Administrator, Trustee) rather than by name. |
g. | If an investment alternative is subject to the Securities Act of 1933, a copy of the most recent prospectus on the security must be provided either immediately before or immediately after your initial investment in that alternative. |
h. | To the extent that voting tender or other similar rights are passed through to you, all materials relating to the exercise of those rights must be provided to you. |
i. | If the Plan permits investment in Employer securities, you must receive a description of the procedures for maintaining confidentiality of transactions as well as the name or title, address and telephone number of the Plan fiduciary responsible for monitoring compliance with the procedures. |
Plan Fiduciary Requirements under ERISA Section 404(c)
In addition to the automatic disclosure rules above, Plan fiduciaries must also respond to your requests for information on a timely basis. This includes a description of the annual operating expenses of each designated alternative. This includes investment management fees, transaction costs, or any other type of fee that would reduce the rate of return to Participants. The disclosure should also include the aggregate amount of such expenses addressed as a percentage of average net assets and any copies of any prospectuses, financial statements, reports, or any other material related to an investment alternative that is provided to the Plan. Special rules that would apply if a designated investment alternative consists of assets that are Plan assets (e.g. a fund managed by Employees). The Plan Administrator will provide you with the necessary information if the Plan permits such an investment.
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Restrictions on Employer Securities offered in a 404(c) Plan
If Employer securities are offered, they must be qualifying securities as defined under ERISA Section 407(d)(5). There are special rules that apply to Employer securities acquired in a Qualified Plan. The Plan Administrator will review these requirements with you.
B. | Investment in Insurance |
Life insurance is not a permitted investment option.
C. | Participant Loans |
Participant loans are permitted by this Plan. Loans are subject to a strict set of rules established by law and must be approved by the Plan Administrator. In order to obtain a loan, please contact the Plan Administrator who will advise you of the application procedures and provide you with a copy of the Plans loan policy.
Loan payments will be suspended during periods of military service in accordance with the Uniformed Service Employment and Reemployment Rights Act of 1994 (USERRA) and IRS Code Section 414(u). Any such suspension shall not be considered a distribution nor be subject to taxation. Loan payments will commence upon your return to employment or in accordance with the Employers written loan policy. Please contact the Plan Administrator for further information.
ARTICLE XI
ADMINISTRATION OF THE PLAN
The Plan Administrator administers the Plan. Your Employer has established the Plan and has overall control and authority to administer the Plan. The Employers duties as the Plan Administrator include:
| appointment of professional advisors needed to administer the plan, including, among others, an accountant, attorney, actuary or administrator; |
| instruction to the Trustee(s) regarding payments from the Plan Trust Fund; |
| communication with Employees about participation and benefits under the Plan, including claims procedures and domestic relations orders; |
| preparation and filing of any returns and reports with the Internal Revenue Service, Department of Labor or any other governmental agency, as required; |
| review and approval of any financial reports, investment reviews, or other reports prepared by any party appointed by the Employer; |
| establishment of a funding policy and investment objectives that are consistent with the purposes of the Plan and the Employee Retirement Income Security Act of 1974 (ERISA); and |
| resolution of any question of Plan interpretation. |
The decision of the Plan Administrator on any dispute arising under the Plan, including but not limited to, questions of construction, interpretation and administration shall be final, conclusive and binding on all persons having an interest in or under the Plan. Any determination made by the Plan Administrator shall be given deference in the event the determination is subject to judicial review and shall be overturned by a court of law only if it is arbitrary and capricious.
The Plan Administrator shall have the right of recovery of an overpayment to a Plan Participant and/or Beneficiary as well as the right of offset.
The Trustee will be responsible for the administration of investments held in the Plan Trust Fund. These duties will include:
| receipt of contributions under the terms of the Plan; |
| investment of Plan assets, unless investment responsibility is delegated to another party; |
| custodian of Plan assets, unless custody responsibility is delegated to another party; |
| distribution of monies from the fund in accordance with written instructions received from the Plan Administrator; |
| maintenance of accounts and records of the financial transactions of the Plan Trust Fund; |
| preparation of an annual report of the Plan Trust Fund that shows the financial transactions for the Plan Year. |
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There may be circumstances that result in the disqualification, ineligibility, or denial, loss, forfeiture, suspension, offset, reduction or recovery of benefits that you or your Beneficiary (or Beneficiaries) might otherwise reasonably expect the Plan to provide. These events may include:
| Leaving the employ of the Employer prior to becoming one hundred percent (100%) vested in contributions made to the Plan on your behalf. |
| A payment from your Plan account that was required under the terms of a Qualified Domestic Relations Order. |
| You do not meet the requirements of the Plan to receive a contribution. |
| You failed to repay a Participant loan on a timely basis and an offset of that amount occurred in your account. |
No benefits under this Plan may be assigned or transferred by you or any other person entitled to benefits. If any person attempts to assign, sell or otherwise transfer any benefits under the Plan, the Plan Administrator may terminate that persons interest in the benefit and dispose of that interest for the benefit of such person or the dependents of such person as it sees fit. However, your benefit under the Plan may be subject to the terms of certain divorce, child support or property agreements involving a Spouse, former Spouse or dependent.
There may be investment fund transaction fees or expenses (e.g., commissions, front-end or back-end loads) associated with the investments that will affect your account. Prior to making any investment, you should obtain and read all available information concerning that particular investment, including financial statements, prospectuses, if applicable, reports or other offering documents, where available.
Depending on the transaction there may be a payment of fees involved as a condition to receipt of benefits under the Plan. If applicable, the Plan Administrator will provide you with written information at the time of the transaction. The costs of administering the Plan are shared between you and your Employer. There may be loan set-up charges and self-directed brokerage account charges (if applicable under the Plan), as well as other administrative costs that may be deducted from your contributions or accounts. These additional costs may include, but are not limited to, distribution charges for benefits that are distributed to you and fees associated with the qualification of a domestic relations order. The Plan Administrator will notify you of any costs that are charged to your account in the operation of the Plan.
If you have any questions relating to these fees and how they affect your account, please contact the Plan Administrator.
ARTICLE XII
AMENDMENT AND TERMINATION
Only the Employer (Plan Sponsor) sponsoring this Plan has the authority to amend this Plan. Any amendment, including the restatement of an existing Plan, may not decrease your Vested Account Balance except to the extent permitted under the law, and may not reduce or eliminate a protected benefit (except as provided under the law) determined immediately prior to the date of the adoption, or if later the effective date, of any amendment to the Plan. The Plan Sponsor may, in its discretion, amend the Plan to eliminate benefits on a prospective basis, but has no legal authority to eliminate benefits which you have already earned.
Your Employer expects to continue the Plan indefinitely; however, in the unlikely event the Plan is terminated or if there is a complete discontinuance of contributions under a plan maintained by the Employer, all amounts credited to your account shall vest and become 100% vested, regardless of the Plans current vesting schedule. Vesting means that you have earned the right to a portion of or the full amount of your account. Once you have vested a portion or the full amount of your account, that amount cannot be forfeited or taken away from you.
In the event of the termination of the Plan, the Plan Administrator shall direct the distribution of accounts to or for the exclusive benefit of you and your Beneficiaries. Such distribution shall be made directly to you or, at your direction, may be transferred directly to another Eligible Retirement Plan or individual retirement account as selected by you and/or your Beneficiary. If you do not respond the communication sent regarding the distribution of your assets in a timely manner, under the law the Plan Administrator has the right to cash out any Participant who does not respond to the communications regarding the Plan termination. That means a check will be sent to you at your last known address, less any applicable withholding, representing your balance in the Plan. Except as permitted by Internal Revenue Service Regulations, the termination of the Plan shall not result in any reduction of protected benefits.
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A partial Plan termination may occur if either a Plan amendment or severance from Service excludes a group of Employees who were previously covered by this Plan. Whether a partial termination has occurred will depend on the facts and circumstances of each case. If a partial termination occurs, only those Participants who cease participation due to the partial termination will become 100% vested. The Plan Administrator will advise you if a partial termination occurs and how such partial termination affects you as a Participant.
Your rights and benefits under this Plan may not be assigned, sold, transferred or pledged by you or reached by your creditors or anyone else. For example, you cannot agree to pledge a part of your benefit under the Plan as security for a bank loan. However, there is an exception for a Qualified Domestic Relations Order (QDRO) or if you are a Plan fiduciary and you are found guilty of a violation of the law involving the assets of this Plan.
ARTICLE XIII
LEGAL PROVISIONS AND RIGHTS OF PLAN PARTICIPANTS
Your Rights As A Plan Participant: As a Participant in this Plan, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). The Pension Benefit Guaranty Corporation does not insure your benefits under this Plan because the law does not require plan termination insurance for this type of Plan. ERISA provides that all Plan participants shall be entitled to the items described below.
Receive Information About Your Plan And Benefits: Examine, without charge, at the Plan Administrators office and at other specified locations such as work-sites and union halls, all documents governing the Plan, including insurance contracts and collective bargaining agreements (if applicable), and a copy of the latest annual report (Form 5500 Series) filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration.
Upon written request to the Plan Administrator, you may obtain copies of documents governing the operation including insurance contracts and collective bargaining agreements and copies of the latest annual report (Form 5500 series) and updated summary [plan description. The Plan Administrator may make a reasonable charge for the copies.
You are also entitled to receive a summary of the Plans annual financial report. The Plan Administrator is required by law to furnish each Participant with a copy of this summary annual report.
Additionally, you may obtain a statement telling you whether you have a right to receive a pension at Normal Retirement Age and if so, what your benefits would be at Normal Retirement Age under the Plan if you stop working now. If you do not have a right to a pension, the statement will tell you how many more years you have to work to get a right to a pension. If you are not directing the investments in your Plan Account, this statement must be requested in writing and is not required to be given more than once every twelve (12) months. The Plan must provide the statement free of charge. If you are directing the investments in your Plan Account, you will receive your statement on a quarterly basis.
Prudent Actions by Plan Fiduciaries: In addition to creating rights for Plan Participants, ERISA imposes duties upon the people who are responsible for the operation of the employee benefit Plan. The people who operate your Plan, called fiduciaries of the Plan, have a duty to do so prudently and in the interest of you and other Plan Participants and Beneficiaries. No one, including your Employer, your union, or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a (pension, welfare) benefit or exercising your rights under ERISA.
Benefit Claims Procedure For Non-Disability Claims : Benefits normally will be paid to Participants and Beneficiaries without the necessity of formal claims. You or your Beneficiary(ies), however, may make a request for any Plan benefits to which you believe you may be entitled. Any such request must be made in writing, and it should be made to the Plan Administrator. The following claims appeal procedure applies to claims other than claims for benefits due to Disability, which are governed by the section entitled Benefits Claims Procedure for Disability Claims.
Your request for Plan benefits will be considered a claim for Plan benefits, and it will be subject to a full and fair review. If your claim for such benefits under the Plan is wholly or partially denied, the Plan Administrator shall furnish you or your Beneficiary (referred to below as a claimant) or your authorized representative with a written or electronic notice of the denial within a reasonable period of time [generally, ninety (90) days after the Plan Administrator receives the claim or one hundred eighty (180) days, if the Plan Administrator determines that special circumstances require an extension of time for processing the claim and furnishes written notice of the extension to the claimant or his authorized representative before the initial ninety (90) day period ends], which sets forth, in an understandable manner, the following information:
| The specific reason(s) for the denial of the claim; |
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| Reference to the specific Plan provision on which the denial is based; |
| A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why that material or information is necessary; and |
| A description of the Plans review procedures and the time limits applicable to those procedures, including a statement of the claimants right to bring a civil action under ERISA Section 502(a) following a denial on review. |
The Plan Administrators written extension notice must indicate the special circumstances requiring an extension of time for processing the claim and the date by which the Plan Administrator expects to render its decision on the claim.
The claimant or his authorized representative may appeal the Plan Administrators decision denying the claim within sixty (60) days after the claimant or his authorized representative receives the Plan Administrators notice denying the claim. The claimant or his authorized representative may submit to the Plan Administrator written comments, documents, records and other information relating to the claim. The claimant or his authorized representative shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim. For these purposes, a document, record or other information is relevant to the claim if it:
| was relied upon by the Plan Administrator in making its decision on the claim, |
| was submitted, considered or generated in the course of the Plan Administrators making its decision on the claim without regard to whether the Plan Administrator relied upon it in making its decision, or |
| complies with administrative processes and safeguards which are designed to ensure and to verify that decisions on claims are made in accordance with governing Plan documents, whose provisions are applied consistently with respect to similarly-situated claimants. |
The Plan Administrators review of the claim and of its denial of the claim shall take into account all comments, documents, records and other information submitted by the claimant or his authorized representative relating to the claim, without regard to whether these materials were submitted or considered by the Plan Administrator in its initial decision on the claim.
The Plan Administrators decision on the appeal of a denied claim shall be made within a reasonable period of time [generally sixty (60) days after the Plan Administrator receives the claim or one hundred and twenty (120) days if the Plan Administrator determines that special circumstances require an extension of time for processing the claim and furnishes written notice of the extension to the claimant or his authorized representative before the initial sixty (60) day period ends indicating the special circumstances requiring extension of time and the date by which the Plan Administrator expects to render its decision on the claim]. The Plan Administrator will furnish the claimant or his authorized representative with written or electronic notice of its decision on appeal. In the case of a decision on appeal upholding the Plan Administrators initial denial of the claim, the Plan Administrators notice of its decision on appeal shall set forth, in an understandable manner, the following information:
| The specific reason(s) for the decision on appeal; |
| Reference to the specific Plan provision on which the decision on appeal is based; |
| A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claim for benefits; and |
| A statement describing any voluntary appeal procedures (including voluntary arbitration or any other form of dispute resolution) offered by the Plan and the claimants right to obtain information sufficient to enable you or your beneficiary to make an informed judgment about whether to submit a benefit dispute to the voluntary level of appeal, and a statement of the claimants right to bring an action under ERISA Section 502(a). |
Benefit Claims Procedure For Disability Claims: The following claims appeal procedure applies to claims due to Disability.
If your claim for such benefits under the Plan is wholly or partially denied, the Plan Administrator shall furnish you or your Beneficiary (hereinafter referred to below as a claimant) or your authorized representative with written or electronic notice of the denial, within a reasonable period of time, generally not to exceed forty-five (45) days after the Plan Administrator receives the claim. This forty-five (45) day period may be extended for up to thirty (30) days, if the Plan Administrator both determines that such an extension is necessary due to matters beyond its
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control and notifies the claimant, prior to the expiration of the initial forty-five (45) day period, of the circumstances requiring the extension of time and the date by which the Plan Administrator expects to render a decision. If, prior to the end of the first thirty (30) day extension period, the Plan Administrator determines that, due to matters beyond its control, it cannot render a decision within that extension period, the period for making the determination may be extended for up to an additional thirty (30) days, provided that the Plan Administrator notifies the claimant, prior to the expiration of the first thirty (30) day extension period, of the circumstances requiring the extension and the date by which the Plan Administrator expects to render a decision. In the case of any extension, the notice of extension shall specifically explain the standards on which entitlement to a benefit is based, the unresolved issues that prevent a decision on the claim, and the additional information needed to resolve those issues, and the claimant will be given at least forty-five (45) days within which to provide the specified information.
Any written or electronic notice of the denial of benefits shall set forth, in an understandable manner, the following information:
| The specific reason(s) for the denial of the claim; |
| Reference to the specific Plan provisions on which the denial is based; |
| A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; |
| A description of the Plans review procedures and the time limits applicable to such procedures, including a statement of the claimants right to bring a civil action under Section 502(a) of the Act following a denial on review; and |
| If the Plan Administrator relied upon an internal rule, guideline, protocol, or other similar criterion in making the adverse determination, the notice shall set forth the specific rule, guideline, protocol, or other similar criterion or a statement that such a rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol, or other criterion will be provided free of charge to the claimant upon request. If the adverse benefit determination is based on a medical judgment, the notice also shall set forth an explanation of the scientific or clinical judgment for the determination, applying the Plans terms to the claimants medical circumstances, or a statement that such explanation will be provided free of charge upon request. |
The Plan Administrators written extension notice must indicate the special circumstances requiring an extension of time for processing the claim, and the date by which the Plan Administrator expects to render its decision on the claim.
The claimant or his authorized representative may appeal the Plan Administrators decision denying his claim within one hundred and eighty (180) days after the claimant or his authorized representative receives the Plan Administrators notice denying the claim. The claimant or his authorized representative may submit to the Plan Administrator written comments, documents, records, and other information relating to the claim. The claimant or his authorized representative shall be provided, upon request and free of charge, reasonable access to, and copies of all documents, records, and other information relevant to the claim. For these purposes, a document, record or other information is relevant to the claim if it:
| was relied upon by the Plan Administrator in making its decision on the claim; |
| was submitted, considered, or generated in the course of the Plan Administrators making its decision on the claim, without regard to whether the Plan Administrator relied upon such document, record or other information in making its decision, or |
| complies with administrative processes and safeguards which are designed to ensure and to verify that decisions on claims are made in accordance with governing Plan documents, whose provisions are applied consistently with respect to similarly situated claimants. |
The Plan Administrators review of the claimants claim and of the Plan Administrators denial of such claim shall take into account all comments, documents, records, and other information submitted by the claimant or his authorized representative relating to the claim, without regard to whether these materials were submitted or considered by the Plan Administrator in its initial decision on the claim. The review of the Plan Administrators initial adverse benefit determination shall not afford deference to such determination and shall be conducted by a named fiduciary of the Plan who is neither the individual who made the initial adverse benefit determination nor a subordinate of that individual. In deciding an appeal of any initial adverse benefit determination that is based, in whole or in part, on a medical judgment, the named fiduciary shall consult with a health care professional who has appropriate training and experience in the field of medicine involved in the medical judgment. The medical or vocational experts whose advise was obtained on behalf of the Plan Administrator in connection with its adverse benefit determination shall be identified to the claimant or his authorized representative, regardless of whether the Plan Administrator relied upon the advice in making the benefit determination. The health care professional whom the named fiduciary consults in making his review of the Plan Administrators initial adverse benefit determination shall be an individual who is neither an individual whom the Plan Administrator consulted in connection with the adverse benefit determination that is the subject of the appeal, nor the subordinate of any such individual.
21
The named fiduciarys decision on the appeal of a denied claim shall be made within a reasonable period of time [not to exceed forty-five (45) days after receipt of the claimants request for review by the Plan, unless the named fiduciary determines that special circumstances (such as a need to hold a hearing) require an extension of time for processing the claim and furnishes written notice of the extension to the claimant or his authorized representative before the initial forty-five (45) day period. In no event shall such extension exceed a period of forty-five (45) days from the end of the initial period ends. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the named fiduciary expects to render the determination on review.] The named fiduciary will furnish the claimant or his authorized representative with written or electronic notice of his decision on appeal. In the case of a decision on appeal upholding the Plan Administrators initial denial of the claim, the named fiduciarys notice of its decision on appeal shall set forth, in an understandable manner, the following information:
| The specific reason(s) for the decision on appeal; |
| Reference to the specific Plan provisions on which the decision on appeal is based; |
| A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the claimants claim for benefits; |
| A statement describing any voluntary appeal procedures (including voluntary arbitration or any other form of dispute resolution) offered by the Plan and the claimants right to obtain information sufficient to enable the claimant to make an informed judgment about whether to submit a benefit dispute to the voluntary level of appeal, and a statement of the claimants right to bring an action under ERISA Section 502(a); |
| If the named fiduciary relied upon an internal rule, guideline, protocol, or other similar criterion in making the adverse determination, the notice shall set forth the specific rule, guideline, protocol, or other similar criterion or a statement that such rule, guideline, protocol or other similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol, or other criterion will be provided free of charge to the claimant upon request; |
| If the adverse benefit determination is based on a medical judgment, the notice also shall set forth and explanation of the scientific or clinical judgment for the determination, applying the Plans terms to the claimants medical circumstances, or a statement that such explanation will be provided free of charge upon request; and |
| In addition, the notice shall include the following statement: You and your Plan may have other voluntary alternatives dispute resolution of terms, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor office and your State insurance regulatory agency. |
These procedures must be exhausted prior to any legal action taken against the Plan. Any legal action must be filed within one (1) year after the exhaustion of the claims appeal process.
Enforce Your Rights: If your claim for a pension benefit is denied or ignored, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.
Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of Plan documents or the latest annual report from the Plan and do not receive them within thirty (30) days, you may file suit in a Federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit in a state or Federal court. In addition, if you disagree with the Plans decision or lack thereof concerning the qualified status of a domestic relations order or a medial child support order, you may file suit in Federal court. If it should happen that Plan fiduciaries misuse the Plans money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.
Assistance With Your Questions: If you have any questions about your Plan, you should contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator, you should contact the nearest office of the Employee Benefits Security Administration of the U.S. Department of Labor listed in your telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, DC 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administration.
22
If more than one Employer maintains this Plan, you can obtain a complete list of all such Employers by making a written request to the Plan Administrator.
This booklet is not the Plan document, but only a Summary Plan Description of its principal provisions and not every limitation or detail of the Plan is included. Every attempt has been made to provide concise and accurate information. However, if there is a discrepancy or omission between this booklet and the official Plan document, the Plan document shall apply.
23
ADDENDUM TO THE SUMMARY PLAN DESCRIPTION
SBERA 401(k) PLAN AS ADOPTED BY CENTURY BANCORP, INC.
Effective: January 1, 2015
Compensation Limits and Cost of Living Increases Applicable to Defined Contribution Retirement Plans
Limitation Type |
Effective
2015 |
|||
Maximum Annual Compensation Limit |
$ | 265,000 | ||
Maximum Elective Deferral Limit |
$ | 18,000 | ||
Maximum Catch-up Contribution Limit |
$ | 6,000 | ||
Maximum Annual Contribution Limit |
$ | 53,000 | ||
Highly Compensated Employee (HCE) Compensation Threshold |
$ | 120,000 | ||
Key Employee (Officer) Compensation Threshold |
$ | 170,000 | ||
Social Security Taxable Wage Base |
$ | 118,500 |
Fees : Listed below are the charges your account will incur as a condition of the receipt of a benefit under the Plan, depending upon the transaction involved:
Participants have the ability to take a loan from the Plan. To do so,
| There will be a loan set-up fee of $50 paid from your account prior to obtaining a loan from the Plan. |
| The loan set-up charge is deducted from your account. All other costs of administering the Plan will be paid by your Employer or from Plan assets. |
If you have any questions relating to these fees and how they affect your account, please contact the Plan Administrator.
Qualified Default Investment Alternative (QDIA) : The Plan contains the following QDIAs:
Name of Primary QDIA: | LifePath Accounts | |
Investment Objectives: | The LifePath series are designed to be complete investment solutions for individuals. Each LifePath strategy is a broadly diversified portfolio, designed for both a particular risk tolerance and when the money will be needed. | |
Risk/Return Characteristics: | The LifePath series are designed to cover the risk spectrum from low to high. The LifePath Retirement represents the lowest risk while the LifePath 2055 represents the highest risk (for 2015). | |
Fees/Expenses: | The expense ratio is 0.15% (15 basis points per year). |
Target Funds:
Name of investment |
Year in which
Normal Retirement Age attained |
|||
LifePath Retirement |
2015 | |||
LifePath 2020 |
2020 | |||
LifePath 2025 |
2025 | |||
LifePath 2030 |
2030 | |||
LifePath 2035 |
2035 | |||
LifePath 2040 |
2040 | |||
LifePath 2045 |
2045 | |||
LifePath 2050 |
2050 | |||
LifePath 2055 |
2055 |
Collective And Commingled Funds : The Trustee is authorized to invest all or any part of the Trust in the following Collective and Commingled Funds:
a. | SBERA Common and Collective Trust |
24
PRIOR PLAN PROVISIONS
PLAN PROVISION:
The automatic enrollment provision applies to new employees, current employees who are deferring less than 3% and current employees who are not deferring effective August 1, 2014.
EFFECTIVE DATE: August 1, 2014
25
Exhibit 10.3
THE CENTURY BANCORP
SUPPLEMENTAL EXECUTIVE RETIREMENT
AND INSURANCE PLAN
AS AMENDED AND RESTATED EFFECTIVE AS OF DECEMBER 31, 2016
TABLE OF CONTENTS
Page | ||||
PREAMBLE |
1 | |||
ARTICLE I CONSTRUCTION OF THE PLAN |
1 | |||
1.1 DEFINITIONS |
1 | |||
1.2 CONSTRUCTION |
5 | |||
ARTICLE II PARTICIPATION |
6 | |||
ARTICLE III ELIGIBILITY FOR BENEFITS |
6 | |||
3.1 NORMAL RETIREMENT |
6 | |||
3.2 EARLY RETIREMENT |
6 | |||
3.3 DEFERRED VESTED RETIREMENT |
6 | |||
3.4 TIMING OF COMMENCEMENT |
6 | |||
3.5 ELECTIONS REGARDING POST-2004 BENEFITS |
7 | |||
ARTICLE IV SUPPLEMENTAL RETIREMENT BENEFITS |
8 | |||
4.1 NORMAL OR POSTPONED RETIREMENT BENEFITS |
8 | |||
4.2 EARLY RETIREMENT BENEFITS |
8 | |||
4.3 DEFERRED VESTED RETIREMENT BENEFITS |
9 | |||
4.4 NO ACCRUAL AFTER COMMENCEMENT |
9 | |||
ARTICLE V PAYMENT OF BENEFITS |
10 | |||
5.1 NORMAL FORM OF PAYMENT |
10 | |||
5.2 OPTIONAL FORMS OF PAYMENT |
10 | |||
5.3 FREQUENCY OF PAYMENT |
11 | |||
5.4 NATURE OF CLAIM |
11 | |||
ARTICLE VI SURVIVOR BENEFITS |
11 | |||
6.1 DEATH AFTER COMMENCEMENT OF BENEFITS |
11 | |||
6.2 DEATH AFTER TERMINATION OF EMPLOYMENT AND BEFORE COMMENCEMENT OF BENEFITS |
11 | |||
6.3 DEATH BENEFIT PLAN DEATH PRIOR TO TERMINATION OF EMPLOYMENT AND BEFORE COMMENCEMENT OF BENEFITS |
12 | |||
6.4 BENEFICIARY DESIGNATION |
13 |
-i-
TABLE OF CONTENTS
(continued)
Page | ||||
ARTICLE VII PLAN ADMINISTRATION |
13 | |||
7.1 PLAN ADMINISTRATOR |
13 | |||
7.2 COMPOSITION OF THE COMMITTEE |
13 | |||
7.3 POWERS AND DUTIES OF COMMITTEE |
13 | |||
ARTICLE VIII MISCELLANEOUS PROVISIONS |
14 | |||
8.1 NO CONTRACT OF EMPLOYMENT |
14 | |||
8.2 ASSIGNMENT |
14 | |||
8.3 FORFEITURE IN THE EVENT OF DISCHARGE FOR CAUSE |
15 | |||
8.4 AMENDMENT |
15 |
Schedule A Change of Control Definition
-ii-
THE CENTURY BANCORP
SUPPLEMENTAL EXECUTIVE RETIREMENT
AND INSURANCE PLAN
PREAMBLE
Century Bancorp, Inc. has adopted The Century Bancorp, Inc. Supplemental Executive Retirement/Insurance Plan for a select group of management Employees in order to (a) attract, retain and motivate qualified management Employees, (b) facilitate the retirement of such Employees, and (c) in certain cases, provide survivor income for the Beneficiaries of such Employees. The Plan is intended to be a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, and shall be interpreted and administered to the extent possible in a manner consistent with that intent.
This Plan was most recently amended and restated effective December 1, 2008, and subsequently amended by First Amendment effective May 12, 2009, by further amendment effective June 1, 2011, and by Third Amendment effective December 31, 2016. This Plan is hereby restated to incorporate all amendments to the December 1, 2008 restatement, effective as of December 31, 2016.
This Plan is intended to comply with the provisions of Section 409A of the Code with respect to Post-2004 Benefits and shall be interpreted and administered to the extent possible in a manner consistent with this intent.
ARTICLE I
CONSTRUCTION OF THE PLAN
Whenever used in this Plan with initial capital letters, the following terms shall have the following meanings:
(a) ACCRUAL PERCENTAGE means:
(i) | in the case of a Participant whose employment with the Employer terminates before attaining age forty (40), 0%; or |
(ii) | in the case of a Participant whose employment with the Employer terminates after attaining age forty (40), the percentage from the following tables: |
For any Participant who is a member of the Executive Management Group, and Employees who became Participants before January 1, 2000, the following table will apply:
Years of Plan Participation |
Accrual Percentage |
|
Fewer than 5 | 0.0% | |
5 but less than 6 | 25.0 | |
6 but less than 7 | 32.5 | |
7 but less than 8 | 40.0 | |
8 but less than 9 | 47.5 | |
9 but less than 10 | 55.0 | |
10 but less than 11 | 62.5 | |
11 but less than 12 | 70.0 | |
12 but less than 13 | 77.5 | |
13 but less than 14 | 85.0 | |
14 but less than 15 | 92.5 | |
15 or more | 100.0 |
For Employees who became Participants after December 31, 1999 (other than members of the Executive Management Group) the following table shall apply:
Years of Plan Participation |
Accrual Percentage |
|
Fewer than 5 |
0% | |
5 but less than 6 |
20 | |
6 but less than 7 |
24 | |
7 but less than 8 |
28 | |
8 but less than 9 |
32 | |
9 but less than 10 |
36 | |
10 but less than 11 |
40 | |
11 but less than 12 |
44 | |
12 but less than 13 |
48 | |
13 but less than 14 |
52 | |
14 but less than 15 |
56 | |
15 but less than 16 |
60 | |
16 but less than 17 |
64 | |
17 but less than 18 |
68 | |
18 but less than 19 |
72 | |
19 but less than 20 |
76 | |
20 but less than 21 |
80 | |
21 but less than 22 |
84 | |
22 but less than 23 |
88 | |
23 but less than 24 |
92 | |
24 but less than 25 |
96 | |
25 or more |
100 |
Notwithstanding the above, upon a Change of Control the Accrual Percentage of a Participant who is employed by the Employer on the date of such Change will be 100%.
2
(b) ACTUARIAL EQUIVALENT means a benefit of equal present value to the benefit which otherwise would have been provided to the Participant, computed on the basis of mortality according to the 1984 Unisex Pension Mortality Table and an interest rate of 7.5% compounded annually.
(c) ACTUARY means the enrolled actuary selected by the Board.
(d) AVERAGE COMPENSATION means the Compensation of a Participant averaged over the thirty-six (36) consecutive calendar months within the last one hundred twenty (120) calendar months as an Employee which produces the highest average.
(e) BENEFICIARY means a person entitled to benefits under the provisions of the Plan, other than the Participant.
(f) BENEFITS COMMENCEMENT DATE means the first day of the month coincident with or next following the date payment of the Participants Post-2004 Benefit is to be made, as determined pursuant to his election or otherwise in accordance with the rules set forth in Article III below.
(g) BENEFIT PERCENTAGE means, for Participants who are members of the Executive Management Group, 75% and for all other Participants, 66%.
(h) BOARD OF DIRECTORS means the Board of Directors of the Employer.
(i) CHANGE OF CONTROL shall mean the occurrence of any one of the events defined in Schedule A.
(j) CODE means the Internal Revenue Code of 1986, as amended.
(k) COMMITTEE means the Plan Committee described in Article VII.
(l) COMPENSATION means the total W-2 earnings paid by the Employer to the Employee during a Plan Year, increased by the amount of any salary reduction contribution on behalf of the Employee by the Employer to a 401 (k) plan maintained by the Employer or to any cafeteria plan maintained by the Employer pursuant to Section 125 of the Code.
(m) DIRECTOR means a member of the Board of Directors.
(n) EARLY RETIREMENT AGE means the first day of the month after a Participant has attained age fifty-five (55) and completed five (5) or more Years of Plan Participation.
(o) EARLY RETIREMENT DATE means a Participants date of termination after attaining his Early Retirement Age, but prior to his Normal Retirement Date.
(p) EFFECTIVE DATE means January 1, 1984.
(q) EMPLOYEE means any person who is hired by the Employer.
3
(r) EMPLOYER means Century Bancorp, Inc., Century Bank & Trust Co., Century North Shore Bank & Trust Company, and the Bank of Massachusetts, all corporations organized and existing under laws of the Commonwealth of Massachusetts or its successor or successors.
(s) ERISA means the Employee Retirement Income Security Act of 1974.
(t) EXECUTIVE MANAGEMENT GROUP means a group of Employees consisting of those individuals designated on their initial participation in the Plan or thereafter as members of the Executive Management Group.
(u) NORMAL RETIREMENT DATE means the first day of the month coincident with or next following the Participants 65th birthday.
(v) PARTICIPANT means any eligible Employee of the Employer who has satisfied the requirements in Section 2.1.
(w) PENSION TRUST OFFSET means the monthly retirement benefit that would be payable to the Participant under the Pension Trust beginning on his Normal Retirement Date or Postponed Retirement Date, if applicable (both as defined in this Plan), under the 120 month term certain annuity form of payment under the Pension Trust.
In the event that payments under the Pension Trust actually begin on a date other than the Participants Normal Retirement Date or Postponed Retirement Date, if applicable (both as defined in this Plan), or are paid in a form other than the 120 months certain annuity, such retirement benefit shall be adjusted based on this Plans definition of Actuarial Equivalence.
(x) PENSION TRUST means The Century Bancorp Pension Trust, a pension plan qualified under Section 401 of the Code.
(y) PLAN means The Century Bancorp Supplemental Executive Retirement and Insurance Plan.
(z) PLAN YEAR means the 12-month period ending on September 30.
(aa) POST-2004 BENEFIT means any part of a Participants Normal Retirement Benefit, Early Retirement Benefit, or Deferred Vested Retirement Benefit, as applicable, under the Plan which is not part of the Participants Pre-2005 Benefit.
(bb) POST-2016 BENEFIT means any part of a Participants Normal Retirement Benefit, Early Retirement Benefit, or Deferred Vested Retirement Benefit, as applicable, under the Plan that exceeds the amount of such benefit determined as of December 31, 2016, based on the Participants Years of Plan Participation, Accrual Percentage, Benefit Percentage, Average Compensation and all other relevant factors as of December 31, 2016, and determined under the terms of the Plan as then in effect.
(cc) POSTPONED RETIREMENT DATE means the first day of any month after a Participants Normal Retirement Date and after his termination of employment.
4
(dd) PRE-2005 BENEFIT means a Participants Normal Retirement Benefit, Early Retirement Benefit, or Deferred Vested Retirement Benefit, as applicable, based on his Years of Plan Participation, Accrual Percentage and all other relevant factors as of December 31, 2004, and determined under the terms of the Plan adopted and in effect as of October 3, 2004, but only to the extent earned and vested as of December 31, 2004 within the meaning of Section 409A of the Code.
(ee) SENIOR MANAGEMENT GROUP means a group of Employees consisting of those individuals designated on their initial participation in the Plan or thereafter as members of the Senior Management Group.
(ff) SOCIAL SECURITY BENEFIT means an estimate made by the Actuary of the monthly primary old-age Social Security Benefit (under Title II of the federal Social Security Act) which would be payable commencing at Normal Retirement or a Postponed Retirement Date, if applicable, assuming the Participant has the number of covered employment years required to maximize his Social Security Benefit.
(gg) SEPARATION FROM SERVICE of a Participant means the Participants separation from service, as defined in Treas. Reg. Section 1.409A-1(h), from the Employer.
(hh) SPECIFIED EMPLOYEE means an officer or other employee of an Employer (or of any other corporation, or trade or business, required to be taken into consideration for this purpose under Section 409A or the Code) who is a specified employee within the meaning of Section 409A of the Code.
(ii) YEARS OF PLAN PARTICIPATION means 1/12 of the number of calendar months while an Employee is employed by the Employer and while he is designated as a Participant in this Plan. When this calculation results in a number of years plus a fraction of a year, if the fraction is 5/12 or less it shall be ignored, otherwise it will be considered the same as one full year. At the sole discretion of the Committee, a Participants Years of Plan Participation may include such additional number of Years as the Committee may elect.
(a) Where necessary or appropriate to the meaning hereof, the singular shall be deemed to include the plural, the plural to include the singular, the masculine to include the feminine, and the feminine to include the masculine.
(b) If any provision of the Plan or the application thereof to any circumstance or person is invalid, the remainder of the Plan and the application thereof to other circumstances or persons shall not be affected thereby.
(c) All headings contained herein are for convenience of reference only and shall not be construed as a part of this Plan, or have any effect upon the meaning of the provisions hereof.
(d) To the extent not preempted by federal law, the provisions of the Plan shall be construed, administered, and enforced under the laws of the Commonwealth of Massachusetts.
5
ARTICLE II
PARTICIPATION
The Participants in the Plan will be such management employees as may be selected from time to time by the Committee. Each Participant will be considered a member of the Senior Management Group for purposes of determining the Participants benefits unless the Committee expressly provides (on initial eligibility or thereafter) that he is to be a member of the Executive Management Group.
The Committee may terminate an Employees participation in the Plan (while he is still an Employee), but, subject to Section 8.3, no such action will reduce the Employers obligation to any Participant below the amount to which he would be entitled under the Plan as in effect immediately prior to such action if his employment then terminated.
ARTICLE III
ELIGIBILITY FOR BENEFITS
A Participant who terminates employment with the Employer after attaining his Normal Retirement Date, or after his Early Retirement Age but having elected to defer commencement of his benefit until his Normal Retirement Date, shall be eligible to receive the normal retirement benefit described in Section 4.1.
A Participant who has attained his Early Retirement Age shall be eligible to receive the early retirement benefit described in Section 4.2.
3.3 DEFERRED VESTED RETIREMENT
A Participant who has attained age forty (40) and has at least five (5) Years of Plan Participation whose employment with the Employer is terminated prior to attainment of his Normal Retirement Date shall, after attaining his Early Retirement Age, be eligible to receive the deferred vested retirement benefit described in Section 4.3.
(a) Payment of any Pre-2005 Benefit shall commence in accordance with the practices and procedures for the commencement of benefits adopted and in effect under the Plan as of October 3, 2004.
(b) Payment of any Post-2004 Benefit (other than that portion of the Post-2004 Benefit that is a Post-2016 Benefit) shall commence on the Participants Normal Retirement Date, regardless of the date of the Participants retirement or other termination of employment, except to the extent the Participant shall have timely and validly established another Benefits Commencement Date with respect to all or any part of such Post-2004 Benefit in accordance with the provisions of Section 3.5.
6
(c) Payment of any Post-2016 Benefit shall commence on the later of the Participants Normal Retirement Date and the first day of the month coinciding with or next following the date of the Participants Separation from Service, except to the extent the Participant shall have timely and validly established another Benefits Commencement Date with respect to his Post-2016 Benefit in accordance with the provisions of Section 3.5. Any election made by a Participant prior to January 1, 2017 to commence payment of his Post-2004 Benefit at a specified age between age fifty-five (55) and age sixty-five (65), regardless of whether the Participant has then incurred a Separation from Service, shall be applied, for purposes of determining the Benefits Commencement Date of his Post-2016 Benefit, as if he had elected to commence benefits at the later of the specified age and his Separation from Service.
(d) Notwithstanding anything in this Section 3.4, if any portion of a Participants Post-2004 Benefit is payable upon the Participants Separation from Service, and the Participant is a Specified Employee as of the date of his Separation from Service, all payments otherwise payable prior to the first day of the seventh month following the month in which his Separation from Service occurs shall be paid in a single sum on such first day (or the date of his death, if earlier).
3.5 ELECTIONS REGARDING POST-2004 BENEFITS
(a) A Participant may elect a Benefits Commencement Date with respect to his Post-2004 Benefits at any time within thirty (30) days after the date the Participant is first designated eligible to participate in the Plan, provided that such election is made at least 12 months in advance of the earliest date on which the Participant shall be entitled to a vested benefit under the Plan, in accordance with Treas. Reg. Section 1.409A-2(a)(5). Any elected Benefits Commencement Date may be
(i) | with respect to that portion of the Participants Post-2004 Benefit that is not a Post-2016 Benefit, (A) the date the Participant attains a specified age, not earlier than age fifty-five (55) and not later than age sixty-five (65), provided, however, that if the Participant elects a specified age before age sixty-five (65), in no event will his Benefits Commencement Date be prior to his completion of five (5) Years of Plan Participation; or (B) the later of the date the Participant attains a specified age (established in accordance with the rules in (A) above) and the date of his Separation from Service; and |
(ii) | with respect to that portion of the Post-2004 Benefit that is a Post-2016 Benefit, the later of the date the Participant attains a specified age (established in accordance with the rules in (i)(A) above) and the date of his Separation from Service. |
7
(b) A Participants Benefits Commencement Date for his Post-2004 Benefit, once established pursuant to an election under Section 3.5(a) or pursuant to the general rule under Section 3.4(b) or (c), is irrevocable and cannot be changed except as follows. A Participant may elect a different Benefits Commencement Date as to all of his Post-2004 Benefits otherwise due to him commencing on a particular Benefits Commencement Date provided either:
(i) | such election was made in a calendar year ending on or prior to December 31, 2008 and did not result in any payment otherwise due to be paid in the calendar year in which the election was made being paid instead after that year, or in any payment otherwise due to be paid in a calendar year subsequent to the year the election was made instead being paid in the calendar year the election was made, or |
(ii) | such election (1) does not take effect until at least twelve (12) months after the date made; (2) is made at least twelve (12) months prior to the Benefits Commencement Date previously established; and (3) results in a new Benefits Commencement Date which is at least five (5) years after the existing Benefits Commencement Date. |
ARTICLE IV
SUPPLEMENTAL RETIREMENT BENEFITS
4.1 NORMAL OR POSTPONED RETIREMENT BENEFITS
The monthly Normal Retirement Benefit of a Participant commencing on the Participants Normal Retirement Date or Postponed Retirement Date shall be the sum of (a) minus (b) minus (c), subject to a minimum benefit (d) below, then multiplied by his Accrual Percentage and then divided by twelve (12):
(a) His Benefit Percentage multiplied by his Average Compensation;
(b) His Pension Trust Offset;
(c) His Social Security Offset, which is equal to 100% of the Social Security Benefit;
(d) $2,400
The monthly Retirement Benefit for Mr. Marshall M. Sloane has been calculated as of January 1, 2001 based on his Accrual Percentage as of January 1, 2001, his Pension Trust offset as of January 1, 2001, and his Social Security Offset as of January 1, 2001, and will not change after January 1, 2001.
8
4.2 EARLY RETIREMENT BENEFITS
The monthly early retirement benefit of a Participant who has commenced receiving payments prior to January 1, 1999, shall be the benefit calculated in accordance with Section 4.1, provided, however, that to the extent payment begins prior to the Participants Normal Retirement Date, the amount thereof shall be reduced according to the following schedule:
Age of Commencement |
Early Retirement Percentage |
|
55 | 35% | |
56 | 40 | |
57 | 45 | |
58 | 50 | |
59 | 55 | |
60 | 60 | |
61 | 68 | |
62 | 76 | |
63 | 84 | |
64 | 92 | |
65 | 100 |
The above factors will be interpolated to the nearest month.
The monthly Early Retirement Benefit of a Participant who has commenced receiving payments on or after January 1, 1999, other than any member of the Executive Management Group who has commenced receiving payments on or after January 1, 2002, shall be the benefit calculated in accordance with Section 4.1, provided, however, that to the extent payment commences prior to the Participants Normal Retirement Date, the amount thereof shall be reduced 5/9% for each of the first sixty (60) months that the commencement of payments precedes the Participants Normal Retirement Date and 5/18% for each of the next sixty (60) months.
The monthly Early Retirement Benefit of a Participant in the Executive Management Group, who has commenced receiving payments on or after January 1, 2002, shall be the benefit calculated in accordance with Section 4.1, provided, however, that to the extent payment commences prior to the Participants 62nd birthday, the amount thereof shall be reduced 5/9% for each of the first twenty-four (24) months that the commencement of payment precedes the Participants 62nd birthday and 5/18% for each for the next sixty (60) months.
4.3 DEFERRED VESTED RETIREMENT BENEFITS
The monthly deferred vested benefit of a Participant shall be the benefit calculated in accordance with Section 4.1, provided, however, that to the extent payment begins prior to the Participants Normal Retirement Date, the amounts thereof shall be reduced as in Section 4.2 above.
4.4 NO ACCRUAL AFTER COMMENCEMENT
No Participant shall accrue additional benefits under the Plan after any part of his benefits shall commence to be paid.
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ARTICLE V
PAYMENT OF BENEFITS
Retirement benefits shall be paid to the Participant monthly for the life of the Participant, but in any event for a minimum of one hundred and twenty (120) months of payments.
If the Participant dies prior to the expiration of such one hundred and twenty (120) month period, his Beneficiary will receive a monthly payment for the remainder of the one hundred and twenty (120) month period equal to the monthly amount payable to the Participant prior to his death. A Participant may designate a Beneficiary entitled to receive benefits under this Section for the balance of the one hundred and twenty (120) month period in writing on a form satisfactory to the Employer. If, after the death of a Participant during the one hundred and twenty (120) month period, there is no designated Beneficiary, an amount shall be payable to the Participants estate as follows: (a) the present value of the Pre-2005 Benefits remaining to be paid during the one hundred and twenty (120) month period shall be calculated on the basis of the Plans Actuarial Equivalent assumptions and shall be paid as soon as practicable to the Participants estate, and (b) the Participants estate will receive a monthly payment for the remainder of the one hundred and twenty (120) month period equal to the monthly amount of Post-2004 Benefits payable to the Participant prior to his death.
Subject to such rules and regulations as the Committee may establish from time to time, a Participant eligible for a Normal, Early, or Deferred Vested Retirement Benefit under the Plan may, in lieu of the Normal Form of Retirement described in Section 5.1, elect to receive his benefit in the form of one of the following optional forms of payment:
(a) JOINT AND SURVIVOR ANNUITIES
A Participant may elect a joint and survivor annuity which shall provide that either one-fourth (1/4), one-half (1/2), two-thirds (2/3), three-fourths (3/4), or all of the monthly joint and survivor benefit payable to the Participant shall continue to be paid following his death to his designated joint annuitant for the duration of such joint annuitants life. A joint and survivor annuity shall be the Actuarial Equivalent of the Participants normal form of payment described in Section 5.1. If the joint annuitant predeceases the Participant after the benefit has commenced, the Participant shall continue to receive the same amount as was being paid during their joint lives.
(b) LIFE ANNUITY AND TERM CERTAIN FORMS OF PAYMENT
A Participant may elect, in lieu of any other retirement benefit under the Plan, to receive his benefit as a life annuity or as a five (5) or fifteen (15) years certain annuity (a Term Certain Annuity.)
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Any such life annuity or Term Certain Annuity shall be the Actuarial Equivalent of the Normal Form of Payment in Section 5.1 to which the Participant would have been entitled. A Term Certain Annuity shall provide a monthly pension for the life of the Participant with monthly payments guaranteed for 60 or 180 months. If the retired Participant begins to receive payments but does not live to receive 60 or 180 payments, then such payment shall continue to his designated Beneficiary (or to his estate if the Beneficiary is deceased) until 60 or 180 payments have been made.
The Committee, at its discretion, may adjust the frequency of payment of Retirement Benefits from monthly payment, with such adjustment being the Actuarial Equivalent of the monthly Retirement Benefit, provided that any such adjustment is made before any annuity payment has been made under the Plan, and provided further that the adjusted payment is made not less frequently than annually.
The Employer shall not be required to set aside or segregate any assets of any kind to meet its obligations hereunder. A Participant shall have no right on account of this Plan in or to any specific assets of the Employer (other than rights with respect to life insurance policies purchased under Article VI). Any right to any payment that a Participant may have on account of the Plan shall be those of a general, unsecured creditor of the Employer.
ARTICLE VI
SURVIVOR BENEFITS
No benefits are payable upon the death of a Participant under this Plan, except as follows:
6.1 DEATH AFTER COMMENCEMENT OF BENEFITS
In the case of a Participant who dies after the commencement of his retirement benefits under the Plan, whether or not he is still employed by the Employer at the time of his death, payment of such benefits shall continue after the Participants death, if at all, only to the extent provided under the form of retirement benefit elected under Article V hereof.
6.2 DEATH AFTER TERMINATION OF EMPLOYMENT AND BEFORE COMMENCEMENT OF BENEFITS
If a Participant dies after terminating employment with the Employer but before the commencement of his retirement benefits under the Plan, then:
(a) if the Participant is survived by his spouse, and has attained age fifty-five (55) and completed five (5) or more Years of Plan Participation, or has attained his Normal Retirement Date, then such spouse shall be entitled to a straight life annuity payable for his life commencing with the month following the Participants death, in a monthly amount equal to the Actuarial Equivalent of the monthly straight life annuity which would have been payable to such spouse under the following conditions:
(i) | the Participant had survived to the date on which he would otherwise have commenced receipt of his retirement benefits under the Plan; |
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(ii) | at that time, the Participant had commenced receipt of his retirement benefits under the Plan under an optional form of benefit providing a reduced monthly benefit to the Participant and, after his death, 50% of such reduced monthly benefit to the spouse for life; and |
(iii) | the Participant had then died; or |
(b) if the Participant is not survived by a spouse, and has attained age fifty-five (55) and completed five (5) or more Years of Plan Participation, or has attained his Normal Retirement Date, then the Participants Beneficiary shall be entitled to a straight life annuity payable for his life commencing with the month following the Participants death, in a monthly amount equal to the Actuarial Equivalent of the 120 months of retirement payments which would have been payable to such Beneficiary (or the Participants estate) under the following conditions:
(i) | the Participant had survived to the date on which he would otherwise have commenced receipt of his retirement benefits under the Plan; |
(ii) | at that time, the Participant had commenced receipt of his retirement benefits under the Plan under the normal form of benefit described in Section 5.1; and |
(iii) | the Participant had then died. |
For the avoidance of doubt, if a Participant dies after terminating employment with the Employer but before the commencement of his retirement benefits under the Plan, and at the time of his death has not either attained age fifty-five (55) and completed five (5) or more Years of Plan Participation, or attained his Normal Retirement Date, then no survivor benefit shall be payable to the Participants Beneficiary or estate under the Plan, and no death benefit shall be payable to the Participants Beneficiary or estate pursuant to Section 6.3 of the Plan.
6.3 DEATH BENEFIT PLAN DEATH PRIOR TO TERMINATION OF EMPLOYMENT AND BEFORE COMMENCEMENT OF BENEFITS
If a Participant dies while employed by the Employer and before the commencement of his retirement benefits under the Plan, the Bank will pay to the Participants Beneficiary, as a death benefit, an amount equal to the sum of:
(a) in the case of a Participant in the Executive Management Group, five (5) times the annual rate of base salary being paid to the Participant at the time of his death; or
(b) in the case of a Participant in the Senior Management Group, four (4) times the annual rate of base salary being paid to the Participant at the time of his death; plus
12
(c) in case of (a) or (b), an additional amount calculated to reimburse the Beneficiary for income taxes payable upon this benefit, determined based upon the highest marginal federal, state and local income tax rates applicable to the Participant in the jurisdiction of the Participants primary residence as of his date of death.
The death benefit shall be payable to the Beneficiary in a single lump sum; provided, however, that, if the Participant so elects in such manner as the Committee shall determine, the death benefit shall be payable to the Beneficiary in five annual installments, with the first installment paid in the year following the Participants death.
The benefits provided under this Section 6.3 are intended to constitute death benefits, within the meaning of Treas. Reg. Section 1.409A-1(a)(5) and Treas. Reg. Section 31.3121(v)(2)-1(b)(4)(iv)(C), and the portion of the Plan providing such death benefits is intended to constitute a separate death benefits plan for purposes of Section 409A of the Code. The death benefits provided pursuant to this Section 6.3 were previously provided through the Century Bank Survivor Benefit Plan, adopted effective June 1, 2011.
A Participant may designate one or more Beneficiaries entitled to receive benefits under this Article VI in the event of his death, and, in the case of the death benefit provided pursuant to Section 6.3, the form (lump sum or five annual installments) in which such death benefit shall be payable, in a form and manner satisfactory to the Committee.
ARTICLE VII
PLAN ADMINISTRATION
The Plan shall be administered by a Plan Committee.
7.2 COMPOSITION OF THE COMMITTEE
The Committee shall be composed of three or more members, who shall be Employees or Directors of the Employer. Any member of the Committee may be removed by the Employer at any time or may resign at any time by submitting his resignation in writing to the Employer. A new Committee member shall be appointed as soon as possible in the event that a Committee member is removed or resigns. Any person so appointed shall signify his acceptance by filing a written acceptance with the Employer. No member of the Committee who is a Participant in this Plan may vote or otherwise participate in any decision or act with respect to a matter relating solely to himself (or to himself and any Beneficiary).
13
7.3 POWERS AND DUTIES OF COMMITTEE
The Committee, acting in its sole discretion, will have authority to interpret the provisions of the Plan and decide all questions and settle all disputes which may arise in connection with the Plan and may establish its own operating and administrative rules and procedures in connection therewith. All interpretations, decisions, and determinations made by the Committee will be binding on all persons concerned, subject to the following claims and review procedures:
(a) Claims for participation in or distribution under the Plan shall be made in writing to the Committee. The Committee shall review such claim within ninety (90) days of its receipt of the same and, if any claim so made is denied in whole or in part, shall furnish the claimant, within such ninety (90) day period, with a written notice, prepared in a manner calculated to be understood by the claimant (i) setting forth the reasons for the denial, (ii) making reference to pertinent Plan provisions, (iii) describing any additional material or information from the claimant which is necessary and why, and (iv) explaining the claim review procedure set forth in Section 7.3(b) below, including a statement of the claimants right to bring a civil action under Section 502(a) of ERISA following an adverse determination on review.
(b) Within sixty (60) days after the denial of any claim for participation or distribution under the Plan, the claimant may request in writing a review of the denial by the Committee. Any claimant seeking review hereunder shall be entitled to examine all pertinent documents and to submit issues and comments in writing. The Committee shall render a decision on review of a claim not later than sixty (60) days after receipt of a request for review hereunder; provided , however , that if the Committee determines that special circumstances, such as the need for a hearing, require an extension, its decision on review shall be rendered within one hundred twenty (120) days after receipt of the request for review (but in that event the Committee shall notify the claimant of the expected date of its determination and the reason for the extension within the original sixty (60) day period). The Committees decision on review shall be in writing and shall state the reason for the decision, referring to the Plan provisions upon which it is based, and shall advise the claimant that he or she is entitled to receive upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimants claim and to bring an action under Section 502(a) of ERISA.
(c) No legal proceeding may be commenced by any person having or claiming any interest in or entitlement under this Plan until the claims and claims review procedures of this Section have been complied with.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
The Plan will not be deemed to constitute a contract of employment between the Employer and any Participant, or to be consideration for the employment of any Participant. The Plan will not be deemed to give any Participant the right to be retained in the employ of the Employer or to affect the Employees ability to discharge any Participant at any time.
14
The interest hereunder of any Participant or Beneficiary will not be alienable by the Participant or Beneficiary by assignment or any other method and will not be subject to be taken by his creditors to any process whatsoever, and any attempt to cause such interest to be so subjected will not be recognized, except to such extent as may be required by law.
The obligations of the Employer hereunder shall be binding on its successors or assigns, whether by merger, consolidation, or acquisition of all or substantially all of its business or assets.
8.3 FORFEITURE IN THE EVENT OF DISCHARGE FOR CAUSE
Notwithstanding any provision in this Plan to the contrary, no Retirement Benefits will be payable hereunder with respect to any Participant who is discharged from the Employer for cause. For purposes of this Plan only the following shall constitute cause:
(a) the Participants falsification of accounts of the Employer, embezzlement of funds from the Employer, or commission of any act constituting gross dereliction of duties; or
(b) the conviction of the Participant for, or entry of a pleading of guilty or nolo contendere by the Participant to, any crime involving moral turpitude or any felony.
The Plan (including the attached Schedule A) may be altered, amended, or revoked in writing by the Employer at any time, but no such action may reduce the Employers obligation with respect to a Participant who is then still employed by the Employer below the amount to which he would be entitled under the Plan as in effect immediately prior to such action if his employment then terminated, and no such action may reduce the Employers obligation with respect to a Participant whose employment with Employer has already then terminated. Notwithstanding the foregoing, any provision that would cause the Plan to fail to satisfy Section 409A of the Code, shall have no force and effect until amended to comply with Section 409A of the Code and any such amendment may be retroactive to the extent permitted by Section 409A of the Code and may be made by the Committee without the consent of Participants affected thereby.
IN WITNESS WHEREOF, the Employer, by its duly authorized officer, has executed this amended and restated Plan, this first day of , 2017.
CENTURY BANCORP, INC. |
By: |
|
15
Schedule A
CHANGE OF CONTROL DEFINITION
Change of Control means the occurrence of any one of the following events:
(a) there occurs a change of control of Century Bancorp, Inc. of a nature that would be required to be reported in response to Item 1(a) of the Current Report on Form 8-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 or in any other filing under the Securities Exchange Act of 1934; or
(b) any Person (other than family members of Marshall M. Sloane) becomes the owner of 25% or more of the Employers Class B Common Stock and thereafter individuals who were not directors of the Employer prior to the date such Person became a 25% owner are elected as directors pursuant to an arrangement or understanding with, or upon the request of, or nomination by, such Person and constitute at least 25% of the Board of Directors; or
(c) there occurs any solicitation or series of solicitations of proxies by or on behalf of any Person other than the Board of Directors and thereafter individuals who were not directors of the Employer prior to the commencement of such solicitation, or series of solicitations, are elected as directors pursuant to an arrangement or understanding with, or upon the request of or nomination by, such Person and constitute at least 25% of the Board of Directors; or
(d) the Employer executes an agreement of acquisition, merger, or consolidation which contemplates that (i) after the effective date provided for in the agreement all or substantially all of the business and/or assets of the Employer shall be owned, leased, or otherwise controlled by another corporation or entity, and (ii) individuals who are directors of the Employer when such agreement is executed shall not constitute a majority of the board of directors of the survivor or successor company immediately after the effective date provided for in such agreement; provided, however, for purposes of this paragraph (d) that if such agreement requires as a condition precedent approval by the Employers shareholders of the agreement or transaction, a Change of Control shall not be deemed to have taken place unless and until such approval is secured (but upon any such approval a Change of Control shall be deemed to have occurred on the date of execution of such agreement).
For purposes of the above, the following definitions apply:
Common Stock shall mean the then outstanding Common Stock of the Employer plus, for purposes of determining the stock ownership of any Person, the number of unissued shares of Common Stock which such Person has the right to acquire (whether such right is exercisable immediately or only after the passage of time) upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise. Notwithstanding the foregoing, the term Common Stock shall not include shares of preferred stock or convertible debt or options or warrants to acquire shares of Common Stock (including any shares of Common Stock issued or issuable upon the conversion or exercise thereof) to the extent that the Board of Directors shall expressly so determine in any future transaction or transactions.
A Person shall be deemed to be the owner of any Common Stock:
(i) of which such Person would be beneficial owner as such term is defined in Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934; or
(ii) of which such Person would be the beneficial owner as such term is defined under Section 16 of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission promulgated thereunder; or
(iii) which such Person or any of its Affiliates or Associates (as such terms are defined in Rule 12B-2 promulgated by the Securities Exchange Commission under the Securities and Exchange Act of 1934) has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant in any agreement, arrangement, or understanding, or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise.
Person shall have the meaning used in Section 13(d) of the Securities Exchange Act of 1934.
Exhibit 21
Subsidiaries of the Registrant:
1) | Century Bank and Trust Company |
2) | Century Bancorp Capital Trust II |
Exhibit 23.1 |
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02111
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Century Bancorp, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-118208, 333-58196, and 333-29987) on Form S-8 of Century Bancorp, Inc. of our reports dated March 15, 2018, with respect to the consolidated balance sheets of Century Bancorp, Inc. as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the effectiveness of internal control over financial reporting as of December 31, 2017, which reports appear in the December 31, 2017 annual report on Form 10-K of Century Bancorp, Inc.
/s/ KPMG
Boston, Massachusetts
March 15, 2018
KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(KPMG International), a Swiss entity.
Exhibit 31.1
I, Barry R. Sloane, certify that:
1. I have reviewed this annual report on Form 10-K of Century Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and;
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors;
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting.
Date: March 15, 2018 | /s/ Barry R. Sloane | |||
Barry R. Sloane | ||||
President and Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
I, William P. Hornby, certify that:
1. I have reviewed this annual report on Form 10-K of Century Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this annual report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and;
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors;
(a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls over financial reporting.
Date: March 15, 2018 | /s/ William P. Hornby | |||
William P. Hornby | ||||
Chief Financial Officer and Treasurer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Century Bancorp, Inc. (the Company) for the year ended December 31, 2017, as filed with the Securities and Exchange Commission, the undersigned, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ Barry R. Sloane |
Barry R. Sloane |
President and Chief Executive Officer |
Date: March 15, 2018 |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Century Bancorp, Inc. (the Company) for the year ended December 31, 2017, as filed with the Securities and Exchange Commission, the undersigned, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ William P. Hornby |
William P. Hornby |
Chief Financial Officer and Treasurer |
Date: March 15, 2018 |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.