-----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, GS+OiSN5c6o2Vl2mks1VJzBr/FiVB5fdpvgjzxF8dfy4MWG6OL+EbIlWqbku5/YC VSa/O2Uo/Nsu9hNM08zDvw== 0000950135-03-005643.txt : 20031113 0000950135-03-005643.hdr.sgml : 20031113 20031113132346 ACCESSION NUMBER: 0000950135-03-005643 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15752 FILM NUMBER: 03997017 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-Q 1 b48044cbe10vq.txt CENTURY BANCORP, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 . ----------------------------------------------- or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from . ---------------------------------------------- Commission file number 0-15752 . ------------------------------------------------------ CENTURY BANCORP, INC. . - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) COMMONWEALTH OF MASSACHUSETTS 04-2498617 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 400 MYSTIC AVENUE, MEDFORD, MA 02155 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (781) 391-4000 . - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). [X] Yes [ ] No Indicate the number of shares outstanding of each of the registrant's classes of common stock as of September 30, 2003: CLASS A COMMON STOCK, $1.00 PAR VALUE 3,405,688 SHARES CLASS B COMMON STOCK, $1.00 PAR VALUE 2,115,100 SHARES 1 of 22 Century Bancorp, Inc.
Page Index Number ----- ------ Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets: September 30, 2003 and December 31, 2002 3 Consolidated Statements of Income: Three (3) and Nine (9) months ended September 30, 2003 and 2002. 4 Consolidated Statements of Changes in Stockholders' Equity: Nine (9) months ended September 30, 2003 and 2002. 5 Consolidated Statements of Cash Flows: Nine (9) months ended September 30, 2003 and 2002. 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16-17 Item 4. Controls and Procedures 17 Part II. Other Information Item 1 through Item 6 17 Signatures 18 Exhibits 19-22
2 of 22 PART I - Item 1 Century Bancorp, Inc. - Consolidated Balance Sheets (unaudited)
(000's) September 30, December 31, Assets 2003 2002 - ------ ----------- ----------- Cash and due from banks $ 52,257 $ 63,188 Federal funds sold and interest-bearing deposits in other banks 18 59,017 ----------- ----------- Total cash and cash equivalents 52,275 122,205 ----------- ----------- Securities available-for-sale, amortized cost $781,512 and $750,129, respectively 788,205 761,531 Securities held-to-maturity, market value $185,809 and $130,014, respectively 183,764 127,209 Loans, net: Commercial & industrial 40,889 46,044 Construction & land development 40,457 33,155 Commercial real estate 278,484 291,598 Residential real estate 87,526 92,291 Consumer & other 7,522 9,634 Home equity 47,418 41,527 ----------- ----------- Total loans, net 502,296 514,249 Less: allowance for loan losses 9,026 8,506 ----------- ----------- Net loans 493,270 505,743 Bank premises and equipment 18,317 12,928 Accrued interest receivable 8,706 9,370 Goodwill 2,717 2,717 Core Deposit Intangible 3,319 0 Other assets 19,779 15,498 ----------- ----------- Total assets $ 1,570,352 $ 1,557,201 =========== =========== Liabilities - ----------- Deposits: Demand deposits $ 269,779 $ 248,340 Savings and NOW deposits 286,264 317,698 Money market accounts 429,220 357,921 Time deposits 228,264 222,325 ----------- ----------- Total deposits 1,213,527 1,146,284 Securities sold under agreements to repurchase 49,010 51,800 Federal Home Loan Bank (FHLB) borrowings and other borrowed funds 164,494 169,420 Accounts payable for investments purchased 0 43,069 Other liabilities 10,768 17,622 Long term debt 28,750 28,750 ----------- ----------- Total liabilities 1,466,549 1,456,945 Commitments and contingencies Stockholders' equity - -------------------- Class A common stock, $1.00 par value per share; authorized 10,000,000 shares; issued 3,789,288 shares and 3,780,915 shares, respectively 3,789 3,781 Class B common stock, $1.00 par value per share; authorized 5,000,000 shares; issued 2,162,650 shares and 2,167,660 shares, respectively 2,163 2,168 Additional paid-in capital 11,175 11,123 Retained earnings 88,764 81,755 Treasury stock, Class A, 383,600 shares, each period, at cost (5,941) (5,941) Treasury stock, Class B, 47,550 shares, each period, at cost (41) (41) ----------- ----------- 99,909 92,845 Accumulated other comprehensive income, net of taxes 3,894 7,411 ----------- ----------- Total stockholders' equity 103,803 100,256 ----------- ----------- Total liabilities and stockholders' equity $ 1,570,352 $ 1,557,201 =========== ===========
See accompanying Notes to unaudited Consolidated Financial Statements. 3 of 22 Century Bancorp, Inc. - Consolidated Statements of Income (unaudited)
(000's except share data) Three months ended Nine months ended September 30, September 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Interest income Loans $ 8,150 $ 9,168 $ 25,070 $ 26,684 Securities held-to-maturity 1,780 1,759 5,103 5,543 Securities available-for-sale 6,921 6,920 22,315 19,909 Federal funds sold and interest-bearing deposits in other banks 38 243 250 522 ---------- ---------- ---------- ---------- Total interest income 16,889 18,090 52,738 52,658 Interest expense Savings and NOW deposits 592 869 2,017 2,353 Money market accounts 1,222 1,293 3,933 3,488 Time deposits 1,847 1,765 5,568 5,204 Securities sold under agreements to repurchase 105 167 369 541 FHLB borrowings, other borrowed funds and long term debt 2,041 2,438 6,442 6,839 ---------- ---------- ---------- ---------- Total interest expense 5,807 6,532 18,329 18,425 ---------- ---------- ---------- ---------- Net interest income 11,082 11,558 34,409 34,233 Provision for loan losses 0 300 450 900 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 11,082 11,258 33,959 33,333 Other operating income Service charges on deposit accounts 1,202 1,096 3,548 3,286 Lockbox fees 733 787 2,451 2,646 Brokerage commissions 140 285 402 872 Other income 267 292 753 1,083 ---------- ---------- ---------- ---------- Total other operating income 2,342 2,460 7,154 7,887 ---------- ---------- ---------- ---------- Operating expenses Salaries and employee benefits 5,359 5,426 16,399 16,045 Occupancy 626 562 1,927 1,661 Equipment 445 563 1,226 1,640 Other 1,858 1,848 6,070 6,065 ---------- ---------- ---------- ---------- Total operating expenses 8,288 8,399 25,622 25,411 ---------- ---------- ---------- ---------- Income before income taxes 5,136 5,319 15,491 15,809 Income tax expense Provision for income taxes 1,939 1,916 5,827 5,766 Retroactive REIT settlement 0 0 1,183 0 ---------- ---------- ---------- ---------- Total income tax expense 1,939 1,916 7,010 5,766 Net income $ 3,197 $ 3,403 $ 8,481 $ 10,043 ========== ========== ========== ========== Share data: Weighted average number of shares outstanding, basic 5,520,025 5,517,400 5,518,587 5,516,317 Weighted average number of shares outstanding, diluted 5,553,470 5,537,009 5,543,722 5,532,417 Net income per share, basic $ 0.58 $ 0.62 $ 1.54 $ 1.82 Net income per share, diluted $ 0.58 $ 0.61 $ 1.53 $ 1.82 Cash dividends declared: Class A common stock $ 0.1100 $ 0.1100 $ 0.3300 $ 0.3100 Class B common stock $ 0.0550 $ 0.0550 $ 0.1650 $ 0.1550
See accompanying Notes to unaudited Consolidated Financial Statements. 4 of 22 Century Bancorp, Inc. - Consolidated Statements of Changes in Stockholders' Equity (unaudited)
Accumulated Class A Class B Additional Treasury Treasury Other Total Common Common Paid-In Retained Stock Stock Comprehensive Stockholders' Stock Stock Capital Earnings Class A Class B Income (Loss) Equity ----- ----- ------- -------- ------- ------- ------------- ------ (000's) 2002 Balance at December 31, 2001 $ 3,761 $ 2,186 $ 11,093 $ 70,123 ($ 5,941) ($ 41) $ 3,418 $ 84,599 Net income - - - 10,043 - - - 10,043 Other comprehensive income, net of tax: Change in unrealized (loss) gain on securities available-for-sale - - - - - - 4,033 4,033 -------- Comprehensive income 14,076 Conversion of Class B common stock to Class A common stock, 17,400 shares 17 (17) - - - - - - Stock Options Exercised, 2,050 shares 2 - 29 - - - - 31 Cash dividends, Class A common stock, $.31 per share - - - (1,053) - - - (1,053) Cash dividends, Class B common stock, $.155 per share - - - (329) - - - (329) -------- -------- -------- -------- -------- -------- -------- -------- Balance at September 30, 2002 $ 3,780 $ 2,169 $ 11,122 $ 78,784 ($ 5,941) ($ 41) $ 7,451 $ 97,324 ======== ======== ======== ======== ======== ======== ======== ======== 2003 Balance at December 31, 2002 $ 3,781 $ 2,168 $ 11,123 $ 81,755 ($ 5,941) ($ 41) $ 7,411 $100,256 Net income - - - 8,481 - - - 8,481 Other comprehensive income, net of tax: Change in unrealized loss on securities available-for-sale - - - - - - (3,517) (3,517) -------- Comprehensive income 4,964 Conversion of Class B common stock to Class A common stock, 5,010 shares 5 (5) - - - - - - Stock Options Exercised, 3,213 shares 3 - 52 - - - - 55 Cash dividends, Class A common stock, $.33 per share - - - (1,123) - - - (1,123) Cash dividends, Class B common stock, $.165 per share - - - (349) - - - (349) -------- -------- -------- -------- -------- -------- -------- -------- Balance at September 30, 2003 $ 3,789 $ 2,163 $ 11,175 $ 88,764 ($ 5,941) ($ 41) $ 3,894 $103,803 ======== ======== ======== ======== ======== ======== ======== ========
See accompanying Notes to unaudited Consolidated Financial Statements. 5 of 22 Century Bancorp, Inc. - Consolidated Statements of Cash Flows (unaudited)
2003 2002 --------- --------- For the nine months ended September 30, (000's) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,481 $ 10,043 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Provision for loan losses 450 900 Deferred income taxes (507) (1,173) Net depreciation and amortization 1,270 1,465 Decrease (Increase) in accrued interest receivable 664 (1,634) Increase in other assets (6,460) (1,687) Loans originated for sale (270) --- Proceeds from sales of loans 267 73 Gain on sales of loans 3 (1) Gain on sale of building --- (359) Increase (decrease) in other liabilities (6,841) 1,193 --------- --------- Net cash (used in) provided by operating activities (2,943) 8,820 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of securities available-for-sale 535,642 200,350 Purchase of securities available-for-sale (566,875) (383,978) Proceeds from maturities of securities held-to-maturity 105,081 42,335 Purchase of securities held-to-maturity (161,719) (22,967) Decrease in payable for investments purchased (43,069) (28,976) Net decrease (increase) in loans 12,318 (48,695) Proceeds from sale of building --- 1,020 Capital expenditures (6,475) (1,670) --------- --------- Net cash used in investing activities (125,097) (242,581) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in time deposits 5,939 (4,779) Net increase in demand, savings, money market and NOW deposits 61,304 118,925 Net proceeds from the exercise of stock options 55 31 Cash dividends (1,472) (1,382) Net decrease in securities sold under agreements to repurchase (2,790) (14,800) Net (decrease) increase in FHLB borrowings and other borrowed funds (4,926) 26,922 --------- --------- Net cash provided by financing activities 58,110 124,917 --------- --------- Net decrease in cash and cash equivalents (69,930) (108,844) Cash and cash equivalents at beginning of period 122,205 177,833 --------- --------- Cash and cash equivalents at end of period $ 52,275 $ 68,989 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 18,573 $ 18,381 Income taxes 13,862 6,267 Change in unrealized gains on securities available-for-sale, net of taxes ($ 3,517) $ 4,033
See accompanying Notes to unaudited Consolidated Financial Statements. 6 of 22 Century Bancorp, Inc. Notes to Consolidated Financial Statements BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of Century Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Century Bank and Trust Company (the "Bank"). The Company provides a full range of banking services to individual, business and municipal customers in Massachusetts. As a bank holding company, the Company is subject to the regulation and supervision of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Bank, a state chartered financial institution, is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the "FDIC") and the Commonwealth of Massachusetts Commissioner of Banks. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on types and amounts of loans that may be made and the interest that may be charged thereon, and limitations on types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. All aspects of the Company's business are highly competitive. The Company faces aggressive competition from other lending institutions and from numerous other providers of financial services. The Company has one reportable operating segment under Statement of Financial Accounting Standards No. 131. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present a fair statement of the results for the interim period presented of the Company and its wholly-owned subsidiary, the Bank. The results of operations for the interim period ended September 30, 2003, are not necessarily indicative of results for the entire year. All significant intercompany accounts and transactions have been eliminated in consolidation. These statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-k for the year ended December 31, 2002. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and to general practices within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. A material estimate is susceptible to change in the near-term relate to the allowance for losses on loans. Management believes that the allowance for losses on loans is adequate based on independent appraisals of collateral and review of other factors associated with the assets. While management uses available information to recognize losses on loans, future additions to the allowance for loans may be necessary based on changes in economic conditions. In addition, regulatory agencies periodically review the Company's allowance for losses on loans. Such agencies may require the Company to recognize additions to the Page 7 of 22 allowance for loans based on their judgments about information available to them at the time of their examination. SUMMARY OF CRITICAL ACCOUNTING POLICIES Accounting policies involving significant judgments and assumptions by management, which had, or could have in the future, a material impact on the carrying value of certain assets and impact income, are considered critical accounting policies. The Company considers the following to be its critical accounting policies: allowance for loan losses, impaired investment securities and deferred income taxes. There have been no significant changes since December 31, 2002 in the methods or assumptions used in the accounting policies that require material estimates and assumptions. ALLOWANCE FOR LOAN LOSSES Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. Management maintains an allowance for credit losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses inherent in the loan portfolio. Management's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances for identified problem loans and the unallocated allowance The formula allowance is calculated by applying loss factors to outstanding loans, in each case based on the internal risk grade of such loans. Changes in risk grades affect the amount of the formula allowance. Risk grades are determined by reviewing current collateral value, financial information, cash flow, payment history and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and qualitative adjustments. For the residential real estate and consumer loan portfolios, the reserves are calculated by applying historical charge-off and recovery experience and qualitative adjustments to the current outstanding balance in each loan category. Loss factors are based on the Company's historical loss experience as well as regulatory guidelines. Specific allowances are established in cases where management has identified significant conditions related to a credit that management believes that the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance The unallocated allowance recognizes the model and estimated risk associated with the formula allowance and specific allowances as well as management's evaluation of various conditions, including the business and economic conditions, delinquency trends, charge-off experience and other asset quality factors, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits Management believes that the allowance for loan losses is adequate. In addition, various regulatory agencies, as part of the examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Page 8 of 22 DEFERRED INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. IMPAIRED INVESTMENT SECURITIES If a material decline in fair value below the amortized cost basis of an investment security is judged to be "other than temporary," generally six months or longer, the cost basis of the investment is written down to fair value. The amount of the write-down is included as a charge to earnings. An "other than temporary" impairment exists for debt securities if it is probable that the Company will be unable to collect all amounts due according to contractual terms of the security. Some factors considered for "other than temporary" impairment related to a debt security include an analysis of yield which results in a decrease in expected cash flows, whether an unrealized loss is issuer specific, whether the issuer has defaulted on scheduled interest and principal payments, whether the issuer's current financial condition hinders its ability to make future scheduled interest and principal payments on a timely basis or whether there was downgrade in ratings by rating agencies. STOCK OPTION ACCOUNTING The Company currently accounts for employee stock options using the intrinsic value method. Under the intrinsic value method, no compensation cost is recognized related to options if the exercise price of the option is greater than or equal to the fair market value of the underlying stock on the date of grant. Under an alternative method, the fair value method, the "fair value" of the option at the grant date is estimated using an option valuation model and recognized as compensation expense over the vesting period of the option. The Company generally awards stock options annually with a grant date in January. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Nine Months Ended September 30, 2003 September 30, 2002 ------------------ ------------------ (Dollars in Thousands) Net income As reported $ 8,481 $ 10,043 Less: Pro forma stock based Compensation (net of tax) 118 119 ---------- ---------- Pro forma net income 8,363 9,924
Page 9 of 22 Basic income per share As reported 1.54 1.82 Pro forma 1.52 1.80 Diluted income per share As reported 1.53 1.82 Pro forma 1.51 1.79
In determining the pro forma amounts, the fair value of each option grant was estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: Dividend yields 1.37% 2.25% Expected life 7 years 8 years Expected volatility 31% 25% Risk-free interest rate 3.41% 4.01%
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD LOOKING STATEMENTS Except for the historical information contained herein, this Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that forward-looking statements are inherently uncertain. Actual performance and results of operations may differ materially from those projected or suggested in the forward-looking statements due to certain risks and uncertainties, including, without limitation, (i) the fact that the Company's success is dependent to a significant extent upon general economic conditions in New England, (ii) the fact that the Company's earnings depend to a great extent upon the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and other borrowings) generated by the Bank and thus the Bank's results of operations may be adversely affected by increases or decreases in interest rates, (iii) the fact that the banking business is highly competitive and the profitability of the Company depends upon the Bank's ability to attract loans and deposits within its market area, where the Bank competes with a variety of traditional banking and other institutions such as credit unions and finance companies, and (iv) the fact that a significant portion of the Company's loan portfolio comprised of commercial loans, exposing the Company to the risks inherent in loans based upon analyses of credit risk, the value of underlying collateral, including real estate, and other more intangible factors, which are considered in making commercial loans. Accordingly, the Company's profitability may be negatively impacted by errors in risk analyses, by loan defaults, and the ability of certain borrowers to repay such loans may be adversely affected by any downturn in general economic conditions. These factors, as well as general economic and market conditions, may materially and adversely affect the market price of shares of the Company's common stock. Because of these and other factors, past financial performance should not be considered an indicator of future performance. The forward-looking statements contained herein represent the Company's judgment as of the date of this Form 10-Q, and the Company cautions readers not to place undue reliance on such statements. Page 10 of 22 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.) OVERVIEW For the quarter ended September 30, 2003. Earnings for the third quarter ended September 30, 2003 were $3.2 million, a decrease of 6.05% when compared with the third quarter 2002 earnings of $3.4 million. Diluted earnings per share for the third quarter 2003 were $0.58 versus $0.61 for the third quarter of 2002. Earnings for the nine months ended September 30, 2003 were $8.5 million, a decrease of 15.6% when compared with the same period last year earnings of $10.0 million. Diluted earnings per share for the first nine months were $1.53 versus $1.82 for the first nine months of 2002. Included in income for the first nine months of 2003 is the previously announced net tax charge of $1.2 million associated with the Real Estate Investment Trust ("REIT") settlement. This change was the result of an agreement with the Massachusetts Department of Revenue ("DOR") settling a dispute related to taxes that the DOR claimed were owed from the Company's REIT. On March 21, 2003, the Company completed the acquisition of Capital Crossing Bank's branch office at 1220 Boylston Street, Chestnut Hill, Massachusetts, and substantially all of the retail deposits at Capital Crossing's main office at 101 Summer Street, Boston, Massachusetts. Century closed the Chestnut Hill branch and transferred all customers of the branch to its nearby branch office at 1184 Boylston Street, Brookline, Massachusetts. In addition, Century transferred all of the retail deposits from Capital Crossing's Summer Street branch to its branch at 24 Federal Street, Boston, Massachusetts. The acquisition included $192.7 million in deposits. The acquisition also included a premium paid to Capital Crossing of approximately $3.9 million. This premium was subsequently reduced by a gain of $395 thousand from the sale of the acquired Chestnut Hill branch. FINANCIAL CONDITION Loans On September 30, 2003, total loans outstanding, net of unearned discount, were $502.3 million, a decrease of 2.3% from the total on December 31, 2002. At September 30, 2003, commercial real estate loans accounted for 55.4% and residential real estate loans, including home equity credit lines, accounted for 26.9% of total loans. Construction loans increased to $40.5 million at September 30, 2003 from $33.2 million on December 31, 2002. The decrease in loans was mainly attributable to a decrease in commercial real estate loans and residential real estate loans, excluding home equity credit lines. Commercial real estate loans decreased mainly because of payoffs in the portfolio. Allowance for Loan Losses The allowance for loan losses was 1.80% of total loans on September 30, 2003 compared with 1.65% on December 31, 2002. Net recoveries for the nine-month period ended September 30, 2003 were $70 thousand compared with net recoveries of Page 11 of 22 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.) $212 thousand for the same period in 2002. Provisions for the third quarter were suspended. At the current time, management believes that the allowance for loan losses is adequate. Nonperforming Loans
September 30, 2003 December 31, 2002 ------------------ ----------------- (Dollars in Thousands) Nonaccruing loans $2,982 $511 Loans past due 90 days or more $ 98 $ 0 Nonaccruing loans as a Percentage of total loans .59% .10%
Investments Management continually evaluates its investment alternatives in order to properly manage the overall balance sheet mix. The timing of purchases, sales and reinvestments, if any, will be based on various factors including expectation of movements in market interest rates, deposit flows and loan demand. Notwithstanding these events, it is the intent of management to grow the earning asset base through loan originations, loan purchases or investment acquisitions while funding this growth through a mix of retail deposits, FHLB advances, and retail repurchase agreements.
September 30, 2003 December 31, 2002 ------------------ ----------------- (Dollars in Thousands) Securities Available-for-Sale U.S. Government and Agencies $760,469 $712,596 Other Bonds and Equity Securities 17,629 18,117 Mortgage-backed Securities 10,107 30,818 -------- -------- Total Securities Available-for-Sale $788,205 $761,531 ======== ======== Securities Held-to-Maturity U.S. Government and Agencies $ 15,400 $ 73,373 Other Bonds and Equity Securities 25 25 Mortgage-backed Securities 168,339 53,811 -------- -------- Total Securities Held-to-Maturity $183,764 $127,209 ======== ========
Securities Available-for-Sale The securities available-for-sale portfolio totaled $788.2 million at September 30, 2003, an increase of 3.5% from December 31, 2002. The portfolio increased Page 12 of 22 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.) mainly because of increases in deposits associated with the acquisition of Capital Crossing. The portfolio is concentrated in United States Government and Agency securities and has an estimated weighted average maturity of 3.5 years. Securities Held-to-Maturity The securities held-to-maturity portfolio totaled $183.8 million on September 30, 2003, an increase of 44.5% from the total on December 31, 2002. The portfolio increased mainly because of increases in deposits associated with the acquisition of Capital Crossing. The portfolio is concentrated in United States Government Agency Collateralized Mortgage Obligations and has an expected average life of 3.1 years. Deposits and Borrowed Funds On September 30, 2003, deposits totaled $1.21 billion, representing a 5.9% increase in total deposits from December 31, 2002. Total deposits increased primarily as a result of increases in money market accounts and time deposits acquired from Capital Crossing. Borrowed funds totaled $213.5 million compared to $221.2 million at December 31, 2002. Borrowed funds decreased from use of some proceeds from the Capital Crossing transaction. RESULTS OF OPERATIONS Net Interest Income For the three-month period ended September 30, 2003, net interest income totaled $11.1 million, a decrease of 4.1% from the comparable period in 2002. For the nine-month period ended September 30, 2003 net interest income totaled $34.4 million versus $34.2 million for the same period in 2002. The 0.5% increase in net interest income for the period is mainly due to a 23.8% increase in the average balances of earning assets, combined with a similar increase in deposits and borrowed funds. The increase in volume was mainly the result of an acquisition of $192.7 million of deposits from Capital Crossing Bank during the first quarter of 2003. This increase in volume was mostly offset by a seventy-two basis point decrease in the net interest margin. The net yield on average earning assets on a fully taxable equivalent basis decreased to 3.11% in the first nine months of 2003 from 3.83% during the same period in 2002. The decrease in the net interest margin was mainly attributable to assets continuing to reprice at historically low levels without a corresponding decrease in rates paid on deposits. The Company believes that the net interest margin will continue to be challenged. Page 13 of 22 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.) The following table sets forth the distribution of the Company's average assets, liabilities and stockholders' equity, and average rates earned or paid on a fully taxable equivalent basis for each of the nine-month periods indicated.
September 30, 2003 September 30, 2002 ------------------------------------------------------------------------------------ Average Interest Rate Average Interest Rate Balance Income/ Earned/ Balance Income/ Earned/ Expense(1) Paid Expense(1) Paid ------------------------------------------------------------------------------------ (dollars in thousands) Assets - ------ Interest-earning assets: Loans (2) $ 500,493 $25,070 6.70% $ 482,024 $26,684 7.40% Securities available-for-sale 793,337 22,315 3.75% 538,765 19,909 4.93% Securities held-to-maturity 152,133 5,103 4.48% 129,621 5,543 5.70% Temporary funds 29,516 250 1.13% 41,707 522 1.67% ----------- ------- ---- ----------- ------- ---- Total interest earning Assets $ 1,475,479 $52,738 4.77% $ 1,192,117 $52,658 5.89% Non interest-earning assets 114,429 98,349 Allowance for loan losses (8,877) (7,643) ----------- ----------- Total assets $ 1,581,031 $ 1,282,823 =========== =========== Liabilities and Stockholders' Equity - ------------------------------------ Interest bearing deposits: NOW account $ 269,084 $ 1,776 0.88% $ 190,060 $1, 878 1.32% Savings accounts 79,122 241 0.41% 72,002 483 0.90% Money market accounts 389,610 3,933 1.35% 255,115 3,488 1.83% Time deposits 241,364 5,568 3.08% 186,192 5,196 3.73% ----------- ------- ---- ----------- ------- ---- Total interest-bearing Deposits 979,180 11,518 2.37% 703,369 11,045 2.10% Securities sold under Agreements to Repurchase 53,497 369 .92% 63,561 541 1.14% Other borrowed funds and Long term debt 166,961 6,442 5.16% 182,618 6,839 5.01% ----------- ------- ---- ----------- ------- ---- Total interest-bearing Liabilities 1,199,638 18,329 2.04% 949,548 18,425 2.59% Non interest-bearing Liabilities Demand deposits 262,768 225,813 Other liabilities 18,071 17,233 ----------- ----------- Total liabilities 1,480,477 1,192,594 Stockholders' equity 100,554 90,229 ----------- ----------- Total liabilities & Stockholders Equity $ 1,581,031 $1, 282,823 =========== =========== Net interest income $34,409 $34,233 -------------------------------------------------------------------------------- Net interest spread 2.72% 3.30% -------------------------------------------------------------------------------- Net yield on earnings Assets 3.11% 3.83% --------------------------------------------------------------------------------
(1) On a fully taxable equivalent basis calculated using a tax rate of 41.825%. (2) Nonaccrual loans are included in average amounts outstanding. Page 14 of 22 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.)
2003 Compared with 2002 ---------------------------------- Increase/(Decrease) Due to Change in ---------------------------------- Income Increase Volume Rate (Decrease) ---------------------------------------------------------------------------------------- (dollars in thousands) Interest Income: Loans $ 994 $(2,608) (1,614) Securities available-for-sale 7,915 (5,514) 2,401 Securities held-to-maturity 870 (1,305) (435) Temporary funds (129) (143) (272) ------- ------- ------ Total interest income 9,650 (9,570) 80 ======= ======= ====== Interest expense: Deposits: NOW accounts 635 (729) (94) Savings accounts 44 (286) (242) Money market accounts 1,517 (1,072) 445 Time deposits 1,372 (1,008) 364 ------- ------- ------ Total interest-bearing deposits 3,568 (3,095) 473 Securities sold under agreements to repurchase (78) (94) (172) Other borrowed funds and long term debt (599) 202 (397) ------- ------- ------ Total interest expense 2,891 (2,987) (96) ------- ------- ------ Change in net interest income 6,759 (6,583) 176 ======= ======= ======
Provision for Loan Losses For the three-month period ended September 30, 2003, the loan loss provision was reduced to $0 compared to $300 thousand for the same period last year. For the nine-month period ended September 30, 2003, the loan loss provision totaled $450 thousand compared to $900 thousand for the same period last year. Loan loss provision decreased because of management's determination of the relative adequacy in the loan loss reserve. The Company's loan loss allowance as a percentage of total loans outstanding has increased from 1.65% at December 31, 2002 to 1.80% at September 30, 2003. The loan loss reserve percentage is deemed adequate. Non-Interest Income and Expense Other operating income for the quarter ended September 30, 2003 was $2.3 million compared to $2.5 million for the third quarter of 2002. The decrease was mainly attributable to a decrease in brokerage commissions, which decreased by $145 thousand, due to decreased volume. For the nine-month period ending September 30, 2003, other operating income totaled $7.2 million compared to $7.9 million for the same period last year. The decrease was mainly attributable to the pre-tax gain of $359,000 associated with the sale of bank premises during the second quarter of 2002. Also, brokerage commissions decreased by $470 thousand due to decreased volume. Page 15 of 22 Management's Discussion and Analysis of Financial Condition and Results of Operation (con't.) Lock box income decreased by $195 thousand for the nine-month period ended September 30, 2003. This decrease was mainly attributable to a decrease in volume that was due to increased competition and changes in the way bills are being paid. This was partially offset by an increase of $262 thousand in service charges on deposit accounts. Service charges on deposit accounts increased mainly because of an increase in deposits accounts. During the quarter ended September 30, 2003, operating expenses decreased by $111 thousand or 1.3% to $8.3 million, from the same period last year. Most of the decrease in operating expenses was attributable to a decrease of $118 thousand in equipment expense and a $67 thousand decrease in salaries and employee benefits. Equipment expense decreased mainly because of a decrease in depreciation expense and salaries and employee benefits decreased mainly because of decrease in accruals for incentive compensation. A decrease in incentive compensation accruals was mostly offset by increased retirement and healthcare costs. For the nine-month period ending September 30, 2003, operating expenses increased by $211 thousand or .8% to $25.6 million, from the same period last year. Most of the increase in operating expense was attributable to an increase of $354 thousand in salaries and employee benefits as well as a $266 thousand increase in occupancy expense. This was somewhat offset by a $414 thousand decrease in equipment expense. Salaries and employee benefits increased because of increased retirement and healthcare costs. Although salaries and benefits expense increased, this was offset by decreases in incentive compensation accruals as the Company's performance has declined. Equipment expense decreased mainly because of a decrease in depreciation expense. Income Taxes For the third quarter of 2003, the Company's income tax expense totaled $1.9 million on pretax income of $5.1 million for an effective tax rate of 37.8%. For last year's corresponding quarter, the Company's income taxes totaled $1.9 million on pretax income of $5.3 million for an effective tax rate of 36.0%. The income tax rate increased mainly because of the elimination of the Company's REIT benefits. For the nine-month period ending September 30, 2003 the Company's income taxes totaled 7.0 million on pretax income of $15.5 million for an effective tax rate of 45.3%. Included in income for the first nine months of 2003 is the previously announced net tax charge of $1.2 million associated with the REIT settlement. This change was the result of an agreement with the Massachusetts DOR settling a dispute related to taxes that the DOR claimed were owed from the Company's REIT. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates tied to specific assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset- Page 16 of 22 liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. ITEM 4 CONTROLS AND PROCEDURES The principal executive officer and principal financial officer have evaluated the disclosure controls and procedures have been evaluated as of the end of the period covered by the quarterly report. Based on this evaluation, the Company has concluded that the disclosure controls and procedures effectively ensure that information required to be disclosed in the Company's filings and submissions with the Securities and Exchange Commission under the Exchange Act, is accumulated and reported to Management (including the principal executive officer and the principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. In addition, the Company has reviewed its internal controls and there have been no significant changes in its internal controls or in other factors that could significantly affect those controls subsequent to the date of its last evaluation. PART II - OTHER INFORMATION Item 1 Legal proceedings - At the present time, the Company is not engaged in any legal proceedings which, if adversely determined to the Company, would have a material adverse impact on the Company's financial condition or results of operations. From time to time, the Company is party to routine legal proceedings within the normal course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company's financial condition and results of operation. Item 2 Change in securities - Not applicable Item 3 Defaults upon senior securities - Not applicable Item 4 Submission of matters to a vote - Not applicable Item 5 Other information - Not Applicable Item 6 Exhibits and reports on form 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14. 31.2 Certification of Chief Financial Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K On July 10, 2003, the Company filed a Form 8-K in connection with its issuance of a press release on July 9, 2003 announcing the Company's results for the quarter ended June 30, 2003. Page 17 of 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: NOVEMBER 12, 2003 CENTURY BANCORP, INC /s/ Marshall M. Sloane /s/ Paul V. Cusick, Jr. - ----------------------------- ----------------------------------- MARSHALL M. SLOANE PAUL V. CUSICK, JR. CHAIRMAN, PRESIDENT AND CEO VICE PRESIDENT AND TREASURER (PRINCIPAL EXECUTIVE OFFICER) (PRINCIPAL ACCOUNTING OFFICER) Page 18 of 22 EX-31.1 3 b48044cbexv31w1.txt CERTFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 31.1 CERTIFICATIONS I, Marshall M. Sloane, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Century Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors; (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Date: November 12, 2003 /s/ Marshall M. Sloane ------------------------------------ Marshall M. Sloane Chairman and Chief Executive Officer (Principal Executive Officer) Page 19 of 22 EX-31.2 4 b48044cbexv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 I, Paul V. Cusick, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Century Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and; (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors; (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and Date: November 12, 2003 /s/ Paul V. Cusick, Jr. ------------------------------ Paul V. Cusick, Jr. Vice President and Treasurer (Principal Financial Officer) Page 20 of 22 EX-32.1 5 b48044cbexv32w1.txt SECTION 906 CERTIFICATION OF C.E.O. Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Century Bancorp, Inc.( the "Company") for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Marshall M. Sloane --------------------------------- Marshall M. Sloane Chairman, President and CEO Date: November 12, 2003 Page 21 of 22 EX-32.2 6 b48044cbexv32w2.txt SECTION 906 CERTIFICATION OF C.F.O. Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. Section 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Century Bancorp, Inc.( the "Company") for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (3) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (4) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Paul V. Cusick, Jr. ------------------------------------ Paul V. Cusick, Jr. Vice President and Treasurer (Chief Financial Officer) Date: November 12, 2003 Page 22 of 22 -----END PRIVACY-ENHANCED MESSAGE-----