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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 September 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
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of September 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
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Century Bancorp, Inc.
Page
Index Number
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PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets:
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Income:
Three (3) and Nine (9) months ended September 30, 2002 and
2001. 4
Consolidated Statements of Changes in Stockholders'
Equity: Nine (9) months ended September 30, 2002 and
2001. 5
Consolidated Statements of Cash Flows:
Nine (9) months ended September 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- 17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK 17
Item 4. CONTROLS AND PROCEDURES 17
Part II. OTHER INFORMATION
Item 1 through Item 6 17-18
Signatures 18
Certifications 19-20
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PART I - Item 1
Century Bancorp, Inc. - Consolidated Balance Sheets
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(000's) Sept. 30,
2002 Dec. 31,
ASSETS (unaudited) 2001
----------- -----------
Cash and due from banks $ 65,475 $ 71,820
Federal funds sold and interest-bearing deposits in other banks 3,514 106,013
----------- -----------
Total cash and cash equivalents 68,989 177,833
----------- -----------
Securities available-for-sale, amortized cost $639,230 and
$455,575, respectively 650,693 460,833
Securities held-to-maturity, market value $126,375 and
$145,237, respectively 123,225 142,608
Loans, net:
Commercial & industrial 53,698 59,162
Construction & land development 48,820 39,256
Commercial real estate 268,671 241,419
Residential real estate 94,990 88,450
Consumer & other 8,225 8,469
Home equity 37,557 26,016
----------- -----------
Total loans, net 511,961 462,772
Less: allowance for loan losses 8,224 7,112
----------- -----------
Net loans 503,737 455,660
Bank premises and equipment 12,138 11,882
Accrued interest receivable 9,195 7,561
Goodwill 2,717 2,717
Core Deposit Intangible 17 167
Other assets 13,012 11,761
----------- -----------
Total assets $ 1,383,723 $ 1,271,022
=========== ===========
LIABILITIES
Deposits:
Demand deposits $ 248,165 $ 227,319
Savings and NOW deposits 221,751 187,676
Money market accounts 306,669 242,665
Time deposits 225,969 230,748
----------- -----------
Total deposits 1,002,554 888,408
Securities sold under agreements to repurchase 58,040 72,840
Federal Home Loan Bank (FHLB) borrowings and other borrowed funds 170,403 143,481
Other liabilities 26,652 52,944
Long term debt 28,750 28,750
----------- -----------
Total liabilities 1,286,399 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 78,785 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)
----------- -----------
89,873 81,181
Accumulated other comprehensive gain, net of taxes 7,451 3,418
----------- -----------
Total stockholders' equity 97,324 84,599
----------- -----------
Total liabilities and stockholders' equity $ 1,383,723 $ 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 September 30, Nine months ended September 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Interest income
Loans $ 9,168 $ 9,060 $ 26,684 $ 28,084
Securities held-to-maturity 1,759 2,273 5,543 7,239
Securities available-for-sale 6,920 5,047 19,909 14,033
Federal funds sold and interest-bearing deposits in other banks 243 505 522 1,932
---------- ---------- ---------- ----------
Total interest income 18,090 16,885 52,658 51,288
Interest expense
Savings and NOW deposits 684 946 1,920 2,819
Money market accounts 1,293 928 3,488 2,591
Time deposits 1,950 2,628 5,637 9,479
Securities sold under agreements to repurchase 167 368 541 1,445
FHLB borrowings, other borrowed funds and long term debt 2,438 1,943 6,839 5,609
---------- ---------- ---------- ----------
Total interest expense 6,532 6,813 18,425 21,943
---------- ---------- ---------- ----------
Net interest income 11,558 10,072 34,233 29,345
Provision for loan losses 300 375 900 1,125
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 11,258 9,697 33,333 28,220
Other operating income
Service charges on deposit accounts 1,096 896 3,286 2,378
Lockbox fees 787 788 2,646 2,592
Brokerage commissions 285 269 872 946
Other income 292 217 1,083 594
---------- ---------- ---------- ----------
Total other operating income 2,460 2,170 7,887 6,510
---------- ---------- ---------- ----------
Operating expenses
Salaries and employee benefits 5,426 4,603 16,045 13,723
Occupancy 562 524 1,661 1,603
Equipment 563 472 1,640 1,376
Other 1,848 1,847 6,065 5,367
---------- ---------- ---------- ----------
Total operating expenses 8,399 7,446 25,411 22,069
---------- ---------- ---------- ----------
Income before income taxes 5,319 4,421 15,809 12,661
Provision for income taxes 1,916 1,626 5,766 4,654
---------- ---------- ---------- ----------
Net income $ 3,403 $ 2,795 $ 10,043 $ 8,007
========== ========== ========== ==========
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Share data:
Weighted average number of shares outstanding, basic 5,517,400 5,538,502 5,516,317 5,542,035
Weighted average number of shares outstanding, diluted 5,537,009 5,550,007 5,532,417 5,547,604
Net income per share, basic $0.62 $0.50 $1.82 $1.44
Net income per share, diluted $0.61 $0.50 $1.82 $1.44
Cash dividends declared:
Class A common stock $0.1100 $0.1000 $0.3100 $0.2800
Class B common stock $0.0550 $0.0500 $0.1550 $0.1400
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc. - Consolidated Statements 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 -- -- -- 8,007 -- -- -- 8,007
Other comprehensive income, net of tax:
Change in unrealized gain on
securities available-for-sale -- -- -- -- -- -- 6,617 6,617
--------
Comprehensive income 14,624
Conversion of Class B common stock to
Class A common stock, 6,420 shares 6 (6) -- -- -- -- -- --
Treasury stock repurchases, 35,000 shares -- -- -- -- (699) -- -- (699)
Cash dividends, Class A common stock,
$.27 per share -- -- -- (920) -- -- -- (920)
Cash dividends, Class B common stock,
$.135 per share -- -- -- (288) -- -- -- (288)
------- ------- ------- -------- ------- ---- ------- --------
Balance at September 30, 2001 $ 3,761 $ 2,186 $11,093 $ 67,715 ($5,941) ($41) $ 5,450 $ 84,223
======= ======= ======= ======== ======= ==== ======= ========
2002
Balance at December 31, 2001 $ 3,761 $ 2,185 $11,093 $ 70,124 ($5,941) ($41) $ 3,418 $ 84,599
Net income -- -- -- 10,043 -- -- -- 10,043
Other comprehensive income, net of tax:
Change in unrealized gain on
securities available-for-sale -- -- -- -- -- -- 4,033 4,033
--------
Comprehensive income 14,076
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,
$.31 per share -- -- -- (1,053) -- -- -- (1,053)
Cash dividends, Class B common stock,
$.155 per share -- -- -- (329) -- -- -- (329)
------- ------- ------- -------- ------- ---- ------- --------
Balance at September 30, 2002 $ 3,780 $ 2,168 $11,122 $ 78,785 ($5,941) ($41) $ 7,451 $ 97,324
======= ======= ======= ======== ======= ==== ======= ========
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc. - Consolidated Statements of Cash Flows (unaudited) 2002 2001
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For the nine months ended
September 30,
(000's)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,043 $ 8,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 900 1,125
Deferred income taxes (1,173) (527)
Net depreciation and amortization 1,465 1,633
Increase in accrued interest receivable (1,634) (583)
(Increase) decrease in other assets (1,687) 91
Proceeds from sales of loans 73 89
Gain on sales of loans (1) (1)
Gain on sales of securities -- (47)
Gain on sale of building (359) --
Increase (decrease) in other liabilities 1,193 (1,186)
--------- ---------
Net cash provided by operating activities 8,820 8,601
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 200,350 163,391
Purchase of securities available-for-sale (383,978) (245,853)
Proceeds from maturities of securities held-to-maturity 42,335 76,921
Purchase of securities held-to-maturity (22,967) (56,940)
(Decrease) increase in payable for investments purchased (28,976) 1,001
Net increase in loans (48,695) (1,037)
Proceeds from sale of building 1,020 --
Capital expenditures (1,670) (3,804)
--------- ---------
Net cash used in investing activities (242,581) (66,321)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in time deposits (4,779) (75,484)
Net increase in demand, savings, money market and NOW deposits 118,925 124,132
Net proceeds from the exercise of stock options 31 --
Treasury stock repurchases -- (699)
Cash dividends (1,382) (1,208)
Net decrease in securities sold under agreements to repurchase (14,800) (6,660)
Net increase in FHLB borrowings and other borrowed funds 26,922 14,891
--------- ---------
Net cash provided by financing activities 124,917 54,972
--------- ---------
Net decrease in cash and cash equivalents (108,844) (2,748)
Cash and cash equivalents at beginning of year 177,833 175,802
--------- ---------
Cash and cash equivalents at end of period $ 68,989 $ 173,054
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 18,381 $ 23,882
Income taxes 6,267 3,938
Change in unrealized gains on securities available-for-sale, net of taxes $ 4,033 $ 6,617
See accompanying Notes to Consolidated Financial Statements.
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Century Bancorp, Inc.
Notes to Consolidated Financial Statements
SUMMARY OF CRITICAL 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 Statements of
Financial Accounting Standards No. 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 September 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
Page 7 of 20
agencies may require the Company to recognize additions to the
allowance for loans based on their judgments 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
Page 8 of 20
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.
Page 9 of 20
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 September 30, 2002.
Earnings for the third quarter ended September 30, 2002 were $3.4
million, an increase of 21.8% when compared with the third quarter
2001 earnings of $2.8 million. Diluted earnings per share for the
third quarter 2002 were $0.61 versus $0.50 for the third quarter of
2001. The increase was mainly attributable to average balance sheet
growth.
Earnings for the nine months ended September 30, 2002 were $10.0
million, an increase of 25.4% when compared with the same period last
year earnings of $8.0 million. Diluted earnings per share for the
first nine months were $1.82 versus $1.44 for the first nine 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.
On October 30, 2002 the Bank and Capital Crossing Bank announced the
signing of a definitive agreement under which the Bank will acquire
Capital Crossing's branch office at 1220 Boylston Street, Chestnut
Hill, Massachusetts, and substantially all of its retail deposits in
its main office at 101 Summer Street, Boston, Massachusetts. The
agreement includes the acquisition of approximately $233.0 million in
deposits and $4.0 million of related loans. The transaction is subject
to customary conditions, including regulatory approval, and is
expected to close in the first quarter of 2003.
Page 10 of 20
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
FINANCIAL CONDITION
LOANS On September 30, 2002, total loans outstanding, net of unearned
discount, were $512.0 million, an increase of 10.6% from the
total on December 31, 2001. At September 30, 2002 commercial real
estate loans accounted for 52.5% and residential real estate
loans, including home equity credit lines, accounted for 25.9% of
total loans. Construction loans increased to $48.8 million at
September 30, 2002 from $39.3 million on December 31, 2001.
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 1.61% of total loans on
September 30, 2002 compared with 1.54% on December 31, 2001. Net
recoveries for the nine-month period ended September 30, 2002
were $212 thousand compared with net recoveries of $264 thousand
for the same period in 2001. Additional provisions have been made
to due to growth in the loan portfolio. At the current time
management believes that the allowance for loan losses is
adequate.
NONPERFORMING LOANS
September 30, 2002 December 31, 2001
------------------ -----------------
(Dollars in Thousands)
Nonaccruing loans $688 $423
Loans past due 90 days
or more $ 0 $ 9
Nonaccuring loans as a
Percentage of total loans .13% .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.
Page 11 of 20
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
September 30, 2002 December 31, 2001
------------------ -----------------
(Dollars in Thousands)
SECURITIES AVAILABLE-FOR-SALE
U.S. Government and
Agencies $597,684 $411,004
Other Bonds and Equity Securities 18,071 19,668
Mortgage-backed Securities 34,938 30,161
-------- --------
Total Securities Available-for-Sale $650,693 $460,833
======== ========
SECURITIES HELD-TO-MATURITY
U.S. Government and
Agencies $ 84,372 $ 85,386
Other Bonds and Equity Securities 25 25
Mortgage-backed Securities 38,828 57,197
-------- --------
Total Securities Held-to-Maturity $123,225 $142,608
======== ========
SECURITIES AVAILABLE-FOR-SALE
The securities available-for-sale portfolio totaled $650.7
million at September 30, 2002, an increase of 41.2% 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 3.0 years.
SECURITIES HELD-TO-MATURITY
The securities held-to-maturity portfolio totaled $123.2 million
on September 30, 2002, a decrease of 13.6% 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 3.2
years.
DEPOSITS AND BORROWED FUNDS
On September 30, 2002 deposits totaled $1,002.6 million,
representing a 12.8% 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
$228.4 million compared to $216.3 million at December 31, 2001.
Page 12 of 20
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
RESULTS OF OPERATIONS
NET INTEREST INCOME
For the three-month period ended September 30, 2002 net interest
income totaled $11.6 million, an increase of 14.8% from the
comparable period in 2001. For the nine-month period ended
September 30, 2002 net interest income totaled $34.2 million, an
increase of 16.7% from the comparable period in 2001. The
increase in net interest income, for the three and nine 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. For the nine-month period, the
increase in volume was partially offset by a twenty-one point
decrease in the net interest margin. The net yield on average
earning assets on a fully taxable equivalent basis decreased to
3.83% in the first nine months of 2002 from 4.04% during the same
period in 2001.
Page 13 of 20
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
The following table sets forth the distribution of the Company's
average assets, liabilities and stockholders' equity, and average
rates earned or paid on a fully taxable equivalent basis for each
of the nine-month periods indicated.
September 30, 2002 September 30, 2001
---------------------------------------------------------------------------------------
Average Interest Rate Average Interest Rate
Balance Income/ Earned/ Balance Income/ Earned/
Expense(1) Paid Expense(1) Paid
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
ASSETS
Interest-earning assets:
Loans (2) $ 482,025 26,684 7.40% $ 439,637 28,084 8.54%
Securities available-for-sale 538,765 19,921 4.93% 314,690 14,048 5.95%
Securities held-to-maturity 129,621 5,543 5.70% 154,919 7,239 6.23%
Temporary funds 41,706 522 1.65% 58,779 1,932 4.33%
----------- ----------- ---- ---------- ------- ----
Total interest earning
Assets $ 1,192,117 $ 52,670 5.90% $ 968,025 $51,303 7.07%
Non interest-earning assets 98,349 84,383
Allowance for loan losses (7,643) (6,377)
---------- ----------
Total assets $ 1,282,823 $1,046,031
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing deposits:
NOW account $ 169,942 $ 1,438 1.13% $134,938 $ 2,090 2.07%
Savings accounts 72,002 482 .90% 62,871 729 1.55%
Money market accounts 255,116 3,488 1.83% 122,954 2,591 2.82%
Time deposits 206,309 5,637 3.65% 237,485 9,479 5.34%
----------- ----------- ---- ---------- ------- ----
Total interest-bearing
Deposits 703,369 11,045 2.10% 558,248 14,889 3.57%
Securities sold under
Agreements to
Repurchase 63,561 541 1.14% 61,746 1,445 3.13%
Other borrowed funds and
Long term debt 182,619 6,839 5.01% 129,427 5,609 5.80%
----------- ----------- ---- ---------- ------- ----
Total interest-bearing
Liabilities 949,549 18,425 2.59% 749,421 21,943 3.92%
Non interest-bearing
Liabilities
Demand deposits 225,813 203,056
Other liabilities 17,232 16,150
---------- ----------
Total liabilities 1,192,594 968,627
Stockholders' equity 90,229 77,404
========== ==========
Total liabilities &
Stockholders
Equity $1,282,823 $1,046,031
=========== ==========
Net interest income $ 34,245 $29,360
-----------------------------------------------------------------------------------------------------
Net interest spread 3.31% 3.15%
-----------------------------------------------------------------------------------------------------
Net yield on earnings
Assets 3.83% 4.04%
-----------------------------------------------------------------------------------------------------
(1) On a fully taxable equivalent basis calculated using a federal tax rate
of 35%.
(2) Nonaccrual loans are included in average amounts outstanding.
Page 14 of 20
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
2002 Compared with 2001
--------------------------------------------------
Increase/(Decrease)
Due to Change in
--------------------------------------------------
Income
Increase
Volume Rate (Decrease)
----------------------------------------------------------------------------------
(dollars in thousands)
Interest Income:
Loans $ 2,729 $(4,129) $(1,400)
Securities available-for-sale 10,010 (4,127) 5,873
Securities held-to-maturity (1,182) (514) (1,696)
Temporary funds (561) (849) (1,410)
-------- ------- -------
Total interest income 10,986 (9,619) 1,367
======== ======= =======
Interest expense:
Deposits:
NOW accounts 650 (1,302) (652)
Savings accounts 106 (353) (247)
Money market accounts 2,819 (1,922) 897
Time deposits (1,236) (2,606) (3,842)
-------- ------- -------
Total interest-bearing deposits 2,339 (6,183) (3,844)
Securities sold under agreements to
repurchase 42 (946) (904)
Other borrowed funds and long term
debt 2,306 (1,076) 1,230
-------- ------- -------
Total interest expense 4,687 (8,205) (3,518)
-------- ------- -------
Change in net interest income $ 6,299 (1,414) 4,885
======== ======= =======
PROVISION FOR LOAN LOSSES
For the three-month period ended September 30, 2002, the loan
loss provision totaled $300 thousand compared to $375 thousand
for the same period last year. For the nine-month period ended
September 30, 2002, the loan loss provision totaled $900 thousand
compared to $1,125 thousand for the same period last year. Loan
loss provision decreased because of 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 1.61% at
September 30, 2002.
NON-INTEREST INCOME AND EXPENSE
Other operating income for the quarter ended September 30, 2002
was $2.5 million compared to $2.2 million for the third quarter
of 2001. The increase was mainly attributable to an increase of
$200 thousand in service charges on deposit accounts. For the
nine-month period ending September 30, 2002 other operating
income totaled $7.9 million compared to $6.5 million for the same
period in 2001. The increase was mainly attributable to a $908
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 $74 thousand from brokerage
commissions, which decreased because of market conditions.
Page 15 of 20
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
During the three-month period ended September 30, 2002, operating
expenses increased by $1.0 million to $8.4 million or 12.8% 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
nine-month period ended September 30, 2002 operating expenses
totaled $25.4 million compared to $22.1 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 equipment and all other expenses.
INCOME TAXES
For the third quarter of 2002, the Company's income taxes totaled
$1.9 million on pretax income of $5.3 million for an effective
tax rate of 36.0%. For last year's corresponding quarter, the
Company's income taxes totaled $1.6 million on pretax income of
$4.4 million for an effective tax rate of 36.8%. For the
nine-month period ended September 30, 2002 the Company's income
taxes totaled $5.8 million on pretax income of $15.8 million for
an effective tax rate of 36.5%. For last year's corresponding
period, the Company's income taxes totaled $4.7 million on pretax
income of $12.7 million for an effective rate of 36.8%.
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 Assessment to
change 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 $322 thousand.
The Company has received additional state tax benefits of
approximately $2.6 million for the twenty-one months ended
September 30, 2002. The Company intends to vigorously 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
Page 16 of 20
Management's Discussion and Analysis of Financial Condition and
Results of Operation (con't.)
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.
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.
ITEM 4 CONTROLS AND PROCEDURES
The principal executive officer and principal financial officer
have evaluated the disclosure controls and procedures as of a
date within 90 days before the filing date of this quarterly
report. Based on this evaluation, the principal executive officer
and principal financial officer have concluded that the
disclosure controls and procedures effectively ensure that
information required to be disclosed in the Company's filings and
submissions with the Securities and Exchange Commission under the
Exchange Act, is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange
Commission. In addition, the Company has reviewed its internal
controls and there have been no significant changes in its
internal controls or in other factors that could significantly
affect those controls subsequent to the date of its last
evaluation.
PART II - OTHER INFORMATION
Item 1 Legal proceedings - At the present time, the Company is not
engaged in any legal proceedings which, if adversely determined
to the Company, would have a material adverse impact on the
Company's financial condition or results of operations. From time
to time, the Company is party to routine legal proceedings within
the normal course of business. Such routine legal proceedings, in
the aggregate, are believed by management to be immaterial to the
Company's financial condition and results of operation.
Item 2 Change in securities - Not applicable
Page 17 of 20
Item 3 Defaults upon senior securities - Not applicable
Item 4 Submission of matters to a vote - Not applicable
Item 5 Other information - Not Applicable
Item 6 Exhibits and reports on form 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer and Chief Financial
Officer of the Company pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On October 30, 2002, the Company filed a Current Report on Form
8-K with respect to the Company's execution of a Purchase and
Assumption Agreement with Capital Crossing Bank pursuant to which
the Company will acquire Capital Crossing's branch office at 1220
Boylston Street, Chestnut Hill, Massachusetts, and substantially
all of its retail deposits in its main office at 101 Summer
Street, Boston, Massachusetts.
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: NOVEMBER 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 AND CONTROLLER
(PRINCIPAL FINANCIAL OFFICER) CENTURY BANK AND TRUST COMPANY
(CHIEF ACCOUNTING OFFICER)
Page 18 of 20
CERTIFICATIONS
I, Marshall M. Sloane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors;
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 /s/ Marchall M. Sloane
-------------------------------
Marshall M. Sloane
Chairman and Chief Executive Officer
(Principal Executive Officer)
Page 19 of 20
I, Paul V. Cusick, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Century Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the period presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant, and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors;
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
/s/ Paul V. Cusick, Jr.
Date: November 12, 2002 -------------------------------------
Paul V. Cusick, Jr.
Vice President and Treasurer
(Principal Financial Officer)