Two professional investors who have amassed large stakes of Century Bancorp Inc. in the past six months are pressuring the Medford, Mass., company to sell.
Sy Jacobs and Paul Magidson say the family running the $1.6 billion-asset Century has done poorly at controlling expenses and managing the balance sheet in recent years.
The two want the family to step aside - preferably by selling Century for a hefty premium. Mr. Jacobs says Century's founder, Marshall Sloane, and his family could make as much as $100 million in a sale.
Mr. Sloane, 78, says he has no interest in putting Century on the block. He acknowledged that investments in new branches, a technology upgrade, and a new headquarters building have reduced his company's profits the past few years, but he said those investments will pay dividends in a market where only a handful of locally owned banks remain.
"I think we've got a good track record, and we hope to keep going," Mr. Sloane said.
Whether Mr. Jacobs and Mr. Magidson succeed in forcing Century to sell remains to be seen. Meanwhile, investors are benefiting from speculation about a sale - Century's stock has risen 13% since June 1.
Mr. Jacobs and Mr. Magidson are active investors in community banks and have owned stakes in Century for several years. They have accumulated more than 200,000 shares in it since Jan. 1 and now own 6.1% of its outstanding shares.
Mr. Sloane, who founded Century in 1969, is its chairman and chief executive; his sons, Barry and Jonathan, are to be co-CEOs when he retires (he has not set a retirement date). The family owns roughly 30% of the company's shares.
Last week Mr. Jacobs sent Century's board a letter criticizing the company's performance under the Sloanes and asking for a meeting with its independent directors.
Mr. Jacobs said that he and Mr. Magidson were reluctant to challenge management.
"We're value investors," he said in an interview Monday. "Our preference would be to buy and hold for the rest of our lives. We don't look to take an activist position."
After earning a record $13.5 million in 2002, Century reported net income of $11.7 million in 2003 and $8.9 million last year.
But the pair became frustrated by what Mr. Jacobs described as Century's subpar performance in recent years.
It reported a profit of $2.04 million for this year's first quarter, with a return on equity of 8%. The average for banks Century's size was 13.2%, according to the Federal Deposit Insurance Corp.
"Management is doing a bad job," Mr. Jacobs said. "The bank is going the other way. Sometimes, you buy a stock so cheaply that all you need to make a profit is mediocrity. This bank doesn't even reach that. Things have gotten worse and worse each of the last several quarters."
Century deemphasized commercial real estate lending out of a mistaken fear that the Boston area was showing signs of overheating, Mr. Jacobs said. Instead, he said, it loaded up on short-term securities, which yield much less than commercial real estate loans.
At March 31 the company's securities portfolio stood at $935 million, or about 60% of assets. The median securities-to-assets ratio for its New England peers is 28%, according to Mr. Jacobs.
Century, whose shares were trading at $30.03 late Tuesday, has proven it can attract deposits in a competitive market but has not shown an ability to turn those deposits into earning assets, Mr. Jacobs said.
As a result, he said, there is a "yawning gap" between the company's value to an acquirer - he estimated Century could command as much as $57 a share - and the value the Sloanes have been able to create.
That argues powerfully for a sale, Mr. Jacobs said. "Are we missing something?" he said.
Mr. Sloane said the letter Mr. Jacobs sent to Century's board contains a number of inaccuracies. He took particular issue with the claim about commercial real estate lending; the company has more than $200 million of such loans on its books, the CEO said.
"If you look at our portfolio, we never got out of the commercial real estate business," he said. "That is totally inaccurate."
Mr. Sloane did call Century's underwriting conservative, but he said a temporary earnings shortfall is much easier to fix than asset quality problems. At the end of the first quarter it reported $1.06 million of nonperforming loans, or 0.18% of its total portfolio, well below industry averages.
"We've got a clean bank," Mr. Sloane said. "In my experience, the only thing that can take down a bank is bad loans or a bad portfolio. We don't have either."
He added that the company's investments in new branches - it has opened three the past two years and now has 22 in the Boston area - and check-imaging technology have put it in good position to grow.
"We'll be back again," he said.
