CENTURY BANCORP INC - 10-Q Quarterly Report

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 March 31, 2004.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission file number 0-15752

CENTURY BANCORP, INC.

(Exact name of registrant as specified in its charter)


COMMONWEALTH OF MASSACHUSETTS		04-2498617

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

400 MYSTIC AVENUE, MEDFORD, MA		02155

(Address of principal executive offices)		(Zip Code)

(781) 391-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [ ] No

Indicate by check mark whether the Registrant 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 March 31, 2004:


Class A Common Stock, $1.00 par value		3,419,073 Shares
Class B Common Stock, $1.00 par value		2,105,740 Shares

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PART I - Item 1

Century Bancorp, Inc. - Consolidated Balance Sheets (unaudited)


(000’s, except share data)


	March 31,			December 31,
	2004			2003
Assets
Cash and due from banks	$	54,269		$	64,299
Federal funds sold and interest-bearing deposits in other banks		39,079			161,022

Total cash and cash equivalents		93,348			225,321

Securities available-for-sale, amortized cost $632,088 and $701,444, respectively		637,649			703,335
Securities held-to-maturity, market value $300,822 and $198,790, respectively		296,418			197,872
Loans, net:
Commercial & industrial		43,642			39,742
Construction & land development		33,503			34,121
Commercial real estate		295,816			293,781
Residential real estate		87,834			86,780
Consumer & other		7,990			8,508
Home equity		53,269			49,382

Total loans, net		522,054			512,314
Less: allowance for loan losses		8,673			8,769

Net loans		513,381			503,545
Bank premises and equipment		22,740			21,589
Accrued interest receivable		7,323			8,450
Goodwill		2,714			2,714
Core deposit intangible		3,126			3,223
Other assets		24,381			22,862

Total assets	$	1,601,080		$	1,688,911

Liabilities
Deposits:
Demand deposits	$	264,044		$	270,115
Savings and NOW deposits		297,840			291,950
Money market accounts		464,254			417,171
Time deposits		206,706			359,617

Total deposits		1,232,844			1,338,853
Securities sold under agreements to repurchase		42,370			40,050
Federal Home Loan Bank (FHLB) borrowings and other borrowed funds		149,628			136,329
Investments purchased payable		15,614			29,330
Other liabilities		24,997			10,982
Long term debt		29,639			29,639

Total liabilities		1,495,092			1,585,183

Commitments and contingencies
Stockholders’ equity
Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,802,673 shares and 3,792,938 shares, respectively		3,803			3,793
Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 2,153,290 shares and 2,162,650 shares, respectively		2,153			2,163
Additional paid-in capital		11,234			11,227
Retained earnings		93,209			91,427
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	)

		104,417			102,628
Accumulated other comprehensive income, net of taxes		1,571			1,100

Total stockholders’ equity		105,988			103,728

Total liabilities and stockholders’ equity	$	1,601,080		$	1,688,911

See accompanying Notes to unaudited Consolidated Financial Statements.

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Century Bancorp, Inc. - Consolidated Statements of Income (unaudited)


	Three months ended March 31,
(000’s except share data)	2004		2003
Interest income
Loans	$	8,082	$	8,533
Securities held-to-maturity		2,282		1,519
Securities available-for-sale		5,276		7,618
Federal funds sold and interest-bearing deposits in other banks		322		69

Total interest income		15,962		17,739

Interest expense
Savings and NOW deposits		537		739
Money market accounts		1,250		1,153
Time deposits		1,979		1,662
Securities sold under agreements to repurchase		78		140
FHLB borrowings, other borrowed funds and long term debt		2,161		2,366

Total interest expense		6,005		6,060

Net interest income		9,957		11,679

Provision for loan losses		0		225

Net interest income after provision for loan losses		9,957		11,454
Other operating income
Service charges on deposit accounts		1,196		1,145
Lockbox fees		735		801
Brokerage commissions		166		135
Net gains on sales of securities		104		0
Other income		552		227

Total other operating income		2,753		2,308

Operating expenses
Salaries and employee benefits		5,638		5,363
Occupancy		792		650
Equipment		558		288
Other		2,076		2,039

Total operating expenses		9,064		8,340

Income before income taxes		3,646		5,422
Income tax expense
Provision for income taxes		1,328		1,989
Retroactive REIT settlement		0		3,229

Total income tax expense		1,328		5,218
Net income	$	2,318	$	204

Share data:
Weighted average number of shares outstanding, basic		5,524,659		5,517,616
Weighted average number of shares outstanding, diluted		5,557,984		5,537,151
Net income per share, basic	$	0.42	$	0.04
Net income per share, diluted	$	0.42	$	0.04
Cash dividends paid:
Class A common stock	$	0.1200	$	0.1100
Class B common stock	$	0.0600	$	0.0550

See accompanying Notes to unaudited Consolidated Financial Statements.

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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)
2003
Balance at December 31, 2002	$	3,781	$	2,168		$	11,123	$	81,755		($	5,941	)	($	41	)	$	7,411		$	100,256
Net income		—		—			—		204			—			—			—			204
Other comprehensive income, net of tax:
Change in unrealized (loss) gain on securities available-for-sale		—		—			—		—			—			—			(1,303	)		(1,303	)

Comprehensive income																					(1,099	)
Conversion of Class B common stock to Class A common stock, 5,010 shares		5		(5	)		—		—			—			—			—			—
Stock Options Exercised, 400 shares		—		—			5		—			—			—			—			5
Cash dividends paid, Class A common stock, $.11 per share		—		—			—		(374	)		—			—			—			(374	)
Cash dividends paid, Class B common stock, $.055 per share		—		—			—		(116	)		—			—			—			(116	)

Balance at March 31, 2003	$	3,786	$	2,163		$	11,128	$	81,469		($	5,941	)	($	41	)	$	6,108		$	98,672

2004
Balance at December 31, 2003	$	3,793	$	2,163		$	11,227	$	91,427		($	5,941	)	($	41	)	$	1,100		$	103,728
Net income		—		—			—		2,318			—			—			—			2,318
Other comprehensive income, net of tax:
Unrealized holding gains arising during period		—		—			—		—			—			—			2,363			2,363
less: reclassification adjustment for gains included in net income		—		—			—		—			—			—			(68	)		(68	)
Minimum pension liability adjustment		—		—			—		—			—			—			(1,824	)		(1,824	)

Comprehensive income																					2,789
Conversion of Class B common stock to Class A common stock, 9,735 shares		10		(10	)		—		—			—			—			—			—
Stock Options Exercised, 375 shares		—		—			7		—			—			—			—			7
Cash dividends paid, Class A common stock, $.12 per share		—		—			—		(409	)		—			—			—			(409	)
Cash dividends paid, Class B common stock, $.06 per share		—		—			—		(127	)		—			—			—			(127	)

Balance at March 31, 2004	$	3,803	$	2,153		$	11,234	$	93,209		($	5,941	)	($	41	)	$	1,571		$	105,988

See accompanying Notes to unaudited Consolidated Financial Statements.

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Century Bancorp, Inc. - Consolidated Statements of Cash Flows (unaudited)


	2004			2003
	Three months ended
	March 31,
	(000’s)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,318		$	204
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		—			225
Deferred income taxes		(43	)		(1,050	)
Net depreciation and amortization		541			229
Decrease (increase) in accrued interest receivable		1,127			(273	)
Increase in other assets		(1,577	)		(4,289	)
Loans originated for sale		—			(180	)
Proceeds from sales of loans		—			177
Gain on sales of loans		—			3
Gain on sale of securities available-for-sale		(104	)		—
Increase (decrease) in other liabilities		10,915			5,078

Net cash provided by operating activities		13,177			124

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available-for-sale		189,663			187,062
Purchase of securities available-for-sale		(122,420	)		(304,926	)
Proceeds from maturities of securities held-to-maturity		10,850			31,102
Purchase of securities held-to-maturity		(109,389	)		(72,877	)
Decrease in payable for investments purchased		(13,716	)		61,926
Net (increase) decrease in loans		(9,807	)		16,269
Proceeds from sales of securities available-for-sale		2,268			—
Capital expenditures		(1,680	)		(1,750	)

Net cash used in investing activities		(54,231	)		(83,194	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in time deposits		(152,911	)		58,991
Net increase in demand, savings, money market and NOW deposits		46,902			111,476
Net proceeds from the exercise of stock options		7			5
Cash dividends		(536	)		(490	)
Net increase in securities sold under agreements to repurchase		2,320			910
Net increase (decrease) in FHLB borrowings and other borrowed funds		13,299			(42,585	)

Net cash (used in) provided by financing activities		(90,919	)		128,307

Net (decrease) increase in cash and cash equivalents		(131,973	)		45,237
Cash and cash equivalents at beginning of period		225,321			122,205

Cash and cash equivalents at end of period	$	93,348		$	167,442

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	5,554		$	6,015
Income taxes		88			4,928
Change in unrealized gains on securities available-for-sale, net of taxes	$	2,295		($	1,303	)

See accompanying Notes to unaudited Consolidated Financial Statements.

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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 consolidated financial statements also include the accounts of the Bank’s wholly-owned subsidiaries, Century Subsidiary Investments, Inc. (CSII), Century Subsidiary Investments, Inc. II (CSII II), Century Subsidiary Investments, Inc. III (CSII III) and Century Financial Services, Inc. (CSFI). CSII, CSII II, CSII III are engaged in buying, selling and holding investment securities. CSFI has the power to engage in financial agency, securities brokerage and investment and financial advisory services and related securities credit. 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 for financial reporting purposes.

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 March 31, 2004, 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, 2003.

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 that is susceptible to change in the near-term is 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 management’s 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

Page 7 of 19



		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 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, 2003 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 19

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:


	Three Months Ended
	March 31, 2004		March 31, 2003
	(Dollars in Thousands)
Net income
As reported	$	2,318	$	204
Less: Pro forma stock based Compensation (net of tax)		67		41

Pro forma net income		2,251		163
Basic income per share
As reported		0.42		0.04


	Three Months Ended
	March 31, 2004		March 31, 2003
	(Dollars in Thousands)
Pro forma		0.41		0.03
Diluted income per share
As reported		0.42		0.04
Pro forma		0.40		0.03



		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		1.83	%		2.45	%
Expected life	7 years			7 years
Expected volatility		34	%		31	%
Risk-free interest rate		3.76	%		4.48	%

Employee Benefits

The Company has a qualified Defined Benefit Pension Plan (the “Plan”) which is offered to all employees reaching minimum age and service requirements. The Company also has a Supplemental Insurance/Retirement Plan (the “Supplemental Plan”), which is limited to certain officers and employees of the Company.

Components of Net Periodic Benefit Cost


	Pension Benefits				Supplemental Insurance/ Retirement Plan
	2004		2003		2004		2003
	(Dollars in Thousands)
Service Cost	$	179	$	173	$	3	$	25
Interest		217		205		217		203
Expected Return on Plan Assets		-149		-153		0		0
Recognized Prior Service Cost		-1		28		16
Recognized Net Losses		55		38		44		65

Net Periodic Benefit Cost	$	301	$	291	$	280	$	293



		Contributions

		The Company previously disclosed in its financial statements for the year ended December 31,2003, that it expected to contribute $1,590,000 to its pension plan in 2004. As of March 31, 2004, $375,000 of contributions has been made.

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

Page 10 of 19



		Management’s Discussion and Analysis of Financial Condition and Results of Operation (con’t.)

		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.

Executive Overview

Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”), is a holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary, Century Bank and Trust Company, A Massachusetts state chartered trust company formed in 1969 (the “Bank”). The Company had total assets of approximately $1.6 billion on March 31, 2004. The Company presently operates 21 banking offices in 16 cities and towns in Massachusetts ranging from Braintree, south of Boston, to Peabody, north of Boston. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments throughout Massachusetts.

The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans, consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through its subsidiary, Century Financial Services, Inc. in conjunction with Commonwealth Equity Services, Inc., a full service securities brokerage business.

The Company is also a provider of financial services including cash management, transaction processing, short term financing and intermediate term leasing to municipalities in Massachusetts. The Company has deposit relationships with approximately 30% of the 351 cities and towns in Massachusetts.

During February 2003 the Company began construction of an addition to its corporate headquarters building. The property is located adjacent to its current headquarters in Medford, Massachusetts and will provide additional corporate office space and an expanded branch banking floor. The building is scheduled to be completed during the second quarter of 2004 and the current cost estimate including Management’s Discussion and Analysis of Financial Condition and Results of Operation (con’t.)

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		land costs is $12.5 million. As of March 31, 2004, $10.5 million has been expended. The capital expenditure will provide a five story addition containing approximately 50 thousand square feet of office and branch space. The Company’s current plan is to sublease approximately 20 thousand square feet of the building.

		Earnings for the first quarter ended March 31, 2004 were $2.3 million, an increase of $2.1 million when compared with the first quarter 2003 earnings of $204 thousand. Diluted earnings per share for the first quarter 2004 were $0.42 versus $0.04 for the first quarter of 2003. Included in income for 2003 is the previously announced tax charge of $3,229,000 associated with the Real Estate Investment Trust (“REIT”) settlement. This charge was subsequently reduced to $1,183,000 during the second quarter of 2003 as a 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. The Company 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, the Company 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 March 31, 2004, total loans outstanding, net of unearned discount, were $522.1 million, an increase of 1.9% from the total on December 31, 2003. At March 31, 2004, commercial real estate loans accounted for 56.7% and residential real estate loans, including home equity credit lines, accounted for 27.0% of total loans. Construction loans decreased slightly to $33.5 million at March 31, 2004 from $34.1 million on December 31, 2003.

The increase in loans was mainly attributable to an increase in both commercial and industrial and home equity credit lines. Both types of loans increased, in part, because of a loan campaign that began during the first quarter.

Allowance for Loan Losses

The allowance for loan losses was 1.66% of total loans on March 31, 2004 compared with 1.71% on December 31, 2003. Net charge-offs for the three-month period ended March 31, 2004 were $96 thousand compared with net recoveries of $20 thousand for the same period in 2003. Provisions for the first quarter were suspended. At the current time, management believes that the allowance for loan losses is adequate.

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		Management’s Discussion and Analysis of Financial Condition and Results of Operation (con’t.)

Nonperforming Loans


	March 31, 2004			December 31, 2003
	(Dollars in Thousands)
Nonaccruing loans	$	709		$	1,175
Loans past due 90 days or more and still accruing	$	0		$	0
Nonaccruing loans as a Percentage of total loans		.14	%		.23	%

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.


	March 31, 2004		December 31, 2003
	(Dollars in Thousands)
Securities Available-for-Sale
U.S. Government and Agencies	$	565,790	$	676,494
Other Bonds and Equity Securities		17,798		17,800
Mortgage-backed Securities		54,061		9,041

Total Securities Available-for-Sale	$	637,649	$	703,335

Securities Held-to-Maturity
U.S. Government and Agencies	$	101,387	$	6,400
Other Bonds and Equity Securities		25		25
Mortgage-backed Securities		195,006		191,447

Total Securities Held-to-Maturity	$	296,418	$	197,872

Securities Available-for-Sale

The securities available-for-sale portfolio totaled $637.6 million at March 31, 2004, a decrease of 9.3% from December 31, 2003. The portfolio decreased mainly because of a movement of matured and called available-for-sale securities to the held-to-maturity portfolio. The portfolio is concentrated in United States Government and Agency securities and has an estimated weighted average maturity of 3.5 years.

Page 13 of 19




		Management’s Discussion and Analysis of Financial Condition and Results of Operation (con’t.)

Securities Held-to-Maturity

The securities held-to-maturity portfolio totaled $296.4 million on March 31, 2004, an increase of 49.8% from the total on December 31, 2003. The portfolio increased mainly because of a movement of matured and called available-for-sale securities to the held-to-maturity portfolio. The portfolio is concentrated in United States Government Agency Collateralized Mortgage Obligations and has an expected average life of 3.3 years.

Deposits and Borrowed Funds

On March 31, 2004, deposits totaled $1.23 billion, representing a 7.9% decrease in total deposits from December 31, 2003. Total deposits decreased primarily as a result of decreases in time deposits. Borrowed funds totaled $192.0 million compared to $176.4 million at December 31, 2003. Borrowed funds increased primarily from the implementation of leveraged balance sheet transactions.

Results of Operations

Net Interest Income

For the three-month period ended March 31, 2004, net interest income totaled $10.0 million, a decrease of 14.7% from the comparable period in 2003. The 14.7% decrease in net interest income for the period is mainly due to a seventy- one basis point decrease in the net interest margin. The decrease in the net interest margin was somewhat offset by an 8.7% increase in the average balances of earning assets, combined with a similar increase in deposits. The increase in volume was mainly the result of an acquisition of $192.7 million of deposits from Capital Crossing Bank at the end of the first quarter of 2003 and internal deposit growth during the year.

The net yield on average earning assets on a fully taxable equivalent basis decreased to 2.61% in the first three months of 2004 from 3.33% during the same period in 2003. 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 14 of 19

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 three-month periods indicated.


	March 31, 2004								March 31, 2003
				Interest		Rate						Interest		Rate
	Average			Income/		Earned/			Average			Income/		Earned/
	Balance			Expense(1)		Paid			Balance			Expense(1)		Paid
(dollars in thousands)
Assets
Interest-earning assets:
Loans (2)	$	515,747		$	8,082		6.36	%	$	501,831		$	8,533		6.90	%
Securities available-for-sale		634,455			5,276		3.33	%		756,161			7,619		4.03	%
Securities held-to-maturity		222,568			2,282		4.10	%		121,768			1,518		4.99	%
Temporary funds		152,661			322		0.84	%		23,720			69		1.16	%

Total interest earning Assets	$	1,525,431		$	15,962		4.19	%	$	1,403,480		$	17,739		5.06	%
Non interest-earning assets		127,689								109,722
Allowance for loan losses		(8,841	)							(8,629	)

Total assets	$	1,644,279							$	1,504,573

Liabilities and Stockholders’ Equity
Interest bearing deposits:
NOW account	$	237,553		$	458		0.78	%	$	256,625		$	652		1.03	%
Savings accounts		81,292			79		0.39	%		76,825			87		0.46	%
Money market accounts		419,921			1,250		1.21	%		318,958			1,153		1.47	%
Time deposits		289,145			1,979		2.78	%		221,132			1,662		3.05	%

Total interest-bearing Deposits		1,027,911			3,766		1.49	%		873,540			3,554		1.65	%
Securities sold under Agreements to Repurchase		40,685			78		0.78	%		54,612			140		1.04	%
Other borrowed funds and Long term debt		175,555			2,161		4.99	%		201,076			2,366		4.77	%

Total interest-bearing Liabilities		1,244,151			6,005		1.96	%		1,129,228			6,060		2.18	%
Non interest-bearing
Liabilities
Demand deposits		277,937								250,413
Other liabilities		16,230								24,041

Total liabilities		1,538,318								1,403,682
Stockholders’ equity		105,961								100,891

Total liabilities & Stockholders Equity	$	1,644,279							$	1,504,573

Net interest income				$	9,957							$	11,679

Net interest spread							2.23	%							2.88	%

Net yield on earnings Assets							2.61	%							3.33	%

(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 15 of 19

Management’s Discussion and Analysis of Financial Condition and Results of Operation (con’t.)


	Three Months Ended March 31, 2004
	Compared with March 31, 2003
	Increase/(Decrease)
	Due to Change in
							Income
							Increase
	Volume			Rate			(Decrease)
(dollars in thousands)
Interest Income:
Loans	$	232		$	(683	)		(451	)
Securities available-for-sale		(1,124	)		(1,219	)		(2,343	)
Securities held-to-maturity		1,073			(310	)		763
Temporary funds		277			(24	)		253

Total interest income		458			(2,236	)		(1,778	)

Interest expense:
Deposits:
NOW accounts		(46	)		(149	)		(195	)
Savings accounts		5			(13	)		(8	)
Money market accounts		324			(228	)		96
Time deposits		476			(157	)		319

Total interest-bearing deposits		759			(547	)		212
Securities sold under agreements to repurchase		(31	)		(31	)		(62	)
Other borrowed funds and long term debt		(310	)		105			(205	)

Total interest expense		418			(473	)		(55	)

Change in net interest income		40			(1,763	)		(1,723	)

Provision for Loan Losses

For the three-month period ended March 31, 2004, the loan loss provision was suspended compared to a provision of $225 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 decreased from 1.76% at December 31, 2003 to 1.66% at March 31, 2004. The loan loss reserve percentage is deemed adequate.

Non-Interest Income and Expense

Other operating income for the quarter ended March 31, 2004 was $2.8 million compared to $2.3 million for the first quarter of 2003. The increase was mainly attributable to life insurance proceeds of approximately $140 thousand and gains on securities available-for-sale for $104 thousand.

Page 16 of 19

Management’s Discussion and Analysis of Financial Condition and Results of Operation (con’t.)

Lock box income decreased by $66 thousand for the three-month period ended March 31, 2004. This decrease was mainly attributable to a decrease in volume from increased competition. This was partially offset by an increase of $51 thousand in service charges on deposit accounts and an increase of $31 thousand in brokerage commissions. Service charges on deposit accounts increased mainly because of an increase in deposits accounts.

During the quarter ended March 31, 2004, operating expenses increased by $724 thousand or 8.7% to $9.1 million, from the same period last year. The increase in operating expenses was mainly attributable to an increase of $275 thousand in salaries and employee benefits, $270 thousand in equipment expense and $142 thousand in occupancy expense. Salary and employee benefits increased as a result of an increase in staff levels and merit increases. Equipment expense increased mainly as a result of a $200 thousand depreciation expense reduction in 2003. Occupancy expense increased mainly as a result of two new branches that were opened during the third quarter of 2003.

Income Taxes

For the first quarter of 2004, the Company’s income tax expense totaled $1.3 million on pretax income of $3.6 million for an effective tax rate of 36.4%. For last year’s corresponding quarter, the Company’s income taxes totaled $5.2 million on pretax income of $5.4 million for an effective tax rate of 96.2%. The income tax rate decreased mainly because of the previously announced tax charge of $3.2 million associated with the Real Estate Investment Trust (“REIT”) settlement. This charge was subsequently reduced to $1.2 million during the second quarter of 2003 as a 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.

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-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its management control interest rate risk.

Item 4 Controls and Procedures

The principal executive officer and principal financial officer have evaluated the disclosure controls and procedures 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

Page 17 of 19

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 January 20, 2004, the Company filed a Form 8-K in connection with its issuance of a press release on January 20, 2004 announcing the Company’s results for the quarter ended December 31, 2004.

On March 10, 2004, the Company filed a Form 8-K in connection with its issuance of a press release on March 10, 2004 announcing Century Bank and Trust Company’s Board of Directors elected Barry R. Sloane, Executive Vice President and Co-Chief Operating Officer.

On March 22, 2004, the Company filed a Form 8-K in connection with its issuance of a press release on March 19, 2004 announcing the Company’s Annual Meeting of Stockholders.

On March 22, 2004, the Company filed a Form 8-K in connection with its issuance of a press release on March 19, 2004 announcing the Company’s preliminary first quarter 2004 results.

Page 18 of 19


		Page
	Index	Number
Part I	Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets: March 31, 2004 and December 31, 2003		3
	Consolidated Statements of Income: Three (3) months ended March 31, 2004 and 2003.		4
	Consolidated Statements of Changes in Stockholders’ Equity: Three (3) months ended March 31, 2004 and 2003.		5
	Consolidated Statements of Cash Flows: Three (3) months ended March 31, 2004 and 2003.		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		18
Signatures			19
Exhibits
Ex-31.1 Section 302 Certification CEO
Ex-31.2 Section 302 Certification CFO
Ex-32.1 Section 906 Certification CEO
Ex-32.2 Section 906 Certification CFO


Date: May 7, 2004				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)

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		The consolidated financial statements include the accounts of Century Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Century Bank and Trust Company (the “Bank”). The consolidated financial statements also include the accounts of the Bank’s wholly-owned subsidiaries, Century Subsidiary Investments, Inc. (CSII), Century Subsidiary Investments, Inc. II (CSII II), Century Subsidiary Investments, Inc. III (CSII III) and Century Financial Services, Inc. (CSFI). CSII, CSII II, CSII III are engaged in buying, selling and holding investment securities. CSFI has the power to engage in financial agency, securities brokerage and investment and financial advisory services and related securities credit. 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 for financial reporting purposes.

		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 March 31, 2004, 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, 2003.

		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 that is susceptible to change in the near-term is 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 management’s 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



		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, 2003 in the methods or assumptions used in the accounting policies that require material estimates and assumptions.



		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.



		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.



		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.



		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:



		The Company has a qualified Defined Benefit Pension Plan (the “Plan”) which is offered to all employees reaching minimum age and service requirements. The Company also has a Supplemental Insurance/Retirement Plan (the “Supplemental Plan”), which is limited to certain officers and employees of the Company.



		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



		Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the “Company”), is a holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary, Century Bank and Trust Company, A Massachusetts state chartered trust company formed in 1969 (the “Bank”). The Company had total assets of approximately $1.6 billion on March 31, 2004. The Company presently operates 21 banking offices in 16 cities and towns in Massachusetts ranging from Braintree, south of Boston, to Peabody, north of Boston. The Bank’s customers consist primarily of small and medium-sized businesses and retail customers in these communities and surrounding areas, as well as local governments throughout Massachusetts.

		The Company offers a wide range of services to commercial enterprises, state and local governments and agencies, and individuals. It emphasizes service to small and medium-sized businesses and retail customers in its market area. The Company makes commercial loans, real estate and construction loans, consumer loans, and accepts savings, time, and demand deposits. In addition, the Company offers to its corporate customers automated lock box collection services, cash management services and account reconciliation services, and actively promotes the marketing of these services to the municipal market. Also, the Company provides full service securities brokerage services through its subsidiary, Century Financial Services, Inc. in conjunction with Commonwealth Equity Services, Inc., a full service securities brokerage business.

		The Company is also a provider of financial services including cash management, transaction processing, short term financing and intermediate term leasing to municipalities in Massachusetts. The Company has deposit relationships with approximately 30% of the 351 cities and towns in Massachusetts.

		During February 2003 the Company began construction of an addition to its corporate headquarters building. The property is located adjacent to its current headquarters in Medford, Massachusetts and will provide additional corporate office space and an expanded branch banking floor. The building is scheduled to be completed during the second quarter of 2004 and the current cost estimate including Management’s Discussion and Analysis of Financial Condition and Results of Operation (con’t.)



		On March 31, 2004, total loans outstanding, net of unearned discount, were $522.1 million, an increase of 1.9% from the total on December 31, 2003. At March 31, 2004, commercial real estate loans accounted for 56.7% and residential real estate loans, including home equity credit lines, accounted for 27.0% of total loans. Construction loans decreased slightly to $33.5 million at March 31, 2004 from $34.1 million on December 31, 2003.

		The increase in loans was mainly attributable to an increase in both commercial and industrial and home equity credit lines. Both types of loans increased, in part, because of a loan campaign that began during the first quarter.



		The allowance for loan losses was 1.66% of total loans on March 31, 2004 compared with 1.71% on December 31, 2003. Net charge-offs for the three-month period ended March 31, 2004 were $96 thousand compared with net recoveries of $20 thousand for the same period in 2003. Provisions for the first quarter were suspended. At the current time, management believes that the allowance for loan losses is adequate.



		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.



		The securities available-for-sale portfolio totaled $637.6 million at March 31, 2004, a decrease of 9.3% from December 31, 2003. The portfolio decreased mainly because of a movement of matured and called available-for-sale securities to the held-to-maturity portfolio. The portfolio is concentrated in United States Government and Agency securities and has an estimated weighted average maturity of 3.5 years.



		The securities held-to-maturity portfolio totaled $296.4 million on March 31, 2004, an increase of 49.8% from the total on December 31, 2003. The portfolio increased mainly because of a movement of matured and called available-for-sale securities to the held-to-maturity portfolio. The portfolio is concentrated in United States Government Agency Collateralized Mortgage Obligations and has an expected average life of 3.3 years.



		On March 31, 2004, deposits totaled $1.23 billion, representing a 7.9% decrease in total deposits from December 31, 2003. Total deposits decreased primarily as a result of decreases in time deposits. Borrowed funds totaled $192.0 million compared to $176.4 million at December 31, 2003. Borrowed funds increased primarily from the implementation of leveraged balance sheet transactions.



		For the three-month period ended March 31, 2004, net interest income totaled $10.0 million, a decrease of 14.7% from the comparable period in 2003. The 14.7% decrease in net interest income for the period is mainly due to a seventy- one basis point decrease in the net interest margin. The decrease in the net interest margin was somewhat offset by an 8.7% increase in the average balances of earning assets, combined with a similar increase in deposits. The increase in volume was mainly the result of an acquisition of $192.7 million of deposits from Capital Crossing Bank at the end of the first quarter of 2003 and internal deposit growth during the year.

		The net yield on average earning assets on a fully taxable equivalent basis decreased to 2.61% in the first three months of 2004 from 3.33% during the same period in 2003. 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.

(1)		On a fully taxable equivalent basis calculated using a tax rate of 41.825%.

(2)		Nonaccrual loans are included in average amounts outstanding.