2017 Annual Report
An unwavering focus on
results
for our customers, communities
and shareholders.
Chairman’s Message
Dear Fellow Shareholders & Customers:
As we approach our 50th year, Century Bank’s unwavering focus on all aspects of the banking operation
and ourselves is why we continue to produce results. We have positive results in our earnings, expense
management, loan quality and customer satisfaction.
I have never compromised on the most important part: Integrity – it counts. It counts with our customers. It
counts with our communities. It counts with our shareholders and it counts with me. I learned from my father
at an early age that if you were trusted by your customers, they would refer their friends and family to you. It’s
an important lesson for business and in life. I have never forgotten that lesson and have instilled it with my
children and all of the Century Bank Associates.
According to Bloomberg®, I am the oldest active bank chairman in the world. I developed my finance skills
while working in my father’s business selling furniture to families on installment. Those skills enabled my
smooth transition into banking over 50 years ago. Here I am still at it - delivering results.
I have many loyal customers, shareholders and associates. That continuity has been a driving force behind our
continued good results. It’s why I come to work every day. I am an active part of the daily management of the
bank as are many loyal associates whose tenure here exceeds 40 years. This is a rare trait in today’s financial
industry. I attribute associate stability to our practice of developing competent personnel, enabling us to recruit
internally for our future leaders. Rosalie Cunio, our first associate, still works beside me each day.
The Bank’s Management Committee works cohesively to leverage a collaborative framework to develop
technology strategy that achieves the bank’s objectives by empowering the customer and our workforce.
I’m thankful to be joined at the Bank with my son and daughter, Barry and Linda. They are highly educated,
experienced and quite competent to lead Century Bank into the future. I am proud that Century Bank is the
largest family-run bank in New England. I am humbled that we count among our customers some of the
world’s most prestigious health care organizations, higher education institutions and Fortune 500 companies.
Thank you for your support and I look forward to continuing to deliver results in 2018 and beyond.
Marshall M. Sloane
Founder and Chairman
President’s Message
Dear Fellow Shareholders:
2017 was a year of excellent core financial results, setting records for the 8th year in a row, until the President
signed the Tax Cuts and Jobs Act of 2017 on December 22, 2017. Excluding the effects of the Tax Act, we had
net earnings of over $30 million, and had growth of our capital to $269 million. Including the results of the Tax Act,
net income for 2017 was $22.3 million and year-end capital was $260 million.
While the reduction in corporate income taxes and the elimination of the corporate AMT (Alternative Minimum Tax)
will have long-term benefits for Century, the short term consequence of the reduction in the corporate tax rate
results in a revaluation of the Company’s net deferred tax assets (DTA’s). We have accumulated significant DTA’s
over time, due in large measure to our unspent contributions to the loan loss reserve. When the tax rate is cut,
in this case from 35% to 21%, as it was in December, the value of those DTA’s are proportionately reduced. For
Century, the immediate write down to earnings and capital was $8.4 million.
This outcome is predicated on a FASB rule, over which we have no control. It is a one-time event in 2017, and will
have no impact on 2018 earnings.
With all this so-called “noise,” we ended 2017 at $4.8 billion in assets, growth of 7.2%, and $22.3 million of
annual earnings, a decline of 9.1%. Century earned $4.01 per share in 2017, as compared to $4.41 in 2016.
Our stock rose an astounding 30% to $78.25 at year-end; a three-year cumulative total return of 99% and a
five-year cumulative total return of 145%. All three principal business units again performed extremely well
in 2017.
Through up and down business and interest rate cycles of varying duration and severity, we have produced
consistent and superior core results. We continued that trend in 2017.
Our Family’s Bank. And Yours.
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 results that have contributed to our success in 2017.
Pictured from left:
Executive Vice President Linda Sloane Kay;
Founder & Chairman Marshall M. Sloane;
and President & CEO Barry R. Sloane
Results 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.
Results in Core Net Earnings Growth and Return on Equity
Net income declined by 9.1% to $22.3 million, or $4.01 per Class A share diluted, for the year ended
December 31, 2017, as compared to net income of $24.5 million, or $4.41 per Class A share diluted for
2016. Century’s return on average equity (ROE) was 8.75%, for 2017, as compared to 2016’s 10.80%.
The ROE would have been 12.1%, had it not been for the DTA charge-off explained earlier. 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 core double digit ROE, the share
price will follow over time. It is why we believe Standard and Poor’s/CFRA continues for the third year to rate
Century’s shares an “A” and a “Buy.”
In addition, our efficiency ratio of overhead to revenue, the key comparative metric of non-interest expense
decreased (favorable) from 63% in 2016 to 58% in 2017. We watch our expenses carefully, and are very
proud of the efficiency ratio declining below 60%, an industry threshold target.
Total Assets (in thousands)
Earnings per Class A share, diluted
Net Income (in thousands)
1
4
4
,
7
4
9
,
3
$
8
0
6
,
2
6
4
,
4
$
2
7
5
,
5
8
7
,
4
$
3
1
.
4
$
1
4
.
4
$
1
0
.
4
$
1
2
0
,
3
2
$
4
3
5
,
4
2
$
1
0
3
,
2
2
$
‘15
‘16
‘17
‘15
‘16
‘17
‘15
‘16
‘17
Marshall M. Sloane receives the Shining Example Award from Regis College
at their Let it Shine Gala for his commitment and compassion to the
community and service to humanity.
Results Yield Significant Asset Growth
Total assets grew 7% to a record of $4.8 billion on December 31, 2017, up from
$4.5 billion on December 31, 2016, an increase of $323 million. We experienced
significant growth in 2017 for all three of our business lines: consumer, business,
and institutional services. 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 11 S&P/CFRA “A” rated banks in
America, and one of only three in Massachusetts, is a strong external contributing
confidence factor.
Results Support Capital Adequacy
Total equity was $260.3 million on December 31, 2017, an increase of $20.3
million or 8.4% from $240.0 million on December 31, 2016. Book value per
share increased to $46.75 at December 31, 2017, up by $3.64 from $43.11
at December 31, 2016. Century is “well capitalized” by all regulatory standards,
and we have passed all “Basel III” requirements through organic capital generation
from earnings.
A
S&P
Quality Ranking
Pictured from left: Executive Vice President Paul A. Evangelista;
Chief Financial Officer & Treasurer William P. Hornby;
Executive Vice President David B. Woonton; and Executive Vice President Brian J. Feeney
31164 ANNUAL_2017_EDITORIAL_V25_FINAL4 cc2017.indd 3
2/22/18 10:15 AM
$2.18
Billion in Total Loans
Barry R. Sloane received the Living Legend Award from the Boston Renaissance Charter Public
School honoring his work, in the tradition of Dr. Martin Luther King, Jr., for his exceptional service to
their communities.
Results Grow Our Loan Portfolio
Our unique loan portfolio strategy continues to work exceptionally well. Total loans
grew by $252 million or 13% to a record $2.18 billion on December 31, 2017;
our largest loan portfolio ever, and a loan to deposit ratio of 56%. Non-performing
assets continued to be a minimal number for a portfolio of our size, increasing
from $1.1 million at December 31, 2016 to $1.7 million at December 31, 2017.
The education and healthcare sectors anchor our loan growth, increasing
some 13% as 2017 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 Massachusetts’ colleges and universities
validate 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 and pricing 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 the loan
portfolio.
2017 was a productive year in which we closed $90 million in residential first
mortgages, and $165 million in home equity loans. We extended 198 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
Results in Our Branch System
We are proud that five of our twenty-seven branches hold over $100 million in deposits, and total branch
deposits exceed $1.8 billion. We are very discerning in the search for our next branch, #28. We are on
the lookout for further high visibility market-extending locations; small size and manageable cost is
paramount. In addition, we now operate 50 ATMs, processing over 600,000 annual transactions.
We fully implemented in 2017 a regionally managed branch system, divided by geography, and
placing supervision and mentoring much closer to the line. It worked skillfully in 2017 along
with our superb staff, as branch deposits grew by 13%.
Results 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 34 million check and payment items in 2017, 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.
For the fifth consecutive year, the audit of our automated lockbox services and its operative effectiveness of
controls was without any finding of deficiency.
In late 2017, we won the largest and most competitive corporate lockbox relationship in our history.
This engagement will begin in 2018. Proof that our service, execution, and reputation is without peer in
New England. We will do our utmost to insure it is always true.
Beth Israel Deaconess Medical Center Ribbon Cutting
New England Conservatory Ribbon Cutting Celebration
Pictured from left: David B. Woonton, EVP, Century Bank; Barry R. Sloane; Ed Lesser, SVP of Finance and Operations, NEC;
Deborah R. Rush, SVP, Century Bank; Ken Burnes, Chair, Board of Trustees, NEC; and Gerald S. Algere, SVP, Century Bank
30%
Increase in
Stock Price
Results in Wealth Management
2017 was the third full year of our wealth management function. Our assets
under management grew 73.3% to over $126 million in 2017, and the business
broke into positive earnings territory. 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. We specialize in global asset allocation
“defensive” portfolios that we believe are particularly relevant when equity
markets are near all time highs.
Results 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, radio, and
now regional television, 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.
Results 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 2017. We are constantly monitoring our systems reliability, and when
customers encounter problems at night or on weekends, we’re always reachable.
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.
Senior Vice Presidents
Top row, pictured from left: Bradford J. Buckley; Shipley C. Mason; Janice A. Brandano; and William J. Gambon, Jr.
Bottom row, pictured from left: Kenneth A. Samuelian; Thomas E. Piemontese; Gerald S. Algere; Brenda C. Kerr; and Yasmin D. Whipple
Senior Vice Presidents
Top row, pictured from left: Anthony C. LaRosa; Susan B. Delahunt; Richard L. Billig; Jason J. Melius; and Christine D. Scarafoni
Bottom row, pictured from left: James M. Flynn, Jr.; Timothy L. Glynn; Deborah R. Rush; and Peter R. Castiglia
Results 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 proud that our most recent completed Massachusetts CRA audit was ranked a
“High Satisfactory.” We diligently try 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.
Results from our 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. The reduction in corporate tax rates were costly to our 2017 earnings.
We are hopeful that the change will be a long-term benefit to both our profitability
and economic activity. Early indications are quite positive for 2018.
Thank you to our shareholders, our clients, our associates, and our communities, for
their confidence and relationships. We will endeavor to make 2018 another year of
superior results through our diligence and resourcefulness.
Gratefully,
Barry R. Sloane
President and CEO
Over
400
Century Bank
Associates
This year, we continued to invest in our communities, supporting 301 organizations.
Boys & Girls Club of Woburn Ribbon
Cutting Celebration
FriendshipWorks
Gann Academy
Gavin Foundation
Good Sports
Greater Boston Real Estate Board
Greater Lawrence Family Health Center
Greater Medford Visiting Nurse Association
Harvard Club of Boston
Hebrew College
Hebrew SeniorLife
HOPE worldwide
Hospitality Homes, Inc.
I.B.E.W. Local 103
Innovation Academy Charter School
Intimate Partner Violence Project, Inc.
Irish American Police Officers Association
of Massachusetts
Irish International Immigrant Center
Italia Unita
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
John J. Forcellese Memorial Fund
Joseph N. Hermann Youth Center
Juvenile Diabetes Research Foundation
Kollel of Greater Boston
Kosher Dental Study
Ladies Ancient Order of Hibernians
Lawrence CommunityWorks
2020 Women on Boards
ACT Lawrence
AFSCME Council 93
Alex’s Team
Alzheimer’s Association
American Foundation for Suicide Prevention
American Red Cross of Northeast Massachusetts
Andover Rotary Club
Andover Youth Foundation
Animal Rescue League of Boston
Apple Orchard School
Archdiocese of Boston
Arlington Community Trabajando
Asian Community Development Corporation
Associazione Gizio
City of Somerville
City of Woburn
Colleen E. Ritzer Memorial Scholarship Fund
Combined Jewish Philanthropies
Commuity Service Network
Community Dispute Settlement Center
Compassionate Care Hospice
Congregation B’nai B’rith
Coolidge Corner Community Chorus
Courageous Sailing
Cristo Rey Boston High School
Cyrus E. Dallin Art Museum, Inc.
Dana-Farber Cancer Institute
Deutsches Altenheim, Inc.
Dignity, Inc.
Century Bank provided the financial support to enable Boston Renaissance Charter Public
School Choir to travel to Washington D.C. to perform at the White House
Dimock Community Health Centers
DONNE 2000
Dormition of the Virgin Mary Greek
Orthodox Church
Dorothy C. Gabriel Foundation
DOVE, Inc.
Downtown Boston Business
Improvement District
East Middlesex Association for Children
Eliot School
Epstein Hillel School
ESSCO-MGH Breast Cancer Research Fund
Essex North Shore Agricultural Technical
Foundation, Inc.
Facing Cancer Together
Families First Parenting Programs
First Light Brookline
Fisher Center for Alzheimer’s Research Fund
Babson College
Back Bay Association
Bais Yaakov of Boston High School for Girls
Bay State Chapter Freedoms Foundation
Beacon Academy
Best Buddies
Beth Israel Deaconess Medical Center - Milton
Beyond Walls
Bike MS
Bishop Fenwick High School
Black Ministerial Alliance of Greater Boston
Boston Architectural College
Boston Ballet
Boston Children’s Hospital
Boston Chinatown Neighborhood Center, Inc.
Boston College Carroll School of Management
Boston College High School
Boston Harbor Association
Boston Jewish Film Festival
Boston Landmarks Orchestra
Boston Renaissance Charter Public School
Boys & Girls Clubs of Boston
Boys & Girls Clubs of Medford & Somerville
Boys & Girls Clubs of Stoneham & Wakefield
Bread of Life
Brookline Chamber of Commerce
Brookline Food Pantry
Burlington Recreation Department
Cambridge Camping
Cambridge College
Cambridge Montessori School
Cambridge School of Weston
Campion Renewal Center
Cardinal Cushing Centers, Inc.
Cardinal Spellman High School
Cathedral High School
Catholic Charities of Boston
Catholic Schools Foundation, Inc./
Inner-City Scholarship Fund
Chabad Lubavitch, Inc.
Children’s Trust
Chinese Cultural Connection
Christians and Jews United for Israel
City of Beverly
City of Chicopee
City of Everett
City of Peabody
Cambridge College Ribbon Cutting Celebration
Florida Hospital Blood and Marrow
Transplant Center
Foundation for MetroWest
Foundation for Racial, Ethnic and
Religious Harmony
Fourth Presbyterian Church of South Boston
Franciscan Children’s
Friends of Christopher Columbus Park
Friends of the Peabody Council on Aging
Friends of the Wellesley Council on Aging
Lazarus House Ministries
LimmudBoston
Lowell Adult Education Center
LUNGevity Foundation
Lynn Chamber of Commerce
Lynn Housing Authority &
Neighborhood Development
Lynn Museum & Historical Society
Malden Babe Ruth League
Malden Chamber of Commerce
Malden Police Patrolman’s Association
Malden Rotary Club
Malden YMCA
Mary Ann Brett Food Pantry - Dorchester
Catholic
Massachusetts Association for Mental Health
Massachusetts Eye and Ear Infirmary
Massachusetts General Hospital
Massachusetts Knights of Pythias
Massachusetts Network of Foster Care Alumni
Massachusetts Teachers Association
Red Sox Foundation/Run to Home Base
Redemptoris Mater Seminary
Regis College
RESPOND, Inc.
Ridgefield Academy
Rodman Ride for Kids
Rosie’s Place
Sacred Heart School
Sail Cape Cod
Saint Anthony’s Society
Saint John School
Saint Leonard Parish
Salem Chamber of Commerce
Somerville Affordable Housing Project Ribbon Cutting Celebration
Salem Rotary Club
Salve Regina University
Service Club of Andover
Shakespeare & Company
Share Your Love Foundation
Silent Spring Institute
Sisterhood Temple Emanuel of Newton
Sisters of St. Joseph of Boston
Social Law Library
Societa di San Giuseppe
Special Olympics Massachusetts
Spirit of Adventure Council, Boy Scouts
of America
St. Anthony Shrine
St. John the Evangelist Church
St. Joseph Parish
Steps to Success
Survivor Tails Animal Rescue
Suzuki School of Newton
Taste of the North End
Teamsters Local 25, Autism Fund Inc.
Temple Beth Avodah
Temple Beth Shalom
Temple Beth Zion
Temple Emanuel Andover
Temple Emanuel Newton
Temple Israel Boston
Temple Ohabei Shalom
Temple Reyim
Temple Shalom Medford
Temple Sinai Sharon
The American Legion - Medford Post 45
The Andover Cares Fund
The Andover Senior Community FRIENDS, Inc.
The Andover Village Improvement Society
The Angel Fund
The ARC of the South Shore
The Carroll Center For The Blind
The David Project
The E Club
The Genesis Fund
The Gifford School
The Greater Boston Food Bank
The Jimmy Fund
The Joey Fund
The Kennek Foundation
The Knitting Connection, Inc.
Matignon High School
Mattapan United
May Institute
Medford Chamber of Commerce
Medford Community Coalition
Medford Firefighters Local 1032
Medford High School
Medford Jingle Bell Festival
Medford Little League
Medford Rotary Club
Melmark New England
Merrimack Valley YMCA
Morgan Memorial Goodwill Industries
MSPCA - Angell
My Brother’s Table
Mystic River Watershed Association
Mystic Valley Area Branch of the NAACP
Mystic Valley Elder Services
Mystic Valley Public Health Coalition
NAIOP Massachusetts
Nashua Senior Activity Center
National Brain Tumor Society
National Tay-Sachs & Allied
Diseases Association
Nativity Preparatory School
Nazzaro Recreation Center
Neighborhood House Charter School
Neurofibromatosis, Inc., Northeast
New England Conservatory
New England Wounded Veterans, Inc.
NewBridge on the Charles/Hebrew SeniorLife
Newton at Home
Newton North High School
Newton-Needham Chamber of Commerce
Newton-Wellesley Hospital
Charitable Foundation
Norman B. Leventhal Map Center
North Andover Housing Authority
North End Against Drugs, Inc.
North End Music and Performing Arts Center
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
Pan-Mass Challenge
Partners HealthCare at Home
Pay it Forward Gift Fund
Peabody Institute Library Foundation
Peabody Veterans Memorial High School
Prospect Hill Academy Charter School
Quincy College
Quincy School Community Partnership
German International School Lower Campus Inauguration
Society of Jesus of New England
Somerville Chamber of Commerce
Somerville Council on Aging
Somerville Fair Housing Commission
Somerville High School
Somerville Home
Somerville Housing Authority
Somerville Kiwanis Club
Somerville Museum
Team Century participating at The Dimock
Center – Road to Wellness 5K
Somerville Pop Warner
South End Community Health Center
South Memorial - Passos Avante
Playground Fund
The Lenny Zakim Fund
The McCourt Foundation
The Merle & Marshall Goldman Endowment
Fund for Jewish Campus Life
The New England Council
The Second Step
The Shadow Fund NE
The Skating Club of Boston
The Soldiers Fund
Torah Academy
Town of Acton
Town of Burlington
Town of Wenham
Trust for the National Mall
UNICO Merrimack Valley
UWUA Local 369
Veterans of Foreign Wars
Visiting Nurse Foundation of
Eastern Massachusetts
VNA Hospice Care
Winchester Foundation for
Educational Excellence
Winchester Historical Society
Woburn Business Association
Woburn Middlesex Lions Club
Woburn Public Library
WomenCorporateDirectors
Women’s Bar Association of Massachusetts
World Unity
Yoga Reaches Out
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
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
First Vice Presidents
Assistant Vice Presidents
Roberta M. Byington
Cindy Cohen
Margaret M. DiCeglie
James R. Ellis
John R. Ferguson
Jill A. Holak, CIA
Linda M. Johns
William B. Keefe
Brian Kelly
Ann E. Mannion
Carol A. Melisi
Robson G. Miguel
Marie A. Nugent
Karen J. Pessia
Scott M. Rembis
Kathleen E. Schroeder
Danielle G. Sheehan
Krzysztof A. Sikorski
Jeremy P. Styles
Oliver Sun
Jeanne A. Wood
Officers
Ryan G. Bachur
Angela L. Barahona
Susan A. Cabral
Jeana A. Caterino
Anel Cetina-Santos
Heather J. Donnellan
Joseph R. Ferreira
Crissy Flaherty
Richard Forrest
Sara A. Gaudet
Lisa M. Glynn
Fatima M. Goncalves
Paula A. Grimaldi
Joshua L. Jick
Earl K. Kishida
Brandon N. Letellier
Paula A. Malley
Daniel R. Martiniello
Kimberly J. Matsumoto
Cheryl L. Miller
Christopher M. Ross
Cynthia E. Sarnie
Biljana Savic
Michael E. Serieka
Maria R. Serrentino
Robert J. Silva
Judith Sinclair
Elizabeth A. Theriault
Michael D. Ballard
Gracine Copithorne
Anna M. Gorska
Carl R. Hall
T. Daniel Kausel
David J. Waryas
Vice Presidents
Zubin C. Bagwadia
Jean P. Belcher-Scarpa
Robert A. Bennett
John S. Bosco, Jr.
Valerie R. Bosse
Jeffrey R. Bradbury
Pasqualina Buttiri
James W. Clark
Derek J. Craig
Rosalie A. Cunio
Anthony Daniels
Dara L. Delaney
Brian J. DeVenne
Laura A. DiFava
Sandra R. Edey
Michele English
Judith A. Fallon
Marissa L. Fitzgerald
Jane C. Gilberti
Howard N. Gold
Lisa Gosling
Geoffrey T. Grayson
Michelle L. Haughton
Ashkon Hedvat
Saida Idouahmane
James J. Jordan
Darlene Joyce
Emma M. Lindsay
Michael F. Long
Nancy M. Marsh
Karen M. Martin
Carl M. Mattos
Kathleen McGillicuddy
Nancy R. Miller
Steven A. Naylor
Jennifer A. Nickerson, CPA
John L. Norris III
Meredith O’Keefe
David J. Orise
Sarah A. O’Toole
Keith M. Pauletti
Cornelius C. Prioleau
Youyi Shi
Mary Spadoni
Rita C. Spitz
Tuesday N. Thomas
Lawrence H. Tsoi
Jose I. Umana
Calvin M. Wong
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
54
56
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 ’17 2017
2016
2015
2014
2013
(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
Core earnings – Non-GAAP (1)
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)
(1)
$ 113,436
27,820
85,616
1,790
83,826
16,552
67,119
33,259
10,958
22,301
30,749
$
$
3,604,029
1,963,880
5,567,909
1,963,880
5,567,909
$
$
$
$
4.86
2.43
4.01
2.43
9.9 %
$ 4,785,572
2,175,944
3,916,967
260,297
46.75
$
0.48 %
8.75 %
2.25 %
0.00 %
5.50 %
57.8 %
2017
Non-GAAP Financial Measures are reconciled in the following tables:
Calculation of Efficiency Ratio:
Total Operating Expenses (numerator)
$
67,119
Net Interest Income
Total Other Operating Income
Tax Equivalent Adjustment
Total Income (denominator)
$
85,616
16,552
13,979
$
$
$
96,699
22,617
74,082
1,375
72,707
16,222
64,757
24,172
(362)
24,534
24,534
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 %
$
$
$
90,093
20,134
69,959
200
69,759
15,993
62,198
23,554
533
23,021
23,021
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 %
$
$
$
85,371
19,136
66,235
2,050
64,185
15,271
56,730
22,726
866
21,860
21,860
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 %
$
$
$
79,765
18,805
60,960
2,710
58,250
18,615
55,812
21,053
1,007
20,046
20,046
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 %
2016
2015
2014
2013
$
$
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
$ 116,147
$ 103,221
$
97,092
$
91,539
$
88,559
Efficiency Ratio, Year – Non-GAAP
57.8 %
62.7 %
64.1 %
62.0 %
63.0 %
2017
2016
2015
2014
2013
Calculation of Dividend Payout Ratio:
Dividends Paid (numerator)
Net Income (denominator)
$
$
2,200
22,301
$
$
2,201
24,534
$
$
2,200
23,021
$
$
2,196
21,860
$
$
2,191
20,046
Dividend Payout Ratio – Non-GAAP
9.9 %
9.0 %
9.6 %
10.0 %
10.9 %
2017
2016
2015
2014
2013
Calculation of core earnings:
Net Income
$
22,301
$
24,534
$
23,021
$
21,860
$
20,046
Add: Deferred Tax Remeasurement Charge
8,448
—
—
—
—
Core earnings – Non-GAAP
$
30,749
$
24,534
$
23,021
$
21,860
$
20,046
1
Century Bancorp, Inc. AR ’17Financial Highlights
Per Share Data
2017, Quarter Ended
Market price range (Class A)
High
Low
Dividends Class A
Dividends Class B
2016, Quarter Ended
Market price range (Class A)
High
Low
Dividends Class A
Dividends Class B
December 31,
September 30,
June 30,
March 31,
$ 89.40
77.85
0.12
0.06
$ 81.10
61.95
0.12
0.06
$ 66.65
53.35
0.12
0.06
$ 64.87
58.55
0.12
0.06
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
The stock performance graph below compares the cumulative total shareholder return of the Company’s Class A Common Stock from December 31, 2012 to
December 31, 2017 with the cumulative total return of the NASDAQ Market Index (U.S. Companies) and the NASDAQ Bank Stock Index. The lines in the graph
represent monthly index levels derived from compounded daily returns that include all dividends. If the monthly interval, based on the fiscal year-end, was not a
trading day, the preceding trading day was used.
Comparison of Five-Year
$300
Cumulative Total Return*
Century Bancorp, Inc.
NASDAQ U.S.
NASDAQ Banks
$250
$200
$150
$100
$50
$0
2012
2013
2014
2015
2016
2017
Value of $100 Invested on
December 31, 2012 at:
2013
2014
2015
2016
2017
Century Bancorp, Inc.
NASDAQ Banks
NASDAQ U.S.
$ 102.35
136.62
140.12
$ 124.97
152.78
160.78
$ 137.17
156.15
171.97
$ 191.38 $ 251.31
233.94
242.71
197.60
187.22
* Assumes that the value of the investment in the Company’s Common Stock and each index was $100 on
December 31, 2012 and that all dividends were reinvested.
2
Century Bancorp, Inc. AR ’17Financial 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
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Act”) became law. The Act was intended to address many issues arising
in the recent financial crisis and is exceedingly broad in scope, affecting many
aspects of bank and financial market regulation. The Act requires, or permits
by implementing regulation, enhanced prudential standards for banks and bank
holding companies inclusive of capital, leverage, liquidity, concentration and
exposure measures. In addition, traditional bank regulatory principles such as
restrictions on transactions with affiliates and insiders were enhanced. The Act
also contains reforms of consumer mortgage lending practices and creates a
Bureau of Consumer Financial Protection, which is granted broad authority
over consumer financial practices of banks and others. It is expected as the
specific new or incremental requirements applicable to the Company become
effective that the costs and difficulties of remaining compliant with all such
requirements will increase. The Act broadened the base for FDIC assessments
to average consolidated assets less tangible equity of financial institutions and
also permanently raises the current standard maximum FDIC deposit insurance
amount to $250,000. The Act extended unlimited deposit insurance on non-
interest bearing transaction accounts through December 31, 2012.
In addition, the Act added a new Section 13 to the Bank Holding Company
Act, the so-called “Volcker Rule,” (the “Rule”) which generally restricts certain
banking entities such as the Company and its subsidiaries or affiliates, from
engaging in proprietary trading activities and owning equity in or sponsoring any
private equity or hedge fund. The Rule became effective July 21, 2012. The final
implementing regulations for the Rule were issued by various regulatory agencies
in December, 2013 and under an extended conformance regulation compliance
was required to be achieved by July 21, 2015. The conformance period for
investments in and relationships with certain “legacy covered funds” has been
extended to July 21, 2017. Under the Rule, the Company may be restricted
from engaging in proprietary trading, investing in third party hedge or private
equity funds or sponsoring new funds unless it qualifies for an exemption from
the rule. The Company has little involvement in prohibited proprietary trading
or investment activities in covered funds and the Company does not expect that
complying with the requirements of the Rule will have any material effect on the
Company’s financial condition or results of operation.
Federal banking regulators have issued risk-based capital guidelines, which assign
risk factors to asset categories and off-balance-sheet items. Also, the Basel
Committee has issued capital standards entitled “Basel III: A global regulatory
framework for more resilient banks and banking systems” (“Basel III”). The
Federal Reserve Board has finalized its rule implementing the Basel III regulatory
capital framework. The rule that came into effect in January 2015 sets the Basel
III minimum regulatory capital requirements for all organizations. It included a
new common equity Tier I ratio of 4.5 percent of risk-weighted assets, raised the
minimum Tier I capital ratio from 4 percent to 6 percent of risk-weighted assets
and would set a new conservation buffer of 2.5 percent of risk-weighted assets.
The implementation of the framework did not have a material impact on the
Company’s financial condition or results of operations.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was
enacted, which represents the most comprehensive reform to the U.S. tax code
in over thirty years. The majority of the provisions of the Tax Act takes effect on
January 1, 2018. The Tax Act lowers the Company’s federal tax rate from 34%
to 21%. Also, for tax years beginning after December 31, 2017, the corporate
Alternative Minimum Tax (“AMT”) has been repealed. For 2018 through 2021,
the AMT credit carryforward can offset regular tax liability and is refundable
in an amount equal to 50% (100% for 2021) of the excess of the minimum
tax credit for the tax year over the amount of the credit allowable for the year
against regular tax liability. Accordingly, the full amount of the alternative
minimum tax credit carryforward will be recovered in tax years beginning before
2022. The Tax Act also contains other provisions that may affect the Company
currently or in future years. Among these are changes to the deductibility of
meals and entertainment, the deductibility of executive compensation, the
dividend received deduction and net operating loss carryforwards. Tax Act
changes for individuals include lower tax rates, mortgage interest and state
and local tax limitations as well as an increase in the standard deduction,
among others.
OVERVIEW
Century Bancorp, Inc. (together with its bank subsidiary, unless the context
otherwise requires, the “Company”) is a Massachusetts state-chartered bank
holding company headquartered in Medford, Massachusetts. The Company is a
Massachusetts corporation formed in 1972 and has one banking subsidiary (the
“Bank”): Century Bank and Trust Company formed in 1969. At December 31,
2017, the Company had total assets of $4.8 billion. Currently, the Company
operates 27 banking offices in 20 cities and towns in Massachusetts, ranging
from Braintree in the south to Andover in the north. The Bank’s customers
consist primarily of small and medium-sized businesses and retail customers
in these communities and surrounding areas, as well as local governments and
large healthcare and higher education 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
3
Century Bancorp, Inc. AR ’17Management’s Discussion and Analysis of Results of Operations and Financial Condition 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 $22,301,000 for the year ended
December 31, 2017, compared with net income of $24,534,000 for the year
ended December 31, 2016 and net income of $23,021,000 for the year ended
December 31, 2015. Class A diluted earnings per share were $4.01 in 2017
compared to $4.41 in 2016 and compared to $4.13 in 2015.
During 2017, the Company’s earnings were negatively impacted by a reduction
in the value of its net deferred tax asset resulting in a charge of $8.4 million
to income tax expense. This was the result of the enactment of the Tax Act on
December 22, 2017, which lowered the Company’s federal tax rate from 34%
to 21%. During 2017 and 2016, 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 2016 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 and 2015,
the U.S. economy experienced a low short-term rate environment. The lower
short-term rates negatively impacted the net interest margin as the rate at which
short-term deposits could be invested declined more than the rates offered on
those deposits.
2017
2016
2015
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
$ 4.86
$ 2.43
$ 4.01
$ 2.43
$ 5.35
$ 2.68
$ 4.41
$ 2.68
$ 5.02
$ 2.51
$ 4.13
$ 2.51
The trends in the net interest margin are illustrated in the graph below:
2.40 %
2.31%
2.26% 2.26%
2.28%
Net Interest Margin
2.30 %
2.19%
2.20 %
2.12%
2.10 %
2.00 %
2.18%
2.15%
2.12%
2.12%
2.16%
2.04%
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3 Q4
2015
2016
2017
During the second and third quarters of 2015 the net interest margin increased
primarily as a result of an increase in higher yielding assets as well as prepayment
penalties collected. The increase in higher yielding assets was primarily the result
of increased purchases of securities held-to-maturity. The margin decreased
during the fourth quarter of 2015 primarily as a result of lower yielding loan
originations. The margin increased during the first quarter of 2016 primarily as a
result of an increase in rates on earning assets. The margin decreased during the
second, third, and fourth quarters of 2016 primarily as a result of a decrease in
rates on earning assets. The margin increased during 2017 primarily as a result
of an increase in rates on earning assets. This increase was primarily the result
of the yield on floating rate assets increasing as a result of recent increases in
short term interest rates as well as an increase in prepayment penalties collected
during the second quarter of 2017. Prepayment penalties collected amounted
to $825,000 and contributed approximately seven basis points to the net
interest margin for the second quarter. During 2017, the Company has not
seen a corresponding increase in short term rates on interest bearing liabilities.
While management will continue its efforts to improve the net interest margin,
there can be no assurance that certain factors beyond its control, such as the
prepayment of loans and changes in market interest rates, will continue to
positively impact the net interest margin.
4.00 %
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 12/31/2017
U.S. Treasury Yield Curve 12/31/2016
U.S. Treasury Yield Curve 12/31/2015
A yield curve is a line that typically plots the interest rates of U.S. Treasury
Debt, which have different maturity dates but the same credit quality, at a
specific point in time. The three main types of yield curve shapes are normal,
inverted and flat. Over the past three years, the U.S. economy has experienced
low short-term rates. During 2016 and 2017, short-term rates increased more
than longer-term rates resulting in a flattening of the yield curve. This flattening
of the yield curve became more pronounced during 2017.
Total assets were $4,785,572,000 at December 31, 2017, an increase of
7.2% from total assets of $4,462,608,000 at December 31, 2016.
On December 31, 2017, stockholders’ equity totaled $260,297,000, compared
with $240,041,000 on December 31, 2016. Book value per share increased to
$46.75 at December 31, 2017, from $43.11 on December 31, 2016.
During June 2016, the Company entered into a lease agreement to open a new
branch located in Wellesley, Massachusetts. The Company closed its existing
Wellesley branch and transferred the accounts to the new Wellesley branch
which opened on December 19, 2016. On September 25, 2017 the Company
purchased the new Wellesley location.
CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by
management, which have, or could have, a material impact on the carrying value
of certain assets and impact income, are considered critical accounting policies.
The Company considers allowance for loan losses and income taxes to be its
critical accounting policies.
4
Century Bancorp, Inc. AR ’17Management’s Discussion and Analysis of Results of Operations and Financial Condition
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, 2017 totaled $397,475,000 and included gross unrealized
gains of $860,000 and gross unrealized losses of $948,000. A year earlier,
the fair value of securities available-for-sale was $499,297,000 including gross
unrealized gains of $555,000 and gross unrealized losses of $1,478,000. In
2017, the Company recognized gains of $47,000 on the sale of available-for-
sale securities. In 2016 and 2015, the Company recognized gains of $52,000
and $289,000, respectively.
Securities classified as held-to-maturity consist of U.S. Government Sponsored
Enterprises, SBA Backed Securities, and U.S. Government Sponsored Enterprise
mortgage-backed securities. Securities held-to-maturity as of December 31,
2017 are carried at their amortized cost of $1,701,233,000. A year earlier,
securities held-to-maturity totaled $1,653,986,000. In 2017 the company did
not recognize any gains on the sale of held-to-maturity securities. In 2016 and
2015 the company recognized gains of $12,000 and $305,000, respectively,
on the sale of held-to-maturity securities. The sales from securities held-to-
maturity relate to certain mortgage-backed securities for which the Company
had previously collected a substantial portion of its principal investment.
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 2016 and 2017, the Company continued to enhance its methodology
to the allowance for loan losses by updating qualitative factors on certain loan
portfolios. Management believes that the allowance for loan losses is adequate.
In addition, various regulatory agencies, as part of the examination process,
periodically review the 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. 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.
5
Century Bancorp, Inc. AR ’17Management’s Discussion and Analysis of Results of Operations and Financial Condition Fair Value of Securities Available-for-Sale
The following table sets forth the fair value and percentage distribution of securities available-for-sale at the dates indicated.
At December 31,
2017
2016
2015
(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
Amount
Percent
Amount
Percent
Amount
Percent
$
1,984
—
0.5 %
0.0 %
$
2,000
24,952
0.4 %
5.0 %
80,950
20.3 %
57,767
11.6 %
$
1,989
—
5,989
225,775
892
82,600
4,971
303
56.8 %
0.2 %
20.8 %
1.3 %
0.1 %
243,325
48.7 %
1,109
0.2 %
164,876
33.0 %
4,924
344
1.0 %
0.1 %
233,526
1,434
156,960
4,473
252
0.5 %
0.0 %
1.5 %
57.7 %
0.4 %
38.8 %
1.0 %
0.1 %
$ 397,475
100.0 %
$ 499,297
100.0 %
$ 404,623
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, 2017.
The increase in SBA Backed Securities was primarily the result of an increased investment return combined with a lower risk rating in these types of securities. The
decrease in Obligations Issued by States and Political Subdivisions was primarily the result of increased competition in the bidding process for these types of securities.
Securities available-for-sale totaling $82,600,000, or 1.7% of assets, are classified as Level 3, as defined in Note 1 of the “Notes to Consolidated Financial
Statements.” These securities are generally municipal securities with no readily determinable fair value. The Company also utilizes internal pricing analysis on various
municipal securities using market rates on comparable securities. The securities are carried at fair value with periodic review of underlying financial statements and
credit ratings to assess the appropriateness of these valuations.
Debt securities of Government Sponsored Enterprises refer primarily to debt securities of Fannie Mae and Freddie Mac.
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,
2017
2016
2015
(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
$ 104,653
57,235
6.2 %
3.4 %
$ 148,326
46,140
9.0 %
2.8 %
$ 186,734
13.0 %
—
0.0 %
1,539,345
90.4 %
1,459,520
88.2 %
1,252,169
87.0 %
Total
$ 1,701,233
100.0 %
$ 1,653,986
100.0 %
$ 1,438,903
100.0 %
6
Century Bancorp, Inc. AR ’17Management’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, 2017. 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
$
—
0.0 %
0.00 %
$
1,984
0.5 %
1.28 %
$
— 0.0 %
0.00 %
$
—
0.0 % 0.00 %
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 of States and
Political Subdivisions
—
—
0.0 %
0.00 %
—
0.0 %
0.00 %
— 0.0 %
0.00 %
—
0.0 % 0.00 %
0.0 %
0.00 %
14,816
3.7 %
1.73 %
27,031 6.8 %
1.89 %
39,103
9.8 % 1.90 %
—
0.0 %
0.00 %
85,292 21.5 %
2.00 %
116,018 29.2 %
2.03 %
24,465
6.2 % 1.99 %
892
0.2 %
1.87 %
—
0.0 %
0.00 %
—
0.0 %
0.00 %
—
0.0 % 0.00 %
77,146 19.4 %
1.82 %
770
0.2 %
3.96 %
225 0.1 %
4.80 %
4,459
1.1 % 3.45 %
Other Debt Securities
300
0.1 %
1.91 %
1,261
0.3 %
2.04 %
1,033 0.3 %
6.00 %
1,035
0.3 % 6.00 %
Equity Securities
—
0.0 %
0.00 %
—
—
0.00 %
— 0.0 %
0.00 %
—
0.0 % 0.00 %
Total
$ 78,338 19.7 %
1.82 %
$ 104,123 26.2 %
1.96 %
$ 144,307 36.4 %
2.04 %
$ 69,062 17.4 % 2.09 %
Non-
Maturing
% of
Total
Weighted
Average
Yield
Total
Weighted
Average
Yield
% of
Total
$
—
—
—
—
—
—
0.0 %
0.00 %
$
1,984
0.5 %
1.28 %
0.0 %
0.00 %
—
0.0 %
0.00 %
0.0 %
0.00 %
80,950
20.3 %
1.87 %
0.0 %
0.00 %
225,775
56.8 %
2.02 %
0.0 %
0.00 %
892
0.2 %
1.87 %
0.0 %
0.00 %
82,600
20.8 %
1.94 %
1,342
0.3 %
2.22 %
4,971
1.3 %
3.64 %
303
0.1 %
6.21 %
303
0.1 %
6.21 %
$ 1,645
0.4 %
2.95 %
$ 397,475 100.0 %
1.99 %
(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
$ 19,947 1.2 % 1.60 % $
84,706 5.0 %
2.12 % $
—
0.0 % 0.00 % $ —
0.0 % 0.00 % $ 104,653
6.2 % 2.02 %
SBA Backed Securities
— 0.0 % 0.00 %
6,939 0.4 %
1.58 %
50,296
3.0 % 2.38 %
— 0.0 % 0.00 %
57,235
3.4 % 2.28 %
U.S. Government
Sponsored Enterprise
Mortgage-Backed
Securities
8,805 0.5 % 2.47 %
1,165,634 68.5 %
2.26 %
361,620 21.2 % 2.42 %
3,286 0.2 % 3.10 %
1,539,345 90.4 % 2.30 %
Total
$ 28,752 1.7 % 1.86 % $ 1,257,279 73.9 %
2.25 % $ 411,916 24.2 % 2.41 % $ 3,286 0.2 % 3.10 % $ 1,701,233 100.0 % 2.28 %
7
Century Bancorp, Inc. AR ’17Management’s Discussion and Analysis of Results of Operations and Financial Condition
At December 31, 2017 and 2016, the Bank had no investments in obligations of individual states, counties, municipalities or nongovernment corporate entities which
exceeded 10% of stockholders’ equity. In 2017, sales of securities totaling $18,180,000 in gross proceeds resulted in a net realized gain of $47,000. In 2016, sales
of securities totaling $2,568,000 in gross proceeds resulted in a net realized gain of $64,000. There were no sales of state, county or municipal securities during
2017 and 2016.
Management reviews the investment portfolio for other-than-temporary impairment of individual securities on a regular basis. The results of such analysis are
dependent upon general market conditions and specific conditions related to the issuers of our securities.
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.
2017
2014
2015
2016
2013
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
$
18,931
763,807
106,599
732,491
287,731
18,458
247,345
582
0.9 %
35.1 %
4.9 %
33.7 %
13.2 %
0.8 %
11.4 %
0.0 %
$
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 % $
22,744
1.7 % $
26.1 %
4.9 %
41.7 %
14.7 %
0.6 %
10.3 %
0.1 %
41,850
149,732 11.2 %
3.1 %
696,272 52.3 %
257,305 19.3 %
0.8 %
151,275 11.4 %
0.2 %
10,925
1,263
33,058
76,675
32,737
2.6 %
6.1 %
2.6 %
696,317 55.0 %
286,041 22.6 %
0.7 %
130,277 10.3 %
0.1 %
8,824
834
Total
$ 2,175,944
100.0 %
$ 1,923,933 100.0 % $ 1,731,536 100.0 % $ 1,331,366 100.0 % $ 1,264,763 100.0 %
At December 31, 2017, 2016, 2015, 2014 and 2013, loans were carried net of discounts of $272,000, $313,000, $360,000, $407,000 and $454,000,
respectively. Net deferred loan fees of $362,000, $641,000, $988,000, $908,000 and $174,000 were carried in 2017, 2016, 2015, 2014 and 2013, respectively.
The following table summarizes the remaining maturity distribution of certain components of the Company’s loan portfolio on December 31, 2017. 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, 2017
One to Five Years
Over Five Years
Total
Construction and land development
Commercial and industrial
Commercial real estate
Total
$
—
34,601
28,122
$ 62,723
$
466
57,909
80,724
$ 139,099
$
18,465
671,297
623,645
$ 1,313,407
$
18,931
763,807
732,491
$ 1,515,229
December 31, 2017
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
$ 69,260
69,839
$ 139,099
$ 325,671
987,736
$ 1,313,407
$ 394,931
1,057,575
$ 1,452,506
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 2016 and 2017, the Company increased its lending activities to these
types of organizations. This increase may expose the Company to concentration risks inherent in financings based upon analysis of credit risk, the value of underlying
collateral, and other more intangible factors, which are considered in originating commercial loans. The percentage of these types of organizations to total C&I loans has
increased to 87 % at December 31, 2017, compared to 81% at December 31, 2016.
8
Century Bancorp, Inc. AR ’17Management’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 had increased its lending activities
to municipalities through 2016. Municipal loans decreased during 2017 as a result of loan payoffs.
Residential real estate (1–4 family) includes two categories of loans. Included in residential real estate are approximately $33,835,000 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, 2017, the Company was obligated to advance a total of $15,152,000 to complete projects
under construction.
2017
December 31,
2016
2014
2015
2013
(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
$ 1,684
—
$ 1,684
$ 2,749
—
0.08 %
0.04 %
2017
$ 4,212
—
2,554
—
348
$ 7,114
$ 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
—
$ 2,549
—
$ 4,146
$2 ,549
$ 3,296
—
0.31 %
0.11 %
$ 5,969
—
0.20 %
0.07 %
2014
$ 962
92
4,318
103
852
2013
$ 1,199
94
4,520
608
1,367
$ 6,327
$ 7,788
At December 31, 2017, 2016, 2015, 2014 and 2013 impaired loans had specific reserves of $164,000, $173,000, $250,000, $904,000 and $1,019,000,
respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $229,533,000, $229,730,000, $185,299,000, $143,696,000 and
$109,301,000 at December 31, 2017, 2016, 2015, 2014 and 2013, respectively. The Company had no loans held for sale at December 31, 2017, December 31,
2016, December 31, 2015, December 31, 2014 and December 31, 2013.
Servicing assets are recorded at fair value and recognized as separate assets when rights are acquired through sale of loans with servicing rights retained. Mortgage
servicing assets (“MSA”) are amortized into non-interest income in proportion to, and over the period of, the estimated net servicing income. Upon sale, the mortgage
servicing asset is established, which represents the then-current estimated fair value based on market prices for comparable mortgage servicing contracts, when
available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses. Servicing rights are assessed for impairment based on fair value at each reporting date. MSAs are reported
in other assets in the consolidated balance sheets. MSAs totaled $1,525,000 at December 31, 2017, $1,629,000 at December 31, 2016, $1,305,000 at
December 31, 2015, $941,000 at December 31, 2014 and $703,000 for December 31, 2013.
9
Century Bancorp, Inc. AR ’17Management’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 increased during 2017, primarily as a result of an increase in home equity and residential real estate nonperforming loans. Nonaccrual loans
decreased during 2016, primarily as a result of a decrease in home equity and residential real estate nonperforming loans. Nonaccrual loans decreased during 2015
primarily due to the sale and partial charge-off of the property securing a large commercial real estate loan subsequent to foreclosure. Nonaccrual loans increased
during 2014 primarily as a result of a large commercial real estate loan.
The Company continues to monitor closely $37,184,000 and $35,583,000 at December 31, 2017 and 2016, respectively, of loans for which management has
concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to
cover the loan balances at December 31, 2017, although such values may fluctuate with changes in the economy and the real estate market. The increase is primarily
attributable to one loan relationship secured by real estate.
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
2017
2016
2014
2015
2013
(net of unearned discount and deferred loan fees)
$ 2,175,944
$ 1,923,933
$ 1,731,536
$ 1,331,366
$ 1,264,763
Average loans outstanding
(net of unearned discount and deferred loan fees)
$ 2,059,797
$ 1,838,136
$ 1,507,546
$ 1,307,888
$ 1,184,912
Balance of allowance for
loan losses at the beginning of year
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
$
24,406
$
23,075
$
22,318
$
20,941
$
19,197
49
—
—
—
341
390
110
—
84
255
449
(59)
1,790
—
—
—
—
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
—
Balance at end of year
$
26,255
$
24,406
$
23,075
$
22,318
$
20,941
Ratio of net (recoveries) charge-offs during the year
to average loans outstanding
Ratio of allowance for loan losses to loans outstanding
0.00 %
1.21 %
0.00 %
1.27 %
(0.04) %
1.33 %
0.05 %
1.68 %
0.08 %
1.66 %
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 2014, 2015 and 2016 as a result of the overall decrease in the level of nonaccrual loans. The dollar amount of the allowance for loan losses increased primarily
as a result of an increase in loan balances offset, somewhat, by lower historical loss factors.
During 2015, the Company enhanced its approach to the development of the historical loss factors and qualitative factors used on certain loan portfolios. The
methodology enhancement was in response to the changes in the risk characteristics of the 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 ’17Management’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 for 2015. For 2016 and 2017, the change in the ratio of the allowance for loan losses to loans
outstanding, was primarily due to changes in portfolio composition, lower historical loss rates, and qualitative factor adjustments.
In addition, the Company monitors the outlook for the industries in which these institutions operate. Healthcare and higher education are the primary industries. The
Company also monitors the volatility of the losses within the historical data.
By combining the credit rating, the industry outlook and the loss volatility, the Company arrives at the quantitative loss factor for each credit grade.
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, 2017.
(in thousands)
Credit Rating:
Aaa-Aa3
A1-A3
Baa1-Baa3
Ba2
Total
$ 478,905
195,599
—
—
$ 62,029
7,635
26,970
8,165
$ 45,066
128,554
122,000
—
$ 586,000
331,788
148,970
8,165
$ 674,504
$ 104,799
$ 295,620
$ 1,074,923
Credit ratings issued by national organizations were utilized as credit quality indicators as presented in the following table at December 31, 2016.
(in thousands)
Commercial
and Industrial
Municipal
Commercial
Real Estate
Total
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 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
2016
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
2017
2015
2014
2013
(dollars in thousands)
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer and other
Home equity
Unallocated
0.9 %
$ 1,645
9,651 35.1 %
1,720
4.9 %
9,728 33.7 %
1,873 13.2 %
0.8 %
373
989 11.4 %
276
1,612
0.8 %
$ 1,012
6,972 31.8 %
7.1 %
11,135 36.2 %
1,698 12.5 %
0.6 %
1,102 11.0 %
582
994
1.6 %
$ $2,041
5,899 26.1 %
4.9 %
10,589 41.7 %
1,320 14.7 %
0.7 %
1,077 10.3 %
644
$ 1,592
1.7 %
4,757 11.2 %
3.1 %
1,488
11,199 52.3 %
776 19.3 %
1.0 %
810
599 11.4 %
$ 2,174
2,617
655
2.6 %
6.1 %
2.6 %
10,935 55.0 %
2,006 22.6 %
0.8 %
432
959 10.3 %
293
511
1,097
1,163
Total
$ 26,255 100.0 %
$ 24,406 100.0 %
$ 23,075 100.0 %
$ 22,318 100.0 %
$ 20,941 100.0 %
Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review
the 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 ’17Management’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
2017
2016
2015
Amount
The following table sets forth the average balances of the Bank’s deposits for the periods indicated.
(dollars in thousands)
Percent
Amount
Amount
Demand Deposits
$ 687,853
18.0 %
$ 609,159
17.8 %
$ 518,161 17.2 %
Savings and Interest Checking
1,457,872
38.2 %
1,322,714 38.6 %
1,139,449 37.8 %
Money Market
1,105,072
28.9 %
1,041,404 30.4 %
951,197 31.5 %
Time Certificates of Deposit
566,940
14.9 %
452,562 13.2 %
408,711 13.5 %
Total
$ 3,817,737 100.0 %
$ 3,425,839 100.0 %
$ 3,017,518 100.0 %
2017
2016
(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
$ 107,649
137,260
123,468
135,426
$ 84,522
42,736
85,476
153,243
Total
$ 503,803
$ 365,977
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 $347,778,000, an increase of $54,778,000 from the prior year. The Bank’s remaining term borrowing capacity at the FHLBB at December 31, 2017,
was approximately $127,631,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. See Note 12, “Other Borrowed Funds and Subordinated
Debentures,” for a schedule, including related interest rates and other information.
Subordinated Debentures
In December 2004, the Company consummated the sale of a Trust Preferred Securities offering, in which it issued $36,083,000 of subordinated debt securities due
2034 to its newly formed unconsolidated subsidiary, Century Bancorp Capital Trust II.
Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities
paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The
coupon rate on these securities was 3.46% at December 31, 2017. The Company is using the proceeds primarily for general business purposes.
Securities Sold Under Agreements to Repurchase
The Bank’s remaining borrowings consist primarily of securities sold under agreements to repurchase. Securities sold under agreements to repurchase totaled
$158,990,000, a decrease of $23,290,000 from the prior year. See Note 11, “Securities Sold Under Agreements to Repurchase,” for a schedule, including related
interest rates and other information.
RESULTS OF OPERATIONS
Net Interest Income
The 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 14.5% in 2017 to $99,595,000, compared with $86,999,000 in 2016. The increase in net interest income for 2017 was mainly due to an 8.1%
increase in the average balances of earning assets, combined with a similar increase in deposits. The increase in net interest income for 2016 was mainly due to a
10.3% increase in the average balances of earning assets, combined with a similar increase in deposits. The level of interest rates, the ability of the 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 increased to 2.25 % in 2017 and decreased to 2.12% in 2016 from 2.18% in 2015. The increase in the net interest margin for
2017 was primarily attributable to an increase in rates on earning assets and prepayment penalties collected. The decrease in the net interest margin, for 2016,
was primarily the result of a decrease in rates on earning assets. This is primarily as a result of originating larger loans to borrowers with high credit quality, some of
which are at variable rates. The Company collected approximately $907,000, $416,000 and $945,000, respectively, of prepayment penalties, which are included in
interest income on loans, for 2017, 2016 and 2015, respectively.
Additional information about the net interest margin is contained in the “Overview” section of this report. Also, there can be no assurance that certain factors beyond
its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin. Management believes
that the current yield curve environment will continue to present challenges as deposit and borrowing costs may have the potential to increase at a faster rate than
corresponding asset categories.
12
Century Bancorp, Inc. AR ’17Management’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.
2017
2016
2015
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
$ 978,593
1,081,204
$ 39,103
40,420
4.00 %
3.74 %
$ 866,180 $ 34,324
35,943
971,956
3.96 %
3.70 %
$ 783,451 $ 32,136
30,862
724,095
4.10 %
4.26 %
354,918
106,717
5,859
1,588
1.65 %
1.49 %
349,023
149,631
3,969
1,465
1.14 %
0.98 %
334,249
120,389
2,558
853
0.77 %
0.71 %
1,725,280
38,348
2.22 %
1,533,032
32,679
2.13 %
1,603,530
34,388
2.14 %
189,193
2,097
1.11 %
235,339
1,236
0.53 %
157,765
436
0.28 %
Total interest-earning assets
4,435,905
127,415
2.87 %
4,105,161
109,616
2.67 %
3,723,479
101,233
2.72 %
Noninterest-earning assets
Allowance for loan losses
221,628
(25,329)
Total assets
$ 4,632,204
210,203
(23,872)
$ 4,291,492
191,700
(22,559)
$ 3,892,620
LIABILITIES AND
STOCKHOLDERS’ EQUITY
Interest-bearing deposits:
NOW accounts
Savings accounts
Money market accounts
Time deposits
$ 949,924
507,948
1,105,071
566,941
$ 3,669
2,627
5,626
7,919
0.39 %
0.52 %
0.51 %
1.40 %
$ 904,892 $ 2,311
1,709
3,542
5,706
417,822
1,041,404
452,562
0.26 %
0.41 %
0.34 %
1.26 %
$ 794,293 $ 1,798
1,019
3,038
4,887
345,156
951,197
408,711
0.23 %
0.30 %
0.32 %
1.20 %
Total interest-bearing deposits
3,129,884
19,841
0.63 %
2,816,680
13,268
0.47 %
2,499,357
10,742
0.43 %
Securities sold under
agreements to repurchase
Other borrowed funds and
subordinated debentures
189,684
496
0.26 %
222,956
472
0.21 %
245,276
487
0.20 %
309,102
7,483
2.42 %
357,974
8,877
2.48 %
374,108
8,905
2.38 %
Total interest-bearing liabilities
3,628,670
27,820
0.77 %
3,397,610
22,617
0.67 %
3,118,741
20,134
0.65 %
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)
687,853
60,925
4,377,448
254,756
$ 4,632,204
609,159
57,602
4,064,371
227,121
$ 4,291,492
518,161
51,247
3,688,149
204,471
$ 3,892,620
$ 99,595
(13,979)
$ 85,616
$ 86,999
(12,917)
$ 74,082
$ 81,099
(11,140)
$ 69,959
2.11 %
2.25 %
2.00 %
2.12 %
2.07 %
2.18 %
(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 ’17Management’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.
2017 Compared with 2016
Increase/(Decrease)
Due to Change in
2016 Compared with 2015
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
$ 4,490
4,080
$
289
397
$ 4,779
4,477
$ 3,306
9,556
$ (1,118)
(4,475)
$ 2,188
5,081
68
(498)
4,229
(283)
1,822
621
1,440
1,144
1,890
123
5,669
861
118
238
1,293
374
1,411
612
(1,504)
283
(205)
517
(1,709)
800
12,086
5,713
17,799
11,997
(3,614)
8,383
120
412
228
1,551
2,311
(77)
(1,187)
1,047
1,238
506
1,856
662
4,262
101
(207)
4,156
1,358
918
2,084
2,213
6,573
24
(1,394)
5,203
267
244
299
543
1,353
(46)
(392)
246
446
205
276
1,173
31
364
513
690
504
819
2,526
(15)
(28)
915
1,568
2,483
$ 11,039
$ 1,557
$ 12,596
$ 11,082
$ (5,182)
$ 5,900
Average earning assets were $4,435,905,000 in 2017, an increase of $330,744,000 or 8.1% from the average in 2016, which was 10.3% higher than the
average in 2015. Total average securities, including securities available-for-sale and securities held-to-maturity, were $2,186,915,000, an increase of 7.6% from
the average in 2016. The increase in securities volume was mainly attributable to an increase in taxable securities held-to-maturity. An increase in securities volume
and short term rates resulted in higher securities income, which increased 20.2% to $45,795,000 on a fully tax equivalent basis. Total average loans increased
12.1% to $2,059,797,000 after increasing $330,590,000 in 2016. The primary reason for the increase in loans was due in large part to an increase in tax-exempt
lending as well as taxable residential mortgage and commercial lending. The increase in loan volume resulted in higher loan income. Loan income increased by 13.2%
or $9,256,000 to $79,523,000 in 2017 compared to 2016. Total loan income was $62,998,000 in 2015. Prepayment penalties collected were $907,000,
$416,000, and $945,000 for 2017, 2016, and 2015, respectively.
The Company’s sources of funds include deposits and borrowed funds. On average, deposits increased 11.4%, or $391,898,000, in 2017 after increasing by 13.5%,
or $408,321,000, in 2016. Deposits increased in 2017, primarily as a result of increases in time deposits, savings, demand deposits, money market, and NOW
accounts. Deposits increased in 2016, primarily as a result of increases in demand deposits, savings, money market, NOW accounts, and time deposits. Borrowed funds
and subordinated debentures decreased by 14.1% in 2017, following a decrease of 6.2% in 2016. The majority of the Company’s borrowed funds are borrowings
from the FHLBB and retail repurchase agreements. Average borrowings from the FHLBB decreased by approximately $48,872,000, and average retail repurchase
agreements decreased by $33,272,000 in 2017. Interest expense totaled $27,820,000 in 2017, an increase of $5,203,000, or 23.0%, from 2016 when interest
expense increased 12.3% from 2015. The increase in interest expense, for 2017, is primarily due to increases in the rates on deposits as well as an increase in average
balances of deposits offset, somewhat, by a decrease in borrowed funds. The increase in interest expense, for 2016, is primarily due to increases in the average
balances of deposits as well as an increase in rates offset, somewhat, by a decrease in borrowed funds.
14
Century Bancorp, Inc. AR ’17Management’s Discussion and Analysis of Results of Operations and Financial Condition
Provision for Loan Losses
The provision for loan losses was $1,790,000 in 2017, compared with
$1,375,000 in 2016 and $200,000 in 2015. These provisions are the result
of 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 2017, primarily as a
result of an increase in loan balances offset, somewhat, by changes in historical
loss factors. The provision for loan losses increased during 2016, primarily as
a result of an increase in loan balances. During the second quarter of 2015,
the Company enhanced its approach to the development of the historical loss
factors on certain loans within the portfolio. This was done in response to
the changing risk profile of the Company’s new loan originations and related
methodology enhancements to address these changes.
Other Operating Income
During 2017, the Company continued to experience strong results in its fee-
based services, including fees derived from traditional banking activities such as
deposit-related services, its automated lockbox collection system and full-
service securities brokerage supported by LPL Financial, a full-service securities
brokerage business.
Under the lockbox program, which is not tied to extensions of credit by the
Company, the 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 2017 was $16,552,000, an increase of
$330,000, or 2.0%, compared to 2016. This increase followed an increase
of $229,000, or 1.4%, in 2016, compared to 2015. Included in other
operating income are net gains on sales of securities of $47,000, $64,000
and $594,000 in 2017, 2016 and 2015, respectively. Also included in other
operating income are net gains on sales of mortgage loans of $370,000,
$1,331,000 and $1,034,000 in 2017, 2016 and 2015, respectively. Service
charge income, which continues to be a major source of other operating income,
totaling $8,586,000 in 2017, increased $679,000 compared to 2016. This
followed an increase of $175,000 in 2016 compared to 2015. The increase
in fees, in 2017, was mainly attributable to an increase in fees collected from
processing activities and debit card fees. The increase in fees, in 2016, was
mainly attributable to an increase in fees collected from processing activities
and debit card fees; this was offset somewhat by a decrease in overdraft fees.
Lockbox revenues totaled $3,290,000, up $126,000 in 2017 following
a decrease of $47,000 in 2016. Other income totaled $3,906,000, up
$465,000 in 2017 following an increase of $399,000 in 2016. The increase
in 2017 was primarily the result of increases in wealth management fees, and
merchant card sales royalties. The increase in 2016 was primarily the result of
increases in wealth management fees, merchant and charge card sales royalties,
and cash surrender values of life insurance policies.
Operating Expenses
Total operating expenses were $67,119,000 in 2017, compared to
$64,757,000 in 2016 and $62,198,000 in 2015.
Salaries and employee benefits expenses increased by $1,865,000 or 4.7%
in 2017, after increasing by 3.8% in 2016. The increase in 2017 was mainly
attributable to merit increases in salaries, bonus, and health insurance costs. The
increase in 2016 was mainly attributable to merit increases in salaries, bonus
accruals, pension costs and health insurance costs.
Occupancy expense decreased by $7,000, or 0.1%, in 2017, following an
increase of $31,000, or 0.5%, in 2016. The decrease in 2017 was primarily
attributable to a decrease in rent expense. The increase in 2016 was primarily
attributable to an increase in rent expense.
Equipment expense increased by $47,000, or 1.7%, in 2017, following an
increase of $219,000, or 8.3%, in 2016. The increase in 2017 was primarily
attributable to an increase in service contracts. The increase in 2016 was
primarily attributable to an increase in depreciation expense.
FDIC assessments decreased by $321,000, or 16.9%, in 2017, following a
decrease of $250,000, or 11.6%, in 2016. FDIC assessments decreased in
2017 and 2016 mainly as a result of a decrease in the assessment rate.
Other operating expenses increased by $778,000 in 2017, which followed a
$1,107,000 increase in 2016. The increase in 2017 was primarily attributable
to an increase in contributions, legal expenses, and marketing expenses.
The increase in 2016 was primarily attributable to an increase in marketing
expenses, telephone expenses, software maintenance costs, contributions, and
postage expenses.
Provision for Income Taxes
Income tax expense was 10,958,000 in 2017, $(362,000) in 2016, and
$533,000 in 2015. The effective tax rate was 32.9% in 2017, (1.5%) in
2016 and 2.3% in 2015. The increase in the effective tax rate for 2017 was
primarily the result of a reduction in the value of the deferred tax asset resulting
in a charge of $8,448,000 to income tax expense. On December 22, 2017, the
Tax Act was enacted, which lowered the Company’s federal tax rate from 34%
to 21%. As a result of the rate reduction, the Company recorded a reduction in
the value of its net deferred tax asset. The decrease in the effective tax rate for
2016 was mainly attributable to an increase in tax-exempt interest income as
a percentage of taxable income. The federal tax rate was 34% in 2017, 2016
and 2015.
15
Century Bancorp, Inc. AR ’17Management’s Discussion and Analysis of Results of Operations and Financial Condition Market Risk and Asset Liability Management
Liquidity and Capital Resources
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
(10.1)
(9.0)
(6.3)
(2.5)
1.2
2.6
(1)
The percentage change in this column represents net interest income for 12 months in various
rate scenarios versus the net interest income in a stable interest rate environment.
The changes in the table above are within the Company’s policy parameters.
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 is provided by maintaining an adequate level of liquid assets that
includes cash and due from banks, federal funds sold and other temporary
investments. Liquid assets totaled $356,430,000 on December 31, 2017,
compared with $239,334,000 on December 31, 2016. In each of these two
years, deposit and borrowing activity has generally been adequate to support
asset activity.
The sources of funds for dividends paid by the Company are dividends received
from the Bank and liquid funds held by the Company. The Company and the
Bank are regulated enterprises and their abilities to pay dividends are subject to
regulatory review and restriction. Certain regulatory and statutory restrictions
exist regarding dividends, loans and advances from the Bank to the Company.
Generally, the Bank has the ability to pay dividends to the Company subject to
minimum regulatory capital requirements.
Capital Adequacy
Total stockholders’ equity was $260,297,000 at December 31, 2017,
compared with $240,041,000 at December 31, 2016. The 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 a decrease in unrealized losses on securities available-for-sale.
This was offset, somewhat, by an increase in the pension liability, net of taxes.
The reduction in the value of the Company’s deferred tax asset of $8.4 million
impacted the Company’s total equity as a reduction to retained earnings.
Federal banking regulators have issued risk-based capital guidelines, which assign
risk factors to asset categories and off-balance-sheet items. The following table
reflects capital ratios computed utilizing the recently implemented Basel III
regulatory capital framework:
Leverage ratios
Common equity tier 1
Minimum
Capital Ratios
Company
4.00 %
6.55 %
6.78 %
Bank
risk weighted capital ratios
Tier 1 risk weighted capital ratios
Total risk weighted capital ratios
4.50 %
6.00 %
8.00 %
11.69 %
11.69 %
12.70 %
10.71 %
12.05 %
13.05 %
16
Century Bancorp, Inc. AR ’17Management’s Discussion and Analysis of Results of Operations and Financial Condition
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, 2017.
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
$ 347,778
36,083
43,460
10,660
158,990
$ 596,971
Total
$ 434,618
5,520
56,502
$ 496,640
Less Than
One Year
$ 164,500
—
3,626
2,309
158,990
$ 329,425
One to
Three Years
$ 91,000
—
7,371
4,005
—
$ 102,376
Amount of Commitment Expiring – By Period
Less Than
One Year
$ 26,127
2,991
6,105
$ 35,223
One to
Three Years
$ 138,030
2,371
4,234
$ 144,635
Three to
Five Years
$ 28,500
—
7,825
2,404
—
$ 38,729
Three to
Five Years
$ 5,132
106
2,491
$ 7,729
After Five
Years
$ 63,778
36,083
24,638
1,942
—
$ 126,441
After Five
Years
$ 265,329
52
43,672
$ 309,053
Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments primarily include commitments to 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-
2016
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
2017
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
$ 5,748
5,520
434,618
15,152
35,602
$ 13,877
6,796
362,357
22,049
52,224
Commitments to originate loans, unadvanced portions of construction loans
and unused letters of credit are generally agreements to lend to a customer,
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
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 $66,000 and $44,000 for 2017 and 2016, respectively.
Recent Accounting Developments
See Note 1 to the Notes to Consolidated Financial Statements for details of
recent accounting developments and their expected impact on the Company’s
financial statements.
17
Century Bancorp, Inc. AR ’17Management’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 $397,563 in 2017 and $500,220 in 2016
(Notes 3, 9 and 11)
Securities held-to-maturity, fair value $1,668,827 in 2017 and $1,635,808 in 2016
(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 3,605,829 shares in 2017 and 3,600,729 shares in 2016
Common stock, Class B,
$1.00 par value per share; authorized 5,000,000 shares;
issued 1,962,080 shares in 2017 and 1,967,180 shares in 2016
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
2017
2016
$
77,199
279,231
356,430
—
$
62,400
173,751
236,151
3,183
397,475
499,297
1,701,233
21,779
2,175,944
26,255
2,149,689
23,527
11,179
124,260
1,653,986
21,042
1,923,933
24,406
1,899,527
23,417
9,645
116,360
$ 4,785,572
$ 4,462,608
$ 736,020
1,367,358
1,188,228
625,361
$ 689,286
1,304,394
1,181,179
478,359
3,916,967
3,653,218
158,990
347,778
36,083
65,457
182,280
293,000
36,083
57,986
4,525,275
4,222,567
—
—
3,606
3,601
1,962
12,292
263,666
281,526
(62)
(3,050)
(18,117)
(21,229)
260,297
1,967
12,292
243,565
261,425
(567)
(4,084)
(16,733)
(21,384)
240,041
$ 4,785,572
$ 4,462,608
18
Century Bancorp, Inc. AR ’17
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
2017
2016
2015
$
39,103
$
34,324
$
32,136
26,910
4,987
1,119
872
38,348
2,097
113,436
6,296
5,626
7,919
496
7,483
27,820
85,616
1,790
83,826
8,586
3,290
353
47
370
3,906
16,552
41,913
6,140
2,892
1,581
14,593
67,119
33,259
10,958
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
$
22,301
$
24,534
$
23,021
3,604,029
1,963,880
5,567,909
1,963,880
$
$
$
$
4.86
2.43
4.01
2.43
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
Century Bancorp, Inc. AR ’17
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 income
Comprehensive income (loss)
See accompanying “Notes to Consolidated Financial Statements.”
Consolidated Statements of Comprehensive Income
2017
2016
2015
$
22,301
$
24,534
$
23,021
533
(28)
505
1,034
(2,315)
931
(1,384)
155
(289)
(32)
(321)
2,812
(297)
970
673
3,164
38
(361)
(323)
3,583
(2,890)
853
(2,037)
1,223
$
22,456
$
27,698
$
24,244
20
Century Bancorp, Inc. AR ’17
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, 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
—
—
—
—
—
—
(323)
(323)
—
—
(1,728)
(472)
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
Net income
Other comprehensive income, net of tax:
Unrealized holding gains arising during period, net of $331 in taxes
and $47 in realized net gains
Accretion of net unrealized losses transferred during the period,
net of $1,258 in taxes
Pension liability adjustment, net of $286 in taxes
Conversion of Class B Common Stock to Class A
Common Stock, 5,100 shares
Cash dividends, Class A Common Stock, $0.48 per share
Cash dividends, Class B Common Stock, $0.24 per share
—
—
—
—
5
—
—
—
—
—
—
(5)
—
—
—
22,301
—
22,301
—
—
—
—
—
—
—
—
—
—
(1,729)
(471)
505
505
1,034
(1,384)
—
—
—
1,034
(1,384)
—
(1,729)
(471)
BALANCE, DECEMBER 31, 2017
$ 3,606
$ 1,962 $ 12,292 $ 263,666
$ (21,229)
$ 260,297
See accompanying “Notes to Consolidated Financial Statements.”
21
Century Bancorp, Inc. AR ’17
Consolidated Statements of Cash Flows
2017
2016
2015
$ 22,301
$ 24,534
$ 23,021
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 (expense)
Net depreciation and amortization
Increase 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 investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in time deposit accounts
Net increase in demand, savings, money market and NOW deposits
Cash dividends
Net decrease in securities sold under agreements to repurchase
Net increase (decrease) 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
(370)
(11)
(47)
1,790
6,918
3,047
(1,534)
—
(16,195)
5,802
21,701
5,284
(2,101)
10,127
(10,864)
259,388
18,180
(175,147)
293,221
—
(337,773)
26,701
(278,242)
—
11
(3,244)
(194,459)
147,002
116,747
(2,200)
(23,290)
54,778
293,037
120,279
236,151
(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
Cash and cash equivalents at end of year
$ 356,430
$ 236,151
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
Change in unrealized gains 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
$
$ 27,731
5,330
505
1,034
(1,384)
—
See accompanying “Notes to Consolidated Financial Statements.”
$
$ 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
22
Century Bancorp, Inc. AR ’17
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, 2017 and 2016, short-term investments include highly
liquid certificates of deposit with original maturities of more than 90 days but
less than one year.
INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost; debt
and equity securities that are bought and held principally for the purpose of
selling are classified as trading and reported at fair value, with unrealized gains
and losses included in earnings; and debt and equity securities not classified
as either held-to-maturity or trading are classified as available-for-sale and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders’ equity, net of estimated
related income taxes. The Company has no securities held for trading.
Premiums and discounts on investment securities are amortized or accreted
into income by use of the level-yield method. Gains and losses on the sale
of investment securities are recognized on the trade date on a specific
identification basis.
Management also considers the 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 ’17Notes 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, 2017, no impairment has been recognized.
LOANS HELD FOR SALE
Loans originated and intended for sale in the secondary market are carried at the
lower of cost or estimated fair value in the aggregate. Net unrealized losses, if
any, are recognized through a valuation allowance by charges to income.
LOANS
Interest on loans is recognized based on the daily principal amount outstanding.
Accrual of interest is discontinued when loans become ninety days delinquent
unless the collateral is sufficient to cover both principal and interest and the
loan is in the process of collection. Past-due status is based on contractual
terms of the loan. Loans, including impaired loans, on which the accrual of
interest has been discontinued, are designated nonaccrual loans. When a loan
is placed on nonaccrual, all income that has been accrued but remains unpaid
is reversed against current period income, and all amortization of deferred
loan costs and fees is discontinued. Nonaccrual loans may be returned to an
accrual status when principal and interest payments are not delinquent or
the risk characteristics of the loan have improved to the extent that there no
longer exists a concern as to the collectibility of principal and interest. Income
received on nonaccrual loans is either recorded in income or applied to the
principal balance of the loan, depending on 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, 2017.
NONPERFORMING ASSETS
In addition to nonperforming loans, nonperforming assets include other real
estate owned. Other real estate owned is comprised of properties acquired
through foreclosure or acceptance of a deed in lieu of foreclosure. Other real
estate owned is recorded initially at the lower of cost or the estimated fair
value less costs to sell. When such assets are acquired, the excess of the loan
balance over the estimated fair value of the asset is charged to the allowance for
loan losses. An allowance for losses on other real estate owned is established
by a charge to earnings when, upon periodic evaluation by management,
further declines in the estimated fair value of properties have occurred.
24
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements 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 Troubled Debt Restructuring (“TDR”). Specific
allowances for loan losses entail the assignment of allowance amounts to
individual loans on the basis of loan impairment. Under this method, loans are
selected for evaluation based upon a change in internal risk rating, occurrence of
delinquency, loan classification or nonaccrual status. A specific allowance amount
is allocated to an individual loan when such loan has been deemed impaired
and when the amount of a probable loss is able to be estimated on the basis of:
(a) present value of anticipated future cash flows, (b) the 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 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
25
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.
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
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements 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, 2017.
The Company uses the fair value method to account for stock options. There
were no options granted during 2017 and 2016.
INCOME TAXES
The Company uses the asset and liability method in accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
The Company accounts for uncertain tax positions in accordance with
FASB ASC 740.
The Company classifies interest resulting from underpayment of income taxes
as income tax expense in the first period the interest would begin accruing
according to the provisions of the relevant tax law.
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.
For tax years beginning after December 31, 2017, the corporate alternative
minimum tax (“AMT”) has been repealed. For 2018 through 2021, the AMT
credit carryforward can offset regular tax liability and is refundable in an amount
equal to 50% (100% for 2021) of the excess of the minimum tax credit for
the tax year over the amount of the credit allowable for the year against regular
tax liability. Accordingly, the full amount of the AMT credit carryforward will be
recovered in tax years beginning before 2022. As a result of the change, the
Company has classified its AMT credit carryforward as currently receivable.
EARNINGS PER SHARE (“EPS”)
Class A and Class B shares participate equally in undistributed earnings. Under
the 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 ’17Notes to Consolidated Financial Statements RECENT ACCOUNTING DEVELOPMENTS
In February 2018, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2018-02, Income Statement—
Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income. The amendments in this
ASU allow a reclassification from accumulated other comprehensive income to
retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs
Act. Consequently, the amendments eliminate the stranded tax effects resulting
from the Tax Cuts and Jobs Act and will improve the usefulness of information
reported to financial statement users. However, because the amendments only
relate to the reclassification of the income tax effects of the Tax Cuts and Jobs
Act, the underlying guidance that requires that the effect of a change in tax laws
or rates be included in income from continuing operations is not affected. The
amendments in this ASU are effective for all entities for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early
adoption of the amendments in this ASU is permitted, including adoption in any
interim period, (1) for public business entities for reporting periods for which
financial statements have not yet been issued and (2) for all other entities
for reporting periods for which financial statements have not yet been made
available for issuance. The amendments in this ASU should be applied either in
the period of adoption or retrospectively to each period (or periods) in which
the effect of the change in the U.S. federal corporate income tax rate in the Tax
Cuts and Jobs Act is recognized. The Company will adopt this update in the first
quarter of 2018 and will apply the effects of the changes retrospectively. The
effect of the changes is approximately $3.8 million.
In July 2017, FASB issued ASU 2017-11, Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging
(Topic 815): I. Accounting for Certain Financial Instruments with Down Round
Features II. Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interest with a Scope Exception. For public entities,
this ASU is effective for annual reporting periods beginning after December 15,
2018. Management is currently assessing the applicability of ASU 2017-11 and
has not determined the impact of the adoption, if any, as of December 31, 2017.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock
Compensation (Topic 718): Scope of Modification Accounting. FASB issued this
Update to address the diversity in practice as well as the cost and complexity
when applying the guidance in Topic 718, Compensation - Stock Compensation,
to a change to the terms or conditions of a share-based payment award. For
public entities, this ASU is effective for annual reporting periods beginning
after December 15, 2017. The effect of this update is not expected to have a
material impact on the Company’s consolidated financial position.
In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable
Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased
Callable Debt. The FASB is issuing this ASU to amend the amortization period
for certain purchased callable debt securities held at a premium. The FASB is
shortening the amortization period for the premium to the earliest call date.
Under current generally accepted accounting principles (GAAP), entities
generally amortize the premium as an adjustment of yield over the contractual
life of the instrument. For public business entities, the amendments in this
ASU are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. Management is currently assessing
the applicability of this ASU and has not determined the impact, if any, as of
December 31, 2017.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement
Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost. The amendments in this ASU
require that an employer disaggregate the service cost component from the other
components of net benefit cost. The amendments also provide explicit guidance
on how to present the service cost component and the other components of net
27
benefit cost in the income statement and allow only the service cost component
of net benefit cost to be eligible for capitalization. The amendments in this ASU
are effective for fiscal years beginning after December 15, 2017. Early adoption
is permitted. This ASU is for presentation purposes only, accordingly, there will
be no impact on the Company’s consolidated financial position.
In February 2017, the FASB issued ASU 2017-05, Other Income Gains and
Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20). This
ASU was issued to clarify the scope of Subtopic 610-20, and to add guidance
for partial sales of nonfinancial assets. For public entities, this ASU is effective
for annual reporting periods beginning after December 15, 2017. The effect
of this update is not expected to have a material impact on the Company’s
consolidated financial position.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill
and Other (Topic 350). This ASU was issued to simplify the subsequent
measurement of goodwill by eliminating Step 2 from the goodwill impairment
test. For public entities, this ASU is effective for the fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. Early
adoption is permitted and application should be on a prospective basis. The
effect of this update is not expected to have a material impact on the Company’s
consolidated financial position.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
This ASU was issued to provide financial statement users with more decision-
useful information about the expected credit losses on financial instruments and
other commitments to extend credit held by a reporting entity at each reporting
date. To achieve this objective, the amendments in this ASU replace the
incurred loss impairment methodology in current GAAP with a methodology that
reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates. The
amendments in this ASU are effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. The Company is in
the process of analyzing this ASU and has begun evaluating software solutions
to help capture information needed to implement this update. The Company has
not determined the impact, if any, as of December 31, 2017.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.
The intention of this ASU is to provide additional clarification on specific
issues brought forth by the FASB and the International Accounting Standards
Board Joint Transition Resource Group for Revenue Recognition in relation to
Topic 606 and revenue recognition. This ASU is to have the same effective
date as ASU 2015-14 which deferred the effective date of ASU 2014-09 to
December 15, 2017. In May 2014, the FASB issued ASU 2014-09, Revenue
from Contracts with Customers (Topic 606), which will replace numerous
requirements in U.S. GAAP, including industry-specific requirements, and provide
companies with a single revenue recognition model for recognizing revenue from
contracts with customers. The core principle of the standard is that a company
should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the company
expects to be entitled in exchange for those goods or services. The two
permitted transition methods under the new standard are the full retrospective
method, in which case the standard would be applied to each prior reporting
period presented and the cumulative effect of applying the standard would be
recognized at the earliest period shown, or the modified retrospective method,
in which case the cumulative effect of applying the standard would be recognized
at the date of initial application. Since the issuance of Update 2014-09, the
FASB has finalized various amendments to the standard that include corrections,
improvements and timing modifications.
In July 2015, the FASB approved the deferral of the new standard’s effective
date by one year. The new standard is effective for annual reporting periods
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting
periods beginning after December 15, 2016.
We monitored FASB activity related to the new standard. A significant amount of the Company’s revenues are derived from interest income on financial assets, which
are excluded from the scope of the amended guidance.
In 2017, we established a cross-functional implementation team consisting of representatives from across our business segments. We utilized a bottom-up approach
to analyze the impact of the standard on our contract portfolio by reviewing our current accounting policies and practices to identify potential differences that would
result from applying the requirements of the new standard to our revenue contracts. In addition, we identified and implemented appropriate changes to our business
processes, systems and controls to support recognition and disclosure under the new standard. The implementation team has reported the findings and progress of
the project to management on a frequent basis over this past year.
During 2017, we completed our evaluation of the potential changes from adopting the new standard on our future financial reporting and disclosures. In the third
quarter of 2017, we finalized our contract reviews. The Company did not identify any significant changes in the timing of revenue recognition when considering the
amended accounting guidance.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheet but recognize expenses on their income
statements in a manner similar to today’s accounting. This ASU also eliminates today’s real estate-specific provisions for all companies. For lessors, this ASU modifies
the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years beginning after December 15, 2018,
including interim periods therein. Early adoption is permitted. The Company has begun analyzing this ASU and will be assessing implementation steps beginning in
2018. The Company has not determined the impact, if any, as of December 31, 2017.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) Restricted Cash. The amendments of this ASU was issued to require that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For public entities, this ASU is effective for the fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. The effect of this update is not expected to have a material impact on the
Company’s consolidated financial position.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 326) Classification of Certain Cash Receipts and Cash Payments. Stakeholders indicated
that there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement
of Cash Flows, and other Topics. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in
this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The effect of this
update is not expected to have a material impact on the Company’s consolidated financial position.
In January 2016, FASB issued ASU 2016-1, “Financial Instruments-Overall” (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities.
This ASU significantly revises an 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 effect of this update is not expected to have
a material impact on the Company’s consolidated financial position.
2. Cash and Due from Banks
The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based
upon deposit levels and amounted to $0 at December 31, 2017, and $0 at December 31, 2016.
December 31, 2017
Gross
Unrealized
Losses
Gross
Unrealized
Gains
Estimated
Fair
Value
December 31, 2016
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
$
1,999 $
—
81,065
—
—
46
$
15
—
161
$
1,984
—
80,950
$
2,000 $
25,000
57,899
—
—
14
$ — $
48
146
2,000
24,952
57,767
Enterprises Mortgage-Backed Securities
225,537
555
317
225,775
243,703
293
671
243,325
Privately Issued Residential
Mortgage-Backed Securities
Obligations Issued by States and
Political Subdivisions
Other Debt Securities
Equity Securities
897
4
82,849
5,100
116
—
68
187
9
249
197
—
892
1,121
2
14
1,109
82,600
4,971
303
165,281
5,100
116
—
18
228
405
194
—
164,876
4,924
344
Total
$ 397,563 $
860
$ 948
$ 397,475
$ 500,220 $
555
$ 1,478 $ 499,297
Included in SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities are securities at fair value pledged to secure
public deposits and repurchase agreements amounting to $216,353,000 and 210,780,000 at December 31, 2017 and 2016, respectively. Also included in
securities available-for-sale at fair value are securities pledged for borrowing at the Federal Home Loan Bank amounting to $67,780,000 and $53,396,000 at
December 31, 2017 and 2016, respectively. The Company realized gains on sales of securities of $47,000, $52,000 and $289,000 from the proceeds of sales of
available-for-sale securities of $18,180,000, $2,376,000 and $47,853,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
28
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
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, 2017.
(dollars in thousands)
Within one year
After one but within five years
After five but within ten years
More than ten years
Nonmaturing
Total
$
78,343
104,041
144,184
69,379
1,616
$
78,338
104,123
144,307
69,062
1,645
$ 397,563
$ 397,475
The weighted average remaining life of investment securities available-for-sale at December 31, 2017, was 5.7 years. The contractual maturities, which were used
in the table above, of mortgage-backed securities, will differ from the actual maturities due to the ability of the issuers to prepay underlying obligations. Also,
$313,037,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of December 31, 2017 and December 31, 2016, management concluded that the unrealized losses of its investment securities are temporary in nature since they
are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not that it
will be required to sell these debt securities before the anticipated recovery of its remaining amortized cost. In making its other-than-temporary impairment evaluation,
the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade. The change in the unrealized losses on
the Obligations Issued by States and Political Subdivisions, Privately Issued Residential Mortgage-Backed Securities and Other Debt Securities was primarily caused by
changes in credit spreads and liquidity issues in the marketplace.
The unrealized loss on SBA Backed Securities and U.S. Government Agency and Sponsored Enterprises Mortgage-Backed Securities related primarily to interest rates
and not credit quality and because the Company has the ability and intent to hold these investments until recovery of fair value, which may be maturity. The Company
does not consider these investments to be other-than-temporarily impaired at December 31, 2017 and December 31, 2016.
In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable.
Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the
underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination,
current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates
of underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuer’s
financial performance are considered.
The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2017. This table shows the unrealized
market loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer.
Temporarily Impaired Investments
There are 16 and 28 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 255 holdings at
Less Than 12 Months
December 31, 2017.
12 Months or Longer
December 31, 2017
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
Total temporarily impaired securities
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$ 1,984
—
18,378
40,394
—
—
400
$ 61,156
$
$
15
—
54
123
—
—
1
193
$
—
—
40,911
59,336
633
4,458
1,803
$ 107,141
$
$
—
—
107
194
9
249
196
755
$ 1,984
—
59,289
99,730
633
4,458
2,203
$ 168,297
$
$
15
—
161
317
9
249
197
948
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.
There are 49 and 15 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 270 holdings at
December 31, 2016.
29
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
Temporarily Impaired Investments
December 31, 2016
(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
Total temporarily impaired securities
Less Than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
—
24,952
52,346
135,612
—
—
453
$ 213,363
$
$
—
48
145
485
—
—
47
725
$
$
—
—
951
31,504
757
4,298
1,553
$ 39,063
$
—
—
1
186
14
405
147
753
$
—
24,952
53,297
$
—
48
146
167,116
757
4,298
2,006
$ 252,426
671
14
405
194
$ 1,478
4. Investment Securities Held-to-Maturity
Amortized
Cost
(dollars in thousands)
U.S. Government Sponsored Enterprises $ 104,653
57,235
SBA Backed Securities
U.S. Government Sponsored Enterprises
Mortgage-Backed Securities
Total
1,539,345
$ 1,701,233
December 31, 2017
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Estimated
Fair
Value
December 31, 2016
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Estimated
Fair
Value
Amortized
Cost
$
341
20
$
472
1,271
$ 104,522
55,984
$ 148,326
46,140
$ 1,066
—
$
527 $ 148,865
45,052
1,088
2,261
$ 2,622
33,285
$ 35,028
1,508,321
$ 1,668,827
1,459,520
$ 1,653,986
4,948
$ 6,014
1,441,891
22,577
$ 24,192 $ 1,635,808
Included in U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprise Mortgage-Backed Securities are securities pledged to secure public
deposits and repurchase agreements at fair value amounting to $1,262,708,000 and $1,147,207,000 at December 31, 2017, and 2016, respectively. Also included
are securities pledged for borrowing at the Federal Home Loan Bank at fair value amounting to $382,120,000 and $424,353,000 at December 31, 2017, and 2016,
respectively. The Company did not realize any gains of sales of securities for the year ending December 31, 2017. The Company realized gains on sales of securities of
$12,000 from the proceeds of sales of held-to-maturity securities of $192,000 for the year ending December 31, 2016. The sales from securities held-to-maturity
relate to certain mortgage-backed securities for which the Company had previously collected a substantial portion of its principal investment. The Company realized
gains on sales of securities of $305,000 from the proceeds of sales of held-to-maturity securities of $3,698,000 for the year ending December 31, 2015.
At December 31, 2017 and 2016, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises. Government Sponsored Enterprises
Fair
primarily refer to debt securities of Fannie Mae and Freddie Mac.
Value
Amortized
Cost
The following table shows the maturity distribution of the Company’s securities held-to-maturity at December 31, 2017.
(dollars in thousands)
Within one year
After one but within five years
After five but within ten years
More than ten years
Total
28,752 $
$
1,257,279
411,916
3,286
28,726
1,234,931
401,947
3,223
$ 1,701,233 $ 1,668,827
The weighted average remaining life of investment securities held-to-maturity at December 31, 2017, was 4.3 years. Included in the weighted average remaining life
calculation at December 31, 2017, were $20,496,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The
contractual maturities, which were used in the table above, of mortgage-backed securities, will differ from the actual maturities due to the ability of the issuers to
prepay underlying obligations. Also, $159,000 of the securities are floating rate or adjustable rate and reprice prior to maturity.
As of December 31, 2017 and December 31, 2016, management concluded that the unrealized losses of its investment securities are temporary in nature since
they are not related to the underlying credit quality of the issuers, and the Company does not intend to sell these debt securities and it is not more likely than not
that it will be required to sell these debt securities before the anticipated recovery of their remaining amortized costs. In making its other-than-temporary impairment
evaluation, the Company considered the fact that the principal and interest on these securities are from issuers that are investment grade.
The unrealized loss on U.S. Government Sponsored Enterprises, SBA Backed Securities and U.S. Government Sponsored Enterprises Mortgage-Backed Securities
related primarily to interest rates and not credit quality, and because the Company does not intend to sell any of these securities and it is not more likely than not that
it will be required to sell these securities before the anticipated recovery of the remaining amortized cost, the Company does not consider these investments to be
other-than-temporarily impaired at December 31, 2017 and December 31, 2016.
In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable.
Internal reviews of issuer financial statements are performed as deemed necessary.
30
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2017. This table shows the unrealized market
Temporarily Impaired Investments
loss of securities that have been in a continuous unrealized loss position for 12 months or less and a continuous loss position for 12 months and longer. There are 117 and
168 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 404 holdings at December 31, 2017.
Less Than 12 Months
12 Months or Longer
December 31, 2017
Total
(dollars in thousands)
U.S. Government Sponsored Enterprises
SBA Backed Securities
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
$ 15,257
19,457
$ 239
142
$ 14,768 $
33,750
233
1,129
$
30,025
53,207
$
472
1,271
519,481
$ 554,195
5,920
$ 6,301
814,712
27,365
$ 863,230 $ 28,727
1,334,193
$ 1,417,425
33,285
$ 35,028
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
Less Than 12 Months
December 31, 2016.
12 Months or Longer
December 31, 2016
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(dollars in thousands)
U.S. Government Sponsored Enterprises
SBA Backed Securities
U.S. Government Agency and Sponsored
Enterprise Mortgage-Backed Securities
Total temporarily impaired securities
5. Loans
$
59,219
45,052
$527
1,088
$
—
—
$ —
—
$
59,219
45,052
$
527
1,088
1,008,960
$ 1,113,231
20,725
$ 22,340
58,535
$ 58,535
1,852
$ 1,852
1,067,495
$ 1,171,766
22,577
$ 24,192
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.
2017
2016
(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
18,931
763,807
106,599
732,491
287,731
18,458
247,345
582
14,928
612,503
135,418
696,173
241,357
11,013
211,857
684
$
Total
$ 2,175,944
$ 1,923,933
At December 31, 2017, and December 31, 2016, loans were carried net of discounts of $272,000 and $313,000, respectively. Net deferred fees included in loans
at December 31, 2017, and December 31, 2016, were $362,000 and $641,000, respectively.
The Company was servicing mortgage loans sold to others without recourse of approximately $229,533,000 and $229,730,000 at December 31, 2017, and
December 31, 2016, respectively. The Company had no residential real estate loans held for sale at December 31, 2017 and December 31, 2016. The Company’s
mortgage servicing rights totaled $1,525,000 and $1,629,000 at December 31, 2017 and December 31, 2016, respectively.
As of December 31, 2017 and 2016, the Company’s recorded investment in impaired loans was $7,114,000 and $3,830,000, respectively. If an impaired loan is
placed on nonaccrual, the loan may be returned to an accrual status when principal and interest payments are not delinquent and the risk characteristics have improved
to the extent that there no longer exists a concern as to the collectibility of principal and interest. At December 31, 2017, there were $ 6,581,000 impaired loans
with specific reserves of $164,000. At December 31, 2016, there were $3,105,000 of impaired loans with a specific reserve of $173,000.
Loans are designated as troubled debt restructures when a concession is made on a credit as a result of financial difficulties of the borrower. Typically, such
concessions consist of a reduction in interest rate to a below-market rate, taking into account the credit quality of the note, or a deferment of payments, principal
or interest, which materially alters the 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.
31
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
December 31,
2017
2016
2015
(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
$ 1,684
—
254
7,114
5,608
2,749
51
—
182
$ 1,084
—
304
3,830
3,661
3,526
37
—
140
$ 2,336
—
332
3,225
4,490
2,893
91
—
104
Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans
and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.
Balance at
Balance at
December 31, 2016
December 31, 2017
The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2017.
(dollars in thousands)
Repayments
and Deletions
Additions
$ 10,982
$ 572
$ 5,729
$ 5,825
6. Allowance for Loan Losses
The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, financial
condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Company’s allowance for
loan losses for the years indicated.
2017
2016
2015
(dollars in thousands)
An analysis of the allowance for loan losses for each of the three years ending December 31, 2017, 2016 and 2015 is as follows:
Allowance for loan losses, beginning of year
Loans charged-off
Recoveries on loans previously charged-off
$ 23,075
(389)
434
$ 24,406
(390)
449
$ 22,318
(781)
1,338
Net recoveries (charge-offs)
Provision charged to expense
Reclassification to other liabilities*
59
1,790
—
45
1,375
(89)
557
200
—
Allowance for loan losses, end of year
$ 26,255
$ 24,406
$ 23,075
* The reclassification relates to allowance for loan losses allocations on unused commitments that have been reclassified to other liabilities.
Construction Commercial
Further information pertaining to the allowance for loan losses at December 31, 2017 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, 2016
Charge-offs
Recoveries
Provision
Ending balance at
December 31, 2017
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:
Ending balance
Loans deemed to be impaired
Loans not deemed to be impaired
$ 1,012 $ 6,972 $ 1,612 $ 11,135 $ 1,698 $
582 $
—
—
633
(49)
110
2,618
—
—
108
—
—
(1,407)
—
2
173
(341)
255
(123)
$
1,102
—
82
(195)
$ 293
—
—
(17)
24,406
(390)
449
1,790
$ 1,645 $ 9,651 $ 1,720 $ 9,728 $ 1,873 $
373 $
989
$ 276
$
26,255
$
— $
7 $
— $
99 $
58 $
— $
—
$ —
$
164
$ 1,645 $ 9,644 $ 1,720 $ 9,629 $ 1,815 $
373 $
989
$ 276
$
26,091
$ 18,931 $ 763,807
$
$ 18,931 $ 763,459
— $
348 $
$106,599 $ 732,491 $ 287,731 $ 19,040 $ 247,345
—
$106,599 $ 729,937 $ 283,519 $ 19,040 $ 247,345
— $ 2,554 $ 4,212 $
— $
$ —
$ —
$ —
$ 2,175,944
$
7,114
$ 2,168,830
32
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
Construction Commercial
Further information pertaining to the allowance for loan losses at December 31, 2016 follows:
and Land
Development
and
Industrial Municipal
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
$ 2,041 $
—
—
(5)
(1,024)
5,899 $
—
132
(25)
966
994 $ 10,589 $ 1,320 $
644 $
—
—
—
618
—
—
(9)
555
—
6
(3)
375
(362)
296
(3)
7
$
1,077
(27)
—
(44)
96
$ 511
—
—
—
(218)
23,075
(389)
434
(89)
1,375
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:
Ending balance
Loans deemed to be impaired
Loans not deemed to be impaired
$ 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
$ 14,928 $ 612,503 $ 135,418 $ 696,173 $ 241,357 $ 11,697 $ 211,857
$
—
$ 14,834 $ 612,114 $ 135,418 $ 693,024 $ 241,159 $ 11,697 $ 211,857
3,149 $
198 $
389 $
94 $
— $
— $
$ —
$ —
$ —
$ 1,923,933
$
3,830
$ 1,920,103
CREDIT QUALITY INFORMATION
The Company utilizes a six-grade internal loan rating system for commercial real estate, construction and commercial loans as follows:
Loans rated 1-3 (Pass) — Loans in this category are considered “pass” rated loans with low to average risk.
Loans rated 4 (Monitor) — These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor
credit quality deterioration as of December 31, 2017.
Loans rated 5 (Substandard) — Substandard loans represent classified loans that management is closely monitoring for credit quality. These loans have had more
significant credit quality deterioration as of December 31, 2017.
Loans rated 6 (Doubtful) — Doubtful loans represent classified loans that management is closely monitoring for credit quality. These loans had more significant credit
quality deterioration as of December 31, 2017, and are doubtful for full collection.
Impaired — Impaired loans represent classified loans that management is closely monitoring for credit quality. A loan is classified as impaired when it is probable that
the Company will be unable to collect all amounts due.
Construction Commercial
The following table presents the Company’s loans by risk rating at December 31, 2017.
and Land
Development
and
Industrial
Municipal
Commercial
Real Estate
(dollars in thousands)
Grade:
1-3 (Pass)
4 (Monitor)
5 (Substandard)
6 (Doubtful)
Impaired
Total
$ 18,931
—
—
—
—
$ 758,093
5,366
—
—
348
$ 106,599
—
—
—
—
$ 705,235
24,702
—
—
2,554
$ 18,931
$ 763,807
$ 106,599
$ 732,491
The Company has increased its exposure to larger loans to large institutions with publicly available credit ratings. These ratings are tracked as a credit quality indicator
for these loans.
33
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
The following table presents the Company’s loans by credit rating at December 31, 2017.
Municipal
Commercial
Real Estate
Total
Commercial
and
Industrial
(dollars in thousands)
Credit Rating:
Aaa-Aa3
A1-A3
Baa1-Baa3
Ba2
Total
$ 478,905
195,599
—
—
$ 62,029
7,635
26,970
8,165
$ 45,066 $ 586,000
331,788
128,554
148,970
122,000
8,165
—
$ 674,504
$ 104,799
$ 295,620
$ 1,074,923
The following table presents the Company’s loans by risk rating at December 31, 2016.
Construction
and Land
Development
Commercial
and
Industrial
Municipal
Commercial
Real Estate
(dollars in thousands)
Grade:
1-3 (Pass)
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 following table presents the Company’s loans by credit rating at December 31, 2016.
Municipal
Commercial
Real Estate
Total
Commercial
and
Industrial
(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 Company utilized payment performance as credit quality indicators for residential real estate, consumer and overdrafts, and the home equity portfolio. The
indicators are depicted in the table “aging of past-due loans,” below.
AGING OF PAST-DUE LOANS
At December 31, 2017 the aging of past due loans are as follows:
Accruing
30-89 Days
(dollars in thousands)
Construction and land development
Commercial and industrial
Municipal
Commercial real estate
Residential real estate
Consumer and overdrafts
Home equity
Past Due Non Accrual
$ —
65
—
672
4,282
5
618
$ —
44
—
215
724
6
695
Total
$ 5,642
$ 1,684
Accruing
Greater
Than
90 Days
$ —
—
—
—
—
—
—
$ —
Total
Past Due
Current
Loans
Total
$
— $
18,931 $
109
—
887
5,006
11
1,313
763,698
106,599
731,604
282,725
19,029
246,032
18,931
763,807
106,599
732,491
287,731
19,040
247,345
$ 7,326 $ 2,168,618 $ 2,175,944
34
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
At December 31, 2016 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
$ —
37
—
597
245
—
735
$
94
65
—
150
656
11
108
Total
$ 1,614
$ 1,084
IMPAIRED LOANS
Accruing
Greater
Than
90 Days
$ —
—
—
—
—
—
—
$ —
Total
Past Due
Current
Loans
Total
$
94 $
14,834 $
102
—
747
901
11
843
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
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, 2017:
Carrying
Value
Unpaid
Balance
Principal
Required
Reserve
Average
Carrying Value
Recognized
(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
$ —
113
—
420
—
—
—
$ —
325
—
548
—
—
—
$ —
—
—
—
—
—
—
$ —
54
—
286
73
—
—
Total
$ 533
$ 873
$ —
$ 413
$ —
235
—
2,134
4,212
—
—
$ —
235
—
2,135
4,212
—
—
$ 6,581
$ 6,582
$ —
348
—
2,554
4,212
—
—
$ —
560
—
2,683
4,212
—
—
$ 7,114
$ 7,455
$ —
7
—
99
58
—
—
$ 164
$ —
7
—
99
58
—
—
$ 164
$
43
318
—
2,501
2,333
—
—
$ 5,195
$
43
372
—
2,787
2,406
—
—
$ 5,608
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
Total
35
Interest
Income
$ —
4
—
21
—
—
—
$ 25
$ —
12
—
72
73
—
—
$ 157
$ —
16
—
93
73
—
—
$ 182
Century Bancorp, Inc. AR ’17Notes 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
(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
Total
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
Total
$ —
45
—
590
90
—
—
$ —
232
—
590
179
—
—
$ 725
$ 1,001
$
94
344
—
2,559
108
—
—
$ 108
360
—
2,665
108
—
—
$ 3,105
$ 3,241
$
94
389
—
3,149
198
—
—
$ 108
592
—
3,255
287
—
—
$ 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
$ —
—
—
39
7
—
—
$ 46
$ —
18
—
71
5
—
—
$ 94
$ —
18
—
110
12
—
—
$ 140
Troubled Debt Restructurings are identified as a modification in which a concession was granted to a customer who was having financial difficulties. This concession
may be below market rate, longer amortization/term, or a lower payment amount. The present value calculation of the modification did not result in an increase in the
allowance for these loans beyond any previously established allocations.
There were no troubled debt restructurings occurring during the year ended December 31, 2017.
There was one commercial real estate troubled debt restructuring during the year ended December 31, 2016. The pre-modification and post-modification outstanding
recorded investment was $2,091,000. The loan was modified in 2016, by reducing the interest rate as well as extending the term on the loan. The financial impact for
the modification was $16,000 reduction in principal payments and $5,000 reduction in interest payments for 2016.
There were no commitments to lend additional funds to troubled debt restructuring borrowers. There were no troubled debt restructurings that subsequently
defaulted during 2017 and 2016.
36
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
December 31,
2017
2016
Estimated Useful Life
(dollars in thousands)
7. Bank Premises and Equipment
Land
Bank premises
Furniture and equipment
Leasehold improvements
Accumulated depreciation and amortization
$ 3,850
21,055
27,117
12,674
64,696
(41,169)
$ 3,478
19,272
26,271
12,802
61,823
(38,406)
—
30-39 years
3-10 years
30-39 years or lease term
Total
$ 23,527
$ 23,417
The Company is obligated under a number of non-cancelable operating leases for premises and equipment expiring in various years through 2028. Total lease expense
approximated $2,608,000, $2,834,000 and $2,755,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Included in lease expense are
amounts paid to a company affiliated with Marshall M. Sloane, Chairman of the Board, amounting to $439,000, $424,000 and $413,000, respectively. Rental
income approximated $321,000, $318,000 and $314,000 in 2017, 2016 and 2015, respectively. Depreciation and amortization amounted to $3,208,000,
$3,099,000 and $2,728,000 at December 31, 2017, 2016 and 2015 respectively.
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, 2017, were as follows:
2018
2019
2020
2021
2022
Thereafter
$ 2,309
2,149
1,856
1,382
1,022
1,942
$ 10,660
8. Goodwill and Identifiable Intangible Assets
At December 31, 2017 and 2016, the Company concluded that it is not more likely than not that fair value of the reporting unit is less than its carrying value, and
goodwill is not considered to be impaired.
Carrying Amount of Goodwill and Intangibles
The changes in goodwill and identifiable intangible assets for the years ended December 31, 2017 and 2016 are shown in the table below.
(dollars in thousands)
Mortgage
Servicing Rights
Goodwill
Total
Balance at December 31, 2015
Additions
Amortization Expense
Balance at December 31, 2016
Additions
Amortization Expense
Balance at December 31, 2017
9. Fair Value Measurements
$ 2,714
—
—
$ 2,714
—
—
$ 1,305
708
(384)
$ 1,629
276
(380)
$ 2,714
$ 1,525
$ 4,019
708
(384)
$ 4,343
276
(380)
$ 4,239
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 ’17Notes 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, 2017, are as follows:
(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
Carrying
Value
$
1,984
—
80,950
225,775
892
82,600
4,971
303
Quoted Prices
in Active Markets
for Identical Assets Observable Inputs
Significant
(Level 1)
(Level 2)
Significant
Other Unobservable
Inputs
(Level 3)
$ —
—
—
—
—
—
—
303
$
1,984
—
80,950
$
—
—
—
225,775
892
—
4,971
—
—
—
82,600
—
—
Total
$ 397,475
$ 303
$ 314,572
$ 82,600
Financial Instruments Measured at Fair Value
on a Non-recurring Basis
Impaired Loans
$
246
$ —
$
—
$
246
Impaired loan balances in the table above represent those collateral dependent loans where management has estimated the credit loss by comparing the 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 2017 for the
estimated credit loss amounted to $3,000.
There were no transfers between level 1, 2 and 3 for the year ended December 31, 2017. There were no liabilities measured at fair value on a recurring or
nonrecurring basis during the year ended December 31, 2017.
The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level
Unobservable Input
3 inputs to determine fair value (dollars in thousands) at December 31, 2017. Management continues to monitor the assumptions used to value the assets listed
Value or Range
Asset
below.
Securities AFS(1)
Valuation Technique
Unobservable Input
Discounted cash flow
Fair Value
Discount rate
1.0%-3.5%(2)
$ 82,600
Impaired Loans
246
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 ’17Notes to Consolidated Financial Statements
Obligations
Issued by States
The changes in Level 3 securities for the year ended December 31, 2017 are as shown in the table below:
and Political
Subdivisions
Auction Rate
Securities
(dollars in thousands)
Balance at December 31, 2016
Purchases
Maturities/redemptions
Amortization
Change in fair value
Balance at December 31, 2017
$ 4,298
—
—
—
161
$ 4,459
$ 160,578
99,136
(181,394)
(179)
—
$ 78,141
Equity
Securities
$ —
—
—
—
—
$ —
Total
$ 164,876
99,136
(181,394)
(179)
161
$ 82,600
The amortized cost of Level 3 securities was $82,849,000 with an unrealized loss of $249,000 at December 31, 2017. The securities in this category are generally
equity investments, municipal securities with no readily determinable fair value or failed auction rate securities. Management evaluated the fair value of these securities
based on an evaluation of the underlying issuer, prevailing rates and market liquidity.
Fair Value Measurements Using
The results of the fair value hierarchy as of December 31, 2016, 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
U.S. Government Agency Sponsored Enterprises
BA 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
$
2,000
24,952
57,767
243,325
1,109
164,876
4,924
344
$ 499,297
$ —
—
—
—
—
—
—
344
$ 344
$
2,000
24,952
57,767
243,325
1,109
—
4,924
—
$
—
—
—
—
—
164,876
—
—
$ 334,077
$ 164,876
$
260
$ —
$
—
$
260
Appraisals, discounted cash flows and real estate tax assessments are reviewed quarterly. There is no specific policy regarding how frequently appraisals will be
updated. Adjustments are made to appraisals and real estate tax assessments based on 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 and 2 for the year ended December 31, 2016. There were no liabilities measured at fair value on a recurring or nonrecurring
basis during the year ended December 31, 2016.
Unobservable Input
The following table presents additional information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized
Value or Range
Asset
Level 3 inputs to determine fair value (dollars in thousands) at December 31, 2016. Management continues to monitor the assumptions used to value the assets
listed below.
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.
39
Century Bancorp, Inc. AR ’17Notes 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.
10. Deposits
2017
Percent
2016
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
$ 436,911
121,802
30,098
36,550
$ 262,406
87,952
83,067
44,934
70 %
19 %
5 %
6 %
55 %
18 %
17 %
10 %
Total
$ 625,361
100 %
$ 478,359
100 %
Time deposits of more than $250,000 totaled $345,183,000 and $250,476,000 in 2017 and 2016, respectively. The increase was mainly attributable to
competitive market rates for these types of deposits.
Deposits totaling $35,486,000 and $26,191,000 were attributable to related parties at December 31, 2017 and December 31, 2016, respectively.
11. Securities Sold Under Agreements to Repurchase
2017
2016
2015
(dollars in thousands)
The following is a summary of securities sold under agreements to repurchase 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
$ 228,848
$ 189,684
$ 241,110
$ 222,956
$ 158,990
$ 182,280
0.32 %
0.26 %
0.21 %
0.21 %
$ 197,850
0.21 %
$ 299,890
$ 245,276
0.20 %
Amounts outstanding at December 31, 2017, 2016 and 2015 carried maturity dates of the next business day. U.S. Government Sponsored Enterprise securities
with a total amortized cost of $162,927,000, $183,829,000, and $199,152,000 were pledged as collateral and held by custodians to secure the agreements
at December 31, 2017, 2016 and 2015, respectively. The approximate fair value of the collateral at those dates was $ 159,051,000, $182,074,000, and
$197,318,000, respectively.
40
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
12. Other Borrowed Funds and Subordinated Debentures
2017
2016
2015
(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
$ 491,583
$ 309,102
$ 467,083
$ 357,974
$ 383,861
$ 329,083
2.26 %
2.42 %
2.39 %
2.48 %
$ 404,083
2.29 %
$ 521,583
$ 374,109
2.38 %
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
December 31,
31, 2017, was approximately $127,631,000. In addition, the Bank has a $14,500,000 line of credit with the FHLBB. A schedule of the maturity distribution of FHLBB
advances with the weighted average interest rates is as follows:
2017
2016
2015
(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
Amount
$ 164,500
$ 63,000
$ 28,000
$ 28,500
$ 63,778
$ 347,778
Weighted
Average
Rate
1.82 %
2.17 %
2.29 %
3.19 %
2.38 %
2.13 %
Weighted
Average
Rate
2.21 %
2.25 %
1.87 %
2.68 %
2.85 %
2.34 %
Amount
$ 77,500
$ 54,500
$ 58,000
$ 58,000
$ 45,000
$ 293,000
Amount
$ 100,000
$ 57,500
$ 54,500
$ 91,000
$ 65,000
$ 368,000
Weighted
Average
Rate
1.89 %
2.72 %
2.25 %
1.85 %
3.23 %
2.30 %
Included in the table above are $20,000,000, $45,000,000 and $55,000,000, respectively, of FHLBB advances at December 31, 2017, 2016 and 2015, that are
putable at the discretion of FHLBB. These put dates were not utilized in the table above.
SUBORDINATED DEBENTURES
Subordinated debentures totaled $36,083,000 at December 31, 2017 and 2016. In May 1998, the Company consummated the sale of a trust preferred securities
offering, in which it issued $29,639,000 of subordinated debt securities due 2029 to its newly formed unconsolidated subsidiary Century Bancorp Capital trust.
Century Bancorp Capital Trust the issued 2,875,000 shares of Cumulative Trust Preferred with a liquidation value of $10 per share. These securities pay dividends at
an annualized rate of 8.30%. The Company redeemed through its subsidiary, Century Bancorp Capital Trust, its 8.30% Trust Preferred Securities, January 10, 2005.
In December 2004, the Company consummated the sale of a trust preferred securities offering, in which it issued $36,083,000 of subordinated debt securities due
2034 to its newly formed unconsolidated subsidiary Century Bancorp Capital Trust II.
Century Bancorp Capital Trust II then issued 35,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $1,000 per share. These securities
paid dividends at an annualized rate of 6.65% for the first ten years and then converted to the three-month LIBOR rate plus 1.87% for the remaining 20 years. The
coupon rate on these securities was 3.46% at December 31, 2017 and 2.83% at December 31, 2016.
OTHER BORROWED FUNDS
There were no overnight federal funds purchased at December 31, 2017 and 2016.
41
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
13. Reclassifications Out of Accumulated Other Comprehensive Income
Details about Accumulated Other
Comprehensive Income Components
Year ended
December 31, 2017
Year ended
December 31, 2016
Affected line item in the Statement
Where Net Income is Presented
(a)
Amount Reclassified from Accumulated
Other Comprehensive Income
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)
47
(19)
28
(2,292)
1,258
$
$
$
52
(20)
32
(4,317)
1,505
(a)
Net gains on sales of investments
Provision for income taxes
Net income
Securities held-to-maturity
Provision for income taxes
$
(1,034)
$
(2,812)
Net income
$
(10)
(1,540)
(1,550)
619
$
(931)
$
(10)
(1,606)
(1,616)
646
$
(970)
Salaries and employee benefits
Salaries and employee benefits
(b)
Income before taxes
(b)
Provision for income taxes
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).
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. There were no common stock equivalents for
2017, 2016 and 2015, respectively.
Year Ended December 31,
2017
2016
2015
(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
Weighted average shares outstanding diluted, Class A
Weighted average shares outstanding, Class B
Diluted EPS, Class A
Diluted EPS, Class B
$
17,526
4,775
3,604,029
1,963,880
$
$
4.86
2.43
$
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
$
17,526
$
19,270
$
18,081
4,775
22,301
3,604,029
1,963,880
5,567,909
1,963,880
$
$
4.01
2.43
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
42
Century Bancorp, Inc. AR ’17Notes 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, 2017 and December 31, 2016.
CAPITAL RATIOS
The Bank and the Company are subject to various regulatory requirements administered by federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank and
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, 2017, that the Bank and the Company meet all capital adequacy requirements to which they are subject.
The Basel Committee has issued capital standards entitled “Basel III: A global framework for more resilient banks and banking systems” (Basel III). The Federal Reserve
has finalized its rule implementing the Basel III regulatory capital framework. The rule was effective in January 2015 and sets the Basel III minimum Regulatory capital
requirements. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Common Equity tier 1, tier 1 risk-based, and Tier 1 leverage
To Be Well Capitalized
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.
Under Prompt Corrective
Action Provisions
For Capital Adequacy
Purposes
The Bank’s actual capital amounts and ratios are presented in the following table:
Actual
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2017 (Basel III)
Total Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
$ 329,666
12.70 %
$ 207,707
303,411
11.69 %
155,780
116,835
185,199
$ 191,081
143,311
107,483
178,469
8.00 %
6.00 %
4.50 %
4.00 %
8.00 %
6.00 %
4.50 %
4.00 %
$ 259,633
10.00 %
207,707
168,762
231,499
8.00 %
6.50 %
5.00 %
$ 238,851
10.00 %
191,081
155,253
223,086
8.00 %
6.50 %
5.00 %
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
303,411
11.69 %
Tier 1 Capital (to 4th Qtr. Average Assets)
303,411
6.55 %
As of December 31, 2016 (Basel III)
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)
$ 293,143
268,737
268,737
268,737
12.27 %
11.25 %
11.25 %
6.02 %
43
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
The Company’s actual capital amounts and ratios are presented in the following table:
Ratio
Amount
Actual
For Capital Adequacy
Purposes
Amount
Ratio
As of December 31, 2017 (Basel III)
Total Capital (to Risk-Weighted Assets)
Tier 1 Capital (to Risk-Weighted Assets)
$ 341,033
13.05 %
$ 209,049
314,778
12.05 %
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
279,778
10.71 %
Tier 1 Capital (to 4th Qtr. Average Assets)
314,778
6.78 %
As of December 31, 2016 (Basel III)
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
12.72 %
11.70 %
10.41 %
6.28 %
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
Ratio
$ 261,312
10.00 %
209,049
169,853
232,072
8.00 %
6.50 %
5.00 %
$ 239,880
10.00 %
191,904
155,922
223,628
8.00 %
6.50 %
5.00 %
156,787
117,590
185,657
$ 191,904
143,928
107,946
178,903
8.00 %
6.00 %
4.50 %
4.00 %
8.00 %
6.00 %
4.50 %
4.00 %
16. Income Taxes
2017
2016
2015
(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
$
$
$ 3,628
412
3,875
439
3,393
399
State
Total current expense
Deferred (benefit) expense:
Federal
State
Valuation Allowance
Total deferred expense (benefit)
4,040
4,314
3,792
6,496
422
—
6,918
(4,450)
(334)
108
(4,676)
(3,098)
(161)
—
(3,259)
Provision for income taxes
$ 10,958
$
(362)
$
533
(dollars in thousands)
Income tax accounts included in other assets at December 31, are as follows:
Currently receivable
Deferred income tax asset, net
$ 15,940
20,892
$
633
43,129
Total
$ 36,832
$ 43,762
2017
2016
2017
2016
2015
(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
Deferred tax remeasurement
Other
$ 11,308
550
(371)
(8,683)
(341)
—
8,448
47
8,218
69
(406)
(8,259)
(395)
108
—
303
8,008
157
(375)
(6,915)
(460)
—
—
118
$
$
Total
Effective tax rate
$ 10,958
$
(362)
$
533
32.95 %
(1.50) %
2.30 %
44
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
2017
2016
(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
$ 7,855
—
7,555
8,436
$ 10,419
10,234
9,684
11,320
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:
Pension asset (liability)
Deferred origination costs
Prepaid expenses
Mortgage servicing rights
Gross deferred income tax liability
Deferred income tax asset, net
1,303
631
—
14
442
17
97
21
17
173
26,561
(108)
3,161
968
612
357
266
128
125
30
26
220
47,550
(108)
26,453
47,442
(4,403)
(481)
(248)
(429)
(5,561)
(3,662)
—
—
(651)
(4,313)
$ 20,892
$ 43,129
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, 2017, with the exception of a $108,000 valuation allowance on a charitable contribution carryforward that has a remaining
carryforward period of 3-4 years. Management believes that existing net deductible temporary differences which give rise to the deferred tax asset will reverse during
periods in which the Company generates net taxable income. In addition, gross deductible temporary differences are expected to reverse in periods during which
offsetting gross taxable temporary differences are expected to reverse. Factors beyond 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.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The majority of the provisions of the Tax Act takes effect on January 1, 2018.
The Tax Act lowers the Company’s federal tax rate from 34% to 21%. The Company evaluated its deferred taxes at 21% as of the enactment date and recorded
additional tax expense of $8,448,000. Also, for tax years beginning after December 31, 2017, the corporate Alternative Minimum Tax (“AMT”) has been repealed.
For 2018 through 2021, the AMT credit carryforward can offset regular tax liability and is refundable in an amount equal to 50% (100% for 2021) of the excess of
the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. Accordingly, the full amount of the alternative
minimum tax credit carryforward will be recovered in tax years beginning before 2022. The Tax Act also contains other provisions that may affect the Company
currently or in future years. Among these are changes to the deductibility of meals and entertainment, the deductibility of executive compensation, the dividend
received deduction and net operating loss carryforwards.
The Company is in an Alternative Minimum Tax (“AMT”) credit position. As the AMT has been repealed and the existing credit is refundable, the AMT credit, totalling
$14,001,000, has been reclassified to currently receivable. The Company and its subsidiaries file a consolidated federal tax return. The Company is subject to federal
and state examinations for tax years after December 31, 2013.
17. Employee Benefits
The Company has a Qualified Defined Benefit Pension Plan (the “Plan”), which had been offered to all employees reaching minimum age and service requirements. In
2006, the Bank became a member of the Savings Bank Employees Retirement Association (“SBERA”) within which it then began maintaining the Qualified Defined
Benefit Pension Plan. SBERA offers a common and collective trust as the underlying investment structure for its retirement plans. The target allocation mix for the
common and collective trust portfolio calls for an equity-based investment deployment range of 40% to 64% of total portfolio assets. The remainder of the portfolio
is allocated to fixed income securities with target range of 15% to 25% and other investments including global asset allocation and hedge funds from 25% to 41%.
The Trustees of SBERA, through its Investment Committee, select investment managers for the common and collective trust portfolio. A professional investment
advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The overall
investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings. The Company closed the plan to
employees hired after March 31, 2006.
45
Century Bancorp, Inc. AR ’17Notes 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 2018 to 2022 are $1,530,000, $1,569,000,
$1,732,000, $1,832,000, and $1,988,000, respectively. The aggregate benefits expected to be paid in the five years from 2023 to 2027 are $11,531,000.
The framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).
Valuation techniques maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The three levels of the fair value hierarchy under
Topic 820 are described as follows:
LEVEL 1
Inputs to the valuation methodology are quoted market prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to
access at the measurement date.
LEVEL 2
Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly, such as: quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other that quoted prices that are observable for
the asset or liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset or liability has
specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
LEVEL 3
Inputs that are unobservable inputs for the asset or liability.
Below is a description of the valuation methodologies used for assets measured at fair value.
Collective Funds
Valued at either the closing price reported on the active market on which the individual securities are traded or valued at the net asset value (NAV) of units of a
collective trust. The NAV, as provided by the trustee, is used as a practical expedient to estimate fair value. The NAV is based on the fair value of the underlying
investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an
amount different than the reported NAV. Participant transactions (purchases and sales) may occur daily. Were SBERA to initiate a full redemption of the collective
trust, the investment advisor reserves the right to temporarily delay withdrawal from the trust in order to ensure that securities liquidations will be carried out in an
orderly business manner.
Equity Securities
Valued at the closing price reported on the active market on which the individual securities are traded.
Mutual Funds
Valued at the daily closing price as reported by the fund. Mutual funds held open-end mutual funds that are registered with the U.S. Securities and Exchange
Commission. The funds are required to publish their daily NAV and to transact at that price.
The mutual funds held are deemed to be actively traded.
Limited Partnerships and Hedge Funds
The funds are valued at NAV, without further adjustment, as calculated by the fund’s manager based upon the terms and conditions of the organization documents of
the underlying investments, with further consideration to portfolio risks.
The following table sets forth by level, within the fair value hierarchy, the plan’s assets at fair value. Classification within the fair value hierarchy table is based upon the
lowest level of any input that is significant to the fair value measurement:
Description
Percent
Level 1
Level 2
Level 3
Total
(dollars in thousands)
The fair value of plan assets and major categories as of December 31, 2017, is as follows:
$ 1,741
Collective Funds
5,195
Equity Securities
8,615
Diversified Mutual Funds
3,836
Short-term investments
3.6 %
10.7 %
17.8 %
7.9 %
Total investments measured in the fair value hierarchy
Investments measured at net asset value(1)
40.0 %
60.0 %
100.0 %
19,387
—
$ 19,387
$
$
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
$ 1,741
5,195
8,615
3,836
19,387
29,035
$ 48,422
(1)
In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.
46
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
Description
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:
$ 2,600
Collective Funds
7,363
Equity Securities
4,615
Diversified Mutual Funds
475
Short-term investments
6.9 %
19.7 %
12.3 %
1.3 %
Total investments measured in the fair value hierarchy
Investments measured at net asset value(1)
40.2 %
59.8 %
100.0 %
15,053
—
$ 15,053
$
$
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
$ 2,600
7,363
4,615
475
15,053
22,394
$ 37,447
(1)
In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.
There were no transfers to or from Level 1, 2, and 3 during the period.
INVESTMENTS MEASURED USING THE NET ASSET VALUE PER SHARE PRACTICAL EXPEDIENT
The following table summarizes investments for which fair value is measured using the net asset value per share practical expedient.
There are no participant redemption restrictions for these investments.
(dollars in thousands)
The investments measured using the net asset value per share practical expedient as of December 31, 2017, is as follows:
Collective Funds by Category:
Equity
Diversified
US debt securities
Fair Value
Percent
31.6 %
0.7 %
9.4 %
9.1 %
$ 15,304
344
4,569
4,419
International equities
Limited Partnerships by Category:
Emerging markets
Multi-strategy
Hedge Funds by Category:
Multi-strategy(1)
Global opportunities(2)
Private investment entities and/or separately managed accounts(3)
2.8 %
1.5 %
3.5 %
0.7 %
0.7 %
60.0 %
1,353
705
1,674
345
322
$ 29,035
(dollars in thousands)
The investments measured using the net asset value per share practical expedient as of December 31, 2016, is as follows:
Collective Funds by Category:
Percent
Fair Value
Equity
Diversified
US debt securities
International equities
Limited Partnerships by Category:
Emerging markets
Multi-strategy
Hedge Funds by Category:
Multi-strategy(1)
Global opportunities(2)
Private investment entities and/or separately managed accounts(3)
24.1 %
0.1 %
11.3 %
9.8 %
0.0 %
7.0 %
5.6 %
1.1 %
0.8 %
59.8 %
$ 9,013
47
4,241
3,684
—
2,623
2,082
422
282
$ 22,394
(1)
This category includes investments in hedge funds that pursue multiple strategies to diversify risks and reduce volatility. Fund objectives are to seek above-average rates of return and long-term capital
growth through investments, which are fund of funds with a diversified portfolio of private investment entities and/or separately managed accounts managed by investment managers or achieve superior
risk-adjusted capital appreciation over the long-term, generally through an investment, which invests in private investment funds and discretional managed accounts, structured notes, swaps or other similar
(2)
products. The fair values of the investments in this category have been determined using the net asset value per share of the fund(s).
This category has an investment strategy to pursue a hybrid absolute return via portfolio managers, secondaries, and co-investments with a flexible and opportunistic mandate tactically allocating capital
to look to capitalize on market dislocations and inefficiencies. The opportunities are expected to fall within the following strategies: Niche Alternatives and Private Credit and Hedge Fund secondaries. The fair
value of the investments in this category have been determined using the last sales price, for listed securities, and in accordance with the agreement terms for portfolio-managed investments, notes, swaps,
(3)
and other similar products.
The Fund’s investment objective is to invest in highly attractive, select investment opportunities by maintaining investments through private investment entities and/or separately managed accounts (each,
an Investment or a Portfolio and collectively, the Investments or the Portfolios) with investment management professionals (each a Manager and collectively, the Managers) specializing in various alternative
investment strategies. The Managers have broad investment experience and the ability to leverage their existing relationships with corporate management teams, investment banks and other institutions to
gain access to certain investment opportunities. As such, the Manager is presented with “best idea” investment opportunities, typically in asset classes where market dislocations or other events have created
attractive investment opportunities. The Managers are not restricted in the investment strategies that they may employ across different asset classes and regions. The Manager anticipates that any number of
strategies will be eligible for consideration for investment by the Fund and the Fund reserves the right to invest in any particular strategy or asset class it deems appropriate.
47
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
ASSET ALLOCATION
SBERA offers a common and collective trust as the underlying investment structure for its retirement plans. The target allocation mix for the common and collective
trust portfolio calls for an equity-based investment deployment range of 40% to 64% of total portfolio assets. The remainder of the portfolio is allocated to fixed
income securities with a target range of 15% to 25% and other investments including global asset allocation and hedge funds from 25% to 41%.
The Trustees of SBERA, through the Association’s Investment Committee, select investment managers for the common and collective trust portfolio. A professional
investment advisory firm is retained by the Investment Committee to provide allocation analysis, performance measurement and to assist with manager searches. The
overall investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings.
The Company has a Supplemental Executive Insurance/Retirement Plan (the Supplemental Plan), which is limited to certain officers and employees of the Company.
The Supplemental Plan is voluntary. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Life
insurance policies, which are owned by the Company, are purchased covering the lives of each participant.
The benefits expected to be paid in each year from 2018 to 2022 are $2,096,000, $2,068,000, $2,002,000, $1,939,000 and $1,966,000, respectively. The
aggregate benefits expected to be paid in the five years from 2023 to 2027 are $13,107,000.
Defined Benefit Pension Plan
2017
2017
2016
2016
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
$
42,255
1,241
1,450
3,456
(1,337)
$
38,597
1,273
1,358
2,593
(1,566)
$
38,610
1,582
1,382
2,087
(1,082)
$
38,204
1,820
1,334
(1,653)
(1,095)
Projected benefit obligation at end of year
$
47,065
$
42,255
$
42,579
$
38,610
Change in plan assets
Fair value of plan assets at beginning of year
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
$
$
$
$
$
$
$
37,447
5,312
7,000
(1,337)
48,422
1,357
47,065
3.49 %
3.99 %
8.00 %
4.00 %
1,241
1,450
(2,985)
(104)
903
505
104
409
513
$
$
$
$
$
$
$
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
552
104
1,347
1,451
$
$
(42,579)
40,375
$
$
(38,610)
36,392
3.42 %
3.85 %
NA
4.00 %
1,582
1,382
—
114
636
$
$
3,714
$
(114)
1,752
1,638
3.85 %
4.01 %
NA
4.00 %
1,820
1,334
—
114
805
4,073
(114)
(2,458)
(2,572)
$
$
$
$
1,018
$
2,003
$
5,352
$
1,501
(dollars in thousands)
Prior service cost
Net actuarial loss
Total
December 31, 2017
Supplemental
Plan
Plan
Total
Plan
December 31, 2016
Supplemental
Plan
Total
$
100
(14,408)
$
(535)
(15,168)
$
(435)
(29,576)
$
204
(13,999)
$
(649)
(13,416)
$
(445)
(27,415)
$ (14,308)
$ (15,703)
$ (30,011)
$ (13,795)
$ (14,065)
$
(27,860)
48
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
The following table summarizes the amounts included in Accumulated Other
Supplemental
Comprehensive Loss at December 31, 2017, 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 2018
Amortization of loss to be recognized in 2018
$ (100)
904
$ 114
707
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 $445,000 for 2017, $418,000 for 2016 and $403,000 for 2015.
Administrative costs associated with the plan are absorbed by the Company.
The Company has a cash incentive plan that is designed to reward our
executives and officers for the achievement of annual financial performance goals
of the Company as well as business line, department and individual performance.
The plan supports the philosophy that management be measured for their
performance as a team in the attainment of these goals. Discretionary bonus
expense amounted to $1,859,000, $1,418,000 and $1,178,000 in 2017,
2016, and 2015, respectively.
The Company does not offer any postretirement programs other than pensions.
18. Commitments and Contingencies
A number of legal claims against the Company arising in the normal course of
business were outstanding at December 31, 2017. Management, after reviewing
these claims with legal counsel, is of the opinion that their resolution will not
have a material adverse effect on the Company’s consolidated financial position
or results of operations.
49
On September 7, 2017, Crimson Galeria Limited Partnership, Raj & Raj, LLC,
Harvard Square Holdings LLC, and Charles River Holdings LLC (collectively,
the “Plaintiffs”) filed suit in the United States District Court for the District
of Massachusetts against the Attorney General of the Commonwealth of
Massachusetts, the Massachusetts Department of Public Health, the City of
Cambridge, the Town of Georgetown, as well as against the Bank, Healthy
Pharms, Inc., (“Healthy Pharms”), Timbuktu Real Estate, LLC, Paul Overgaag,
Nathaniel Averill, 4Front Advisors, LLC, 4Front Holdings LLC, Kristopher T.
Krane, 3 Brothers Real Estate, LLC, Red Line Management, LLC, unspecified
insurance providers to certain Plaintiffs, Tomolly, Inc., and (collectively, the
“Defendants”).
The Plaintiffs allege that they own property in Cambridge, MA, and claim that
the value and use of their property will be impaired by Healthy Pharms decision
to open a registered medicinal marijuana dispensary in abutting or nearby
situated property. The Plaintiffs further allege that the Bank has a banking
relationship with Healthy Pharms and that, by entering into such relationship,
the Bank conspired with Healthy Pharms to violate the Racketeer Influenced
and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. The Plaintiffs seek
unspecified treble damages, and attorney’s costs and fees, as well as injunctive
and declaratory relief.
The Company believes that the claims and allegations against the Bank set forth
in the complaint are without merit, and the Company and the Bank intend to
vigorously defend against them.
On December 15, 2017, the Company filed a motion to dismiss the complaint;
the plaintiffs filed an opposition brief, and the Company filed a reply in further
support of its motion.
19. Financial Instruments with Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers.
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-
Contract or Notional Amount
balance-sheet instruments. Financial instruments with off-balance-sheet risk at
December 31 are as follows:
(dollars in thousands)
2017
2016
Financial instruments whose contract
amount represents credit risk:
Commitments to originate
1–4 family mortgages
$ 5,748
$ 13,877
Standby and commercial letters of credit
5,520
6,796
Unused lines of credit
434,618
362,357
Unadvanced portions of construction loans
15,152
Unadvanced portions of other loans
35,602
22,049
52,224
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
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
extending loan facilities to customers.
Year ended December 31,
2017
2016
2015
20. Other Operating Expenses
(dollars in thousands)
Marketing
Software maintenance/amortization
Legal and audit
Contributions
Processing services
Consulting
Postage and delivery
Supplies
Telephone
Directors’ fees
Insurance
Other
$ 2,315
1,859
1,543
993
1,160
1,199
966
945
1,020
440
308
1,845
$ 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
Total
$ 14,593
$ 13,815
$ 12,708
21. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of its financial instruments. Excluded from this disclosure
are all non-financial instruments. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The assumptions used below are expected to approximate those that market
participants would use in valuing these financial instruments.
Fair value estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument, including
estimates of timing, amount of expected future cash flows and the credit
standing of the issuer. Such estimates do not consider the tax impact of the
realization of unrealized gains or losses. In some cases, the fair value estimates
cannot be substantiated by comparison to independent markets. In addition,
the disclosed fair value may not be realized in the immediate settlement of the
financial instrument. Care should be exercised in deriving conclusions about our
business, its value or financial position based on the fair value information of
financial instruments presented below.
SECURITIES HELD-TO-MATURITY
The fair values of these securities were based on quoted market prices, where
available, as provided by third-party investment portfolio pricing vendors. If
quoted market prices were not available, fair values provided by the vendors
were based on quoted market prices of comparable instruments in active markets
and/or based on a matrix pricing methodology which employs The Bond Market
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, 2017 and December 31, 2016. This table excludes
financial instruments for which the carrying amount approximates fair value.
Financial assets for which the fair value approximates carrying value include cash
and cash equivalents, short-term investments, FHLBB stock and accrued interest
receivable. Financial liabilities for which the fair value approximates carrying
value include non-maturity deposits, short-term borrowings and accrued
interest payable.
50
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
(dollars in thousands)
December 31, 2017
Financial assets:
Securities held-to-maturity
Loans(1)
Financial liabilities:
Time deposits
Other borrowed funds
Subordinated debentures
December 31, 2016
Financial assets:
Securities held-to-maturity
Loans(1)
Financial liabilities:
Time deposits
Other borrowed funds
Subordinated debentures
(1)
Carrying Amount
Estimated
Fair Value
Fair Value Measurements
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
$ 1,701,233
2,149,689
$ 1,668,827
2,094,517
625,361
347,778
36,083
627,517
349,364
36,083
$ 1,653,986
1,899,527
$ 1,635,808
1,873,703
478,359
293,000
36,083
480,133
294,940
36,083
$
$
—
—
—
—
—
—
—
—
—
—
$ 1,668,827
—
$
—
2,094,517
627,517
349,364
—
—
—
36,083
$1,635,808
—
$
—
1,873,703
480,133
294,940
—
—
—
36,083
Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates
do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no
active market exists for some of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, cash flows,
current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect
the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates
and have not been considered.
51
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
2017 Quarters
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
2016 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
Fourth
Third
Second
First
$
29,470
7,768
21,702
450
21,252
4,410
15,992
9,670
9,645
$
28,521
7,168
21,353
450
20,903
3,942
16,205
8,640
617
$
28,806
6,701
22,105
490
21,615
4,291
17,197
8,709
552
$ 26,639
6,183
20,456
400
20,056
3,909
17,725
6,240
144
$
25
$
8,023
$
8,157
$
6,096
3,605,829
1,962,080
5,567,909
1,962,080
3,605,829
1,962,080
5,567,909
1,962,080
3,603,729
1,964,180
5,567,909
1,964,180
$
$
$
$
$
$
$
$
$
$
0.01
—
—
—
Fourth
24,689
5,927
18,762
200
18,562
3,700
16,156
6,106
(394)
$
$
$
$
$
1.75
0.87
1.44
0.87
Third
25,005
5,791
19,214
375
18,839
4,225
16,630
6,434
(52)
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.33
0.66
1.09
0.66
1.78
0.89
1.47
0.89
Second
First
23,742
5,486
18,256
350
17,906
4,643
16,288
6,261
20
$ 23,263
5,413
17,850
450
17,400
3,654
15,683
5,371
64
$
6,500
$
6,486
$
6,241
$
5,307
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.42
0.71
1.17
0.71
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.41
0.71
1.16
0.71
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.36
0.68
1.12
0.68
3,600,729
1,967,180
5,567,909
1,967,180
$
$
$
$
1.16
0.58
0.95
0.58
52
Century Bancorp, Inc. AR ’17Notes to Consolidated Financial Statements
23. Parent Company Financial Statements
The balance sheets of Century Bancorp, Inc. (“Parent Company”) as of December 31, 2017 and 2016 and the statements of income and cash flows for each of the
BALANCE SHEETS
years in the three-year period ended December 31, 2017, are presented below. The statements of changes in stockholders’ equity are identical to the consolidated
December 31,
2017
statements of changes in stockholders’ equity and are therefore not presented here.
(dollars in thousands)
2016
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
$ 1,981
283,881
16,833
$ 302,695
$6,315
36,083
260,297
$ 302,695
2,768
$
263,070
10,335
$ 276,173
$
49
36,083
240,041
$ 276,173
2017
2016
2015
$ 2,500
1
34
2,535
1,121
209
1,205
(440)
1,645
20,656
$
2,000
3
28
2,031
937
220
874
(383)
1,257
23,277
$ 1,500
13
24
1,537
792
212
533
(328)
861
22,160
Net income
$ 22,301
$ 24,534
$ 23,021
STATEMENTS OF CASH FLOWS
December 31,
(dollars in thousands)
2017
2016
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities
$ 22,301
$ 24,534
$ 23,021
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
(20,656)
—
(6,498)
6,266
1,413
—
(2,200)
(2,200)
(787)
2,768
(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
$ 1,981
$
2,768
$ 5,230
53
Century Bancorp, Inc. AR ’17Notes 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.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and its subsidiary (the “Company”) as of December 31, 2017 and 2016,
the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2017, and the related notes, collectively, the “consolidated financial statements”. In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2018 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1982.
Boston, Massachusetts
March 15, 2018
54
Century Bancorp, Inc. AR ’17 Report of Independent Registered Public Accounting Firm
KPMG LLP
Independent Registered Public Accounting Firm
Two Financial Center
60 South Street
Boston, Massachusetts 02111-2759
The Board of Directors and Stockholders
Century Bancorp, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Century Bancorp, Inc. and its subsidiary’s (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance
sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity,
and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes, collectively, the consolidated financial statements, and
our report dated March 15, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’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 are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A 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.
Boston, Massachusetts
March 15, 2018
55
Century Bancorp, Inc. AR ’17 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, 2017. 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, 2017, 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 55.
Barry R. Sloane
President & CEO
March 15, 2018
William P. Hornby, CPA
Chief Financial Officer & Treasurer
56
Century Bancorp, Inc. AR ’17 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 505000
Louisville, KY 40233
TEL (781) 575-3400
Computershare.com
The annual meeting of stockholders will be held on Tuesday, April 10, 2018, 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 $4.8 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.
results
Our family’s bank.
And yours.
400 Mystic Avenue
Medford, MA 02155
(866) 823-6887
CenturyBank.com
Equal Housing Lender/Member FDIC
© 2018 Century Bancorp, Inc. All rights reserved.
002-CSN8B63