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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 0-15752
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CENTURY BANCORP, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COMMONWEALTH OF MASSACHUSETTS 04-2498617
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 MYSTIC AVENUE, MEDFORD, MA 02155
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(Address of principal executive offices) (Zip Code)
(781) 391-4000
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(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 the number of shares outstanding of each of the registrant's classes of
common stock as of June 30, 2002:
CLASS A COMMON STOCK, $1.00 PAR VALUE 3,396,870 SHARES
CLASS B COMMON STOCK, $1.00 PAR VALUE 2,120,530 SHARES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: AUGUST 12, 2002 CENTURY BANCORP, INC
/S/ PAUL V. CUSICK JR. /S/ KENNETH A. SAMUELIAN
- ----------------------------- ---------------------------
PAUL V. CUSICK, JR. KENNETH A. SAMUELIAN
VICE PRESIDENT AND TREASURER VICE PRESIDENT
(PRINCIPAL FINANCIAL OFFICER) CENTURY BANK AND TRUST COMPANY
(CHIEF ACCOUNTING OFFICER)
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Century Bancorp, Inc.
PAGE
INDEX NUMBER
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets:
June 30, 2002 and December 31, 2001 3
Consolidated Statements of Income:
Three (3) and Six (6) months ended June 30, 2002 and
2001. 4
Consolidated Statements of Changes in Stockholders'
Equity: Six (6) months ended June 30, 2002 and
2001. 5
Consolidated Statements of Cash Flows:
Six (6) months ended June 30, 2002 and 2001. 6
Notes to Consolidated Financial Statements 7-10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 15
PART II. OTHER INFORMATION
Item 1 through Item 6 15
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PART I -- Item 1
Century Bancorp, Inc. -- Consolidated Balance Sheets
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(000's) June 30,
2002 Dec. 31,
ASSETS (unaudited) 2001
- ------ ----------- -----------
Cash and due from banks $ 49,124 $ 71,820
Federal funds sold and interest-bearing deposits in other banks 45,520 106,013
----------- -----------
Total cash and cash equivalents 94,644 177,833
----------- -----------
Securities available-for-sale, amortized cost $563,396 and
$455,575, respectively 572,508 460,833
Securities held-to-maturity, market value $131,317 and
$145,237, respectively 128,390 142,608
Loans, net:
Commercial & industrial 50,455 59,162
Construction & land development 42,433 39,256
Commercial real estate 269,267 241,419
Residential real estate 94,650 88,450
Consumer & other 8,307 8,469
Home equity 32,473 26,016
----------- -----------
Total loans, net 497,585 462,772
Less: allowance for loan losses 7,720 7,112
----------- -----------
Net loans 489,865 455,660
Bank premises and equipment 12,016 11,882
Accrued interest receivable 9,456 7,561
Goodwill 2,717 2,717
Core Deposit Intangible 67 167
Other assets 13,130 11,761
----------- -----------
Total assets $ 1,322,793 $ 1,271,022
=========== ===========
LIABILITIES
- -----------
Deposits:
Demand deposits $ 222,774 $ 227,319
Savings and NOW deposits 208,373 187,676
Money market accounts 305,152 242,665
Time deposits 216,933 230,748
----------- -----------
Total deposits 953,232 888,408
Securities sold under agreements to repurchase 56,890 72,840
Federal Home Loan Bank (FHLB) borrowings and other borrowed funds 170,413 143,481
Other liabilities 20,625 52,944
Long term debt 28,750 28,750
----------- -----------
Total liabilities 1,229,910 1,186,423
Commitments and contingencies
STOCKHOLDERS' EQUITY
- --------------------
Class A common stock, $1.00 par value per share; authorized
10,000,000 shares; issued 3,780,470 shares and 3,761,020 shares,
respectively 3,780 3,761
Class B common stock, $1.00 par value per share;
authorized 5,000,000 shares; issued 2,168,080 shares and
2,185,480 shares, respectively 2,168 2,185
Additional paid-in capital 11,122 11,093
Retained earnings 75,873 70,124
Treasury stock, Class A, 383,600 shares, each period, at cost (5,941) (5,941)
Treasury stock, Class B, 47,550 shares, each period, at cost (41) (41)
----------- -----------
86,961 81,181
Accumulated other comprehensive gain, net of taxes 5,922 3,418
----------- -----------
Total stockholders' equity 92,883 84,599
----------- -----------
Total liabilities and stockholders' equity $ 1,322,793 $ 1,271,022
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc. -- Consolidated Statements of Income (unaudited)
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(000's except share data) Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
----------- ---------- ---------- ----------
Interest income
Loans $ 8,929 $ 9,312 $ 17,516 $ 19,024
Securities held-to-maturity 1,825 2,390 3,784 4,966
Securities available-for-sale 6,894 4,558 12,989 8,986
Federal funds sold and interest-bearing deposits
in other banks 138 868 279 1,427
---------- ---------- ---------- ----------
Total interest income 17,786 17,128 34,568 34,403
Interest expense
Savings and NOW deposits 651 972 1,236 1,873
Money market accounts 1,170 866 2,195 1,663
Time deposits 1,778 3,201 3,687 6,851
Securities sold under agreements to repurchase 184 697 373 1,077
FHLB borrowings, other borrowed funds and long term debt 2,304 1,617 4,402 3,666
---------- ---------- ---------- ----------
Total interest expense 6,087 7,353 11,893 15,130
---------- ---------- ---------- ----------
Net interest income 11,699 9,775 22,675 19,273
Provision for loan losses 300 375 600 750
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 11,399 9,400 22,075 18,523
Other operating income
Service charges on deposit accounts 1,113 773 2,190 1,482
Lockbox fees 972 974 1,859 1,804
Brokerage commissions 320 337 587 677
Other income 574 175 791 377
---------- ---------- ---------- ----------
Total other operating income 2,979 2,259 5,427 4,340
---------- ---------- ---------- ----------
Operating expenses
Salaries and employee benefits 5,396 4,638 10,619 9,120
Occupancy 528 520 1,099 1,079
Equipment 538 463 1,077 904
Other 2,182 1,820 4,217 3,520
---------- ---------- ---------- ----------
Total operating expenses 8,644 7,441 17,012 14,623
---------- ---------- ---------- ----------
Income before income taxes 5,734 4,218 10,490 8,240
Provision for income taxes 2,098 1,552 3,850 3,028
---------- ---------- ---------- ----------
Net income $ 3,636 $ 2,666 $ 6,640 $ 5,212
========== ========== ========== ==========
- --------------------------------------------------------------------------------------------------------------------------
Share data:
Weighted average number of shares outstanding, basic 5,515,982 5,540,350 5,515,767 5,543,831
Weighted average number of shares outstanding, diluted 5,536,224 5,548,550 5,530,548 5,547,047
Net income per share, basic $ 0.66 $ 0.48 $ 1.20 $ 0.94
Net income per share, diluted $ 0.66 $ 0.48 $ 1.20 $ 0.94
Cash dividends declared:
Class A common stock $ 0.1000 $ 0.0900 $ 0.2000 $ 0.1800
Class B common stock $ 0.0500 $ 0.0450 $ 0.1000 $ 0.0900
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc. -- Consolidated Statement of Changes in Stockholders' Equity (unaudited)
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Accumulated
Class A Class B Additional Treasury Treasury Other Total
Common Common Paid-In Retained Stock Stock Comprehensive Stockholders'
Stock Stock Capital Earnings Class A Class B Income (Loss) Equity
--------- ------- ---------- -------- -------- ------- ------------- -------------
(000's)
2001
- ----
Balance at December 31, 2000 $3,755 $2,192 $11,093 $60,916 ($5,242) ($41) ($1,167) $71,506
Net income -- -- -- 5,212 -- -- -- 5,212
Other comprehensive income, net of tax:
Change in unrealized gain on
securities available-for-sale -- -- -- -- -- -- 1,951 1,951
-------
Comprehensive income 7,163
Conversion of Class B common stock to
Class A common stock, 6,300 shares 6 (6) -- -- -- -- -- --
Treasury stock repurchases, 10,000 shares -- -- -- -- (178) -- -- (178)
Cash dividends, Class A common stock,
$.18 per share -- -- -- (613) -- -- -- (613)
Cash dividends, Class B common stock,
$.09 per share -- -- -- (192) -- -- -- (192)
--------- ------ ------- ------- ------- ---- ------ -------
Balance at June 30, 2001 $3,761 $2,185 $11,093 $65,323 ($5,420) ($41) $784 $77,686
=========================================================================================
2002
- ----
Balance at December 31, 2001 $3,761 $2,185 $11,093 $70,124 ($5,941) ($41) $3,418 $84,599
Net income -- -- -- 6,640 -- -- -- 6,640
Other comprehensive income, net of tax:
Change in unrealized gain on
securities available-for-sale -- -- -- -- -- -- 2,504 2,504
--------
Comprehensive income 9,144
Conversion of Class B common stock to
Class A common stock, 17,400 shares 17 (17) -- -- -- -- -- --
Stock Options Exercised, 2,050 shares 2 -- 29 -- -- -- -- 31
Cash dividends, Class A common stock,
$.20 per share -- -- -- (679) -- -- -- (679)
Cash dividends, Class B common stock,
$.10 per share -- -- -- (212) -- -- -- (212)
--------- ------ ------- ------- ------- ---- ------ -------
Balance at June 30, 2002 $3,780 $2,168 $11,122 $75,873 ($5,941) ($41) $5,922 $92,883
=========================================================================================
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc. -- Consolidated Statements of Cash Flows (unaudited)
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For the six months ended
June 30,
--------------------------
2002 2001
--------- ----------
(000's)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,640 $ 5,212
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 600 750
Deferred income taxes (803) (384)
Net depreciation and amortization 947 1,140
(Increase) decrease in accrued interest receivable (1,895) 182
Increase in other assets (1,660) (3,175)
Proceeds from sales of loans 73 40
Gain on sales of loans (1) (1)
Gain on sales of securities -- (27)
Gain on sale of building (359) --
Increase (decrease) in other liabilities 619 (777)
--------- ---------
Net cash provided by operating activities 4,161 2,960
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 114,314 100,244
Purchase of securities available-for-sale (222,088) (186,229)
Proceeds from maturities of securities held-to-maturity 32,170 54,483
Purchase of securities held-to-maturity (17,969) (29,953)
(Decrease) increase in payable for investments purchased (33,976) 13,993
Net increase in loans (34,641) (1,607)
Proceeds from sale of building 1,020 --
Capital expenditures (1,126) (1,348)
--------- ---------
Net cash used in investing activities (162,296) (50,417)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in time deposits (13,815) (66,840)
Net increase in demand, savings, money market and NOW deposits 78,639 26,054
Net proceeds from the exercise of stock options 31 --
Treasury stock repurchases -- (178)
Cash dividends (891) (805)
Net decrease in securities sold under agreements to repurchase (15,950) (6,040)
Net increase (decrease) in FHLB borrowings and other borrowed funds 26,932 (4,823)
--------- ---------
Net cash provided by (used in) financing activities 74,946 (52,632)
--------- ---------
Net decrease in cash and cash equivalents (83,189) (100,089)
Cash and cash equivalents at beginning of year 177,833 175,802
--------- ---------
Cash and cash equivalents at end of period $ 94,644 $ 75,713
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 11,963 $ 16,820
Income taxes 4,412 2,572
Change in unrealized losses on securities available-for-sale,
net of taxes $ 2,504 $ 1,951
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc.
Notes to Consolidated Financial Statements
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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 types and amounts
of loans that may be granted and the interest that may be charged
thereon, and limitations on 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 under FASB 131.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements reflect all adjustments, consisting
of normal recurring adjustments, which are necessary to present a fair
statement of the results for the interim period presented of the
Company and its wholly owned subsidiary, the Bank. The results of
operations for the interim period ended June 30, 2002, are not
necessarily indicative of results for the entire year. All significant
intercompany accounts and transactions have been eliminated in
consolidation. It is suggested that these statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10K for the
year ended December 31, 2001.
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of
America and to 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.
Material estimates that are susceptible to change in the near-term
relate to the allowance for losses on loans. Management believes that
the allowance for losses on loans is adequate based on independent
appraisals and review of other factors associated with the assets.
While management uses available information to recognize losses on
loans, future additions to the allowance for loans may be necessary
based on changes in economic conditions. In addition, regulatory
agencies periodically review the Company's allowance for losses on
loans. Such
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agencies may require the Company to recognize additions to the
allowance for loans based on their judgements about information
available to them at the time of their examination.
INVESTMENT SECURITIES
Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as held-to-maturity and reported at
amortized cost; debt and equity securities that are bought and held
principally for the purpose of selling are classified as trading and
reported at fair value, with unrealized gains and losses included in
earnings; and debt and equity securities not classified as either
held-to-maturity or trading are classified as available-for-sale and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholder's equity.
The Company has no securities held for trading.
Premiums and discounts on investment securities are amortized or
accreted into income by use of the level-yield method. If a decline in
fair value below the amortized cost basis of an investment is judged
to be other than temporary, the cost basis of the investment is
written down to fair value. The amount of the writedown is included as
a charge to earnings. Gains and losses on the sale of investment
securities are recognized at the time of sale on a specific
identification basis.
LOANS
Interest on loans is recognized based on the daily principal amount
outstanding. Accrual of interest is discontinued when loans become 90
days delinquent unless the collateral is sufficient to cover both
principal and interest and the loan is in the process of collection.
Loans, including impaired loans, on which the accrual of interest has
been discontinued are designated non-accrual loans. When a loan is
placed on non-accrual, all income which has been accrued but remains
unpaid is reversed against current period income and all amortization
of deferred loan fees is discontinued. Non-accrual loans may be
returned to an accrual status when principal and interest payments are
not delinquent and the risk characteristics of the loan have improved
to the extent that there no longer exists a concern as to the
collectibility of principal income. Income received on non-accrual
loans is either recorded in income or applied to the principal balance
of the loan depending on management's evaluation as to the
collectibility of principal.
Loans held for sale are carried at the lower of aggregate amortized
cost or market value. When loans are sold with servicing rights
retained the Company allocates the carrying amount of the loans
between the underlying asset sold and the servicing rights retained on
the basis of the relative fair values of the assets sold and rights
retained. The value of the servicing rights retained is amortized
against mortgage banking income based on the estimated servicing
period. When actual prepayments exceed the estimated prepayments, the
balance of the mortgage servicing rights is reduced. Periodically the
mortgage servicing rights are assessed for impairment based on the
fair value of such rights using market prices.
Loan origination fees and related direct incremental loan origination
costs are offset and the resulting net amount is deferred and
amortized over the life of the related loans using the level-yield
method.
The Bank accounts for impaired loans, except those loans that are
accounted for at fair value or at lower of cost or fair value, at the
present value of the expected
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future cash flows discounted at the loan's effective interest rate.
This method applies to all loans, uncollateralized as well as
collateralized, except large groups of smaller-balance homogenous
loans that are collectively evaluated for impairment, loans that are
measured at fair value and leases. Management considers the payment
status, net worth and earnings potential of the borrower, and the
value and cash flow of the collateral as factors to determine if a
loan will be paid in accordance with its contractual terms. Management
does not set any minimum delay of payments as a factor in reviewing
for impaired classification. Impaired loans are charged-off when
management believes that the collectibility of the loan's principal is
remote. In addition, criteria for classification of a loan as
in-substance foreclosure have been modified so that such
classification need be made only when a lender is in possession of the
collateral. The Bank measures the impairment of troubled debt
restructurings using the pre-modification rate of interest.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based on management's evaluation of
the quality of the loan portfolio and is used to provide for losses
resulting from loans which ultimately prove uncollectible. In
determining the level of allowance, periodic evaluations are made of
the loan portfolio which take into account such factors as the
character of loans, loan status, financial posture of the borrowers,
value of collateral securing the loans and other relevant information
sufficient to reach an informed judgment. The allowance is increased
by provisions charged to income and reduced by loan charge-offs, net
of recoveries.
Management maintains an allowance for credit losses to absorb losses
inherent in the loan portfolio. The allowance is based on assessments
of the probable estimated losses inherent in the loan portfolio.
Management's methodology for assessing the appropriateness of the
allowance consists of several key elements, which include the formula
allowance, specific allowances for identified problem loans and the
unallocated allowance.
The formula allowance is calculated by applying loss factors to
outstanding loans, in each case based on the internal risk grade of
such loans. Changes in risk grades affect the amount of the formula
allowance. Loss factors are based on the Company's historical loss
experience as well as regulatory guidelines.
Specific allowances are established in cases where management has
identified significant conditions related to a credit that management
believes that the probability that a loss has been incurred in excess
of the amount determined by the application of the formula allowance.
The unallocated allowance recognizes the model and estimation risk
associated with the formula allowance and specific allowances as well
as management's evaluation of various conditions, the effects of which
are not directly measured in the determination of the formula and
specific allowances. The evaluation of inherent loss with respect to
these conditions is subject to a higher degree of uncertainty because
they are not identified with specific problem credits.
While management uses available information in establishing the
allowance for loan losses, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluations. Loans are charged-off in
whole or in part when, in management's opinion, collectibility is not
probable.
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Management believes that allowance for loan losses is adequate. In
addition, various regulatory agencies, as part of their examination
process, periodically review the Company's allowance for loan losses.
Such agencies may require the Company to recognize additions to the
allowance based on their judgments about information available to them
at the time of their examination.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets or
the term of leases, if shorter. It is general practice to charge the
cost of maintenance and repairs to operations when incurred; major
expenditures for improvements are capitalized and depreciated.
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which
temporary differences are expected to be recovered or settled. Under
this method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW For the quarter ended and year-to-date ended June 30, 2002.
Earnings for the second quarter ended June 30, 2002 were $3.6 million,
an increase of 36.4% when compared with the second quarter 2001
earnings of $2.7 million. Diluted earnings per share for the second
quarter 2002 were $0.66 versus $0.48 for the second quarter of 2001.
The increase was mainly attributable to average balance sheet growth
as well as a pretax realized gain of $359,000 associated with the sale
of bank premises.
Earnings for the six months ended June 30, 2002 were $6.6 million, an
increase of 27.4% when compared with the same period last year
earnings of $5.2 million. Diluted earnings per share for the first six
months were $1.20 versus $0.94 for the first six months of 2001. The
increase was mainly attributable to average balance sheet growth, as
well as a pretax realized gain of $359,000 associated with the sale of
bank premises.
FINANCIAL CONDITION
LOANS On June 30, 2002 total loans outstanding, net of unearned discount,
were $497.6 million, an increase of 7.5% from the total on December
31, 2001. At June 30, 2002 commercial real estate loans accounted for
54.1% and residential real estate loans, including home equity credit
lines, accounted for 25.5% of total loans. Construction loans
increased to $42.4 million at June 30, 2002 from $39.3 million on
December 31, 2001.
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Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
The increase in loans was partly attributable to commercial real
estate loans and residential real estate loans, including home equity
credit lines. Also, originations of corporate loans reflect the
Company's interest for this type of loan.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses was 1.55% of total loans on June 30,
2002 compared with 1.54% on December 31, 2001. Net recoveries for the
six-month period ended June 30, 2002 were $8 thousand compared with
net recoveries of $193 thousand for the same period in 2001. The
allowance has been added to due to loan growth.
Management believes that the allowance for loan losses is adequate.
Management uses available information to provide for losses but
recognizes that changes in economic conditions may result in
additional losses and additional loss provisions. Also, the allowance
is reviewed in conjunction with regulatory examinations. These reviews
may require the Company to make additional provisions to the allowance
based on judgements made by the regulators.
NONPERFORMING LOANS
JUNE 30, DECEMBER 31,
U 2002 2001
-------- ------------
(Dollars in Thousands)
Nonaccruing loans $674 $423
Loans past due 90 days
or more $324 $ 9
Nonaccuring loans as a
Percentage of total loans .14% .09%
INVESTMENTS
Management continually evaluates its investment alternatives in order
to properly manage the overall balance sheet mix. The timing of
purchases, sales and reinvestments, if any, will be based on various
factors including expectation of movements in market interest rates,
deposit flows and loan demand. Notwithstanding these events, it is the
intent of management to grow the earning asset base through loan
originations, loan purchases or investment acquisitions while funding
this growth through a mix of retail deposits, FHLB advances, and
retail repurchase agreements.
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(Dollars in Thousands)
SECURITIES AVAILABLE-FOR-SALE
U.S. Government and
Agencies $518,527 $411,004
Other Bonds and Equity Securities 18,967 19,668
Mortgage-backed Securities 35,014 30,161
-------- --------
Total Securities Available-for-Sale $572,508 $460,833
======== ========
SECURITIES HELD-TO-MATURITY
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Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
U.S. Government and
Agencies $ 85,362 $ 85,386
Other Bonds and Equity Securities 25 25
Mortgage-backed Securities 43,003 57,197
-------- --------
Total Securities Held-to-Maturity $128,390 $142,608
======== ========
SECURITIES AVAILABLE-FOR-SALE
The securities available-for-sale portfolio totaled $572.5 million at
June 30, 2002, an increase of 24.2% from December 31, 2001. The
portfolio increased mainly because of increases in deposits and
borrowed funds. The portfolio is concentrated in United States
Treasury and Agency securities and has an estimated weighted average
maturity of 3.2 years.
SECURITIES HELD-TO-MATURITY
The securities held-to-maturity portfolio totaled $128.4 million on
June 30, 2002, a decrease of 10.0% from the total on December 31,
2001. The portfolio is concentrated in United States Treasury and
Agency securities, including Mortgage Backed Securities and has an
estimated weighted average maturity of 3.3 years.
DEPOSITS AND BORROWED FUNDS
On June 30, 2002 deposits totaled $953.2 million, representing a 7.3%
increase in total deposits from December 31, 2001. Total deposits
increased primarily as a result of increases in savings and money
market accounts. Borrowed funds totaled $227.3 million compared to
$216.3 million at December 31, 2001.
RESULTS OF OPERATIONS
NET INTEREST INCOME
For the three-month period ended June 30, 2002 net interest income
totaled $11.7 million, an increase of 19.7% from the comparable period
in 2001. For the six-month period ended June 30, 2002 net interest
income totaled $22.7 million, an increase of 17.7% from the comparable
period in 2001. The increase in net interest income, for the three and
six month periods, was primarily attributable to an increase in the
average balances of earning assets combined with a similar increase in
deposits and borrowed funds offset by a slight decrease in the net
interest margin. A more favorable mix of deposits also contributed to
the increase in net interest income. The net yield on average earning
assets on a fully taxable equivalent basis decreased to 3.93% in the
first six months of 2002 from 4.03% during the same period in 2001.
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Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
SELECTED COMPONENTS OF CHANGES IN VOLUME AND RATE
(Year-to-date averages in thousands) CHANGE IN CHANGE IN
VOLUME RATE
-------- ---------
Earning Assets:
Securities $194,825 (.95)%
Total Loans 30,299 (1.21)%
Deposits, Borrowed Funds
and Long-Term Debt:
Demand Deposits $ 18,475 --
Total Interest Bearing Deposits 124,983 (1.64)%
Borrowed Funds and
Long-Term Debt 53,335 (1.11)%
PROVISION FOR LOAN LOSSES
For the three-month period ended June 30, 2002 the loan loss provision
totaled $300 thousand compared to $375 thousand for the same period
last year. For the six-month period ended June 30, 2002 the loan loss
provision totaled $600 thousand compared to $750 thousand for the same
period last year. Loan loss provision decreased because management's
determination of the relative adequacy in the loan loss reserve. The
Company's loan loss allowance as a percentage of total loans
outstanding has increased from 1.54% at December 31, 2001 to 1.55% at
June 30, 2002.
NON-INTEREST INCOME AND EXPENSE
Other operating income for the quarter ended June 30, 2002 was $3.0
million compared to $2.3 million for the second quarter of 2001. The
increase was mainly attributable to an increase of a pretax gain of
$359 thousand associated with the sale of bank premises as well as a
$340 thousand increase in service charges on deposit accounts. For the
six-month period ending June 30, 2002 other operating income totaled
$5.4 million compared to $4.3 million for the same period in 2001. The
increase was mainly attributable to a $708 thousand increase in
service charges on deposit accounts as well as a pretax gain of $359
thousand associated with the sale of bank premises. Service charges on
deposit accounts increased mainly because of an increase in deposits.
This increase was partially offset by a decrease of $90 thousand from
brokerage commissions, which decreased because of market conditions.
During the six-month period ended June 30, 2002, operating expenses
increased by $1.2 million to $8.6 million or 16.2% from the same
period last year. Most of the increase was in compensation expense
associated with increased staff levels as well as merit increases in
salaries and employee benefits with the remainder in equipment and all
other expenses. For the six-month period ended June 30, 2002 operating
expenses totaled $17.0 million compared to $14.6 million for the same
period in 2001. Most of the increase was in staff levels as well as
merit increases in salaries and employee benefits with the remainder
in all other expenses.
INCOME TAXES
For the second quarter of 2002, the Company's income taxes totaled
$2.1 million on pretax income of $5.7 million for an effective tax
rate of 36.6%. For last year's corresponding quarter, the Company's
income taxes totaled $1.6 million
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Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
on pretax income of $4.2 million for an effective tax rate of 36.8%.
For the six month period ended June 30, 2002 the Company's income
taxes totaled $3.9 million on pretax income of $10.5 million for an
effective tax rate of 36.7%. For last year's corresponding period, the
Company's income taxes totaled $3.0 million on pretax income of $8.2
million for an effective rate of 36.7%.
The Company has received from the Commonwealth of Massachusetts
Department of Revenue (DOR) notice that dividend distributions by the
Bank's subsidiary real estate investment trust (REIT) are fully
taxable in Massachusetts and therefore not subject to the dividends
received deduction (DRD). The Notice of Intent to Assess additional
state excise taxes totaled $1.3 million plus interest for the two
years ended December 31, 1999 and 2000. As of the date of this notice
interest amounted to $280 thousand. The Company has received
additional state tax benefits of approximately $2.2 million for the
eighteen months ended June 30, 2002. The Company intends to defend its
position.
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 and Section 21E
of the Securities Exchange Act of 1934. 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
nontraditional institutions such as credit unions and finance
companies, and (iv) the fact that a significant portion of the
Company's loan portfolio was 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, 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.
14 of 15
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The response is incorporated herein by reference from the discussion
under the sub caption "Market Risk and Asset Liability Management" of
the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" on page 12 of the Annual Report
which is incorporated herein by reference.
PART II -- OTHER INFORMATION
Item 1 Legal proceedings -- The Company is not engaged in any legal
proceedings of a material nature at the present time. From time to
time, the Company is party to routine legal proceedings within the
normal course of business. Such routine legal proceedings, in the
aggregate, are believed by management to be immaterial to the
Company's financial condition and results of operation.
Item 2 Change in securities -- Not applicable
Item 3 Defaults upon senior securities -- Not applicable
Item 4 Submission of matters to a vote -- Not applicable
Item 5 Other information --
Certification Under Sarbanes-Oxley Act
Our chief executive officer and chief financial officer have furnished
to the SEC the certification with respect to this Report that is
required by section 906 of the Sarbanes-Oxley Act of 2002.
Item 6 Exhibits and reports on form 8-K -- Not applicable
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