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CNBKA > SEC Filings for CNBKA > Form 10-Q on 7-Aug-2014All Recent SEC Filings

Show all filings for CENTURY BANCORP INC

Form 10-Q for CENTURY BANCORP INC


7-Aug-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 June 30, 2014, the Company had total assets of $3.6 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. This property will be leased from an entity affiliated with Marshall M. Sloane, Chairman of the Board of the Company. This agreement was approved by the Board of Directors in the absence of the Chairman of the Board. The branch 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 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, New Hampshire, 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 quarter ended June 30, 2014 was $5,599,000, or $1.01 per Class A share diluted, compared to net income of $5,026,000, or $0.90 per Class A share diluted, for the quarter ended June 30, 2013. Net income for the six-month period ended June 30, 2014 was $10,531,000, or $1.89 per Class A share diluted, compared to net income of $9,502,000, or $1.71 per Class A share diluted, for the quarter ended June 30, 2013. Earnings per share (EPS) for each class of stock and time period is as follows:

                                           Three months       Three months
                                              ended              ended
                                             June 30,           June 30,
                                               2014               2013
           Basic EPS - Class A common     $         1.22     $         1.10
           Basic EPS - Class B common     $         0.61     $         0.55
           Diluted EPS - Class A common   $         1.01     $         0.90
           Diluted EPS - Class B common   $         0.61     $         0.55

                                            Six months         Six months
                                              ended              ended
                                             June 30,           June 30,
                                               2014               2013
           Basic EPS - Class A common     $         2.30     $         2.08
           Basic EPS - Class B common     $         1.15     $         1.04
           Diluted EPS - Class A common   $         1.89     $         1.71
           Diluted EPS - Class B common   $         1.15     $         1.04

Net interest income totaled $33.3 million for the six-months ended June 30, 2014 compared to $29.1 million for the same period in 2013. The 14.5% increase in net interest income for the period is primarily due to an increase in average earning assets. The net interest margin increased from 2.21% on a fully taxable equivalent basis in 2013 to 2.23% 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 13.3% 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:

[[Image Removed: LOGO]]

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

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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 and decreased during the second quarter of 2014 primarily as a result of a decrease in asset yields.

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 June 30, 2014, the loan loss provision was $450,000 compared to a provision of $750,000 for the same period last year. For the six months ended June 30, 2014, the loan loss provision was $1.1 million compared to a provision of $1.5 million for the same period last year. The decrease in the provision was primarily as a result of changes in the portfolio composition and changes in qualitative economic factors. Nonperforming loans decreased to $2.8 million at June 30, 2014 from $3.3 million on June 30, 2013.

The Company had no sales of investment securities during the six months ended June 30, 2014. The Company capitalized on favorable market conditions for the three and six months ended June 30, 2013 and realized net gains on sales of investments of $781,000 and 1.7 million, respectively.

Included in operating expenses for the first six months ended June 30, 2014 are FDIC assessments of $974,000 compared to $850,000 for the same period in 2013.

For the first six months of 2014, the Company's effective income tax rate was 4.7% compared to 5.8% 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 June 30, 2014, total loans outstanding were $1.3 billion, up by $49.5 million from the total on December 31, 2013. At June 30, 2014, commercial real estate loans accounted for 58.4% and residential real estate loans, including home equity loans, accounted for 32.2% of total loans.

Commercial and industrial loans decreased to $88.7 million at June 30, 2014 from $92.4 million at December 31, 2013, primarily as a result of a decrease in commercial and industrial financing. Construction loans decreased to $25.9 million at June 30, 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 June 30, 2014 was $21.7 million as compared to $20.9 million at December 31, 2013. The increase was due to the increase in the size of the loan portfolio. Also, the level of the allowance for loan losses to total loans decreased slightly from 1.66% at December 31, 2013 to 1.65% at June 30, 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 June 30, 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.

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Higher balance loans: Loans greater than $1.0 million are considered "high balance loans". The balance of these loans is $744.0 million at June 30, 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 $433.9 million, at June 30, 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 $38.0 million at June 30, 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.

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

                                                     Three months ended             Six months ended
                                                          June 30,                      June 30,
                                                    2014            2013           2014           2013
                                                                      (in thousands)
Allowance for loan losses, beginning of period    $  21,259       $ 19,759       $ 20,941       $ 19,197
Loans charged off                                      (113 )         (160 )         (542 )         (533 )
Recoveries on loans previously charged-off              126            151            273            336

Net charge-offs                                          13             (9 )         (269 )         (197 )
Provision charged to expense                            450            750          1,050          1,500

Allowance for loan losses, end of period          $  21,722       $ 20,500       $ 21,722       $ 20,500

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:



                                                 June 30, 2014              December 31, 2013
                                                            (Dollars in thousands)
Nonaccruing loans                               $         2,845            $             2,549
Loans past due 90 days or more and
still accruing                                  $           614            $                -
Nonaccruing loans as a percentage of
total loans                                                0.22 %                         0.20 %
Accruing troubled debt restructures             $         5,883            $             5,969

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Cash and Cash Equivalents

Cash and cash equivalents decreased during the first six months of 2014. This was primarily the result of a decrease in lower yielding interest-bearing deposits in other banks during the quarter.

Short-term Investments

Short-term investments decreased as a result of maturities.

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 $494.3 million at June 30, 2014, an increase of 6.5% 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 $100.1 million for the six months ended June 30, 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 4.6 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 $60.7 million, or 1.7% 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 six months of 2014, net unrealized losses on the securities available-for-sale decreased to $0.9 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.

                                                  June 30, 2014           December 31, 2013
                                                               (In thousands)
U.S. Treasury                                    $         2,001         $             1,998
U.S. Government Sponsored Enterprises                         -                       10,004
Small Business Administration                              6,973                       7,302
U.S Government Agency and Sponsored
Enterprise Mortgage-backed Securities                    419,625                     403,189
Privately Issued Residential
Mortgage-backed Securities                                 2,127                       2,277
Obligations issued by States and Political
Subdivisions                                              60,902                      36,723
Other Debt Securities                                      2,180                       2,176
Equity Securities                                            501                         576

Total Securities Available-for-Sale              $       494,309         $           464,245

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

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 $1.5 billion on June 30, 2014, an increase of 3.3% 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 4.8 years.

                                                   June 30, 2014          December 31, 2013
                                                                (In thousands)
U.S. Government Sponsored Enterprises             $       328,351        $           291,779
U.S. Government Agency and Sponsored
Enterprise Mortgage-backed Securities                   1,208,637                  1,196,105

Total Securities Held-to-Maturity                 $     1,536,988        $         1,487,884

At June 30, 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 June 30, 2014, the FHLBB reported preliminary net income of $31.3 million. The FHLBB also declared a dividend equal to an annual yield of 1.48%. During the first six months of 2014, the Company purchased $2.3 million of additional capital stock and redeemed $700,000. As of June 30, 2014, no impairment has been recognized.

Deposits and Borrowed Funds

On June 30, 2014, deposits totaled $2.9 billion, representing a 5.0% 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 six months of the year. Borrowed funds totaled $447.5 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.

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Stockholders' Equity

At June 30, 2014, total equity was $188.3 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 6.47% at June 30, 2014, compared to 6.50% at December 31, 2013. The decrease in the leverage ratio is due to an increase in assets, offset somewhat, by an increase stockholders' equity. Book value as of June 30, 2014 was $33.88 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
                                                          June 30, 2014                                       June 30, 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                             $   764,653      $       8,237            4.32 %    $   760,440      $       8,343            4.40 %
Loans tax-exempt                              526,116              6,791            5.18          393,213              5,721            5.84
Securities available-for-sale (5):
Taxable                                       457,955                739            0.65        1,424,732              5,495            1.54
Tax-exempt                                     38,600                 84            0.87           47,779                117            0.98
Securities held-to-maturity:
Taxable                                     1,522,059              8,020            2.11          251,518              1,419            2.26
Interest-bearing deposits in other
banks                                         194,418                129            0.27          206,535                145            0.28

Total interest-earning assets               3,503,801             24,000            2.75        3,084,217             21,240            2.76
Non interest-earning assets                   164,071                                             173,309
Allowance for loan losses                     (21,566 )                                           (20,149 )

Total assets                              $ 3,646,306                                         $ 3,237,377

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits:
NOW accounts                              $   820,396      $         450            0.22 %    $   711,429      $         416            0.23 %
Savings accounts                              333,290                210            0.25          320,686                233            0.29
Money market accounts                         935,477                669            0.29          752,880                582            0.31
Time deposits                                 399,554              1,141            1.14          387,381              1,234            1.28

Total interest-bearing deposits             2,488,717              2,470            0.40        2,172,376              2,465            0.46
Securities sold under agreements to
repurchase                                    211,829                 93            0.18          199,255                 89            0.18
Other borrowed funds and subordinated
debentures                                    251,752              2,237            3.56          219,305              2,066            3.78

Total interest-bearing liabilities          2,952,298              4,800            0.65 %      2,590,936              4,620            0.72 %

Non interest-bearing liabilities
Demand deposits                               473,578                                             425,366
Other liabilities                              34,434                                              43,383

Total liabilities                           3,460,310                                           3,059,685

Stockholders' equity                          185,996                                             177,692
Total liabilities & stockholders'
equity                                    $ 3,646,306                                         $ 3,237,377

Net interest income on a fully taxable
equivalent basis                                                  19,200                                              16,620
Less taxable equivalent adjustment                                (2,446 )                                            (2,108 )

Net interest income                                        $      16,754                                       $      14,512
. . .
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