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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, 2003 .
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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 .
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of September 30, 2003:
CLASS A COMMON STOCK, $1.00 PAR VALUE 3,405,688 SHARES
CLASS B COMMON STOCK, $1.00 PAR VALUE 2,115,100 SHARES
1 of 22
Century Bancorp, Inc.
Page
Index Number
----- ------
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets:
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Income:
Three (3) and Nine (9) months ended September 30, 2003 and
2002. 4
Consolidated Statements of Changes in Stockholders'
Equity: Nine (9) months ended September 30, 2003 and
2002. 5
Consolidated Statements of Cash Flows:
Nine (9) months ended September 30, 2003 and 2002. 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-16
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 16-17
Item 4. Controls and Procedures 17
Part II. Other Information
Item 1 through Item 6 17
Signatures 18
Exhibits 19-22
2 of 22
PART I - Item 1
Century Bancorp, Inc. - Consolidated Balance Sheets (unaudited)
(000's)
September 30, December 31,
Assets 2003 2002
- ------ ----------- -----------
Cash and due from banks $ 52,257 $ 63,188
Federal funds sold and interest-bearing deposits in other banks 18 59,017
----------- -----------
Total cash and cash equivalents 52,275 122,205
----------- -----------
Securities available-for-sale, amortized cost $781,512 and
$750,129, respectively 788,205 761,531
Securities held-to-maturity, market value $185,809 and
$130,014, respectively 183,764 127,209
Loans, net:
Commercial & industrial 40,889 46,044
Construction & land development 40,457 33,155
Commercial real estate 278,484 291,598
Residential real estate 87,526 92,291
Consumer & other 7,522 9,634
Home equity 47,418 41,527
----------- -----------
Total loans, net 502,296 514,249
Less: allowance for loan losses 9,026 8,506
----------- -----------
Net loans 493,270 505,743
Bank premises and equipment 18,317 12,928
Accrued interest receivable 8,706 9,370
Goodwill 2,717 2,717
Core Deposit Intangible 3,319 0
Other assets 19,779 15,498
----------- -----------
Total assets $ 1,570,352 $ 1,557,201
=========== ===========
Liabilities
- -----------
Deposits:
Demand deposits $ 269,779 $ 248,340
Savings and NOW deposits 286,264 317,698
Money market accounts 429,220 357,921
Time deposits 228,264 222,325
----------- -----------
Total deposits 1,213,527 1,146,284
Securities sold under agreements to repurchase 49,010 51,800
Federal Home Loan Bank (FHLB) borrowings and other borrowed funds 164,494 169,420
Accounts payable for investments purchased 0 43,069
Other liabilities 10,768 17,622
Long term debt 28,750 28,750
----------- -----------
Total liabilities 1,466,549 1,456,945
Commitments and contingencies
Stockholders' equity
- --------------------
Class A common stock, $1.00 par value per share; authorized
10,000,000 shares; issued 3,789,288 shares and 3,780,915 shares, respectively 3,789 3,781
Class B common stock, $1.00 par value per share; authorized
5,000,000 shares; issued 2,162,650 shares and 2,167,660 shares, respectively 2,163 2,168
Additional paid-in capital 11,175 11,123
Retained earnings 88,764 81,755
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)
----------- -----------
99,909 92,845
Accumulated other comprehensive income, net of taxes 3,894 7,411
----------- -----------
Total stockholders' equity 103,803 100,256
----------- -----------
Total liabilities and stockholders' equity $ 1,570,352 $ 1,557,201
=========== ===========
See accompanying Notes to unaudited Consolidated Financial Statements.
3 of 22
Century Bancorp, Inc. - Consolidated Statements of Income (unaudited)
(000's except share data) Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Interest income
Loans $ 8,150 $ 9,168 $ 25,070 $ 26,684
Securities held-to-maturity 1,780 1,759 5,103 5,543
Securities available-for-sale 6,921 6,920 22,315 19,909
Federal funds sold and interest-bearing deposits in other banks 38 243 250 522
---------- ---------- ---------- ----------
Total interest income 16,889 18,090 52,738 52,658
Interest expense
Savings and NOW deposits 592 869 2,017 2,353
Money market accounts 1,222 1,293 3,933 3,488
Time deposits 1,847 1,765 5,568 5,204
Securities sold under agreements to repurchase 105 167 369 541
FHLB borrowings, other borrowed funds and long term debt 2,041 2,438 6,442 6,839
---------- ---------- ---------- ----------
Total interest expense 5,807 6,532 18,329 18,425
---------- ---------- ---------- ----------
Net interest income 11,082 11,558 34,409 34,233
Provision for loan losses 0 300 450 900
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 11,082 11,258 33,959 33,333
Other operating income
Service charges on deposit accounts 1,202 1,096 3,548 3,286
Lockbox fees 733 787 2,451 2,646
Brokerage commissions 140 285 402 872
Other income 267 292 753 1,083
---------- ---------- ---------- ----------
Total other operating income 2,342 2,460 7,154 7,887
---------- ---------- ---------- ----------
Operating expenses
Salaries and employee benefits 5,359 5,426 16,399 16,045
Occupancy 626 562 1,927 1,661
Equipment 445 563 1,226 1,640
Other 1,858 1,848 6,070 6,065
---------- ---------- ---------- ----------
Total operating expenses 8,288 8,399 25,622 25,411
---------- ---------- ---------- ----------
Income before income taxes 5,136 5,319 15,491 15,809
Income tax expense
Provision for income taxes 1,939 1,916 5,827 5,766
Retroactive REIT settlement 0 0 1,183 0
---------- ---------- ---------- ----------
Total income tax expense 1,939 1,916 7,010 5,766
Net income $ 3,197 $ 3,403 $ 8,481 $ 10,043
========== ========== ========== ==========
Share data:
Weighted average number of shares outstanding, basic 5,520,025 5,517,400 5,518,587 5,516,317
Weighted average number of shares outstanding, diluted 5,553,470 5,537,009 5,543,722 5,532,417
Net income per share, basic $ 0.58 $ 0.62 $ 1.54 $ 1.82
Net income per share, diluted $ 0.58 $ 0.61 $ 1.53 $ 1.82
Cash dividends declared:
Class A common stock $ 0.1100 $ 0.1100 $ 0.3300 $ 0.3100
Class B common stock $ 0.0550 $ 0.0550 $ 0.1650 $ 0.1550
See accompanying Notes to unaudited Consolidated Financial Statements.
4 of 22
Century Bancorp, Inc. - Consolidated Statements of Changes in Stockholders'
Equity (unaudited)
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)
2002
Balance at December 31, 2001 $ 3,761 $ 2,186 $ 11,093 $ 70,123 ($ 5,941) ($ 41) $ 3,418 $ 84,599
Net income - - - 10,043 - - - 10,043
Other comprehensive income,
net of tax:
Change in unrealized
(loss) 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 $ 2,169 $ 11,122 $ 78,784 ($ 5,941) ($ 41) $ 7,451 $ 97,324
======== ======== ======== ======== ======== ======== ======== ========
2003
Balance at December 31, 2002 $ 3,781 $ 2,168 $ 11,123 $ 81,755 ($ 5,941) ($ 41) $ 7,411 $100,256
Net income - - - 8,481 - - - 8,481
Other comprehensive income,
net of tax:
Change in unrealized loss
on securities
available-for-sale - - - - - - (3,517) (3,517)
--------
Comprehensive income 4,964
Conversion of Class B common
stock to Class A common
stock, 5,010 shares 5 (5) - - - - - -
Stock Options Exercised,
3,213 shares 3 - 52 - - - - 55
Cash dividends, Class A
common stock, $.33 per
share - - - (1,123) - - - (1,123)
Cash dividends, Class B common
stock, $.165 per share - - - (349) - - - (349)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2003 $ 3,789 $ 2,163 $ 11,175 $ 88,764 ($ 5,941) ($ 41) $ 3,894 $103,803
======== ======== ======== ======== ======== ======== ======== ========
See accompanying Notes to unaudited Consolidated Financial Statements.
5 of 22
Century Bancorp, Inc. - Consolidated Statements of Cash Flows (unaudited)
2003 2002
--------- ---------
For the nine months ended
September 30,
(000's)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,481 $ 10,043
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses 450 900
Deferred income taxes (507) (1,173)
Net depreciation and amortization 1,270 1,465
Decrease (Increase) in accrued interest receivable 664 (1,634)
Increase in other assets (6,460) (1,687)
Loans originated for sale (270) ---
Proceeds from sales of loans 267 73
Gain on sales of loans 3 (1)
Gain on sale of building --- (359)
Increase (decrease) in other liabilities (6,841) 1,193
--------- ---------
Net cash (used in) provided by operating activities (2,943) 8,820
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale 535,642 200,350
Purchase of securities available-for-sale (566,875) (383,978)
Proceeds from maturities of securities held-to-maturity 105,081 42,335
Purchase of securities held-to-maturity (161,719) (22,967)
Decrease in payable for investments purchased (43,069) (28,976)
Net decrease (increase) in loans 12,318 (48,695)
Proceeds from sale of building --- 1,020
Capital expenditures (6,475) (1,670)
--------- ---------
Net cash used in investing activities (125,097) (242,581)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in time deposits 5,939 (4,779)
Net increase in demand, savings, money market and NOW deposits 61,304 118,925
Net proceeds from the exercise of stock options 55 31
Cash dividends (1,472) (1,382)
Net decrease in securities sold under agreements to repurchase (2,790) (14,800)
Net (decrease) increase in FHLB borrowings and other borrowed funds (4,926) 26,922
--------- ---------
Net cash provided by financing activities 58,110 124,917
--------- ---------
Net decrease in cash and cash equivalents (69,930) (108,844)
Cash and cash equivalents at beginning of period 122,205 177,833
--------- ---------
Cash and cash equivalents at end of period $ 52,275 $ 68,989
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 18,573 $ 18,381
Income taxes 13,862 6,267
Change in unrealized gains on securities available-for-sale, net of taxes ($ 3,517) $ 4,033
See accompanying Notes to unaudited Consolidated Financial Statements.
6 of 22
Century Bancorp, Inc.
Notes to Consolidated Financial Statements
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 Board of Governors
of the Federal Reserve System (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 made 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
Statement 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, 2003, are not
necessarily indicative of results for the entire
year. All significant intercompany accounts and
transactions have been eliminated in consolidation.
These statements should be read in conjunction with
the consolidated financial statements and the notes
thereto included in the Company's Annual Report on
Form 10-k for the year ended December 31, 2002.
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.
A material estimate is 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 of collateral 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
agencies may require the Company to recognize
additions to the
Page 7 of 22
allowance for loans based on their judgments about
information available to them at the time of their
examination.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments
and assumptions by management, which had, or could
have in the future, a material impact on the carrying
value of certain assets and impact income, are
considered critical accounting policies. The Company
considers the following to be its critical accounting
policies: allowance for loan losses, impaired
investment securities and deferred income taxes.
There have been no significant changes since December
31, 2002 in the methods or assumptions used in the
accounting policies that require material estimates
and assumptions.
ALLOWANCE FOR LOAN LOSSES
Arriving at an appropriate level of allowance for
loan losses involves a high degree of judgment.
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. Risk grades are determined by reviewing
current collateral value, financial information, cash
flow, payment history and other relevant facts
surrounding the particular credit. Provisions for
losses on the remaining commercial and commercial
real estate loans are based on pools of similar loans
using a combination of historical loss experience and
qualitative adjustments. For the residential real
estate and consumer loan portfolios, the reserves are
calculated by applying historical charge-off and
recovery experience and qualitative adjustments to
the current outstanding balance in each loan
category. 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
estimated risk associated with the formula allowance
and specific allowances as well as management's
evaluation of various conditions, including the
business and economic conditions, delinquency trends,
charge-off experience and other asset quality
factors, the effects of which are not directly
measured in the determination of the formula and
specific allowances. The evaluation of the inherent
loss with respect to these conditions is subject to a
higher degree of uncertainty because they are not
identified with specific problem credits
Management believes that the allowance for loan
losses is adequate. In addition, various regulatory
agencies, as part of the 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.
Page 8 of 22
DEFERRED 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.
IMPAIRED INVESTMENT SECURITIES
If a material decline in fair value below the
amortized cost basis of an investment security is
judged to be "other than temporary," generally six
months or longer, the cost basis of the investment is
written down to fair value. The amount of the
write-down is included as a charge to earnings. An
"other than temporary" impairment exists for debt
securities if it is probable that the Company will be
unable to collect all amounts due according to
contractual terms of the security. Some factors
considered for "other than temporary" impairment
related to a debt security include an analysis of
yield which results in a decrease in expected cash
flows, whether an unrealized loss is issuer specific,
whether the issuer has defaulted on scheduled
interest and principal payments, whether the issuer's
current financial condition hinders its ability to
make future scheduled interest and principal payments
on a timely basis or whether there was downgrade in
ratings by rating agencies.
STOCK OPTION ACCOUNTING
The Company currently accounts for employee stock
options using the intrinsic value method. Under the
intrinsic value method, no compensation cost is
recognized related to options if the exercise price
of the option is greater than or equal to the fair
market value of the underlying stock on the date of
grant. Under an alternative method, the fair value
method, the "fair value" of the option at the grant
date is estimated using an option valuation model and
recognized as compensation expense over the vesting
period of the option. The Company generally awards
stock options annually with a grant date in January.
Had compensation cost for the Company's stock option
plans been determined based on the fair value at the
grant date, the Company's net income and earnings per
share would have been reduced to the pro forma
amounts indicated below:
Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
(Dollars in Thousands)
Net income
As reported $ 8,481 $ 10,043
Less: Pro forma stock based
Compensation (net of tax) 118 119
---------- ----------
Pro forma net income 8,363 9,924
Page 9 of 22
Basic income per share
As reported 1.54 1.82
Pro forma 1.52 1.80
Diluted income per share
As reported 1.53 1.82
Pro forma 1.51 1.79
In determining the pro forma amounts, the fair value
of each option grant was estimated as of the date of
grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Dividend yields 1.37% 2.25%
Expected life 7 years 8 years
Expected volatility 31% 25%
Risk-free interest rate 3.41% 4.01%
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
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 other institutions
such as credit unions and finance companies, and (iv)
the fact that a significant portion of the Company's
loan portfolio 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.
Page 10 of 22
Management's Discussion and Analysis of Financial
Condition and Results of Operation (con't.)
OVERVIEW For the quarter ended September 30, 2003.
Earnings for the third quarter ended September 30,
2003 were $3.2 million, a decrease of 6.05% when
compared with the third quarter 2002 earnings of $3.4
million. Diluted earnings per share for the third
quarter 2003 were $0.58 versus $0.61 for the third
quarter of 2002.
Earnings for the nine months ended September 30, 2003
were $8.5 million, a decrease of 15.6% when compared
with the same period last year earnings of $10.0
million. Diluted earnings per share for the first
nine months were $1.53 versus $1.82 for the first
nine months of 2002. Included in income for the first
nine months of 2003 is the previously announced net
tax charge of $1.2 million associated with the Real
Estate Investment Trust ("REIT") settlement. This
change was the result of an agreement with the
Massachusetts Department of Revenue ("DOR") settling
a dispute related to taxes that the DOR claimed were
owed from the Company's REIT.
On March 21, 2003, the Company completed the
acquisition of Capital Crossing Bank's branch office
at 1220 Boylston Street, Chestnut Hill,
Massachusetts, and substantially all of the retail
deposits at Capital Crossing's main office at 101
Summer Street, Boston, Massachusetts. Century closed
the Chestnut Hill branch and transferred all
customers of the branch to its nearby branch office
at 1184 Boylston Street, Brookline, Massachusetts. In
addition, Century transferred all of the retail
deposits from Capital Crossing's Summer Street branch
to its branch at 24 Federal Street, Boston,
Massachusetts. The acquisition included $192.7
million in deposits. The acquisition also included a
premium paid to Capital Crossing of approximately
$3.9 million. This premium was subsequently reduced
by a gain of $395 thousand from the sale of the
acquired Chestnut Hill branch.
FINANCIAL CONDITION
Loans On September 30, 2003, total loans outstanding, net
of unearned discount, were $502.3 million, a decrease
of 2.3% from the total on December 31, 2002. At
September 30, 2003, commercial real estate loans
accounted for 55.4% and residential real estate
loans, including home equity credit lines, accounted
for 26.9% of total loans. Construction loans
increased to $40.5 million at September 30, 2003 from
$33.2 million on December 31, 2002.
The decrease in loans was mainly attributable to a
decrease in commercial real estate loans and
residential real estate loans, excluding home equity
credit lines. Commercial real estate loans decreased
mainly because of payoffs in the portfolio.
Allowance for Loan Losses
The allowance for loan losses was 1.80% of total
loans on September 30, 2003 compared with 1.65% on
December 31, 2002. Net recoveries for the nine-month
period ended September 30, 2003 were $70 thousand
compared with net recoveries of
Page 11 of 22
Management's Discussion and Analysis of Financial
Condition and Results of Operation (con't.)
$212 thousand for the same period in 2002. Provisions
for the third quarter were suspended. At the current
time, management believes that the allowance for loan
losses is adequate.
Nonperforming Loans
September 30, 2003 December 31, 2002
------------------ -----------------
(Dollars in Thousands)
Nonaccruing loans $2,982 $511
Loans past due 90 days
or more $ 98 $ 0
Nonaccruing loans as a
Percentage of total loans .59% .10%
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.
September 30, 2003 December 31, 2002
------------------ -----------------
(Dollars in Thousands)
Securities Available-for-Sale
U.S. Government and Agencies $760,469 $712,596
Other Bonds and Equity Securities 17,629 18,117
Mortgage-backed Securities 10,107 30,818
-------- --------
Total Securities Available-for-Sale $788,205 $761,531
======== ========
Securities Held-to-Maturity
U.S. Government and Agencies $ 15,400 $ 73,373
Other Bonds and Equity Securities 25 25
Mortgage-backed Securities 168,339 53,811
-------- --------
Total Securities Held-to-Maturity $183,764 $127,209
======== ========
Securities Available-for-Sale
The securities available-for-sale portfolio totaled
$788.2 million at September 30, 2003, an increase of
3.5% from December 31, 2002. The portfolio increased
Page 12 of 22
Management's Discussion and Analysis of Financial
Condition and Results of Operation (con't.)
mainly because of increases in deposits associated
with the acquisition of Capital Crossing. The
portfolio is concentrated in United States Government
and Agency securities and has an estimated weighted
average maturity of 3.5 years.
Securities Held-to-Maturity
The securities held-to-maturity portfolio totaled
$183.8 million on September 30, 2003, an increase of
44.5% from the total on December 31, 2002. The
portfolio increased mainly because of increases in
deposits associated with the acquisition of Capital
Crossing. The portfolio is concentrated in United
States Government Agency Collateralized Mortgage
Obligations and has an expected average life of 3.1
years.
Deposits and Borrowed Funds
On September 30, 2003, deposits totaled $1.21
billion, representing a 5.9% increase in total
deposits from December 31, 2002. Total deposits
increased primarily as a result of increases in money
market accounts and time deposits acquired from
Capital Crossing. Borrowed funds totaled $213.5
million compared to $221.2 million at December 31,
2002. Borrowed funds decreased from use of some
proceeds from the Capital Crossing transaction.
RESULTS OF OPERATIONS
Net Interest Income
For the three-month period ended September 30, 2003,
net interest income totaled $11.1 million, a decrease
of 4.1% from the comparable period in 2002. For the
nine-month period ended September 30, 2003 net
interest income totaled $34.4 million versus $34.2
million for the same period in 2002. The 0.5%
increase in net interest income for the period is
mainly due to a 23.8% increase in the average
balances of earning assets, combined with a similar
increase in deposits and borrowed funds. The increase
in volume was mainly the result of an acquisition of
$192.7 million of deposits from Capital Crossing Bank
during the first quarter of 2003. This increase in
volume was mostly offset by a seventy-two basis point
decrease in the net interest margin.
The net yield on average earning assets on a fully
taxable equivalent basis decreased to 3.11% in the
first nine months of 2003 from 3.83% during the same
period in 2002. The decrease in the net interest
margin was mainly attributable to assets continuing
to reprice at historically low levels without a
corresponding decrease in rates paid on deposits. The
Company believes that the net interest margin will
continue to be challenged.
Page 13 of 22
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, 2003 September 30, 2002
------------------------------------------------------------------------------------
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) $ 500,493 $25,070 6.70% $ 482,024 $26,684 7.40%
Securities available-for-sale 793,337 22,315 3.75% 538,765 19,909 4.93%
Securities held-to-maturity 152,133 5,103 4.48% 129,621 5,543 5.70%
Temporary funds 29,516 250 1.13% 41,707 522 1.67%
----------- ------- ---- ----------- ------- ----
Total interest earning Assets $ 1,475,479 $52,738 4.77% $ 1,192,117 $52,658 5.89%
Non interest-earning assets 114,429 98,349
Allowance for loan losses (8,877) (7,643)
----------- -----------
Total assets $ 1,581,031 $ 1,282,823
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest bearing deposits:
NOW account $ 269,084 $ 1,776 0.88% $ 190,060 $1, 878 1.32%
Savings accounts 79,122 241 0.41% 72,002 483 0.90%
Money market accounts 389,610 3,933 1.35% 255,115 3,488 1.83%
Time deposits 241,364 5,568 3.08% 186,192 5,196 3.73%
----------- ------- ---- ----------- ------- ----
Total interest-bearing Deposits 979,180 11,518 2.37% 703,369 11,045 2.10%
Securities sold under
Agreements to Repurchase 53,497 369 .92% 63,561 541 1.14%
Other borrowed funds and
Long term debt 166,961 6,442 5.16% 182,618 6,839 5.01%
----------- ------- ---- ----------- ------- ----
Total interest-bearing Liabilities 1,199,638 18,329 2.04% 949,548 18,425 2.59%
Non interest-bearing
Liabilities
Demand deposits 262,768 225,813
Other liabilities 18,071 17,233
----------- -----------
Total liabilities 1,480,477 1,192,594
Stockholders' equity 100,554 90,229
----------- -----------
Total liabilities &
Stockholders Equity $ 1,581,031 $1, 282,823
=========== ===========
Net interest income $34,409 $34,233
--------------------------------------------------------------------------------
Net interest spread 2.72% 3.30%
--------------------------------------------------------------------------------
Net yield on earnings
Assets 3.11% 3.83%
--------------------------------------------------------------------------------
(1) On a fully taxable equivalent basis calculated using a tax rate of
41.825%.
(2) Nonaccrual loans are included in average amounts outstanding.
Page 14 of 22
Management's Discussion and Analysis of Financial
Condition and Results of Operation (con't.)
2003 Compared with 2002
----------------------------------
Increase/(Decrease)
Due to Change in
----------------------------------
Income
Increase
Volume Rate (Decrease)
----------------------------------------------------------------------------------------
(dollars in thousands)
Interest Income:
Loans $ 994 $(2,608) (1,614)
Securities available-for-sale 7,915 (5,514) 2,401
Securities held-to-maturity 870 (1,305) (435)
Temporary funds (129) (143) (272)
------- ------- ------
Total interest income 9,650 (9,570) 80
======= ======= ======
Interest expense:
Deposits:
NOW accounts 635 (729) (94)
Savings accounts 44 (286) (242)
Money market accounts 1,517 (1,072) 445
Time deposits 1,372 (1,008) 364
------- ------- ------
Total interest-bearing deposits 3,568 (3,095) 473
Securities sold under agreements to
repurchase (78) (94) (172)
Other borrowed funds and long term
debt (599) 202 (397)
------- ------- ------
Total interest expense 2,891 (2,987) (96)
------- ------- ------
Change in net interest income 6,759 (6,583) 176
======= ======= ======
Provision for Loan Losses
For the three-month period ended September 30, 2003,
the loan loss provision was reduced to $0 compared to
$300 thousand for the same period last year. For the
nine-month period ended September 30, 2003, the loan
loss provision totaled $450 thousand compared to $900
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 1.65% at December 31, 2002 to 1.80% at September
30, 2003. The loan loss reserve percentage is deemed
adequate.
Non-Interest Income and Expense
Other operating income for the quarter ended
September 30, 2003 was $2.3 million compared to $2.5
million for the third quarter of 2002. The decrease
was mainly attributable to a decrease in brokerage
commissions, which decreased by $145 thousand, due to
decreased volume. For the nine-month period ending
September 30, 2003, other operating income totaled
$7.2 million compared to $7.9 million for the same
period last year. The decrease was mainly
attributable to the pre-tax gain of $359,000
associated with the sale of bank premises during the
second quarter of 2002. Also, brokerage commissions
decreased by $470 thousand due to decreased volume.
Page 15 of 22
Management's Discussion and Analysis of Financial
Condition and Results of Operation (con't.)
Lock box income decreased by $195 thousand for the
nine-month period ended September 30, 2003. This
decrease was mainly attributable to a decrease in
volume that was due to increased competition and
changes in the way bills are being paid. This was
partially offset by an increase of $262 thousand in
service charges on deposit accounts. Service charges
on deposit accounts increased mainly because of an
increase in deposits accounts.
During the quarter ended September 30, 2003,
operating expenses decreased by $111 thousand or 1.3%
to $8.3 million, from the same period last year. Most
of the decrease in operating expenses was
attributable to a decrease of $118 thousand in
equipment expense and a $67 thousand decrease in
salaries and employee benefits. Equipment expense
decreased mainly because of a decrease in
depreciation expense and salaries and employee
benefits decreased mainly because of decrease in
accruals for incentive compensation. A decrease in
incentive compensation accruals was mostly offset by
increased retirement and healthcare costs. For the
nine-month period ending September 30, 2003,
operating expenses increased by $211 thousand or .8%
to $25.6 million, from the same period last year.
Most of the increase in operating expense was
attributable to an increase of $354 thousand in
salaries and employee benefits as well as a $266
thousand increase in occupancy expense. This was
somewhat offset by a $414 thousand decrease in
equipment expense. Salaries and employee benefits
increased because of increased retirement and
healthcare costs. Although salaries and benefits
expense increased, this was offset by decreases in
incentive compensation accruals as the Company's
performance has declined. Equipment expense decreased
mainly because of a decrease in depreciation expense.
Income Taxes
For the third quarter of 2003, the Company's income
tax expense totaled $1.9 million on pretax income of
$5.1 million for an effective tax rate of 37.8%. For
last year's corresponding quarter, the Company's
income taxes totaled $1.9 million on pretax income of
$5.3 million for an effective tax rate of 36.0%. The
income tax rate increased mainly because of the
elimination of the Company's REIT benefits. For the
nine-month period ending September 30, 2003 the
Company's income taxes totaled 7.0 million on pretax
income of $15.5 million for an effective tax rate of
45.3%. Included in income for the first nine months
of 2003 is the previously announced net tax charge of
$1.2 million associated with the REIT settlement.
This change was the result of an agreement with the
Massachusetts DOR settling a dispute related to taxes
that the DOR claimed were owed from the Company's
REIT.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
Market risk is the risk of loss from adverse changes
in market prices and rates. The Company's market risk
arises primarily from interest rate risk inherent in
its lending and deposit taking activities. To that
end, management actively monitors and manages its
interest rate risk exposure. The Company's
profitability is affected by fluctuations in interest
rates. A sudden and substantial increase or decrease
in interest rates may adversely impact the Company's
earnings to the extent that the interest rates tied
to specific assets and liabilities do not change at
the same speed, to the same extent, or on the same
basis. The Company monitors the impact of changes in
interest rates on its net interest income using
several tools. The Company's primary objective in
managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the
Company's net interest income and capital, while
structuring the Company's asset-
Page 16 of 22
liability structure to obtain the maximum yield-cost
spread on that structure. The Company relies
primarily on its asset-liability structure to control
interest rate risk.
ITEM 4 CONTROLS AND PROCEDURES
The principal executive officer and principal
financial officer have evaluated the disclosure
controls and procedures have been evaluated as of the
end of the period covered by the quarterly report.
Based on this evaluation, the Company has 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 accumulated and reported to
Management (including the principal executive officer
and the principal financial officer) and 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
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
31.1 Certification of Chief Executive Officer of the
Company Pursuant to Securities Exchange Act Rules
13a-14 and 15d-14.
31.2 Certification of Chief Financial Officer of the
Company Pursuant to Securities Exchange Act Rules
13a-14 and 15d-14.
32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer
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 July 10, 2003, the Company filed a Form 8-K in
connection with its issuance of a press release on
July 9, 2003 announcing the Company's results for the
quarter ended June 30, 2003.
Page 17 of 22
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, 2003 CENTURY BANCORP, INC
/s/ Marshall M. Sloane /s/ Paul V. Cusick, Jr.
- ----------------------------- -----------------------------------
MARSHALL M. SLOANE PAUL V. CUSICK, JR.
CHAIRMAN, PRESIDENT AND CEO VICE PRESIDENT AND TREASURER
(PRINCIPAL EXECUTIVE OFFICER) (PRINCIPAL ACCOUNTING OFFICER)
Page 18 of 22