PINX:CNBKB Century Bancorp Inc Class B Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012.

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 0-15752

 

 

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

COMMONWEALTH OF MASSACHUSETTS   04-2498617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

400 MYSTIC AVENUE, MEDFORD, MA   02155
(Address of principal executive offices)   (Zip Code)

(781) 391-4000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. (See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x   No

As of April 30, 2012, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,556,429 Shares   

Class B Common Stock, $1.00 par value

     1,991,880 Shares   

 

 

 


Table of Contents

Century Bancorp, Inc.

 

     

Page
Number

 

Index

      

Part I

  Financial Information   
  Forward Looking Statements      3   

Item 1.

  Financial Statements (unaudited)   
  Consolidated Balance Sheets: March 31, 2012 and December 31, 2011      4   
  Consolidated Statements of Income: Three months ended March 31, 2012 and 2011      5   
  Consolidated Statements of Comprehensive Income Three months ended March 31, 2012 and 2011      6   
  Consolidated Statements of Changes in Stockholders’ Equity: Three months ended March 31, 2012 and 2011      7   
  Consolidated Statements of Cash Flows: Three months ended March 31, 2012 and 2011      8   
  Notes to Consolidated Financial Statements      9-26   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      26-34   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      34   

Item 4.

  Controls and Procedures      34-35   

Part II.

  Other Information   

Item 1.

  Legal Proceedings      35   

Item 1A.

  Risk Factors      35   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      35   

Item 3.

  Defaults Upon Senior Securities      35   

Item 5.

  Other Information      35   

Item 6.

  Exhibits      36   

Signatures

     37   

Exhibits

  Ex-31.1   
  Ex-31.2   
  Ex-32.1   
  Ex-32.2   
  Ex-101 Instance Document   
  Ex-101 Schema Document   
  Ex-101 Calculation Linkbase Document   
  Ex-101 Labels Linkbase Document   
  Ex-101 Presentation Linkbase Document   
  Ex-101 Definition Linkbase Document   

 

Page 2 of 37


Table of Contents

Forward Looking Statements

Except for the historical information contained herein, this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, without limitation, (i) the fact that the Company’s success is dependent to a significant extent upon general economic conditions in New England, (ii) the fact that the Company’s earnings depend to a great extent upon the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings) generated by the Bank and thus the Bank’s results of operations may be adversely affected by increases or decreases in interest rates, (iii) the fact that the banking business is highly competitive and the profitability of the Company depends upon the Bank’s ability to attract loans and deposits within its market area, where the Bank competes with a variety of traditional banking and other institutions such as credit unions and finance companies, and (iv) the fact that a significant portion of the Company’s loan portfolio is comprised of commercial loans, exposing the Company to the risks inherent in loans based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans. Accordingly, the Company’s profitability may be negatively impacted by errors in risk analyses, and by loan defaults, and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions. These factors, as well as general economic and market conditions, may materially and adversely affect the market price of shares of the Company’s common stock. Because of these and other factors, past financial performance should not be considered an indicator of future performance. The forward-looking statements contained herein represent the Company’s judgment as of the date of this Form 10-Q, and the Company cautions readers not to place undue reliance on such statements.

 

Page 3 of 37


Table of Contents

PART I - Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     March 31,
2012
    December 31,
2011
 
Assets     

Cash and due from banks

   $ 43,266      $ 50,187   

Federal funds sold and interest-bearing deposits in other banks

     87,996        157,579   
  

 

 

   

 

 

 

Total cash and cash equivalents

     131,262        207,766   
  

 

 

   

 

 

 

Short-term investments

     13,303        18,351   

Securities available-for-sale, amortized cost $1,297,282 and $1,244,972, respectively

     1,313,839        1,258,676   

Securities held-to-maturity, fair value $321,917 and $184,822, respectively

     316,223        179,368   

Federal Home Loan Bank of Boston stock, at cost

     15,146        15,531   

Loans, net:

    

Commercial and industrial

     81,882        82,404   

Construction and land development

     36,937        56,819   

Commercial real estate

     502,413        487,495   

Residential real estate

     249,981        239,307   

Home equity

     109,817        110,786   

Consumer and other

     6,946        7,681   
  

 

 

   

 

 

 

Total loans, net

     987,976        984,492   

Less: allowance for loan losses

     17,434        16,574   
  

 

 

   

 

 

 

Net loans

     970,542        967,918   
  

 

 

   

 

 

 

Bank premises and equipment

     21,848        21,757   

Accrued interest receivable

     6,094        6,022   

Goodwill

     2,714        2,714   

Core deposit intangible

     23        120   

Other assets

     64,978        65,002   
  

 

 

   

 

 

 

Total assets

   $ 2,855,972      $ 2,743,225   
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 360,308      $ 365,854   

Savings and NOW deposits

     746,741        708,988   

Money market accounts

     645,143        616,241   

Time deposits

     439,474        433,501   
  

 

 

   

 

 

 

Total deposits

     2,191,666        2,124,584   
  

 

 

   

 

 

 

Securities sold under agreements to repurchase

     142,230        143,320   

Other borrowed funds

     241,143        244,143   

Subordinated debentures

     36,083        36,083   

Due to broker

     44,423        —     

Other liabilities

     34,490        34,446   
  

 

 

   

 

 

 

Total liabilities

     2,690,035        2,582,576   
  

 

 

   

 

 

 
Stockholders’ Equity     

Preferred stock - $1.00 par value; 100,000 shares authorized; no shares issued and outstanding

     —          —     

Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,556,429 shares and 3,548,317 shares, respectively

     3,556        3,548   

Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 1,991,880 and 1,994,380 shares, respectively

     1,992        1,994   

Additional paid-in capital

     11,708        11,587   

Retained earnings

     149,302        146,039   
  

 

 

   

 

 

 
     166,558        163,168   

Unrealized gains on securities available-for-sale, net of taxes

     10,055        8,319   

Pension liability, net of taxes

     (10,676     (10,838
  

 

 

   

 

 

 

Total accumulated other comprehensive income(loss), net of taxes

     (621     (2,519
  

 

 

   

 

 

 

Total stockholders’ equity

     165,937        160,649   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,855,972      $ 2,743,225   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 37


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Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended March 31,  
     2012      2011  

Interest income

     

Loans

   $ 12,048       $ 12,105   

Securities held-to-maturity

     1,463         1,773   

Securities available-for-sale

     5,715         5,353   

Federal funds sold and interest-bearing deposits in other banks

     139         347   
  

 

 

    

 

 

 

Total interest income

     19,365         19,578   
  

 

 

    

 

 

 

Interest expense

     

Savings and NOW deposits

     534         712   

Money market accounts

     605         705   

Time deposits

     1,681         2,279   

Securities sold under agreements to repurchase

     92         110   

Other borrowed funds and subordinated debentures

     2,051         1,845   
  

 

 

    

 

 

 

Total interest expense

     4,963         5,651   
  

 

 

    

 

 

 

Net interest income

     14,402         13,927   

Provision for loan losses

     1,100         1,200   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     13,302         12,727   

Other operating income

     

Service charges on deposit accounts

     1,988         1,887   

Lockbox fees

     699         737   

Net gain on sales of investments

     148         164   

Other income

     784         747   
  

 

 

    

 

 

 

Total other operating income

     3,619         3,535   
  

 

 

    

 

 

 

Operating expenses

     

Salaries and employee benefits

     8,141         7,341   

Occupancy

     1,122         1,251   

Equipment

     583         558   

FDIC assessments

     407         735   

Other

     2,547         2,325   
  

 

 

    

 

 

 

Total operating expenses

     12,800         12,210   
  

 

 

    

 

 

 

Income before income taxes

     4,121         4,052   

Provision for income taxes

     313         327   
  

 

 

    

 

 

 

Net income

   $ 3,808       $ 3,725   
  

 

 

    

 

 

 

Share data:

     

Weighted average number of shares outstanding, basic

     5,544,748         5,540,583   

Weighted average number of shares outstanding, diluted

     5,545,711         5,541,927   

Net income per share, basic

   $ 0.69       $ 0.67   

Net income per share, diluted

   $ 0.69       $ 0.67   

Cash dividends paid:

     

Class A common stock

   $ 0.12       $ 0.12   

Class B common stock

   $ 0.06       $ 0.06   

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 37


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Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands, except share data)

 

     Three months ended March 31,  
     2012     2011  

Net income

   $ 3,808      $ 3,725   

Other comprehensive income, net of tax:

    

Unrealized gains(losses) on securities:

    

Unrealized holding gains(losses) arising during period

     1,884        (523

Less: reclassification adjustment for gains included in net income

     (148     (164
  

 

 

   

 

 

 
     1,736        (687

Defined benefit pension plans:

    

Amortization of prior service cost and loss included in net periodic benefit cost

     162        95   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     1,898        (592
  

 

 

   

 

 

 

Comprehensive income

   $ 5,706      $ 3,133   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 37


Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Three Months Ended March 31, 2012 and 2011

 

     Class A
Common
Stock
     Class B
Common
Stock
    Additional
Paid-In
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
 
     (In thousands)  

Balance at December 31, 2010

   $ 3,529       $ 2,011      $ 11,537       $ 131,526      $ (3,578   $ 145,025   

Net income

     —           —          —           3,725        —          3,725   

Unrealized holding losses arising during period, net of $482 in taxes and $164 in realized net gains

     —           —          —           —          (687     (687

Pension liability adjustment, net of $63 in taxes

     —           —          —           —          95        95   

Comprehensive income

              

Conversion of class B common stock to class A common stock, 14,500 shares

     14         (14     —           —          —          —     

Stock options exercised, 350 shares

     1         —          5         —          —          6   

Cash dividends paid, Class A common stock, $.12 per share

     —           —          —           (424     —          (424

Cash dividends paid, Class B common stock, $.06 per share

     —           —          —           (120     —          (120
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

   $ 3,544       $ 1,997      $ 11,542       $ 134,707      $ (4,170   $ 147,620   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 3,548       $ 1,994      $ 11,587       $ 146,039      $ (2,519   $ 160,649   

Net income

     —           —          —           3,808        —          3,808   

Unrealized holding gains arising during period, net of $1,117 in taxes and $148 in realized net gains

     —           —          —           —          1,736        1,736   

Pension liability adjustment, net of $189 in taxes

     —           —          —           —          162        162   

Comprehensive income

              

Conversion of class B common stock to class A common stock, 2,500 shares

     2         (2     —           —          —          —     

Stock options exercised, 5,612 shares

     6         —          121         —          —          127   

Cash dividends paid, Class A common stock, $.12 per share

     —           —          —           (425     —          (425

Cash dividends paid, Class B common stock, $.06 per share

     —           —          —           (120     —          (120
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 3,556       $ 1,992      $ 11,708       $ 149,302      $ (621   $ 165,937   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Three months ended March 31,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 3,808      $ 3,725   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net gain on sales of investments

     (148     (164

Provision for loan losses

     1,100        1,200   

Deferred income taxes

     (444     (421

Net depreciation and amortization

     1,505        1,411   

Decrease (increase) in accrued interest receivable

     (72     33   

Increase in other assets

     (785     596   

Increase (decrease) in other liabilities

     325        748   
  

 

 

   

 

 

 

Net cash provided by operating activities

     5,289        7,128   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     11,101        37,098   

Purchase of short-term investments

     (6,053     (34,131

Proceeds from maturities of securities available-for-sale

     144,891        99,533   

Proceeds from sales of securities available-for-sale

     72,198        12,642   

Purchase of securities available-for-sale

     (249,934     (175,589

Proceeds from maturities of securities held-to-maturity

     24,776        25,918   

Purchase of securities held-to-maturity

     (137,000     —     

Net (increase) decrease in loans

     (3,712     (38,981

Capital expenditures

     (634     (319
  

 

 

   

 

 

 

Net cash used in investing activities

     (144,367     (73,829
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in time deposits

     5,973        82,436   

Net increase in demand, savings, money market and NOW deposits

     61,109        47,919   

Net proceeds from exercise of stock options

     127        6   

Cash dividends

     (545     (544

Net increase (decrease) in securities sold under agreements to repurchase

     (1,090     11,040   

Net decrease in other borrowed funds

     (3,000     (23,975
  

 

 

   

 

 

 

Net cash provided by financing activities

     62,574        116,882   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (76,504     50,181   

Cash and cash equivalents at beginning of period

     207,766        188,552   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 131,262      $ 238,733   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 5,016      $ 5,533   

Income taxes

     190        434   

Change in unrealized gains on securities available-for-sale, net of taxes

     1,736        (687

Pension liability adjustment, net of taxes

     162        95   

Due to broker

     44,423        1,250   

See accompanying notes to unaudited consolidated interim financial statements.

 

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Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Three Months Ended March 31, 2012 and 2011

Note 1. 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, 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. 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. The Company’s quarterly report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission.

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 independent appraisals and review of other factors, including historical charge-off rates with additional allocations based on 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.

 

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Note 2. Recent Market Developments

The financial services industry continues to face unprecedented challenges in the aftermath of the recent national and global economic crisis. Since June 2009, the US economy has been recovering from the most severe recession and financial crisis since the Great Depression. There have been some improvements in private sector employment, industrial production and US exports; nevertheless, the pace of economic recovery has been extremely slow. The housing markets continue to be depressed. Financial markets have improved since the depths of the crisis, but are still unsettled and volatile. Investors have pulled back from risky assets. Lower equity prices and wider spreads on corporate bonds and other debt instruments and greater pressures on financial institutions have resulted. At the same time, heightened demand for safe assets has put downward pressure on yields. There is continued concern about the US economic outlook and the potential effects of the continued crisis in the European financial markets.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection 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 broadens 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 extends unlimited deposit insurance on non-interest bearing transaction accounts through December 31, 2012.

On September 29, 2009, the FDIC adopted a Notice of Proposed Rulemaking (NPR) that would require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC Board voted to adopt a uniform three-basis point increase in assessment rates effective on January 1, 2011, and extend the restoration period from seven to eight years. This rule was finalized on November 2, 2009. As a result, the Company is carrying a prepaid asset of $4.3 million as of December 31, 2011. The Company’s quarterly risk-based deposit insurance assessments will be paid from this amount until the amount is exhausted or until December 30, 2014, when any amount remaining would be returned to the Company.

On September 30, 2011, the Massachusetts Department of Revenue issued a Draft Directive prohibiting a corporation from pledging more than 50 percent of security corporation stock it owns to secure a borrowing, effective for tax years beginning on or after October, 2012. Century Bank currently utilizes the stock of two of its security corporations to secure Federal Home Loan Bank of Boston (“FHLBB”) advances. Should this draft directive have become effective, Century Bank would have had fewer assets available to secure FHLBB advances, or would have had a higher tax rate if it chose to utilize security corporations to a lesser extent. On April 6, 2012, the Massachusetts Department of Revenue issued an updated Draft Directive allowing a corporation to pledge up to 100% of security corporation stock it owns to secure a borrowing. This revised Draft Directive would allow Century Bank to continue to utilize existing assets to secure FHLBB advances without pledging limitations.

 

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Note 3. Stock Option Accounting

Stock option activity under the Company’s stock option plan for the three months ended March 31, 2012 is as follows:

 

     Amount     Weighted
Average
Exercise Price
 

Shares under option:

    

Outstanding at beginning of year

     36,062      $ 28.90   

Exercised

     (5,612     22.61   

Forfeited

     (450     22.50   
  

 

 

   

 

 

 

Outstanding at end of period

     30,000      $ 30.17   
  

 

 

   

 

 

 

Exercisable at end of period

     30,000      $ 30.17   
  

 

 

   

 

 

 

Available to be granted at end of period

     223,534     
  

 

 

   

On March 31, 2012, the outstanding options to purchase 30,000 shares of Class A common stock have exercise prices between $26.68 and $31.83, with a weighted average exercise price of $30.17 and a weighted average remaining contractual life of 2.0 years. The intrinsic value of options exercisable at March 31, 2012 had an aggregate value of $5,952. The intrinsic value of options exercised at March 31, 2012 had an aggregate value of $26,311.

The Company uses the fair value method to account for stock options. All of the Company’s stock options are vested and there were no options granted during the first quarter of 2012.

Note 4. Securities Available-for-Sale

 

    March 31, 2012     December 31, 2011  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair
Value
 
    ( In thousands)  

U.S. Treasury

  $ 1,999      $ 9      $ —        $ 2,008      $ 1,999      $ 13      $ —        $ 2,012   

U.S. Government Sponsored Enterprises

    116,957        165        21        117,101        174,657        311        11        174,957   

Small Business Administration

    8,430        94        —          8,524        8,714        87        —          8,801   

U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities

    1,121,934        17,909        781        1,139,062        1, 020,752        16,262        1,176        1,035,838   

Privately Issued Residential Mortgage Backed Securities

    3,392        —          167        3,225        3,509        —          311        3,198   

Obligations Issued by States and Political Subdivisions

    30,802        76        958        29,920        21,515        84        957        20,642   

Other Debt Securities

    13,258        165        44        13,379        13,293        —          683        12,610   

Equity Securities

    510        110        —          620        533        85        —          618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,297,282      $ 18,528      $ 1,971      $ 1,313,839      $ 1,244,972      $ 16,842      $ 3,138      $ 1,258,676   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in U.S. Government Sponsored Enterprise Securities and U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities are securities at fair value pledged to secure public deposits and repurchase agreements amounting to $476,920,000 and $488,690,000 at March 31, 2012 and December 31, 2011, respectively. Also included in securities available-for-sale are securities pledged for borrowing at the Federal Home Loan Bank of Boston amounting to $265,267,000 and $246,036,000 at March 31, 2012 and December 31, 2011, respectively. The Company realized gross gains of $148,000 from the proceeds of $72,198,000 from the sales of available-for-sale securities for the three months ended March 31, 2012. The Company realized gross gains of $164,000 from the proceeds of $12,642,000 from the sales of available-for-sale securities for the three months ended March 31, 2011.

 

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

The following table shows the maturity distribution of the Company’s securities available-for-sale at March 31, 2012.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 83,590       $ 84,599   

After one but within five years

     963,384         977,449   

After five but within ten years

     233,396         235,375   

More than 10 years

     14,902         14,339   

Non-maturing

     2,010         2,077   
  

 

 

    

 

 

 

Total

   $ 1,297,282       $ 1,313,839   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at March 31, 2012 was 3.9 years. Included in the weighted average remaining life calculation at March 31, 2012 was $106,957,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life. 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.

As of March 31, 2012 and December 31, 2011, 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 likely 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 state and municipal securities and the nonagency mortgage-backed securities was primarily caused by changes in credit spreads and liquidity issues in the marketplace.

The unrealized loss on U.S. Government Sponsored Enterprises and U.S. Government Sponsored Enterprises Mortgage Backed Securities related primarily to interest rates and not credit quality and because the Company 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. The change in the unrealized losses on the state and municipal securities and the nonagency mortgage-backed securities were primarily caused by changes in credit spreads and liquidity issues in the marketplace.

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.

 

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The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at March 31, 2012. 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 65 and 6 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 419 holdings at March 31, 2012.

 

     March 31, 2012  
     Less than 12 months      12 months or longer      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

Temporarily Impaired Investments

                 

U.S. Government Sponsored Enterprises

   $ 19,976       $ 21       $ —         $ —         $ 19,976       $ 21   

U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities

     368,548         781         —           —           368,548         781   

Privately Issued Residential Mortgage Backed Securities

     —           —           3,225         167         3,225         167   

Obligations Issued by States and Political Subdivisions

     —           —           3,725         958         3,725         958   

Other Debt Securities

     5,538         1         1,457         43         6,995         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     394,062       $ 803       $ 8,407       $ 1,168       $ 402,469       $ 1,971   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at December 31, 2011. 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 60 and 6 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 393 holdings at December 31, 2011.

 

     December 31, 2011  
     Less than 12 months      12 months or longer      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

Temporarily Impaired Investments

                 

U.S. Government Sponsored Enterprises

   $ 14,989       $ 11       $ —         $ —         $ 14,989       $ 11   

U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities

     331,469         1,176         —           —           331,469         1,176   

Privately Issued Residential Mortgage Backed Securities

     —           —           3,198         311         3,198         311   

Obligations Issued by States and Political Subdivisions

     —           —           3,725         957         3,725         957   

Other Debt Securities

     10,542         652         1,468         31         12,010         683   

Equity Securities

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 357,000       $ 1,839       $ 8,391       $ 1,299       $ 365,391       $ 3,138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 5. Investment Securities Held-to-Maturity

 

    March 31, 2012     December 31, 2011  
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair
Value
    Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Estimated
Fair
Value
 
    (In thousands)  

U.S. Government Sponsored Enterprises

  $ 24,665      $ 9      $ 44      $ 24,620      $ 26,979      $ 36      $ 2      $ 27,013   

U.S. Government Agency and Sponsored Enterprises Mortgage Backed Securities

    291,568        6,115        386        297,297        152,389        5,435        15        157,809   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 316,223      $ 6,124      $ 430      $ 321,917      $ 179,368      $ 5,471      $ 17      $ 184,822   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in U.S. Government and Agency Securities are securities pledged to secure public deposits and repurchase agreements at fair value amounting to $24,377,000 and $8,885,000 at March 31, 2012 and December 31, 2011, respectively. Also included are securities pledged for borrowing at the Federal Home Loan Bank of Boston at fair value amounting to $114,692,000 and $49,345,000 at March 31, 2012 and December 31, 2011, respectively.

 

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At March 31, 2012 and December 31, 2011, all mortgage-backed securities are obligations of U.S. Government Agencies and Government Sponsored Enterprises. Government Sponsored Enterprises primarily refer to debt securities of Fannie Mae and Freddie Mac.

The following table shows the maturity distribution of the Company’s securities held-to-maturity at March 31, 2012.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 6,311       $ 6,440   

After one but within five years

     239,130         244,509   

After five but within ten years

     70,499         70,682   

More than ten years

     283         286   
  

 

 

    

 

 

 

Total

   $ 316,223       $ 321,917   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at March 31, 2012 was 4.3 years. Included in the weighted average remaining life calculation at March 31, 2012 were $19,655,000 of U.S. Government Sponsored Enterprises obligations that are callable at the discretion of the issuer. The actual maturities, which were used in the table above, of mortgage-backed securities, will differ from the contractual maturities, due to the ability of the issuers to prepay underlying obligations.

As of March 31, 2012 and December 31, 2011, 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 likely 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 Agency and 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 likely 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 March 31, 2012 and December 31, 2011.

In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary.

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at March 31, 2012. 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 8 and 1 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 107 holdings at March 31, 2012.

 

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     March 31, 2012  
     Less Than 12 Months      12 Months or Longer      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (Dollars in thousands)  

Temporarily Impaired Investments

                 

U.S. Government Sponsored Enterprises

   $ 12,698       $ 44       $ —         $ —         $ 12,698       $ 44   

U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities

     34,068         369         5,368         17         39,436         386   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 46,766       $ 413       $ 5,368       $ 17       $ 52,314       $ 430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the temporarily impaired securities of the Company’s held-to-maturity portfolio at December 31, 2011. 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 2 and 0 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 92 holdings at December 31, 2011.

 

     December 31, 2011  
     Less Than 12 Months      12 Months or Longer      Total  
      Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 
     (In thousands)  

Temporarily Impaired Investments

                 

U.S. Government Sponsored Enterprises

   $ 4,994       $ 2       $ —         $ —         $ 4,994       $ 2   

U.S. Government Agency and Sponsored Enterprise Mortgage-Backed Securities

     5,367         15         —           —           5,367         15   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 10,361       $ 17       $ —         $ —         $ 10,361       $ 17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 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, the 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 periods indicated.

 

     Three months ended
March  31,
 
     2012     2011  

Allowance for loan losses, beginning of period

   $ 16,574      $ 14,053   

Loans charged off

     (424     (589

Recoveries on loans previously charged-off

     184        294   
  

 

 

   

 

 

 

Net charge-offs

     (240     (295

Provision charged to expense

     1,100        1,200   
  

 

 

   

 

 

 

Allowance for loan losses, end of period

     17,434      $ 14,958   
  

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for the three months ending March 31, 2012 follows:

 

Page 15 of 37


Table of Contents
     Construction
and land
development
     Commercial
and
industrial
    Commercial
real

estate
     Residential
real
estate
    Consumer
and other
    Home
Equity
     Unallocated      Total  
     (Dollars in thousands)  

Allowance for loan losses:

                    

Balance at December 31, 2011

   $ 2,893       $ 3,139      $ 6,566       $ 1,886      $ 356      $ 704       $ 1,030       $ 16,574   

Charge-offs

     —           (111     —           (159     (154     —           —           (424

Recoveries

     —           42        1         5        136        —           —           184   

Provision

     27         150        774         52        (21     37         81         1,100   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at March 31, 2012

   $ 2,920       $ 3,220      $ 7,341       $ 1,784      $ 317      $ 741       $ 1,111       $ 17,434   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Amount of allowance for loan losses for loans deemed to be impaired

   $ 1,000       $ 493      $ 525       $ 93      $ —        $ —         $ —         $ 2,111   

Amount of allowance for loan losses for loans not deemed to be impaired

   $ 1,920       $ 2,727      $ 6,816       $ 1,691      $ 317      $ 741       $ 1,111       $ 15,323   

Loans:

                    

Ending balance

   $ 36,937       $ 81,882      $ 502,413       $ 249,981      $ 6,946      $ 109,817       $ —         $ 987,976   

Loans deemed to be impaired

   $ 1,500       $ 1,721      $ 4,541       $ 515      $ —        $ —         $ —         $ 8,277   

Loans not deemed to be impaired

   $ 35,437       $ 80,161      $ 497,872       $ 249,466      $ 6,946      $ 109,817       $ —         $ 979,699   

Further information pertaining to the allowance for loan losses at March 31, 2011 follows:

 

     Construction
and Land
Development
     Commercial
and
Industrial
    Commercial
Real

Estate
     Residential
Real
Estate
    Consumer     Home
Equity
    Unallocated     Total  
     (Dollars in thousands)  

Allowance for loan losses:

                  

Balance at December 31, 2010

   $ 1,752       $ 3,163      $ 5,671       $ 1,718      $ 298      $ 725      $ 726      $ 14,053   

Charge-offs

     —           (156     —           (279     (154     —          —          (589

Recoveries

     —           146        —           14        134        —          —          294   

Provision

     226         479        350         348        8        (18     (193     1,200   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2011

   $ 1,978       $ 3,632      $ 6,021       $ 1,801      $ 286      $ 707      $ 533      $ 14,958   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans deemed to be impaired

   $ —         $ 709      $ 351       $ 1      $ —        $ —        $ —          1,061   

Amount of allowance for loan losses for loans not deemed to be impaired

   $ 1,978       $ 2,923      $ 5,670       $ 1,800      $ 286      $ 707      $ 533      $ 13,897   

Loans:

                  

Ending balance

   $ 54,027       $ 90,696      $ 448,772       $ 231,876      $ 6,340      $ 113,151      $ —        $ 944,862   

Loans deemed to be impaired

   $ 4,000       $ 1,430      $ 6,069       $ 34      $ —        $ —        $ —        $ 11,533   

Loans not deemed to be impaired

   $ 50,027       $ 89,266      $ 442,703       $ 231,842      $ 6,340      $ 113,151      $ —        $ 933,329   

 

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Table of Contents

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 March 31, 2012 and December 31, 2011.

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 March 31, 2012 and December 31, 2011.

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 March 31, 2012 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.

The following table presents the Company’s loans by risk rating at March 31, 2012.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real

estate
 
     (Dollars in thousands)  

Grade:

        

1-3 (Pass)

   $ 28,047       $ 79,652       $ 493,543   

4 (Monitor)

     7,390         509         4,329   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     1,500         1,721         4,541   
  

 

 

    

 

 

    

 

 

 

Total

   $ 36,937       $ 81,882       $ 502,413   
  

 

 

    

 

 

    

 

 

 

The following table presents the Company’s loans by risk rating at December 31, 2011.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real

estate
 
     (Dollars in thousands)  

Grade:

        

1-3(Pass)

   $ 48,298       $ 80,140       $ 478,186   

4 (Monitor)

     7,021         739         4,748   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     1,500         1,525         4,561   
  

 

 

    

 

 

    

 

 

 

Total

   $ 56,819       $ 82,404       $ 487,495   
  

 

 

    

 

 

    

 

 

 

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.

 

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Further information pertaining to the allowance for loan losses at March 31, 2012 follows:

 

     Accruing
30-89  Days
Past Due
     Non Accrual      Accrual
Greater
Than
90 Days
     Total
Past Due
     Current Loans      Total  
     (Dollars in thousands)  

Construction and land development

   $ —         $ 1,500       $ —         $ 1,500       $ 35,437       $ 36,937   

Commercial and industrial

     600         1,026         447         2,073         79,809         81,882   

Commercial real estate

     2,128         719         296         3,143         499,270         502,413   

Residential real estate

     2,612         1,219         —           3,831         246,150         249,981   

Consumer and overdrafts

     243         10         —           253         6,693         6,946   

Home equity

     1,140         99         —           1, 239         108,578         109,817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,723       $ 4,573       $ 743       $ 12,039       $ 975,937       $ 987,976   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses at December 31, 2011 follows:

 

     Accruing
30-89 Days
Past Due
     Non Accrual      Accrual
Greater
Than
90 Days
     Total
Past Due
     Current Loans      Total  
     (Dollars in thousands)  

Construction and land development

   $ —         $ 1,500       $ —         $ 1,500       $ 55,319       $ 56,819   

Commercial and industrial

     1,417         763         18         2,198         80,206         82,404   

Commercial real estate

     2,528         736         —           3,264         484,231         487,495   

Residential real estate

     2,635         2,324         —           4,959         234,348         239,307   

Consumer and overdrafts

     519         9         —           528         7,153         7,681   

Home equity

     171         495         —           666         110,120         110,786   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,270       $ 5,827       $ 18       $ 13,115       $ 971,377       $ 984,492   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. The Company’s policy for recognizing interest income on impaired loans is contained within Note 1 of the consolidated financial statements.

 

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The following is information pertaining to impaired loans for March 31, 2012:

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying  Value
     Interest
Income
Recognized
 
     (Dollars in thousands)  

With no required reserve recorded:

              

Construction and land development

   $ —         $ —         $ —         $ 1,125       $ —     

Commercial and industrial

     214         259         —           357         —     

Commercial real estate

     179         202         —           181         —     

Residential real estate

     32         32         —           145         —     

Consumer

     —           —           —           —           —     

Home equity

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 425       $ 493       $ —         $ 1,808       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ 1,500       $ 3,292       $ 1,000       $ 375       $ —     

Commercial and industrial

     1,507         1,730         493         1,285         14   

Commercial real estate

     4,362         4,394         525         4,002         34   

Residential real estate

     483         482         93         789         1   

Consumer

     —           —           —           —           —     

Home equity

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,852       $ 9,898       $ 2,111       $ 6,451       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Construction and land development

   $ 1,500       $ 3,292       $ 1,000       $ 1,500       $ —     

Commercial and industrial

     1,721         1,989         493         1,642         14   

Commercial real estate

     4,541         4,596         525         4,183         34   

Residential real estate

     515         514         93         934         1   

Consumer

     —           —           —           —           —     

Home equity

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,277       $ 10,391       $ 2,111       $ 8,259       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is information pertaining to impaired loans at March 31, 2011:

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value
     Interest
Income
Recognized
 
     (Dollars in thousands)  

With no required reserve recorded:

              

Construction and land development

   $ 4,000       $ 8,504       $ —         $ 3,087       $ —     

Commercial and industrial

     343         531         —           731         86   

Commercial real estate

     192         192         —           1,727         122   

Residential real estate

     —           —           —           —           —     

Consumer

     —           —           —           —           —     

Home equity

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,535       $ 9,227       $ —         $ 5,545       $ 208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

              

Construction and land development

   $ —         $ —         $ —         $ 1,531       $ —     

Commercial and industrial

     1,087         1,098         709         810         44   

Commercial real estate

     5,877         5,905         351         1,491         42   

Residential real estate

     34         34         1         —           —     

Consumer

     —           —           —           —           —     

Home equity

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,998       $ 7,037       $ 1,061       $ 3,832       $ 86   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

              

Construction and land development

   $ 4,000       $ 8,504       $ —         $ 4,618       $ —     

Commercial and industrial

     1,430         1,629         709         1,541         130   

Commercial real estate

     6,069         6,097         351         3,218         164   

Residential real estate

     34         34         1         —           —     

Consumer

     —           —           —           —           —     

Home equity

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,533       $ 16,264       $ 1,061       $ 9,377       $ 294   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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There were no troubled debt restructurings occurring during the three month period ended March 31, 2012.

Troubled Debt Restructurings occurring during the three month period ended March 31, 2011:

 

     Number of
Contracts
     Pre-
modification
outstanding
recorded
investment
     Post-
modification
outstanding
recorded
investment
 
     (Dollars in
thousands)
               

Commercial and industrial

     1       $ 34       $ 33   

Commercial real estate

     1         440         436   
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 474       $ 469   
  

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings were identified as a modification where a concession was granted to a customer who is having financial difficulties. This concession may be below market rate, longer amortization/term, and 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. The loans were modified, for both the commercial and industrial and commercial real estate loans, by reducing interest rates as well as extending terms on the loans. The financial impact of the modifications for performing commercial and industrial loans were $1,349 reduction in principal and $275 reduction in interest payments for the quarter ended March 31, 2011. The financial impact of the modifications for performing commercial real estate were $530 reduction in principal and $2,394 reduction in interest payments for the quarter ended March 31, 2011.

Note 7. Employee Benefits

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 and its subsidiaries who have at least one year of service may participate in the Supplemental Plan. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Life insurance policies, which are owned by the Company, are purchased covering the lives of each participant.

 

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Components of Net Periodic Benefit Cost for the Three Months Ended March 31,

 

 

 

     Pension Benefits     Supplemental Insurance/
Retirement Plan
 
     2012     2011     2012      2011  
     (In thousands)  

Service cost

   $ 274      $ 211      $ 356       $ 170   

Interest

     324        355        231         233   

Expected return on plan assets

     (410     (399     —           —     

Recognized prior service cost (benefit)

     (26     (26     29         28   

Recognized net actuarial losses

     184        123        84         32   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 346      $ 264      $ 700       $ 463   
  

 

 

   

 

 

   

 

 

    

 

 

 

Contributions

The Company previously disclosed in its financial statements for the year ended December 31, 2011 that it expected to contribute $1,800,000 to the Pension Plan in 2012. As of March 31, 2012, $450,000 of the contribution had been made. The Company expects to contribute an additional $1,350,000 by the end of the year.

Note 8. Fair Value Measurements

The Company follows FASB ASC 820-10, Fair Value Measurements and Disclosures, (formerly SFAS 157, “Fair Value Measurements,”) 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.

Level III – Instruments that 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.

 

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The results of the fair value hierarchy as of March 31, 2012, are as follows:

Financial Instruments Measured at Fair Value on a Recurring Basis:

Securities AFS Fair Value Measurements Using

 

     Carrying
Value
     Quoted Prices
In Active
Markets  for
Identical
Assets
(Level 1)
     Significant
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 
     (In thousands)  

U.S. Treasury

   $ 2,008       $ —         $ 2,008       $ —     

U.S. Government Sponsored Enterprises

     117,102         —           117,102         —     

SBA Backed Securities

     8,524         —           8,524         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     1,139,062         —           1,139,062         —     

Privately Issued Residential Mortgage Backed Securities

     3,225         —           3,225         —     

Obligations Issued by States and Political Subdivisions

     29,920         —           2,138         27,782   

Other Debt Securities

     13,378         —           13,378         —     

Equity Securities

     620         226         —           394   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,313,839       $ 226       $ 1,285,437       $ 28,176   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Instruments Measured at Fair Value on a Non-recurring Basis:

 

Impaired Loans

     3,848         —           —           3,848   

Other Real Estate Owned

     1,183         —           —           1,183   

Impaired loan balances 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. Specific provisions relate to impaired loans recognized for the three-month period ended March 31, 2012 amounted to $1.4 million. The Company uses appraisals, discounted as appropriate, based on management’s observations of the local real estate market for loans in this category.

There were no transfers between level 1 and 2 for the three months ended March 31, 2012. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the three month period ended March 31, 2012.

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 3 inputs to determine fair value (dollars in thousands).

 

Asset

   Fair Value     

Valuation Technique

  

Unobservable Input

  

Unobservable Input

Value or Range

Securities AFS

   $ 28,176       Discounted cash flow    Discount rate    0% -1% (3)

Impaired Loans

     3,848       Appraisal of collateral (1)    Appraisal adjustments (2)    0% - 25% discount

Other real estate owned

     1,183       Appraisal of collateral (1)    Appraisal adjustments (2)    0%

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3) Weighted averages

 

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The changes in Level 3 securities for the three-month period ended March 31, 2012 are shown in the table below:

 

     Auction  Rate
Securities
     Obligations
Issued by States
& Political
Subdivisions
    Equity
Securities
    Total  
     (In thousands)  

Balance at December 31, 2011

   $  3,725       $  14,772      $  417      $  18,914   

Purchases

     —           12,730        —          12,730   

Maturities and calls

     —           (3,434     (23     (3,457

Amortization

     —           (11     —          (11

Changes in fair value

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 3,725       $ 24,057      $ 394      $ 28,176   
  

 

 

    

 

 

   

 

 

   

 

 

 

The amortized cost of Level 3 securities was $29,135,000 at March 31, 2012 with an unrealized loss of $959,000. 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.

The changes in Level 3 securities for the three-month period ended March 31, 2011, are shown in the table below:

 

     Auction Rate
Securities
     Obligations
Issued by States
& Political
Subdivisions
    Equity
Securities
     Total  
     (In thousands)  

Balance at December 31, 2010

   $ 4,393       $ 15,988      $ 279       $ 20,660   

Purchases

     —           4,296        —           4,296   

Maturities and calls

     —           (3,300     —           (3,300

Amortization

     —           —          —           —     

Changes in fair value

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at March 31, 2011

   $ 4,393       $ 16,984      $ 279       $ 21,656   
  

 

 

    

 

 

   

 

 

    

 

 

 

The amortized cost of Level 3 securities was $21,945,000 at March 31, 2011 with an unrealized loss of $289,000. 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.

Note 9. 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 nonfinancial 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.

 

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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 March 31, 2012 and December 31, 2011. 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.

 

                   Fair Value Measurements  
     Carrying Amount      Estimated Fair
Value
     Level 1 Inputs      Level 2 Inputs      Level 3 Inputs  

March 31, 2012

                                  

Financial assets:

              

Securities held-to-maturity

   $ 316,223       $ 321,917       $ —         $ 321,917       $ —     

Loans (1)

     970,542         1,016,776         —           —           1,016,776   

Financial liabilities:

              

Time deposits

     439,474         447,532         —           447,532         —     

Other borrowed funds

     241,143         252,586         —           252,586         —     

Subordinated debentures

     36,083         41,972         —           —           41,972   

December 31, 2011

                                  

Financial assets:

              

Securities held-to-maturity

     179,368         184,822         —           184,822         —     

Loans (1)

     967,918         1,018,822         —           —           1,018,822   

Financial liabilities:

              

Time deposits

     433,501         439,711         —           439,711         —     

Other borrowed funds

     244,143         258,165         —           258,165         —     

Subordinated debentures

     36,083         43,063         —           —           43,063   

 

(1) Comprised of loans (including collateral dependent impaired loans), net of deferred loan costs and the allowance for loan losses.

 

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Note 10. Recent Accounting Developments

In April 2011, the FASB issued ASU No. 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements. This update revises the criteria for assessing effective control for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The determination of whether the transfer of a financial asset subject to a repurchase agreement is a sale is based, in part, on whether the entity maintains effective control over the financial asset. This update removes from the assessment of effective control: the criterion requiring the transferor to have the ability to repurchase or redeem the financial asset on substantially the agreed terms, even in the event of default by the transferee, and the related requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. The amendments in this update will be effective for interim and annual reporting periods beginning on or after December 15, 2011. The amendments will be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date and early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires, for public entities, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this Update are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. Early application was permitted. The Company has presented the requirements for this amendment in footnotes 8 and 9.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the consolidated statement of changes in stockholders’ equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with retrospective application required. Early application is permitted. There was no impact on the Company’s consolidated financial results as the amendments relate only to changes in financial statement presentation. In December 2011, the FASB elected to defer the effective date of those changes in ASU 2011-05 that relate only to the presentation of reclassification adjustments in the statement of income by issuing ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The Company has presented a separate financial statement as a result of this pronouncement.

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment. This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill. Under the new guidance, an entity will have the option of first assessing qualitative factors

 

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(events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary. The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company implemented the provisions of ASU 2011-08 as of January 1, 2012. The adoption of this pronouncement did not have a material effect on the consolidated financial statements.

 

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. The Company had total assets of approximately $2.9 billion as of March 31, 2012. The Company presently operates 24 banking offices in 17 cities and towns in Massachusetts ranging from Braintree in the south to Beverly 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 2010, the Company entered into a lease agreement to open a branch located at Newton Centre in Newton, Massachusetts. The branch opened on June 20, 2011.

During September 2010, the Company entered into a lease agreement to open a branch located in Andover, Massachusetts. The branch is scheduled to open during the second quarter of 2012.

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 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 189 (54%) of the 351 cities and towns in Massachusetts.

Net income for the first quarter ended March 31, 2012 were $3,808,000, or $0.69 per share diluted, compared to net income of $3,725,000, or $0.67 per share diluted, for the first quarter ended March 31, 2011.

 

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Net interest income totaled $14.4 million for the first three months of 2012 compared to $13.9 million for the same period in 2011. The 3.4% increase in net interest income for the period is due to an 11.1% increase in the average balances of earning assets, combined with a similar increase in deposits, offset by a decrease in the net interest margin. The net interest margin decreased from 2.64% on a fully taxable equivalent basis in 2011 to 2.48% on the same basis for 2012.

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

 

LOGO

The primary factor accounting for the general decrease in the net interest margin for the third quarter of 2010 was a large influx of deposits, primarily from municipalities, and a corresponding increase in short-term investments. Pricing discipline continued 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 first 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.

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, 2012, the loan loss provision was $1.1 million compared to a provision of $1.2 million for the same period last year. The decrease in the provision was primarily due to management’s quantitative analysis of the loan portfolio. During the three months ended March 31, 2012, management provided $1.0 million for one large construction loan. Nonperforming loans decreased to $4.6 million at March 31, 2012 from $10.8 million on March 31, 2011.

The Company capitalized on favorable market conditions for the first quarter ended March 31, 2012 and realized net gains on sales of investments of $148,000, compared to $164,000 for the same period in 2011. Other income increased for the first quarter of 2012 compared to the same period last year primarily as a result of increased service charges on deposit accounts. Included in operating expenses for the first quarter ended March 31, 2012 are FDIC assessments of $407,000, compared to $735,000 for the same period in 2011. FDIC assessments decreased primarily as a result of a decrease in the assessment rate, offset somewhat by an increase in the assessment base.

For the first quarter of 2012, the Company’s effective income tax rate was 7.6% compared to 8.1% for last year’s corresponding quarter. The effective income tax rate decreased primarily as a result of an increase in tax-exempt income.

 

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Financial Condition

Loans

On March 31, 2012, total loans outstanding were $988.0 million, an increase of 0.4% from the total on December 31, 2011. At March 31, 2012, commercial real estate loans accounted for 50.9% and residential real estate loans, including home equity loans, accounted for 36.4% of total loans. The Company had $6.6 million of loans held for sale at March 31, 2012.

Commercial and industrial loans decreased to $81.9 million at March 31, 2012 from $82.4 million at December 31, 2011. Construction loans decreased to $36.9 million at March 31, 2012 from $56.8 million on December 31, 2011, primarily as a result of a large loan moving into permanent financing.

Allowance for Loan Losses

The allowance for loan loss at March 31, 2012 was $17.4 million as compared to $16.6 million at December 31, 2011. The increase was due to quantitative factors associated with the loan loss reserve requirement. As part of the analysis, management provided $1.0 million for one large construction loan. Also, the level of the allowance for loan losses to total loans increased from 1.68% at December 31, 2011 to 1.76% at March 31, 2012. The dollar amount of the allowance for loan losses and the level of the allowance for loan losses to total loans increased, primarily as a result of increases in required specific reserves associated with impaired loans. 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, 2012 is $36.9 million. A major factor in nonaccrual loans is one large construction loan. Based on this fact, and 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 $487.8 million at March 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 $186.8 million, at March 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.

 

   

Small business loans: The outstanding loan balances of small business loans is $ 43.6 million at March 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.

 

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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,
 
     2012     2011  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 16,574      $ 14,053   

Loans charged off

     (424     (589

Recoveries on loans previously charged-off

     184        294   
  

 

 

   

 

 

 

Net charge-offs

     (240     (295

Provision charged to expense

     1,100        1,200   
  

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 17,434      $ 14,958   
  

 

 

   

 

 

 

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, 2012     December 31, 2011  
     (Dollars in thousands)  

Nonaccruing loans

   $  4,573      $  5,827   

Loans past due 90 days or more and still accruing

   $ 743      $ 18   

Other real estate owned

   $ 1,183      $ 1,183   

Nonaccruing loans as a percentage of total loans

     0.46     0.59

Accruing troubled debt restructures

   $ 4,603      $ 4,634   

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 remained relatively stable during the first quarter of 2012.

Short-term Investments

Short-term investments decreased mainly as a result of increases in longer term higher yielding investments.

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)

 

     March 31, 2012      December 31, 2011  
     (In thousands)  

U.S. Treasury

   $ 2,008       $ 2,012   

U.S. Government Sponsored Enterprises

     117,102         174,957   

Small Business Administration

     8,524         8,801   

U.S Government Agency and Sponsored Enterprise Mortgage-backed Securities

     1,139,062         1,035,838   

Privately Issued Residential Mortgage-backed Securities

     3,225         3,198   

Obligations issued by States and Political Subdivisions

     29,920         20,642   

Other Debt Securities

     13,378         12,610   

Equity Securities

     620         618   
  

 

 

    

 

 

 

Total Securities Available–for-Sale

   $ 1,313,879       $ 1,258,676   
  

 

 

    

 

 

 

During the first three months of 2012 the Company capitalized on favorable market conditions and realized $148,000 of gains on sales of investments. The sales of investments represented ten U.S. Government Sponsored Enterprise bonds totaling $72.2 million.

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

Securities Held-to-Maturity (at Amortized Cost)

 

     March 31, 2012      December 31, 2011  
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 24,655       $ 26,979   

U.S. Government Agency and Sponsored Enterprise Mortgage-backed Securities

     291,568         152,389   
  

 

 

    

 

 

 

Total Securities Held-to-Maturity

   $ 316,223       $ 179,368   
  

 

 

    

 

 

 

At March 31, 2012 and December 31, 2011, 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.

Securities Available-for-Sale

The securities available-for-sale portfolio totaled $1.3 billion at March 31, 2012, an increase of 4.4% from December 31, 2011. Purchases of securities available-for-sale totaled $249.9 million for the three months ended March 31, 2012. 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 3.9 years.

The majority of the Company’s securities AFS are classified as Level 2. 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. Market indicators and industry and economic events are also monitored.

 

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Securities available-for-sale totaling $28.2 million, or 0.99% 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.

Securities Held-to-Maturity

The securities held-to-maturity portfolio totaled $316.2 million on March 31, 2012, an increase of 76.3% from the total on December 31, 2011. The portfolio is concentrated in United States Government Sponsored Enterprises and Mortgage-backed Securities and had an estimated weighted average remaining life of 4.3 years.

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, 2012, the FHLBB reported preliminary net income of $46.8 million. The FHLBB also declared a dividend equal to an annual yield of 0.52%. As of March 31, 2012, no impairment has been recognized.

Deposits and Borrowed Funds

On March 31, 2012, deposits totaled $2.2 billion, representing a 3.2% increase from December 31, 2011. Total deposits increased primarily as a result of increases in time deposits, money market, savings and NOW. Savings and NOW, money market and time 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 $383.4 million compared to $387.5 million at December 31, 2011. Borrowed funds decreased mainly as a result of matured term borrowings from the FHLBB.

Stockholders’ Equity

At March 31, 2012, total equity was $165.9 million compared to $160.6 million at December 31, 2011. The Company’s equity increased primarily as a result of earnings and other comprehensive income, net of taxes, offset somewhat by dividends paid. The Company’s leverage ratio stood at 7.05% at March 31, 2012, compared to 7.21% at March 31, 2011. This decline in the leverage ratio is due to an increase in assets, offset by an increase in stockholders’ equity. The Company’s Tier 1 capital-to-risk assets and total capital-to-risk assets stood at 14.67% and 15.92%, respectively, at March 31, 2012. Book value as of March 31, 2012 was $29.91 per share.

 

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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, 2012     March 31, 2011  
     ( In thousands)  
     Average
Balance
    Interest(1)     Average
Yield/
Rate
    Average
Balance
    Interest(1)     Average
Yield/
Rate
 

ASSETS

            

Interest-earning assets:

            

Loans (2)

            

Loans taxable

   $ 700,255      $ 8,819        5.07   $ 702,012      $ 9,442        5.45

Loans tax-exempt

     285,967        5,100        7.17        222,855        4,195        7.63   

Securities available-for-sale (5):

            

Taxable

     1,242,091        5,662        1.82        928,632        5,293        2.28   

Tax-exempt

     22,492        79        1.40        28,199        91        1.30   

Securities held-to-maturity:

            

Taxable

     205,538        1,463        2.85        211,658        1,773        3.35   

Tax-exempt

     —          —          —          —          —          —     

Interest-bearing deposits in other banks

     186,515        139        0.30        285,590        347        0.49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     2,642,858        21,262        3.23     2,378,946        21,141        3.58

Non interest-earning assets

     167,029            151,717       

Allowance for loan losses

     (17,079         (14,587    
  

 

 

       

 

 

     

Total assets

   $ 2,792,808          $ 2,516,076       
  

 

 

       

 

 

     

LIABILITIES AND STOCKHOLDERS’ EQUITY

            

Interest-bearing deposits:

            

NOW accounts

   $ 522,489      $ 371        0.29   $ 464,560      $ 482        0.42

Savings accounts

     274,160        163        0.24        246,166        230        0.38   

Money market accounts

     646,618        605        0.38        542,738        705        0.53   

Time deposits

     416,271        1,681        1.62        445,695        2,279        2.07   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     1,859,538        2,820        0.61        1,699,159        3,696        0.88   

Securities sold under agreements to repurchase

     155,193        92        0.24        129,472        110        0.35   

Other borrowed funds and subordinated debentures

     217,908        2,051        3.79        203,487        1,845        3.68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,232,639        4,963        0.89     2,032,118        5,651        1.13
    

 

 

   

 

 

     

 

 

   

 

 

 

Non interest-bearing liabilities

            

Demand deposits

     360,249            308,749       

Other liabilities

     36,151            28,925       
  

 

 

       

 

 

     

Total liabilities

     2,629,039            2,369,792       
  

 

 

       

 

 

     

Stockholders’ equity

     163,769            146,284       

Total liabilities & stockholders’ equity

   $ 2,792,808          $ 2,516,076       
  

 

 

       

 

 

     

Net interest income on a fully taxable equivalent basis

       16,299            15,490     

Less taxable equivalent adjustment

       (1,897         (1,563  
    

 

 

       

 

 

   

Net interest income

     $ 14,402          $ 13,927     
    

 

 

       

 

 

   

Net interest spread (3)

         2.33         2.46
      

 

 

       

 

 

 

Net interest margin (4)

         2.48         2.64
      

 

 

       

 

 

 

 

(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.

 

     Three Months Ended March 31, 2012
Compared with

Three Months Ended March 31, 2011
 
    

Increase/(Decrease)

Due to Change in

 
     Volume     Rate     Total  
     (in thousands)  

Interest income:

      

Loans

      

Taxable

   $ (21   $ (602   $ (623

Tax-exempt

     1,167        (262     905   

Securities available-for-sale

      

Taxable

     1,562        (1,193     369   

Tax-exempt

     (20     8        (12

Securities held-to-maturity

      

Taxable

     (50     (260     (310

Interest-bearing deposits in other banks

     (98     (110     (208
  

 

 

   

 

 

   

 

 

 

Total interest income

     2,540        (2,419     121   
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Deposits:

      

NOW accounts

     56        (167     (111

Savings accounts

     25        (91     (67

Money market accounts

     123        (223     (100

Time deposits

     (140     (458     (598
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     63        (939     (876

Securities sold under agreements to repurchase

     20        (38     (18

Other borrowed funds and subordinated debentures

     146        60        206   
  

 

 

   

 

 

   

 

 

 

Total interest expense

     229        (917     (688
  

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 2,311      $ (1,502   $ 809   
  

 

 

   

 

 

   

 

 

 

Net Interest Income

For the three months ended March 31, 2012, net interest income on a fully taxable equivalent basis totaled $16.3 million compared to $15.5 million for the same period in 2011, an increase of $809,000 million or 5.2%. This increase in net interest income for the period is due to an 11.1% increase in the average balances of earning assets, combined with a similar increase in deposits, offset by a decrease in the net interest margin. The net interest margin decreased from 2.64% on a fully taxable equivalent basis in 2011 to 2.48% on the same basis for 2012.

Provision for Loan Losses

For the three months ended March 31, 2012, the loan loss provision was $1.1 million compared to a provision of $1.2 million for the same period last year. The decrease in the provision for the three months ended March 31, 2012, was primarily due to management’s quantitative analysis of the loan portfolio. The level of the allowance for loan losses to total loans increased from 1.68% at December 31, 2011 to 1.76% at March 31, 2012. The increase was primarily the result of an increase in required specific reserves associated with impaired loans.

 

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Non-Interest Income and Expense

Other operating income for the quarter ended March 31, 2012 increased by $84,000 to $3.6 million from $3.5 million for the same period last year. There was an increase in service charges on deposit accounts of $101,000, which was mainly attributable to an increase in fees collected and debit card fees. Lockbox fees decreased by $38,000 as a result of decreased customer volume. Other income increased by $37,000 mainly as a result of increases in the growth of cash surrender values on life insurance policies offset by a decrease in brokerage commissions.

For the quarter ended March 31, 2012, operating expenses increased by $590,000 or 4.8% to $12.8 million, from the same period last year. The increase in operating expenses for the quarter was mainly attributable to an increase of $800,000 in salaries and employee benefits, $222,000 in other expenses and $104,000 occupancy and equipment expenses. This was offset somewhat by a decrease of $328,000 in FDIC assessments. Salaries and employee benefits increased mainly as a result of merit increases, increased staffing levels and pension costs. Occupancy and equipment increased mainly as a result of costs associated with the Newton Centre branch opening during the second quarter of 2011. Other expenses increased mainly as a result of increases in software maintenance. FDIC assessments decreased mainly as a result of a decrease in the assessment rate, offset somewhat by an increase in the assessment base.

Income Taxes

For the first quarter of 2012, the Company’s income tax expense totaled $313,000 on pretax income of $4.1 million resulting in an effective tax rate of 7.6%. For last year’s corresponding quarter, the Company’s income tax expense totaled $327,000 on pretax income of $4.1 million resulting in an effective tax rate of 8.1%. The effective income tax rate decreased for the three months ended mainly as a result of an increase in tax exempt income as a percentage of taxable income compared to the same period last year.

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

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 increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates tied to specific 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. 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. Management believes that there has been no material changes in the interest rate risk reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission. The information is contained in the Form 10-K within the Market Risk and Asset Liability Management section of Management’s Discussion and Analysis of Results of Operations and Financial Condition.

 

Item 4. Controls and Procedures

The Company’s management, with participation of the Company’s principal executive and financial officers, has evaluated its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on this evaluation, the Company’s management, with participation of its principal executive and financial officers, have

 

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concluded that the Company’s disclosure controls and procedures effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act is accumulated and reported to Company management (including the principal executive officers and the principal financial officer) as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has evaluated its internal control over financial reporting and during the first quarter of 2012 there has been no change in its internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – Other Information

 

Item 1 Legal proceedings – At the present time, the Company is not engaged in any legal proceedings which, if adversely determined to the Company, would have a material adverse impact on the Company’s financial condition or results of operations. From time to time, the Company is party to routine legal proceedings within the normal course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company’s financial condition and results of operation.

 

Item 1A Risk Factors – Please read “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. There have been no material changes since this 10-K was filed. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely effect the Company’s business, financial condition and operating results.

 

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