10-Q 1 d398431d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 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 October 31, 2012, the Registrant had outstanding:

 

Class A Common Stock, $1.00 par value            3,562,929 Shares
Class B Common Stock, $1.00 par value            1,986,880 Shares

 

 

 


Table of Contents

Century Bancorp, Inc.

 

   

Index

   Page
Number
 
Part I   Financial Information   
  Forward Looking Statements      3   
Item 1.   Financial Statements (unaudited)   
 

Consolidated Balance Sheets:

September 30, 2012 and December 31, 2011

     4   
 

Consolidated Statements of Income:

Three months and nine months ended September 30, 2012 and 2011

     5   
 

Consolidated Statements of Comprehensive Income:

Three and nine months ended September 30, 2012 and 2011

     6   
 

Consolidated Statements of Changes in Stockholders’ Equity:

Nine months ended September 30, 2012 and 2011

     7   
 

Consolidated Statements of Cash Flows:

Nine months ended September 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      28-39   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      39   
Item 4.   Controls and Procedures      39   
Part II.   Other Information   
Item 1.   Legal Proceedings      39   
Item 1A.   Risk Factors      40   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      40   
Item 3.   Defaults Upon Senior Securities   
Item 5.   Other Information      40   
Item 6.   Exhibits      40-41   
Signatures      42   
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 42


Table of Contents

Forward Looking Statements

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

 

Page 3 of 42


Table of Contents

PART I - Item 1

Century Bancorp, Inc.

Consolidated Balance Sheets (unaudited)

(In thousands, except share data)

 

     September 30,     December 31,  
     2012     2011  
Assets     

Cash and due from banks

   $ 44,198      $ 50,187   

Federal funds sold and interest-bearing deposits in other banks

     217,424        157,579   
  

 

 

   

 

 

 

Total cash and cash equivalents

     261,622        207,766   
  

 

 

   

 

 

 

Short-term investments

     31,364        18,351   

Securities available-for-sale, amortized cost $1,208,527 and $1,244,972, respectively

     1,229,099        1,258,676   

Securities held-to-maturity, fair value $290,781 and $184,822, respectively

     284,490        179,368   

Federal Home Loan Bank of Boston stock, at cost

     15,146        15,531   

Loans, net:

    

Commercial and industrial

     78,567        82,404   

Construction and land development

     38,318        56,819   

Commercial real estate

     562,252        487,495   

Residential real estate

     262,426        239,307   

Home equity

     116,699        110,786   

Consumer and other

     6,661        7,681   
  

 

 

   

 

 

 

Total loans, net

     1,064,923        984,492   

Less: allowance for loan losses

     18,658        16,574   
  

 

 

   

 

 

 

Net loans

     1,046,265        967,918   

Bank premises and equipment

     23,416        21,757   

Accrued interest receivable

     5,866        6,022   

Goodwill

     2,714        2,714   

Other assets

     65,835        65,122   
  

 

 

   

 

 

 

Total assets

   $ 2,965,817      $ 2,743,225   
  

 

 

   

 

 

 
Liabilities     

Deposits:

    

Demand deposits

   $ 406,681      $ 365,854   

Savings and NOW deposits

     832,525        708,988   

Money Market Accounts

     672,447        616,241   

Time deposits

     431,630        433,501   
  

 

 

   

 

 

 

Total deposits

     2,343,283        2,124,584   

Securities sold under agreements to repurchase

     176,060        143,320   

Other borrowed funds

     184,144        244,143   

Subordinated debentures

     36,083        36,083   

Due to broker

     10,750        —     

Other liabilities

     37,385        34,446   
  

 

 

   

 

 

 

Total liabilities

     2,787,705        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 3,561,804 shares and 3,548,317 shares, respectively

     3,562        3,548   

Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 1,986,880 and 1,994,380 shares, respectively

     1,986        1,994   

Additional paid-in capital

     11,718        11,587   

Retained earnings

     158,661        146,039   
  

 

 

   

 

 

 
     175,927        163,168   

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

     12,536        8,319   

Pension liability, net of taxes

     (10,351     (10,838
  

 

 

   

 

 

 

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

     2,185        (2,519
  

 

 

   

 

 

 

Total stockholders’ equity

     178,112        160,649   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,965,817      $ 2,743,225   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Income (unaudited)

(In thousands, except share data)

 

     Three months ended September 30,      Nine months ended September 30,  
     2012      2011      2012      2011  

Interest income

           

Loans

   $ 14,494       $ 12,030       $ 39,114       $ 36,147   

Securities held-to-maturity

     1,744         1,304         5,131         4,595   

Securities available-for-sale

     5,671         6,042         17,054         17,104   

Federal funds sold and interest-bearing deposits in other banks

     170         262         457         967   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     22,079         19,638         61,756         58,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Savings and NOW deposits

     562         583         1,649         2,023   

Money market accounts

     603         636         1,833         2,109   

Time deposits

     1,493         2,512         4,774         7,285   

Securities sold under agreements to repurchase

     94         82         274         290   

Other borrowed funds and subordinated debentures

     2,107         1,987         6,215         5,826   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     4,859         5,800         14,745         17,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     17,220         13,838         47,011         41,280   

Provision for loan losses

     1,250         1,200         3,250         3,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     15,970         12,638         43,761         37,680   

Other operating income

           

Service charges on deposit accounts

     1,977         2,031         5,887         5,854   

Lockbox fees

     745         658         2,225         2,129   

Net gain on sales of investments

     529         883         1,119         1,245   

Other income

     854         931         2,481         2,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other operating income

     4,105         4,503         11,712         11,879   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

           

Salaries and employee benefits

     8,400         7,357         24,732         21,948   

Occupancy

     1,161         1,059         3,459         3,285   

Equipment

     627         608         1,754         1,700   

FDIC assessments

     450         413         1,302         1,612   

Other

     3,070         2,618         8,712         7,495   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     13,708         12,055         39,959         36,040   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     6,367         5,086         15,514         13,519   

Provision for income taxes

     685         504         1,253         1,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,682       $ 4,582       $ 14,261       $ 12,504   
  

 

 

    

 

 

    

 

 

    

 

 

 

Share data:

           

Weighted average number of shares outstanding, basic

           

Class A

     3,561,625         3,544,967         3,556,369         3,542,170   

Class B

     1,986,880         1,995,630         1,990,838         1,998,422   

Weighted average number of shares outstanding, diluted

           

Class A

     5,549,810         5,541,646         5,548,133         5,541,711   

Class B

     1,986,880         1,995,630         1,990,838         1,998,422   

Basic earnings per share:

           

Class A

   $ 1.25       $ 1.01       $ 3.13       $ 2.75   

Class B

   $ 0.62       $ 0.50       $ 1.57       $ 1.38   

Diluted earnings per share

           

Class A

   $ 1.02       $ 0.83       $ 2.57       $ 2.26   

Class B

   $ 0.62       $ 0.50       $ 1.57       $ 1.38   

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Comprehensive Income (unaudited)

(In thousands)

 

     Three months ended September 30,  
     2012      2011  

Net income

     $ 5,682         $ 4,582   

Other comprehensive income, net of tax:

         

Unrealized gains on securities:

         

Unrealized holding gains arising during period

     2,628           4,469     

Less: reclassification adjustment for gains included in net income

     (529     2,099         (883     3,586   
  

 

 

      

 

 

   

Defined benefit pension plans:

         

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

       163           95   
    

 

 

      

 

 

 

Other comprehensive income

       2,262           3,681   
    

 

 

      

 

 

 

Comprehensive income

     $ 7,944         $ 8,263   
    

 

 

      

 

 

 
     Nine months ended September 30,  
     2012      2011  

Net income

     $ 14,261         $ 12,504   

Other comprehensive income, net of tax:

         

Unrealized gains on securities:

         

Unrealized holding gains arising during period

     5,336           8,121     

Less: reclassification adjustment for gains included in net income

     (1,119     4,217         (1,245     6,876   
  

 

 

      

 

 

   

Defined benefit pension plans:

         

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

       487           285   
    

 

 

      

 

 

 

Other comprehensive income

       4,704           7,161   
    

 

 

      

 

 

 

Comprehensive income

     $ 18,965         $ 19,665   
    

 

 

      

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

For the Nine Months Ended September 30, 2012 and 2011

 

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

Balance at December 31, 2010

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

Net income

     —           —          —           12,504        —          12,504   

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

     —           —          —           —          6,876        6,876   

Pension liability adjustment, net of $126 in taxes

     —           —          —           —          285        285   

Conversion of class B common stock to class A common stock, 17,000 shares

     17         (17     —           —          —          —     

Stock options exercised, 350 shares

     1         —          5         —          —          6   

Cash dividends paid, Class A common stock, $.36 per share

     —           —          —           (1,274     —          (1,274

Cash dividends paid, Class B common stock, $.18 per share

     —           —          —           (361     —          (361
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 3,547       $ 1,994      $ 11,542       $ 142,395      $ 3,583      $ 163,061   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

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

Net income

     —           —          —           14,261        —          14,261   

Unrealized holding gains arising during period, net of $2,651 in taxes and $1,119 in realized net gains

     —           —          —           —          4,217        4,217   

Pension liability adjustment, net of $216 in taxes

     —           —          —           —          487        487   

Conversion of class B common stock to class A common stock, 7,500 shares

     8         (8     —           —          —          —     

Stock options exercised, 5,987 shares

     6         —          131         —          —          137   

Cash dividends paid, Class A common stock, $.36 per share

     —           —          —           (1,279     —          (1,279

Cash dividends paid, Class B common stock, $.18 per share

     —           —          —           (360     —          (360
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 3,562       $ 1,986      $ 11,718       $ 158,661      $ 2,185      $ 178,112   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Consolidated Statements of Cash Flows (unaudited)

(In thousands)

 

     Nine months ended September 30,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 14,261      $ 12,504   

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

    

Mortgage loans originated for sale

     (10,812     —     

Proceeds from mortgage loans sold

     14,497        —     

Gain on sales of mortgage loans held for sale

     (296     —     

Net gain on sales of investments

     (1,119     (1,245

Gain on sale of loans

     —          (364

Provision for loan losses

     3,250        3,600   

Deferred income taxes

     (1,377     (1,024

Net depreciation and amortization

     4,838        3,828   

Decrease in accrued interest receivable

     156        608   

Gain on sale of other real estate owned

     (4     —     

Increase in other assets

     (3,303     (5,587

Increase in other liabilities

     3,788        816   
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,879        13,136   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of short-term investments

     23,351        119,044   

Purchase of short-term investments

     (36,364     (24,495

Proceeds from maturities of securities available-for-sale

     429,440        556,599   

Proceeds from sales of securities available-for-sale

     271,500        43,124   

Purchase of securities available-for-sale

     (654,900     (955,685

Proceeds from maturities of securities held-to-maturity

     69,831        95,708   

Purchase of securities held-to-maturity

     (175,343     —     

Proceeds from sales of loans

     —          11,295   

Net increase in loans

     (85,354     (58,990

Proceeds from sales of other real estate owned

     1,187        —     

Capital expenditures

     (3,309     (2,328
  

 

 

   

 

 

 

Net cash used in investing activities

     (159,961     (215,728
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net (decrease) increase in time deposits

     (1,871     82,456   

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

     220,570        120,930   

Net proceeds from exercise of stock options

     137        6   

Cash dividends

     (1,639     (1,635

Net increase in securities sold under agreements to repurchase

     32,740        24,480   

Net decrease in other borrowed funds

     (59,999     (28,975
  

 

 

   

 

 

 

Net cash provided by financing activities

     189,938        197,262   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     53,856        (5,330

Cash and cash equivalents at beginning of period

     207,766        188,552   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 261,622      $ 183,222   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the period for:

    

Interest

   $ 14,828      $ 17,578   

Income taxes

     1,828        2,311   

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

     4,217        6,876   

Pension liability adjustment, net of taxes

     487        285   

Due to broker

     10,750        5,000   

Transfer of loans to other real estate owned

     400        —     

See accompanying notes to unaudited consolidated interim financial statements.

 

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Table of Contents

Century Bancorp, Inc.

Notes to Unaudited Consolidated Interim Financial Statements

Nine Months Ended September 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.

 

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Certain reclassifications are made to prior-year amounts whenever necessary to conform with the current-year presentation.

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 September 30, 2011:

 

     As previously
reported
     As revised  

Basic EPS – Class A common

   $ 0.83       $ 1.01   

Basic EPS – Class B common

   $ 0.83       $ 0.50   

Diluted EPS – Class A common

   $ 0.83       $ 0.83   

Diluted EPS – Class B common

   $ 0.83       $ 0.50   

For the nine months ended September 30, 2011:

 

     As previously
reported
     As revised  

Basic EPS – Class A common

   $ 2.26       $ 2.75   

Basic EPS – Class B common

   $ 2.26       $ 1.38   

Diluted EPS – Class A common

   $ 2.26       $ 2.26   

Diluted EPS – Class B common

   $ 2.26       $ 1.38   

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. At the same time, heightened demand for safe assets has put downward pressure on yields. There is continued concern about the US economic outlook and the potential effects of the continued crisis in the European financial markets.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act became law. The Act was intended to address many issues arising in the recent financial crisis and is exceedingly broad in scope affecting many aspects of bank and financial market regulation. The Act requires, or permits by implementing regulation, enhanced prudential standards for banks and bank holding companies inclusive of capital, leverage, liquidity, concentration and exposure measures. In addition, traditional bank regulatory principles such as restrictions on transactions with affiliates and insiders were enhanced. The Act also contains reforms of consumer mortgage lending practices and creates a Bureau of Consumer Financial Protection which is granted broad authority over consumer financial practices of banks and others. It is expected as the specific new or incremental requirements applicable to the Company become effective that the costs and difficulties of remaining compliant with all such requirements will increase. The Act broadens the base for FDIC assessments to average consolidated assets less tangible equity of financial institutions and also

 

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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 $3.2 million as of September 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 nine months ended September 30, 2012 is as follows:

 

     Amount     Weighted
Average
Exercise Price
 

Shares under option:

    

Outstanding at beginning of year

     36,062      $ 28.90   

Exercised

     (5,987     22.87   

Forfeited

     (450     22.50   
  

 

 

   

 

 

 

Outstanding at end of period

     29,625      $ 30.22   
  

 

 

   

 

 

 

Exercisable at end of period

     29,625      $ 30.22   
  

 

 

   

 

 

 

Available to be granted at end of period

     223,534     
  

 

 

   

On September 30, 2012, the outstanding options to purchase 29,625 shares of Class A common stock have exercise prices between $26.68 and $31.83, with a weighted average exercise price of $30.22 and a weighted average remaining contractual life of 1.5 years. The intrinsic value of options exercisable at September 30, 2012 had an aggregate value of $50,379. The intrinsic value of options exercised at September 30, 2012 had an aggregate value of $54,203.

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 nine months of 2012.

 

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Note 4. Securities Available-for-Sale

 

     September 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       $ 6       $ —         $ 2,005       $ 1,999       $ 13       $ —         $ 2,012   

U.S. Government Sponsored Enterprises

     85,035         334         —           85,369         174,657         311         11         174,957   

Small Business Administration

     8,142         113         —           8,255         8,714         87         —           8,801   

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

     1,041,144         21,187         250         1,062,081         1,020,752         16,262         1,176         1,035,838   

Privately Issued Residential Mortgage Backed Securities

     3,072         32         21         3,083         3,509         —           311         3,198   

Obligations Issued by States and Political Subdivisions

     66,377         52         960         65,469         21,515         84         957         20,642   

Other Debt Securities

     2,300         —           36         2,264         13 ,293         —           683         12,610   

Equity Securities

     458         115         —           573         533         85         —           618   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,208,527       $ 21,839       $ 1,267       $ 1,229,099       $ 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 $518,615,000 and $488,690,000 at September 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 $236,894,000 and $246,036,000 at September 30, 2012 and December 31, 2011, respectively. The Company realized gross gains of $1,119,000 from the proceeds of $271,500,000 from the sales of available-for-sale securities for the nine months ended September 30, 2012. The Company realized gross gains of $1,245,000 from the proceeds of $43,124,000 from the sales of available-for-sale securities for the nine months ended September 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 September 30, 2012.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 96,169       $ 96,670   

After one but within five years

     925,961         943,843   

After five but within ten years

     173,923         176,773   

More than 10 years

     10,516         9,776   

Non-maturing

     1,958         2,037   
  

 

 

    

 

 

 

Total

   $ 1,208,527       $ 1,229,099   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities available-for-sale at September 30, 2012 was 3.5 years. Included in the weighted average remaining life calculation at September 30, 2012 was $70,037,000 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.

 

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As of September 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 September 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 9 and 7 securities that are temporarily impaired for less than 12 months and for 12 months or longer, respectively, out of a total of 444 holdings at September 30, 2012.

 

     September 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

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

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

     52,036         221         11,629         29         63,665         250   

Privately Issued Residential Mortgage Backed Securities

     —           —           1,939         21         1,939         21   

Obligations Issued by States and Political Subdivisions

     —           —           3,725         960         3,725         960   

Other Debt Securities

     —           —           1,464         36         1,464         36   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 52,036       $ 221       $ 18,757       $ 1,046       $ 70,793       $ 1,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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     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

 

     September 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       $ 42       $ —         $ 7,787       $ 26,979       $ 36       $ 2       $ 27,013   

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

     276,745         6,414         165         282,994         152,389         5,435         15         157,809   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 284,490       $ 6,456       $ 165       $ 290,781       $ 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 $158,319,000 and $8,885,000 at September 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 $111,707,000 and $49,345,000 at September 30, 2012 and December 31, 2011, respectively.

At September 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 September 30, 2012.

 

     Amortized
Cost
     Fair
Value
 
     ( In thousands)  

Within one year

   $ 19,167       $ 19,356   

After one but within five years

     227,971         233,077   

After five but within ten years

     37,076         38,061   

More than ten years

     276         287   
  

 

 

    

 

 

 

Total

   $ 284,490       $ 290,781   
  

 

 

    

 

 

 

The weighted average remaining life of investment securities held-to-maturity at September 30, 2012 was 3.5 years. Included in the weighted average remaining life calculation at September 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.

 

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As of September 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 September 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 September 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 98 holdings at September 30, 2012.

 

     September 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

     19,030         143         5,370         22         24,400         165   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 19,030       $ 143       $ 5,370       $ 22       $ 24,400       $ 165   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

   FairValue      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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 17,979      $ 15,915      $ 16,574      $ 14,053   

Loans charged off

     (728     (1,283     (1,787     (2,252

Recoveries on loans previously charged-off

     157        170        621        601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (571     (1,113     (1,166     (1,651

Provision charged to expense

     1,250        1,200        3,250        3,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 18,658      $ 16,002      $ 18,658      $ 16,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

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

Charge-offs

     —           (532     —           (49     (147     —           —          (728

Recoveries

     —           38        2         2        99        16         —          157   

Provision

     140         133        967         240        52        176         (458     1,250   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at September 30, 2012

   $ 3,029       $ 3,105      $ 8,723       $ 1,986      $ 297      $ 873       $ 645      $ 18,658   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses for nine months ending September 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

     —           (931     —           (110     (587     (159     —          (1,787

Recoveries

     —           243        5         11        346        16        —          621   

Provision

     136         654        2,152         199        182        312        (385     3,250   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2012

   $ 3,029       $ 3,105      $ 8,723       $ 1,986      $ 297      $ 873      $ 645      $ 18,658   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,000       $ 455      $ 434       $ 127      $ —        $ 97      $ —          2,113   

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

   $ 2,029       $ 2,650      $ 8,289       $ 1,859      $ 297      $ 776      $ 645      $ 16,545   

Loans:

                  

Ending balance

   $ 38,318       $ 78,567      $ 562,252       $ 262,426      $ 6,661      $ 116,699      $ —        $ 1,064,923   

Loans deemed to be impaired

   $ 1,500       $ 1,882      $ 2,302       $ 777      $ —        $ 97      $ —        $ 6,558   

Loans not deemed to be impaired

   $ 36,818       $ 76,685      $ 559,950       $ 261,649      $ 6,661      $ 116,602      $ —        $ 1,058,365   

 

Page 16 of 42


Table of Contents

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

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

Charge-offs

     (900     (203     —          —           (180     —           —           (1,283

Recoveries

     —          66        —          4         100        —           —           170   

Provision

     1,312        (217     (364     31         81        8         349         1,200   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Balance at September 30, 2011

   $ 2,984      $ 3,221      $ 5,957      $ 1,780       $ 292      $ 783       $ 985       $ 16,002   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses for nine months ending September 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

     (900     (585     —           (281     (485     (1     —           (2,252

Recoveries

     —          222        —           19        360        —          —           601   

Provision

     2,132        421        286         324        119        59        259         3,600   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30, 2011

   $ 2,984      $ 3,221      $ 5,957       $ 1,780      $ 292      $ 783      $ 985       $ 16,002   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 350      $ 345      $ 227       $ 3      $ —        $ —        $ —           925   

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

   $ 2,634      $ 2,876      $ 5,730       $ 1,777      $ 292      $ 783      $ 985       $ 15,077   

Loans:

                  

Ending balance

   $ 54,498      $ 84,765      $ 458,858       $ 235,636      $ 6,419      $ 111,131      $ —         $ 951,307   

Loans deemed to be impaired

   $ 1,800      $ 1,778      $ 4,247       $ 483      $ —        $ —        $ —         $ 8,308   

Loans not deemed to be impaired

   $ 52,698      $ 82,987      $ 454,611       $ 235,153      $ 6,419      $ 111,131      $ —         $ 942,999   

 

Page 17 of 42


Table of Contents

The Company utilizes a six grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 1-3 (Pass):

Loans in this category are considered “pass” rated loans with low to average risk.

Loans rated 4 (Monitor):

These loans represent classified loans that management is closely monitoring for credit quality. These loans have had or may have minor credit quality deterioration as of September 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 September 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 September 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 September 30, 2012.

 

     Construction
and land
development
     Commercial
and
industrial
     Commercial
real
estate
 
     (Dollars in thousands)  

Grade:

  

1-3 (Pass)

   $ 29,380       $ 76,213       $ 555,721   

4 (Monitor)

     7,438         472         4,229   

5 (Substandard)

     —           —           —     

6 (Doubtful)

     —           —           —     

Impaired

     1,500         1,882         2,302   
  

 

 

    

 

 

    

 

 

 

Total

   $ 38,318       $ 78,567       $ 562,252   
  

 

 

    

 

 

    

 

 

 

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 42


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Further information pertaining to the allowance for loan losses at September 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       $ 36,818       $ 38,318   

Commercial and industrial

     1,237         1,268         —           2,505         76,062         78,567   

Commercial real estate

     914         696         —           1,610         560,642         562,252   

Residential real estate

     954         1,890         —           2,844         259,582         262,426   

Consumer and overdrafts

     16         6         —           22         6,639         6,661   

Home equity

     764         98         —           862         115,837         116,699   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,885       $ 5,458       $ —         $ 9,343       $ 1,055,580       $ 1,064,923   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 42


Table of Contents

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

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value
for 3 Months
Ending 9/30/12
     Average
Carrying Value
for 9 Months
Ending 9/30/12
     Interest
Income
Recognized
For 3 Months
Ending  9/30/12
     Interest
Income
Recognized
For 9 months
Ending  9/30/12
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

   $ —         $ —         $ —         $ —         $ 450       $ —         $ —     

Commercial and industrial

     635         1,346         —           473         382         —           —     

Commercial real estate

     172         200         —           174         178         —           —     

Residential real estate

     31         31         —           218         152         —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 838       $ 1,577       $ —         $ 865       $ 1,162       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

   $ 1,500       $ 3,292       $ 1,000       $ 1,500       $ 1,050       $ —         $ —     

Commercial and industrial

     1,247         1,295         455         1,745         1,492         12         35   

Commercial real estate

     2,130         2,170         434         2,138         3,027         40         84   

Residential real estate

     746         746         127         494         610         1         1   

Consumer

     —           —           —           —           —           —           —     

Home equity

     97         97         97         73         29         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,720       $ 7,600       $ 2,113       $ 5,950       $ 6,208       $ 53       $ 120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

                    

Construction and land development

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

Commercial and industrial

     1,882         2,641         455         2,218         1,874         12         35   

Commercial real estate

     2,302         2,370         434         2,312         3,205         40         84   

Residential real estate

     777         777         127         712         762         1         1   

Consumer

     —           —           —           —           —           —           —     

Home equity

     97         97         97         73         29         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,558       $ 9,177       $ 2,113       $ 6,815       $ 7,370       $ 53       $ 120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 20 of 42


Table of Contents

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

 

     Carrying Value      Unpaid
Principal
Balance
     Required
Reserve
     Average
Carrying Value
For 3 Months
Ending 9/30/11
     Average
Carrying Value
For 9 Months
Ending 9/30/11
     Interest
Income
Recognized for
3 Months Ending
9/30/11
     Interest
Income
Recognized for
9 Months Ending
9/30/11
 
     (Dollars in thousands)  

With no required reserve recorded:

                    

Construction and land development

   $ —         $ —         $ —         $ 1,350       $ 2,940       $ —         $ —     

Commercial and industrial

     642         1,090         —           443         429         1         3   

Commercial real estate

     415         431         —           246         378         —           —     

Residential real estate

     450         450         —           —           —           —           —     

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,507       $ 1,971       $ —         $ 2,039       $ 3,747       $ 1       $ 3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With required reserve recorded:

                    

Construction and land development

     1,800       $ 3,292       $ 350       $ 2,110       $ 844       $ —         $ —     

Commercial and industrial

     1,136         1,160         345         1,428         1,087         6         10   

Commercial real estate

     3,832         3,858         227         6,738         5,215         82         112   

Residential real estate

     33         33         3         146         68         1         2   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,801       $ 8,343       $ 925       $ 10,422       $ 7,214       $ 89       $ 124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

                    

Construction and land development

   $ 1,800       $ 3,292       $ 350       $ 3,460       $ 3,784       $ —         $ —     

Commercial and industrial

     1,778         2,250         345         1,871         1,516         7         13   

Commercial real estate

     4,247         4,289         227         6,984         5,593         82         112   

Residential real estate

     483         483         3         146         68         1         2   

Consumer

     —           —           —           —           —           —           —     

Home equity

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,308       $ 10,314       $ 925       $ 12,461       $ 10,961       $ 90       $ 127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

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

Construction and land development

     —         $ —         $ —     

Commercial and industrial

     1         41         41   

Commercial real estate

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 41       $ 41   
  

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings occurring during the nine month period ended September 30, 2011:

 

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

Construction and land development

     1       $ 39       $ —     

Commercial and industrial

     7         484         454   

Commercial real estate

     4         2,641         2,636   
  

 

 

    

 

 

    

 

 

 

Total

     12       $ 3,164       $ 3,090   
  

 

 

    

 

 

    

 

 

 

There was one troubled debt restructuring, totaling $11,000, during the 9 months ended September 30, 2011, that subsequently defaulted.

 

Page 21 of 42


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Troubled Debt Restructurings were identified as a modification in which a concession was granted to a customer who is having financial difficulties. This concession may be below market rate, longer amortization/term, and a lower payment amount. The present value calculation of the modification did not result in an increase in the allowance for these loans beyond any previously established allocations. The loans were modified, for both the commercial and industrial and commercial real estate loans, by reducing interest rates as well as extending terms on the loans. The financial impact of the modifications for performing commercial and industrial loans were $14,368 reduction in principal and $612 increase in interest payments for the quarter ended September 30, 2011 and $21,378 reduction in principal and $103 increase in interest payments for the nine months ended September 30, 2011. The financial impact of the modifications for performing commercial real estate were $8,953 reduction in principal and $11,911 reduction in interest payments for the quarter ended September 30, 2011 and $17,769 reduction in principal and $25,067 reduction in interest payments for the nine months ended September 30, 2011. The financial impact of the modifications for nonperforming was a $7,000 reduction in the carrying value of the loans as a result of payments received under the modified terms of the loans.

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 September 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 Nine Months Ended September 30,

 

     Pension Benefits     Supplemental Insurance/

Retirement Plan

 
     2012     2011     2012      2011  
           (In thousands)               

Service cost

   $ 822      $ 633      $ 1,066       $ 510   

Interest

     970        1,065        693         699   

Expected return on plan assets

     (1,230     (1,197     —           —     

Recognized prior service cost (benefit)

     (78     (78     87         84   

Recognized net actuarial losses

     553        370        252         97   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net periodic benefit cost

   $ 1,037      $ 793      $ 2,098       $ 1,390   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

Page 22 of 42


Table of Contents

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 September 30, 2012, $1,350,000 of the contribution had been made. The Company expects to contribute an additional $450,000 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 September 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

   $ 2,005       $ —         $ 2,005       $ —     

U.S. Government Sponsored Enterprises

     85,369         —           85,369         —     

SBA Backed Securities

     8,255         —           8,255         —     

U.S. Government Agency and Sponsored Mortgage Backed Securities

     1,062,081         —           1,062,081         —     

Privately Issued Residential Mortgage Backed Securities

     3,083         —           3,083         —     

Obligations Issued by States and Political Subdivisions

     65,469         —           1,750         63,719   

Other Debt Securities

     2,264         —           2,264         —     

Equity Securities

     573         231         —           342   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,229,099       $ 231       $ 1,164,807       $ 64,061   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

Impaired Loans

     4,051         —           —           4,051   

Other Real Estate Owned

     400         —           —           400   

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 nine-month periods ended September 30, 2012 amounted to $203,000 and $2.0 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 nine months ended September 30, 2012. There were no liabilities measured at fair value on a recurring or nonrecurring basis during the nine month period ended September 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). Management continues to monitor the assumptions used to value the assets listed below.

 

Asset

   Fair Value     

Valuation Technique

  

Unobservable Input

  

Unobservable Input

Value or Range

Securities AFS (4)

   $     64,061       Discounted cash flow    Discount rate    0% -1% (3)

Impaired Loans

     4,051       Appraisal of collateral (1)    Appraisal adjustments (2)    0%-25% discount

Other Real Estate Owned

     400       Appraisal of collateral (1)    Appraisal adjustments (2)    0%

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated expenses.
(3) Weighted averages
(4) Municipal securities generally have maturities of one year or less and, therefore, the amortized cost equates to the fair value.

The changes in Level 3 securities for the nine-month period ended September 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

     —           79,588        —          79,588   

Maturities and calls

     —           (34,333     (75     (34,408

Amortization

     —           (33     —          (33

Changes in fair value

     —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 3,725       $ 59,994      $ 342      $ 64,061   
  

 

 

    

 

 

   

 

 

   

 

 

 

The amortized cost of Level 3 securities was $65,020,000 at September 30, 2012 with an unrealized loss of $960,000. 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 nine-month period ended September 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

     —           18,905        —           18,905   

Maturities and calls

     —           (21,665     —           (21,665

Amortization

     —           (5     —           (5
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at September 30, 2011

   $ 4,393       $ 13,223      $ 279       $ 17,895   
  

 

 

    

 

 

   

 

 

    

 

 

 

The amortized cost of Level 3 securities was $18,179,000 at September 30, 2011 with an unrealized loss of $284,000. 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.

 

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Time deposits: The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Other borrowed funds: The fair value of other borrowed funds is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other borrowed funds of similar remaining maturities.

Subordinated debentures: The fair value of subordinated debentures is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other subordinated debentures of similar remaining maturities.

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 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  

September 30, 2012

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

Financial assets:

              

Securities held-to-maturity

   $ 284,490       $ 290,781       $ —         $ 290,781       $ —     

Loans (1)

     1,046,265         1,097,153         —           —           1,097,153   

Financial liabilities:

              

Time deposits

     431,630         436,653         —           436,653         —     

Other borrowed funds

     184,144         195,729         —           195,729         —     

Subordinated debentures

     36,083         43,853         —           —           43,853   

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

 

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of existing transactions that occur on or after the effective date and early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s financial condition or results of operations.

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

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

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

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210), Disclosures about offsetting assets and liabilities. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position, and to allow investors to better compare financial statements prepared under U.S. GAAP with financial statements prepared under IFRS. The new standards are effective for annual periods beginning January 1, 2013, and interim periods within those annual periods. Retrospective application is required. The Company is currently assessing the impact on the Company’s financial statements and will implement the provisions of ASU 2011-11 as of January 1, 2013.

 

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

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the “Bank”): Century Bank and Trust Company formed in 1969. The Company had total assets of approximately $3.0 billion as of September 30, 2012. The Company presently operates 24 banking offices in 19 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 closed on September 21, 2012 and the accounts were temporarily moved to the Brookline, Massachusetts branch. During July 2012, the Company entered into a lease agreement and received regulatory approval to open a branch at a new location at Chestnut Hill in Newton, Massachusetts. The branch is scheduled to open during the fourth quarter of 2013 and the accounts that were temporarily moved to the Brookline, Massachusetts branch will be moved to the new branch at Chestnut Hill in Newton, Massachusetts.

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

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, non-profit organizations and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans and consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate and institutional customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through a program called Investment Services at Century Bank, which is supported by LPL Financial, a third party full-service securities brokerage business.

The Company is also a provider of financial services, including cash management, transaction processing and short term financing to municipalities in Massachusetts and Rhode Island. The Company has deposit relationships with approximately 189 (54%) of the 351 cities and towns in Massachusetts.

 

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Net income for the third quarter ended September 30, 2012 was $5,682,000, or $1.02 per Class A share diluted, compared to net income of $4,582,000, or $0.83 per Class A share diluted, for the third quarter ended September 30, 2011. Net income for the nine months ended September 30, 2012 was $14,261,000, or $2.57 per Class A share diluted, compared to net income of $12,504,000, or $2.26 per Class A share diluted, for the same period a year ago. Earnings per share (EPS) for each class of stock and time period is as follows:

 

     Three months
ended
September 30,
2012
     Three months
ended
September 30,
2011
 

Basic EPS – Class A common

   $ 1.25       $ 1.01   

Basic EPS – Class B common

   $ 0.62       $ 0.50   

Diluted EPS – Class A common

   $ 1.02       $ 0.83   

Diluted EPS – Class B common

   $ 0.62       $ 0.50   

 

     Nine months
ended
September 30,
2012
     Nine months
ended
September 30,
2011
 

Basic EPS – Class A common

   $ 3.13       $ 2.75   

Basic EPS – Class B common

   $ 1.57       $ 1.38   

Diluted EPS – Class A common

   $ 2.57       $ 2.26   

Diluted EPS – Class B common

   $ 1.57       $ 1.38   

Net interest income totaled $47.0 million for the first nine months of 2012 compared to $41.3 million for the same period in 2011. The 13.9% increase in net interest income for the period is due to a 10.5% increase in the average balances of earning assets, combined with a similar increase in average deposits. The net interest margin increased from 2.49% on a fully taxable equivalent basis in 2011 to 2.58% on the same basis for 2012. This was primarily the result of prepayment fees of approximately $3.0 million that were collected during the first nine months of 2012 compared to $43,000 for the period last year. Also, interest expense decreased primarily as a result of the continued decline in market rates.

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

 

LOGO

The primary factor accounting for the general decrease in the net interest margin for the third quarter of 2010 was a large influx of deposits, primarily from municipalities, and a corresponding increase in short-term investments. Pricing discipline continued through the first quarter of 2011. The net interest margin fell somewhat during the second quarter of 2011 mainly as a result of increased deposits and corresponding lower yield short-term investments. During the third quarter of 2011 through the third quarter of 2012, management stabilized the net interest margin by continuing to lower cost of funds, and by deploying excess liquidity through expansion of the investment portfolio.

 

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While management will continue its efforts to improve the net interest margin, there can be no assurance that certain factors beyond its control, such as the prepayment of loans and changes in market interest rates, will continue to positively impact the net interest margin.

For the three months ended September 30, 2012, the loan loss provision was $1.3 million compared to a provision of $1.2 million for the same period last year. For the nine months ended September 30, 2012, the loan loss provision was $3.3 million compared to a provision of $3.6 million for the same period last year. The decrease in the provision was primarily as a result of a decline in the balance of construction loans, partially offset by an increase in commercial real estate loans. During the nine months ended September 30, 2012, management provided $1.0 million for one large construction loan. Nonperforming loans decreased to $5.5 million at September 30, 2012 from $6.1 million on September 30, 2011.

The Company capitalized on favorable market conditions for the third quarter and nine months ended September 30, 2012 and realized net gains on sales of investments of $529,000 and $1.1 million as compared to $883,000 and $1.2 million for the same periods in 2011. Included in operating expenses for the first nine months ended September 30, 2012 are FDIC assessments of $1.3 million, compared to $1.6 million for the same period in 2011. FDIC assessments decreased primarily as a result of a decrease in the assessment rate, offset somewhat by an increase in the assessment base.

For the first nine months of 2012, the Company’s effective income tax rate was 8.1% compared to 7.5% for last year’s corresponding period. The effective income tax rate has remained low primarily as a result of tax-exempt income.

Financial Condition

Loans

On September 30, 2012, total loans outstanding were $1.1 billion, an increase of 8.2% from the total on December 31, 2011. At September 30, 2012, commercial real estate loans accounted for 52.8% and residential real estate loans, including home equity loans, accounted for 35.6% of total loans.

Commercial and industrial loans decreased to $78.6 million at September 30, 2012 from $82.4 million at December 31, 2011. Construction loans decreased to $38.3 million at September 30, 2012 from $56.8 million on December 31, 2011, primarily as a result of a large loan moving into permanent financing.

Allowance for Loan Losses

The allowance for loan loss at September 30, 2012 was $18.7 million as compared to $16.6 million at December 31, 2011. The increase was due to quantitative factors associated with the loan loss reserve requirement. As part of the analysis, management provided $1.0 million for one large construction loan in the first quarter of 2012. Also, the level of the allowance for loan losses to total loans increased from 1.68% at December 31, 2011 to 1.75% at September 30, 2012. The dollar amount of the allowance for loan losses and the level of the allowance for loan losses to total loans increased, primarily as a result of increases in required specific reserves associated with impaired loans. Also, the allowance for loan losses increased as a result of growth in the commercial real estate portfolio which increased from $487.5 million at December 31, 2011 to $562.3 million at September 30, 2012. In evaluating the allowance for loan losses the Company considered the following categories to be higher risk:

 

   

Construction loans: The outstanding loan balance of construction loans at September 30, 2012 is $38.3 million as compared to $56.8 million at December 31, 2011. A major factor in nonaccrual loans is one large construction loan. Based on this fact, and the general local conditions facing construction, management closely monitors all construction loans and considers this type of loans to be higher risk.

 

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Higher balance loans: Loans greater than $1.0 million are considered “high balance loans”. The balance of these loans is $548.4 million at September 30, 2012 as compared to $489.1 million at December 31, 2011. These loans are considered higher risk due to the concentration in individual loans. Additional allowance allocations are made based upon the level of high balance loans. Included in high balance loans are loans greater than $10.0 million. The balance of these loans, which is included in the loans greater than $1.0 million category, is $235.8 million, at September 30, 2012 as compared to $189.2 million at December 31, 2011. Additional allowance allocations are made based upon the level of this type of high balance loans that is separate and greater than the $1.0 million allocation.

 

   

Small business loans: The outstanding loan balances of small business loans is $41.0 million at September 30, 2012 as compared to $44.0 million at December 31, 2011. These are considered higher risk loans because small businesses have been negatively impacted by the current economic conditions. In a liquidation scenario, the collateral, if any, is often not sufficient to fully recover the outstanding balance of the loan. As a result, the Company often seeks additional collateral prior to renewing maturing small business loans. In addition, the payment status of the loans is monitored closely in order to initiate collection efforts in a timely fashion.

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  
     (in thousands)  

Allowance for loan losses, beginning of period

   $ 17,979      $ 15,915      $ 16,574      $ 14,053   

Loans charged off

     (728     (1,283     (1,787     (2,252

Recoveries on loans previously charged-off

     157        170        621        601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (571     (1,113     (1,166     (1,651

Provision charged to expense

     1,250        1,200        3,250        3,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses, end of period

   $ 18,658      $ 16,002      $ 18,658      $ 16,002