2016 Annual Report
Outperformance
A year of outdoing ourselves.
2 0 1 6 A N N U A L R E P O R T
Chairman’s Message
I turned 90 years young in 2016 and continued to accomplish many goals, including publishing my autobiography
titled “Character Counts.” I used the book to reflect on my past and share life lessons with my family, associates
and friends. I’ve seen the business of banking transform over the course of my career. Working in my father’s
furniture store taught me that my generation, the “Greatest Generation,” made their decisions based on service,
honesty and convenience. If you provided one family member with great service they referred others to our store.
My generation wanted this same convenience and service with their banking too.
When I founded Century, banks were confined to a single community. I recognized the need for a state-chartered
commercial bank in Somerville but I didn’t want to limit my customer base to a single community. I knew a major
highway, Route 93, was being planned that would funnel traffic from the communities north of Boston onto
Mystic Avenue in Somerville. I knew exactly where our first branch needed to be located for optimal visibility.
During my generation, the laws changed to enable banks to expand from cities to counties, to the entire state
and then nationally. When I opened our Malden branch, I introduced free checking and numerous other products
that appealed to the public. We also expanded our operating hours to include Saturday. Customers welcomed
these changes, but other local bankers were furious with me because they were used to closing on Wednesday
afternoons and Saturdays. They felt I was being disruptive by focusing on what the customers desired. None of
these banks are in existence today; they have all closed or merged.
Today’s generation banks from anywhere, at any time. Weekly trips to the bank to make deposits are no
longer routine – deposits are made by taking pictures from mobile phones. Century Bank’s adaption of new
technology has enabled us to compete with the largest international banks. Even with all of these changes,
brick-and-mortar branches still matter. Technology and generational tastes change but the physical branch still
remains an important aspect of where to bank. We’ve responded by shrinking the branch size and expanding
our staff skills to provide the full breath of banking services. Brands that once were the gold standard of retailing,
like Sears, are struggling to find their place today. Retailers have been slow to evolve their model to compete
with online behemoths like Amazon. Generations change and business must evolve with them.
No matter what happens, banking remains a business of trust. Our clients and communities trust us with their
homes, life savings and businesses. They expect us to do the right thing. Yet we continue to read about bankers
who take advantage of this trust for their own gain. I was disheartened, but not surprised, to recently learn
another giant bank took advantage of their clients’ trust by charging them fees for products and services they
never requested. The fraud was ingrained in their organizational culture. Once discovered by the regulators they
paid big fines but I have my doubts these indiscretions won’t reoccur even with the new leadership. Century’s
culture would never tolerate this behavior which is why I’m proud to partner with the more than 400 Associates
in the business I founded almost 50 years ago. My son and daughter, Barry and Linda, are the leaders for the
next generation and will carry on the principles my father taught me. We are the largest family-run bank in
New England, a rare characteristic in today’s financial industry. I am confident we will continue to deliver
outperformance in our financial growth and risk decisions. I’m still excited and fascinated by the business of
banking and intend to actively lead Century Bank as long as my health allows. I look forward to prospering
together in 2017 and the years ahead. I thank you for your continued support and loyalty.
Our Family’s Bank. And Yours.
Marshall M. Sloane, Founder and Chairman
2 0 1 6 A N N U A L R E P O R T
President’s Message
Dear Fellow Shareholders:
2016 is the seventh consecutive record year for Century Bank. Century has been profitable in virtually every one of
its 48 years, and has paid an uninterrupted dividend for 40 years. We continue to outperform in nearly all matters
financial and strategic. Capital, assets, deposits, earnings, and loans all again reached record year-end levels. We
wish to make particular note of our loan growth in 2016, $192 million, or 11%, to a total of $1.9 billion. We have
achieved consistent and meaningful loan growth, without taking any speculative real estate project risk, a very
different strategy than virtually all of our peers. We ended 2016 at $4.5 billion in assets, growth of 13% and
$24.5 million of annual earnings, an increase of 6.6%. Our stock rose an astounding 38% to $60 at year-end;
a three-year cumulative total return of 87% and a five-year cumulative total return of 127%. All three principal
business units performed extremely well in 2016.
It is no exaggeration to say that the regulatory, fiscal, and macroeconomic environment all changed on
November 8. The post-election world, despite enormous controversy, appears to be constructive for our future.
Our Family’s Bank. And Yours.
Our Founder and Chairman, Marshall M. Sloane, is in his 91st year, making him one of the 3 most senior working
bank Chairmen in the country. He comes to work every day, adding his unparalleled market knowledge and industry
experience to our decision making process.
Our slogan translates into our devotion to treat our clients as we, as a family and a business, would wish to be
treated. It means fair products, rates, and fees, quick credit decisions and closings, transparency of process, and
respect for the continuity and loyalty of our clients. Yet we also appreciate the frailty of life and business conditions,
and try to support our clients through those inevitable undulations.
Let’s examine the multiple elements of Century’s outperformance that have contributed to our success.
Pictured from left: Founder & Chairman Marshall M. Sloane; Executive Vice President Linda Sloane Kay; and President & CEO Barry R. Sloane
2 0 1 6 A N N U A L R E P O R T
Total Assets (in thousands)
6
3
0
,
4
2
6
,
3
$
1
4
4
,
7
4
9
,
3
$
8
0
6
,
2
6
4
,
4
$
‘14
‘15
‘16
Earnings per Class A share, diluted
3
9
.
3
$
3
1
.
4
$
1
4
.
4
$
‘14
‘15
‘16
Net Income (in thousands)
0
6
8
,
1
2
$
1
2
0
,
3
2
$
4
3
5
,
4
2
$
‘14
‘15
‘16
Outperforming Through Centralized Hands on Management
Banking is a business of temperament and daily routine. We are steadfast in our
centralized control and transparency of management. Our Loan Committee is a
weekly institution that approves in open forum every loan over $500,000.
So-called Deal of the Day meets almost every afternoon to approve all other
loans and lines of credit. I participate in virtually every one. It is a level of
centralized credit approval that ensures we know the risks we take, makes sure
we reward customer loyalty, and connects us to our clients and communities.
Our Management Committee is composed of the 11 most senior sector
executives at Century. This bi-weekly, half-day, meeting follows an agenda that
covers officer hirings, contracts, leases, audits, marketing campaigns,
significant complaints, policy changes, donations, and pipelines of all new
business. MANCOM, as we call it, sets our cultural tone of centralized, yet
participatory, management engagement. Opinions and dialogue are encouraged;
the wisdom of our collective executive team is shared. All have a stake in
decisions made. It works.
Outperforming in Consistency of Net Earnings Growth
and Return on Equity
Net income grew by 6.6% to a record $24.5 million, or $4.41 per Class A share
diluted, for the year ended December 31, 2016, as compared to net income of
$23.0 million, or $4.13 per Class A share diluted for 2015. Century’s return on
average equity (ROE) was 10.80%, for 2016, as compared to 2015’s 11.26%.
Our ROE remains within the top 15% of our regional peer group. The ROE is the
primary building block of our financial goal setting. It reflects our priority to grow
shareholder value as the key driver of our strategic plan, our annual budget, and
our tactical decisions. We can’t control the equity markets, but we can have a
high level of confidence that if we continue to produce a double digit ROE, the
share price will follow over time. It is why we believe Standard and Poor’s
continues for the second year to rate Century’s shares an “A” and a “Buy.”
In addition, our efficiency ratio of overhead to revenue, the key metric of
comparative non-interest expense decreased (favorable) from 64% in 2015 to
63% in 2016. We watch our expenses carefully.
2 0 1 6 A N N U A L R E P O R T
38%
Increase in Stock Price
Outperforming Results Yield
Significant Asset Growth
Outperforming Supports
Capital Adequacy
Total equity was $240.0 million on
December 31, 2016, an increase
of $25.5 million or 11.9% from
$214.5 million on December 31,
2015. Book value per share
increased to $43.11 at December 31,
2016, up by $4.58 from $38.53
at December 31, 2015. Century is
“well capitalized” by all regulatory
standards, and we have passed all
“Basel III” requirements through
organic capital generation from
earnings.
Total assets grew 13% to a record of
$4.5 billion on December 31, 2016,
up from $3.9 billion on December
31, 2015, an increase of $515
million. We experienced significant
growth in 2016 for all three of
our business lines: consumer,
business, and institutional
services. Our depositor confidence is
pronounced and predicated on our
consistent growth of earnings and
assets. We are proud to have dozens
of depositors who each routinely
keep tens of millions at Century with
confidence in our high performing
earnings and asset growth. Being
one of the nine S&P “A” rated banks
in America, and one of only two in
Massachusetts, is a strong external
contributing confidence factor.
Pictured from left: Chief Financial Officer & Treasurer
William P. Hornby; Executive Vice President Paul A.
Evangelista; Executive Vice President David B. Woonton;
and Executive Vice President Brian J. Feeney
2 0 1 6 A N N U A L R E P O R T
Annual Priesthood Celebration
Pictured from left: Bradford J. Buckley, SVP, Century Bank; James M. Flynn, Jr., SVP, Century Bank; Barry R. Sloane; Cardinal Sean P. O’Malley;
Reverend J. Bryan Hehir; Marshall M. Sloane; Gerald S. Algere, SVP, Century Bank; David B. Woonton, EVP, Century Bank; Linda Sloane Kay;
Most Reverend Peter J. Uglietto, Vicar General; Karen Woonton; and Peter R. Castiglia, SVP, Century Bank.
$1.92
Billion in Total Loans
Outperforming Grows
Our Loan Portfolio
Our unique loan portfolio strategy
continues to work really well. Total
loans grew by $192 million or 11%
to a record $1.92 billion on December
31, 2016; our largest loan portfolio
ever, and a loan to deposit ratio of
53%. Non-performing assets fell
again from the previous year to $1.1
million, down from $2.3 million, a
continued minimal number for a
portfolio of our size. The education
and healthcare sectors anchor our
loan growth, increasing some 10%
as 2016 saw many quality not-for-
profit institutions expanding and
continuing to refinance debt with
simpler and less expensive “direct
purchase” loan placements. We are,
by any standard, one of the leading
experts in tax-exempt financing in
New England.
We believe the magnetism and
quality of Greater Boston’s colleges
and universities validates our
decade-long strategic conclusion
that education and healthcare were
and are the future of our region.
Our calling officers are seeking
new middle market business
prospects every day. We combine
expert market knowledge with
extraordinary product expertise,
leading to some of the longest
duration satisfied relationships in
commercial banking. The process
goes on, every day, pushing up our
market share, but it’s not easy as
many of our peers have lower
underwriting standards than we
do. The middle business market
is an exceptionally competitive
environment.
Loan quality is religion to us;
our portfolio continues to be well-
diversified with emphasis on quality
underwriting and effective ongoing
monitoring of every loan.
2016 was a productive year in which
we closed $93 million in residential
first mortgages, and $148 million in
home equity loans. We extended
188 energy conservation loans
through the Mass Save loan program,
which helped us do our part for
conservation while originating many
new long term relationships.
Beth Israel Deaconess Medical Center Ribbon Cutting
Pictured from left: Jayne Carvelli-Sheehan, SVP, BIDMC; Doug Karp, EVP, New England Development;
The Honorable Setti Warren, Mayor of Newton; Kevin Tabb, M.D.; Walter Armstrong, SVP, BIDMC;
and Linda Sloane Kay
2 0 1 6 A N N U A L R E P O R T
Outperformance in Our Branch System
In 2016 we decided to relocate our “downtown” Wellesley branch to 258
Washington Street in Wellesley Hills at Route 9. It is an improved location with
reserved parking in front, and we opened in December 2016. It has already met
with a warm reception from the community and deposits have grown. We will be
very discerning in the search for branch #28. We are on the lookout for further
high visibility market-extending locations, small size and manageable cost is
paramount.
We approved in 2016 a regionally managed branch system, dividing by geography,
and placing supervision and mentoring much closer to the line. It worked
skillfully in 2016 along with our superb staff, as branch deposits grew by 20%.
Outperformance Fostered Record Growth in Institutional Services
The Institutional Services Group, which includes our government, cash management,
and not-for-profit banking teams, had another record year of client growth. Our
share of government banking deposits is now the highest among Massachusetts
chartered banks, and we have expanded our client set significantly in Rhode
Island and New Hampshire.
We processed over 37 million check and payment items in 2016, with exceptional
quality control and customer service. The lockbox function remains a time tested
magnet for corporate and institutional clients. We are proud of the most stable
operational management team in the industry, combining an advanced technology
platform with live and experienced customer service personnel.
Let me quote one truly satisfied long-duration government client who wrote to
us, “Providing quality customer service has become a lost art as companies
today are strictly profit driven. There is no business that we are affiliated with
that sets a higher standard than Century Bank…it remains a first class
organization in every respect.” I truly could not have said it any better. We will do
our utmost to insure it is always true.
Beth Israel Deaconess Medical Center Ribbon Cutting
Wellesley Branch Grand Opening Ribbon Cutting
Pictured from left: Barbara J. Sloane; State Senator Richard Ross; Jack Morgan, Wellesley Board of Selectman; State Representative
Alice Peisch; Linda Sloane Kay; Marshall M. Sloane; Jonathan Kay; Kerry Healey, President of Babson College; Candace Lapidus Sloane, M.D.,
Chair of the Board of Registration in Medicine; Barry R. Sloane; Russell B. Higley, Esq., Century Bank Board Member; Joseph J. Senna, Esq.,
Century Bank Board Member; and George R. Baldwin, Century Bank Board Member.
2 0 1 6 A N N U A L R E P O R T
A
S&P Quality Ranking
Senior Vice Presidents
Pictured from left: Yasmin D. Whipple;
Kenneth A. Samuelian; William J. Gambon Jr.;
Brenda C. Kerr; Janice A. Brandano;
Shipley C. Mason; Thomas E. Piemontese;
Gerald S. Algere; Bradford J. Buckley;
Anthony C. LaRosa; Richard L. Billig;
Jason J. Melius; Christine D. Scarafoni;
Timothy L. Glynn; Deborah R. Rush;
Peter R. Castiglia; Susan B. Delahunt;
and James M. Flynn, Jr.
Outperformance in Wealth Management
2016 was the second full year of our rechristened wealth management function.
Our assets under management grew 31.6% to over $78 million in 2016. Our
wealth management business is a great opportunity to serve the generational
transition challenges of our private clients while providing our non-profit clients
an institutional-quality offering that embraces industry best practices. In 2016
we also migrated to a much enhanced custodial and trading platform that
improves reporting and reduces client expenses.
Outperformance in Branding
It’s easy to be different in this realm as there is no other family managed and
controlled bank of our size in New England. Our advertising, in print and on
radio, promotes our consistent message of local family control, permanence,
approachability, and personal service. Dad, Linda, and I keep taking the time to
personally sign each welcome note thanking all new clients of Century. This level
of personal touch is unique from all others in the industry.
Outperformance in Information Systems
We pride ourselves on a technology platform of redundancy and expertise that
our clients can rely on for financial inquiry, transactions, and high quality service.
We are proud to say that Information Systems met all of its operational and
service goals in 2016. We are constantly monitoring our systems reliability, and
when customers encounter problems at night or on weekends we’re always
reachable. Even New Year’s Eve when a client with a withdrawal problem
reached me at 1 AM, we took action to rectify the issue within an hour.
We are forever vigilant in the daily battle against cybercrime. It is the new
“bank robbery” risk. We employ the most sophisticated tools and consultants
available to reduce our risks of fraud.
2 0 1 6 A N N U A L R E P O R T
Over
400
Century Bank Associates
Outperformance in Commitment
to the Community
We are focused on our social
responsibility to our home
communities. Led by our imperative
for locally controlled enterprise,
community development, and
relationship based philanthropy,
we live our social mission every
day. We support the Community
Reinvestment Act function with
staff, resources, and management
commitment. We are utilizing these
resources to better serve our minority
and lower income communities
with home ownership opportunities
and access to traditional banking
services. We have refreshed our
First Time Home Buyer offering, and
are very proud that we are the lead
lender to a new affordable housing
project in Somerville of 25 units to
be occupied in 2018.
Outperformance of People
and Our Values
We can’t say enough about the
commitment and capability of our
over 400 Century Associates. When
bad weather, family calamity, or
industry changes bring challenges,
our colleagues faultlessly respond
with time, ability and ingenuity. So
many of our colleagues have worked
together for decades, a rare
condition in our industry that makes
our teamwork superb. Most of the
achievements described above
are the result of the talent and
resourcefulness of the Century team.
Finally, we see so clearly our family
and corporate values of industry,
fairness, and community. We
certainly hope in 2017 that the
divisions in our society will mend,
and all Americans will focus on the
elements of our commonality, rather
than our differences.
Thank you to our shareholders, our
clients, our associates, and our
communities, for their confidence
and relationships. We will endeavor
to make 2017 another year of
outperformance through our
diligence and resourcefulness.
Gratefully,
Barry R. Sloane
President and CEO
2016 This year, we continued to invest in our communities, supporting 278 organizations.
2020 Women on Boards
ACT Lawrence
Action for Boston Community Development, Inc.
Adenoid Cystic Carcinoma Research Foundation
AFSCME Council 93
American Cancer Society
American Foundation for Suicide Prevention
American Jewish Committee
Andover Business Community Association
Andover Coalition for Education
Andover Rotary Club
Animal Rescue League of Boston
Anti-Defamation League
Archdiocese of Boston
Asian Community Development Corporation
Associazione Gizio
Back Bay Association
Bais Yaakov of Boston High School for Girls
Beacon Academy
Rabbi Elaine Zecher Honoring
Marshall M. Sloane
Best Buddies
Beth Israel Deaconess Medical Center - Milton
Bishop Fenwick High School
Black Ministerial Alliance of Greater Boston
Boston Architectural College
Boston Ballet
Boston Celtics Shamrock Foundation
Boston Children’s Hospital
Boston College Carroll School of Management
Boston Harbor Association
Boston Jewish Film Festival
Boston Landmarks Orchestra
Boston University
Bottom Line
Boys & Girls Clubs of Medford and Somerville
Bread of Life
Brookline Chamber of Commerce
Brookline Recreation Department
Burlington Recreation Department
Cambridge Camping
Cambridge College
Cambridge Mayor’s Fire Relief Fund
Cambridge Montessori School
Cambridge School of Weston
Cambridge YMCA
Cambridge YWCA
Cancer Research and Marblehead/
Salem Scholarships
Cape Cod Healthcare Foundation
Cardinal Cushing Centers, Inc.
Cardinal Spellman High School
Cathedral High School
Catholic Charities of Boston
Catholic Schools Foundation, Inc./Inner-City
Scholarship Fund
Challenge Unlimited
Chinese Cultural Connection
Christians and Jews United for Israel
City of Beverly
City of Cambridge
City of Chicopee
City of Everett
City of Lowell
City of Peabody
City of Somerville
Codman Square Health Center
Cohen Hillel Academy
Colleen E. Ritzer Memorial Scholarship Fund
Colton J. Buckley Memorial Fund
Combined Jewish Philanthropies
Community Dispute Settlement Center
Congregation Shaarei Tefillah
Coolidge Corner Merchants’ Association
Cristo Rey Boston High School
Cyrus E. Dallin Art Museum, Inc.
Dana-Farber Cancer Institute
DCF Kids Fund
Development Corporation for Israel
Dimock Community Health Centers
DONNE 2000
Dorothy C. Gabriel Foundation
Team Century Participating in
Step Up for Colleen
East Middlesex Association for Children
Elizabeth Peabody House
ESSCO - MGH Breast Cancer Research Fund
Essex Chamber Music Players
Essex County Community Foundation
Essex North Shore Agricultural Technical
Foundation, Inc.
Everett Chamber of Commerce
Everett Rotary Club
Facing Cancer Together
Family Promise Metrowest
Fisher Center for Alzheimer’s Research Fund
Foundation for MetroWest
Fractured Atlas
Franciscan Children’s
Friends of Christopher Columbus Park
Gann Academy
German International School Boston
Greater Boston Jewish Directory
Greater Lawrence Family Health Center
Greater Lynn Senior Services
Greater Medford Visiting Nurse Association
Greater Salem NH Rotary Club
Griffin Museum of Photography
Hadassah
Hearing Loss Association of America
Asian Community Development Corporation
First Time Homebuyer Seminar at
Century Bank Malden
Hebrew SeniorLife
Hillel House at Boston University
Homes for Our Troops
Hospitality Homes, Inc.
I.B.E.W. Local 103
Innovation Academy Charter School
Intimate Partner Violence Project, Inc.
Irish International Immigrant Center
Italian American Association
Italian Home for Children
James L. McKeown Boys & Girls Club of Woburn
Jewish Big Brothers Big Sisters
Jewish Cemetery Association of Massachusetts
Jewish Community Centers of Greater Boston
Jewish Family Service
Jewish Vocational Service
John J. Forcellese Memorial Fund
Joseph N. Hermann Youth Center
Justin’s Voice
Kironde Education and Health Fund
Knights of Pythias, Local 158
Koleinu Boston’s Jewish Community Chorus
Kosher Dental Study
Ladies Ancient Order of Hibernians
Lupus Foundation of America
Lynn Chamber of Commerce
This year, we continued to invest in our communities, supporting 278 organizations.
Lynn Housing Authority & Neighborhood
Development
Lynn Museum & Historical Society
Malden Babe Ruth League
Malden Chamber of Commerce
Malden YMCA
Massachusetts Affordable Housing Alliance
Massachusetts Association of Community
Development Corporations
Massachusetts Eye and Ear Infirmary
Massachusetts General Hospital
Matignon High School
May Institute
Mayor Theodore D. Mann Memorial Prayer
McNally Education Fund
Medford Chamber of Commerce
Medford Public Schools
Medford Rotary Club
Merrimack Valley Chamber of Commerce
MetroWest Jewish Day School
Minority Business Expo
Minuteman Senior Services
Monsignor Neagle Apartments
Morgan Memorial Goodwill Industries
My Life My Choice
Mystic Valley Area Branch of the NAACP
Mystic Valley Elder Services
Mystic Valley Public Health Coalition
Mystic Valley Regional Charter School
NAIOP Massachusetts
Nashua Senior Activity Center
National Association of Black Accountants
National Brain Tumor Society
Century Bank received the Outstanding
Friend Award from the National Association of
Black Accountants
National Tay-Sachs & Allied
Diseases Association
Nativity Preparatory School
Nazzaro Recreation Center
Neighborhood House Charter School
Neurofibromatosis, Inc., Northeast
New England Conservatory
Newbury Street League
Newton South High School
Newton-Needham Chamber of Commerce
Newton-Wellesley Hospital Charitable
Foundation
North Andover Scholarship Foundation
North End Against Drugs, Inc.
North End Beautification Committee
North End Music and Performing Arts Center
North End Waterfront Health
North Reading Little League
North Shore Chamber of Commerce
North Shore Community Action Programs, Inc.
Northeast Arc
On the Rise
One Mission
Our Lady of Cedars of Lebanon Church
Pancreatic Cancer Research at MGH
Pan-Mass Challenge
Partners HealthCare at Home
Peabody Chamber of Commerce
WROR Morning Show Hosts and
Pan-Mass Challenge
Precision Athletic Training
Prospect Hill Academy Charter School
Quincy Asian Resources, Inc.
Quincy Chamber of Commerce
Quincy College
Rashi School
Redemptoris Mater Seminary
Regis College
Ridgefield Academy
Riverside Community Care
Road to Responsibility
Rosie’s Place
Run for our Troops
Sacred Heart Parish
Sacred Heart School
Sail Cape Cod
Saint Anthony’s Society
Saint John School
Saint Joseph School
Saint Leonard Parish
Saint Peter School
Saint Vasilios
Salem Chamber of Commerce
Salem Rotary Club
Salesian Missions
Salve Regina University
Science Club for Girls
Shakespeare & Company
Sharsheret
Silent Spring Institute
Sisters of St. Joseph of Boston
Solomon Schechter Day School
Somerville Chamber of Commerce
Somerville Family Learning Collaborative
Somerville High School
Somerville Housing Authority
Somerville Museum
Somerville Rotary Club
South End Community Health Center
SpeakEasy Stage Company
Special Olympics Massachusetts
Spirit of Adventure Council, Boy Scouts
of America
St. Anthony Shrine
St. John the Evangelist Church
St. Joseph Parish
Suzuki School of Newton
Teamsters Local 25, Autism Fund Inc.
Temple Beth Shalom
Temple Emanuel Andover
Temple Emanuel Newton
Temple Israel of Boston
Temple Reyim
The Angel Fund
The ARC of the South Shore
The Carroll Center For The Blind
The Community Family Inc.
The Exchange Club of Needham
The Gifford School
The Greater Boston Food Bank
The Jett Foundation
The Jimmy Fund
The Joey Fund
The Juilliard School
The Kennek Foundation
The Progeria Research Foundation
The Second Step
The Skating Club of Boston
The Soldiers Fund
Torah Academy
Town of Acton
Salem Rotary Club Honoring Local Veterans
Town of Arlington
Town of Burlington
UNICO Merrimack Valley
UWUA Local 369
Vilna Shul
Walnut Street Center
Ward 7 Improvement Association
Watertown Youth Baseball
Wellesley BNI
Wellesley Chamber of Commerce
Winchester Foundation for Educational
Excellence
Winchester Rotary Club
Woburn Business Association
Woburn Dollars for Scholars
Woburn Middlesex Lions Club
Woburn Public Library
Women’s Bar Association of Massachusetts
Women’s Business Group Connects
Women’s Lunch Place
World Unity
YAD Chessed Fund
Yoga Reaches Out
Catholic Charities Spring Celebration
Pictured from left: Barry R. Sloane; Meb Keflezighi, Boston Marathon Winner; Linda Sloane Kay;
Marshall M. Sloane; and Barbara J.G. Sloane
Jennifer A. Nickerson, CPA
Marie A. Nugent
Karen J. Pessia
Scott M. Rembis
Krzysztof A. Sikorski
Jeremy P. Styles
Oliver Sun
Jeanne A. Wood
Officers
Angela L. Barahona
Susan A. Cabral
Anel Cetina-Santos
Margaret M. DiCeglie
James R. Ellis
Joseph R. Ferreira
Crissy Flaherty
Richard Forrest
Sara A. Gaudet
Lisa M. Glynn
Paula A. Grimaldi
Jill A. Holak, CIA
Joshua L. Jick
Earl K. Kishida
Brandon N. Letellier
Paula A. Malley
Daniel R. Martiniello
Laura A. Paranay
Christopher M. Ross
Cynthia E. Sarnie
Biljana Savic
Kathleen E. Schroeder
Michael E. Serieka
Maria R. Serrentino
Danielle G. Sheehan
Robert J. Silva
Judith Sinclair
Elizabeth A. Theriault
Century Bank and Trust
Company Officers
Management Committee
Marshall M. Sloane
Chairman of the Board
Barry R. Sloane
President & CEO
William P. Hornby, CPA
Chief Financial Officer & Treasurer
Paul A. Evangelista
Executive Vice President
Brian J. Feeney
Executive Vice President
Linda Sloane Kay
Executive Vice President
David B. Woonton
Executive Vice President
Richard L. Billig
Senior Vice President
James M. Flynn, Jr.
Senior Vice President
Jason J. Melius
Senior Vice President
Christine D. Scarafoni
Senior Vice President
Senior Vice Presidents
Gerald S. Algere
Janice A. Brandano
Bradford J. Buckley
Peter R. Castiglia
Susan B. Delahunt
William J. Gambon, Jr.
Timothy L. Glynn
Brenda C. Kerr
Anthony C. LaRosa, CPA
Shipley C. Mason
Thomas E. Piemontese
Deborah R. Rush
Kenneth A. Samuelian
Yasmin D. Whipple
Century Bancorp, Inc.
Directors
George R. Baldwin4,6*
President & CEO
Baldwin & Company
Stephen R. Delinsky, Esq.1,3*,7
Attorney
Clark, Hunt, Ahearn & Embry
Louis J. Grossman 4,7
Chairman
The Grossman Companies, Inc.
Russell B. Higley, Esq.6,7
Attorney
Jackie Jenkins-Scott 4,5*
President Emeritus
Wheelock College
Linda Sloane Kay 4,5,6,7
Executive Vice President
Century Bank and Trust Company
Fraser Lemley 2*,3,4,5
Chairman & CEO
Sentry Auto Group
Joseph P. Mercurio1,2,4,7*
Senior Vice President
Administration & Finance
Quincy College
Joseph J. Senna, Esq.1*,4
Attorney
Jo Ann Simons 5,6
CEO
Northeast ARC
Barry R. Sloane 4,5,6,7
President & CEO
Century Bank and Trust Company
Marshall M. Sloane 4,5
Chairman of the Board
Century Bank and Trust Company
George F. Swansburg 4*,5,6
Jon Westling 1,2,3
President Emeritus
Boston University
Officers
Marshall M. Sloane
Founder and Chairman
Barry R. Sloane
President & CEO
Linda Sloane Kay
Executive Vice President
William P. Hornby, CPA
Chief Financial Officer & Treasurer
Rosalie A. Cunio
Clerk
Judith Sinclair
Assistant Clerk
First Vice Presidents
Michael D. Ballard
Gracine Copithorne
Anna M. Gorska
T. Daniel Kausel
David J. Waryas
Vice Presidents
Jean P. Belcher-Scarpa
Robert A. Bennett
John S. Bosco, Jr.
Valerie R. Bosse
Gerald Bovardi
Pasqualina Buttiri
James W. Clark
Derek J. Craig
Rosalie A. Cunio
Anthony Daniels
Laura A. DiFava
Tracy E. Dunn
Sandra R. Edey
Michele English
Judith A. Fallon
Marissa L. Fitzgerald
Jane C. Gilberti
Adam S. Glick
Howard N. Gold
Lisa Gosling
Geoffrey T. Grayson
Carl R. Hall
Michelle L. Haughton
Ashkon Hedvat
James J. Jordan
Darlene Joyce
Michael F. Long
Nancy M. Marsh
Karen M. Martin
Carl M. Mattos
Kathleen McGillicuddy
Nancy R. Miller
Patricia M. Moran
John L. Norris III
Meredith O’Keefe
David J. Orise
Sarah A. O’Toole
Cornelius C. Prioleau
Youyi Shi
Mary Spadoni
Tuesday N. Thomas
Lawrence H. Tsoi
Jose I. Umana
Calvin M. Wong
Assistant Vice Presidents
Zubin C. Bagwadia
Roberta M. Byington
Cindy Cohen
John R. Ferguson
Saida Idouahmane
Linda M. Johns
William B. Keefe
Brian Kelly
Anne M. Mahoney
Ann E. Mannion
Carol A. Melisi
Robson G. Miguel
1 Audit Committee, 2 Compensation Committee, 3 Nominating Committee, 4 Executive Committee, 5 Asset Liability Committee, 6 Non-deposit Investment and
Insurance Products Committee, 7 Trust Committee, * Committee Chairperson
Financial Highlights
1
FINAN C IAL STATEMENTS
3
Management’s Discussion and Analysis of Results of Operations and Financial Condition
18
19
20
21
22
23
52
54
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Management’s Report on Internal Control Over Financial Reporting
Century Bancorp, Inc. AR ’16 (dollars in thousands, except share data)
FOR THE YEAR
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision
for loan losses
Other operating income
Operating expenses
Income before income taxes
Provision for income taxes
Net income
Average shares outstanding Class A, basic
Average shares outstanding Class B, basic
Average shares outstanding Class A, diluted
Average shares outstanding Class B, diluted
Total shares outstanding at year-end
Earnings per share:
Basic, Class A
Basic, Class B
Diluted, Class A
Diluted, Class B
Dividend payout ratio – Non-GAAP (1)
AT YEAR-END
Assets
Loans
Deposits
Stockholders’ equity
Book value per share
SELECTED FINANCIAL PERCENTAGES
Return on average assets
Return on average stockholders’ equity
Net interest margin, taxable equivalent
Net (recoveries) charge-offs as a percent
of average loans
Average stockholders’ equity to
average assets
Efficiency ratio – Non-GAAP (1)
2016
2015
2014
2013
2012
$
96,699
22,617
74,082
1,375
72,707
16,222
64,757
24,172
(362)
$
90,093
20,134
69,959
200
69,759
15,993
62,198
23,554
533
$
85,371
19,136
66,235
2,050
64,185
15,271
56,730
22,726
866
$
79,765
18,805
60,960
2,710
58,250
18,615
55,812
21,053
1,007
$
81,494
19,540
61,954
4,150
57,804
15,865
53,238
20,431
1,392
$
24,534
$
23,021
$
21,860
$
20,046
$
19,039
3,600,729
1,967,180
5,567,909
1,967,180
5,567,909
$
$
$
$
5.35
2.68
4.41
2.68
9.0 %
$ 4,462,608
1,923,933
3,653,218
240,041
43.11
$
0.57 %
10.80 %
2.12 %
0.00 %
5.29 %
62.7 %
3,600,729
1,967,180
5,567,909
1,967,180
5,567,909
$
$
$
$
5.02
2.51
4.13
2.51
9.6 %
$ 3,947,441
1,731,536
3,075,060
214,544
38.53
$
0.59 %
11.26 %
2.18 %
(0.04) %
5.25 %
64.1 %
3,591,732
1,969,030
5,562,209
1,969,030
5,567,909
$
$
$
$
4.78
2.39
3.93
2.39
10.0 %
$ 3,624,036
1,331,366
2,737,591
192,500
34.57
$
0.61 %
11.57 %
2.22 %
0.05 %
5.27 %
62.0 %
3,575,683
1,980,855
5,557,693
1,980,855
5,556,584
$
$
$
$
4.39
2.19
3.61
2.19
10.9 %
$ 3,431,154
1,264,763
2,715,839
176,472
31.76
$
0.60 %
11.58 %
2.21 %
0.08 %
5.22 %
63.0 %
3,557,693
1,990,474
5,549,191
1,990,474
5,554,959
$
$
$
$
4.18
2.09
3.43
2.09
11.5 %
$ 3,086,209
1,111,788
2,445,073
179,990
32.40
$
0.65 %
11.06 %
2.51 %
0.15 %
5.85 %
62.1 %
(1)
2016
Non-GAAP Financial Measures are reconciled in the following tables:
Calculation of Efficiency Ratio:
2015
2014
2013
2012
Total Operating Expenses (numerator)
Net Interest Income
Total Other Operating Income
Tax Equivalent Adjustment
$
$
64,757
74,082
16,222
12,917
$
$
62,198
69,959
15,993
11,140
$
$
56,730
66,235
15,271
10,033
$
$
55,812
60,960
18,615
8,984
$
$
53,238
61,954
15,865
7,964
Total Income (denominator)
$ 103,221
$
97,092
$
91,539
$
88,559
$
85,783
Efficiency Ratio, Year – Non-GAAP
62.7 %
64.1 %
62.0 %
63.0 %
62.1 %
2016
2015
2014
2013
2012
Calculation of Dividend Payout Ratio:
Dividends Paid (numerator)
Net Income (denominator)
$
$
2,201
24,534
$
$
2,200
23,021
$
$
2,196
21,860
$
$
2,191
20,046
$
$
2,186
19,039
Dividend Payout Ratio – Non-GAAP
9.0 %
9.6 %
10.0 %
10.9 %
11.5 %
1
Century Bancorp, Inc. AR ’16Financial Highlights
Per Share Data
2016, Quarter Ended
Market price range (Class A)
High
Low
Dividends Class A
Dividends Class B
2015, Quarter Ended
Market price range (Class A)
High
Low
Dividends Class A
Dividends Class B
December 31,
September 30,
June 30,
March 31,
$ 62.60
44.95
0.12
0.06
$ 45.45
41.41
0.12
0.06
$ 43.24
38.75
0.12
0.06
$ 43.96
38.61
0.12
0.06
December 31,
September 30,
June 30,
March 31,
$ 45.09
40.95
0.12
0.06
$ 41.87
38.61
0.12
0.06
$ 41.44
38.37
0.12
0.06
$ 40.50
38.34
0.12
0.06
The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2011 to
December 31, 2016 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.
Comparison of Five-Year
$300
Cumulative Total Return*
NASDAQ Banks
NASDAQ U.S.
Century Bancorp, Inc.
$250
$200
$150
$100
$50
$0
2011
2012
2013
2014
2015
2016
Value of $100 Invested on
December 31, 2011 at:
2012
2013
2014
2015
2016
Century Bancorp, Inc.
NASDAQ Banks
NASDAQ U.S.
$ 118.54
134.74
117.45
$ 121.32
184.08
164.57
$ 148.13
205.85
188.84
$ 162.59
210.40
201.98
$ 226.85
266.24
219.89
* Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on
December 31, 2011 and that all dividends were reinvested.
2
Century Bancorp, Inc. AR ’16Financial Highlights
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 Company’s 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
The financial services industry continues to face challenges in the aftermath
of the recent national and global economic crisis. Since June 2009, the U.S.
economy has been recovering from the most severe recession and financial crisis
since the Great Depression. There have been improvements in private sector
employment, industrial production and U.S. exports; nevertheless, the pace
of economic recovery has been slow. Financial markets have improved since
the depths of the crisis but are still unsettled and volatile. There is continued
concern about the U.S. economic outlook.
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
3
equity funds or sponsoring new funds unless it qualifies for an exemption from
the rule. The Company has little involvement in prohibited proprietary trading
or investment activities in covered funds and the Company does not expect that
complying with the requirements of the Rule will have any material effect on the
Company’s financial condition or results of operation.
Federal banking regulators have issued risk-based capital guidelines, which
assign risk factors to asset categories and off-balance-sheet items. Also, the
Basel Committee has issued capital standards entitled “Basel III: A global
regulatory framework for more resilient banks and banking systems” (“Basel
III”). The Federal Reserve Board has finalized its rule implementing the Basel III
regulatory capital framework. The rule that came into effect in January 2015
sets the Basel III minimum regulatory capital requirements for all organizations.
It included a new common equity Tier I ratio of 4.5 percent of risk-weighted
assets, raised the minimum Tier I capital ratio from 4 percent to 6 percent of
risk-weighted assets and would set a new conservation buffer of 2.5 percent
of risk-weighted assets. The implementation of the framework did not have a
material impact on the Company’s financial condition or results of operations.
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,
2016, the Company had total assets of $4.5 billion. Currently, the Company
operates 27 banking offices in 20 cities and towns in Massachusetts, ranging
from Braintree in the south to Andover in the north. The Bank’s customers
consist primarily of small and medium-sized businesses and retail customers
in these communities and surrounding areas, as well as local governments
and institutions throughout Massachusetts, New Hampshire, Rhode Island,
Connecticut and New York.
The Company’s results of operations are largely dependent on net interest
income, which is the difference between the interest earned on loans and
securities and interest paid on deposits and borrowings. The results of
operations are also affected by the level of income and fees from loans, deposits,
as well as operating expenses, the provision for loan losses, the impact of
federal and state income taxes and the relative levels of interest rates and
economic activity.
The Company offers a wide range of services to commercial enterprises, state
and local governments and agencies, non-profit organizations and individuals. It
emphasizes service to small and medium sized businesses and retail customers in
its market area. In recent years, the Company has increased business to larger
institutions, specifically, healthcare and higher education. The Company makes
commercial loans, real estate and construction loans and consumer loans, and
accepts savings, time, and demand deposits. In addition, the Company offers its
corporate and institutional customers automated lock box collection services,
cash management services and account reconciliation services, and actively
promotes the marketing of these services to the municipal market. Also, the
Company provides full service securities brokerage services through a program
called Investment Services at Century Bank, which is supported by LPL Financial,
a third party full-service securities brokerage business.
The Company has municipal cash management client engagements in
Massachusetts, New Hampshire and Rhode Island comprised of approximately
250 government entities.
The Company had net income of $24,534,000 for the year ended
December 31, 2016, compared with net income of $23,021,000 for the year
ended December 31, 2015, and net income of $21,860,000 for the year
ended December 31, 2014. Class A diluted earnings per share were $4.41 in
2016, compared to $4.13 in 2015 and $3.93 in 2014.
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition 2016
2015
2014
Earnings per share (EPS) for each class of stock and for each year ended
Basic EPS – Class A common
December 31, is as follows:
Basic EPS – Class B common
Diluted EPS – Class A common
Diluted EPS – Class B common
$ 5.35
$ 2.68
$ 4.41
$ 2.68
$ 5.02
$ 2.51
$ 4.13
$ 2.51
$ 4.78
$ 2.39
$ 3.93
$ 2.39
2.50 %
The trends in the net interest margin are illustrated in the graph below:
2.40 %
2.27%
Net Interest Margin
2.30 %
2.20%
2.20 %
2.10 %
2.00 %
2.18% 2.15%
2.19%
2.28%
2.18%
2.12%
2.12%
2.22%
2.12%
2.04%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3 Q4
2014
2015
2016
The net interest margin declined slightly throughout 2014 and the first quarter
of 2015. During the second and third quarter 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.
While management will continue its efforts to improve the net interest margin,
there can be no assurance that certain factors beyond its control, such as the
prepayment of loans and changes in market interest rates, will continue to
4.00 %
positively impact the net interest margin.
Historical U.S. Treasury Yield Curve
3.00 %
2.00 %
1.00 %
0.00 %
3 Month 6 Month 2 Year 3 Year
5 Year 10 Year 30 Year
U.S. Treasury Yield Curve 12/31/2016
U.S. Treasury Yield Curve 12/31/2015
U.S. Treasury Yield Curve 12/31/2014
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 2015 and 2016, short-term rates increased
slightly more than longer-term rates resulting in a slight flattening of the
yield curve.
During 2016 and 2015, the Company’s 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 2015 was a decrease in the provision for loan losses. This was primarily the
result of changes in the risk profile of the Company’s new loan originations,
related methodology enhancements to address these changes, as well as net
recoveries being realized during the year. During 2016, 2015 and 2014,
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.
Total assets were $4,462,608,000 at December 31, 2016, an increase of
13.1% from total assets of $3,947,441,000 at December 31, 2015.
On December 31, 2016, stockholders’ equity totaled $240,041,000,
compared with $214,544,000 on December 31, 2015. Book value per
share increased to $43.11 at December 31, 2016, from $38.53 on
December 31, 2015.
During December 2013, the Company entered into a lease agreement to
open a branch located in Woburn, Massachusetts. The branch opened on
November 3, 2014.
During March 2014, the Company entered into a lease agreement to open a
branch located on Boylston Street in Boston, Massachusetts. This property is
leased from an entity affiliated with Marshall M. Sloane, Chairman of the Board
of the Company. This agreement was approved by the Board of Directors in the
absence of the Chairman of the Board. The branch opened on April 22, 2015.
The deposits from the Kenmore Square, Boston, Massachusetts branch, which
closed on September 30, 2014, were moved to the new Boylston Street branch.
The Kenmore Square landlord did not renew the existing lease during 2014.
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.
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 impairment of investment securities, allowance for loan
losses and income taxes to be its critical accounting policies. There have been
no significant changes in the methods or assumptions used in the investment
securities accounting policy that require material estimates and assumptions.
There was a methodology enhancement to the allowance for loan losses policy.
This enhancement is described below.
Impaired Investment Securities
Management evaluates securities for other-than-temporary impairment (“OTTI”)
on a periodic basis. Factors considered in determining whether an impairment is
OTTI include: (1) the length of time and the extent to which the fair value has
been less than amortized cost, (2) projected future cash flows, (3) the financial
condition and near-term prospects of the issuers and (4) the intent and ability
of the Company to hold the investment for a period of time sufficient to allow
for any anticipated recovery in fair value. The Company records an OTTI loss in
an amount equal to the entire difference between the fair value and amortized
cost if (1) the Company intends to sell an impaired investment security, (2) it
is more likely than not that the Company will be required to sell the investment
security before its amortized costs or (3) for debt securities, the present value
of expected future cash flows is not sufficient to recover the entire amortized
cost basis. If an investment security is determined to be OTTI but the Company
does not intend to sell the investment security, only the credit portion of the
estimated loss is recognized in earnings, with the non-credit portion of the loss
recognized in other comprehensive income.
The Company does not intend to sell any of its debt securities with an
unrealized loss, 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, which may be maturity.
4
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
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. Management’s
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.
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
management’s estimate of probable losses. Further information regarding the Company’s methodology for assessing the appropriateness of the allowance is contained
within Note 1 of the “Notes to Consolidated Financial Statements”.
During 2015, the Company enhanced its approach to the development of the historical loss factors and qualitative factors used on certain loan portfolios. The
enhancement is described within the Allowance for Loan Losses section of “Management’s Discussion and Analysis of Results of Operations and Financial Condition”.
During 2016, 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 Company’s 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 management’s 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 and the existence of prior years’ taxable income
to which refund claims could be carried back. 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 Company’s financial statements for which
payment has been deferred, or a deduction taken on the Company’s tax return but not yet recognized as an expense in the Company’s financial statements. Deferred
tax liabilities are also recognized for certain non-cash items such as goodwill.
FINANCIAL CONDITION
Investment Securities
The Company’s 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, 2016 totaled $499,297,000 and included gross unrealized gains of $555,000 and gross
unrealized losses of $1,478,000. A year earlier, the fair value of securities available-for-sale was $404,623,000 including gross unrealized gains of $979,000 and
gross unrealized losses of $1,333,000. In 2016, the Company recognized gains of $52,000 on the sale of available-for-sale securities. In 2015 and 2014, the
Company recognized gains of $289,000 and $450,000, respectively.
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, 2016 are carried at their amortized cost of $1,653,986,000. A year earlier, securities
held-to-maturity totaled $1,438,903,000. In 2016 the company recognized gains of $12,000 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. In
2015, the Company recognized gains of $305,000. In 2014 the Company did not recognize any gains on sales of held-to-maturity securities.
During the third quarter of 2013, $987,037,000 of securities available-for-sale with unrealized losses of $25,333,000 were transferred to securities held-to-
maturity. This was done in response to rising interest rates and an assessment of liquidity needs.
The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated.
5
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition Fair Value of Securities Available-for-Sale
At December 31,
(dollars in thousands)
U.S. Treasury
U.S. Government Sponsored Enterprises
SBA Backed Securities
U.S. Government Agency and Sponsored Enterprises
Mortgage-Backed Securities
Privately Issued Residential Mortgage-Backed Securities
Obligations Issued by States and Political Subdivisions
Other Debt Securities
Equity Securities
Total
2016
2015
2014
Amount
Percent
Amount
Percent
Amount
Percent
$
2,000
24,952
57,767
243,325
1,109
164,876
4,924
344
0.4 %
5.0 %
11.6 %
48.7 %
0.2 %
33.0 %
1.0 %
0.1 %
$
1,989
—
5,989
0.5 %
0.0 %
1.5 %
$
2,000
—
6,717
233,526
57.7 %
337,093
1,434
0.4 %
156,960
38.8 %
4,473
252
1.1 %
0.1 %
1,874
96,784
3,524
398
0.4 %
0.0 %
1.5 %
75.2 %
0.4 %
21.6 %
0.8 %
0.1 %
$ 499,297
100.0 %
$ 404,623
100.0 %
$ 448,390
100.0 %
The majority of the Company’s 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.
Management’s understanding of a pricing service’s 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. Management’s validation of a vendor’s
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, 2016.
Securities available-for-sale totaling $164,876,000, or 3.7% 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.
Amortized Cost of Securities Held-to-Maturity
The following table sets forth the amortized cost and percentage distribution of securities held-to-maturity at the dates indicated.
At December 31,
2016
2015
2014
(dollars in thousands)
U.S. Government Sponsored Enterprises
SBA Backed Securities
U.S. Government Sponsored Enterprise
Mortgage-Backed Securities
Amount
Percent
Amount
Percent
Amount
Percent
$ 148,326
46,140
9.0 %
2.8 %
$ 186,734
13.0 %
$ 251,617
17.9 %
—
—
—
—
1,459,520
88.2 %
1,252,169
87.0 %
1,155,175
82.1 %
Total
$ 1,653,986
100.0 %
$ 1,438,903
100.0 %
$ 1,406,792
100.0 %
6
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
Fair Value of Securities Available-for-Sale
The following two tables set forth contractual maturities of the Bank’s securities portfolio at December 31, 2016. Actual maturities may differ from contractual
Amounts Maturing
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Within
Weighted
One Year
Weighted
Five Years
Weighted
Over
Weighted
One
Year
% of
Total
Average
Yield
to Five
Years
% of
Total
Average
Yield
to Ten
Years
% of
Total
Average
Yield
Ten
Years
% of
Average
Total
Yield
(dollars in thousands)
U.S. Treasury
$ 2,000
0.4 %
0.54 %
$
—
0.0 %
0.00 %
$
—
0.0 %
0.00 %
$
—
0.0 % 0.00 %
U.S. Government
Sponsored Enterprises
9,999
2.0 %
0.70 %
14,953
3.0 %
0.83 %
—
0.0 %
0.00 %
—
0.0 % 0.00 %
SBA Backed Securities
—
0.0 %
0.00 %
—
0.0 %
0.00 %
18,613
3.7 %
1.21 %
39,154
7.8 % 1.14 %
U.S. Government Agency
and Sponsored Enterprise
Mortgage-Backed
Securities
Privately Issued Residential
Mortgage-Backed
Securities
Obligations of States and
Political Subdivisions
—
0.0 %
0.00 %
90,157 18.1 %
1.17 %
148,429 29.6 %
1.24 %
4,739
1.0 % 1.38 %
1,109
0.2 %
1.71 %
—
0.0 %
0.00 %
—
0.0 %
0.00 %
—
0.0 % 0.00 %
Other Debt Securities
800
0.2 %
1.59 %
159,355 31.9 %
1.18 %
919
753
0.2 %
3.57 %
305
0.1 %
4.75 %
4,297
0.9 % 1.80 %
0.2 %
1.88 %
1,000
0.2 %
6.00 %
1,017
0.2 % 6.00 %
Total
$ 173,263 34.7 %
1.15 %
$ 106,782 21.5 %
1.15 %
$ 168,347 33.6 %
1.28 %
$ 49,207
9.9 % 1.32 %
Non-
Maturing
% of
Total
Weighted
Average
Yield
Total
Weighted
Average
Yield
% of
Total
$
—
—
—
—
—
—
0.0 %
0.00 %
$
2,000
0.4 %
0.54 %
0.0 %
0.00 %
0.0 %
0.00 %
24,952
57,767
5.0 %
0.78 %
11.6 %
1.16 %
0.0 %
0.00 %
243,325
48.7 %
1.22 %
0.0 %
0.00 %
1,109
0.2 %
1.71 %
0.0 %
0.00 %
164,876
33.0 %
1.21 %
1,354
0.2 %
3.06 %
344
0.1 %
3.24 %
4,924
344
1.0 %
3.85 %
0.1 %
6.24 %
$ 1,698
0.3 %
3.21 %
$ 499,297
100.0 %
1.22 %
(dollars in thousands)
U.S. Treasury
U.S. Government Agency Sponsored Enterprises
SBA Backed Securities
U.S. Government Agency and Sponsored
Enterprise Mortgage-Backed Securities
Privately Issued Residential Mortgage-Backed Securities
Obligations of States and Political Subdivisions
Other Debt Securities
Equity Securities
Total
Amortized Cost of Securities Held-to-Maturity
Amounts Maturing
Within
One
Year
Weighted
One Year
Weighted
Five Years
Weighted
Over
% of
Total
Average
Yield
to Five
Years
% of
Total
Average
Yield
to Ten
Years
% of
Total
Average
Yield
Ten
Years
% of
Total
Weighted
Average
Yield
Total
Weighted
Average
Yield
% of
Total
(dollars in thousands)
U.S. Government
Sponsored
Enterprises
$ 14,926 0.9 % 1.52 % $ 123,405
7.5 %
1.70 % $ 9,995
0.6 % 2.06 % $ —
0.0 % 0.00 % $ 148,326
9.0 % 1.71 %
SBA Backed Securities
— 0.0 % 0.00 %
7,965
0.5 %
1.57 %
33,169
2.0 % 2.20 %
5,006
0.3 % 2.56 %
46,140
2.8 % 2.13 %
U.S. Government
Sponsored Enterprise
Mortgage-Backed
Securities
7,876 0.5 % 2.80 %
991,308 59.9 %
2.17 %
457,191 27.6 % 2.31 %
3,145
0.2 % 3.02 %
1,459,520
88.2 % 2.22 %
Total
$ 22,802 1.4 % 1.96 % $ 1,122,678 67.9 %
2.11 % $ 500,355 30.2 % 2.30 % $ 8,151
0.5 % 2.73 % $ 1,653,986 100.0 % 2.17 %
7
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
At December 31, 2016 and 2015, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which
exceeded 10% of stockholders’ equity. 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 2016 and 2015. In 2015, sales of securities totaling $51,551,000 in gross proceeds resulted in net realized
gains of $594,000. In 2014, sales of securities totaling $40,285,000 in gross proceeds resulted in net realized gains of $450,000.
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.
Loans
The Company’s 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
December 31,
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.
2016
2015
2014
2013
2012
The following summary shows the composition of the loan portfolio at the dates indicated.
Amount
Amount
Amount
Percent
of Total
Percent
of Total
Percent
of Total
Amount
Percent
of Total
Amount
Percent
of Total
(dollars in thousands)
Construction and
land development
$
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer
Home equity
Overdrafts
Total
14,928
612,503
135,418
696,173
241,357
11,013
211,857
684
0.8 %
31.8 %
7.0 %
36.2 %
12.5 %
0.6 %
11.0 %
0.1 %
$
27,421
452,235
85,685
721,506
255,346
10,744
178,020
579
1.6 % $
26.1 %
4.9 %
41.7 %
14.7 %
0.6 %
10.3 %
0.1 %
22,744
149,732
41,850
696,272
257,305
10,925
151,275
1,263
1.7 % $
11.2 %
3.1 %
52.3 %
19.3 %
0.8 %
11.4 %
0.2 %
33,058
76,675
32,737
696,317
286,041
8,824
130,277
834
2.6 % $
6.1 %
2.6 %
55.0 %
22.6 %
0.7 %
10.3 %
0.1 %
38,618
88,475
1,446
575,019
281,857
6,823
118,923
627
3.5 %
8.0 %
0.1 %
51.7 %
25.3 %
0.6 %
10.7 %
0.1 %
$ 1,923,933
100.0 %
$ 1,731,536 100.0 % $ 1,331,366
100.0 % $ 1,264,763 100.0 % $ 1,111,788 100.0 %
At December 31, 2016, 2015, 2014, 2013, and 2012, loans were carried net of discounts of $313,000, $360,000, $407,000, $454,000 and $498,000,
respectively. Net deferred loan fees of $641,000, $988,000, $908,000, $174,000, and $369,000 were carried in 2016, 2015, 2014, 2013 and
2012, respectively.
The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2016. The table excludes
loans secured by 1–4 family residential real estate, loans for household and family personal expenditures, and municipal loans. Maturities are presented as if scheduled
One Year or Less
principal amortization payments are due on the last contractual payment date.
(dollars in thousands)
Remaining Maturities of Selected Loans at December 31, 2016
One to Five Years
Over Five Years
Total
Construction and land development
Commercial and industrial
Commercial real estate
Total
$ 2,535
38,330
49,815
$ 90,680
783
$
23,821
57,691
$ 82,295
$
11,610
550,352
588,667
$ 1,150,629
$
14,928
612,503
696,173
$ 1,323,604
December 31, 2016
One to Five Years
Over Five Years
Total
(dollars in thousands)
The following table indicates the rate variability of the above loans due after one year.
Predetermined interest rates
Floating or adjustable interest rates
Total
$ 37,516
44,779
$ 82,295
$ 284,820
865,809
$ 1,150,629
$ 322,336
910,588
$ 1,232,924
The Company’s 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 2015, and 2016, the Company increased its lending activities to these
types of organizations. The percentage of these types of organizations to total C&I loans has increased to 81% at December 31, 2016, compared to 76% at
December 31, 2015.
8
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Bank’s 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 has increased its lending activities
to municipalities.
Residential real estate (1–4 family) includes two categories of loans. Included in residential real estate are approximately $28,464,000 of C&I type loans secured by
1–4 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 1–4 family residential properties located in the Bank’s 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 Bank’s market area. Loans are underwritten to a
maximum loan to property value of 75%.
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, 2016, the Company was obligated to advance a total of $22,049,000 to complete projects
under construction.
December 31,
2016
2015
2014
2013
2012
(dollars in thousands)
The composition of nonperforming assets is as follows:
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Accruing troubled debt restructured loans
Loans past due 90 and still accruing
Nonperforming loans as a percent of gross loans
Nonperforming assets as a percent of total assets
Residential real estate, multi-family
The composition of impaired loans at December 31, is as follows:
Home equity
Commercial real estate
Construction and land development
Commercial and industrial
Total impaired loans
$ 1,084
—
$ 1,084
$ 3,526
—
0.06 %
0.02 %
2016
$ 198
—
3,149
94
389
$ 3,830
$ 2,336
—
$ 2,336
$ 2,893
—
0.13 %
0.06 %
2015
$ 916
90
1,678
98
443
$ 3,225
$ 4,146
—
$ 4,146
$ 3,296
—
0.31 %
0.11 %
2014
$
962
92
4,318
103
852
$ 6,327
$ 2,549
—
$ 2,549
$ 5,969
—
0.20 %
0.07 %
$ 4,471
—
$ 4,471
$ 3,048
—
0.40 %
0.14 %
2013
$ 1,199
94
4,520
608
1,367
$ 7,788
2012
$ 766
96
2,281
1,500
1,282
$ 5,925
At December 31, 2016, 2015, 2014, 2013, and 2012, impaired loans had specific reserves of $173,000, $250,000, $904,000, $1,019,000, and
$1,732,000 respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $229,730,000, $185,299,000, $143,696,000, $109,301,000, and
$26,786,000 at December 31, 2016, 2015, 2014, 2013, and 2012, respectively. The Company had no loans held for sale at December 31, 2016, December 31,
2015, December 31, 2014, December 31, 2013, and $9,378,000 at December 31, 2012.
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 $1,629,000 at December 31, 2016, $1,305,000 at December 31, 2015, $941,000 at
December 31, 2014, $703,000 for December 31, 2013, and $137,000 for December 31, 2012.
9
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
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 Company’s 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 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. Nonaccrual loans decreased during 2013 primarily as a result of a
charge-off of a construction loan and a decrease in residential real estate nonperforming loans.
The Company continues to monitor closely $35,583,000 and $11,203,000 at December 31, 2016 and 2015, 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, 2016, 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.
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
Year Ended December 31,
condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Company’s allowance for
(dollars in thousands)
loan losses for the years indicated.
Year-end loans outstanding
2016
2015
2014
2013
2012
(net of unearned discount and deferred loan fees)
$ 1,923,933
$ 1,731,536
$ 1,331,366
$ 1,264,763
$ 1,111,788
Average loans outstanding
(net of unearned discount and deferred loan fees)
$ 1,838,136
$ 1,507,546
$ 1,307,888
$ 1,184,912
$ 1,036,296
Balance of allowance for
loan losses at the beginning of year
Loans charged-off:
Commercial and industrial
Construction
Commercial real estate
Residential real estate
Consumer
Total loans charged-off
Recovery of loans previously charged-off:
Commercial and industrial
Construction
Real estate
Consumer
Total recoveries of loans previously charged-off:
Net loan (recoveries) charge-offs
Provision charged to operating expense
Reclassification to other liabilities
$
23,075
$
22,318
$
20,941
$
19,197
$
16,574
—
—
—
27
362
389
132
—
6
296
434
(45)
1,375
(89)
—
172
298
—
311
781
212
780
91
255
1,338
(557)
200
—
333
500
—
24
525
1,382
201
—
117
391
709
673
2,050
—
234
1,000
—
—
579
1,813
389
—
31
427
847
966
2,710
—
1,253
—
—
351
697
2,301
307
—
45
422
774
1,527
4,150
—
Balance at end of year
$
24,406
$
23,075
$
22,318
$
20,941
$
19,197
Ratio of net (recoveries) charge-offs during the year
to average loans outstanding
Ratio of allowance for loan losses to loans outstanding
0.00 %
1.27 %
(0.04) %
1.33 %
0.05 %
1.68 %
0.08 %
1.66 %
0.15 %
1.73 %
The amount of the allowance for loan losses results from management’s evaluation of the quality of the loan portfolio considering such factors as loan status, specific
reserves on impaired loans, collateral values, financial 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 2013, 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 a lower level of charge-off activity combined with changes in the portfolio composition and related methodology enhancements to
address these changes.
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 Company’s 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
10
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
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 Company’s 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.
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.
Commercial
and Industrial
Municipal
Commercial
Real Estate
Total
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2016.
(in thousands)
Credit Rating:
Aaa-Aa3
A1-A3
Baa1-Baa3
Ba2
Total
$ 334,674
188,777
—
—
$ 66,245
33,365
26,970
3,610
$ 6,596
129,423
127,366
—
$ 407,515
351,565
154,336
3,610
$ 523,451
$ 130,190
$ 263,385
$ 917,026
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2015.
(in thousands)
Commercial
and Industrial
Municipal
Commercial
Real Estate
Total
Credit Rating:
Aaa-Aa3
A1-A3
Baa1-Baa3
Ba2
Total
$ 234,733
140,419
—
—
$ 63,865
7,400
8,890
4,480
7,547
$
130,872
167,489
—
$ 306,145
278,691
176,379
4,480
$ 375,152
$ 84,635
$ 305,908
$ 765,695
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
2015
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:
Percent
of Loans
in Each
Category
to Total
Loans
Percent
of Loans
in Each
Category
to Total
Loans
Percent
of Loans
in Each
Category
to Total
Loans
Percent
of Loans
in Each
Category
to Total
Loans
Percent
of Loans
in Each
Category
to Total
Loans
Amount
Amount
Amount
Amount
Amount
2016
2014
2013
2012
(dollars in thousands)
Construction and land development
$ 1,012
0.8 %
$ 2,041
1.6 %
$ 1,592
1.7 %
$ 2,174
Commercial and industrial
6,972 31.8 %
5,899 26.1 %
4,757 11.2 %
2,617
1,612
7.1 %
994
4.9 %
1,488
3.1 %
655
11,135 36.2 %
10,589 41.7 %
11,199 52.3 %
10,935 55.0 %
9,041
51.7 %
1,698 12.5 %
1,320 14.7 %
776 19.3 %
2,006 22.6 %
1,994
25.3 %
582
0.6 %
644
0.7 %
1,102 11.0 %
1,077 10.3 %
810
1.0 %
599 11.4 %
432
0.8 %
959 10.3 %
293
511
1,097
1,163
0.7 %
10.7 %
333
886
760
$ 24,406 100.0 %
$ 23,075 100.0 %
$ 22,318 100.0 %
$ 20,941 100.0 %
$ 19,197 100.0 %
2.6 %
6.1 %
2.6 %
$ 3,041
3,118
24
3.5 %
8.0 %
0.1 %
Municipal
Commercial real estate
Residential real estate
Consumer and other
Home equity
Unallocated
Total
Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review
the Company’s 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.”
11
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
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 customer’s 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 customer’s checking account.
Interest rates on deposits are set twice per month by the Bank’s 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.
Percent
Percent
Amount
Amount
Percent
2016
2015
2014
Amount
The following table sets forth the average balances of the Bank’s deposits for the periods indicated.
(dollars in thousands)
Demand Deposits
$ 609,159
17.8 %
$ 518,161
17.2 %
$ 481,035 16.8 %
Savings and Interest Checking
1,322,714
38.6 %
1,139,449
37.8 %
1,096,303 38.2 %
Money Market
1,041,404
30.4 %
951,197
31.5 %
920,485 32.1 %
Time Certificates of Deposit
452,562
13.2 %
408,711
13.5 %
372,699 12.9 %
Total
$ 3,425,839 100.0 %
$ 3,017,518 100.0 %
$ 2,870,522 100.0 %
2016
2015
(dollars in thousands)
Time Deposits of $100,000 or more as of December 31, are as follows:
Three months or less
Three months through six months
Six months through twelve months
Over twelve months
$ 84,522
42,736
85,476
153,243
$ 106,268
86,015
63,409
99,108
Total
$ 365,977
$ 354,800
Borrowings
The Bank’s borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLBB”) borrowings collateralized by a blanket pledge agreement on the Bank’s
FHLBB stock, certain qualified investment securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s borrowings from the
FHLBB totaled $293,000,000, a decrease of $75,000,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2016,
was approximately $239,163,000. 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 ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The
Company is using the proceeds primarily for general business purposes.
Securities Sold Under Agreements to Repurchase
The Bank’s remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled
$182,280,000, a decrease of $15,570,000 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 Company’s operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent
basis increased 7.3% in 2016 to $86,999,000, compared with $81,099,000 in 2015. 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 increase in net interest income for 2015 was mainly due to an
8.3% increase in the average balances of earning assets, combined with a similar increase in deposits. The level of interest rates, the ability of the Company’s earning
assets and liabilities to adjust to changes in interest rates and the mix of the Company’s earning assets and liabilities affect net interest income. The net interest margin
on a fully taxable equivalent basis decreased to 2.12% in 2016 from 2.18% in 2015 and decreased from 2.22% in 2014. The decrease in the net interest margin, for
2016 and 2015, 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 $416,000, $945,000 and $693,000 respectively, of prepayment penalties, which
are included in interest income on loans, for 2016, 2015, and 2014, 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.
12
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
Year Ended December 31,
The following table sets forth the distribution of the Company’s average assets, liabilities and stockholders’ equity, and average rates earned or paid on a fully taxable
equivalent basis for each of the years indicated.
2016
2015
2014
Average
Balance
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
Average
Balance
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
Average
Balance
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans(2)
Taxable
Tax-exempt
Securities available-for-sale:(3)
Taxable
Tax-exempt
Securities held-to-maturity:
Taxable
Interest-bearing deposits
in other banks
$ 866,180
971,956
$ 34,324
35,943
3.96 %
3.70 %
$ 783,451
724,095
$ 32,136
30,862
4.10 %
4.26 %
$ 757,088
550,800
$ 32,198
27,798
4.25 %
5.05 %
349,023
149,631
3,969
1,465
1.14 %
0.98 %
334,249
120,389
2,558
853
0.77 %
0.71 %
445,656
55,272
2,883
428
0.65 %
0.77 %
1,533,032
32,679
2.13 %
1,603,530
34,388
2.14 %
1,499,995
31,745
2.12 %
235,339
1,236
0.53 %
157,765
436
0.28 %
129,472
352
0.27 %
Total interest-earning assets
4,105,161
109,616
2.67 %
3,723,479
101,233
2.72 %
3,438,283
95,404
2.77 %
Noninterest-earning assets
Allowance for loan losses
210,203
(23,872)
Total assets
$ 4,291,492
191,700
(22,559)
$ 3,892,620
166,792
(21,876)
$ 3,583,199
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts
Savings accounts
Money market accounts
Time deposits
$ 904,892
417,822
1,041,404
452,562
$ 2,311
1,709
3,542
5,706
0.26 %
0.41 %
0.34 %
1.26 %
$ 794,293
345,156
951,197
408,711
$ 1,798
1,019
3,038
4,887
0.23 %
0.30 %
0.32 %
1.20 %
$ 762,280
334,023
920,485
372,699
$ 1,677
862
2,715
4,421
0.22 %
0.26 %
0.29 %
1.19 %
Total interest-bearing deposits
2,816,680
13,268
0.47 %
2,499,357
10,742
0.43 %
2,389,487
9,675
0.40 %
Securities sold under
agreements to repurchase
Other borrowed funds and
subordinated debentures
222,956
472
0.21 %
245,276
487
0.20 %
216,937
391
0.18 %
357,974
8,877
2.48 %
374,108
8,905
2.38 %
271,710
9,070
3.34 %
Total interest-bearing liabilities
3,397,610
22,617
0.67 %
3,118,741
20,134
0.65 %
2,878,134
19,136
0.66 %
Noninterest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income on a
fully taxable equivalent basis
Less taxable equivalent adjustment
Net interest income
Net interest spread
Net interest margin
(1)
609,159
57,602
4,064,371
227,121
$ 4,291,492
518,161
51,247
3,688,149
204,471
$ 3,892,620
481,035
35,033
3,394,202
188,997
$ 3,583,199
$ 86,999
(12,917)
$ 74,082
$ 81,099
(11,140)
$ 69,959
$ 76,268
(10,033)
$ 66,235
2.00 %
2.12 %
2.07 %
2.18 %
2.11 %
2.22 %
(2)
(3)
On a fully taxable equivalent basis calculated using a federal tax rate of 34%.
Nonaccrual loans are included in average amounts outstanding.
At amortized cost.
13
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
The following table summarizes the year-to-year changes in the Company’s 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 year’s volume. Changes due to volume
Year Ended December 31,
are computed by multiplying the change in volume by the prior year’s 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.
2016 Compared with 2015
Increase/(Decrease)
Due to Change in
2015 Compared with 2014
Increase/(Decrease)
Due to Change in
(dollars in thousands)
Interest income:
Loans
Taxable
Tax-exempt
Securities available-for-sale:
Taxable
Tax-exempt
Securities held-to-maturity:
Taxable
Interest-bearing deposits in other banks
Total interest income
Interest expense:
Deposits:
NOW accounts
Savings accounts
Money market accounts
Time deposits
Total interest-bearing deposits
Securities sold under agreements to repurchase
Other borrowed funds and subordinated debentures
Total interest expense
Change in net interest income
Volume
Rate
Total
Volume
Rate
Total
$ 3,306
9,556
$ (1,118)
(4,475)
$ 2,188
5,081
$ 1,101
7,836
$ (1,163)
(4,772)
$
(62)
3,064
118
238
1,293
374
1,411
612
(1,504)
283
(205)
517
(1,709)
800
11,997
(3,614)
8,383
267
244
299
543
246
446
205
276
513
690
504
819
1,353
(46)
(392)
1,173
31
364
2,526
(15)
(28)
915
1,568
2,483
(797)
464
2,216
78
10,898
72
30
93
430
625
54
2,861
3,540
472
(39)
427
6
(325)
425
2,643
84
(5,069)
5,829
49
127
230
36
442
42
(3,026)
(2,542)
121
157
323
466
1,067
96
(165)
998
$ 11,082
$ (5,182)
$ 5,900
$ 7,358
$ (2,527)
$ 4,831
Average earning assets were $4,105,161,000 in 2016, an increase of $381,682,000 or 10.3% from the average in 2015, which was 8.3% higher than the average
in 2014. Total average securities, including securities available-for-sale and securities held-to-maturity, were $2,031,686,000, a decrease of 1.3% from the average
in 2015. The decrease in securities volume was mainly attributable to a decrease in taxable securities. An increase in short term rates resulted in slightly higher
securities income, which increased 0.8% to $38,113,000 on a fully tax equivalent basis. Total average loans increased 21.9% to $1,838,136,000 after increasing
$199,658,000 in 2015. The primary reason for the increase in loans was due in large part to an increase in tax-exempt lending as well as residential second mortgage
lending. The increase in loan volume resulted in higher loan income. Loan income increased by 11.5% or $7,269,000 to $70,267,000. Total loan income was
$59,996,000 in 2014. Prepayment penalties collected were $416,000, $945,000, and $693,000 for 2016, 2015, and 2014, respectively.
The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 13.5%, or $408,321,000, in 2016 after increasing by 5.1%,
or $146,996,000, in 2015. Deposits increased in 2016, primarily as a result of increases in demand deposits, savings, money market, NOW accounts, and time
deposits. Deposits increased in 2015, primarily as a result of increases in demand deposits, savings, money market, NOW accounts, and time deposits. Borrowed funds
and subordinated debentures decreased by 6.2% in 2016, following an increase of 26.8% in 2015. The majority of the Company’s borrowed funds are borrowings
from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $16,134,000, and average retail repurchase
agreements decreased by $22,320,000 in 2016. Interest expense totaled $22,617,000 in 2016, an increase of $2,483,000, or 12.3%, from 2015 when interest
expense increased 5.2% from 2014. The increase in interest expense, for 2016, is primarily due to increases in the average balances of deposits offset, somewhat by a
decrease in borrowed funds. The increase in interest expense, for 2015, is primarily due to increases in the average balances of deposits and borrowed funds.
Provision for Loan Losses
The provision for loan losses was $1,375,000 in 2016, compared with $200,000 in 2015 and $2,050,000 in 2014. These provisions are the result of
management’s 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 2016, primarily as a result of an increase in loan
balances. The provision for loan losses decreased during 2015, primarily as a result of changes in the portfolio composition, related methodology enhancements
to address these changes, as well as net recoveries being realized during the year. 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 Company’s new loan
originations and related methodology enhancements to address these changes.
14
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
The allowance for loan losses was $24,406,000 at December 31, 2016,
compared with $23,075,000 at December 31, 2015. Expressed as a
percentage of outstanding loans at year-end, the allowance was 1.27% in 2016
and 1.33% in 2015. The allowance for loan losses increased primarily as a
result of an increase in loan balances. The ratio of allowance for loan losses as a
percentage of outstanding loans at year-end decreased primarily as a result of
changes in portfolio composition and lower historical loss rates.
Nonperforming loans, which include all non-accruing loans, totaled $1,084,000
on December 31, 2016, compared with $2,336,000 on December 31, 2015.
Nonperforming loans decreased primarily as a result of a decrease in consumer
mortgage nonperforming loans.
Other Operating Income
During 2016, 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 Company’s 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 customer’s 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 Bank’s representatives. The Bank receives a share in the commission revenues.
Total other operating income in 2016 was $16,222,000, an increase of
$229,000, or 1.4%, compared to 2015. This increase followed an increase
of $722,000, or 4.7%, in 2015, compared to 2014. Included in other
operating income are net gains on sales of securities of $64,000, $594,000
and $450,000 in 2016, 2015 and 2014, respectively. Also included in other
operating income are net gains on sales of mortgage loans of $1,331,000,
$1,034,000 and $757,000 in 2016, 2015 and 2014, respectively. Service
charge income, which continues to be a major source of other operating income,
totaling $7,907,000 in 2016, increased $175,000 compared to 2015. This
followed a decrease of $331,000 in 2015 compared to 2014. 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. The decrease in fees, in 2015, was mainly attributable to a
decrease in overdraft fees and fees collected from processing activities; this was
offset somewhat by an increase in debit card fees. Lockbox revenues totaled
$3,164,000, down $47,000 in 2016 following an increase of $112,000 in
2015. Other income totaled $3,441,000, up $399,000 in 2016 following an
increase of $442,000 in 2015. 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. The increase in 2015 was
primarily the result of increases in merchant and charge card sales royalties.
Operating Expenses
Total operating expenses were $64,757,000 in 2016, compared to
$62,198,000 in 2015 and $56,730,000 in 2014.
Salaries and employee benefits expenses increased by $1,452,000 or 3.8% in
2016, after increasing by 10.0% in 2015. The increase in 2016 was mainly
attributable to merit increases in salaries, bonus accruals, pension costs and
15
health insurance costs. The increase in 2015 was mainly attributable to increases
in staff levels, merit increases in salaries, pension costs and health insurance costs.
Occupancy expense increased by $31,000, or 0.5%, in 2016, following an
increase of $613,000, or 11.1%, in 2015. The increase in 2016 was primarily
attributable to an increase in rent expense. The increase in 2015 was primarily
attributable to an increase in rent expense, depreciation expense and building
maintenance associated with branch expansion.
Equipment expense increased by $219,000, or 8.3%, in 2016, following an
increase of $297,000, or 12.8%, in 2015. The increase in 2016 was primarily
attributable to an increase in depreciation expense. The increase in 2015 was
primarily attributable to an increase in depreciation expense associated with
branch expansion.
FDIC assessments decreased by $250,000, or 11.6%, in 2016, following
an increase of $182,000, or 9.2%, in 2015. FDIC assessments decreased in
2016 mainly as a result of a decrease in the assessment rate. FDIC assessments
increased in 2015 mainly as a result of deposit growth.
Other operating expenses increased by $1,107,000 in 2016, which followed
an $876,000 increase in 2015. The increase in 2016 was primarily attributable
to an increase in marketing expenses, telephone expenses, software maintenance
costs, contributions, and postage expenses. The increase in 2015 was primarily
attributable to an increase in bank security, software maintenance costs, and
legal expenses.
Provision for Income Taxes
Income tax expense was ($362,000) in 2016, $533,000 in 2015, and
$866,000 in 2014. The effective tax rate was (1.5%) in 2016, 2.3% in 2015
and 3.8% in 2014. The decrease in the effective tax rate for 2016 and 2015 was
mainly attributable to an increase in tax-exempt interest income as a percentage
of taxable income. The federal tax rate was 34% in 2016, 2015 and 2014.
Market Risk and Asset Liability Management
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company’s market risk arises primarily from interest rate risk inherent in its
lending and deposit-taking activities. To that end, management actively monitors
and manages its interest rate risk exposure.
The Company’s profitability is affected by fluctuations in interest rates. A
sudden and substantial change in interest rates may adversely impact the
Company’s 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 Company’s 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
+300
+200
+100
–100
–200
(9.0)
(6.4)
(4.7)
(2.1)
0.8
(0.4)
(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 Company’s policy parameters.
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income
and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. 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 $239,334,000 on December 31, 2016, compared with $223,957,000 on December 31, 2015. 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 $240,041,000 at December 31, 2016, compared with $214,544,000 at December 31, 2015. The Company’s 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,
decreased primarily as a result of a decrease in unrealized losses on securities transferred from available-for-sale to held-to-maturity and amortization of the pension
liability. This was offset, somewhat, by an increase in unrealized losses on securities available-for-sale.
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:
Leverage ratios
Common equity tier 1 risk weighted capital ratios
Tier 1 risk weighted capital ratios
Total risk weighted capital ratios
6.02 %
11.25 %
11.25 %
12.27 %
6.28 %
10.41 %
11.70 %
12.72 %
4.00 %
4.50 %
6.00 %
8.00 %
Company
Bank
Minimum
Capital Ratios
Contractual Obligations, Commitments, and Contingencies
Contractual Obligations and Commitments by Maturity
The Company has entered into contractual obligations and commitments. The following tables summarize the Company’s contractual cash obligations and other
(dollars in thousands)
commitments at December 31, 2016.
Payments Due – By Period
CONTRACTUAL OBLIGATIONS
FHLBB advances
Subordinated debentures
Retirement benefit obligations
Lease obligations
Customer repurchase agreements
Total contractual cash obligations
OTHER COMMITMENTS
Lines of credit
Standby and commercial letters of credit
Other commitments
Total commitments
Total
$ 293,000
36,083
40,331
12,313
182,280
$ 564,007
Total
$ 362,357
6,796
88,150
$ 457,303
Less Than
One Year
$ 77,500
—
3,488
2,408
182,280
$ 265,676
One to
Three Years
$ 112,500
—
6,951
4,276
—
$ 123,727
Amount of Commitment Expiring – By Period
Less Than
One Year
$ 22,348
6,209
18,091
$ 46,648
One to
Three Years
$ 125,912
320
1,050
Three to
Five Years
$ 58,000
—
7,270
3,103
—
$ 68,373
Three to
Five Years
$ 5,698
106
2,534
$ 127,282
$ 8,338
After Five
Years
$ 45,000
36,083
22,622
2,526
—
$ 106,231
After Five
Years
$ 208,399
161
66,475
$ 275,035
16
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
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 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 Company’s 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-
2015
Contract or Notional Amount
balance-sheet instruments. Financial instruments with off-balance-sheet risk at
(dollars in thousands)
December 31 are as follows:
Financial instruments whose contract amount
2016
represents credit risk:
Commitments to originate 1–4 family mortgages
Standby and commercial letters of credit
Unused lines of credit
Unadvanced portions of construction loans
Unadvanced portions of other loans
$ 13,877
6,796
362,357
22,049
52,224
$ 5,638
4,936
320,874
11,589
41,717
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
customer’s 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 management’s 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 $44,000 and $51,000 for 2016 and 2015, 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 Company’s
financial statements.
17
Century Bancorp, Inc. AR ’16Management’s Discussion and Analysis of Results of Operations and Financial Condition
December 31,
(dollars in thousands except share data)
ASSETS
Cash and due from banks (Note 2)
Federal funds sold and interest-bearing deposits in other banks
Total cash and cash equivalents
Short-term investments
Securities available-for-sale, amortized cost $500,220 in 2016 and $404,977 in 2015
(Notes 3, 9 and 11)
Securities held-to-maturity, fair value $1,635,808 in 2016 and $1,438,960 in 2015
(Notes 4 and 11)
Federal Home Loan Bank of Boston, stock at cost
Loans, net (Note 5)
Less: allowance for loan losses (Note 6)
Net loans
Bank premises and equipment (Note 7)
Accrued interest receivable
Other assets (Notes 5, 8 and 16)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Demand deposits
Savings and NOW deposits
Money market accounts
Time deposits (Note 10)
Total deposits
Securities sold under agreements to repurchase (Note 11)
Other borrowed funds (Note 12)
Subordinated debentures (Note 12)
Other liabilities
Total liabilities
Commitments and contingencies (Notes 7, 18 and 19)
Stockholders’ equity (Note 15):
Preferred Stock – $1.00 par value; 100,000 shares authorized;
no shares issued and outstanding
Common stock, Class A,
$1.00 par value per share; authorized 10,000,000 shares;
issued 3,600,729 shares in 2016 and 2015
Common stock, Class B,
$1.00 par value per share; authorized 5,000,000 shares;
issued 1,967,180 shares in 2016 and 2015
Additional paid-in capital
Retained earnings
Unrealized losses on securities available-for-sale, net of taxes
Unrealized losses on securities transferred to held-to-maturity, net of taxes
Pension liability, net of taxes
Total accumulated other comprehensive loss, net of taxes (Notes 3, 13 and 15)
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying “Notes to Consolidated Financial Statements.”
Consolidated Balance Sheets
2016
2015
$
62,400
173,751
236,151
3,183
$
52,877
167,847
220,724
3,233
499,297
404,623
1,653,986
21,042
1,923,933
24,406
1,899,527
23,417
9,645
116,360
$ 4,462,608
$ 689,286
1,304,394
1,181,179
478,359
3,653,218
182,280
293,000
36,083
57,986
1,438,903
28,807
1,731,536
23,075
1,708,461
24,106
8,002
110,582
$ 3,947,441
$ 541,955
1,070,585
989,094
473,426
3,075,060
197,850
368,000
36,083
55,904
4,222,567
3,732,897
—
—
3,601
3,601
1,967
12,292
243,565
261,425
(567)
(4,084)
(16,733)
(21,384)
240,041
1,967
12,292
221,232
239,092
(246)
(6,896)
(17,406)
(24,548)
214,544
$ 4,462,608
$ 3,947,441
18
Century Bancorp, Inc. AR ’16
Consolidated Statements of Income
Year Ended December 31,
(dollars in thousands except share data)
INTEREST INCOME
Loans, taxable
Loans, non-taxable
Securities available-for-sale, taxable
Securities available-for-sale, non-taxable
Federal Home Loan Bank of Boston dividends
Securities held-to-maturity
Federal funds sold, interest-bearing deposits in other banks and short-term investments
Total interest income
INTEREST EXPENSE
Savings and NOW deposits
Money market accounts
Time deposits
Securities sold under agreements to repurchase
Other borrowed funds and subordinated debentures
Total interest expense
Net interest income
Provision for loan losses (Note 6)
Net interest income after provision for loan losses
OTHER OPERATING INCOME
Service charges on deposit accounts
Lockbox fees
Brokerage commissions
Net gains on sales of securities
Gains on sales of mortgage loans
Other income
Total other operating income
OPERATING EXPENSES
Salaries and employee benefits (Note 17)
Occupancy
Equipment
FDIC assessments
Other (Note 20)
Total operating expenses
Income before income taxes
Provision for income taxes (Note 16)
Net income
SHARE DATA (Note 14)
Weighted average number of shares outstanding, basic
Class A
Class B
Weighted average number of shares outstanding, diluted
Class A
Class B
Basic earnings per share
Class A
Class B
Diluted earnings per share
Class A
Class B
See accompanying “Notes to Consolidated Financial Statements.”
19
2016
2015
2014
$
34,324
$
32,136
$
32,198
23,440
3,003
1,051
966
32,679
1,236
96,699
4,020
3,542
5,706
472
8,877
22,617
74,082
1,375
72,707
7,907
3,164
315
64
1,331
3,441
16,222
40,048
6,147
2,845
1,902
13,815
64,757
24,172
(362)
19,992
1,900
583
658
34,388
436
90,093
2,817
3,038
4,887
487
8,905
20,134
69,959
200
69,759
7,732
3,211
380
594
1,034
3,042
15,993
38,596
6,116
2,626
2,152
12,708
62,198
23,554
533
17,910
2,601
282
283
31,745
352
85,371
2,539
2,715
4,421
391
9,070
19,136
66,235
2,050
64,185
8,063
3,099
302
450
757
2,600
15,271
35,096
5,503
2,329
1,970
11,832
56,730
22,726
866
$
24,534
$
23,021
$
21,860
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
5.35
2.68
4.41
2.68
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
5.02
2.51
4.13
2.51
3,591,732
1,969,030
5,562,209
1,969,030
$
$
$
$
4.78
2.39
3.93
2.39
Century Bancorp, Inc. AR ’16
Year Ended December 31,
(dollars in thousands)
NET INCOME
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period
Less: reclassification adjustment for gains included in net income
Total unrealized gains (losses) on securities
Accretion of net unrealized losses transferred during period
Defined benefit pension plans:
Pension liability adjustment:
Net (loss) gain
Amortization of prior service cost and loss included in net periodic benefit cost
Total pension liability adjustment
Other comprehensive (loss) income
Comprehensive income (loss)
See accompanying “Notes to Consolidated Financial Statements.”
Consolidated Statements of Comprehensive Income
2016
2015
2014
$
24,534
$
23,021
$
21,860
(289)
(32)
(321)
2,812
(297)
970
673
3,164
38
(361)
(323)
3,583
(2,890)
853
(2,037)
1,223
1,401
(279)
1,122
3,188
(8,544)
226
(8,318)
(4,008)
$
27,698
$
24,244
$
17,852
20
Century Bancorp, Inc. AR ’16
Consolidated Statements of Changes in Stockholders’ Equity
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Total
Retained Comprehensive Stockholders’
Earnings
Equity
Loss
(dollars in thousands except share data)
BALANCE, DECEMBER 31, 2013
$ 3,580
$ 1,976
$ 11,932
$ 180,747
$ (21,763)
$ 176,472
Net income
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $756 in taxes
and $450 in realized net gains
Accretion of net unrealized losses transferred during the period,
net of $2,004 in taxes
Pension liability adjustment, net of $5,532 in taxes
Conversion of Class B Common Stock to Class A
Common Stock, 9,000 shares
Stock options exercised, 11,325 shares
Cashless stock options exercised, 7,700 shares
Cash dividends, Class A Common Stock, $0.48 per share
Cash dividends, Class B Common Stock, $0.24 per share
—
—
—
—
9
12
—
—
—
—
—
—
—
(9)
—
—
—
—
—
21,860
—
21,860
—
—
—
—
349
11
—
—
—
—
—
—
—
—
(1,723)
(473)
1,122
1,122
3,188
(8,318)
—
—
—
—
—
3,188
(8,318)
—
361
11
(1,723)
(473)
BALANCE, DECEMBER 31, 2014
$ 3,601
$ 1,967
$ 12,292
$ 200,411
$ (25,771)
$ 192,500
Net income
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $211 in taxes
and $594 in realized net gains
Accretion of net unrealized losses transferred during the period,
net of $1,919 in taxes
Pension liability adjustment, net of $1,357 in taxes
Cash dividends, Class A Common Stock, $0.48 per share
Cash dividends, Class B Common Stock, $0.24 per share
—
—
—
—
—
—
—
—
—
—
—
—
—
23,021
—
23,021
—
—
—
—
—
—
—
—
(1,728)
(472)
(323)
(323)
3,583
(2,037)
—
—
3,583
(2,037)
(1,728)
(472)
BALANCE, DECEMBER 31, 2015
$ 3,601
$ 1,967
$ 12,292
$ 221,232
$ (24,548)
$ 214,544
Net income
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $248 in taxes
and $52 in realized net gains
Accretion of net unrealized losses transferred during the period,
net of $1,505 in taxes
Pension liability adjustment, net of $448 in taxes
Cash dividends, Class A Common Stock, $0.48 per share
Cash dividends, Class B Common Stock, $0.24 per share
—
—
—
—
—
—
—
—
—
—
—
—
—
24,534
—
24,534
—
—
—
—
—
—
(321)
(321)
—
—
(1,729)
(472)
2,812
673
—
—
2,812
673
(1,729)
(472)
BALANCE, DECEMBER 31, 2016
$ 3,601
$ 1,967 $ 12,292 $ 243,565
$ (21,384)
$ 240,041
See accompanying “Notes to Consolidated Financial Statements.”
21
Century Bancorp, Inc. AR ’16
Year Ended December 31,
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of portfolio loans
Gain on sale of fixed assets
Net gains on sales of securities
Provision for loan losses
Deferred tax benefit
Net depreciation and amortization
(Increase) decrease in accrued interest receivable
Gain on sales of other real estate owned
Increase in other assets
Increase in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of short-term investments
Purchase of short-term investments
Proceeds from redemptions of Federal Home Loan Bank of Boston stock
Purchase of Federal Home Loan Bank of Boston stock
Proceeds from calls/maturities of securities available-for-sale
Proceeds from sales of securities available-for-sale
Purchase of securities available-for-sale
Proceeds from calls/maturities of securities held-to-maturity
Proceeds from sales of securities held-to-maturity
Purchase of securities held-to-maturity
Proceeds from sales of portfolio loans
Net increase in loans
Proceeds from sales of other real estate owned
Proceeds from sales of fixed assets
Capital expenditures
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposit accounts
Net increase in demand, savings, money market and NOW deposits
Net proceeds from the exercise of stock options
Cash dividends
Net decrease in securities sold under agreements to repurchase
Net (decrease) increase in other borrowed funds
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
Change in unrealized losses on securities available-for-sale, net of taxes
Change in unrealized losses on securities transferred to held-to-maturity, net of taxes
Pension liability adjustment, net of taxes
Transfer of loans to other real estate owned
See accompanying “Notes to Consolidated Financial Statements.”
Consolidated Statements of Cash Flows
2016
2015
2014
$ 24,534
$ 23,021
$ 21,860
(1,331)
—
(64)
1,375
(4,676)
3,561
(1,643)
—
(2,953)
3,203
22,006
3,233
(3,183)
10,381
(2,616)
277,657
2,376
(375,608)
416,599
192
(627,670)
74,668
(265,732)
—
—
(2,263)
(491,966)
4,933
573,225
—
(2,201)
(15,570)
(75,000)
485,387
15,427
220,724
$ 236,151
$
$ 22,668
3,730
(321)
2,812
673
—
(1,034)
—
(594)
200
(3,259)
3,296
(1,761)
(57)
(10,862)
2,103
11,053
—
(1,102)
891
(4,782)
206,109
47,853
(210,302)
414,786
3,698
(444,969)
66,600
(467,048)
1,973
—
(2,652)
(388,945)
90,281
247,188
—
(2,200)
(14,510)
(27,500)
293,259
(84,633)
305,357
$ 220,724
$
$ 19,979
4,300
(323)
3,583
(2,037)
1,916
(757)
(5)
(450)
2,050
(3,613)
2,937
298
(60)
(2,849)
2,976
22,387
4,617
(2,131)
680
(7,524)
153,832
40,285
(176,224)
267,486
—
(181,411)
44,501
(111,528)
615
5
(3,104)
30,099
921
20,831
361
(2,196)
(2,080)
140,356
158,193
210,679
94,678
$ 305,357
$
$ 19,168
4,493
1,122
3,188
(8,318)
555
22
Century Bancorp, Inc. AR ’16
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 Bank’s wholly owned subsidiaries, Century Subsidiary
Investments, Inc. (“CSII”), Century Subsidiary Investments, Inc. II (“CSII II”),
Century Subsidiary Investments, Inc. III (“CSII III”) and Century Financial
Services Inc. (“CFSI”). CSII, CSII II, and CSII III are engaged in buying, selling and
holding investment securities. CFSI has the power to engage in financial agency,
securities brokerage, and investment and financial advisory services and related
securities credit. The Company also owns 100% of Century Bancorp Capital
Trust II (“CBCT II”). The entity is an unconsolidated subsidiary of the Company.
All significant intercompany accounts and transactions have been eliminated
in consolidation. The Company provides a full range of banking services to
individual, business and municipal customers in Massachusetts, New Hampshire,
Rhode Island, Connecticut and New York. As a bank holding company, the
Company is subject to the regulation and supervision of the Federal Reserve
Board. The Bank, a state chartered financial institution, is subject to supervision
and regulation by applicable state and federal banking agencies, including the
Federal Reserve Board, the Federal Deposit Insurance Corporation (the “FDIC”)
and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is
also subject to various requirements and restrictions under federal and state
law, including requirements to maintain reserves against deposits, restrictions
on the types and amounts of loans that may be granted and the interest that
may be charged thereon, and limitations on the types of investments that may
be made and the types of services that may be offered. Various consumer laws
and regulations also affect the operations of the Bank. In addition to the impact
of regulation, commercial banks are affected significantly by the actions of the
Federal Reserve Board as it attempts to control the money supply and credit
availability in order to influence the economy. All aspects of the Company’s
business are highly competitive. The Company faces aggressive competition
from other lending institutions and from numerous other providers of financial
services. The Company has one reportable operating segment.
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America and general
practices within the banking industry. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could differ from
those estimates.
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 Company’s allowance for loan losses.
Such agencies may require the Company to recognize additions to the allowance
for loan losses based on their judgments about information available to them at
the time of their examination. Certain reclassifications are made to prior-year
amounts whenever necessary to conform with the current-year presentation.
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:
23
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 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 management’s best estimate of fair value, where the
inputs into the determination of fair value require significant management
judgment or estimation. Instruments that are included in this category generally
include certain commercial mortgage loans, certain private equity investments,
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, 2016 and 2015, 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 Company’s 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 Company’s 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
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements 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 Company’s consolidated statement of income.
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, 2016, 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 management’s 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 loan’s 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 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 loan’s principal is
not probable. The specific factors that management considers in making the
determination that the collectibility of the loan’s principal is not probable
include the delinquency status of the loan, the fair value of the collateral, if
secured, and, the financial strength of the borrower and/or guarantors. 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 Company’s 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 loan’s 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 Company’s 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 Company’s 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, 2016.
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 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,
24
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements 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, 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 management’s 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. Management’s 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 management’s
opinion, collectibility is not probable. The specific factors that management
considers in making the determination that the collectibility of the loan’s
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 management’s 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 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 loan’s 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
25
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 Company’s historical
experience. For larger loans with available external credit ratings, these ratings
are utilized rather than the Company’s 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 Company’s 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 Company’s loan portfolio. Market risk factors may consist of changes to
general economic and business conditions, such as unemployment and GDP that
may impact the Company’s 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 Company’s 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 management’s assessment of current conditions.
After considering the above components, an unallocated component may be
generated to cover uncertainties that could affect management’s 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 Company’s 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.
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements 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 unit’s 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.
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
Company’s 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 management’s 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, 2016.
The Company uses the fair value method to account for stock options. There
were no options granted during 2016 and 2015.
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.
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 Company’s judgment
changes regarding an uncertain tax position.
EARNINGS PER SHARE (“EPS”)
Class A and Class B shares participate equally in undistributed earnings. Under
the Company’s Articles of Organization, the holders of Class A Common Stock
are entitled to receive dividends per share equal to at least 200% of dividends
paid, if any, from time to time, on each share of Class B Common Stock.
Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS
excludes all common stock equivalents. The 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.
26
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements RECENT ACCOUNTING DEVELOPMENTS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts
with Customers (Topic 606). This ASU is intended to create a single source
of revenue guidance which is more principles based than current revenue
guidance. The guidance affects any entity that either enters into contracts
with customers to transfer goods or services, or enters into contracts for the
transfer of non-financial assets, unless those contracts are within the scope of
other standards. In August 2015, the FASB issued ASU 2015-14, “Revenue
from Contracts with Customers (Topic 606): Deferral of the Effective Date” to
amend the effective date of ASU 2014-09. The amendments in ASU 2014-09
are effective for annual and interim periods within fiscal years beginning after
December 15, 2017. Earlier adoption is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim reporting periods
within that reporting period. The FASB has since issued additional related ASUs
amendments intended to clarify certain aspects and improve understanding
of the implementation guidance of Topic 606 but do not change the core
principles of the guidance in Topic 606. The effective date and transition
requirements for the amendments are the same as the effective date and
transition requirements of Topic 606. The Company is currently evaluating the
potential impact of the ASU and its amendments on the Company’s financial
statements and results of operations.
In January 2016, FASB issued ASU 2016-1, “Financial Instruments-Overall”
(Subtopic 825-10) Recognition and Measurement of Financial Assets and
Financial Liabilities. This ASU significantly revises an entity’s accounting related
to (1) the classification and measurement of investments in equity securities and
(2) the presentation of certain fair value changes for financial liabilities measured
at fair value. It also amends certain disclosure requirements associated with the
fair value of financial instruments. This ASU is effective for fiscal years beginning
after December 15, 2017, including interim periods therein. The Company is
currently assessing the applicability of this ASU and has not determined the
impact, if any, as of December 31, 2016.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires
lessees to put most leases on their balance sheet but recognize expenses on
their income statements in a manner similar to today’s accounting. This ASU also
eliminates today’s real estate-specific provisions for all companies. For lessors,
this ASU modifies the classification criteria and the accounting for sales-type
and direct financing leases. This ASU is effective for fiscal years beginning
after December 15, 2018, including interim periods therein. Early adoption is
permitted. The Company is currently assessing the applicability of this ASU and
has not determined the impact, if any, as of December 31, 2016.
In March 2016, the FASB issued ASU 2016-07, Investments—Equity Method
and Joint Ventures (Topic 323) Simplifying the Transition to the Equity Method
of Accounting. This ASU requires that an entity that has an available-for-sale
equity security that becomes qualified for the equity method of accounting
recognize through earnings the unrealized holding gain or loss in accumulated
other comprehensive income at the date the investment becomes qualified for
use of the equity method. This ASU is effective for all entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15,
2016. The effect of this update is not expected to have a material impact on the
Company’s consolidated financial position.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting. This ASU was issued as part of the FASB Simplification Initiative
which intends to reduce the complexity of GAAP while improving usefulness to
users. There are eight main items in this ASU that contribute to the simplification
of share-based accounting. For public entities, this ASU is effective for the
fiscal years beginning after December 15, 2016, including interim periods
27
within those fiscal years. Early adoption is permitted. The effect of this update
is not expected to have a material impact on the Company’s consolidated
financial position.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This ASU was issued to provide financial statement users with more decision-
useful information about the expected credit losses on financial instruments
and other commitments to extend credit held by a reporting entity at each
reporting date. To achieve this objective, the amendments in this ASU replace
the incurred loss impairment methodology in current GAAP with a methodology
that reflects expected credit losses and requires consideration of a broader
range of reasonable and supportable information to inform credit loss estimates.
The amendments in this ASU are effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. The
Company is currently assessing this ASU and has not determined the impact, if
any, as of December 31, 2016.
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 Company is currently assessing
the applicability of this ASU and has not determined the impact, if any, as of
December 31, 2016.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740)
Intra-Entity Transfers of Assets Other Than Inventory. This ASU was issued to
improve the accounting for income tax consequences of intra-entity transfers
of assets other than inventory. For public entities, this ASU is effective for the
fiscal years beginning after December 15, 2017, including interim periods
within those fiscal years. Early adoption is permitted. Management is currently
assessing the applicability of this ASU and has not determined the impact, if any,
as of December 31, 2016.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810)
Interests Held through Related Parties That Are under Common Control. The
amendments of this ASU affect reporting entities that are required to evaluate
whether they should consolidate a Variable Interest Entity within the Variable
Interest Entities Subsections of Subtopic 810-10, Consolidation—Overall, in
certain situations involving entities under common control. For public entities,
this ASU is effective for the fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. Early adoption is permitted.
The effect of this update is not expected to have a material impact on the
Company’s consolidated financial position.
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. Early adoption is permitted.
Management is currently assessing the applicability of this ASU and has not
determined the impact, if any, as of December 31, 2016.
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements 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, 2016, and $0 at December 31, 2015.
December 31, 2016
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Estimated
Fair
Value
December 31, 2015
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Estimated
Fair
Value
Amortized
Cost
3. Securities Available-for-Sale
Amortized
Cost
(dollars in thousands)
U.S. Treasury
U.S. Government Sponsored Enterprises
SBA Backed Securities
U.S. Government Agency and Sponsored
$
$
2,000
25,000
57,899
—
—
14
$ —
48
146
$
2,000
24,952
57,767
$
$
1,999
—
5,983
—
—
8
$
10 $
—
2
1,989
—
5,989
Enterprises Mortgage-Backed Securities
243,703
293
Privately Issued Residential
Mortgage-Backed Securities
Obligations Issued by States and
Political Subdivisions
Other Debt Securities
Equity Securities
1,121
165,281
5,100
116
2
—
18
228
671
14
405
194
-
243,325
232,967
859
300
233,526
1,109
1,437
164,876
4,924
344
157,838
4,600
153
10
—
3
99
13
878
130
-
1,434
156,960
4,473
252
Total
$ 500,220
$
555
$ 1,478
$ 499,297
$ 404,977
$
979
$ 1,333 $ 404,623
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 $210,780,000 and $220,482,000 at December 31, 2016 and 2015, respectively. Also included in
securities available-for-sale at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $53,396,000 and $20,056,000 at
December 31, 2016 and 2015, respectively. The Company realized gains on sales of securities of $52,000, $289,000, and $450,000 from the proceeds of sales
of available-for-sale securities of $2,376,000, $47,853,000, and $40,285,000 for the years ended December 31, 2016, 2015, and 2014, 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.
Amortized
Cost
Fair
Value
The following table shows the estimated maturity distribution of the Company’s securities available-for-sale at December 31, 2016.
(dollars in thousands)
Within one year
After one but within five years
After five but within ten years
More than ten years
Nonmaturing
Total
$ 173,276
107,005
168,698
49,625
1,616
$ 173,263
106,782
168,347
49,207
1,698
$ 500,220
$ 499,297
The weighted average remaining life of investment securities available-for-sale at December 31, 2016, was 4.4 years. Included in the weighted average remaining life
calculation at December 31, 2106, were $15,000,000 of US 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, $301,253,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of December 31, 2016 and December 31, 2015, 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, 2016 and December 31, 2015.
In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable.
Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the
underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination,
current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates
of underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuer’s
financial performance are considered.
28
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
The following table shows the temporarily impaired securities of the Company’s available-for-sale 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.
Temporarily Impaired Investments
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
Less Than 12 Months
December 31, 2016.
12 Months or Longer
December 31, 2016
Total
(dollars in thousands)
U.S. Treasury
U.S. Government Sponsored Enterprises
SBA Backed Securities
U.S. Government Agency and Sponsored
Enterprise Mortgage-Backed Securities
Privately Issued Residential Mortgage-Backed Securities
Obligations Issued by States and Political Subdivisions
Other Debt Securities
Fair Value
$
—
24,952
52,346
135,612
—
—
453
Unrealized
Losses
Fair Value
Unrealized
Losses
$
—
48
145
485
—
—
47
725
$
$
—
—
951
31,504
757
4,298
1,553
$ 39,063
$
—
—
1
186
14
405
147
753
Fair Value
$
—
24,952
53,297
167,116
757
4,298
2,006
Unrealized
Losses
$
—
48
146
671
14
405
194
Total temporarily impaired securities
$ 213,363
$
$ 252,426
$ 1,478
The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2015. 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.
Temporarily Impaired Investments
There are 14 and 11 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 290 holdings at
Less Than 12 Months
December 31, 2015.
12 Months or Longer
December 31, 2015
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(dollars in thousands)
U.S. Treasury
SBA Backed Securities
U.S. Government Agency and Sponsored
Enterprise Mortgage-Backed Securities
Privately Issued Residential Mortgage-Backed Securities
Obligations Issued by States and Political Subdivisions
Other Debt Securities
$ 1,989
1,031
$
26,519
—
—
497
Total temporarily impaired securities
$ 30,036
$
10
2
52
—
—
3
67
$
$
—
—
49,341
490
3,820
1,373
—
—
248
13
878
127
$ 1,989
1,031
$
75,860
490
3,820
1,870
10
2
300
13
878
130
$ 55,024
$ 1,266
$ 85,060
$ 1,333
4. Investment Securities Held-to-Maturity
Amortized
Cost
(dollars in thousands)
December 31, 2016
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Estimated
Fair
Value
December 31, 2015
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Estimated
Fair
Value
Amortized
Cost
U.S. Government Sponsored Enterprises $ 148,326
$ 1,066
$
527
$ 148,865
$ 186,734
$ 2,234
$
141 $ 188,827
SBA Backed Securities
46,140
—
1,088
45,052
—
—
—
—
U.S. Government Sponsored Enterprises
Mortgage-Backed Securities
1,459,520
4,948
22,577
1,441,891
1,252,169
7,547
9,583
1,250,133
Total
$ 1,653,986
$ 6,014
$ 24,192
$ 1,635,808
$ 1,438,903
$ 9,781
$ 9,724 $ 1,438,960
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 $1,147,207,000 and $1,004,743,000 at December 31, 2016, and 2015, respectively. Also included
are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $424,353,000 and $432,965,000 at December 31, 2016, and
2015, respectively. The Company realized gains of 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 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. There were no sales of held-to-maturity securities for the year ending December 31, 2014.
At December 31, 2016 and 2015, 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.
29
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
The following table shows the maturity distribution of the Company’s securities held-to-maturity at December 31, 2016.
(dollars in thousands)
Amortized
Cost
Fair
Value
Within one year
After one but within five years
After five but within ten years
More than ten years
Total
$
22,802
1,122,678
500,355
8,151
$
22,911
1,114,481
490,546
7,870
$ 1,653,986
$ 1,635,808
The weighted average remaining life of investment securities held-to-maturity at December 31, 2016, was 4.5 years. Included in the weighted average remaining life
calculation at December 31, 2016, were $59,745,000 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, $188,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of December 31, 2016 and December 31, 2015, 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 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, 2016 and December 31, 2015.
In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable.
Internal reviews of issuer financial statements are performed as deemed necessary.
The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio 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.
Temporarily Impaired Investments
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
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(dollars in thousands)
U.S. Government Sponsored Enterprises
$
59,219
$
527
$
45,052
1,088
$
-
-
-
-
$
59,219
$
527
45,052
1,088
SBA Backed Securities
U.S. Government Agency and Sponsored
Enterprise Mortgage-Backed Securities
Total temporarily impaired securities
1,008,960
20,725
58,535
1,852
1,067,495
22,577
$ 1,113,231
$ 22,340
$ 58,535
$ 1,852
$ 1,171,766
$ 24,192
The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2015. 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.
Temporarily Impaired Investments
There are 101 and 26 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 322 holdings at
December 31, 2015.
Less Than 12 Months
12 Months or Longer
December 31, 2015
Total
(dollars in thousands)
U.S. Government Sponsored Enterprises
U.S. Government Agency and Sponsored
Enterprise Mortgage-Backed Securities
Total temporarily impaired securities
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
9,859
$
141
$
-
$
-
$
9,859
$
141
626,218
6,657
123,864
2,926
750,082
9,583
$ 636,077
$ 6,798
$ 123,864
$ 2,926
$ 759,941
$ 9,724
30
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
5. Loans
The majority of the Bank’s 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
December 31,
other loans for its portfolio.
2016
2015
(dollars in thousands)
The following summary shows the composition of the loan portfolio at the dates indicated.
$
Construction and land development
$
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer
Home equity
Overdrafts
Total
14,928
612,503
135,418
696,173
241,357
11,013
211,857
684
27,421
452,235
85,685
721,506
255,346
10,744
178,020
579
$ 1,923,933
$ 1,731,536
At December 31, 2016, and December 31, 2015, loans were carried net of discounts of $313,000 and $360,000, respectively. Net deferred fees included in loans
at December 31, 2016, and December 31, 2015, were $641,000 and $988,000, respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $229,730,000 and $185,299,000 at December 31, 2016, and
December 31, 2015, respectively. The Company had no residential real estate loans held for sale at December 31, 2016 and December 31, 2015. The Company’s
mortgage servicing rights totaled $1,629,000 and $1,305,000 at December 31, 2016 and December 31, 2015, respectively.
As of December 31, 2016 and 2015, the Company’s recorded investment in impaired loans was $3,830,000 and $3,225,000, 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, 2016, there were $3,105,000 of impaired loans
with a specific reserve of $173,000. At December 31, 2015, there were $3,051,000 of impaired loans with specific reserves of $250,000.
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 Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is
materially less than those contractually established at the loan’s origination. Restructured loans are included in the impaired loan category.
December 31,
2016
2015
2014
(dollars in thousands)
The composition of nonaccrual loans and impaired loans is as follows:
Loans on nonaccrual
Loans 90 days past due and still accruing
Impaired loans on nonaccrual included above
Total recorded investment in impaired loans
Average recorded investment of impaired loans
Accruing troubled debt restructures
Interest income not recorded on nonaccrual loans according to their original terms
Interest income on nonaccrual loans actually recorded
Interest income recognized on impaired loans
$ 1,084
—
304
3,830
3,661
3,526
37
—
140
$ 2,336
—
332
3,225
4,490
2,893
91
—
104
$ 4,146
—
3,031
6,327
7,434
3,296
123
—
144
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.
Balance at
December 31, 2016
Balance at
December 31, 2015
The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2016.
(dollars in thousands)
Repayments
and Deletions
Additions
$ 5,010
$ 6,778
$ 806
$ 10,982
31
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
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 Company’s allowance for
loan losses for the years indicated.
2016
2015
2014
(dollars in thousands)
An analysis of the allowance for loan losses for each of the three years ending December 31, 2016, 2015 and 2014 is as follows:
Allowance for loan losses, beginning of year
Loans charged-off
Recoveries on loans previously charged-off
$ 22,318
(781)
1,338
$ 23,075
(389)
434
$ 20,941
(1,382)
709
Net recoveries (charge-offs )
Provision charged to expense
Reclassification to other liabilities*
Allowance for loan losses, end of year
45
1,375
(89)
557
200
—
(673)
2,050
—
$ 24,406
$ 23,075
$ 22,318
* The reclassification relates to allowance for loan losses allocations on unused commitments that have been reclassified to other liabilities.
Construction Commercial
Further information pertaining to the allowance for loan losses at December 31, 2016 follows:
Industrial Municipal
and Land
Development
and
Commercial Residential
Real Estate Real Estate Consumer
Home
Equity
Unallocated
Total
(dollars in thousands)
Allowance for Loan Losses:
Balance at December 31, 2015
Charge-offs
Recoveries
Reclassification to
other liabilities
Provision
Ending balance at
December 31, 2016
Amount of allowance for loan
losses for loans deemed
to be impaired
Amount of allowance for loan
losses for loans not deemed
to be impaired
Loans:
$ 2,041
—
—
$ 5,899
—
132
$
994 $ 10,589
—
—
—
—
$ 1,320
—
6
$
644
(362)
296
$
1,077
(27)
—
$ 511
—
—
$
(5)
(1,024)
(25)
966
—
618
(9)
555
(3)
375
(3)
7
(44)
96
—
(218)
23,075
(389)
434
(89)
1,375
$ 1,012
$ 6,972
$ 1,612 $ 11,135
$ 1,698
$
582
$
1,102
$ 293
$
24,406
$
3
$
23
$
— $
140
$
7
$
—
$
—
$ —
$
173
$ 1,009
$ 6,949
$ 1,612 $ 10,995
$ 1,691
$
582
$
1,102
$ 293
$
24,233
Ending balance
Loans deemed to be impaired
Loans not deemed to be impaired
$ 14,928
94
$
$ 14,834
$ 612,503
389
$
$ 612,114
$ 135,418 $ 696,173
— $ 3,149
$
$ 135,418 $ 693,024
$ 241,357
198
$
$ 241,159
$ 11,697
—
$
$ 11,697
$ 211,857
—
$
$ 211,857
$ —
$ —
$ —
$ 1,923,933
3,830
$
$ 1,920,103
Construction Commercial
Further information pertaining to the allowance for loan losses at December 31, 2015 follows:
Industrial Municipal
and Land
Development
and
Commercial Residential
Real Estate Real Estate
Consumer
Home
Equity
Unallocated
Total
(dollars in thousands)
Allowance for Loan Losses:
Balance at December 31, 2014
Charge-offs
Recoveries
Provision
Ending balance at
December 31, 2015
Amount of allowance for loan
losses for loans deemed to
be impaired
Amount of allowance for loan
losses for loans not deemed
to be impaired
Loans:
$
$ 1,592
—
780
(331)
4,757
(172)
212
1,102
$ 1,488 $ 11,199
(298)
84
(396)
—
—
(494)
$
776
—
7
537
$
$
810
(311)
255
(110)
$
599
—
—
478
$ 1,097
—
—
(586)
22,318
(781)
1,338
200
$ 2,041
$
5,899
$
994 $ 10,589
$ 1,320
$
644
$
1,077
$ 511
$
23,075
$
10
$
19
$
— $
99
$
32
$
—
$
90
$ —
$
250
$ 2,031
$
5,880
$
994 $ 10,490
$ 1,288
$
644
$
987
$ 511
$
22,825
Ending balance
Loans deemed to be impaired
Loans not deemed to be impaired
$ 27,421
$
98
$ 27,323
$ 452,235
$
443
$ 451,792
$ 85,685 $ 721,506
$
1,678
— $
$ 85,685 $ 719,828
$ 255,346
$
916
$ 254,430
$ 11,323
$
—
$ 11,323
$ 178,020
$
90
$ 177,930
$ —
$ —
$ —
$ 1,731,536
$
3,225
$ 1,728,311
32
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
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, 2016.
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, 2016.
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, 2016, 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.
Construction Commercial
The following table presents the Company’s loans by risk rating at December 31, 2016.
and Land
Development
and
Industrial
Municipal
Commercial
Real Estate
(dollars in thousands)
Grade:
1-3 (Pass)
4 (Monitor)
5 (Substandard)
6 (Doubtful)
Impaired
Total
$ 14,834
—
—
—
94
$ 612,114
—
—
—
389
$ 135,418
—
—
—
—
$ 661,271
31,753
—
—
3,149
$ 14,928
$ 612,503
$ 135,418
$ 696,173
The Company has increased its exposure to larger loans to large institutions with publicly available credit ratings beginning in 2015. These ratings are tracked as a
credit quality indicator for these loans.
Commercial
and
Industrial
The following table presents the Company’s loans by credit rating at December 31, 2016.
Municipal
Commercial
Real Estate
Total
(dollars in thousands)
Credit Rating:
Aaa-Aa3
A1-A3
Baa1-Baa3
Ba2
Total
$ 334,674
188,777
—
—
$ 66,245
33,365
26,970
3,610
$ 6,596
129,423
127,366
—
$ 407,515
351,565
154,336
3,610
$ 523,451
$ 130,190
$ 263,385
$ 917,026
The following table presents the Company’s loans by risk rating at December 31, 2015.
Construction
and Land
Development
Commercial
and
Industrial
Municipal
Commercial
Real Estate
$ 20,281
7,042
—
—
98
$ 451,774
18
—
—
443
$ 85,685
—
—
—
—
$ 718,911
917
—
—
1,678
$ 27,421
$ 452,235
$ 85,685
$ 721,506
(dollars in thousands)
Grade:
1-3 (Pass)
4 (Monitor)
5 (Substandard)
6 (Doubtful)
Impaired
Total
33
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
The following table presents the Company’s loans by credit rating at December 31, 2015.
Municipal
Commercial
Real Estate
Total
Commercial
and
Industrial
(dollars in thousands)
Credit Rating:
Aaa-Aa3
A1-A3
Baa1-Baa3
Ba2
Total
$ 234,733
140,419
—
—
$ 63,865
7,400
8,890
4,480
$
7,547
130,872
167,489
—
$ 306,145
278,691
176,379
4,480
$ 375,152
$ 84,635
$ 305,908
$ 765,695
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, 2016 the aging of past due loans are as follows:
Accruing
30-89 Days
(dollars in thousands)
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer and overdrafts
Home equity
Total
Past Due Non Accrual
$ —
37
—
597
245
—
735
$
94
65
—
150
656
11
108
$ 1,614
$ 1,084
At December 31, 2015 the aging of past due loans are as follows:
Accruing
30-89 Days
Past Due
Non Accrual
(dollars in thousands)
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer and overdrafts
Home equity
Total
$ —
—
—
1,462
596
6
628
$
99
60
—
174
1,559
—
444
$ 2,692
$ 2,336
Accruing
Greater
Than
90 Days
$ —
—
—
—
—
—
—
$ —
Accruing
Greater
Than
90 Days
$ —
—
—
—
—
—
—
$ —
Total
Past Due
Current
Loans
Total
$
94
102
—
747
901
11
843
$
14,834 $
612,401
135,418
695,426
240,456
11,686
211,014
14,928
612,503
135,418
696,173
241,357
11,697
211,857
$ 2,698
$ 1,921,235 $ 1,923,933
Total
Past Due
Current
Loans
Total
$
99
60
—
1,636
2,155
6
1,072
$
27,322 $
452,175
85,685
719,870
253,191
11,317
176,948
27,421
452,235
85,685
721,506
255,346
11,323
178,020
$ 5,028
$ 1,726,508 $ 1,731,536
34
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
IMPAIRED LOANS
A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. When a loan is impaired, the Company measures impairment based on the present value of expected future cash flows discounted at the
loan’s effective interest rate, except that as a practical expedient, the Company measures impairment based on a loan’s observable market price or the fair value of the
collateral if the loan is collateral dependent. Loans are charged-off when management believes that the collectibility of the loan’s principal is not probable. The specific
factors that management considers in making the determination that the collectibility of the loan’s principal is not probable include; the delinquency status of the loan,
the fair value of the collateral, if secured, and the financial strength of the borrower and/or guarantors. For collateral dependent loans, the amount of the recorded
investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance
amount when such an amount has been identified definitively as uncollectible. The Company’s policy for recognizing interest income on impaired loans is contained
within Note 1 of the “Notes to Consolidated Financial Statements.”
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
$ —
—
—
39
7
—
—
$ 46
$ —
18
—
71
5
—
—
$ 94
$ —
18
—
110
12
—
—
$ 140
(dollars in thousands)
With no required reserve recorded:
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer
Home equity
$ —
45
—
590
90
—
—
$ —
232
—
590
179
—
—
Total
$ 725
$ 1,001
With required reserve recorded:
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer
Home equity
Total
Total
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer
Home equity
$
94
344
—
2,559
108
—
—
$ 108
360
—
2,665
108
—
—
$ 3,105
$ 3,241
$
94
389
—
3,149
198
—
—
$ 108
592
—
3,255
287
—
—
Total
$ 3,830
$ 4,242
$ —
—
—
—
—
—
—
$ —
$ 3
23
—
140
7
—
—
$ 173
$ 3
23
—
140
7
—
—
$ 173
$ —
53
—
375
102
—
—
$ 530
$
96
360
—
2,324
323
—
28
$ 3,131
$
96
413
—
2,699
425
—
28
$ 3,661
35
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
The following is information pertaining to impaired loans at December 31, 2015:
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
Municipal
Commercial real estate
Residential real estate
Consumer
Home equity
$ —
60
—
—
114
—
—
$ —
246
—
—
200
—
—
Total
$ 174
$ 446
With required reserve recorded:
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer
Home equity
Total
Total
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer
Home equity
$
98
383
—
1,678
802
—
90
$ 108
399
—
1,776
802
—
90
$ 3,051
$ 3,175
$
98
443
—
1,678
916
—
90
$ 108
645
—
1,776
1,002
—
90
Total
$ 3,225
$ 3,621
$ —
—
—
—
—
—
—
$ —
$ 10
19
—
99
32
—
90
$ 250
$ 10
19
—
99
32
—
90
$ 250
$ —
32
—
151
125
—
—
$ 308
$ 101
626
—
2,550
814
—
91
$ 4,182
$ 101
658
—
2,701
939
—
91
$ 4,490
$ —
—
—
—
8
—
—
$
8
$ —
20
—
69
7
—
—
$ 96
$ —
20
—
69
15
—
—
$ 104
Troubled Debt Restructurings are identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession
may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the
allowance for these loans beyond any previously established allocations.
There was one 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
the modification was $16,000 reduction in principal payments and $5,000 reduction in interest payments for 2016.
There were no troubled debt restructurings occurring during the year ended December 31, 2015. Also, there were no commitments to lend additional funds to
troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently defaulted during 2015 and 2016.
36
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
December 31,
2016
2015
Estimated Useful Life
(dollars in thousands)
7. Bank Premises and Equipment
Land
Bank premises
Furniture and equipment
Leasehold improvements
Accumulated depreciation and amortization
Total
$ 3,478
19,272
26,271
12,802
61,823
(38,406)
$ 23,417
$ 3,478
19,272
24,131
12,892
59,773
(35,667)
$ 24,106
—
30-39 years
3-10 years
30-39 years or lease term
The Company is obligated under a number of non-cancelable operating leases for premises and equipment expiring in various years through 2026. Total lease expense
approximated $2,834,000, $2,755,000 and $2,465,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Included in lease expense are
amounts paid to a company affiliated with Marshall M. Sloane, Chairman of the Board, amounting to $424,000, $413,000, and $208,000, respectively. Rental
income approximated $318,000, $314,000 and $307,000 in 2016, 2015 and 2014, respectively. Depreciation and amortization amounted to $3,099,000,
$2,728,000, and $2,322,000 at December 31, 2016, 2015 and 2014 respectively.
Amount
Year
(dollars in thousands)
Future minimum rental commitments for non-cancelable operating leases with initial or remaining terms of one year or more at December 31, 2016, were as follows:
2017
2018
2019
2020
2021
Thereafter
$ 2,408
2,222
2,054
1,777
1,326
2,526
$ 12,313
8. Goodwill and Identifiable Intangible Assets
At December 31, 2016 and 2015, 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.
Carrying Amount of Goodwill and Intangibles
The changes in goodwill and identifiable intangible assets for the years ended December 31, 2016 and 2015 are shown in the table below.
(dollars in thousands)
Mortgage
Servicing Rights
Goodwill
Total
Balance at December 31, 2014
Additions
Amortization Expense
Balance at December 31, 2015
Additions
Amortization Expense
Balance at December 31, 2016
9. Fair Value Measurements
$ 2,714
—
—
$ 2,714
—
—
$
941
626
(262)
$ 1,305
708
(384)
$ 2,714
$ 1,629
$ 3,655
626
(262)
$ 4,019
708
(384)
$ 4,343
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.
37
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
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 management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, non-investment
grade residual interests in securitizations, as well as certain highly structured OTC derivative contracts.
Fair Value Measurements Using
The results of the fair value hierarchy as of December 31, 2016, are as follows:
Quoted Prices
in Active Markets
for Identical Assets Observable Inputs
Significant
(Level 1)
(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
U.S. Government Agency Sponsored Enterprises
SBA Backed Securities
U.S. Government Agency and Sponsored Enterprises
Mortgage-Backed Securities
Privately Issued Residential Mortgage-Backed Securities
Obligations Issued by States and Political Subdivisions
Other Debt Securities
Equity Securities
Total
Financial Instruments Measured at Fair Value
on a Non-recurring Basis
Impaired Loans
Carrying
Value
$
2,000
24,952
57,767
243,325
1,109
164,876
4,924
344
$ —
—
—
—
—
—
—
344
$
2,000
24,952
57,767
243,325
1,109
—
4,924
—
$
—
—
—
—
—
164,876
—
—
$ 164,876
$ 499,297
$ 344
$ 334,077
$
260
$ —
$
—
$
260
Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the loan’s carrying
value against the expected realizable fair value of the collateral. Fair value is generally determined through a review process that includes independent appraisals,
discounted cash flows, or other external assessments of the underlying collateral, which generally include various Level 3 inputs which are not identifiable. The
Company discounts the fair values, as appropriate, based on management’s observations of the local real estate market for loans in this category.
Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be
updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve
months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis 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, 2 and 3 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
Unobservable Input
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
Value or Range
Asset
listed below.
Securities AFS(1)
Valuation Technique
Unobservable Input
Discounted cash flow
Fair Value
Discount rate
$ 164,876
0%-1%(2)
Impaired Loans
260
Appraisal of collateral(3)
Appraisal adjustments(4)
0%-30% discount
(1)
(2)
(3)
(4)
Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.
Weighted averages.
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
38
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
Obligations
Issued by States
The changes in Level 3 securities for the year ended December 31, 2016 are as shown in the table below:
and Political
Subdivisions
Auction Rate
Securities
(dollars in thousands)
Balance at December 31, 2015
Purchases
Maturities/redemptions
Amortization
Change in fair value
Balance at December 31, 2016
$ 3,820
—
—
—
478
$ 4,298
$ 153,140
216,646
(208,990)
(218)
—
$ 160,578
Equity
Securities
$ 37
—
(37)
—
—
$ —
Total
$ 156,997
216,646
(209,027)
(218)
478
$ 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.
Fair Value Measurements Using
The results of the fair value hierarchy as of December 31, 2015, are as follows:
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
SBA Backed Securities
U.S. Government Agency and Sponsored Enterprises
Mortgage-Backed Securities
Privately Issued Residential Mortgage-Backed Securities
Obligations Issued by States and Political Subdivisions
Other Debt Securities
Equity Securities
Total
Financial Instruments Measured at Fair Value
on a Non-recurring Basis
Impaired Loans
$
1,989
5,989
233,526
1,434
156,960
4,473
252
$ 404,623
$ —
—
—
—
—
—
215
$ 215
$
1,989
5,989
233,526
1,434
—
4,473
—
$ 247,411
$
—
—
—
—
156,960
—
37
$ 156,997
$
1,056
$ —
$
—
$
1,056
Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be
updated. Adjustments are made to appraisals and real estate tax assessments based on management’s estimate of changes in real estate values. Within the past twelve
months there have been no updated appraisals, however, all impaired loans have been reviewed during the past quarter using either a discounted cash flow analysis 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 ($165,000).
There were no transfers between level 1 and 2 for the year ended December 31, 2015. There were no liabilities measured at fair value on a recurring or nonrecurring
basis during the year ended December 31, 2015.
The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized
Unobservable Input
Level 3 inputs to determine fair value (dollars in thousands) at December 31, 2015. Management continues to monitor the assumptions used to value the assets
Value or Range
Asset
listed below.
Securities AFS(1)
Valuation Technique
Unobservable Input
Discounted cash flow
Fair Value
Discount rate
$ 156,997
0%-1%(2)
Impaired Loans
1,056
Appraisal of collateral(3)
Appraisal adjustments(4)
0%-30% discount
(1)
(2)
(3)
(4)
Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.
Weighted averages.
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
39
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
Obligations
Issued by States
The changes in Level 3 securities for the year ended December 31, 2015 are as shown in the table below:
and Political
Subdivisions
Auction Rate
Securities
(dollars in thousands)
Balance at December 31, 2014
Purchases
Maturities/redemptions
Amortization
Change in fair value
Balance at December 31, 2015
$ 3,820
—
—
—
—
$ 3,820
$ 92,964
207,509
(147,277)
(56)
—
$ 153,140
Equity
Securities
$ 102
—
(65)
—
—
$ 37
Total
$ 96,886
207,509
(147,342)
(56)
—
$ 156,997
The amortized cost of Level 3 securities was $157,874,000 with an unrealized loss of $877,000 at December 31, 2015. 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
2016
Percent
2015
Percent
(dollars in thousands)
The following is a summary of remaining maturities or re-pricing of time deposits as of December 31,
Within one year
Over one year to two years
Over two years to three years
Over three years to five years
$ 262,406
87,952
83,067
44,934
$ 315,559
44,838
49,538
63,491
55 %
18 %
17 %
10 %
67 %
9 %
10 %
14 %
Total
$ 478,359
100 %
$ 473,426
100 %
Time deposits of more than $250,000 totaled $250,476,000 and $193,598,000 in 2016 and 2015, respectively.
Deposits totaling $26,191,000 and $21,970,000 were attributable to related parties at December 31, 2016 and December 31, 2015, respectively.
11. Securities Sold Under Agreements to Repurchase
2016
2015
2014
(dollars in thousands)
The following is a summary of securities sold under agreements to repurchase as of December 31,
Amount outstanding at December 31
$ 197,850
Weighted average rate at December 31
Maximum amount outstanding at any month end
Daily average balance outstanding during the year
Weighted average rate during the year
$ 241,110
$ 222,956
$ 299,890
$ 245,276
$ 182,280
0.21 %
0.21 %
0.21 %
0.20 %
$ 212,360
0.18 %
$ 243,750
$ 216,937
0.18 %
Amounts outstanding at December 31, 2016, 2015 and 2014 carried maturity dates of the next business day. U.S. Government Sponsored Enterprise securities
with a total amortized cost of $183,829,000, $199,152,000, and $213,817,000 were pledged as collateral and held by custodians to secure the agreements
at December 31, 2016, 2015 and 2014, respectively. The approximate fair value of the collateral at those dates was $182,074,000, $197,318,000, and
$212,255,000, respectively.
12. Other Borrowed Funds and Subordinated Debentures
2016
2015
2014
(dollars in thousands)
The following is a summary of other borrowed funds and subordinated debentures as of December 31,
Amount outstanding at December 31
Weighted average rate at December 31
Maximum amount outstanding at any month end
Daily average balance outstanding during the year
Weighted average rate during the year
$ 521,583
$ 374,109
$ 467,083
$ 357,974
$ 404,083
$ 329,083
2.39 %
2.48 %
2.38 %
2.29 %
$ 431,583
1.91 %
$ 431,583
$ 271,710
3.34 %
40
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
FEDERAL HOME LOAN BANK BORROWINGS
Federal Home Loan Bank of Boston (“FHLBB”) borrowings are collateralized by a blanket pledge agreement on the Bank’s FHLBB stock, certain qualified investment
securities, deposits at the FHLBB and residential mortgages held in the Bank’s portfolios. The Bank’s remaining term borrowing capacity at the FHLBB at December 31,
December 31,
2016, was approximately $239,163,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. A schedule of the maturity distribution of FHLBB
Weighted
advances with the weighted average interest rates is as follows:
Average
Rate
Weighted
Average
Rate
Weighted
Average
Rate
Amount
Amount
Amount
2016
2015
2014
(dollars in thousands)
Within one year
Over one year to two years
Over two years to three years
Over three years to five years
Over five years
Total
$ 77,500
$ 54,500
$ 58,000
$ 58,000
$ 45,000
$ 293,000
2.21 %
2.25 %
1.87 %
2.68 %
2.85 %
2.34 %
$ 100,000
$ 57,500
$ 54,500
$ 91,000
$ 65,000
$ 368,000
1.89 %
2.72 %
2.25 %
1.85 %
3.23 %
2.30 %
$ 169,500
$ 55,000
$ 45,000
$ 70,000
$ 56,000
$ 395,500
0.51 %
3.07 %
3.18 %
2.43 %
3.16 %
1.89 %
Included in the table above are $45,000,000, $55,000,000 and $35,000,000 respectively, of FHLBB advances at December 31, 2016, 2015 and 2014, that are
putable at the discretion of FHLBB. These put dates were not utilized in the table above.
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 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 2.83% at December 31, 2016.
OTHER BORROWED FUNDS
There were no overnight federal funds purchased at December 31, 2016 and 2015.
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, 2016
Year ended
December 31, 2015
Affected line item in the Statement
Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities
Accretion of unrealized losses transferred
Amortization of defined benefit pension items
Prior-service costs
Actuarial gains (losses)
Total before tax
Tax (expense) or benefit
Net of tax
(a)
$
$
$
(a)
52
(20)
32
(4,317)
1,505
$
$
$
594
(233)
361
(5,502)
1,919
(a)
Net gains on sales of investments
Provision for income taxes
Net income
Securities held-to-maturity
Provision for income taxes
$
(2,812)
$
(3,583)
Net income
$
(10)
(1,606)
(1,616)
646
$
(10)
(1,411)
(1,421)
568
Salaries and employee benefits
Salaries and employee benefits
(b)
Income before taxes
(b)
Provision for income taxes
$
(970)
$
(853)
Net income
(b)
Amounts in parentheses indicate decreases to profit/loss.
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).
41
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
14. Earnings per share (“EPS”)
Class A and Class B shares participate equally in undistributed earnings. Under the Company’s Articles of Organization, the holders of Class A Common Stock are
entitled to receive dividends per share equal to at least 200% of dividends paid, if any, from time to time, on each share of Class B Common Stock.
Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for
the Company are the stock options discussed below. The dilutive effect of these stock options for 2016, 2015 and 2014 was an increase of 0, 0, and 1,447
shares, respectively.
Year Ended December 31,
2016
2015
2014
(in thousands except share and per share data)
The following table is a reconciliation of basic EPS and diluted EPS:
BASIC EPS COMPUTATION
Numerator:
Net income, Class A
Net income, Class B
Denominator:
Weighted average shares outstanding, Class A
Weighted average shares outstanding, Class B
Basic EPS, Class A
Basic EPS, Class B
DILUTED EPS COMPUTATION
Numerator:
Net income, Class A
Net income, Class B
Total net income, for diluted EPS, Class A computation
Denominator:
Weighted average shares outstanding, basic, Class A
Weighted average shares outstanding, Class B
Dilutive effect of Class A stock options
Weighted average shares outstanding diluted, Class A
Weighted average shares outstanding, Class B
Diluted EPS, Class A
Diluted EPS, Class B
$
19,270
5,264
3,600,729
1,967,180
$
$
5.35
2.68
$
18,081
4,940
3,600,729
1,967,180
$
$
5.02
2.51
$
17,157
4,703
3,591,732
1,969,030
$
$
4.78
2.39
$
19,270
$
18,081
$
17,157
5,264
24,534
3,600,729
1,967,180
—
5,567,909
1,967,180
$
$
4.41
2.68
4,940
23,021
3,600,729
1,967,180
—
5,567,909
1,967,180
$
$
4.13
2.51
4,703
21,860
3,591,732
1,969,030
1,447
5,562,209
1,969,030
$
$
3.93
2.39
42
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
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
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 management’s 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, 2016 and December 31, 2015.
December 31, 2016
December 31, 2015
December 31, 2014
Stock option activity under the plan is as follows:
Amount
Shares under option:
Outstanding at beginning of year
Forfeited
Exercised
Outstanding at end of year
Exercisable at end of year
—
—
—
—
—
$ —
—
—
$ —
$ —
Weighted
Average
Exercise Price
Weighted
Average
Exercise Price
$ —
—
—
$ —
$ —
Weighted
Average
Exercise Price
$ 31.82
31.83
31.81
$ —
$ —
Amount
20,375
(9,050)
(11,325)
—
—
Amount
—
—
—
—
—
Available to be granted at end of year
233,934
233,934
233,934
The weighted average intrinsic value of options exercised for the period ended December 31, 2014, was $8.76 per share with an aggregate value of $99,217.
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
Company’s 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 Company’s assets and liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank and Company’s 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, 2016, that the Bank and the Company meet all capital adequacy requirements to which they are subject.
The Basel Committee has issued capital standards entitled “Base 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 Bank’s categorization.
43
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
The Bank’s actual capital amounts and ratios are presented in the following table:
Actual
Amount
Ratio
As of December 31, 2016
Total Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Capital (to 4th Qtr. Average Assets)
As of December 31, 2015
Total Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
$ 293,143
268,737
268,737
268,737
$ 278,769
255,694
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
255,694
Tier 1 Capital (to 4th Qtr. Average Assets)
255,964
12.27 %
11.25 %
11.25 %
6.02 %
12.03 %
11.04 %
11.04 %
6.48 %
The Company’s actual capital amounts and ratios are presented in the following table:
Ratio
Amount
Actual
As of December 31, 2016
Total Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Capital (to 4th Qtr. Average Assets)
As of December 31, 2015
Total Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
Tier 1 Capital (to 4th Qtr. Average Assets)
$ 305,065
280,659
249,753
280,659
$ 291,635
268,560
233,560
268,560
12.72 %
11.70 %
10.41 %
6.28 %
12.54 %
11.55 %
10.04 %
6.79 %
For Capital Adequacy
Purposes
Amount
Ratio
$ 191,081
143,311
107,483
178,469
$ 185,320
138,990
104,242
157,734
8.00 %
6.00 %
4.50 %
4.00 %
8.00 %
6.00 %
4.50 %
4.00 %
For Capital Adequacy
Purposes
Amount
Ratio
$ 191,904
143,928
107,946
178,903
$ 186,021
139,515
104,637
158,114
8.00 %
6.00 %
4.50 %
4.00 %
8.00 %
6.00 %
4.50 %
4.00 %
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
$ 238,851
10.00 %
191,081
155,253
223,086
8.00 %
6.50 %
5.00 %
$ 231,650
10.00 %
185,320
150,572
197,167
8.00 %
6.50 %
5.00 %
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
$ 239,880
10.00 %
191,904
155,922
223,628
8.00 %
6.50 %
5.00 %
$ 232,526
10.00 %
186,021
151,142
197,642
8.00 %
6.50 %
5.00 %
16. Income Taxes
2016
2015
2014
(dollars in thousands)
The current and deferred components of income tax (benefit) expense for the years ended December 31, are as follows:
Current expense:
Federal
$
$
$ 3,875
439
3,393
399
3,981
498
State
Total current expense
Deferred (benefit) expense:
Federal
State
Valuation allowance
Total deferred benefit
Provision for income taxes
4,314
3,792
4,479
(4,450)
(334)
108
(4,676)
(3,098)
(161)
—
(3,259)
(3,179)
(434)
—
(3,613)
$
(362)
$
533
$
866
(dollars in thousands)
Income tax accounts included in other assets at December 31, are as follows:
Currently receivable
Deferred income tax asset, net
633
$
43,129
$
1,217
40,157
Total
$ 43,762
$ 41,374
2016
2015
44
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
2016
2015
2014
(dollars in thousands)
Differences between income tax (benefit) expense at the statutory federal income tax rate and total income tax expense are summarized as follows:
Federal income tax expense at statutory rates
State income tax, net of federal income tax benefit
Insurance income
Effect of tax-exempt interest
Net tax credit
Valuation allowance
Other
$ 8,218
69
(406)
(8,259)
(395)
108
303
8,008
157
(375)
(6,915)
(460)
—
118
7,727
42
(353)
(6,097)
(517)
—
64
$
$
Total
Effective tax rate
$
(362)
$
533
$
866
(1.50) %
2.30 %
3.80 %
2016
2015
(dollars in thousands)
The following table sets forth the Company’s gross deferred income tax assets and gross deferred income tax liabilities at December 31:
Deferred income tax assets:
Allowance for loan losses
AMT credit
Deferred compensation
Pension and SERP liability
Unrealized losses on securities transferred
$ 10,419
10,234
9,684
7,658
9,852
7,041
8,495
8,714
$
to held-to-maturity
Depreciation
Accrued bonus
Unrealized (gains) losses on securities available-for-sale
Charitable contributions carryforward
Acquisition premium
Nonaccrual interest
Limited partnerships
Investments write down
Other
Gross deferred income tax asset
Valuation allowance
Gross deferred income tax asset,
net of valuation allowance
Deferred income tax liabilities:
Mortgage servicing rights
Gross deferred income tax liability
Deferred income tax asset net
3,161
968
612
357
266
128
125
30
26
220
43,888
(108)
4,667
673
508
108
—
231
138
52
26
173
40,678
—
43,780
40,678
(651)
(651)
(521)
(521)
$ 43,129
$ 40,157
Based on the Company’s 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, 2016, with the exception of a $108,000 valuation allowance on a charitable contribution carryforward that has a remaining
carryforward period of four 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 management’s 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. The Company is in an Alternative Minimum Tax (“AMT”) credit position. The AMT credit is carried as a deferred asset and has an indefinite life.
The Company’s intent is not to perpetually remain an AMT taxpayer and has potential tax planning strategies available which support the deferred AMT credit and, at
this time, no valuation allowance is needed. The Company and its subsidiaries file a consolidated federal tax return. The Company is subject to federal examinations for
tax years after December 31, 2013, and state examinations for the tax years after December 31, 2012.
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 20% to 36%.
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.
45
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
The measurement date for the Plan is December 31 for each year. The benefits expected to be paid in each year from 2017 to 2021 are $1,457,000, $1,481,000,
$1,516,000, $1,671,000, and $1,863,000, respectively. The aggregate benefits expected to be paid in the five years from 2022 to 2026 are $10,650,000. The
Company plans to contribute $1,000,000 to the Plan in 2017.
Asset Category
Percent
Level 1
Level 2
Level 3
Total
(dollars in thousands)
The fair value of plan assets and major categories as of December 31, 2016, is as follows:
$ 22,209
Collective fund
7,363
Equity securities
4,615
Mutual funds
2,786
Hedge funds
474
Short-term investments
59.3 %
19.7 %
12.3 %
7.4 %
1.3 %
100.0 %
$ 37,447
$ 4,708
7,363
4,615
—
474
$ 17,160
$ 17,501
—
—
—
—
$ 17,501
$ —
—
—
2,786
—
$ 2,786
Asset Category
Percent
Total
Level 1
Level 2
Level 3
(dollars in thousands)
The fair value of plan assets and major categories as of December 31, 2015, is as follows:
Collective fund
Equity securities
Mutual funds
Hedge funds
Short-term investments
LEVEL 1
61.20 %
17.70 %
11.90 %
7.50 %
1.70 %
100.00 %
$ 20,627
5,990
4,001
2,524
575
$ 33,717
$ 4,307
5,990
4,001
—
575
$ 14,873
$ 16,320
—
—
—
—
$ 16,320
$ —
—
—
2,524
—
$ 2,524
The plan assets measured at fair value in Level 1 are based on quoted market prices in an active exchange market.
LEVEL 2
Plan assets measured at fair value in Level 2 are based on pricing models that consider standard input factors, such as observable market data, benchmark yields,
interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.
LEVEL 3
Plan assets measured at fair value in Level 3 are based on unobservable inputs, which includes SBERA’s assumptions and the best information available under the
circumstance. Level 3 assets consist of hedge funds. The underlying assets are valued based upon quoted exchange prices, over-the-counter trades, bid/ask prices,
relative value assessments based on market conditions, and other information, as available. Further adjustments may be made based on factors impacting liquidity.
The asset or liability’s fair value measurement level within fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Below is a description of the valuation
methodologies used for assets measured at fair value.
The Trust reports bonds and other obligations, short-term investments and equity securities at fair values based on published quotations, Collective funds and hedge
funds (Funds) are valued in accordance with valuations provided by such Funds, which generally value marketable securities at the last reported sales price on the
valuation date and other investments at fair value, as determined by each Fund’s manager.
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future values. Furthermore,
although the Trust believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies to determine the
fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Year Ended December 31,
2016
2015
(dollars in thousands)
The changes in Level 3 securities are shown in the table below:
Balance at beginning of year
Purchases
Redemptions
Actual return – assets still being held
$ 2,524
114
(309)
457
Balance at end of year
$ 2,786
$ 2,360
224
(40)
(20)
$ 2,524
There were no transfers in or out of level 3 during the year ended December 31, 2016 and 2015.
46
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
The performance of the plan assets is dependent upon general market conditions and specific conditions related to the issuers of the underlying securities.
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 2017 to 2021 are $2,031,000, $1,990,000, $1,964,000, $1,906,000 and $1,830,000, respectively. The
aggregate benefits expected to be paid in the five years from 2022 to 2026 are $11,972,000.
Defined Benefit Pension Plan
2016
2015
2016
2015
Supplemental Insurance/
Retirement Plan
(dollars in thousands)
Change projected in benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain)/loss
Benefits paid
$
38,597
1,273
1,358
2,593
(1,566)
$
40,011
1,343
1,576
(3,424)
(909)
$
38,204
1,820
1,334
(1,653)
(1,095)
$
31,989
1,589
1,365
4,304
(1,043)
Projected benefit obligation at end of year
$
42,255
$
38,597
$
38,610
$
38,204
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
(Unfunded) Funded status
Accumulated benefit obligation
Weighted-average assumptions as of December 31
Discount rate – Liability
Discount rate – Expense
Expected return on plan assets
Rate of compensation increase
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Recognized prior service cost
Recognized net losses
Net periodic cost (benefit)
Other changes in plan assets and benefit obligations
recognized in other comprehensive income
Amortization of prior service cost
Net (gain) loss
Total recognized in other comprehensive income
Total recognized in net periodic benefit cost and
other comprehensive income
$
$
$
$
$
33,717
3,221
2,075
(1,566)
37,447
(4,808)
42,255
3.99 %
4.18 %
8.00 %
4.00 %
1,273
1,358
(2,776)
(104)
801
$
$
$
$
$
33,812
(1,186)
2,000
(909)
33,717
(4,880)
38,597
4.18 %
4.00 %
8.00 %
4.00 %
1,343
1,576
(2,749)
(104)
812
$
$
(38,610)
36,392
$
$
(38,204)
34,884
3.85 %
4.01 %
NA
4.00 %
4.03 %
4.00 %
NA
4.00 %
$
1,820
1,334
—
114
805
$
1,589
1,365
—
114
599
$
552
$
878
$
4,073
$
3,667
$
104
1,347
1,451
$
104
(301)
(197)
$
(114)
(2,458)
(2,572)
$
(114)
3,705
3,591
$
2,003
$
681
$
1,501
$
7,258
December 31, 2016
Supplemental
Plan
Plan
Total
Plan
December 31, 2015
Supplemental
Plan
Total
$
204
(13,999)
$
(649)
(13,416)
$
(445)
(27,415)
$
308
(12,652)
$
(763)
(15,874)
$
(455)
(28,526)
$ (13,795)
$ (14,065)
$ (27,860)
$ (12,344)
$ (16,637)
$
(28,981)
(dollars in thousands)
Prior service cost
Net actuarial loss
Total
47
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
The following table summarizes the amounts included in Accumulated Other
Supplemental
Comprehensive Loss at December 31, 2016, expected to be recognized as
Plan
components of net periodic benefit cost in the next year:
Amortization of prior service cost to be
Plan
recognized in 2017
Amortization of loss to be recognized in 2017
$ (104)
903
$ 114
636
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.
Assumptions for the expected return on plan assets and discount rates in the
Company’s 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 plan’s asset allocation.
This forecast reflects the Company’s and actuarial firm’s 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 Company’s 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 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 Company’s 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 Company’s match
totaled $418,000 for 2016, $403,000 for 2015 and $346,000 for 2014.
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 $1,418,000, $1,178,000 and $1,434,000 in 2016,
2015, and 2014, 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, 2016. Management, after reviewing
these claims with legal counsel, is of the opinion that their resolution will not
have a material adverse effect on the Company’s consolidated financial position
or results of operations.
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.
The Company’s 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-
Contract or Notional Amount
balance-sheet instruments. Financial instruments with off-balance-sheet risk at
December 31 are as follows:
(dollars in thousands)
2016
2015
Financial instruments whose contract
amount represents credit risk:
Commitments to originate
1–4 family mortgages
$ 13,877
$
5,638
Standby and commercial letters of credit
6,796
4,936
Unused lines of credit
362,357
320,874
Unadvanced portions of construction loans
22,049
Unadvanced portions of other loans
52,224
11,589
41,717
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 customer’s 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 management’s 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
Year ended December 31,
extending loan facilities to customers.
2016
2015
2014
(dollars in thousands)
20. Other Operating Expenses
Marketing
Software maintenance/amortization
Legal and audit
Contributions
Processing services
Consulting
Postage and delivery
Supplies
Telephone
Directors’ fees
Insurance
Other
Total
$ 2,185
1,863
1,255
789
1,040
1,168
987
948
1,032
413
323
1,812
$ 1,849
1,670
1,269
690
1,002
1,050
905
965
804
377
301
1,826
$ 1,793
1,524
1,072
735
944
964
964
870
753
389
304
1,520
$ 13,815
$ 12,708
$ 11,832
48
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
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 Association’s standard calculations for cash flow and price/yield analysis, live benchmark bond pricing
and terms/condition data available from major pricing sources. Management regards the inputs and methods used by third party pricing vendors to be “Level 2 inputs
and methods” as defined in the “fair value hierarchy” provided by FASB.
LOANS
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 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 Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have
significant value.
OTHER BORROWED FUNDS
The fair value of other borrowed funds is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently
offered for other borrowed funds of similar remaining maturities.
SUBORDINATED DEBENTURES
The fair value of subordinated debentures is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently
offered for other subordinated debentures of similar remaining maturities.
The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as
of December 31, 2016 and December 31, 2015. 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
Fair Value Measurements
Estimated
liabilities for which the fair value approximates carrying value include non-maturity deposits, short-term borrowings and accrued interest payable.
Fair Value
Carrying Amount
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
(dollars in thousands)
December 31, 2016
Financial assets:
Securities held-to-maturity
Loans(1)
Financial liabilities:
Time deposits
Other borrowed funds
Subordinated debentures
December 31, 2015
Financial assets:
Securities held-to-maturity
Loans(1)
Financial liabilities:
Time deposits
Other borrowed funds
Subordinated debentures
(1)
$ 1,653,986
1,899,527
$ 1,635,808
1,873,703
478,359
293,000
36,083
480,133
294,940
36,083
$ 1,438,903
1,708,461
$ 1,438,960
1,677,270
473,426
368,000
36,083
474,046
372,209
36,083
$
$
—
—
—
—
—
—
—
—
—
—
$ 1,635,808
—
$
—
1,873,703
480,133
294,940
—
—
—
36,083
$ 1,438,960
—
$
—
1,677,270
474,046
372,209
—
—
—
36,083
Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses.
49
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates
do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no
active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows,
current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect
the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates
and have not been considered.
2016 Quarters
Second
Fourth
Third
First
22. Quarterly Results of Operations (unaudited)
(in thousands, except share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income
Operating expenses
Income before income taxes
Provision for income taxes
Net income
Share data:
Average shares outstanding, basic
Class A
Class B
Average shares outstanding, diluted
Class A
Class B
Earnings per share, basic
Class A
Class B
Earnings per share, diluted
Class A
Class B
2015 Quarters
(in thousands, except share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income
Operating expenses
Income before income taxes
Provision for income taxes
Net income
Share data:
Average shares outstanding, basic
Class A
Class B
Average shares outstanding, diluted
Class A
Class B
Earnings per share, basic
Class A
Class B
Earnings per share, diluted
Class A
Class B
$ 23,263
5,413
17,850
450
17,400
3,654
15,683
5,371
64
5,307
$
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.16
0.58
0.95
0.58
Second
First
$
$
24,689
5,927
18,762
200
18,562
3,700
16,156
6,106
(394)
$
6,500
$
25,005
5,791
19,214
375
18,839
4,225
16,630
6,434
(52)
6,486
3,600,729
1,967,180
5,567,909
1,967,180
3,600,729
1,967,180
5,567,909
1,967,180
$
$
23,742
5,486
18,256
350
17,906
4,643
16,288
6,261
20
6,241
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
$
$
1.42
0.71
1.17
0.71
Fourth
22,496
5,274
17,222
—
17,222
4,448
15,794
5,876
(95)
5,971
3,600,729
1,967,180
5,567,909
1,976,180
$
$
$
$
1.30
0.65
1.07
0.65
$
$
$
$
$
$
1.41
0.71
1.16
0.71
Third
23,750
5,134
18,616
—
18,616
3,830
16,100
6,346
180
6,166
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.35
0.67
1.11
0.67
$
$
$
$
$
$
1.36
0.68
1.12
0.68
22,675
4,961
17,714
—
17,714
4,210
15,766
6,158
233
5,925
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.29
0.65
1.06
0.65
$ 21,172
4,765
16,407
200
16,207
3,505
14,538
5,174
215
4,959
$
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.08
0.54
0.89
0.54
50
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
23. Parent Company Financial Statements
The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of December 31, 2016 and 2015 and the statements of income and cash flows for each of the
BALANCE SHEETS
years in the three-year period ended December 31, 2016, are presented below. The statements of changes in stockholders’ equity are identical to the consolidated
December 31,
2016
statements of changes in stockholders’ equity and are therefore not presented here.
(dollars in thousands)
2015
ASSETS:
Cash
Investment in subsidiary, at equity
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities
Subordinated debentures
Stockholders’ equity
Total liabilities and stockholders’ equity
STATEMENTS OF INCOME
Year Ended December 31,
(dollars in thousands)
Income:
Dividends from subsidiary
Interest income from deposits in bank
Other income
Total income
Interest expense
Operating expenses
Income before income taxes and equity in undistributed income of subsidiary
Benefit from income taxes
Income before equity in undistributed income of subsidiary
Equity in undistributed income of subsidiary
Net income
STATEMENTS OF CASH FLOWS
December 31,
(dollars in thousands)
$ 2,768
263,070
10,335
$ 276,173
$
49
36,083
240,041
$ 276,173
5,230
$
236,629
8,808
$ 250,667
$
40
36,083
214,544
$ 250,667
2016
2015
2014
$ 2,000
3
28
2,031
937
220
874
(383)
1,257
23,277
$ 24,534
$
1,500
13
24
1,537
792
212
533
(328)
861
22,160
$ 23,021
$
—
21
72
93
2,329
204
(2,440)
(830)
(1,610)
23,470
$ 21,860
2016
2015
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities
$ 24,534
$ 23,021
$ 21,860
Undistributed income of subsidiary
Depreciation and amortization
Increase in other assets
Decrease in liabilities
Net cash (used in) operating activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise of stock options
Cash dividends paid
Net cash used in financing activities
Net (decrease) in cash
Cash at beginning of year
Cash at end of year
(23,277)
—
(1,527)
9
(261)
—
(2,201)
(2,201)
(2,462)
5,230
(22,160)
3
(1,112)
4
(244)
—
(2,200)
(2,200)
(2,444)
7,674
$ 2,768
$
5,230
(23,470)
12
(1,067)
(71)
(2,736)
361
(2,196)
(1,835)
(4,571)
12,245
$ 7,674
51
Century Bancorp, Inc. AR ’16Notes to Consolidated Financial Statements
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.:
We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and its subsidiary as of December 31, 2016 and 2015 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, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Century Bancorp, Inc. and
its subsidiary as of December 31, 2016 and 2015 and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2016, 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), Century Bancorp, Inc.’s internal control
over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2017, expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Boston, Massachusetts
March 15, 2017
52
Century Bancorp, Inc. AR ’16 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.:
We have audited Century Bancorp, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Century Bancorp, Inc.’s 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 “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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
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.
A company’s 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 company’s 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 company’s 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.
In our opinion, Century Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of
Century Bancorp, Inc. as of December 31, 2016 and 2015 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, 2016, and our report dated March 15, 2017, expressed an unqualified
opinion on those consolidated financial statements.
Boston, Massachusetts
March 15, 2017
53
Century Bancorp, Inc. AR ’16 Management’s 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 Company’s internal control system was designed to provide reasonable assurance to the Company’s
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 Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this
assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated
Framework (2013). Based on our assessment, we believe that, as of December 31, 2016, the Company’s internal control over financial reporting is effective based
on those criteria.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial
reporting. Their report appears on page 53.
Barry R. Sloane
President & CEO
March 15, 2017
William P. Hornby, CPA
Chief Financial Officer & Treasurer
54
Century Bancorp, Inc. AR ’16 Stockholder Information
Corporate Headquarters
Transfer Agent and Registrar
Century Bank
400 Mystic Avenue
Medford, MA 02155-6316
TEL (866) 823-6887
CenturyBank.com
Annual Meeting
Computershare Investor Services
P.O. Box 30170
College Station, TX 77842-3170
TEL (781) 575-3400
Computershare.com
The annual meeting of stockholders will be held on Tuesday, April 11, 2017, at 10:00 a.m. The meeting will take
place at Century Bank, 400 Mystic Avenue, Medford, MA.
Stock Listing
Century Bancorp, Inc. became a public company in 1987. Century’s Class A Common Stock is listed on the
NASDAQ market and is traded under the symbol “CNBKA.”
10-K Report
A copy of the Company’s annual report to the Securities and Exchange Commission on Form 10-K may be obtained
without charge upon written request to: Century Bancorp, Inc., Investor Relations, 400 Mystic Avenue, Medford,
MA 02155 or online at http://www.centurybank.com/about/investorrelations.
About Century
Century Bancorp, Inc. is a $4.5 billion banking and financial services company
headquartered in Medford, Massachusetts. The Company operates 27 banking
offices in 20 cities and towns in Massachusetts and provides a full range of
business, personal, and institutional services.
Headquarters
Allston
Andover
Back Bay
Beverly
Braintree
Brookline
Burlington
Cambridge
Chestnut Hill Square
Coolidge Corner
Everett
Federal Street
Fellsway
Lynn
Malden
Medford Square
Newton Centre
North End
Peabody
Quincy
Salem
Somerville
State Street
Wellesley
Winchester
Woburn
Our family’s bank. And yours.
Our family’s bank. And yours.
400 Mystic Avenue, Medford, MA 02155 (866) 823-6887 CenturyBank.com
Equal Housing Lender/Member FDIC
© 2017 Century Bancorp, Inc. All rights reserved.
002-CSN76B8