PINX:CNBKB Century Bancorp Inc Class B Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 July 31, 2012, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value

     3,556,554 Shares   

Class B Common Stock, $1.00 par value

     1,991,880 Shares   

 

 

 

 

Page 1 of 40


Century Bancorp, Inc.

 

    

Index

  

Page

Number

 
Part I  

Financial Information

  
 

Forward Looking Statements

     3   
Item 1.  

Financial Statements (unaudited)

  
 

Consolidated Balance Sheets: June 30, 2012 and December 31, 2011

     4   
 

Consolidated Statements of Income: Three months and six months ended June 30, 2012 and 2011

     5   
 

Consolidated Statements of Comprehensive Income: Three and six months ended June 30, 2012 and 2011

     6   
 

Consolidated Statements of Changes in Stockholders’ Equity: Six months ended June 30, 2012 and 2011

     7   
 

Consolidated Statements of Cash Flows: Six months ended June 30, 2012 and 2011

     8   
 

Notes to Consolidated Financial Statements

     9-27   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27-38   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     38   
Item 4.  

Controls and Procedures

     38   
Part II.  

Other Information

  
Item 1.  

Legal Proceedings

     38   
Item 1A.  

Risk Factors

     39   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     39   
Item 3.  

Defaults Upon Senior Securities

  
Item 5.  

Other Information

     39   
Item 6.  

Exhibits

     39   

Signatures

       40   
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 40


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 40


PART I — Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     June 30,
2012
    December
31, 2011
 

Assets

    

Cash and due from banks

   $ 58,530      $ 50,187   

Federal funds sold and interest-bearing deposits in other banks

     270,128        157,579   
  

 

 

   

 

 

 

Total cash and cash equivalents

     328,658        207,766   
  

 

 

   

 

 

 

Short-term investments

     22,136        18,351   

Securities available-for-sale, amortized cost $1,219,888 and $1,244,972, respectively

     1,237,024        1,258,676   

Securities held-to-maturity, fair value $292,260 and $184,822, respectively

     286,662        179,368   

Federal Home Loan Bank of Boston stock, at cost

     15,146        15,531   

Loans, net:

    

Commercial and industrial

     78,971        82,404   

Construction and land development

     36,422        56,819   

Commercial real estate

     535,232        487,495   

Residential real estate

     259,006        239,307   

Home equity

     112,602        110,786   

Consumer and other

     6,597        7,681   
  

 

 

   

 

 

 

Total loans, net

     1,028,830        984,492   

Less: allowance for loan losses

     17,979        16,574   
  

 

 

   

 

 

 

Net loans

     1,010,851        967,918   
  

 

 

   

 

 

 

Bank premises and equipment

     22,887        21,757   

Accrued interest receivable

     5,872        6,022   

Goodwill

     2,714        2,714   

Core deposit intangible

     —          120   

Other assets

     68,324        65,002   
  

 

 

   

 

 

 

Total assets

   $ 3,000,274      $ 2,743,225   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Demand deposits

   $ 403,999      $ 365,854   

Savings and NOW deposits

     810,018        708,988   

Money market accounts

     705,963        616,241   

Time deposits

     419,414        433,501   
  

 

 

   

 

 

 

Total deposits

     2,339,394        2,124,584   
  

 

 

   

 

 

 

Securities sold under agreements to repurchase

     173,190        143,320   

Other borrowed funds

     208,553        244,143   

Subordinated debentures

     36,083        36,083   

Due to broker

     37,195        —     

Other liabilities

     35,151        34,446   
  

 

 

   

 

 

 

Total liabilities

     2,829,566        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 3,556,529 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

     11,711        11,587   

Retained earnings

     153,526        146,039   
  

 

 

   

 

 

 
     170,785        163,168   

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

     10,437        8,319   

Pension liability, net of taxes

     (10,514     (10,838
  

 

 

   

 

 

 

Total accumulated other comprehensive loss, net of taxes

     (77     (2,519
  

 

 

   

 

 

 

Total stockholders’ equity

     170,708        160,649   
  

 

 

   

 

 

 

Total liabilities and stockholders' equity

   $ 3,000,274      $ 2,743,225   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 4 of 40


Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended
June 30,
     Six months ended June 30,  
     2012      2011      2012      2011  

Interest income

           

Loans

   $ 12,572       $ 12,012       $ 24,620       $ 24,117   

Securities held-to-maturity

     1,924         1,518         3,387         3,291   

Securities available-for-sale

     5,668         5,709         11,383         11,062   

Federal funds sold and interest-bearing deposits in other banks

     148         358         287         705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     20,312         19,597         39,677         39,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Savings and NOW deposits

     560         719         1,087         1,431   

Money market accounts

     618         777         1,230         1,482   

Time deposits

     1,600         2,494         3,281         4,773   

Securities sold under agreements to repurchase

     88         98         180         208   

Other borrowed funds and subordinated debentures

     2,057         1,994         4,108         3,839   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,923         6,082         9,886         11,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     15,389         13,515         29,791         27,442   

Provision for loan losses

     900         1,200         2,000         2,400   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     14,489         12,315         27,791         25,042   

Other operating income

           

Service charges on deposit accounts

     1,922         1,936         3,910         3,823   

Lockbox fees

     781         734         1,480         1,471   

Net gain on sales of investments

     442         198         590         362   

Other income

     843         973         1,627         1,720   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     3,988         3,841         7,607         7,376   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Salaries and employee benefits

     8,191         7,250         16,332         14,591   

Occupancy

     1,176         975         2,298         2,226   

Equipment

     544         534         1,127         1,092   

FDIC assessments

     445         464         852         1,199   

Other

     3,095         2,552         5,642         4,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     13,451         11,775         26,251         23,985   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     5,026         4,381         9,147         8,433   

Provision for income taxes

     255         184         568         511   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 4,771       $ 4,197       $ 8,579       $ 7,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share data:

           

Weighted average number of shares outstanding, basic

           

Class A

     3,556,474         3,543,717         3,553,734         3,540,773   

Class B

     1,991,880         1,996,880         1,992,818         1,999,818   

Weighted average number of shares outstanding, diluted

           

Class A

     5,548,830         5,541,595         5,547,237         5,541,743   

Class B

     1,991,880         1,996,880         1,992,818         1,999,818   

Basic earnings per share:

           

Class A

   $ 1.05       $ 0.92       $ 1.89       $ 1.74   

Class B

   $ 0.52       $ 0.46       $ 0.94       $ 0.87   

Diluted earnings per share

           

Class A

   $ 0.86       $ 0.76       $ 1.55       $ 1.43   

Class B

   $ 0.52       $ 0.46       $ 0.94       $ 0.87   

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 5 of 40


Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended June 30,  
     2012      2011  

Net income

     $ 4,771         $ 4,197   

Other comprehensive income, net of tax:

         

Unrealized gains on securities:

         

Unrealized holding gains arising during period

         824           4,175     

Less: reclassification adjustment for gains included in net income

     (442     382         (198     3,977   
  

 

 

      

 

 

   

Defined benefit pension plans:

         

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

       162           95   
    

 

 

      

 

 

 

Other comprehensive income

       544           4,072   
    

 

 

      

 

 

 

Comprehensive income

     $   5,315         $   8,269   
    

 

 

      

 

 

 

 

     Six months ended June 30,  
     2012      2011  

Net income

     $ 8,579         $ 7,922   

Other comprehensive income, net of tax:

         

Unrealized gains on securities:

         

Unrealized holding gains arising during period

     2,708           3,652     

Less: reclassification adjustment for gains included in net income

     (590     2,118         (362     3,290   
  

 

 

      

 

 

   

Defined benefit pension plans:

         

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

       324           190   
    

 

 

      

 

 

 

Other comprehensive income

       2,442           3,480   
    

 

 

      

 

 

 

Comprehensive income

     $ 11,021         $ 11,402   
    

 

 

      

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 6 of 40


Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders' Equity (unaudited)

For the Six Months Ended June 30, 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

     —           —          —           7,922        —          7,922   

Unrealized holding losses arising during period, net of $2,098 in taxes and $362 in realized net gains

     —           —          —           —          3,290        3,290   

Pension liability adjustment, net of $126 in taxes

     —           —          —           —          190        190   

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, $.24 per share

     —           —          —           (850     —          (850

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

     —           —          —           (241     —          (241
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $ 3,544       $ 1,997      $ 11,542       $ 138,357      $ (98   $ 155,342   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

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

Net income

     —           —          —           8,579        —          8,579   

Unrealized holding gains arising during period, net of $1,314 in taxes and $590 in realized net gains

     —           —          —           —          2,118        2,118   

Pension liability adjustment, net of $216 in taxes

     —           —          —           —          324        324   

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

     2         (2     —           —          —          —     

Stock options exercised, 5,712 shares

     6         —          124         —          —          130   

Cash dividends paid, Class A common stock, $.24 per share

     —           —          —           (852     —          (852

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

     —           —          —           (240     —          (240
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 3,556       $ 1,992      $ 11,711       $ 153,526      $ (77   $ 170,708   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 7 of 40


Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Six months ended June 30,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 8,579      $ 7,922   

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

    

Mortgage loans originated for sale

     (2,448     —     

Proceeds from mortgage loans sold

     5,968        —     

Gain on sales of mortgage loans held for sale

     (131     —     

Net gain on sales of investments

     (590     (362

Gain on sale of loans

     —          (95

Provision for loan losses

     2,000        2,400   

Deferred income taxes

     (783     (875

Net depreciation and amortization

     3,158        2,626   

Decrease (increase) in accrued interest receivable

     150        (453

Gain on sale of other real estate owned

     (4     —     

Increase in other assets

     (5,311     (8,572

Increase in other liabilities

     1,271        235   
  

 

 

   

 

 

 

Net cash provided by operating activities

     11,859        2,826   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     17,315        41,192   

Purchase of short-term investments

     (21,100     (21,365

Proceeds from maturities of securities available-for-sale

     318,626        250,729   

Proceeds from sales of securities available-for-sale

     233,002        20,516   

Purchase of securities available-for-sale

     (490,103     (434,375

Proceeds from maturities of securities held-to-maturity

     54,211        33,546   

Purchase of securities held-to-maturity

     (161,722     —     

Proceeds from sales of loans

     —          7,318   

Net increase in loans

     (48,302     (64,601

Proceeds from sales of other real estate owned

     1,187        —     

Capital expenditures

     (2,209     (1,510
  

 

 

   

 

 

 

Net cash used in investing activities

     (99,095     (168,550
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net (decrease) increase in time deposits

     (14,087     90,070   

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

     228,897        64,113   

Net proceeds from exercise of stock options

     130        6   

Cash dividends

     (1,092     (1,091

Net increase in securities sold under agreements to repurchase

     29,870        380   

Net decrease in other borrowed funds

     (35,590     (8,975
  

 

 

   

 

 

 

Net cash provided by financing activities

     208,128        144,503   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     120,892        (21,221

Cash and cash equivalents at beginning of period

     207,766        188,552   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 328,658      $ 167,331   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 10,022      $ 11,704   

Income taxes

     1,353        1,785   

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

     2,118        3,290   

Pension liability adjustment, net of taxes

     324        190   

Due to broker

     37,195        —     

See accompanying notes to unaudited consolidated interim financial statements.

 

Page 8 of 40


Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Six Months Ended June 30, 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.

 

Page 9 of 40


Revision of EPS Presentation

The Company determined in the quarter ended June 30, 2012 that although the Class A and Class B common stock have different dividend rates, the Company had not applied the two-class method when calculating earnings per share (“EPS”) separately for the Class A and Class B common stock. This resulted in immaterial revisions to previously reported basic EPS for Class A and Class B common stock and diluted EPS for the Class B common stock as summarized below:

For the quarter ended June 30, 2011:

 

     As
previously
reported
     As
revised
 

Basic EPS – Class A common

   $ 0.76       $ 0.92   

Basic EPS – Class B common

   $ 0.76       $ 0.46   

Diluted EPS – Class A common

   $ 0.76       $ 0.76   

Diluted EPS – Class B common

   $ 0.76       $ 0.46   

For the six months ended June 30, 2011:

 

     As
previously
reported
     As
revised
 

Basic EPS – Class A common

   $ 1.43       $ 1.74   

Basic EPS – Class B common

   $ 1.43       $ 0.87   

Diluted EPS – Class A common

   $ 1.43       $ 1.43   

Diluted EPS – Class B common

   $ 1.43       $ 0.87   

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

 

Page 10 of 40


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 $3.6 million as of June 30, 2012. 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. On May 24, 2012, the Massachusetts Department of Revenue issued Directive 12-2. The directive states that the pledge by a shareholder of shares of stock of a corporation as security or collateral for a loan to the shareholder, in and of itself, will not preclude classification of the corporation as a security corporation or result in revocation of a corporation’s existing security corporation classification.

Note 3. Stock Option Accounting

Stock option activity under the Company’s stock option plan for the six months ended June 30, 2012 is as follows:

 

     Amount     Weighted
Average
Exercise
Price
 

Shares under option:

    

Outstanding at beginning of year

     36,062      $ 28.90   

Exercised

     (5,712     22.68   

Forfeited

     (450     22.50   
  

 

 

   

 

 

 

Outstanding at end of period

     29,900      $ 30.19   
  

 

 

   

 

 

 

Exercisable at end of period

     29,900      $ 30.19   
  

 

 

   

 

 

 

Available to be granted at end of period

     223,534     
  

 

 

   

On June 30, 2012, the outstanding options to purchase 29,900 shares of Class A common stock have exercise prices between $26.68 and $31.83, with a weighted average exercise price of $30.19 and a weighted average remaining contractual life of 1.7 years. The intrinsic value of options exercisable at June 30, 2012 had an aggregate value of $13,300. The intrinsic value of options exercised at June 30, 2012 had an aggregate value of $30,828.

 

Page 11 of 40


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 six months of 2012.

Note 4. Securities Available-for-Sale

 

     June 30, 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       $ 7       $ —         $ 2,006       $ 1,999       $ 13       $ —         $ 2,012   

U.S. Government Sponsored Enterprises

     44,269         49         31         44,287         174,657         311         11         174,957   

Small Business Administration

     8,320         95         —           8,415         8,714         87         —           8,801   

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

     1,076,906         18,282         454         1,094,734         1,020,752         16,262         1,176         1,035,838   

Privately Issued Residential Mortgage Backed Securities

     3,269         7         154         3,122         3,509         —           311         3,198   

Obligations Issued by States and Political Subdivisions

     71,405         65         959         70,511         21,515         84         957         20,642   

Other Debt Securities

     13,221         164         45         13,340         13 ,293         —           683         12,610   

Equity Securities

     499         110         —           609         533         85         —           618   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,219,888       $ 18,779       $ 1,643       $ 1,237,024       $ 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 $518,480,000 and $488,690,000 at June 30, 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 $261,401,000 and $246,036,000 at June 30, 2012 and December 31, 2011, respectively. The Company realized gross gains of $590,000 from the proceeds of $233,002,000 from the sales of available-for-sale securities for the six months ended June 30, 2012. The Company realized gross gains of $362,000 from the proceeds of $20,516,000 from the sales of available-for-sale securities for the six months ended June 30, 2011.

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 June 30, 2012.

 

     Amortized
Cost
     Fair
Value
 
     (In thousands)  

Within one year

   $ 107,680       $ 108,256   

After one but within five years

     930,190         945,124   

After five but within ten years

     169,462         171,792   

More than 10 years

     10,557         9,789   

Non-maturing

     1,999         2,063   
  

 

 

    

 

 

 

Total

   $ 1,219,888       $ 1,237,024   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at June 30, 2012 was 3.5 years. Included in the weighted average remaining life calculation at June 30, 2012 was $34,269,000 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.

 

Page 12 of 40


As of June 30, 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.

In evaluating the underlying credit quality of a security, management considers several factors such as the credit rating of the obligor and the issuer, if applicable. Internal reviews of issuer financial statements are performed as deemed necessary. In the case of privately issued mortgage-backed securities, the performance of the underlying loans is analyzed as deemed necessary to determine the estimated future cash flows of the securities. Factors considered include the level of subordination, current and estimated future default rates, current and estimated prepayment rates, estimated loss severity rates, geographic concentrations and origination dates of underlying loans. In the case of marketable equity securities, the severity of the unrealized loss, the length of time the unrealized loss has existed, and the issuer’s financial performance are considered.

The following table shows the temporarily impaired securities of the Company’s available-for-sale portfolio at June 30, 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 23 and 5 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 461 holdings at June 30, 2012.

 

     June 30, 2012  
     Less than 12 months      12 months or longer      Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (In thousands)  

U.S. Government Sponsored Enterprises

   $ 10,013       $ 32       $ —         $ —         $ 10,013       $ 32   

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

     126,302         453         __         __         126,302         453   

Privately Issued Residential Mortgage Backed Securities

     __         __         1,957         154         1,957         154   

Obligations Issued by States and Political Subdivisions

     __         __         3,725         959         3,725         959   

Other Debt Securities

     —           —           1,455         45         1,455         45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

     136,315       $ 485       $ 7,137       $ 1,158       $ 143,452       $ 1,643   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

Page 13 of 40


 

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

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

 

     June 30, 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

   $ 7,745       $ 38       $ —         $ 7,783       $ 26,979       $ 36       $ 2       $ 27,013   

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

     278,917         5,697         137         284,477         152,389         5,435         15         157,809   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 286,662       $ 5,735       $ 137       $ 292,260       $ 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 $154,999,000 and $8,885,000 at June 30, 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 $118,431,000 and $49,345,000 at June 30, 2012 and December 31, 2011, respectively.

At June 30, 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 June 30, 2012.

 

     Amortized
Cost
     Fair
Value
 
     (In thousands)  

Within one year

   $ 21,486       $ 21,676   

After one but within five years

     211,518         215,957   

After five but within ten years

     53,378         54,338   

More than ten years

     280         289   
  

 

 

    

 

 

 

Total

   $ 286,662       $ 292,260   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at June 30, 2012 was 3.6 years. Included in the weighted average remaining life calculation at June 30, 2012 were $7,745,000 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.

 

Page 14 of 40


As of June 30, 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 June 30, 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 June 30, 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 3 and 1 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 105 holdings at June 30, 2012.

 

     June 30, 2012  
     Less Than 12
Months
     12 Months or
Longer
     Total  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in thousands)  

U.S. Government Sponsored Enterprises

   $ —         $ —         $ —         $ —         $ —         $ —     

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

     20,197         118         5,369         19         25,566         137   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 20,197       $ 118       $ 5,369       $ 19       $ 25,566       $ 137   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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  
Temporarily Impaired Investments    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (In thousands)  

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 15 of 40


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
June 30,
    Six months ended June
30,
 
     2012     2011     2012     2011  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 17,434      $ 14,958      $ 16,574      $ 14,053   

Loans charged off

     (635     (380     (1,059     (969

Recoveries on loans previously charged-off

     280        137        464        431   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (355     (243     (595     (538

Provision charged to expense

     900        1,200        2,000        2,400   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 17,979      $ 15,915      $ 17,979      $ 15,915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for the three months ending June 30, 2012 follows:

 

     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 March 31, 2012

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

Charge-offs

     —          (289     —           (59     (287     —          —          (635

Recoveries

     —          164        2         3        111        —          —          280   

Provision

     (31     371        411         65        152        (60     (8     900   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 2,889      $ 3,466      $ 7,754       $ 1,793      $ 293      $ 681      $ 1,103      $ 17,979   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for six months ending June 30, 2012 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, 2011

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

Charge-offs

     —          (399     —           (219     (441     —          —           (1,059

Recoveries

     —          206        3         9        246        —          —           464   

Provision

     (4     520        1,185         117        132        (23     73         2,000   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at June 30, 2012

   $ 2,889      $ 3,466      $ 7,754       $ 1,793      $ 293      $ 681      $ 1,103       $ 17,979   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 1,000      $ 871      $ 450       $ 92      $ —        $ —        $ —           2,413   

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

   $ 1,889      $ 2,595      $ 7,304       $ 1,701      $ 293      $ 681      $ 1,103       $ 15,566   

Loans:

                  

Ending balance

   $ 36,422      $ 78,971      $ 535,232       $ 259,006      $ 6,597      $ 112,602      $ —         $ 1,028,830   

Loans deemed to be impaired

   $ 1,500      $ 2,328      $ 2,321       $ 513      $ —        $ —        $ —         $ 6,662   

Loans not deemed to be impaired

   $ 34,922      $ 76,643      $ 532,911       $ 258,493      $ 6,597      $ 112,602      $ —         $ 1,022,168   

 

Page 16 of 40


Further information pertaining to the allowance for loan losses for three months ending June 30, 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 March 31, 2011

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

Charge-offs

     —           (228     —           (1     (150     (1     —           (380

Recoveries

     —           30        —           —          107        —          —           137   

Provision

     594         141        300         (55     48        69        103         1,200   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30, 2011

   $ 2,572       $ 3,575      $ 6,321       $ 1,745      $ 291      $ 775      $ 636       $ 15,915   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses for six months ending June 30, 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

     —           (385     —           (281     (302     (1     —          (969

Recoveries

     —           175        —           14        242        —          —          431   

Provision

     820         621        650         294        54        51        (90     2,400   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

   $ 2,572       $ 3,574      $ 6,321       $ 1,745      $ 292      $ 775      $ 636      $ 15,915   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 303       $ 770      $ 394       $ 3      $ —        $ —        $ —          1,470   

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

   $ 2,269       $ 2,804      $ 5,927       $ 1,742      $ 292      $ 775      $ 636      $ 14,445   

Loans:

                  

Ending balance

   $ 55,572       $ 88,619      $ 470,041       $ 232,235      $ 6,560      $ 110,001      $ —        $ 963,028   

Loans deemed to be impaired

   $ 4,000       $ 1,861      $ 7,867       $ 33      $ —        $ —        $ —        $ 13,761   

Loans not deemed to be impaired

   $ 51,572       $ 86,758      $ 462,174       $ 232,202      $ 6,560      $ 110,001      $ —        $ 949,267   

 

Page 17 of 40


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 June 30, 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 June 30, 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 June 30, 2012 and December 31, 2011 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 June 30, 2012.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real

estate
 
     (Dollars in thousands)  

Grade:

        

1-3 (Pass)

   $ 27,484       $ 76,046       $ 528,630   

4 (Monitor)

     7,438         597         4,281   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     1,500         2,328         2,321   
  

 

 

    

 

 

    

 

 

 

Total

   $ 36,422       $ 78,971       $ 535,232   
  

 

 

    

 

 

    

 

 

 

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.

 

Page 18 of 40


Further information pertaining to the allowance for loan losses at June 30, 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       $ 34,922       $ 36,422   

Commercial and industrial

     594         1,706         57         2,357         76,614         78,971   

Commercial real estate

     2,427         704         —           3,131         532,101         535,232   

Residential real estate

     2,203         1,287         —           3,490         255,516         259,006   

Consumer and overdrafts

     4         17         —           21         6,576         6,597   

Home equity

     179         99         —           278         112,324         112,602   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,407       $ 5,313       $ 57       $ 10,777       $ 1,018,053       $ 1,028,830   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

Page 19 of 40


The following is information pertaining to impaired loans for June 30, 2012:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying
Value
for 3
Months
Ending
6/30/12
     Average
Carrying
Value
for 6
Months
Ending
6/30/12
     Interest
Income
Recognized
For 3
Months

Ending
6/30/12
     Interest
Income
Recognized
For 6
months

Ending
6/30/12
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

   $ —         $ —         $ —         $ —         $ 643       $ —         $ —     

Commercial and industrial

     409         454         —           282         334         —           —     

Commercial real estate

     176         201         —           178         180         —           —     

Residential real estate

     31         32         —           32         97         —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 616       $ 687       $ —         $ 492       $ 1,254       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ 1,500       $ 3,292       $ 1,000       $ 1,500       $ 857       $ —         $ —     

Commercial and industrial

     1,919         2,147         871         1,556         1,408         12         27   

Commercial real estate

     2,145         2,183         450         3,056         3,410         58         78   

Residential real estate

     482         482         92         482         657         —           1   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,046       $ 8,104       $ 2,413       $ 6,594       $ 6,332       $ 70       $ 106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

                    

Construction and land development

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

Commercial and industrial

     2,328         2,601         871         1,838         1,742         12         27   

Commercial real estate

     2,321         2,384         450         3,234         3,590         58         78   

Residential real estate

     513         514         92         514         754         —           1   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,662       $ 8,791       $ 2,413       $ 7,086       $ 7,586       $ 70       $ 106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is information pertaining to impaired loans for June 30, 2011:

 

     Carrying
Value
     Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying
Value

For 3
Months
Ending
6/30/11
     Average
Carrying
Value

For 6
Months
Ending
6/30/11
     Interest
Income
Recognized
for

3 Months
Ending
6/30/11
     Interest
Income
Recognized
for

6 Months
Ending
6/30/11
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

   $ 1,800       $ 3,292       $ —         $ 3,450       $ 3,686       $ —         $ —     

Commercial and industrial

     324         725         —           337         407         —           —     

Commercial real estate

     190         203         —           191         427         —           —     

Residential real estate

     —           —           —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,314       $ 4,220       $ —         $ 3,978       $ 4,520       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 40


With required reserve recorded:

                    

Construction and land development

     2,239       $ 5,251       $ 303       $ 560       $ 320       $         —         $         —     

Commercial and industrial

     1,537         1,551         770         1,189         956         3         6   

Commercial real estate

     7,677         7,809         394         6,305         4,695         21         33   

Residential real estate

     33         33         3         34         19         1         1   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,486       $ 14,644       $ 1,470       $ 8,088       $ 5,990       $ 25       $ 40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

                    

Construction and land development

   $ 4,039       $ 8,543       $ 303       $ 4,010       $ 4,006       $ —         $ —     

Commercial and industrial

     1,861         2,276         770         1,526         1,362         3         6   

Commercial real estate

     7,867         8,012         394         6,496         5,123         21         33   

Residential real estate

     33         33         3         34         19         1         1   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,800       $ 18,864       $ 1,470       $ 12,066       $ 10,510       $ 25       $ 40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no troubled debt restructurings occurring during the six month period ended June 30, 2012.

Troubled Debt Restructurings occurring during the three month period ended June 30, 2011:

 

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

Construction and land development

     1       $ 39       $ 39   

Commercial and industrial

     4         394         370   

Commercial real estate

     3         2,201         2,200   
  

 

 

    

 

 

    

 

 

 

Total

     8       $ 2,634       $ 2,609   
  

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings occurring during the six month period ended June 30, 2011:

 

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

Construction and land development

     1       $ 39       $ 39   

Commercial and industrial

     6         443         414   

Commercial real estate

     4         2,641         2,636   
  

 

 

    

 

 

    

 

 

 

Total

     11       $ 3,123       $ 3,089   
  

 

 

    

 

 

    

 

 

 

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

 

Page 21 of 40


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 $6,770 reduction in principal and $461 reduction in interest payments for the quarter ended June 30, 2011 and $7,010 reduction in principal and $525 reduction in interest payments for the six months ended June 30, 2011. The financial impact of the modifications for performing commercial real estate were $8,399 reduction in principal and $11,267 reduction in interest payments for the quarter ended June 30, 2011 and $8,816 reduction in principal and $13,156 reduction in interest payments for the six months ended June 30, 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.

Components of Net Periodic Benefit Cost for the Three Months Ended June 30,

 

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

Service cost

   $ 274      $ 211      $ 355       $ 170   

Interest

     323        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

   $ 345      $ 264      $ 699       $ 463   
  

 

 

   

 

 

   

 

 

    

 

 

 

Components of Net Periodic Benefit Cost for the Six Months Ended June 30,

 

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

Service cost

   $ 548      $ 422      $ 711       $ 340   

Interest

     647        710        462         466   

Expected return on plan assets

     (820     (798     —           —     

Recognized prior service cost (benefit)

     (52     (52     58         56   

Recognized net actuarial losses

     368        247        168         65   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 691      $ 529      $ 1,399       $ 927   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

Page 22 of 40


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 June 30, 2012, $900,000 of the contribution had been made. The Company expects to contribute an additional $900,000 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.

The results of the fair value hierarchy as of June 30, 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

   $ 2,006       $ —         $ 2,006       $ —     

U.S. Government Sponsored Enterprises

     44,287         —           44,287         —     

SBA Backed Securities

     8,415         —           8,415         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     1,094,734         —           1,094,734         —     

Privately Issued Residential Mortgage Backed Securities

     3,122         —           3,122         —     

Obligations Issued by States and Political Subdivisions

     70,511         —           2,117         68,394   

Other Debt Securities

     13,340         —           13,340         —     

Equity Securities

     609         226         —           383   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,237,024       $ 226       $ 1,168,021       $ 68,777   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

Impaired Loans

     4,630         —           —           4,630   

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 and six-month periods ended June 30, 2012 amounted to $367,000 and $1.8 million, respectively. 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 six months ended June 30, 2012. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the six month period ended June 30, 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

   $ 68,777      

Discounted cash flow

  

Discount rate

  

0% -1% (3)

Impaired Loans

     4,630      

Appraisal of collateral (1)

  

Appraisal adjustments (2)

  

0% - 25% discount

 

(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

The changes in Level 3 securities for the six-month period ended June 30, 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

     —           64,970          —        64,970   

Maturities and calls

     —           (15,058     (34     (15,092

Amortization

     —           (15     —          (15

Changes in fair value

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 3,725       $ 64,669      $ 383      $ 68,777   
  

 

 

    

 

 

   

 

 

   

 

 

 

The amortized cost of Level 3 securities was $69,733,000 at June 30, 2012 with an unrealized loss of $956,000. 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.

 

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The changes in Level 3 securities for the six-month period ended June 30, 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

     —           10,321        —           10,321   

Maturities and calls

     —           (11,288     —           (11,288

Amortization

     —           —          —           —     

Changes in fair value

     —           (2     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at June 30, 2011

   $ 4,393       $ 15,019      $ 279       $ 19,691   
  

 

 

    

 

 

   

 

 

    

 

 

 

The amortized cost of Level 3 securities was $19,978,000 at June 30, 2011 with an unrealized loss of $287,000. 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.

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.

 

Page 25 of 40


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 June 30, 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
 

June 30, 2012

              

Financial assets:

              

Securities held-to-maturity

   $ 286,662       $ 292,260       $ —         $ 292,260       $ —     

Loans (1)

     1,010,851         1,061,540         —           —           1,061,540   

Financial liabilities:

              

Time deposits

     419,414         426,036         —           426,036         —     

Other borrowed funds

     208,553         220,292         —           220,292         —     

Subordinated debentures

     36,083         43,787         —           —           43,787   

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.

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.

 

Page 26 of 40


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 (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

 

Page 27 of 40


approximately $3.0 billion as of June 30, 2012. The Company presently operates 25 banking offices in 18 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 opened on July 16, 2012.

During June 2012, the Company entered into a lease agreement to open a branch located in Wellesley, Massachusetts. The branch is scheduled to open during the fourth quarter of 2012.

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

The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees from loans, deposits, as well as operating expenses, the provision for loan losses, the impact of federal and state income taxes and the relative levels of interest rates and economic activity.

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. I