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CNBKA > SEC Filings for CNBKA > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for CENTURY BANCORP INC

Form 10-Q for CENTURY BANCORP INC


8-Nov-2013

Quarterly Report


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

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the "Company") is a Massachusetts state-chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the "Bank"): Century Bank and Trust Company formed in 1969. At September 30, 2013, the Company had total assets of $3.4 billion. Currently, the Company operates 25 banking offices in 19 cities and towns in Massachusetts, ranging from Braintree in the south to Andover in the north. The Bank's customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments and institutions throughout Massachusetts.

During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch opened on July 16, 2012.

During June 2012, the Company entered into a lease agreement to open a branch located in Wellesley, Massachusetts. The branch opened on November 26, 2012.

During July 2012, the Company received state regulatory approval to close a branch at Chestnut Hill in Newton, Massachusetts. The branch closed on September 21, 2012 and the accounts were temporarily moved to the Brookline, Massachusetts branch. During July 2012, the Company entered into a lease agreement and received regulatory approval to open a branch at a new location at Chestnut Hill in Newton, Massachusetts. The branch is scheduled to open during the fourth quarter of 2013 and the majority of the accounts that were temporarily moved to the Brookline, Massachusetts branch will be moved to the new branch at Chestnut Hill in Newton, Massachusetts.

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. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.

The Company is also a provider of financial services, including cash management, transaction processing and short term financing to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with approximately 192 (55%) of the 351 cities and towns in Massachusetts.

Net income for the third quarter ended September 30, 2013 was $5,519,000, or $0.99 per Class A share diluted, compared to net income of $5,682,000, or $1.02 per Class A share diluted, for the third quarter ended September 30, 2012. Net income for the nine-

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month period ended September 30, 2013 was $15,021,000, or $2.70 per Class A share diluted, compared to net income of $14,261,000, or $2.57 per Class A share diluted, for the nine-month period ended September 30, 2012. Earnings per share (EPS) for each class of stock and time period is as follows:

                                          Three months        Three months
                                              ended               ended
                                          September 30,       September 30,
                                              2013                2012

          Basic EPS - Class A common     $          1.21     $          1.25
          Basic EPS - Class B common     $          0.60     $          0.62
          Diluted EPS - Class A common   $          0.99     $          1.02
          Diluted EPS - Class B common   $          0.60     $          0.62

                                           Nine months         Nine months
                                              ended               ended
                                          September 30,       September 30,
                                              2013                2012

          Basic EPS - Class A common     $          3.29     $          3.13
          Basic EPS - Class B common     $          1.64     $          1.57
          Diluted EPS - Class A common   $          2.70     $          2.57
          Diluted EPS - Class B common   $          1.64     $          1.57

Net interest income totaled $44.9 million for the first nine months of 2013 compared to $47.0 million for the same period in 2012. The 4.6% decrease in net interest income for the period is primarily due to $3.0 million of prepayment penalties collected during the first nine months of 2012 compared to $424,000 of prepayment penalties collected during the first nine months of 2013. The net interest margin decreased from 2.58% on a fully taxable equivalent basis in 2012 to 2.21% on the same basis for 2013. This was primarily the result of a decrease in asset yields. Also, interest expense decreased primarily as a result of the continued decline in market rates and there was a 13.6% increase in the average balances of earning assets, combined with a similar increase in average deposits.

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

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Pricing discipline occurred through the first quarter of 2011. The net interest margin fell somewhat during the second quarter of 2011 mainly as a result of increased deposits and corresponding lower yield short-term investments. During the third quarter of 2011 through the third quarter of 2012, management stabilized the net interest margin by continuing to lower cost of funds, and by deploying excess liquidity through expansion of the investment portfolio. Also, the Company collected approximately $3,000,000 of prepayment penalties during the first three quarters of 2012. The primary factor accounting for the decrease in the net interest margin for the fourth quarter of 2012 and through the third quarter of 2013 was an additional large influx of deposits. Management invested the funds in shorter term securities.

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.

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For the three months ended September 30, 2013, the loan loss provision was $750,000 compared to a provision of $1.3 million for the same period last year. For the nine months ended September 30, 2013, the loan loss provision was $2.3 million compared to a provision of $3.3 million for the same period last year. The decrease in the provisions was primarily as a result of a lower level of charge-off activity and changes in portfolio composition. Nonperforming loans decreased to $3.7 million at September 30, 2013 from $5.5 million on September 30, 2012.

The Company capitalized on favorable market conditions for the third quarter and nine months ended September 30, 2013 and realized net gains on sales of investments of $1.0 million and $2.7 million as compared to $529,000 and $1.1 million for the same periods in 2012.

The Company's effective tax rate decreased from 8.1% for the first nine months of 2012 to 5.6% for the same period in 2013 primarily as a result of an increase in tax-exempt income.

Financial Condition

Loans

On September 30, 2013, total loans outstanding were $1.2 billion, an increase of 10.7% from the total on December 31, 2012. At September 30, 2013, commercial real estate loans accounted for 54.1% and residential real estate loans, including home equity loans, accounted for 35.4% of total loans.

Commercial and industrial loans decreased to $87.5 million at September 30, 2013 from $88.5 million at December 31, 2012, primarily as a result of loan payments. Construction loans decreased to $32.8 million at September 30, 2013 from $38.6 million on December 31, 2012, primarily as a result of loan payments and a single loan status change to permanent financing.

Allowance for Loan Losses

The allowance for loan loss at September 30, 2013 was $21.3 million as compared to $19.2 million at December 31, 2012. The increase was due to the increase in the size and composition of the loan portfolio as well as qualitative factors. Also, the level of the allowance for loan losses to total loans remained stable at 1.73% at December 31, 2012 and September 30, 2013. In evaluating the allowance for loan losses the Company considered the following categories to be higher risk:

Construction loans: The outstanding loan balance of construction loans at September 30, 2013 is $32.8 million as compared to $38.6 million at December 31, 2012. A major factor in nonaccrual loans is one large construction loan. Management closely monitors all construction loans and considers this type of loans to be higher risk.

Higher balance loans: Loans greater than $1.0 million are considered "high balance loans". The balance of these loans is $648.6 million at September 30, 2013 as compared to $567.3 million at December 31, 2012. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high balance loans. Included in high balance loans are loans greater than $10.0 million. The balance of these loans, which is included in the loans greater than $1.0 million category, is $352.4 million, at September 30, 2013 as compared to $245.2 million at December 31, 2012. Additional allowance allocations are made based upon the level of this type of high balance loans that is separate and greater than the $1.0 million allocation.

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Small business loans: The outstanding loan balances of small business loans is $38.4 million at September 30, 2013 as compared to $42.0 million at December 31, 2012. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion.

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

                                                     Three months ended             Nine months ended
                                                       September 30,                  September 30,
                                                    2013            2012           2013           2012
                                                                      (in thousands)
Allowance for loan losses, beginning of period    $  20,500       $ 17,979       $ 19,197       $ 16,574
Loans charged off                                      (149 )         (728 )         (682 )       (1,787 )
Recoveries on loans previously charged-off              149            157            485            621

Net charge-offs                                          -            (571 )         (197 )       (1,166 )
Provision charged to expense                            750          1,250          2,250          3,250

Allowance for loan losses, end of period          $  21,250       $ 18,658       $ 21,250       $ 18,658

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

Nonperforming Assets

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



                                             September 30, 2013               December 31, 2012
                                                           (Dollars in thousands)
Nonaccruing loans                            $             3,745             $             4,471
Loans past due 90 days or more and
still accruing                               $                -              $                -
Nonaccruing loans as a percentage
of total loans                                              0.30 %                          0.40 %
Accruing troubled debt restructures          $             6,027             $             3,048

Loans past due greater than 90 days and accruing represent loans that matured and the borrower has continued to make regular principal and interest payments as if the loan had been renewed when, in fact, renewal had not yet taken place. It is expected that the loans will be renewed or paid in full without any loss.

Cash and Cash Equivalents

Cash and cash equivalents increased during the first nine months of 2013. This was primarily the result of an influx of deposits during the period.

Short-term Investments

Short-term investments decreased during the first nine months of 2013 mainly as a result of decreases in shorter term lower yielding investments.

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Investments

Management continually evaluates its investment alternatives in order to properly manage the overall balance sheet mix. The timing of purchases, sales and reinvestments, if any, will be based on various factors including expectation of movements in market interest rates, deposit flows and loan demand. Notwithstanding these events, it is the intent of management to grow the earning asset base mainly through loan originations while funding this growth through a mix of retail deposits, FHLB advances, and retail repurchase agreements.

Securities Available-for-Sale (at Fair Value)

The securities available-for-sale portfolio totaled $495.0 million at September 30, 2013, a decrease of 65.5% from December 31, 2012. During the third quarter of 2013, $987.0 million of securities available-for-sale with unrealized losses of $25.3 million were transferred to securities held-to-maturity. This was done in response to rising interest rates. Purchases of securities available-for-sale totaled $539.7 million for the nine months ended September 30, 2013. The portfolio is concentrated in United States Government Sponsored Enterprises, Mortgage-backed Securities and Obligations issued by States and Political Subdivisions and had an estimated weighted average remaining life of 5.1 years.

The majority of the Company's securities AFS are classified as Level 2. The fair values of these securities are generally obtained from a pricing service, which provides the Company with a description of the inputs generally utilized for each type of security. These inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Market indicators and industry and economic events are also monitored.

Securities available-for-sale totaling $40.5 million, or 1.2% of assets are classified as Level 3. These securities are generally failed auction rate securities, equity investments or obligations of states and political subdivisions with no readily determinable fair value. Failed auction rate securities were reclassified to Level 3 during the first quarter of 2009 due to the lack of an active market. Fair values for Level 3 securities are, generally, arrived at based upon a review of market trades of similar instruments, if any, as well as an analysis of the security based upon market liquidity and prevailing market interest rates.

During the third quarter unrealized losses on the securities available-for-sale increased to $1.0 million from an unrealized gain position of $20.2 million at December 31, 2012. Unrealized losses on the available-for-sale portfolio increased as a result of increases in interest rates.

                                               September 30, 2013            December 31, 2012
                                                               (In thousands)

U.S. Treasury                                 $              1,996          $             2,004
U.S. Government Sponsored Enterprises                        9,998                      130,340
Small Business Administration                                7,431                        8,156
U.S Government Agency and Sponsored
Enterprise Mortgage-backed Securities                      429,309                    1,233,357
Privately Issued Residential
Mortgage-backed Securities                                   2,418                        2,947
Obligations issued by States and
Political Subdivisions                                      41,013                       55,174
Other Debt Securities                                        2,189                        2,253
Equity Securities                                              547                          570

Total Securities Available-for-Sale           $            494,901          $         1,434,801

During the first nine months of 2013 the Company capitalized on favorable market conditions and realized $2,665,000 of net gains on sales of investments. The sales of investments represented 48 U.S. Government Sponsored Enterprise bonds totaling $216,078,000.

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Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $1.4 billion million on September 30, 2013, an increase of 399% from the total on December 31, 2012. During the third quarter of 2013, $987.0 million of securities available-for-sale with unrealized losses of $25.3 million were transferred to securities held-to-maturity. This was done in response to rising interest rates. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 5.2 years.

                                               September 30, 2013            December 31, 2012
                                                               (In thousands)
U.S. Government Sponsored Enterprises         $            276,509          $            17,747
U.S. Government Agency and Sponsored
Enterprise Mortgage-backed Securities                    1,098,203                      257,760

Total Securities Held-to-Maturity             $          1,374,712          $           275,507

At September 30, 2013 and December 31, 2012, all mortgage-backed securities are obligations of U.S. Government Sponsored Enterprises.

Debt securities of Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

Federal Home Loan Bank of Boston Stock

The Bank, as a member of the Federal Home Loan Bank of Boston ("FHLBB") system, is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Company reviews for impairment based on the ultimate recoverability of the cost basis in the stock. For the quarter ended September 30, 2013, the FHLBB reported preliminary net income of $38.1 million. The FHLBB also declared a dividend equal to an annual yield of 0.37%. During the first none months of 2013, the Company increased its net investment in the capital stock of the FHLBB by $2.5 million to a total of $17.7 million. As of September 30, 2013, no impairment has been recognized.

Deposits and Borrowed Funds

On September 30, 2013, deposits totaled $2.7 billion, representing an 9.9% increase from December 31, 2012. Total deposits increased primarily as a result of increases in money market accounts, savings and NOW, and demand deposits. Money market and Savings and NOW increased as the Company continued to offer attractive rates for these types of deposits during the first nine months of the year. Time deposits decreased by $68.4 million primarily as a result of maturities of short term deposits. Borrowed funds totaled $426.3 million compared to $386.5 million at December 31, 2012. Borrowed funds increased mainly as a result of increases in borrowed funds from the FHLBB.

Stockholders' Equity

At September 30, 2013, total equity was $166.3 million compared to $180.0 million at December 31, 2012. The Company's equity decreased primarily as a result of an increase in other comprehensive loss, net of taxes, and dividends paid, offset somewhat by earnings. Other comprehensive loss, net of taxes, increased as a result of an increase in unrealized losses on securities. Unrealized losses on the investment portfolio

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increased as a result of increases in interest rates. The Company's leverage ratio stood at 6.54% at September 30, 2013, compared to 6.80% at December 31, 2012. The decrease in the leverage ratio is due to an increase in assets. Book value as of September 30, 2013 was $29.93 per share compared to $32.40 at December 31, 2012.

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Results of Operations

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



                                                                                Three Months Ended
                                                      September 30, 2013                                 September 30, 2012
                                                                                  (In thousands)
                                                                              Average                                            Average
                                           Average                            Yield/          Average                            Yield/
                                           Balance         Interest(1)         Rate           Balance         Interest(1)         Rate

ASSETS
Interest-earning assets:
Loans (2)
Loans taxable                            $   759,299      $       8,283           4.33 %    $   714,470      $       8,518           4.74 %
Loans tax-exempt                             456,405              6,935           6.03          350,848              8,031           9.11
Securities available-for-sale (5):
Taxable                                      569,505              1,329           0.93        1,153,336              5,560           1.93
Tax-exempt                                    44,526                 96           0.86           69,522                170           0.98
Securities held-to-maturity:
Taxable                                    1,260,195              6,181           1.96          288,600              1,744           2.42
Interest-bearing deposits in other
banks                                        171,895                120           0.28          236,850                170           0.29

Total interest-earning assets              3,261,825             22,944           2.81        2,813,626             24,193           3.43 %
Non interest-earning assets                  156,818                                            173,181
Allowance for loan losses                    (20,850 )                                          (18,462 )

Total assets                             $ 3,397,793                                        $ 2,968,345

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts                             $   719,079      $         441           0.24 %    $   596,514      $         398           0.27 %
Savings accounts                             330,608                233           0.28          277,934                164           0.23
Money market accounts                        852,628                681           0.32          688,761                603           0.35
Time deposits                                399,846              1,089           1.08          395,059              1,493           1.50

Total interest-bearing deposits            2,302,161              2,444           0.42        1,958,268              2,658           0.54
Securities sold under agreements to
repurchase                                   200,173                 89           0.18          178,474                 94           0.21
Other borrowed funds and subordinated
debentures                                   238,348              2,218           3.69          220,647              2,107           3.80

Total interest-bearing liabilities         2,740,682              4,751           0.69 %      2,357,389              4,859           0.82 %

Non interest-bearing liabilities
Demand deposits                              449,057                                            397,428
Other liabilities                             42,392                                             38,056

Total liabilities                          3,232,131                                          2,792,873

Stockholders' equity                         165,662                                            175,472
Total liabilities & stockholders'
equity                                   $ 3,397,793                                        $ 2,968,345

Net interest income on a fully taxable
equivalent basis                                                 18,193                                             19,334

Less taxable equivalent adjustment                               (2,395 )                                           (2,114 )

Net interest income                                       $      15,798                                      $      17,220
. . .
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