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CNBKA > SEC Filings for CNBKA > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for CENTURY BANCORP INC

Form 10-Q for CENTURY BANCORP INC


8-May-2014

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 March 31, 2014, the Company had total assets of $3.5 billion. Currently, the Company operates 26 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 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 opened on November 7, 2013 and the majority of the accounts that were temporarily moved to the Brookline, Massachusetts branch were moved to the new branch at Chestnut Hill in Newton, Massachusetts.

During December 2013, the Company entered into a lease agreement to open a branch located in Woburn, Massachusetts. The branch is scheduled to open during the fourth quarter of 2014.

During March 2014, the Company entered into a lease agreement to open a branch located on Boylston Street in Boston, Massachusetts. The branch is scheduled to open during the first quarter of 2015. The deposits from the Kenmore Square, Boston Massachusetts branch, which is scheduled to close on September 30, 2014, will be moved to the new Boylston Street branch. The transaction is subject to regulatory approval.

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 193 (55%) of the 351 cities and towns in Massachusetts.

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Net income for the first quarter ended March 31, 2014 was $4,932,000, or $0.89 per Class A share diluted, compared to net income of $4,476,000, or $0.81 per Class A share diluted, for the first quarter ended March 31, 2013. Earnings per share (EPS) for each class of stock and time period is as follows:

                                           Three months       Three months
                                              ended              ended
                                            March 31,          March 31,
                                               2014               2013
           Basic EPS - Class A common     $         1.08     $         0.98
           Basic EPS - Class B common     $         0.54     $         0.49
           Diluted EPS - Class A common   $         0.89     $         0.81
           Diluted EPS - Class B common   $         0.54     $         0.49

Net interest income totaled $16.5 million for the quarter ended March 31, 2014 compared to $14.5 million for the same period in 2013. The 13.5% increase in net interest income for the period is primarily due to an increase in average earning assets. The net interest margin increased from 2.25% on a fully taxable equivalent basis in 2013 to 2.27% on the same basis for 2014. This was primarily the result of a decrease in rates paid on deposits and borrowed funds. Also, interest expense increased slightly as a result of an increase in deposit balances and there was a 13.0% 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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From the beginning of 2012 through the third quarter of 2012, management stabilized the net interest margin by continuing to lower the cost of funds, and by deploying excess liquidity through expansion of the investment portfolio. Also, the Company collected approximately $3,253,000 of prepayment penalties during 2012. The primary factor accounting for the decrease in the net interest margin for the fourth quarter of 2012 and through the fourth quarter of 2013 was an additional large influx of deposits. Management invested the funds in shorter term securities. The net interest margin increased during the first quarter of 2014 primarily as a result of pricing discipline.

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.

For the three months ended March 31, 2014, the loan loss provision was $600,000 compared to a provision of $750,000 for the same period last year. The decrease in the provision was primarily as a result of changes in the portfolio composition. Nonperforming loans decreased to $1.6 million at March 31, 2014 from $4.1 million on March 31, 2013.

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The Company had no sales of investment securities during the first quarter ended March 31, 2014. The Company capitalized on favorable market conditions for the first quarter ended March 31, 2013 and realized net gains on sales of investments of $883,000. Included in operating expenses for the first three months ended March 31, 2014 are FDIC assessments of $480,000 compared to $400,000 for the same period in 2013.

For the first three months of 2014, the Company's effective income tax rate was 5.6% compared to 6.0% for last year's corresponding period. The effective income tax rate decreased primarily as a result of an increase in tax-exempt income.

Financial Condition

Loans

On March 31, 2014, total loans outstanding were $1.3 billion, down slightly from the total on December 31, 2013. At March 31, 2014, commercial real estate loans accounted for 56.1% and residential real estate loans, including home equity loans, accounted for 33.6% of total loans. The company had $12.8 million of residential real estate loans held for sale at March 31, 2014.

Commercial and industrial loans increased to $95.8 million at March 31, 2014 from $92.4 million at December 31, 2013, primarily as a result of an increase in commercial and industrial financing. Construction loans decreased to $25.9 million at March 31, 2014 from $33.1 million on December 31, 2013, primarily as a result of loan payments.

Allowance for Loan Losses

The allowance for loan loss at March 31, 2014 was $21.3 million as compared to $20.9 million at December 31, 2013. The increase was due to the composition of the loan portfolio as well as qualitative factors. Also, the level of the allowance for loan losses to total loans increased from 1.66% at December 31, 2013 to 1.68% at March 31, 2014. 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 March 31, 2014 is $25.9 million as compared to $33.1 million at December 31, 2013. Based on the general local conditions facing construction, 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 $693.5 million at March 31, 2014 as compared to $701.1 million at December 31, 2013. 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 $371.7 million, at March 31, 2014 as compared to $377.9 million at December 31, 2013. 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.

Small business loans: The outstanding loan balances of small business loans is $39.0 million at March 31, 2014 as compared to $40.2 million at December 31, 2013. 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.

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

                                                         Three months ended
                                                              March 31,
                                                           (in thousands)
                                                         2014           2013
      Allowance for loan losses, beginning of period   $  20,941      $ 19,197
      Loans charged off                                     (429 )        (371 )
      Recoveries on loans previously charged-off             147           183

      Net charge-offs                                       (282 )        (188 )
      Provision charged to expense                           600           750

      Allowance for loan losses, end of period         $  21,259      $ 19,759

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:



                                                March 31, 2014               December 31, 2013
                                                            (Dollars in thousands)
Nonaccruing loans                              $          1,560             $             2,549
Loans past due 90 days or more and
still accruing                                 $             -              $                -
Nonaccruing loans as a percentage of
total loans                                                0.12 %                          0.20 %
Accruing troubled debt restructures            $          5,811             $             5,969

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 quarter of 2014. This was primarily the result of an influx of deposits during the quarter.

Short-term Investments

Short-term investments remained relatively stable.

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.

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Securities Available-for-Sale (at Fair Value)

The securities available-for-sale portfolio totaled $473.3 million at March 31, 2014, an increase of 2.0% from December 31, 2013. 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 $44.7 million for the three months ended March 31, 2014. 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 5.2 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 $33.1 million, or 0.9% 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 first quarter unrealized losses on the securities available-for-sale decreased to $1.3 million from $1.7 million at December 31, 2013. Unrealized losses on the available-for-sale portfolio increased as a result of increases in interest rates.

                                                 March 31, 2014            December 31, 2013
                                                               (In thousands)
U.S. Treasury                                   $          2,000          $             1,998
U.S. Government Sponsored Enterprises                         -                        10,004
Small Business Administration                              7,149                        7,302
U.S Government Agency and Sponsored
Enterprise Mortgage-backed Securities                    426,015                      403,190
Privately Issued Residential
Mortgage-backed Securities                                 2,187                        2,277
Obligations issued by States and
Political Subdivisions                                    33,201                       36,723
Other Debt Securities                                      2,180                        2,175
Equity Securities                                            570                          576

Total Securities Available-for-Sale             $        473,302          $           464,245

There were no realized gains on sales of investments for the first three months of 2014.

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

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Securities Held-to-Maturity (at Amortized Cost)

The securities held-to-maturity portfolio totaled $1.5 billion million on March 31, 2014, an increase of 0.6% from the total on December 31, 2013. 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 5.0 years.

                                                  March 31, 2014           December 31, 2013
                                                                (In thousands)
U.S. Government Sponsored Enterprises            $        292,325         $           291,779
U.S. Government Agency and Sponsored
Enterprise Mortgage-backed Securities                   1,186,125                   1,196,105

Total Securities Held-to-Maturity                $      1,478,450         $         1,487,884

At March 31, 2014 and December 31, 2013, 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 March 31, 2014, the FHLBB reported preliminary net income of $36.1 million. The FHLBB also declared a dividend equal to an annual yield of 1.49%. During the first quarter of 2014, the Company purchased $800,000 of additional capital stock. As of March 31, 2014, no impairment has been recognized.

Deposits and Borrowed Funds

On March 31, 2014, deposits totaled $2.8 billion, representing a 1.8% increase from December 31, 2013. Total deposits increased primarily as a result of increases in demand deposits, money market accounts, and savings and NOW deposits. Money market and Savings and NOW deposits increased as the Company continued to offer attractive rates for these types of deposits during the first three months of the year. Borrowed funds totaled $483.3 million compared to $469.6 million at December 31, 2013. Borrowed funds increased mainly as a result of an increase in borrowings from the FHLBB.

Stockholders' Equity

At March 31, 2014, total equity was $182.1 million compared to $176.5 million at December 31, 2013. The Company's equity increased primarily as a result of earnings and a decrease in other comprehensive loss, net of taxes, offset somewhat by dividends paid. Other comprehensive loss, net of taxes, decreased as a result of a decrease in unrealized losses on securities available-for-sale and securities transferred from available-for-sale to held-to-maturity. 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 Company's leverage ratio stood at 6.57% at March 31, 2014, compared to 6.50% at December 31, 2013. The increase in the leverage ratio is due to an increase in stockholders' equity, offset somewhat, by an increase in assets. Book value as of March 31, 2014 was $32.77 per share compared to $31.76 at December 31, 2013.

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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
                                                          March 31, 2014                                    March 31, 2013
                                                                                  ( In thousands)
                                                              Interest          Rate                            Interest          Rate
                                             Average          Income/          Earned/         Average          Income/          Earned/
                                             Balance         Expense(1)        Paid(1)         Balance         Expense(1)        Paid(1)
ASSETS
Interest-earning assets:
Loans (2)
Loans taxable                              $   762,284      $      8,200           4.36 %    $   754,464      $      8,353           4.49 %
Loans tax-exempt                               502,765             6,607           5.33          372,288             5,530           6.02
Securities available-for-sale (5):
Taxable                                        459,934               770           0.67        1,365,332             5,528           1.62
Tax-exempt                                      34,308                75           0.87           54,257               135           1.00
Securities held-to-maturity:
Taxable                                      1,492,839             7,780           2.08          268,199             1,520           2.27
Interest-bearing deposits in other banks       121,093                82           0.27          170,727               119           0.28

Total interest-earning assets                3,373,223            23,514           2.80        2,985,267            21,185           2.85
Non interest-earning assets                    162,308                                           176,421
Allowance for loan losses                      (21,193 )                                         (19,503 )

Total assets                               $ 3,514,338                                       $ 3,142,185

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts                               $   731,971      $        383           0.21 %    $   676,513      $        388           0.23 %
Savings accounts                               340,343               226           0.27          312,165               222           0.29
Money market accounts                          904,037               639           0.29          701,838               532           0.31
Time deposits                                  376,792             1,085           1.17          394,668             1,334           1.37

Total interest-bearing deposits              2,353,143             2,333           0.40        2,085,184             2,476           0.48
Securities sold under agreements to
repurchase                                     226,927               101           0.18          208,306                90           0.18
Other borrowed funds and subordinated
debentures                                     252,295             2,183           3.51          210,605             2,026           3.90

Total interest-bearing liabilities           2,832,365             4,617           0.66 %      2,504,095             4,592           0.74 %

Non interest-bearing liabilities
Demand deposits                                468,623                                           417,886
Other liabilities                               33,609                                            40,045

Total liabilities                            3,334,597                                         2,962,026

Stockholders' equity                           179,741                                           180,159
Total liabilities & stockholders' equity   $ 3,514,338                                       $ 3,142,185

Net interest income on a fully taxable
equivalent basis                                                  18,897                                            16,593
Less taxable equivalent adjustment                                (2,383 )                                          (2,048 )

Net interest income                                         $     16,514                                      $     14,545

Net interest spread (3)                                                            2.14 %                                            2.11 %

Net interest margin (4)                                                            2.27 %                                            2.25 %

(1) On a fully taxable equivalent basis calculated using a federal tax rate of 34%.

(2) Nonaccrual loans are included in average amounts outstanding.

(3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.

(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(5) Average balances of securities available-for-sale calculated utilizing amortized cost.

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The following table presents certain information on a fully-tax equivalent basis regarding changes in the Company's interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to changes in rate and changes in volume.

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