-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QyjQQbs2tJFKRTjHLDJuSfwLU5SRU+Wu8NsrSPHgcoaPuxuE7hHB5FMhSmmD7FDz UDcS6uxvC6BNpP2lIldWaw== 0000950135-02-001703.txt : 20020415 0000950135-02-001703.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950135-02-001703 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTURY BANCORP INC CENTRAL INDEX KEY: 0000812348 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 042498617 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15752 FILM NUMBER: 02590346 BUSINESS ADDRESS: STREET 1: 400 MYSTIC AVENUE CITY: MEDFORD STATE: MA ZIP: 01887 BUSINESS PHONE: 6173934606 MAIL ADDRESS: STREET 1: 400 MYSTIC AVE CITY: MEDFORD STATE: MA ZIP: 01887 10-K 1 b42249cbe10-k.txt CENTURY BANCORP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2001 ------------------------------------------------- | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (I.R.S. Employer incorporation or organization) Identification number) 400 MYSTIC AVENUE, MEDFORD, MA 02155 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (781) 391-4000 ----------------------------- Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON STOCK, $1.00 PAR VALUE ------------------------------------- (Title of class) 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 if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. | | State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28, 2002: $6,447,083 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of February 28,2002: CLASS A COMMON STOCK, $1.00 PAR VALUE 3,391,020 SHARES CLASS B COMMON STOCK, $1.00 PAR VALUE 2,124,730 SHARES i CENTURY BANCORP INC. FORM 10-K TABLE OF CONTENTS
PAGE PART I ITEM 1 BUSINESS 1-8 ITEM 2 PROPERTIES 8 ITEM 3 LEGAL PROCEEDINGS 8 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY 9 HOLDERS PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED 9-10 STOCKHOLDER MATTERS ITEM 6 SELECTED FINANCIAL DATA 10 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10 CONDITION AND RESULTS OF OPERATIONS ITEM 7a QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET 10 RISK ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 10 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 10 ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 39-41 ITEM 11 EXECUTIVE COMPENSATION AND OTHER INFORMATION 41-45 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 46 AND MANAGEMENT ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND 47-48 REPORTS ON FORM 8-K SIGNATURES 49
ii PART I ITEM 1. BUSINESS THE COMPANY Century Bancorp, Inc. (together with its bank subsidiary, unless the context otherwise requires, the "Company"), is a Massachusetts state chartered bank holding company headquartered in Medford, Massachusetts. The Company is a Massachusetts corporation formed in 1972 and has one banking subsidiary (the "Bank"): Century Bank and Trust Company formed in 1969. The Company had total assets of $1.27 billion on December 31, 2001. The Company presently operates 18 banking offices in 16 cities and towns in Massachusetts ranging from Braintree to Peabody. The Banks' 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. On June 11, 1998, the Company acquired Haymarket Co-operative Bank ("Haymarket"), headquartered in Boston, Massachusetts, and merged Haymarket into the Bank. The purchase price paid by the Company to the shareholders of Haymarket was $21.1 million in cash and the transaction was accounted for using the purchase method of accounting. The results of operations for 1998 include the effect of the Haymarket acquisition for the period beginning June 12, 1998. In May 1998, the Company, through its newly formed subsidiary, Century Bancorp Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30%. The Company used the proceeds for general business purposes. 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. -1- The following table summarizes the remaining maturity distribution of certain components of the Company's loan portfolio on December 31, 2001. The table excludes loans secured by one-to-four family residential real estate and loans for household family and other personal expenditures. Maturities are presented as if scheduled principal amortization payments are due on the last contractual payment date.
Remaining Maturities of Selected Loans at December 31, 2001 ----------------------------------------------------------- One Year One to Five Over or Less Years Five Years Total -------- ----------- ---------- --------- (In Thousands) Construction and land development $25,202 $ 8,504 $ 5,550 $ 39,256 Commercial and industrial 10,472 23,715 24,975 59,162 Industrial revenue bonds 0 48 0 48 Commercial real estate 22,857 120,772 97,790 241,419 ------- -------- -------- -------- Total $58,531 $153,039 $128,315 $339,885 ======= ======== ======== ========
The following table indicates the rate variability of the above loans due after one year.
December 31, 2001 ----------------- One to Five Over Years Five Years Total ----------- ---------- -------- (In Thousands) Predetermined interest rates $127,095 $ 10,753 $137,848 Floating or adjustable interest rates 25,944 117,562 143,506 -------- -------- -------- Total $153,039 $128,315 $281,354 ======== ======== ========
Individual loan officers have designated lending authorities established by the Board of Directors, with larger loans requiring a second approval. The Bank has an Executive Committee of its Board of Directors which meets monthly and reviews all credits above a specified size. In addition, the Company has an Executive Management Committee which meets bi-monthly and monitors the Company's lending policies and practices. The members of the Executive Management Committee are: Marshall M. Sloane, Chairman, President and CEO; Jonathan G. Sloane, Executive Vice President; Paul V. Cusick, Jr., Vice President and Treasurer; all of the Company, and David B. Woonton, Paul A. Evangelista and William J. Sloboda, all Executive Vice Presidents of the Bank. The Company's commercial and industrial (C&I) loan customers represent various small and middle market established businesses involved in manufacturing, distribution, retailing and services. Most clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The Bank has placed greater emphasis on building its C&I base in the future. The regional economic strength or weakness impacts the relative risks in this loan category. There is little concentration to any one business sector and loan risks are generally diversified among many borrowers. Commercial real estate loans are extended to finance various manufacturing, warehouse, light industrial, office, retail and residential properties in the Banks's market area, which generally includes Eastern Massachusetts and Southern New Hampshire. Loans are normally extended in amounts up to a maximum of 80% of appraised value and normally for terms between three to five years. Amortization schedules are long-term and thus a balloon payment is due at maturity. Under most circumstances, the Bank will offer to re-write or otherwise extend the loan at prevailing interest rates. During recent years, the Bank has emphasized non-residential type owner-occupied properties. This compliments our C&I emphasis placed on the operating business entities and will be continued. The regional economic environment affects the risk of both non-residential and residential mortgages. Residential real estate (1-4 family) includes two categories of loans. Approximately $7 million of loans are classified as "Commercial and Industrial" type loans secured by 1-4 family real estate. Primarily, these are small businesses with modest capital or shorter operating histories where the collateral mitigates some risk. -2- This category of loans shares similar risk characteristics with the C&I loans, notwithstanding the collateral position. The balance of loans in this category are mostly 1-4 family residential properties located in the Bank's market area. General underwriting criteria are largely the same as those used by Fannie Mae but normally only one or three year adjustable interest rates are used. The Bank utilizes mortgage insurance to provide lower down payment products and has provided a "First Time Homebuyer" product to encourage new home ownership. Residential real estate loan volume has increased and remains a core consumer product. The economic environment impacts the risks associated with this category. This year, the economy has deteriorated, and the market has generally been volatile. Home equity loans are extended as both first and second mortgages on owner occupied residential properties in the Bank's market area. Loans are underwritten to a maximum loan to property value of 75%. The Bank intends to maintain a market for construction loans, principally for smaller local residential projects or an owner occupied commercial project. Individual consumer residential home construction loans are also extended on a similar basis. Bank officers evaluate the feasibility of construction projects, based on independent appraisals of the project, architects or engineers evaluations of the cost of construction, and other relevant data. As of December 31, 2001, the Company was obligated to advance a total of $25.6 million to complete projects under construction. On December 31, 2001, approximately 52.2% of the Company's loan portfolio consisted of commercial real estate loans. Construction loans had increased to 8.5% of the Company's outstanding loans. At December 31, 2001, the Company's residential mortgage loans amounted to $88.4 million. The Company's consumer and other loan portfolio amounted to $34.4 million at December 31, 2001, primarily consisting of home equity loans of $26 million and personal lines of credit, motor vehicle loans and other installment loans of $7.7 million. NONPERFORMING ASSETS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES Loans are placed on nonaccrual status when any payment of principal and/or interest is 90 days or more past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. In addition to internal loan review, the Company has contracted with an independent organization to review the Company's commercial and commercial real estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as situations identified as potential problems, are reviewed on a regular basis by senior management and monthly by the Board of Directors of the Bank. The relatively low level of nonperforming assets of $423 thousand in 2001 and $110 thousand in 2000 resulted from a reduction in new additions to nonperforming assets during the year combined with an improvement in the resolution of nonperforming assets including payments on nonperforming loans. In addition to the above, the Company is monitoring closely $4.1 million of loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2001, although such values can fluctuate with changes in the economy and the real estate market. The balance of impaired loans were $1.1 million at December 31, 2001. There were no impaired loans with specific reserves at December 31, 2001 and 2000 because, in the opinion of management, none required a specific reserve. All impaired loans have been measured using the fair value of the collateral method. -3- The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the loans, loan performance, the financial condition of borrowers, the value of collateral securing loans and other relevant factors. The following table summarizes the changes in the Company's allowance for loan losses for the years indicated.
Year Ended December 31, ----------------------- 2001 2000 1999 1998 1997 -------- -------- --------- -------- -------- (Dollars in Thousands) Year end loans outstanding (net of unearned discount) $462,772 $439,563 $ 422,725 $395,903 $316,390 ======== ======== ========= ======== ======== Average loans outstanding (net of unearned discount) $443,395 $434,780 $ 405,794 $358,498 $304,147 ======== ======== ========= ======== ======== Balance of allowance for loan losses at beginning of year $ 5,662 $ 7,646 $ 6,022 $ 4,446 $ 4,179 -------- -------- --------- -------- -------- Loans charged-off: Commercial 27 3,522 81 316 25 Construction and land development 0 0 0 0 0 Commercial real estate 343 0 61 21 48 Residential real estate 12 0 14 0 363 Consumer 55 139 315 506 253 -------- -------- --------- -------- -------- Total loans charged-off 437 3,661 470 843 689 -------- -------- --------- -------- -------- Recoveries of loans previously charged-off: Commercial 154 26 197 21 76 Real estate 184 195 393 367 162 Consumer 49 31 30 37 58 -------- -------- --------- -------- -------- Total recoveries of loans previously charged-off 387 252 619 425 296 -------- -------- --------- -------- -------- Net loan charge-offs (recoveries) 50 3,409 (149) 418 393 Additions to allowance charged to operating expense 1,500 1,425 1,475 800 660 Acquired allowance 0 0 0 1,194 0 -------- -------- --------- -------- -------- Balance at end of year $ 7,112 $ 5,662 $ 7,646 $ 6,022 $ 4,446 ======== ======== ========= ======== ======== Ratio of net charge-offs during the year to average loans outstanding 0.01% 0.78% (0.04%) .12% .13% ======== ======== ========= ======== ======== Ratio of allowance for loan losses to loans outstanding 1.54% 1.29% 1.81% 1.52% 1.41% ======== ======== ========= ======== ========
At December 31, 2001, nonperforming assets were $0.4 million or 0.09% of loans and related assets. The increase ratio of allowance for loan loss to loans for 1999, reflects increased provisions associated with the deterioration of one borrower's credit quality whose total relationship amounted to $4.1 million. Management placed this credit to nonaccrual status during the fourth quarter of 1999 and subsequently charged off $3.5 million of this loan during the first quarter of 2000. These provisions are the result of management's evaluation of the quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. While the Company expects a similar level of charge-offs in future periods, the pace of the charge-offs depends on many factors including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. -4- The allowance for loan losses is an estimate of the amount needed for an adequate reserve to absorb losses in the existing loan portfolio. This amount is determined by an evaluation of the loan portfolio including input from an independent organization engaged to review selected larger loans, a review of loan loss experience and current economic conditions. At December 31, the allowance was comprised of the following components.
2001 2000 1999 1998 1997 ---------------- ---------------- ---------------- ---------------- ---------------- Percent Percent Percent Percent Percent of of of of of loans in loans in loans in loans in loans in each each each each each category category category category category Balance at end of to total to total to total to total to total period applicable to Amount loans Amount loans Amount loans Amount loans Amount loans - -------------------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Construction and land development $ 605 8.5% $ 285 5.0% $ 441 5.1% $ 361 5.5% $ 104 2.4% Commercial and industrial 1,257 12.8 1,200 21.8 2,846 18.3 912 16.4 716 16.0 Industrial revenue bonds 0 0.0 1 0.0 1 0.0 6 0.2 17 0.9 Commercial real estate 3,786 52.2 1,923 47.6 2,951 49.5 2,737 47.3 2,138 44.3 Residential real estate 955 19.1 726 18.5 867 19.6 1,296 22.1 846 24.1 Consumer 173 1.7 1,290 2.2 325 2.9 508 3.6 402 6.1 Home equity 336 5.6 230 4.8 209 4.5 197 4.8 214 6.0 Overdrafts 0 0.1 7 0.1 6 0.1 5 0.1 9 0.2 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- $7,112 100.0% $5,662 100.0% $7,646 100.0% $6,022 100.0% $4,446 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
-5- BORROWED FUNDS Federal Home Loan Bank Borrowings A summary of borrowings from the Federal Home Loan Bank of Boston ("FHLB") is as follows: (Dollars in thousands)
December 31, --------------------------------------------------------------------------------------------------- 2001 2000 1999 -------------------------------- ----------------------------- ---------------------------- Weighted Weighted Weighted Average Average Average Amount Rate Amount Rate Amount Rate ------------- -------------- --------- ------------ --------- ------------- Within 1 year $ 48,000 2.11% -- 0.00% $ 60,000 5.60% Over 1 year to 2 years -- 0.00% $ 2,000 6.76% -- 0.00% Over 2 years to 3 years 5,000 1.99% -- 0.00% -- 0.00% Over 3 years to 5 years 1,284 7.20% -- 0.00% -- 0.00% Over 5 years 86,000 5.53% 72,331 5.87% 54,375 5.32% -------- ---- ------- ---- -------- ---- Total $140,284 4.22% $74,331 5.89% $114,375 5.47% ======== ======= ========
OTHER SERVICES In addition to fees derived from traditional banking activities such as loan origination fees, the Company derives revenues from its automated lock box collection system and full service securities brokerage offered through Commonwealth Equity Services, Inc., an unaffiliated registered securities broker-dealer and investment adviser. Under the lock-box program, which is not tied to extensions of credit by the Company, the Company's customer arranges for payments of its accounts receivable to be made directly to the Company. The Company records on its computer the amounts paid to its customers, deposits the funds to the customer's account with the Company and provides computerized records of the amounts received to the Company's customers. Typical customers for the lock box service are municipalities, who use it to automate tax collections, cable TV companies, and other commercial enterprises. Through Commonwealth Equity Services, Inc., the Bank provides full service securities brokerage services. Registered representatives employed by the Bank offer investment advice, execute transactions and assist customers in financial and retirement planning. Commonwealth Equity Services, Inc. provides research to and supervises representatives in exchange for payment by the Bank for a fixed fee and a share in the commission revenues. -6- EMPLOYEES As of December 31, 2001, the Company had 261 full-time and 109 part-time employees. The Company's employees are not represented by any collective bargaining unit. The Company believes that its employee relations are good. FINANCIAL SERVICES MODERNIZATION On November 12, 1999, President Clinton signed into law The Gramm-Leach-Bliley Act ("Gramm-Leach") which significantly altered banking laws in the United States. Gramm Leach enables combinations among banks, securities firms and insurance companies beginning March 11, 2000. As a result of Gramm Leach, many of the depression-era laws which restricted these affiliations and other activities which may be engaged in by banks and bank holding companies, were repealed. Under Gramm-Leach, bank holding companies are permitted to offer their customers virtually any type of financial service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency) and merchant banking. In order to engage in these new financial activities, a bank holding company must qualify and register with the Federal Reserve Board as a "financial holding company" by demonstrating that each of its bank subsidiaries is "well capitalized," "well managed," and has at least a "satisfactory" rating under the Community Reinvestment Act of 1977 ("CRA"). The Company has not elected to become a financial holding company under Gramm-Leach. These new financial activities authorized by Gramm-Leach may also be engaged in by a "financial subsidiary" of a national or state bank, except for insurance or annuity underwriting, insurance company portfolio investments, real estate investment and development and merchant banking, which must be conducted in a financial holding company. In order for the new financial activities to be engaged in by a financial subsidiary of a national or state bank, Gramm-Leach requires each of the parent bank (and its sister-bank affiliates) to be well capitalized and well managed; the aggregate consolidated assets of all of that bank's financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest banks, it must meet certain financial rating or other comparable requirements. Gramm-Leach establishes a system of functional regulation, under which the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the U.S. Securities and Exchange Commission will regulate their securities activities, and state insurance regulators will regulate their insurance activities. Gramm-Leach also provides new protections against the transfer and use by financial institutions of consumers' nonpublic, personal information. HOLDING COMPANY REGULATION The Company is a bank holding company as defined by the Bank Holding Company Act of 1956, as amended (the "Holding Company Act") and is registered as such with the Board of Governors of the Federal Reserve System (the "FRB"), which is responsible for administration of the Holding Company Act. Although the Company may meet the qualifications for electing to become a financial holding company under Gramm-Leach, the Company has elected to retain its pre-Gramm-Leach status for the present time under the Holding Company Act. As required by the Holding Company Act, the Company files with the FRB an annual report regarding its financial condition and operations, management and intercompany relationships of the Company and the Bank. It is also subject to examination by the FRB and must obtain FRB approval before ( i ) acquiring direct or indirect ownership or control of more than 5% of the voting stock of any bank, unless it already owns or controls a majority of the voting stock of that bank, (ii) acquiring all or substantially all of the assets of a bank, except through a subsidiary which is a bank, or (iii) merging or consolidating with any other bank holding company. A bank holding company must also give the FRB prior written notice before purchasing or redeeming its equity securities, if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company's consolidated net worth. The Holding Company Act prohibits a bank holding company, with certain exceptions, from (i ) acquiring direct or indirect ownership or control of any voting shares of any company which is not a bank or a bank holding company, or (ii) engaging in any activity other than managing or controlling banks, or furnishing services to or performing services for its subsidiaries. A bank holding company may own, however, shares of a company engaged in activities which the FRB has determined are so closely related to banking or managing or controlling banks as to be a proper incident thereto. -7- The Company and its subsidiaries are examined by federal and state regulators. The FRB has responsibility for holding company activities and performed a review in 2001. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 On December 19, 1991, the FDIC Improvement Act of 1991 (the "1991 Act") was enacted. This legislation sought to recapitalize the Bank Insurance Fund of the FDIC ("BIF"), which had been severely depleted as a result of the larger members of failed banks. The recapitalization continues to be funded through, among other things, increased deposit insurance assessments payable by BIF-insured institutions, which increases the cost of doing business by all BIF-insured institutions, including the Bank. The 1991 Act also provides for, among other things: enhanced federal supervision of depository institutions, including greater authority for the appointment of a conservator or receiver for undercapitalized institutions; the establishment of risk-based deposit insurance premiums; a requirement that the federal banking agencies amend their risk-based capital requirements to include components for interest-rate risk, concentration of credit risk, and the risk of nontraditional activities; expanded authority for cross-industry mergers and acquisitions; mandated consumer protection disclosures with respect to deposit accounts; and imposed restrictions on the activities of state-chartered banks, including the Bank. Provisions of the 1991 Act relating to the activities of state-chartered banks significantly impact the way the Company conducts its business. In this regard, the 1991 Act provides that insured state banks, such as the Bank, may not engage as principal in any activity that is not permissible for a national bank, unless the FDIC has determined that the activity would pose no significant risk to the BIF and the state bank is in compliance with applicable capital standards. Activities of subsidiaries of insured state banks are similarly restricted to those activities permissible for subsidiaries of national banks, unless the FDIC has determined that the activity would pose no significant risk to the BIF and the state bank is in compliance with applicable capital standards. INTERSTATE BANKING The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended (the "Interstate Banking Act") generally permits bank holding companies to acquire banks in any state and preempts all state laws restricting the ownership by a bank holding company of banks in more than one state. The Interstate Banking Act also permits a bank to merge with an out-of-state bank and convert any offices into branches of the resulting bank if both states have not opted out of interstate branching; permits a bank to acquire branches from an out-of-state bank if the law of the state where the branches are located permits the interstate branch acquisition; and operated de novo interstate branches whenever the host state opts-in to de novo branching. Bank holding companies and banks seeking to engage in transactions authorized by the Interstate Banking Act must be adequately capitalized and managed. COMPETITION The Company experiences substantial competition in attracting deposits and making loans from commercial banks, thrift institutions and other enterprises such as insurance companies and mutual funds. These competitors include several major commercial banks whose greater resources may afford them a competitive advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. A number of these competitors are not subject to the regulatory oversight that the Company is subject to, which increases these competitors' flexibility. ITEM 2. PROPERTIES The Company owns its main banking office, headquarters, and operations center in Medford, and 12 of the 17 other facilities in which its branch offices are located. The remaining offices are occupied under leases expiring on various dates from 2002 to 2026. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to various claims and lawsuits arising in the course of their normal business activities. Although the ultimate outcome of these suits cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Company's consolidated financial position. -8- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's Stockholders during the fourth quarter of the fiscal year ended December 31, 2001. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Class A Common Stock of the Company is traded on the NASDAQ National Market system under the symbol "CNBKA." The price range of the Company's Class A common stock since January 1, 2000 is shown on page 11. The Class B Common Stock is not traded on NASDAQ or any other national securities exchange. Generally speaking, the shares of Class A Common Stock are not entitled to vote on any matter, including in the election of Company Directors, but, in limited circumstances, may be entitled to vote as a class on certain extraordinary transactions, including any merger or consolidation (other than one in which the Company is the surviving corporation or one which by law may be approved by the directors without any stockholder vote) or the sale, lease, or exchange of all or substantially all of the property and assets of the Company. Since the vote of a majority of the shares of Class B Common Stock, voting as a class, is required to approve certain extraordinary corporate transactions, the holders of Class B Common Stock have power to prevent any takeover of the Company not approved by them. (b) Approximate number of equity security holders as of December 31, 2001.
Approximate Number Title of Class of Record Holders Class A Common Stock 314 Class B Common Stock 47
(c) Under the Company's Articles of Organization, the holders of the Class A Common Stock are entitled to receive dividends per share equal to at least 200% of that paid, if any, from time to time, on each share of Class B Common Stock. -9- The following table shows the dividends paid by the Company on the Class A and Class B Common Stock for the periods indicated.
Dividends Per Share Class A Class B ------- ------- 1999 First quarter $ .060 $ .0170 Second quarter .080 .0370 Third quarter .080 .0370 Fourth quarter .080 .0370 2000 First quarter $ .080 $ .0370 Second quarter .080 .0370 Third quarter .080 .0370 Fourth quarter .090 .0450 2001 First quarter $ .090 $ .0450 Second quarter .090 .0450 Third quarter .090 .0450 Fourth quarter .100 .0500
As a bank holding company, the Company's ability to pay dividends is dependent in part upon the receipt of dividends from the Bank, which is subject to certain restrictions on the payment of dividends. A Massachusetts trust company may pay dividends out of net profits from time to time, provided that either (i) the trust company's capital stock and surplus account equal an aggregate of at least 10% of its deposit liabilities, or (ii) the amount of its surplus account is equal to at least the amount of its capital account. ITEM 6. SELECTED FINANCIAL DATA The information required herein is shown on page 11 and 12. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The information required herein is shown on pages 13 through 18. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required herein is shown on page 17 and 18. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required herein is shown on pages 19 through 38. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -10- FINANCIAL HIGHLIGHTS
2001 2000 1999 ---------- ---------- ---------- (dollars in thousands, except share data) YEAR-END Total assets $1,271,022 $1,083,830 $ 925,533 Total loans 462,772 439,563 422,725 Total deposits 888,408 793,796 643,673 Total stockholders' equity 84,599 71,506 60,296 YEARLY AVERAGES Total assets $1,058,924 $ 949,015 $ 860,501 Total earning assets 978,371 882,545 801,092 Total securities available-for-sale 330,217 267,633 229,739 Total securities held-to-maturity 151,975 165,970 157,706 Total loans 443,395 434,780 405,794 Total deposits 767,574 681,486 624,428 Total borrowed funds 166,083 163,944 134,625 Total stockholders' equity 79,279 63,424 61,610 EARNINGS Net income $ 10,859 $ 10,205 $ 9,105 Net interest income, taxable equivalent 39,800 35,488 32,561 Other operating income 8,863 7,234 5,603 Operating expenses 30,025 25,638 22,655 PERFORMANCE MEASURES Earnings per share, basic $ 1.96 $ 1.82 $ 1.57 Earnings per share, diluted $ 1.96 $ 1.82 $ 1.56 Return on average stockholders' equity 13.70% 16.09% 14.78% Book value per share at December 31 $ 15.34 $ 12.88 $ 10.63 Return on average assets 1.03% 1.08% 1.06% Efficiency ratio 61.7% 60.6% 59.4% COMMON SHARE DATA Average shares outstanding, basic 5,535,309 5,597,136 5,791,858 Average shares outstanding, diluted 5,541,745 5,597,629 5,818,633 Shares outstanding at year-end 5,515,350 5,550,350 5,670,600
PER SHARE DATA 2001, QUARTER ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, - ------------------- ------------ ------------- -------- --------- Market price range (Class A) High $ 21.79 $ 24.30 $ 20.60 $ 19.125 Low 19.20 18.55 17.10 14.625 Dividends Class A 0.10 0.09 0.09 0.09 Dividends Class B 0.05 0.045 0.045 0.045
2000, QUARTER ENDED DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, - ------------------- ------------ ------------- -------- --------- Market price range (Class A) High $ 15.00 $ 14.87 $ 14.75 $ 16.50 Low 13.438 11.875 12.00 12.938 Dividends Class A 0.09 0.08 0.08 0.08 Dividends Class B 0.045 0.037 0.037 0.037
-11- FINANCIAL HIGHLIGHTS
2001 2000 1999 1998 1997 ---------- ---------- ----------- ---------- ---------- (dollars in thousands except share data) FOR THE YEAR Interest income $ 67,459 $ 66,554 $ 58,819 $ 51,878 $ 41,216 Interest expense 27,701 31,092 26,284 22,015 15,922 ---------- ---------- ----------- ---------- ---------- Net interest income 39,758 35,462 32,535 29,863 25,294 Provision for loan losses 1,500 1,425 1,475 800 660 ---------- ---------- ----------- ---------- ---------- Net interest income after provision for loan losses 38,258 34,037 31,060 29,063 24,634 Other operating income 8,863 7,234 5,603 5,230 4,994 Operating expenses 30,025 25,638 22,655 21,326 18,600 ---------- ---------- ----------- ---------- ---------- Income before income taxes 17,096 15,633 14,008 12,967 11,028 Provision for income taxes 6,237 5,428 4,903 4,862 4,205 ---------- ---------- ----------- ---------- ---------- Net income $ 10,859 $ 10,205 $ 9,105 $ 8,105 $ 6,823 ---------- ---------- ----------- ---------- ---------- Average shares outstanding, basic 5,535,309 5,597,136 5,791,858 5,806,445 5,772,135 Average shares outstanding, diluted 5,541,745 5,597,629 5,818,633 5,847,444 5,830,910 Earnings per share: Basic $ 1.96 $ 1.82 $ 1.57 $ 1.40 $ 1.18 Diluted $ 1.96 $ 1.82 $ 1.56 $ 1.39 $ 1.17 Dividend payout ratio 15.2% 14.5% 15.0% 10.3% 11.1% AT YEAR-END Assets $1,271,022 $1,083,830 $ 925,533 $ 853,326 $ 631,125 Loans 462,772 439,563 422,725 395,903 316,390 Deposits 888,408 793,796 643,673 643,425 515,449 Stockholders' equity 84,599 71,506 60,296 61,051 53,857 Book value per share $ 15.34 $ 12.88 $ 10.63 $ 10.49 $ 9.30 SELECTED FINANCIAL PERCENTAGES Return on average assets 1.03% 1.08% 1.06% 1.13% 1.20% Return on average stockholders' equity 13.70% 16.09% 14.78% 14.09% 13.56% Net yield on average earning assets, taxable equivalent 4.06% 4.02% 4.07% 4.52% 4.99% Net charge-offs (recoveries) as a percent of average loans 0.01% 0.78% (0.04%) 0.12% 0.13% Average stockholders' equity to average assets 7.49% 6.68% 7.16% 7.99% 8.88%
-12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW Century Bancorp, Inc. (the "Company") had net income of $10,859,000 for the year ended December 31, 2001, compared with net income of $10,205,000 for year ended December 31, 2000 and net income of $9,105,000 for the year ended December 31, 1999. Basic earnings per share were $1.96 in 2001 compared to $1.82 in 2000 and $1.57 in 1999. Diluted earnings per share were $1.96 in 2001 compared to $1.82 in 2000 and $1.56 in 1999. Total assets were $1,271,022,000 at December 31, 2001, an increase of 17.3% from total assets of $1,083,830,000 on December 31, 2000, which, in turn, were 17.1% higher than total assets of $925,533,000 on December 31, 1999. On December 31, 2001, stockholders' equity totaled $84,599,000 compared with $71,506,000 on December 31, 2000, and $60,296,000 on December 31, 1999. Book value per share increased to $15.34 at December 31, 2001 from $12.88 on December 31, 2000, which had increased from $10.63 on December 31, 1999. During the year the Company opened two new branch locations in Brookline and Newton, Massachusetts. The Brookline branch was opened during January 2001 and the Newton branch was opened during April 2001. The Company also opened a second lockbox processing center in Worcester, Massachusetts in October 2001. The new lockbox facility has added capacity and has begun to contribute to the operations of the Company. During the third quarter of 2001, the Company announced plans to continue its stock repurchase plan. Under the program, the Company is authorized to repurchase up to 300,000 shares, or less than 9%, of Century Bancorp Class A Common Stock. Through December 31, 2001, 25,000 shares have been repurchased under this program. The program expires on July 15, 2002. On June 11, 1998, the Company acquired Haymarket Co-operative Bank ("Haymarket"), headquartered in Boston, Massachusetts, and merged Haymarket into Century Bank and Trust Company (the "Bank"). The purchase price paid by the Company to the shareholders of Haymarket was $21.1 million in cash and the transaction was accounted for using the purchase method of accounting. The results of operations include the effect of the Haymarket acquisition for the period beginning June 12, 1998. In May 1998 the Company, through its newly formed subsidiary, Century Bancorp Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30%. The Company is using the proceeds for general business purposes. RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 years indicated.
December 31, 2001 December 31, 2000 December 31, 1999 ------------------------------- ------------------------------ ------------------------------ Rate Rate Rate Average Interest Earned Average Interest Earned Average Interest Earned Balance Income(1) (1) Balance Income(1) (1) Balance Income(1) (1) ---------- -------- ------ -------- -------- ------ -------- -------- ------ (dollars in thousands) ASSETS Interest-earning assets: Loans(2) $ 443,395 $36,853 8.31% $434,780 $39,206 9.02% $405,794 $35,720 8.80% Securities available-for-sale: Taxable 328,351 19,040 5.80% 266,759 16,050 6.02% 229,015 13,441 5.87% Tax-exempt 1,866 111 5.95% 874 57 6.52% 724 34 4.70% Securities held-to-maturity: Taxable 151,975 9,381 6.17% 165,970 10,379 6.25% 157,696 9,261 5.87% Tax-exempt -- -- 0.00% -- -- 0.00% 10 1 10.00% Federal funds sold 52,768 2,116 4.01% 14,156 888 6.27% 7,786 385 4.94% Interest bearing deposits in other banks 16 -- 3.12% 6 -- 0.00% 67 3 4.48% ---------- ------- ---- -------- ------- ---- -------- ------- ---- Total interest- earning assets $ 978,371 $67,501 6.90% $882,545 $66,580 7.54% $801,092 $58,845 7.35% Non interest-earning assets 87,135 72,151 65,903 Allowance for loan losses (6,582) (5,681) (6,494) ---------- ------- ---- -------- ------- ---- -------- ------- ---- Total assets $1,058,924 $949,015 $860,501 ---------- ------- ---- -------- ------- ---- -------- ------- ----
(1) On a fully taxable equivalent basis calculated using a federal tax rate of 35%. (2) Nonaccrual loans are included in average amounts outstanding. -13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
December 31, 2001 December 31, 2000 December 31, 1999 ----------------------------- ------------------------------ ----------------------------- Interest Rate Interest Rate Interest Rate Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/ Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) Balance Expense(1) Paid(1) ------- -------- ------ -------- -------- ------ -------- -------- ------ (dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing deposits: NOW accounts $134,535 $ 2,531 1.88% $127,809 $ 2,926 2.29% $116,753 $ 2,541 2.18% Savings accounts 63,064 882 1.40% 60,373 1,167 1.93% 58,733 1,283 2.18% Money market accounts 130,717 3,334 2.55% 82,686 2,306 2.79% 82,292 2,149 2.61% Time deposits 230,070 11,727 5.10% 242,061 13,642 5.64% 228,157 11,326 4.96% Total interest-bearing deposits 558,386 18,474 3.31% 512,929 20,041 3.91% 485,935 17,299 3.56% Securities sold under agreements to repurchase 71,826 1,647 2.29% 68,808 2,919 4.24% 48,782 1,863 3.82% Other borrowed funds and long term debt 123,007 7,580 6.16% 123,886 8,132 6.56% 114,593 7,122 6.22% ---------- ------- ---- -------- ------- ---- -------- -------- ---- Total interest-bearing liabilities 753,219 27,701 3.68% 705,623 31,092 4.41% 649,310 26,284 4.05% Non interest-bearing liabilities Demand deposits 209,188 168,557 138,493 Other liabilities 17,238 11,411 11,088 ---------- ------- ---- -------- ------- ---- -------- -------- ---- Total liabilities 979,645 885,591 798,891 Stockholders' equity 79,279 63,424 61,610 ---------- ------- ---- -------- ------- ---- -------- -------- ---- Total liabilities & stockholders' equity $1,058,924 $949,015 $860,501 ---------- ------- ---- -------- ------- ---- -------- -------- ---- Net interest income (1) $39,800 $35,488 $ 32,561 ---------- ------- ---- -------- ------- ---- -------- -------- ---- Net interest spread 3.22% 3.14% 3.30% Net yield on earnings assets 4.06% 4.02% 4.07% ---------- ------- ---- -------- ------- ---- -------- -------- ----
(1) On a fully taxable equivalent basis calculated using a federal tax rate of 35%. -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following table summarizes the year-to-year changes in the Company's net interest income resulting from fluctuations in interest rates and volume changes in earning assets and interest bearing liabilities. Changes due to rate are computed by multiplying the change in rate by the prior year's volume. Changes due to volume are computed by multiplying the change in volume by the prior year's rate. Changes in volume and rate that cannot be separately identified have been allocated in proportion to the relationship of the absolute dollar amounts of each change. Year Ended December 31,
Year Ended December 31, ----------------------------------------------------------------------------------- 2001 Compared With 2000 2000 Compared With 1999 --------------------------------------- ------------------------------------- Increase/(decrease) Increase/(decrease) Due to Change in Due to Change in --------------------------------------- ------------------------------------- Income Income Increase Average Average Increase Volume Rate (Decrease) Balance Rate (Decrease) ------- ------- ---------- ------- ------- ---------- (in thousands) Interest income: Loans $ 765 $(3,118) $(2,353) $2,598 $ 887 $ 3,485 Securities available-for-sale: Taxable 3,590 (600) 2,990 2,264 345 2,609 Tax-exempt 59 (5) 54 8 15 23 Securities held-to-maturity: Taxable (865) (133) (998) 500 618 1,118 Tax-exempt -- -- -- -- (1) (1) Federal funds sold 1,650 (422) 1,228 379 124 503 Interest-bearing deposits in other banks -- -- -- (4) 1 (3) ------- ------- ------- ------ ------- ------- Total interest income 5,199 (4,278) 921 5,745 1,989 7,734 ------- ------- ------- ------ ------- ------- Interest expense: Deposits: NOW accounts 148 (543) (395) 249 136 385 Savings accounts 50 (335) (285) 35 (151) (116) Money market accounts 1,240 (212) 1,028 10 147 157 Time deposits (654) (1,261) (1,915) 719 1,597 2,316 ------- ------- ------- ------ ------- ------- Total interest-bearing deposits 784 (2,351) (1,567) 1,013 1,729 2,742 Securities sold under agreements to 1,395) 32 24 repurchase 123 ( (1,272) 8 2 1,056 Other borrowed funds and long term debt (57) (495) (552) 597 413 1,010 ------- ------- ------- ------ ------- ------- Total interest expense 850 (4,241) (3,391) 2,442 2,366 4,808 ------- ------- ------- ------ ------- ------- Change in net interest income $ 4,349 $ (37) $ 4,312 $3,303 $ (377) $ 2,926 ------- ------- ------- ------ ------- -------
The Company's operating results depend primarily on net interest income and fees received for providing services. Net interest income on a fully taxable equivalent basis increased 12.2% in 2001 to $39,800,000 compared with $35,488,000 in 2000. The increase in net interest income was mainly due to a 10.9% increase in the average balances of earning assets, combined with a similar increase in deposits and borrowed funds. The level of interest rates, the ability of the Company's earning assets and liabilities to adjust to changes in interest rates and the mix of the Company's earning assets and liabilities affect net interest income. The net yield on earning assets on a fully taxable equivalent basis increased to 4.06% in 2001 from 4.02% in 2000, which had decreased from 4.07% in 1999. The increase was mainly attributable to rates paid on liability products, such as deposits, repricing sooner than rates earned on asset products, such as loans and investments, in a declining interest rate environment. Average earning assets were $978,371,000 in 2001, an increase of $95,826,000 or 10.9% from the average in 2000, which was 10.2% higher than the average in 1999. Total average securities, including securities available for sale and securities held to maturity, increased 11.2% to $482,192,000. The increase in securities volume was mainly attributable to both deposit and borrowings growth. This increase in securities volume offset by lower level of interest rates resulted in higher securities income, which increased 7.7% to $28,532,000. Total average loans increased 2.0% to $443,395,000 after increasing $28,986,000 or 7.1% in 2000. Total loans increased primarily as a result of internal loan growth. The increase in loan volume combined with a lower level of interest rates resulted in lower loan income, which decreased by 6.0% or $2,353,000 to $36,853,000. Total loan income was $35,720,000 in 1999. -15- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company's sources of funds include deposits and borrowed funds. On average, deposits showed an increase of 12.6% in 2001 after increasing by 9.1% in 2000. Deposits increased in 2001 primarily as a result of internal deposit growth. Borrowed funds increased by 1.3% in 2001 following an increase of 21.8% in 2000. The majority of the Company's borrowed funds are borrowings from the Federal Home Loan Bank (FHLB) and retail repurchase agreements. Retail repurchase agreements contributed approximately $3,018,000 to the Company's increased year-to-date average. Interest expense totaled $27,701,000 in 2001, a decrease of $3,391,000 or 10.9% from 2000 when interest expense increased 18.3% from 1999. This decrease in interest expense is due primarily to increases in deposits offset by decreases in deposit rates and a more favorable mix of deposits. PROVISION FOR LOAN LOSS The provision for loan losses was $1,500,000 in 2001 compared with $1,425,000 in 2000 and $1,475,000 in 1999. These provisions are the result of management's evaluation of the quality of the loan portfolio considering such factors as loan status, collateral values, financial condition of the borrower, the state of the economy and other relevant information. The allowance for loan losses was $7,112,000 at December 31, 2001 compared with $5,662,000 at December 31, 2000 and $7,646,000 at December 31, 1999. Expressed as a percentage of outstanding loans at year-end, the allowance was 1.54% in 2001, 1.29% in 2000 and 1.81% in 1999. The increased ratio, for 1999, reflects increased provisions associated with the deterioration with one borrower's credit quality whose total relationship amounted to $4.1 million. Management placed this credit to nonaccrual loans during the fourth quarter of 1999 and subsequently charged off $3,500,000 of this loan during the first quarter of 2000. Management maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans, in each case based on the internal risk grade of such loans. Changes in risk grades affect the amount of the formula allowance. Loss factors are based on the Company's historical loss experience as well as regulatory guidelines. Specific allowances are established in cases where management has identified significant conditions related to a credit where management believes that the probability that a loss has been incurred is in excess of the amount determined by the application of the formula allowance. The unallocated allowance recognizes the model and estimation risk associated with the formula allowance and specific allowances as well as management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of 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. These agencies may require the Company to recognize additions to the allowance based on their judgements about information available to them at the time of their examination. The Company experienced net charge-offs in 2001 with net charge-offs as a percent of average loans outstanding at 0.01%. The comparable net charge-offs (recoveries) figures for 2000 and 1999 were 0.78% and (0.04)% respectively. Non-performing loans, which include all non-accruing loans and certain restructured, accruing loans, totaled $423,000 on December 31, 2001, compared with $110,000 on December 31, 2000. OTHER OPERATING INCOME The Company continued to experience good results in its fee-based services in 2001. These fee-based services include deposit related services, lockbox processing, and securities brokerage services. Total other operating income in 2001 was $8,863,000 an increase of $1,629,000 or 22.5% compared to 2000. This increase followed an increase of $1,631,000 or 29.1% in 2000, compared to 1999. Service charge income, which continues to be a major area of other operating income with $3,379,000 in 2001, saw an increase of $1,119,000 compared to 2000. Lockbox revenues totaled $3,439,000 up $933,000 in 2001, primarily as a result of an increase in the lockbox customer base and a new facility. Brokerage commissions decreased to $1,248,000 in 2001 from $1,511,000 in 2000, primarily as a result of adverse market conditions. -16- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OPERATING EXPENSES Total operating expenses were $30,025,000 in 2001 compared to $25,638,000 in 2000 and $22,655,000 in 1999. Salaries and employee benefits expenses increased by $2,853,000 or 17.9% in 2001 after increasing 11.3% in 2000. Most of the increase for 2001 was in compensation expense associated with increased staff levels, primarily as a result of the two new branches and the new lockbox facility, as well as merit increases in salaries and employee benefits. Nearly all of the increase, for 2000 was in the salaries category and was caused by an increase in the wage base and increased accruals for incentive compensation. Occupancy expense increased by $535,000 or 33.7% in 2001, this followed an increase of $49,000 or 3.2% in 2000. The increase in 2001 was mainly attributable to full-year costs associated with the opening of two new branches. In 2001 equipment expense increased by $236,000. Equipment expense increased primarily because of increased equipment depreciation. Other operating expenses increased by $763,000 in 2001, which followed a $1,028,000 increase in 2000. The increase for 2001 was primarily the result of increased check processing charges, consultants expense, postage expense and other processing services. The increase for 2000 was primarily the result of increased marketing expense, check processing charges, legal expense and supplies expense. PROVISION FOR INCOME TAXES Income tax expense was $6,237,000 in 2001, $5,428,000 in 2000 and $4,903,000 in 1999. The effective tax rate was 36.5% in 2001, 34.7% in 2000 and 35.0% in 1999. The Company is continuing to realize savings in this area as a result of strategic tax savings initiatives. MARKET RISK AND ASSET LIABILITY MANAGEMENT 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, investment 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 in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by 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. One measure of the Company's exposures to differential changes in interest rates between assets and liabilities is an interest rate risk management test. This test measures the impact on net interest income of an immediate change in interest rates in 100 basis point increments.
- -------------------------------------------------------------------------------------------- Change in Interest Rates (in Basis Points) Percentage Change in Net Interest Income(1) - -------------------------------------------------------------------------------------------- +200 1.6% +100 1.1% -100 (1.0%) -200 (2.1%)
(1) The percentage change in this column represents net interest income for 12 months in various rate scenarios versus the net interest income in a stable interest rate environment. 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 asset-liability structure to control interest rate risk. LIQUIDITY Liquidity is provided by maintaining an adequate level of liquid assets that include cash and due from banks, federal funds sold and other temporary investments. Liquid assets totaled $177,833,000 on December 31, 2001 compared with $175,802,000 on December 31, 2000 and $66,528,000 on December 31, 1999. In each of the three years, deposit activity has generally been adequate to support asset activity. The source of funds for dividends paid by the Company is dividends received from the Bank. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements. -17- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CAPITAL ADEQUACY Total stockholders' equity was $84,599,000 at December 31, 2001, compared with $71,506,000 at December 31, 2000 and $60,296,000 at December 31, 1999. The increase in 2001 was primarily the result of retained earnings less dividends paid and an increase in net unrealized gains on securities available-for-sale offset by treasury stock repurchases. The increase in 2000 was primarily the result of retained earnings less dividends paid which were offset by a decrease in net unrealized losses on securities available-for-sale and treasury stock repurchases. Also, there was a $104,000 increase in 2000 and a $71,000 increase in 1999 from the execution of certain stock options. Federal banking regulators have issued risk-based capital guidelines, which assign risk factors to asset categories and off-balance sheet items. The current guidelines require a Tier I capital-to-risk assets ratio of 4.00% and a total capital-to-risk assets ratio of 8.00%. The Company and the Bank exceeded these requirements with a Tier 1 capital-to-risk assets ratio of 17.29% and 12.14% respectively, and total capital-to-risk assets ratio of 18.74% and 13.31%, respectively at December 31, 2001. Additionally, federal banking regulators have issued leverage ratio guidelines, which supplement the risk-based capital guidelines. The minimum leverage ratio requirement applicable to the Company is 4.00% and at December 31, 2001, the Company and the Bank exceeded this requirement with leverage ratios of 9.68% and 6.79%, respectively. FORWARD-LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. -18- CONSOLIDATED BALANCE SHEETS
December 31, 2001 2000 - ---------------------------------------- ----------- ----------- (dollars in thousands except share data) ASSETS Cash and due from banks (note 2) $ 71,820 $ 63,790 Federal funds sold and interest-bearing deposits in other banks 106,013 112,012 ----------- ----------- Total cash and cash equivalents 177,833 175,802 Securities available-for-sale, amortized cost $455,575 in 2001 and $274,939 in 2000 (note 3) 460,833 273,144 Securities held-to-maturity, market value $145,237 in 2001 and $168,462 in 2000 (notes 4 and 9) 142,608 169,186 Loans, net (note 5) 462,772 439,563 Less: allowance for loan losses (note 6) 7,112 5,662 ----------- ----------- Net loans 455,660 433,901 Bank premises and equipment (note 7) 11,882 8,819 Accrued interest receivable 7,561 7,612 Other assets (note 12) 14,645 15,366 ----------- ----------- Total assets $ 1,271,022 $ 1,083,830 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits $ 227,319 $ 198,914 Savings and NOW deposits 187,676 175,655 Money market accounts 242,665 131,159 Time deposits (note 8) 230,748 288,068 ----------- ----------- Total deposits (note 8) 888,408 793,796 Securities sold under agreements to repurchase (note 9) 72,840 71,450 Other borrowed funds (note 10) 143,481 97,328 Other liabilities 52,944 21,000 Long term debt (note 10) 28,750 28,750 ----------- ----------- Total liabilities 1,186,423 1,012,324 Commitments and contingencies (notes 7, 14 and 15) Stockholders' equity (note 11): Common stock, Class A, $1.00 par value per share; authorized 10,000,000 shares; issued 3,761,020 shares in 2001 and 3,754,600 shares in 2000 3,761 3,755 Common stock, Class B, $1.00 par value per share; authorized 5,000,000 shares; issued 2,185,480 shares in 2001 and 2,191,900 shares in 2000 2,186 2,192 Additional paid-in-capital 11,093 11,093 Retained earnings 70,123 60,916 Treasury stock, Class A, 383,600 shares in 2001 and 348,600 shares in 2000, at cost (5,941) (5,242) Treasury stock, Class B, 47,550 shares in 2001 and 2000, at cost (41) (41) ----------- ----------- 81,181 72,673 Accumulated other comprehensive income (loss), net of taxes (note 3) 3,418 (1,167) ----------- ----------- Total stockholders' equity 84,599 71,506 ----------- ----------- Total liabilities and stockholders' equity $ 1,271,022 $ 1,083,830 ----------- -----------
See accompanying Notes to Consolidated Financial Statements. -19- CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, 2001 2000 1999 - ---------------------------------------- ---------- ---------- ---------- (dollars in thousands except share data) INTEREST INCOME Loans $ 36,849 $ 39,199 $ 35,620 Securities held-to-maturity 9,381 10,379 9,262 Securities available-for-sale 19,113 16,088 13,463 Federal funds sold and interest-bearing deposits in other banks 2,116 888 474 ---------- ---------- ---------- Total interest income 67,459 66,554 58,819 INTEREST EXPENSE Savings and NOW deposits 3,413 4,093 3,824 Money market accounts 3,334 2,306 2,149 Time deposits (note 8) 11,727 13,642 11,326 Securities sold under agreements to repurchase 1,647 2,919 1,863 Other borrowed funds and long term debt 7,580 8,132 7,122 ---------- ---------- ---------- Total interest expense 27,701 31,092 26,284 ---------- ---------- ---------- Net interest income 39,758 35,462 32,535 Provision for loan losses (note 6) 1,500 1,425 1,475 Net interest income after provision for loan losses 38,258 34,037 31,060 OTHER OPERATING INCOME Service charges on deposit accounts 3,379 2,260 1,811 Lockbox fees 3,439 2,506 1,736 Brokerage commissions 1,248 1,511 1,460 Other income 797 957 596 ---------- ---------- ---------- Total other operating income 8,863 7,234 5,603 OPERATING EXPENSES Salaries and employee benefits (note 13) 18,770 15,917 14,307 Occupancy 2,121 1,586 1,537 Equipment 1,871 1,635 1,339 Other (note 16) 7,263 6,500 5,472 ---------- ---------- ---------- Total operating expenses 30,025 25,638 22,655 ---------- ---------- ---------- Income before income taxes 17,096 15,633 14,008 Provision for income taxes (note 12) 6,237 5,428 4,903 ---------- ---------- ---------- NET INCOME $ 10,859 $ 10,205 $ 9,105 ---------- ---------- ---------- SHARE DATA (NOTE 11) Weighted average number of shares outstanding, basic 5,535,309 5,597,136 5,791,858 Weighted average number of shares outstanding, diluted 5,541,745 5,597,629 5,818,633 Net income per share, basic $ 1.96 $ 1.82 $ 1.57 Net income per share, diluted $ 1.96 $ 1.82 $ 1.56
See accompanying Notes to Consolidated Financial Statements. -20- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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 ------- ------- ---------- -------- -------- -------- ------------- ------------- (dollars in thousands except share data) BALANCE, DECEMBER 31, 1998 $ 3,673 $ 2,227 $ 10,965 $ 44,451 $ (136) $ (41) $ (88) $ 61,051 Net income -- -- -- 9,105 -- -- -- 9,105 Other comprehensive income, net of tax: Increase in unrealized losses on securities available-for-sale net of $3,050 in taxes -- -- -- -- -- -- (5,577) (5,577) ------------- Comprehensive income 3,528 Conversion of Class B common stock to Class A common stock, 29,420 shares 30 (30) -- -- -- -- -- -- Stock options exercised, 19,033 shares 19 -- 52 -- -- -- -- 71 Treasury stock repurchases, 170,600 shares -- -- -- -- (2,986) -- -- (2,986) Cash dividends, Class A common stock, $0.30 per share -- -- -- (1,093) -- -- -- (1,093) Cash dividends, Class B common stock, $0.128 per share -- -- -- (276) -- -- -- (276) BALANCE, DECEMBER 31, 1999 3,722 2,197 11,017 52,188 (3,122) (41) (5,665) 60,296 ------- ------- ---------- -------- -------- -------- ------------- ------------- Net income -- -- -- 10,205 -- -- -- 10,205 Other comprehensive income, net of tax: Decrease in unrealized losses on securities available-for-sale net of $628 in taxes -- -- -- -- -- -- 4,498 4,498 -------- Comprehensive income 14,703 Conversion of Class B common stock to Class A common stock, 5,000 shares 5 (5) -- -- -- -- -- -- Stock options exercised, 27,750 shares 28 -- 76 -- -- -- -- 104 Treasury stock repurchases, 148,000 shares -- -- -- -- (2,120) -- -- (2,120) Cash dividends, Class A common stock, $0.33 per share -- -- -- (1,142) -- -- -- (1,142) Cash dividends, Class B common stock, $0.156 per share -- -- -- (335) -- -- -- (335) BALANCE, DECEMBER 31, 2000 3,755 2,192 11,093 60,916 (5,242) (41) (1,167) 71,506 ------- ------- ---------- -------- -------- -------- ------------- ------------- Net income -- -- -- 10,859 -- -- -- 10,859 Other comprehensive income, net of tax: Increase in unrealized gains on securities available-for-sale net of $1,840 in taxes -- -- -- -- -- -- 4,585 4,585 -------- Comprehensive income 15,444 Conversion of Class B common stock to Class A common stock, 6,420 shares 6 (6) -- -- -- -- -- -- Treasury stock repurchases, 35,000 shares -- -- -- -- (698) -- -- (698) Cash dividends, Class A common stock, $0.37 per share -- -- -- (1,257) -- -- -- (1,257) Cash dividends, Class B common stock, $0.185 per share -- -- -- (396) -- -- -- (396) ------- ------- ---------- -------- -------- -------- ------------- ------------- BALANCE, DECEMBER 31, 2001 $ 3,761 $ 2,186 $ 11,093 $ 70,123 $ (5,941) $(41) $ 3,418 $ 84,599 ------- ------- ---------- -------- -------- -------- ------------- -------------
See accompanying Notes to Consolidated Financial Statements. -21- CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2001 2000 1999 - ----------------------- --------- --------- --------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 10,859 $ 10,205 $ 9,105 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,500 1,425 1,475 Deferred income taxes (101) 4,455 (1,269) Net depreciation and amortization 2,066 1,939 2,225 Decrease (increase) in accrued interest receivable 51 (988) (106) Increase in other assets (948) (2,902) (728) Proceeds from sales of loans 89 61 153 Gain on sales of loans (1) (1) (2) Gain on calls of securities (47) -- -- Gain on sale of building -- (386) -- (Decrease) increase in other liabilities (8,771) 3,261 (6,331) --------- --------- --------- Net cash provided by operating activities 4,697 17,069 4,522 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from calls/maturities of securities available-for-sale 215,708 20,396 61,312 Purchase of securities available-for-sale (396,285) (31,611) (114,711) Proceeds from calls/maturities of securities held-to-maturity 95,904 14,269 58,425 Purchase of securities held-to-maturity (69,340) (30,934) (51,730) Increase (decrease) in investments purchased payable 38,976 1,999 (5,493) Net increase in loans (22,875) (19,906) (26,545) Proceeds from sale of building -- 1,342 -- Capital expenditures (4,558) (1,684) (994) --------- --------- --------- Net cash used in investing activities (142,470) (46,129) (79,736) CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in time deposit accounts (57,320) 17,493 28,667 Net increase (decrease) in demand, savings, money market and NOW deposits 151,932 132,630 (28,198) Net proceeds from the issuance of common stock -- 104 71 Treasury stock repurchases (698) (2,120) (2,986) Cash dividends (1,653) (1,477) (1,369) Net increase in securities sold under agreements to repurchase 1,390 11,970 1,790 Net increase (decrease) in other borrowed funds 46,153 (20,266) 82,748 --------- --------- --------- Net cash provided by financing activities 139,804 138,334 80,723 --------- --------- --------- Net increase in cash and cash equivalents 2,031 109,274 5,509 Cash and cash equivalents at beginning of year 175,802 66,528 61,019 --------- --------- --------- Cash and cash equivalents at end of year $ 177,833 $ 175,802 $ 66,528 --------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 30,351 $ 29,549 $ 25,566 Income taxes 5,588 2,424 6,911 Change in unrealized gains (losses) on securities available-for-sale, net of taxes $ 4,585 $ 4,498 $ (5,577)
See accompanying Notes to Consolidated Financial Statements. -22- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of Century Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Century Bank and Trust Company (the "Bank"). The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts. As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC") and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company's business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment under FASB 131. BASIS OF FINANCIAL STATEMENT PRESENTATION The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are susceptible to change in the near-term relate to the allowance for losses on loans. Management believes that the allowance for losses on loans is adequate based on independent appraisals and review of other factors associated with the assets. While management uses available information to recognize losses on loans, future additions to the allowance for loans may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company's allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance for loans based on their judgements about information available to them at the time of their examination. INVESTMENT SECURITIES Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling are classified as trading and reported at fair value, with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of estimated related income taxes. The Company has no securities held for trading. Premiums and discounts on investment securities are amortized or accreted into income by use of the level-yield method. If a decline in fair value below the amortized cost basis of an investment is judged to be other than temporary, the cost basis of the investment is written down to fair value. The amount of the writedown is included as a charge to earnings. Gains and losses on the sale of investment securities are recognized at the time of sale on a specific identification basis. LOANS Interest on loans is recognized based on the daily principal amount outstanding. Accrual of interest is discontinued when loans become 90 days delinquent unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. Loans, including impaired loans, on which the accrual of interest has been discontinued are designated non-accrual loans. When a loan is placed on non-accrual, all income which has been accrued but remains unpaid is reversed against current period income and all amortization of deferred loan fees is discontinued. Non-accrual loans may be returned to an accrual status when principal and interest payments are not delinquent and the risk characteristics of the loan have improved to the extent that there no longer exists a concern as to the collectibility of principal and income. Income received on non-accrual loans is either recorded in income or applied to the principal balance of the loan depending on management's evaluation as to the collectibility of principal. -23- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Loans held for sale are carried at the lower of aggregate amortized cost or market value. When loans are sold with servicing rights retained the Company allocates the carrying amount of the loans between the underlying asset sold and the servicing rights retained on the basis of the relative fair values of the assets sold and rights retained. The value of the servicing rights retained are amortized against mortgage banking income based on the estimated servicing period. When actual prepayments exceed the estimated prepayments, the balance of the mortgage servicing rights is reduced. Periodically the mortgage servicing rights are assessed for impairment based on the fair value of such rights using market prices. Loan origination fees and related direct incremental loan origination costs are offset and the resulting net amount is deferred and amortized over the life of the related loans using the level-yield method. The Bank accounts for impaired loans, except those loans that are accounted for at fair value or at lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate. This method applies to all loans, uncollat-eralized as well as collateralized, except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value and leases. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Impaired loans are charged-off when management believes that the collectibility of the loan's principal is remote. In addition, criteria for classification of a loan as in-substance foreclosure has been modified so that such classification need be made only when a lender is in possession of the collateral. The Bank measures the impairment of troubled debt restructurings using the pre-modification rate of interest. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is based on management's evaluation of the quality of the loan portfolio and is used to provide for losses resulting from loans which ultimately prove uncollectible. In determining the level of the allowance, periodic evaluations are made of the loan portfolio which take into account such factors as the character of the loans, loan status, financial posture of the borrowers, value of collateral securing the loans and other relevant information sufficient to reach an informed judgement. The allowance is increased by provisions charged to income and reduced by loan charge-offs, net of recoveries. Management maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans and the unallocated allowance. The formula allowance is calculated by applying loss factors to outstanding loans, in each case based on the internal risk grade of such loans. Changes in risk grades affect the amount of the formula allowance. Loss factors are based on the Company's historical loss experience as well as regulatory guidelines. Specific allowances are established in cases where management has indentified significant conditions related to a credit that management believes that the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance. The unallocated allowance recognizes the model and estimation risk associated with the formula allowance and specific allowances as well as management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of 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. While management uses available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Loans are charged-off in whole or in part when, in management's opinion, collectibility is not probable. Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgements about information available to them at the time of their examination. -24- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the terms of leases, if shorter. It is general practice to charge the cost of maintenance and repairs to operations when incurred; major expenditures for improvements are capitalized and depreciated. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the 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. 2. CASH AND DUE FROM BANKS The Company is required to maintain a portion of its cash and due from banks as a reserve balance under the Federal Reserve Act. Such reserve is calculated based upon deposit levels and amounted to $437,000 at December 31, 2001 and $12,000 at December 31, 2000. 3. SECURITIES AVAILABLE-FOR-SALE
December 31, 2001 December 31, 2000 ------------------------------------------------- ------------------------------------------------ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value --------- ---------- ---------- --------- --------- ---------- ---------- --------- (in thousands) U.S. Government and Agencies $ 435,796 $ 6,459 $ 1,089 $ 441,166 $ 256,390 $ 137 $ 1,689 $ 254,838 Obligations of states and political subdivisions 2,005 -- -- 2,005 1,000 -- -- 1,000 FHLB Stock 13,084 -- -- 13,084 13,084 -- -- 13,084 Other 4,690 48 160 4,578 4,465 19 262 4,222 --------- ---------- ---------- --------- --------- ---------- ---------- --------- $ 455,575 $ 6,507 $ 1,249 $ 460,833 $ 274,939 $ 156 $ 1,951 $ 273,144 --------- ---------- ---------- --------- --------- ---------- ---------- ---------
December 31, 1999 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- (in thousands) U.S. Government and Agencies $ 247,289 $ 10 $ 8,521 $ 238,778 Obligations of states and political subdivisions 250 -- -- 250 FHLB Stock 13,084 -- -- 13,084 Other 3,067 14 218 2,863 --------- ---------- ---------- --------- $ 263,690 $ 24 $ 8,739 $ 254,975 --------- ---------- ---------- ---------
Included in U.S. Government and Agency securities are securities pledged to secure public deposits and repurchase agreements amounting to $81,332,000 at December 31, 2001, $79,464,000 at December 31, 2000 and $141,679,000 at December 31, 1999. The following tables show the maturity distribution of the Company's securities available-for-sale at December 31, 2001, 2000 and 1999 and the weighted average yields of securities, which are based on the amortized cost, calculated on a fully taxable equivalent basis.
December 31, 2001 -------------------------------------------------------------------------------------------------- Obligations U.S. of States Government and Estimated and Political Market Agencies Yield Subdivision Yield Other Yield Total Yield Value ---------- ----- ----------- ----- ------- ----- -------- ----- --------- (in thousands) Within one year $ 15,945 6.26% $ 2,005 5.12% $ -- 0.00 $ 17,950 6.14% $ 18,329 After one but within five years 324,081 5.00 -- 0.00% 700 6.81% 324,781 5.00% 328,654 After five but within ten years 65,969 5.56% -- 0.00% -- 0.00% 65,969 5.56% 66,777 More than ten years 29,801 6.14% -- 0.00% -- 0.00% 29,801 6.14% 30,161 Non-maturing -- 0.00% -- 0.00% 17,074 6.80% 17,074 6.80% 16,962 ---------- ----- ----------- ----- ------- ----- -------- ----- --------- $ 435,796 5.21% $ 2,005 5.12% $17,774 6.80% $455,575 5.27% $ 460,883 ---------- ----- ----------- ----- ------- ----- -------- ----- ---------
-25- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average remaining life of investment securities available-for-sale at December 31, 2001, 2000 and 1999 was 4.9, 3.8 and 4.7 years, respectively. Included in the weighted average remaining life calculation at December 31, 2001 and 2000 were 268.7 million and 60.1 million respectively of U.S. agency obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life. 4. INVESTMENT SECURITIES HELD-TO-MATURITY
December 31, 2001 December 31, 2000 ------------------------------------------------- ------------------------------------------------ Gross Gross Estimated Gross Gross Estimated Amortized Unrealized Unrealized Market Amortized Unrealized Unrealized Market Cost Gains Losses Value Cost Gains Losses Value --------- ---------- ---------- --------- --------- ---------- ---------- --------- (in thousands) U.S. Government and Agencies $125,054 $ 2,662 $ 228 $ 127,488 $ 146,962 $ 485 $ 1,003 $ 146,444 Other 17,554 207 12 17,749 22,224 -- 206 22,018 --------- ---------- ---------- --------- --------- ---------- ---------- --------- $142,608 $ 2,869 $ 240 $ 145,237 $ 169,186 $ 485 $ 1,209 $ 168,462 --------- ---------- ---------- --------- --------- ---------- ---------- ---------
December 31, 1999 ------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- --------- (in thousands) U.S. Government and Agencies $ 127,719 $ -- $ 5,036 $ 122,683 Other 24,880 -- 960 23,920 --------- ---------- ---------- --------- $ 152,599 $ -- $ 5,996 $ 146,603 --------- ---------- ---------- ---------
Included in U.S. Government and Agency securities are securities pledged to secure public deposits and repurchase agreements amounting to $0 at December 31, 2001, $1,999,000 at December 31, 2000 and $1,999,000 at December 31, 1999. The following table shows the maturity distribution of the Company's securities held-to-maturity at December 31, 2001 and the weighted average yields of securities, which are based on the amortized cost, calculated on a fully taxable equivalent basis.
December 31, 2001 -------------------------------------------------------------------------------------------------- Obligations U.S. of States Government and Estimated and Political Market Agencies Yield Subdivision Yield Other Yield Total Yield Value ---------- ----- ----------- ----- ------- ----- -------- ----- --------- (in thousands) Within one year $ 11,000 6.03% $ -- 0.00% $ -- 0.00% $ 11,000 6.03% $ 11,238 After one but within five years 53,388 5.43% -- 0.00% 25 5.50% 53,413 5.43% 54,739 After five but within ten years 21,105 5.86% -- 0.00% -- 0.00% 21,105 5.86% 21,515 More than ten years 39,561 6.49% -- 0.00% 17,529 6.47% 57,090 6.48% 57,745 ---------- ----- ----------- ----- ------- ----- -------- ----- --------- $ 125,054 5.89% $ -- 0.00% $17,554 6.47% $142,608 5.96% $ 145,237 ---------- ----- ----------- ----- ------- ----- -------- ----- ---------
The weighted average remaining life of investment securities held-to-maturity at December 31, 2001, 2000 and 1999 was 3.2, 4.9 and 7.2 years, respectively. Included in the weighted average remaining life calculation at December 31, 2001 and 2000 were 53.4 million and 21.0 million respectively of U.S. agency obligations that are callable at the discretion of the issuer. These call dates were not utilized in computing the weighted average remaining life. 5. LOANS The Company's lending activities are conducted principally in Massachusetts. The Company makes single and multi-family residential loans, commercial and commercial real estate loans, and a variety of consumer loans. To a lesser extent, the Company makes loans for the construction of residential homes, multi-family properties, commercial real estate properties, and land development. Most loans made by the Company are secured by real estate collateral. The ability and willingness of commercial real estate, commercial, construction, residential and consumer loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate market in the borrowers' geographic areas and the general economy. -26- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following summary shows the composition of the loan portfolio at the dates indicated.
December 31, ------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------ Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total -------- -------- --------- -------- -------- -------- -------- -------- -------- -------- (in thousands) Construction and land development $ 39,256 8.5% $ 21,840 5.0% $ 21,682 5.1% $ 21,691 5.5% $ 7,549 2.4% Commercial and industrial 59,162 12.8% 95,957 21.8% 77,166 18.3% 64,822 16.4% 50,560 16.0% Industrial revenue bonds 48 0.0% 119 0.0% 190 0.0% 1,034 0.3% 2,693 0.9% Commercial real estate 241,419 52.2% 209,233 47.6% 209,332 49.5% 187,285 47.3% 140,270 44.3% Residential real estate 88,450 19.1% 81,526 18.5% 82,968 19.6% 87,518 22.1% 76,385 24.1% Consumer 7,701 1.7% 9,226 2.1% 11,678 2.8% 14,355 3.6% 19,254 6.1% Home equity 26,016 5.6% 21,107 4.8% 19,227 4.5% 18,839 4.8% 19,031 6.0% Overdrafts 720 0.2% 555 0.1% 482 0.1% 359 0.1% 648 0.2% -------- -------- --------- -------- -------- -------- -------- -------- -------- -------- $462,772 100.0% $ 439,563 100.0% $422,725 100.0% $395,903 100.0% $316,390 100.0% -------- -------- --------- -------- -------- -------- -------- -------- -------- --------
At December 31, 2001, 2000, 1999, 1998, and 1997, loans were carried net of discounts of $969,000, $1,446,000, $1,923,000, $2,399,000, and $2,875,000 respectively. Included in these amounts at December 31, 2001, 2000, 1999, 1998 and 1997, residential real estate loans were carried net of discounts of $959,000, $1,431,000, $1,903,000, $2,375,000 and $2,847,000 respectively, associated with the acquisition of loans from another financial institution. The composition of non-accrual loans, impaired loans and troubled debt restructuring agreements is as follows:
2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (in thousands) Loans on non-accrual $ 423 $ 110 $4,621 $1,281 $1,705 Impaired loans on non-accrual included above $ 292 $ 41 $4,378 $1,131 $1,235 Total recorded investment in impaired loans $1,118 $1,535 $6,019 $2,992 $3,515 Average recorded value of impaired loans $2,016 $2,444 $3,806 $3,048 $3,157 Loans 90 days past due and still accruing $ 9 $ 19 $ 188 $ 698 $ 7 Interest income on non-accrual loans according to their original terms $ 43 $ 19 $ 463 $ 166 $ 202 Interest income on non-accrual loans actually recorded $ 32 $ 9 $ 331 $ 27 $ 84 Interest income recognized on impaired loans $ 116 $ 160 $ 458 $ 142 $ 216
The composition of impaired loans at December 31, is as follows:
2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (in thousands) Residential real estate: 1 to 4 family $ 29 $ 41 $ 341 $ 330 $ 250 Multi-family 656 681 702 729 771 Commercial real estate 433 782 950 1,662 2,323 Commercial and industrial -- 31 4,026 271 171 Total $1,118 $1,535 $6,019 $2,992 $3,515 ------ ------ ------ ------ ------ Specific valuation allowance -- -- -- -- -- ------ ------ ------ ------ ------ Total impaired loans $1,118 $1,535 $6,019 $2,992 $3,515 ------ ------ ------ ------ ------
There were no impaired loans with specific reserves from December 31, 1997 through December 31, 2001 and in the opinion of management, none of the above listed impaired loans required a specific reserve. All of the impaired loans listed above have been measured using the fair value of the collateral method. The Company was servicing mortgage loans sold to others without recourse of approximately $7,226,000, $10,678,000, $13,033,000, $16,123,000 and $18,053,000 at December 31, 2001, 2000, 1999, 1998 and 1997. Additionally, the Company was servicing mortgage loans sold to others with limited recourse. The outstanding balance of these loans with limited recourse was approximately $338,000, $479,000, $490,000, $501,000, and $753,000 at December 31, 2001, 2000, 1999, 1998, and 1997. -27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features. The following table shows the aggregate amount of loans to directors and officers of the Company and their associates during 2001.
Balance At Repayments Balance At December 31, 2000 Additions and Deletions December 31, 2001 ----------------- --------- ------------- ----------------- (in thousands) $ 1,538 $ 725 $ 912 $ 1,351 ----------------- --------- ------------- -----------------
6. ALLOWANCE FOR LOAN LOSSES
2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (in thousands) Balance at beginning of year $ 5,662 $ 7,646 $ 6,022 $ 4,446 $ 4,179 Acquired allowance -- -- -- 1,194 -- Provision charged to operating expense 1,500 1,425 1,475 800 660 Loans charged-off (437) (3,661) (470) (843) (689) Loan recoveries 387 252 619 425 296 ------- ------- ------- ------- ------- Balance at end of year $ 7,112 $ 5,662 $ 7,646 $ 6,022 $ 4,446 ------- ------- ------- ------- -------
7. BANK PREMISES AND EQUIPMENT
December 31, 2001 2000 - ------------ -------- -------- (in thousands) Land $ 3,633 $ 1,839 Bank premises 6,533 6,533 Furniture and equipment 15,330 12,566 Leasehold improvements 1,888 1,888 -------- -------- 27,384 22,826 Accumulated depreciation and amortization (15,502) (14,007) -------- -------- $ 11,882 $ 8,819 ======== ========
The Company and its subsidiaries are obligated under a number of noncancelable operating leases for premises and equipment expiring in various years through the year 2026. Total lease expense approximated $589,000, $199,000 and $148,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Future minimum rental commitments for noncancelable operating leases with initial or remaining terms of one year or more at December 31, 2001 were as follows:
Year Amount ---- ------ (in thousands) 2002 $ 605 2003 605 2004 606 2005 557 2006 476 Thereafter 2,130 ------ $4,979 ------
The Company offers savings accounts, NOW accounts, demand deposits, time deposits and money market accounts. The Company offers cash management accounts which provide either automatic transfer of funds above a specified level from the customer's checking account to a money market account or short-term borrowings. Also, an account reconciliation service is offered whereby the Company provides a computerized report balancing the customer's checking account. Interest rates on deposits are set bi-monthly by the Bank's rate-setting committee, based on factors including loan demand, maturities and a review of competing interest rates offered. Interest rate policies are reviewed periodically by the Company`s Asset/Liability Committee and Executive Management Committee. -28- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Time Deposits as of December 31, are as follows:
2001 2000 1999 -------- -------- -------- (in thousands) Three months or less $102,004 $153,958 $134,010 Three months through twelve months 111,150 106,222 106,782 Over twelve months 17,594 27,888 29,783 -------- -------- -------- $230,748 $288,068 $270,575 -------- -------- --------
Time Deposits of $100,000 or more as of December 31, are as follows:
2001 2000 1999 -------- -------- -------- (in thousands) Three months or less $ 54,873 $108,783 $ 87,363 Three months through twelve months 22,425 31,382 31,468 Over twelve months 770 1,688 2,938 -------- -------- -------- $ 78,068 $141,853 $121,769 -------- -------- --------
The following table shows the average amount of and average rate paid on various deposits during the years indicated.
2001 2000 1999 -------------------------- -------------------------- --------------------------- Average Average Average Average Interest Rate Average Interest Rate Average Interest Rate Amount Paid Amount Paid Amount Paid -------- ------------- -------- ------------- -------- ------------- (In Thousands) Interest-bearing deposits: Interest-bearing transaction accounts $134,535 1.88% $127,809 2.29% $116,753 2.18% Savings accounts 63,064 1.40% 60,373 1.93% 58,733 2.18% Money Market Deposits 130,717 2.55% 82,686 2.79% 82,292 2.61% Time Deposits of $100,000 or more 65,676 4.73% 91,378 6.00% 64,698 5.05% Other Time Deposits 164,394 5.24% 150,683 5.41% 163,459 4.93% -------- ------------- -------- ------------- -------- ------------- Total Interest-bearing deposits 558,386 3.31% 512,929 3.91% 485,935 3.56% Non Interest-bearing deposits 209,188 168,557 138,493 -------- ------------- -------- ------------- -------- ------------- Total average deposits $767,574 2.41% $681,486 2.94% $624,428 2.77% -------- ------------- -------- ------------- -------- -------------
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
2001 2000 1999 ------- ------- ------- (dollars in thousands) Amount outstanding at December 31, $72,840 $71,450 $59,480 Weighted average rate at December 31, 1.12% 4.04% 3.68% Maximum amount outstanding at any month end $75,950 $77,426 $59,480 Daily average balance outstanding during the year $71,826 $68,808 $48,782 Weighted average rate during the year 2.29% 4.24% 3.82%
Amounts outstanding at December 31, 2001, 2000, and 1999 carried maturity dates of the next business day. U.S. Government and Agency securities with a total book value of $71,629,000, $72,974,000, and $62,121,000 were pledged as collateral and held by custodians to secure the agreements at December 31, 2001, 2000, and 1999, respectively. The approximate market value of the collateral at those dates was $73,262,000, $72,552,000, and $59,486,000, respectively. 10. OTHER BORROWED FUNDS AND LONG TERM DEBT
2001 2000 1999 ------- -------- -------- (dollars in thousands) Amount outstanding at December 31, $172,231 $126,078 $146,344 Weighted average rate at December 31, 5.30% 6.73% 6.08% Maximum amount outstanding at any month end $172,231 $161,838 $159,545 Daily average balance outstanding during the year $123,007 $123,886 $114,593 Weighted average rate during the year 6.16% 6.56% 6.22%
The Bank serves as a Treasury Tax and Loan depository under a note option with the Federal Reserve Bank of Boston. This open-ended interest bearing borrowing carries an interest rate equal to the daily Federal funds rate less 0.25%. Also, the bank borrowed seventeen long-term loans with the Federal Home Loan Bank. These loans total $140,284,000, bear a weighted average interest rate of 4.22% and mature between January 2, 2002 and April 12, 2010. -29- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In May 1998 the Company, through its newly formed subsidiary, Century Bancorp Capital Trust, issued 2,875,000 shares of Cumulative Trust Preferred Securities with a liquidation value of $10 per share. These securities pay dividends at an annualized rate of 8.30% and mature on June 30, 2029. The Company is using the proceeds primarily for general business purposes. 11. STOCKHOLDERS' EQUITY DIVIDENDS Holders of the Class A common stock may not vote in the election of directors, but may vote as a class to approve certain extraordinary corporate transactions. Class A common stockholders are entitled to receive dividends per share equal to at least 200% per share of that paid, if any, on each share of Class B common stock. Class A common stock is publicly traded. Class B common stock is not publicly traded, however, it can be converted on a share for share basis to Class A common stock at any time. Dividend payments by the Company are dependent in part on the dividends it receives from its bank subsidiary, which are subject to certain regulatory restrictions. EARNINGS PER SHARE (EPS) Diluted EPS includes the dilutive effect of common stock equivalents; basic EPS excludes all common stock equivalents. The only common stock equivalents for the Company are the stock options discussed below. The dilutive effect of these stock options for 2001, 2000 and 1999 was an increase of 6,436, 493 and 26,775 shares, respectively. STOCK OPTION PLAN During 2001 common stockholders of the Company approved a stock option plan (the "Option Plan") that provides for granting of options for not more than 150,000 shares of Class A common stock. Under the Option Plan, all officers and key employees of the Company are eligible to receive non-qualified and incentive stock options to purchase shares of Class A common stock. The Option Plan is administered by the Compensation Committee whose members are ineligible to participate in the Option Plan. Based on management's recommendations, the Committee submits its recommendations to the Board of Directors as to persons to whom options are to be granted, the number of shares granted to each, the option price (which may not be less than 85% of the fair market value for non-qualified stock options, or the fair market value for incentive stock options, of the shares on the date of grant) and the time period over which the options are exercisable (no more than ten years from the date of grant). There were no options exercisable at December 31, 2001. The Company measures compensation cost for its stock option plans using the intrinsic value based method of accounting. 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:
December 31, 2001 - ------------ ------- (in thousands, except per share data) Net income: As reported $10,859 Pro forma and diluted $10,719 Basic earning per share As reported $ 1.96 Pro forma $ 1.94
In determining the pro forma amounts, the fair value of each option grant was estimated as of the date of grant using Black-Scholes option-pricing model with the following weighted-average assumptions:
December 31, 2001 - ------------ -------- Dividend yields 2.65% Expected life 10 YEARS Expected volatility 36% Risk-free interest rate 4.94%
-30- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock option activity under the plan is as follows:
DECEMBER 31, 2001 ---------------------------------- WEIGHTED AVERAGE AMOUNT EXERCISE PRICE ------- ---------------- Shares under option: Outstanding at beginning of year -- -- Granted 36,500 $ 15.56 Cancelled -- -- Exercised -- -- Outstanding at end of year 36,500 $ 15.56 ------- ---------------- Exercisable at end of year -- -- ------- Weighted average fair value of options granted during the year $ 5.92 -------
At December 31, 2001 the 36,500 options outstanding have exercise prices between $15.063 and $16.57, with a weighted average exercise price at $15.56 and a weighted average remaining contractual life of 9 years. There were no options granted in 1999 or 2000. CAPITAL AND OTHER REGULATORY REQUIREMENTS The Bank is subject to various regulatory requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material affect on the Company's financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulation) to risk weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2001, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes would cause a change in the Bank's categorization. The Bank's actual capital amounts and ratios are presented in the following table.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- -------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- -------- ------ (dollars in thousands) As of December 31, 2001: Total capital (to risk-weighted assets) $80,895 13.31% $48,630 8.00% $60,788 10.00% Tier 1 capital (to risk-weighted assets) 73,783 12.14% 24,315 4.00% 36,473 6.00% Tier 1 capital (to 4th qtr. average assets) 73,783 6.79% 43,449 4.00% 54,312 5.00% As of December 31, 2000: Total capital (to risk-weighted assets) $71,240 12.84% $44,384 8.00% $55,480 10.00% Tier 1 capital (to risk-weighted assets) 65,578 11.82% 22,192 4.00% 33,288 6.00% Tier 1 capital (to 4th qtr. average assets) 65,578 6.69% 39,195 4.00% 48,994 5.00%
-31- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. INCOME TAXES The current and deferred components of income tax expense for the years ended December 31 are as follows:
2001 2000 1999 ------- ------- ------- (in thousands) Current expense: Federal $ 6,161 $ 883 $ 5,883 State 177 90 289 ------- ------- ------- Total current expense 6,338 973 6,172 ------- ------- ------- Deferred expense: Federal (101) 4,534 (1,269) State -- -- -- Valuation allowance -- (79) -- ------- ------- ------- Total deferred expense (101) 4,455 (1,269) ------- ------- ------- Provision for income taxes $ 6,237 $ 5,428 $ 4,903 ------- ------- -------
Income tax accounts included in other assets and other liabilities at December 31 are as follows:
2001 2000 ------- ------- (in thousands) Currently receivable (payable) $ 328 $ 1,078 Deferred income tax (liability) asset, net (3,137) (769) ------- ------- $(2,809) $ 309 ------- -------
Income tax expense for the years presented is different from the amounts computed by applying the statutory Federal income tax rate of 35% for 2001, 2000 and 1999 to income before Federal income taxes. The following tabulation reconciles Federal income tax expense based on statutory rates to the actual income tax expense for the years ended December 31:
2001 2000 1999 ------- ------- ------- (in thousands) Federal income tax expense at statutory rates $ 5,984 $ 5,471 $ 4,903 State income taxes, net of Federal income tax benefit 115 59 188 Effect of tax-exempt interest (27) (17) (17) Other 165 (85) (171) ------- ------- ------- $ 6,237 $ 5,428 $ 4,903 ------- ------- ------- Effective Tax Rate 36.5% 34.7% 35.0%
The following table sets forth the Company's gross deferred income tax assets and gross deferred income tax liabilities at December
2001 2000 ------- ------- (in thousands) Deferred income tax assets: Allowance for loan losses $ 2,640 $ 2,806 Deferred compensation 2,169 1,892 Unrealized loss on securities 28 available-for-sale -- 6 Acquisition premium 441 340 Investments writedown 51 51 Other 49 72 ------- ------- Gross deferred income tax asset 5,350 5,789 Deferred income tax liabilities: Deferred income (4,879) (4,949) Unrealized gain on securities available-for-sale (1,841) -- Accrued dividends (66) (73) Purchase accounting -- (26) Depreciation (358) (246) Limited partnerships (1,263) (1,205) Other (80) (59) ------- ------- Gross deferred income tax liability (8,487) (6,558) ------- ------- Deferred income tax liability, net $(3,137) $ (769)
-32- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. 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. An increase in the size of the work force and increased compensation expense in 2001 resulted in an increase in pension cost. The Company has a Supplemental Insurance/Retirement Plan (the "Supplemental Plan"), which is limited to certain officers and employees of the Company. The Supplemental Plan is voluntary and participants are required to contribute to its cost. Under the Supplemental Plan, each participant will receive a retirement benefit based on compensation and length of service. Individual life insurance policies, which are owned by the Company, are purchased covering the lives of each participant. Increased compensation expense and the addition of participants resulted in increased cost for the Supplemental Plan.
Supplemental Insurance/ Defined Benefit Pension Plan Retirement Plan 2001 2000 2001 2000 --------- ---------- -------- ------- (in thousands) Change in benefit obligation: Benefit obligation at beginning of year $ 9,240 $ 7,628 $ 8,067 $ 6,272 Service cost 493 427 53 32 Interest cost 624 553 545 455 Actuarial (gain)/loss 396 917 1,139 1,321 Benefits paid (220) (285) (13) (13) -------- ------- ------- ------- Benefit obligation at end of year $ 10,533 $ 9,240 $ 9,791 $ 8,067 -------- ------- ------- ------- Change in plan assets: Fair value of plan assets at beginning of year $ 6,446 $ 5,625 Actual return on plan assets 158 506 Employer contributions 675 600 Benefits paid (220) (285) -------- ------- Fair value of plan assets at end of year $ 7,059 $ 6,446 -------- ------- Funded status $ (3,474) $(2,794) $(9,791) $(8,067) Unrecognized transition obligation -- (1) -- (103) Unrecognized prior service cost (324) (424) 368 407 Unrecognized net actuarial loss (2,345) (1,646) (3,958) (2,963) -------- ------- ------- ------- Accrued benefit cost $ (805) $ (723) $(6,201) $(5,408) -------- ------- ------- ------- Weighted average assumptions as of December 31: Discount rate 6.75% 6.75% 6.75% 6.75% Expected return on plan assets 8.00% 8.00% N/A N/A Rate of compensation increase 5.00% 5.00% 5.00% 5.00% Components of net periodic benefit cost: Service cost $ 493 $ 427 $ 53 $ 32 Interest cost 624 553 545 455 Expected return on plan assets (508) (443) -- -- Amortization of unrecognized transition obligation 1 1 103 103 Recognized prior service cost 99 99 (39) (39) Recognized net losses 48 2 144 72 -------- ------- ------- ------- Net periodic cost $ 757 $ 639 $ 806 $ 623 -------- ------- ------- -------
The Company offers a 401(k) defined contribution plan for all employees reaching minimum age and service requirements. The plan is voluntary and employee contributions are matched by the Company at a rate of 25% for the first 4% of compensation contributed by each employee. The match was increased to a 33.3% match for the first 6% of compensation on October 1, 2001. The Company's match totaled $70,000 for 2000 and $112,000 for 2001. Administrative costs associated with the plan are absorbed by the Company. The Company does not offer any post retirement programs other than pensions. 14. COMMITMENTS AND CONTINGENCIES A number of legal claims against the Company arising in the normal course of business were outstanding at December 31, 2001. Management, after reviewing these claims with legal counsel, is of the opinion that their resolution will not have a material adverse affect on the Company's consolidated financial position. -33- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments with off-balance sheet risk at December 31 are as follows:
Contract or Notional Amount 2001 2000 - --------------------------- ------- ------- (in thousands) Financial instruments whose contract amount represents credit risk: Commitments to originate 1- 4 family mortgages $ 2,305 $ 1,344 Standby letters of credit 1,738 991 Unused lines of credit 86,556 88,679 Unadvanced portions of construction loans 25,547 24,476
Commitments to originate loans, unadvanced portions of construction loans and unused lines of credit are generally agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In addition to general commitments, the Company has originated 1- 4 family mortgages for sale in the secondary markets. These loans were sold with and without recourse and no loan was originated without its sale having been pre-arranged. The Company was servicing mortgage loans sold to others with a maximum recourse provision of 10% of the outstanding balance of approximately $338,000 at December 31, 2001 and $479,000 at December 31, 2000. 16. OTHER OPERATING EXPENSES
Year Ended December 31, 2001 2000 1999 - ----------------------- ------ ------ ------ (in thousands) Marketing $1,064 $1,286 $ 947 Supplies 587 595 479 Telephone 312 268 240 Postage and delivery 621 492 470 Legal and audit 508 546 462 Consulting 419 278 180 Software maintenance/amortization 584 539 421 Processing services 1,013 764 436 Insurance 200 164 179 Director's fees 208 181 109 FDIC assessment 150 141 82 Core deposit intangible amortization 200 200 200 Goodwill amortization 267 267 327 Capital expense amortization 311 224 257 Other 819 555 683 ------ ------ ------ $7,263 $6,500 $5,472
-34- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating fair values of its financial instruments. Excluded from this disclosure are certain financial instruments for which it is not practical to estimate their value and all nonfinancial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. CASH AND CASH EQUIVALENTS: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate the fair values of these assets because of the short-term nature of these financial instruments. SECURITIES HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE: The fair value of these securities, excluding certain state and municipal securities whose fair value is estimated at book value because they are not readily marketable, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. LOANS: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair value of other loans is estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Incremental credit risk for non-performing loans has been considered. ACCRUED INTEREST RECEIVABLE AND PAYABLE: The carrying amounts for accrued interest receivable and payable approximate fair values because of the short-term nature of these financial instruments. DEPOSITS: The fair value of demand deposits, savings, NOW and money market accounts is based on the estimated discounted value of cash flows. The discount rate used is estimated based on similar rates currently offered for deposits of similar remaining estimated maturities. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for deposits of similar remaining maturities. REPURCHASE AGREEMENTS AND OTHER BORROWED FUNDS: The fair value of repurchase agreements and other borrowed funds is based on the discounted value of contractual cash flows. The discount rate used is estimated based on the rates currently offered for other borrowed funds of similar remaining maturities. OFF-BALANCE SHEET INSTRUMENTS: The fair values of the Company's unused lines of credit, commitments to originate and sell loans and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of the Company's commitments to sell mortgage loans approximates the estimated cost to terminate or otherwise settle the obligations with the counterparties. Therefore, at December 31, 2001 and 2000, there was no fair value adjustment. The carrying amounts and fair values of the Company's financial instruments at December 31 are as follows:
2001 2000 ----------------------------- -------------------------- Carrying Carrying Amounts Fair Value mounts Fair Value -------- ---------- -------- ---------- (in thousands) Financial assets: Cash and cash equivalents $177,833 $ 177,833 $175,802 $ 175,802 Securities available-for-sale 460,833 460,833 273,144 273,144 Investment securities held-to-maturity 142,608 145,237 169,186 168,462 Net loans 455,660 460,302 433,901 422,040 Accrued interest receivable 7,561 7,561 7,612 7,612 Financial liabilities: Deposits 888,408 848,147 793,796 754,559 Repurchase agreements and other borrowed funds 216,321 227,655 168,778 167,786 Long term debt 28,750 28,750 28,750 26,234 Accrued interest payable 1,204 1,204 3,854 3,854
LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the type of financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Because no active market exists for some of the Bank's financial instruments, fair value estimates are based on judgements regarding future expected loss experience, cash flows, current economic conditions, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and -35- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS therefore cannot be determined with precision. Changes in assumptions and changes in the loan, debt and interest rate markets could significantly affect the estimates. Further, the income tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on the fair value estimates and have not been considered. 18. QUARTERLY RESULT OF OPERATIONS (UNAUDITED)
2001 Quarters Fourth Third Second First - ------------- ---------- ---------- ---------- ---------- (in thousands, except per share data) Interest income $ 16,171 $ 16,885 $ 17,128 $ 17,275 Interest expense 5,758 6,813 7,353 7,777 ---------- ---------- ---------- ---------- Net interest income 10,413 10,072 9,775 9,498 Provision for loan losses 375 375 375 375 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 10,038 9,697 9,400 9,123 Other operating income 2,353 2,170 2,259 2,081 Operating expenses 7,956 7,446 7,441 7,182 ---------- ---------- ---------- ---------- Income before income taxes 4,435 4,421 4,218 4,022 Provision for income taxes 1,583 1,626 1,552 1,476 ---------- ---------- ---------- ---------- Net income $ 2,852 $ 2,795 $ 2,666 $ 2,546 ---------- ---------- ---------- ---------- Share Data: Average shares outstanding, basic 5,515,350 5,538,502 5,540,350 5,547,350 Average shares outstanding, diluted 5,524,578 5,550,007 5,548,550 5,547,350 Earnings per share, basic $ 0.52 $ 0.50 $ 0.48 $ 0.46 Earnings per share, diluted $ 0.52 $ 0.50 $ 0.48 $ 0.46 ---------- ---------- ---------- ----------
2000 Quarters Fourth Third Second First - ------------- ---------- ---------- ---------- ---------- (in thousands, except per share data) Interest income $ 17,207 $ 16,943 $ 16,592 $ 15,812 Interest expense 8,040 7,958 7,768 7,326 ---------- ---------- ---------- ---------- Net interest income 9,167 8,985 8,824 8,486 Provision for loan losses 375 375 375 300 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 8,792 8,610 8,449 8,186 Other operating income 1,943 1,772 2,060 1,459 Operating expenses 6,799 6,549 6,303 5,987 ---------- ---------- ---------- ---------- Income before income taxes 3,936 3,833 4,206 3,658 Provision for income taxes 1,304 1,307 1,510 1,307 ---------- ---------- ---------- ---------- Net income $ 2,632 $ 2,526 $ 2,696 $ 2,351 ---------- ---------- ---------- ---------- Share Data: Average shares outstanding, basic 5,553,720 5,560,350 5,603,086 5,672,269 Average shares outstanding, diluted 5,553,720 5,560,350 5,603,086 5,674,306 Earnings per share, basic $ 0.47 $ 0.45 $ 0.48 $ 0.41 Earnings per share, diluted $ 0.47 $ 0.45 $ 0.48 $ 0.41 ---------- ---------- ---------- ----------
19. PARENT COMPANY FINANCIAL STATEMENTS The balance sheets of Century Bancorp, Inc. ("Parent Company") as of December 31, 2001 and 2000 and the statements of income and cash flows for each of the years in the three-year period ended December 31, 2001 are presented below. The statements of changes in stockholders' equity are identical to the consolidated statements of changes in stockholders' equity and are therefore not presented here. BALANCE SHEETS
December 31, 2001 2000 - -------------- -------- -------- (in thousands) Assets: Cash $ 33,014 $ 32,172 Investment in subsidiary, at equity 80,144 67,955 Other assets 859 1,329 -------- -------- Total assets $114,017 $101,456 -------- -------- Liabilities and Stockholders' Equity: Liabilities $ 668 $ 1,200 Long term debt 28,750 28,750 Stockholders' equity 84,599 71,506 -------- -------- Total liabilities and stockholders' equity $114,017 $101,456 -------- --------
-36- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STATEMENTS OF INCOME
Year Ended December 31, 2001 2000 1999 - ----------------------- -------- -------- -------- (in thousands) Income: Dividends from subsidiary $ 4,251 $ 3,193 $ 1,678 Interest income from deposits in bank 1,297 1,835 1,714 Other income 73 79 86 -------- -------- -------- Total income 5,621 5,107 3,478 Interest expense 2,460 2,460 2,460 Operating expenses 448 283 390 -------- -------- -------- Income before income taxes and equity in undistributed income of subsidiary 2,713 2,364 628 Provision for income taxes (542) (293) (373) -------- -------- -------- Income before equity in undistributed income of subsidiary 3,255 2,657 1,001 Equity in undistributed income of subsidiary 7,604 7,548 8,104 -------- -------- -------- Net income $ 10,859 $ 10,205 $ 9,105 -------- -------- --------
STATEMENTS OF CASH FLOWS
Year Ended December 31, 2001 2000 1999 -------- -------- -------- (in thousands) Cash flows from operating activities: Net income $ 10,859 $ 10,205 $ 9,105 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed income of subsidiary (7,604) (7,548) (8,104) Depreciation and amortization 317 230 234 Decrease (increase) in other assets 153 (133) 14 (Decrease) increase in liabilities (532) 507 277 -------- -------- -------- Net cash provided by operating activities 3,193 3,261 1,526 -------- -------- -------- Cash flows from financing activities: Stock options exercised -- 104 71 Cash dividends paid (1,653) (1,477) (1,369) Treasury stock repurchases (698) (2,120) (2,986) Net cash (used in) provided by financing activities (2,351) (3,493) (4,284) -------- -------- -------- Net increase (decrease) in cash 842 232 (2,758) Cash at beginning of year 32,172 32,404 35,162 -------- -------- -------- Cash at end of year $ 33,014 $ 32,172 $ 32,404 -------- -------- --------
-37- INDEPENDENT AUDITORS' REPORT KPMG LLP Certified Public Accountants 99 High Street Boston, Massachusetts 02110 THE BOARD OF DIRECTORS CENTURY BANCORP, INC.: We have audited the accompanying consolidated balance sheets of Century Bancorp, Inc. and subsidiary (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Century Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP January 9, 2002 -38- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors of the Company and their ages as of December 31, 2001 are as follows:
NAME AGE POSITION George R. Baldwin 58 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Roger S. Berkowitz 49 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Karl E. Case, Ph. D. 55 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Henry L. Foster, D.V.M. 76 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Marshall I. Goldman, Ph. D. 71 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Russell B. Higley, Esquire 62 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Jonathan B. Kay 42 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Fraser Lemley 61 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Joseph P. Mercurio 53 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Joseph J. Senna, Esquire 62 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Barry R. Sloane 46 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Jonathan G. Sloane 43 Director and Executive Vice President, Century Bancorp, Inc.; President and Chief Operating Officer, Century Bank and Trust Company Marshall M. Sloane 75 Chairman, President and Chief Executive Officer, Century Bancorp, Inc.; Chairman and Chief Executive Officer, Century Bank and Trust Company Stephanie Sonnabend 48 Director, Century Bancorp, Inc., and Century Bank and Trust Co. George F. Swansburg 59 Director, Century Bancorp, Inc., and Century Bank and Trust Co. Jon Westling 59 Director, Century Bancorp, Inc., and Century Bank and Trust Co.
-39- Mr. Baldwin became a director of the Company in 1996. He has been a Director of Century Bank and Trust Company since 1995. Mr. Baldwin is President and CEO of Baldwin & Co. He was formerly President and Chief Executive Officer of Arthur J. Gallagher & Co. Mr. Berkowitz became a director of the Company in 1996. He was elected a director of Century Bank/Suffolk in 1989 and has been a director of Century Bank and Trust Company since the banks merged in 1992. Mr. Berkowitz is President and CEO of Legal SeaFoods, Inc. Dr. Case became a director of the Company in 1996. Dr. Case has been a director of Century Bank and Trust Company since 1995. He is a Professor of Economics at Wellesley College and a Visiting Scholar at the Federal Reserve Bank of Boston. Dr. Foster has been a director of the Company since its organization in 1972. He was a founding director of Century Bank and Trust Company in 1969. He is founder and Chairman Emeritus of Charles River Laboratories, Inc. Formerly, he was Chairman of the Board of Charles River Laboratories, Inc. Dr. Goldman has been a director of the Company since its organization in 1972. He was also a founding director of Century Bank and Trust Company in 1969. He is a Professor of Economics at Wellesley College and Associate Director of the Davis Center for Russian Studies at Harvard University. Mr. Higley became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1986. Mr. Higley is an attorney in private practice. Mr. Kay became a director of the Company in 1997. He was also elected a director of Century Bank and Trust Company in 1997. Mr. Kay is President of The Kay Companies. Mr. Lemley became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1988. Mr. Lemley is Chairman of the Board and CEO of Sentry Ford, Inc., Sentry Lincoln-Mercury, Inc., and Sentry South Lincoln-Mercury, Inc. Mr. Mercurio became a director of the Company in 1990. He has been a director of Century Bank and Trust Company since 1995. He is an Executive Vice President of Boston University. Mr. Senna became a director of the Company in 1986. He has been a director of Century Bank and Trust Company since 1979. Mr. Senna is an attorney in private practice. Mr. Barry R. Sloane became a director of the Company in 1997. He was also elected a director of Century Bank and Trust Company in 1997. Mr. Sloane is managing director of Steinberg, Priest & Sloane Capital Management, LLC. Formerly, he was the Regional Head for the Southeastern United States at The CitiBank Private Bank and, prior to that, he was a member of Senior Management, Head of North America at Credit Suisse Private Bank. Mr. Jonathan G. Sloane became a director of the Company in 1986. He has been a Director of Century Bank and Trust Company since 1992. Mr. Sloane is currently Executive Vice President of Century Bancorp Inc. and President and Chief Operating Officer of Century Bank and Trust Company. From 1992 to 1998 he was Senior Executive Vice President of Century Bank and Trust Company. Mr. Marshall M. Sloane is the founder of the Company and has been Chairman, President and Chief Executive Officer since its organization in 1972. He founded Century Bank and Trust Company in 1968 and is currently its Chairman and Chief Executive Officer. Ms. Sonnabend became a director of the Company in 1997. She has been a director of Century Bank and Trust Company since 1997. Ms. Sonnabend is President of Sonesta International Hotels Corporation. Mr. Swansburg became a director of the Company in 1986. He has been a director of Century Bank and Trust since 1992. From 1992 to 1998 he was President and Chief Operating Officer of Century Bank and Trust Company. He is now retired from Century Bank and Trust Company. Mr. Westling became a director of the Company in 1996. He has been a director of Century Bank and Trust Company since 1995. Mr. Westling is President of Boston University. All of the Company's directors are elected annually and hold office until their successors are duly elected and qualified. There are no family relationships between any of the directors or executive officers, except that Barry R. Sloane and Jonathan G. Sloane are the sons of Marshall M. Sloane and Jonathan B. Kay is the son-in-law of Marshall M. Sloane. -40- The Audit Committee meets with KPMG LLP, the independent certified public accountants, in connection with the annual audit of the Company's financial statements. The Audit Committee reviews the findings and recommendations of the FRB, FDIC, and Massachusetts Bank Commissioner's staff in connection with their examinations and the internal audit reports and procedures for the Company and its subsidiary. The Audit Committee met four times during 2001. AUDIT COMMITTEE REPORT The Audit Committee of the Company's Board of Directors is responsible for providing independent, objective oversight of the Company's accounting functions and internal controls. The Audit Committee is composed of five directors, each of whom is independent as defined by the National Association of Securities Dealers' current listing standards. The Audit Committee operates under a written charter first adopted and approved by the Board of Directors in 2000. A copy of this Charter was last published in the 10-K for the period ending December 31, 2000. Management is responsible for the Company's internal controls and financial reporting process. The independent accountants are responsible for performing an independent audit of the Company's consolidated financial statements in accordance with generally accepted auditing standards and to issue a report thereon. The Audit Committee's responsibility is to monitor and oversee these processes. The Audit Committee has reviewed and discussed the audited financial statements with management. The Audit Committee has also discussed with KPMG LLP, the independent accounting firm for the Company, the matters required to be discussed by Codification of Statements on Auditing Standards No. 61 (Communication with Audit Committees). The Audit Committee has received the written disclosures and the letter from the independent accountants as required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees). Additionally, the Audit Committee has discussed with KPMG LLP the firm's independence. Fees paid to KPMG LLP for audit fees and other fees were $102,000 and $55,425, respectively. The other fees were mainly for tax services performed. Based on the review and discussions referred to in the paragraph above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-K for the last fiscal year for filing with the Securities and Exchange Commission. Joseph J. Senna, Chair, George R. Baldwin, Henry L. Foster, Russell B. Higley, Jon Westling DIRECTOR COMPENSATION Directors not employed by the Company receive a $6,000 retainer per year, $250 per Century Bancorp, Inc. Board meeting attended, $500 per Century Bank and Trust Company Board and $450 per committee meeting attended. ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION Executive officers are elected annually by the Board prior to the Annual Meeting of Shareholders to serve for a one year term and until their successors are elected and qualified. The following table sets forth the name of each executive officer of the Company and the principal positions and offices he holds with the Company Marshall M. Sloane Chairman, President and Chief Executive Officer; Chairman and Chief Executive Officer, Century Bank and Trust Company. Mr. Sloane is 75 years old. Jonathan G. Sloane Director and Executive Vice President; Director, President and Chief Operating Officer, Century Bank and Trust Company. Mr. Sloane is 43 years old. Paul V. Cusick, Jr. Vice President and Treasurer; Executive Vice President, Chief Financial Officer and Treasurer, Century Bank and Trust Company. Mr. Cusick is 57 years old. Paul A. Evangelista Executive Vice President, Century Bank and Trust Company with responsibility for retail, cash management and fee income. Mr. Evangelista is 38 years old. He joined the Company in 1999. Formerly, he was Senior Vice President at U.S. Trust. Kenneth M. Johnson President, Century Financial Services, Inc. Mr. Johnson is 41 years old.
-41- William J. Sloboda Executive Vice President, Century Bank and Trust Company with responsibility for operations. Mr. Sloboda is 59 years old. David B. Woonton Executive Vice President, Century Bank and Trust Company with responsibility for lending. Mr. Woonton is 46 years old. He joined the Company in 1999. Formerly, he was Regional President of Citizens Bank.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee is a committee of the Board of Directors composed of Joseph P. Mercurio as Chairman, Fraser Lemley and Roger S. Berkowitz. It reviews the salaries of the Company's officers and administers the Company's Supplemental Executive Insurance/Retirement Income Plan and Incentive Compensation Plan. Decisions on compensation of the Company's executives are generally made by the Compensation Committee of the Board of Directors. Each member of the Compensation Committee is a non-employee director. The goal of the Committee is to provide competitive levels of compensation in order to attract and retain qualified executive personnel. The Compensation Committee believes that the actions of each executive officer have the potential to affect the short and long term profitability of the Company. Accordingly, the Compensation Committee places considerable importance on the design and administration of the executive compensation program. The Company has an executive compensation program that is driven by the overall performance of the Company, the increase in shareholder value, the performance of the business unit directly affected by the executive and by the performance of the individual executive. The three primary components of the executive compensation program are base salary, cash incentive plan and stock based incentive plans. BASE SALARY Base salary levels are set so that the Company has the management talent to meet the challenges in the financial services industry. Several factors are included in setting base salaries including the responsibilities of the executive officer, the scope of the executive's position, individual performance and salary levels at peer banks. Historically, the Company's executive compensation practices have been designed to provide total compensation in the middle range of compensation levels at similar banking institutions. Salary increases for the senior management group have averaged 5% to 9% during the last several years. CASH INCENTIVE PLANS The Company has a cash incentive compensation plan which provides for the award of bonuses up to a percentage of base salary to officers of the Company or its subsidiaries. Recipients of incentive compensation are selected by the Compensation Committee, upon the recommendation of management, as eligible to participate in the plan. Awards are based upon the attainments of established objectives including profitability, expense control, sales volume and overall job performance. No bonuses are paid unless actual earnings are of budgeted net income. Upon recommendation of the Compensation Committee, the Board of Directors determines the amounts, if any, to be awarded. Earned bonuses for 2001, 2000 and 1999 are shown in the Summary Compensation Table. EXECUTIVE BENEFITS The Company's executive compensation package includes a special benefits component in addition to base salary and cash and stock incentive plans. These special benefits are viewed as less important than the above. Where such benefits are provided, they are intended to support other business purposes including facilitating business development efforts. CHIEF EXECUTIVE OFFICER COMPENSATION Mr. Marshall Sloane is eligible to participate in the same executive compensation plans available to other executive officers described above. The 2001 cash compensation for Mr. Sloane was $911,500, of which $643,500 was base salary. CONCLUSION The Compensation Committee believes that the executive compensation package will motivate the management team to produce the results the Company has historically achieved. -42- COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN* [FIVE-YEAR PERFORMANCE GRAPH] Value of $100 Invested on December 31, 1996 at:
12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 -------- -------- -------- -------- -------- Century 138.00 142.37 128.94 119.40 165.62 Nasdaq Banks 167.41 166.33 159.89 182.38 197.44 Nasdaq U.S. 122.48 172.68 320.89 193.01 153.15
* Assumes that the value of the investment in the Company's Common Stock and each index was $100 on December 31, 1996 and that all dividends were reinvested. -43- SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION The following table shows, for fiscal years ending December 31, 1999, 2000 and 2001, the cash compensation paid by the Company and its subsidiaries, as well as certain other compensation paid, accrued or granted for those years to the five most highly compensated executive officers of the Company. SUMMARY COMPENSATION TABLE
Long-Term Compensation ------------------------------- Annual Compensation Awards Payouts ------------------------ ---------------------- ------- Restricted Securities All Other Name Stock Underlying LTIP Compensation And Salary Bonus(1) Other Awards Options/ Payouts ($) Principal Position Year ($) ($) ($) ($) SARs (#) ($) (2) - ----------------------------------------------------------------------------------------------------------------- Marshall M. Sloane 2001 643,500 295,600 0 0 12,000 0 58,863 Chairman, President and CEO, 2000 585,000 268,000 0 0 0 0 49,955 Century Bancorp, Inc. 1999 520,000 242,200 0 0 0 0 46,102 Chairman and CEO, Century Bank and Trust Company - ----------------------------------------------------------------------------------------------------------------- Jonathan G. Sloane 2001 316,000 119,700 0 0 6,000 0 5,762 Executive Vice President 2000 295,000 108,800 0 0 0 0 5,379 Century Bancorp, Inc. 1999 250,000 96,900 0 0 0 0 3,950 President and COO, Century Bank and Trust Company - ----------------------------------------------------------------------------------------------------------------- Paul V. Cusick, Jr. 2001 209,000 76,500 0 0 3,000 0 8,466 Executive Vice President 2000 195,000 69,500 0 0 0 0 6,218 Century Bank and Trust 1999 160,000 60,600 0 0 0 0 5,108 Company - ----------------------------------------------------------------------------------------------------------------- Kenneth M. Johnson 2001 222,999 0 0 0 0 0 1,896 President 2000 251,128 0 0 0 0 0 1,700 Century Financial 1999 240,454 0 0 0 0 0 1,600 Services, Inc. - ----------------------------------------------------------------------------------------------------------------- David B. Woonton 2001 200,000 76,500 0 0 2,000 0 2,851 Executive Vice President 2000 187,200 69,500 0 0 0 0 1,280 Century Bank and 1999 123,914 40,400 0 0 0 0 0 Trust Company - -----------------------------------------------------------------------------------------------------------------
(1) Bonus amounts are based on performance for the years shown. (2) Term insurance premiums paid for Supplemental Executive Insurance/Retirement Income Plan and matching contribution for the 401(k) plan. OPTIONS/SAR GRANTS IN 2001 The following table provides information relating to option grants pursuant to our stock option plans during 2001 to our named executive officers.
Potential Realizable Value INDIVIDUAL GRANTS at Assumed Rates of Stock Price Appreciation Percentage of for Option Term Options Total Options Exercise Expiration -------------------------- Executive Officer Granted Granted to Price Date 5% 10% - ----------------- ------- ------------- -------- ---------- -------------------------- Marshall M. Sloane 12,000 8.00% $16.057 January 16, 2006 $53,235 $117,636 Jonathan G. Sloane 6,000 4.00% 15.063 January 16, 2011 56,838 144,039 Paul V. Cusick, Jr. 3,000 2.00% 15.063 January 16, 2011 28,419 72,020 Kenneth M. Johnson -- -- -- -- -- -- David B. Woonton 2,000 1.33% 15.063 January 16, 2011 18,946 48,013
-44- (1) Options vest and become exercisable 50% per year commencing on the first anniversary of the date of grant. None of the indicated awards were accompanied by stock appreciation rights. (2) Percentage of options to purchase an aggregate of 150,000 shares of Common Stock to all Officers during 2001. (3) The exercise price was based on the market price of the Common Stock on the date of grant. (4) Assumes future stock prices of $20.49 and $25.86 for options granted on January 16, 2001 to Marshall M. Sloane at compounded rates of return of 5% and 10% respectively. (5) Assumes future stock prices of $24.54 and $39.07 for options granted on January 16, 2001 to all other Officers at compounded rates of return of 5% and 10% respectively. (6) There were no exercises of stock options in 2001. SUPPLEMENTAL EXECUTIVE INSURANCE/RETIREMENT INCOME PLAN Executive officers of the Company or its subsidiaries who have at least one year of service may participate in the Supplemental Executive Insurance/Retirement Income Plan (the "Supplemental Plan"). The Company maintains split dollar life insurance policies for participants, in addition to the group term life insurance, which provides life insurance equal to twice the individual's salary with a maximum of $200,000, which they receive under a policy the Company maintains for its employees generally. The split dollar insurance provides death benefits if the participant dies while in the employ of the Company, equal to $3,218,000, $1,500,000, $1,045,000, $1,000,000 for Messrs. Marshall M. Sloane, Jonathan G. Sloane, Cusick and Woonton. Premiums paid by the Company in 2001 amounted to $87,800, $63,500, $27,200, $65,000, for policies on the lives of Messrs. Marshall M. Sloane, Jonathan G. Sloane, Cusick, and Woonton. The policies are on an "insurance bonus" basis, which means that the Company pays the full amount of all premiums on the policies but an amount equal to the one-year term cost of the insurance is treated for tax purposes as a bonus to the insured. The Company is the owner of these policies and each participating employee has received an assignment of a portion of each policy's proceeds. Upon the death of a participant, the Company will receive benefits equal to the difference between the death benefits payable to the named beneficiary under the Supplemental Plan and the face amount of the policy (less any policy loans then in force). A participant in the Supplemental Plan is also entitled to retirement benefits. Participants, upon retirement at age 65, after a specified number of years of service, are entitled to receive for life, with ten years certain, 75% of their highest 36 months compensation for certain executives, or 66% of such compensation if the participants are senior officers (as determined by the Compensation Committee), less the primary social security benefits and the benefit received from the defined benefit retirement plan. If a participant retires or terminates employment prior to age 65 such person is entitled to a reduced benefit. Five years of service are required for any benefits to become vested. Thereafter benefits vest incrementally. The following table illustrates representative annual retirement benefits at various compensation levels for executive management employees under the Supplemental Plan who retire at age 65 and with 15 years of service, without reflecting the required offset of benefits from social security and the defined benefit retirement plan.
Five Year Executive Officer Senior Officer Average Compensation Annual Benefit Annual Benefit -------------------- ----------------- -------------- $ 100,000 $ 75,000 $ 66,666 150,000 112,500 100,000 200,000 150,000 133,300 250,000 187,500 166,700 300,000 225,000 200,000 400,000 300,000 266,700 600,000 450,000 400,000 800,000 600,000 533,300
As of January 1, 2002, Messrs. Marshall M. Sloane, Jonathan G. Sloane, Cusick, and Woonton were 100%, 100%, 85%, and 0%, vested, respectively, under the Supplemental Plan. -45- ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as to the number and percentage of shares of Class A and Class B Common Stock beneficially owned as of December 31, 2001 (i) by each person known by the Company to own beneficially more than 5% of the Company's outstanding shares of Class A or Class B Common Stock (ii) by each of the Company's directors and certain officers; and (iii) by all directors and officers of the Company as a group. As of December 31, 2001, there were shares of Class A Common Stock and shares of Class B Common Stock outstanding.
NUMBER OF BENEFICIAL OWNER & ADDRESS OR NUMBER CLASS A % A CLASS B % B OF PERSONS IN GROUP OWNED OWNED OWNED OWNED - ------------------- ----- ----- ----- ----- Charles J. Moore (11) 251,300 7.44% The Banc Funds 208 South LaSalle Street Chicago, IL 60604 Gary G. Campbell (12) Kennedy Capital Management, Inc. 225,400 6.67% 10829 Olive Boulevard St. Louis, MO 63141 Marshall M. Sloane (a)(b) 17,198(1) 0.51% 1,682,690(2) 78.71% 400 Mystic Ave. Medford, MA 02155 George R. Baldwin (a) 2,990 0.09% Roger S. Berkowitz (a) 2,250 0.07% Karl E. Case (a) 1,481 0.04% Paul V. Cusick, Jr. (b) 15,200 0.45% Paul A. Evangelista(b) 500 0.01% Henry L. Foster, D.V.M. (a) 19,574 0.58% 1,000 0.05% Marshall I. Goldman (a) 1,443(3) 0.04% 30,000(4) 1.40% Russell B. Higley, Esquire (a) 4,750 0.14% Jonathan B. Kay (a) 5,709(7) 0.17% 60,000(6) 2.81% Donald H. Lang (a) 12,100 0.36% Fraser Lemley (a) 8,123(9) 0.24% Joseph P. Mercurio (a) 3,603 0.11% Joseph J. Senna (a) 46,169(5) 1.37% Barry R. Sloane (a) 2,130(10) 0.06% Jonathan G. Sloane (a)(b) 17,852(8) 0.53% 60,000 2.81% William J. Sloboda (b) 10,009 0.30% 500 0.02% Stephanie Sonnabend (a) 1,211 0.04% George F. Swansburg (a) 30,040 0.89% Jon Westling (a) 1,622 0.05% David B. Woonton (b) -- 00.0% (a) Denotes director of the Company. (b) Denotes officer of the Company. All directors and officers as a group (20 in number) (iii) 203,954 6.04% 1,834,190 85.79%
(1) Includes 2,500 shares owned by Mr. Sloane's spouse and also includes 13,979 shares held in trust for Mr. Sloane's grandchildren. (2) Includes 1,500 shares owned by Mr. Sloane's spouse, and does not include 120,000 shares owned by Mr. Sloane's children. Mr. Sloane disclaims beneficial ownership of such 120,000 shares. (3) Does not include 9,000 shares held of record by Mr. Goldman's children; Mr. Goldman disclaims beneficial ownership of such shares. (4) Does not include 9,000 shares held of record by Mr. Goldman's children; Mr. Goldman disclaims beneficial ownership of such shares. (5) Includes 34,800 shares owned by Mr. Senna's spouse. (6) Entire 60,000 shares are owned by Mr. Kay's spouse who is also Marshall Sloane's daughter. (7) Includes 71 shares owned by Mr. Kay's spouse. -46- (8) Includes 81.86 shares owned by Mr. Sloane's spouse and includes 339 shares owned by Mr. Jonathan Sloane's children. (9) Includes 500 shares owned by Mr. Lemley's spouse and 610 shares held by son, Noah Lemley. (10) Includes 30 shares owned by son and 61 shares owned by partner Candace Lapidus. (11) The Company has relied upon the information set forth in the Schedule 13G filed with the SEC by the Banc Funds on February 14, 2002. (12) The Company has relied upon the information set forth in the Schedule 13G filed with the SEC by Kennedy Capital Management, Inc. on February 15, 2002. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Exchange Act requires the Company's Executive Officers and Directors, and any persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership of securities with the SEC and NASDAQ. Executive Officers, Directors, and greater than 10% stockholders (of which, to the Company's knowledge, there currently are none) are required by SEC regulation to furnish the Company's with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such reports received by it or written representations from certain reporting persons that no other reports were required, the Company believes that, during 2001, all Section 16(a) filing requirements applicable to its Executive Officers and Directors were complied with. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Directors and Officers of the Company and Bank and members of their immediate family are at present, as in the past, customers of the Bank have transactions with the Bank in the ordinary course of business. In addition, certain of the Directors are at present, as in the past, also Directors, Officers or Stockholders of Corporations or members of partnerships that are customers of the Bank and have transactions with the Bank in the ordinary course of business. Such transactions with Directors and Officers of the Company and the bank and their families and with such corporations and partnerships were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility or present other features unfavorable to the Bank. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements. The following financial statements of the company and its subsidiaries are presented in Item 8: Independent Auditors' Report Consolidated Balance Sheets -- December 31, 2001 and 2000 Consolidated Statements of Income -- Years Ended December 31, 2001, 2000 and 1999 Consolidated Statements of Changes in Stockholders' Equity -- Years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows-Years Ended December 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements (2) Financial Statement Schedules All schedules are omitted because either the required information is shown in the financial statements or notes incorporated by reference, or they are not applicable, or the data is not significant. (3) Exhibits Exhibit number 23.1, the Independent Auditors Consent, is attached. -47- (b) Reports on Form 8K. There were no items reported on Form 8K during the last quarter of the period covered by this Form. (c) Exhibits required by Item 601 of Regulation S-K. See (a)(3) above for exhibits filed herewith. (d) Financial Statement required by Regulation S-X. Schedules to Consolidated Financial Statements required by Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. -48- SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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, on this 12th day of March 2002. Century Bancorp, Inc. /s/ Marshall M. Sloane ----------------------------------------------- By: Marshall M. Sloane, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated. /s/ George R. Baldwin /s/ Barry R. Sloane - ------------------------------------ -------------------------------------- George R. Baldwin, Director Barry R. Sloane, Director /s/ Stephanie Sonnabend - ------------------------------------ -------------------------------------- Roger S. Berkowitz, Director Stephanie Sonnabend, Director /s/ Karl E. Case /s/ George F. Swansburg - ------------------------------------ -------------------------------------- Karl E. Case, Ph.D., Director George F. Swansburg, Director /s/ Jon Westling - ------------------------------------ -------------------------------------- Henry L. Foster, D.V.M., Director Jon Westling, Director /s/ Marshall I. Goldman /s/ Marshall M. Sloane - ------------------------------------ -------------------------------------- Marshall I. Goldman, Ph.D., Director Marshall M. Sloane, Chairman, President and Chief Executive Officer /s/ Russell B. Higley - ------------------------------------ /s/ Jonathan G. Sloane Russell B. Higley, Esquire, Director -------------------------------------- Jonathan G. Sloane, Director and Executive Vice President /s/ Jonathan B. Kay - ------------------------------------ Jonathan B. Kay, Director /s/ Paul V. Cusick, Jr. -------------------------------------- Paul V. Cusick, Jr., Vice President /s/ Fraser Lemley and Treasurer, Principal - ------------------------------------ Financial Officer Fraser Lemley, Director /s/ Kenneth A. Samuelian /s/ Joseph P. Mercurio -------------------------------------- - ------------------------------------ Kenneth A. Samuelian, Joseph P. Mercurio, Director Vice President and Controller, Century Bank and Trust Company, Principal Accounting Officer /s/ Joseph J. Senna - ------------------------------------ Joseph J. Senna, Esquire, Director
-49- EX-23.1 3 b42249cbex23-1.txt CONSENT OF KPMG LLP Exhibit 23.1 Independent Auditors' Consent The Board of Directors Century Bancorp, Inc.: We consent to the incorporation by reference in the registration statement on Form S-8 of Century Bancorp, Inc. of our report dated January 9, 2002, with respect to the consolidated balance sheets of Century Bancorp, Inc as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001, which report appears in the December 31, 2001, annual report on Form 10-K of Century Bancorp, Inc. /s/ KPMG LLP Boston, Massachusetts March 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----